Earnings Call Transcript - LU Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited First Quarter 2022 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 now 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.

Chen Yu, Head of Board Office and Capital Markets

Thank you, operator. Hello, everyone, and welcome to our first quarter 2022 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 key achievements, then address some focal issues for investors. 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 Puhui 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 Guangheng, Chairman of Lufax.

Guangheng Ji, Chairman

Hello, everyone, and thank you for joining our first quarter 2022 earnings conference call. I will start today’s call with an update on our key achievements for the quarter and then share our views on the main issues for investors. Due to the COVID-19 situation in Shanghai, my colleagues and I are participating from home, so please bear with us if we encounter any technical issues during the call. Despite the COVID-19 resurgence and economic slowdown, we achieved steady growth in the first quarter. Our total income rose by 13.5% year-over-year to RMB17.3 billion, and net profit increased by 6.5% year-over-year to RMB5.3 billion. Our basic earnings per ADS for the quarter reached RMB2.31. In April, we distributed a dividend of US$0.34 per ADS for the first time since our IPO, and we plan to continue returning value to our shareholders. In terms of key investor concerns, we prioritize open communication and hosted over 60 investor events in the first quarter. Our data shows that about 60% of investor inquiries are focused on the macro environment and business operations, 30% on regulatory trends, and the remaining inquiries pertain to capital market developments. Generally, investors are concerned about Chinese ADRs, as many believe that panic selling has caused their valuations to disconnect from their fundamentals. Although recent statements from Chinese regulators have boosted some market confidence, most investors remain cautious and are taking a wait-and-see approach, particularly regarding our growth prospects in the current economic climate. In March, China stepped up measures to control the coronavirus, leading to lockdowns in Shanghai under the nationwide COVID-zero policy, which further affected the economic situation. The financial services sector as a whole has faced a slowdown in growth and an increase in asset quality concerns, and our business has also felt these impacts. Our analysis indicates that the effects of this year’s pandemic are more severe than those in 2020. In response, our management has proactively implemented several initiatives, including tightening our credit policies, controlling costs prudently, and enhancing cash flow management. Greg will provide more details on these initiatives later. Many investors have raised concerns regarding the progress of the April 29 ratification and the risk of ADR delisting. We have completed most of our ratification-related activities and developed detailed action plans for remaining issues. At the financial stability and development committee meeting on March 16, Vice Premier Liu He emphasized the importance of advancing the ratification of large platform companies as soon as possible. The Central Committee of the Communist Party echoed this sentiment on April 29, highlighting the need to promote regulated development of the platform economy. Based on this information, we believe that the regulatory ratification process is approaching its final phase. Regarding the delisting risk, on May 9, 2022, the U.S. Securities and Exchange Commission provisionally designated our company as an issuer under the Holding Foreign Companies Accountable Act, along with over 100 Chinese ADRs listed. More significantly, we have received positive market signals indicating that Chinese and U.S. authorities are moving closer to an agreement. During the recent Boao Forum for Asia, Mr. Fang Xinghai, Vice Chairman of the China Securities Regulatory Commission, noted that discussions between Chinese and American regulators concerning audit issues for U.S.-listed Chinese companies are progressing well, and a cooperation agreement seems possible. We are optimistic that the delisting risk will likely decrease. Turning to Lufax’s mid- to long-term development, despite the challenges presented by COVID-19, I want to remind you of our four key competitive advantages: alignment with policy direction, significant market potential, unique business model, and strong capital reserves. These advantages provide us with confidence to navigate the current economic cycle. Our alignment with policy direction is important as small- and micro-businesses are essential to the Chinese economy. They receive comprehensive policy support and show great growth potential but face challenges in obtaining funding, characterized by high costs, insufficient financial documentation, and difficulties in accessing conventional banking services. We aim to bridge these gaps through our commitment to providing inclusive financing services. The domestic market for financial services targeting small and micro-businesses is marked by high growth and low penetration. Data from the People’s Bank of China reveals that inclusive loans to these businesses grew at a 29% CAGR from 2019 to 2021, indicating significant room for development compared to developed countries where a larger proportion of loans go to small and micro-businesses. Our unique business model has allowed us to deliver integrated online-to-offline financing services tailored to small and micro-businesses for the past 18 years. Coupled with our technological capabilities, this model equips us to effectively reach borrowers and manage risks. By March 31, 2022, we had substantial capital reserves, with roughly RMB100 billion in net assets and over RMB40 billion in cash. This positions us well to endure economic fluctuations while maintaining consistent returns to our shareholders. Despite challenges posed by COVID-19 this year, we intend to keep our per ADS dividend level at or above that of 2021. In summary, despite the difficult macro environment this year, our strengths in regulatory compliance, market potential, business models, and capital reserves have strategically positioned us to navigate the current economic landscape while fulfilling our mission of supporting small and micro-business owners. We will continue to align with China's national policies aimed at fostering the growth and development of these enterprises and the broader economy. Now, I will pass the call to Greg, who will provide detailed updates on our business.

