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Edited Transcript of PT.OQ earnings conference call or presentation 23-Sep-19 11:30am GMT

Q2 2019 Pintec Technology Holdings Ltd Earnings Call

Sep 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Pintec Technology Holdings Ltd earnings conference call or presentation Monday, September 23, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joyce Tang

* Jun Dong

Pintec Technology Holdings Limited - Chairman & Acting CEO

* Yuan Ning Sim

Pintec Technology Holdings Limited - CFO

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Conference Call Participants

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* Alice Cai

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Presentation

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Operator [1]

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Good morning, and good evening, everyone. Thank you for standing by, and welcome to Pintec Technology Holdings First Half of 2019 Earnings Call. (Operator Instructions) Now I'll turn the call over to your speaker host today, Ms. Joyce Tang, the company's Investor Relations Director. Please, go ahead.

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Joyce Tang, [2]

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Thank you, operator. Hello, everyone, and thank you for joining us on today's call. Pintec has announced its first half 2019 financial results before the market opened, and a news release is now available on the company's IR website.

Today, you will hear from Pintec's Chairman and acting CEO, Mr. Allen Dong, who will start off the call with a review of recent company developments of strategies followed by the company's CFO, Mr. Steven Sim, who will address financial results in more details.

Before we proceed, please note this call may contain forward-looking statements according to the safe harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise except as required by the law. Please also note that the company will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the generally accepted accounting principles in the company's earning release and filing with the SEC. Be reminded that such non-GAAP measures should not be reviewed in isolation or as an alternative to the equivalent GAAP measures and that non-GAAP measures are not uniformly defined by all companies, including those in the same industry.

Now with that said, I'm pleased to present Mr. Allen Dong, acting CEO of Pintec. Allen, please go ahead.

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [3]

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Hello, everyone. This is Allen Dong. I was recently elected as the new Chairman of Pintec's Board of Directors, and I'm fulfilling the role and responsibilities of the company's acting CEO during the duration of William's medical leave. On behalf of the Board of Directors, I would like to wish Mr. William Wei a complete and speedy recovery. We look forward to his return to the company.

As a cofounder of Pintec, I've always kept a close-knit relationships with the management team and have been paying attention to Pintec's status. Even with some challenges and adjustments, I have full confidence in Pintec and team to strengthen its strategy and the business in the long run.

We've filed our 2018 annual report on July 30, 2019. Today, we will discuss our results for the first half of 2019, which includes both the first and the second quarter of the year. As highlights of the company's performance, during the first half of 2019, the total volume of new loans that we've facilitated were RMB 7 billion, which was decreasing compared to the same period of last year, as we continued to face business environment changes. Funding structure of our loan facilitation business has changed with less reliance on P2P or Jimu Box funding. At a year-over-year basis, the volume of loans funded by non-P2P financial partners increased by 36%. While the volume of loans that we facilitated in associations with Jimu box or P2P decreased by 60%.

Overall, the new launch funded by financial institutions other than P2P or Jimu box as a percentage of the total volume increased to 70% in the first half of 2019. It is our strategy to reduce reliance on Jimu and to expand financial institution partners. We have continued to adjust our products for better-fitting needs of variety of financial institutions. On the other hand, we'll also use a newly acquired or invested lending licenses, such as micro-lending licenses and factoring license, to conduct cooperation with big -- with both business partners and the financial institutions.

During the first half of 2019, total revenue were RMB 479.5 million, equivalent to USD 70 million, a year-to-year decrease of 17% from RMB 577.7 million in the same period of 2018.

Gross profits was RMB 274.6, while USD 40 million, a year-over-year increase of 16.3%. Gross margin of the company expanded to 57.3% from 40.9% in the same period of 2018.

Net income was RMB 73.3 million, or USD 10.7 million, a year-over-year increase of 492% from RMB 12.4 million in the same period of 2018.

Since our inception, we have committed to improve financial services with modern technology and operations, particularly our search is for financial partners, business partners and end-users to cover the entire loan origination and management process. This has been the core of our business, despite developments of other tech solutions' businesses, such as wealth management and insurance.

