Qfin Holdings - Q3 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Qifu Technology Third Quarter 2023 Earnings Conference Call. At this time, all participants are in the listen only mode. After the speakers' presentation, there will be a question and answer session, at which time, if you wish to ask question, please press star one one and wait for your name to be announced. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Karen Ji, Senior Director of Capital Markets. Please go ahead, Karen.

Karen Ji (Senior Director of Capital Markets)

Thank you, Desmond. Hello, everyone, and welcome to Qifu Technology's Third Quarter 2023 Earnings Conference Call. Our earnings release was distributed earlier today and is available on our IR Website. Joining me today are Mr. Haisheng Wu, our CEO, Mr. Alex Xu, our CFO, and Mr. Zheng Yan, our CRO. Before we start, I would like to refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP financial measures to GAAP financial measures. Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms.

Before we start, please also note that today's prepared remarks from our CEO will be delivered in English using an AI-generated voice. Now, I will turn the call over to Mr. Haisheng Wu. Please go ahead.

Haisheng Wu (CEO)

Hello, everyone. Thank you for joining Our Third Quarter Earnings Conference Call. Since the start of the year, the momentum of China's macroeconomic recovery has softened after rebounding earlier in the year, with effective demand for consumer credit also coming in weaker than expected. We promptly adjusted our strategic approach to this new market environment by diversifying our customer acquisition channels and refining operations, all with the clear goal of driving high quality growth and improving profitability. These efforts yielded solid results in Q3. By the end of the quarter, our platform empowered a total of 155 financial institutions and cumulatively served more than 49 million users with approved credit lines. Total loan facilitation and origination volume on our platform reached RMB 123.1 billion, up roughly 11% year-over-year.

With the quality of our earnings further improving, our Non-GAAP net income for the quarter increased by approximately 14% year-over-year. In today's complex macro environment, it is particularly important that we expand our safety cushion by improving profitability. To achieve this, we are optimizing resource allocation across customer acquisition, products, risk management, and asset distribution to boost operational efficiency and ultimately drive bottom line growth. Now, I'll walk you through some of the progress we made in this regard during the quarter. To start with, we continue to explore diversified customer acquisition channels and deploy innovative approaches to attract new customers, which not only improved customer acquisition efficiency, but also resulted in notably better quality of new users. In terms of optimizing our customer acquisition channels, we established a partnership with a leading short-form video platform through our embedded finance business in the third quarter.

Leveraging the platform's massive active user base and our ability to accurately profile users and identify risk, we have consistently maintained a leading market share on the platform since the start. During the quarter, our embedded finance business generated an impressive 46% sequential increase in the number of new users with approved credit lines. Approximately 33% of total new users with approved credit lines during the quarter were acquired through the embedded finance channel. We also intensified our marketing efforts through innovative marketing approaches during the quarter to attract high quality customers. This was done by deploying more compelling ad placements to expand our customer reach. Based on user profile analysis, users acquired through innovative marketing methods significantly outperformed those obtained through conventional methods in terms of educational background, mortgage and credit history.

They also clearly have better risk performance in terms of short-term delinquency rates, as we observed during the first three months. With our innovative customer acquisition strategy firmly in place, the proportion of high-quality users increased by more than four percentage points from July to October. This not only directly complements our existing user base, but also contributes to the stability of our overall risk performance. As a result of these initiatives, the number of new users with approved credit lines increased by 18% in Q3 sequentially, while unit customer acquisition costs increased only slightly. Moving on to product design, we introduced a loyalty program to enhance engagement of existing users. By offering a wider range of value-added services, we are effectively enhancing user engagement and retention, which increases our revenue and profit per user.

Users who joined the loyalty program demonstrated higher engagement with a double-digit increase in both the rate of drawdown and the number of loans borrowed over a certain period of time. Turning to risk, we swiftly responded to the changing market environment. In Q3, we gradually tightened credit standards and upgraded risk models. In particular, we further enhanced the Knowledge Graph for our broadly defined SME segment. By closely analyzing relationships among individuals, businesses, and industries, we improved our ability to identify risks within this segment. It's worth noting that there are clear differences between our broadly defined SME segment and SMEs in the traditional sense, as are primarily younger enterprises acquired through online channels. When conducting risk assessments, we place more emphasis on individual credit history and use business data as a secondary reference.

As a result, credit lines extended to our SME segment are usually smaller, making associated risk much more manageable. Compared to the consumer segment, the SME segment generates much more stable demand and stronger growth potential, with similar risk performances. Looking ahead, we are confident that there is significant room for growth and value generation over the long term for our broadly defined SME segment, driven by our accurate user identification and differentiated operations. Lastly, we kept pricing at stable levels and leveraged our funding strengths to further optimize our economic model. With relatively ample liquidity in the financial system during the quarter, we further optimized our funding structure by increasing the proportion from larger banks, which reduced our funding costs by another 20 basis points.

