Hello and welcome to the Conference Call and titled 360 Finance Announce Second Quarter 2019 unaudited financial results. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Matthew Li of 360 Finance. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to our second quarter of 2019 earnings conference call. Our results were issued earlier today and it can be found on the IR website. Joining me today on the call are Mr. Haisheng Wu, our CEO and Director; Mr. Alex Wu, our CFO and Mr. Yan Zheng, our Vice President.Before we begin our prepared remarks, I would like to remind you of the Company's Safe Harbor Statement in connection with today's conference call. Except for any historical information, the material discussed on this conference call may contain forward-looking statements. These statements are based on our current plans, estimates and productions and therefore you should not place undue reliance on them.Forward-looking statements involved inherent risks and uncertainties. We caution that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about potential risks and uncertainties, please refer to the Company's filings with SEC in its registration statements.In addition, this call will also include discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the 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 RMB.With that, I'll turn the call over to our CEO, Mr. Xu.

Okay. Thanks, Matt, and thank you everyone for joining our call today. This is Haisheng, and we are sorry that Mr. Xu Jun is not able to join us today since he has to leave the Company for personal and their family reasons. We would like to thank him for his extraordinary services to 360 Finance as our co-founder and the CEO.Our business fundamental are very strong. We will continue to execute our strategy to building our company into a financial technology company. Our core team members have been working together very well and we expect the transition process will be very smooth. We believe our advantage, our culture and systematic, we have established a solid foundation for our business in China. We believe our structural advantage will not be impacted by the change of one management member.Now I'll going to go back to my prepared remarks.We are pleased to further solidify our leading position in industry with another solid quarter. As of June 30, 2019, we have cumulatively originated RMB217 billion of loans through our platform with outstanding loan balance of RMB51.3 billion. Our cumulatively registered users reached 109 million, users with credit line reached 19.2 million and the cumulative borrowers with successful drawdown reached 12.5 million. We are very proud of due to such a huge user base and the digital year in just three short years since we're founded the Company.In the second quarter, we acquired 14.2 million registered users, granted credit in line to $3.2 million borrowers and had $2.1 million borrowers with successful drawdown. Our loan origination volume increased by 127% year-over-year and 17% from the previous quarters to RMB48.1 billion. While we continue to grow our business quickly and consistently, we have been able to efficiently manage our borrower credit risk.Our market leading with…

Thank you, Haisheng. Since our operational and financial results were released early today, I will only comment on few highlights. Our Q2 financial results continue to present solid as our total net revenues increased by 128% year-over-year and 11% from the previous quarter to 2.2 billion. This brings our total net revenues in the first six months of this year to 4.2 billion, which means that we have already accomplished about 50% of our full year revenue guidance of 8 billion to 8.5 billion. The moment is very strong in the foreseeable future and we remain very confident in achieving our full year results, provided in our guidance.In addition to driving the static growth of our business, we also optimized the mix of long facilities under different models. During the second quarter, we originated 3.8 billion of long under the capital-light model, which brings zero credit risk to our company. Loans originated under the capital line model accounts for approximately 8% of the total loan origination during the second quarter, which is significantly higher than less than 1% in the previous quarter. We expect this trend will continue as we focus on providing technology services to our institutional funding partners.In the second quarter, we also originated 3.5 billion on-balance sheet loans through consolidate trust, which increased by 70% from previous quarter, and accounted for 7.5 of loan origination volume in Q2. The on-balance sheet loans generate financing income and better match revenue recognition with cash flow. As we are seeing a decline channel funding cost from charts, we plan to originated more on-balance sheet loans through consolidate trust in the coming few quarters.While most of the cost items are launched in line with the growth of our business, I would like to reiterate our view on sales and marketing expenses.…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from John Cai of Morgan Stanley. Please go ahead.

So my first question is about the capital-light model. Can management share more details on the economics of capital-light model as compared to our traditional funding models? And also, what portion or percentage do we see this capitalized funding trend in the futures like for example, towards the end of the year? What percentage of the loan presentation would come from this capital-light model?And my second question is about the cash. I think I'm looking at the free cash of 1.8 billion there. So, it's increased on a year-on-year -- sorry on Q-on-Q basis. I think as our loan book continue to grow, obviously, our cash flow on a monthly basis will continue to increase. So just wonder, what we see this free cash trend in particular given we have some plan to invest in the international markets?And the final question is about cost. So, I think, actually, I have two questions -- two more questions. The first one is about the origination costs. It seems it increased on a Q-on-Q basis. Just wonder, if there's more color on that? And then a final one is about the delinquency rate, it edged up a little bit to 1% for the 90 days delinquency. So, if there's any color on that, it will be great as well? Thank you very much.