In line with the growth prospects of the China financial service market and our company, we are trying to continue focusing on digital lending business, which will remain committed to strengthening services to financial partners. We also plan to utilize our own financial licenses for better ecosystem. With our business partners, we continue to maintain the leading position in the installment payments market for travel and mobile devices in the first half of 2019. At the same time, we have expanded services into other consumer industries such as education.

In the travel segment, we made strides in invigorating our cooperation with leading online travel platforms, such as Ctrip and Qunar, while also developing partnerships with offline travel service group Caesar. In the mobile device market, we have already established partnerships with 2 of the 3 largest mobile telecom operators in China. Moreover, we launched the new partnership with several educational service providers.

By partnering with the industry pioneers in different areas, we're able to leverage their flourishing customer traffics and exhaustive service offerings to consistently augment the competitiveness of our product offerings.

In August, we established a commercial factoring company with leading off-line travel agency, Caesar Travel. Through this partnership, we will also installment loan payments service and provide integrated online or off-line shopping experiences to customers of Caesar and other third-party platforms. We will be able to explore additional smart-lending opportunities together with Caesar in the travel sector as well as other financial products. We will be able to explore additional -- this factoring company will integrate our state-of-the-art capabilities in big data risk control and AI technology with our extensive experiences in providing travel sector financial services. Our partnership with Caesar marks another important milestone for our expansion into the travel installment loan sector. We're confident that it will help us to improve our leadership in this sector.

By leveraging our market-leading capabilities, the internet product operation, big data risk control and AI-powered financing applications, we continue to capitalize on China's booming consumer finance market opportunity.

Regarding revenue segments. First, in the technical service segment, we generate fees by providing technical services such as traffic allocation, big data credit assessment and post-lending management to our financial partners, which will include commercial banks and other financial institutions. On most occasions, it is not Pintec, but our financial partners who provide direct lending to the customer. We serve more as an intermediary and provide limited or no guarantee to fund providers. However, in order to cultivate new partnerships, we have started to offer guaranteed provisions during the onboarding period to build relationships with our new partners. Because it is customary for financial institutions in China to require such guarantees when collaborating with intermediaries, we anticipate that an increased proportion of our revenues will come from loan services in which we will provide guarantees or credit assess -- or credit enhancement for the short to midterm. Therefore, as we accelerate the expansion of our financial partners base through all available channels, our revenues from guaranteed loans will likely increase gradually as well.

Going forward, we aim to improve the flexibility and the diversity of our services as we expand our business. By using our lending licenses and other strategies, we will propel our partnerships with our financial partners and, in return, grow our revenues. At the same time, we also plan to actively market our industrial leading -- lending service platform and the full suite of value-added solutions to our financial partners. We are confident that our cutting-edge product offerings will help us to establish new partnerships, bolster existing collaborations and enrich customer stickiness.

Second, in the installment service segment, we primarily generate fees both by providing financing services by using our own licenses and by providing loans to borrowers through trust arrangements with financial institutions such as trust license. We bear credit risk but most of the installment loans that we facilitate and related outstanding amount is reflected on our balance sheet. As of today, we mainly generate installment service revenue from our factoring business, which focuses on the travel and e-commerce sectors.

Meanwhile, we aim to better utilize the online micro-lending license that we obtained through an acquisition in March. As we test our new technologies through micro-lending operations, we'll continue to identify areas where we can further improve and optimize. Beyond these upgrades, we also plan to cultivate more micro-lending centric collaborations with institutional partners.

We believe that we can attract and retain business partners in a diverse set of industries by further utilizing our own lending licenses. We are also able to provide financial partners with high-quality lending assets and their client base with good repayment track records.

Third, in the wealth management service segment, we have developed, integrated financial technology solutions to meet diverse customer demands. This includes smart wealth management and the smart insurance brokerage services.

In summary, in the past 6 months, we continued to optimize our technical services, drive modest global expansion and establish additional strategic partnerships with industrial-leading business and the financial institutions.

