Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech Second Quarter 2022 Earning Conference Call. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Mandy Dong, IR Director. Please go ahead, Mandy.

Thank you. Hello, everyone, and welcome to our second quarter 2022 earnings conference call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Xu, our CFO and Director; and Mr. Zheng Yan, our CRO. Before we begin the prepared remarks, I’d like to remind you of our Safe Harbor statement in our earnings press release, which also applies to this call. We may refer to forward-looking statement based on our current plans, estimates, and projections. Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP ones. Last, unless otherwise stated, all figure mentioned are in RMB. I will now turn the call over to our CEO, Mr. Wu Haisheng.

Hello everyone. I am very happy to report another strong quarter. In Q2, total loan origination and the facilitation volume reached RMB98.3 billion up 11% y-o-y. Outstanding loan balance reached RMB160.5 billion up 28% y-o-y. Despite volatile macro-environment with the Shanghai lockdown and resurgence of COVID in multiple states, we delivered a solid performance, which once again demonstrated a reliance of our operations and risk management capabilities facing adversity. On the regulatory front, there are further developments in rectification work of platform economy. The recent regulatory meetings have all sent a clear signal that the reform is reaching an ending phase. Going forward, regulators will put emphasize on driving healthy and sustainable industry development through normalized supervision. As the regulatory environment gradually stabilized, we see clearer guidance. On July 28, the Central Political Bureau of the community's party of China set up economic priorities for the second half of the year. The policy makers pledge to promote healthy, orderly development of the platform economy, complete the rectification work and conduct regular supervision. At a follow-up meeting by the PBLC on August 01, the Central Bank remarked significant progress of major platform rectification, and it will urge this company to complete the whole rectification project, place them on the regular supervision that is more standardized, transparent and predictable. As a result, this promotes the growth of the platform economy in job creation and boosting consumption. We have completed most of the rectification work according to the regulatory requirements and now in the stage of regular data reporting, regarding credit agency report by Julian , we have already submitted our execution plans to regulators and have since maintained close dialogue with them based on feedback and direction from the regulators. We started to work with other business partners to implement our plan.…

Okay. Thank you, everyone. Thank you, Haisheng. Good morning. Welcome to our second quarter earnings call. As Haisheng discussed, we delivered another solid quarter in a rather challenging period of time from micro per economic perspective. Early in the quarter, COVID lockdowns in Shanghai and other regions of the nation noticeably weakened consumer's confidence and altered consumption pattern for many. Since the lockdown removed in June, we have observed some recovery in consumer's demand for credit; although the pace of the recovery are expected to be gradual and modest. Despite the impact from COVID and the generally soft macroenvironment, we continue to push for steady improvement in the overall asset quality throughout the quarter and the year. With optimization of a risk model and contribution from high quality new borrowers, overall day one delinquency has been declining sequentially each and every month since beginning of this year even during the peak of the COVID lockdown in April and May. It was 4.9% for Q2 versus 5.2% in Q1 and further declined to 4.6% in July. Particularly day one delinquency for new borrowers in Q2 was well below 4% indicating clear better quality versus existing borrowers. 30-day collection rate remains stable at around 86% in Q2. COVID lockdowns significantly hampered our collection operation in April and early May. 30 day collection rate hit the lowest point of this cycle in April at less than 85%. Then start to recover by July, it was already above 87%, the highest point so far this year. Again, we see clear outperformance by new borrowers versus existing borrowers. For new borrowers, 30-day collection rate was above 90% in Q2. These risk metrics continue to support our current user acquisition strategy, which focus on high quality segment of the market. Total net revenues for Q2 was…

Our first question is Yao Lee, CICC. Please go ahead.

Okay then, I'll do the translation part. So under the current microeconomic and the pandemic certainties, so we saw most of the retail credit service providers, the financial institutions generally has encountered certain pressure, such as the increase of customer's early prepayment, the customer acquisition challenges after the pricing adjustments. So I was wondering in the context of these uncertainties, are there any changes, willingness of our bank partners to operate with us and are there any changes in the funding cost to the customer acquisition cost and also the actual demand of our potential customers? And if there were some certain challenges, what our plans and how are we going to overcome it? Thanks management.

Yes. I will answer your question, Yao. That first your observation is correct. Due to the impact of macroeconomy, financial institutions are under some pressures however, thanks to our number one, accumulated credibility in the market, then from our consumer loan business. Number two, financial institutions pressure from other asset costs actually in Q2, our high quality consumer loan assets is in high demand from financial institutions that is reflected by the job in funding costs that we already discussed. In July and August, we are seeing the trending down our funding cost further. For your second question, as for the customer acquisition activities, due to the lockdown of pandemic of offline activities, our customer drawdown activities is to some extent massively impacted. Thanks to our series of counter measures that we apply more precise task customer targeting that the draw down activity of our users are boosting. We have done a lot work in Q2. We are expecting to see the work bearing fruit in Q3.

Next question is Thomas Chong from Jefferies.

Thanks management for taking my questions. My first question is about, our SME strategies, given the current macro backdrops, will we scale back the pace of our SME business as well as the offline sales team and, my second question is about the average ticket size. Given the uncertainties of the macroenvironments, are we seeing the borders are getting a lower ticket size and they are getting a bit more prudent. Thank you.

