Earnings Call Transcript - LX Q4 2020

Operator, Operator

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

Tony Hung, Senior Director of Capital Markets

Thank you, operator. Hello, everyone, and welcome to Lexin's fourth quarter and full-year 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. Yang Qiao, our Vice President; Mr. Stanley Zhao, 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. Zhao 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 discussion 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.

Jay Xiao, CEO

I will now turn the call over to our CEO, Mr. Xiao, whom I will translate for.

Tony Hung, Senior Director of Capital Markets

In the fourth quarter, Lexin's bank technology loan facilitation model achieved significant growth. As a percentage of new originations, our risk-free pure technology service model reached 50% of total new originations for the very first time. We are creating a comprehensive technology service system that will cover all aspects of customer acquisition and operations, enabling financial institutions to immediately and seamlessly integrate with our system. On this basis, fourth quarter platform revenues reached RMB720 million, an increase of 232%. For the full-year, platform revenues reached RMB2 billion, an increase of 150% and increased as a portion of total revenues to 17.5% versus 7.7% from a year ago.

Jay Xiao, CEO

We are creating a comprehensive technology service system that will cover all aspects of customer acquisition and operations, enabling financial institutions to immediately and seamlessly integrate with our system. On this basis, fourth quarter platform revenues reached RMB720 million, an increase of 232%. For the full year, platform revenues reached RMB2 billion, an increase of 150% and increased as a portion of total revenues to 17.5% versus 7.7% from a year ago.

Tony Hung, Senior Director of Capital Markets

In the fourth quarter, Lexin generated loan originations of RMB53.2 billion. Our non-GAAP net income reached over RMB600 million, and total loan originations last year reached RMB176.5 billion, representing a year-on-year increase of 40%. Revenues were RMB11.6 billion. We've also recorded our sixth consecutive quarter where new registered user growth reached 10 million. In addition, quarterly active users reached 8.2 million, a new record high for us. And as of the end of 2020, Lexin's total registered users reached 118 million, representing a year-on-year increase of 61%.

Jay Xiao, CEO

Foreign Language

Tony Hung, Senior Director of Capital Markets

So as a result, I'm pleased to announce to everyone that in the face of a complex macro environment, we successfully executed our new consumption strategy, achieving once again good results. Our To Bank financial technology services has achieved high-quality growth. Our To Business products, Yuehui, Maiya and other new products are rapidly gaining recognition and opening a new avenue for growth, which will continue to firmly establish our position as a leader in the industry.

Jay Xiao, CEO

I am pleased to announce to everyone that in the face of a complex macro environment, we successfully executed our new consumption strategy, achieving good results once again. Our financial technology services have achieved high-quality growth. Our products, including Yuehui, Maiya, and other new offerings, are rapidly gaining recognition and opening a new avenue for growth, which will continue to firmly establish our position as a leader in the industry.

Tony Hung, Senior Director of Capital Markets

Our asset quality continues to improve. Our 90-day delinquency declined from 2.6% in the third quarter to 1.95% in the fourth quarter. New loans made in the fourth quarter are currently exhibiting even better levels of credit quality than loans made in 2018.

Jay Xiao, CEO

Our new products are rapidly gaining recognition and opening a new avenue for growth, which will continue to firmly establish our position as a leader in the industry. Our asset quality continues to improve. Our 90-day delinquency declined from 2.6% in the third quarter to 1.95% in the fourth quarter. New loans made in the fourth quarter are currently exhibiting even better levels of credit quality than loans made in 2018.

Tony Hung, Senior Director of Capital Markets

Even while our financial technology service business continues its rapid growth and development, we are also establishing a new consumption ecosystem and expanding our potential customer base from 120 million to the 500 million new consumption consumers. Our business scope will expand from installment loans to cover the larger new consumption market. We will establish ourselves as a new consumption digital technology service provider and we have confidence that our many years of accumulated technology capabilities and operational experience in the financial technology sector will ultimately enable us to find opportunities and succeed in the larger new consumption market.

Jay Xiao, CEO

We aim to grow our customer base from 120 million to 500 million new consumers. Our business will extend from providing installment loans to covering the broader new consumption market. We plan to position ourselves as a digital technology service provider for new consumption, and we believe that our extensive experience and technology capabilities in the financial technology sector will help us identify opportunities and thrive in this expanding market.

