Q2 2023 Qifu Technology Inc Earnings Call

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Qifu Technology Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star one on your telephone. You'll hear an automated message advising your hand is raised. Please all note today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Karen Ji, Senior Director of Capital Markets. Please go ahead, Karen.

Karen Ji: Thank you, operator. Hello, everyone, welcome to Qifu Technology's Q2 2023 Earnings Conference Call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Haisheng Wu, our CEO, Mr. Alex Xu, our CFO, and Mr. Yan Zheng, our CIO. Before we start, I would 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 statements. 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. Please note that unless otherwise stated, all figures mentioned in this call are in RMB terms. Now I will turn the call over to our CEO, Mr. Wu Haishun. Please go ahead.

Haisheng Wu: 大家好，感谢参加我们今天举办的二季度的业绩电话会。

Karen Ji: Hello, everyone. Thanks for joining our Q2 Earnings Conference Call.

Haisheng Wu: 今年二季度以来，我们感受到宏观经济的复苏动能有所减弱。消费信贷行业，我们看到用户需求也更加谨慎一些。那我们呢，依然是继续奉行稳健的经营策略。我们在维持风险表现稳定的前提下，追求一个合理的增长。在二季度，我们撮合放款规模达到1,242亿，同比增长26.4%，环比增长13.5%。相比一季度，应该说是进一步地提速了。截止到今年的二季度末，我们的平台赋能了153家金融机构，累计为超过4,700万的用户提供了授信服务。

Karen Ji: During the quarter, given the softening macroeconomic recovery and more cautious sentiments among consumer credit users, we remain committed to our prudent operating strategy and pursued meaningful growth while maintaining stable risk performance. In Q2, total loan facilitation and origination volume on our platform reached RMB 124.2 billion, up 26.4% year over year and 13.5% quarter over quarter, reflecting an accelerated growth trajectory compared to Q1. By the end of Q2, our platform had empowered a total of 153 financial institutions and cumulatively served more than 47 million users with approved credit lines.

Haisheng Wu: 今年以来，我们稳步地推进我们的战略升级，在追求我们高质量增长的同时，进一步地提升我们的盈利能力，从而提高我们的安全边际，让我们的商业模式在复杂的宏观形势下更加具有韧性。在业务增长方面，我们继续地去拓展多元化的获客渠道，与多家头部的流量平台开展了更加深入的嵌入式金融的合作，提升了我们对于优势客群的一个覆盖。面对我们消费和小微客群的不同的用户画像，我们也开发出了针对性的产品，满足了用户更多元化的需求，为我们的业务提供一个新的增长的动能。在提升盈利性方面，我们进一步地优化了经营的效率，降低了资金成本，提升了我们的风险识别能力，也进一步优化了我们的资产的分发的策略，从而提升了我们整体资产包的盈利水平。

Karen Ji: Throughout the year, we have made steady progress in advancing our strategic upgrades to further improve profitability while seeking high-quality growth. This will allow us to increase the margin of safety and strengthen the resilience of our business model against the complex macro environment. In terms of business growth, we have continued to expand and diversify our customer acquisition channels. By partnering with multiple leading traffic platforms under the embedded finance model, we have effectively expanded our coverage to the targeted users. We have also developed products tailored to different consumer and SMB profiles, addressing varied users' needs and providing additional growth engines for our business. In terms of profitability, we have taken further steps to boost operational efficiency, reduce funding costs, and improve risk assessment capabilities to optimize asset allocation and improve the overall profitability of our loan portfolio.

Haisheng Wu: 现在我来具体分享一下我们二季度的一些重要的进展。

Karen Ji: Now let me share some of our highlights in Q2.

