Lufax Holding Ltd Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, we will have a Q&A session. Please note this event is being recorded. Now I would like to hand the conference over to your speaker host today, Mr. Yu Chen, the company’s Head of Board Office and Capital Markets. Please go ahead, sir.

Thank you, operator. Hello, everyone, and welcome to our fourth 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 key achievements in 2021, address current capital market concerns and, finally, share our outlook for 2022. Our co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategies in the quarter. 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 retail 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.

[Foreign Language]

Hello, everyone, and thank you for joining our fourth quarter 2021 earnings conference call. I will start today’s call with an update of our key achievements for the year then address current market concerns and, finally, share our outlook for 2022.

[Foreign Language]

First, key achievements. In 2021, we achieved steady growth, improved regulatory compliance and corporate governance, and strengthened our status as a role model for compliance and governance among overseas-listed Chinese companies.

[Foreign Language]

Our full-year 2021 total income increased by 19%, net profit by 36%, and non-IFRS net profit by 29% when excluding the impact of non-core items. As a result, our basic earnings per ADS for 2021 reached RMB 7.11. At the same time, we increased our share of credit risk-bearing while proactively reducing the all-in cost of our 2021 average outstanding loan balance by 3 percentage points, improving regulatory compliance and contributing to the national goal of common prosperity.

[Foreign Language]

In communicating with regulators, we maintained frequent dialogues through all available channels and achieved satisfactory results. Upholding our principle of pre-emptive diagnosis and swift operational adjustments for optimal results, we maintained a proactive, candid, positive, and responsible stance in aligning the direction of our business with the trend of regulatory changes.

[Foreign Language]

Secondly, key investor concerns. Since releasing our Q3 results, our management team has engaged in over 50 investor events, including post-earnings calls, numerous road shows, and other meetings.

[Foreign Language]

Based on our data, 66% of the investor questions were about business operations, 24% about macroeconomic and regulatory trends, and the remainder about capital market initiatives such as dividend payout, share buybacks, and Hong Kong listing. We’re glad to see that investors are refocusing their attention back on our core business as we gain more clarity on our regulatory front. I will share our thoughts on macroeconomic and regulatory direction, then Greg and Y.S. will discuss our operational and financial results.

[Foreign Language]

Updates on the April 29 ratification. By the end of 2021, we had completed the vast majority of our ratification initiatives, and we’re on track to clear the remaining issues that require prolonged efforts, including the closing of redundant subsidiaries, running off our online deposit products, and ceasing to share certain borrower data directly with financial institutions. Judging from information and insights gathered from our channels, including a statement from Mr. Guo Shuqing, Chairman of CBIRC, during the Q&A session of a press conference on March 2, we believe that the regulatory ratification process is gradually entering its final phase. We’ll continue to push the ratification process toward the finish line and cooperate with regulatory authorities for final review. Based on preliminary feedback from a number of relevant regulatory authorities, we are ranked among the front of the 14 companies undergoing regulatory review based on our ratification stance, execution plans, and accomplished results. We envision that these assessments will be validated over time.

[Foreign Language]

Local financial supervision and administration measures, the preliminary draft mentioned certain restrictions. Although the preliminary draft mandated that local financial institutions shall not conduct business across provisional administrative boundaries, we foresee rather limited impact on Lufax for a few reasons. First of all, our guarantee companies have largely completed the establishment of a nationwide local branch network that enables us to conduct local business. Secondly, we possess a nationwide consumer finance license. Thirdly, we have sufficient time to stay attuned to new licensing requirements, devise proactive plans, and execute preparations as the draft regulation is currently still at the stage of public comments. With our abundant capital reserves, excellent compliance infrastructure, and sound corporate governance, we’re well-positioned to apply for a national micro-lending license or any necessary licenses should they become available.

[Foreign Language]

Response to Chinese ADR delisting risk. Forcing ADRs to delist from the U.S. exchange will affect not just us, but all U.S.-listed Chinese companies. Given the long-lasting and widespread impact of such regulations, we believe that both Chinese and U.S. authorities are engaged in constant discussions. Since our public listing, Lufax has strictly complied with all relevant regulations in both countries and fulfilled our disclosure obligations. At the same time, we have explored potential delisting on the Hong Kong Stock Exchange and engaged in preliminary communications with relevant regulatory departments.

