High Templar Tech Limited (HTT) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by for Qudian Incorporated Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a 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 2019 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 will be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company’s 20-F 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, Mr. Min Luo. Please go ahead.

Thank you, Annie. I want to first thank all our investors, analysts and the media, who have taken an interest to join today’s call. I’d like to walk you through some the key factors in our business performance, before handing over to Carl, who will take you through more details. Another record-breaking quarter in terms of user growth and net income. Our strength in earnings is not just about the scale and the growth trajectory. Since we launched open-platform last year, we are enjoying substantially earnings quality improvement as the larger and larger portion of the quarter’s earnings are generated from our risk-free open-platform, our referral revenue. Before we dive into the results, I would like to use the moment to help the community understand what is really driving the business. The early adoption of technology across our business has enabled us to develop a highly cost-efficient and user-friendly platform for a 100 plus licensed financial funding partners to serve the underpenetrated consumption credit market in China by funding loans to borrowers on our platform. Our loan book, which is a product of the credit, tech, we develop using AI and big data is driven by an industrial leading RMB 220 billion and growing one of accumulated transactions. This gives us a technology advantage in data analytics that is leading industry. This area of big data applications includes customer behavior patterns, complex network, address analysis, LBS information, biometric recognition, small title forms of machine learning, smart collection and real time credit format based risk strategy. We are able to use these technology tools to grow our loan book responsibly, which was at RMB 28.7 billion at the end of second quarter. To put words in perspective, we are leveraging our 1,500 secure and efficient cloud-based servers and are having over a 100 terabytes of transactional data per day. This massive volume of data creates a solid foundation for our big data analytics capability. In previous quarters, we have explained that we do not need costly marketing to drive user growth. We pride ourselves in having a competitive regulatory compliant fee and a one-stop seamless user experience welcomed by young, mobile-centric and underpenetrated population. Our scalable and profitable platform allows us to consistently test new and dormant users using NPL [ph] allowing us to have an authentic base of user growth. At the end of the second quarter 2019, our registered user base grew to 76 million, and total outstanding borrowers reached 6.1 million, both highest in operating history of the Company. On our risk-free referral open-platform, years of technology integration with licensed financial institutions has built a liable infrastructure with low cost, high speed and high accuracy for credit data processing. Disbursement and transaction clearly sets our financial service partners on our risk-free plus referral, open-platform can rely on the technology investment we have made to make credit decisions faster and better, clear transactions in near real time and access our quality user base with no marketing spend. In the first quarter, we had one bank partner operating under loan referral program on our risk-free referral open-platform; and now, this has increased to eight today, signifying the trust they place in our technology infrastructure with the seamless user interface and experience. The borrowers also continue to find our customer -- our consumer interface a great way to get a better service and cost. As such, out of users that are qualified to draw loan again in open-platform in the second quarter, the repeat ratio was 70%, showing the overall sustainability and user stickiness uplift initiative. With the consumer lending industry in China’s budget at over RMB 8 trillion, I continue to be excited by our prospects. Like we said in the first quarter, we are committed and focused on this consumer credit opportunity, and both the loan book and open-platform approaches are making strong inroads with our massive proprietary app based user base. At the same time, we are building a distributed traffic ecosystem by partnering with third-party mobile internet platform across different verticals, empowering them with the embedded app consumer finance solution for their users. This distributed traffic ecosystem is another value add to our funding partners to supplement our existing massive underserved user base, leveraging latest HTML5 technology. Our solutions are well-equipped to deliver the seamless and customized credit solutions within the third-party apps. We made a great strategic investment last quarter and now making great progress on new verticals with new partnerships to close soon. I very much look forward to continuing to deliver exciting development in the near future. Here is Carl for more detail.

