Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Jiayin Group Second Quarter 2019 Earnings Conference Call, [Operator Instructions] As a reminder, we are recording today's call. [Operator Instructions] Now I'll turn the call over to Ms. Julia Qian. Managing Director of The Blueshirt Group Asia.

Hello, everyone. Thank you all for joining on today's earning conference call to discuss the company's financial result for the second quarter of 2019. We released the result early today. The press release is available on the company's website as well as from newswire services. On the call with me today are Mr. Yan Dinggui, Chief Executive Officer; Mr. Chunlin Fan, Chief Financial Officer; and Ms. Xu Yifang, Chief Risk Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese RMB. With that, let me now turn the call over to our CEO, Yan Dinggui. Mr. Yan will speak in Chinese and then our IR Director, Shelley Bai will translate his comments to English. Go ahead, Mr. Yan.

[Foreign Language] Shelley Bai;IR Director: [Interpreted] This is Shelley Bai, Jiayin's Director of Investor Relations. I will now do Mr. Yan's comments in English. I want to first thank all of our investors and analysts for joining us today. We are pleased to host our second earnings call as a public company. During the second quarter, we continued our focus on maintaining attractive profitability as we navigate the reforms being implemented in the P2P lending industry. We also remain committed to strict compliance with our government's finances driving the evolution of our industry to a more healthy and sustainable model.

[Foreign Language] Shelley Bai;IR Director: [Interpreted] We are pleased that we were able to manage our business to sustain healthy profitability despite facing very challenging headwinds. Our net profit margin of 26.5% is good performance in an industry environment of declining low volume. This profit performance reinforces the attractiveness of our platform model, which produces valuable service for our customers.

[Foreign Language] Shelley Bai;IR Director: [Interpreted] As we manage the retail lending business gently lower in compliance with policy from government authorities, we will emphasize elements of our strategy that we will sustain our profitability and reignite growth over the medium term.

[Foreign Language] Shelley Bai;IR Director: [Interpreted] First, the shift of our primary funding process from individuals to institutions. As you know, institutional investments are not regulated in the same way as retail and the large players within our industry are currently focused on partnering with institutions. Our historical success has been with individual investors, but we are shifting our focus aggressively to institutions like banks, trust companies and the like. We believe we can successfully attract institutions due to our robust business model, strong brand and solid reputation in the industry. We are one of the top lending platforms in China and our status as a U.S.-listed public company further enhances our positive reputation.

[Foreign Language] Shelley Bai;IR Director: [Interpreted] In the second quarter, we initiated discussions with many potential institutional investors and began our soft onboarding process with several of them. The onboarding process consisted of due diligence, review, approval and system integration. We are conducting this asset prudently, which means 6 months of work. We expect some of these partnerships to start funding in the second half of this year. This is our primary focus to increase our funding from institutions.

[Foreign Language] Shelley Bai;IR Director: Second, we continue to focus on tight cost control to sustain margins. Marketing expense was down meaningfully. In particular, we reduced the promotional spending by increasing our focus on repeat borrowers. Our automated reinvestment system also help us to reduce costs.

[Foreign Language] Shelley Bai;IR Director: [Interpreted] Third, we continue to invest in technology development to strengthen our risk management program, develop new products and the improved customer service and rotation. We believe an effective credit assessment and the credit management program is not only critical for the lending business, it's also critical to create foundation for partnering with institutions. We are investing in extensive data collection, which will come with machine learning to attract new insights into our business and the customer's behavior. Through AI plus Big Data, we are able to create or alter our products in a timely manner, thus enable us to modify our strategy quickly. We are able to analyze borrower behavior, improve product stickiness and improve customer satisfaction.

[Foreign Language] Shelley Bai;IR Director: [Interpreted] Although the regulatory environment remains uncertain, we are very confident in our business model. Our key business assets are clear strategy of strong and agile platform, a smart professional team and loyal and happy customers. We intend to be nimble and make adjustments as needed to drive sustainable growth.

