Ladies and gentlemen, thank you for standing by and welcome to the LexinFintech Second Quarter and First Half 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you and please go ahead.

Thank you, operator. Hello, everyone and welcome to Lexin’s second quarter 2018 earnings conference call. The company’s results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer and Mr. Craig Zeng, our Chief Financial Officer; Mr. Ryan Liu, our Chief Risk Officer; Mr. Stanley Zhou, our Senior Financial Director and other members of our team. For today’s agenda, Mr. Xiao will provide an overview of our recent performance and highlights. Mr. Zeng will discuss our financial results and Mr. Liu will discuss our credit performance. Before we continue, I refer you to our Safe Harbor statement in the earnings press release which applies to this call as we will make forward-looking statements. Also this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi. I will now turn the call over to our CEO, Mr. Xiao whom I will translate for.

I am very pleased to announce that in the second quarter of 2018, we have continued the strong growth on previous quarters have achieved solid results. At the end of the second quarter, our total registered users reached over 29 million, an increase of 80% from the previous year. Total loan originations reached RMB16.6 billion, an increase of 68.4% and our total outstanding loan balance reached RMB24.7 billion doubling from a year ago. In the second quarter, our adjusted net income reached RMB502 million achieving an all-time high. Overall, we have reached a stage where we are reaping the benefits of our investment in our financial technology. In the second quarter of 2018, Lexin through various financial services had achieved financial technology revenues of RMB232 million, an increase of 339% year-on-year. Lexin spent nearly one-third of our operating expenses on financial technology. In the first half of the year we invested RMB146 million, an increase of 45% versus last year. These investments allow us to not only achieve increasing business scale, but also greater operating efficiency. In 2015, our operating expenses represented 17.3% of our average loan balance, in 2016 and 2017 these costs were reduced to 8.9% and 5.8% respectively. Today our operating costs again declined to 4.7% of our average loan balance. Today, Lexin in every part of our operations is already fully utilizing AI technology and dramatically increasing our service quality and efficiency. Lexin’s Hawkeye, smart risk management engine utilizes over 7,500 risk model data points and can automatically process 98% of all orders produced instantaneous results. In addition our Wormhole system enables us to handle vast quantities of small individual loans connecting financial institutions with borrowers while accounting for differences among individual users, order type and asset quality, automatically determining the light credit level pricing in…

Thank you, Jay and hello everyone. I am pleased to announce that we have continued our robust growth trends and again delivered strong results. Our continued strong performance is the reflection of our highly vigilant business model which has fueled our acquiring high-quality educated young adult customers and accessing multiple funding sources to serve their needs. In the interest of time, I will now go over line items – by line items of our financials from our detailed discussion of our second quarter and the first half 2018 results, please refer to our earnings press release. Total operating revenue for the second quarter reached RMB1.78 billion driven by our customer growth. Adjusted net income was RMB502 million including our one-time tax benefits of RMB193 million. Net income per ADS for the second quarter of 2018 was 2.57 on a fully diluted basis. Excluding the tax benefits on our normal operating basis, net income per ADS would have been 1.5. Non-GAAP fully diluted net income per ADS was 2.77. We continued to see the future potential of our business model and the performance of the customer cohort whom we acquired in the first quarter of 2015, whose balance has now right into over 11,300 and whose 30 days delinquency rate is 1.01%, while maintaining a stable level of quarterly activity rate at RMB0.465. In the quarter we saw the benefits of our operating leverage as well. As Jay mentioned operating expense as a percentage of average loan balance decreased to 4.7% in the year-to-date versus 4.8% for the whole year 2017. Non-advertising marketing, advertising G&A and R&D decreased to 1.6%, 0.6%, 1.2% and 1.3% of average loan balance respectively. We currently have over 8.9 million users with credit line, up from 7.6 million at the end of 2017. Overall, our average…

Thank you, Craig. In the second quarter of 2018 we continued our focus on our search of focusing on acquiring the right customers continued to pay off in the virtue of performance. As Jay mentioned earlier, our 90 days plus delinquency ratio remains low at 1.39% and we continued to see performance as our lifetime charge-off ratios continued to remain at around 2%. In the second half of 2018, our NPL ratio for on balance sheet loans was 2.34% and our NPL coverage ratio was 108.6%. In addition we have seen the strength of our strategy in growing with our customer. As Craig mentioned earlier, our delinquency ratio for the cohort which we acquired in the fourth quarter of 2015 continues to be low at around 1%. With that, we conclude our prepared remarks. Operator, please proceed.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jacky Zuo with Deutsche Bank. Please ask your question.

