Q3 2019 Earnings Call

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Hello, Ladies and gentlemen, thank you for Sunday by Fourq Gideon incorporated third quarter 2019 earnings Conference call. At this time all participants are in listen only mode. After managements prepared remarks, there will be a question and answer session.

At least going for in school is being recorded I'll now turn the call over to your host Mr., Ben Joe's CEO assistant for the company. Then please go ahead.

[noise] Hello, everyone and welcome to Chew Dance third quarter 2019 earnings Conference call. The copies results were issued via Newswire services earlier today, and what posted online you're going to old earnings press release and sign up for the company's distribution list by visiting our website at <unk> dot shouldn't dot com.

Mr. Meanwhile, our founder Chairman and CEO and Mr. call Young our CFO will start to call with their prepared remarks.

Before we continue please note that today's discussion will contain forward looking statements made on under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act 1995.

Forward looking statements involve inherent risks and uncertainties as such the company's results may be materially different from the views expressed today.

Further information regarding these and other risks and other since it's been southern piece is included in the company's 20-F as filed with the U.S. Securities and Exchange Commission.

The company does not assume any any obligation to update any forward looking statements, except as required under applicable law.

Please note that should ask Chris earnings Press release and is this conference call include discussions unaudited GAAP financial information as well as unaudited non-GAAP financial measures.

Today's press release contains a reconciliation of unaudited non-GAAP measures to de unaudited most directly comparable GAAP measures.

We also puts a slide presentation, Oh I, our website, providing details all resulting the quota will reference those resulting all prepared remarks, but will not referred to specific site during our discussion.

I'll now turn the call, which I would feel mingle. Please go ahead.

[laughter] in Quebec.

I want to focus that all of them as close as any kind of media who have taken a interest with joining today's call I'd like to walk you through some up a key factor in our business format before handing over to call will take you through more detail.

Portal make smart our successful evolution to a better shoot you hinted that technology servicing fee driving business.

You know color, we saw big funding quality improvement as our risk.

Independent open that fall Camelot <unk>.

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Recurring <unk> hundred 50% growth from previous quarter.

By using our technology.

So we operate.

We are you named boding, well regulated lipid institutional partner.

Two real real it lowers the cost to exit the message.

I'm on the service inclusive consumer finance opportunity.

We are leading the technology application in high speed deficient processing of micro loans.

At the same pot.

[laughter] syndicating individually or user to multiple lender.

This allows all our lender partner for lower.

While providing in house Matt.

In credit side.

Allowing.

Open platform to focus on a higher quality borrowers. We also continue to empower our founding partner crabby.

Matt efficiently, our dictate how crowded application, including regulatory compliant customer behavior pets.

Compact that well.

Yes, well expectation.

Oh, yes favorably P bauma.

How much it.

Permission.

Machine learning I mean, how to collection and the real time crowded to perform it makes the risk strategy.

The result, however be impressed people.

That's all right and office that sort of caught her our open prep all has an empty.

Our 1 billion outstanding borrowers with 11 life that regulated founding partner.

More than doubling.

From a lot per quarter.

The rapid uptake and access.

I'd call it 45, Barbara and allows us to regulate it.

Financial service provider through from Cody.

He said at the leading consumer finance technology Pratfall.

Recently.

There has been noisy allow the national while P to P. Reinstall collection practices and use the latest pro private private.

Nick you moving and come Pratt regulatory and commercial landscape. We are confident that's treat yet has made a write off.

Upgrade to ensure our leadership in in the industry.

We take regulatory compliant as of the number one priority our popped up airport in the early adoption of secure one for what.

Compete award that Oh P to P business model, how good a person.

Institutional founding bed.

Displays.

In house approach to collection and the effect of our customer data privacy.

All kill me.

Cumulated to our open platform solution.

Our approach to walk only with like that and regulated financial institution.

That that land.

That being responsible for forests with why to de provides a full set of transaction services using cutting edge.

Technologies to eating house analytics.

Usually ria reduce customer acquisition and the engagement call.

It's very lucky to ultimate fraud.

For fall of regulatory compliance Fintech in China.

We will see.

Same that user interface and experience as our well proven loan book business.

I would offer users that were qualified to draw alone again in open platform in the third quarter.

Repeat racial staying well about 70% now very close to 80%.

Oh at the end of a third quarter 2019 outlets the user.

They throw to 78.3 million and total.

Outstanding warrants, which it 60 point 6.3 million both.

Both the highlight.

In our.

Company history.

Illustrating the south painfully south temporally the team and the Stickney.

Our utility mouth [noise].

We are excited by the prospect.

Our tax driver business model and delivering the right risk NIM independent that at the regulatory compliance approach to Oh were RMB eight she did a few more crowded opportunity in China I very much looking for walk to continue to show me to you.

Really remarkable and sustainable financial itself and with cash from our older Pratfall initial chief.

Hey call for more detail.

Thank you man.

And Hello, everyone.

First I'd like to touch base on a couple highlights from the for third quarter.

We delivered another solid quarter non-GAAP net income of RMB 1.06 billion, a 52.9% year over year increase despite the overall industry credit weakening driven by macroeconomic environment and reduce the quick.

Yes.

As noncompliance players exit the credit market.

This came as a result of our risk independent open platform initiative really taking off.