Thank you, Min, and hello, everyone. First, I’d like to touch base on a couple of highlights from the second quarter. While officially we’ve joined quarterly net income about RMB 1 billion. Coming off a record first quarter of 2019, we started this year with another milestone, achieving another record non-GAAP net income of RMB 1.16 billion, up 57.1% year-to-year. This came as a result of continuing to ramp up our risk-free open-platform initiatives and successfully growing our loan balance, while managing risk appropriately. Particularly, our loan book grew by 91.8% year-on-year, demonstrating overwhelming user demand and ample institutional funding. As Min discussed, we have been continuing the activation of our dormant user base by effective credit trial programs. Instead of purchasing high cost traffic to our app, our credit assessment model identifies specific user cohorts to which we extend very small credit size for a short duration to quickly gauge the credit behavior data, and thereby can extrapolate risk profiles from multiple clusters of the test user group, gradually adding qualified users to our core user group. Through this effort, our new active borrowers increased by 108.2% from the last quarter, and approximately RMB 500 million was provisioned in the quarter to bring on more outstanding borrowers to reach over 6 million on our own loan books in the second quarter, growing the outstanding borrower base on the loan book by 12% in one single quarter. Our M1+ vintage delinquency rates would have decreased by 0.5%, excluding users in these trial programs. Owning to a massive under-tapped user base and highly evolved distributed traffic ecosystem, our open-platform initiative continues to prove its strong potential to become a key growth driver, generating RMB 398.1 million in revenues for the second quarter, compared to RMB 158.7 million in the first quarter. That’s 150% growth in one single quarter. The number of outstanding borrowers under the loan referral business also increased to 415,000 from 135,000 in the first quarter, driving total outstanding borrower base to our entire platform to 6.1 million. Since 2019, we have made effective efforts to address evolving regulations and partnership landscapes, and our share price performance has performed well to reflect the more positive sentiment. With solid second quarter results driven by strong momentum in our open-platform initiatives and better than expected loan book growth, we have raised our original guidance of RMB 3.5 billion, 28.6% to RMB 4.5 billion on a non-GAAP net income basis. And our second quarter earnings have again exceeded the Street consensus by 32.7%. In addition to delivering strong financial results, we also have a longstanding commitment to delivering value to our shareholders. We seized the market window to raise $345 million via a convertible bond issue in June, including a fully exercised green shoe, and at 1% coupon for seven years and further entered a capped call transaction to increase effective conversion premium to 75%. More importantly, given still the visible disconnect between the Company’s value and fundamentals versus the share price, the majority of these proceeds earmarked for share buyback in the next one to two years. The deal not only makes sense financially but has a brought us access to more large global investors, enhancing the quality of our stakeholder base. Now, let me share with you some key financial results. In the interest of time, I will not go through over line item by line item. For more detailed discussions of our second quarter results, I invite you to read our official earnings press release. Our total non-GAAP net income continued to set a new record, increasing by 57.1% to RMB 1.16 billion year-on-year, driven largely by tractions on the open-platform business. Referral service fees which relate to traffic referral services and transaction referral services provided by open-platform substantially increased to RMB 398.1 million from nothing in the same period last year. Our operating efficiency continues to improve as we achieve larger scale. Cost of revenues decreased by 69.8% to RMB 286.1 million from RMB 947.8 million for the second quarter of 2018. And sales and marketing expenses decreased by 51.6% to RMB 77.7 million from RMB 160.6 million for the second quarter 2018. To improve our credit assessment models and activate the existing dormant user base, we started to conduct credit trials in the third quarter of 2018 by extending credit to cohorts of non-core borrowers identified by our AI-based algorithms, which may not have met our strictest credit standards and were placed parts of trials or initiatives. Approximately additional RMB 500 million was provisioned in the quarter and the outstanding borrower base from that effort on the loan book side increased by 12% to reach 6 million in one single quarter. We continue to be conservative on our provisioning and operations. The M1+ delinquency coverage ratio for this quarter was 1.3x for the whole loan book. As equity reaches RMB 12.3 billion and outstanding loan balance also increased to RMB 28.7 billion, the leverage ratio stands at only 2.3x, lowest amongst our peers. In addition, we had cash and cash equivalents and restricted cash of RMB 3.4 billion. We believe our low leverage model and sufficient cash reserve will help to sustain our long-term growth. Finally, again on guidance, we remain fully confident in our growth prospects, given sufficient funding, strong user demand, and ramp-up of our open-platform. Therefore, as mentioned, we are reaffirming our previously issued guidance and expect our total non-GAAP net income for the full year of 2019 to be greater than RMB 4.5 billion, which will basically mean a 76.5% increase from RMB 2.5 billion in 2018. Now, this above outlook is based on current market conditions and reflects the Company’s preliminary expectations as to market conditions, its regulatory and operating environment, as well as customer demand, all of which are subject to change. Now, this concludes our prepared remarks. I will now open the call to questions. Operator, please kindly go ahead.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from the line of Alan Kuang from Aletheia Capital. Please go ahead.

