Hello ladies and gentlemen. Thank you for standing by for Qudian Inc.’s Second Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I will now turn the call over to your host, Ms. Annie Huang, Director of Capital Markets for the Company. Annie, please go ahead.

Hello, everyone, and welcome to Qudian’s second quarter 2018 earnings conference call. The Company’s results were issued via newswire services earlier today and were posted online. You can download the earnings press release and sign up for the Company’s distribution list by visiting our website at ir.qudian.com. Mr. Min Luo, our Founder, Chairman and Chief Executive Officer; and Mr. Carl Yeung, our Chief Financial Officer will start the call with their prepared remarks. Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company’s results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company’s prospectus as filed with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Qudian’s earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Qudian’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. We also posted a slide presentation on our IR website providing details on our results in the quarter. We will reference those results in our prepared remarks, but will not refer to specific slides during our discussion. I will now turn the call over to our CEO, Min Luo. Please go ahead.

Thank you, Annie. In the second quarter, we achieved a record net income and delivered another quarter of strong results. During the quarter, we continued to grow our core online consumer finance businesses while the new Dabai Auto business maintained conservative growth with a focus on profitability. Last quarter’s proactive de-risking to tighten credit policies and adjust product strategy worked well into the second quarter. As a result, we achieved a robust year-on-year growth of 40.3% in loan balance while seeing marked improvement in risk metrics and asset quality. The M1+ Delinquency Rate by Vintage declined to less than 1.0% for new loans generated this year. The total delinquency rate increased slightly due to legacy of loans generated last year, but also shows tapering off trends. In addition, as our registered users grew steadily and reached 67.9 million, we can focus on our growth on activating and monetizing our large existing user base instead of over-reliance on expensive marketing. Our strong data analytics capability in assessing customer credit worthiness further differentiated us and allowed us to successfully drive risk-adjusted profitability. During the second quarter, we were able to increase the average loan size and term among our high quality users inline with their income to meet their increasing consumption spending demand, without raising the burden of monthly repayment, while at the same time maintaining high credit quality. In addition, we continued to diversify our funding sources through partnerships and remain committed to strict compliance with both existing and new laws and regulations. Our core business is on solid footing. I would also like to share updates on Dabai Auto. During the second quarter, Dabai Auto business generated conservative, healthy growth as we continued to increase operational and supply chain efficiency. During the second quarter, we sold over 8,474 cars and…

Thank you, Min, that’s great, and hello everyone. First, I’d like to touch base on a couple highlights of the quarter. We achieved a new milestone by achieving record net income while navigating a maturing regulatory environment. Our non-GAAP net income increased by 42% year-on-year to RMB737.6 million, as a result of successfully growing our loan balance while managing risk appropriately. Our asset quality showed marked improvement as we successfully implemented tighter credit policies and adjusted our product strategy. Our provision to on-balance loan facilitation amount was less than 2% compared with 4% last quarter, as a result of a decrease in M1+ delinquency rate for new loans generated starting from last quarter. During the second quarter, we further increased average credit size to RMB1,430 and credit tenure to around 7 months for high quality customers, while keeping the overall delinquency rate at a low level. This allowed us to enhance profitability without raising borrowers’ repayment burden. Meanwhile, we continued our efforts to diversify funding sources and entered into new funding arrangements with 8 regulated and licensed institutional funding partners during the second quarter. We believe this combination of stable and diversified funding sources and our stockpile of liquidity reserves enables us to maintain confidence in our liquidity positions and sustain long-term growth. We firmly believe Qudian’s strategy of not relying on individuals for funding, but rather utilizing stable, licensed, and regulated institutional funding sources will further differentiate us and avoid the liquidity concerns that some P2P businesses in China may be struggling today with. We remain confident about future growth as the industry continues to evolve and mature. Now, to give further color on the agreement with Ant Financial relating to user engagement through Alipay’s dedicated channel for online third-party service providers that expires this month, both parties have…

