LexinFintech Holdings Ltd. Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to LexinFintech’s First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. I must advise you that this conference has been recorded today. I would now like to hand the conference over to your speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you. Please go ahead, sir.

Thank you, operator. Hello, everyone and welcome to Lexin's first quarter 2020 earnings conference call. The Company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer; Mr. Craig Zeng, our Chief Financial Officer; Mr. Ryan Liu, our Chief Risk Officer; Mr. Stanley Zhou, our Senior Financial Director; and other members of our team. For today's agenda, Mr. Xiao will provide an overview of our recent performance and highlights, Mr. Zeng will discuss our financial results, and Mr. Liu will discuss our credit performance. Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also please note that this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi. I will now turn the call over to our CEO, Mr. Xiao, whom I will translate for.

Hello everybody. It’s certainly unusual circumstances in the environment created by the COVID-19 outbreak that led us to release our first quarter 2020 results. Lexin's cloud business operating metrics continue to be stable. We achieved our loan origination target for the first quarter. Our user numbers, revenues, and other core metrics continue to show healthy and strong growth rates. In the first quarter, Lexin facilitated 34.1 billion yuan in loans, a 69.5% increase, exceeding our previous target of 32 billion yuan. Registered users reached 84.2 million, up by 99.7%, achieving a record high. By the end of the first quarter, the outstanding loan balance reached 58.5 billion yuan, an increase of 67.2%, and first-quarter revenues reached 2.5 billion yuan, a 40.9% year-on-year increase. During the ongoing pandemic, we chose to adopt a more prudent and stable policy towards asset management, aiming to maintain stability in our operations and growth. We proactively reduced costs and fees to support the recovery and growth of our ecosystem, investing a total of 340 million yuan. Additionally, we donated 15 million yuan to pandemic relief efforts. Responding to the government’s call, we issued 25 million yuan worth of consumption coupons while maintaining stable operations. We allocated 900 million yuan to prepare for the pandemic's impact, which led to a first quarter loss of 678 million yuan. Provisions are not the same as losses; they represent the company's preparations for potential pandemic consequences. If actual losses are lower than our provisions, some amounts will be written back over time. This positioning will benefit the company in the future and promote stable development. We believe that during the pandemic, no one can succeed alone. By working together with our partners through this challenging time, we can emerge with a sustainable and positive outcome. We have accepted our responsibility to our customers, partners, and society. While our short-term accounting profits may be impacted, the measures we are taking to aid our ecosystem's recovery post-pandemic will lead to enhanced user growth and activity, better protection for our funding partners, and ensure stable long-term business growth. This aligns with our core values of generating long-term value. In the first quarter, our new consumption platform strategy continued to perform well, generating user growth, scale, and revenues, alongside installment consumption. Lexin’s online and offline consumption scenarios generated 10.5 billion yuan in transactions, marking a 337% increase, with offline scenarios accounting for 9.3 billion yuan, up by 1239%. We anticipate even stronger growth in the second quarter. April's offline transactions rose by 12.7% month-on-month compared to March, and May's transactions increased by 17.8% compared to April, showing consistent growth each month. Our membership benefits program, which includes various member-related products, has served customers nearly 2 million times and yielded a repeat rate of 63.5%. In the second quarter, the increases in our membership benefit programs across members, usage types, and transactions in April were 141%, 260%, and 846%, respectively, month-on-month. Under our stable risk control policy, our overall asset quality remains stable with reduced risk. First-quarter 90-day delinquencies reached 2.57%. As we enter the second quarter, asset quality trends continue to improve. Our first quarter seven-day delinquency rate was 3.7%, recovering alongside the domestic Chinese economy. Currently, our seven-day delinquency rate has decreased to 2.77%, returning to pre-pandemic levels. This strong performance has helped us gain the trust of even more partners. The total number of funding partners continues to grow. The worst of the pandemic in China appears to be over, with both consumption and employment recovering rapidly, and our business has now returned to pre-pandemic levels. In the second quarter, we expect loan originations to surpass 38 billion yuan, a 46% increase. We also anticipate returning to profitability in the second quarter. We are confident in our ability to meet our full-year guidance of 170 billion to 180 billion yuan. New consumption and new infrastructure are becoming the twin engines driving economic recovery. This year, the government’s work report outlined a strategy to expand domestic demand, boost consumption recovery, and encourage financial technology firms to reduce financial service costs. The CBIRC has issued draft guidelines for feedback on the loan facilitation model, reinforcing the value and importance of Internet finance platforms in society. In a recovering consumption environment paired with favorable regulatory policies, we will expedite the advancement of Lexin's new consumption platform strategy, creating greater opportunities for growth and expansion. Next, I'd like to invite our CFO, Craig, to discuss our recent financial performance.

