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Edited Transcript of 2003.HK earnings conference call or presentation 23-Aug-19 10:59am GMT

Half Year 2019 VCREDIT Holdings Ltd Earnings Call

Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of VCREDIT Holdings Ltd earnings conference call or presentation Friday, August 23, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Saiwang Liu

VCREDIT Holdings Limited - CEO & Executive Director

* Zheng Zhou

VCREDIT Holdings Limited - CFO

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Conference Call Participants

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* Lingfeng Cai

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to today's VCREDIT 2019 Interim Results Conference Call with Chief Executive Officer, Mr. Stephen Liu; and Chief Financial Officer, Mr. Daniel Zhou. (Operator Instructions) Mr. Liu will provide an overview of the company recent performance and highlights. Mr. Zhou will present you with a more detailed discussion on financial results. There will be a Q&A session after the presentations. The company has uploaded information under the company website.

I would like to take this opportunity to remind you that the company's remarks today may include certain forward-looking statements. A number of risks that's beyond its control may cause the actual results to differ materially from these forward-looking statements. During this call, the company will present both IFRS and non-IFRS financial measures. Here we also discuss general market conditions for the industry, and such information may come (inaudible) of source outside of VCREDIT.

Now I'd like to turn the call over to Mr. Liu. Mr. Liu, please begin.

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Saiwang Liu, VCREDIT Holdings Limited - CEO & Executive Director [2]

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Okay. Thank you. Good morning, everyone. It is my pleasure to report a solid business performance of VCREDIT for the first half of 2019 as we carried out our planning strategies to remain a dedicated technology-driven player in the inclusive consumer finance market in China.

With the disposal of our group's legacy online-to-off-line business platform in the second half of 2018, we have refined our business strategies in the area of product range and offering, organizational structure and also in efforts to attract more talents. We have successfully completed our transformation and moved our operation into a pure online consumer finance platform based on 3 major pillars, which are growth, efficiency and talents, which we believe these would be our long-term strategies.

In terms of operational performance. As demonstrated by our strong operational performance in the first half of 2019, we are successfully executing our business strategies by driving growth from a pure online consumer finance platform supported by leading-edge technology and also technology-driven data integration and analytics, also in light of the shift in focus from private lending and trust lending structures to more credit-enhanced loan facilitation structure.

As the Chinese online consumer lending market especially serving borrowers underserved by conventional financial institutions, we actually contract during the first half of 2019 with the number of P2P lending platforms dropping significantly in volume during the period. We have seen the opening up of opportunities that allowed us as a non-P2P company to attract more select borrowers previously loyal to other platforms and, hence, increased our customer base and market value -- market share.

We have therefore been prioritizing the expansion of our customer base by increasing our efforts on customer acquisition through the adoption of advanced targeted marketing [ad events]. Hence, we have been able to effectively expand our cumulative unit customer base by 16.7% to a total number of 69.7 million registered customers during the period.

To improve our services and customer experience, we have also streamlined our customer categorizations and corresponding product offerings. Our loan origination volume for the first half of 2019 was RMB 14,402.9 million, growing 49.6% as compared to the same period last year and also representing a 29.4% increase from loan origination volume for this -- of RMB 11,129.7 million. That is the total volume originated for the second half of 2018. So even compared with the second half of 2018, we managed to grow it by 29.4% in terms of loan origination.

And of equal importance to supporting the growth of our business is our sustainable and scalable funding. In promoting technology space and inclusive consumer finance business in China, we have also continued to cultivate and foster long-term funding partnerships with licensed financial institutions. The source of our funding differentiates us from many of our online competitors and places us on a better footing to deal with the challenges of recent regulatory changes and also regulatory uncertainties.

In the first half of 2019, we successfully committed 8 more new funding partners. That brings to the total number of our licensed financial institution funding partners to 38. The majority of our incremental funding partnerships are banks and the licensed consumer finance companies. Our funding partners are supportive and recognize the mutual benefits from our strategic initiatives into serving consumer financial needs with credit-enhanced loan facility -- facilitation structures.

