Title

Presentation

Operator: Hello, and welcome to the LexinFintech’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. It is now my pleasure to introduce IR Director, Mandy Dong.

Mandy Dong: Thank you. Hello everyone. Welcome to Lexin second quarter 2023 earnings conference call. Our results were issued earlier today, and it can be found on our IR Web site. Joining me today are our CEO, Jay Xiao; President, Jared Wu; and CFO, James Zheng. Before we get started, I’d like to remind you our Safe Harbor statement and our earnings press release, which also applies to this call. During the call we may refer to business outlook and the forward-looking statements, which are based on our current plans, estimates, and projections. The actual results may differ materially, and we undertake no obligation to update any forward-looking statements. Unless otherwise stated, all figures mentioned are in RMB. Jay will first provide an update on our overall performance.

James will cover the financial results in more detail. And lastly, Jared will then discuss risk management. I will now turn the call over to Jay. His remarks will be in Chinese. And the English translation will follow.

Jay Xiao: [Foreign Language] Hello, everyone. It’s my pleasure to share with you our performance for the second quarter of 2023. In the current macroeconomic environment we have achieved another strong quarterly results by adopting a prudent business approach. Loan volumes for the second quarter was RMB63.9 billion, up 30% year-over-year, once again exceeding the high end of our guidance. Loan balance reached RMB114.1 billion, up 32% year-over-year. Revenue was RMB3.1 billion, up 27% year-over-year. Net profit was RMB356 million, up 112% year-over-year. [Foreign Language] In the second quarter we adhered to the two main focuses of risk and data, pushed forward more refined operations, iteratively upgraded user risk identification systems, and improved the quality of new assets.

The e-commerce business grew rapidly. And the synergies with the main consumer finance business got further enhanced. We have achieved solid business growth for the five consecutive quarters, with profitability and cash flow improving significantly. In addition, we attached great importance to compliance capability-building and successfully completed the stage-by-stage credit reform which was to disconnect with financial institutions in Chinese [Foreign Language] as scheduled in accordance with the June 30 end-day compliance requirements. [Foreign Language] There were three highlights of the second quarter results. [Foreign Language] First, we further refined operations to optimize asset structure and increase the proportion of high-quality customer segment.

In the second quarter, we continued to iterate and hone our models to strengthen our risk identification capabilities, and improve the accuracy of user identification. In terms of existing customer operations, thanks to our improving capabilities, marketing efficiency reached a higher level in the second quarter. Marketing efficiency increased by 16%, while telemarketing costs decreased by 39% sequentially. In terms of the operation of settled users, the order rate of the re-approved users in the same month increased from 40% to 90%. And day-one delinquency rate decreased by 20% which manifested our notable operation improvement. In terms of new customer operations, the number of new active user increased by 14.9% in the second quarter, compared to Q1.

While customer acquisition cost remained basically flattish, continued refinement of operations also brought us a steadily improvement in asset quality. The proportion of new loans contributed by high-quality users rose to 92% from 80% in the second quarter of last year. While the day-one delinquency rate in the second quarter fell by nearly 10% on a quarter-over-quarter sequential basis. Although the asset quality of existing loans fluctuated slightly due to a specific industry event and the macro environment, we believe overall asset quality will continue to improve as we acquire more and more high-quality users. [Foreign Language] Secondly, we saw the rapid growth of our e-commerce business and then further enhanced the synergies among different business segments in our Lexin consumption ecosystem.

In the second quarter, the e-commerce business achieved a transaction volume of RMB1.49 billion, up 31.6% q-on-q, and 34.5% year-over-year, exceeding the 10.7% year-over-year growth rate of total retail sales of consumer goods. And then the e-commerce business achieved a 44 year-over-year growth rate of transaction volume during the June 18 Shopping Festival period. The number of users also grew substantially. In the second quarter, the number of active user in the e-commerce business grew 24.2% q-on-q, and 36.4% year-over-year. The e-commerce business has been focusing on high-quality and high-growth young consumer groups who fancy new trendy goodies. Therefore, we continued to introduce high-quality merchants such as fashion, sports and international-like luxury brands that are more suitable for installment consumption.