In terms of ABS, we secured ABS investments from multiple state-owned and joint stock banks and top securities firms, leading to a 47 basis point decrease, quarter-over-quarter in ABS issuance costs. With the accuracy of user profiling and identification continuously improving, we also further expanded the range of our financial institution partners, strengthening our ability to serve various loan asset segments. With more financial partners coming on board under the ICE or referral model, which further mitigates risk, our ability to engage with the lower tier user segment has significantly improved. As we continue to optimize asset allocation efficiency, we expect our overall profitability to further improve going forward. Now, let me share with you the progress we made on the technology front. Our Technology Solutions business is making solid progress as we expand the array of solutions we offer to cover the entire credit process.

During the quarter, we entered into partnerships with three additional financial institutions, each from a different category: a joint stock, internet, and private bank. To cater to the diverse needs of our banking partners, we adopted various deployment models and are committed to providing them with end-to-end technology solutions as well. Going forward, we will extend our end-to-end technology solutions to more financial institution partners to scale up our client base. In the long run, we expect a steady increase in the take rate for our technology solutions business. Additionally, we continued to invest in cutting-edge technologies, such as artificial intelligence and large language models. On September 18, we partnered with the China Academy of Information and Communications Technology to officially unveil the first domestic standard for large language models in the financial sector.

The standard will serve as a crucial reference and benchmark for the design, development, application, and review of large language models in finance. At the same time, we purchased hundreds of graphics cards and have been exploring the application of AIGC technology to improve efficiency throughout the entire credit process by conducting tests or implementing it in advertising, telemarketing, loan collection, and quality control. For example, our telemarketing system is now able to conduct semantic analysis and extract valuable leads from each conversation, improving our telemarketing conversion rate by more than 5%. In addition, around 70% of our image-based marketing materials are currently generated by AIGC. In the future, we will use large language models to tag and rate these materials from multiple dimensions to optimize ad placements and boost marketing effectiveness.

Looking back at the past three quarters, despite a challenging macro environment, we remained vigilant about market conditions and improved our earnings quality by further optimizing operations and fine-tuning our business model. Since Q3, certain macro indicators are showing marginal improvement as a result of multiple supporting policies. Against this backdrop, we are confident in our ability to continuously make breakthroughs and create value for our shareholders with better results. With that, I will now turn the call over to our CFO, Alex Xu, who will walk you through our financial results for the quarter.

Alex Xu (CFO)

Okay, thank you, Haisheng. Good morning and good evening, everyone. Welcome to our third quarter earnings call. Facing slower than expected micro recovery and worsening consumer sentiment, we proactively took actions in Q3 to optimize our product and service offerings, strengthen relationship with users and key partners, aiming to drive long-term, sustainable quality growth. In Q3, we saw some volatility in asset quality and key leading risk metrics start to fluctuate from historical best levels achieved in previous quarters. Day one delinquency was 4.6% in Q3, versus 4.2% in Q2. The uptick in day one delinquency mainly reflect borrowers' negative sentiment toward the ongoing macro uncertainties. Thirty-day collection rate was 86.7% in Q3, versus 87.2% in Q2. This modest decline also was driven by macro weakness.

Throughout Q3, we have proactively adjusted our risk management models and gradually applied more restrictive standards on incoming applications. By late September, we start to see stable credit quality among new borrowers. As economic conditions remain challenging, we may continue to see some fluctuation of these metrics in the near future, although overall risk level should still be manageable with our continued effort to proactively mitigate risks. Total net revenue for Q3 was CNY 4.3 billion, versus CNY 3.9 billion in Q2 and CNY 4.1 billion a year ago. Revenue from credit-driven service, capital heavy, was CNY 3.1 billion in Q3, compared to CNY 2.8 billion in Q2 and CNY 2.9 billion a year ago. The year-on-year growth was mainly due to growth in on-balance sheet loans, partially offset by decline in expected average tenor of the loans.

The sequential increase reflected growth in loan balance, as well as continued improvement in effective tenors. On-balance sheet loans account for over 19% of total loan volume. Overall funding cost further declined by roughly 20 basis points, with the help of our strong relationship with financial institution partners, as well as additional issuance of ABS. Revenue from platform service, capital light, was CNY 1.2 billion in Q3, compared to CNY 1.1 billion in Q2 and CNY 1.2 billion a year ago. The sequential growth was mainly due to continued improvement in overall effective tenor of the loans and strong contribution from ICE, substantially offsetting the decline in capital light loan facilitation volume. For Q3, capital light loan facilitation, ICE, and other tech solutions combined account for roughly 56% of the total loan volume, compared to roughly 58% in prior quarter.

