LexinFintech Holdings Ltd. (LX) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the LexinFintech Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions]. I must advise 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. Please go ahead, sir.

Thank you, Operator. Hello, everyone, and welcome to Lexin's Fourth Quarter and Full Year 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; 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'll 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 now turn the call over to our CEO, Mr. Xiao, whom I will translate for.

Hello, everyone, I'm very pleased to once again announce to everyone our strong results, which has been continuously driven by Lexin's 3 advantages of consumption scenarios, financial technology and diversified funding sources for the past 4 quarters. In the fourth quarter of 2018, our non-GAAP EBIT reached CNY850 million. Our full year 2018 net profit reached CNY2 billion, representing an increase of 700%. We are very excited by our strong growth. For the full year of 2018, we originated CNY66.1 billion in loans, an increase of 38.5% as compared to 2017. Our strong growth can clearly be seen in the fourth quarter. When we reported our third quarter earnings, our guidance was CNY17 billion to CNY19 billion, but as we began to benefit from the macroeconomic policies, encouraging consumption and increased credit in the fourth quarter, we announced on December 12 that we will be raising our guidance to CNY19 billion to CNY20 billion. Today, as we report our fourth quarter earnings, our actual results have even surpassed our raised guidance. We achieve loan originations for the fourth quarter of CNY21 billion, exceeding the high end of our range by CNY1 billion, an increase of 53% versus the third quarter loan originations of CNY13.7 billion. It's worth noting that financial technology is the area where we are seeing the fastest growth. For the full year 2018, Lexin, through various financial services, achieved financial technology revenues of CNY2.08 billion, an increase of 448% over CNY380 million in 2017. In the fourth quarter, Lexin continued to increase the number of institutional partners and enlarge the scope of our cooperation with our partners. Total funding partners are now over 100 and approximately 70% of the new funding on our platform comes from financial institutions. On Fenqile, e-commerce platform recorded GMV of CNY5.83 billion in 2018, an increase of 41.9% versus 2017. This is far higher than the retail growth rate of 9%. We're now increasing our efforts to meet the consumption needs of our customers by adding more products and service categories on our Fenqile platform and by working with more e-commerce providers. This will enable us to acquire more high-quality educated young adult customers and provide existing customers when expanding set of consumption scenarios. From mobile and PC to travel packages, through Fenqile and Lexin's partners, we're able to fully meet the lifestyle and consumption needs of our educated young adult customers. In the future, we will continue to develop new consumption and provide our customers with additional consumption scenarios, member benefits and services. We are full of confidence in the future of Lexin. As the next generation of China's consumers emerge, consumption has entered into a new era, which will focus on technology, product quality and service. The 250 million strong that make up China's post-'95 generation will become a new force of consumption. In addition, the central government has also taken multiple steps to strengthen the economy by encouraging consumption, which has enabled financial technology companies to connect with China's mainstream financial institutions creating a new model for consumption. As finance enables and drives new policy changes, we believe that Lexin, a company built on financial technology, servicing the next generation of consumers, will have even greater room to grow and develop. Next, I'd like to invite our CFO, Craig, to discuss our recent performance.