Sure, Carl. Total revenues were RMB2,243.7 million, an increase of 124.7% from RMB998.4 million for the same quarter of 2017, mainly driven by growth of the revenues from sales income generated by Dabai Auto business and the loan facilitation income and others. Financing income totaled RMB895.1 million, due to an increase of 7.8% from RMB830.5 million for the same quarter of 2017. Due to an increase in loan balance as a result of increases in average loan size and term, partially offset by a decrease in active borrowers as a result of tightening credit policies. Loan facilitation income and others substantially increased to RMB452.1 million from RMB15.2 million for the same quarter of 2017, as a result of a substantial increase in off-balance sheet transactions and the adoption of ASC 606 revenue from contracts with customers, effective January 1, 2018. Prior to the adoption of ASC 606, the loan facilitation service income was limited to the amount that is not contingent on the delivery of the undelivered post origination services. Upon adoption of ASC606, the total consideration is allocated between the loan facilitation service and post origination services performance obligations. Loan facilitation service income is recognized when the service is rendered. For example, successful matching borrowers with institutional funding partners, the amount recognized is limited to the amount of variable consideration that's probable not to be reversed in future periods. Accordingly, the timing of revenue recognition for loan facilitation service income connected in periodical installments will be recognized earlier under ASC 606. The adoption of ASC 606 resulted in an increase of RMB156.7 million in loan facilitation income for the second quarter of 2018. Sales income was RMB784.8 million compared to nil in the second quarter of 2017 as a result of the launch of the new Dabai Auto business.…

[Operator Instructions] Our first question comes from the line of Alice Li from Credit Suisse. Please ask your question.

I have two questions, both about your cooperation with Ant Financial. The first one is on the user engagement. You mentioned that the user engagement from the Alipay will not be renewed. I would like to know what portion of or what percentage of your loan volume facilitated in the first and second quarter came from your own APP? And also I would like to know what's the number of new borrowers in your platform in the first half of this year? And how customer acquisition costs? This is my first question. And my second question is about the corporation in the credit assessment. Because it is reported that the corporation with Zhima Credit score has also been terminated, I would like to know is there any update on this? And how will this affect your credit risk management? Thank you.

This is Carl, the Chief Financial Officer of the company. Thank you for the questions, very insightful. So first of all, relating the corporation with Ant financial, as we have previously disclosed and discussed, as early as November, 2017, we have been proactive in promoting and marketing the users into our app. In fact, to address your question regarding the first and second quarter numbers, approximately 96% of total transactions facilitated were in our independent app, as this has been proven over -- at least over eight months now. That’s why we have the confidence to say that we do not necessarily rely on this particular way of acquiring users through transactions. That's why we have disclosed that this change will not have any material impact to operations, with a track record of over 8 months of doing so. So that's kind of the first part. The second part was the number of new borrowers in -- I'll just basically say, approximately 30% of new borrowers are registered through the specific contract under this agreement. So that is going to change, but we have confidence in that. The remaining 60% of the new registration will continue to come to our platform. In fact, if you look at the overall structure of our user base, we have a very, very interesting opportunity to further grow without actually acquiring users. We have over 67 million registered users. And its disclosed in the borrowing, we we only had serving approximately 5 million borrowers out of 67 million. And also, we mentioned that the average transaction size for these active borrowers is only around RMB1,400. Therefore we have a lot of room to grow, so number one, activating the number of users over 60 million of them, who are not borrowing credit. Even within…

Thank you. Our next question comes from the line of Victor Wang from CICC. Please ask your question.