We expect this ratio to be roughly stable around this level for the year. We will continue to evaluate different components of our operation and seek a better mix between risk-bearing and non-risk-bearing solutions based on macro environment and operational conditions. In Q3, we saw continued sequential improvement in revenue take rate for both cap heavy and cap light business, as early repayment ratio gradually returned to normal levels and effective tenors gradually extended. During the quarter, average IRR of the loans we originated and/or facilitated remained stable Q-on-Q, well within the regulatory rate cap requirement. Looking forward, we expect pricing to be fluctuating in a narrow band around this level for the coming quarters. Sales and marketing expenses increased 21% Q-on-Q, but declined 15% year-on-year.

We added over 1.7 million new credit line users in Q3, compared to 1.5 million in Q2. Unit cost to acquire new credit line user also increased modestly Q-on-Q to CNY 306 from CNY 296 in Q2. While we will continue to drive for efficiency in our operation, we may adjust the pace of our new user acquisition based on macro conditions from time to time. As Haisheng mentioned, we have made noticeable progress in diversifying our user acquisition channels during the quarter. Meanwhile, we will continue to focus on re-energizing existing user base as repeat borrowers historically contribute vast majority of our business. As macro uncertainties persist and the credit quality fluctuates, we will continue to take a prudent approach to book provisions against potential credit losses.

Total new provision for risk-bearing loans in Q3 were approximately CNY 2.1 billion, and write backs of previous provisions were approximately CNY 600 million. Provision coverage ratio, which is defined as total outstanding provision divided by total outstanding delinquent loan balance between 90 and 180 days, were 534% in Q3, compared to 511% in Q2. Non-GAAP net profit was CNY 1.18 billion in Q3, compared to CNY 1.15 billion in Q2. Effective tax rate for Q3 was over 22%, compared to our typical ETR of approximately 15%. The higher ETR in Q3 was mainly due to additional withholding tax provision related to cash distribution from onshore to offshore for dividend payments and share repurchase programs....

Please also note, our second quarter earnings was helped by a tax rebate of approximately CNY 160 million. Excluding the tax rebate, Non-GAAP net, net income actually grew approximately 16% sequentially in Q3. With our solid operating results and stable contribution from capital light models, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, was 3.5 times in Q3, near a historical low compared to 3.8 times a year ago. We expect to see the leverage ratio fluctuate around this level in the near future. We generate approximately CNY 1.2 billion cash from operations in Q3, compared to CNY 1.8 billion in Q2. The decline was mainly due to the change in working capital at the end of the quarter.

Total cash and cash equivalents was CNY 8.2 billion in Q3, compared to CNY 8.5 billion in Q2. Non-restricted cash was approximately CNY 4.9 billion in Q3, compared to CNY 5.3 billion in Q2. The sequential decline in cash position was mainly due to increased cash usage in our on-balance sheet lending. As we discussed earlier, we will continue to look for opportunities to deploy resources to launch new initiatives, develop new technologies, and expand services, offerings. As we continue to generate healthy cash flow from operations, we believe our current cash position is sufficient to support our business development and to return to our shareholders. In June 20th, 2023, we announced a share buyback program to repurchase up to CNY 150 million over a 12-month period.

As of November 16, 2023, we have bought approximately $80 million worth of ADSs in open market at an average price around $16.2. We will continue to execute the buyback program in accordance with the related rules and regulations. With the fully execution of the repurchase program and the dividend plan, the combined payout ratio will exceed 50%. Going forward, we will continue to optimize our capital allocation plan and make timely adjustment to generate attractive returns to our shareholders. Finally, regarding our outlook, while macro recovery appears slower than expected, we remain confident to achieve our operational targets for the year.

As such, we now expect Q4 total loan volume to be between RMB 116 billion and RMB 126 billion, and for the full year, total loan volume to be between RMB 473 billion and RMB 483 billion, representing year-on-year growth of 15%-17%. As always, this forecast reflects the company's current and preliminary view, which is subject to material changes. With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question on the phone, please press star one one and wait for your name to be announced. If you'd like to cancel your request, you can press star one one again. For those who can speak Chinese, please kindly ask your question in Chinese first, followed by English translation. In addition, in order to have enough time to address everyone on the call, please keep it to one question and one follow-up, and return to the queue if you have more questions. Thank you. One moment for the first question. The first question comes from the line of Richard Xu from Morgan Stanley. Please go ahead.

Richard Xu (Managing Director and Senior Equity Analyst)

谢谢给我这个第一个提问的机会啊。我就想问这两个问题。一个呢，就是从现在需求方面，最近几个月的趋势大概是什么样的？管理层最近也提到这个，很大一部分，这个消费者现在需求属于这种，范小薇的客群吧。那么这边这种的这个需求和纯消费相比，最近有什么不一样的趋势吗？然后对这块的战略，风控有什么不一样？那第二个也想问一下，这个最新资金成本在什么水平？鉴于整个的利率都有下降了，那下一部分有没有可能进一步地降低这个资金成本。

Alex Xu (CFO)

Essentially, I have two questions. One is, essentially, what's the credit demand trend at the moment, particularly, there's some demand for the consumption from the SME client base, what are the differences between the trends from the typical consumption loan demand? And also, any different differences in strategy and risk management. Secondly is, what's the funding cost and whether there's further room to reduce funding costs in the future? Thanks.