Thank you, Jay, and hello, everyone. I'm pleased to announce that we have, once again, delivered strong results. Before I start, I would like to highlight that we recently adopted ASC 606 as our new revenue recognition policy and as a result, we recognized the cumulative effect of approximately RMB210 million as an increase to the opening balance of return earnings as of January 1, 2018. As a result of the initial application of the revenue standard, further adjustments are outlined in our press release. These adjustments were mainly due to the timing of revenue recognition. Also, I would like to mention that we are now accounting for our new loans, primarily on an off balance sheet basis. In the interest of time, I will not go over line item by line item of our financials. For more detailed discussion of our fourth quarter and full year 2018 results, please refer to our earnings press release. Total operating revenue for the full year 2018 reached RMB7.6 billion, driven by strong growth in our financial service income. Adjusted net income was RMB2.1 billion, an increase of 439% from same period a year ago, reflecting our continued strong growth and performance. Net income per ADS for the full year 2018 was RMB10.9 on a fully diluted basis. Non-GAAP fully diluted net income per ADS was RMB11.56. We continue to see the future potential of our business model. In the performance of our customer cohort, whom we acquired in the first quarter of 2015, whose balance has now risen to over RMB13,000 and with 30-day delinquency rate is still approximately 1% with a stable level of quarterly active rates at 41%. Our operating leverage continue to improve. Operating expense as a percentage of average loan balance decreased to 4.6% in the year to-date versus 5.8% for 2017. Non-advertising marketing, advertising, G&A and R&D was 1.5%, 0.6%, 1.1% and 1.2% of average loan balance, respectively. We currently have 37.3 million registered users and 10.5 million customers with credit lines, up from 7.6 million at the end of 2017. We acquired nearly 2.3 million new active customers in 2018. Overall, our average credit limit is approximately RMB8,650 while our tenor has increased to 14.2 months. Our weighted average APR was at 25.8%. In term of our funding, for the fourth quarter, approximately 34% of our funding for new loan originations came from our Juzi Licai platform and 66% of our funding for new loan originated came from our institutional funding partners. For our guidance, we fully expect to continue - we expect strong growth and believe we will achieve RMB90 billion to RMB100 billion in new loan origination for the year 2019. Next, Ryan will discuss our credit situation. Ryan, please.

Thank you, Craig. We continued our strong credit performance in the fourth quarter of 2018. In spite of market and macro environment conditions, we do not see any significant change in our credit quality that is outside our range of expectations. Our credit quality continues to be high and we expect our credit statistics and charge-off ratio to remain at the same level. Our 90-day plus delinquency ratio remains low at 1.41%. And we continue to see strong credit performance as our lifetime charge-off ratio is just over 2%. We fully expect our strong performance to continue for the full year of 2019. With that, I conclude our prepared remarks. Operator, please proceed.

[Operator Instructions]. We have the first question from the line of Jacky Zuo from Deutsche Bank. Please go ahead.

[Foreign Language] First question is about our 2019 outlook. So I just want to get some sense about the assumptions behind our CNY90 billion to CNY100 billion loan volume guidance. What is the active borrower number growth? What is the ticket size and long-term situation in 2019 and second question is about our asset quality. I saw on our fourth quarter income statements, we have a total gain of CNY260 million from loss on guarantee liabilities and change in fair value of financial guarantee derivatives. So just want to get a sense of that. Is that because of improvements on our asset quality? And third question is about regulation. We've recently heard some regulatory direction to promote SME, finance and customer finance, and Mr. Xiaoguang actually proposed to loosen the regulation on online microlending license to increase the leverage and also our financial channels. So I just want to get some sense if we're able to get useful lending license if we consider to change our business model from loan facilitation to balance sheet lending?

So Jacky, I think the first thing that we should probably emphasize a little bit is that in terms of our overall strategies, there's no real change here. It's still servicing our high-growth cohort, which is our educated young adults cohort. Obviously, having worked with this cohort and worked with this group for a very long time, we have a very good sense of how their income grows and changes over time and our strategy is to continue to grow with them and grow with our old customers and to continue to meet their needs. At the same time though, we are also in the process of strengthening our customer acquisitions and also increasing our new active customers from that. And we tried a few different things that has been pretty successful so far. With regards to your question around the ticket size and also a general sense of the tenor, as you know, we've disclosed a particular cohort in the past, which should give everybody a sense or a guide as to how the amounts will change over time; in particular, the higher borrowings over time. And of course with that comes longer tenor. So from this, you should be able to get a very good sense of how things are changing and developing over time. And obviously, again, having been the company that serve the educated young adults for a long time, we do have a very, very good sense of how they will develop and grow and hence, that's how we know we'll be able to achieve the guidance outlined. So with regards to your second question on the gains and our credit quality. Well, every single quarter we evaluate the accounts and you can say that the gains and what we see here is a reflection of the high quality of our educated young adult cohort as well as the strength of our systems. So Jacky, with regards to your question on regulations and also specifically licenses, as a whole, when it comes to a long-term strategy, we certainly would not mind and we certainly would target to acquire more licenses, but ultimately, the purpose of doing so would be to maintain the ability to continue to have stable funding sources and to work with our funding partners and, effectively, to be an effective platform, where we work with others to serve our clients. So hence, it's a situation where we would necessarily one day go, if you will, by ourselves and operate by ourselves as opposed to working with others. And in terms of the licenses as a whole, different licenses will also have different restrictions. So depending on the exact nature of the license, we would need to adjust the use accordingly. And ultimately, as mentioned earlier, our goal is to be a financial technology company, like a platform and to really operate outside of that, that's not our current goal, at least. Also in terms of just the regulatory environment, bigger picture, as I think we all know, since the third quarter, macro policies in general have been very, very favorable, whether it's been targeted towards consumption or other policies targeted to growing and stabilizing the economy further. So for example, in the fourth quarter, in terms of our growth on a monthly basis, we can see something like 1 billion in terms of growth every month. Now as a whole, what the policies are doing is exactly what the Chinese economy needs right now. Currently, the Chinese economy definitely needs consumer finance. So we're definitely in a good position to benefit from the current trends on the regulatory side.