The total loan origination volume consumed through credit-enhanced loan facility structure amounted to RMB 9,130.6 million or 63.4% of total loan origination volume in the first half of 2019. And also represent RMB 6,734.5 million in increase in a month and also 38.4 percentage points increase in loan origination volume contribution, respectively, if we compare to that for the period end June 2018.

We also spend much -- quite some effort in attracting more talents because we believe talent acquisition and retention is a key strategy for us in the long run.

During the period, our Chief Risk Officer, Mr. Luo Sheng, retired and has been succeeded by Mr. Ethan Gong. Mr. Gong comes with extensive experience in consumer lending and risk management, who has spent more than 10 years at Capital One United States before returning to China.

Our performance for the first 6 months of 2019 has been achieved without any compromise in our asset quality. Our M3+ ratios flattened during the period against a relatively flat total average outstanding loan balance of around RMB 14,784.8 million during the period. The cumulative life-cycle credit loss for recent vintages have come at the expected levels, indicating the effectiveness of our latest credit policies.

Overall first payment delinquency ratio increased slightly in the past 6 months around -- to a level around 2%, which is consistent with our latest strategies for a product mix of shorter loan tenor. Usually, product with shorter loan tenor will tend to have a higher first payment delinquency ratio.

And in terms of financial performance, our total income saw the year-on-year increase of 46.4% to RMB 1,860.2 million in the first half of 2019. The surge in total income during the period was directly attributable to the growth in loan origination volume through our credit-enhanced loan facilitation business, which corresponds -- with corresponding increase in loan facilitation service fee which actually soared up by more than 9x, it's actually 901.9%, to RMB 572.9 million.

Our total interest income from direct lending and trust lending structure actually decreased by RMB 417.2 million during the period, in line with our shift in our business strategy from private lending and trust lending structures to credit-enhanced loan facilitation structure.

To aid our overall financial performance, we are committed to continuously improving operating efficiencies. Our operating expenses, excluding share-based compensation expenses and nonrecurring items, decreased 11.1% to RMB 449.9 million during the period.

As a result, our adjusted operating profit and adjusted net profit for the 6 months ended June 30, 2019, rose 31.8% and 101.6%, respectively, to RMB 244 million and RMB 192.8 million if we compare that for the period ended June 30, 2018.

To further strengthen our capitalization and expand our institutionalized funding sources and to fund our business and operations, we have successfully issued senior notes of USD 100 million at a coupon rate of 11% in June 2019.

In terms of business outlook and our upcoming strategies. We believe the regulatory environment has been stable during the first half of 2019 which actually helped our operations. More consistent messages and actions has been emanating from state and local government agencies and regulators in different regions, providing less uncertainty to the regulation of the consumer lending sector.

The ongoing orderly exits of P2P platforms and also cleaning up of unlawful activities such as abuse of privacy and questionable debt collection practices among unqualified consumer lenders by the government has started showing benefits. Borrowers are, in general, becoming better educated and aware of the need for and the benefits of clean -- of good [PTLC] credit histories and records and also they're better aware of their responsibility for repaying loans. More consolidation among the leading players in the Chinese consumer finance market is taking place especially those targeting borrowers underserved by traditional financial institutions.

We will continue to monitor and refine and adapt our business strategies as necessary to respond to the market developments and challenges in a sustainable manner while still continuing to deliver growth and profitability.

With the regulatory framework heading into the next phase with the launch of migration pilot programs expected in the last quarter of this year, as communicated in the notes from the latest central government networking meeting, we're confident in our ability to continue to evolve and further secure to our business strategies and capture more opportunities as the overall industry transforms.

Our management remains optimistic about the market potential of consumer finance in China and committed to improving our encouraging performance for the first half of 2019. We believe as we continue executing our strategies with our vision and aspiration, we are poised to deliver long-term and sustainable value for all our stakeholders. Thank you.

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Zheng Zhou, VCREDIT Holdings Limited - CFO [3]

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Hi, everyone. This is Daniel Zhou, Chief Financial Officer. Whilst Stephen has given some of the headline numbers in the financials, I'll just go through and highlight some of the specific items that we'd like to attract your attention.

