Earnings Call Transcript - QFIN Q3 2024

Operator, Operator

Ladies and gentlemen, thank you for being with us. Welcome to Qifu Technology's Third Quarter 2024 Earnings Conference Call. Please be aware that today's event is being recorded. I will now hand the call over to Ms. Karen Ji, Senior Director of Capital Markets. Please proceed, Karen.

Karen Ji, Senior Director of Capital Markets

Thank you, operator. Hello, everyone, and welcome to Qifu Technology's Third Quarter 2024 Earnings Conference Call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Haisheng, our CEO; Mr. Alex Xu, our CFO; and Mr. Zheng Yan, our CRO. Before we start, I would like to refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP financial measures to GAAP financial measures. Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms. Before we start, we would like to let you know that today's prepared remarks from our CEO will be delivered in English using an AI-generated voice. Now I will turn the call over to Mr. Wu Haisheng. Please go ahead.

Haisheng Wu, CEO

Hello, everyone. Thank you for joining us today. Autumn is a season of harvest, and we are pleased to share that our hard work has yielded remarkable results this quarter. Since the start of 2024, we have adhered to a strategy of prudent operations, optimizing risk performance and boosting operational efficiency. These initiatives have led to substantial improvements in our risk metrics and record profitability in Q3. Our solid business foundation has provided us with a margin of safety to pursue moderate sequential growth. In Q3, our loan volume stabilized and began bottoming out. Meanwhile, we continue to iterate on our business model to build a more open ecosystem. Through a platform approach, we are creating value for both users and financial institutions, broadening our business boundaries and strengthening our operational resilience. By the end of Q3, our platform had empowered a total of 162 financial institutions and served more than 55 million users with approved credit lines on a cumulative basis. Excluding the contribution from risk management SaaS services or RM SaaS, total loan facilitation and origination volume on our platform increased by 13.1% sequentially. Driven by further improvements in risk metrics and operational efficiency, our non-GAAP net income for the quarter reached an all-time high of RMB 1.83 billion, an increase of 29.1% sequentially and 54.5% year-over-year. Our ongoing share buyback is also contributing to improved non-GAAP net income per diluted ADS, which increased 34.8% sequentially and 71.5% year-over-year to RMB 12.4. Coupled with the ongoing optimization of capital allocation, our ROE in Q3 increased further to 32.2%, well ahead of most financial services and internet companies in China. Despite macroeconomic headwinds, we have consistently improved upon our past results and outperformed our market commitments through ongoing evolvement and enhancements to our business. Now I'll walk you through the progress we made this quarter. Asset quality further improved in Q3 as we continued to execute our rigorous risk strategy. We further optimized our product and service offerings for differentiated user groups. For low-risk users, we tailored credit limits and pricing to offer more attractive terms, boosting user engagement while maintaining stable risk levels. Additionally, we optimized our funding structure by collaborating with financial institutions whose risk management capabilities or appetites complement our own, further strengthening our overall asset quality. Within our post-lending processes, we reinforced repayment reminders for borrowers and refined the management of our partner institutions to improve collection efficiency. These initiatives resulted in a notable improvement in our risk metrics in Q3 with D1 delinquency rate falling by 0.2 percentage points sequentially and 30-day collection rate increasing by 1.1 percentage points to reach the highest level since 2022. With the optimization of risk strategies already in place, we expect our risk performance to remain relatively stable in the coming quarters. During Q3, liquidity in the financial system remained ample, leveraging our robust asset quality and the long-term trust that we have built with financial partners, we maintained our negotiating leverage on the funding side and reduced funding costs by 30 basis points sequentially. Additionally, we