We have the next question from the line of Eddie Leung from Bank of America Merrill Lynch.

[Foreign Language]. So I've got two questions. The first one is about the trends of the cost of capital of the two major funding channels. Basically, the P2P as well as the institutional side. And then the second question is about the long-term competition. How do we think about the potential competition with the big Internet and fintech platforms like the Ant Financial, Tencent, even some of the fast-growing news apps in the long run?

So first question, with regards to the cost of capital from institutions. I think it's first worth noting that as a whole, the market is very much market driven, it's very competitive. So it's very much a supply-demand situation. So in the first half of 2018, for example, it was quite expensive because there was just less supply. But then it gradually declined and right now, in the first half of 2019, it's definitely going down as a whole. And in fact, we can pick and choose a little bit and try to get better terms. So definitely, as a whole, the funding now currently is much more plentiful and the environment is much more supportive. So as a whole, for the first half of 2019, the institutional funding cost is definitely going down. And as we all know, at the macro level, there's definitely also very supportive policies occurring. So Eddie, with regards to your second question on competition. I think it's worth pointing out that first, the environment has always been competitive. The financial market has always been very, very competitive. In fact, in the past, even before much of the new regulations came out, one can even describe the market as being white-hot. Essentially, because of the regulations now, actually there is less competition and because of what has occurred in the market, it's also becoming increasingly clear to everyone where our advantages are and what we're very good at. With regards to what you talked about, which can be summarized as the big traffic platforms, those companies with a lot of traffic, I think it's worth pointing out that the market's big enough. Nobody can serve it all. Not even the major banks here in China. Inherently, the financial market in China is big enough to allow multiple players at multiple levels and we can see this clearly just by how financial markets, in general, are divided up. So for example, banks may be serving those who are at a 6% interest. Ali, Tencent, maybe they're serving those in an 18% interest. And in our case, we have a clear position. We're serving a very, very clear cohort, the educated young adults. They're young, they have high growth and they care about their credit. And because we have been serving them since the beginning, we have very, very clear advantages in data and analysis. We get to them ahead of Ali, ahead of Tencent by two years. We get to them ahead of the banks by five years. And while everybody has data, we have more data because we start from earlier and as they're customers, we pay - we know more about them and we know how to serve them better. And as we serve them better, they become stickier and today, we know that many of our customers, in fact now do qualify for Ali's or Tencent's credit products, but they choose to stay with us because we engage them better and because money is fungible, it's the same everywhere, but we can give them actually lower APRs, higher credit lines, longer tenors. So overall, we know where our position is and where our strength is. And finally, on this point, I'd like to say that because the market is quite substantial, everybody has room to grow. Everybody has room to continue to serve. So I think everybody in the end will do fairly well in the market. Thank you.

We have the next question from the line of Alex Ye from UBS.

[Foreign Language]. So I have three questions. The first one is about update on the P2P registration process. Do we still - is there any time line that we can expect at this stage? And the second question is about the outlook on our loan guidance for next year. So we can see we have a pretty strong increase in our loan - full year loan expectation volume for the next year compared to this year. So do we expect such a big increase to mainly come from more, increased number of partners we are working with? Or are we seeing more credit lines granted by these 15 funding partners. And the third question is about our business model on the partnering with institutions. So we know that some banks may require some guarantee companies to bear the credit costs, the credit risk, but some may prefer to bear the creditor risk by themselves. I wonder if you can give us some more color on what kind of model we are going to choose going forward and what would be the likely impact on our financials?