Thank you, Jay, and hello everyone. I'm pleased to announce that we have once again delivered strong growth in our business, as reflected in our strong loan origination volume. Before we begin our discussion of our underlying business, the performance for the first quarter of 2020, I would like to first discuss our recent accounting policy change, the adoption of CECL. As we had already disclosed and noted a few months earlier in our 2019 year-end results, we fully expected CECL to have a material impact on our financials for this year. And today everyone can see the impact on not only our results, but also the results of our peers. As many of you have probably noted as well, we had also disclosed many additional details in our 20-F specifying the impact of our accounting change and have previously communicated with many of you on the likely material impact and how to potentially view and adjust forecasts accordingly. In the interest of time, given the fact that we and more recently, many of our peers have already described and provided many details on the accounting change and its full impact, we will just provide a high-level overview of our impact of the change. The CECL guidance replaced the existing incurred loss methodology. And it reduced our forward-looking expected loss approach known as the current expected credit loss (CECL) methodology. Under the incurred loss methodology, credit losses are recognized only when the losses are probable or have been incurred. For guarantees within the scope of the ASC 326 and subject to the CECL methodology, many of you are already fully aware that from a high level perspective, the main difference between the new and the old accounting standard is essentially a timing difference. Under the new accounting standard, guarantees are required to be recognized over time through the amortized schedule over the life of the off-balance sheet loan and recorded in a separate financial statement line item. Meanwhile, the provision for the contingent liability for the loan would be recorded as a whole immediately at the inception of the loan in another separate financial statement line item. This is in contrast to the old accounting standard where we only needed to book the guarantee liability once. Many of you are probably already aware that this change in accounting has no impact on the underlying profitability of our loans. It is simply a timing change in the recognition of the revenue and profit from the loan. You should know that the change in accounting also does not change our underlying business and is not indicative of changes to credit performance or asset quality. In terms of asset quality, the underlying assets remain the same quality with similar provisions facing the same circumstances. However, as a company that is continuing to grow rapidly, the new accounting standard— which requires the recognition of provisions for contingent liabilities to be recorded upfront as a whole—effectively penalizes faster growth, at least in the short term, by producing higher provisions on the P&L relative to the old standard. It should also be noted that under the new accounting standard, we are not encountering any impact on our accounting treatment for financial guarantee derivatives. In the first quarter, we also faced unique challenges as a result of COVID-19. Due to COVID-19, we believe that our financial performance could be potentially negatively impacted by the pandemic in the foreseeable future. This, combined with the fact that the CECL lifetime methodology required us to take into consideration all macroeconomic variables, and particularly the impact of the ongoing COVID-19 pandemic on the economics, means that we had to incur additional costs. As a result of this combination of CECL and COVID-19, and in accordance with the new accounting requirements, we took a position that is consistent with ongoing uncertainties in the markets. When it comes to our provisions, guarantee liability, and financial guarantee derivatives, we incurred an additional RMB0.9 billion in additional costs and the related charges due to the combination of CECL and COVID-19. Now let's return to our financials. In the interest of time, I will not go over line item by line item of our P&L. For a more detailed discussion of our first quarter results, please refer to our earnings press release. Total operating revenue for the first quarter reached RMB2.5 billion, driven by strong growth in our financial service income, which reached RMB2.0 billion, of which loan facilitation and service fees accounted for RMB1.05 billion. Adjusted net loss was RMB596 million, reflecting our continuing strong growth and performance, excluding the impact of the pandemic. Fully diluted adjusted net loss per ADS was RMB3.31. We continue to see the future potential of our business model. The performance of the customer cohort we acquired in the first quarter of 2015 has a balance of RMB12,684, with a 30-day delinquency rate of approximately 1.4% and quarterly active rates of 30.9%. Regarding our operating leverage, operating expenses as a percentage of the average loan balance was 3.1% for the quarter. Non-advertising, marketing, advertising, G&A, and R&D were 0.7%, 0.9%, 0.7%, and 0.8% of the average loan balance, respectively. We currently have 84.2 million registered users and 20.7 million customers with credit lines, up from 19.4 million on December 31, 2019. We acquired nearly 965,000 new active customers in the first quarter. Overall, our average credit limits are RMB9,117 while our average tenor is now 10.7 months, and our weighted average is 27.1%. In terms of our funding, for the quarter, no funding for new loan origination came from the Juzi Licai platform, and all of our funding for new loan origination came from our institutional funding partners. The ongoing COVID-19 outbreak has brought many challenges to our business, but we are now seeing a gradual recovery. We believe that, with the gradual recovery and the determined effort of our team, we may still be able to achieve our previously stated guidance for the year. Next, Ryan will discuss our credit situation. Ryan, please.

