Earnings Call Transcript
Qfin Holdings, Inc. (QFIN)
Earnings Call Transcript - QFIN Q1 2020
Operator, Operator
Good day everyone and welcome to the 360 Finance First Quarter 2020 Earnings Conference Call. At this time, I’d like to turn the conference call over to Ms. Mandy Dole, IR Director. Please go ahead, Mandy.
Mandy Dole, IR Director
Thank you, operator. Hello, everyone, and welcome to our first quarter 2020 earnings conference call. Our results were issued earlier today and it can be found on our IR website. Joining me today on the call are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Wu, our CFO and Director; and Mr. Zheng Yan, our Vice President. Before we begin our prepared remarks, I would like to remind you of the company’s Safe Harbor statements in connection with today’s earnings call. Except for any historical information, the material discussed on this conference call may contain forward-looking statements. These statements are based on our current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about potential risks and uncertainties, please refer to the company’s filings with the SEC in its registration statements. In addition, in this call will also include a discussion of certain non-GAAP financial matters. Please refer to our earnings release, which contains a reconciliation of the 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 RMB. I will now turn the call over to our CEO and Director, Mr. Wu Haisheng.
Wu Haisheng, CEO
Hello everyone and thanks for joining our earnings call today. The first quarter of 2020 was highly unusual, as the entire fintech industry underwent a COVID-19 induced extreme stress test. By maintaining a compliant and cautious operations strategy, we successfully navigated this challenge, thanks to our high-quality borrower base and prudent internal management. We achieved remarkable progress in all aspects of our business operations, even amidst the challenging market conditions. Loan origination volume reached RMB 51.8 billion during the quarter, reflecting a 25.6% year-over-year increase. Our outstanding loan balance grew to RMB 73.1 billion from RMB 72.2 billion in the fourth quarter of 2019. Financially, total revenue for the first quarter reached RMB 3.18 billion. Excluding the new accounting standards, our non-GAAP net income for the quarter was RMB 764 million, one of our best results since our IPO. Despite the pandemic's impact, all areas of our operations showed significant improvement. Now, let me update you on key developments since our last call. In risk management, while our risk models faced pressure due to the pandemic, they remained effective and stable, leading to a swift recovery in our underlying asset quality, as well as improvements in the D1 delinquency rate and collection rate. To date, our D1 delinquency rate has decreased to 6.6%, while our M1 collection rate has risen above 85.8%. Although our M3 delinquency rate, a lagging indicator, increased to 2.17% compared to pre-pandemic levels, this is still a notable achievement in a challenging environment. We maintained a provisional coverage of four times during the quarter. Thanks to our strong operational and technical capabilities, we ensured full and transparent industry-leading information disclosure throughout both pre-pandemic and pandemic periods. Regarding our capital-light model and Platform Services business, which involves no principal risk, by the end of the first quarter, this business generated an accumulated operational cash flow of RMB 780 million. The outstanding loan balance under our capital-light model now accounts for 21.2% of our total loan book, up from 19.5% in Q4 2019. Moving forward, our long-term growth strategy will prioritize expanding our capital-light model while cautiously adjusting growth to align with market dynamics and maximize shareholder value. In terms of operational efficiency, we proactively reduced our acquisition activities and lowered sales and marketing expenses during the quarter in response to market changes. Consequently, the acquisition cost for each new borrower with an approved credit line decreased to RMB 159 from RMB 228 in Q4 2019. This reduction in customer acquisition cost was due to a more prudent risk management strategy that lowered our approval rate. We also adopted a diversified strategy in customer acquisition to expand our channels and attract users with better credit profiles. We have partnered with various high-quality channel partners with consumption scenarios, including Hellobike, Xiaomi, and ICE. With our enhanced user experience, we expect to attract more channel partners to collaborate with us. In terms of existing customer management, our virtual credit card product, V-pocket, has increasingly contributed to our user base in the first quarter, with a repeat purchase rate within 30 days reaching 80%, indicating an average of 10 transactions per month. Additionally, we launched a popular credit limit upgrade product that has already attracted 1.5 million users. We are also introducing a product called Intelligent Credit Engine, aimed at activating borrowers who have yet to conduct their first