Let me answer your first three questions. I will turn that question -- to turn the last question to our CIO on talking about delinquency rate, okay. So for the capital-light model, it's essentially just, we don't take any credit risk. We just transfer all the economics to the financial institutions, our partners. And the economic will be a little bit lower compared with the traditional model and facilitation model, obviously. But it's manageable for us, and we think that it will help us to build up healthy, more healthy, loan book in the long run.In terms of percentage, as I just mentioned, we have -- we see 8% loan origination in the last quarter, and the percentage will continue to go up. It really depends on the interaction between the customers, financial institution partners and that our risk model. We can't give specific number, but we were very competent to see that percentage to go up to double-digit, more double-digits by the end of this year. So, that's the first question.And the second one for the cash, I think that you are collected with this cash position and highly correlated with our business model. So given that we see our business very solid in the coming few quarters, the cash position will continue to going up.And for the third question, the origination I think there were -- there are the key reason is we increased on-balance sheet loan. The financing cost for the on-balance sheet loan will be record in that under that item, so it increased a little bit more. So that means that if we continue to increase on-balance sheet loans, the so-called our origination and servicing fee will continue to go up, but that's primarily driven by the balance sheet loans, financing costs. That's the third question. So for the last question, let me just turn to our CIO.

[Foreign Language]

Hey John this is Matthew. I am translator for Mr. Jiang. So, although, we see a slight increase of our M3+ far delinquency rate in the second quarter to 1.02%, so we believe this is still an industry-leading backlog, if you compare with in other shares. So, we think when we look at our risk performance of our loans, by vintage, the members makes more sense. So, if you look at the vintage performance of M6+ delinquency rates, we also included that in our earnings release. So, the loans we facilitated in the recent quarters are actually performing better than the one we facilitate in Q2 of last a year. So, we're seeing an improving trend of our risk management.

The next question comes from Steven Chan of Haitong International. Please go ahead.

Three questions for me. First of all, if my calculation is correct, I think that your take rates for the traditional loan facilitation business has been declining in Q2 compared to Q1. And I would like to know, what's the rationale behind? Is that because of higher guarantee costs, lower lending rate or higher funding cost? So that's my first question.Second question going back to the capital-light' model, you've mentioned that you're targeting double-digit towards the end of the years. Do you have any sort of like medium-term target for this capital-light' model? And I would also like to know whether -- because I suppose this should some great area from the regulator's point, because the regulators may not even encourage the micro finance company to issue ABS or whatever. So I'm not sure how large this proportion could grow? So could you be give us a medium-term target, say three to five years time was a proposal and you're expecting that to reach?And finally, about the acquisition cost, my rough calculation is that it has increased food from Q1 around 200 now to run 260, my calculations is correct. So I just want to know how much more you can afford to rise on this acquisition, customer acquisition costs. So, basically, these three questions.

Thank you, Steven, very good questions. Let me just answer first and see our CEO will have any further points to add, which just for the take rate, you are correct. If you just use a lump sum number to calculate a take rate. The gross take rate will decrease a little bit in the second quarter. The key reason is not because of the guarantee liability or the cost. That's because what I just mentioned we originate, we have used this capital-light model that will decrease the economic with we are more the whole book is health, more healthy. So if you take that capital-light model out the traditional model, take rate, relatively stable, okay and actually it slightly going up a little bit.To answer your second question. First of all capitalized model is not ABS, okay. It's just -- it's a pure for us as a pure technology services. We basically help the financial institution to find the customers do the preliminary risk analysis and help them do these post organization collections and other services.The only difference between capital-light model and the traditional model is we don't take any credit risk, and financial institution will take all the credit risks, okay? So it's not an ABS issue. So we don't see any regulation hurdle for that portion. So going forward, in the long run, we don't have number yet, but we are very confident to increase that portion significantly, as long as the financial institution are willing to take that.And for the third question, acquisition cost. Yes, it continues to grow up, growing up as I just, in my remark, I just mentioned that primarily due to the competition landscape, but we still see that as a long time investment, and so as long as the return on investment for the customers are sound and attractive, we will continue to do that. And as I just mentioned, for the first long slowdown, we can easily breakeven for all the cost. So we don't see any reason to stop this long-term investment. And maybe Haisheng will have something to add on the previous questions.

[Foreign Language]

So as Alex mentioned. So, and our current customer acquisition costs, we're still able to cover the borrowers acquisition costs. And the initial draw down loans. And our repeatable contribution keeps increasing in this quarter. So we believe, the ROI, the return on investment of our sales and marketing expenses is still very attractive and we think give us long-term investments.And currently, we have very sufficient funding from many of our institutional funding partners, and we continue to see very strong demand from our users, from our borrowers. And at the same time, we have been performing a very solid risk management of our assets. So that's why we believe, the spending on sales and marketing is a long-term investment instead of a short-term expense.In terms of numbers members, our CEO, Haisheng mentioned our large user base earlier. We stop spending for new customer acquisitions, and focused our existing users. Our loan transaction volume will still be very large.So in Q2, our total loan facilitation volume was 48.4 billion and our repeat borrower contribution was about 70%, which translates to 33.8 billion of loans. So as you can see, as our repeat borrower contribution continued to increase. We will still be able to achieve a very large transaction volume. So that's why we're focusing more on the future benefits instead of the short-term income or revenues.

