Ladies and gentlemen, thank you for standing by, and welcome to the Qifu Technology Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please also note that 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 Markets. Please go ahead, Karen.

Thank you, Amberly. Hello everyone, and welcome to Qifu Technology's fourth quarter 2023 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 would like to refer you to our Safe Harbor statement in earnings press release, which also applies to this call. During the call, we will be making forward-looking statements which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our most recent Form 20-F filed with SEC. 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 financial measures to GAAP financial measures. Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms. Today's prepared remarks from our CEO will be delivered in English using an AI-generated voice. Now I will turn the call over to Mr. Wu Haisheng. Please go ahead.

Hello, everyone. Thank you for joining us today. During the quarter, our efforts in optimizing our top and bottom line performance started to bear fruit, capping off a solid 2023 for us. As we empowered more financial institutions, total loan facilitation and origination volume on our platform reached RMB119 billion, up 13.8% year-over-year. With the ongoing business optimization, our revenue increased 15.1% year-over-year to approximately RMB4.5 billion, hitting a nine-quarter high. Our non-GAAP net income increased 25.1% year-over-year to roughly RMB1.15 billion, representing the fastest growth seen over the past nine quarters. From an annual perspective, total loan facilitation and origination volume on our platform increased 15.4% year-over-year to a record RMB475.8 billion. Non-GAAP net income increased approximately 6% from last year to roughly RMB4.45 billion. In 2023, we promptly adjusted our strategies to navigate market challenges, which allowed us to not only meet the growth target set at the beginning of the year, but also achieve a notable improvement in profitability during the second half of the year. This robust performance underscores our operational resilience and sets a solid foundation for our high-quality development in 2024. The consumer credit industry entered the post-pandemic era in 2023. As China navigated a bumpy journey towards economic recovery, consumers within the high-quality segment were becoming increasingly cautious about borrowing. Simultaneously, certain user segments started to face pressures on repayments amid elevated youth unemployment rates. The deceleration in the overall consumer credit market's momentum also led to a decline in the marginal efficiency of incremental growth. After thorough consideration by management, we have set quality growth and profitability as our primary objectives and shifted our operational strategy to prioritize efficiency over scale. By refining every aspect of our operations, we aim to enhance the long-term healthiness and sustainability of our business. In 2023,…

Thank you, Haisheng. Good morning and good evening everyone. Welcome to our fourth quarter earnings call. While the fourth quarter was a fairly challenging period for our operations as macroeconomic recovery progressed slower than we hoped and the consumer sentiment remained muted, we still delivered another solid quarter of financial performance. During the quarter, we took proactive actions to fine-tune our product and service offerings, strengthen relationship with users and key partners, optimize business mixes, and trim exposures to underperforming assets. Total net revenue for Q4 was RMB4.5 billion versus RMB4.3 billion in Q3 and RMB3.9 billion a year ago. Revenue from credit driven service capital heavy was RMB3.2 billion in Q4 compared to RMB3.1 billion in Q3 and RMB2.8 billion a year ago. The year-on-year growth was mainly due to longer effective duration, growth in on-balance sheet loans, and contribution from other value-added services, partially offset by decline in off-balance sheet loans. The sequential increase reflect the growth in on-balance-sheet loans and contribution from other value-added services. On-balance sheet loan accounted for over 20% of the total loan volume in Q4. Overall funding costs further declined by roughly 20 bps sequentially and over 100 bps year-on-year with the help of a strong relationship with financial institution partners and record-breaking ABS assurance. Revenue from platform service capital-light was RMB1.2 billion in Q4 compared to RMB1.2 billion in Q3 and RMB1.1 billion a year ago. The year-on-year growth was mainly due to strong contribution from ICE and other value-added services, substantially offsetting the decline in capitalized loan facilitation. For Q4, capital-light loan facilitation, ICE and other tech solution combined account for roughly 57% of the total loan volume compared to roughly 56% in the prior quarter. We expect this ratio to be gradually trending up through 2024 as we try to…

[Operator Instructions] Our first question comes from the line of Richard Xu from Morgan Stanley. Please ask your question, Richard.