With more merchants and product categories introduced on our ecommerce platform, a large number of existing users have been revitalized, resulting in the synergy between ecommerce and consumer finance business. During the June 18 Shopping Festival period, the significant growth in the ecommerce consumer traffic lead to a rise in the number of quality active users in the consumer finance business with an increase of approximately 4% in June compared to April. At the same time, the active users in consumer finance business have further stimulated the e-commerce consumption resulting in a mutually reinforced loop in the business ecosystem. We have seen further reinforced synergies between e-commerce platform and consumer finance in terms of acquiring new customers and boosting existing user activities attributing to our unique Lexin consumption ecosystem.

In July, we won award of best digital customer ecosystem initiative in China by the industry-renowned Asian Banker. [Foreign Language] Thirdly, we have successfully delivered five consecutive quarters of solid business growth and a strong cash flow. In the second quarter, our net margin rose to 11.6%, a 4.7 percentage increase on a year-over-year basis. Cash flow remained strong and increased by 30.2 compared to the yearend of fiscal year 2022. We have always taken a firm stance to implement a two-wheel drive strategy of risk and data which essentially fueled the turnaround of our business since the nadir in the Q2 of 2022. The second quarter in 2023 is the fifth growing quarter in a row. And, we expect the momentum to continue. Taking the above-mentioned into consideration, the Board approved and decided to distribute recurring cash dividend aiming to improve return to our shareholders and express our full confidence in the business prospects in the long run.

Starting from the second fiscal quarter of 2023, we will distribute a recurring cash dividend semi-annually at an amount equivalent to approximately 15% to 30% of the company’s net profit in the previous six months period or as otherwise authorized by the Board. In Q3, we will distribute a dividend of $0.058 per ordinary share or $0.116 per ADS for the six months period ended June 30, 2023, representing approximately 20% of net profit for the period of the first-half 2023. [Foreign Language] It is our continuous implementation of a two-wheel drive strategy that boosted the steady growth of our business. On the front of technology investment, in Q2 research and development expenses reached RMB120 million, maintaining the industry-leading level.

It’s worth noting that we accelerated the development of the use case of AI large language models in finance sector. This model has been incorporated into our tech robots that are used in the daily operation of tele sales, smart customer service, and operation inspection. Thanks to the application, we saw ongoing improvements in our operational efficiency and refined user experience. For example, in terms of customer service application, percentage of cases solved without human intervention increased to 91.5%, which got 8.2% higher on a year-over-year basis. Regarding the use case in smart assistant service, new addition to coding assistant tools and initiative of design we talked about in last quarter was further applied to data analysis, the design and optimization of risk management data base, which boosted the analysis efficiency and reduced employees’ workload.

[Foreign Language] Last but not least, let me give you an update on our progress in social responsibility. Since we launched small store supporting project focusing to facilitate the financing needs of SME, we have helped over 100,000 SME owners in over 300 cities and 30 provinces. In addition on the front of customer protection, we worked together with regulators, the police, lawyers, and industry association and financial institutions. Our capability in terms of data security got further recognition from national level institutions such as The China Academy of Information and Communication Technology and The China Cyber Security Industry Alliance. [Foreign Language] Looking ahead in the face of the complex and uncertain macro-environment, we will remain the prudent business approach.

Continuously push ahead strategies of risk management into rating and customer base upgrading and deliver higher quality growth. [Foreign Language] Next, I’ll pass to our CFO, Zheng for financial updates.

James Zheng: Thank you, Jay. I’ll now provide more details on our financial results. Please note that all numbers are in RMB unless otherwise stated. The second quarter marked our fifth consecutive quarter of rebound since we bottomed out from the trough in Q1 of last year. We delivered another quarter of healthy growth both in overall operating and financial numbers. This is not an easy achievement amidst the relatively mild consumption recovery in the second quarter. Thanks to our continuous efforts on reconstructing risk management capabilities, upgrading to a better customer base, refining the operations and cost optimization initiatives. We believe we have planted the right seeds by undertaking the above mentioned strategies and expect to reap more benefits of such improvements in the coming quarters.