First of all, I think what's been a very significant development in our operations is the funding structure. For some of you who have followed us for quite some time, we are successfully transforming into an online operating platform and the shift from what was predominantly trust lending and direct lending, on-balance sheet funding structure into a more balanced on- and off-balance sheet funding structure.

Now back in 2018, the overall on-balance sheet funding source accounted for about 60% of our total volume back then. And in 2019 first half, this number was 35%. We are very excited about this result. And this is very consistent with our strategy that we're trying to work with more and more licensed financial institutions while having 100% institutional funding. And as a result, the total number of our funding partners actually has grown to 38 as of now. And out of the 38, we have 27 that are having the facilitation models with us. So all of them are banks and the consumer finance companies.

I think going forward, the funding split will relatively be stable, so we will expect around 35% to 40% funding still comes from trust. This is very important because we see -- especially in this macro environment, we see the merit of having trust funding being reliable and sustainable, while consumer finance or bank funding. Sometimes from time to time actually, there are volatilities. So we believe a mix of these 2 at a 46% -- 40%-60% split, is healthy and sustainable.

Now with that, as you can see, with the decrease of the on-balance sheet funding structure, this attributed to the decrease of our interest-type income during the first half. And correspondingly, because of the increase of the off-balance sheet funding, the loan facilitation service fee increased significantly.

With respect to the other income, as you can see, yes, from the breakdown, there are a bunch of items in this account. There is the penalty income that we collect from borrowers. There is also the -- some kind of the value-added services fees that we charge. To name a few, there are the membership fees that we had; there are the traffic referral fees that we collect from partners that we work with; there are the referral fees that we get from financial institutions for cross-selling from financial services; there are also fees that we track for providing credit assessment services including reports and some guidance work with the potential borrowers.

So this is -- if you look at it, this is being very, very diversified. And we believe it adds more revenue streams, revenue sources for our business. And we believe going forward, this will constantly provide a steady stream of income at a similar rate going forward.

On the expense side, as Stephen mentioned, our asset quality has been relatively stable. One number that I'd like to point out is the fair value loss. The headline number of fair value loss is about CNY 1 billion. This number, if you recall, our -- this is -- first of all, this is relevant to our on-balance sheet portfolio. And if you recall, our on-balance sheet portfolio is undergoing a transformation from running off the legacy off-line portfolio and having more pure online portfolio into this on-balance sheet portion. Because of that, because we no longer originate off-line portfolio, the fair value of the off-line portfolio is experiencing a bigger loss than it should have been when there is new volume coming in. So this is what we are going through during this transition period. We expect the off-line legacy portfolio to decrease from where it was at the end of 2018 at about CNY 3.4 billion to about CNY 2.4 billion at the end of June this year. And we expect this number to further go down to about CNY 1.4 billion at the end of this year. So that's on the legacy portfolio.

Other than that, from the operating expense perspective, we have achieved great efficiency by transforming into a pure online player. As you can see, the total OpEx -- total direct OpEx, including both variable and the fixed OpEx, actually decreased about 11% year-on-year. And if you strip out the variables, this decrease is even bigger. For the variables, we spent about [CNY 250 million] on customer acquisition. We believe this is a relatively healthy rate given our overall volume of CNY 14.4 billion. We think in the current market, we are one of the leading, I guess, traffic acquirers among almost all the Internet -- mobile Internet platforms in the market.

Now with that, I think if we look at our adjusted operating number and -- our operating profit number and adjusted net income number, we are seeing a more significant kind of development in the profitability. And we believe this increase, in terms of profitability from a, for example, net profit take rate perspective, the increased trending will still continue in the next 12 to 18 months. We think we will try to hit about 2% net profit take rate for the entire year. First half is about 1.3%. I think next year, our target will be in the north of 2.8% take rate.

With that, I'll conclude our management presentation for now and open the floor for questions.

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Questions and Answers

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Operator [1]

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Thank you, Mr. Zhou. We now begin our question-and-answer session. (Operator Instructions) Our first question is George from JPMorgan.