Thank you, Craig. In spite of the challenging conditions in the markets arising from the ongoing COVID-19 pandemic, we were able to maintain credit quality at expected levels and have seen marked improvement in our leading credit statistics indicating that we could improve in the second half of the first quarter. We fully expect our credit statistics to continue to improve over time and perform at expected levels. Our 90-day plus delinquency ratio is currently at 2.57%, and we continue to see stable credit performance as our lifetime charge-off ratio is around 3%. As stated in the past, due to the ongoing COVID-19 pandemic and the high number of new customers we acquired in 2019, we expect the vintage charge-off ratios for our loan book to increase to approximately 3.5% to 4.5% over the course of the next few months before improving in the third quarter. This is consistent with our previous statements and in accordance with our expectations. We fully expect our stable credit performance to continue in 2020. Initial paths have been noted, and as many of you are already fully aware, certain credit statistics are effectively leading indicators. With that, I conclude our prepared remarks. Operator, please proceed with the question-and-answer session.

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. We have the first question from Jacky Zuo with China Renaissance. Please go ahead.

I will translate my questions. I have three questions. First, regarding our loan origination outlook, what are our underlying assumptions for our loan origination targets in the second half? Will we be increasing our customer acquisition efforts? Can you also provide the loan volume for April and May? Second, concerning asset quality, our CFO mentioned an additional provision of around RMB900 million in the first quarter. Could you detail where we can find these additional provisions in the profit and loss statement, and which item contains these details? Additionally, what are the vintage loss assumptions we used in the first quarter? Finally, regarding the ADR issue, considering the U.S.-China tensions, many investors are worried about the ADR listing. How is management addressing this concern? Thank you.

Just wondering if you can give us some details on where we can find these additional provisions in the P&L, and in which item we can see the details? Following on that, what vintage loss assumptions are we using in the first quarter? Lastly, regarding the ADR issue, given the U.S.-China tension, many investors are concerned about the listing issue of the ADR. How is our management addressing this issue? Thank you.

So Jacky, on your question about our guidance and whether or not we can achieve certain things, obviously, as you know, in the first quarter we guided for RMB32 billion. We exceeded that. We achieved RMB34 billion, and this is, of course, under very difficult conditions. Nevertheless, we did very well because we have a lot of channels. It’s interesting to note that we have a lot of channels. We have online, offline, and the offline goes offline. So we managed to rely on both online and offline solutions. Nevertheless, we still achieved and exceeded our targets. And for the second quarter, as you see from the press release, we've given a target of RMB38 billion. So needless to say, for the full-year, we're pretty confident for a few reasons, one of which is that we have diversified our customer acquisition methods. This includes ads, referrals, natural traffic, and we have e-commerce both online and offline. Essentially, even within one channel, we have multiple methods. So we have room and we can adjust, and hence, we're pretty confident in our ability to execute on this. In fact, on the customer acquisition, we have a very large customer base. We have over 20 million customers, and there’s plenty of value and room to develop there. The customers we acquired last year have shown real growth in this space. So hence we already have a very strong fundamental base to grow. The third reason is that we've managed to maintain asset quality, and we’ve adjusted our model accordingly. Looking at the underlying situation, we have a balanced and healthy portfolio. For the second half, in light of the situation, we are planning to strengthen our growth. You can see that in the first quarter, our marketing expense has been adjusted, and it has gone down, leaving room that we will apply that to the second half of the year to grow.