[Foreign Language]

Thirdly, the outlook for 2022. Having overcome many challenges in 2021, we enter 2022 facing continued uncertainties. Knowing the further risk due to macroeconomic slowdowns and pockets of COVID resurgence, we have made preemptive preparations. In the fourth quarter, we placed a greater emphasis on credit asset quality by implementing more stringent risk management criteria. In 2022, we’ll focus on deepening our business transformation and returning more value to our shareholders.

[Foreign Language]

Deepening our business transformation. To ensure the quality of our income and the sustainability of our growth, we plan to deepen our business transformation and strike a balance between scale, expansion, and quality improvement in 2022.

[Foreign Language]

In our retail credit facilitation business, to mitigate the impact of shifting market dynamics, we plan to strengthen our direct sales channel, recruit more capable direct salespeople, optimize our team structure, and help them achieve greater productivity. In addition to increasing the contribution of direct sales to our overall loan volume, we’ll also implement more prudent risk-management measures to keep macroeconomic impacts under tight control.

[Foreign Language]

In our wealth management business, we strive to optimize our product mix, improve our user experience, enhance our service quality and efficiency, and secure our client assets' principal value as well as return on investment.

[Foreign Language]

These initiatives may cause some short-term fluctuations in our results, but we are confident we will resume our growth trajectory in the second half of 2022. We’re convinced that these business transformation initiatives are necessary to lay a solid foundation for our long-term stability and growth. Greg will share more details on our business initiatives and financial guidance later.

[Foreign Language]

Continue to reward shareholders. Despite continued market volatility and uncertainties in 2022, we hold high confidence in our own prospects because of our steady profitability, quality cash flow, ample capital reserves, and preemptive compliance measures. As such, we will continue to reward our shareholders through share buybacks and dividend payouts.

[Foreign Language]

In April 2022, we will distribute roughly 30% of our 2021 net profit to shareholders in the form of cash dividend, equal to $0.34 per ADS.

So we go from here. [Foreign Language]

In terms of share buyback, as of December 31, 2021, we had completed about USD 860 million, or 86% of the USD 1 billion total share buyback announced in 2021. On top of that, our Board of Directors has approved another USD 500 million of share buybacks in 2022.

[Foreign Language]

Finally, I would like to reiterate our core competitive advantages borne out of our exceptional business model. First, our business is fully in sync with China’s national policy directive of supporting the real economy, as we primarily serve small macro business owners, mostly in wholesale trade, manufacturing, and retail industries. Second, we operate through guarantee licenses, as well as our nationwide consumer financial license. Thirdly, we have unparalleled insight into regulatory trends through our close dialogues with regulatory authorities. We have also accomplished a thorough implementation of regulatory requirements by leveraging our domain expertise and financial DNA. The combination of these unique factors enables us to achieve business transformation and grow steadily and sustainably in a constantly evolving policy environment. Looking ahead, we will continue to uphold our commitment to maintaining full operational compliance, providing compassionate and inclusive financial services, setting ourselves as a model for corporate governance among overseas-listed Chinese companies, and generating growing value for our shareholders and our society.

[Foreign Language]

With that, I’ll turn the call over to Greg, who will share our business updates in detail.