issued RMB 3.5 billion in ABSs in the quarter with issuance costs falling by more than 50 basis points sequentially. As a result, total ABS issuance for the first 3 quarters of 2024 reached RMB 13.4 billion, up by 23% year-over-year, further optimizing our funding structure. We also successfully issued our first asset-backed note in the interbank market, which further expanded our funding channels and investor base by attracting international investors through China's Bond Connect scheme. Given the seasonally tighter funding environment in Q4, we expect our funding costs to remain stable at current levels. In terms of user acquisition, we further explored diversified channels to improve efficiency and moderately increased investment to acquire new users. In Q3, new credit line users increased by 23.8% sequentially, while average unit acquisition cost declined by 7.4%. Notably, the proportion of new credit line users acquired through our embedded finance channels increased by roughly 5 percentage points with loan volume from this channel increasing by 85% year-over-year. With improved user profiling accuracy on partner platforms, both credit costs and operational efficiency of our embedded finance business improved in Q3, driving an ROA increase of approximately 60 basis points from the previous quarter. Furthermore, we continue to explore collaborations with financial institutions to engage their existing customer bases, leveraging their proprietary traffic alongside our differentiated pricing and service capabilities to expand the breadth and depth of our user coverage. To date, we have partnered with 5 financial institutions across various categories under this model, including joint stock banks, municipal banks, private banks, and consumer finance companies. As these partnerships progress, they will create new opportunities for us to empower financial institutions and further extend our reach to high-value user segments. In terms of managing existing users, we adopted a differentiated operation strategy based on user segmentation by their value and risk profiles. This enables us to provide more targeted offers, driving higher user engagement and conversion efficiency. We also strengthened the long-term retention of high-value users with the rollout of a VIP service strategy and enhanced engagement and insight analysis. For dormant users seeking large ticket, low-interest loans beyond our core offerings, we referred them to our financial partners, which enhances our ability to serve users throughout their entire life cycle. As a result of these initiatives, our log-in conversion rate increased by 11.6% sequentially in Q3. The number of users with successful drawdown grew consistently each month with the monthly average increasing by approximately 12% from last quarter. After a year of refining and upgrading our business model, our capital-light segment has assumed a more prominent role in our business mix. Excluding contribution from RM SaaS, the capital-light segment contributed 55% of total loan facilitation and origination volume in Q3, an increase of approximately 10 percentage points from the same period last year. From a long-term perspective, we plan to dynamically adjust the mix of capital-light and capital-heavy segments to balance returns and risks. By transitioning from a loan facilitation model to a platform model, we are building a comprehensive credit tech service platform that encompasses the entire user life cycle and promotes financial inclusion. Under the platform model, we prioritize long-term user engagement. Based on real-time insights into user needs and risk profiles, we have collaborated with a broad network of financial institutions under different models, diversifying our products, pricing options and funding sources. This approach enables us to address users' credit needs at different stages of their life cycle while achieving a better balance between scale, risk, and profitability of our business. In today's uncertain macroeconomic environment, we believe that our long-term value lies in our ability to better understand user needs, respond more swiftly, and provide consistent support throughout their financial journeys. Our total technology solution business has continued to make steady progress as we focus on building our Qifu DigiTech brand, which offers end-to-end technology solutions to banks. Recently, Qifu DigiTech was included