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Edited Transcript of LX.OQ earnings conference call or presentation 18-Nov-19 11:00am GMT

Q3 2019 Lexinfintech Holdings Ltd Earnings Call

Dec 7, 2019 (Thomson StreetEvents) -- Edited Transcript of LexinFintech Holdings Ltd earnings conference call or presentation Monday, November 18, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Huanian Liu

LexinFintech Holdings Ltd. - Chief Risk Officer

* Tony Hung

LexinFintech Holdings Ltd. - Investor Contact

* Wenjie Xiao

LexinFintech Holdings Ltd. - Chairman & CEO

* Yan Zeng

LexinFintech Holdings Ltd. - CFO & Director

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Conference Call Participants

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* Alan Kuang;Aletheia Capital;Analyst

* Eddie Leung

BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst

* Jacky Zuo

China Renaissance Securities (US) Inc., Research Division - Analyst

* John Cai

Morgan Stanley, Research Division - Research Associate

* Martin Ma

Nomura Securities Co. Ltd., Research Division - Associate

* Wen Li

Goldman Sachs Group Inc., Research Division - Research Analyst

* Xiaoxiong Ye

UBS Investment Bank, Research Division - China Financials Research Associate

* Yiran Zhong

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the LexinFintech Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today.

I would like to hand the conference over to your first speaker today, Mr. Tony Hung, Senior Director of Capital Markets. Thank you, and please go ahead.

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [2]

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Thank you, operator. Hello, everyone, and welcome to Lexin's Third Quarter 2019 Earnings Conference Call. The company's results were issued earlier today and are posted online. Joining me today on the call are Mr. Jay Xiao, our Founder, Chairman and Chief Executive Officer; Mr. Craig Zeng, our Chief Financial Officer; Mr. Ryan Liu, our Chief Risk Officer; Mr. [Stanley Zhou], our Senior Financial Director; and other members of our team. For today's agenda, Mr. Xiao will provide an overview of our recent performance and highlights; Mr. Zeng will discuss our financial results; and Mr. Liu will discuss our credit performance.

Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi.

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

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [3]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [4]

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[Interpreted] Hello, everyone. I am very pleased to announce the execution of our new consumption platform strategy and our strong active customer growth has once again allowed us to achieve strong growth in our business.

This quarter, for the first time, our registered users reached over 60 million, an increase of 92.2% year-on-year. Our new active customers for the quarter was 2.5 million, a very strong increase of 265%. Our sales was CNY 3.2 billion, an increase of 72%. Our gross profit was CNY 1.7 billion, an increase of 122%, allowing us to achieve our eighth straight quarter of double-digit growth since our IPO.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [5]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [6]

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[Interpreted] We can see that in our year-to-date, Lexin, in the 3 areas of consumption scenarios, financial services and customer benefits and privileges, have continued to push forward on our strategy of the new consumption platform, connecting our customers with many online and off-line consumption scenarios, activating millions of new consumption requests, which is demonstrated in the increasing growth of our platform.

During Singles' Day, Lexin's own consumption platform achieved over 100 million in GMV in under 10 minutes, less than half the time it took last year. Lexin, with our partner, Xiaomi, NetEase Kaola, (inaudible) and 18 other e-commerce platforms, together, created a new Singles' Day installment market, increasing the number of daily installment purchases by 3.8x and increasing GMV by 540%.

In addition, Lexin's new membership benefits card, Le Card, has today connected other benefit cards, including movies, dining, music, travel and other benefits and products liked by educated young adult customers. At the end of the third quarter, Lexin's paid membership product has already served over 1.5 million customers.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [7]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [8]

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[Interpreted] We are deeply aware of and appreciate the fact that as the number of our customers grow, our responsibility to protect our customers grows as well.