Thank you, Chairman Ji. In 2021, we successfully executed a series of operational adjustments to ensure the long-term sustainability of our growth and profitability. We reduced the average APR of our loan portfolio, increased self-risk-bearing, and reduced our reliance on the Ping An Life channel for sourcing. Our full-year revenue growth was 18.8% year-over-year, and net profit grew by 36.1% year-over-year, both exceeding guidance. In 2021, our retail credit facilitation business achieved a number of important milestones. First, we lowered our average loan portfolio pricing to 22.4% in the fourth quarter of 2021 from 25.7% in the same period of 2020 while maintaining overall unit economics. More details will be provided by James. Second, our business model is now more aligned with regulatory requirements. As Chairman Ji mentioned, our guarantee company has set up locally approved subsidiaries across all of mainland China, except Tibet, Ningxia, and Yunnan provinces, allowing us to operate our financial licenses locally. Regarding potential future license requirements, we have a consumer finance license that enables us to leverage up to 10 times our capital compared to a 5x leverage ratio currently contemplated for the proposed national micro-lending license. So if any changes arise that lead to a national micro-lending license, we have the required capital reserves, eligibility, and preparedness to apply, giving us even more flexibility in serving our core small business owner segments. Our current guarantee licenses allow us to share credit risk and process data flows with more than 65 national and local funding partners under existing regulatory frameworks. Additionally, we are actively exploring new collaborations to meet expected credit rating license usage requirements, which will come into effect by mid-2023. We are prepared to connect with a third-party credit scoring company by the end of June this year. Based on our latest understanding, the cost of that connection and the potential changes to our business model will not have any material impact. Third, we continue to increase our share of risk-bearing in line with regulatory guidelines. During the fourth quarter of 2021, excluding the consumer finance company, we bore risk on 20.8% of new loans facilitated, up from 10% in the same period of 2020. Our guarantee company that bears credit risk operates with a leverage ratio under two times at the end of 2021 against the maximum leverage requirement of 10 times. Our healthy leverage ratio, together with a strong capital position, gives us comfort to meet any new capital requirements that may arise from regulatory changes. Last but not least, we saw improvements in direct sales productivity and operating costs while delivering steady gross and net returns despite sharply reduced reliance on Ping An. During the quarter, new loan sales from the Ping An Life channel continued to slow down, accounting for 24.6% of new loan sales in the fourth quarter, down from 36.4% in the same period of 2021. To counter this, our direct sales team contributed more by improving productivity. Compared to the fourth quarter of 2020, our direct sales generated 21.6% more volume in new loan sales, but the headcount only increased by 8.4%, and productivity rose by 12.1%. This increased investment in O2O direct sales reaffirms our view that our offline-to-online service approach is the most effective way to increase coverage of this otherwise hard-to-reach small business owner segment. Our Wealth Management business is also making good progress in a transitioning market. In the fourth quarter, total client assets of $432 billion remained flat, but grew by 13% year-over-year when excluding P2P and online bank deposit products. Meanwhile, we deepened our product reform to focus on high-value clients and higher take-rate products. As of December 31, 2021, the contribution to total client assets from customers with investments of more than RMB 300,000 on our platform increased to 81% from 76% in the same period in 2020. Client assets from customers with investments over RMB 1 million on the platform grew by 14% year-over-year, and these customers have a clear preference for higher take-rate products. We have differentiated ourselves by demonstrating consistent growth in high-value customers and higher take-rate products, laying a solid foundation for future growth. As a result, our take rate in the fourth quarter was 64 basis points, increasing 19.9 basis points compared to the previous quarter. Driven by the optimization in product and investor mix, our wealth management business has improved economics. Moving forward, we will further focus on higher take-rate products and new growth in upper-middle-class customers as we continue to develop additional value-added services to bolster wealth management revenues. Now let’s take a look at our future strategies. In the second half of 2021, the transformation of Ping An Life led to a notable decline in the business velocity and credit quality of customers sourced through that life channel. The impact of this decline is seen in the change in our overall C to M3 flow-through rates, which deteriorated from 0.4% in Q3 to 0.5% in Q4. This deterioration deepened our resolve to initiate change in our channel mix, further reducing reliance on the life channel and increasing the quality, productivity, and overall number of direct sales. In 2022, we will strengthen our direct sales channel by raising our recruiting standards, hiring more capable direct salespeople, providing them with more systematic training, equipping them with new technology, and overall helping them achieve greater productivity. Increasing the contribution of direct sales will sustain our new loan sales growth and should improve our overall loan portfolio quality as our direct sales force has higher control over the assessment of borrower creditworthiness than our referral channels. As a result of the actions taken, we expect the C to M3 flow-through rate to peak in the first quarter and normalize in the second half, creating limited financial impact during the course of 2022. In the next few months, we will closely monitor new loan sales, channel mix, asset quality, and productivity of direct sales to track our progress and demonstrate our success during this transition. Finally, regarding our guidance. Most of the impacts from these channel adjustments will occur in the first half of 2022, resulting in slower profit growth in that timeframe, but accelerated new business and profit growth in the second half. Our guidance for 2022 is therefore more detailed to reflect the timing of planned adjustments and one-time items. We expect our new loan sales growth to be relatively flat to low single-digit in Q1 and gradually pick up to 3% to 6% for the first half. Accelerated growth in new loan sales should be witnessed during the second half, and we expect to grow new loan sales at 9% to 12% for the whole year. We expect total income to grow by 8% to 10% for Q1, 10% to 12% for both the first half and the full year. Projected profit growth for the full year is 11% to 13%, with profit growth of negative 2% to 2% in Q1 and the first half. The slower profit growth in the first half reflects a number of year-over-year legacy-related items in the first and second quarters, which suppresses relative profit growth in the first half of 2022. If we remove the impact of these specific items, year-over-year net profit growth is expected to be 6% to 10% in Q1 and 6% to 9% in the first half, respectively. Lufax’s management team has a track record of executing transformations to ensure business sustainability and profitability, and we believe this time is no different. By taking the short-term pain of making the channel transition in the first half at a time we believe it is prudent to be cautious with overall growth, we will set strong foundations for steady high-quality long-term growth. I will now turn the call over to James Zheng, our CFO, to go through the detailed operating and financial performance and our guidance for the year.