So I will translate my question. I have two questions regarding to the funding. So first one is on P2P, we saw news that last week the regulators started this regulatory compliance check with 108 detailed rules. So, in terms of our P2P operation, what kind of amendment, need to be made to comply with these new 108 rules? And in particular for loan balance, do we see a stricter control and how is the loan balance – sort of P2P loan balance situation in August? And second one is regarding to the institutional funding, so we saw the institutional funding percentage increased in the second quarter, so what’s the outlook for institutional funding, how many institution funding partners have we seen in the pipeline already connected and what is the funding quota for each institution and what will be the funding mix at the year and this year? Thank you.

So Jacky, with regards to your question, I mean, first regarding the 108 rules have come out. What we are seeing is that it’s actually pretty consistent with what’s going on, on the local level before whether it’s 106 or 180. And to some degree actually requirements are lower and as far as we can tell we are already fully compliant with it. In fact, we did a quick assessment and internally we definitely believe that we are there. Now that said, we would like the government also to take a closer look and inspect that what we have done and it maybe we can make some minor adjustments. So overall, I think we have faced that we are in a very good position when it comes to meeting the requirements of the 108 rules. Now, with regards to scale, there has definitely been no request on our side to limit the scale, but we do focus again on being compliant and we are in close communications with all the regulatory authorities and we will work directly with the government to make sure that we are fully compliant. Now with regards to the events last month with some non-compliant platforms having problems, you can see that immediately the government has taken effective steps to curb some of the problems that have come out of that. Given our situation where we have clearly better assets and also the fact that we are a reputable public company, this has given our investors a lot of confidence. And recovery this month has been definitely quick and to some degree and solid rating as well. And we strongly believe that after the current turmoil if you will and the problems that occurred in the sector we are going to come out of this much…

So I have a follow-up question on the funding cost both on P2P and the institutional side, so due to current P2P segregation, we may see expectation on the institutional funding, would that push up the funding cost? Thank you.

And so Jacky, as you know, there is 42% or so of our funding recently has come from institutions with regards to the competition for institutional funding, but as mentioned earlier, the barriers is actually quite high. It’s not easy for other financial technology companies to access institutional funding. Overall, institutional funding partners inherently have high requirements. So for example, if your APR is too high, then they can’t work with you or if your bad debt is too high and your bad debt isn’t low enough, they wouldn’t work with you. Also, they require that you have certain amount of technology as well as stability in your overall performance. In addition, they also need to have confidence in your team management, etcetera, but this is not something that other companies can easily access. Now, in our case, of course, we have already accessed this in the future we are going to commit more resources and dedicate more resources towards acquiring access to more institutional partners, which will then fuel our continuous strong growth. Hope that answers your question.

Not get the funding cost?

The funding cost for the P2P side, you basically had seen the rates on [indiscernible] and it’s pretty stable this year and if it’s only thing different, sometimes we have seasonal promotions. So that’s quite stable there. Regarding the institution, the cost compared to the late last year is little higher just because of the whole condition of our ability of the markets, but it’s about similar to what we see last quarter. So, [indiscernible] you see in this quarter’s number actually, it’s a combination of historical funding cost. So overall, it’s kind of 8% to 9% kind of the prime institution.

Got it. Thanks so much.

Thank you. Your next question comes from the line of Bo Pang with China Renaissance. Please ask your question.

So good evening everybody and thank you for taking my question and congrats on the great quarter. So my question will be more focused on assets side. The first question is regarding to the loan APR, so we have seen the APR up sequentially in this quarter, but still way below the industry level, so what’s the borrower acceptance on the price increase first of all? And secondly, any borrower structure change in terms of their credit risk level associated with this change and how should we think about the price change in the predictable future alongside with your product category expansion? And my second question is on the sales and marketing efficiency, so the user acquisition cost seems a little bit higher and lagging expectation in this quarter despite a very strong e-commerce performance, which is typically an entry point to our ecosystem, so can management share a bit more color on your thought regarding the user acquisition trends going forward and the potential strategy of improving it? Thank you.