Going forward, we will also strategically focus on lending services, especially the service we provide to our financial partners. As we fully utilize our lending licenses to deepen our relationship with both business and financial partners. We're confident that we will generate sustainable revenue growth going forward.

In the end, Pintec's market in China is facing massive opportunities as well as tightening regulatory scrutiny. We're going to make adjustments to accommodate such environment and believe long-term sustainability is more important than short-term profitability.

Next, I will pass microphone to our CFO, Steven, to cover more information on financials.

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Yuan Ning Sim, Pintec Technology Holdings Limited - CFO [4]

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Thank you, Allen. Hello, everyone. Before I start, please note that unless otherwise noted, all numbers stated in my remarks are in RMB terms. In the first half of 2019, our total revenues were RMB 479.5 million, specifically revenues from our technical service fees, which accounted for 80% of our total revenues, declined by 4% to RMB 383.8 million in the first half of 2019 from RMB 399.7 million in the same period of 2018. The year-over-year decline was due to the decrease of loan originations in the first half of 2019.

Revenue from our installment service fees, which accounted for 17.1% of our total revenues, decreased by 51.7% to RMB 82 million in the first half of 2019 from RMB 169.9 million in the same period last year. The decrease was as a result of reduction in our on-book installment loan volumes, which is also in line with the decrease of our on-book loan business and part of our strategy to shift to an asset-light model.

Revenues from our wealth management service fees increased by 69.4% in the first half of 2019 to RMB 13.7 million from RMB 8.1 million in the same period last year. The increase was primarily attributable to the development and expansion of our wealth management services, in particular, our insurance solutions. Our cost of revenues decreased by 40% in the first half of 2019 to RMB 204.9 million from RMB 341.5 million in the same period last year. As a percentage of total revenues, our cost of revenues decreased significantly to 44.7% in the first half of 2019 from 51 -- sorry, from 59.1% in the same period last year. The reduction was mostly due to a 59% decrease in our funding costs and a 72.6% decrease in our provision for credit losses and a 21.5% decrease in origination and servicing costs during the first half of 2019 as we reduced our on balance sheet loan balances.

Our gross profit, as a result, increased by 16.3% to RMB 274.6 million from RMB 236.1 million. And our gross margin expanded to 57.3% from 40.9% during the first half of 2018. The improvements in gross profit and gross margin were mainly due to the lower volume of our on-book loan business, which led to lower funding costs and lower provision for credit losses. In addition, we achieved better economies of scale across our business lines.

Our total operating expenses in the first half of 2019 increased to RMB 218.6 million from RMB 186.9 million in the same period last year. Sales and marketing expenses decreased by 17.6% to RMB 42.2 million in the first half of 2019 from RMB 51.3 million in the same period last year. Since the end of 2018, the company had begun optimizing its product structure and winding down the off-line personal installment loan business. Off-line direct marketing group disbanded -- were disbanded, and off-line marketing and promotion and expenses decreased significantly as a result. At the same time, marketing efficiency improved significantly.

The general and administrative expenses increased to RMB 131.2 million in the first half of 2019 from RMB 96.6 million in the same period last year. The increase was primarily due to the increased professional service fees associated with being a public company, bad debt provision, stock cost and share-based compensation. Research and development expenses increased to RMB 45.1 million in the first half of the 2019 from RMB 39.1 million in the same period last year, as we continue to invest in our talent recruitment and enhance our R&D capabilities.

Our operating profit in the first half of the 2019 was RMB 56 million compared to RMB 49.2 million in the same period last year. Our net income in the first half of 2019 was RMB 73.3 million, representing a year-over-year increase of 492% from RMB 12.4 million in the same period last year. Excluding share-based compensation of RMB 29.9 million, our adjusted net income increased by 218% to RMB 103.2 million in the first half of 2019 from RMB 32.5 million in the same period last year. The increase in net income was due to the increase of gross profit of RMB 32.7 million in accumulative interest income from a loan to Jimu.