Thank you, Greg. I will now provide a closer look into our fourth quarter results. Please note that all numbers are in RMB terms and all comparisons are on a year-over-year basis, unless otherwise stated. We concluded the fourth quarter with solid financial results, achieving consistent growth in both the top line and bottom line. During the quarter, our total income was RMB 15.8 billion, up 19.2% year-over-year, and our net profit increased by 1.7% to RMB 2.9 billion year-over-year. Without considering the one-time asset impairment cost, our net profit is RMB 3.4 billion, reflecting about 19.7% year-over-year growth. For the full year of 2021, our total income was RMB 61.8 billion, up 18.8% year-over-year, and our net profit increased by 36.1% to RMB 16.7 billion year-over-year, with the growth in both income and net profit for the full year of 2021 exceeding the high end of our previously announced guidance range. Additionally, our net margin for the full year of 2021 improved to 37% from 24% last year. Let’s have a closer look at our operating numbers. First, we further reduced our APR while maintaining stable unit economics in the retail credit facilitation business. Our loan balance APR was 22.4% in the fourth quarter of 2021, a 3.3 percentage-point decline from 25.7% in the fourth quarter of 2020. In comparison, our loan balance take rate was 9% in the fourth quarter of 2021, only a 0.1 percentage-point decline from 9.1% in the fourth quarter of 2020. Our loan balance APR was 23.5% for the full year of 2021, a 3 percentage-point decline from 26.5% in 2020, while our 2021 take rate only declined by 0.2 percentage points to 9.6%. As we continue to diversify funding sources, engage with more banking partners, reduce credit insurance premiums on our loan portfolios, and improve our customer charging mechanism, we will continue to maintain stable unit economics and drive relentless improvement in our sales and operational efficiencies despite APR declines. Secondly, we maintained stable growth in our overall loan volume and further penetrated into core and targeted customer segments. On the retail credit side, we grew our new loan sales by 14.3% to RMB 151.6 billion during the fourth quarter of 2021, in line with our business focus on risk management under the current macro conditions. At the same time, we continued focusing on serving small business owners. During the fourth quarter, excluding our consumer finance subsidiary, 79.6% of new loans facilitated were disbursed to small business owners, up from 74.4% in the same period of 2020. On the wealth management side, despite the negative impact of P2P and online deposit products runoff, we managed to grow our total client assets to RMB 432.7 billion by December 31, 2021. Third, we continue to execute our plans to evolve our risk-sharing business while simultaneously maintaining asset quality. In line with prevailing regulatory requirements, we bore credit risks for 21% of the new loans we facilitated in the fourth quarter of 2021, up from 20% in Q3 and 10% in Q4 of last year. As of December 31, 2021, our outstanding balance of loans facilitated with guarantees from third-party credit enhancement partners accounted for 78.9% of the total outstanding balance of loans facilitated, down from 89.4% as of December 31, 2020. All of the aforementioned operating metrics exclude our consumer finance subsidiary. Due to the slowdown of macroeconomic growth, the COVID-19 pandemic, and changes in the life channel, we saw some deterioration in overall asset quality. Thankfully, our risk management system limited the negative impact on our risk indicators. Excluding our consumer finance subsidiary, our 30-day plus and 90-plus delinquency rates were 2.2% and 1.2%, respectively, for the total loans we facilitated as of December 31, 2021, compared to 1.9% and 1.1% as of September 30, 2021. We will remain vigilant and prudent with our borrower acquisition and risk management strategy. Fourth, we optimized our product mix to improve the take rate of our wealth management segment. During the quarter, our take rate for this segment increased by 19.9 bps to 64 bps from 44.1 bps in the previous quarter, primarily driven by our continuous focus on optimizing the product mix as we shifted toward higher take-rate products. Now let’s take a closer look at our fourth quarter financial numbers. At the highest level, our