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Edited Transcript of QD.N earnings conference call or presentation 25-Nov-19 2:00pm GMT

Q3 2019 Qudian Inc Earnings Call - Second Session BEIJING Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Qudian Inc earnings conference call or presentation Monday, November 25, 2019 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Ka Hong Yeung Qudian Inc. - CFO * Weichen Zhao Qudian Inc. - CEO Assistant ================================================================================ Conference Call Participants ================================================================================ * Alan Kuang Aletheia Capital * Daphne Poon Citigroup Inc, Research Division - Associate * Jacky Zuo China Renaissance Securities (US) Inc., Research Division - Analyst * John Cai Morgan Stanley, Research Division - Research Associate * Matthew Lewton Larson National Securities * Yaser Al Nimr Emirates Bank * Yiran Zhong Crédit Suisse AG, Research Division - Diversified Financial Services Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello, ladies and gentlemen, thank you for standing by for Qudian Inc.'s Third Quarter Investor Update Conference Call. (Operator Instructions) Today's conference call is being recorded. I will now turn the call over to your host, Mr. Ben Zhao, CEO Assistant for the company. Ben, please go ahead. -------------------------------------------------------------------------------- Weichen Zhao, Qudian Inc. - CEO Assistant [2] -------------------------------------------------------------------------------- Hello, everyone, and welcome to Qudian's Third Quarter Investor Update Conference Call. The company's third quarter results were issued via our Newswire services on November 18 and were posted online. You can download the earnings press release and sign up for the company's distribution list by visiting our website at ir.qudian.com. Mr. Carl Yeung, our Chief Financial Officer, will start the call with his prepared remarks. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's 20-F as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Qudian's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Qudian's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. We also posted a slide presentation on our IR website, providing details our most -- of most recent operating and financial metrics. We will reference those results in our prepared remarks, but we'll not refer to specific slides during our presentation. I will now turn the call over to our CFO, Carl. Please go ahead. -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [3] -------------------------------------------------------------------------------- Thank you, Ben. I want to first thank all the investors, analysts and media who have taken an interest to join today's call. Since we released our third quarter 2019 financials on November 18, we have observed unreasonable volatility in our ADR trading prices. The purpose of this call is to be openly accessible to the market, which is part of our continuous effort to be transparent. In the past few days, we have summarized the key issues of concern, and hope to use this opportunity to give market further clarity in how we are addressing the immense market opportunity in the Chinese consumer credit space, and more importantly, put the inaccurate interpretations and rumors to rest. Key areas we hope to cover on today's call includes: risk management and asset quality, open-platform's business model and its sustainability, guidance and how we remain highly competitive to drive consistently better bottom line results. On risk management and delinquency. Risk management is the top priority in our operations. The foremost focus on risk management is placed specifically on regulatory compliance. This ultimately ensures the business to be sustainable over time. We have proven time and time again, we are the most compliant operator in our sector. These are the facts. In 2016 and '17, we upgraded our business under 2 proper Internet microlending licenses. In 2017, we put on a system-level restriction such that no credit products generate over 36% IRR. Yes, that's IRR. Because we do not take fees upfront and products are on a simple repayment with declining balance on each payment, this IRR converting to a typical APR definition, being, all interest and fees divided by the principle received by the borrower on an annualized basis translates to around 20.6% on a 12-month tender loan. The fact is real effective APR in the third quarter of 2019 and for the first 9 months of 2019 was around 20.5%. From 2017, we made a decision to completely avoid the P2P business model, and took on a 100% license-regulated, institutional-funded model. And look at where the sector is today, we are 12 to 20 months ahead of the leading players in adopting a regulatory-compliant business model. The open-platform business expanded through 2019, where we focus only on the technology enhancements and cost efficiency for financial institutions. This model is what we believe to be the final and long-term viable form of fintech in China. We have demonstrated well in our history, we lead in regulatory compliance. Focusing on this is the only path to deliver sustainable results and therefore, long-term leadership. On asset quality. The company has taken a conservative approach to deliver optimized risk return at a principal. As previously discussed, the fact is Chinese economy is slowing to a new normal rate of growth. The fact is there has been significantly more players exiting the online lending space