So overall, in terms of the APR we just replaced this slightly and this is within the normal market range or behavior. In terms of credit quality, there has definitely been no impact. We are still very much focused on serving high-quality credit customers and yes, we haven’t seen any changes to their credit quality. What has occurred is that we have done much more careful and detailed analysis of our customer cohorts. And based on that analysis to maximize the possible economics and to come up with the most appropriate ARR at different levels and as a result of that detailed analysis we have come up with the slightly higher APR. Now that said, overall I think longer term in terms of where the APR would be, it will be probably around 24% range plus or minus a little bit, so normal range would be always around 24% plus or minus.

Second question about customer acquisition costs, we have been always to emphasize like we are not looking for even lower customer acquisition costs. We think the customer acquisition cost between 100 to 200 is a very comfortable zone for us. And regarding to the increase compared to the first quarter of the customer acquisition cost, we still have been pretty effective acquiring over 0.5 million of the new active customers, but from the cost side, because we are not finding traffic we are not doing a lot of online advertisement for customers. So majority of our customer acquisition costs actually were people related costs. So, it’s like over 70% people related cost. Second quarter is kind of annual salary adjustments time. So we adjust people’s salary and that’s become the major reason for the customer acquisition cost increase. So for that we will be lapped for the year. So this is kind of nominal kind of trend you will see every second quarter of the year.

Thank you very much.

Thank you. Your next question comes from the line of [indiscernible] of UBS. Please ask your question.

So I have three questions. First one is on asset quality, we have seen your 90 days plus delinquency ratio has declined quarter-on-quarter, can we have more color on your early delinquency days, 30 to 89 days so that we have an understanding of your recent credit performance especially for July and August given the industry events? And the second question is on funding side of your platform, we see a minor decline in terms of outstanding loan volume as well as the investor. Are we taking any measures to ensure we are getting more investor confidence and we are competing as part of the leading platforms? Does it mean we will see more pressure on the funding front going forward? And lastly, do we have any rough figure on what percentage of the highly educated customers versus your total customers? Thank you.

Okay. Let me answer your first question. Things, right now, we see the whole portfolio that we are seeing quite stabilized as we mentioned earlier and it’s remain – as for later parts, it remains around 1.4%. So from my perspective, if we see number around the 1.4% with same ranges we are stabilizing it. So, actually from Q1 to Q2 and we see all our portfolio has remained stable. So, even with early delinquency [indiscernible] it’s both within the same reach. So because we cannot release early delinquency numbers before, so I am afraid I would not agree to that here, but I can tell you the whole performance is the whole portfolio has been stable.

Regarding the percentage of high educated, we really focused on the high educated people solely like, in our annual report we are seeing over 90% of the total customer was high educated, but in the – that’s kind of one of the line we are using, but actually in our credit customer portfolio, we are even higher than that, so majority of our overnight expense or 95% of the people in our customer portfolio with high education.

Yes. Alex, maybe can you repeat the second question that you had a little bit. I understand it was about just a little bit?

Yes, yes, okay. So my second question is on your – the funding side of your [indiscernible] platform, so we are seeing your decline in your the loan balance and the investor number in July, so make sure we are taking to ensure that we will see a coupon in investor confidence going forward and we will see a rising fund – rising pressure on the funding cost?

To respond to your question first Jay mentioned in his response to Jacky’s question, he said like last month because of the whole industry environment, so with the customer confidence after buying new investments in the P2P they have the impact by those short-term market conditions. As we have been better reputation and we have the solid kind of the background and the solid assets quality, I think we – our investors actually have more confidence than average investor, so we always see the rebound of the customer evidence – confidence, so basically that’s as Jay already mentioned. Regarding to the cost we did see some of the players kind of increased their interest rates, increased their returns from their products, but we don’t think we need to do that actually. If you keep kind of follow waving down in our Q3 platform, we didn’t change our interest rates actually in our platform as well. So on the long run I think in this area it’s not kind of the high interest rates, high return type customers, it’s the quality of the assets, the task of the company and the stabilize of the operation will attract the investor confidence.