Net profit attributable to ordinary shareholders in the first half of 2019 was RMB 73.3 million as compared to net profit attributable to ordinary shareholder of RMB 20.8 million in the same period of 2018. Diluted GAAP and non-GAAP net income to ordinary shares were RMB 0.26 and RMB 0.36, respectively, in the first half of 2019.

Now let's turn to our balance sheet. As of June 30, 2019, we had combined cash and cash equivalents, restricted cash and short-term investments of RMB 730 million compared to RMB 710 million as of December 31, 2018. Total net financing receivables, including short term and long term, declined to RMB 646.3 million at the end of June 2019 from RMB 761 million at the end of last year, mostly due to our strategy of lower volume for our on-book installment loan services and shifting to an asset-light model.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alice Cai of China Renaissance.

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Alice Cai, [2]

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This is Alice from China Renaissance, and my question is, the Chinese digital lending market is not growing as strong as several years ago. What do you think it would influence the current license situation in Pintec? And what is the [inaudible] direction of Pintec in this market?

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [3]

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Alice, this is Allen Dong. I think the observation you got of China Pintec lending sector does not grow as dramatically as a couple of years ago. I think it's a restriction of the structure because most of the existing leading fintech companies focused on particular sector to make loans. But we believe the overall retail lending sector of China is still pretty big, and the whole fintech industry were more focused on particular sector and then it's going to expand into the whole spectrum of the borrowers. For example, most of fintech companies or the industry was focusing on people with less credit data or with no credit data, but actually more and more matured customer base will have a similar demand in the sector. So I believe the further growth of retail finance markets will continue. And for us, it's more of a building a diversified portfolio of borrowers. And as far as the structure is healthy, we still have a very big room to grow.

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Alice Cai, [4]

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Now it's my next question. So my next question is, there are several additional lending business in China and what do you think is the comparative advantage of Pintec?

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [5]

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Okay. Alice, yes, even it looks like it's a relatively crowded market, but if we're looking at pure number of players in the market, it's a lot less than years ago when the whole industry was booming. So if you're looking at only top-tier fintech lending companies or facilitation companies in the market, the number is definitely a lot less. I think it's within a couple of dozen in China. First of all, the overall players are only a very small group to do such services out of the whole China market comparing with traditional financial institution. Second of all, as I mentioned in the last question, now we are facing a really massive market. As far as the structure of the potential clients are healthy, I don't think the competition is a issue for the company to grow. It's really about how sustainable your model is, how good your risk management is and how in compliance you are to make sure that you can grow for the -- and as a range of things -- phenomenon, I've seen, in the last couple of years, we haven't really faced any direct competition from any of the peer companies in the market. It's really about try to be as good as possible by yourself game in this sector.

Okay. Our core competitive advantage -- sorry, yes. Our core competitive advantage in this sector is really simple. We are a company with a combination of 3 different capabilities: first, our financial service capabilities, including the risk management; second, our technology will improve our operational efficiencies; and third, our customer service capability derives from our internet DNA. So combined with the 3 capabilities is are very rare quality in the market. And even there are some players, I think there's still enough room for us to grow.

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Alice Cai, [6]

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So my last question is, what are your next steps for the core business of Pintec? What are your future plans for the development in this market?

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [7]

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Sorry, can you please repeat the question?

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Alice Cai, [8]

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No problem. So my last question is, what are the next steps for the core businesses of Pintec? And how do you manage to grow in the market?

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [9]

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Sure. As you might know, Pintec started as a tech solution company, and we are capable of providing technology solutions for different types of financial product sectors. But given the current market environment, actually in a short run, our focus is more going to be lending solutions, which will continue to grow our total asset under management in terms of how much loans we've facilitated through working with third-parties or with our own lending licenses. I think with this foundation, we will able to gradually improve our capabilities in other related areas, including wealth management and insurance. But in the short to mid-run, the less margin business will be less of a priority, and in the future, we will be able to have the -- enough resource and capability of focus on those.

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Operator [10]

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Our next question is from the line of Daphne (inaudible) of Citibank.