And I have two questions. The first one is the strategy or the 2, 3-year target for Dabai Auto. Originally QD had rather aggressive target of 100,000 units to be arranged in 2018, and now the target has been officially brought down to 25,000 to 30,000. But in 2, 3-year horizon, what is your current kind of planning for this business? And what are the key parameters or the key data points that will help you to make the final decision whether to further accelerate or to further contain the business scale? And the second question is about your view on the regulatory environment. On one hand, QD is not rely on P2P platform and business model at all, which have given you clear advantage relative to the P2P players. But on the other hand, the overall cash flow industry is under -- clearly under more direct competition coming from not only the commercial banks, but also coming from the players like Ali or Tencent. So what is your media term view that the QD’s key competitive advantage and what will be your -- is there any capital, anything that will concern you in the longer-term for the overall business, I would say, strategy or the potential market scale? Thank you.

Victor, thank you. It’s always great to hear from you. Thanks for the question. Regarding question on Dabai, it’s a very simple answer for us, it’s about profitability. So all of our strategy divisions are to make sure Dabai becomes a profitable business. So for the next 2 to 3 years, we believe the market continues to be very, very large. The word profitability entails also risk. So we like to only do the risk we assess. If you look at some of the numbers we’re doing now, we’ve leased over 10,000 units of cars, and the M1+ delinquency number of cars is only 20 something, it just goes to show how conservative of a company we are. This strategy is build upon our business model of doing direct leases only and not doing leasebacks. So we continue to direct lease only. There’s no question on demand. And we're lowering this guidance because out of 10 customers that come to our doors, 8 to 9 of them want a leaseback. They want the title to be theirs. But unfortunately at this moment, we’re not comfortable with that kind of risk yet. So we continue to look to profitable sustainable growth in the next 2, 3 years given the risks appetite that we have, so that’s kind of Dabai Auto. Relating to the regulatory environment, thank you very much for observing we’re not a P2P, and so we clearly don’t have a lot of the issues that many P2P companies face. So regarding regulation, we can actually reaffirm and confirm that we are fully compliant with 141 issued on December 1, pertaining cash lending. So right now, we’re fully compliant with all the requirements stipulated by the PBOC plus the CBIRC in the way that we work with licensed financial institutions,…

Our next question comes from the line of Richard Xu with Morgan Stanley. Please ask your question.

I also have two questions. Firstly, basically, I'm looking at the quarterly active borrowers. It's been relatively stable. I understand that given the environment have been conservative, but going forward what will be the strategy, what you're going to do to increase the active borrower base? Or is that of the time where if you want to simply increase the volume per borrower where -- loan balance per borrower? What’s the strategy? Are you actively inviting more from your existing client base? Or if there's any other -- or are they actively still applying for the type of cash credits? That’s the first question. And secondly, also on Dabai Auto business, can you talk about the trend on profitability? And you know from the past two quarters, any experience from -- or any lessons learned from what type of business is more profitable? And what will help improve or achieve more profitability for this business going forward?

Hi Richard, it’s always good to hear from you too. So thanks for the questions. Number one regarding the user, basically, and the loan balance, we have a lot of things in mind to drive growth and these are fairly achievable or at least within arms-reach of what we have today. First of all, it’s a 67 million registered user base of 5 million of borrower with balance. So obviously the 67 million registered users have an intent to borrow. We were just not offering the right credit size yet. So they're offering a right product across these borrowers is something that we continue to explore and that will increase the active and the borrower with balance with us from what we have today. Secondly, we are increasing the so called loan balance and the tenure for our existing user base to drive profitability as you've seen the development trend over Q4, Q1 and now Q2. We've been doing that at a very conservative base. Last year, our average transaction size was just under RMB1,000, and in the second quarter it's RMB1,400. So we've go down a little bit. We can see visibly that we can increase that to as far as RMB3,000 without any basic change in the risk profile of the entire portfolio. So we have a lot of room to grow. We're not in a rush to do so. We'd like to be conservative and monitor market risk appropriately. This is kind of in our DNA to be conservative. So we do that -- do these two things. Regardless still, our app is ranked among the top apps across many app stores in China that naturally drive a lot of traffic too. In the most conservative scenario, we still believe going ahead, we expect to drive at…

Actually, just -- I mean, on the answer for the first question, do you know how many out of 68 million regiestered users, how many are still visiting the app on a quarterly or monthly basis? And how many of these borrowed once from the firm? I don’t know if you have data on that?