Haisheng Wu: 第一个方面呢，我们继续去拓展多元化的获客的渠道和创新的获客的方式，提升获客效率。7月份，我们陆续上线了一些头部的短视频、支付等流量平台的一些合作，依托场景方更庞大的这种活跃用户的基础，我们通过双方一起联合建模，通过一些创新和定制化的这种客群的识别策略，我们的效率进一步提升，增加了我们对于优势客群的覆盖。在投放规模与一季度基本持平的情况下，我们二季度的新客动支人数比一季度提升了16%，因此获客效率有一个进一步的提升。同时我们也通过4.8%利率的一个极限的定价的测试，更高效地去触达一批有稳定信贷需求的这种优质客群。我们发现他们的动支意愿和额度的需求都相对更好。这也是对我们现有客群的一个有效的补充。那接下去我们还会继续去探索各类型客群的获客和接触方式，通过产品的创新去满足这种更多样化的用户需求。

Karen Ji: First, we continue to expand and diversify our customer acquisition channels while leveraging innovative approaches to improve marketing efficiency. In July, we entered into partnerships with top-tier traffic platforms, including smartphone video platforms and payment providers to tap into their massive active user base. Through joint modeling, process innovation, and tailored user identification strategies, we boosted user conversion and enhanced our ability to reach targeted users. With marketing spending largely flat from Q1, the number of new users making drawdowns increased 16% sequentially. We offered some experimental compelling rates to boost engagement in a more innovative and effective way with high quality users with stable credit needs, stronger intention to borrow, and appetite for larger credit lines, which also serves as an effective supplement to our existing user base.

Karen Ji: Moving forward, we will continue to explore effective ways to acquire and manage users from various segments and address their diverse needs through product innovation.

Haisheng Wu: 第二个方面，我们加强了用户的精细化的运营，实现了用户活跃度的一个显著提升。我们从用户的需求出发，优化了我们用户全生命周期的产品、风险和运营策略，充分地利用我们人行的征信和泛小微的这种数据的补充，精准地识别用户。实现了我们在风险稳定的基础上，提供了更加有竞争力的定价额度和更加灵活的这种还款方式，以满足用户更加多样化的需求，也大幅地提升了我们新用户和老用户的动支意愿。加上我们更多的这种对用户的触达方式和运营手段，我们在二季度新客的M0的人头动支率比一季度提升了13%，老客的复借率比一季度提升8%。在这个基础上，我们还引入了这个用户的忠诚度计划，通过为用户提供更加丰富的产品和权益，来提升我们平台用户的粘性。

Karen Ji: Second, we improved our user engagement capabilities and achieved a significant boost in user activity. Starting from user needs, we optimized our product risk and operational strategies throughout the user life cycle. We also enhanced our ability to identify users by leveraging PBOC credit data as well as data related to the broadly defined SME segments. This enabled us to offer more competitive rates and credit lines and more flexible repayment methods catering to varied users' needs while ensuring the stability of our risk performance. As a result, we saw a notable improvement in drawdown intention among new and existing users.

Karen Ji: In addition, through our diverse user outreach and engagement approaches, the first month drawdown ratio of new borrowers increased by approximately 13% from Q1, and the re-borrowing rate of existing borrowers, meaning the average percentage of existing borrowers with an outstanding loan balance that drawdown again the following month increased by approximately 8% from Q1. On top of this, we also introduced user loyalty programs and offered a broader range of products and benefits to boost users engagement.

Haisheng Wu: 第三个方面是我们继续维持稳定的定价和良好的风险水平，我们充分地利用我们的资金端的优势，进一步地优化我们的盈利模型。二季度，我们与金融机构进一步地加深合作，推动了整体平台资金成本进一步的下降，而且降幅应该说是超过市场区域的平均的下降水平。我们通过创新的产品设计，引入了多家国有银行和股份制大行的ABS的投资。二季度的ABS发行规模达到53.4亿，环比增长了132%。这个也应该说是进一步摊薄了我们整体的资金成本。那随着我们的风险识别能力的不断地提升，我们对接了更多元化的金融机构合作伙伴，来提升我们各类型资产分层的这种承接能力，不断地优化我们资产分发的策略，从而提升我们整体的盈利能力。

