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Operator: Good day, and thank you for standing by. Welcome to Lexin First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Will Tan, Head of Capital Markets. Please go ahead.

Will Tan: Thank you, operator. Hello, everyone. Welcome to our first quarter 2025 earnings conference call. Our results were released earlier today and are currently available on our IR website. Today, you will hear from our Chairman and CEO, Mr. Jay Wenjie Xiao, who will provide an update on overall performance and strategies of our business. Our CRO, Mr. Arvin Zhanwen Qiao, will then provide more details on our risk management initiatives and updates. Lastly, our CFO, Mr. James Zheng, will discuss our financial performance. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. Last, please note that all figures are presented in renminbi terms, and all comparisons are made on a quarter-over-quarter basis, unless otherwise stated.

Please kindly note Jay and Arvin will give their whole remarks in Chinese first, then the English version will be delivered by Jay’s and Arvin’s AI-based voices. With that, I’m now pleased to turn over the call to Mr. Jay Wenjie Xiao, Chairman and CEO of Lexin.

Jay Wenjie Xiao: Thanks for joining us today for our first quarter 2025 earnings call. Despite ongoing macroeconomic uncertainties, our GAAP net profit reached CNY 430 million, a record high in 13 quarters, representing quarter-over-quarter growth of 18.6% and year-over-year growth of 113%. Our first quarter results demonstrate the success of our 2-year transformation, centering on building a model driven by data analytics, risk management and refined operations. Having completed this challenging transformation, we have entered a new phase of high-quality development. The fundamental enhancement of our core capabilities will drive sustained value creation moving forward, and we remain confident in delivering our full year performance targets.

Over the past 2 years of transformation, we have adhered to a risk-first approach, comprehensively upgrading our core business capabilities. We have iterated and optimized the full life cycle strategy, covering risk management, marketing and operations while also strengthening our system infrastructure to achieve effective coordination between risk management and business development. By far, we have completed the upgrade of our risk management framework and established robust risk management infrastructure. Furthermore, we have built a comprehensive quantitative business analysis framework that supports differentiated credit assessment and pricing strategies tailored to various customer segments. These initiatives have resulted in significant enhancements to our refined operations.

Lexin has also achieved significant progress across multiple ecosystem businesses. For our online consumer finance business, we have notably enhanced customer acquisition capabilities and efficiency by implementing model-based decision-making upfront at the traffic allocation stage. Building on our differentiated pricing strategy, we launched the on-demand credit product, [Foreign Language] flexible loan in the first quarter, featuring flexible use of credit and repayment. The new product, together with our existing products, [Foreign Language] and [Foreign Language] forms a competitive product matrix. Our overall product offering features optimized credit lines, rates and tenors, making our financial solutions more competitive in the market.

For our installment e-commerce business, we’ve revamped the risk management system, upgraded the e-commerce supply chain and expanded the boundary of user development. We match different users with tailored installment services. As a result, approval rate of installment applications increased significantly in the first quarter, driving e-commerce GMV to increase by 16.2%. For our off-line inclusive finance business, targeting small and micro business owners, quantitative assessment is combined with manual review to accurately determine the credit lines granted for high-quality users. In the first quarter, our off-line inclusive finance business not only saw lower risk, but also higher product competitiveness as we continue to increase penetration of small and micro business owners in lower-tier cities and strengthen localized operations.

GMV from Tier 4, Tier 5 and lower regions has accounted for over 70% of our inclusive finance GMV in the first quarter, alongside sequential profit growth. For our overseas business, we have completed the upgrading of financial products in the Mexico and Indonesian markets, improved the risk management system and enhanced the operational capabilities of customer acquisition channels. In the first quarter, customer acquisition costs decreased by 19% quarter-over-quarter and the overseas business have achieved profitability. Our matured risk management capabilities, technological strength and back-office support enable us to expand into more overseas markets. As these businesses develop and mature, Lexin’s ecosystem will gradually become our unique competitive edge.