[Foreign Language] Shelley Bai;IR Director: [Interpreted] With that, I would now turn the call over to our CFO, Chunlin Fan, who will offer more details on second quarter financial performance. Chunlin, please go ahead.

Thank you, Mr. Yan, and thank you, everyone for attending our conference. Our press release contains all the figures and comparisons you need, so I'm not going to repeat all the numbers. Instead, I'm going to focus on the drivers and examples that influence results. Keep in mind that we are referring to the second quarter figures, unless I say otherwise and that our figures are RMB, unless otherwise noted. As Mr. Yan just mentioned, the industry's regulatory environment is still challenging. We are compliant with the regulator's triple decline policy. We are decreasing our outstanding loan balance, reducing the number of investors and reducing the number of borrowers. This caused the lower loan origination volume and resulting decline in our top line. Let me go over some of the key metrics in our financial results for the second quarter. Net revenue were CNY 635.6 million, down 6.6% year-over-year, due mainly to the lower loan origination volume. Originations were down 15.1% year-over-year and 25% sequentially. Turning to costs. Even as we prudently managed our expenses, we are investing in many business functions, so that will improve our long-term prospects. For instance, origination and servicing expense was up 26% as we've significantly beefed up our collections capability. We did a lot of hiring in the collection team, which added payroll and office expense. This is a resulting post-origination revenue growth. R&D expense was up 33.9% as we continue to refine and advance our technology. We are committed to build the systems integration infrastructure that will enable us to cost efficiently serve new institutional investors. Sales and marketing expense was CNY 149.8 million, down 27.7% year-over-year. We continue to reduce our advertisement spending and promotional activities as we ratchet back with new customer acquisition and leverage the automatic reinvestment programs. Looking at general overheads, the allowance for uncollectible accounts was up as we take a more conservative approach due to challenging industry conditions. As I mentioned, we are investing in better collection capabilities. So I hope that our result will also be overly conservative. General and administrative expense was up, but this was mainly stock-based compensation related to options granted last year, for which value was realized around the IPO timing. Turning to the balance sheet. We are in a strong financial position. We had cash and cash equivalents of CNY 438.4 million compared with CNY 41.4 million at the end of 2018. We believe that our strong cash position enables us to weather the current industry challenges while investing in the initiatives that will drive long-term growth. With that, let's open the call for questions. Mr. Yan, Mr. Xu, our Chief Risk Officer, and I will answer questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Craig Irwin from Roth Capital.

So can you speak a little bit about the medium-term and longer-term targets for sourcing funding from institutional investors? Do you have a specific mix of funding source that you hope to get from institutions by the end of the year?

[Foreign Language]

[Interpreted] This is Yifang. I'm just going to interpret for Mr. Yan. Obviously, that institutional funding is critical part of our overall strategy. And as we have mentioned early, our primary focus is shifting towards this trend. Up to this point, we have 5 active partners and we have secured almost close to RMB 1 billion -- RMB 0.7 billion total credit line. In this process, as you know the stats, onboarding process can take some time. It will start from the business development, negotiation, contracting process, due diligence as well as system integration. And we have experience of some for -- depending on the partners, some may take longer time to ramp -- to go through the whole process, but we also have seen some partners have taken as less as 1 month. So currently, we have very healthy pipelines for our institutions. And there are -- 80 partners are in this whole pipeline process. And we are going to -- we have strong belief that we're going to continue to expand our institutional partners and probably by the end of -- by the next round of the earnings calls, we will have better estimation of where we will be in terms of the institutional partner -- number of institutional partners and also the significant level to our overall business. But however, I want to just add a little bit more is that the partners we are partnering with are banks or trusts or consumer financing companies. What they are looking for is really getting more towards this -- of Internet lending capabilities, which is what we have to offer and we believe that it's not that the capabilities these institutions will be able to develop in a number of years. So we believe there's a strong sources for them to -- we can serve them and support them better in providing such capabilities to our partners.