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Lingfeng Cai, JP Morgan Chase & Co, Research Division - Analyst [2]

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Stephen and Daniel, congratulations on your [results]. I'm George from JPMorgan. I just have 3 questions regarding the underlying numbers.

So first one is on the on-balance sheet part. So I do notice that we have an APR calculation of 24.4%. I believe this is somewhat different versus the number that was disclosed in the 2018 annual report which is around 35%. So could you give us some color of -- on a comparable basis with the APR in the first half of 2019?

And then in terms of the outstanding number of the on-balance sheet loans, do you mind if I ask the number on a gross basis before all the fair value changes?

And then can you just explain the fair value changes of on-balance sheet loans? This was mainly due to the legacy book of off-line portfolio. So is it because the off-line portfolio running worse in terms of asset quality, so we have to do more fair value loss, or what's the underlying reason behind this? I just want to gain more clarification. So that's your first one on the on-balance sheet part.

And then the second question will be on the off-balance sheet loans. So if I simply divided the loan facilitation revenue by the loan volume generated off-balance sheet, I seem to see a rise in the take rate of the off-balance sheet loan generation. So just wondering if you could share us some colors on why the take rate rose in the first half of 2019.

And then lastly, my question would be on the loan volume side. Daniel has mentioned about a 40%-60% split in terms of the on- and off-balance sheet. And then I still noticed that there is some momentum in off-balance sheet loan volume growth. But the majority of that could come from our finance guarantee companies. So wondering if we have -- how much quota do we have in terms of the finance guarantee companies in terms of the [share] capital? And then how much quota we've used to have because there is a 10x leverage cap on that? So that's pretty much my 3 questions.

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Zheng Zhou, VCREDIT Holdings Limited - CFO [3]

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Thanks, George. So on the first question on the on-balance sheet, if you look at the -- so the number for the on-balance sheet balance right now is roughly -- it's roughly CNY 7 billion. That's the on-balance sheet number. So that's -- basically, that's 46% -- sorry, 49% of CNY 15.7 billion. So CNY 15.7 billion is the Q2 end, my total outstanding balance. So 49% of that is on-balance sheet.

On your question on the APR, so the APR right now here is 24.4%. This is the average we have. If you compare it with the number you have mentioned, I think that number was somewhere between 19% to 20% on apples-to-apples basis because we're using the -- what people -- some people may refer as a [nominal APR] right now. So on apples-to-apples basis, this is about around 4 to 5 percentage points difference. This is because of a few things. One is the absence of our off-line portfolio. So back in 2018, we still have off-line portfolio which has a relatively lower APR especially for the secured products. So the blended APR was actually lower.

And the second is we actually underwent a new customer segmentation back in Q3 -- at the end of Q3 last year. And the segmentation resulted in a volume increase ramp-up ever since 2018 Q4, and that is why you see strong growth momentum in this. With this new customer segmentation, essentially, we are able to have more specific kind of -- have more significance in identifying different customers. And this essentially increases our, number one, approval ratio; number two, our customers' acceptance ratio because our pricing, our offering in terms of size and tenor becomes more favorable to the customers, and they're more willing to take our offers. So with all these, the efficiency have increased, and the mix of shorter tenor products actually has increased.

So if you look at it -- our online -- if you just look at our online portfolio, the average tenor actually has gone down slightly. Right now, it's about 9 months. I think going forward, it will be somewhere between 8.5 to 9.5 within the spend. And -- but between '19 and '18, there is slightly a decrease in terms of that. So because of this, shorter tenor of products tends to have a higher APR just because we annualize all the APRs for the calculation. So that is why you see a 4 to 5 percentage points increase in the nominal APR that we disclosed here. So that's the second question on the on-balance sheet.

I'm sorry, what is the third question on on-balance sheet? I kind of missed that.

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Lingfeng Cai, JP Morgan Chase & Co, Research Division - Analyst [4]

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Sorry, could I understand more on the fair value change of loan to customer?