Gregory Dean Gibb, Co-CEO

Thank you, Chairman Ji. In the first quarter, we built on the solid foundations of 2021 to deliver stable operational results in an increasingly challenging environment. Cognizant of the negative impact brought by COVID resurgence, we have recently launched critical actions for the more difficult market conditions ahead. Before turning to our COVID response, let me highlight a few key figures for the first quarter. Please note that all numbers are in RMB terms unless otherwise stated. In the first quarter, we generated RMB17.3 billion of total income and RMB5.3 billion of net profit, both figures exceeding our prior guidance. The take rate in our retail credit facilitation business remained steady at 9.7% this quarter versus 10% a year ago. By the end of the first quarter, the wealth management saw stable client assets of RMB433 billion, despite volatile markets, and the revenue take rate in this business reached 53.9 basis points in March. Operational costs were held steady while we continued with technology investments to empower our direct sales productivity in loan facilitation and to optimize online customer management in wealth. In the first quarter, about 40% of our new direct sales hires for lending facilitation met our upgraded target profile for the ongoing channel transformation, while first quarter direct sales productivity for lending increased 4.8% versus a year ago. Now, turning to the resurgence of COVID, we believe the multicity lockdowns that started in March will likely have a deeper impact on the economy and our operations than seen prior in 2020. Our 18 years of experience have taught us that rapid changes in the environment require decisive preemptive steps to both minimize downside risks and to be best positioned for growth when the environment recovers. Under the current zero-COVID policy, we believe that simultaneous rolling lockdowns across multiple cities will likely remain rooted in the landscape for most of the remainder of 2022. We enter this landscape facing a weaker macro economy than in 2020. The two-plus-month lockdown in Shanghai, its inter-regional and intercontinental highways, and its supply chains are creating much larger ripple effects than those seen in Wuhan during 2020. Through the lens of our data and experience, we can now roughly profile the impact of Shanghai’s lockdown on our lending facilitation business. We forecast that entry flow rates will triple during the lockdown period, gradually returning to pre-lockdown levels six months after the lockdown ends. However, as zero-COVID policies and restrictions are constantly evolving, it’s difficult to assess the impact on other cities. Furthermore, we think it’s only prudent to assume that during the second half of the year, more cities could be placed under varying degrees of lockdown. From our vantage point, we cannot estimate the exact number of cities that could be affected, and thus the overall impact is extremely difficult to assess at this point. While uncertainties remain ahead, we are nonetheless confident that the array of measures we have implemented nationwide will mitigate the challenges posed by this operating environment. These measures include targeting higher-quality customers, providing more customized products, and improving our risk management efficiency. First, we are continuing to target higher quality customers and tightening our credit policy using a differentiated approach. On the one hand, we are gradually ceasing to serve high-risk profile customers, particularly in industries likely to be hardest hit by COVID, such as travel-related sectors. On the other hand, we’ve adopted a differentiated approach based on risk performance for geographies and channels with stronger credit performance, making smaller adjustments in response to their conditions. Second, we are providing a greater number of customized products to mitigate any potential sales losses created by our adoption of higher quality standards. For those customers who present too high a credit risk to secure unsecured loans, we encourage them to pledge collateral and apply for secured loans. For those small business owners who have higher quality risk profiles, we offer them lower APRs, longer tenure period products, and more flexible payment schedules to alleviate their financial burden and help them overcome their current difficulties. Finally, we are improving our risk management efficiency. Our collections team is equipped with our risk management system through remote working platforms and technology tools. With deep experience gained in 2020, they can work remotely to monitor borrowers' statuses, proactively identify potential loans at risk, and take immediate action on loan collection. Our proprietary data-driven collection source of 10,000 agents is deployed across ten cities. This team, together with more than 57,000 direct sales agents, is fully deployed to help manage and mitigate risks. It’s also important to note, as Chairman Ji just emphasized, that our strong balance sheet and cash position provide us with a resilient ability to overcome challenges. At the end of the first quarter, our net assets stood at RMB98.3 billion, and our leverage ratio was less than 2 times, positioning us well to handle risk fluctuations. Our credit insurance partners are also in a strong capital position to handle associated risks, although they will certainly reprice credit insurance fees as we move through the cycle. The financial strength of the underlying credit enhancement and risk-sharing that we have with our funding partners minimizes burdens during ongoing loan servicing for small business owners. We believe this enables stable funding availability during this challenging time and further distinguishes us from other platforms that may charge higher prices, encounter higher risks, and possess fewer capital resources for operational resilience. Being in a relatively strong position with solid partners will enable a faster resumption of growth once the macro environment stabilizes. While we are selectively putting on the brakes on new loan growth for prudence in the near term, we remain focused on executing our longer-term strategic priorities. The channel transformation has continued at pace in the first quarter, with our direct sales making up 57% of new sales compared to 49% in the same quarter last year, underpinning the improved productivity. Additionally, within the direct sales team, we recruited more high-quality talent and dismissed below-average performers, resulting in high quality accounting for 40% of new hires in the first quarter. We believe this proportion will continue to grow. More broadly, we noted that the regulatory environment is placing increased focus on the funding availability for the small business sector, indicating likely greater stability in regulatory requirements this year compared to the past year. Taking all these points together leads us to provide guidance for the first half of 2022; we will provide full-year guidance when we gain more clarity. Our renewed guidance in this very dynamic environment is based on the principle that it is better to be conservative early rather than later. Hence, we are revising our new loan sales growth for the first half of 2022 to decrease by 7% to 10%. For our wealth management business forecasts, we remain largely unchanged, but will monitor domestic capital performance impacting investor sentiment. We expect our first half revenue growth to be between 8% and 10% year-on-year; however, we believe the impact of the lockdowns across multiple cities, the volatility in foreign exchange rates, and the increase in credit losses we will incur will be greater than previously guided. Therefore, we estimate our net profit for the first half will likely decrease by 11% to 13% year-on-year. If non-cash foreign exchange losses are excluded from the calculation of net profit, the company expects the net profit for the first half of 2022 to decrease by 3% to 4%. As Chairman Ji mentioned, we are confident that we can successfully navigate through the current economic cycle and are committed to maintaining our 2022 per ADS dividends at or above the level set in 2021. Last but not least, our CFO James has decided to take an early retirement. James has been with the company for eight years, and we want to thank him for his great contributions. The company has begun searching for a new CFO, and during this interim period, Mr. David Siu will assume the finance function of the company. With that, I’ll turn the call over to James Zheng, our CFO, to go over the financial details. James?