Generating Ruby 993.3 million in revenues for the third quarter.

Representing a staggering 150% quarter over quarter growth.

This risk independent fee based revenue contribution now to over 90% of our net profit as it carries little margin no operational costs, and we assume no credit risk.

The number of outstanding borrowers in open platform also increased to over 1 million from 415000 in the second quarter.

Driving total outstanding borrowing base to out our ecosystem to 6.3 million.

A new record in companies operating history.

In the third quarter.

669001st time borrowers drew loans from our platform.

And to us with minimum customer acquisition cost.

Demonstrating that in Eylea affordable and attractive service does not require costly marketing to successfully wrote.

Again, our open platform marks our service now even more attractive at the higher quality borrowers can now access more appropriately sized credit rather than before the frankly, our previously over a conservative credit sizes because.

We have self restrain limits per borrower by underwriting using our own balance sheet only.

The total balance or through the ecosystem, including open platform has grown further to 38.4 billion renminbi. Despite what we believed to be a temporary credit down cycle, and it's sort of solidifies our strong execution.

Cities to succeed by quickly navigating the various changes in macro environment online consumer finance industry regulatory environment and partnership landscape.

Building on the innovations in the open platform, we will continue to pursue our tech driven growth strategy to connect the 300 million plus creditworthy, but underserved consumers in China to over 5000 license domestic domestic financial institutions.

In the risk taking side of the business as a result of our commitment to delivering risk adjusted returns and our overall conservative risk appetite, we swiftly reduced credit volumes and paused credit trial programs.

The proactive management of market driven risk was proven effective and stabilizing delinquency rates.

To enhance comparability to peers and transparency in our disclosures our M. One plus vintage measure by current receivables at risk stayed below 3.4%, while m. six vintage charge off rate was below 1.6%.

We look to continuously enhanced transparency and we'll continue to disclose both total and current receivables with standards, while current at risk maybe a more direct comparison to some of our peers disclosure standards.

Although risk remains well managed we believe the recent exit of many smaller players may create further liquidity pressure for the Chinese consumption credit sector.

As such we expect to continue a conservative approach on a risk taking book into the final quarter of 2019.

Revise our full year guidance accordingly to renminbi 4 billion.

Representing a significant 57% increase from RMB 2.55 billion for what we achieved in 2018.

Given the strong momentum and now open platform and its risk free fee based business model. We think we have established a solid basis for an opportunity to security to be revalued at a more reasonable valuation where our current.

Market value approximate net assets.

Therefore, another is U.S. dollar 195 million of shares were announced and most recently fully repurchase under our accelerated stock repurchase program.

Bringing our total buyback amount to us dollars 572 million since we became a public company.

This very large cumulative share buyback since we became public reflects our confidence in shouldn't gross prospects and uphold our commitment in creating shareholder value.

Since our inception in 2016.

We have gone to stages of business and regulatory compliance upgrades from license based lending.

To risk undertaking loan facilitation for financial institutions to now, becoming a technology base fee driven platform.

Our consistently strong financial results have demonstrated our longstanding commitment to deliver value to our shareholders.

And we're honored to be only of the three use that listed Chinese stocks selected touched soon joined the M. Sci China Index, one of the most influential indices that track stocks with exceptional liquidity and widespread investors' interest.

Now let me show you some key financial results.

And the interest of time I will not go over line by line item.

For more detailed discussions of our third quarter 2019 results. Please refer to our published earnings press release.

In addition, and most recently updated Powerpoint presentation.

Decipher in all the numbers are uploaded in our website.

Total revenues wherever reminbi.

2500, 90.9 million or us dollars 362.5 million, which increased by 34.3% from RMB 1.9 billion for a third quarter of 2019 18.

Transaction service fees.

And other related income substantially increase to remain be 993.3 million or us dollars 139 million from nil in the third quarter of 2018 as a result of the fast ramp up of open platform initiative.

Cost of revenues decreased by 70.5% to remain B 206 point Threemillion, our U.S dollars 28.9 million from SMB 698.5 million for the third quarter 2018.

Primarily due to the increase a decrease in cost incurred by the time I also business and a decrease in funding costs associated with the on balance sheet portion of our loan book business.

Sales and marketing expenses decreased by 45.4% to even be $65.5 million or U.S dollars 9.2 million from MB 120.1 million for the third quarter of 2018.

This decrease was primarily due to the scaling down of the top I also business.

non-GAAP net income attributable to today and shareholders increase.

By 52.9% turn be 1.06 billion or us dollars 148.6 million.

Or even be 3.34 or us dollars 0.47 per diluted adss.

This concludes our prepared remarks.

We'd like to open the call two questions.

Operator, please kindly go ahead.

Thank you for sensors.

Ladies and gentlemen, we will now begin the question and answer session to ask a question. Please press star one in your telephone now this week for it needs to be amounts to cancel your request CP press the pound or hushed.

Again, it's star one to ask any questions.

Your first question comes from the line Sanjay Jain from Alethia capital you can ask question.

Hello, everyone can you hear me.

Hi, Sanjay good to hear from you hi, Thank you so much for this call and congratulations on great reserves.

Actually the performance in open platform.

I just wanted to clarify.

And our mix of this business as I understand that.

In open platform is closer to 36%.