In the third quarter, we introduced our [Yongwang] User Protection Program 2.0 system for protecting customers, using AI and big data technology to protect against overconsumption, to protect against fraud and to protect our users' private data, or what we call the 3 protections. We believe that with our technology capabilities, which has been accumulated over the past 6 years, we can provide hundreds of millions of customers with a safe, convenient and sustainable service, and in turn, enable Lexin to continue to grow in a stable and sustainable manner.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [9]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [10]

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[Interpreted] In addition, Lexin's AI laboratory and big data center has introduced our new [Ling Xie] AI Smart Finance platform, which is not only being deployed across all our business lines to increase efficiency, but is also providing Lexin's financial technology with greater security and safety.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [11]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [12]

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[Interpreted] As a result of our strong capabilities, Lexin has gained the trust of the broadest and most diversified group of institutional funding partners. To date, we have established with over 100 large national banks, insurance companies and consumer finance companies, strategic cooperation agreements, positioning ourselves as the leader in our industry in diversified funding.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [13]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [14]

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[Interpreted] Lexin's new consumption platform strategy is continuing to release the internal consumption potential of China's millions of educated young adult customers, giving us confidence in the future of our company.

As a result, we have adjusted our full year loan origination guidance to CNY 115 billion to CNY 125 billion as compared to last year's CNY 66 billion, a growth of 74% to 90%.

Recently, AC Nielsen's report on the leverage levels of China's youth also revealed that China's youth debt levels, as measured by monthly payment as a percentage of monthly income, is only 12.5% and still exhibits great potential for growth. In accordance with the government's macro policies encouraging consumption, we have reason to believe that leading players serving the emerging educated young adult consumer population will have further room to grow and develop.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [15]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [16]

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Next, I'd like to invite our CFO, Craig, to discuss our recent financial performance.

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Yan Zeng, LexinFintech Holdings Ltd. - CFO & Director [17]

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Thank you, Jay, and hello, everyone. I'm pleased to announce that we have once again delivered strong results. In the interest of time, I will not go over line item by line items of our financials. For a more detailed discussion of our third quarter 2019 results, please refer to our earnings press release.

As Jay mentioned, total operating revenue for the third quarter 2019 reached CNY 3.2 billion, driven by strong growth in our financial service income, which reached CNY 2.2 billion of which loan facilitation was CNY 1.9 billion. Adjusted net income was CNY 714 million, reflecting our continued strong growth and performance. Fully diluted adjusted net income per -- income per ADS was CNY 3.86.

We continue to see the future potential of our business model. In the performance of our customer cohort whom we acquired in the [first] quarter of 2015, whose balance is now RMB 13,778 and whose 30-day interest rate is approximately 1.19%, with a stable level of quota activity rate at 42.7%.

Our operating leverage, operating expense as a percentage of the average loan balance, is now 6.5% in the quarter and the nonadvertisement marketing, advertising, G&A and R&D was 1.3, 3.1, 1% and 1.1% of average loan balance, respectively. We currently have 62.6 million registered users and 16.7 million customer with credit line, up from 9.6 million in September 30, 2018. We acquired nearly 2.5 million new active customers in the third quarter. Overall, our average credit limit was RMB 9,488, while our average tenor is now 13.3 months. Our weighted average APR was 26.6%.

In terms of our funding for the quarter, only 6.5% of our funding for new loan origination came from our Juzi Licai platform and 93.5% of our funding for new loan origination came from our institution funding partners. And as Jay mentioned, we are pleased to announce that we now expect total 2019 loan origination to be in a range of RMB 115 billion to RMB 125 billion versus our previous guidance of RMB 115 billion.

Next, Ryan will discuss our credit situation. Ryan, please.

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Huanian Liu, LexinFintech Holdings Ltd. - Chief Risk Officer [18]

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Thank you, Craig. We continued our strong performance in this quarter. In spite of certain tax affecting others in our industry, our credit quality continued to be high and we expect our credit [statistics] and charge-off ratios to remain at the same level as disclosed for this quarter. Our 90-day product delinquency ratio remains low at 1.4%, and we continue to see strong performance as our lifetime charge-off ratio is approximately 2.5%. We fully expect our strong performance to continue for the full year 2019.

With that, I conclude our prepared remarks. Operator, please proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jacky Zuo from China Renaissance.

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Jacky Zuo, China Renaissance Securities (US) Inc., Research Division - Analyst [2]

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(foreign language) So I will translate my questions. So congrats on the results. I have 3 questions. So first is about our Le Card product. I just want to check, so what's the percentage of the loan origination from Le Card as of our total originations. And what is the new user or new borrowers' contribution from Le Card? And the related question is about the competition on this virtual credit card solution. We recently saw that, for example, WeChat -- sorry, WeBank also launched a related -- sorry, similar product called (inaudible). So just want to get your view about the future competition on this virtual credit card product.