total income in the fourth quarter grew by RMB 2.5 billion, or 19.2% year-over-year, while total expenses increased by RMB 2.4 billion, or 26.2% year-over-year, leading to a net profit growth of 1.7% year-over-year to RMB 2.9 billion. While operating-related costs remained flat due to efficiencies, the total expenses increase is primarily driven by the credit impairment costs due to higher risk sharing and one-time asset impairment costs. Excluding one-time asset impairment costs, which were mainly due to the impairment loss of intangible assets related to Shanghai Asset Exchange and the Tianjin guarantee company, total net profit was RMB 3.4 billion, reaching a 19.7% year-over-year increase. Next, let’s go through financial numbers line by line. As the total income mix of our retail credit facilitation business continued to improve, total income increased by RMB 2.5 billion or 19.2% year-over-year. During the quarter, while platform service fees decreased by 10.4% to RMB 8.8 billion, our net interest income grew by 81.5% to RMB 4.2 billion, and our guaranteed income grew by more than 538% to RMB 1.6 billion. Additionally, other income, which is directly linked to delivering services to our financial partners, increased to RMB 769 million in the fourth quarter from RMB 452 million in the same period last year. As a result, our retail credit facilitation platform service fee as a percentage of total income decreased to 51% from 70%. Given that consolidated trust plans provide lower funding costs, we will continue to utilize them in our funding operations, enabling our net interest income as a percentage of total income to increase to 27% from 18% a year ago. Moreover, as we continue to bear more credit risk, we generated more guaranteed income, reaching 10% as a percentage of total income, compared to 2% a year ago, by expanding our service to creating enhancement partners in account management, collections, and other value-added services. Our other income as a percent of total income increased to 5% from 3% a year ago. Our investment income decreased by 7% to RMB 359 million in the quarter from RMB 386 million in the same period last year, mainly due to fair value losses from investment assets. In terms of wealth management, our total platform transaction service fees increased by 23% to RMB 708 million in the fourth quarter from RMB 576 million in the same period of 2020. This increase was mainly driven by an increase in fees generated from our current products, which was partially offset by the runoff of legacy products. Turning to our expenses. In the fourth quarter, our total expenses grew by RMB 2.4 billion or 26.2%, reaching RMB 11.5 billion from RMB 9.1 billion in the same period of 2020, primarily driven by increased credit impairment costs and one-time asset impairment costs. Total expenses, excluding credit and asset impairment losses, increased by 4% to RMB 8.3 billion in the fourth quarter of 2021 from RMB 8 billion in the same period of 2020, remaining almost unchanged as we further improved operating efficiency. Our total sales and marketing expenses, which include expenses for borrowers and investor acquisition, as well as general sales and marketing expenses, decreased by 1% to RMB 4.8 billion in the fourth quarter. Our general and administrative expenses decreased by 1.5% to RMB 971 million in the fourth quarter from RMB 986 million in the same period of 2020. This decrease was primarily due to our expense control measures. Our operations and servicing expenses increased by 15.2% to RMB 1.9 billion in the fourth quarter from RMB 1.7 billion a year ago. This increase was mainly due to increased expenses from trust plans management, resulting from an increase in the usage of consolidated trust plans and growth in the outstanding balance of loans facilitated. Our technology and analytics expense increased by 29.5% to RMB 597 million in the fourth quarter of 2021 from RMB 461 million in the same period of 2020, primarily due to ongoing investments in technology, research, and development, along with a lower base in the fourth quarter of 2020 attributed to social security relief during the COVID-19 outbreak. Our current impairment losses increased by 157.2% to RMB 2.5 billion in the fourth quarter from RMB 985 million a year ago. This was mainly due to increased provisions and indemnity losses driven by increased risk exposure