Karen Ji: Third, we kept our pricing and risk performance at stable levels, leveraging funding strength to further optimize our economic model. During the quarter, our deepened cooperation with financial institutions contributed to a further reduction in our funding costs that far outpaced market rate cuts. In addition, through innovative product design, we secured ABS investments from multiple state-owned banks and major joint stock banks. We issued roughly RMB 5.3 billion of ABS in the quarter, up 132% quarter-over-quarter, and leading to a further reduction in our overall funding costs. As our credit assessment capabilities steadily improve, we are collaborating with a broader spectrum of financial institutions, which will enhance our ability to optimize asset allocation and boost profitability.

Haisheng Wu: 第四个方面，我们的金融科技战略应该说得到一个稳步推进，并且取得一个初步成效。我们进一步地完善了我们的产品矩阵和解决方案，支持了银行更多元化的这种需求。从组织上，我们已经搭建了一支初步具备规模的专业化团队，能更好地为我们的金融机构提供更专业的这种服务。那我们中小银行对于数字化转型，应该说我们看到有着非常迫切和很大的需求，也对我们提出了更多的这种提供全流程的技术赋能的解决方案的需求。那我们目前陆续开始有项目逐渐进入到交付的阶段了。

Karen Ji: Fourth, our technology solution business advanced steadily and has begun to take shape. We further optimized our product matrix and solutions to address the diverse needs of our banking partners. In terms of organizational development, we assembled a sizable team capable of providing professional service to financial institutions. Small and medium-sized banks are particularly keen to push forward the digital transformation with the support of our end-to-end tech solutions. A number of projects are currently in the implementation phase.

Haisheng Wu: 回顾一下我们今年的上半年，虽然宏观环境面临着很多的挑战，我们也凭借我们非常稳健的经营策略，平衡了增长和风险，应该说还是取得了非常不错的表现。下半年我们会进一步地去拓宽我们的渠道和产品线，提升我们的用户粘性，进一步地加深和金融机构的合作，优化我们的资产的分层和分发的策略，从而提升我们的收入和盈利能力。在今天这个宏观形势下，我们通过商业模式的这种持续的迭代，会让我们的企业具有更强的韧性。那我们今天所处的这个行业地位和我们的资源禀赋，也让我们非常有信心继续在这个行业保持一个领先的位置，以获得一个长期更健康的发展。

Karen Ji: Looking back at H1 of 2023, despite the softening macroeconomic environment, we balanced growth and risk through our prudent operational practice and delivered solid results. In H2, we will further expand our channel presence and product offerings to enhance user stickiness, forge closer partnerships with financial institutions, and optimize our asset allocation to improve our top-line and bottom-line performance. Our ongoing efforts to refine and upgrade our business model will enhance the resilience of our company in today's macro landscape. We are confident that our industry position and unique resources and capabilities will enable us to sustain our leadership position in the credit tech market and deliver even more robust growth in the long term.

Haisheng Wu: 6月20号，我们宣告了一个未来12个月内以1.5亿美元为上限的股份回购计划。从公告到今天，我们一直在非常积极地执行我们这个回购计划。那我们对于公司长期的盈利和现金流，我们是非常有信心的，因此我们会坚定地通过这些计划去持续地回馈我们的股东，为股东创造更多的价值。

Karen Ji: On 20 June, we announced a share repurchase program under which we may repurchase up to $150 million worth of shares over the next 12 months. Since the announcement, we have been actively executing the program. We have strong confidence in the company's long-term profitability and cash flow performance, and remain committed to rewarding and creating value for our shareholders through those shareholder return initiatives.

Haisheng Wu: 好，那我的部分到这里。下面请Alex给大家带来一些财务方面的分享。

Karen Ji: With that, I will now turn the call over to our CFO, Alex Xu, who will walk you through our financial results for the quarter.