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Zheng Zhou, VCREDIT Holdings Limited - CFO [5]

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Right, right. The fair value, yes. Yes. So let me just explain a little bit more. So first of all, it does not mean that the fair value of asset quality has deteriorated. So first of all, it's stable, the asset quality is stable, which you can see from the disclosure of our vintage curves for the off-line portfolio, number one. Number two, this is the nature of fair value accounting. As you may know, when we are running an ongoing portfolio, the outstanding balance has new incoming loans originated on -- for on-balance sheet loans. And also, they have the legacy portfolio that's going out. When you have this flow, the new portfolio that's coming in will contribute fair value gain at the inception while the outgoing portfolios will produce fair value loss. This is irrelevant to the asset quality fluctuations. Of course, asset quality fluctuations will cause additional amount, either positive or negative, to this gain and loss changing, but even when the asset quality is stable, there is a gain and a loss.

So what I'm trying to say is because we are no longer originating the off-line portfolio which means we do no longer produce gains on that portfolio, and hence, during this period, the loss tends to be higher because it's a pure running-off mode. And we expect this runoff mode to complete -- largely complete within this year. And we'll have an even minor impact next year given our expected growth of our ongoing online portfolio. So I hope this answers your question.

Right. So on the second part of the off-balance sheet, yes, you noticed the increase of our off-balance sheet take rate. I think this is in line with the one I discussed because from operations' perspective, our product, our offerings to our customers are funding structure agnostic. So basically, whatever we offer to our customers, we do not differentiate them across different funding structures. And I mentioned, and I explained, if you look at the APR, there is about 4 to 5 percentage points increase from a year ago. This is the same thing for off-line products. So that's largely why the take rate is going up.

And also, we have a slight increase in the upfront recognition of our loan facilitation fees for us for the off-line -- sorry, for the off-balance sheet funding structure. Current ratio is at about 80%, the reason being we -- first of all, the off-line portfolio is gone. The majority of the facilitation origination work is accounting for more of the services that we provide for our funding structures, while the rest of the services are relevant to post-origination servicing. Hence, there is about roughly 10 percentage points increase in the upfront recognition. So that's a minor point -- minor factor that contributes to the increase of the take rate.

We expect going forward I think this ratio should be normalized because it's more -- it's less -- from a time perspective, lagged than the on-balance sheet funding structure. So it's more timely reflecting our current business operations. And I think with a 67% headline number take rate, I think it's sustainable going forward.

Last question on the finance guarantee company, our current leverage ratio for the finance guarantee company is at about 7x. This is still well below the 10x cap that the regulators have. The key reason if you look at it is because we have -- we are going through this transformation from online-off-line together to a pure online operator. And during this period, as we can see, as Stephen has also mentioned that the overall outstanding balance during the past 18 months has been relatively stable. It's been at around -- if you look at the average, it's about CNY 14-point-something billion. The clean balance for 2019 June, that I just mentioned, is about -- is CNY 15.7 billion. We expect we are going to see moderate growth in this overall balance, but it's relatively tempered by the running off of my off-balance sheet which has longer tenor. And the incoming new proposals usually have shorter tenors, so this mismatch in duration, call it a slower pace of growth in our outstanding balance, with that this has little pressure for us at least for the next 12 to 18 months on our [finance] guarantee companies given our current growth pace. We expect about -- we are running at about CNY 3.3 billion running rate a month right now. So this gives us about CNY 20 billion for the second half of this year. So with this current growth pace, even extending to next year, we're pretty comfortable that the finance guarantee companies' capital ratio should be okay.

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Saiwang Liu, VCREDIT Holdings Limited - CEO & Executive Director [6]

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Let me add one more point here, and back to the third question of George, about the financial guarantee. And we have to pay attention to the guarantee quota from time to time because we will need to report that figure to the government on a monthly basis. So and -- I mean, we actually will have also for the new strategy, we already started working with credit insurance company and also third-party independent guarantee companies. And through working with them, we actually kind of can shift most [most of the quota] to the third parties, certain independent parties.

So I just want to let you know that our business is not entirely based on our own financial guarantee quota. We have been also involved -- already kicked out, and we have been working with credit insurance and the external guarantee companies as well.

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Operator [7]

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(Operator Instructions) Next question is [Lucy] from Goldman Sachs.