in the second half of 2019 because of tightened regulatory scrutiny, which does reduce borrowers' liquidity. But the fact is also true that the Chinese consumer credit industry is massive with over 400 million potential users and largely underserved by traditional FIs. The fact is average real consumer leverage, is low, is still low. It is growing, but still have significant more room for growth. In addition, there is high confidence that unemployment rate will remain stable in China due to highly efficient policy deployments. And wages for the working class will see steady and healthy increases from the current low base. These all point towards a bigger and safer consumer credit market for players that are regulatory-compliant to consolidate the market share. We are so well positioned to capture this market opportunity because of our lower-than-peers' leverage. This key risk management tool allows our company to absorb any imaginable or even unimaginable potential risk while giving us more room for growth if we choose to. We understand the market is dynamic and evolving. So we take extra efforts to be transparent to investors so that everyone can have a better understanding of what makes sense. I encourage investors, and most importantly, some sell-side analysts to scrutinize such data with care and take views in a holistic, impartial way and compare numbers apple-to-apple across the sector. Now we have seen D1 delinquency increase quicker in the third quarter of 2019, into the 10% to 12% zone, due to mainly lower liquidity in the market as smaller players exit and also due to our proactive customer activation efforts in the second quarter 2019. The result was we did activate our large dormant customer base highly effectively. As we have completed the customer activation programs in the third quarter, these loan terms will roll off in the 1 to 8 months life, and therefore, it is clear that the increase in D1 is well expected to stabilize into Q4, and we should expect to see marked improvement in the first half of 2020. In addition, please do not interpret D1 as a measure of losses. Our M1+ or 30 days plus vintage delinquency rate is below 3.4%, while our highest M6+ vintage charge-off rate is below 1.6% as of the end of third quarter. Entirely reasonable and comparable rates across the leading players. Now we do maintain a significantly smaller total loan book exposure at CNY 26 billion, and we operate this at a lower leverage of 2.2x, while the after risk-adjusted net income or our bottom line is the highest amongst the leading players. This translates no less to a better business model with a safer capital structure, less total risk exposure, better at handling even a remote risk occurrence. Bottom line is, we are competitively more profitable at the same risk level than all other players. This, we think, is a much more holistic and reasonable view of what makes sense on asset quality. Now I'll move on to the core strategy of open-platform and the sustainability. Diligently interpreting regulatory directions. We made a calculated decision to stay away from the P2P business model from 2017. With the same diligence, we believe the future of fintech in China is not about risk taking. The existence of fintech is about putting together technologies that help license-regulated FIs do what they are supposed to do in the first place, namely, lending money and taking risk on it. We want to be clear, we do not take risk or provide any implicit guarantees on open-platform. An open-platform is not simply referring customers to banks. Here is what we really do: we provide a total solution using technologies we have developed on, one, user engagement and activation; two, real loan performance-centric analytics, backed by over CNY 250 billion worth of transactions; three, high position, real-time processing on micro syndication; four, risk tools engines set up for our funding partners so they can plug in to our open-platform for high-speed credit decisions for these partners; five, funding distribution using cashless infrastructure; six, building a customer services call center; seven, repayment processing and building on late payments; eight, repayment clearing with high precision across multiple funding partners from a single borrower; number nine, our compliance collection services. This is a total complete technology solution, served altogether as a large cost saving tools for FIs looking to enter the real consumer credit market. And really, compared to what FIs will pay to a simple borrower sourcing service at a market rate of roughly 30% of gross fees, what we charge is entirely reasonable. At the same time, apples-to-apples, our funding partners do make higher risk-adjusted returns on our open-platform and loan facilitation. We helped our lending partners grow a loan balance from CNY 0 to CNY 12 billion and still growing. It is just a 1-year-old business, but its achievements are nothing short of incredible. The number of borrowers on open-platform increased from the January of 16,000 to end of September to over 1 million. The number of funding partners increased from 1 to 4 to 11 in the third quarter, and the number, as of today, is 17. The stickiness of customer is well over 70% and growing. These are all facts that point towards to the immense value we are bringing to both the lenders and the borrowers. Now we do post these achievements and progress in detail in our presentation updates. Please do look at that. On sustainability, the key question lies in how far it can go and how can we maintain this take rate. Rather than taking