Got it. Thank you.

Thank you. Your next question comes from the line of Cindy Wang with DBS. Please ask your question.

So my first question is how do we come up with loan facilitation guidance of RMB65 billion to RMB75 billion versus previous RMB80 billion, so based on our calculation right now, the first half loan facilitation has achieved 42% to 38%, so supposedly, the second half would be the peak consumption season, so the borrowers would have more installment loan demand, do you think that guidance is a bit conservative? And my second question is right now how much of the loans are covered by insurance in our platform and how does that trend looks like? Thank you.

Regarding your first question, yes, in a nominal kind of trend, the second half is kind of the more demand from the customer compared to the first half. This year is a little special because we see this whole kind of checkout off of the China financial industry both on the institution side and the P2P. Institution side actually nothing – basically nothing to do with what we have been doing is a whole kind of the market that elaborates kind of the efforts. So, this year, it’s a little uncertain how quick the market can come back in the second half. So, that’s why we have been giving a range to see, how quick the market come to nominal kind of stage. Used to be, the market will pickup pretty quickly on the August September, then go to the peak on the November and early December. Now, we see lot of positive signs, but to coming back to the order fundings everything, it still takes time for us to be more clear. Regarding to the asset side, the demand side, actually the demand is quite strong this year. We have been handling the pressure off to have enough funding to set it by order demands. I think that’s not only alerting and today the market feel the similar thing. So the reason we are aware of mistake is first we see demands there, second is we see the sign from the government really want to have this internet industry, what we have been doing smart directed by consumer finance is the right on the direction the customer wants encouraging. So, we see mixed volumes that amounted some of the negative news impact for the future with a lot of positive things. So, let’s see, what we are getting more kind of information or as you know what our new target is. And regarding your question on the insurance, we have different models. We are using – we have a financial guaranty company. We have our P2P to work with the insurance – third-party insurance companies and also we didn’t have a close discussion with regulators saying how they want to do with our P2P, which model they like. Now, it looks like the insurance is one way they may accept it. So, we didn’t give exact percentage yet. I don’t have that number on my hand right now, but because of the asset quality we have actually not a difficult thing for us to find the partner to provide that kind of assurance to our customers in reference.

Okay, great. Thank you.

Thank you. Your next question comes from the line of Lucy Lee with Goldman Sachs. Please ask your question.

So I will briefly translate my question. The first one is on guaranty liabilities line, so I wonder if that’s the same idea as provision for credit loss. May I simply add up that to arrive at the profession? If so then, is it true that the credit cost this quarter is higher than Q1 this year even though the delinquency rate and overdue rates seem to be stable quarter-on-quarter? And the second question is on the e-commerce platform, there has been very strong growth in terms of GMV this quarter and we have seen even higher margins on the e-commerce side. I wonder one, what’s the percentage of e-commerce like loans originator or loan balance from – contributed by the e-commerce platform? And secondly in a normalized situation, what’s the right module we are looking at? Thank you.

