Hello, ladies and gentlemen, thanks for standing by for Qudian's Incorporated First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to our host from Qudian. Please go ahead.

Unidentified Speaker -

Hello, everyone, and welcome to Qudian's first quarter 2021 earnings conference call. The company's results were issued via Newswire services earlier today and were posted online. You can download the earnings press release and sign up for the company's distribution list by visiting our website at ir.qudian.com. Mr. Min Luo, our Founder, Chairman, and Chief Executive Officer and Mr. Sissi Zhu, our VP of Investor Relations will start the call with prepared remarks and then we will open the call to Q&A.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 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 uncertainties is included in the company's 20-F as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please also note that Qudian's earnings press release and this conference call includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Qudian's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. We also posted a slide presentation on our IR website providing details on our results in the quarter. We will reference those results in our prepared remarks, but will not refer to specific slides during our discussion. I will now turn the call over to our CEO, Min Luo. Please go ahead.

Min Luo - Chairman and Chief Executive Officer

Hello, everyone. I would like to thank you all for joining us on today's call. We kicked off 2021 with a solid first quarter. We greatly improved the quality of our assets while maintaining prudent operations of our cash credit business in light of the ongoing shift in online lending regulations. Notably, we recorded a net profit of RMB478 million for the first quarter compared to a loss in the first quarter last year. Our net assets increased to RMB12.4 billion and we had approximately RMB7.3 billion of cash and cash equivalents and short-term investments at the end of the first quarter. Our strong balance sheet allows us enough funding to invest in new business initiatives, which we believe will increase long-term shareholder value.

We are very excited about the meaningful progress we have made with our early childhood education business, Wanlimu Kids. In January, we launched our very first Wanlimu Kids center in Xiamen where our company is headquartered. This center occupies approximately 4,600 square meters. Early feedback has been positive and we are going ahead with our plans to expand our nationwide footprint in China's large and underserved early childhood extra-curricular enrichment market. Our mission for Wanlimu Kids Club is to help Chinese kids grow up happy and healthy.

We hope to help kids explore their potential in sports, arts, and music cheerfully and freely while also helping children build healthy bodies and minds parallelly. We firmly believe in the great potential of extra-curricular enrichment for young kids in China. We estimate that there are currently about 160 million kids between the age of zero and nine in China and we expect the penetration rate of extra-curricular enrichment services as well as household spending in this area will grow Wanlimu Kids business [Indecipherable] special curricular education.

We consistently strive to differentiate ourselves from others and we believe Wanlimu Kids value proposition for parents and kids is very clear. Firstly, we guarantee a hassle-free refund policy as opposed to non-refundable lump sum prepayment required by many other institutions. Secondly, we provide comprehensive program offerings in one place to affordable prices saving parents the time and money spent in taking kids to different places. Certainly, we have well-trained instructors in each of our centers with standardized teaching procedures and we also have a centralized teaching research and development team.

Last, but not least, we provide state-of-the-art hi-tech facilities to create a safe and comfortable environment in each center. With our first-mover advantages, we built strong entry barriers in two aspects, location and talent. There are limited good and convenient locations near core urban residential areas and once we secure the right of use at these locations, others cannot easily find a similar location there. On the other hand, as talent are at the core of this business, we have attracted over 50 excellent entrepreneurs who have run education business with annual revenue of over RMB100 million to join us as equity partners. Specifically, our equity partners will actively participate in our front-line business operations. Our senior management team and employees are highly motivated and share the same vision adding critical value to the success of this new business.

In conclusion, as we venture further into 2021, we will remain cautious in our credit loan business operations, striving to develop our early childhood education business. I'm also happy to share with you that we had our internal kick-off meeting today attended by over 800 employees and core management teams, marking Wanlimu Kids official move to the national stage for Xiamen, backed by our shared vision. We look forward to joining hands with our core management team and employees to build a nationwide extra-curricular platform in China to help tens of millions of kids grow up happy and healthy. Now, I would like to turn the call over to Sissi for more detail on our results.

Sissi Zhu - Vice President of Investor Relations

Thank you, Min and good morning and good evening everyone. As Min mentioned, in order to navigate evolving market dynamics, we maintained our conservative approach to operate our loan business by rigorously assessing credit risks of new transactions. Consequently, we experienced an 8.4% decrease in transaction volume for our loan book business for the first quarter of 2021 compared with the previous quarter. Our strict credit approval standards continued to pay off during the first quarter with a further sequential decrease in our delinquencies. In particular, our D1 delinquency rate for loan book business fell to less than 5% at the end of the first quarter of 2021, a normal level in our operating history.

Moreover, our balance sheet remains strong and healthy enabling us to safeguard the interest of our shareholders. Additionally, more than 98% of our outstanding loans were funded by our own balance sheet loan transactions and our M1 plus delinquency coverage ratio remained at 2.7 times. Echoing Min on our early childhood quality education business, we are actively progressing towards our goal of becoming a comprehensive one-stop service provider for early childhood extra-curricular enrichment program. Our Wanlimu Kids project offers numerous top quality sports, arts, music enrichment programs for children from ages zero to nine such as swimming, basketball, football, and dancing etc. Following the effective opening and operation of the Xiamen Caizihui Activity Center, our first endeavor in the early childhood education market, we are designing more than 80 additional activity centers to replicate its success.