James Xigui Zheng, CFO

Thank you, Greg. I will now provide a closer look into our first 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 achieved solid financial results in the first quarter, as we continue to drive growth in both the top line and the bottom line. During the quarter, our total income was RMB17.3 billion, up 13.5% year-over-year, and our net profit increased by 6.5% to RMB5.3 billion year-over-year. Let’s take a closer look at our operating numbers. First, we maintain stable unit economics for our retail credit facilitation business while further reducing our APR. Our loan balance APR was 21.8% in the first quarter of 2022, a three percentage point decline from 24.8% in the first quarter of 2021. In comparison, our loan balance take rate was 9.7% in the first quarter of 2022, only a 0.3 percentage point decline from 10% in the first quarter of 2021. Our continued efforts to diversify funding sources enabled us to maintain stable unit economics despite the decline in APR. Second, we continue to penetrate our core and targeted customer segments. On the retail credit side, we continued to focus on serving small business owners. During the first quarter, excluding our consumer finance subsidiary, 83.5% of new loans facilitated were disbursed to small business owners, up from 75.7% in the same period of 2021. On the wealth management side, despite the negative impact of P2P and online deposit product runoff, we managed to grow our total client assets by 2.7% to RMB432.6 billion as of March 31, 2022. Client assets contributed by mass affluent customers investing more than RMB300,000 increased to 81.3% as of March 31, 2022, up from 76.3% as of March 31, 2021. Third, we continue to drive for the evolution of our risk-sharing business while remaining vigilant on asset quality changes. In line with prevailing regulatory requirements, we bore credit risks for 20.4% of the new loans we facilitated in the first quarter of 2022, compared to 12.5% in the first quarter last year. All of the aforementioned operating metrics exclude those of our consumer finance subsidiary. Due to the slowdown of macroeconomic growth and the COVID-19 pandemic, we witnessed some deterioration of overall asset quality. However, thanks to our risk management system, the negative impacts on our risk indicators are limited. Excluding our consumer finance subsidiary, our DPD 30-plus and DPD 90-plus delinquency rates were 2.6% and 1.4% for the total loans we facilitated as of March 31, 2022, compared to 2.2% and 1.2% as of December 31, 2021. We will remain vigilant and prudent in our borrower acquisition and risk management strategy. Now, let’s take a closer look at our first quarter financial numbers. At the highest level, our total income in the first quarter grew by RMB2.1 billion, representing 30.5% year-over-year growth, while total expenses increased by RMB1.6 billion, or 19.1% year-on-year growth, and net income grew by 6.5% year-over-year to reach RMB5.3 billion. If non-cash foreign exchange losses were excluded from the calculations of net profit, then the year-over-year net profit change would be 2.1%. While operating related costs remain flat due to efficiencies, the total expense increase was primarily driven by credit impairment costs due to higher risk taking and increased risk and impairment provision rate relating to loans. Next, let’s go through the financial numbers line by line. As the total income mix of our retail credit facilitation payments continues to change, our total income increased by RMB2.1 billion or 13.5% year-over-year. During the quarter, while platform service fees decreased by 9.7% to RMB9.3 billion, our net interest income grew by 71.2% to RMB5 billion, and our guarantee income grew by 245% to RMB1.9 billion. Other income decreased to RMB704 million in the first quarter from RMB1 billion in the same period last year. As a result, our retail credit facilitation platform service fees as a percentage of total income decreased to 50.2% from 63.4% since consolidated trust plans provided lower funding costs. We continue to utilize them in our funding operations, enabling our net interest income as a percentage of total income to increase to 28.8% from 19.1% a year ago. Moreover, as we continue to take on more credit risks, we generate even more guarantee income, reaching 11% of total income compared to 3.6% a year ago. Our investment income decreased by 11.2% to RMB435 million in the first quarter from RMB490 million in the same period last year, mainly due to the decrease of investment assets, partially as a result of share buyback. In terms of wealth management, our platform transaction and service fees decreased by 5.3% to RMB592 million in the first quarter from RMB625 million in the same period of 2021. This decrease was mainly driven by the runoff of legacy products, which was partially offset by the increase in fees generated from our current