credit drawdown on our app, which has proven effective as well. In summary, we aim to explore various initiatives to enhance operational efficiencies across our business and further boost customer retention. We have successfully issued three ABS this year, with the cost of the most recent one reaching a coupon rate of just 4.2% for the senior A tranche, contributing to our decrease in overall funding costs for our credit-driven services to 7.7% from 8% in Q4 2019. As a leading fintech platform in China, we have consistently adhered to high compliance standards. Together with major players like BAT, JD, and Lufax, we were among the first companies to receive approval to file our mobile finance app with the National Internet Finance Association of China. Among those listed, we stand out as one of the few platforms that is neither a financial institution nor a payment company. Additionally, our 360 Jietiao app has obtained a Level 3 testing certificate from China’s National Computer Virus Emergency Response Center, the highest rating available, covering both privacy policy and data security. It's also worth mentioning that the China Banking and Insurance Regulatory Commission issued new guidelines for commercial banks' online lending businesses for public comment. The draft moves away from one-size-fits-all regulations, differentiating between consumer finance loans and business loans, establishing separate credit caps and tender requirements based on the product type. We believe this will become fundamental legislation for online lending in China, supporting the legitimacy of online lending platforms while reducing regulatory burdens. This development marks a significant milestone for the China online lending industry and loan facilitation business. We anticipate this regulation will be advantageous for leading players in the industry, fostering a healthier business environment. We believe that strict regulatory requirements and economic pressures will ultimately benefit top players while gradually eliminating weaker platforms. This trend has been evident in the first quarter. As demand in the consumer finance market continues to grow, we are well-positioned to seize opportunities and increase our market share with a positive outlook. Therefore, we are guiding for a full-year loan origination volume of RMB 200 billion to RMB 220 billion. In the short term, taking into account the gradually recovering markets and the pandemic both in China and globally, our asset quality has already begun to improve, as indicated by recent operational data. We will conduct our business operations with cautious optimism for the rest of the year, aiming to carefully grow loan origination volume and the number of borrowers, thereby enhancing both the quality and quantity of our loan portfolios. We remain confident in delivering strong returns to our shareholders in the upcoming quarters. I will now hand over to our CFO to provide remarks.
Alex Wu, CFO
Okay, thank you, Haisheng, and thank you, Mandy. Good evening, everyone. Haisheng just shared with you a lot of exciting news about our first quarter and the coming quarters going forward. My part would be a little more boring talking about the new accounting standards. So, please bear with me. So, we see a very unusual quarter compared with the previous ones, not only because of the outbreak of COVID-19 but also the complicated situation by the new accounting standards. So, let me start off by explaining the difference between the new accounting standards we adopted starting this quarter and the old ones, and the migration between the two. Hopefully, we will give you clear guidance after these remarks on how to read our statements. As a U.S. listed company, we are required to adopt the new accounting standard ASC 326: Financial instruments-Credit Losses from this year. Consequently, our results this quarter are not directly comparable with previous quarters on a like-for-like basis. In consideration of helping all stakeholders better understand the impact of the new accounting standards as well as provide a more accurate reflection of our business and financial performance, I would like to spend some time working you through how the new accounting standards have impacted our financial statements. As we provide guarantee services for Credit Driven Services business, at the inception of each loan, we estimate expected guaranteed revenue and record contingent guarantee liabilities with provisions for the potential credit losses. Under the old accounting standards, provisions for the above-mentioned guarantee liabilities and the guarantee revenue are netted out directly on the very first day of loan inception. However, under the new accounting standards, guarantee revenue is required to be recognized on an amortized schedule throughout the loan lifecycle, whereas the provision for these contingent guarantee liabilities is still recorded in full at Day 1. Two key points to emphasize here: first, the amortized recognition of the guarantee revenue is not related to the actual credit loss after the loan. To put it in plain words, even if the loan eventually defaults, guarantee