Moving forward, we will focus on the following areas. Firstly, we will maintain a user-centric approach, focusing on enhancing user experience and promoting the steady growth of high-quality customers. Our strategy involves strengthening our product portfolio with more competitive offers and flexible repayment methods designed to boost user loyalty throughout the entire customer life cycle. Additionally, consumer protection will remain a priority. We will continue to optimize customer engagement and service experiences in order to increase overall customer satisfaction. Secondly, we will strengthen synergies across our ecosystem businesses to further build our unique and differentiated competitive advantage. We will match diverse products and services to different user segments, addressing their demands for care-free consumption and flexible liquidity throughout their entire life cycle.

For the installment e-commerce business, we will improve the merchandise supply chain to meet the differentiated demands of users with varying risk profiles. This will help unlock consumption potential across different customer tiers and increase GMV from high-quality users, enhancing customer engagement and acquisition. For the inclusive finance business, we will leverage our in-house off-line team’s capabilities in customer acquisition and personalize one-on-one service. We will deepen our presence in industrial clusters and specialized markets in lower-tier cities, explore and refine various business models and strengthen localized operations and deepen market penetration to increase the share of quality micro business owner customers. For the online consumer finance business, we will focus on expanding high-quality customer acquisition channels, tapping into the potential of large platform partnerships and broadening our business boundaries to maintain sustainable growth and scale.

Thirdly, we’ll increase investment in technology, particularly in applying AI to empower various business scenarios and enhance the company’s competitiveness. By locally deploying mature and high-performance large AI models, we will reshape business processes, improve operational efficiency and reduce service costs. We will explore the application of AI agents with financial adaptive capabilities in the pre-lending process, to autonomous decision-making and task execution. We will promote process automation and decision intelligence and scenarios such as customer acquisition, operations and risk management, further enhancing the company’s operational refinement. Despite the volatile macroeconomic environment, evolving industry landscape and yielding uncertainties, our operational resilience has significantly improved, thanks to our continuously enhanced capabilities and unique ecosystem advantage.

Therefore, we are confident in achieving sustained growth in net profit for full year 2025, reaffirming our full year 2025 profit guidance of substantial year-over-year growth. The company has always attached great emphasis on shareholder returns and remains committed to delivering value to our shareholders through various channels. In November 2024, we announced to increase our cash dividend payout ratio from 20% to 25% of total net profit starting from 2025. The Board of Directors has approved to further increase the dividend payout ratio to 30% of net profit, effective from the second half of 2025. Now I would like to give the floor to our CRO, Arvin. Thanks.

Arvin Zhanwen Qiao: Thanks, Jay. Next, I will provide a review of our key initiatives and achievements in risk management for the first quarter. In the first quarter, we remained committed to our strategy of prioritizing asset quality, focusing on scale stability and profitability enhancement. Specifically, we focus on improving risk identification capability, optimizing risk strategy system and developing smart risk tools as well as actively exploring the application of large models in risk management. Thanks to the initiatives we’ve taken, risks of both new and overall assets maintained the downward trend in the first quarter. Leading risk indicator for new loans, first payment default, FPD, over 7 days of the first quarter declined by about 5% compared to the previous quarter.

On total loan portfolio, day 1 delinquency ratio decreased by about 11% and 90 days delinquency ratio decreased by 9% quarter-over-quarter. I will introduce in detail the key initiatives we’ve taken for the first quarter. Firstly, in terms of risk identification capabilities, we’ve continued to improve the performance of our risk identification models. We built a multimodal fusion model, integrating different types of heterogeneous data, including textual time series, numerical and graph features, which helped further improve the risk identification capabilities by 10%. Meanwhile, we deployed a 2-stage modeling structure. A standard model was used to identify the mid- to long-tail customer groups. We then optimized the data samples and brought additional data sources to conduct more granular risk identification for these customers, further improving the risk differentiation capabilities.