Tony Hung, Senior Director of Capital Markets

Yuehui has already established working relationships with hundreds of merchants, including movie theaters, restaurants, shopping centers and hotels, totaling over 10 different industries and sectors and has been recognized by 17 industry associations in their consumption documents and proposals. Maiya is now online and operating within our Fenqile e-commerce platform. And we estimate that in the first month, we will generate approximately RMB50 million in GMV with strong potential growth in the second quarter.

Jay Xiao, CEO

We have built strong working relationships with hundreds of merchants across various industries, including movie theaters, restaurants, shopping centers, and hotels, and have received recognition from 17 industry associations in their documentation and proposals. Maiya is now live and functioning on our Fenqile e-commerce platform. We anticipate generating around RMB50 million in GMV in the first month, with significant growth potential in the second quarter.

Tony Hung, Senior Director of Capital Markets

Following the pandemic, the economy has continued to recover and grow rapidly, and we now see even more growth opportunities. Based on the strong growth and improving asset quality that we are seeing in the first quarter, we are raising our full-year 2021 loan origination guidance to RMB240 billion to RMB250 billion, representing a year-on-year increase of approximately 40% versus our 2020 numbers.

Craig Zeng, CFO

Thank you, Jay, and hello, everyone. I'm pleased to announce that we have once again delivered strong results. In the interest of time, I will not go over line item by line item of our financials. For a more detailed discussion of our fourth quarter and full-year 2020 results, please refer to our earnings press release. Total operating revenue reached RMB11.6 billion for 2020, and the credit-oriented service income reached RMB7.5 billion. Platform-based service income reached over RMB2 billion, representing an increase of 150% from 2019. Adjusted net income was RMB903 million for 2020. Fully diluted adjusted net income for the quarter per ADS was RMB2.93. Our operating leverage. Operating expense as a percentage of average loan balance was 3.1% for the quarter, and non-advertising marketing, advertising, G&A and R&D was 0.7%, 1.2%, 0.7% and 0.5% of average loan balance, respectively. As Jay mentioned, we currently have 118 million registered users and our customers with credit line reached 27.7 million, up by 43.2% versus December 31, 2019. We acquired nearly 6.1 million new active customers in 2020. For the last quarter, our average tenor was 12 months. Our nominal APR was 16.1%. Next, we will discuss our credit situation.

Jay Xiao, CEO

The company recorded a 3.1% cost for the quarter, with non-advertising marketing, advertising, general and administrative expenses, and research and development accounting for 0.7%, 1.2%, 0.7%, and 0.5% of the average loan balance, respectively. As Jay mentioned, we currently have 118 million registered users, and the number of customers with a credit line has reached 27.7 million, an increase of 43.2% compared to December 31, 2019. In 2020, we added nearly 6.1 million new active customers. For the last quarter, the average tenor was 12 months, and the nominal annual percentage rate was 16.1%. Next, we will discuss our credit situation.

Tony Hung, Senior Director of Capital Markets

I am also pleased to announce a management change. Ryan Liu, our CRO, has now been promoted to our Senior Vice President in charge of new business initiatives, where he will handle various new initiatives as well as overseas business. We strongly thank Ryan for his service to our company. And we feel that based on his personal preference and desires, he will be able to meet the challenges in his new business responsibilities. I'd also like to introduce Mr. Qiao Yang, who has decades of overseas experience as well as domestic experience in the credit industry and has deep experience and know-how when it comes to credit scoring, risk control and asset management. Next, I would like Mr. Yang to discuss our current credit situation.

Yang Qiao, Vice President

Thank you, Jay, for the introduction. We continue our stable credit performance in the quarter. In spite of challenging conditions in the past year in the market, our credit quality continues to be high and within expected levels, and we fully expect our credit statistics to perform well within expected levels and to improve over time. As Jay mentioned, our 90-day-plus delinquency ratio declined from the third quarter to 1.95% in the fourth quarter, and we continue to see stable or improving credit performance as our lifetime charge-off ratio has stabilized. In addition, our first payment default rates for new loan originations have been below 1% for the past five months now, and our one-month delinquencies for all our key past vintages have peaked. As a result, we fully expect our credit performance to remain strong, stable and improve in 2021. With that, I conclude our prepared remarks. Operator, please proceed with the questions-and-answer session.

Operator, Operator

Ladies and gentlemen, we will now begin the question-and-answer session. Your first question today comes from Jacky Zuo from China Renaissance. Please go ahead.