Boasting solid financial strength and the superior team of education industry veterans, we plan to broaden our early childhood education services across the country with a mission to help Chinese children grow up happy and healthy. The incremental spending in our Wanlimu Kids business may put pressure on our profitability in the near-term, but we believe we are well equipped to tap into the opportunities in the fast growing extra-curricular enrichment market in China.

Following the completion of loss-making ramp-up period, we anticipate that the unit economics or UE for the Wanlimu Kids Club business will be very attractive. The UE will be superior to that of many other offline businesses because number one, being large long-term traffic generating tenants, we can enjoy lower rents compared with smaller institutions; number two, we can enjoy lower user acquisition costs due to the variety of activities being offered and because of strong word of mouth referrals as evidenced by the fact that over 50% of our traffic for the first center were from referrals and natural walk-ins. Having said that, we have a concrete plan to expand across China this year and hope our investors could stay with us and enjoy the great journey ahead.

Going forward, we will keep a close eye on regulations in the online lending industry and proactively take adaptive measures in the rapidly changing environment. Supported by our adequate cash resources and strong financial position, we believe we can continue to grow our overall business and deliver sustainable value to our shareholders over the long-term. Now, let me share with you some key financial results. In the interest of time, I will not go over them line by line. For a more detailed discussion of our first quarter 2021 results, please refer to our earnings press release.

Our total revenues were RMB515.7 million or $78.7 million representing a decrease from RMB958 million for the first quarter of 2020. Our financing income totaled RMB362 million representing a decrease from the RMB623 million for the first quarter last year as a result of the decrease in the average on-balance sheet loan balance. Loan facilitation income and other related income decreased by 97% to RMB12 million from RMB422 million for the first quarter of 2020 as a result of the reduction in transaction volume of off-balance sheet loans during this quarter.

Our transaction services fee and other related income increased to RMB50.6 million from a loss of RMB150 million for the first quarter last year mainly as a result of the reassessment of variable consideration. Sales income and others increased to RMB62.5 million from RMB17.1 [Phonetic] million for this first quarter of 2020 mainly due to the sales related to the Wanlimu e-commerce platform. Our sales commission fee decreased by 68% to RMB10.7 million from RMB33.7 million for the first quarter of 2020 due to the decrease in the amount of merchandise credit transactions.

Our total operating costs and expenses also decreased by 97% to RMB63.3 million from RMB2 billion for the first quarter last year. Our cost of revenues decreased by 4.8% to RMB91 million from RMB95.6 million for the first quarter last year primarily due to a decrease in funding costs associated with the on-balance sheet loan book business partially offset by the increase in cost of goods sold related to Wanlimu e-commerce platform. Sales and marketing expenses decreased by 36% to RMB37.6 million from RMB58.8 million for the first quarter last year primarily due to the decrease in third-party service fees and marketing promotional expenses.

General and administrative expenses decreased by 12.9% to RMB66.7 million from RMB76.6 million for the first quarter of 2020 as a result of the decrease in staff salaries. Research and development expenses decreased by 28.4% to RMB39.2 million from RMB54.7 million for the first quarter of 2020 as a result of the decrease in staff salaries. Our provision for receivables and other assets was a reversal of RMB106.8 million compared to a loss of RMB1.1 billion for the first quarter last year mainly due to the decrease in past-due on-balance sheet outstanding principal receivables compared to the first quarter last year.

Our income from operations was RMB464.8 million as compared to a loss of RMB961.1 million for the first quarter of 2020. Our net income attributable to Qudian's shareholders was RMB478.4 million or RMB1.81 per diluted ADS. Our non-GAAP net income attributable to Qudian's shareholders was RMB488.3 million or RMB1.85 per diluted ADS. With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please continue. Thank you, Annie.

Question & Answers

Operator

[Operator Instructions] Our first question is from the line of Jacky Zuo of China Renaissance. Your line is open. Please go ahead.

Jacky Zuo - China Renaissance - Analyst

[Foreign Speech] So let me translate my questions. So, thanks for taking my questions and congrats for the solid results. Number one is about our credit business. We observed that our risk level continued to decrease year-to-date. So just want to check what is our loan balance outlook for this year. And in terms of the credit business model, my understanding is we continue to use the interested lending model for our on-balance sheet loans. Do you see any regulatory pressure for this type of model? Are we planning to switch to, let's say, license lending, for example, using the micro loan license?

And second question is about our new business, Wanlimu Kids. So just trying to understand the unit economics for this new business. Can you give us some details of breakdown? And also, we mentioned we will increase the spending for this new business in terms of the nationwide expansion. So what will be the investment scale and pace going forward?

