Lufax Holding Ltd Q3 FY2021 Earnings Call

Thank you, operator. Hello, everyone, and welcome to our third quarter 2021 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman, Mr. Ji Guangheng, who will start the call with some general updates on our achievements for the quarter and share our thoughts on recent regulatory developments and industry dynamics. Our Co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategy. Afterwards, our CFO, Mr. James Zheng, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. Y.S. Cho, our Co-CEO; and Mr. David Choy, CFO of our Credit Facilitation Business, will also be available during the question-and-answer session. 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. Please also note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in our earnings release and filings with the SEC. With that, I'm now pleased to turn over the call to Mr. Ji, Chairman of Lufax.

Hello, everyone, and thank you for joining our 2021 third quarter earnings call. For today's call, I will start with an update of our key achievements in the quarter then address top concerns that investors and analysts reached in our recent communications and finally share our views on the latest market development. First, key achievements in 2021 Q3. Overall, we achieved steady and healthy growth during the third quarter. At the same time, we improved our regulatory compliance and corporate governance. We published our initial ESG report as part of our proactive effort in establishing ourselves as a model for regulatory compliance and corporate governance among overseas listed Chinese companies. In the third quarter, our total income increased by 22% year-over-year. Excluding the impact of non-recurring expenses in the third quarter of 2020, our net profit in the third quarter increased by 18% year-over-year. While our net profit in the nine months ended September 30, 2021, increased by 28% year-over-year. Due to the steady and healthy growth of our operational results and our confidence towards market outlook and business prospects, the Board of Directors decided to pay out 20% to 40% of our net profit in the previous years as dividends starting from 2022. We will release the details of our dividend payout plan in the fourth quarter earnings report in early 2022. Following the completion of our USD 300 million shares repurchase program in the second quarter, we announced an additional USD 700 million in August. As of September 30, 2021, we had bought back about 60 million ADSs worth approximately USD 600 million, with roughly USD 400 million remaining. Despite market fluctuations, we maintained a high level of confidence about our future, built on our steady profit generation, excellent operating cash flow, abundant capital reserve, and effective regulatory response. We plan to continue to return value to our shareholders through share repurchases and dividend payout. On the compliance front, we proactively follow regulatory guidance and fully completed the run-off of our legacy peer-to-peer products in the third quarter, accomplishing a smooth and structured withdrawal from the online learning business, setting a model for the industry. In mid-October, Mr. Guo Shuqing, Chairman of CBIRC stated publicly that, in the process of rectifying and reforming the 14 Internet-based lending platforms, the financial regulators raised close to 1,000 issues, the majority of which have been addressed and about half of which have been resolved. As such, we anticipate more material substantive progress by the end of this year. Recently, we noted the speech by certain regulators on the boundaries of financial licenses. I want to reiterate, among those companies undergoing regulatory review, Lufax has maintained constructive dialogues with the regulatory authorities and progressed smoothly through all aspects of the review by leveraging our domain expertise, financial DNA, and thorough understanding of regulations. Our early understanding is reasonably consistent with recent requirements and we periodically review all of our business lines to ensure compliance. We will proactively adjust our business direction to more closely align with regulatory trends as always. On the ESG front, we devoted substantial resources to establishing ourselves as a model for overseas listed Chinese companies in terms of compliance governance. Our industrial ESG report published in September of this year showcased our achievements in implementing strong governance, green finance, and consumer services and protection. Also, our inclusion in the FTSE Russell's major ESG Indices demonstrated market endorsement of our accomplishments in ESG, corporate responsibility, and social value. I then want to share some of the key investor concerns. Since releasing our Q2 results, our management team has maintained frequent communication with investors by hosting more than 60 events, including post-earnings calls and other meetings. We received 320 questions from investors, among which 253 questions, or 79% of the total, were about macroeconomics and regulatory trends. 