Can we maybe talk a little bit about the expenses for your move to sourcing funding from institutional investors? So in your financial results for the second quarter, your cost of origination and servicing was up just a little bit year-over-year, 2.2% -- sorry, materially, 26%, right, while your origination revenue was down 6.6% or the total volume originated was also down about 15%. Can you maybe approximate for us what portion of your overall costs are related to sourcing funding from institutional investors? Can you maybe help us understand what the income statement would look like without these costs in the second quarter?

Craig, I will take this question. Actually for the P&L, you're looking at -- for Q2 2019, the origination and servicing expense mainly do come from our P2P business because we started our institutional partner funding cooperation since the third quarter. So for that RMB 127 million origination and service expenses, they are all coming from our P2P business. And the reason why this goes up, right, by 26% year-over-year is mainly due to that we enhanced our loan collection capability and we hired more personnel, who will be engaged in the loan collection. And that's the major reason why the origination and servicing expenses have gone up for the second quarter of this year. And the result is also very obvious. We can see our post-origination revenue actually goes up by more than 60%, though that's the money worth it. So regarding the change about the P&L, if we add the institutional partner, corporation expense, maybe we can give you a more clear picture in the third quarter earning release.

Okay. Excellent. And my next question is about the triple decline policy. Obviously, you took discretionary steps to comply with government regulation and everybody knows that the regulators are simply looking to establish an orderly market, a market that's good for the lenders, for the borrowers and obviously, for the platforms like Jiayin Group. Can you maybe describe for us what the triple decline policy means for your origination over the next couple of quarters? Is there a specific volume that you expect to go down to? Would you expect it to be flattish? Can you maybe share a little color, so we can get a clear picture on how this will impact the short-term financials at Jiayin?

[Foreign Language]

[Interpreted] So in -- with regard to the triple decline, as you have noted that this has been -- the government's policies -- very clearly declared the policies since early this year. And we have seen over the time this government oversight has become -- has been getting more and more stringent. But as of now when you asked the questions about related to whether there's specific target numbers. We don't have anything material to declare at this point. We have no visibility in terms of the specific requirements. However, in the process, we are continuously speaking with -- having clear and regular and active communication with regulators, and we have been compliant with the government's regulators' requirement in terms of information declaration as such. And as we know more about the specific requirement, we're definitely going to have -- well, our strategy is definitely going to stay compliant with what the regulator requirements are. So that switch towards our business is that in the Q2, our business has not reflected any such requirements on our overall revenue and profitability, but yet we expect to see some impact in the coming quarter. And as also we mentioned early that our strategy is shifting towards to focusing more on the institutional funding and the pipelines we have -- and the process we have declared -- we have discussed early is going to be -- which we're going to see some of that changes impacting our financials later of this year.

Last question, if I may. I understand that there are multiple opportunities for product diversification that are a very good match for your platform and your approach to peer-to-peer lending. Can you maybe share with us whether or not you're evaluating these opportunities? And if any of them are under serious consideration, would you expect to maybe test something or discuss something with investors over the next couple of quarters?

Sorry, Craig, is that question related to our investment products or are you speaking about lending products? If I may ask?

It could be either, although I was thinking specifically about lending products. There's opportunities for things across the spectrum in consumer finance that I see is a very good match for your reputation and the platform and the way Jiayin does business.