products and services. Turning to our expenses, in the first quarter, our total expenses grew by RMB1.6 billion or 19.1% to RMB10.2 billion from RMB8.5 billion in the same period of 2021, primarily driven by the increase in credit impairment costs. Total expenses, excluding credit and asset impairment losses, finance costs, and other losses, increased by 2.7% to RMB7.2 billion in the first quarter of 2022 from RMB7.1 billion in the same period of 2021, remaining almost the same as we further improved operating efficiency. Our total sales and marketing expenses, which include expenses for borrower and investor acquisition as well as general sales and marketing expenses, increased by 5.9% to RMB4.5 billion in the first quarter. Our general and administrative expenses decreased by 15% to RMB726 million in the first quarter from RMB854 million in the same period of 2021, mainly due to our expense control measures. Our operational and servicing expenses increased by 4.5% to RMB1.6 billion in the first quarter from RMB1.5 billion a year ago, primarily due to the increase of trust plan management expenses, resulting from the rise in consolidated trust plans. Our technology and analytics expense increased by 0.2% to RMB448 million in the first quarter of 2022 from RMB447 million in the same period of 2021, mainly due to ongoing investments in technology research and development. Our credit impairment losses increased by 168.2% to RMB2.8 billion in the first quarter from RMB1.1 billion a year ago. This was mainly driven by two factors: one, an increase of provision and indemnity loss due to higher risk exposure. As a reference, including the consumer finance subsidiary, the company bore risk on 19.4% of its outstanding balance compared to 8.7% as of March 31, 2021. Two, changes in credit performance due to the impact of the COVID-19 outbreak. Our finance costs decreased by 25.7% to RMB211 million in the first quarter from RMB284 million a year ago, mainly due to the increase in interest income resulting from the rise in deposits. Additionally, our effective tax rate was 26% during the quarter of 2022, remaining consistent with the same period of 2021. Other gains were RMB118 million in the first quarter of 2022, compared to other losses of RMB138 million in the same period of 2021, mainly due to foreign exchange gains in the first quarter of 2022. We have observed that the volatility of foreign exchange rates between the renminbi and the U.S. dollar has increased, and such volatility could have both positive and negative impacts on our quarterly net profit in the future. As a consequence of the aforementioned factors, our net income increased by 6.5% to RMB5.3 billion during the first quarter from RMB5 billion in the same quarter of 2021. Meanwhile, our basic and diluted earnings per ADS during the first quarter were RMB2.31 and RMB2.14, respectively. As of March 31, 2022, we had a cash balance of RMB40.6 billion in cash at the bank, compared to RMB34.7 billion as of December 31, 2021. Additionally, liquid assets maturing in 90 days or less amounted to RMB52.1 billion as of March 31, 2022. During the first quarter of 2022, the overall economics in China were impacted by regional lockdowns. Under the current zero-COVID policy, we believe that rolling lockdowns simultaneously across multiple cities will likely remain entrenched in the landscape throughout most of 2022, thus exerting severe negative influences on the entire economy and the credit business. Given the current uncertainty, we would like to provide our revised first half guidance to account for the near-term macro headwinds, and we will provide full-year guidance when we gain more clarity. For the first half of 2022, as we adopt a more prudent approach to underwriting, we expect new loans facilitated to decrease by 7% to 10% year-over-year, to a range of RMB294 billion to RMB301 billion. Client assets are anticipated to grow by 1% to 3% year-over-year, to a range of RMB425 billion to RMB434 billion. We expect total income to grow by 8% to 10% year-over-year, to a range of RMB32.5 billion to RMB33.1 billion. Credit-related provisions will increase given the deterioration of asset quality driven by the COVID impact and higher risk exposure. Other losses are expected to rise due to foreign exchange volatility, and operations-related costs will decline as we continue to enhance our efficiency. Consequently, we expect net profit to decrease by 11% to 13% year-over-year, to a range of RMB8.5 billion to RMB8.6 billion. If non-cash foreign exchange losses are excluded from the calculation of profit, the company's expectation for the first half of 2022 would reflect a decrease in net profit of between 3% to 4%. We anticipate profit growth to pick up once the impact of channel optimization is realized, as our credit costs normalize on an annual basis. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator, Operator