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Unidentified Analyst, [8]

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So I have 2 small questions on the income statement, the operating number side. The first one is on sales and marketing, we noticed that there's a significant saving in terms of sales and marketing, and then the management already explained that it actually comes from a result of defined -- the client acquisition model. So that we have largely increased -- improved the efficiency. I'm just wondering if this kind of quite low level of sales and marketing expense could be sustained or whether we can continue to acquire customers at such a low cost going forward.

The second one is on tax rates. Can you briefly explain on how the tax rate is -- like what constitutes to the seemingly high tax rate and what would be the normalized rate going forward?

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Zheng Zhou, VCREDIT Holdings Limited - CFO [9]

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So on the sales and marketing -- okay, first of all, let me explain how we allocate the numbers in the P&L. So sales and marketing -- or actually, I should say customer acquisitions. So customer acquisition, actually, our customer acquisition costs are in both origination and servicing expenses account and sales and marketing account. So it's not just sales and marketing, just for your benefit. Because the reason we will have to have customer acquisitions in both of the accounts is because for some of the sales and marketing -- sorry, for some of the customer acquisition costs, they are directly attributed to specific loan accounts. And for those, they are booked under origination and servicing expenses.

For some of the customer acquisition expenses that are not directly attributed to any specific accounts, we will have to put them under sales and marketing. Now to give you specific examples, if we have an advertisement on Tencent WeChat Moments, that will be considered as sales and marketing. So if we do a CPS or a CPA with, for example, [Gen Pool], Loan (inaudible), Loan 360, then that will be accounted under origination and servicing. So just to understand the accounting a little bit on this, how we do this.

So with that, if you look at our customer acquisition cost, it's about [CNY 250 million] for 2019 first half. And that is why I mentioned about a close to 2% customer acquisition cost for the first half. From a headline number perspective, CNY 250 million was actually higher than about [CNY 200 million] back in the first half of 2018. So the headline number is actually increasing, while our total OpEx, including this customer acquisition cost, is decreasing. So that's why I'm saying the overall operating efficiency, essentially my fixed cost, has gone down quite a bit. So this is the comment on the sales and marketing.

Sorry, [Lucy], what was the other? Oh, the tax rate. Tax rate actually has been relatively flat. Our effective tax rate is about 20%. But the thing is we're trying to make improvement on our tax rate, but there are, from practical perspectives, there are challenges to a certain extent because we will have to have our finance guarantee company to book a large number of our revenue and corresponding profit. And for the -- for finance guarantee company doing management, it's important to show the financial strength of the company.

So although, to the extent possible, we will transfer out the profits from the finance guarantee subsidiary to other subsidiaries that have more beneficial tax brackets, but we will have to keep -- retain [twice] amount of our profit under the subsidiary, under the financial guarantee -- finance guarantee company subsidiary, again, to show financial strength. And that is why for a financial guarantee company -- finance guarantee company, the tax bracket at 25%. It's difficult to get so-called high-tax, preferential tax bracket of 15% for finance guarantee company. And that is why our plan that we do have another subsidiary that have the preferred tax bracket, but it's not -- we are not able to apply that to all the net profit that we have. Hence, our marginal tax rate is about 20%. But we're very aware of that, and we're constantly trying to find means to improve it.

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Unidentified Analyst, [10]

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Maybe just to clarify, when I see the tax payment of [CNY 52 million] this period, what's the base of like -- you mentioned that the marginal tax rate is somewhere in between 20% to 25%, depends on what it is from the guarantee company, right? So how -- why would -- how would [VC] transfer into the CNY 52 million ?

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Zheng Zhou, VCREDIT Holdings Limited - CFO [11]

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Right, right. Some of the -- I'm planning to go back -- get back to you later for specific tax numbers. But as far as I understand, because you see a large chunk of our so-called expenses are expenses relevant to share-based compensation, I don't think that's actually [applicable] in the -- yes, I think it's largely because of that actually. The share-based compensation is about CNY 187 million actually.

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Unidentified Analyst, [12]

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So that's tax deductible as well, right?

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Zheng Zhou, VCREDIT Holdings Limited - CFO [13]

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It's not tax deductible. Yes. It's not -- yes, yes, yes.