Alex Xu: Okay. Thank you, Huaxiong. Good morning and good evening, everyone. Welcome to our Q2 earnings call. Despite the slower than expected macro recovery, we continue to see modest improvement in many aspects of our operations throughout H1. Users' activity levels measured by drawdown ratios continue to improve in recent months, which led to the accelerated loan volume growth in Q2. Although the pace of macro recovery is still uncertain, we are proactively taking some actions to optimize our product and service offerings, strengthen relationship with key partners, and ultimately to drive long-term sustainable quality growth. In Q2, the quality of our user base remained solid. Key leading risk indicators were relatively stable near the best level of recent quarters. Day 1 delinquency was 4.2% in Q2 versus record-setting 4.1% in Q1. The slight uptick in Day 1 delinquency somewhat reflects borrowers' sentiment toward the ongoing macro uncertainties. 30-day collection rate was 87.2% in Q2 versus 86.2% in Q1. This sharp rebound mainly reflects seasonal factors, as well as some improved collection efficiency. As economic recovery remains uncertain, we may continue to see some fluctuation of these metrics in the near future. Although overall risk level should be relatively stable in our continued effort to proactively mitigate risks. Total net revenue for Q2 was RMB 3.9 billion, versus RMB 3.6 billion in Q1 and RMB 4.2 billion a year ago. Revenue from credit driven service, Capital Heavy, was RMB 2.8 billion in Q2 compared to RMB 2.6 billion in Q1 and RMB 2.9 billion a year ago. The year-on-year decline was mainly due to overall decline in expected average tenure of new loans, as well as a lower average interest rate. The sequential increase reflects growth in loan volume under Capital Heavy and the relatively stable effective tenures. Early repayment levels were relatively stable in Q2 versus Q1. On-balance sheet loans continue to grow nicely and account for nearly 19% of the total loan volume. We issued a record RMB 5.3 billion ABS, up 143% and 132% year-on-year and sequentially, respectively, which helped us further lower our overall funding cost and drive for better utilization of our micro lending licenses. Revenue from platform service, Capital Light, was RMB 1.13 billion in Q2 compared to RMB 969 million in Q1 and RMB 1.24 billion a year ago. The year-on-year decline was mainly due to overall decline in expected average tenure of the loans, and also the modest decline in average pricing. For Q2, Capital Light loan facilitation, ICE, and other technology solutions combined account for roughly 58% of the total loan volume, compared to roughly 56% in the prior quarter. We expect this ratio to be gradually trending down for the remainder of the year to a normalized level. Also, we are evaluating different components of our operations and seeking a better mix between risk-bearing and non-risk-bearing solutions based on macro environment and operational conditions. During the quarter, average IRR of the loans we originated and/or facilitated remained stable Q-on-Q, well within the regulatory rate cap requirement. Looking forward, we expect pricing to be continued relatively stable for the coming quarters. Sales and marketing expense increased slightly Q-on-Q as we remained prudent and continued to diversify user acquisition channels. We added approximately 1.5 million new credit line users in Q2, roughly flat versus Q1. Unit cost to acquire a new credit user also increased marginally Q-on-Q at approximately RMB 296. While we will continue to drive for efficiency in our operations, we may adjust the pace of our new user acquisition based on macro condition throughout 2023. Meanwhile, we will continue to focus on re-energizing existing user base as repeat borrowers historically contribute vast majority of our growth. Although we will continue to take a prudent approach in booking provisions against potential credit losses, we should expect further write-back of the provisions from previous periods as overall risk profile of our loan portfolios has been stabilizing to improving. Total new provisions for risk-bearing loans in Q2 were approximately RMB 1.9 billion, and the write-backs of previous provisions were approximately RMB 525 million. Provision coverage ratio, which is defined as total outstanding provision divided by total outstanding delinquent loan balance between 90 and 180 days, or 511% in Q2 compared to 432% in Q1.