We have a very strong fundamental base to grow. The third reason is that we've managed to maintain asset quality and adjusted our model accordingly. Looking at the underlying situation, we have a balanced and healthy portfolio. For the second half, in light of the situation, we are planning to strengthen our growth. You can see that in the first quarter, our marketing expense has been adjusted and it has gone down, allowing us to apply that savings to the second half of the year to grow.

Regarding the RMB900 million provision, as you know, there is the ongoing pandemic and we believe that, to be conservative, we should have this. In terms of the exact details on where to find it, Craig will describe it later. Overall, as you know, the credit trends and what we're heading towards, we're still pretty stable as we mentioned before, and we are consistent on this. We believe the final vintage charge-offs will be about 3.5% to 4.5%.

Tony Hung, Senior Director of Capital Markets, mentioned that regarding the RMB900 million provision, the ongoing pandemic has influenced the decision to adopt a conservative approach. Craig will provide more specifics later. Overall, the credit trends remain stable, and this consistency is important to note. The final vintage charge-offs are expected to be approximately 3.5% to 4.5%.

Continuing from where Ryan mentioned, due to our on-balance and off-balance sheet model with different guarantee liabilities, it is not as straightforward as simply adding one line to another for modeling. We will ensure we provide guidance in the future. Fundamentally, we have various funding partners with different requirements based on their contracts, which auditors review in different accounts. Regarding the ADR issue, following the U.S. Congress legislation, there have been market concerns that we have heard from some shareholders and investors. The Hong Kong listing is a possibility—many companies are considering it and some have already done so. We are evaluating this option among several others. For example, an article noted that only 22 companies currently qualify, and fortunately, we are one of them. We will keep assessing the situation. When the time is right, we will take necessary steps to protect our investors and shareholders, as this is very important to us. If necessary, we’ll consider a Hong Kong listing, which we are examining very carefully.

Thank you.

Thank you. Can we move to the next question, sir?

Please do.

Yes. The next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please go ahead.

My question is about the customer acquisition strategy. As Jay mentioned, there are multiple channels for acquiring customers. I am curious about how we will approach our strategy across these different channels in the next couple of quarters, especially considering our focus on credit risk management. Thank you.

So my question is about the customer acquisition strategy. As Jay mentioned, there are multiple customer acquisition channels. I'm just wondering how we assess our strategy across these different channels in the coming quarters, considering our emphasis on credit risk management. Thank you.

So Eddie, I think you fully understand, but for everyone's benefit, different channels will definitely have different quality customers. The offline channels as a whole have lower risk and also have a higher contribution in the long term. We can get a better understanding and a more appropriate assessment of the credit risk for offline customers, allowing us to give them more appropriate amounts of credit. Online inherently is riskier, with higher incidences upfront. However, we have a strong risk control system and accurate assessments of our customers. When we assess risk, we consider these levels and adjust accordingly. The first and second quarters were affected by the pandemic, thus impacting our customer acquisition channels, particularly the offline sector. We can see that our customer acquisition is recovering very strongly. Offline channels are set not just to recover but will increase versus last year as we plan to acquire more customers in the second half of the year. Another method will be our platform, where we help other platforms sell products including several large platforms like QQ Music. And our Black Card product is also a priority that channels a lot of customers through offline routes. These three areas should all be stronger this year. Ads will be adjusted to determine the effectiveness of customer acquisition, corresponding to online traffic, and adapting our strategy.

Thank you very much, Tony and Jay.