as the risk sharing at the total balance level has increased from 6.3% to 16.6%. It is worth noting that we grew our guarantee income by 539%, a faster pace than expenses, and continued to achieve positive profitability for our guaranteed business. Included in the credit impairment losses, there is also a RMB 260 million increase related to legacy products in our wealth management business. Our finance costs decreased by 18% to RMB 267 million in the fourth quarter from RMB 326 million a year ago, mainly due to a decrease in the balance of convertible bonds following our C-round convertible notes restructuring and an increase in interest income due to a rise in deposits. Additionally, our effective tax rate was 33.3% during the fourth quarter of 2021 compared to 31.9% in the same period of 2020, influenced by a one-time deferred tax asset impact. For the full year of 2021, our effective tax rate was 28.6% versus 31.5% in 2020. As a consequence of the aforementioned factors, our net profit increased by 1.7% to RMB 2.9 billion during the fourth quarter from RMB 2.8 billion in the same quarter of 2020. Meanwhile, our basic and diluted earnings per ADS during the fourth quarter were RMB 1.26 and RMB 1.21, respectively. Our basic and diluted earnings per ADS during the year of 2021 were RMB 7.11 and RMB 6.69, respectively, representing a 27.2% and a 20.5% growth year-over-year. As of December 31, 2021, we had a cash balance of RMB 34.7 billion compared to RMB 24.2 billion as of December 31, 2020. Looking ahead, we expect annual new loan sales growth to be at 9% to 12%, but the growth will notably be much higher in the second half due to the completion of channel optimization initiatives. Similarly, we expect total income growth of 10% to 12% throughout the year. Operating-related costs will stay stable across the year with an annual increase of about 6% to 8%. Credit-related provision growth will even out in the second half, given the increased risk sharing that already started in the second half of 2021. As a result, we expect our total profit to grow between 11% to 13% for the entire year. Year-over-year growth will similarly be lower in the second half due to one-time legacy-related items in 2021. The profit growth rates will pick up in the second half once the channel optimization impact starts to come through and credit costs normalize on an annual basis. Next, let me give you some specific guidance for Q1, the first half and the entire year. For the full year of 2022, we expect new loans to grow by 9% to 12% year-over-year, to the range of RMB 706.8 billion to RMB 726.2 billion, and wealth management assets to grow by 2% to 3% year-over-year, to the range of RMB 441.3 billion to RMB 445.7 billion. We expect our total income to grow by 10% to 12% year-over-year, to the range of RMB 68 billion to RMB 69.3 billion, and net profit to grow by 11% to 13% year-over-year, to the range of RMB 18.6 billion to RMB 18.9 billion. For the first quarter of 2022, we expect new loans to grow by negative 2% to 2% year-over-year, to the range of RMB 169 billion to RMB 175.8 billion, and wealth management client assets to grow by 2% to 3% year-over-year, to a range of RMB 429.6 billion to RMB 433.8 billion. Since retail credit facilitation income is recognized over the life of a loan and is more driven by loan balance, we expect total income to grow by 8% to 10% year-over-year, to a range of RMB 16.5 billion to RMB 16.8 billion. In the first quarter, net profit is expected to grow between negative 2% to 2% year-over-year, to a range of RMB 4.9 billion to RMB 5.1 billion. However, if excluding the legacy P2P impact in 2021, net profit is expected to grow by 6% to 10% year-over-year. For the first half of 2022, we expect new loans to grow by 3% to 6% year-over-year, to a range of RMB 334.8 billion to RMB 344.6 billion, and wealth management assets to grow by 3% to 4% year-over-year, to a range of RMB 433.7 billion to RMB 437.9 billion. We expect our total income to grow by 10% to 12% year-over-year, to the range of RMB 33.1 billion to RMB 33.7 billion, with net profit growing by 1% to 3% year-over-year, to a range of RMB 9.8 billion to RMB 10 billion, and by 6% to 9%, excluding the legacy P2P impact in 2021. This forecast reflects our current and preliminary views on market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we’re now ready to take questions.