Alex Xu: With solid operating results and stable contribution from Capital Light model, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity, was again at a historical low of 3.3 times in Q2 compared to four times a year ago. We expect to see leverage ratio fluctuated around this best level in the near future. We generated approximately RMB 1.8 billion cash from operations in Q2, roughly flat Q on Q. Total cash and cash equivalents was RMB 8.5 billion in Q2 compared to RMB 9 billion in Q1. Non-restricted cash was approximately RMB 5.3 billion in Q2 compared to RMB 5.1 billion in Q1. The sequential decline in cash position was mainly due to increased cash usage in our balance sheet lending. As we discussed earlier, we will continue to look for opportunities to deploy resources to launch new initiatives, develop new technology, and expand service offerings.

Alex Xu: Non-GAAP net profit was $1.147 billion in Q2 compared to $976 million in Q1. As we continue to generate healthy cash flow from operations, we believe our current cash position is sufficient to support our business development and to return to our shareholders. In Q1's earnings call, we announced to increase our dividend payout ratio to 20% to 30% and switch to a semi-annual dividend distribution schedule. Today, we are glad to declare a semi-annual dividend of $0.25 per ordinary share or $0.50 per ADS in US dollar, both, which represents approximately 30% of the payout ratio. In 20 June 2023, we announced a share buyback plan to repurchase up to $150 million over 12 months period. As of 18 August 2023, we have already bought approximately $28 million US worth of our ADSs in open market, at an average price of $18.03.

Alex Xu: We will continue to execute the buyback program in accordance with the relevant rules and regulations. With the full execution of the repurchase program and the dividend plan, we may return more than half our net profit to our shareholders. Going forward, we will continue to optimize our capital allocation plan and make timely adjustments to generate higher returns to our shareholders. Finally, regarding our outlook. While we see accelerated year-on-year growth in loan volume in Q2, which is in part driven by easy comp, we do notice continued uncertainty in microeconomy. At this junction, we still see a slow recovery in consumer credit, with a growth rate somewhat depending on micro conditions for the rest of the year.

Alex Xu: As such, we would like to adjust our full year total loan volume target for 2023 to between RMB 470 billion and RMB 485 billion, representing a year-on-year growth of 14% to 18%. As always, this forecast reflects the company's current and the preliminary view, which is subject to material changes. With that, I would like to conclude our prepared remarks. Operator, we are now open to take some questions.

Operator: Thank you. As a reminder, to ask questions, you will need to press star one one on your telephone. For those who can speak Chinese, please kindly ask your questions in Chinese first, followed by English translations. In addition, in order to have enough time to address everyone on the call, please keep it to one question and one follow-up and return to the queue if you have more questions. Please stand by while we compile the Q&A roster. First question comes from the line of Alex Ye from UBS. Please go ahead.

Alex Ye: My question is, there appears to be some dislocation between the strong volume growth and the less strong revenue growth in the past two quarters. Is it mainly due to the higher repayments issue, or there is some product change that lead to such changes? How should we expect the revenue take rate trend going forward? Thank you.

Alex Xu: Sure. I think I will take this one, Alex. You're probably right. Basically, the reason that the loan balance growth as well as the revenue growth is slower than the loan volume growth is mainly because of the duration of the loans, at least so far this year, are shortening. Which in part because of the issue we encountered in Q1 of the early repayment. If you recall, in Q1, there was a pretty significant impact on the revenue stream because of early repayment. Even though Q2, we saw that the early repayment sort of peaked around the April timeframe and then started to gradually, although marginally trending to the right direction for us. Still, compared to historical average, we're still seeing a shorter duration of the loan book.

Alex Xu: That shorter duration will definitely result in a slower accumulation of the loan balance, and also a slower growth in the revenue relative to the loan volume. I guess from product mix perspective, they didn't have too much significant directional impact, say, we're taking in a bunch of new products that happen to be shorter duration. No, I don't think that's a significant factor. It more so has to do with the issue I mentioned earlier. Going forward, ever since the Q2, we are taking some kind of measures to gradually move the duration or move the tenure of the loans to a longer period. As I mentioned, from May to July, we see a gradual improvement so far.