Thank you. We have our next question from the line of Alex Ye from UBS. Please go ahead.

I will briefly translate my question. My first question is about the company's business model regarding partnerships with financial institutions. As we know, Lexin typically includes a portion of its loan volume through a non-guarantee model, where revenue is shared with financial institutions without providing guarantees. I'm curious about the percentage of this risk-sharing business in Q1 loan volume and our targets for the next one to two years. My second question concerns our take rate trend. I've observed a decline in the Q1 take rate. Are there additional factors that contributed to a lower take rate during the first quarter? I noted you mentioned waiving fees and interest of about RMB340 million related to COVID-19. How much of this has been reflected in our Q1 revenue? Lastly, what is the competitive landscape regarding our Le Hua Card? I've noticed that more peers are offering similar products that link their credit lines to retail payments. Can management provide insights on how we can compete in this increasing competition? Thank you.

Are there any other reasons that contributed to a lower take rate during the first quarter? I noted you mentioned waiving fees and interest of around RMB340 million related to COVID-19. How much of this has been reflected in our Q1 revenue? Lastly, what's the competitive landscape regarding our Le Hua Card? I've noticed more peers are offering a similar product linking their credit line to retail payment. Can management share some insights on how we can compete in this increasing competition? Thanks.

So on the first question, the loan facilitation model, particularly the non-guarantee model, is an important strategic direction for the company this year. There are several benefits, most notably that we do not have any cash requirements, and we do not need to set aside reserves at banks. It's a straightforward process where we ultimately get a revenue share of roughly 30% to 35%. This model made up about 26% of our funding in the first quarter, and it's currently about 30% of our funding. Our goal is to have this reach 50% by year-end. Another reason this is so important is that, as seen in our graphs, this is welcomed by financial institutions and regulators, guiding us towards our growth direction. Regarding the Le Hua Card, we were the first company to offer this type of product. The idea of opening our credit line to offline users has proven successful, resulting in about 1 million daily transactions and 10 million customers using it. We're the clear leader in this market. However, I acknowledge there are challenges and barriers due to transaction stability and the relationships with funding partners who are also crucial for this success. With good product offerings, we attract competition, and we're confident in our ability to provide better services to retain customers. Our customer acquisition and risk control will maintain our edge over competitors. Finally, we welcome others to grow the market with us; competition is natural, and together we can develop the market.

I acknowledge there are challenges and barriers due to transaction stability and the relationships with funding partners who are also crucial for this success. With good product offerings, we attract competition, and we're confident in our ability to provide better services to retain customers. Our customer acquisition and risk control will maintain our edge over competitors. Finally, we welcome others to grow the market with us; competition is natural, and together we can develop the market.

On your second question about take rate trends, the long-term outlook is stable. We feel the key to our profitability will depend more on the scale of our business than on the take rate. That said, the take rate should be stable long-term as we focus very much on long-term growth rather than short-term gains. In terms of funding costs, we began at 8-9% with P2P funding. We took a long-term view by expanding to more partners, starting with higher funding costs at banks while developing a more revenue-sharing model. Over time, we target to get to an 8-9% funding cost, similar to P2P rates. While we may have to give up some profitability to lenders, we believe our take rates will stabilize as we scale our growth and profitability.

Yes, sir. The next question comes from Martin Ma from Nomura. Please go ahead.

My first question is about the statement in the first quarter report regarding an additional RMB0.9 billion in credit costs due to the settlement of the impact from the COVID-19 pandemic, particularly in the Chinese and global economy. As we approach the second quarter, though the pandemic is not over, it has been largely controlled in China. My second question concerns a new line on the balance sheet titled deposits to insurance companies and guarantee companies. I would like to understand how this differs from restricted cash and restricted time deposits. The third question relates to the PPT released on the website, especially on Page 13, where the funding cost for this quarter is around 8%, which contrasts with the 9.7% reported in previous investor PPTs. Can you explain the reason for the 2% difference between the current and past disclosures? Thank you.