Richard Xu (Managing Director and Senior Equity Analyst)

好，谢谢Richard。首先我声明一下，前面那个部分，那个讲稿部分，我是让我们的团队帮我训练的一个人工智能的替身帮我讲的，那后面这个问答部分，那个-

Haisheng Wu (CEO)

...

我还是需要用中文的，所以跟大家做个报告。然后这两个问题我来说一下。就关于信贷需求，我们从最近，从这个Q4看来，Q4看来呢，比起Q3的话，我们应该说是稳中略有下降。那这里呢，应该是有一些这个周期性的这个因素，因为每年十月份因为有黄金周，所以它相对就是比前面要少一些。那到了十一月份的话，就会相对要稳定一些，这是整体趋势上。那从放小微来讲的话呢，我们看到的是放小微的这个需求，应该说略好于这个消费的客群。同时呢，这个不同行业的放小微也呈现出一些结构化的差异。比如说我们看到的这个体育行业，这个娱乐行业，或者就是那些服务业，服务业和这个技术型的行业，它的需求是明显好于其他行业的，所以它有一个结构化的特征，它跟消费相比的话。那从这个比较而言呢，相比这个消费客群而言呢，放小微这个客群的需求呢，也更加稳定一点，那它的需求呢，相对，也会大一些，所以它的这个价值也会比这个消费客群高一些。因此呢，我们也希望能够提升在我们整体这个客群盘子里面对于我们放小微这个客群的识别能力，因为这些客群需求不一样，所以它需要用一些差异化的产品和服务来满足它，你只有满足了它，你才能够提高它对我们这个平台的整体的这个粘性。因此呢，我们是希望，确实是希望能够加大对这个客群的识别和差异化的服务设计。那我们，也需要强调一下的，就是我们的放小微这个客群呢，和传统意义上这个小微还是不一样的，因为我们的额度会比他们要小很多，比这个传统小微。我们这个风险建模的基础，那也是以个人的画像为主要的建模依据的，那企业的经营数据只是作为一个辅助，表现在这个风险结果上呢，我们的放小微这个风险呢，也会好很多。

Karen Ji (Senior Director of Capital Markets)

Okay, thank you, Richard. I want to highlight that the prepared remarks just now delivered was generated by our Large Language Model team but for Q&A part, I will still answer the question in Chinese. Regarding your question, stepping into Q4, we have observed the credit amount slightly trending down. In particular, credit amount was soft in October, mainly due to the seasonality factor during the national holiday. And after that, it maintains stable into November. From user segment perspective, the credit demand from broadly defined SME segment is slightly better than our consumer sector, and we do see some divergence from industry perspective. For example, the service sector, like sports, entertainment and also the technology sector, are better than the others. Compared to consumer segments, the broadly defined SME segment has more stable credit amounts and generates higher value.

We expect to enhance our ability to identify the user group and use diversified products and services to improve our customers' experience and their business as well. Here we would like to emphasize. Our broadly defined SME users are totally different from traditional SMEs, as their ticket size is much smaller and our risk model are more based on individual profiles with the business data as supplementary information. Therefore, the risk performance of our broadly defined SME users are much better.

Haisheng Wu (CEO)

然后，这个客群的风险管理措施，看看我们CRO郑燕有没有补充的。

Karen Ji (Senior Director of Capital Markets)

I would like to invite our CIO Mr. Zheng Yan to add on the risk part.

Yan Zheng (Chief Risk Officer)

好的，正如海总说的，我们对放小微客群的风险管理不同于常见的以企业经营为主的风险管理模式。我们是以企业个人信息为主，企业经营信息为辅的双引擎管理模式。那在我们，我们在用户授权的情况下，引入了11种小微特有的数据源，比如说税务、发票，工商信息，POS流水账单，等数据。那这个结合平台上企业主的一个信贷表现，我们会将这些碎片化的数据通过算法的整合后，就可 以对小微企业主进行更加准确的风险评估。那在额度管理上面，我们针对，部分行业资金需求急且比较大的一个特点，我们通常会，通过弹性的固额去匹配一个每个行业定制的季节性的限额，以及，像双十一、618等平台大促的一些限额，全方位地去服务小微企业的各类资金需求。

Karen Ji (Senior Director of Capital Markets)

As Haisheng just mentioned, our risk management mechanism for the broadly defined SME segment is different from the traditional SME sector. In the sense that our risk model is primarily based on personal data of the business owner with the enterprise data as the secondary layer of information input. Upon user's approval, we integrate the personal credit data with the SME specific data source, for example, the tax, invoice, cash flow, billings, etc., based on our sophisticated algorithm, so we can better evaluate the creditworthiness of the SME borrowers. As this segment normally has urgent and higher credit amounts, so we combine the fixed credit line with additional temporary credit lines in relation to certain seasonal events, like Double Eleven Shopping, Festival on June 16th, etc., so we can better serve all kinds of needs of the SME users.