on the IDC China Top 50 emerging Fintech list, significantly enhancing our reputation and competitiveness in the industry. This year, we have partnered with an additional 9 financial institutions, bringing the total number of financial partners for our total technology solutions to 14. Our solutions have already been deployed and launched with 10 of them. Compound monthly growth rate in loan volume powered by our solutions reached 14% during the first 9 months of the year. Furthermore, our tech solutions are expanding beyond consumer credit services with the development of a proprietary solution tailored for SME lending. This solution features an integrated 3-tiered credit assessment system, which combines big data-driven risk management, user self-verification, and offline intelligent due diligence. We have already launched a pilot program for this solution with an institutional partner. We are also seeing growing synergies between our tech solutions and credit businesses. Through our integrated solutions covering technology empowerment, joint operations, loan facilitation and user referrals, we will further deepen our support for financial institutions and expand user reach. As a tech-driven company, we are committed to leveraging AI and large language models to empower our business and improve both the user experience and operational efficiency. We upgraded our efficiency-focused AI copilot system, achieving a recall rate of 96.3% and an accuracy rate of 98.8% in key information extraction for loan collection. This AI copilot system has been deployed across various collection scenarios, including user information identification and case tracking, enabling our collection team to more effectively pinpoint critical information and promptly follow up on cases. This boosts both the quality and efficiency of our collection efforts. Average daily use of the system by our collection team has more than doubled since it was deployed. Additionally, we also enhanced the Qifu report interpretation system by integrating the Qifu large language model with traditional natural language processing models, allowing us to quickly gain deeper insights into the products of our SME borrowers. Combined with our financial knowledge graph, we can track operational changes for 30% of our SME borrowers, enabling us to offer more precise and customized financial services. Since Q3, the Chinese government has rolled out a range of monetary and fiscal policies to drive high-quality economic growth. At the same time, various levels of government have issued guidelines encouraging financial institutions to optimize credit products, provide differentiated services and increase funding support for key consumption scenarios while balancing risk and business sustainability. The guidelines also promote deeper integration of consumption scenarios and consumer credit services to enhance the consumer experience, boost confidence, unleash consumption potential, strengthen market vitality, and drive consumption. Recently, one leading fintech platform has made significant progress in its rectification process, indicating that regulators acknowledge the significant value of the fintech industry and that regulatory trends are largely stabilizing. After a year of optimization, our core business has become more robust, bolstered by diversified business models and broader strategic partnerships. While we remain cautiously optimistic about the economic outlook, we are confident in our ability to achieve long-term and high-quality growth. This year, we further optimized capital allocation to enhance shareholder returns, executing our share repurchase plan at a pace significantly ahead of market expectations. We anticipate that total shareholder returns in 2024 will approach 100% of our net income for 2023, one of the highest payout ratios among Chinese ADRs. Having already completed the majority of our USD 350 million share repurchase plan this year, the Board has approved a new repurchase plan of USD 450 million set to start on January 1, 2025. We are confident about the future of our company and believe that our share price remains undervalued. As such, we have decided to further scale up our share buyback efforts and continue to reduce our share count over the next two years. Going forward, we remain committed to efficient capital allocation and shareholder value creation through substantial repurchases and dividends.