revenue will still be recognized by each installment as originally scheduled. The credit losses are accounted for by adjusting provisions and guarantee liabilities. Second, from the perspective of asset quality, the old and the new accounting standards make no difference. The only change lies in the accounting treatment on paper and the timeline of recognition. As a result, for each quarter going forward, there will be two additional items on our income statement. One is the provision for contingent liabilities under the expense line, which accounts for the estimated credit loss associated with the contingent guarantee liabilities, driven by the new loan originated during the specific quarter, and the other one is revenue from the release of guarantee liabilities, under the revenue line for guarantee revenue released on an amortized schedule, driven by the historical loan assets. During the first quarter of this year, provisions for contingent liabilities were RMB 1.7 billion, while revenue from releasing guarantee liabilities was RMB 1 billion. Furthermore, the new accounting standards require a one-time adjustment of expected credit loss related to existing loan portfolios, which is reflected in the opening balance of the retained earnings at the beginning of 2020. This translated into an RMB 1.4 billion reduction in our retained earnings. I would like to draw your attention to the fact that this decrease in the retained earnings mainly results from the recognition of the contingent guarantee liabilities and stand-ready guarantee liabilities at the inception of the guarantees in accordance with the new standards. The stand-ready guarantee liabilities, which is an asset item, will be recognized, or released, as guarantee revenue on an amortized basis over the loan's lifetime. This has no impact on net income, business operations, and asset quality once the guarantee service expires. Hopefully, that provides more conceptual clarity on the impact of the new accounting standards. Now, let’s take a look at the numbers changes on our financial statements due to this new accounting standard. First, as you can see on our P&L, there was a revenue line on the Credit Driven Services segment, titled revenue from releasing guarantee liabilities, which represents the guarantee revenue recognized for historical loan portfolios on an amortized schedule. This line amounts to RMB 1 billion under the new standards and RMB 107 million under the old standards. Second, there was an expense line titled provision for contingent liabilities, which stands for provisions set aside for the estimated credit loss associated with the contingent guarantee liabilities, driven by the new loans originated in the first quarter, which is RMB 1.4 billion. The remainder is the additional provision of RMB 280 million, which accounted for the additional provision to cope with the deterioration of asset quality of the historical loan portfolios due to COVID-19. Thirdly, on the balance sheet, for a sub-line titled retained earnings in the shareholder equity section, the balance of accumulated retained earnings decreased by approximately RMB 1.25 billion compared with year-end 2019. The decrease represented an accurate amount of RMB 1.4 billion reduction in the opening balance of the retained earnings, which accounted for one-time provision for the existing loan book required by the new accounting standards, and RMB 183 million increase in retained earnings attributable to net income attributable to ordinary shareholders in the first quarter. Well, hopefully, you are not lost in my explanation of the accounting standards; just in case you are already lost, we have prepared a few slides, which will be available on our IR website in the coming few days to illustrate the migration from the old accounting standards to the new one. So, which is essentially what I mentioned just now. Okay. With the clarification on the new accounting standards, I would like to now go over a like-for-like basis analysis on financial performance under the old accounting standards in an effort to help stakeholders better understand our business operation in the first quarter. Firstly, as Haisheng just mentioned, under the old accounting standards, the total net revenue was RMB 2.3 billion, representing a 16.7% year-over-year increase, and relatively flat on a quarterly basis, which was remarkable in our sense given the heat of COVID-19 during the same period. Non-GAAP net income was RMB 764 million, representing a 48% quarter-over-quarter increase, one of the most exceptional quarters we have ever had since our IPO. Secondly, in the face of significant macroeconomic uncertainty during the pandemic, we have undertaken decisive initiatives to cut costs and enhance operational efficiency. For instance, customer acquisition cost for each new borrower with an approved credit line dropped further to RMB 159 million in the past quarter compared with RMB 228 million in Q4 2019. Total sales and marketing expense fell to RMB 223 million in the past quarter from RMB 425 million in Q4 2019. This was the third consecutive quarter of improvement in customer