Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech Fourth Quarter and Full-Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Karen Ji, Senior Director of Capital Market. Please go ahead, Karen.

Thank you, operator. Hello, everyone, and welcome to 360 DigiTech's fourth quarter and full-year 2022 earnings conference call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Haisheng, our CEO; Mr. Alex Xu, our CFO; and Mr. Zheng Yan, our CRO. Before we start, I'd like to refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make certain forward-looking statement. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to GAAP measures. Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms. Now I'll turn the call over to our CEO, Mr. Wu Haisheng. Please go ahead.

Hello, everyone. Thanks for joining our Q4 2022 earnings conference call. On the macro environment front, we experienced a volatile quarter in Q4, swinging from widespread grounds across China in October and in November to the border reopening and the cancellation of almost all COVID-19 restrictions in December. This concluded nearly three-year period of strict COVID control policies in China. Regulatory authorities also announced that the rectification of financial business within the major Internet platform companies has been mostly completed. At a meeting held on February 27, 2023, the China Banking and Insurance Regulatory Commission, CBIRC, called for proactive coordination between financial, fiscal, and social policies to provide greater support for the growth of private consumption and domestic demand in China. The financial market department of the People's Bank of China, PBOC, also pledge to facilitate a healthy development of the platform economy in three ways, including speeding up the rectification of the remaining minor issues with some Internet platform companies, improving standards for regular supervision and developing financial measures to support the sustainable healthy development of the firm economy. Our industry is therefore headed in a more positive direction. As of the end of Q4, we have partnered with a total of 143 financial institutions for our loan facilitation business. Total loan origination and facilitation volume was RMB104.6 billion, up 8% year-over-year. As of the end of Q4, cumulative number of users with approved credit lines reached approximately 44.5 million, and cumulative borrowers with successful drawdowns reached approximately 27 million, up by 16% and 11% year-over-year, respectively. In last Q4, China implemented its most extensive COVID control measures since 2020. While in December, the government adjusted its COVID policies and a massive wave of infections subsequently occurred across China. Given the uncertainties posed by both the COVID and the…

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our fourth quarter earnings call. As Haisheng discussed earlier, we delivered another strong quarter in the very challenging macro environment. COVID outbreaks and the restrictions created additional headwinds for our operations during the quarter, particularly in December. However, since the reopening in early January, we have experienced some modest pickup in demand for consumer credit with asset quality noticeably improving. In Q4, we continue to target higher quality and lower risk user base and drive further improvement in user quality despite significant macro uncertainties. Key leading indicators day-one delinquency has been on a steady declining trend throughout 2022. It was 4.3% in Q4 versus 4.5% and further declined to approximately 4.1% in February. To this day, the declining trend continued on the . The continued improvement in day-one delinquency reflects the user based upgrade and macro improvement in the new year. 30-day collection rate was 84.7% in Q4 versus 86.4% in Q3. This of our collection operations and the deterioration of consumer confidence following the timing COVID restriction in November and the surge in COVID cases in December. As the COVID cases peak in late December and the reopening progressed by early February 30 day collection rate has quickly recovered to above the Q3 level. Total net revenue for Q4 was $3.9 billion versus $4.1 billion in Q3 and $4.4 billion a year-ago. Revenue from credit-driven service capital heavy was 2.8 billion in Q4 compared to 2.9 billion in Q3 and 2.7 billion a year-ago. The slight year-on-year growth was mainly due to growth in on-balance sheet loan volume as we achieved better utilization of our micro-lending license. This solid performance was more than enough to offset decline in average pricing of the loan and the decrease in off-balance…

First question comes from the line of Judy Zhang from Citi. Please go ahead.

I will translate my question. So thank you management for giving me the first opportunity – like to ask a question, like a first place. And my questions regarding the credit demand. How significant the credit demand recovering? Do you see things that are reopening? And what's the main reason for not seeing a strong recovery? And also we said – we saw the management give a relatively conservative loan origination of growth guidance for this year, which is like 10% to 20% year-on-year growth, which is just below the loan volume growth guidance like last year, which is 15% to 25% year-on-year growth. What's the key reason behind? Thank you.