Jacky Zuo, Analyst

So I will translate my questions. Thanks for taking my questions. So I have three questions. Number one is about our loan growth guidance. I saw that we are guiding 40% loan growth for this year. I just want to understand the key drivers behind. And we actually lift our loan guidance within two months. So I just want to check the first quarter trend regarding the loan growth. And I also want to check what is the loan balance growth according to our 40% loan volume guidance. And second question is about the regulation. We observed that the recent document regarding the strengthening of regulation regarding the college loan, so just want to check what is the impact to us because the document actually mentioned that third-party cannot direct the college student traffic to licensed financial institutions. And third question is regarding our asset quality. Because we mentioned that we try to maintain a high-quality growth this year, so just trying to understand what is our risk management strategy this year? And also, what is our vintage loss target for 2021? Thank you.

Jay Xiao, CEO

I would like to know the impact of the new college loan regulations, particularly since the document states that third parties cannot direct college student traffic to licensed financial institutions. Additionally, I am interested in our asset quality as we aim for high-quality growth this year. Can you elaborate on our risk management strategy for this year and our vintage loss target for 2021? Thank you.

Tony Hung, Senior Director of Capital Markets

So Jay will answer, Jacky, your first couple of questions. With regards to the first question on why we raised guidance, well, it's primarily due to two reasons. One, you can say, is a macro reason or a high-level reason. The second one, you can say, is a micro reason or a reason specifically attributable to us and our performance. First, on the first reason, we're seeing right now a very, very good and positive macro environment. And in particular, when it comes to the regulations and the regulatory environment, it's increasingly stable and also increasingly moving towards a favorable direction. While there may be some announcements that seem negative to us, we do see that as a hope, what is happening is that it is primarily impacting the much larger players. And it's primarily aimed at limiting the much larger co-lending model. For the model that we use, the loan facilitation model, what we're seeing and what we are hearing is actually quite the opposite, that it is actually being recognized and increasingly recognized by the regulators as a favorable part of the entire environment. And of course, that is the only model that we use. So hence, we see an environment where the regulatory environment is increasingly stable or even favorable, the larger players are, in turn, also being constrained because of the co-lending model. And hence, this is generating tremendous potential opportunities for us. So hence, we feel strongly that there's going to be new additional growth this year. So that's the macro reason. On the micro reasons, when we look at our first quarter numbers and how we have performed thus far, in particular, compared to the fourth quarter of last year, which, by the way, was a record quarter, we can actually see very, very strong growth. And not only do we see strong growth, we see, in fact, years to date, some of the best growth and not the best growth ever that we have experienced. And, in fact, this extends also to our asset quality, which we can see is among the historical best and may, in fact, even get better. So hence, for these two reasons, one, again, the larger environment or the macro environment, in particular, the regulatory; two, our own recent performance, we feel strongly about our ability to raise our guidance. So in regards to the specific loan balance, we feel that it will probably be something like 25% year-on-year growth in loan balance. So on the second question that you had, Jacky, with regards to the student loans and the impact from the recent regulatory announcement, as you know, from actually many years of covering us, this is nothing new in particular. This is something that has been out there and written in very, very similar ways literally years ago. And as a result, you can say that we have been prepared since years ago, and of course, the banks or the institutions that actually approve the credit and needs to go through their system and hence, we are already compliant in many ways on this. So in a lot of ways, with regards to the request or the actual details of the proposal and how it's implemented, we're very much within that system and range already. Now, of course, we may need to make some possible adjustments. But primarily, the adjustments will be made on our funding partner side, and we will work with them to make these adjustments. However, I think we do want to emphasize that we expect very limited change or impact to our underlying operations as we continue to work with our partners on instituting the appropriate changes.

Yang Qiao, Vice President

To answer your third question, as I mentioned in the conference call, our 30-day and 90-day delinquency ratios continue to improve. Our vintage delinquencies have also been decreasing over the past couple of months, and our day one delinquency and collection performance have also continued to improve. Therefore, we believe our current credit performance is in very healthy condition and will support our strategic plan to grow our portfolio. Moving forward, we intend to maintain a cautious approach. Our credit performance will fluctuate within a controllable and narrow range, and as our new business continues to grow, we will attract lower risk customers to our portfolio, thereby improving our portfolio risk. If I were to provide a number, our vintage loss target will be around or below 4% for the year 2021.

Operator, Operator

And your next question today comes from the line of Eddie Leung from Bank of America. Please ask your question.

Eddie Leung, Analyst

I have two quick questions. First, what is the expected contribution from the buy now, pay later model to the full-year loan growth guidance? Second, how might the public sharing model impact the take rate and revenue growth for 2021? Thank you.