Yes, I can share with you one data point. Our current MAU is somewhere between 15 million to 20 million unique users every month. So it’s an incredible number. It’s just simply incredible. So we’re just working with 5 million of them.

Our next question comes from line of Jacky Zuo from Deutsche Bank. Please ask your question.

Just a question first on the funding side. So I observed that our loan balance risk nearly RMB 15 billion at the end of second quarter. And I remember in the first quarter, we disclosed that our loan balance was RMB 14.6 billion, around that in May. So since in July, the growth was kind of slowdown. So just wonder from funding side, do you see some kind of constraints recently? And what was the pipeline to onboard more funding partners? And what's the funding mix currently or as of second quarter? And we also mentioned the funding cost actually decreased year-on-year. So what was the recent funding cost trend as well as in the second quarter? So that’s the first question. And another one related to this is beyond this year, and look into 2019-20 what kind of loan balance growth are you looking at? And last one is a small one. So what kind of tax rate you are going to see for the following quarter, because for this quarter our tax rate is still low, like 10%?

Thanks, Jacky, I appreciate the questions. Yes, so on the funding side, thank you for observing the loan balance numbers. We have proactively slowdown a little bit more in terms of versus exiting Q1 in terms of loan balance because Q1 was just a very, very conservative quarter for us. We were in the process of essentially asking users to leave the platform because there is so much risk going on in the market multiple lending behaviors. So we were able to accelerate at a much faster pace between Q1 to Q2. Now into Q2, we saw a bit of change in the P2P space. So we want to be conservative and grow that loan balance at a prudent pace. Now that we have to keep in mind is all based on again, our reaffirmation that our net income is expected to be over RMB2.5 billion. So we’re on track with that, we’re managing that growth; we’re managing that risk in line to make sure we exceed that number. But we don’t absorb too much risk. Now, in terms of the funding pipeline, again, also thank you for observing our comments on the lower funding costs. Because of the value we are providing to our funding partners and providing big data and providing a very, very high cost efficient way to transact with users, we’ve been able to be selective in the type of funding partners that we work with. So through this process, we’ve actually reduced our volumes with some of the higher cost base funding providers and work with the more lower cost base funding providers. That’s more of the key drivers of that. In addition, we’ve been deploying quite a bit of our unused cash is sitting to help facilitate loan transactions through licensed funding channels. So that’s driving the efficiency in lowering our funding costs overall. The second question is a tricky one. Basically it's going to be providing some kind of expectations for beyond 2018. Unfortunately, we do not provide any guidance beyond 2018 yet, but I can point you towards what we feel. Based on the current massive user base that we have, again without much sales and marketing effort, we believe there is a sustainable long-term growth rate of anywhere between 30% to 50% for the foreseeable few years in terms of bottom line.

So just last question on the tax rate. What kind of tax rates are you looking at?

Yes, so we believe 10% is probably the right way to think about as going forward, actually.

Thank you. Our next question comes from the line of Linda Sun-Mattison from Bernstein. Please ask your question.

I have a couple of questions. So first one, can I just dive down a little bit ANT financial customer engagement channel. Carl, you mentioned that 30% of registered users are coming from the channel. I’m just wondering whether you have different credit approval rate for the 30% versus the 70% your own app? And with that, Carl you mentioned about really penetrates your 67 million registered users. But I do recall that your credit approval rate is around 50%, just less than 50% that you have to cap the approval rate to maintain credit quality. So I’m just wondering whether there is any change in the approval rate of the registered users?

Okay. So that’s the one question we have, right? Thank you Linda and good to hear.

Yes. Also another question was because this is a long question, sorry about that.