And second question is about the recent business trend, including the loan origination growth, asset quality, and also our sales and marketing expense. As we've seen, we actually spent over CNY 500 million on sales and marketing in the third quarter, so just want to check our acquisition pace in the fourth quarter.

And the last question is about the regulation. So we've seen that regulator is encouraging the online lenders with strong capital base and strong capability to be licensed. So what is our current situation in terms of applying license, such as consumer finance, company license or online micro lending company license?

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [3]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [4]

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[Interpreted] So Jacky, on your questions, I'll answer the first and third one, and I'll leave the question on the fourth quarter and the situation there for Craig, our CFO.

Le Card, as you know, it's demonstrated very, very strong growth. It's a very, very convenient product. And as we're looking into the fourth quarter and beyond, it continues to be very strong, contributing greatly to customer acquisition and other numbers. It can make up something, like say, maybe 20% to 30% of new loan originations, and perhaps this will continue to grow. And certainly, it's helping our customers with their needs. So we certainly see that we're getting a lot of new active customers from this. And as mentioned, the growth in the active rates continue to be very, very strong.

Now with regards to the competition, I think it's perhaps worth pointing out that we're still targeting the same type of customers. And also, a lot of the customers that we're serving were, in fact, already our existing customers. So in fact, we're actually serving the same customers. And also, we're not changing our fundamental customer profile.

Now why is this important? It's important because WeBank and some of the other competitors out there, they serve fundamentally different customers, customers that are not our customers, that have a different profile. So as a result, we're not really seeing significant competition or potential competition from them as they're actually fundamentally targeting a different group.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [5]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [6]

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[Interpreted] Yes. Now on the licensing and the licensing situation, I think we've been consistent in saying that, ultimately, we're not a financial institution. And fundamentally, we don't want to rely on any particular license per se. But as you said, the companies that are highly compliant, the companies that are good, they will basically get the respect and attention. And certainly, if we have the opportunity, we will certainly focus on potentially acquiring additional licenses.

Now as you know, we already have the Internet micro loan licenses and other licenses, and we'll continue to accumulate the proper licenses. However, on specifically, the license that may be coming, we'll disclose more about it at the appropriate time when the time becomes closer.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [7]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [8]

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[Interpreted] And so I think, Jacky, given that for the overall guidance for the year, we revised it upwards a bit. That kind of answers some of your questions regarding the numbers for the fourth quarter and how things are looking. Now that said, on one hand, we're very fortunate in that nearly all of our funding now is institutional funding. However, there's always certain uncertainties associated with institutional funding at year-end. So hence, there is some risk there. But that said, again, our overall guidance for the full year has been raised. So ultimately, in spite of the uncertainty, certainly, the fourth quarter numbers are looking higher than they were before.

Now on customer acquisition, I think, ultimately, as you know, we are very analytical about these things, and it always depends on the terms, the effectiveness, how the different channels work. So right now, the returns certainly are very good. It will take us something like 3 months, maybe maximum 6 months, to recover the typical costs. And certainly, we've spent a lot in the third quarter. But ultimately, because we're very analytical about this and it depends on the returns we can get on the channel, we'll have to adjust accordingly in the future. So it will depend on the situation. But again, the third quarter was definitely a bit of a high. And potentially, in the future, we may adjust downward slightly. I hope that answers your questions.

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Operator [9]

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(Operator Instructions) Your next question comes from the line of Eddie Leung from Bank of America Merrill Lynch.

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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [10]

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(foreign language) So I have 2 quick follow-up questions. The first one is about user demographics. Understood that Jay already saying that not much of a change in terms of the user profile, but still curious on whether we have seen some different trends recently, given the fast user growth in terms of, let's say gender, age groups and geographical location.

And then secondly, also a follow-up question on regulations. Recently, we have seen news about certain proposal on regulations on private companies using user data for credit analysis. So just wondering if we have any thought on how we're positioned against such a proposal.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [11]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [12]

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[Interpreted] And so Eddie, with regards to your question with regards to our customers and what changes we have seen, I think it's first important to emphasize that we're continuing to serve China's educated young adult cohort or China's high-growth cohort. Now the channels may change, the acquisition methods may change, but ultimately, these are still the customers that we're going after.

