QFIN 奇富科技

Operator

Ladies and gentlemen, thank you for standing by and welcome to the 360 DigiTech Third Quarter 2021 earnings conference call. Please also note today's event is being recorded. At this time. I would like to turn the conference over to Ms. Mandy Dole, IR Director

Mandy Dong

Thank you. Hello everyone and welcome to our Third Quarter 2021 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Haisheng Wu, our CEO and Director, Mr. Alex Xu, our CFO and Director, and Mr. Jung Yan (ph), our CIO. Before we begin the prepared remarks, I would like to remind you of our safe harbor statement in our earnings press release, which also applies to this call. We may refer to forward-looking statement based on our current plans, estimates, and projections. Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and the GAAP ones. Plus, unless otherwise stated, all figure mentioned are in RMB. I will now turn the call over to our CEO, Mr. Haisheng Wu.

Haisheng Wu

Mandy Dong

Hello everyone. I'm very happy to report another strong quarter. This marks the Sixth consecutive Quarter of record-breaking results since the pandemic last year. During the quarter, total of facilitation volume reached RMB $97.6 billion to our platform marking another record high at 48% year-on-year and 10% Q-on-Q. Outstanding loan balance reached RMB133.4 billion at 58% year-over-year and 13% Q-on-Q. Total revenue was RMB4.6 billion in Q3, up 25% year-on-year and 15% Q-on-Q. Non-GAAP net income was RMB1.63 billion, up 27% year-on-year and 1% Q-on-Q. We are not changing work and the market hot topics come and go. Our results to all of that is to consistently deliver record-setting without quarter after quarter. We believe these fully demonstrates of our team and the business.

Haisheng Wu

Mandy Dong

We've got a lot of questions about recent method how we development. We have maintained with regulators in recent months. So let me share some updates here.

Haisheng Wu

Mandy Dong

Gratification is the top priority for 14 leading internet platforms summoned by regulators early this year. Majority of the issues have to be addressed by the end of this year. On October 19, 2021, Mr. PBOC and Chairman, of the IRC stated publicly, in the process of rectification of the 14 leading Internet platform, regulations raised over 1,000 issues. We have received the proactive response for majority of the issues. And about half of the issues have been resolved. As such, we anticipate more substantiate programs by the end of this year. Compared to other platforms with financial holding Company structure, we don't do payment business, nor do we offer sophisticated one-stop financial service. Our business model is rather simple and straightforward; thus, we have far fewer issues than most other platforms. Currently, we are progressing based on the regulatory timeline. This includes enhancing corporate revenues, adjusting operation on the various license, and optimizing UV experienced etc. We are very confident to complete these compliance-related items by the regulatory deadlines.

Haisheng Wu

Mandy Dong

As for new regulations related to credit agency, we have been in close communications with regulators and the prepared multiple proposals to cover differently scenarios. First, we can further elaborate various financial license on hand and we also have a sufficient cash to inject capital into our licensed entity, if necessary. Second, we came actively in discussions with existing credit rating agencies to explore potential business arrangement. Of course, this is a rather complicated process from both operational and technology perspective. That's why regulators gave a rather long break period. Third, as the leading tech Company in Shanghai and the national ones, we were also proactively participating in applying for a new credit agency license on opportunity per day. Fourth, we will continue to work with our strategic partner, KCB leveraging the banking license. As you can see, we have multiple solutions to satisfy this requirement of new regulations, and we might be the better propelled than most other peers.

Haisheng Wu

Mandy Dong

24%. Some financial institutions have been window guiding to lower their API to be around 24% by next June. We have proactively communicated with our financial planner to drive down private, go our platform. Our average pricing in Q3 dropped by more than 1% compared to Q2, and for October more than 60% of loans from our platforms of price below 24%. Going forward, we will continue to lower our average pricing in all 3 manners to make CAP 24% by Q2 next year. Meanwhile, the hedges that benefit of lower prices are gradually showing. We start to attract better quality customers and the larger financial institutions. New customer risk profile appears better than existing one. Meanwhile, our operational efficiency is also enhancing.