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Unidentified Analyst, [14]

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Okay. Got it. And if I may, I would like to follow up with another question on asset quality.

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Zheng Zhou, VCREDIT Holdings Limited - CFO [15]

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Sure, yes.

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Unidentified Analyst, [16]

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Yes. As mentioned, the first payment delinquency rate slightly increased even though on the entire loan book basis, the delinquency rates, both within 3 months and longer than 3 months, seems to be stable. But just because of the early trends of the -- for example, the first payment delinquency, do you expect going forward, for example, in another quarter or 2, we're likely to encounter higher credit cost? If so, by how much?

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Zheng Zhou, VCREDIT Holdings Limited - CFO [17]

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I'll start first maybe, and then Stephen can add more color. I think first of all, this is future number. We explained why, what happened. Basically, especially from 2018 Q4, when we started implementing our new customer segmentation, the -- ultimately driving the growth of our business are showing great momentum, and we were able to capture larger group of customers. Just to give you more color what we mean by growth, it's not just the volume that you're seeing, we are adding pure and new transaction borrowers every month at a rate of 100,000 people, 100,000 brand-new borrowers to our platforms. This number, if you want to have a year-on-year compare, was 50,000, so we're doubling our customer acquisition -- new customer acquisition rate transacting customers. These are all the results of our new customer segmentation. So we are very happy about the results.

Now together with that, and you can see, we are adding a bit -- we are having a higher mix of shorter tenor products. Now 12-month tenor product accounts for about 50% of our total volume right now, so which means 3 months and 6 months, these are the 3 prevailing tenors that we have accounting for 99-plus percent of our volume. And that's why we have a blended tenor of about 9 months.

And excluding -- if you were to apply the original customer segmentation, the -- as we disclosed in the announcement, the first payment delinquency ratio was significantly below the 2%. This was not saying that the newer customers that we are adding are essentially having less asset quality. It's a mix of expanding our customer base while having a shorter tenor. For example, a 3-month product, for example, the ultimate linkage loss will be 4%, and the pattern will become roughly 2% to 2.5% first payment delinquency on first payment because it's just -- it makes less spend if they have paid 1 or 2 installments, leaving the last one delinquent. So the behavior shifts a little bit.

But we are constantly refining our customer segmentation and our risk management algorithms. And again, 2% first payment delinquency ratio is something that we try to defend for the long run, given the growth pace. And so far, with all the numbers that we are seeing, we're confident that we are able to defend this number. So we do not expect this number will go up in the future quarters. And we hope we can bring it down back to below 2%, but it's always a balance that we need to keep between having a stable asset quality and healthy growth of our business.

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Saiwang Liu, VCREDIT Holdings Limited - CEO & Executive Director [18]

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I just want to add one more point here on -- to your question. So tenor, you mentioned that you know, we have -- we see so much uncertainties. That is why we decided to adjust our product strategy, our product mix. We actually are offering products with more -- more -- to customers with relatively shorter loan tenor. But if we pick out those products with long -- with relatively long -- shorter loan tenor, the mass majority with a loan tenor of, for example, 12 months, the first payment delinquency ratios had been very stable. It's actually even -- it's even coming down. And for the second quarter, it will compare with the fourth quarter of last year and first quarter of this year. So we have a reason to believe, because these loan with a 12-year -- 12-months' loan tenors, I think they contribute the majority of our loan book portfolios. So we have a reason to belief the subsequent M1-M3 ratio and the M3+ ratio will be stable, if not even further improved.

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Zheng Zhou, VCREDIT Holdings Limited - CFO [19]

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Yes. And just for everyone's benefit, I think it's fair to comment that one single metric is not always a good reflection of asset quality in our business. I think this is exactly why, if you look at our disclosure, we have first payment delinquency ratio which is vintage-based. We disclosed our vintage-based, cohort-based vintage -- ultimate vintage loss in graphs. And we also have balance-based NPL -- so called NPL ratio, which is M1-M3 ratio and M3+ ratio. We want to offer a more comprehensive picture to give you guys a holistic view from different perspectives, both cohort-based and balance-based, we believe by looking at all of them together, you will be able to have a much clearer picture of the asset quality trending that we are having. So I would suggest you [add have all the points].