51 or 16% of the total questions were about our business operations, and the remainder were about our capital market initiatives such as dividend payout and share buyback. I will share our thoughts on macroeconomics and regulatory directions, then Greg and James will discuss our operational and financial details. Regarding macroeconomics, some investors are concerned about the impact of our future business from the tightening of China's property market and the slowdown of overall economic growth. Our direct and indirect client exposure to the real estate industry is rather small. Bearing in mind that even though the macro economy may be under pressure in the near term, medium, small, and micro-sized businesses are extremely resilient and serve as crucial components of the Chinese economy. Consequently, we have seen healthy and stable numbers in business and risk metrics. At the same time, we'll remain vigilant and closely monitor all aspects. Secondly, regarding regulatory policies, some investors questioned whether China will maintain its open capital market and where regulations might head next. We believe that China is at a critical point of transitioning from high-speed to high-quality growth. The nation's reformative and open stance remains unchanged. Its capital market stays connected to the world economy and needs investments from around the globe to develop a healthy domestic capital market, and its regulatory authorities aim to maintain long-term market stability. In a speech given at the opening ceremony of the Fourth China International Import Expo, President Xi reaffirmed China's willingness to open to the rest of the world. At the 2021 annual financial summit held in late October, Vice Premier Liu He declared that the objectives of China's financial system should include promoting a high level of openness, establishing a fair market environment, protecting the legal rights of foreign enterprises in China, prioritizing the development of financial technology, and improving the quality and efficiency of financial services. We believe that the government will keep refining regulatory policies to foster a stable and sustainable environment for capital market development. When it comes to implementing industry-specific regulations such as licensing requirements for credit scoring, preventing loan facilitators and co-lenders from dealing directly with financial institutions, and reducing borrowing costs, the direct impact on our business is rather muted. Our business model and operational performance remain steady and healthy, thanks to our preemptive regulatory assessment, proactive operational adjustments, and anticipatory business realignment. Going forward, we'll continue to maintain open and frequent dialogues with regulators at our levels and through all available channels in order to maintain a tight and accurate grasp of policy intentions and achieve a more thorough implementation of regulatory requirements. Certainly, Lufax is a unique business model. I would like to reiterate the compliant and unique nature of our retail product facilitation business as well as the core competitive advantages of our business model. First, we focus on serving small and micro businesses. In the third quarter of 2021, 81% of our new loans were distributed to small and micro business owners. As of the end of September, we had provided credit facilitation services to 16.1 million cumulative borrowers. Second, we conduct our business activities through licensed financial guarantee subsidiaries. What differentiates us from those unlicensed and pure-play loan facilitators is that we have a business license to provide financial guarantees backed with registered capital, allowing us to participate significantly in the lending business and ensure strict regulatory compliance in every aspect of our business process. Third, regarding the credit risk on those new loans that we facilitate in accordance with regulatory guidance and requirements, we have established a sustainable risk-sharing business model and increased our risk exposure in the third quarter of 2021. Excluding our consumer finance subsidiary, our credit risk exposure to the new loans facilitated increased to 20%. Going forward, to stay in sync with regulatory guidance, we plan to make additional preparations for expanding our credit risk exposure. We continually reduce our borrowers' costs, thanks to our technological advancements and managerial efficiency improvements. Since the third quarter, we have reduced the all-in cost of new loans facilitated to 21.8%. Going forward, we'll continue to optimize our cost structure through technology and fulfill our commitment to financial inclusion. In conclusion, we believe that FinTech industries' regulatory oversight and ratification should achieve more progress, which in turn should ensure stable and sustainable industry growth. Our retail credit facilitation and wealth management businesses are fully aligned with China's policy objectives of supporting small and micro businesses to attain common prosperity. A constantly evolving regulatory environment, our unique business model, and strong corporate governance enable us to accomplish gradual business transformation and achieve steady growth. Looking ahead, we'll continue to uphold our commitment to maintaining full operational compliance, providing compassionate and inclusive financial services, setting ourselves as a role model for corporate governance among overseas listed Chinese companies, and generating increasing value for our shareholders and society. With that, I will turn the call over to Greg, who will share our business updates for the quarter.