Two questions. First of all, it sounds like management still has a relatively conservative outlook for the year. So what's the expected loan growth for the full year? What are the key considerations? And also how the loans will be sort of like allocated through the different quarters? Secondly is what's the credit quality trend at the moment and outlook for the provisions for the year? Thank you.

Okay. Thanks, Richard. As you can see, given the macro uncertainties at this stage, we will continue to maintain prudent approach in our operations at least in the first half of 2024. Therefore, the overall loan volume growth is not our primary goal. Instead, our primary goal will be the quality of our growth and the quality of earnings. Based on this strategy, I think, to some extent, will impact our overall loan volume growth, but as we trimmed our loan exposure to the assets with lower marginal profits or even loss-making assets, which we are actually making positive impact on our profitability. In terms of internal and external data we are looking at, so far we have seen positive trend in the macro data such as the CPI has improved in February, and the first two months import and export data also increased by 8.7% and our own risk metrics is also trending better, which makes us more comfortable about the near-future trend. As for quarterly planning, Q1 is usually slack season for our business plus we made a lot of efforts in optimizing our risk performance in this quarter. We expect our loan volume for Q1 will be the lowest level for this year and then gradually ramp up in Q2 and Q3.

Okay. I will do the translation. Regarding the asset quality, we made more proactive adjustments to improve asset quality in Q4 and Q1 through tightening our credit standards for new loans and cutting back longer-duration loans to mitigate the uncertainties. Based on our observation, the FPD 30 delinquency rate of our new loans originated in December improved by 13% compared to Q3, and then the FPD 30 delinquency rate of the new loans for early January further improved by 10% from December. In addition, longer-duration loans accounted for 18% of our new loans in second half last year, while the contribution has been reduced to less than 10% so far in 2024 as we shortened the duration for those macro-sensitive users. So far we have seen improvement in the risk performance of our overall loan portfolio in January and February and expect to see further improvements throughout the year with the legacy loans gradually mature.

Okay. Regarding the provision booking, as you know, historically we have been on a pretty prudent approach to book the provision. As Yan Zheng mentioned, we are expecting the risks metrics will gradually improve throughout this year, but still we probably will take the similar kind of a booking ratio to book our provision, just to be conservative. And at the same time, please note that overall, the capital-heavy loans as a percentage of a total as well as the absolute volume for this year will most likely be lower than last year. As we mentioned, we are shifting towards more cap-light segment. So the base for those provision are getting lower for this year, which means the absolute provision amount will most likely dropped versus last year, but the booking ratio will most likely be still the same on the conservative side. Thank you, Richard.

Thank you for your question, Richard. Our next question comes from the line of Alex Ye from UBS. Please ask your question, Alex.

So I have two questions. First one is on the take rate and profitability. So previously management has guided that going forward, we should probably expect better earnings growth than loan volume growth. I'm wondering, is that statement still valid and how confident is management on this? Can you share with us some of the drivers, given there are lots of moving part and given we should note the downside risk from asset quality and your current strategy of shifting more toward -- from capital-heavy to capital-light model? Second question is on asset quality outlook. Management has just discussed about the factors from both macro front and some temporary factors such as the co-op capacity. So I'm wondering which could be the dominant driver, and if we look at this from a vintage loss perspective, what's the expectation for 2024 vintage loss and versus 2023? Thank you.

Okay. I will do the translation. Thanks, Alex. Regarding the drivers for profitability improvement, since last Q3, we have made substantial efforts to improve our overall profitability, creating positive impact in -- on our last Q3 and Q4. We expect the trend will continue in 2024. For this year, we believe our profit will increase as we continue to work on our risk funding, asset allocation, and product front. Number one, on the risk front, we will cut back the lower quality or lower efficiency assets to improve the ROA of our overall loan portfolio. Second, on funding side, last year, we have seen substantial decline in our funding cost. Given the still ample market liquidity this year, we will continue to push more ABS issuance and reduce our funding costs further. Third, on asset allocation, we will collaborate with more financial institutions this year to matching their risk appetite with appropriate assets to improve the asset allocation efficiency and our profitability as well. Fourth, on the products side, we will further enhance and differentiate our product offerings to increase user stickiness and their long-term LTV. Fifth, we will improve our operational efficiency through large language model empowerment. For example, we applied AIGC-generated pictures to our intelligent marketing, which reduced our unit acquisition cost by roughly 9%. With large language model empowering our telemarketing team, our average drawdown per user increased by roughly 5%. Currently, AI programming has replaced 15% of our coding and all these efforts, we believe, will eventually improve our efficiency in the near term and long run. In summary, we have seen some positive signs from the latest published macro data and our continuous efforts in improving our profitability is also bearing fruit. At this time point, we are confident to achieve our goal to generating better profit growth than loan volume growth. Regarding the asset quality, as our CRO just mentioned, we fine-tuned our risk strategies in Q4 and Q1, leading to a better FPD 30 delinquency rate performance of the new loans issued in the last two months. Considering the marginally better macro-conversion, we believe our asset quality is also generally manageable.