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Operator [20]

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The next question is George from JPMorgan.

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Lingfeng Cai, JP Morgan Chase & Co, Research Division - Analyst [21]

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Sorry, my question was asked. I don't have further questions.

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Saiwang Liu, VCREDIT Holdings Limited - CEO & Executive Director [22]

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Okay.

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Operator [23]

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And our next question is [Lu Chin] from [Voltech].

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Unidentified Analyst, [24]

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Congratulations for the results. And I've only got one very simple question about certain micro environments in China, as you may know, that has slowed down. So are there some impact to your business?

Another one is about the tight regulation for future new business in China, as you may know. And are there some shifts of the private customers from the P2P businesses and to your company? And what you're doing about the future trends?

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Zheng Zhou, VCREDIT Holdings Limited - CFO [25]

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Sorry, I missed the first question. Can you repeat the first question again?

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Unidentified Analyst, [26]

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Yes, it is, that there's a slowdown of environment in China. So are there some impacts to your business? And my concern is that they may be about 2% less. [And a simple sale] yes, borrows less, and then that's it. Yes, maybe half, but it's kind of [maximum]. But from the [data], it seems not that issue, so what do you think about it and, yes, the future?

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Saiwang Liu, VCREDIT Holdings Limited - CEO & Executive Director [27]

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Yes. Let me try to answer your question first. And maybe, Daniel, if you have more color, you can add on. I think what we have seen -- the reason why we became more aggressive in acquiring customers is because we think this is an opportunity for us because, obviously, we believe up to this moment, I think most of the business -- the industry consensus is probably government is not going to allow P2P, I mean, to be a kind of properly registered or licensed player in the long run. So what we are seeing there are more and more P2P players actually they're pulling out of the market. Some of them actually just have to close down the business.

So we see a trend like more customers actually are been channeled to us. But again, I think we got 2 very important. The first is we're only focused on customers we call -- so-called underserved customers, that we'd properly serve them. They've been served by banks but not properly. We'll only focus on that group. At the moment, we're still not very aggressive in acquiring customers from P2P platforms with [credit] histories. But in the long run, we are actually -- we currently have a pilot project to study that possibility as well because it seems, obviously, some of the P2P platforms, even they are focusing on serving the so-called underserved customer, some of them are doing pretty well. So we are also exploring this opportunity. But at this moment, we are still primarily focusing on customers with credit histories or primarily focused on customer -- so-called underserved customers. That's our strategy. So yes, we are getting like -- as we mentioned, getting like more than 100,000 new customers. So I think we'll try to capture this opportunity.

And then in the long run, we think we're actually seeing some of the, I would say, better platforms. They are all shifting the -- their business model. Originally, we loan the P2P money. Now also shifting to this loan facilitation model. So we're seeing some other trend of trying to migrate themselves to more like our business model. So I think in a sense, this is actually pretty healthy because, obviously, we don't want to see the old P2P structure collapse all of a sudden because that will cause a collateral damage into our business as well. We hope to see some of the [first year] platform, they are able to migrate themselves successfully to be a -- like a pure institutional model like VCREDIT.

But having said, I think during this process, we are pretty optimistic. And that is why we -- also, we look at our figures. I think the figures speak for itself. We think asset quality is stable, and growth is actually -- we believe this pace of growth is sustainable. And we'll become more [successful and willing to take more] opportunities in the current market situation. I hope I answered your questions.

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Operator [28]

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(Operator Instructions) There are currently no more questions. Management, do you have any follow-up? Management, do you have any follow-up? There are currently no more questions.

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Zheng Zhou, VCREDIT Holdings Limited - CFO [29]

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Well, thank you, everyone, for joining us for the call. And we wish you all have a good day then.

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Operator [30]

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And this concludes our conference call. Thank you, everyone. Goodbye.

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Saiwang Liu, VCREDIT Holdings Limited - CEO & Executive Director [31]

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Thank you.