First, please let me elaborate at a high level on what happened in this quarter as compared with the same quarter of 2022. Total loan originations for the quarter reached RMB63.9 billion, an increase of 30.1% year-over-year, beating the high end of Q2 guidance we gave earlier. Revenue grew by 26.6% year-over-year to reach around RMB3.1 billion for the quarter, which was mainly driven by the GMV growth and the increased loan balance, which reached RMB114 billion. As a result of our customer base upgrading, better quality customers usually generate larger ticket size loans, hence contributing the GMV growth. The strong revenue growth was achieved despite the fact that the weighted average APR fell below 24% in Q2, around 1 percent point lower than a year ago.

Loans with APR under 24% now made up over 86% of all loans, more than 5% higher than one year ago. Another contributing factor was the funding cost which stood at 6.6% during this quarter, a decrease from 7.2% a year ago as the corporations with new funding partner banks continue to roll out, we expect lower funding costs in the coming quarters. In addition, the loan tenure was 14.7 months versus 12.8 months in Q2 last year also contributing to the revenue growth. However, amidst the increased macro uncertainties, we have started to optimize the tenure structure earlier this year to reduce the potential exposures. We continue to sharpen our focus on iterating and refining risk management capabilities in the second quarter upholding risk management as our top business priority.

Asset quality steadily trended better. For instance, day one delinquency rate got lower. We also further improved accuracy of credit profiling and risk management efficiency. Due to the short-term turmoil in the post loan collection industry caused by some certain company specific incident, our 30-day plus delinquency rate and a 90-day plus delinquency rate fluctuated a bit, but still better than one year ago, standing at 2.59% and a 4.61% respectively, versus 2.63% and a 4.85%. In Q2, as we continue to push ahead cost efficiency initiatives, total operating related costs and expenses, including processing and servicing cost, sales, marketing, R&D and G&A as a percentage of average loan balance dropped notably to 1.01% versus 1.43% in Q2 of last year, indicating a 42 basis point of cost reduction.

On the going forward basis, we are fully committed to continue the cost optimization initiatives as one of the long-term strategies. As a result of the aforementioned, we are able to report a net income of $356 million, an increase of 112% year-over-year. The net margin improved to 11.6% versus 6.9% in Q2 last year. We have seen substantial improvements in operational efficiency and profitability compared to one year ago, which clearly serves as a strong testament of our ability to sustain the V shaped rebound. Apart from the above year-over-year analysis, I would also like to share some perspectives through our quarterly comparisons. In Q2, total RMB63.9 billion, an increase of 4.9% quarter-over-quarter as we maintained a prudent growth approach considering the wary consumer spending, it’s worth mentioning that we fully leveraged our lurching consumption ecosystem and well captured the growth opportunity during the June 18 shopping festival.

As a result, we were able to deliver a faster than expected 31.6% quarter-over-quarter GMV growth on e-commerce platform. We also expanded products offerings and introduced more high-margin SKUs in order to boost the gross profit of e-commerce business line. Consumer finance take rate fell slightly to 2.3% from 2.5% of last quarter. The slight fluctuation in take rate is the combined results of the lowered APR which stood at 23.6% versus 24.4% in Q1 and more bookings of provisions due to the overall market uncertainty and the shortened tenure. The tenure is now at 14.7 months versus 15.1 months of the previous quarter. Consequently, the total operating revenue for Q2 booked an increase of 2.4% quarter-over-quarter among which revenue from tech empowerment service registered a 6.5% increase quarter-over-quarter and the revenue from the installment e-commerce recorded an increase of 5.5% quarter-over-quarter.

The e-commerce revenue growth was lower than GMV growth due to the increased platform service or pop business instead of the company directly sourcing and selling the merchandising, therefore more revenue is booked on the net basis. Overall operating expenses stayed almost flat despite 3% growth in sales and marketing related costs driven by the user growth. Offsetting the sales and marketing cost increase is the decrease in G&A and R&D expenses due to efficiencies. Therefore, we achieved a sequential growth in net income of 8.6% and further enhanced the net margin to 11.6% from 11% in the last quarter. To conclude, we have registered a strong improvement during the second quarter from both year-over-year and quarter-over-quarter perspective.