Oh, and they are paying you nine and half percent in the third quarter. So in a percentage of loan terms that is 15, 16%. So your partner is actually left with 15% to 20% and then they have to bear a cost of funding of their own.

Which is say three four or 5%.

And so the only via this economics work for your partner is if the credit loss is relatively quite low actual five 6% and currently I believe it is even lower than that.

Hi comfortable profile of the customers, that's smit I'm blanking basically.

Understand find out what is the difference between open platform and known facilitation I believe open platform. The income is four to 6000 per month instead of three to 5000 in loan facilitation.

But you are lending 15000 or borrowers.

It is 5000.

And if I remember correctly, you used to keep the monthly installments to 300 RMB now it must be around 1000.

Oh and I believe you are restricting the number of platforms a custom I would have borrowed from to 4.7 to 5.2 or that is a range actually on the open platform that they would have borrowed on average from five blackstone's versus six or seven or more in loan facilitation. So I'm just trying.

I understand that the differentiated income versus the differentiated monthly installments and then the 5% credit cost here versus.

10% or move in loan facilitation.

How does it work.

Fantastic Sanjay and.

Given your question.

We really appreciate how much insight you have enough business most of which are substantially all of which are very very accurate.

So you Reno, you know business very very well and thank you for that now regarding the open platform initiative as you said the economics only makes sense to my funding partner if the loss rate is lower and it is lower now now why is it lower there are seven.

No aspects that creates a better threaded assessment.

In addition, it's our overall direction with our founding partners in an overall macroeconomic down cycle to focus on the high quality borrowers now how do we do that number one the open platform a borrower numbers as you can see is about 1 million.

It is a subset of our total outstanding ball base of 6.3.

I would believe there is still substantial room to grow from that because we do have pay a credit line now approved to over 33 million people of our customers. So there's two substantial room to go now in that subset.

Created a very very innovator, where it's very excited by that a so called a credit syndication process, where all of our funding partners, whom have their own independent know how incurred assessment.

To the same platform and they do their own independent credit underwriting.

With that if my borrower maybe borrowing from other platforms. One one funding partner may not know, but another founding partner with no no. We bring all the information together in a process was open that's why for open platform and we share that information quickly decide on a credit.

That borrowed can can become borrow so we're really bring more heads to the table than before and Thats what explains the credit.

Sort of delinquency to be significantly lower than just a the loan book business.

Well, we're excited by how we created this are using a lot of advanced technologies in transaction clearing and high speed processing physician processing.

And with delivering the right service to our funding partners you can see that exciting growth. We went from four funding partners in the second quarters, and now 11, and we look to now grow closer to 20 as we redefined the solution to a problem that all my funding partners face number one bring the Costa and we're happy that.

If that consistently even with long precipitation right, but number two.

The core worry for all everybody can put less mainly my regulated license financial funding partners is how do you get a better credit and by bringing more has to go to it just works. It just works really well. So that's that now we do believe there are substantial number of Chinese.

Time, let's this let's forget all the acronym okay, let's let's focus on mute the view user. Okay. There is a substantial massive amount of underserved or under bank under credit or borrowers that just.

We have massive disposable income, but they may not have a disposable capital to buy what they what they want.

You mentioned that at 15000 room, and B, which is the current loan balance right now across my open platform. It's right now about 14000, okay.

The actual Monte repayment is somewhere around 1000 principal plus interest.

Now does that mean pressure to my borrowers in fact, not really even if you look at a person who is making I'm just on average 5000, which is not massive amongst maybe a month.

What's special about the Chinese under bank consumer spaces, where if youre a factory worker, if youre a construction work even restaurant wages.

One amazing thing that's different in China versus anywhere else in the world, who will payday loan situation is they all have.

Dormitories provider for and they all have three muse provider for.

Which makes the entirety of the income truly disposable and they don't really have to worry about basic license.

Which makes this class of users safer.

And better.

It's just that we were not doing our business right before.

The customer the high quality customers, where there, but we were to self constraints on risk we were not letting people go over 10000, even if they can dessert 2030 and with the open platform now we can achieve that so we've opened up a gold mine.

That was already in our ecosystem, we just in a minor people.

Okay.

Hello.

Thank you very much everybody's enforced shows about one small observation on that and one clarification. So the smaller observation is that.

How do you defined under bank or underserved is these customers are the ones who are.

Borrowings from anywhere between 4.75 0.2 platforms as of now the new lending to them another 14000 UAN.

In the open platform.

So that's just an observation.

I just want to that but the bigger question I had is that you are making 15, 16%.

Off of this note simply for the incidence and the bank is making another 789, 10% return on that note.

After their funding cost and credit cost assuming that the credit quality remains in that range.

5% to 7% so I'm just wondering whether it is this is to profitable.

This is too many people in the food chain, making too much money.

How would you respond to that.

Hi, how does it is all your sense.

Yes. Thank you Sanjay first of all Oh, we cannot agree with few more recurring observation.

We are a fairly transparent and at the reckon on this company our there's no doubt borrowers in the on the industry space is stacking, okay, let's let's not shy away from the reality.

And we would like to open they say that right, but there are ways. If you think about these borrowers again they may have taken two or three mean, maybe even four or five loans up at the loan size.

Her their Monte disposable income is still well manageable.

And see a losses are there that we have a human on open platform is still fairly manageable a very well contained.