Haisheng Wu

Mandy Dong

In addition to consumer loan users, our SME and the large ticket loan user has both grown nicely. And the quality of our SME further continuing to improve. Average craft line of SME Bharat, was up by 34% year-on-year. As such, CACIE customer division cut is no longer a proper manager to evaluate our user application efficiency. We have established a more diversified, the flora matrix, that has better quantity and higher IOI. In addition, our embedded finance API model continue to grow rapidly, and maintain leadership position. In Q3, more than half of our new consumer loan borrowers were acquired under this model.

Haisheng Wu

Mandy Dong

On the founding front, we will gradually expand our collaboration with national banks and diverse beyond consumer finance Company and urban commercial banks. Currently, we have a number of national banks in our pipeline, including Everbright Bank, Deutsche Bank, and Pudong Development Bank among others. Expanding relationship with larger national banks will provide us with more stable funding source, at a more attractive cost. In Q3, our overall funding costs remained at around 6.7% near historical low.

Haisheng Wu

Mandy Dong

Next, I would like to share some strategy about to commence. First for the tech-driven transition strategy, long facilitation under the cap-light and the cap model, increased to 56.8% in Q3, close to our full-year target. Our smart marketing products ICE Intelligence Credit Engine continues to grow with more innovative products rolling out. Transaction volume under ICE in October increased by 53% compared to June. For our customers application system, we are piloting upgrading its more matching on some panels and the EBITDA data shows average credit line rapidly increased by 20%, but per dollar we spent. We will continuously progress the test ramp and upside to watch those top 10 badger qua customers. We have received the pay downs and have outstanding pay down application in several cutting-edge areas, such as, that the rate is alarming, perception and reclamation, and the bionic . So far, we have fired over 900 Peyton application in ThinkTac -related areas. Recently, we have received multiple awards from the Asian Banker, 3 years in a row. We won the Best Risk Data and the NavTech's technology implementation of the year in China. The best brought prevention to the monitoring implementation of the Year in China. Back, lending stories in China. Among think tech companies, we had the most awards in the most categories for 2021.

Haisheng Wu

Mandy Dong

Our SME business continued to deliver solid rollout in Q3. Total amount of new approved the credit lines increased 13% Q-on-Q to RMB 8 billion. We're constantly refining our business process to roll out more innovative products. For example, we leverage our technical strength to improve borrowing experience, more than 30% of SME owners receive the lines within per minute. Better user experience gives us a clear competitive edge in marketing channels. We also established the process for the bank and the tax interaction model, our financing channel by which then provide loans to SME based on their historical tax payment. We've also made breakthroughs in corporate credit rating, and a credit approval. Last but not the lease, our offline direct sales teams, continue to ramp operations, and it contribute about 20% new customer in Q3. Offline team can access better quality first-hand customer information to fit in our risk models. With these measures, we have gradually built up our competitive strength in finance in terms of risk management founding, user acquisition, and the products.

Haisheng Wu

Mandy Dong

As of latest in our Company, with regard ESC as a key component of our long-term business strategy. Under the guidance line of China Association of Small and Medium Enterprise, CA SME, we have launched joint loan products with over 100 partners, including . These products serve different industries including supermarket, suppliers and logistics. Meanwhile, we announced in November at the special SME months, during which we target to raise RMB 10 million worth of interest for our SME customers. To support China carbon neutrality commitments, we have roll-out consumer loans for electric vehicles. In addition, the world economy foreign recently awarded us new champions community award of excellence in AgriBusiness Governance 2021. We are especially honored to be the only Company in Asia to have received this award this year. This speaks to our increasing impact and the commitment to social responsibility and the corporate governance.

Haisheng Wu

Mandy Dong

Finally, a note on our guidelines for Q4. It is already in the middle of November, based on our year-to-date performance and the business momentum so far this year, we are confident that we will deliver a solid Q4 and exceed our previous full-year loan volume guidance.