Thank you. Can I have two more follow-up questions on the previous question?

Yes, sure. So please, go ahead.

First of all, I think I've mixed up the capital-light with the on-balance sheet. So, indeed, my question should be called ABS or trust scheme should be more related to the on-balance sheet, because we are seeing a fairly substantial rise in their on-balance sheet loan. So, how much larger reporting for their parts to grow in the coming years?And second follow-up questions is, I think a lot of the -- I met a lot of investors. They have big concern about the capital-light return. So could you give us some guidance about to say for example, maybe if we use the take rate, the take rate of the capital-light model compared to traditional model, how much lower, just a rough idea how much lower will that be?

So for the on-balance sheet, as it's basically -- it's primarily a continue agreement, okay. Structure wise, it's same as our [indiscernible] model. So, there was no -- if there is some hurdle from regulation on this business, there will be hurdle on the on-balance loan as well. It doesn't really matter, okay.For the second question the take rate, even though we didn't publish the oldest details, so I can't give you the exact numbers. But it really depends on the assets we offload. For example, if we offload the asset with APR 36. That means the take rate will -- the difference will have to take rate will be very large, or compare with if we offload asset with APR, they elevate lower, say for example 24%, then the take rate difference will be quite small. I hope I answer partial of your questions.

So you mean that's the take rate for the capital-light model?

Yes.

Okay. Thanks.

It's basically that the model is you use the APR. Just take a percentage of the APR is our technology services, and we don't deduct any credit cost, we don't got any financing costs.

[Operator Instructions] The next question comes from Alex Ye of UBS.

So I also have a follow-up on your capital-light model. So I wonder in terms of the new partner set that has utilized this model with you. I wonder what type of that partners are, so are they like the regional banks or national banks? And what is the -- your cooperation with them like? So does they it take a long time of relationship between you and the founding partners before they more comfortable to do this capital-light model with you? And also are there any particular type of API range that they are more comfortable to take on when they do this model? So that's my first question.And my second question is just to can I get an update on your average API on the kind of total loan visitation in the past quarter? Have then change much from the around 50% from the last quarter? Thank you.

Thank you, Alex, a very good question. For the capital-light, the partners are, to be honest, are all long term partners, they know our asset, they know our operation, they know our risk analysis capability. So, that includes all these regional banks, consumer finance companies, and even national banks. And in terms of what kind of assets we offload to them, it really dense on the commercial discussion and negotiation.So today, we primarily offload high APR assets to this financial institution partners. And to be honest, this model is not new. We did that last year. We did that in the first quarter as well. But we just want us to highlight that for the second quarter as well. For your second question, April is actually, the average APR drill down a little bit. In the first quarter, the average APR for the whole loan book is 29.3%. Now, it's 29% and we see that APR continued to go, go down a little bit.

Thanks Alex. Can I just have a follow-up quickly?

Sure.

So, I would like to ask, so all of your over 50 funding partners or how many of them are doing this capital-light model with us currently?

Currently only a few single digit, right now. We are talking to a lot of partners in the past few months.

The next question comes from Daphne Poon of Citibank. Please go ahead.

So just one quick follow-up on the cost management side. So you mentioned about the symptomatic cost, you will continue to invest in that. So, as your point about like, seeing that as a long-term investment, but in terms of the -- maybe more near-term margin outlook, so do you expect the operating margin and continue to decline because of the higher marketing costs? And also any guidance or outlook for the customer acquisition cost level, maybe for the next two quarters? Thank you.

Thank you, Daphne. You've raised a very good question. Yes, the margin will continue -- from that perspective, the margin will dropdown a little bit in the coming few quarters that given that acquisition costs will continue to go up as we see the competition is going up a little bit, but we have more channels in own discussion to mitigate that cost.So I think that's, it's a very dynamic, you can isn't, it a little bit difficult for us to foresee what exactly the number will be for the third quarter and fourth quarter. And to be honest, in the third quarter, what we can see now the acquisition cost as regional down a little bit. So let's wait and see. But we will monitor that parameter on the daily basis. And our CEO, Haisheng, may add a few points on that.

No. Okay.

Okay. Thank you. I think that's pretty much it for your question. I hope that answered your question, Daphne.

Yes. So, would you have any like packets on the operating margin or financial measure is quite dynamic?

From operational, operating margin, we receive quite stable between around 40%. That's a non-GAAP basis and net margin will be around 30 to 35.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Li for any closing remarks.

Thank you, operator, and thank you everyone for joining us today on the call. So should have any further questions going forward, please do not hesitate to contact us. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may not disconnect.