Yes. Sure. So as mentioned early either from peer-to-peer business model or partnering -- providing products and services to support our institutional funders -- funding companies, our core competencies rely in the Internet lending capability related to credit risk assessment capabilities as well as effective customer acquisition areas to internet. And so a couple of things I'd like to mention early -- I would like to mention here is and we have seen this space -- the online consumer lending area is changing pretty significantly. So I just want to point out one thing easier to -- that happened early this year is that we've seen -- since the March of this year, we've noticed some significant changes in the loan marketing channels. Some of the lending market places due to legal or compliance issues are facing pretty significant challenges to attract quality customers. Some of them are even publicly listed companies. But meanwhile, we are seeing the rise of information stream advertising. There are partners -- there are companies such as Facebook in China too, like DouYin and Toutiao and these companies are delved into this consumer lending space pretty significantly. So normally, different types or categories of marketing channels will attract somewhat very different potential customer groups. And we also are seeing that some of these channels will have their own pretty unique third-party data that could be effectively utilized and leveraged to support credit underwriting. So we have adopted pretty and invested heavy analytical resources trying to apply our test and learn approach and to conduct channel customize -- customize-to-channel acquisition risk-based model approach to ensure that we can maintain competitors' underwriting capability in facing such changes in terms of the channel mix. And other will be -- we probably have a mention a little bit early, it's about our product qualification in terms of introducing some different tender loans, which we have started pretty significantly in our loan portfolio in Q3, actually. So another example we can give out is that we're also going to heavily leverage our existing lending customer base as we have been operating for over 8 years now. We have maintained a pretty significant pool of our lending customers. So our -- one part of our pretty strong asset is that we're holding a strong proprietary know-how in terms of knowing of -- in terms of our customers' behavior and how they perform and on the loans. So specifically, I want to mention a little about our -- in Q2, we have revamped our repeat customer overwriting, which is kind of based on our capabilities to derive over 2,000 behavioral metrics and integrate such metrics and variables into our credit assessment algorithm, which allows us to further develop our differential customer repayment capability and to optimize our credit lines and to ensure better customer satisfaction. Does that answer your question?

Yes. That does answer the question.

[Operator Instructions] We have a follow-up question from the line of Craig Irwin from Roth Capital.

I have more questions, so I appreciate you taking them. As far as government regulations, can you maybe clarify for us whether or not there is an expected announcement of approved platforms continue to be expected for later on this year?

[Foreign Language]

[Interpreted] So to your question related to the uncertain regulations, on the P2P registration process, we don't have very specific line of sight into and to whether there will be registration processes and when it will happen. And -- but the uncertainties related to registration doesn't have any significant impact on the strategy we are focusing on in the second half this year, as said early, focusing on developing institutional funding is going to be our primary goal and will allow us to continue to grow our balance sheet, grown our business and independent of how this whole P2P process -- registration process will go.

Understood. Understood. So then as we look at the third fiscal quarter, your -- the September calendar quarter, this is obviously something we can call a transitional period while the business is going through regulatory and other adjustments. Is it fair to expect profitability in the short term? Or would we may be expect to incur some losses while the business is repositioned and recalibrated for future growth?

[Foreign Language]

[Interpreted] We have seen some impact on our business since Q2, but we have strong confidence that we will remain be profitable in Q3 and Q4 and we might see some -- we might expect some decline in Q3. But overall, we still think the company is going to be profitable.

Understood. And last question, if I may. My understanding of the regulation is that the Chinese authorities do not place a limit on growth when their funding -- when you're funding is sourced from institutional investors for lending to retail investors. Can you maybe confirm this and describe whether or not you see this as a significant growth opportunity for the next few years?

[Foreign Language]

[Interpreted] To your question, there -- to answer your question, there's -- at this point, we don't -- we confirm that we don't have any -- we haven't received any special requirements or limitations in terms of the size or the growth related to institutional funding. But whether in the future, there will be any license requirements for Fintech company? We are open in that conversation. We will continue to have open conversation with regulators. But at this point, no. And we believe that there is a strong synergy between us and the Fintech company and with the licensed consumer institutional fundings because we -- as we said early that we are primarily focused on Internet credit-based consumer lending and our capabilities and service will be valuable for our partners.

Excellent growth. Congratulations on the solid 26% net margin and 80% gross margin. Even with the small revenue contraction, you're clearly executing. So we look forward to continuing progress in the future quarters.

Thank you, Craig.

Thank you.

Thank you. There are no further questions at this time. I'd now like to hand the conference back to the management team for the closing remarks.

Thank you, operator, and thank you all for participating on today's call and for your support. We appreciate your interest and look forward reporting to you again next quarter on our progress.

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