Haisheng Wu

Alex Xu

Thank you, Haisheng. Good morning and good evening, everyone, welcome to our quarterly earnings call. For the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for details. As Haisheng Wu mentioned, we delivered the sixth consecutive quarter breaking -- record-breaking quarterly results in both operational and the financial terms for the third quarter of 2021, in a relatively muted micro-backdrop. We saw continued strong consumer demand for credit and stable asset quality. Our faster than market growth suggests that we continue to gain shares in the target segment. Total net revenue for Q3 was 4.6 billion versus $4 billion in Q2 and $3.7 billion a year ago. Revenue from credit-driven surveys, capital heavy was $2.62 billion compared to $2.4 billion in Q2, and $2.96 billion a year ago. The year-on-year decline was mainly due to facilitation mix change as capital heavy loan, volume decreased significantly. Meanwhile, capital heavy facilitation revenue check rate improved modestly, quarter-on-quarter. Revenue from platform service, cap-light was $1.99 billion, compared to $1.6 billion in Q2 and $748 million a year ago. The robust growth was mainly driven by continued progress we have made in cap-light other technology solutions. During the quarter, capitalized and other tech solution contribute roughly 57% of total loan volume, and capitalized facilitation revenue take rate also improved nicely. During the quarter, average pricing was 26.1% compared to 27.2% in Q2 and 25.9% a year ago. As the 24% rate cap being implemented across the industry, gradually, we are expecting average pricing to trend down by about 1% each point each quarter through mid-2022 to satisfy the rate cap requirement. As we discussed in the past, even under a more restrictive and steeper rate cut scenario, we should still be able to maintain healthy growth, and profitability in the transitional year of 2022, and resume to a more robust growth afterwards. During the quarter, we continue to maintain healthy pace of customer acquisition while focusing on attracting high-quality borrowers. In particular, we significantly increased the number of customers, which much larger credit line than -- and relatively low risk. The average ticket size of these type of customer typically runs between a 150,000 to 200,000 RMB compared to the average of 10 thousand RMB for call regular borrowers. As such, on a blended basis, average customer acquisition cost, which is calculated by dividing the sales and marketing costs with the total new credit card users. Customer acquisition costs per user with approved credit line, was RMB305 in Q3 compared to RMB 250 in Q2. However, excluding large ticket-size customers in both consumer and SME market, average costs per approved credit line was approximately RMB249 in Q3 compared to RMB 224 in Q2. As we discussed in the past, average cost per proved credit line is a calculate number with limited value in our internal decision-making process. We will continue to use lifecycle ROI and LTV as key metrics to determine the pace and scope of our customer acquisition strategy. So far in 2021, we have maintained housing ROI and our LTV trends, which in turn drive stable net take rate. While overall risk metrics were relatively stable in Q3, we continue to take prudent approach in booking provisions against the potential credit loss. New provision for contingent liability for loans originated in the quarter was approximately $1.5 billion. Meanwhile, approximately RMB800 million of provisions for contingent liability of previous period loans was written back as actual performance of those loans was better than expected. Provision booking ratio, which is defined as new provision for contingent liability divided by capital heavy long facilitation volume, remained stable. With strong operating results and increased contribution from cap-light model, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders equity, further declined to 4.3 times in Q3 from 4.9 times in Q2 and 7.4 times a year ago. We expect to see continued de -leveraging in our business driven by further movement towards cap-light, and solid operating results. We generated 1.74 billion cash from operation in Q3 compared to 1.3 billion in Q2, and 1.42 billion a year ago. Total cash-in-cash equivalents was 7.6 million in Q3 compared to 8.8 billion in Q2. Non-restricted cash was approximately 4.2 billion in Q3 versus $5.2 billion in Q2. The decline in cash was mainly due to more proactive deployment of cash in our operations to support ABS and a pre -ABS assets, which generate higher returns. As a result, during the quarter on balance sheet loan volume increased to RMB12.8 billion from RMB9.8 billion sequentially. Meanwhile, a significant portion of our cash was also allocated to security deposit, with our institutional partners and registered capital of different entities to support our daily operations. As we continue to generate strong cash flow from operations, we believe our current cash position is more than sufficient to support the growth of our business, to invest in key technologies, and to satisfy potential regulatory requirements. Therefore, yesterday our Board of Directors approved a quarterly dividend policy and declared our first ever quarterly dividend of U.S. $0.28 per ADS for Q3. Going forward, we will distribute approximately 15% to 20% of quarterly net income after-tax in the form of cash dividends on a recurring basis. We believe it is appropriate way to generate additional return for our shareholders and to appreciate their long-term support. Finally, let me give you some update of our outlook for the fourth quarter. The operating results for the first 3 quarters of 2021 were very encouraging, and then we continue to see healthy business development in Q4, despite some seasonal headwinds and muted micro conditions. As such, we now expect Q4 total loan volume to be between RMB $90 billion and RMB $100 billion. Which bring our 2021 total? Loan volume guidance to be between RMB350 billion and RMB360 billion compared to previous guidance of RMB340 billion and RMB350 billion. The revised guidance represents year-on-year growth of 42% to 46%. As always, this forecast reflects the Company's current and preliminary view which is subject to material change. With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