acquisition efficiency and financial discipline. Another solid cost-efficient enhancement laid out on our funding side, as Haisheng just mentioned, in the past quarter would continue to develop cooperation with more institutional funding partners, despite the severe challenging market conditions. The number of institutional funding partners we work with increased from 81 to 84 by the end of the past quarter. This further brought down the overall funding cost to 7.57%. In addition, we successfully issued three rounds of ABS in 2020 with a total size of more than RMB 1 billion. The latest round of issuance hit historical low-record funding costs at 4.2% for the Senior A tranche. We believe this is a strong reflection of financial institutions' faith in us. Thirdly, given the negative impact from volatile markets on the asset quality, we will continue to roll out prudent operational and financial initiatives to offset the impact. While the effort will primarily reflect in three dimensions. First, in terms of the leverage ratio, under the old accounting standards, it went down continuously to 7.7 times from 8.1 times in Q4 2019. This was primarily driven by the increased proportion of our capital-light model as Haisheng just mentioned. While our total outstanding loan balance continued to grow, the portion of the Credit Driven Services business actually decreased to RMB 57.6 billion at the end of the first quarter from RMB 58.1 billion at year-end 2019. Second, in Q4 2019, we booked an additional provision of RMB 735 million to enhance our provision coverage ratio to 4.4 times, as we noticed the challenges in asset quality due to unfavorable market conditions. In Q1 of this year, we witnessed a deterioration in asset quality in February, but then it slowly returned back to normalized levels, hence, we further booked a provision of RMB 280 million to maintain a four times provision coverage ratio. Third, our cash result hit a historical record of RMB 6.8 billion. Excluding cash deposits required in operations, registered capital for various business licenses, and operational working capital, our free cash flow recorded the highest level of RMB 1.6 billion in the first quarter. This was largely benefited from our diligent efforts on cost control and operational efficiencies such as reducing the turnover days of account receivables and reasonably increasing the turnover days of payables to our business partners during the COVID-19 situation. All these efforts have not only equipped us with the flexibility to navigate the pandemic storm but also positioned us to capture the historic and enormous growth opportunities when we exit this crisis. Finally, let me give you some color about our outlook for the second quarter and full year from a financial perspective. First, our business during the second quarter has improved remarkably on a sequential basis and should be reflected in our financial performance in the coming quarter. We expect decent growth in terms of both top line and bottom line on our P&L in the second quarter. Based on our current assessment, we do not expect to incur any further additional provisions for credit losses triggered by the deterioration of asset quality in the near future. With the guarantee revenue from the historical loan book being recognized over time, we expect shareholders’ equity to gradually return to a healthier level. Second, we are still evaluating market conditions to decide whether we will resume a scalable expansion of business. However, we should remain vigilant about the potential second round of negative impact due to the global pandemic development. Hence, we would like to maintain our full-year 2020 guidance, with no change. That concluded my remarks. Thank you, everyone. Now, we are open for questions.
Operator, Operator
Thank you. We will now begin our question-and-answer session. Our first question is from John Cai at Morgan Stanley. Please go ahead.
John Cai, Analyst
Hi, thank you, management, for taking my questions and congratulations on the results. So, I have a few, I’ll probably ask them one by one. So first is on the accounting adjustment. So, I noticed that the release mentioned, there is around RMB 140 million revenue resulting from these accounting changes, and then there is RMB 1.4 billion cost. So simply put, the difference is the accounting adjustments, and I think it’s roughly RMB 580 million. So, when I add this number to our profit, it seems to be in line with the RMB 764 million non-GAAP net profit under your standards. So the first question is really just whether this understanding is correct?
Alex Wu, CFO
John, yes, you are correct.
John Cai, Analyst
Okay. So and follow-up on that is on the RMB 1.4 billion incremental costs. So if I look at this number in the context of the guarantee of balance sheet origination, I guess that’s what the situation would have. So, if I divided this by the origination of guarantee loans, the number is 4.5%. So does that reflect our lifetime loss estimate for the first quarter origination loan? And it seems a little bit high given our Day 1 delinquency is roughly 6% to 7%, so I just want to confirm this.