Now why is that.

Because the.

The traditional Chinese financial institutions as Youre aware like the traditional bank credit card issuers are generally quite conservative on personal credits or I have a personal experience frankly, even with my type of income a one largest credit card issuer oney grants me a 50000.

Rimondi okay.

Hi, My credit.

A more commercial global credit card issuer offered me a over 20 times that amount and I can definitely we pay any of that.

So number one other banks have been quite conservative on personal credit number two or even for the industry participants we believe the Chinese consumer leverage taking our household is still at a very early stage of leverage admittedly. The group is very fast.

So the leverage opportunity is still massive are we still think that we're still far from the safety sort of bright line.

Now how do you come back stacking with stacking.

Right number one is in a previous workloads are there too many small players the capital being deployed in the P to P space, which we will not involved. So we will know really are the right number. There's no. We didn't know where we can see to help but now as more and more larger platforms become compliant.

Okay copying our business model from loan facilitation to not talking something similar like our risk. We open platform more more them are supported by regulated license banks.

And we share a lot of these funding partners and these funding partners knows the best.

Right, that's why we weren't where we're going that direction of open platform. These funding partners from the license banks consumer finance companies, our trust companies, who participate in this industry with no this better than us. So there will be more equipped to handle stacking.

They are more conservative in handling the type of risk, while we can significantly add on the value of re significantly reducing usually.

Acquisition engagement cost the transaction clearing building as well as collection service. So it's really bringing the to the best Professor cockroach together and this transaction. If you think about the syndication process can only happen at our platform or maybe a third party platform independent of just one single bank.

Yes, so one platform reduce the risk for 10 11 banks now right. So it just makes sense.

I do observed you had the comment about the.

Massive probability that we're enjoying under the current model.

My view is a conservative view.

Is that over time, the margin must come down a we're not going to be taking close to 10% of the transaction dollar volume.

Maybe taking closer to somewhere between 5% to 8% over a longer period or.

Now so far though my take rate in the first quarter, two second quarter to now third quarter that we've initiated and now the loan balance sheet created for our partners not small it's over 12 billion has been consistently closer to 10%. So.

So so far my comments are happy with is they're happy to share. This economics of us helping them build into the finance infrastructure to bring the technology into the game. So they can actually have a chance to access as market overtime as competition sort of increases we would see that take rates come down frankly speaking.

Makes sense I mean, this is right now a fantastic situation for you.

The competition.

It holding in the marketplace.

And quite possibly or your partners to probably don't even understand subtly economics of this business.

Yes.

They are bad.

Thank you Sir.

HSBC [laughter] good for you if they don't but anyway.

That's very very helpful.

If I may also be the second question on credit trial program, how many borrowers do you have outstanding from back now.

And the loan amount of personal loans from the fed beside from them and asset quality what would it be excluding the okay to try to prevent board or speeds.

Sure.

So I'm not at Liberty to disclose that specific amount.

But it's not big up because we have seen or delinquency basically kept a stay stable right now at about the one of 10% to 12% range.

So as we call the credit program. It just this is Paul I, we see that actually to improve over the next year, our sunk strong conviction. The credit delinquency do you want to improve over next year as a smaller noncompliance and sector.

Now how much of it from a user or loan balance perspective, it's not the majority obviously.

You know just giving you a sense of range is about probably 20% from each angle or the outstanding right now.

So we did enjoy a very large uptake in obviously you observe the active borrower base over the last two three quarters and we will go through that and to the end of this year and that quality will improve significantly.

Into next year.

Yes, setting us up and I must say that your number of new borrowers is quite impressive despite the shutdown of the trial program.

The third quarter. So if I can hold one small clarification on the loan syndication part.

Then you do a loan syndication multiple partners when your share of the syndication be subordinate.

To the other partners I will then be able to foreign concept and is that the mechanism through which you covered a accreditor installment.

No we follow very very strict practice of not subordinating because every word to subordinate if you look at that long as a whole we would be basically a first off takers and we would have to bring that all risk the whole risk into our balance sheet.

So we do not actually provide any subordination, there's actually a very come a good commercial reason why we do not subordinate.

Because the loan has a certain capacity right you don't want to overextended borrower right and each funding partner knows that the experts in vending is a banks.

For the problem is each person has a specific limited capacity and it's the first come first serve so you at the back of acute number one you were not because you may not be the one getting your money to the hand of a good borrower number two it was lost does take place what happens is the first lenders get paid first.

The first dollar so you don't want to be last in the queue either need. This absolutely explains why the massive growth in open platform because.

My funding partners are rushing to the best borrowers as quickly as possible right.

Because they don't want to be the ones left behind there is a really good commercial reason why are we designed it the way so that it encourages growth or we do not take any risk.

And I think this is the real ultimate form of Fintech in China.

Mmm very very interesting so you would be the first.

If you want to be in every case I imagine because you are the one who is originating the customer.

And suppose there are three lenders and in one of the mines. The board has not the 1000 UAN as he is supposed to but say he pays 500, how can that be allocated among the three lenders then.

Yeah, it's it would be separated in several different bills basically whoever put up the credit first will be first in line.

So that obviously, it's a syndicated process, yes, but there is a slight timing gap difference between different blenders reporting back to the platform how much they're willing to land.