Hi. This is Alan from Aletheia. Thank you for taking my question and congratulations on great results. I have two questions. My first question is on the traffic ecosystem. Can you give us some color on strategy investment plan in building that traffic ecosystem? And how much strategic or minority stake investments have you made so far and how much more do you plan to spend for the rest of the year, or maybe even next year, if you can give us some guidance? My second question is on user acquisition cost. We saw in the press release that Qudian has added about 2.3 million registered users in Q2 ‘19. Can you give us some colors on how many of these new users are from the third-party app ecosystem and how much cheaper it is to acquire new users from this ecosystem versus other channels? Thank you.

Hey. Thank you, Alan. I appreciate the questions. First of all, on the current strategy for the traffic ecosystem. Again, we made a great strategic investment in the last quarter in one of leading karaoke apps. So far, the conversion rate is pretty decent, it’s well above 1% of the initial models that we’ve built to support that investment thesis. But so far, we still are in the optimization phase in terms of where the placement of the icon will make the best exposure. So, the contribution to this quarter’s revenues or user base is not significant. But, we are very excited that as Min mentioned, we are closing several more partnerships. Now, these may not necessarily mean we have to take a strategic stake. Given the first step we’ve taken to build that system out, more and more leading internet platforms are seeing this as a way to really provide a great service to their user base. So, we’re working with at least two to three pretty large platforms, which we hope to close in the next few months from just a servicing perspective, and we probably would not need to take a stake in them. It’s hard to quantify the amount of dollar we would spend on these strategic stake relationships because one of the difficult tasks that we have to be responsible for is make sure purely strictly from a financial sense that investment makes sense, that the investment is cheap and reasonable and we expect to make a good investment return in the period. So, these are rare. But, we are expected that our ecosystem potential partners are seeing beyond just us being a stakeholder and seeing great value in the technology platform we can provide. So, look out ahead, in the next few months, we could be announcing some exciting partnerships. The user acquisition cost, on the second question. Thank you for observing, adding about 2 plus million of registered users, none of which came from sales and marketing spend. Again, a material amount of it comes from our traffic ecosystem for now. We continue to have a very, very large, massive proprietary sort of app-based user base. And I think that will be able to support great open-platform growth for the next few quarters already. The open-platform initiative is really just building something for the next two to three years when eventually at some point our massive user base gets used up. So, again, no marketing spend there, and open-platform in terms of users is not contributing material amount yet. But, we are very excited about the prospects. Great. Thank you, Alan, does that answer the question?

Yes. That answers the question. Do you mind if I ask the follow-up questions as well?

Please.

I believe you have mentioned in the credit trial program that you are targeting some of the noncore borrowers right now. Could you give us some borrower profiles on those kinds of borrowers that you are targeting in the credit trial program?

Sure. So, if we look at bid data, about 76 million now registered users and around 30-plus-million approved users. So, we actually have a fairly large gap, about 40 million potential customers that we’ve just been conservative on. Logically speaking, the deferral rate cannot be 50%. So, what we’re doing is, we’re using AI to identify sort of the next level of risk that we may not have understood before and issue them RMB 500 or RMBB 1,000 ticket size. And these will be much more blindsided testing. And we’re able to absorb these provision costs because we have such a large net income that can support us to do so. That’s why you see in the second quarter our loan duration has dropped from the previous quarter of 9.9 to now around 8 months. That reflects a part of our loan going out being much shorter duration, much smaller ticket size. So, I think that’s a step we’re taking. I cannot give you the specifics of the so called user profile because that is a highly trade secret what we’re doing. But the numbers are great, because we’ve essentially added 700,000 outstanding borrowers in one single quarter from Q1 to now Q2.

Yes. Thank you. That’s very helpful.

Thank you, Alan.

Your next question comes from the line of John Cai from Morgan Stanley. Your line is now open.

Hi. Thank you for taking my questions and congratulations on the strong results and particularly the growth momentum of users. So, my first question is, do we see this momentum to continue in the second half? And related is question about the cost. I think the credit trial program will lead to certain increase in the provision. So, just wonder, because I see in the second quarter the provision went up on a quarter-on-quarter basis, just wonder if the management can provide some breakdown on how much is related to the new acquisitions -- new users acquisitions. So, that’s the first one. And the second one is about the proceeds of CB issuance. I think, in the previous press release, we also mentioned that there will be some strategic investment. And now, it seems that the wording changed to basically share buyback. And I think that would be over the next one to two years framework. So, just wonder what we plan to use when we have not identified any strategic investment yet? And obviously the share buyback cannot be done over the next months. So, just wonder any plan on the cash. And the final question is about some balance sheet items. I noticed there is a new balance sheet item called risk assurance liabilities, and just wonder what’s that. And then, there is also some pickup in the long-term contract assets, so just wonder if there is any color on that as well. Thank you very much.