Jay Xiao, CEO

So Eddie, with regards to your first question on the buy now, pay later product or Maiya product, well, as you know, it's a totally new model. It's a different kind of model, where there is no charge to the customer, but there is a cost to the business, which no doubt they'll make back. And we're obviously very, very pleased to see all the positive reaction from our customers to this product, which is why we expect to do RMB 50 million in GMV in the very first month. Now that said, this is a new product, and this is still very, very early. So it's hard to say what it will do. And it also depends on how things develop. And depending on how things develop, we may deploy certain resources and commit additional resources to this product, which, of course, then, in turn, impacts its potential growth. So there's a few things going on here, and hence, it will probably not be appropriate for us right now to give a full year number on this. Now I think it's also very, very important to point out to everyone that this product, similar to what you would see if you look at Afterpay in Australia and the U.S., this is not a loan product, and that is by definition, and by definition, actually mean by the regulatory authorities definition. This is not a loan product. So in that sense, there's no loan origination. There's no loan balance. So it is basically very different. And hence, it would not be regarded as, if you will, a financial product in the sense that you're used to looking at our underlying business.

Tony Hung, Senior Director of Capital Markets

In the fourth quarter, we achieved over 50% of our loan originations through the profit sharing model, marking a significant growth that highlighted our ability to transfer credit risk to our funding partners and their confidence in our credit risk management. By increasing this model, it will undoubtedly affect our take rate since financial institutional partners will be assuming more credit risk and, consequently, should receive greater rewards. However, since this is a new product, pricing may vary as it requires negotiation with each partner, resulting in different pricing structures. A more established funding partner may receive one rate, while a newer partner may seek a different rate. These dynamics will influence the overall outcome, but it will definitely have an impact. Last year, there was around a 1% difference compared to our traditional loan facilitation model, and we aim to reduce that difference this year. Additionally, we may manage the volume of profit sharing to some extent, meaning it may not grow as quickly as it did last year, especially in the fourth quarter. For modeling purposes, we might suggest an adjustment of around 50 to 100 basis points compared to the previous take rate, and that is the recommendation for any adjustments.

Operator, Operator

And our next question today comes from the line of Richard Xu from Morgan Stanley.

Richard Xu, Analyst

I have two questions. First, regarding the client acquisition channels, have there been any changes from last year given the regulatory changes affecting major platforms in the industry? Have these changes impacted the dynamics of the client acquisition channels or led to any strategic adjustments? Secondly, concerning the profit-sharing model, which key institutions are we collaborating with, and are there any potential partners we foresee in the future?

Jay Xiao, CEO

So Richard, that's definitely right. We've had some changes in customer acquisition. If you look closely at our efforts in 2019 and compare that with 2020, you'll notice some interesting trends. In 2019, we invested significantly in online advertising, leading to record customer acquisitions. In 2020, we came very close to matching those numbers but made substantial cuts in sales and marketing expenses, particularly by reducing our online advertising efforts. We employed a variety of innovative and unconventional methods to attract traffic, achieving similar or better quality at a lower cost. Overall, last year was quite successful as we transitioned to these new channels. A key aspect of this strategy involved collaborating with platforms like QQ Music and QQ Video. In some cases, when they refer customers to us or our Lehua card, we provide memberships to those platforms. This allows us to engage in a bidding or auction process rather than relying solely on standard online advertising, enabling us to secure more competitive and favorable pricing. Ultimately, it's a win-win situation for all parties involved. As a result, we've rapidly expanded this approach, and we've seen that we can attract several thousand new customers each month through these unconventional channels. I have double-checked the numbers, and currently, there are over 20 financial institution partners collaborating with us on profit sharing. Many more are showing significant interest. This is to be expected, as numerous institutions and funding partners are comfortable with our risk levels and have accumulated years of data on our performance and the associated risks. There is a clear profile of the risks of our underlying assets, which highlights the generated risks. Therefore, we anticipate an increasing number of partners entering the pipeline and coming on board to assess these risks, which we expect will scale up. Ultimately, this will lead to better returns for the funding partners. Unsurprisingly, those not currently working with us are showing interest in exploring potential collaboration. Presently, the more active funding partners include city commercial banks and consumer finance companies, which are typically smaller and more dynamic, allowing them to move quickly. We expect this landscape to evolve over time. Overall, we anticipate an increase in profit sharing and will look for ways to balance and optimize this, experimenting with new funding models to lower our overall funding costs. This may involve profit sharing, non-profit sharing, or a combination of both. In summary, profit sharing is set to rise.