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Unidentified Analyst [11]

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So a couple of questions from my side. So first one is about the institutional funding model. So would be wondering like as you increase the portion of loans from the bigger financial institutions, what would be the types of new financial institutions that you introduce? And also regarding the tech rate, so how does the tech rate for the guarantee model compare to the -- of the loan guarantee loans? And second is about the asset-quality outlook? So I guess if we look across the sector, we do see like the -- I guess, asset-quality outlook is getting more challenging with the economy slowing down. So would be wondering how the management see this like from your point of view? And also how does that impact your growth outlook, I guess, for the second half of this year, especially as we are also seeing in the first half like the growth has been slowing down. So whether you expect to continue relatively slow pace of loan growth or do you expand the recovery going forward? And lastly it's about the -- you mentioned about the use of the micro-lending license and also the factoring license for lending. So the question is, if we look across other players who also use this wholesale funding model or loan facilitation model, they don't really lend [inaudible] a license. So would be wondering, how your model differs compared to your peers. So that's all my questions.

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [12]

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Okay. Hey, [Daphne], this is Allen. As we keep diversifying our, what we call, financial institution partners, a majority of this sector includes most lending licenses in China. As you might understand, there are a variety of bank-like or quasi-lending licenses in China that we can work with, for example, banks in many different ways, and there are also trust companies, micro-lending license companies, consumer finance companies or even some security house, which will be able to provide us funding from securitizations. So in terms of the take rate question, I will leave Steven to explain, and I will continue with other questions.

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Yuan Ning Sim, Pintec Technology Holdings Limited - CFO [13]

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So [Daphne], this is Steven. So I think the question on the take rates specifically relating to -- on those that we take on limited risks and which shows up in the financial statements as guarantee liability. So we do not disclose specifically as a separate item the take rate, but qualitatively, I try to give you some color. I think on the whole when we look at the market is not so much that we are consolidating because as Allen mentioned, the market is too big enough to expand. And even though in some specific cases, you see regulatory tightening or you might also see certain players being very volatile. But in our case, we focus on serving our business and financial partners. And in such situations, we do actually have some leverage over the kind of margins we can expect to make on a particular business, on a particular product. In such situations, I think that our take rate has always been pretty healthy, and we feel that it's actually going in a good direction because as you know the players reduce to a healthier participant in the market, we see more and more rational behaviors from our different partners, and they value -- they don't just value financial returns, they also value the customer service, the speed of response, technical capability. So in that sense, we do have some leverage over the kind of prices that we can command. And with the funding costs also rationalizing, I think we should be able to well place to so-called select healthier margin products to work on in the future.

I think the next question is on asset quality. I think, again, in our press release, we do disclose the various delinquency rates. So for the purpose of answering this question, we will not repeat the numbers. But I think qualitatively, in a way, it's on a risk-adjusted basis, that is a better understanding of how much our delinquency rates have increased or decreased over time. In that sense, one side of the picture is the actual delinquency rate, but the other side of the picture is actually the risk-adjustment margin. So in that respect, again, we are focusing on the healthier business products. And in that sense, we will have more cash generation and also more property generation.

Allen, please.

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [14]

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Yes. Regarding quality of the assets, I have a couple of points to add. So we definitely have experienced or have seen the volatilities in terms of delinquency rates in the market. I think this is a result of 2 major reasons. One reason is a microenvironment change, including the regulatory environment change. Second reason is the concentration of customer group by most fintech players in China and interesting to see if we break down our portfolio into different sectors. For example, we have done point-of-sales consumer installment loans, we have done SME -- online SME loans, we have done personal loans. And we have found a different volatilities of different type of assets, targeting different customers. So I think the signal for us is very clear, we're trying to improve the diversification of the portfolio more towards a prime and [inaduble]-prime customers, which shows a high quality of risk volatilities to our point of view. And that sector is a less crowded in terms of competition, even we don't think competition is a real issue in this industry.