Besides, for customers from different channels, we conducted deep joint modeling with our channel partners. This allowed us to fully leverage both partner channel data and our own internal data to improve model performance. Secondly, we also strengthened risk management through preventive and proactive approaches. Regarding high-risk assets, we adopted a preventative approach. Specifically, for customers who have borrowings across multiple platforms, exhibit weaker repayment capabilities or present volatile risk profiles, we reduced or suspended their credit lines. Additionally, we optimized repayment reminders and enhanced the auto debit repayment functionality both on and after the due date to minimize the formation of overdue assets. Regarding high-quality assets, we conducted a proactive approach.

We promoted the growth of high-quality assets by strengthening the competitiveness of offers to customers. These concerted efforts have collectively contributed to reducing risks, optimizing our asset mix and enhancing asset quality. In the second quarter, we will respond [indiscernible] to market dynamics and asset quality performance, fully leveraging a combination of proactive and preventative risk management approaches and tools to ensure the continued decline in asset risk levels. Thirdly, we continue to ramp up the development and application of intelligent risk management tools, which significantly increased the accuracy and time efficiency of credit line and pricing decision-making. We have developed credit line robot and pricing robot and gradually applied them in various business scenarios.

Our AB testing results demonstrate that these robot tools substantially helped improve the effectiveness and time efficiency of decision-making. Over the past year, our efforts in enhancing risk identification capabilities, building a more robust risk management framework and applying intelligent risk management tools comprehensively have contributed to a sustained decline in risk levels for both new and total assets for 4 consecutive quarters. Looking ahead to the second quarter of 2025, amid increased volatility in the external environment and evolving industry dynamics, we will continue to strengthen our capabilities in automated high-risk asset screening and resolution, further refine credit approval and lending management and swiftly identify and address potential high-risk assets.

These measures are aimed at ensuring that key risk indicators remain on a downward trajectory. Next, I will hand over to our CFO, James, to provide a review of the company’s financial performance in the first quarter.

James Zheng: Thanks, Arvin. I will now provide a detailed overview of our first quarter financial results. Please note that all figures are presented in renminbi terms and all comparisons are made on a quarter-over-quarter basis, unless otherwise stated. Our first quarter performance marked another strong leap forward and we are on track on our profit growth road map. During the quarter, our net income increased by 18.6% to CNY 430 million and 113.4% year-over-year, even though the overall new loan volume and the loan balance declined slightly due to the Chinese New Year seasonality. Our net income margin increased to 13.9% from 9.9% last quarter. Net profit take rate calculated as the net income divided by the average loan balance, increased to 1.58% from 1.31% from last quarter and 0.66% a year ago, advancing by 27 basis points sequentially.

The net income, net income margin and the net take rate, all reached the highest level in the last 3 years, laying a solid foundation for future profit expansion. From a unit economics perspective, the 27 basis point net profit take rate improvement quarter-over-quarter is led by a 47 basis point increase of revenue take rate, which is calculated by dividing the sum of credit facilitation service and the tech empowerment service income after deducting the funding and the credit cost by the average loan balance. During the quarter, the revenue take rate increased from 6.22% to 6.69% of the previous quarter. The improvement of revenue take rate reflects our ongoing risk-centered business transformation, which resulted in better asset quality and therefore, a lower credit and funding cost and the refined business operations.

The specific business execution involved focus on retaining prime customers through competitive loan offers, including lower prices and improved tenor and migrating subprime borrowers to capital-light model via intelligent credit platform, ICP, to reduce the risk exposure of the optimized profitability. Next, I will provide more details in the following 3 highlights. First, reduction in credit cost driven by continuous improvement in asset quality. The reduced credit costs reflected our sustained improvements in asset quality driven by our enhanced risk management capability. The following key risk indicators demonstrated improvement. On the loan balance side, day 1 delinquency rate declined by 11% and 90-day delinquency ratio declined by nearly 33 basis points from 3.6% to 3.3%.