Operator, Operator

Your next question comes from the line of Alex Ye from UBS.

Alex Ye, Analyst

So I have two questions. First question is on the outlook for pricing and funding cost. So I have seen the nominal APR have some recovery from the level in Q3. So I'm just wondering what's the outlook for the pricing going forward? And what's the current level of funding cost? Do we have room for further decline in the funding cost? And my second question is on the take rate for the risk-sharing model, it seems like the take rate for risk-sharing model has declined somewhat from Q3. So I'm wondering what's the reason. And would the take rate recover back to the previous level in Q2 and Q3 last year?

Jay Xiao, CEO

So on pricing, I think Jay wants to emphasize, there's 2 perspectives overall. One, if you will, that's a little bit longer term, and the second one, that's a little bit shorter term. So first, with regards to the slightly longer-term outlook. Fundamentally, as you know, we target a very high-quality, high-growth, a good cohort. And given that this is a high-quality, good and high-growth cohort of maturing and improving credit quality over time, rates naturally will decline over time. So hence, over the long term, we fully expect the rates that we charge to our customer over the long term to decrease. Now short term, if we look at the current situation, if there's no new, if you will, regulatory requirements, if there is no new guidance, in particular on this, then I think, at least for the current moment, you can expect the interest rates that we charge to be relatively stable.

Tony Hung, Senior Director of Capital Markets

So with regards, Alex, to your second question on the profit sharing take rate, I think it's important to note that there is all these things against the profit sharing ratio, the take rates, the negotiations there as well as, of course, the underlying cost of capital. Now for the fourth quarter, our underlying cost of capital probably increased slightly from 7.4% to about 7.7%. This is in no small part due to our continued strong growth. And as we grow, we, of course, have to source additional institutional partners. And unfortunately, in the fourth quarter for a variety of reasons, the bigger institutional funding partners have had certain limits or requirements or otherwise, if you will. So hence, the funding was a little bit tighter in the fourth quarter, and we had to get other sources, which then impacted our cost of capital. So hence, it was for growth reasons, if you will, that some of these things occur. Now longer term, though, we fully expect the cost of funding to decrease. And in fact, the longer-term expense, if you looked at this year, this year, we certainly expect the cost of funding to continue to decrease. And of course, we have to balance all of this with the profit sharing model as well, which, in turn, reduces profitability. Also, of course, as we introduce new partners in whether as a funding partner or alternatively introducing them to the profit sharing model, this may require additional negotiations when it comes to the economics as they are a new partner in one way or another, which of course may mean that we need to give up some of the economics in order to gain them and gain their trust initially as a partner. So there's always these types of ongoing balances that we also talked about earlier and also involving the different models. So hence, there's different complicated things, if you will, going on in the background, which I think after you heard all this, you understand fully how it can be nuanced and again complex.

Operator, Operator

Your next question today comes from the line of Ethan Wang from CLSA.

Ethan Wang, Analyst

So I have two questions. The first is a follow-up question on the BNPL model. Because on this model, most of the time the platform needs to pay the merchants first before granting the pay later scheme to the consumers, and they need to borrow from banks in order to do that. So the main version is they borrow more from banks in the future. My second question is regarding line item of change in fair value of financial guarantee derivatives within other income in the fourth quarter. We noticed that this line has incurred RMB700 million loss in the quarter. So just wondering what is the reason behind it.

Jay Xiao, CEO

So I think, Ethan, regarding the buy now, pay later model, as we've highlighted earlier, this is a completely new concept and product. There are definitely many moving parts and various factors involved. We're also working with different frameworks. Currently, we're finding that we can offer merchants and vendors two options, or they can choose between two options themselves. Some merchants, if we direct the right customers to them, are willing to take on the capital requirements themselves. They can effectively lend or manage installment payments over time by the customer. I want to stress again, for lack of a better term, that other merchants may prefer to receive cash immediately. However, with the buy now, pay later transaction, we create an account receivable. Therefore, we can collaborate with various trusts and financial institutions to manage the receivables financing or establish alternative structures. As I mentioned earlier, it's a new and dynamic model with various elements at play. I want to emphasize that this is not a financial transaction, but rather a non-financial transaction, similar to Afterpay. There will be no credit record for the customer, and it won't be recorded in any database. Essentially, this is something fundamentally different.