This solid result was achieved under the current macro uncertainties and slowing economic recoveries. At the end of second quarter, the company had cash position of around RMB5.5 billion on hand and net equity position of RMB9.4 billion. In view of the healthy cash flow situation, the board approved the semiannual dividend plan. The cash flow from operations is improving and robust to sustain a future growth, thanks to increasing profitability, more efficient guaranteed deposit required for the loan facilitation business. This also demonstrates our confidence in the overall business to continuously produce shareholder returns. Finally, I would like to update our outlook for the second-half of 2023. Based on the company’s preliminary assessment of the current market conditions and the macro situation, the company reaffirms the early of the year guidance of annual GMV amount of RMB245 billion to RMB255 billion which represents a 20% to 25% year-over-year growth.

Therefore for the second-half of the year, we expect in the high single-digit to mid-teens percentage growth year-over-year. These estimates reflect the company’s current expectation which is subject to change. In summary, strong second quarter results represented the fifth consecutive quarter of continued rebounding both in operating metrics and the financials. It further solidifies our commitment to continue the turnaround journey despite possible headwinds from the macro uncertainties. With that, I would like to turn the call over to our President, Jared Wu, who will discuss our risk management. Jared, please go ahead.

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Frank Zheng with Credit Suisse.

Frank Zheng: [Foreign Language] Thank you, Management, for giving me the opportunities to ask questions. I have two questions. The first one is on the outlook for various operating metrics in the third quarter as well as in the second-half. How is the credit demand in July and August in view of the macro headwinds? And the second question is around asset quality. As mentioned previously, due to the change in loan collection industry there are some fluctuations in asset quality. What’s the impact so far, and also could Management share more updates on future outlook of asset quality. Thank you very much.

Jay Xiao: [Foreign Language]

James Zheng: [Foreign Language] I’d like to add a little more. Basically, in view of the uncertainties in the macro situation, we’re going to stick to our original early-of-the-year guidance of RMB245 billion to RMB255 billion GMV growth. That represents 20% to 25% year-over-year growth. As a matter of fact, while we have completed the first-half of the year already, if you look at the numbers we have achieved 35% year-over-year growth up to this point. So, that means if we look at the whole year of 20% to 25%, for the second-half we’ll be looking at basically a GMV growth of high single-digit to probably mid teens growth into the GMV. And really this is because we are adopting a very prudent kind of approach in terms of the business growth.

We would like to kind of more overlooking at stabilize the overall scale, the overall GMV growth. But really put the risk management and also the net income, the overall profitability as the first priority where we go with our operations for the second-half.

Mandy Dong: Okay, so, Frank, I’ll do the translation for Jay for the first question. We do still, like James said, we expect the full-year guidance to maintain within the range of RMB245 billion to RMB255 billion. And I think this year, as of right now, the macro recovery is not too optimistic as we were hoping to or expecting for the – earlier this year. And then we’re actually consciously controlling our increase in pace. And right now, depending on the macro environment, right now we are taking a more prudent business approach. We’re focusing more on profitability and as our priority. And for the second-half, [it would be just] (ph) the increasing pace of our business mentioned really depends on the macro recovery conditions.

And from the company’s operational level, the demand growth in July and August is more or less similar to the second quarter. And we don’t see a very strong recovery trend. So, the third quarter will be more on reasonable growth, again focusing on profitability. And it will remain more or less stable. [Foreign Language] In terms of your second question, as I mentioned before, with the macro economy being down a little, it puts some pressure on our asset quality. In the second quarter, with the known industry impact from certain collection issues having with the certain collection companies, we did bear some burden. It did impact our collection rate or further collection rate, but we are having — putting on more efforts improving on our new assets — asset quality.