Thanks, Judy. In terms of the credit recovery, actually, we have seen some surge of consumer behavior recovery right after the reopening. And we also see a modest recovery in credit. But if we look at different sectors, we have seen some sectors leading the recovery, for example, the restaurant and the tourism. But some of the industries are lacking behind. So we believe it takes some time for the outlook for employment and personal income to eventually benefit from the recovery of consumption and boost the credit demand recovery. So it's not right now for the credit demand to recover from the – to have immediate recovery for our credit needs. And although the recovery in credit needs is not so robust in the Q1, we believe the Q2 and Q3 will be better.

In terms of our guidance, actually we are a company sticking to our promise. We won't allow the situation. We cannot deliver our promise. Even in the extreme situation in last year, we still stick to our initial – the guidance in the beginning of the year, and actually we delivered that. So in terms of the guidance for this year, we think it's within the market expectation, and we take – tend to take a prudent view for the pace of our loan volume growth in this year. And we believe if the market situation, the macro economy improved further in later this year, we will also adjust our – the growth pace. And we believe this year will be – for the loan volume and the growth rate will be gradually ramping up in the year. And this year will be a good year for us. Hope this answer your questions, Judy.

Thank you for the questions. Next question, we have the line from Yada Li from CICC. Please proceed.

Then I will do the translation. Hello, management. This is Yada from CICC and thanks for taking my questions. During the COVID pandemic, we noticed that you paid more attention to the operation of the existing users in terms of the customer acquisition side, and therefore the new loan sales were partly from the premium existing users. And I was wondering if the marketing budget will increase in 2023 and 2024, what kind of customer acquisition strategy will you adopt in the future? And what are the main factors that determine whether to increase the marketing budget? That’s all. Thank you.

Thanks, Yada for your question. So I want to highlight the major growth driver for our business. Actually, we have over 40 million users with approved credit lines and over 20 million borrowers. So you can see that we have over 20 million users who never borrowed the money from us. In terms of new customers, actually we have 3 million to 4 million new customers acquired basically every year. So it's very crucial for us to spend more time making more efforts in terms of engaging our existing users. And we believe this will be a major driver for the growth of our business in the future.

From a marketing budget perspective, actually we allocate budget to existing users and new users. For existing users, we will spend money to reach out to them and use some offers to call back them, use some better offers to call them back to and we'll also improve the user experience of those broadly defined SME borrowers to keep them active on our platform. So we will keep our budget for the engagement of all the existing users.

Okay. For the new users, we will expand our network to cooperate with more platforms in terms of the embedded finance business model because our pricing is already below 24%. So it brings us opportunities to connect with more quality platforms to serve a larger number of customer base. So in terms of the market spending, considering the recovery – credit needs recovery in terms of the user's activeness, actually we will – first, we'll prioritize our work to increase the credit utilization for those new users first and then we will consider to expand our marketing, expanding to acquire new users. Hope it clarifies your question.

Thank you for the questions. Next question, we have the line from Thomas Chong from Jefferies. Please go ahead.

Thanks management for taking my questions. My question is about competition. Going into the future, in terms of the pricing side, how should we think about the competition with friends or social media? Thank you.

First of all, we think we are quite differentiated from the traditional banks and large Internet platforms in terms of the pricing. Actually we enjoy a absolute competitive edge in terms of serving the pricing segment between 18% to 24%. So we don't believe that we will have a head-to-head competition with those large platform or traditional banks. On the contrary, we think we can provide additional value to them by cooperating with those platforms.

So because of this differentiation points, we realized that a lot of Internet giant's platforms, they want to expand their outreach to different type of customers. So because of our core competence can help them to expand their customer base and increase their credit product, the loan volume to serving their credit product to their users. So we believe this is what we can – the additional value can provide to those platforms. Yes. I hope this answer your questions, Thomas.