Alex Xu, CFO

Okay. Sorry, there's a line issue there. Let me start again. Thank you, Haisheng. Good morning, and good evening, everyone. Welcome to our third quarter earnings call. While the macro environment was still challenging, we start to see tentative indications of modest improvement in user activities with more stimulus economic policies released late in Q3. However, it is still too early to call a sustainable recovery, and we continue to focus on optimizing operations, improving efficiencies, and managing risk exposure. Total net revenue for Q3 was RMB 4.37 billion versus RMB 4.16 billion in Q2 and RMB 4.28 billion a year ago. Revenue from credit-driven service, capital heavy, was RMB 2.9 billion in Q3 compared to RMB 2.91 billion in Q2 and RMB 3.07 billion a year ago. The year-on-year decline was mainly due to significant decline in off-balance sheet loans despite strong contribution from on-balance sheet loans and other value-added services. Overall funding costs further declined over 30 basis points sequentially and over 150 basis points year-on-year with the help of ample supply of liquidities and additional ABS issuance. Revenue from platform service, capital light, was RMB 1.47 billion in Q3 compared to RMB 1.25 billion in Q2 and RMB 1.21 billion a year ago. The year-on-year growth was mainly due to strong contribution from ICE and other value-added services, more than offsetting the decline in capital-light loan facilitation. Excluding other Technology Solutions segment, the contribution from platform service further increases as we try to strike an optimal mix between risk-bearing and non-risk-bearing assets in an uncertain macro environment. During the quarter, average IRR of the loans we originated and facilitated was 21.4% compared to 21.6% in the prior quarter. Looking forward, we expect pricing to fluctuate around this level for the coming quarters. Sales and marketing expenses increased 15% quarter-on-quarter but declined 21% year-on-year. Although we saw modest sequential uptick in consumer activities, we maintain a prudent pace of user acquisition in a still uncertain environment. We added approximately 1.58 million new credit line users in Q3 versus 1.28 million in Q2. The unit cost to acquire a new credit line user declined to 265 from 286 quarter-on-quarter. We will continue to make timely adjustments to the pace of new user acquisition based on macro conditions from time to time and further diversify our user acquisition channels. Meanwhile, we will also continue to focus on reenergizing our existing user base as repeat borrowers historically contribute the vast majority of our business. The 90-day delinquency rate was 2.7% in Q3 compared to 3.4% in Q2. The Day 1 delinquency rate was 4.6% in Q3 versus 4.8% in Q2. The 30-day collection rate was 87.4% in Q3 versus 86.3% in Q2. After a few quarters of proactive risk tightening, we are comfortable with our current risk exposure, and we expect to see relatively stable risk metrics in the coming months. Under the current macro environment and geopolitical uncertainties, we continue to take a prudent approach to book provisions against potential credit losses. Total new provision for risk-bearing loans in Q3 was approximately RMB 1.63 billion versus RMB 1.31 billion in Q2. Write-backs of previous provision were approximately RMB 910 million in Q3 versus RMB 480 million in Q2. The provision coverage ratio, which is defined as the total outstanding provision divided by total outstanding delinquent risk-bearing loan balance between 90 and 180 days was 482% in Q3 compared to 421% in Q2. Non-GAAP net income was RMB 1.83 billion in Q3 compared to RMB 1.41 billion in Q2. The significant improvement in profitability was mainly due to better asset quality and operational efficiency as well as favorable mix change in recent quarters. Non-GAAP net income per fully diluted ADS was RMB 12.35 in Q3 compared to RMB 9.16 in Q2 and RMB 7.20 a year ago as proactive share repurchase created significant EPADS accretion. The effective tax rate for Q3 was 23.4% compared to our typical effective tax rate of approximately 15%. The higher-than-normal effective tax rate was mainly due to approximately RMB 200 million withholding tax provision related to large sum of cash distribution from onshore to offshore for dividend payment and share repurchase programs during the quarter. With solid operating results and higher contribution from capital-light models, our leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity was 2.3x in Q3 at a historical low. We expect to see leverage ratio fluctuate around this level in the near future. We generated approximately RMB 2.37 billion cash from operating in Q3 compared to RMB 1.96 billion in Q2. Total cash and cash equivalents and short-term investments were RMB 9.77 billion in Q3 compared to RMB 8.78 billion in Q2. As we continue to generate strong cash flow from operations, we believe our current cash position is sufficient to support our business development and to return to our shareholders. On March 12, 2024, we announced a share repurchase plan to repurchase up to RMB 350 million worth of our ADS over a 12-month period starting April 1, 2024. As of November 19, 2024, we have in aggregate purchased approximately 13.7 million ADSs in the open market for a total amount of approximately RMB 298 million, inclusive of commissions at the average price of RMB 21.7 per ADS under this share repurchase plan. We intend to substantially complete the repurchase plan by the end of 2024. Furthermore, on November 19, 2024, our Board of Directors approved a new share repurchase plan to buy back up to RMB 450 million worth of our ADS over a 12-month period starting January 1, 2025. The proactive execution of the existing share repurchase plan and the launch of the new plan further demonstrates management's confidence and commitment to the future of the company, and management intends to consistently use share repurchase to achieve additional EPS and ADS accretion in the long run. In addition, we will continue to distribute cash dividends as under our current dividend policy and aim to achieve a gradual increase in dividend per ADS on a semiannual basis. With the full execution of a share repurchase plan and the dividend policy, we are generating one of the highest combined yields on a recurring basis among Chinese ADRs to our shareholders. Finally, regarding our business outlook, while we start to see some tentative signs of marginal improvement in user activities, we will continue to take a prudent approach in business planning and focus on enhancing the efficiency of our operations. For the fourth quarter of 2024, the company expects to generate non-GAAP net income between RMB 1.8 billion and RMB 1.9 billion, representing a year-on-year growth between 57% and 65%. This outlook reflects the company's current and preliminary view, which is subject to material changes. With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