Thank you, John. So, for the first question, the second half momentum I think will continue to be strong. I don’t see any sort of data or trends pointing otherwise. So, if you add up the first two quarters that we just completed, the first quarters, our non-GAAP net income was RMB 970 with the sale RMB 1.16 billion. So, we’re well north of RMB 2 billion already. So, I think that -- and I’m reaffirming my guidance, so I expect the second half total, combined Q3 and Q4, we should be able to deliver around the numbers that can get us across the guidance line with good confidence. So, I don’t think there are any factors that point towards specific slowdown yet. And I think, the demand continues to be strong. But, I think, we have to be mindful that this an evolving industry. We are a responsible Company in terms of taking on risk, like what we’ve done in the first quarter of 2018, when industry risk was not at the right place we wanted, we would bring down our loan book. We rather make -- spend less money and make sure that risks do not get out of control. So, we continue to be responsible in such regard, but delivering the numbers seems to be well on track now. You mentioned about the cost on provisions. So, again, this is a way that we activate our user base. Approximately around 500 million on plus off balance sheet out of the loan book that we had provisioned in the second quarter was used to bring on more active borrowers. So, I think, this is something that we continue to monitor. The objective follows the kind of path. We first do a work around in terms of thinking about where our target net income numbers are because that’s my guidance. And if we have room in such quarter to drive more users, then we would lend more sort of higher risk loans out to drive more borrowers. So, it’s a bottoms-up approach, and we continue to manage that responsibly, so that we can deliver both earnings growth as well as a good consistent user growth. And then, on the proceeds on the convertible bond issuance. Yes, the proceeds are earmarked for mainly two things. Number one is strategic investments that add value to the Company, and more specifically, perhaps on the open-platform side; and then, because we still see the Company as significantly undervalued, we hope to buy more shares back. So, that will be used for that. Now, in terms of priority, again, it’s hard to specifically pinpoint or identify strategic investments because they do come when they come. So, as far as we can see a direct value add that we can provide to our shareholders is to first buy back. And given that some of the investments can be done onshore, we believe we have ample money onshore. As such, we now have 3.4 billion of sitting cash balance that we can make the right investments onshore already. So, that I think a large portion of that proceeds from the CD would be earmarked for buybacks. Now, buybacks will be subject to different price and volume limitations, but we will do so in a view to enhance shareholder value. Timeframe wise, we’re saying one to two years, but we could be more aggressive if the price is right; we can be more conservative, if the price is right. I don’t know. But, we hope to deliver what we did this quarter. If you look at our EPS from one year ago, our earnings grew by about 50% from a year ago, but our EPS grew by close to 80%. That largely, thanks to buybacks and share count. Our share count as of today is -- as of the earnings day is only 279 million. So, again, that’s real good shareholder value add. We think we continue to do so. Now, you mentioned about one extra balance sheet item. We started to introduce our asset management Company models to pick up the fees that are in excess of something that the banks would be happy to charge, but still remaining under the legal limit framework of 36%. And by going to these AMC companies, the asset management companies, we have to assess just slightly off-balance sheet model, how much we have to provision on the day that the transaction happens. And that’s why you see a new line item in our P&L as well, covering these, so called guarantees on asset management models. We actually made a gain of around 30 million in the second quarter. That’s because we were slightly too conservative on the provisions we were making when we started to do this with these asset management company partners. And then, long-term contracts, I’m looking at some of the numbers. Perhaps I’ll add to that at the end of the conversation. Does that answer most of your questions, John?

Yes, yes. That’s helpful. So, just one clarification on the asset management company, does that -- so, is that off-balance sheet or on-balance sheet?

That’s off-balance sheet.

Okay. Thank you very much.

So, that’s why the accounting is exactly the same as off-balance sheet where we book it off-balance sheet and then we only account that for the guarantee -- sort of the potential loss part.

Got it. Got it. Thank you.

Thank you.

Your next question comes from the line of Tian Hou from T.H. Capital. Your line is now open.