Alex Xu: For H2, we'll continue to take some actions to manage the duration, and hopefully H2, the revenue take rate, you will see a little bit improvement or increase compared to what you saw in H1.

Alex Ye: Okay. Thank you very much.

Alex Xu: Thank you.

Operator: Thank you for the questions. One moment for the next question. Next question comes from the line of Frank Zheng from Credit Suisse. Please go ahead.

Frank Zheng: Thank you, management, for giving me the opportunity to ask questions. This is Frank from Credit Suisse. The first question is, based on the latest microenvironment and the credit risk performance of the portfolio, do we foresee any extra provision we need to take, or is there any more room for extra write-back going forward? Especially considering the provision cover ratio recorded another step up to over 500% this quarter. The second question is a follow-up of the previous question. Could the management give us more specifics on measures taken to improve the duration of loans? Just curious that in the current microenvironment, are we preferring longer duration or shorter duration? Thank you. Okay. I think I will take the first part, and then I'll let our CRO, Mr. Zheng, answer the second part.

Alex Xu: In terms of provisions, as you know, we have been on a very consistent policy to book our provisions conservatively, and make sure that all the provisions are more than enough to cover the potential risks there. If you look at the historical financial report of us, basically, other than a very special quarter, one or two quarters, for the majority of the period, we have the write-backs from the previous provisions. As I mentioned in my prepared remarks, I think right now we see it relatively stable, although some fluctuation in the risk profile. You should continue to see write-backs in the coming quarters. Although the size of a write-back, we really can't determine at this point. It's up to a multiple, the third-party evaluation and also all the other factors. Directionally, you will continue to see write-backs in the coming quarters.

Alex Xu: We will, in terms of continued booking additional provision, we will take more prudent approach based on our observation of the microenvironment. If we feel necessary, we will book more provisions to counter the potential risk. The provision coverage ratio you mentioned, the 511% versus last quarter's 430%. That's not a metrics we have a target on. Rather, it's a calculated number. We book provision and then when we do the calculation, it happens to be 511. That's not an indication that we're targeting a higher coverage ratio or something. No. We book provision basically based on that quarter's loan volume and the third-party evaluation. I will stop here and the second part of question I'll hand over to Mr. Cheng.

Yan Zheng: 好的，那我用中文说一下，可以听到吗？

Alex Xu: 可以。

Yan Zheng: 我用中文说一下，然后请Karen帮我翻译一下。好，然后贷款期限这一块的话，其实是由借款合同期限以及提前还款率两个部分组成的。我先说一下提前还款率。那提前还款率我们其实是在稳步下降的，最核心的因素是宏观因素，其次是运营动作的因素。Karen，你帮我说一下。

Karen Ji: We believe loan duration is a combined result of contract retainer and early repayment. First I will talk about the early repayment. Early repayment was steadily declining, mainly due to the macro environment changes. The second reason is our operational efforts.

Yan Zheng: 从宏观因素来讲的话，我们现在客户的提前还款需求，现在是看到是在降温的。那我们观察到从四月份到七月份吧，这几个月历史的存量资产的提前还款率连续四个月都在稳定的降低。那第二块是运营动作方面，近期我们也在优化一些运营的策略，以降低提前还款率。那主要包括三个动作吧，一是发布最新的电话销售的基本法，将提前还款率作为一个考核指标，那电销人员在这个基本法下面，他的话术和客群选择上面都会倾向于让客户提前还款率下降。那第二个是提前还款页面，我们增加了一些福利去挽回一些客户。第三块是优化了我们的发券的一个策略，降低了某些产品下面7天免息券的一个使用比例。那这个优化策略下面，我们的提前还款率也会有进一步的一个下降。

Karen Ji: From macro perspective, the early repayment sentiment was cooling off. We have observed that the early repayment ratio for our historical loan portfolio has been decreasing for four consecutive months from April to July. From operation perspective, we have refined our operation strategy to reduce the early repayment in three ways. The first is we applied a new telemarketing rules to incorporate the early repayment ratio into the KPI of the salesperson, so the salesperson tend to control this ratio. Second, we offer some benefits to retain the users when they have the intention for early repayment. Third, we reduce the 7-day interest-free coupon to avoid those short-term borrowers. Based on those optimizations, we have seen improvements in our early repayment situation.