Thank you, Chairman Ji. We delivered strong revenue and profit growth in the third quarter of 2021 despite the changing economic and regulatory environment. We grew our revenue by 21.8% and our net profit by 90.8% year-over-year, respectively. Excluding the impact of the C-round restructuring expenses in the third quarter of 2020, our adjusted net profit increased by 18.1% year-over-year. Before James takes you through our detailed operational and financial updates, I'd like to cover three broader areas related to our business. First, concerns in the real estate sector; second, an update on the rectification progress; and third, our financial position and capital-related plans. Concerns about the real estate sector: while we've observed the risk in the broader economic environment, including increased credit risk in the real estate sector, there has been no impact on our business performance to date. We do not provide lending services to property developers, although some of our small business customers produce construction materials and provide home decoration services. Our exposure to borrowers who are directly or indirectly linked to the property sector is quite limited. To date, we have not detected any signs of credit deterioration in our secured or unsecured loan facilitation portfolios, and we will remain vigilant and address credit issues quickly if needed. As of this third quarter, flow-through rates indicating future credit quality remain stable and in line with the previous several quarters. Our wealth management business and proprietary investment book have limited exposure to the real estate sector. Second, I want to provide more on the regulatory rectification progress. As mentioned by Chairman Ji, regulators recognize that the current industry rectification effort should see substantial progress by the end of the year, and some industry observers believe the current stage of regulatory changes is reaching finalization. Based on our understanding of the current regulatory requirements, we do not anticipate any major changes to our business model or substantial impact on future business development. Over the last year, regulatory rectification of lending businesses has required platforms to separate lending services from other financial and payment services, rationalize personal consumption risks, facilitate lower loan pricing to support the real economy, and have skin in the game to share credit risk with requisite licenses and capital requirements. Rectification has also required partnering banks to demonstrate independent risk management, set limits for cooperation with any one platform, and limit lending to their geographic footprint. Finally, rectification requires data sharing between platforms and finance institutions to be conducted via a credit-rating license by mid-2023. Lufax continues to make consistent progress on all rectification requirements. Lufax conducts lending facilitation independently of any other financial service, and about 81% of all new loans facilitated as of the third quarter have gone to small business owners, in line with policy priorities. The all-in pricing for loan balances has dropped to 23.1% as of the third quarter this year, down from 26.6% a year ago. As of the third quarter, we now bear risk on 20% of all new loans; our nationwide guarantee companies, which share credit risk on all new lending, operate with a leverage ratio under 3x as of September 31 this year. Given our strong capital position and likely future regulatory requirements, we expect to bear risk on 30% of all new loans in the future, probably by the end of next year. All of the aforementioned operating metrics exclude those of our consumer finance subsidiary. Lufax's 589 bank partners operate with their independent risk systems. Given our diversified partnerships, current cooperation is fully aligned with regional footprint matching requirements, and each partnership operates within the single platform concentration limits. We are currently in discussions with a number of parties to establish a credit-rating license within the regulatory timeframe, if this indeed becomes a requirement. Moving to our financial position and capital plans: through this third quarter, we've been able to meet the rectification requirements and optimize customer pricing while sustaining both our revenue take rates and net profit margins at or above historical levels. As of September 31, our net assets amount to around 93 billion, with liquid assets maturing in 90 days or less totaling 47 billion, providing us with a position of strength to maximize shareholder value and make ongoing investments in the business. In terms of capital management, as mentioned, we've completed about 60% of the 1 billion in shareholder buyback that we've announced in recent quarters. Despite our plans to increase our stake in the lending facilitation business, our strong ongoing cash flows allow us to announce today that starting next year, we will begin to pay out 20% to 40% of net profit from the previous year in cash dividends to shareholders. These plans should allow us to continue to improve shareholder return on equity and leave us with more than sufficient resources to continue to invest in our core business while seizing opportunities that may arise medium term due to the changing industry and regulatory landscape. Within the core business, our priority areas for investment remain upgrading our lending services, direct sales force with new technology enablement tools, deepening the deployment of AI capabilities in risk management and collections infrastructure, adding new functionality to our product lines, and sharing technology capabilities with financial partners in both lending facilitation and wealth management. The main goals for our technology deployment are increasing market reach, enhancing our unique O2O business model productivity, deepening partner connectivity, and further automating services to improve both service quality and cost efficiency. Worth mentioning is that we did increase our O2O salesforce serving primarily small business owners in Q3 to around 64,000, up from 59,000 at the end of Q2 to further expand market reach. The increase in direct sales was masked by an increase in sales force productivity. Excluding new recruited sales force in Q3, our productivity rose 8% quarter-on-quarter and 7% year-over-year. If we include the newly recruited sales force, our productivity rose 4% quarter-on-quarter. This increased investment into direct sales reaffirms our view that our offline-to-online services approach is the most cost-effective way to increase the coverage of this otherwise hard-to-reach small business owner segment. Also worthy of note is that emerging affluent investors, those investing RMB 300,000 or more on the platform, made up 81% of customer assets on our wealth management platform, up from 78% a year ago. The revenue take rate for the wealth management platform increased from 31.8 basis points to 44.1 basis points quarter-on-quarter due to the increased mix of qualified investor products, insurance services, and technology enablement fees. Our overall performance for the third quarter is in line with our prior guidance, and today, we reaffirm our previous guidance for the full year concerning revenue and profit growth. I'll now turn the call over to James Zheng, our CFO, to go through the detailed operating and financial performance and our reaffirmed guidance for the year.