Alex Wu, CFO
First of all, I need to take a look at your calculation formula, but the number is quite close compared to our calculations. And just a small reminder, this is not vintage, this is our provision. So it’s more like coverage, right. So, probably our CRO will give you more flavor on the vintage loss numbers, but here what I can say is that this is to cover the first quarter’s estimated loss throughout its lifetime, and we provide a sufficient buffer, as I just mentioned, we will maintain the four times coverage ratio to ensure the stability of our business.
John Cai, Analyst
Okay, thank you. And so, also related to risk, basically as we mentioned that the provision for loans originating in the previous period is RMB 280 million. So, I guess, if we exclude the content change, the guarantee release from the old loans with our – the accounting impact is also around RMB 280 million. So basically, we don’t have any incremental provision for this quarter, meaning that the release of the previous status, I guarantee is able to fully offset the incremental provision. Is that a proper understanding as well?
Alex Wu, CFO
Well, those numbers are slightly off. So for the revenue from releasing guarantee liabilities under the old standards was RMB 170 million, not RMB 280 million.
John Cai, Analyst
Okay.
Alex Wu, CFO
And by the way, that was the highest level throughout and since our IPO. Then for the additional provision on the guarantee liabilities to cope with the COVID-19 was RMB 280 million. That part, you’re correct. That was under...
John Cai, Analyst
Okay, thank you. And so finally on the Day 1 – I’m sorry, on the M3+ delinquency, I think this is led by a quarter, so the ratio is above 2% now, and pricing, it does not include the impact from COVID-19. So, because it happens in the first quarter. So, how should we expect this number to trend in the second quarter? And also, does the pickup in the first quarter due to the collection tighten in the first quarter other than COVID-19? Thank you.
Alex Wu, CFO
Well, do you mind translating in Chinese, so our CRO can answer a little bit?
John Cai, Analyst
I'm sorry, on the M3+ delinquency, I think this is led by a quarter, so the ratio is above 2% now, and pricing does not include the impact from COVID-19 since it occurred in the first quarter. How should we expect this number to trend in the second quarter? Additionally, does the increase in the first quarter result from the collection tightening in the first quarter aside from COVID-19? Thank you.
Zheng Yan, CRO
Hi John, I'd like to provide a perspective from our CRO. First, the M3 delinquency rate is a lagging indicator. We recommend focusing on more relevant metrics that we will post on our IR website, specifically the adjusted delinquency rate, which considers the loan balance from two quarters ago as the denominator and the delinquency amount as the numerator. Second, regarding the M3 delinquency rate, you're right that it's a lagging indicator influenced by government restrictions from the fourth quarter of 2019. However, we suggest you look at leading indicators, such as the D1 delinquency rate and the M1 collection rate. Overall, we anticipate that the M3 delinquency rate will be under pressure in the coming quarter, but we advise focusing on leading indicators for a clearer picture of our business performance. To elaborate, our D1 delinquency has recently dropped to comparable levels with our debt from the fourth quarter of 2019, and weekly data shows a declining trend. The M1 collection rate has recovered to over 86%, and we believe it could reach 87% soon. In summary, we believe our asset quality is experiencing steady recovery. Additionally, in relation to the M3 delinquency rate, we recommend examining our provision coverage ratio, which we have successfully maintained at four times the pre-pandemic level.
John Cai, Analyst
My final confirmation is about whether the current provision level has fully accounted for the potential loss due to the tightening of collections and COVID-19 in the first quarter.
Alex Wu, CFO
Yes, John. you’re right.
John Cai, Analyst
Thank you very much.
Operator, Operator
Thank you. Our next question is from Jacky Zuo at China Renaissance. Please go ahead.