So Alex, with regards to your questions, Jay can address the first one regarding the developments on P2P, and the third one, regarding the assisted lending-type model. So first, on the P2P. As you can probably guess, our information is about the same as everybody's. Currently, the status is as a whole, the government has finished their checks on everybody. Everything was done last year. Everything on our side has definitely been completed. The relevant regulatory authorities here in Shenzhen completed their checks on us quite a while ago, in fact. And of course, we've now joined the Chinese Internet Finance Association, which is a requirement in terms of getting to the final P2P license. And part of this requires us to provide data, which we've done. And essentially, we are waiting for the next step, which is not clear at this time. However, we do believe that sometime in the first half of this year, first half of 2019, there will be greater clarity emerging. But ultimately, it's up to the government. But overall, on our end, we've met all the requirements. We've gone through all the checks. Essentially, we're all set and it's just waiting to see what the government does. And as we all know, the smaller P2Ps now are gradually being forced out. In fact, some regional governments and some other local governments have actually been more aggressive on this as you've probably seen. Now that said, in the context of everything that we just said about P2P, our plan in 2019 is to not rely on P2P for growth. Since the end of last year, in accordance with the regulators' wishes, we stopped the growth of the balances on our P2P. Instead, we are fully prepared to have all the growth this year being driven from institutions. This is something that we've been preparing for, for quite a long time. So ultimately, whatever is happening on the P2P regulatory side, it should have a very, very limited impact on our overall financial situation. Now with regards to your question on the assisted lending and related models as well as our newer model of having our institutional funding partners taking on the full risk. As you know, unlike many other companies, we do have a guarantee license, so we can give guarantees if that's what our institutional partners desires. At the same time, we also work with multiple, and in fact many, insurance as well as a guarantee companies. So that's what our financial institution partners prefer. That's something that we can certainly provide and work with as well. It really just depends on what their needs are. And in terms of fully transferring the risk, the other model, right now there are also multiple institutions that are working with us in this particular situation. So in that case, we have no reserves. The reserves are done by the institutions. What this would mean, of course, is that in the short term, we will possibly have to partially give up some of the economics. Now that said, right now, as we just mentioned, we have both types of systems. We have multiple ways of doing the assisted lending. We're very much ready to go on everything. But in the near future, we're probably a little bit more partial to having the full transfer risk model and giving up some of the short-term economics from that.

So with regards to your second question on the 2019 outlook and how will we get there, whether it remains more financial institutions or just the current partners, Jay addressed it a bit as well, but ultimately, capital is fungible right now and we are committed to developing more financial institutional partners and to get more financial institutions onto our platform. We definitely don't want to be limited to just our current partners, so we're definitely going to grow the number of new partners. Thank you.

Your next question comes from the line of Lucy Li from Goldman Sachs.

[Foreign Language] So the first one is on client acquisition. Is it possible to share with us the main channels for client acquisition nowadays and what's the price - what's the pricing like? Do we think competition are getting more and more fierce especially for the client group of our targeted group of around 24% APRs. And related to that, once the banks receive the client information of our borrowers, will the banks serve the clients directly going forward and therefore, those borrowers doesn't need to come back to us? And secondly, it's on working with banks or financial institutions. Which are the major banks that will work nowadays? And then related to that, the recent regulations reinforce that the local commercial banks cannot - have to focus on lending in the local area. So do we see any potential impact or inevitable impact to us? And thirdly, how do we see the credit demand and asset quality coming into the first 2 months of this year? Do we think that the young people nowadays are getting poorer and therefore, potentially, they will encounter problems to pay back the money going forward?