Tony Hung, Senior Director of Capital Markets

Yes. So for the RMB 700 million number, Ethan, you're obviously referring to the full-year number, the change in fair value for financial guarantee derivatives. I think, basically, as you know, we have a changing financing model, risk model, etc., a model that in the past, in the larger modeling sessions we've held for everyone in the past, have outlined how it will work. So hence, as our funding/risk models continue to change, naturally, the mix will change, and the line items will change as well, just as you see, if you will, the profit sharing lines, etc. In the future, if you want, given we've done this in the past, and it's probably more worthwhile to do it that way, we're more than happy to schedule a more detailed modeling session with you off-line to go into how this will work.

Operator, Operator

Your next question comes from the line of Steven Chan from Haitong International.

Steven Chan, Analyst

I have two questions. One is a follow-up on the profit sharing model. I want to clarify two things. One, are we expecting that the share of profit sharing business to you stay at around 50% for 2021? And what is our outlook for the take rate of the profit sharing business? Would that be stable or declining or increasing in '21? Second question is related to two items. One is the change in fair value of loans and then the other one is investment-related impairment. We saw that for these 2 items, actually, for the past two quarters, there are some impairment at all, negative change in fair value. But in the balance sheet, we've seen that these 2 items, indeed this is not a big amount, so if you're trying to calculate the impairment or negative change in fair value against the amount in the balance sheet, I think that the ratios would be quite large. So I would like to understand what has caused the negative change or the impairment loss. Are we going to expect that to recur in 2021?

Jay Xiao, CEO

So I think for this year, as a whole, we're going to definitely see many, many more funding partners come aboard and accept our profit sharing model, and we're going to see increasing numbers of that. But in light of everything, also our increased scale in size, I think at least for the immediate term, right now, we're expecting the profit sharing to be fairly stable. So maybe at around 50% or so. But longer term, we certainly expect this ratio to increase over time. And the reason why we're now expecting this to be stable is that we feel that we really need to see better and have greater clarity on the underlying performance and the profitability of the model and to make the right choices when it comes to the balance of these things. But that said, we're pretty confident in the long-term direction and potential of this, given that there is going to be more and more funding partners coming aboard. There's more and more funding available. There's fewer of us, there's more of them. And hence, we should see improvements over time and ultimately, improvements in the underlying take rate.

Tony Hung, Senior Director of Capital Markets

I think we've covered your first point regarding the change in fair value of financial guarantee derivatives and the various models. As for the second issue you brought up concerning investment-related items, this pertains to a relatively small investment we made in a U.S. company that focuses on providing auto loans to foreign students and other types of debt. Unfortunately, the pandemic has significantly affected this company, leading us to write off about half of our investment in the third quarter, and we plan to continue this in the fourth quarter as well. This is not a long-term concern; it is a one-time situation.

Steven Chan, Analyst

The company specializes in providing auto loans to foreign students in the U.S. and other types of debt. Unfortunately, the pandemic has severely affected this business. Consequently, we chose to write off about half of our investment in the third quarter and will continue this in the fourth quarter. This is not a long-term issue and is essentially a one-time occurrence.

Tony Hung, Senior Director of Capital Markets

Sorry, Steve, can you translate that for everyone? I appreciate it.

Steven Chan, Analyst

I apologize for not being clear in my earlier question. I want to inquire about the decline in the fair value of loans, which is around RMB 47 million. However, the amount of these loans on the balance sheet does not seem significant. Can you explain what has led to this decline? Is it related to interest rates, asset quality issues, or the types of loans we are purchasing and their sources?

Tony Hung, Senior Director of Capital Markets

Yes. So I think you understood that. Some fair value adjustments to some of the repayments.

Operator, Operator

And your next question today comes from the line of Dennis Zeng from Merchant Asset Management.

Unidentified Analyst, Analyst

I guess my question for the management is about the possible secondary listing. Later last year, the management in different occasions briefly mentioned a possible secondary listing back in Hong Kong or China Mainland stock market. I wonder if there's anything that the management can share today or any strategic direction change?

Tony Hung, Senior Director of Capital Markets

Yes. So I think when we've been asked this question in the past, we will say that we'll definitely consider all options and do what's in the best interest of our shareholders as a whole. So for, obviously, many, many reasons, we probably can't comment too much on too many additional details, given, if you will, the entire nature of the process. So we have to stick to the official line on this.

Operator, Operator

We have no further questions online, and that does conclude our conference for today. We thank you all for your participation. You may now disconnect.