So the first all at the first 500 always goes through the first bar for cylinders, yes. In other cases, we would be participating I would probably be the first in Q.

This would tremendously enhance our credit quality just bear with me.

Over time, because we're now in the risk assessment game not alone anymore.

All my banks are helping us and we're helping each other this is the wonderful publication in the previous sort of non Fintech world syndication does happen over a big loan portfolio, but the buyers of the lenders get holding a bag don't know what the asset inside what we've done as we create a technology no.

That all my partners know exactly what they're dealing with on a very detail single individual power level.

Moving embedded leave and design product I must say you're going to determine how are you.

Hi lead your seamless which is fantastic for me as that you guys had only the thank you very much way or clarification appreciate that.

Thank you Sandy I. Appreciate you are always a understanding our company very well.

Again to ask your question. Please press star one from your telephone you start once asked the question. Your next question comes from the line of Johnson shy from Morgan Stanley You May ask question.

Hi, I'm things management for taking my question for so on us and I will focus on the risk.

Oh I see the Ppt online 10 shows that they want delinquencies is.

Rising up to 12% now if we exclude open platform and then by the open pit from probably around 11%. So just wonder what's the latest trend you sit under control now and given this is the case and we have make us and Carthage related loans, including provision.

In the guarantee related loss roughly 1 billion in this quarter I'm just wonder how much.

Provisions, we need to make.

Going forward and was the growth strategy on that is risk environment. Thank you very much.

Thank you, John and yes, and I really would encourage all interested parties to look at our presentation posted online we've enhanced the disclosure to our company.

And we're holding the standard of what a fintech companies with disclose or in our presentation. So a lot information is there to help you understand the business.

And I think we're selling benchmarks across our peers. So a on page 23 of the presentation as uploaded on the Oh on the web or we want to be transparent and we disclose our de one delinquency.

Which represents a daily moving.

Our view time assessments of the entire portfolios risk a one thing is right John observed that it's about 10% to 12% range and now it's stabilized around 12% one thing I have to correct. This open platform is now at 10% a 10% a after blending open platform the entirety of Longbow plus.

Open platform, what do you want delinquency rate would be.

Open platform the when delinquency rate is significantly lower due to the reasons I just discussed with Sanjay.

So.

Thats kind of that so it's a it's a we posted up there. It's a real time you updated frequently we have seen a very good stabilization of that's where the acceleration a decline of the one delinquency up that her has stopped so I think that that's the first part and if we look further into the.

Strategies that weve deployed in the last.

Two three months last quarter and the product before we actually do expect that delinquency to stabilize into Q4 and will actually likely to reverse in Q1 now granted that the macro situation and liquidity remained constant okay.

But we are conservative on our view as you know we have always been a conservative company with lower leverage our loan book to equity ratio.

With a a more buffer a margins to protect equity from losses.

So are we are taking more provisions in the quarter our ability.

One plus delinquency coverage ratio is actually covering real M by well over 120%.

In the quarter.

And ER and that John mentioned, a numbers right at about 1 billion on and off balance sheet together.

And we expect that number to be similar into Q4.

And you would actually start to reverse a into the next.

First quarter second quarter 2020.

We are seeing this before our company is well experience and facing a shops in liquidity or although a we only a five year old company, we have seen many credit cycles in the Chinese consumer credit sector.

First decline was in 2017 December we've managed to that and we delivered still in this first quarter in 300 plus million of earning we've seen another uptick or with the P to P crack down through the summer of 2018 and this is I think the final phase our PDP exited so.

The D. The future beyond Q4 looks very optimistic.

Is that helpful job.

Yeah, I'm, so how does the in power growth strategy I'm just to follow up I mean for four for Fourq, you and the next year. Thank you.

Yeah. So we really appreciate this important question I think our strategy is very clear laid out clearly laid out in the third quarter results. Our company strives to be a technology company routed to be a lender. So over time, you expect our leverage to continue decline.

We'll take less and less risk on book overtime because.

We've found that you know our founding partner appreciate our sort of cost saving aspect of the business just as much as the risk taking part of the business. So given that demand is insatiable given that we have the relationship giving that the customers. All all focus now is to become a tech.

Tony.

And I think that's a better way to go from the overall regulatory shifts and changes to.

Our shareholders will be much more protected from any regulatory noise. A we've demonstrated this before we completely avoided the PDP business model, so that direction for us is clear less and less and less investment risk taking if the opportunity allows.

If the opportunity really allows we wouldn't have loan book at all [laughter].

Sure.

Yes, I think so since just one quick follow up on one number I think.

As soon as a 6.3 million outstanding borrowers, including open platforms in the interim facilities in business.

Just wonder if what's the number for pure facilities 1 million, excluding open platform I'm not sure. If we have Andy Thank you.

It's about 6 million.

It's about 6 million.

Great. Thank you very much.

Thank you John .

So again to ask the question you read the press Star one of your telephone now.

It's star one to ask a question.

Your next question comes from the line Jackie Xu from China Reticence.

Your last November .

Hi call. Thanks for taking my question.

Two questions for me personally about the at some acquisition strategy.

I've seen that our sales and marketing expense actually has have been quite low versus fuse and some of appears actually spend very aggressive sales marketing budgets.

Especially this year, so how do you view.

You know the user growth and the parent rolls.