So Lucy, with regards to your two questions. Jay can address the first two and then our other colleagues can address the others. On the customer acquisitions, as you know, our methods are quite different from our peers'. We have much higher requirements out of our customers and we're definitely not in the subprime market. We require our customers to have a stable passive growth. We expect them to have high growth and we expect our customers to be our long-term customers. So hence, we built up a complete system of customer acquisition that's designed around that. Whether it's the e-commerce, depending on what you sell, what you sell will attract a certain type of people, and we've been sure to make sure that what we're selling attracts the right type of people. Also, we have our 1,000-plus ground sales force who are going to the offices and other areas where young, white collar workers are congregating so that we can acquire the high-quality customers that we want. And as you know, in the past, this has been a key to our customer acquisition, which is the fact that young customers are very, very social. So hence, we've established, for a very long time now, a very stable system for referrals for the young customers to refer to each other. Now that said, aside from our existing channels, which we just mentioned, we do have additional new channels. So for example, we are working more with third-party e-commerce solutions providers and we're engaging their educated young adult customers. But we're certainly targeting those e-commerce providers that are serving, in particular, our customer cohort. And by providing the financing for those platforms, we're actually raising the sales, of course, for those particular e-commerce platforms. So on one hand, it helps us get customers. On the other hand, it improves the sales of our partners, and this is also a low-cost method for acquiring customers. Overall, as you can see, our customer acquisition typically is about 30% growth year-on-year. Now that said, outlook for the immediate future, of course, as it has been in the past for us, is not driven by acquiring new customers. The outlook is instead driven by the growth of our existing customers. So hence, the model here is a little bit different. Now with regards to your second question about institutions and potentially losing customers to institutions, it's probably worth pointing out again that we've worked with institutions for a long time. It's not this year or recently that we just started cultivating institutional relationships. We've been engaging with them for a couple of years now and hence, this is a situation we're very familiar and we're very familiar with dealing with. And a lot of it is ultimately, we make sure that our customer has the habit of coming to our app and engaging to us - with us. We make sure that our engagement with our customers is better so that they don't migrate. And ultimately, we have to ensure that our customers are stickier. Now that said, institutions themselves, quite often, don't want to take the steps to engage in these types of businesses because it's complicated, it's difficult to engage with educated young adults. Instead, they quite often do prefer what we give them, which is a very, very stable and good part of the economics. So hence, this is something that is actually potentially a natural state that given the limited ability of institutions to serve our educated young adult customers and to engage with them properly, because it is tough, this is probably in fact the ideal situation, whereby, we're the lead engager and they're the funding provider. And what we said just now about working with the institutions and stickiness, et cetera, that's actually also the same, quite often, with the major platforms. Ultimately, if we can deal with our customers better, if we can provide them with better service and cultivate the better habits to make sure that the customer is stickier, then they definitely won't migrate. Yes, Lucy, with regards to two of your other questions. In terms of the concentration of funding sources, as a whole, we do try actively to diversify. So that we're not reliant on any single funding partner. So hence, as a result of that, there's definitely a lack of concentration among our funding sources and funding partners. Regarding the concerns or the potential regulations about local banks potentially not being able to lend outside of their region or region of jurisdiction, it's probably worth pointing out that now as mentioned earlier, we have over 100 institutional funding partners over the country. We're aware of the potential for such a role, but we also have major national banks who are our funding partners. In addition, we are also in anticipation for any potential changes cultivating relationships with more and more regional banks. So that when and if, and perhaps the emphasis should be on if right now, any new regulations emerge on this front, it will be like other times when new regulations emerge. We should be able to manage it relatively smoothly, if not completely smoothly with limited or even no impact to our underlying business, as has happened in general in the past. So in short, we're prepared. We're prepared for anything that might happen on that front. Now that said, whether the rule will come out or whether there's anything that's being decided or what's the time horizon from that, we haven't heard anything new. So it's definitely still up in the air right now.

With regards to your last question on the credit quality of our cohort and whether or not things may look worse given the current macroeconomic environment. It's probably worth pointing out first that in general, numbers in the fourth quarter may actually look a little worse. Whether it's due to seasonality, the Chinese New Year, people just forgetting or repaying a little bit late. So overall, that's something that might occur. Now that said, for our particular set of customers, the educated young adults, there's definitely less issues. People tend to be much more focused on preserving their credit quality. People are very much aware and conscious of their ability to repay. So we're definitely seeing overall limited impact on a cohort basis overall, certainly not over borrowing. That said, again, in the first quarter, you might see some inconsistent numbers in the future versus, for example, other quarters in the past. Now compared to however, say, the first quarters in the past, it would not be so inconsistent, and in fact, it should look stable overall. But from what we're seeing now definitely, there's nothing unusual in the trend. So for example, March now, as one can expect, everything is very much returning to normal. Now with regards again to the macro environment, we think that there might be my concerns around, if you will, other types of customers out there, as in customers that are not our type of customers, the subprime customers. I hope that answers your question. Thanks.