On the new loan side, on a quarterly basis, the first payment default rate over 7 days decreased by about 5%. With higher quality new loans gradually replacing matured vintage loans, we expect to see continued asset quality improvement contributing to our profit expansion. Meanwhile, our provision coverage ratio, which is calculated as the total outstanding provision divided by the total outstanding loan balance between 90 and 180 days stood sufficiently at 268%, the highest level since the second quarter of 2024. Second, decrease in funding costs. Funding costs for new loans and the capital-heavy model dropped by 9 basis points to 3.93%, further boosting our revenue take rate. While we have already achieved relatively low funding costs, we expect to maintain this advantage through improving asset quality, strengthening partnerships with funding partners and diversifying our funding sources.

Third, capital-light model volume growth. During the quarter, we have optimized our risk-bearing arrangements by shifting more high-risk volumes to the capital-light model through our intelligent credit platform, ICP, where we don’t take principal risks for customers with risk rating beyond our preferred range. Total volume under the capital-light model increased by 43% quarter-over-quarter and accounted for 28% of the total GMV, up from 20% of last quarter. Under the capital-heavy model, we have improved competitiveness of our offering with lower pricing and improved tenor to attract prime customers. The APR was lowered about 100 basis points from 23.9% down to 22.6% for the last quarter. While at the same time, the user quality has improved as evidenced by the super prime customers taking a higher percentage of new loans.

With the capital-light model, we migrated more subprime customers to the ICP platform, offering risk-based pricing and shortened loan tenor to reduce overall risk exposure. As a result, the overall tenor for new loans under both capital-heavy and capital-light models slightly decreased quarter-over-quarter. To summarize the above 3 highlights, due to the improvement of credit cost and funding cost, our net profit take rate increased from 1.31% to 1.58% last quarter. Additionally, the capital-light model volume growth has lowered the risk exposure for our business, enabled differentiated risk-based pricing for high-risk users, enhanced risk-adjusted returns and sustained our offer competitiveness for high-quality customers. Next, let’s go through some key financial line items.

Total revenue from lending-related business, which include credit facilitation and service income and the tech empowerment service income combined, decreased by 15% quarter-over-quarter. There are 3 factors attributing to the change: one, lower APR of loans under capital-heavy model as our effort to attract better quality customers, as mentioned earlier; two, increased early payoffs due to more flexible early payoff terms for offer competitiveness and customer satisfaction; three, the GMV volume shift to capital-light model where the revenue is booked net of related credit costs, while in comparison, under the capital-heavy model, gross revenue and the credit costs are booked in 2 separate lines. Loan volume originated under the capital-heavy model decreased by 11% quarter-over-quarter and accounted for 72% of total GMV, down from the 80% in the first — in the previous quarter.

As a result, credit facilitation and service income primarily associated with the capital-heavy model decreased by 19% quarter-over-quarter. In contrast to the decline in the credit facilitation service income, the tech empowered service income, which is primarily associated with our capital-light model, increased by 4% quarter-over-quarter. This revenue now accounted for 20% of total revenue, up from 16% last quarter, mainly driven by the increased volume from the capital-light model and partially offset by increased provision driven by our prudent provision estimation. Similar to the revenue side of the story, total credit costs, including total provisions and a fair value change of financial guarantee derivatives and loans at fair value, decreased by 40% quarter-over-quarter.

This is partially due to the net revenue accounting method as well as the contribution from the asset quality improvement. As a cross reference, we can take a holistic view to add total revenue and credit cost and both the capital-heavy and capital-light models together. Total revenue from lending-related business, net of total cost was about CNY 18.2 billion, increased by 5.6% or CNY 97 million from CNY 17.2 billion last quarter. Separately, installment e-commerce platform service income decreased by 16.4%, while GMV grew by 16.2% quarter-over-quarter. Similarly, this difference was caused by accounting difference due to the volume mix shift between the third-party sellers and the company direct sourcing. For third-party sellers, only platform service commission is recognized as a revenue rather than the entire transaction amount under the direct sourcing model.