Operator, Operator

Our first question comes from Richard Xu from Morgan Stanley.

Richard Xu, Analyst

Let me rephrase my question in English. First of all, congratulations on a very successful quarter in a challenging environment. We observed that in the third quarter, loan volume increased by 4.4% sequentially. What are the factors driving this growth, especially considering the recent efforts to enhance function and market sentiment? Is the company likely to see more positive loan volume growth next year? What concerns remain, and what is the outlook?

Haisheng Wu, CEO

Okay. Thank you, Richard. Let me answer your question about growth. Yes, we achieved good growth in the third quarter, and we have seen a slight recovery of customer demand by the end of September. Our platform strategy had a positive effect in serving a broader customer base. We have been upgrading our business model from a single loan service provider to a platform model. Under this model, we have created various solutions for our financial institutions to serve all kinds of customer needs on our platform. Therefore, we have better customer retention rates, and we can generate higher lifetime value. And there are more and more loan volumes coming from our diversified customer channels. For example, the loan volume from embedded finance channels grew by 85% year-over-year. Looking forward, there is still a lot of uncertainty in macroeconomics, geopolitics, and domestic policies. It may be too early for us to say whether we are optimistic or conservative about 2025. At this point, we want to remain prudent. Our top priority will still be focused on healthy operations and executing our platform strategy. Lastly, I want to say, after several years of effort, we have made significant improvements in all key capabilities, and we are stronger than in the past. If more growth opportunities arise in the future, I believe we will be in a better position to seize these opportunities faster than others. Thank you.

Operator, Operator

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

Alex Ye, Analyst

I have a couple of questions. First, I want to ask about the write-back amount, which exceeded RMB 900 million, marking a significant increase from last quarter and the average of recent quarters. What is driving this substantial growth in the write-back, and how sustainable is it? Additionally, in response to a previous seller report, you mentioned that the provision ratio for current new loans ranged from 3% to 4% for both your capital-heavy loan models. Could you update us on the provision ratios for this quarter? My second question is about the competitive landscape. Specifically, can you talk about the current challenges Qifu faces from banks as well as both larger and smaller fintech competitors? How has this landscape evolved this year, and how is it influencing our strategy?