And especially when our competitors.

Our aggressive on this and second pension is about the lending license.

From the regulators and they've been discussing two kids license to.

Capable PDP or on the lenders such as consumer Finance company license or online Microlending license or will you consider that as a.

In alternative business model in the future.

To get the license and the license lender. Thank you.

Thank you Jackie and our first of all congratulation on Euro and great to hear from you in your a new capacity first of all your question on customer acquisition.

It's.

Always a a question that all this more analysts ask and our to US. The answer has always been we're not in a rush to acquire customers. We have always had a problem of too much demand a one number I don't disclose anymore, but I can do sort of roughly share. This is since the end of 2000.

18 to now.

Our one small part or the open platform is about just referring customers away to other platforms.

That number stood at about 3 million at the end of second quarter. It grew to 5 million.

To end the third quarter, so not only we don't have a probable or acquiring customers. We just had too many customers, we actually sent 5 million people to other.

Interested parties. So it just goes so far as to the demand that we're facing so we really no rush to get customers. We have some rough numbers in terms of how we think about next year in a year beyond.

Anything further I'd be lying to you.

So we do have some sort of shape or form of next year into beyond we believe weve ourselves and marketing will be well positioned to deliver a very attractive strong results like we've done before for next 12 to 24 months.

Beyond that we have a strategy in place which is a D.

Ecosystem part of the open platform, where we partner with many many a at partners such as Oh, we talked about before Tom Oh. We also in addition to that in about eight different ecosystems by now.

Pretty successful because all my our partners one way to monetize.

But.

This is our view and our view only.

We don't believe the current credit environment in China as P to P is unwinding in liquidity is shrinking is the right time to apply customers. So we have the channels. We absolutely have to dollars, we have more cash and more profit than any of my peers.

We can spend that anytime we think it's the right timing.

So as we don't expect Theres a need to do this next one here or 12 months or we would spend that dollar wisely at the right time to deliver better results over the course of our growth cycle.

So a number two regarding lending license or Weve had deep thoughts about this we started our business with two proper micro internet or micro into that lending licenses.

Back we've had a pretty restrain use and froze them over that period, we are not too interested in new forms of licenses because that could be policy, driven and the regulatory structure behind that could be unstable over time.

We found a better way.

Away, where we do open platform, where we allow license lenders, 100% license lenders to then we don't has to long and from a lending perspective, but we just serviceable.

It's probably the better way to conduct fintech.

And it just makes us the better at night, it should make all of our shareholders the better and I overtime. So.

That's our direction to be a tech company.

Thank you Carl can you smoke granted.

Thank you Jackie.

I get asked a question you read the press star one from your telephone keypad.

Your next question comes from the line ups on China from Morgan Stanley .

Your line open.

Hi, I'm thinking for taking my questions again, so to find a percentage is really useful.

Just noticed that the is relatively new balance sheet items, which is called risk insurance liabilities.

Daniel Carlos on this items, because I noticed that on the presentation page 27. This.

About the breakdown of operating expenses seems that these changes on for his conference liabilities contribute positively to our.

Onto our income so so it's a negative it's an income contribution instead of risk so.

Oh, just probably a little bit more explanations on this items and how he works or would be helpful. Thank you very much.

Sure John and thank you for the observation, they're very very insight and we'd love to explain that this is absolutely positive contribution to our net income the specific amount is 160 million in the third quarter that grew from 32 million in the second quarter 2019.

Now the mechanics and behind it is a we actually have a finance guarantee life.

Okay and that contributes to the part of the transaction structure and our loan facilitation sort of the vis taking business model.

And as a receivables go into this.

Guarantee companies are just as a same as our loan facilitation sort of four by banks, we actually have to recognize this income upfront as well as the risk upfront.

Okay. What happens is a we have been consistently over conservative.

On the potential on recoverable receivables from there so.

So as the loan performed much better than our original accounting assumptions or we have to reconcile that over that quarter basis. So we actually were a little bit.

Too conservative on the risk assumption or in a and drove a 160 million positive contribution in Q3.

So it's the same thing as our long facilitation, but it's part of the guarantee a part of the transaction.

That we provide.

Understood under proper license no less.

Understand thank you very much.

Good job.

Again. Your next question comes from the line Oliver quantum from capital.

Some of it.

Hi, how Ah. Thank you for taking my question I just wanted to clarify.

Sending money to the Escos just got to me.

Because I believe on during the previous analyst day.

We have discussed about E. One delinquency ratio.

By saying that there, but as a quality concerns hence were trying to be ways and when you see credit exposure, but taking business.

And ideally would show one times leverage at one point by looks like based on disclosure. We saw in the presentation back that's still Sabit, all fall off balance sheet loans.

Oh, yeah, very sticky business I'm just wondering.

It's interesting because local strategies and we feel we'll continue to reduce the outside wishing portion going forward.

Because we understand that if you use your own funding to line.

I have to pay their funding costs. So they call. It makes a lot more attractive.

What about the level of credit costs.

Wondering if that's okay.

We'll go strategies.

That's right.

Thank you Alan and and really again appreciate or in fact, all my analysts are that covers a stock to come to Sherman and take interest in us and understanding company are the strategy remains the same as we discussed.

And it's very clearly laid out now that we want to be a tech company and we can be a tech company given the capabilities. So number one.