Yan Zheng: 然后贷款期限方面，这个并不能简单地归结为越短越好，或者说越长越好。而是说针对不同的客户，我们会有不同的一个最优期限的方案。举个例子，比如说我们面对一个还款意愿比较好，但借款金额比较大，且收入比较稳定的客户，那我们会倾向于给他一个较长的期限，以降低客户的一个还款压力。但是如果我们面对一个长期还款能力较弱，但短期还款能力还可以的客户呢，我们就会倾向于降低客户的风险敞口，同时缩短客户的借款期限，以控制风险表现。那客户不同的风险属性以及借款额度都会对长期和短期的信用风险造成不同的影响。那我们会进一步去迭代我们自研的GBST模型，就是之前我们提到的梯度生存树模型，去提升这个客户的期限的一个匹配度和适应度，这样去平衡好收益和风险。那整体来说，我们觉得在宏观因素的影响，以及我们积极的一个管理下面，我们预计三季度的一个提前还款率指标会进一步下降，且实际九期会有所增加。

Karen Ji: As for contract retainer, we won't say shorter the better or vice versa. We offer the tenure based on the user's profile. For example, for those who have stable income and higher creditworthiness, we tend to offer a longer tenure to lower their repayment pressure. For those who have less long-term visibility, we tend to reduce the risk exposure and shorten the tenure to control the risk. Different user profile and ticket size will have different impact on the short-term and the long-term credit risk. We will further upgrade our self-developed GBST model, the gradient survival tree model, to improve the fitness of long tenure and balance the profitability and risks. In conclusion, under current macro conditions and our proactive management, we expect the early repayment ratio will further decline and our effective loan duration will increase in Q3.

Yan Zheng: 我不知道这能不能回答你的问题。

Frank Zheng: 好的，非常感谢。

Frank Zheng: I hope this answer your question.

Frank Zheng: Thank you very much.

Frank Zheng: Thank you for the questions. We move on to the next questions from the line of Emma Xu from Bank of America Securities. Please go ahead.

Emma Xu: 谢谢给我这个提问的机会。我想问一下，关于三季度的贷款需求和贷款利率的情况。我们看到七月份的时候，居民短贷其实是下降了420亿，整体目前来看，消费复苏还是比较疲弱的。那我们目前看到的三季度以来的贷款需求情况是怎么样的？这个又会怎么样影响到我们的贷款利率？同时，一年前LPR也下调了两次，这个对我们的贷款利率会有什么影响呢？I have two questions.

Emma Xu: The first one is about the loan demand. In Q3, we see the short-term household consumption loan declined RMB 42 billion in July. It seems the consumption recovery remained lackluster. What do you see the loan demand at your side? The second question is about loan pricing. Will the lackluster loan demand impact your loan pricing? With the LPR being cut for twice since June, do you also need to adjust down your loan pricing? Thank you.

Haisheng Wu: 谢谢Emma，我回答一下你的问题。我们也注意到了七月份居民短贷是有一个下降。那从我们自己的角度来看，我们在七八月份的余额其实还是上升的。所以应该说没有出现像宏观整体经济短贷那样减少的趋势。没有出现。

Karen Ji: Thanks Emma. I will answer your question. We also noticed that the citizen short term loan has decreased in July. From our perspective, our loan balance continued to increase in July and August, unlike the declining trend of the citizen short term loan balance.