Sissi Zhu - Vice President of Investor Relations

Thank you, Jacky. I'm happy to see you on the call. So let me answer your questions one by one. Regarding our credit business as we also observed that our D1 delinquency rate as well as our vintage charges have been improving over the past quarters, but in the long-term future, we believe - although the demand for small credit will always exist. However, in China, such demand in the long-term we believe will be highly likely served by large financial institutions as opposed to non-government-backed technology companies like us. So the regulation in the sector should not be ignored as we observed that the tone from regulators have been on the tightening side.

So in our point of view, including things like interest rate cap, leverage restriction, information disclosure requirements, credit guarantee restrictions etc, there were not many positive updates in the regulation in the first quarter or the second quarter. As such, we chose to maintain our prudent strategy which means we will maintain our similar credit assessment - rigorous credit assessment rules and similar volumes. However, our loan balance for our loan book business will still be decreasing in the second quarter. With regards to the on-balance sheet loan channels from the interested loan model to other regulated models - license models, yes, we have already changed that to license trend. So the risks pending the interested loan model is not with us.

Regarding your second question on our UEs. We expect the UEs to be superior to that of many of other offline businesses. Although it is our company's policy not to give guidance since 2019, we surely will incur some capex for the renovation of activity centers and operational expenses for staff costs and rents. The unit economics although I couldn't give out concrete guidance, I could help guide the market to think and make reference to other offline businesses. ROE will be superior to many traditional education businesses as we do not need to incur abnormally high user acquisition costs or high rents and also our UEs could be a bit similar to that of offline catering business as well, just need to take out the large amount of food and consumable expenses of the offline catering business. So the UE will be very attractive.

And with regards to our capex and ramp-up speed, as we mentioned in our call and in our presentation, we currently have over 80 centers in the designing process and renovation process. So we expect to do a big ramp-up and expansion nationwide this year. There will be certainly capex expenditures, but we expect in the steady state, our UE will be very attractive. Thank you, Jacky.

Jacky Zuo - China Renaissance - Analyst

Thank you, Sissi, clear.

Operator

[Operator Instructions] Our next question is from the line of Steve Chan of Haitong International. Please go ahead, your line is open.

Steve Chan - Haitong International - Analyst

[Foreign Speech] Let me translate it into English. I have two questions. First of all, I think Sissi just mentioned about the loan balance of the credit business will likely to be reduced in Q2 and we will maintain a conservative approach in the credit business. So does that imply that in the medium-term, Qudian are likely to gradually transform from a loan facilitation or credit lending business towards a more like an education - early education company. That's the first question.

And secondly, could you give us some - secondly, two sub-questions, one from the accounting point of view, where did you put the revenue and expenses of Wanlimu Kids in the P&L account and do you have any target revenue or target return for this business, say, in three years time. Thanks.

Sissi Zhu - Vice President of Investor Relations

Thank you, Steven for speaking to me over the line again. So let me address your questions one by one. First of all, our balance swapping and rate, so as a matter of fact, the unit economics of our credit business is still very profitable. We charge at 36% annual interest rate and our - delinquency of our annualized delinquency default rates is less than 10%. So this business is still very lucrative. So as long as we're making profit on this business, we will keep a similar level of loan volume and similar level of risk assessment procedures.

In the mid to long-term, from an investment point of view, as we were seeing today the investors who invest in both credit business and Wanlimu Kids business, if the payoff from Wanlimu Kids business is better than our cash credit business, we will allocate more resources in Wanlimu Kids business for sure. And from a regulatory standpoint, we believe the Wanlimu Kids quality education business is more safer from the regulatory point of view, although it is still very small at this stage, we only have a full quarter of one school, one center only in the first center.

So relating back to your second question, in accounting terms, our revenues and costs for the first Wanlimu center is quite minimal and it is inside the sales income as well as the cost of goods sold. In two to three years, the return on Wanlimu Kids business, we expect that the unit economics of this business after the ramp-up period will be very attractive. If we look at the offline catering business, the unit economics of net profits will be around 10% net profit margin and for some other offline education business, the UE for net profit will be around 10% to 20%. So as we have experimented our strategy in our first and second school, we anticipate that the UE of our kids business will be superior to that of the offline catering and traditional offline education business. Hope that answers your question. Thank you, Steven.

Steve Chan - Haitong International - Analyst

Very clear. Thanks, Sissi.

Operator

[Operator Instructions] Our next question is from the - [Operator Instructions] All right, thank you. There are no further questions now. I'd like to turn the call back over to the company for closing remarks. Please continue.

Sissi Zhu - Vice President of Investor Relations

So thank you all once again for joining today's conference call. We warmly invite investors to visit us in Xiamen and very soon in other major cities in China as well. If you come here in-person, you see our centers in-person, I'm sure you'll be impressed by the new species of Qudian's quality education that we're developing. And if you have any further questions, please don't hesitate to contact our IR team and visit our IR website. So thank you once again very much.

Operator

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QUDIAN INC

Q1 2021

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