So your third question for us is regarding the growth of second half. I think leave to our second half numbers to show eventually. I just want to restate what I mentioned in my script that we think this market is not about a competition. This market has no limits of growing. So how to make sure we are in good position to grow. Sustainability is much more important than the short-term profitability. That's why we will focus on better positioning ourselves in the second half of the year, but we will still have a lot of business opportunities with current infrastructure to go. And your last question is regarding how to utilize our micro-lending license. So micro-lending license, especially the license we have is very limited, so-called internet micro-lending license in China. The number is very limited. It's a very valuable license, allowing us to practice business nationwide online, perfectly fitting our business needs, and at the same time, we can leverage -- we can deploy our own capital to lend directly, but on top of that, we can also get reasonable leverage from financial institutions. And more importantly, which is proved by many examples in China, is the micro-lending licenses or other lending licenses we have is a perfect vehicle for further securitization of underlying assets. Securitization market in China for this sector is still underdeveloped, even the market demand is very strong. And we believe that will offer us a great opportunity to further grow our portfolio. That's all answers.

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Unidentified Analyst [15]

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Just a follow-up on the micro-lending license. So what is the maximum leverage that you can leverage up to? And also, you mentioned about securitization, I suppose that will also be subject to that leverage cap rate under the current regulatory requirements?

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [16]

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I would say, so far, it's actually subject to different scrutiny of different areas. We have seen the conservative leverage of micro-lending license of about 1 to 2x of your total capital, but we've also seen examples that is much higher than that. I think it all depends on, first, the underlying assets quality of how you practice business with your micro-lending license, and second, it also depends on your conversation or efforts with the local regulator, which will allow them to understand your business better and allowing to have more flexibilities. But I would say 2 to 3x of your capital will be reasonable. And on top of that, when you're talking securitization, and -- then it's a different level of question for micro-lending license because they are on-book securitization and there are off-the-book securitization. So for example, for off-the-book securitization, you issue the loans with micro-lending license and you can sell that to the ABS market. As far as micro-lending license doesn't provide credit guarantee or credit enhancement to the deal, there are a bunch of third-party guarantors in a market who like to rep high-quality consumer finance loans. And that part of the leverage will not be considered in a restriction. So we'll figure it out in actual practice.

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Operator [17]

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Our next question is from the line of [Lynn] of [ICBCI].

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Unidentified Analyst [18]

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We notice that many fintech companies have accelerating their pace in transition towards [2B] with their business emphasis shifting from consumer side to business side, and Pintec is one of the pioneers in such transformation. May I know what the reason behind the transformation towards 2B? And what specific action the company will take, depending on which transformation in the coming year or near future? And how does it support the company's revenue growth? Now that's the only question I have.

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [19]

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Okay. This is Allen. Thanks for the question. Yes, we have found that many fintech companies in China emphasize their to [2B] strategy. What I want to [say] is, okay, I will restate my points I mentioned before, this is a huge market. So no matter how you play, as far as you find your sustainability, I think you'll be able to find a good room to grow. But as many fintech companies in China are relatively more start-ups, as you can understand, either the traffic side or funding side are not fintech companies' strengths in this market. So that makes perfect sense of fintech companies to work with either, what we call, business partners or financial institution partners to get the platform, in fact, works. So no matter how they position the business model, I think working with existing institutions with either traffics or funding capabilities is unavoidable in a market. But for Pintec as day one, we have find other than just purely focused on what end-customer needs in terms of the borrowers or investors. We can also focus on how to help our financial institutions or business partners to improve their efficiencies, to improve their user experiences in a very in-depth way is a very valuable practice. So that's why I think even other companies might see a P2P -- a 2B business model, but it will not really change the nature of the business as we are going to leverage existing institutions in a market with funding and traffics and help them to create value out of our capability.

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Operator [20]

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(Operator Instructions) And there are no further questions at this moment, and I will hand back to the management for their closing remarks.

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Jun Dong, Pintec Technology Holdings Limited - Chairman & Acting CEO [21]

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Thank you, everyone, for taking your time to join our conference call today. We look forward to seeing you next time. Thank you very much.

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Operator [22]

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Thank you. Ladies and gentlemen, that does conclude the conference for today, and thank you for participating. You may now all disconnect.