Thank you for the questions. Next question comes from the line of Hans Fan from CLSA. Please go ahead.

So this is Hans Fan from CLSA. I got question related to the loan outlook, because the management was mentioning about the – this year is going to be a better part in the second half. So I was wondering that what's the sort of lending pace across different quarters. And also in terms of the split between capital heavy and platform services, how do we think about the split this year? Do we have a target for the split in the longer run? Thank you very much.

In terms of the quarters pace, we expect it will ramp up throughout the year, which means the loan volume will grow quarter-by-quarter because we believe the credit needs will benefit from the recovery of the consumer's behavior. So the loan volume in second half of this year will be increasing compared to the first half.

Okay. In terms of the contributions from our asset light or the platform service business model. First of all, we believe this – our long-term strategy to develop our platform service business model because we always position ourselves as a fintech company. So in the long run, we believe the loan volume contribution from the capital light will further increase. But if we look at the short-terms, we will actually adjust to the loan volume contribution from the asset light business model based on our assessments of the macro environment and credit risk associated with the macro. In terms of – and we want to – we will adjust the contribution to balance the risk and the profitability of our business. We believe this year will be a stable year, and we want to achieve a healthy profitability for our business. So this will be overall judgment. We expect the overall contribution from the capital light business will remain stable in this year. But in the next step, we will better develop our tech solution business because it's a pure tech business model. So as our customer base grow, our loan volume will also increase, and we expect the contribution from the capital light or platform service will further increase in the future.

Hans, I just want to add a couple points regarding the gross rate for this year. We noticed that in the recent few days, some of the companies related to consumer market report their earnings. They gave a pretty – somewhat disappointing outlook for the first quarter in terms of year-over-year growth. And we look at it – although last year Q1 was a relatively normal quarter, meaning there's not really much disruption in operations in the last year's Q1, the comp is not that easy. But even with that kind of a not so easy comp, we are expecting year-over-year growth in terms of volume of this year. And then along the way, as we move forward for the remainder of the year, as Haisheng mentioned, we may see gradual acceleration of growth quarter-by-quarter on the year-over-year basis. That's a point I want to add. Thank you.

Got it. Thank you.

Thank you for the questions. In the interest of time, we'll now take the last question. Lastly, we have the line from Alex Ye from UBS. Please go ahead.

I'll translate my question. I have a two follow-up on your loan guidance for this year. So if we look at the midpoint of your guidance of 15%, can we ask what are the underlying assumptions here? For example, would you still frame the consumer credit recovery as the modest one? And do you need to increase your risk appetite in order to achieve this newborn target? And secondly, for the higher end of your target at 20%, I'm just wondering, what are the things or data point you need to see for you to be more comfortable to go forward to that higher end and what are the drivers? Thank you.

Okay. I will pass this question to our CRO, Zheng Yan.

Okay. From risk appetite perspective, we will take a prudent credit assessment approach in this year, so we can see the further improvement in our risk performance in 2023. For example, our day-one delinquency rate in February has come down to 4.1%. And the 30-day collection rate, also recovered to a level – the highest level in last year, in February, and we believe in March, those two indicators will further improve. So in this year, overall risk performance will be better than last year. Our guidance is based on the assumption that the recovery of the macro environment will improve the outlook for the employment and the personal income and eventually benefit the credit needs recovery. And at the same time, we believe, there is assumption that our risk performance will continue to improve down the road. So this year, if the things getting better, then all the recovery of the credit needs and the risk performance accelerated in this year, we will also consider to adjust our growth pace. This is our answer.

Thank you very much. With that, I'd like to hand the call back to the management for closing.

Okay. Thank you, again, everyone for joining us for the meeting. And if you have additional questions, please feel free to contact us offline. Thank you. Bye-bye.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.