Alex Xu, CFO

Okay. Alex, I will take the first part, and then Haisheng will deal with the competition question. So as you know, we have been adopting a very prudent policy in terms of booking provisions against potential credit losses. Historically, the provision ratios that we booked are meaningfully higher than the eventual kind of vintage losses our portfolio is supposed to have. For example, in the third quarter, the new provision that I mentioned in the prepared remarks, we booked about RMB 1.63 billion in new provision. If you do the math, that's roughly 4.3%, 4.4% of the risk-bearing loan volume for the quarter. So that's higher than last quarter for sure, and also obviously significantly higher than our normal kind of vintage loss ratio between 2.5% to 3.5%. This very prudent kind of provision booking policy results in write-backs in most quarters. If you look at the history, although quarter-by-quarter, you may see some very significant volatility in terms of write-backs depending on that particular quarter's macro environment and risk performance. But if you strip the timeline from an annualized basis, to look at it, almost in the last few years, on average, we have close to RMB 2 billion or somewhere around RMB 2 billion write-backs on an annual basis. This year, in the first two quarters, in Q1 and Q2, total write-backs were only less than RMB 500 million. So you use that annual average, meaning for the second half, we still have more than RMB 1.5 billion write-backs to be done, that's kind of the average look. And also one of the fundamental drivers for the write-backs, obviously, is really the risk performance improvement in our operation. Since we began to take more tightening kind of risk standards late last year, we have shown very significant improvement in our risk metrics, as you saw in our reporting. Those improvements in risk metrics also drive up the write-backs because it reduces the actual loss of the portfolio. So that's why we have this kind of a bigger-than-normal write-backs in Q3. I think most likely, you will still see a sizable write-back in Q4 as the reasons I mentioned above. From a more long-term perspective, we look at it, and we will continue to take a very prudent approach in terms of booking new provisions. With that, you will probably continue to see write-backs going forward. But keep in mind, as we are gradually shifting from capital-heavy to capital-light model, the risk-bearing assets or the size of the risk-bearing assets won't be growing that much; in some cases, maybe even shrinking on a going-forward basis. Which means that we will probably no longer need to book a very large sum of provisions, even though we still maintain a very prudent kind of a booking ratio. And so that's kind of a more longer-term look there. But anyway, so that's the key point I want to make: write-backs will continue. And if you look at it on an annual basis, it will still be a very sizable write-back at least in the foreseeable future.

Haisheng Wu, CEO

Okay. Alex, let me answer the question about competition. The first thing I want to convey is we are not in a completely homogeneous market. Different players serve different customer groups. There is no one player that can succeed in every customer group. But in the group that we target, we have a huge competitive advantage. I believe you can trust this point. And secondly, as I said before, we have upgraded our business model from a single loan service provider to a platform model. Under this model, we have a better customer retention rate and higher lifetime value. I am very glad that after years of development, Qifu is no longer just a loan service provider but has become a credit platform. We are more confident in dealing with competition. We believe that the platform model has made us more robust and resilient than any single loan business model. Thank you.

Operator, Operator

Our next question comes from Emma Xu from Bank of America.

Emma Xu, Analyst

Congratulations on the strong results. I have a question about your asset quality. Your main asset quality metrics have continued to improve in the third quarter. Can you share your outlook for asset quality? Many banks are experiencing pressure on asset quality in their retail and credit card sectors, but QFIN is seeing improvements in this area.

Haisheng Wu, CEO

Okay. Let me provide the translation. Regarding our risk management capabilities, I will address this from two perspectives. First, from our company strategy perspective. This year, we have implemented a high-quality development strategy, prioritizing quality over quantity. This focus has driven improvements in our risk indicators. We were among the pioneers in tightening our credit standards with strong resolve. On a technical level, the comprehensive risk management system we have developed over the years enables us to swiftly achieve our strategic objectives. Specifically, as a technology company, we continuously allocate resources to enhance our risk management technology and strengthen our core competencies. In the third quarter, we significantly upgraded our risk models. By utilizing our advanced graph network, sequence, and natural language processing algorithms, we have improved the performance of our primary transaction model by over three percentage points. Additionally, we developed models focused on pricing sensitivity, credit limit sensitivity, and long-term balance risk that align with our business strategy, equipping us with more tools to engage high-quality customer segments. Second, we refined the allocation and distribution models for medium and high-risk assets by selectively partnering with financial institutions that complement our risk capabilities or preferences. Moreover, we incorporated additional data to enhance our risk identification models, lowering the risk level and our overall exposure to this customer segment. From a post-lending management standpoint, we also strengthened our collection process in the third quarter. By continuously optimizing the AI reminders prior to repayment dates, we have decreased our day one delinquency rate. Utilizing our large language models, we have enhanced the efficiency of our overdue case assignments. Through dynamic adjustments to our incentive schemes and consistently attracting high-quality front-end and back-end collection resources, we have improved our collection efficiency. At this point, we have largely achieved our risk optimization goals and anticipate maintaining relatively stable risk performance in the near future, provided the macro environment remains subdued.