Thank you. [Operator Instructions] We have our first question from Richard Xu from Morgan Stanley. Richard, please go ahead.

Thank you, management, for the detailed explanations. I have just some additional questions on the reform of the direct marketing channels. Could management provide a little bit more details in terms of what’s entailed? Also, I noticed that in the past couple of years, management in China has been reducing the costs for the direct marketing channels. Will this lead to rising costs and cost/income ratios from the reform of direct marketing channels? And for the insurance channels, any expectations in terms of the contribution from those channels in a couple of years? Thank you.

Okay. Let me answer the question, and then Greg can supplement if I miss anything. So let me first provide an overall picture on the new loan sales trend by channel before I talk about this reform. If you look at our total loan sales growth ratio, in 2021, it was 14.8% with 16.9% coming from direct sales while the life channel made negative 7% growth. In the fourth quarter, quarter-on-quarter, total loans grew by 14.3%, with direct sales delivering 21.6% growth while the life channel saw negative 20% growth. If I share January and February numbers, the direct sales channel continues to deliver double-digit growth, but the life channel’s contribution dropped by almost 40% compared to the same period in 2021. As a result, the life channel’s contribution ratio to our new sales dropped from 36% in 2020 to 29% in 2021, and further to 24% in Q4 last year. If I measure January to February numbers, it has already come down to 20%. It’s quite a rapid decrease. This is a result of our management decision, which is why we intended to act accordingly. The life channel’s credit quality, which is measured by net flow, is almost 50% higher than that of the direct sales channel. So we are closely monitoring and safeguarding our portfolio quality. Moving forward, we plan to increase sales volume from direct sales to cover the shortfall from the life channel. I want to emphasize that this reform is not just to fix issues but to build on the direct sales channel's strong performance. Our fourth-quarter direct sales channel sales volume growth rate was 21.6%, delivered by 8% headcount growth and productivity growth by over 12%. Direct sales stand strong. Therefore, we believe this reform—widening by this reform—is to increase direct sales channel contributions to sales volume. We focus on optimizing our hiring, especially targeting groups with more than three years of experience and personal life circumstances that drive greater motivation. Initially, these groups made up less than 10% of our new hires, but they now comprise 45% as of January this year. This targeted hiring will further enhance our capability and help reduce direct sales costs through higher productivity.

Richard, do you have any follow-up questions on that?

That’s pretty clear. Thank you.

Thank you. We will now have our next question from Hans Fan of CLSA. Hans, please go ahead.

Thank you, management, for giving me this opportunity to ask questions. I actually have two questions, if I may. The first one is actually on the take rate in the fourth quarter. We note that the take rate was down a lot quarter-on-quarter to 9%. Can you please elaborate on the drivers behind this? And also, looking into this year in terms of take rates, how do we see the change there? That’s my first question. And the second question is on the regulatory side. Just now, Chairman Ji mentioned—sorry, Greg mentioned—that by the end of June, Lufax is likely to finish connecting with third-party credit scoring companies. So just wondering how likely this is to happen? Is that a 100% guarantee? Have we come out with a regulation on this yet? This is something that is really clear to the market. Just wondering how confident we are on this. Thank you.

Thanks, Hans. Let me answer your first question first. About the take rate, normally, the fourth quarter is the period we have the lowest take rate and margin. If you compare year-on-year from 2020 to 2021, the balance-based unit economics actually didn’t change. I will show this later. If you look at our new business unit economics, our net margin didn’t change despite a drop in our APR from around 20% also led to a notable revenue increase. Moving forward, we believe our take rate and net margin will remain stable. Regarding the regulatory process, we are fully prepared to meet the new requirements based on our ongoing dialogues with the PBOC. However, we are still waiting to receive a clear confirmation of our needed adjustments, and we have already submitted our plans for implementation. While it's uncertain when we will receive an answer, we expect it to happen before June.

Understood. Thank you very much.

Next question, please?

Thank you. We now have a question from Thomas Wang from Goldman Sachs. Thomas, please go ahead.

Thank you, management. It’s a good set of numbers. Congrats on that. Can I just check on the full year 2022 guidance? If I roughly work on new loan numbers, the first half guidance is only 3% to 6% and the full year is 9% to 12%, which implies roughly 15% to 20% growth in the second half. Can I just get your thoughts on whether this is sustainable growth as we extend this into 2023? Are you factoring some sort of pent-up demand in that number? Thank you.

Okay. So I think the key here is for new sales. If you remember, our fourth quarter guidance number, we believe new sales will not see obvious growth from the previous year. The biggest reason is that the life channel’s contribution to sales volume had dropped nearly 40%. Even with direct sales growing by double digits, it is not enough to offset the decline from the life channel. So while it takes some time to build ourselves back up in this area, we expect to see significant new sales growth beginning in the second quarter.

The upfront adjustment in this first half is indeed self-imposed so we can maintain long-term quality. We expect to see over two-digit growth compared with last year in the second half, and this will consequently contribute to revenue and net income growth.