[Foreign Language] So, I want to get some clarification on the referral business. I want to -- would like to know how many and who are they that you guys do business with? And how exactly the services fee is collected? Is that percentage of the loan you get facilitated or is it flat fee? So, how do you get this services fee? And also, who are the guys you cooperate with? And we saw some issues with very local banks. Do you guys have any measurements to control such potential risky partnerships? Thank you.

Thank you, Tian. Really great to hear from you, and great insight on some of the questions. I’d like to first quickly address the last part of John’s question, which is the long-term contract assets that are sitting on my balance sheet. That’s basically receivables as longer term receivables because under the off-balance sheet arrangements, we have longer term receivables from our bank partners. And that sits inside, it’s basically the work that we continue to do. Now, Tian, to answer your great questions, number one, on the open-platform. The way we do this is, again, we do a risk-free business model where just refer -- a majority of it is referring out transactions to my bank partners. We had a concentration risk in the first quarter because there was only one bank partner supporting basically the entire open-platform on the transaction side, but that increased to four partners in Q2. And now, as Min mentioned, there are eight partners supporting this open-platform initiative. So, I think, the concentration risk has essentially gone away. Now, how this really works is, we take a referral fee, and that’s based off of a percentage of the transaction dollar that we introduce. So, in Q1, that was 8%; in Q2, if you back out a month, it’s coming close to about 10%. But, again, this is just the early stage of this business. I think, over the longer period of time, the take rate should be closer to 5% to 6% as more and more partners join and we become much more competitive in pricing to attract more partners. So, the revenue recognition, just to get the more details out to the community, is exactly the same as our off-balance sheet model, where we recognize the transactions revenue in one day. But, the good thing is, we do not need to take any guarantee either/or. And cash flow is collected when the loans are repaid over time from our bank partners. Secondly, on the risks surrounding industry, that’s something we continue to focus on. I also answered some of the first -- part of the first question whom are the partners. These partners are essentially licensed internet banks, or licensed consumer finance companies, whom have nationwide license to do business everywhere in China. We do not essentially deal with localized banks. We have one or two partners but they contribute a significant amount of our -- or even material amount of our business. So, some of the names you mentioned that blown up in the past few months, have no impact to us at all, because the bank partners that we work with are in a very different need. These would be names that every household name, household would know of. These would be your -- I’m not at a discretion to disclose the names, but they are fantastic names.

That’s very helpful. Thank you, Carl. That’s pretty much all my questions. Thank you.

Great. Thank you, Tian. I appreciate it.

Your next question comes from the line of Martin Ma from Nomura. Please go ahead.

[Foreign Language] Thank you for taking my questions. My first question is on start by Dabai Auto business. As announced by Company that the new business will be stopped from May this year. And I just want to understand what is the size of current inventory, and how will you handle that inventory? And the second question is on regulation. Recently, there was a regulation released by CBRC that requires online lending platforms to stop filing accident insurance policies. And I just want to see whether that will have any influence on our Company’s profitability, and what is the size of insurance products sold on our platform, and how is that booked in our P&L? Thank you.

Great Thank you, Martin for the questions, great set of new questions. And on Dabai Auto, we winded it up basically; we stopped selling new vehicles since May of 2019 from our first quarter earnings announcement date. And back then, we still had a few thousand cars. But right now, as of today, we have less than 500 cars in inventory. So, we’re quickly getting rid of that inventory to avoid exposure and having to mark down inventory. And anything that’s already -- still remaining in this 500 cars or less is already well provisioned for. So, you don’t have to worry about any potential impact to our P&L going forward. So, I think that’s basically a final sort of finishing up of Dabai Auto. We will for, full disclosure propose, we will continue to collect cars as some of the delinquency will continue to happen under the old portfolio. But, again, that will have immaterial impact to a net income base of 1-billion-plus per quarter going forward. So, I don’t think we need to -- I think, we can call it a day for that. On insurance, yes, thank you for observing the recent regulation on CBRC preventing insurance companies to participate in so called cash lending. We did explore that as part of product enhancement in the fourth quarter last year and partially in the first quarter of 2019. But, we have the foresight to not get close to so called regulatory sort of fringes. We stay away from anything that are susceptible to regulatory change. So, essentially, there are no insurance fees or income in second quarter 2019. We are one of the earliest companies in the sector to explore this and we are earliest of the companies to basically stop that and way ahead of the potential regulation, when that came in I think June. So, they are essentially immaterial, nothing in Q2. Does that help answer the questions, Martin?