There is a new line called deposits to insurance companies and guarantee companies. I'm curious about this line and how it differs from restricted cash and restricted time deposits. The third question pertains to the presentation released on the website, particularly on Page 13, where the cost of funding for this quarter is around 8%, which is different from the 9.7% seen in previous investor presentations. Can you clarify the reason for the 2% difference between the current and past disclosures? Thank you.

Regarding the special provisions, we consider the U.S. situation, the global situation, and China's situation. This is likely a one-time event. We do not foresee a reason to do this again in the second quarter.

The cost of funding for this quarter is around 8%, which is different from the 9.7% seen in previous investor presentations. Can you clarify the reason for the 2% difference between the current and past disclosures? Thank you. We consider the U.S. situation, the global situation, and China's situation regarding the special provisions. This is likely a one-time event. We do not foresee a reason to do this again in the second quarter.

On your question regarding deposits with the insurance and guarantee companies, this can be viewed as kind of restricted cash. It's a reflection of different funding models we have with partners. If a funding partner does not want us to leave cash in the bank, they may require us to leave money as a deposit at an insurance or guarantee company. So that’s essentially a reflection of that.

So basically, if we add back the other things that we've taken out, such as guaranteed costs, where would that take us?

Craig's answer was, you can't precisely calculate that as it depends greatly on the funding partner, their requirements, and the model. If the partner does not require an external guarantee, then that gives a certain number, but if they require a guarantee from an external party that typically charges, it might increase costs by 1%. It truly depends on various factors and might not give an accurate picture.

Thank you. Can we move to the next question, sir?

Absolutely.

Yes. The next question comes from the line of Sanjay Jain from Aletheia Capital. Please go ahead.

Hi, everyone. Thanks for the presentation. Two quick questions—first one may not be so quick depending on you. So as I understand, you have four categories or types of loans within your loan book, which are subject to three different types of accounting policies. It's complex, but I don't know how my friends on the sell-side and buy-side are doing the numbers. Trying to work out full-year numbers is incredibly complex, perhaps unnecessarily so. Can you provide us with a framework or a way to figure out how the full year will look and maybe next year? My back of the envelope suggests the same profit number as last year. Can you help us with something to go on?

Yes, Sanjay. We need to organize a modeling day with everyone in the future. As you pointed out, this situation is very complicated. Therefore, we will definitely work on setting this up. Let me also translate your question for the team.

We need to do something like a modeling day with everyone in the future. As you mentioned and correctly, this situation is complicated to say the least. Hence, we’ll definitely look into setting this up accordingly. And let me translate your question for the team.

Sanjay, you're absolutely right, and it's not only you. Everyone is facing these issues, and it’s a complex situation that's been changing due to SEC shifts regarding accounting. But based on what we've heard, there's no current reason to believe further changes will complicate things. In the long term, I hope things will stabilize and become clearer. We'll eventually shift to a model where banks take on the reserves, simplifying the situation. In the short term, we agree it is complex, and we do not wish this complexity upon anyone. We’re aiming to provide a formal modeling day shortly to help our investors understand the numbers and provide better clarity.

Okay, thanks. My second question concerns risk transfer loans. Legally, on paper, banks take the reserves; however, I know you have expressed skepticism regarding true risk transfer. Who are the partners that do these loans with you as opposed to loan facilitation? Are they the same lot, and what do they see? Are you giving them better economics on a risk transfer loan compared to the previous model? Are they motivated to take the risk?

Okay, no problem, Sanjay. Let me translate that for you first.

Okay. No problem, Sanjay. Let me translate that for you first.

Firstly, as a fintech company, we must be responsible while addressing this topic. Unlike previous statements from others, you cannot merely cost transfer risk to banks; it doesn’t work that way. Collaboration is essential for risk sharing. The banks trust you to manage risk effectively. The banks will do so if they believe in your risk control abilities and the quality of the assets. Regarding funding partners— we collaborate with banks, consumer finance companies, and trusts. Often, we engage with these partners under different models: one where they assume the reserves, and another where we do. Typically, in standard models, if a loan generates a 24% APR, the funding partner may take an 8% cut, and we would get the remaining 16%. If banks assume risk reserves, they stand to profit more so long as risks are accurately assessed. This model of shared responsibility allows better economics for both sides. If the terms fail, we would no longer receive that revenue share, nor would we collaborate.