Okay. I will comment on the risk front. The weaker than expected macro environment in Q3 continued its momentum in Q4 as a result of underperforming macro statistics, liquidity tension in credit market and the stricter line control by telecom carriers. Our risk metrics for the overall loan portfolio were further trending up in Q4. In our view, the macro uncertainties as well as the line control issue may continue to put pressure on our risk management in this year, but we do see improvements in the latest economic data and market liquidity. Our day one delinquency ratio has been consistently trending lower from the peak level in last November. From our business planning perspective, we will take a more prudent approach in terms of risk appetite. With all these efforts, we aim to lower our vintage loss for 2024 new loans by 10% to 15% compared to 2023.

Thank you. Our next question comes from the line of Emma Xu from Bank of America Securities. Please ask your question, Emma.

So we noticed that you keep your dividend payout ratio at 20% to 30%, target ratio at 20% to 30%, and announced a new shareholder share buyback plan of US$350 million. You mentioned some of the considerations behind. I'm just wondering if such shareholder return is sustainable in the long term. Could you share more consideration with us? Thank you.

Thanks, Emma. I think the -- as we mentioned in prepared remarks, we consider the combination of dividend and the share repurchase as a lasting kind of measures we're going to take to return to our shareholders in terms, the mix between the two from time to time, depending on the market condition, may change, but the intensity of this kind of return program will probably be similar to what we see in 2024 we just announced. In other words, if we consistently doing the repurchase and the dividend for the next, say, three years, it could possible we see the shrink of total share count by roughly 30% or even more and -- based on current share price. So basically, what we're trying to say is that we view -- given our current cash flow position, we view that returning to shareholders is a very important long-term tools to the company, and so we'll continue to do that and -- year by year.

Thank you. This is very encouraging.

All right. Thank you.

All right. Thank you, Emma. Our next question comes from the line of Yada Li from CICC. Please ask your question, Yada.

Then I will do my translation. Firstly, I was wondering what are the percentage trends of different facilitation models, including the microcredit, the guaranteed model and the capitalized model in the volume going forward. And considering the macro environment, which one is preferred by the financial institutions? And secondly, I've noticed that there was a notable growth of the ICE both in volume and percentage. And during this year, what can we expect regarding the ICE? That's all. Thank you.

Okay. Thanks, Yada. Regarding your question about the loan mix, I think at this stage, basically we won't set a target for our loan mix structure. Instead, we target to diversify the funding partnership structure, adjust our loan mix and asset allocation strategy to improve our overall take rate. In the meantime, we strive to improve the asset matching and allocation efficiency, reduce the partnership cost and boost our take rate for each of those categories. As you mentioned, let's take ICE for instance. We managed to diversify our funding partnership and optimized asset allocation under ICE in last year, which resulted in an overall 50% year-over-year increase in our revenue take rate for ICE in Q4 2023. So with ICE contributing more in the loan mix, our overall profitability is also improving. This year, we will continue to conduct this strategy to improve our operational efficiency under different models and make dynamic adjustments to our loan mix to improve our overall take rates. Thank you.

Thank you, Yada. We have reached the end of the question-and-answer session. Thank you very much for all your questions. I would now like to turn the conference back to the management team for any additional closing comments.

Again, thanks again for joining us for the conference call. If you have any additional questions, please feel free to contact us offline. Thank you.

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.