Yes. That’s very helpful. Thank you.

Thank you.

Your next question comes from the line of Shenghao Yu from Needham. Your line is now open.

My question is still about -- the first question on the open-platform. So, in the first quarter, if we divide the revenue made in open-platform by the user referred, it’s about RMB 930 revenue per user and in this quarter it’s about RMB 954 revenue per user. So, should expect to continue to grow -- in terms of per user revenue? And if it is going to grow, is it driven by our take rate or driven by the sight loan offered by the partner? And what’s the ceiling out of these per user revenue? And my second question is about the funding partner. How many funding partners we have for now and how long it takes for them to onboard to our new system? Thank you.

Thank you, Shenghao. Again, open-platform is something we focus on. So, great questions to help everyone get more details. Again, thanks for observing the revenue take rate per user. That is a function of these loan transaction size and the take rates that we can get. So, in the first quarter, the loan transaction size was around RMB 13,000. That’s relatively stable into Q2, and the take rate was 8% in Q1 and take rate was about 10% in Q2. There is no ceiling. So, if my funding partner determines that a user I send deserves a RMB 0.5 million, then obviously we take a certain percentage of that RMB 0.5 million on some pre-agreed rates. So, there is no ceiling. It depends on the risk that my funding partner is willing to take on that. So, that number will vary. But, I think the overall trajectory is that we think from an absolute revenue perspective, we continue to see at least another few quarters of growth, because to answer your second question, we had one partner in Q1 contributing to the open-platform; we had four partners in Q2; and as Min mentioned, as of today, we now have eight. So, this has become a very proven value proposition across the regulated license financial institutions to tap into a brand new market that they couldn’t access before.

Thank you.

Does that answer your questions?

Yes. Thanks.

Your next question comes from the line of Daphne Poon from Citi. Your line is now open.

Hi. Thanks for taking my questions. So, my first question is on the asset quality side, so as previous on the vintage delinquency rates. So, the vintage continued to trend up, like for example on the 2Q 2018 cohort. So, I’m wondering where should we expect that to stabilize in the longer term. And also because you mentioned earlier you are having this credit trial program, which means, you’re essentially increasing your risk appetite. So, going forward, is there any comfortable number on the annualized delinquency rates that you will expect, and when should we expect -- where should we expect credit cost to like stabilize going forward? And the second question is about I guess the outlook for the core cash loan business versus the open-platform business. So, on the cash loan, if we look at that -- the loan balance, assuming your presentation slide, it actually came off a little bit in July. So, I’m not sure if that is because you’re intentionally shifting the focus more towards the open-platform business. And in that sense, is there any target in terms of the revenue mix between these two referral service fees versus the core cash loan business contribution?

Great. Thank you, Daphne. Again, great questions. Number one, all new questions from today, from everybody else. Number one, delinquency rate, yes, Q2 number has picked up to now slightly over 4% in terms of M1, and slightly over 2%, closer to 3% on the M6 charge-off rate. It is higher than previous quarters. But, that just means the highest vintage is sitting there, where the other vintages are still below that. Now, because what we’re doing is on a bottom-up approach, if we can deliver the same bottom line, we’d like to activate more users. So, we will continue to use that as a priority and see how much provisioning we can spend in each quarter and activate how much users. If the delinquency trends accelerate beyond that, then we have to pull our loan back. That’s kind of how we think about it. I cannot tell you the exact sort of longer term rates, but I can tell you basically the trend, it has to go up for three main reasons. Number one, I think, the overall economic profile, the macro side, continues to be deteriorating over relative period from last year. It’s still very strong Chinese economy, but on a relative basis, it has slowed down. Number two that there are more and more players that are going bust, which means some of the people who were able to refinance couldn’t be financed. That’s kind of driving delinquency rate up as well. And number three, we are proactively doing this, so called, NPL marketing method. And if we were to take out the NPL for marketing purpose, I think the delinquency rate on some of the back calculations we’ve done would have been just around 3.7% on M1+, and then just around 2.1% on a M6 charge-off. So, it is pretty much stable, like before. That’s kind of how we think about it. I’m trying very hard to see if we can, in the next few quarters, be able to separate that delinquency by vintage into what is really the core business and what is really for sales and marketing purpose, so everybody can have a better comparison in terms of how we spend money on acquiring users versus other. So that’s something we’re working on. But overall, the trend has to go up. On the cash loan business versus referral business mix, thank you for observing the daily charge that we post online. So, you see blips and troughs. We are carefully managing that so called trajectory so that we meet our guidance numbers carefully. If you have to ask us as a company and you I think as most investors, I think the preference is if we can generate a 100% of net income from referrals with no risk, why not, because that’s a better higher multiple business. So, we’re constantly tracking the development of open-platform. If that can help us across our goals and contribute a bigger percentage of net income contribution, we will take down our loan book, so that we would have less exposure to risk period. So, that’s kind of how we think about it. Regarding the specific mix, it’s a function of how quickly we can grow open-platform revenue, the provisions we are making and how effective we can bring users onboard to take them through the loan book program and eventually filter them into the open-platform business. So, it’s a dynamic process. But, our goal is to be -- majority of our net income contribution coming from open-platform. I think, we made great progress, in the first quarter roughly 15%, around 15% of net income kind of attributes to open-platform. In the second quarter, I think, given the net income of 1.16 billion and we had a just under 400 million referral fee, that’s just under 40%, around 30ish percent. Hopefully, in the next quarter or so or next two quarters may be that riskless net income can be over 50%. So, that’s kind of how we like that. Does that helpful with the questions, Daphne?