Operator

Thank you, Management. We now begin our question-and-answer sections. English translation. In additional, in order to have enough time to address everyone on the call, please keep to 1 question and 1 follow-up and then return to queue if you have more questions. Our first question is, Richard Xu from Morgan Stanley.

Richard Xu

Morgan Stanley, Richard. The management mentioned that there's 60% of loans already priced at below 24%. What's the gross, and net take rate, and risk profile of the client base? And that will give us probably a better indicator of the profitability after the transition periods.

Haisheng Wu

Mandy Dong

I will translate for our CEO, Haisheng. First, thank you Richard for your question. I will give you some color about this take rate. Number 1, for the network rate our assets below 24% is 1% lower than our current total loan book which is 3% on net take rate. Secondly, as for the risk profile of this 24% cap assets. What we observed is in Q3, the new transaction has better risk performance than the existing asset. Quite somehow in day one delinquency recent metrics, the new transaction is 4.2% and the total loan book is 5.1%.

Haisheng Wu

Mandy Dong

To add a little bit more. In the meanwhile, we have seen that there's a little bit fluctuation in risk performance. For example, the D1 delinquency rate has declined for 5 consecutive quarters, while it's 5.1% in this quarter, slightly higher than second quarter. And the 30-day recovery rate increased from 90% Q2 to less than 90%. We are very confident to say that Section G for very controllable. They believe that changes that costs if I'd a second co-factors as Wyatt rapidly true policies. They are short-termed and temporary and have rapidly later impact our customer pays. At the same time, our customer acquisition team and risk management team has made some changes per actively, including, firstly, for customer acquisition, we have improved our intelligent marketing strategy, what changed from improving efficiency and controlling costs to improving quality and controlling cost. Taking information flow channels as example, the proportion of RTA acquisition model has further increased to more than 40%. In this quarter, the premium model was optimized focusing on user quality and user acquisition efficiency. Increased to the user quality screening, a better day was improved by 17% and the user acquisition and efficiency was improved by 20%. So as Haisheng Wu has mentioned before, with the same and acquisition costs, were able to improve -- increased the credit line by 28%. Secondly, for potential retail customers, we have started with reductions strategy in advance. We make full use of our self-developed advanced algorithm models such as GBST to accurately identify rates for flexible groups and tighten ratio management accordingly. For example, for people borrowing from multiple platforms, we have lowered approval rate. Certainly, for existing customers, we reduced prices while matching users’ conception and business revolving needs, so as to achieve the efficiency of transferring balance to lower risk customers. Eventually, as Haisheng has mentioned, we can see risks for new transactions is decreasing. Taking the first repayments of new loans in September as example, the delinquency rates decreased to 20% which is lower than the average of the second quarter. In short, with a continuous improvement of our customer base and optimization more risk management, we are very confident to keep the risks within expected range in the future.

Alex Xu

Richard, do you have any follow-up or we can move onto the next question?