Jacky Zuo, Analyst
Hi, good evening, management. Thank you for taking my questions. My first question is about the second quarter outlook. Can you provide insights on the recent trends in loan origination volume? I believe we forecasted a stable volume for the second quarter, but I'm curious if we've noticed any signs of an increase lately. Additionally, under what conditions would we ramp up our loan origination volume? Is there a possibility this could happen in the third quarter given the current landscape? My second question pertains to funding. I understand our funding cost decreased to 7.7% in the first quarter, and I'm looking for more details on what led to this drop. Are we seeing increased demand following the new banking regulations affecting the lending sector? Are we receiving more funding from major national banks? I recognize we are also influenced by lower ABS issuance. Lastly, I would like to know more about the new product our CEO mentioned, V-pocket, which is a virtual credit card. Can you provide more details about the user base and profitability of this new product? Thank you.
Wu Haisheng, CEO
Okay. Let me translate for our CEO in response to your question, Jacky. First of all, if we look at our outlook for Q2 as the Chinese government gradually controls the pandemic domestically and the market starts to recover, we have seen an improvement in our operating data, asset quality, and operational efficiency. Therefore, we expect a stronger quarter in the coming months in both operational and financial areas. Regarding your question about the Q3 outlook, we think it's too early to assess that, but we will remain alert in our efforts to expand our business for the rest of the year, which will depend on a few factors. The first is the global pandemic situation. As you know, in our interconnected world, no one is safe if another's situation worsens. The second factor is the tension between China and the U.S., which will affect China's export industries. Fortunately, current data suggests we see limited impact from this. To summarize, once we have better visibility, we will inform the market about our business plans.
Alex Wu, CFO
As for your question about the decrease in funding costs, we have sufficient liquidity in the China market. For instance, we have successfully issued three ABS this year. However, we believe the main factor is that loan facilitation platforms will acquire better quality assets, gaining more bargaining power with funding institutions. Many platforms are currently facing issues with their asset quality.
Wu Haisheng, CEO
Well, regarding your question about the V-pocket in Chinese, it has the same profitability level as our core product 360 Jietiao. It also aims to expand our user base. To elaborate, this product we developed serves as a virtual credit payment platform designed to enhance user engagement and retention. As I mentioned earlier, the repurchase rate over 30 days is 80%, which corresponds to an average of 10 transactions in a month. Currently, we have accumulated 480,000 users, with an average daily loan origination of RMB 30 million. I hope that answers your question, Jacky.
Jacky Zuo, Analyst
Yes, very clear. Thank you, Mandy.
Operator, Operator
Our next question is from Daphne Poon at Citi. Please go ahead.
Daphne Poon, Analyst
Hi, good evening, management. Thanks for taking my question. I have three questions. First, can you provide an update on your latest expectations for the Vintage delinquency rate for Q1 and the loss rate for new loans originated in the second quarter? Second, what is your outlook for the provision in the second quarter? I recall you mentioned earlier that you expect both top line and bottom line earnings to improve, potentially due to a lower operational figure. Should we anticipate a larger release of the guarantee liability in Q2 and a reduction in the provision for new loans as well? Lastly, regarding your customer acquisition, there was a significant decline in Q1 traffic costs. What is driving this change? Is it a broader industry trend, or more related to improvements in your customer acquisition model? Additionally, do you expect this decline in acquisition costs to continue or decrease further? Could you also provide a breakdown of the currency mix in customer acquisition, particularly the contribution from middle consumption scenarios mentioned in your prepared remarks?
Zheng Yan, CRO
Okay. Let me translate the first question, Daphne. This is a comment from our CRO. We observed that the D1 delinquency rate and the M1 collection rate were better than we anticipated. However, we remain cautious and reaffirm our earlier guidance regarding the vintage loss projected to be between 2.5% to 3.5% for this year. Additionally, we are seeing positive momentum on a quarter-on-quarter basis.
Alex Wu, CFO
And Daphne, let me answer your second question about provisions. Before I dive into the details, just a small reminder that in Q4, on the earnings call, we mentioned that due to the uncertain macro situation, we provided approximately RMB 750 million in additional provisions due to potential loss. So, when I just mentioned in my remarks that we will not see any further provisions on that perspective, it's under the same concept. So, as our CRO just mentioned, our lifetime expected loss for the whole year would be within a range of 2.5% to 3.5%. Overall, on a quarter-by-quarter basis, you will see the vintage loss decrease significantly in the coming quarters. So, that is why we said in the second and third quarters, going forward, we will not take additional provisions on that front. That is obviously under the assumption that there is no second round of negative impact from COVID-19. Hopefully, I understood your second question well. Now I turn to our CEO for your third question.