If you see my our total alone vote to equity ratio that number was a 2.3 X in Q2 now it's 2.2 acts in Q3, a consistent with that the leverage.

Sort of strategy and this number is frankly, the lowest amongst all my peers. So.

So we have better equipped to handle risk than any of the up funding or any of my peers.

So talk about risk.

Management I think QD is really in the good position.

We really know how to handle.

Secondly, the absolute dollar amount of all in on on and off a loan balance together as a loan book drop from a slightly over 28 billion to now 26.1 billion a into the third quarter or we expect that to continue to drop into Q4 next year.

As we found a much better growth engine. The open platform. We can do the same business I'll focus on a high quality borrowers earn a you know interesting fee [laughter] and ER and carry on book. So we don't need to leverage we don't need to take on risk.

So strategy consistent.

All right.

So I.

Thank you al.

Against you asked the question is the press Star one from the telephone now. Your next question comes from the line of Duff <unk> from Citi.

Some of it.

[laughter].

Thanks for taking my question. So two questions for me, especially since adding the delinquency rate quickly just a follow up so you how was a two fred.

Much of the rise in saving Seaway over the past quarter had a interms of that anyone delinquency rate.

See how much is related to the I kind of who plan.

It could be either way, it's excluding the impact from the question how program, what we eat in Australia.

The first quarter.

And the second question is regarding the on the income statement. So if we look at the financing income I tried to convey to take way by.

I think that like 90 official balance since the take rate has shrunk.

For quanta previous used to be around 20, 425% discount Islam, 31%.

I understand that should be approximately.

Approximately 80 hours, so would you help us understand oh, well what cash that excited here yeah. So that's my questions. Thanks.

Sure. Thank you definitely a again insightful questions appreciate that number one the delinquency rate I'm, assuming we were to take out the credit trial program I've, partially answered that to Sanjay as well its about 20% less it's about 20% that but we wouldn't disclose that a number because I don't.

It's meaningful what's interesting is if you look at my.

More full disclosure today are we disclose M M. Six on both total receivables and card receivables are we found that Milan appears in our class actually just like to disclose card receivables. So we'd like to put that number up just to make things Apple to Apple. Okay. So anyway, that's OSI, one it's about 20% lower.

Oh, we actually stop the hardest positive credit trial program, because we do believe there is a sort of credit cycle going through a it will finish perhaps by the end of this year ended the first quarter. So that's why we're quite convinced that the do when delinquency rate is now stable and now in fact drop into potentially.

You want in Q2 next year.

So that's I think hopefully helpful and number two regarding D or take rates on the balance sheet par or which is our.

On balance sheet part of the loan book, which is the financing income.

The take rate.

Around 30 334 per se, but the same.

It's about range now so if I think a one thing is.

One thing that could be driving this is maybe a slightly more use of cost structures and Q3 than the previous quarter, but I have to have a double check on that but in general the number should be roughly the same given number one.

The financing costs.

Our two to two to two through this hasn't changed on balance sheet leverage.

Number two the channel cost really haven't changed a and any provision. This is kept under the piano below that line. So I wouldn't see any reason for it maybe just.

Oh long duration.

I think long duration may have some small impacted this but it would just fluctuate around the 30, 35% range.

Let me show.

Yeah.

Uh huh.

I get asked the question you need to press Star one from your telephone.

Let's start once asked the question.

Your next question comes from the line of John Shy from Morgan Stanley give me the other question.

Yes, It's me again, thank you again so.

About a risk and grows so.

Probably about our assessment first why we would expect the delinquency to come down in the next year because Oh. That's my first question. So secondly, obviously, a as mentioned we rely on the open platform to grow in.

In the coming years so.

From a customer perspective, Hum. So obviously, our total customer base reported roughly 10%. They went delinquency. So if we need to keep the delinquency rate at the open platform loads that probably means we need to acquire some new customer.

So what's our strategies on on on basically two tools to support the course of open platform, particularly on the customer site and funding seems okay. The moment, but if there's some kind of two at on the open platform from the non poppy Oh the management. Thank you file on small details on that.

Thank you very much.

Okay sure. Thank you John so regarding delinquency expectations or how we actually see that evolved number one.

More recent uptake, partially due to macroeconomic environment liquidity as well as this credit trial program to two of the three factors I think we'll roll over a very soon especially you know one thing that under our control is the credit truck program. So that's part number two is the liquidity.

Shrink from the P to P wind down of should finish a and the next two three months or maybe even longer for five months, but it would be over soon.

So I think that all contribute well towards delinquency coming down we've seen this before it goes up and it comes back down fairly quickly.

Secondly.

On the very fundamental basis or open platform has done some pretty interesting upgrades to our risk model over the past 10 months of experience running it.

Oh, because my funding partners are lending using their own credit model and then they decide to lend on our we know that lending does happen or not happen.

We are getting much more insight onto the really high quality borrowers than before.

We would get simply right we were putting our one head to try to solve this problem now we have one plus 11 had a would go to 20 head and by the end of 20.

This year. So we just have more sort of capable people doing this.

As institutions. So I think a we are going to start to see some pretty interesting good trends.

Into Q1, Q4 will still be you know like a tail end of what's happening in 2019, but Q1 I wish you expect to see some fantastic results from doing all of this especially now we can tap into other People's Yossi credit records are because it's all regulatory compliance, especially now that.