Currently, about 1/3 of the customers are being acquired from online sources, in particular, online direct advertising. About 1/3 is from referrals or some natural traffic and then about 1/3 is off-line. But fundamentally, the customers, they're still 24, there's still 25.

Now with regards to the online customer acquisition source, it is a very results-driven particular channel, it's a very effective channel. And even though it is a new channel that really we only used very widely this year, it's still the same customers that we're going after. So at the core of it, on the answer to your question how have the customers changed, no obvious changes. Perhaps, the only thing is that, given that we're acquiring them online, we're just slightly more conservative with the credit that we give them, so we will prefer that we give them some credit and then let them use it and then give them additional credit based on that assessment.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [13]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [14]

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[Interpreted] Eddie, with regards to your question around privacy concerns and some of the things that have been issued out there, I think, first, it's perhaps important to emphasize that when it comes to data and the use of data, we're pretty conservative and we try to make sure that there is minimal impact or intrusion, and we use the minimal amounts of data that we need.

So in particular, for things such as contacts and GPS data as well as other information, there's 3 principles that we definitely have to abide by, at least internally. One, as mentioned, we want to minimize the intrusion and also minimize the use of, in particular, sensitive information. So this is something that, very much internally, we have as a policy.

Second, we obviously have to do all this with the customer's permission. So it's only with the customer's permission and authorization that we use any of the data.

And then, finally, we definitely cannot use any of this data for things such as collections or pursuing debts. So in regards to the overall situation, everything that we do is compliant with the law, with the nation's law. And the companies that have gotten into problems in the past, quite often, they were using the data in a nondiscrete way to make profit. So this is something that also we don't do. We certainly do not involve in those types of practices.

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Operator [15]

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

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Xiaoxiong Ye, UBS Investment Bank, Research Division - China Financials Research Associate [16]

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(foreign language) Sorry, I will translate my question. So my first question is about the proposed use of the USD 300 million of [convertible notes] that Lexin issued earlier. And related to that, we have seen on the news that Lexin has invested into a newly established private bank incorporated in Jiangxi province with a stake of 10% shareholdings. Just wondering, could you have some additional insights on that and how would that investment help our business in the future?

And my second question is about asset quality. So we have seen the 90-days-plus delinquency ratio has remained stable in the Q3, but we also see some -- we have 2 fair value items in the P&L that have seen some negative losses in this quarter, which may reflect some of the asset quality fluctuations. So just wondering if we could have an update on our underlying trend on the asset quality.

And related to that, we have seen some of the banks turning more conservative on their credit card loans this year, so wondering what the management's view on that.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [17]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [18]

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[Interpreted] So Alex, with regards to the SCB, as you know, we have disclosed quite a bit of information as well once we made the announcement. And as you know, the SCB was for $300 million, with a conversion price of around $14. And with PAG, one of the top investors in the sector, certainly very, very well respected, I think, by everyone. And they have been, in fact, observing us for quite a long time.

Now with regards to the use of proceeds, certainly, the use will be for future plans and operations. And then, again, the terms of the proceeds was quite good. And it will certainly help us drive our future growth for our shareholders in the future. Now on the Yumin Bank investment, it's the 18th private bank in China and as I think you know, we have a 10% stake. It is a completely new bank and, in and of itself, this provides a lot of value, given that there's no legacy problems.

First, as you know, private bank licenses are very, very rare in China. And it's a very rare opportunity for us to participate in one, especially a new one. We believe that, in this situation, we can have a strategic cooperation as well as deploy our technology to help the bank grow and to achieve the vision of becoming a technology bank in their place. It will also help us greatly with issues around compliance, and also deepen the cooperation with financial institutions.