Richard Xu

Can I just -- 1 quick follow-up. What's the overall, if you factor in the risks and client acquisition costs differences, any overall guidance on the net take rate for this client base?

Alex Xu

Well, let me take this one. We're still seeing the same logic as we mentioned after the second quarter results if you recall we have the stress test under the 24% scenario. Basically, we still see 1% drop when everything has been said and done. When the entire portfolio moved down below 24%, the average pricing will probably be sitting somewhere around 22.5% and the net take rate will drop from 4% roughly to about 3%. That still does the outlook for the moment.

Richard Xu

Okay, so it's consistent with our original estimates the new --

Alex Xu

Yeah

Richard Xu

Data sketch, right? Okay. Got it. Thank you.

Alex Xu

That's right.

Operator

Next question is Yao Lee, CICC.

Yao Lee

Okay that will translate my question. A question is regarding the risk of matrix. I see some of our risk matrix on year the buy-sell level in Q3 during this quarter, I was wondering when we're looking forward, what interest rate regulate declines and a lower origination continue increasing can we expect to see a better level of risk matrix or what we can see now is almost as the best that we can do? Thanks, management.

Haisheng Wu

Mandy Dong

Okay. We will take some time before adjustment and so, when adjustment is finally done, we can say that as the proportion of new transaction takes place and customers improved, eventually the risk performance will be improved. While during the process, there will be cycling call and regulatory policies changed. So, there will be a later base fluctuation in the process.

Alex Xu

Do you have any follow-up?

Yao Lee

Alex Xu

Thank you.

Operator

Next question is Alex Ye from UBS.

Alex Ye

So my question is regarding regulations. In your prepared remarks you mentioned about considering different options of the Company financial license. Could you give us some additional color on that in terms of what you mean and where you saw from the news earlier that one of the micro-loan licenses under your Q3 has increased capital from 500 million to 1 billion? I'm wondering what's your consideration behind and is there any progress you have heard from the regulators about the link nation of micro-loan license, and finally, so, given the current regulatory progress or directions, have you considered a scenario where in the licenses future Europe business model will need to be conducted through any kind of license? Thank you.

Haisheng Wu

Mandy Dong

Sure. Well, compared to other, let's say peers, we are one of the fewer companies that has direct dialogue with regulators. Therefore, we can proactively follow the regulatory guidance according to our first-hand information. Firstly, for our credit rating agency we will participating actively in applying for the Neil credit rating license. Secondly, for the current existing financial license on-hand, we will now consider carefully to inject capital into the license that can't entities. Of course, we have abundant capital reserve to inject. Thirdly, according to the regulator requirement for the financing Company. That way -- nowadays, we have shareholders in 2 guarantee companies. In the discussion we might need to exit from 1 guaranty Company, but there will be very muted impact to our operations.

Alex Xu

Yeah. Sorry, I wanted to get a little bit clarification on this, so we currently hold 2 financial guaranty licenses. And according to the new regulatory guidelines, for any entity, you can only hold one. So, we will, in the future consolidated two into one license. And because this license --basically the business driven by the registered capital as the license, essentially, we just need to move the registered capital from one license to another, from the scale -- in terms of scale, the business we can do with this license, there's no impact. Because it's based on the capital -- registered capital. That's just one add up to that up there. Haisheng, you can continue.

Haisheng Wu

Okay. Thank you.

Mandy Dong

As for your second part question for post-debt possible business model change, I will address this question in 2 parts. First, for our sales founded the business, where you can further leverage our microfinance license and are guaranteed license. Both licenses are national wise and they have enough leverage to be utilized. Second part for our long facilitation business. First, we can actively cooperate with the current existing credit rating agencies. Secondly, the microfinance license can also play a vital role in the loan facilitation business.

Haisheng Wu

Mandy Dong

KCB has a broader relationship with us. We can further utilize too fully .

Alex Xu

Sorry. Mandy was breaking up a little bit relying but, basically Haisheng said is that KCB is even though it's not our directly holding license as a related party hold it. But we can still leverage in a relationship with KCB and to use the banking license to conduct a series of business Thank you.