Wu Haisheng, CEO
Sure. The decrease in our customer acquisition cost is attributed to several factors. First, in the industry Jiang Wu mentioned, we have observed that demand for the product is not high, as evidenced by the ongoing intense competition among e-commerce and gaming companies in the advertising space. Second, we believe that our decision to slow down and reduce our customer acquisition efforts has played a significant role in lowering marginal costs. Third, we are continuously improving our customer acquisition strategy and partnering with more various high-quality external partners, contributing to this reduction. Additionally, I want to emphasize two points. First, we are refining our marketing strategy to achieve a higher return on investment. For instance, we are implementing our marketing strategies on online platforms like ByteDance, which accounts for 50% of our market activities. We are putting significant effort into this refined approach. Secondly, as mentioned earlier, we have expanded our external channels with consumption scenarios, which currently contributes to 15% of our overall traffic. I hope that addresses all your questions, Daphne.
Daphne Poon, Analyst
Can I follow up on the channel partnership? How much can the customer acquisition cost be reduced, and is that related to the revenue-sharing model?
Wu Haisheng, CEO
Well, as you mentioned, mostly, the cooperation is using a revenue-sharing model. That’s the first point. The second point is that the traffic in those consumption scenarios helps cover the shops. Therefore, they can provide us with better quality users who have a better credit profile.
Daphne Poon, Analyst
Thank you.
Operator, Operator
Our next question is from Steven Chan at Haitong International. Please go ahead.
Steven Chan, Analyst
Good evening, management. I have three questions to ask, and I'll address them one at a time. First, regarding my estimate of the take rate for the capital-light business, it appears to have declined in Q1. I would like to know if this is due to your efforts in targeting higher quality customers while offering lower lending rates to funding partners, or if it's related to a reduction in profits shared with funding partners due to a decline in asset quality.
Alex Wu, CFO
Steven, this is a very good question, and you are really good to analyze it in such a short time. Thank you for asking the question. It’s kind of a – it’s kind of a hybrid. First of all, obviously, all assets deteriorated in the first quarter, especially in February. So, we have a lot of measures to preempt the situation. First, we renegotiated some terms with some funding partners, or business partners, in terms of the charges. So, to some extent, the charge is slightly lower than in Q4, but the most important thing is that after the negotiation with the business partners, we kind of repeat what we did in Q4. That is, we speed up the return – the payback schedule before the terms. Internally, we call it the discount rate, and this is actually higher. So, let me put an example. For instance, there is a 12-term loan during the first quarter; we worked with our business partners to encourage the borrowers to repay the principal interest early. So instead of 12 terms, we only have four terms left. We ask them that if they pay them back now, we will waive all the interest, not only for the rest of the four times, but also probably give you one time interest-free treatment, something like that. Therefore, the discount rate – so-called discount rate discussion, we got it higher a little bit. All in all, our take rate on the capital-light business would be slightly lower compared with Q4. So, your adjustment is right.
Steven Chan, Analyst
Okay, thank you. I understand. Second question, I think it is similar to Daphne’s question, but I want to get more sense about this provision for contingent liabilities excluding that RMB 218 million you still have RMB 1.4 billion provisions in Q1. So, I just want to clarify whether this RMB 1.4 billion is purely related to asset quality issues, or do you still have some supply macro or local other parameters factored into your credit risk model, resulting in some provisions. I mean comparing with banks, it’s just like whether you still have some Stage 1 and 2 provisions like what you see for banks means that it is more related to macroeconomic outlook rather than asset quality. If yes, how much will that be? And then I think the follow-up on Daphne’s question is do you expect there will be conversion – a converging trend between the provisions and the release in the revenue. That means that the gap between the releasing liabilities and the provisions will be reduced.