The next question comes from the line of Shengbo Tang from Nomura.

So I'll translate your question first for everyone. So I believe your question was regarding how many banks are working with us and also how many insurance companies, et cetera. First, with the insurance companies. I mean, it's definitely much more along the lines of support and helping with the credibility, if you will, of our products. And hence, for that, it's perhaps a little less directly related to institutional funding although, again, they do definitely provide support. But in terms of the banks, whether it's a large or regional - large regional or nationwide banks or financial institutions, those definitely take up something like 90% of our total institutional funding sources.

[Foreign Language]

Sorry, can you translate the question as well?

Sure. So in your funding source regarding institutional partners, what's your share of the top 10 players?

So it's very diversified, it's definitely not concentrated at all and it depends on - at what point in time you look at it exactly, but the #1 one, the biggest one probably at any given time maximum would be something like 5%. So it's definitely not very, very concentrated, the top 10.

The next question comes from the line of Martin Ma from Nomura. Martin M&A: [Foreign Language]. Just one question on the loan-assisting business mode. Is there any capital requirement if Lexin provides guarantee over its loans through funded by financial institutions? And secondly, I - we saw an increase in the balance of restricted cash from CNY550 million to CNY1.3 million - CNY1.3 billion. So what is the reason behind that?

Yes. So as you probably are aware, under the guarantee license, if we're to provide guarantees, there is a leverage ratio. So that's definitely included in the accounts. But also included in restricted cash account would be other things as well, whether it's associated with our P2P or potentially some of the cooperation with the banks, et cetera. And as Jay mentioned earlier as well, in terms of the way that we would operate with the financial institutions, there's actually multiple ways, not just, of course, our guarantee company are using our guarantee license. It could be insurance companies. It could be other guarantee companies, et cetera.

We have our next question from the line of John Chai [ph] from Morgan Stanley.

[Foreign Language]. So I have two questions. The first question is on the APR definitions. It seems that the wording of the APR definitions in the fourth quarter has changed and it seems the denominator now is the net proceeds received by the customer, the outstanding loan volume. So for example if in the fourth quarter, 24% APR for 1 year loans and we - just use 24% times the loan volume to get the facilitation income. And what would be the current off balance sheet take rate on the facilitation income. And the second question is about the cash balance. So I think we have been profitable for a few quarters, but in the second quarter and the third quarter, the cash balance is actually flattish or declining. So but in the fourth quarter, obviously, there's a strong rebound in the cash balance so just wondering if that's related to our current approach of not providing guarantee with some financial institutions because you - we might not be required by the financial institutions that provide us guarantee, security deposit under that requirement. And also what would be the take rate difference under this guarantee and non-guarantee model?

Yes. So John, with regards to the APR definition. I think the first thing to note is that in the past, we had much more of an on balance sheet model as opposed to now currently, where we're definitely moving everything off balance sheet. But in the past, we've done the calculations off of the on balance sheet amount, which was not inconsistent with our business model in the past. However, under the new model, as well as under 606, it may be now inconsistent with our current model and it might also be in fact, as a result, less informative. So hence, we believe that by providing a APR that ties more effectively and directly to our loan origination, this will probably be more informative.

With regards to your question on why the cash behaves a certain way as opposed to the net income. As you pointed out as well there are things going on with the guarantee. In the past, in particular in the second quarter and third quarter last year, when funding was tighter, different partners had different requirements and quite often, the requirements were stricter. So back then, in order to meet the requirements of various funding partners, we had to do more perhaps on the cash side. However, as mentioned throughout the call tonight, now we have much more diversified ways and more ways meeting the requirements, whether it's through guarantee companies or insurance companies, et cetera. So hence, we do see that changing over time. So a big part of why the cash behaves a certain way had, again, to do with the requirements. And also to be fair, there were also some investments that we decide to do. Thank you.