Haisheng Wu (CEO)

好，然后关于funding cost的这个问题。我们三季度比二季度呢，应该说还是有一个继续的降低，这个环比是有一个20个BP的降低，那我们ABS的发行成本呢，也降低了47个BP。那从最近的时间来看的话，应该说跟，跟Q3呢，基本上保持了一个相对稳定的一个状态了。那从这个降息这个背景来讲的话，降息呢，从逻辑上，应该说能够，驱动金融机构的成本有一个下降，从而传递到这个实体经济里去。但是今年的这个环境呢，还是比较复杂的，我们看到这种传导性呢，还不够明显。我们今年的这个资金成本在持续降低呢，我们认为还主要是供需关系决定的。那今年从这个金融机构端来看的话，整个的这个房贷下降之后呢，那个资金端对于消费信贷类的资产的配置需求是在明显上升的，而我们的资产的稀缺性又非常好，因此我们驱动了全年的这个funding cost的有一个明显的降低。那从今年，从今年这个9月份以后呢，我们又看到这个政府融资和房地产行业的一个需求呢，又会导致资金有，有一些这个，从消费信贷这个资产类别上往外分流的一种动力。那这个呢，我们长期呢，也会，去做好这个准备，看他们是否会影响到我们的这个，这个成本的这个持续下降。那从，从这个ABS的角度呢，我们，应该说还是会，是去，去保持甚至是扩大我们ABS的一个发行节奏。那我们的这个ABS的这个，这个规模，发行规模和这个发行成本，应该说在，呃，我们同行业同行来看的话，应该还算是，做得非常好的。我们希望能够继续维持我们这种，发行的节奏，维系我们的这个领先性，所以因此来推动，保持我们这个资金成本的相对优势。

Karen Ji (Senior Director of Capital Markets)

Regarding the funding cost, our cost of funding declined by 20 basis points sequentially in Q3 with our ABS issuance cost down by 47 basis points. And our current funding cost is quite similar to the Q3 level. From a rate cutting perspective, theoretically, rate cutting can drive down the funding cost of financial institutions and eventually benefit the real economy. However, due to the complex macro environment in this year, we didn't see it help that much. Our funding cost decline this year was mainly driven by the supply and demand dynamics in the market, as the funding partners allocated more resources to consumer loan assets when the mortgage loan is underperforming this year.

Given the scarcity of our assets, we managed to continue to optimize our funding costs in this year. However, since September, there is some other sectors, including government financing, property sectors, are also attracting funding flows, which may put pressure on the further reduction of our funding cost. We will continue, going forward, we will continue to optimize our funding structure and keep the pace or even expand our ABS issuance to maintain our cost competitive advantage from the funding part, and maintain our funding cost at a stable level.

Haisheng Wu (CEO)

好，谢谢，Richard，你看有没有回答你的问题啊？

Richard Xu (Managing Director and Senior Equity Analyst)

非常谢谢，非常感谢，感谢海强总。

Operator (participant)

Thank you for the questions. Now move on to the next questions from Alex Ye from UBS. Please go ahead.

Alex Ye (Equity Research Analyst)

哦，感谢管理层给我的提问的机会。这里2个问题，第一个是关于资产质量，能不能给我们更多的一些color关于Q3这个资产质量有一些波动，其实感觉更多是宏观环境的一个影响，还是说，是我们这个行业其实本身也面临一些挑战，例如说回收效率方面是否有一些下降？然后对于Q4，当前最近2个月看到的一个趋势是怎么样的？

然后，第二个问题是关于这个定价的一个展望，就是我们其实也看到今年，一个主题吧，政府是，去，降低了普通家庭的一个利息负担，所以也降低了现-现存房贷的一个利率。在这种大背景下，就是当然降息可以帮助我们的经营成本下降，但是会不会，从而传导到对整个消费信贷行业的一个定价端也带来一定的压力。So, my first question is about the asset quality outlook, can you give us more color in terms of the reason for causing the fluctuations in Q3? Is it more driven by the macro environment or some of the industry specific reasons, such as your collection efficiency?

What's the latest trend in Q4 in the most recent months? Second question is on the loan pricing outlook. In September, we have seen China lowering the mortgage rate for the existing mortgages. Under that kind of a backdrop, do you expect the current lower interest rate environment to also translate into some of the low downward pressure to our loan pricing future? Thank you.