So to clarify, the risks are entirely on the bank. There is no liability returning to you?

Yes, it’s a revenue-sharing model, where banks take the risk. According to our contract, if things go south, the worst-case scenario for us is that we don’t receive the revenue share and the cooperation ceases.

The risks are entirely on the bank. There is no liability returning to you? Yes, it’s a revenue-sharing model, where banks take the risk. According to our contract, if things go south, the worst-case scenario for us is that we don’t receive the revenue share and the cooperation ceases.

Can we move to the next question? The next question comes from the line of John Cai from Morgan Stanley. Please go ahead.

I have several questions regarding our business operations, provisions, and future risk targets. Firstly, I want to follow up on the profit share in our revenue-sharing models. What type of APR assets are we currently transferring the risk to our funding partners? I've heard that individual borrowers may have varying risks for different loans, with some secured by guarantees and others by risk sharing. What is our approach to this? Additionally, how much of the Lehua Card's impact is attributable to new customers, as I previously understood it mainly served existing ones? Finally, what is the customer contribution from the Lehua Card, and what does the outlook look like for new customers?

At the end of April, we are currently transferring the risk to our funding partners. I understand that a single borrower might have varying risks associated with different types of loans, some backed by guarantees and others through risk sharing. What’s our approach regarding that? How much of the Lehua Card's impact comes from new customers, given that it primarily served existing customers in the past? Lastly, what is the customer contribution from the Lehua Card, and what are the prospects for acquiring new customers?

On revenue sharing, you might see quite similar pricing. The rates aren't essentially different; it depends on the customer and the financial institution providing financing. The Lehua Card will also become a core part of our customer acquisition strategy this year. If you run commercials for loans, you might see one result. However, we've found that with the Lehua Card, it ties better into various platforms and spending categories, giving it a better ROI. Conclusively, it’s advantageous and contributes positively to our acquisition strategy.

A quick follow-up: was the RMB10 billion transaction mentioned solely from the Lehua Card?

No, that amount includes various products, not just the Lehua Card. The contributions are quite substantial.

Thank you.

I will translate my questions. My first question regards customer acquisition numbers from Q1. I wonder how much came from organic means versus channel partnerships. Also, do you have a target mix for loan contributions from repeat borrowers versus new borrowers on a full-year basis? Given your proactive approach to customer acquisition in the second half, do you still expect significant year-over-year growth in new borrowers? My second question concerns funding. After the new regulation on online lending in early May, have you seen trends change regarding partnerships with banks? Are larger banks more willing to partner with you now? Also, do you anticipate downtrends in funding costs, and do you have guidance on that? Thank you.

Given the proactive approach to customer acquisition in the second half, do you still expect significant year-over-year growth in new borrowers? My second question concerns funding. After the new regulation on online lending in early May, have you noticed any changes in trends regarding partnerships with banks? Are larger banks more inclined to partner with you now? Additionally, do you foresee any downtrends in funding costs, and do you have any guidance on that? Thank you.

In Q1, our new customer growth primarily came from natural traffic. The new customers contributed about 20% to loans in Q1, less than last year. This year, we expect organic growth to recover as the market conditions improve. The projections for new customer growth should normalize more toward previous levels. Concerning banks, yes—big, small, all sizes are looking to work with us. We observe a lot of cooperation initiatives driven by a positive trend in funding and opportunities to lower costs. Banks like ICBC have collaborated with us for a long time, and many are proactively offering lower rates for access to our asset base. We are seeing numerous instances where funding costs have been negotiated down by about 50 basis points. Overall, wide-ranging cooperation is evident in the current macro environment, offering favorable conditions for us.

Okay. That's very clear. Thank you.

As there are no further questions, I would like to turn the conference back to presenters for any closing remarks.

Thanks, operator. That concludes the conference call. Thank you all for participating. You can all disconnect.

Thank you, ladies and gentlemen. That concludes the conference for today. Thank you for participating. You may all disconnect. Thank you.