Alex Wu, CFO
Okay. Let me answer your question here. So, I think you have two parts of the questions. The first part is how do we evaluate the asset quality? Obviously, the valuation model needs to take into account of macro-economy and even some potential impact of the Sino-U.S. tensions situation. So, it’s kind of blended together. It’s difficult to quantify the impact of the macro economy versus the pure operation or industrial level or our company level’s numbers. So, everything is taken into consideration. Also, this is for the asset generated or originated in Q1. So, as John just mentioned, there is an easy way to calculate that. You just use RMB 1.5 billion divided by the new loan originations under the capital-heavy model in Q1. It will give you a rough sense of how much provision is largely taken. And so the number was quite close to a four-point something. This takes into account of a sufficient coverage ratio. Okay. Then your second question is whether there is a sort of calculation between this provision and the releasing of guarantee liabilities going forward. The short answer is it’s a very difficult question for everybody. Because every single quarter we need to reevaluate the asset quality based on that quarter’s situation. So, it’s hard to say that, but I can give you an example. This quarter just under the old accounting standards, the releasing of the guarantee liabilities is RMB 170 million. As I just mentioned in my remarks, it is the highest level of the releasing of guarantee liability. The reason is that in Q4 last year, we took a more prudent measure to take provisions. It turns out the actual performance is better than our estimates. So, we released a significant amount of money to our revenue. So going forward, if today’s estimate is too pessimistic, compared to the future, we are confident to see the releasing of guarantee liability will go up. On the contrary, if there was a second round of negative impact from COVID-19, we might take additional provisions, which might mean we have less release of the guarantee liabilities on revenue, but there's no crystal ball to accurately forecast a number or say the breach between this provision and the releasing of guarantee liabilities. Hope I answered your question.
Steven Chan, Analyst
Thank you, very clear.
Operator, Operator
Our next question is from John Cai at Morgan Stanley. Please go ahead.
John Cai, Analyst
Hi, thank you for allowing me to ask another question. I'm hoping the management can help me better understand the competitive landscape for our products. I believe we operate in a segment with an average APR of 28%, but please correct me if I'm wrong. We recognize that there are small to medium players in the market. My main question is about the number of competitors, particularly how many unlisted players of significant size exist in this 28% APR segment and whether they directly compete with us in areas like risk management. Thank you very much.
Wu Haisheng, CEO
Sure. Okay. Let me translate for our CEO. First of all, you can effectively segment the consumer finance market in China by APR. Regarding the private competitors you mentioned, we believe you are referring to Ant, WeBank, and JD. Most of these competitors offer products with an APR below 4%. Therefore, according to your segmentation, we operate in the same sub-segment as those private competitors. However, our customer research indicates that although we may share the same user base, some loan users may not be sensitive to the APR; instead, they prioritize user experience and service. To highlight our competitive strengths against the three competitors you mentioned: first, private competitors like Ant and WeBank operate in the lower APR market, limiting direct competition. Second, as I've mentioned, in comparison to the U.S. market, we are confident that as an internet giant-backed consumer finance company, we benefit from strong support from our parent company, 360 Group, giving us structural advantages in risk management, traffic, and branding. Lastly, compared to the third type of competitor, which we consider to be the original partners in the consumer market, we believe we surpass them in risk management capabilities and the user experience offered to borrowers. I hope this provides some insight into the competitive landscape and addresses your questions.
John Cai, Analyst
We have structural advantages in risk management, traffic, and branding. In comparison to the competitors we are licensing consumer finance from, we see them as more of the founding partners in the consumer market. We excel over them in risk management capabilities and the user experience we offer to borrowers. I hope this provides some insight into the competitive landscape and addresses your questions.
Mandy Dole, IR Director
Okay. Hi, operator, are there any more audience on the question line? If not, maybe we can conclude the call today.
Operator, Operator
Thank you. There are no questions on the line. So, this concludes today’s conference call. Thank you all for your participation. You may disconnect.