Okay. So, yes, again on the new registered users is about 30% on the specific paid marketing channel that’s under this contract that expired. We are not too worried about that at all because we’ve been very selective about new customers. Our approval rate for new customers versus approval rate for repeat borrowers is significantly different. Now we don’t necessarily disclose that, because it’s a industry trade secret, but the overall approval rate is somewhere around 50%, like you've observed. If you look at some of these numbers, you basically -- you can feel how it looks like. The percentage of transactions totally for the last eight months from this paid marketing specific channel is only about 2%. So although new registered users is somewhere around 30%, it's only about 2% contribution to the actual transactions and therefore revenues and profits. Therefore, it doesn't really affect essentially anything.

Yes. And just on top of that, you used to disclose average ticket size and duration. And I think that's one of the key selling points to investors because more ticket size and duration, therefore the credit risk is more diversified and -- as the turnover rate is higher. So you use it to change direction when you see something wrong in the market like what you did in December. Now you have stopped disclosing that this set of number. I'm just wondering is there any reason? Does this indicate some change in your overall strategy? You mentioned about ticket size of RMB3,000. I know it doesn't sound very high to white collar professionals working in Shanghai. But, how does the RMB3,000 ticket size compare with your average borrower, their income profile?

We thrive based on small credit and we understand that. It's the data and the volume that's driving so much of the value. In fact, in Q2, we did disclose just now in the discussion, our average transaction size in Q2 was about RMB1,400. And that is still a very, very low number. I'd like to help and guide by understanding this one situation. If we look at the last year's number, it was just under RMB1,000 approximately over 2 months. So if you add into APRs and everything, the average repayment per month is somewhere around RMB300 something. So it's actually slightly over RMB300 something. It's close to RMB400. Sorry about that. But now, if you look at this current quarter of RMB1,400 and over 7 months the average repayment is just around RMB200 or something. So we do pay a keen attention in terms of the monthly income about active borrower rate. And we make sure it doesn't overburden them. What we have done in the last several months is to make the loan size bigger, but yes, make the monthly repayment lower to reduce risk. And that has shown an immediate visible kind of positive impact in terms of delinquency rates. Now some may argue or ask a question for you that if you have a longer duration, does that risk sit further in the back, we are acutely aware of this potential risk, but we're comfortable that is not going to likely happen, because we're also observing an internal data point is the total outstanding delinquent, the total receivable delinquent balance. And that balance has been growing at basically a much lower rate than loan volume growth. So in fact, we’re seeing lower, lower risk that’s what we're seeing.

Carl, may I just ask one last question. And I do apologize for other people on the phone. Just a very quick one. Your loan facilitation fee has grown very strongly, which is good thing. But I can’t really understand what kind of fee in terms of percentage of facilitation are you getting? Because I look at your total loan balance is RMB 15 billion as of second quarter. And to generate that amount that means you have to do a lot of lot of loan to make the numbers work?

Sorry, Linda. I am not quite sure your question, because our fees actually calculated on fairly simply method. We take the transaction and we make sure that the total APR we charge is 36%, that’s all, that’s how we calculate the fee structure. Yes.

Our next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.

So two questions, and one is related to your funding partners and also the business beyond using your own balance sheet to do the loans. So I wonder if you can give us some color about the composition of your funding partner, who they are and what you do for them. And that’s number one. And also relate to this, as going forward, what’s the composition in terms of the loan? How much come from you and how much come from your funding partner? That is the first question. The second is related to the delinquency rate. This quarter, delinquency rate is kind of a low. And I wonder how you envision the delinquency rate going forward? So that’s two questions. Thank you.