Thank you, Greg. I will now provide a closer look into our third-quarter operational and financial results. Before I begin, please be reminded that all numbers are in RMB terms, and all comparisons are on a year-over-year basis unless otherwise stated. We delivered another very strong quarter, achieving double-digit growth in both revenue and net profit. Our total income increased by 21.8% to 15.9 billion, and our net profit increased by 9.8% to 4.1 billion year-over-year. If compared to adjusted net income in the same period last year, which excludes the impact of the C1 restructuring expenses, net profit increased by 18.1% year-over-year. Let me share some of the business milestones we achieved during the quarter despite the economic slowdown and regulatory overhead. First, we maintained stable unit economics despite APR declines. Our loan balance APR was 23.1% in the third quarter of 2021, a 0.9% point decline from 24% in the second quarter of 2021 and a 3.5% point decline from 26.6% in the third quarter of 2020. In comparison, our loan balance take rate remained stable at 9.7% in the third quarter of 2021, the same as the second quarter and a 0.3% point increase from the third quarter of 2020. We were able to maintain the take rate because we continue to diversify our funding sources and increase the number of banking partners we work with. Additionally, we attained further reductions in the credit insurance premiums on our loan portfolio. Also, thanks to our new methods of charging customers, we experienced diminishing impacts from early loan repayments. Above all, we drove relentless improvements in our sales and marketing efficiency. All these initiatives combined should enable us to maintain stability in our take rate and the net margin even if the APR may reduce further in our retail credit facilitation business in the future. Second, we sustained growth in our overall loan volume with an optimized business mix. On the retail credit side, we grew our new loan sales by 16.2% to 171.7 billion during the third quarter of 2021, in line with our expectations. At the same time, we continued focusing on serving more business owners and improving the risk profile of our borrowers. In the third quarter, excluding our consumer finance subsidiary, 85% of new loans facilitated were dispersed to small business owners, up from 75.7% in the same period of 2020. On the Wealth Management side, our total client assets increased by 12.4% to 425.1 billion as of September 30, 2021. Client asset contributions from mass-affluent customers investing more than 300,000 increased to 80.8% as of September 30, 2021, up from 77.5% as of September 30, 2020. Third, we continue to evolve our risk-sharing business and stabilize asset quality. In line with prevailing regulatory requirements, we borrowed credit risks for 20% of the new loans we facilitated in the third quarter of 2021, up from 16% in the second quarter and 7% in the third quarter of last year. As of September 30, 2021, our outstanding balance of loans facilitated with guarantees from third-party credit enhancement partners had decreased to 81.1% from 91.8% a year ago. All of the aforementioned operating metrics exclude growth of our consumer finance subsidiary. Driven by the evolving risk-sharing business development and ongoing technological operational improvements, excluding our consumer finance subsidiary and the legacy products, the DBD 30-plus and the DBD 90-plus delinquency rate remained stable at 1.9% and 1.1% for total loans we facilitated as of September 30, 2021, compared to 1.9% at 1.1% as of June 30, 2021. Fourth, we improved the take rate of our wealth management segment through product mix optimization. During the quarter, our take rate for the segment increased by 12.3 basis points to 44.1 basis points from 31.8 basis points in the previous quarter, primarily driven by our continued product mix optimization as we sharpened our focus on products with higher take rates. Now let's take a closer look into the financials. As the revenue mix of our retail credit facilitation continued to improve, thanks to the evolution of our business and risk-sharing model, total income increased by 21.8% year-over-year. During the quarter, while the platform service fees decreased by 3.5% to 9.6 billion, our net interest income grew 57.2% to 3.8 billion, and our guaranteed income grew by more than 600% to 1.3 billion. In addition, other income, which is directly linked to delivering services to our financial partners, increased by 144% to 1 billion. As a result, our retail credit facilitation platform service fee as a percentage of total revenue decreased to 57.1% from 72%. Because consolidated trust plans provide lower funding costs, we continue to utilize them in our funding operations, enabling our net interest income as a percentage of total revenue to increase to 23.9% from 18.5% a year ago. Moreover, as we continue to build more credit risk, we generated more guaranteed income, reaching 8.1% as a percentage of total revenue compared to 1.3% a year ago. By expanding our services to credit enhancement partners in account management, collections, and other value-added services, our other income as a percentage of total revenue increased to 6.3% from 3.1% a year ago. Our investment income increased by 149% to 266 million in the quarter