This structural volume mix change is evidenced by the sales growth volume from third-party seller accounting for 56% of the total e-commerce GMV in the first quarter, up from 36% in the last quarter. As a result, our installment e-commerce platform service income decreased despite total e-commerce GMV increased from CNY 970 million to CNY 1.1 billion. Furthermore, it’s worth highlighting that the gross profit from e-commerce business more than doubled in the first quarter. As a priority within our integrated business ecosystem, we’ll keep growing our e-commerce business moving forward by developing tailored financial solutions that actively stimulate and fulfill the evolving consumption and financing needs across diverse customer segments. We aim to diversify our revenue structure and eventually enhance the overall operational resilience and profitability.

Total operating expenses, which include processing and servicing costs, sales and marketing expenses, research and development expenses and general and administrative expenses remained relatively stable at CNY 1.3 billion. Driven by the aforementioned factors, our net income in the first quarter increased by 18.6% quarter-over-quarter from CNY 363 million to CNY 430 million, and our net income margin increased from 9.9% to 13.9%. For balance sheet items, as of March 31, our cash position, which includes cash, cash equivalents and restricted cash was approximately CNY 5 billion. Shareholders’ equity remained solid at about CNY 11.2 billion. Looking ahead, despite challenging macroeconomic environment, evolving industry landscape and geopolitical uncertainties, the management remains confident in achieving a significant year-over-year growth in net income, reaffirming our full year earnings guidance.

This concludes our prepared remarks for today. Operator, we’re now ready to take questions.

Operator: [Operator Instructions] Our first question comes from [Emma Zu] from BofA.

Unidentified Analyst: So how does the company address various external challenges such as the impacts of the new rules on loan facilitation business and geopolitical uncertainties on the company’s listing standards? Does the company have any plans for Hong Kong IPO?

Jay Wenjie Xiao: This is the translation for Jay’s remarks. Despite significant changes in the macroeconomic environment and industry landscape this year, the company has delivered outstanding results by adhering to its strategy, focusing on risk management, data analytics and refined operations. Although external challenges persist, the company is well prepared to navigate through them and management remains confident in achieving its 2025 performance targets. Regarding the new rules on loan facilitation-based business, we welcome and support regulators’ efforts in standardizing the industry. While the full impact of these rules remain to be seen in the short term, they are expected to foster a more compliant, healthy and sustainable environment for the sector in the long run, a trend that particularly benefits large and compliant platforms like Lexin.

For us, we have the capabilities and resilience to address the potential impact of the new rules. Therefore, we are confident in achieving our full year profit target. Regarding the geopolitical uncertainties, the company has proactively taken measures to prepare, including exploring potential listings on different exchanges, including Hong Kong Stock Exchange in order to protect the interest of all shareholders. Once any concrete plans or significant progress materialize, we will promptly disclose relevant information to the market in accordance with laws and regulations.

Operator: Our next question comes from Alex Ye from UBS.

Alex Ye: So my questions include — first one is what are the progress and development plan for your ecosystem business? And second is, can you give us more color in terms of where we are in terms of our asset quality improvement trend and how to understand the strength of the current risk management capabilities and what’s the plan for the next stage?

Jay Wenjie Xiao: Lexin has always had very diverse business [indiscernible] and not only having online business but also offline, and we have unique competitive edge in our own ecosystem business. More specifically, as I mentioned in my remarks, for our online consumer finance business, we continue to improve the risk management capabilities and operational refinement and have witnessed a substantial enhancement in the capability and efficiency of customer acquisition. Going forward, we’ll focus on providing tailored product offers to match customers with varying risk profiles, enriching our product portfolio to enhance customer offer competitiveness and expanding customer acquisition channels. Meanwhile, we will further explore collaboration with huge traffic platform, which has already exhibited good momentum this year and expanding our business model to achieve sustainable volume growth.

For our installment e-commerce business, we have revamped our risk management system, upgraded merchandise supply chain and expanded the business boundaries. By tailoring installment services to users based on their risk profile, we better address diverse customer demand. Going forward, we will fully leverage our e-commerce business to better engage existing customers and attract new ones, making it a key lever for us to adapt to [Technical Difficulty] changes and enhance the company’s operational resilience. For our off-line inclusive finance business, which is quite a unique feature of our business deployment, we have strengthened our in-house channel development and optimized the risk management model to ensure the differentiated competitiveness of our products and also secured sequential increase of profit.