Also, as a shareholder, it will be easier to gain trust from this bank and also within the context of the situation. And on this point, of course, for the future, we're constantly pushing the plans and also have a very, very clear plan to work together with the bank in the future.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [19]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [20]

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[Interpreted] So I think, when you look at the situation with the credit quality, there was a very, very unique situation in 2018 with the P2P in the third quarter. And at the time, certainly, we made different tests and adjustments. But because of the situation with the P2P, we face basically a climate whereby it was actually a little bit difficult to deal with the borrowers in that particular quarter. But since then, as you can see from our other statistics, we have made some fairly big adjustments to adapt to what was basically a unique situation in that case, so hence, as to not repeat the mistakes of the past. But again, on that particular quarter -- third quarter 2018, yes, there certainly was a clear deterioration in credit quality.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [21]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [22]

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[Interpreted] So on the fair value changes, the financial derivatives guarantees. I think -- we all know that, that's an account that will be looked at every single quarter. And depending on where the numbers are, there may be some adjustments up and down accordingly. So there may be, if you will, some fluctuations in that, but that is essentially a normal part of our business.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [23]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [24]

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[Interpreted] A part of this, of course, is the fact that we acquired a lot of new customers in the third quarter. So naturally, as the new customers come in, this will then in turn increase some of the credit costs or the potential provisionings. And as these are new customers, we also have to, within the quarter or period, remove the bad ones and detect the bad credit. So this, in turn, will naturally, under our model, generate some of the fluctuations.

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Operator [25]

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Your next question comes from the line of Lucy Li from Goldman Sachs.

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Wen Li, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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(foreign language) My question would just be 2 quick follow-up on the topics already mentioned previously. The first one is, again, on the fair value change of the financial guaranteed derivatives. Because in the statement, it's mentioned that this change is a result of the remeasurement. So just wanted to make -- so just wanted to double check with you that we are not observing changes -- fundamental changes, in terms of the asset quality for the total book.

And then the second question, again, on the new client acquisition, I just wanted to know what's the proportion on ongoing basis that's contributed by the new customers in terms of the loan facilitation value.

And also related to that, where do we see our TAM or ceiling in terms of the target customer cohort?

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [27]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [28]

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[Interpreted] So Lucy, with regards to your questions, I think, overall, as you know, under 606, we have to do a forecast. And in terms of the forecast for the asset quality and the outlook, certainly we don't see any deterioration in asset quality, at least not right now. Everything is looking very stable and so, hence, yes, our asset quality continues to be fine.

With regards to the customers and the composition, yes, there's definitely a higher percentage of new customers within the active. But in terms of the old customers and how they're behaving and their retention rates, it's still very much about the same. So no real changes there, so it's really just more new customers. And longer term, perhaps something like in the medium term, at least 30% of the active customers are new customers, would be what we consider a healthy number. And of course, we have a very mature and sophisticated management system for managing the new customers' credit to ensure that they continue to grow with us.

So ultimately, in terms of the customer mix profile and our operations around it, yes, some of the numbers have changed. But fundamentally, not too much has changed with regards to our operations.

Now with regards to your question of whether there's some type of ceiling for a customer acquisition, what we see, certainly, is that there is a very stable, high-growth industry environment, at least for us. So in that sense, we also see that this is reflecting the consumption upgrade, the new consumption, many of the things that we see in the Chinese economy. So actually, we don't really see a ceiling right now for the customer acquisition.

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Operator [29]

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(Operator Instructions) Your next question comes from the line of Martin Ma from Nomura.

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Martin Ma, Nomura Securities Co. Ltd., Research Division - Associate [30]

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(foreign language) In the third quarter of this year, APR was recorded at 26.6%. And from the 4Q of last year, we can see a clear trend of pickup in APR. Does it mean -- is it because Lexin has a larger share of business from new customers? And what is -- and is there any differences in terms of APRs provided to old customers and new customers?

And the second question is about the delinquency rate. When we compare the third quarter delinquency ratio with the first half number, there is a very strong improvement. Is it because of the strong loan balance growth during the quarter or is it because that the [business] quality of new business is better than the old business?

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [31]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [32]

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[Interpreted] Okay. Okay. I guess, let me translate that first. So yes, you're absolutely right. The APR, the rise in APR is a function of a few things, one of which would be the number of new customers as well as the loan amount. And yes, indeed, the new customers would have higher APRs. But obviously, as we continue to work with our new customers, as they become our recurring customers, the APR will come down and we have to determine the actual risks and adjust the APR accordingly.