Alex Ye

Thank you. Follow up for me. So, you mentioned that your micro-loan license could play a role in the future. So, given that regulation regarding the handout of micro-loan licensing deal in the consolidation status, do you have any expectation of when it's going to be rolled out? And also, you state it's such micro-loan license, part of your South impaction and ratification progress for the 14 platforms. Thank you.

Haisheng Wu

Mandy Dong

To answer your question. First, we are not informed about the timeline of the guidelines for micro finance license. We believe that may follow after some basic law about the 9th financial institution guidance is released. Secondly, yes you are right. The guideline of microfinance licensing is within the users of the 14 internet platforms recertification (ph) progress.

Alex Ye

That's all for me. Thank you.

Operator

The next question is Thomas Chong from Jefferies.

Thomas Chong

Thanks management for taking my questions. My question is more about the 2022 outlook. Though it's a bit early to talk about next year numbers. But I give the fact that the met goal headwinds and the uncertainties of the properties. How should we think about our business growth momentum into next year? Qualitatively will be great. Thank you.

Haisheng Wu

Mandy.

Mandy Dong

Yes. Sure. First, understand that market has some concern about micro economy, next year. But we stay very vigilant, and closely monitor our operational matters on every front. Nowadays, we still in the budgeting process, we do not have more concrete guide as to share with you, but we can assure you that at all the outlook we get now is based on a very prudent approach. Secondly, I want to emphasize that our business and its team has experienced the cycle of regulations and pandemics last year. This is a very strong demonstration of the resilience of our business and the teams. We don't think next year, the situation or we're we more severe than the previous regulation cycle or pandemic cycle. Therefore, we are confident.

Thomas Chong

My follow-up question is about our different customers or industry categories. Given that we are ramping up -- the SME business -- just want to get some color about the industries that they are engaging in, and whether they are impacted by the macro headwinds. Are there any categories that doing, okay? some are not doing better or a bit below expectation? Can we talk about the key factors that they're engaging in and the outlook? Thank you.

Haisheng Wu

Alex Xu

You may go ahead and Mandy.

Mandy Dong

Sure. Okay, I will translate first. Currently, SME takes a small portion in our business and our customer is tiny small business customers, based on our first-hand information with them, with DOC, very good rate performance. Yan Zheng, please go ahead.

Yan Zheng

Mandy Dong

Our SME business is relatively , we have a larger phase to choose the customers that we want. And for body and risk performance, we like to say that we risk relatively steady, but for some cities that -- with the COVID problem there's this small fluctuation. While with the COVID in this performance will become again. And as mentioned before, core customers acquired the portions of direct sales is increasing, and the risk performance of the direct sales, consumer acquisition is just like 80% to 90% of the average. With the increasing of these channels, we can see average performance will be lower in the future.

Thomas Chong

Thank you.

Alex Xu

I just want to add Thomas, I just want to add one color to your first question regarding the outlook for 2022. As you mentioned, yes, we -- at this point we can't give you any official guidance to the outlook, but if you recall after the second quarter, we did the stress test, which is related to the 24% rate cap. In that stress test, we consider the micro environment for 2022 as well as the regulatory change. In particular related to the credit agency connectivity issues, which we believe is a very complicated issue, involve a lot of the technology, problem-solving. And with that kind of assumption, in that stress test, if you recall, we assumed a 20% volume growth for next year. And then the net take rate, as I mentioned earlier in this call, will come down from 4% right now to about 3% Index stress tests. So that assumption as well as the conclusion for that stress test still hold at this point, although I would just want to emphasize again, this is not an official guidance. Thank you.

Thomas Chong

Got it. Thank you.

Operator

And thank you. This is the end of the question-and-answer sessions. Now, I hand back over to management for closing remarks.

Alex Xu

Okay. Thank you, everyone who joined us for the call. If you have additional questions, please contact us directly. Thank you.

Operator

That's the end of conference call. You can hang up. Thank you.