from 107 million in the same period of last year, mainly due to the increase of investment assets and reserves. In terms of wealth management, our platform transaction and service fees decreased by 4.7% to 467 million in the third quarter from 490 million in the same period of 2020. This decrease was mainly driven by the runoff of legacy products and partially offset by the increase in fees generated from the company's current products. Now moving on to our expenses. In the third quarter, our total expenses grew by 5.1% to 9.9 billion, excluding the 1.3 billion in restructuring expenses in the third quarter of 2020. Adjusted total expenses grew by 22.2% year-over-year, mainly driven by the increase in credit impairment costs. However, excluding credit and asset impairment losses, financial costs, and other losses, total expenses increased by 10.5% in the third quarter as we maintained our growth trajectory and further improved operating efficiency. Our sales and marketing expenses, which include expenses for borrowers and investor acquisition costs, increased by 7% to 4.6 billion in the third quarter. Our borrower acquisition expenses, which are a major component of our total sales and marketing expenses, decreased by 8.5% year-over-year to 2.6 billion, mainly driven by increased sales productivity and decreased sales commissions. Our investor acquisition and retention expenses increased by 10.1% to 0.2 billion in the third quarter, mostly due to increased marketing efforts to attract and retain investors. Our general sales and marketing expenses, which are mainly comprised of payroll and related expenses for marketing personnel, brand promotion costs, consulting fees, business development costs as well as other marketing and advertising costs, increased by 39.2% to 1.8 billion in the third quarter from 1.3 billion a year ago. This year-over-year increase was largely due to the increase in sales costs and lower base in the third quarter of 2020, resulting from the social security release during the COVID-19 outbreak in the same period. Our general and administrative expenses increased by 46% to 937 million in the third quarter from 642 million a year ago. This increase was mainly due to the increase of accrued bonuses driven by better performance, a lower base in the third quarter of 2020, and headcount expansion in the third quarter of 2021 to support our new business development initiatives, including the development of our consumer finance business. Our operations and servicing expenses increased by 6.3% to 1.7 billion in the third quarter from 1.6 billion a year ago. This increase was primarily due to the increase in trust plan management expenses resulting from the increase in the usage of consolidated trust plans. We remain committed to investing in technology, research, and development as our technology and analytics expense increased by 8.7% to 524 million in the third quarter. Our credit impairment losses increased by 74.8% to 1.7 billion in the third quarter from 952 million a year ago. This was due to the continuing evolution of our business model, which led to increased loan-related risk exposure and higher upfront credit impairment losses. It is worth noting that the increase in impairment losses is purely a function of the increase of the proportion of credit risks borne by us. While the overall risk profile of our borrowers has continued to improve, as mentioned earlier, our asset impairment losses increased to 410 million in the third quarter due to impairment losses of intangible assets and goodwill. Our finance costs decreased by 89.8% to 168 million in the third quarter from 1.7 billion a year ago, mainly due to the higher base in the third quarter last year, which included 1.3 billion of C1 restructuring expenses. Additionally, our effective tax rate decreased to 31% during the third quarter of 2021 from 40% in the same period of 2020. Consequently, our net income increased by 9.8% to 4.1 billion during the third quarter from 2.2 billion in the same quarter of 2020. Excluding the impact of the C1 restructuring expenses in the comparable quarter, adjusted net income increased by 18.1% year-over-year. Net margin was 25.8% in the quarter compared to a net margin of 16.5% and adjusted net margin of 26.6% in the same period of last year. Meanwhile, our basic and diluted earnings per ADS were RMB 1.76 and RMB 1.66, respectively. As of September 30, 2021, we had a cash balance of 30.5 billion compared to 24.1 billion as of December 31, 2020. Net cash flow from operating activities was 1.7 billion in the third quarter of 2021. Now moving on to the outlook. We reiterate our guidance for the full year of 2021. We expect our new loans facilitated to be in the range of 649 billion to 665 billion, client assets to be in the range of 430 billion to 450 billion. Meanwhile, as we continue our efforts to maintain growth momentum and improve our operating efficiency, we expect our total income to be in the range of 61.1 billion to 61.4 billion and our net profit to be in the range of 16.3 billion to 16.5 billion. This translates into year-over-year total income growth of 17% to 18% and year-over-year net profit growth of 33% to 34% for the full year of 2021. These forecasts reflect our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we're now ready to take questions.