Operator, Operator

Our next question comes from Cindy Wang from China Renaissance.

Cindy Wang, Analyst

My question is about shareholder returns. The share buyback rate has been quite rapid this year, and you recently announced an additional USD 450 million repurchase plan. Can you provide insights on the pace of buybacks expected in 2025 and considerations regarding the repurchase price?

Haisheng Wu, CEO

Okay. Thank you, Cindy. Yes, we have been very determined to finish our current share repurchase program this year. When all is fully executed, we will spend close to 100% of last year's profit to buy back shares and pay cash dividends in 2024. This buyback will effectively reduce our share count by about 12%. In the third quarter, we achieved a 71.5% EPS growth year-over-year. Since we are very confident about our strategy and execution, we believe our shares are still significantly undervalued. So we will continue to prioritize share buybacks among all capital allocation tools. We believe this is the most efficient capital allocation strategy for now, which will significantly further reduce our share count, improve EPS and maximize shareholder returns. Based on this, the Board of Directors has approved a new USD 450 million share buyback program that is set to start on January 1, 2025. We will carry out this plan firmly in the coming year.

Alex Xu, CFO

Yes. And Cindy, I just want to add a little bit to your question regarding the price we are looking at. We don't have a really set price target for the repurchase. Even though our shares have moved positively in the last few months. But if you look at it on a forward PE basis, it still looks very attractive based on the current kind of estimate, probably looking below 5x in terms of forward PE. To us, that's still a very attractive valuation. So we will continue to proactively operate in the market. For the 2025 plan, the basic assumption is that as we execute the plan and continue to deliver solid results, the share price will reflect that positive momentum. So we will most likely continue to take a similar approach as we did in 2024, meaning that we will put more effort upfront, hopefully to buy as much as we can when the valuations are still very attractive. So that's how we look at next year's actions.

Operator, Operator

In the interest of time, we will now take the last question. Last question comes from the line of Yada Li from CICC.

Yada Li, Analyst

Congratulations on the result. The take rate has continued to improve from 4.4% last quarter. What are the main factors that contributed to this increase? Considering the potential improvement in credit and funding costs, do we anticipate a further increase in the take rate next year? Additionally, how do we view the long-term sustainable take rate?

Alex Xu, CFO

Thank you, Yada. I'll address this. We observed a notable enhancement in the take rate in Q3. The primary drivers behind this improvement include three key factors. Firstly, there has been a significant advancement in risk management, which has effectively lowered our overall credit costs, reflected as provision write-backs in our financial statements. We noted a substantial write-back in Q3. The second factor contributing to the improved take rate is the decrease in funding costs. Given the current macro environment and increased liquidity, we expect funding costs to decline further. Lastly, the third factor is the mix change that occurred over the past few quarters, leading to a deferred impact on Q3, and partially on Q4 as well. For Q4, based on our guidance, we anticipate a take rate similar to Q3, driven by the same factors: risk, funding costs, and the deferred impact of the mix change. Looking ahead, I believe risk management and funding contributions will persist, ensuring solid performance next year. As long as the macro environment remains stable, the funding landscape should also remain favorable. However, we expect the mix change effect to gradually diminish in the near term since we do not foresee a significant shift in the mix shortly. On a yearly basis, we estimate the overall take rate for this year to be approximately 5%. For next year, we expect a slight increase, anticipating a net take rate a little above 5%. In the longer term, the outlook depends on macroeconomic projections. Should we witness a consistent recovery in the macro economy, we will undoubtedly capitalize on these positive changes. However, at this moment, we are not forecasting such a recovery and are thus preparing for a relatively subdued environment in 2025.

Operator, Operator

We have no more questions at this time. I would like to hand the call back to management for closing.

Alex Xu, CFO

Okay. Thank you, everyone, for joining us. If you have any additional questions, feel free to contact us offline. Thank you.

Operator, Operator

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.