So in terms of the funding structure, as the 2018 June 30th loan balance of $15 billion, approximately 36% were self-funding, basically our own capital deployed the licensed funding channels. So there is a channel that is licensed that we can fund these loans with. And then the on balance sheet, so called funding, is approximately 35%, which basically entails trust. So these are external funding to basically various asset management companies or banks. They also fund these transactions through license cost structures. And then approximately 29% is from so called off-balance sheet funding transactions, which are basically essentially bank funding, where we essentially send the users, and along with the big data to the bank, and they originate these loans themselves, and we take a service fee for that. So this is kind of the funding structure, 36% to 35 and about 30%, and by the end of 2018 June 30. So going forward we see this as a pretty stable way to fund these transactions. We don’t expect big changes to this funding structure. And by the way we are fully compliant with 141, we have introduced all the necessary license guarantee companies across all these transactions since two months ago. Now, secondly, your question regarding delinquency rate, yes, in Q2, our loan provision to the loan transaction volume was half of Q1. And I think basically the worst has passed. Q1 was a challenging period in terms of the overall risks in the market, and we're basically seeing things return to normal. I think this is kind of provision ratio is sustainable going forward. I’d like to still remind the global investment community that there may be changes in the overall environment of the Chinese economy, the user base and different changes in the industry. But we will be the first to react, and basically through the right -- risk adjusted profits.

Thank you. The next question comes from the line of Daphne Poon from Citi. Please ask your question.

So I have two questions, so first is follow-up on the asset quality and also the funding cost trend. So you mentioned earlier that there has been some change, actually recently in the delinquency rate because of what’s happening on the P2P side. So can you tell us that what is the magnitude of change, for example, in delinquency rates, in the past two months? And secondly, on the funding cost side, I guess, also related to the P2P rate of collapse. And we do see there are more P2P platforms. They're now trying to fight for institutional funding. So whether that has any spillover effect in terms of your funding cost over the past two months? And then secondly, I want to understand more about your longer term customer acquisition strategy. So I get the point that in a near-term, you can still like sustain the growth by further monetizing on the existing over 60 million registered user base. So from a longer term, for example, in the 2 to 3 years point of view, say after the industry consolidation, what do you think will be our key competitive advantage in terms of attracting new borrowers versus some of the other larger players? And also currently our customer acquisition cost is still much lower than most of the other like list of players. So do you expect in the longer run this cap to be leveled?

So first of all, in terms of the asset quality in basically the last months, we’ve seen stability, basically similar to delinquency levels from where we exited Q2. We have -- we have to be very thankful of what happened in Q1. The delinquency uptake in Q1 helped our AI and machines learned a lot about multiple borrowers. So first of all the current situations with the P2P is happening more on the funding side, where the funding is being withdrawn. The asset quality hasn't really turned extremely bad. It's more about the liquidity that these P2P companies facing, because there's been withdrawn of funding. And because of this fundamental nature of the change in the industry, and it's not about the borrowers are turning bad and we're much better at identifying the bad borrowers now. We have seen delinquency to be within well expected ranges and isn't been stable. There have been a lot of P2P players entering into the institutional funding game, and it's great, because it's a testament to the validity of our business model, the sustainable nature of the way we operate our business. We are working with these institutional funding partners for much longer period of time and in much larger sizes. But down to the core it's the business, and this business is about asset quality. I think, we are a public company. Many of the largest P2P players are public companies. Just look at our asset quality, we have confidence to say that we have some of the industry leading asset quality. So if you're funding partner, would you prefer to work with the lowest risk player providing most efficient platform or somebody else? So we don't worry about that kind of competition at the moment. But again, we are always trying to push ourselves to be more efficient, be better and analyzing data, so that this competitive advantage remains. Yes, longer-term customer acquisition strategy, like I said, based on the current existing user base that we have, we don't foresee going sales and marketing at least until 2020, but still be able to deliver the numbers as we discussed in the guidance. Now this is based on the existing user base. I like to also add that without any external sources of traffic, just on natural traffic alone, user initiative engagement is searching for our platform either to app store or other open platforms or we are adding about 1 to 2 million new registered users every quarter in light of the so called changes in the Ant Financial agreements. So we're still quite comfortable in terms of growing without sales and marketing for as long as I can see. Thank you.

Thank you. I'll now hand the call back to management for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Qudian's investor relations department through the contact information provided on our website.