Haisheng Wu (CEO)

好，这个请我们CIO郑燕回答一下。

Yan Zheng (Chief Risk Officer)

哦，好 的，关于风险这块，就 Q3 的资产波动啊，我们认为主要是两个因素叠加造成的，一个是宏 观层面，那我们也知道一些重大的宏观经济指标都不及预期。那第二个是信贷投放本身，其实是具有一定的季节性特征的。那一般来说，上半年是相对充裕一点，而下半年会相对收紧一些。所以，消费信贷的资产会在 Q3 Q4 会出现一定幅度的波动。对，那这些，这两个因素，最终它会在表象上会体现在回收率下降之类的，整个行业都可能会遇到这样的问题。那我们是预计明年上半年整体市场的流动性会恢复比较宽裕的状态，这，将会对 Q4 的新增资产风险会有帮助。那同时我们其实从 Q3 开始已经做了快速的调整，啊，包括优化客户，后客，客，就是新增客户的一些，质量结构，去对冲宏观和行业的风险形势，那也包括说收紧了一些交易的审批策略，降低了客户的额度敞口。所以从新增资产的一个早期风险表现，比如说 FPD7 这个指标来看，我们九月份已经较八月份呢有一个相对，已经下降了 5%。对，然后十月份已经有一些表现，那预计全月的这个指标，相对九月来说还会有进一步的优化。Q4 来说的话，我们会进一步加强风险工具升级的一个建设工作，大概会包括三方面，一块是，我们会引入三家互联网大厂的评分，并且后续会推动，我们会把中台的大模型团队拉进来，和风险团队一起，去到大厂那边进行一些联合建模。那，第二个是，我们内部数据会继续深挖，并且，去，我们会在常规迭代一版我们的常规 B 卡，会重点对 APP 买点数据和人行征信数据进行新的一轮深挖，利用，利用我们的序列算法大模型构建风险指标，这个预计是在十一月底会完成和常规 B 卡的融合建模，进一步提升风险识别能力。第三个是升级贷中风险模型的一个，矩阵，会构建快速响应 B 卡，B 卡评分。这个快速响应 B 卡，它不同于常规 B 卡，以长期的样本稳定性为要求，这个快速 B 卡会基于更近期的样本，然后融合最新数据和算法结果，去快速更新 B 卡评分，以快速地去识别新增的风险。这个工作我们是预计在十二月，十二月完成。那，我相信随着我们工作的推进，会更好地对冲风险，预计十一、十二月份新增的资产的风险会稳定下来。

Karen Ji (Senior Director of Capital Markets)

Okay, I will do the translation. The fluctuation of our asset quality in Q3 was mainly a result of two factors adding together. The first is from our macro perspective, the key macro indicators are below the expectation. The second reason is that the similarity of the credit industry in the sense that the liquidity is typically better in the first half than second half, which led to some fluctuation of our asset quality in Q3. However, we expect the situation, especially the, especially the liquidity situation, will improve in early next year, which may help improve the risk performance of our new loans issued in Q4. At the same time, we swiftly adjusted our operations by upgrading our user base, tightening our credit assessment criteria, and reducing the exposure of our existing borrowers since Q3. Accordingly, our early risk indicators for new loans, say FPD7, improved by 5% sequentially in September, and we expect it to continue to improve in October. And in Q4, we have further strengthened our risk management tools from three aspects... First, we incorporated the scorecard data from three leading internet platforms and built joint model with those platforms.

Second, we deep dive into our internal data and upgrade our regular B Scorecard by further leveraging our app data and PBOC data, using sequence algorithm and large models to, large language models to construct risk sub-analysis, aiming for an integrated B Scorecard and further improved screening capability by the end of November. Third, we will upgrade our post-lending risk models and generate fast-responding B Scorecard rating system by end of December, primarily based on recent samples, which is more helpful for us to identify new risks. Putting together all these efforts, we expect the risk performance of the new loans originated in November and December will stabilize.

Haisheng Wu (CEO)

关于定价这个问题，我想说，应该说是从主观上呢，我们会采取不同的这个动作来吸引不同的客群。比如说我们对这个，优质的，更优质的客群，我们会采取那个更，更好的这个，更低的价格测试，从而提高，我们用户的这个满意度，优化我们的客群的这个结构。那同时我们也会对风险较高的这个用户进行适度的这个，这个提价的可能。因此综合来看的话，我们认为我们在平均定价上应该还是会能够，保持一个稳定性。但同时另外就是从宏观的这个，这个背景下呢，现在，消费金融仍然还是，刺激我们消费的这个主要手段之一。在目前这个监管体系下呢，国家应该说已经是形成了一个多层次的消费金融的供给的一个体系，那我们会基于我们自己的这个角色，基于这个市场的这个供求关系来，来进行定价，以积极地这个发挥我们在，扩大消费和助力这个小微企业这个中间的作用。