Thanks. Firstly, we are [indiscernible] being very detailed accounting questions. The simple answer is – quick answer is we cannot be adding these two together, one is on balance sheet and one is the off balance sheet. Off balance sheet is more like a guaranty liability is more for the [indiscernible] platform. We have been put up by the operation, but we cannot be adding that. For more details, I think we can have a follow-up on call, we can go through you with all the detailed calculation and how you should do that in your model, but simply you cannot adding these two together. So, your second question about our loans through the e-commerce platform and other. So actually this is not how we appreciate that. We are actually looking at a person. So if a same person, we actually don’t differentiate this alone coming from buying something from our e-commerce or see borrowing tax. Actually, it’s for us, it’s the same kind of risk and same kind of person, so same kind of category. So for us, actually we do more from the people perspective. So e-commerce, its one place we satisfy our customers’ needs on the high ASP stuff and also we collecting data from there and their behavior data. But from our perspective actually we didn’t separate that. Secondly, margin of our e-commerce, last year we were talking about more like a breakeven, because our e-commerce is more focused on three products, especially like Apple products, their gross margin is pretty low. So, our goal is to have our customer when they are purchasing our e-commerce with installment payments. We were giving a big part of our gross margin back to them to let them only pay one margin, now two margins. So, we basically gain from their financial service income, not from the product margin, but with more and more existing customers and old customers we had, we actually enhanced our SKUs on our e-commerce platform. Now, we have about 1 million SKUs, so which means we have lot of high margin product suite. We may offer our e-commerce platform, which allow us actually to be e-commerce be public center instead of cost center for our whole portfolio. We don’t have a stacked margin percentage by e-commerce at this moment. We actually – we are in the transition of that. I think the first breakeven with the last year fourth quarter and this is only second quarter living on our property center, so we still think it’s not being significant compared to the whole financial we have. So you can simply make a breakeven or just little profit kind of center for us.

Okay, thank you.

Thank you. Your last question comes from the line of [indiscernible] with Morgan Stanley. Please ask your question.

So I will translate the first question first. So my question is about the change of the accountant in the [indiscernible]. So we have seen that from April that loan facilitated on the [indiscernible] off balance sheet, just wonder what’s the detailed change in the product designs and what will we expect the progress to be by the end of this year approximately how many percentage will be off balance sheet as a group? And then what would be the revenue recognition for this off balance sheet loan versus the previously off balance sheet loan growth we need to adopt to this accounting policy?

Thanks, John. To other question, I’d say we are looking it’s a tax based company. So to providing technology service to our partners, including individual investors and institutional investors, it’s always been our goal. So, we have been keep changing our model to be more like into a tax based company being a tax provider. So, I think this is also in line with the regulator being want us to do. So we have been keeping – put efforts on our right directions. So this is one of the milestone we had is moving our [indiscernible] platform to be off balance sheet. But regarding the revenue recognition actually we didn’t change that, we still been using over the period metallurgy to recognize the revenue. We do have a little change like loss guaranty and liability kind of thing, but that’s overall with the whole trend of the recognized over the period haven’t been changed. Your second question about 606, we are still using 605 actually. Today, we compare to our peers, I think most of our peers been using 606 already, we are using 605. Actually, our revenue recognition is kind of more post-differed rather than others being – and the 606 have more revenue, have been early recognized. For our plan based on what the size we have, the revenue we have, we think the right time for us to make that change is the end of this year, so we were starting from next year we will be using all the new 606.

Thanks for the answers. So I will translate my last two questions. And the first one is about tax rates, so we have seen this differed tax rate recognized in the second quarter. So I will just wonder if going forward we will assume that the position will be deductible, so the effective tax rate will come to a more normalized level of 25% or below. And the final question is about the regulations, so we have seen that there is some tightening on the offline promotion activities by online lenders to promote their products to borrowers. So, just wonder if there would be any – just wonder how should we interpret that and do we see any impact on our current operation? Thank you.

Thanks, John. For your first question, yes, in the future, so you can put in the model like all the provisions can be tax deducted. That’s basically what we have been able to do this way. And regarding for the long-term effective tax rate, you probably can assume around 15%. That’s the effective tax rate. So you will see in the near term. Second question regarding for the offline promotion of the P2P products, we never get offline promotion for those P2P products. We didn’t do any kind of offline promotions for our investors. So that’s actually not impact us at all.

So just a quick follow-up, because I have seen this, so previously might be only regulations on the funding size or we can promote to the investor offline, but since the latest regulations have also some wordings about asset size. So, I am sure if that’s relevant? Thank you.

So asset size, like we probably do some, but we probably promote our e-commerce sites not really being. I would see what’s exactly you have been talking about, but one, it’s maybe – it’s on asset size or on the funding size, but for the asset size, we have been very clearly – we have been very carefully on being compliant with all the regulations even we do promote our e-commerce sites.

Okay, thank you. Understand. Just want to congratulate on the strong second quarter again. Thank you very much.

Thank you. There are no further questions.

Operator, there are no further questions. I think you can conclude the call.