All my funding partners are supporting other platforms as well as well like I said or we can solve the stacking problem much.

More.

More capable capability, so all that should help or and then regarding the question on open platform on the customer site.

Oh, we're not worried at all.

On that role.

From the customer side reason being quite simple right now we have slightly over 1 million or active borrowers on open platform.

The next year, we're only shooting for slightly over 2 million, we're increasing loan balance to maybe around 20000.

And that would actually just doing that itself will drive pretty.

Interesting growth for us to become a pretty much all risk free platform. So we're not far from 2 million. The backdrop is not again not from a my funding partners come and create this white less Oh, my sort of borrowers, we prove a credit limit and that white, let's dance.

At over 21 million people.

Now all of them to borrow but you know 21 million and would shooting to get 10% all of that into next year should be achievable.

Granted so I want to be absolutely transparent.

Does the role of open platform is not like a linear shape.

This is funding partners. These are massive a license regulated financial institutions and if they found something they loved it would you not grow that bounds very quickly.

And then once they get to a certain balance it will plateau and then you've got to get the new funding partners are coming to come in to bring that index level growth and we have achieved that oh, we wish to start the business. One we had all in the second quarter now Weve got 11 activity lending to the path own pack on granted that about.

Oh six of them six seven of the must've small so we're still growing those.

So that's the reason why we account for the risk if you account for the staggered growth of open platform I do want to be slightly more conservative on 2019, but for a very temporary period.

Does that help with the dynamics and the shape of strategies and growth or John .

Yes, so I think.

Because the funding on has you know a.

They come while Wileys of 21 million people Im still weve put quality.

I'm just wonder this sort of like quality bar, where we serve.

Maybe we could probably utilizes a because total to basically a water risk you my room at the moment is that an option on though.

That's right we were doing exactly what you mentioned a we are focused on the high quality borrowers. We've just simply left that behind if you compare our average loan balance on my loan book with any of my peers.

We're talking about really to Dan being very conservative right. My average loan balance Oh My loan book was what 4000.

5000 under 5000 for sure.

All my peers across 10000, if normal okay. So we are supercuts or that we just.

I didn't want to go beyond that but with open platform. All of my good borrowers can now get access to the credit enhancement get to a more appropriate criticized than before.

So that's all it that's all this and these are the best quality borrowers were not just saying we're focused on quality borrowers with doing it and with delivering it.

Got it thank you very much.

Thank you John .

Your next question comes from the line all that Sanjay Jain from your capital.

Give me the asked the question.

Right. Thank you [laughter] encouraged by John in terms of a follow up question just one clarification on loans facilitation.

One of your partners saves bag look I.

Basis of the economics as I see today I neutral between open platform.

And Oh annual facilitation, but if.

As a sensitivity we consider it a spike in credit costs, then I'm on the who thought I'm I'm a library.

More losses are less profits.

If the carry costs spike so if a partner assays I still want some or all of my partnership to be in don't facilitation, what do you say to them be walk me or Oh, you used to do so.

Thank you Sanjay we take you know profitability as the serious consideration because that actually that margin helps us up and protect us from our longer risk.

So if we can generate that profit and I. We will also at the partner comes and you know they're sitting between offense, obviously, we measure which side of the pop because he makes sense for now actually open platform, we actually on a greater yield that you because it's really because the risk of open platform for us and all my peers.

Because we allow that to the syndication without the focus on the high quite borrower is significantly lower and we share that upside okay. The reduction in risk. So everybody makes more money. So right now in general are more more my partners are wanting to transfer the open platform because they make more money faceless risk and.

Certainly most most importantly for us and all my funding partners. This is the most regulatory compliant structure.

Because there is no third party involved in guaranteeing risk banks are doing exactly what supposed to land and put stuff on balance sheet.

So I think if you consider that whole package.

Open platform should be more attractive and that's why you seem okay.

Sorry, but do you have stopped balloon facilitation business completely.

Speaker 1: Oh, we will decide now obviously, we are number one we have a much lower leverage so we do have that leverage capacity if we want.

Right now, it's not the time to leverage.

If the time is right, we were absolutely leverage and deliver a massive growth.

But when I wanted to be risk and served.

And Oh, the guidance of sort of where we want to be in terms of leverage is literally 123 acts. Okay. So if open travel goes really well, we can pass with reduced to one from one aspect. If the risk continues to increase the market, we will be leveraged to onex right just to do it for equity lending.

In my assistant vending model. So it doesn't matter if it was a part tomorrow was to be around.

If the risk becomes right. We will we leveraged to earn that interest margin I'll turn that spread but we will not do it at more than three X.

To keep things to say, so that's kind of how we manage this business manocept between one to three act depending on this.

Okay. So you have temporarily shut it down but you can always bring it back if you feel that.

This has improved.

Yeah, and that's how your specific number if my do you want delinquency starts to drop below 10%.

We will start leveraging up.

Okay. Thank you very much.

Thank you thank you sandy.

[noise], yes, no further questions at this time I would now like the conference back to the management team. Please continue.

Thank you again for joining us today, if you have any further questions. Please feel free to contact should ask Investor Relations Department through the contact information provided a website. Thank you.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating give me all disconnect.