As we mentioned earlier in our script, the overall asset quality for our new assets are actually improving. And then it in turn reflected on a lower further collection rate. And it kind of evened out the overall data. In the future, with the macro not being in the recovery [technical difficulty] we were hoping to, there will still be some challenge on our risk level. But we’re confident as we input we’re taking in more good-quality new assets, the overall asset quality will get better. And I hope that answer your question, Frank?

Operator: Thank you. [Operator Instructions] And our next question comes from the line of Alex Ye with UBS.

Alex Ye: [Foreign Language] So, my first question is on the e-commerce business line. So, management has mentioned in the remarks that the business line has to grow rapidly in Q2. Can you elaborate a bit more on the drivers and your future plan on this business? Second, there is some mentioning about the e-commerce business line being a part of the Lexin ecosystem. Could you tell us or get some color on the update on Lexin’s consumption ecosystem as a whole? Thank you.

Jay Xiao: [Foreign Language] So, probably we’ve been focusing on high-quality and potential users. And for the last quarter, we have — will continue to expand our category and introduce high-quality merchants as well as increasing of categories to fit better to our targeted audience. And also, we’ve been leveraging on the 618 e-commerce shopping festival. And we’ve increased our operational efforts and our promotional range, that which resulted in a very remarkable result. And a more fundamental reason is that we’re [actually rooted] [technical difficulty] today we’re rooted in the consumer genes of the Lexin Group. We have created a consumer ecosystem that’s centered around good-quality, high potential users. And the synergies between e-commerce and business and our consumer finances have been further strengthened.

And they mutually encourage each other. And specifically, our e-commerce platform actually helps us when it comes to customer acquisition as well as revitalizing the already settled customers that’s creating synergies between two platforms and business. [Foreign Language] So, Lexin started from the installed e-commerce business, which gradually build up Lexin’s market segment consumer ecosystem, which includes consumer finance as the main business, accompanied by the installment e-commerce business, [program] (ph) offline customer acquisition finance business, the SaaS business for financial — for providing businesses to financial institutions and innovative business, which is a multi-business line and a all-round ecosystem of providing credit services to customers.

And as we just introduced — or prior the progress of our e-commerce business in the second quarter, our SaaS business for financial institutions and our [program] (ph) offline team business are developing steadily as expected, and accordingly to our plan. And we believe that we will have a more scalable and more notable business — more significant results to actually share with you in the future. Hope that answers your question, Alex?

Alex Ye: Sure, thank you.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Yada Li with CICC.

Yada Li: [Foreign Language] Then, I will do the translation. Hello, management. Thank you for taking my question. My question is about can management elaborate more about the reason on improving the dividend policy under current consensus. And are there potential impacts on the company cash flow? That’s all. Thank you.

James Zheng: Okay, I’ll attack this question. In view of the macroeconomic uncertainties, obviously we are maintaining a very prudent approach in terms of business growth. So, we are basically trying to look at more stabilized — stabilizing the overall kind of a scale, but really put the focus on risk management and profit. So, basically if you put more focus on risk management and profit, this will actually generate more profit. So, we continue to see the growth in profit activities. Plus, we continue to take cost optimization initiatives as one of our long term initiatives. This will also lead to higher profitability down the road. So basically, the cash flow from operation is sufficient and robust to support future business expansion.

And as we announced earlier of the year, we also have kind of restructured our original convertible bond with a PAG. So, the payment to the PAG actually is not an issue for us anymore. As a matter of fact, we have paid half of the original convertible bond amount. So, it’s cash sufficient. And, we feel that dividend really is a more direct and tangible way to reward the shareholders at this time. So, that’s why the Board has approved our plan to start giving out dividend on a semi-annual basis in the range of 15% to 30% of the net income as a recurring policy. So, really this underscores the overall management’s confidence in the operations of the business. So, hopefully, this answers your question, Yada.

Yada Li: Well, thank you very much.

Operator: Thank you. I’ll now hand the call back for any closing remarks.

Mandy Dong: Okay. Thank you, everyone, again for joining us today. If you have further questions, please contact us via our contact information available on our IR website. Thank you everyone.

James Zheng: Bye.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. And, you may now disconnect.