[Operator Instructions] Your first question comes from Richard Yu from MS. Please go ahead.

Thank you very much. Congratulations on the strong third quarter. I just have a couple of questions regarding the funding part at the moment. One is basically, are we seeing opportunity to further reduce the funding costs or basically the yield from the funding partners that we work with at the moment since we're expanding our cooperation population? And in addition to that, are we seeing these banks taking more risk on their own? So what percentage of risks are taken directly by the banks at the moment? Thank you.

Okay. Regarding the proceeds of our funding call, as of today, we have 59 companies and six trust companies. In terms of the mix, bank funding takes about 60%, while 40% comes from other sources with different funding costs. The bank funding cost is at 6.4%, and other financing sources at 5.6%. So going forward, we believe there is room to further review funding costs and safeguard our take rate amidst the changing environment. As of today, if you look at our fourth-quarter numbers, our guarantee portion takes up to 20% of new renewals, and our dependence on insurance companies, especially in P&C, has gone down to about 70%. So the rest, approximately 10%, is taken by us in terms of risk sharing. Ten percent is taken by banks and insurance companies together.

Okay. Sorry. Yes. I want to ask a high-level question regarding how management thinks about the difference between the credit assistant lending model versus the co-lending model. I mean, apparently, regulators have made pretty strict rules regarding the co-lending model, right, the risk sharing and percentage funding sharing, which is more capital intensive. But in fact, essentially, the way Lufax has been complying with the regulation, you are taking more risk because you are putting loans on balance sheet, and you do have the capital to be fully compliant. Whereas on the other side, the so-called assistant lending model has more regulatory uncertainty regarding the license requirement and disconnection from the banks. So strategically, how do you compare the cost between those two business models? And where do you see Lufax's business model evolving over time? Thank you.