Going forward, we will continue to increase the penetration of micro business owners in lower-tier cities, enhance localized business development and improve operational efficiency. For our overseas business, we further optimized the business model and capabilities at various fronts. By far, our overseas business have achieved profit overall. Going forward, for overseas business, we will adopt a prudent approach in terms of investment and expansion. Over the past year, we have comprehensively upgraded our risk management system across multiple fronts, including risk identification, differentiated risk strategy, differentiated risk pricing, risk-bearing models, risk monitoring and early warning and risk management tool, et cetera. This has led to a significant improvement in our risk management strength and our ability to handle risk volatility.

Thanks to our efforts and upgrades in the past year, we have established a mature, robust quantitative-driven risk management system. As a result, risk levels of both new and overall assets have exhibited a sustained decline over the past year. In light of the persistently challenging external environment and ongoing industry uncertainties, we remain committed to our risk-centric strategy and prudent operational approach. We will further strengthen our risk management capability. We’re actively exploring the application of large models to enhance the accuracy and efficiency of our risk management system. This will ensure asset risk maintain the current downward trajectory.

Operator: Our next question comes from Yada Li from CICC.

Yada Li: First, congrats to the record high results. My first question is, in this quarter, I’ve noticed that the revenue structure experienced some material changes. And I was wondering what are the main reasons to drive this change? And second, what is the company’s plan in shareholders’ returns going forward?

James Zheng: Okay. I will take the first question and ask Jay to talk about the second. So the first question, first of all, as I mentioned in my previous script, it is important to bear in mind that despite the different factors contributing to the quarter-over-quarter revenue variance analysis, we should always take a holistic view to look at the total revenue and the credit cost together to get the big picture. The big picture is that from the unit economics perspective, our revenue take rate increased from 6.22% to 6.69% quarter-over-quarter. And the net take rate after offsetting the operational cost increased from 1.31% to 1.58% quarter-over-quarter. So in terms of the specific revenue variance analysis, basically, the quarter-over-quarter variance in total revenue was primarily due to lower credit facilitation service income driven by the reduced pricing, higher early repayments and the shift in GMV towards the capital-light model.

While the tech empowerment service line income saw some increase driven by the capital-light GMV volume migration, here, the net-based accounting recognition is used where the revenue is net of related credit costs instead of recognizing revenue and the credit costs in 2 separate lines. So related to this, the total credit cost declined at the same time, partially due to the same reason. Additionally, despite the sequential GMV growth of 16.2% quarter-over-quarter, the installment e-commerce platform revenue decreased similarly as a result of the revenue recognition difference due to the volume mix shift between the third-party sellers and the company direct sourcing. For the third-party sellers, only the platform service commission is recognized as a revenue rather than the entire transaction amount under the direct sourcing model.

The sales volume from the third-party seller account for 56% of the total e-commerce GMV in the first quarter, up from the 36% in the last quarter. So in conclusion, the revenue structural variance really reflected our ongoing risk-centric business transformation and our operational refinement. While the accounting treatment across different business models may cause some top line variances, however, our profit and profit margin continue to improve, really firmly tracking our plan.

Jay Wenjie Xiao: The company has always attached great importance on shareholders’ return and is committed to delivering value to shareholders through various means. Since November 2024, the company has increased its cash dividend payout ratio twice within 6 months, demonstrating its emphasis on shareholders’ return. This not only testifies the company’s stable and reliable profitability, but also reflects the management’s confidence in achieving stable and sustainable growth in the future. The company will continue to create value for shareholders. We understand investors’ expectations regarding shareholders’ return and we will work to align our dividend policy with shareholders’ expectations by considering the company’s resources, its business development and capital market conditions while striving to enhance returns appropriately.

Operator: I see no further questions at this time. I will now hand the conference back to Will for closing remarks.

Will Tan: Thank you, operator. This conference is now concluded. Thank you for joining today’s call. If you have any more questions, please do not hesitate to contact us.