Haisheng Wu: 从需求这个角度，我们也发现了一些从今年以来一些结构性的变化的趋势。这种结构化体现在几个方面。第一个就是我们从用户的资质这个角度来看，我们发现一些最优质的一些客户倾向于提前还款，次优一些的客户需求相对就比较稳定。另外一个角度，就是从用途这个角度。用途角度，消费客群的发起需求有一个降低，小微的客群需求反而是稳定的一个上升趋势。从行业来看，会体现在建筑行业、交通运输行业、旅游行业、住宿、餐饮，这些需求上升还是比较明显的。加上今年我们也侧重会在小微上做了很多这种专项的开发工作和运营工作。那整体上这个客群的效率，我们看到有一些还是有一个大幅度提升的。

Karen Ji: From demand perspective, since the beginning of this year, we have seen some structural changes in terms of users demand. From user quality perspective, the highest quality users tend to repay the loan earlier, while the lower quality users have relatively stable demand. From the usage perspective, the broadly defined SME users are more active than the consumer credit users, especially for those in the construction, transportation, tourism, hotel, and catering industries. Plus our operational efforts, we have gained efficiency improvement in managing the broadly defined SME segments.

Haisheng Wu: 在这种消费相对低迷的这种宏观下，我们后续将会继续在泛小微这个客群上增加投入。我们也会在新客方面去继续提高我们的泛小微客群的浓度，在老客上去提高对于泛小微客群的服务能力，增加他们的服务粘性。

Karen Ji: Given the softer consumer credit demand, we expect to increase our spending on the broadly defined SME users. We will increase our penetration in the broadly defined customer segment in new user acquisition. For the existing users, we will improve our service qualities to improve the users' stickiness.

Haisheng Wu: 关于您说的贷款定价这个事，我们判断后期的定价应该还是会是比较稳定的。从历史情况来看，我们服务的客群受LPR上升或者下降的影响相对比较小，我们更多应该说还是由市场的供需关系决定的。

Karen Ji: In terms of the pricing, we expect the pricing will be stable in the future. From our past experience, the LPR rise or cuts had very little impact on our pricing. Our pricing is mainly determined by the supply and the demand in this market.

Haisheng Wu: 我就这些，看有没有回答你。

Emma Xu: 谢谢，非常有帮助。

Operator: Thank you for the questions. One moment for the next question. Next question is from the line of Yada Li from CICC. Please go ahead.

Yada Li: 管理层好，感谢给我这个提问的机会。我是中金公司的李亚达，今天想向管理层请教一下近期我们的回购计划。想请教一下，这次US$1.5亿的回购计划主要是出于什么考虑？那我们是否可以将本次的回购视为对股东回报的这样一个常规方式？谢谢。Hello management, thanks for taking my question. This is Yada with CICC, and today I just have one quick question.

Yada Li: I was wondering could you please elaborate more about the consideration behind the $150 million share repurchase program this time? Should we consider it as a regular way to return value to the shareholders? Thank you.

Haisheng Wu: 这个请Alex说一下吧。

Alex Xu: Okay. Yada, thanks for your question. Basically every quarter, we are reviewing our cash position as well as our capital allocation kind of a strategy. When we determine that there are actual, we consider the free cash sitting there idle without making too much of a return, then we would like to deploy that cash, either in the form of the dividends or in the form of the buyback. Okay? That's, I would say, ongoing process in the future quarters as well. We consider an optimal balance between the buyback and a dividend is the best way to return to the shareholders. Like I said, the first thing first, we need to complete this $150 million buyback program. Along the way, we will do our periodical review to determine what to do afterwards there.

Alex Xu: Longer term, I would say some kind of a combination between the buyback and the dividends.

Yada Li: Thank you.

Operator: Thank you for the questions. In the interest of time, I will now conclude the Q&A session. I would like to hand the call back to management for closing remarks.

Alex Xu: Okay. Thanks for everyone joining the conference. Since we have our peers right behind us in their earnings call, so to the courtesy, we just conclude our call here. If you have additional question, please contact us offline. Thank you.

Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.