Now also, Jay, would like to emphasize that, of course, our new customers will -- they become our old customers. And as we continue to work with them, we believe that not only will the APR for them come down but overall, that the APR for our entire platform should not continue to rise. So it's basically exactly, as you said, it's essentially a function of the number of new customers.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [33]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [34]

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[Interpreted] So with regards to the credit numbers, we've always maintained a very conservative policies, and we certainly haven't changed policies with regards to our customers and customer acquisition. With regards specifically to the decrease in the delinquency, there's a couple of reasons for that. One, definitely, partially, it was due to the strong growth, so the denominator, if you will, in the equation impacted the overall numbers. But also, because we didn't loosen the policies, we continued to maintain a very, very strict policy, so hence, our overall performance was a reflection of that as well.

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Martin Ma, Nomura Securities Co. Ltd., Research Division - Associate [35]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [36]

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Sorry, Martin, can you translate that?

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Martin Ma, Nomura Securities Co. Ltd., Research Division - Associate [37]

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Yes, yes, yes. And a follow-up question on the 4Q guidance. Is it -- as we have seen that you guys have -- you revised up the full year guidance by around 10%, is it largely due to the strong performance of 11-11 sales in the last week or any other reasons behind that?

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [38]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [39]

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[Interpreted] So Martin, it's safe to say that we had a very good Singles' Day. We did very well there. We had good numbers and growth. But that said, there's definitely no direct relation per se between Singles' Day and the raise in guidance. Rather, it has a lot to do, given the time of the year already, the scale that we've achieved over the full year, in particular, our number of customers, the growth of our platform. So it has more to do with our operating model than Singles' Day per se.

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Operator [40]

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You next question comes from the line of Yiran Zhong from Crédit Suisse.

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Yiran Zhong, Crédit Suisse AG, Research Division - Research Analyst [41]

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(foreign language) I'll translate that. Firstly, I have 2 questions. Firstly, on the assisted lending model, what's the latest percentage of nonguarantee model versus the guarantee model? And how is the funding cost for that versus the guarantee model?

And secondly, as a follow-up to the question previously on APR, we also see that the revenue -- net revenue take rate has seen a sequential decline, jointly, in 3Q. And I wonder what's the reason behind that.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [42]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [43]

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[Interpreted] So with regards to the loan facilitation, the 2 models of off-balance sheet, if you will, or just passing the risk completely off-balance sheet, and the other model where you do have the risk reserves, we've been doing both for quite a long time. And we have to adjust how much we use of each or do of each based on, if you will, what the circumstances are to make the most reasonable or correct adjustment.

But to answer your question more directly, it's currently at something like less than 20%. That is effectively off-balance sheet. And ultimately, the reasonable trade-off that we have to consider is a question around the company's profitability and some other considerations as well.

So if we do more off-balance sheet, obviously, we have to give up some profitability. Essentially, that then goes to the institutional funding partner. Now is that trade-off worth it? I guess it depends on other things going on in the operations at the time. And ultimately, this is simply just a risk-reward trade-off. And if we can control the risk and we're confident in our ability to control the risk, then why would we want to give up the profitability?

Now there's clearly benefits to both models, to both having reserves and not having reserves, but ultimately, we have to make a decision based again on the profitability as well as our own cash and other situations.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [44]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [45]

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[Interpreted] So with regards to the changes you're seeing a bit in the take rate, there is definitely multiple factors going on here. And I think it can only be described as being a little bit complex. Clearly, there's the on and off that we talked about earlier. And also, if you do more of one, then, obviously, you're going to give up some profitability and, in turn, that impacts the take rates. But then that, in turn, then also ties into other things around our future plans and anything that we might have, if you will, for the next year. So it's a little bit more complicated. But ultimately, if we had to sum up the take rate, it would be stable. It's still generally stable within where we expect it to be.

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Operator [46]

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Your next question comes from the line of Alan Kuang from Aletheia Capital.

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Alan Kuang;Aletheia Capital;Analyst, [47]

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(foreign language) My question is on funding costs. Can you share with us what's the latest numbers for the retail as well as for institutional funding? In the 2Q presentation, we saw that institutional funding is a lot more expensive than retail funding. And if we continue to replace P2P funding with institutional funding, should we expect the overall funding costs to go up in future? And would that have a negative impact on the company's overall profitability? That's my question.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [48]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [49]

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[Interpreted] So on the funding cost and, in particular, the individual versus institutional, they can be different and the individual could be cheaper, but they're not really significantly cheaper. So I'll give an example where they're particularly close.