Got it. If I take it, meaning, if the market stays viable, it means that—looking at your internal channels and sales force, how you have this kind of dip for the first half of 2022. If I may have a follow-up, obviously, the direct channel plays a bigger part in this growth to drive an increase. Where are you hiring these new direct sales personnel? And what type of people are you hiring, and how are you training them?

Yes. Actually, we are hiring locally. We have 35 local branches hiring their own direct sales teams. We specifically target individuals who have over three years of sales experience, some personal life circumstances make them more driven. Earlier, they represented a small portion of our new hires, but now they are over 40%. We have made progressing in hiring motivated personnel and offer enhanced training through our sales app. This provides more efficient onboarding than before.

The interesting aspect to consider, Thomas, is that this period of adjustment is essential to ensure credit quality and harness growth. As we hire a more stable and capable workforce, we believe this will significantly benefit us in the long run. Also, the technological innovations will enable this new sales force to effectively manage our customer relationships in a more efficient manner.

Got it.

Thank you, Thomas.

Please move to the next and last question, please, operator.

Sure. We now have our last question from May Yan from UBS. May, please go ahead.

Okay, thank you. Thank you for giving me a chance to ask the last question. I actually have three questions, if I may. The first one is about [Foreign Language].

[Foreign Language]

[Foreign Language]

Thank you, May. Sorry to interrupt. Please kindly replace most of your questions in English. Thank you.

Sorry, May.

Yes, yes, please go ahead.

A quick summary of the Q&A that just occurred before we move on. The question was on the regulatory sense of the April 29 ratification and whether there is likely to be more scrutiny or regulations coming for the loan facilitation model. The Chairman's answer highlighted the overall judgment that, based on multiple channels, gathering insights from various departments and platforms undergoing review, they believe that this process is nearing completion. Lufax Holdings is among the better performers in this regard, and he does not expect to see a ranking of the 14 platforms but anticipates grouping among platforms based on readiness. In terms of timing, we've communicated persistently with regulators since it's the one-year mark for this review. It's clear regulators wish to conclude it. Importantly, Lufax has established trust with regulators, redesigning business models for compliance. Regarding new regulations for loan facilitation, the focus now is more on implementation rather than new regulations.

May, please continue with your other two questions.

[Foreign Language]

[Foreign Language]

Thank you, May. Again, sorry to interrupt. Please provide the remaining questions in English. Thank you.

Sorry, May. Let’s proceed.

Okay, thank you. The other two questions I have are related to the business channel transformation that you mentioned regarding direct sales channels and their asset quality. Also, Greg, you mentioned that the flow-through ratio has degraded a little in the fourth quarter as you increased sales from direct channels. Is that mainly due to changes in the macro environment? Or are there other reasons as well, such as issues within the life insurance sector?

Regarding the second question on asset quality, yes, we confirm that the decline was mainly due to the life channel's impact. Excluding this channel and solely analyzing the performance of others—especially the direct sales—the situation remains stable. Some impact was noticed in December and January because of lockdowns affecting our business operations, but the primary deterioration is from the life channel situation. That’s why we rapidly adjusted our channel mix.

To address your question about wealth management, we allowed lower-margin products to phase out as we shifted focus toward qualified investor products. Our fund mix is also changing, leaning more towards higher-margin products and adding insurance services, which tend to yield higher margins. We expect to see further improvement in the take rate, perhaps adding another 10 basis points over this year.

[Foreign Language]

Once again, just to quickly summarize the Q&A that occurred regarding the precise timing of the April 29 conclusion and whether that would affect a Hong Kong listing. The Chairman mentioned that it is his personal judgment that the conclusion will likely be made in one announcement rather than separately for each platform and that it might categorize those that are almost done and those needing monitoring. The Chairman does not believe this will take too long. Regarding the Hong Kong listing, yes, the April 29 ratification will impact its timing. We will not pursue an IPO in Hong Kong until we get the regulatory blessing from the corresponding authorities. Lastly, on the China-U.S. relationship, we believe regulators from both sides are maintaining channels of discussion. The potential forced delisting of Chinese ADRs could have too substantial an impact for both sides to absorb. We are hopeful that a conclusion, or some kind of compromise, will be reached soon.

Thank you, operator. I think that concludes our call today. Thank you, everyone.

Thank you.

Thank you, ladies and gentlemen. This concludes today’s call. Thank you for joining. You may now disconnect your lines.