Thank you. Our first question comes from Winnie Wu from Bank of America. Please go ahead.

Winnie Wu, Analyst

Thank you very much for giving me the opportunity to ask a question. So, my question is regarding the COVID lockdown. Apparently, management is being very prudent in terms of adjusting the growth target and lifting the lending standards. But I just want to ask, if the impact on loan demand is temporary, or could this lockdown lead to more prolonged damage to the demand from the SME sector, impairing the growth outlook for even 2023 and 2024? This relates to my second question regarding the impact on asset quality and impairment. Assuming the COVID situation can get under control by, say, the end of June, when do you think we will see the peak in terms of NPR formation, NPR ratio, and impairment due to the situation?

Guangheng Ji, Chairman

Thanks, Winnie. This situation with COVID is significantly different from 2020. Now, the impact covers a much larger area and has lasted longer. Back in 2020, the outbreak was confined to specific regions and didn't last long. Our credit indicators showed we would only need to address issues on a company level within three months at that time, and the overall economic conditions were much stronger. There were no supply chain disruptions, no issues with imports or exports, and no major problems in real estate, for instance. Therefore, we believe that even after the pandemic is under control, the market environment won't revert to how it was before the pandemic. With the signs of an economic downturn highlighted by various metrics since the latter half of last year, we proactively took measures starting in the first quarter of last year. We reduced over 20% of our target segments, which had a notable effect on our latest channel new sales, leading to a nearly 40% drop compared to the same period last year. However, in hindsight, we think we made the right choice. This isn't about chasing reputational goals; it's about being more cautious regarding the quality of new customers and our asset quality. There are still many uncertainties concerning the trajectory of this pandemic and its implications, which is why we are only providing guidance for the first half. However, we bring more than 15 years of experience in managing consumer credit risk. As Greg mentioned, we have over 10,000 credit staff across the country who have experience working remotely during lockdowns, supported by top-notch systems. Additionally, we have 57,000 representatives involved in offline collections to enhance our collection efforts. On the demand side, even though we are seeing a decline in the recent demand for operational loans, we are not overly worried because the market will face challenges but is expected to regain about 1% market share over time. In the long term, we believe this sector will benefit from government support and policies. Regarding the peak of our credit losses or net flow consolidation, the good news is that the peak has already passed; in April, we recorded the highest metrics concerning city entry, and we are starting to see clear improvement from May onward. I am confident that we are on the path to recovery, particularly in Shanghai.