Yes. Regarding SME business; naturally, this is more signaling called than our consumer loan business that we take a more prudent approach on this business. We have tightened our credit standard for this business. As you can see the total loan origination offer facilitation in SME business in Q2 dropped big. This is number one. For the second point, as for the customer acquisition channel, for external channels that we have less control we scale back the volume, and more focus on our direct sales team of customer acquisition.

Yes Thomas, the vision that the customer consumption wellness jobs due to the impact of pandemic is correct. However, we released a few counter measures. Number one is we tighten the credit standards. That means we make -- the approve rate is lower. Number two, we focus more on the high quality customers, which bring more value to the business, two measures together that makes our ticket size rather relatively stable.

Okay. Thomas, just add a couple more point there. One is on the SME as Haisheng mentioned, if you look at our earnings release, this quarter the credit line, the new credit line granted to SME is about RMB4.9 billion and the actual long facilitator or originated two SME is about RMB7.8 billion roughly. Compared to last quarter, that loan volume was a little bit over RMB10 billion. So that's the numbers there. But I just want to make sure when we talk about SME, we are talking about rather narrowly defined SME. So meaning like that's real SME as opposed to some of the players talking about more broadly defined SME. So that's the -- that makes a difference. Secondly, regarding the ticket size, if you look at, for example average draw down we look at for Q2, is increased by roughly 5% sequentially. So, that's just added point to Haisheng's comments. Once we pass through the lockdown period, we actually see pretty -- still see pretty noticeable growth in terms of ticket size in consumption. Thank you.

Our next question is Alex Ye from UBS.

So my question is for mainly on your tech rate outlook. So during -- you have mentioned that your average IRR during the quarter was 22% to 23% and expect that to remain stable going forward. And you also mentioned that your funding cost is improving and your credit performance is also stabilizing. So I'm wondering if we could expect some stabilization or improvement to your takeaway going forward. Thank you.

Sure. Alex. Let me take your question here. You are generally, you're right. Given that we are already reached a point in terms of pricing goal, based on the regulatory guidelines. So we don't see really too much pricing downward trend going forward for the remainder of the year. And with that, the overall take rate I would say you probably will see a more stable take rate. If anything, there could be some improvement there, but of course, other factors you need to consider is the number one, the microenvironment and that will have I would say more impact than usual. If we have a rather stable microenvironment than other assumptions we can assume it will be a stable to maybe modestly improve take rate. But if some something, unexpected happening on the micro front, then there will be another question there. From funding cost, as Haisheng mentioned, sure, second quarter we're 6.8%. And right now we are sitting at about 6.5%. So, there's maybe still a little bit room to go in terms of lowering funding cost, given the current money supply is pretty available out there. There may be some -- still some room to go, but overall I would say from our modelling perspective, we are conservatively, you can model a rather stable take rate, if you want to add some to it modestly, then that's also fine.

Next question. Is Richard from Morgan Stanley.

Basically my question is on the competitive environment in China at the moment given 360 DigiTech is also aiming for low risk bars, basically it's also from overlap with the targeted customer by like, and banks etcetera. So what's the competitive landscape at the moment?

Yes, you are right. After we lower our average product price, the overlap of target markets with other drawings, like you mentioned, and banks that increased a little bit. However, we do not see the direct head-to-head competition with them. There are a few reasons. Number one, the consumer loan market is the grant market with multilayers. For example, banks, they have 10% price product and has 15%. Our price range as we discussed previously, if we bring 22% to 23%. Number two, we believe different companies can arrive and prosper based on their unique competence, for example, and has tripled their unique ecosystem. For us, we do not have any eCommerce platform or eCommerce ecosystem. Therefore, we can collaborate with all the platform in the market and cover the full spectrum of customer groups.

And our next question is CLSA.

So my question is more quality. Management just mentioned that looking to the second half, we're going to see improvement in overall risk indicator. My, question is more about how do we see the pass of this improvement? Is it like a gradual bumpy one, or like a notable options, especially regarding the COVID flare-ups recently in across many cities. And also when do we expect the 90-day delinquency ratio to pick? Yeah, that's my question. Thank you.

Okay. So our risk management team has been working with other teams closely to make several adjustments in the second quarter. Firstly, improving the quality of nearly acquired customers with the comprehensive coverage of RTA and in duration of the model. The number of our best quality customers has been doubled compared with the first quarter. And secondly, improving the data mining of the People's Bank of China Quality Report, we have set up a joint project team and derived 18,000 effective variables from the quality report, covering the optimization of several models, including competitive offer exploration, high quality customers identification, bad customers identification, career model, income and liability model, etcetera. And in the meanwhile we evaluate customers with poor credit performance more cautiously. Thirdly, we improved the resource allocation to high quality customers on the operation side, including pricing credit lines and promotions. With these actions, the credit performance of new transactions has been improved. We have seen that FTD 30 days, Q2 dropped by about 20% compares with first quarter and it's maintained a downward trend in July and August. With the academic outbreak, we can see lower rates, which truly demonstrates the resilience of our team and our asset. Now over the results of some actions mentioned above have not been fully reflected as some actions are in pilot, we need to absorb long term performance. Therefore, with fully adoptions of these actions, we are very confident to retain stable risk performance in the future. As for 90-day delinquency rates, it will be lower in third quarter. As we focus more on 30-day delinquency rates, it has been the lowest in July and our future target will be within 2.5% to 3%. Hope this can clarify your question.

And this is the end of our question-and-answer sections. And now I hand back to your management for conclusion.

Okay. Thanks again for joining us the conference call. If you have any additional question, please feel free to contact us offline. Thank you.