In the fourth quarter of last year, when capital was a bit more abundant on both, we saw that it was basically something like 7.9% versus 7.8%. And part of this also just has to do with how certain costs are accounted for. So the individual, sometimes, the operating costs or those costs of operating it, are not included. But overall, you can say that, ultimately, the individual funding, it's pretty stable at somewhere around 8%.

Institutional, however, it can be more complicated. It's fairly stable as well, but as mentioned earlier, with regards to the loan facilitation and different models and different reporting and whether the risk is on or off, once you include that into the math, then you get numbers that are a little bit different and perhaps less stable. But once you take that out, you'll probably still get something like 8% plus or so. So ultimately, there is a difference, but it's probably not that significant.

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Operator [50]

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Your next question comes from the line of John Cai from Morgan Stanley.

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John Cai, Morgan Stanley, Research Division - Research Associate [51]

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(foreign language) So I have 3 questions about risk, customer acquisitions and product. So the first one is on the risk. It seems that on-balance sheet provision as a percentage of the on-balance sheet principal, this ratio remained relatively high for the -- for these 2 quarters. Is there any accounting impact on that or is this a normal ratio going forward?

The second question is on the customer acquisition. We mentioned about 1/3 of the traffic is acquired online. I just wondered, is that a fixed percentage or we dynamically change that according to some metrics. And not sure what's the metrics of that we are looking at, like customer acquisition costs or exceptionals. And just wonder if you would -- feels like harder for me that the customer acquired online seems to be more difficult to retain. Not sure if that's the same as the management sees.

And the final question is about the tenor. It seems there's a slight increase of our loan tenor to 13.3 months. It's not very big difference, but it seems a bit strange, given that we have a higher portion of new customer this quarter. Just wondering how to elaborate on that trend.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [52]

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(foreign language)

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Yan Zeng, LexinFintech Holdings Ltd. - CFO & Director [53]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [54]

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[Interpreted] Okay. So John, with regards to the customer acquisition, so certainly, for the online customer acquisition, we have, if you will, a fully developed strategy method, a suite, if you will, of customer acquisition and plans associated with that, plus, you can get greater and faster scale with the online methods, in particular, under the full suite of solutions that we developed internally. So hence, the effectiveness is quite high, it's quite efficient. And we can recover the cost in 3 months or less. So hence, we'll definitely continue to do more. But ultimately, we'll do more at appropriate levels and depending on the overall situation.

Now off-line has a lot of benefits as well. It's much more precise. We can be clearer about some of these things. Obviously, it's also face-to-face, perhaps maybe a little bit surprising is the fact that, actually, off-line is even more effective. We can recover costs perhaps in something like a month. So hence, it's just adjusting the right amount of mix, if you will, based on the circumstance.

Now on the new customers on the online, as mentioned earlier, definitely need for the new customers a particular period of operations. And then longer term, of course, the new customers will move to -- will become old customers and this, in turn, impacts our operations. But in terms of the tenor and the 13.3 months, it doesn't really have anything per se to do with new customers. It's not related to that. It's much more the overall product and the product designs and the product mix that our customers are using.

And another way, perhaps, to look at it, as you know, the tenor -- average tenor for the previous quarter was 12.8 months and 13.3 months isn't that big a difference. So it's kind of within the normal range of operations and based on how we manage our customers.

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Wenjie Xiao, LexinFintech Holdings Ltd. - Chairman & CEO [55]

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(foreign language)

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [56]

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[Interpreted] And so with regards to the on off-balance sheet and the managing risk and what you say, the accounts, yes, you are definitely very astute. And ultimately, the on-balance sheet, in terms of the risk, yes, you could say it's higher, that would definitely be true. Now has that been because of any major changes or anything like that? No, definitely not. Everything, in general, is more or less the way that it was before. There definitely has not been any changes or adjustment. And as I think -- and we've talked about many, many times, where we manage the company and we run the whole company as a whole, we look at the whole book, we don't look at it as, basically, on/off risk but rather, we look at the risk of the entire portfolio.

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Operator [57]

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There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.

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Tony Hung, LexinFintech Holdings Ltd. - Investor Contact [58]

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Operator, if there's no further questions at the time, I think we can conclude the call.

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Operator [59]

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Thank you, ladies and gentlemen, that does conclude the conference call for today. Thank you for participating. You may all disconnect.