Karen Ji (Senior Director of Capital Markets)

Regarding pricing, I would say from our own intention perspective, we will conduct different pricing tests for varied customer groups to improve user stickiness and satisfaction. Through more attractive pricing, we are also able to acquire quality new users to improve our user mix. Meanwhile, we will also raise our pricing for higher risk users. Combined, our average pricing will continue to keep stable. Under current macro environment, consumer finance is also one of the means to boost consumption and economy. Under the current regulatory system, this is a multilayer supply system for the consumer credit industry. And based on that, we will also set price based on supply and demand dynamics, and actively play our role to drive the consumption and help SME players.

Haisheng Wu (CEO)

好，Alex，谢谢你。

Karen Ji (Senior Director of Capital Markets)

Thank you, Alex.

Operator (participant)

Thank you for the question. One moment for the next question. Next question comes from the line of Emma Xu of Bank of America Securities. Please go ahead.

Emma Xu (Equity Research Analyst)

Thank you for giving me this opportunity to ask the question. So I have a question about shareholder returns. We see that the company is still continuously repurchasing, as of the most recent period, it has already repurchased $80 million, that is 80 million dollars at such a level. Then I want to ask, at the current valuation level, will it conduct more repurchases? Then for the medium to long term, after this period of repurchase ends, for the medium to long term, will it -

Karen Ji (Senior Director of Capital Markets)

嗯 。

Emma Xu (Equity Research Analyst)

那个，会进行更多的回购。 So my question is about your shareholder capital return.

Karen Ji (Senior Director of Capital Markets)

Yes.

Emma Xu (Equity Research Analyst)

It's really encouraging to see that you continue to do buyback your shares at current level. I just want to ask whether you will continue to do the buyback and after the completion of the current buyback program, will you launch more buyback program in the future?

Alex Xu (CFO)

Okay, Emma.I will take this question. So as you said, we already did $80 million repurchase since June twentieth. Well ahead of the timeline. And obviously, we will continue to execute the current repurchase program, you know, throughout the remainder of the year, and also into next year. We already structured internally a very kind of a comprehensive system to periodically review our cash position, as well as the use of the efficient usage of the cash. Try to compare the expected return between the reinvestment in operations, and the return generated from either the buyback or the dividend payment.

Through this kind of a review, we will determine which is the best way to deploy additional cash or additional resource, you know, in the future. So, after we complete the current buyback program, as well as this year's dividend plan, we will do a new review based on the cash position at that point, and you know, make necessary changes to the shareholder return program, either through buyback or through dividend, or through some kind of a combination of the both. In summary, basically, the logic behind our future cash deployment is based on whichever method can generate the highest shareholder return, then we will use the cash to that direction.

Thank you.

Karen Ji (Senior Director of Capital Markets)

Mm-hmm. Thank you.

Operator (participant)

Thank you for the questions. One moment for the next question. Next questions, we have the line from Cindy Wang from China Renaissance. Please go ahead.

Cindy Wang (Director)

嗨，谢谢管理层给我这个提问的机会。那我这边有一个问题，关于管理层对于轻重资产的一个策略。可否帮我们拆分一下目前轻重资产的一个利润率，以及管理层如何看待这个未来的一个轻重资产占比？那与这个放款量增长的一个相比的话，未来我们这边是不是会更看重盈利的一个重要性？那我很快的一下翻译我的问题。So my question, thanks for management teams to giving this opportunity.

So, my question is about the management strategy for Capital Light and Capital Heavy assets. Can you help us break down the current profit margins of Capital Light and the Capital Heavy loans? And how does the management view the proportion of Capital Light and the Capital Heavy loans in the future? So compared with the growth of loan volume, will company be more focused on the profitability in 2024? Thank you.

Haisheng Wu (CEO)

谢谢Cindy。关于轻重资产。从这个take rate角度来看，这两种资产的盈利性，应该说，我们努力做到了让这两种资产都基本上平衡在3%左右的一个take rate。那重资产呢，是略高于3%，那轻资产呢，我们也会通过我们的精细的运营和配置，让它也做到了接近3%。所以它们，本质上差异不是那么大。关于未来的资产占比的角度来看，我们应该说，并不把这个绝对的比例作为我们的一个主要目标。应该说，我们是在平衡我们的盈利性和我们整体资产包的长期健康度，作为我们的终极目标，我们维持一个相对动态的一个平衡状态，这是它们的比例方面。那从未来这两个，你说的放款量和盈利性的重要性的角度来看，我们也是同样的逻辑，我们既不把这个放款量作为我们唯一重要的优先级去考虑，也不把盈利性作为我们唯一重要的优先级去考虑。因为如果我们把盈利作为第一考虑，那，我们其实可以像...