So my follow-up questions would be on APR, what would be the apple-to-apple APR in the fourth quarter as compared to the third quarter under the same definitions? And also what would be the take rate for our off balance sheet loan if we try to divide it - divide the facilitation income by the off balance sheet origination?

So John, with regards to your first question on the APR and what would be like an apples-to-apples comparison. I guess, the first thing to emphasize is that in many respects, it's always been apple-to-apple one way or the other. The rate effectively has been stable no matter how you calculate it. As you know in the past, we've emphasized that, historically, there's been no concept, if you will, of on and off in terms of how the company is managed, but where we thought about how to best disclose the APR, given that there was more information for the on and perhaps most importantly, given that there was no real difference between the on and off, we've disclosed it on an on basis. But again, the business is actually not managed or run on an on-and-off basis. So ultimately, it's probably about the same. So what you see is already more or less apples-to-apples. On the take rate, I think as it does pertain to how we work with our institutional partners and other things, we night not want to go into too much details on that at this time, unfortunately.

Our next question comes from the line of Cindy Wang from DBS.

So the first question is we announced that we acquired a few shares of 1 insurance company in the third quarter, and can we update - and can we give us any update on this insurance company, what the positioning will be within our ecosystem. And the second question is after the 175 document release in the market, we haven't seen a lot of small platform exiting the market. So can we - can management team give us any color on how we are going to foresee the process is going to speed up for the industry consolidation?

So Cindy, with regards to your two questions. First, on the insurance company, on the [indiscernible] Insurance. As mentioned earlier, we view licenses and we learn - and we view acquiring licenses and having more access to licenses and license companies as part of our inherent strategy. And ultimately, what we saw was a unique opportunity to gain access to a company, to become a company shareholder that have the insurance license. And from this, essentially, we would be able to more easily and access more institutional funding. So ultimately, this is much more about establishing the credibility, meeting the requirements that institutional funding partners may require of us and hence, we took advantage of the opportunity to become a shareholder of this insurance company. In terms of the service and the insurance that they provide, it is quite good. It's not too different per se than what we get from other insurance companies. So overall, you can say that they're part of our group of suppliers or the insurance companies that we work with. With regards to your second question about document 170 and also what's happened with the P2Ps and whether or not we should have been expecting a faster decline or an increase in the, shall we say, the exiting of smaller P2P platforms. I think it's always important to point out that given that this is individual investors' money, this is people's potential losses, it's inherently a sensitive issue. Overall, there are contracts, there are terms and things will go along the lines of those terms contracts. But if we're expecting to see something very, very quick such as a document or something comes out today and something happens tomorrow, that probably is not the best scenario for anyone. That would probably be basically a crisis or a shock and, of course, that will lead to many unhappy individual investors, which may lead to other things. So we do expect things to happen, but certainly, we don't expect it to happen overnight. It would probably happen gradually and over time, in accordance with the terms of the contracts.

Our last question comes from the line of Philip Huang [ph] from BNP.

This is Anderson Cha from BNP Paribas. First of all, congrats with your strong results and let me ask you two questions. First, it seems like take rate has improved significantly in the third quarter and understand that the adoption of ASC 606 could be one of the reasons for that. Was there any reason for that? And can you guide us how take rate will develop in the coming quarters? My second question is I understand that you've briefly mentioned this earlier in the call, but can you elaborate more on the significant increase in changes in fair value of financial guarantee derivatives? Does it reflect sequential improvement in underlying credit quality of your borrowers? Or is there any other reason? Can you also share your outlook about credit quality?

So with regards to your two questions. On the take rate, it probably shouldn't be higher, but we're not sure the approach that you're taking. So maybe sometime in the near future, off-line, we can go over the math together more specifically on that. With regards to the financial guarantee derivative and the change there and you're right, this is something that we addressed before. This is something that we do every quarter and essentially, we see what the situation is and it's just basically a reflection of the current environment and our particular situation for that. Perhaps not too much more should be read into that.

As there are no further questions, thank you, ladies and gentlemen. That does conclude the conference for today. Thank you for participating. You may all disconnect now. Thank you.

Thank you.