Yes. That’s helpful. And I actually would like to follow up, understand more about asset quality or the risk control perspective. I guess, I can see that for 2019 earnings perspective, you have a pretty strong buffer to take on more risk, but you can still meet your full year guidance of RMB 4.5 billion. I guess, the question is, if we look beyond, for the longer term, say in 2020, I mean, you continue to take on higher risk and you see higher credit cost, while because the APR is kind of 36%, so that would essentially mean a lower net revenue take rate and also a lower profitability. So, is there any bottom line profitability that you will be targeting at? So, that’s a follow-up question.

Yes. Thanks, Daphne. As of today, we hope to have the annualized take rate of at least 10%, that’s kind of where we see a good cushion of buffer, and that may change depending on how quickly we can go open-platform. Yes. It means that we take on more risk in the delinquency side and have a lower take rate on the loan book, so, we can grow open-platform may be 4, 5, 10 folds. It might make sense to do so. But, we haven’t seen that yet. We’re just doubling every quarter right now on open-platform. So, the 10% kind of average take rate on the loan book is something we are kind of comfortable with for now.

Okay. Thanks.

Your ext question comes from the line of John Cai from Morgan Stanley. Please go ahead.

Thank you for taking my questions again. So, I have two questions. The first one is on the 70% repeat ratios under the open-platform. So, I think -- yes, it shows user stickiness. But just wonder -- so that means most of the revenue from the second quarter is actually repeat borrowers. And what should we expect for this repeat ratio forward? And secondly is on -- it’s actually a follow-up on the mix between open-platform and our loan book. I think, if I look at the funding side for the risk business, we -- the funding now we are sourcing essentially going to AMC. So, just wonder if there is more kind of on funding cost there as compared to the banks. And then, if I look at open-platform, we are actually able to add eight banks now. So, it seems they are more interested in doing open-platform. So, how should we think about that as well? So, obviously they get more revenue. So, that’s probably the driver. But, is there any long-term strategy in terms of customer retention? Thank you very much.

Yes. Thank you, John, again for following up. Two questions. The first one, 70% repeat ratio. I threw that number in after careful analysis because people who may not have used our app think that once our borrower through our open-platform gets referred to a bank, it’s a one way road, they don’t come back. They worry the sustainability of an open-platform. So, I want to put some numbers to help them understand that the customers recognize that the consumer interface is us, not the banks, so that they keep coming back. Now, to put numbers in perspective. In the first quarter, we had about 140,000 open-platform outstanding loan borrowers. In the second quarter that’s about 440,000. So, again, most of them are new. That 70% comes from a pool of borrowers whom we paid enough from Q1 that they can have a loan draw down capacity in Q2. So, it doesn’t mean that 70% of the borrowers in Q2 are repeating. That means that the qualified ones are drawing down again from our platform again. So, some of them may not need a loan anymore, I suspect. Some of them will need a loan whom have the capacity to draw down, again they come back from our platform. So, it really is there to help people alleviate the concern that once we refer that transaction to a bank, it goes away; it still comes back to Qudian’s ecosystem. So, that’s kind of the repeat ratio metric. We’ve made a very careful definition in our earnings release what that means, basically who has capacity to draw down again, they draw down again in our platform. But people who don’t, who may not draw down, don’t have the capacity, they just stay there. And then, in terms of mix of open-platform or loan book. Again, our AMC model is a model to supplement what the interest rate the bank can directly charge. And I think the fee we’re paying there is less than 1% because again, we’re taking still the risk up. AMC companies really do not account for being a funding partner, but rather as a regulatory compliant way to collect that fee. And we will give them a very, very small revenue share for their troubles. And then, the mix of open-platform or loan book, your question really comes from the funding side preference. I think, the funding partners enjoy both types of business. It’s really about the user cohorts for the really micro lending stuff that they don’t have the capability on. I think, they still want to stick with the loan book business that we provide an underwriting service for. But for risk that they begin to understand, especially for larger tick size, I think that they are happy to go with the open-platform model. If you look at the transaction ticket size again on the open-platform, it’s like RMB 13,000 versus on the loan book, it’s still even in the second quarter just under RMB 2,000 per transaction. So, there is a still very good user cohort sort of different pool sitting there going on. So, I think, most of my partners like to do both, depending on the right user cohort.