像一些平台一样，大部分做重资产其实就很好，就可以让我们的营业质量有一个更大的规模的提升。但是我们还是认为，今天这样的一个比例，是，是对于我们整体资产组合的这个健康度，最有利的一种状态。因此呢，我们在可预见未来，我们还是会去动态平衡，去把握，整体的这个健康度，应该不会出现跟今天这种比例出现太大幅波动的这种，这种变化。

Karen Ji (Senior Director of Capital Markets)

Okay. Thanks, Cindy. Regarding the profitability of our capital heavy and capital light business model. I would say both capital heavy and capital light loan facilitation model generates a roughly 3% net take rate, with capital heavy a little bit higher than 3%, and the capital light a little bit lower, but pretty close to 3%. In terms of the loan mix, we will balance profitability and the long-term healthiness of our loan portfolio and keep a dynamic balance between these two categories. Regarding the importance of loan volume versus profitability, I would say it is not our priority to either pursue loan growth or pursue profitability improvements. If we only pursue profitability, we can just all do as a heavy business, like some other platforms.

Our target is to balance profitability and the long-term healthiness and sustainability of our loan portfolio. We expect loan mix will maintain largely stable in the foreseeable future. Thank you.

Alex Xu (CFO)

Yeah. I probably want to add one little point here, is that in 2023, because the micro factors and also because the first half of the year, we are facing a tough comp in terms of pricing versus last year. That's why you see the profitability growth is slower than the loan volume growth for 2023. I would say these kind of negative factors related to profitability is already behind us. So in the future years, we will try to at least maintain the same pace in terms of between the volume and the profitability. If anything, we try to also drive some additional operating leverages in the future. Thank you, Cindy.

Operator (participant)

The questions. Our next question comes from the line of Yada Li from CICC. Please go ahead.

Haisheng Wu (CEO)

Hello, good evening!

Yada LI (Executive Director and Equity Research Analyst)

I'll do my translation. Hello, management. Thanks for taking my question. This is Yada.

Karen Ji (Senior Director of Capital Markets)

Line dropped. Yes. Okay, because we understand your question, so we can go ahead answer this question. Okay.

Haisheng Wu (CEO)

好。谢谢大家，我回答一下。关于这个 Take Rate 的这个变化趋势啊，...

我们认为短期上看的话，影响 take rate 因素，比较多，那也会经常会有一些波动。比如说我们今年来看，风险会有一些波动，资金成本呢，也有一个向下的波动。因此呢，我们在各种波动因素中，在各种波动中间，我们通过我们自己的努力，比如说我们通过资金成本的降低优化，以及我们投入更多的研发资源，来降低我们的各种经营成本，比如说获客方面呀，比如说风险方面呀，等等相关的。基于我们各种技术驱动的经营，我们尽量去抵消掉这种上下波动的影 响，以保持我们一个相对稳定的 take rate。那从第三季度来看的话，我们第三季度通过我们各种精细化的研发资源的投入，我们的各项成本是有一个降低，效率也有所提升。包括我们在给用户提供更加多元化的服务，从而提高我们整体盈利性方面。其实我们的 take rate 在第三季度是有一个上升的，但是我们也看到了，我们第三季度获客规模其实是有所上升的，那我们第三季度做的分红呢，也从税收上抵消掉了一部分利润。因此呢，反映在结果上，看起来 take rate 与上个季度是有一个持平的状态，但实际上我们 Q3 其实是有 take rate 的一个上升的过程。那从长远来看的话，我们对于我们继续投入更多的，我们的技术力量，去提升我们的整体的运营效率，我们非常有希望能看到 take rate 会有一个稳中向升的稳中有升的趋势。

Karen Ji (Senior Director of Capital Markets)

Okay. Regarding the take rate, I would say in the short run, we will see some fluctuation in terms of our credit cost and funding cost. In this regard, we will further fine-tune our operation, optimize our funding structure, and invest more resources into R&D to improve our operational efficiency and funding cost. With those costs and efficiency improved, we will mitigate largely the fluctuation. So we will see the take rate maintain stable in the short term. Actually, if you look at our take rate in Q3, it's actually improved sequentially from apple-to-apple perspective with diversified services offered to our users and optimizing our asset allocation.

But, because we expanded our customer outreach in Q3 and adding on additional tax costs related to our dividend and the share buyback program, it looks like our Take Rate in Q3 maintained stable from last quarter. From long-term perspective, we will further improve our operational efficiency, and we do hope to see a steady increase in our Take Rate. Thank you.

Operator (participant)

Thank you. I see no more questions from the phone line. I would like to hand the call back to management for closing remarks.

Alex Xu (CFO)

Okay. Thanks again for everyone to join us for the call. If you have additional questions, please feel free to contact us offline. Thank you. Have a good day.

Operator (participant)

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect your lines.