Thanks, Winnie, it's Greg. I'll take a first shot at your question, and then I'll see if Ji has anything to add. The way regulators increasingly look at this can be categorized really into two buckets: loans done by banks and then everything else is regarded as a form of facilitation and cooperation. Under the bucket of facilitation and cooperation, there have been some recent announcements regarding requirements for how they partner with banks. The core of this is really that you have to have skin in the game. We have done it at 20% up to now, but we'll probably be moving to 30% over the next 12 to 18 months. And so that skin in the game is robust and very much in line with the overall spirit of regulation. The second aspect is that when you take this skin in the game, you need to have a license that is regulated and where capital leverage is controlled within 10x. We achieve this through our guarantee company; our leverage today on those guaranteed companies is under 3x. We're very well positioned to handle all of that. The other thing I would highlight is if you look at the requirements announced recently, they now have to split the lending they do through their consumer finance company and their partnerships with banks, which must be separately branded. We are already compliant with that requirement in that our consumer finance business is separately branded. When customers process a loan through our facilitation, the banks themselves are disclosed, and each bank carries out its own risk process to vet the lenders. We believe that we are unique in having that guarantee company, taking shared risk on every loan and bringing that to 30%, having the capital behind it and disclosing our bank partners in the process. I think it will be difficult for some players in the market to really meet those capital requirements going forward. So I don't think there's that much of a distinction between co-lending and facilitation. The real issue is having that capital to back up risk sharing. David Choy, anything to add?

Technically speaking, we are not calling for sure. We don't have any license. All funding comes from banks or from first companies. And we are not in a situation where we are lending as well because we are financing guaranteed compliance. That's the way we do it; it's compliant with our financing guarantee licenses. However, we don't think regulators will clearly separate co-lending from other lending systems. We believe going forward that one part of the regulation will apply to all different models of loan services, including the assistance lending model and co-lending, and only affect the bank loan, which conducts all functional loans by themselves from base underwriting to collections. In our case, going forward, we expect all loan funds to come from banks, and we will take 40% of credit risk while the remaining 60% is taken by lenders and partners. We hope to achieve this point gradually.

Thank you. Can you hear me?

Yes, go ahead, May.

Okay. Maybe I'll follow up on Winnie's earlier question regarding regulation. The CBRC and the PBOC have mentioned there will be clear boundaries between financial services, lending technology services, and credit scoring. So it looks like they're targeting to have each operator acquire certain licenses that will allow them to engage in such activities. So does that mean that the service parts and technology service parts will be segregated from the lending operations as well? Is that technically happening in the way you conduct your lending or the whole business? I don't know if I'm clear on that question. And then also, earlier, you mentioned that by March, you will be connected to some kind of credit scoring services and paying a small fee of about less than RMB 100,000 per month. I just want to confirm if you already have guidance on which companies you will do this with. And also, sorry, on the operating front, we've seen insurance groups have had a lot of turnover, and sales have declined a lot; has that impacted your customer acquisition through your sales force, etc.? By the way, it's great to see the strong third-quarter results and to hear about the dividend payout. Congratulations.

Thank you, May. Let me start from the back. The number of live agents has indeed declined, now reaching about 70,000, which has affected our business growth. If you look at our sales channel mix, last year they contributed about 40%, but now they only contribute around 28%. Therefore, we have much less dependence on that channel. However, our sales team's contributions have exceeded 50% now, which is a positive sign. We're confident that despite the sales agent channel decline, we've been able to maintain strong performance. Regarding credit scoring, we are in close discussion with the PBOC directly, and we are building our process in detail. Normally, we share around 300 base points per customer with banks. As Ji said, about 80 out of the 300 variables must go through the licensing company for credit scoring. We are working on this and it will be in place by March next year, ahead of the regulatory requirements. We estimate the total live agents to be around 60,000 or 70,000, which is manageable. This doesn't offset our profitability.

In summary, regarding the three points Ji just mentioned: first, we are fully aligned with regulatory intentions to lower funding costs for small business owners. We achieve this through technology and efficiency improvements, risk management, and better negotiations with funding partners. Second, the process of reducing funding costs will take time and cannot be solved overnight. It requires cooperation from all participants. Third, so far, there are no specific requirements from regulators regarding exact numbers or timelines for us. However, we have internal targets to lower prices at the right time.

I think the three points Ji just summarized: first, we're aligned with regulatory intentions to lower costs through technology, efficiency, and negotiations; second, achieving lower costs will take time; and third, there are currently no specific regulatory requirements for us, but we have internal goals to reduce prices appropriately.

Thank you, operator. Thanks, everyone, for listening to our earnings call.