Thomas Chong, Analyst

Hi, good morning. Thanks, management, for taking my question. I have a question regarding management strategy and how consumer sentiment impacts the business trends. Thank you.

Guangheng Ji, Chairman

On the wealth management side, we continue to concentrate on three main areas. First, we are enhancing our services for affluent and upper affluent customers by providing more content and services related to our new product offerings. With the shift in China from fixed income to NAV-based mutual funds and private placement funds, which are more volatile, we aim to deliver increased information and post-investment services. We leverage our expertise through online channels and telecom services to assist these higher-end customers in navigating the evolving market landscape. Despite a 20% to 30% decline in Asian markets, our customer base and overall client assets have remained stable. Therefore, we will persist in refining these services and offering real-time updates on portfolios to help customers diversify and improve their profile for steady returns in this challenging environment. As the markets have significantly dropped in the first half, we see potential recovery opportunities for our customers in the second half, which will allow us to further tailor our product offerings for this target segment. Additionally, we are increasing our focus on insurance products, as we've been adapting to these changes for over a year. With our average customer age around 39, pension-related issues are becoming increasingly relevant, representing a valuable business margin. Overall, we will continue to advance our online initiatives, pursue new customer growth, focus on the upper segment, and adjust our product mix to improve our overall business margin. At the end of March, our performance showed about 53 to 54 basis points in income over total client assets, marking a significant improvement from the previous year. This is an area we will prioritize for long-term growth.

Hans Fan, Analyst

Sure. Thanks for giving me this opportunity to ask a question. My query mainly pertains to the progress of the direct sales reform. As we know, Lufax launched the initiative to reform the direct sales team last year. I’m wondering about the current progress and how long we should expect this reform to be largely completed. Also, as a follow-up question, can you provide the breakdown of customer acquisition percentages coming from the access team, the insurance team of Ping An, and from telephone sales?

Guangheng Ji, Chairman

Thanks, Hans. In the first quarter, new sales through the direct sales channel decreased by nearly 40% compared to the same time last year, now contributing about 20%. In contrast, the contribution from direct sales has increased by approximately 10%, making up 57%. For the channel mix, life sales account for about 20%, while direct sales comprise nearly 60%, with the remaining 20% coming from telemarketing, especially for re-borrowing among ETDC customers. This reflects our current mix. Before discussing the direct sales reform, I want to clarify the situation regarding the life channel. We implemented several risk mitigation measures starting in the first quarter of 2020, so the 40% drop in first-quarter sales this year, while significant, was expected due to our strategy. When assessing new customer quality in the life channel from the first quarter of 2020, we took action to evaluate this quality using DPD 1-plus as MOV3. Currently, DPD 30-plus at MOV3 statistics are slightly better than those of the access channel, which is a positive sign. The total number of life agents has remained stable without significant decline, and we anticipate greater contributions to new sales moving forward. Concerning the direct sales reform, this is an ongoing process that requires time. As of the end of March, we have a total of 57,000 direct sales personnel, including team leaders and supporting staff, which is unchanged from last year. While the number of direct sales has remained steady, the sales volume has increased by nearly 10%, showing continuous improvement in our direct sales products. We are tightening sales policies and narrowing our target market to enhance asset quality while still focusing on optimizing our sales mix. We seek to attract more high-yield new sales, which have retention rates that are twice as high as standard sales and show over 20% higher productivity compared to other sales models. We are emphasizing how to boost new sales growth relative to previous targets and adjust the mix of organic sales. As Greg noted, recent hires represent over 40% of total new hires in comparison to last year. We are making progress and enhancing our sales capabilities through increased technology and upgrades to improve efficiency. We are gradually transitioning to middle-tier positions, which constitute about 10% of total sales personnel, to further enhance our sales productivity. Our focus remains on strengthening the direct sales team during this ongoing reform, setting a foundation for sustainable growth potentially in the coming year after we navigate this phase.

Chen Yu, Head of Board Office and Capital Markets

Thank you everyone for joining the conference call. If you have more questions, please do not hesitate to contact the company’s IR team. Thanks again. Bye-bye.

Operator, Operator

Ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect the line.