Thank you, Carl. So, just quick follow-up. How many banks are we working with under our loan book or the risk business? Thank you.

We work with just under 30 active licensed financial institutions, some of them are banks, some of them are consumer finance companies, some of them are trust companies. But, trust play a very, very small part now, like most of them are just banks and consumer finance companies. So, on the risk-taking side, around 30. So, hopefully we can turn 8 at some point to 30.

Next question comes from the line of Tian Hou from T.H. Capital. Your line is now open.

Carl, another question. So, in the past for a long time, you guys were misunderstood as a P2P. So, you guys are not P2P. So, would you please give us some kind of insight or clarification, what are the applicable laws for you and what are some applicable laws for P2P, so that we have some much clear distinction between you guys and the P2P vendors? Thank you.

Okay. Thank you for the question, Tian. It can help us clear a really big question for a lot of people who talk to us for the first time. This strictest definition of P2P is peer-to-peer basically and private individual whom is investor lending to a private individual whom is borrower. And the platform sits in the middle, just acts intermediary to bring these people together. Now, the risk there is that this private individual whom is the investor, may not fully appreciate or understand and be able to underwrite that risk that they are taking lending. So, we understand that this may not be the best approach for an emerging market such as China. So, we have never adopted the P2P approach. We’ve adopted a purely institutional approach where the funding of these loans are made strictly by licensed financial institutions whom the core business is to understand risk. These would be your banks and financial, consumer finance companies. So, there is a big difference in the way we get the funding into the hands of the borrowers. And in our case, we’ve taken this to an even furtherer step by not touching the loan in itself. So, if you look at the regulation that applies in this transaction structure, we are a internet technology company, we have a proper ITC license to allow us to run our app, run the technology platform, manage that traffic on behalf of the bank. The banks have a proper lending license so that the lending relationship happens between the borrower and the bank. We don’t touch that money, just don’t. And when that transaction goes through [technical difficulty] the banks pays us a service fee. Now, that can be recorded as a financing income, if it’s our capital that is being invested through a bank or a loan facilitation income if that capital happens to be bank’s on capital. Now, the difference on open-platform versus a loan book is, at the same time on the loan book side, we’re providing an underwriting service to the bank if the loan goes bad. And we have a proper finance guarantee license to allow us to provide a guarantee. If you don’t have the license, the bank cannot take my guarantee. That’s not regulatory compliant. But, on the open-platform side, because we don’t take any risk at all, we don’t need a license at all to do so. This is a purely a traffic business and all it needs is a proper internet ITC license. The P2P regulation and the legal framework is beyond me, beyond my understanding because the P2P institutions are somewhat mixed in the bag of helping investors price risk. So, I think they are -- that whole segment is still evolving. And are rumors of registration process, eventually a registration to licensing process. But, none of that applies to us.

Okay. Carl, that’s very helpful.

Does that make sense?

Yes makes sense. Clear to me. So, thank you.

Thank you, Tian.

There are no further questions at this time.

Great. I would like to thank the global investor community, media and our stakeholders for joining our second quarter earnings. We continue to deliver very strong numbers. It proves the resilience of our Company. We look forward to deliver -- continue to deliver strong numbers going forward. So, again, thank you, everyone. And have a good night and have a good day.

Ladies and gentlemen, that does conclude our conference for the day. Thank you for participating. You may all disconnect.