a qualitative and subjective guesswork, here's what's real. Our partners have provided requirements on risks and customer profile. Over 21 million existing registered users on our database match such profile, and it's still growing. We are at 1 million today. And again, we grew from 0 to 1 million in 12 months. There is a long runway ahead. On the topic of risk management on the open-platform. Open-platform made breakthroughs in how a qualified micro loan can be syndicated to multiple lenders, each bringing their own risk engines, allowing every funding partner to find their customized cohort of users at their full control with syndication, instead of just one lender assessing risk. Multiple banks are running independent risk models with the loan being approved or not transparent across all parties. This allows the collective lending consortium better ability by means of cross checks to locate the higher-quality borrowers, significantly reducing risk for everyone, translating to more economics to share and it yields better risk-adjusted returns for my partners than loan facilitation. And precisely because we do not take first loss, every player that is lending is much more careful in their own risk assessment resulting a much lower delinquency rate when you attach syndication to it. It's the core of open-platform business model. The fact is M1+ delinquency is below 2.7%, roughly 50% lower than our loan book. The net charge-off rate on a loan balance basis, a core parameter when banks measure risk, is just a fraction of the 2.7% M1+ delinquency, providing ample room to move into the risk curve as more borrowers come onto the open-platform. Yes, our take rate in the second quarter and third quarter on origination volume was approximately 9%. Again, that translates to about 20% higher than FIs would have paid in the market at roughly 30% for only loan origination from a sourcing agent. This premium is, again, backed by the complete package of technology-based services we provide, while syndication lowers risk for everyone. When the fully competitive day comes and only then we would expect our take rate to come down to about 5% to 8%. Before then, our current take rates are sustainable. As we are the first mover in the space here, it should take maybe 12 to 24 months again for our peers to catch up if they can, and then the market may become more competitive. On guidance, the facts are, we provide the first guidance of CNY 3.5 billion in November of 2018. By June of 2019, we were far ahead of our target loan balance with over CNY 2 billion of net income already achieved. And with the upward trajectory of open-platform, it was clear CNY 3.5 billion no longer made sense. That's why we revised up to CNY 4.5 billion in June, with confidence to still achieve beyond that. Given the controlled user activations drove delinquency up and more importantly, the tightened regulatory scrutiny we have observed against other players in the recent past few months, we wish to move in to be more conservative and be just in case if other aggressive players have issues down the road. Thus, on a conservative basis, we have to adjust our guidance to CNY 4 billion or more. This still represents 57% growth on 2018 at a large profit size. We do appreciate how the market reacted to lower guidance, but we hope the market also appreciates we are doing the right things to avoid any potential risk, even if they may never come. This sets up a better foundation for delivery of a sustainable business over time. Lastly, the company is committed to delivering long-term shareholder value. We uphold the promise, and we have fully completed the USD 195 million forward share repurchase program in October. And the Board of Directors of the company have approved, and we have, today, fully completed the cancellation of 26,169,241 shares repurchased under that program. The cancellation of the 26 million shares stands for approximately 10% of our total shares outstanding for the company. Since our inception in 2016, we have gone through stages of business and regulatory compliance upgrades, from license-based lending to loan facilitation for financial institutions to now becoming a technology-based, fee-driven platform. We take regulatory compliance as the #1 priority and is highly conservative on risk taking. We know we have found a better way through open-platform to address the massive market opportunity from the emerging Chinese consumption credit offering and is ambitious about our next -- our company's next stage of growth, and we are forever grateful for the support from our investors and analysts. We will continue to maintain the most transparent communication and disclosure standards in the industry, and we are confident exceptional returns will be delivered in our platform. This concludes our prepared remarks. We'd like to open the call for any questions. Operator, thank you very much. Please go ahead. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from the line of John Cai from Morgan Stanley. -------------------------------------------------------------------------------- John Cai, Morgan Stanley, Research Division - Research Associate [2] -------------------------------------------------------------------------------- So I think our loans are of relatively short durations. So I think the cover of credit risk we see in third quarter is, as mentioned, could be related to the -- partly to the -- you say, activations or credit trial program within the second quarter. And I remember that we have been doing this for -- since, I guess, early second half '18. Just wonder why second quarter '19 is -- result in a more severe credit deterioration as compared the previous credit trial program. Yes, just any colors or details about specifically the second quarter '19 credit trial program would be helpful. -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [3] -------------------------------------------------------------------------------- John, thank you for the question. As -- and thank you for being long-term followers of our development and being very diligent. First of all, we have done this ever since 2018 as a normal course of conducting our user activation efforts. Why the second quarter 2019 cohorts recently showed more tendency of high delinquency has to do with the overall industry liquidity must have declined. This, you don't have to -- I don't have to tell you, you know that most recently there has been lot of scrutiny on the P2P players, data-driven, kind of, risk management providers, even collection companies, and a lot of companies have exited because of this. And when that happens, when liquidity decreased, the higher-risk cohorts that were generated from the second quarter 2019 tend to have less ability to refund their borrowings -- to refinance their borrowings, and that's why you would see a higher uptick. And given that we have observed these situations in terms of regular scrutiny in the last few months, we have made the right decision, we believe, to derisk further, and that's why you see this guidance. And we know that the loans -- given the testing cohorts, the loan lives are between anywhere from 1 to 8 months. They should, well, roll off by the first quarter if not the latest by the second quarter of 2020. So with that, we're quite comfortable that the risk curve will stabilize in Q4 and then it will roll back off in Q1 and Q2. -------------------------------------------------------------------------------- John Cai, Morgan Stanley, Research Division - Research Associate [4] -------------------------------------------------------------------------------- Just a follow-up on that because I think credit trial or user activation has been the approach, we drive the users and loan growth, I guess, since 2018. So if the growth quality, different cohorts, that didn't do well, and do we have any reassessment of this growth approach? Or are we thinking maybe adopting other growth approach going forward? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [5] -------------------------------------------------------------------------------- Thank you, John. What we've done is on a carefully calculated basis, this approach could still go cheaper on user acquisition than combining sales and marketing costs with a potential loss attached to those sales and marketed users. But we -- as we've proven ourselves, we are a dynamic company that knows how to navigate the changing landscape. So we have tools. The buying traffic is nothing new to us. We can buy that traffic, just like everyone else, and we have more margins and more cash to do so and a better balance sheet to do so than other players. So rest assured, we have that tool. Rest assured that -- on top of that we are building an ecosystem of app partners. We now have 7, 8 app partners that have our HTML5 technology embedded in their apps. So that's another way to get users. And we will do a pay-as-you-go approach instead of, sort of, blind sales and marketed way to acquire traffic. So we have all these tools set up, not just 1, but another 2 more sort of total direction that we can follow. But right now as far as we can see into 2020, there is no urgent need to acquire traffic, but still provide a fairly substantial net income size relative to our current valuation. So we're not at the urgency to buy traffic right now. Let the regulatory scrutiny that had been very heavy in the last 2 months settle. Let the P2P guys be put to rest. We will be on a user acquisition position. -------------------------------------------------------------------------------- John Cai, Morgan Stanley, Research Division - Research Associate [6] -------------------------------------------------------------------------------- And so just one last question. So I think that the industry operating environment or risk environment seems to be more volatile than we previously expected. And yes, when the risk arised it slowed down the growth and following the guidance revision. But going forward, do we take a more conservative approach on growth or more risk taken, particularly through this credit trial approach? So -- it's just because of the uncertainty of the environment that we operate in. The volatility thus lead to more of a slower growth approach, a more cautious approach than we have got in the future. -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [7] -------------------------------------------------------------------------------- Yes. Thank you, John. I think the best way to address this question is, for the current moment, we are more focused on the highest-quality borrowers. So open-platform. If we found a better business model, and all the packaged solutions that we provide to banks makes sense and that the banks help us, help each other as a consortium, build better risk engines together, right? We have a value add. They all have. So when we do that, we are focusing on the highest-quality borrowers when this credit cycle rolls over. We have better balance sheet, we have a much better balance sheet than any of our peers to leverage up, right? If I'm at already 10, 20x leverage, how much more leverage can I go, right? I'm at 2.2x leverage, if the risk -- these are cycles, right? When the risk comes back down, I can grow 5x, I can grow 5x to catch up with my peers, right? There is no doubt about how much room there is for us. So we have more firepower at acquiring users, and we now even have a better business model. So right now let us focus on the best-quality users. We may not be growing our user base aggressively, but we do believe it's the absolute best thing to do right now and still deliver better than peers' earnings dollar to dollar. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- The next question comes from the line of Matthew Larson from National Securities. -------------------------------------------------------------------------------- Matthew Lewton Larson, National Securities [9] -------------------------------------------------------------------------------- Your stock dropped sharply after the earnings, presumably because of the rollback of your guidance. But it was already trading at an extremely low multiple, as were a number of your peers. So that there was a lot of, I guess, caution built into the market for the prospect of maybe delinquencies rising. So it's not as if your stock was trading at 10 or 15x earnings and growing at 30% or 40%, and now your growth is cut back fractionally. In fact, your multiple was quite low. You don't have receptible debt and you're trading level is below book value at this juncture. So it seems to me it was already priced at a cautionary levels, so it must have been surprising to see it pull back on heavy volume. And I think the question that anybody has in here. And maybe the previous caller was touching on it is, you're going to make between $500 million and $600 million this year, it sounds like (inaudible) for -- yes, yes. And then can we expect growth next year? Can you give us any sort of guidance for 2020 based on the things you're looking at right now, this short-term cycle and the rolling off of some of these loans that have been affected because of the liquidity withdrawal? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [10] -------------------------------------------------------------------------------- Yes. Thank you, Matt -- Matthew. We are perplexed, first of all, on how the market reacted. We think it's unreasonable, as we stated in the conference call just now. And we are always in a position to try to add shareholder value. Actually, up from the life of the company being a public company. We have no less bought back more than USD 570 million of shares, of which all of them are canceled, okay? All of them are canceled, not just in the treasury. So we believe in -- the longer-term prospects are great. We are investing in the better business model and the technologies in a regulatory-compliant way to do things for the long term. Right now we are not in the position to provide next year's guidance yet. We believe it's still under the open-platform approach, there should be more growth than this year from what we have achieved so far. That's all I can say, unfortunately, I would like to give you more. But we did honestly provided maybe the guidance last year too early, so that it was way too lowballed. And then we had to adjust it, and we probably don't want to do that right now. -------------------------------------------------------------------------------- Matthew Lewton Larson, National Securities [11] -------------------------------------------------------------------------------- All right. And then I guess, investors should look at, to me, the positives that you -- it's an open-ended type of growth industry you're in as long as it's managed properly. But you all went public essentially 2 years ago and issued, I'm rounding, maybe 38 million shares at $24, and you've bought back more than that at below $7. I mean that's, to me, one of the greatest trades ever, where you go public at $24, you buy back not only from Quinlan and also in the open market at an aggregate average price of $6 and change. And your growth probably is as good or better than anybody would have thought when you went public. That's, at least, my assessment because I've followed your company since it did go public. And so I -- as long as one can be comfortable that you're going to see more growth next year, even if it's small or hopefully, large, then it seems to me that there is a floor in this stock because people just want to be sure that the profits don't turn into losses, which is the issue when one is dealing with financial companies. It wasn't too long ago that we had a financial crisis. And I did overhear that you all said that you expect 4 billion or more for this year, okay? So there is a chance that you beat that new estimate, it sounds like. And finally, you had mentioned previously that you might use most of the proceeds from the convertible to maybe buyback shares. You've only used 195 million of it. Are you in a position to consider further buybacks going forward? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [12] -------------------------------------------------------------------------------- Thank you, Matthew, for the observation and following us for our brief history as a public company. We have, I think, worked very hard to deliver the right business model. And you have seen our results have been no less than great compared to a lot of periods even across other sectors. It is, yes, a dynamic and new environment in China from a regulatory perspective. So I do appreciate there could be some concerns about the stability of things, but we are best equipped, best equipped from management DNA to adapt to all these changes, and we have proven time and time. So I wouldn't comment whether there's a floor or not. This is a market that we respect. But we have, from our company's view, there is a pretty large disconnect between the fundamentals and the value of the company. So we've been consistently buying back. When we rated the convertible bond, we told our investors there that we will use majority of the proceeds to buy back shares. And we have done that, we have done that, and all those shares are now canceled. There is another about $100 million left in there. We want to continue to assess the market situation. We have done that in the past. We've bought back shares in the past, no doubt about that. And we utilize the right tools to add more value to our shareholders. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- The next question comes from the line of Daphne Poon from Citi. -------------------------------------------------------------------------------- Daphne Poon, Citigroup Inc, Research Division - Associate [14] -------------------------------------------------------------------------------- So I just want to understand better about the relationship between your loan performance and I guess, the growth outlook of your open-platform. So you mentioned that, like, because you see the delinquency is rising, and you start to derisk and shift towards the open-platform business. Well, if it is more like the rise in NPL, if it is more of a systematic or macro-driven risk, then shouldn't that also affect the performance of your loans on the open-platform as well? And in that sense, like, if the banks or your funding partners see the rise in delinquency rates or your loan book, shouldn't they also, like, become more cautious about the open-platform business. So although, like, I guess, I think, so far the open platform has been growing very fast, but will you have any concern about the outlook or the sustainability of that, if the delinquency rate, like, stays at a relatively high level? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [15] -------------------------------------------------------------------------------- Sure. Thank you, Daphne. Very smart questions, as usual. So first of all, let's put numbers in the context of this question. Right now the M1 delinquency -- M1+ delinquency by vintage on the open-platform is less than 2.7% at the highest vintage, although it's a young vintage that's -- I'll be transparent about that. But as you know, as you cover a lot of banks as well, you know that banks actually look at charge-off rates on a balance basis. Given that the balance is growing very fast over open-platform, the charge-off rate is a small fraction of the M1+. Obviously, it's nothing to do with us, so we don't really care. It's nothing -- not that we take the risk, right? But we do care that the overall quality has to remain stable. And there is still room, there's a lot of room for that to grow. I think the cutoff points are somewhere around 5% net charge-off the balance for a bank to, sort of, really take a deep review of whether this business is viable or not for them. So I think we're still far from that kind of hurdle. Right now we see the banks coming in by masses, right? We went from 1 to 4 to 11, now 17. We have good confidence by the end of this year, we'll close 20 that we'll be working with open-platform. So there's definitely room to grow. Your structural view, we cannot completely agree with you more. It's absolutely right. But the absolute numeric number right now is low, and that low is driven by the reason that it's not a simple referral business. We don't just do that. There's no value in that. Every bank that participate is adding to the risk assessment. And when you have many banks who start -- capable -- who got capable -- capabilities, putting all their heads together to look at this risk, it's a better business model than just a fintech company doing this. So we found a better business model, let it develop for a few more quarters to see more normalized rates of growth. I think 150% growth from Q3 to Q4 is just early stage, but when we get to a more normalized rate of growth and the vintage kind of more normalized, I can answer your question with a lot better numbers. But right now I think there's room, a lot more room. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- The next question comes from the line of Yiran Zhong from Crédit Suisse. -------------------------------------------------------------------------------- Yiran Zhong, Crédit Suisse AG, Research Division - Diversified Financial Services Analyst [17] -------------------------------------------------------------------------------- Just a follow-up question on John's question on borrower acquisitions. You mentioned over 21 million registered borrower base, matching the profiles provided by the funding partners. How is the approval rates looking on the open-platform side? And how does that compare with your traditional loan book side? And also, can you provide an update on any acquisitions through the partnering traffic ecosystem? How many of the new borrowers were acquired through the ecosystem as of 3Q? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [18] -------------------------------------------------------------------------------- Okay. So thank you. Let me check 1 number, and I'll answer your call -- question directly. I think this number could add a lot of value in terms of seeing the potential opportunity here. So first of all, it's over 21 million people whom our partners deem that are capable -- suitable for them to underwrite risk. We are now seeing 1 million people that have lended through this. Do you know, in the past 12 months, actually, we've only allowed 5.5 million out of the 21 million people access to open-platform. We haven't opened the entire open-platform to our borrower base yet. This is so that we don't get a too large a flow. But one of the key, sort of, value-add for our platform is to balance risk -- sort of, obviously, risk, but supply and demand. So that things are in check. There's no oversupply, over demand, so that this grows at a reasonable pace. So only 5.5 million people out of 21 million people have access on the open-platform larger credit size right now. We will slowly and surely open up to more, eventually to all the 21 million people. And by the way, that 21 million people that have been approved, it's still growing. At the top of the funnel, we have been consistently growing 2 million new registered users quarter after quarter with no sales and marketing, of which we would probably lend to about 1/3 of them. So that would be a continuous traffic flow that will drive that total base. So I think we are in a fairly good position that there's still a deep pocket for open-platform, and I think that's quite obvious to us. I'm sorry that this may not have been apparent to the market yet, but it will be over time. And then there's a question about our ecosystem that we're building. We haven't switched the engines on because we have such an over demand. And given the macro situation, we don't want to take more risk right now. So we are in, I think, last count, about 8 app ecosystem, all of them have over 10 million to 20 million monthly active user base. We setup the ATMs, namely in the form of a HTML5-based technology so that users do not have to leave their app but can draw a loan directly in those apps. It's a better model than forcing users to come. And the last kind of the most unwanted model that we -- in our business sort of strategy is to buy traffic, because what happens in our business, okay, if you're an Internet business running e-commerce and games, whatever, we are all well-trained in those. We all come from those backgrounds. The easiest thing, spend money, buy traffic, get some conversion rates, get the business done, growth, right? Everybody understands that. But in our business, no. If you spend $500 million, $800 million a quarter acquiring users, you know what happens is if that user comes and you don't lend to them, that's all sunk cost. So what happens is you become forced to lend. In our business, you never ever want to be forced to lend. You want to switch on the lights and switch them off on your own risk appetite. So those are all set up, right? We've got a deep pocket. We've got the app ecosystem, we haven't switched on. And finally, we have more cash, we have more profits that can drive more user acquisition if we want to. So I don't think we are in a hurry. Let our bottom line be better than everybody in margin-wise and absolute dollar-wise over time. Is that helpful, Li Zhan? -------------------------------------------------------------------------------- Yiran Zhong, Crédit Suisse AG, Research Division - Diversified Financial Services Analyst [19] -------------------------------------------------------------------------------- Yes, yes, helpful. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question comes from the line of Jacky Zuo from China Renaissance. -------------------------------------------------------------------------------- Jacky Zuo, China Renaissance Securities (US) Inc., Research Division - Analyst [21] -------------------------------------------------------------------------------- Carl, thanks for providing the update. It's very helpful. Just one follow-up on the open-platform, regarding to the loan product we offer. I -- so from my understanding, so basically, the borrowers on open-platform have to provide their, like, bank payments, social insurance proof in order for our bank partners to provide their independent assessments. And probably, it takes like 10 minutes (inaudible) all the documents for them to process the risk assessment and to provide the funding to borrowers. So just comparing with the product offered by our peers. Since they can basically offer similar size of loans with -- like the processing time, like, within seconds. So just want to get your comments about the competitiveness of the loan product on our open-platform and any room for us to improve further? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [22] -------------------------------------------------------------------------------- Thank you, Jacky. These are very, very keen observations. And appreciate you for really taking the time to use the product and be diligent about things. I really respect your professionalism there. So there is a time sort of barrier because we really do not provide implicit guarantee, that's a fact. That's why my bank partners have to be more careful. And right now we are at really stage 1 of open-platform deployment in terms of system-level risk approval for my bank partners. It will get better and better and better. So, these banks are driven to get into the consumer finance space. They are growing. They are learning. So I think, over time, these will improve to a more compared levels. If we were to underwrite, we will put down the loan book. And if we were to underwrite, that approval process will literally take seconds. But unfortunately, we want to be really -- do not provide implicit guarantee, so it does take a longer period. To the user, there is some inconvenience. But the key question is, for a user -- I think, for open-platform, all these users tend to get scrutinized very carefully for my bank partners that they don't have loans outstanding on other platforms in order for them to get this credit. So I think that over time, they will get a better approval, a bigger loan size, and as we improve on the timing of loan dispersion, that competitive -- competitiveness will continue to yield better and better customers stickiness. Again, first of all, our customer stickiness is already well over 70% in the short 12 months we operate this. So these numbers look good, but we definitely still have a lot of room to improve. Thank you. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from the line of Yaser Al Nimr from Emirates Bank. -------------------------------------------------------------------------------- Yaser Al Nimr, Emirates Bank [24] -------------------------------------------------------------------------------- Just wanted to know the level of loans that turned bad in off balance sheet arrangement? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [25] -------------------------------------------------------------------------------- Yes, thank you for the question. We disclosed that as a complete loan book, a vintage delinquency on D1 on the M1 and M6, both on current and total potential risk in the presentation online. So if you look at our total loan book, I actually encourage the community to not differentiate on and off balance because the risk is the same, it's just who's providing the funding. So we like to disclose the full picture. So the D1 right now is in the zone of 10% to 12%, while the M1, on a vintage basis, is less than -- 5 -- around 5%. And then on the M6 charge-off, it's less than 1.7%. So these are current, sort of, loss rates. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- The next question comes from the line of BB from Jupiter. -------------------------------------------------------------------------------- Unidentified Analyst [27] -------------------------------------------------------------------------------- It's BB from Jupiter. Apologies if I missed this at the beginning, but I just had a question on insurance because that has been one of the concerns. Could you just comment on the new platform loans, what proportion of products require or would have insurance included? And how the regulatory landscape is -- will affect that practice going forward? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [28] -------------------------------------------------------------------------------- Thank you for the question, [B]. And the answer is actually simple, it's 0. Qudian takes regulatory compliance as the foremost important risk that we work with. We've avoided P2P, again. We've done a 36% IRR, which translates specifically to a 20% APR product, which is -- works well with the regulators. And we do not -- currently, we do not have any fees or interest structures that involve insurance companies. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- The next question comes from the line of Alan Kuang from Aletheia Capital. -------------------------------------------------------------------------------- Alan Kuang, Aletheia Capital [30] -------------------------------------------------------------------------------- I think I heard earlier that you have about 17 funding partners on the open-platform now and are looking to add about 3 more and reach perhaps 20 funding partners by the year-end. That's almost double the number of funding partners as compared to 3Q. Anything to share you had about your other funding partners? And can we expect a stronger loan volume for 4Q in that case? And on a related question, I'm curious who is controlling the pace of growth here for the open-platform? Because it does look like there's a lot of qualified borrowers that could potentially borrow from the open-platform, but the loan growth pace is not exactly that size. Is there any funding constraint? Or are the -- any of the funding partners are slowing down their growth expectation? Perhaps, given this is the year-end, their loan quota might have been used up. Are there any of these kind of constraints here? And just, I guess, the question is that, I'm curious, who is exactly controlling the pace of growth here for the open-platform? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [31] -------------------------------------------------------------------------------- Sure, Alan. The answer is -- I'll be very transparent, as usual. The control of pace is absolutely under our funding partners, reason being, we don't underwrite risk. So it's their risk appetite, it's their funding size. That's why it's critical, it's absolutely critical that we grow a vast base of multiple funding partners so that our economics are kept, so that the growth of this business is healthy. Now you alluded to sort of where Q4 is pointed. As you can see from the guidance that if you take out the absolute dollars or net income we've made in the first 3 quarters, it's a conservative number. That conservatism is built around that the open-platform, the first few partners that have grown -- has grown to much larger balances. And when they get to the large balances, they need to take time to breath. And it's the fourth quarter, right? We've made them a lot of money already, let them take a breath. We have added from 4 partners to 11, but the net add partners does take a long time to the -- for the systems to integrate and for the trial to run. These are banks. These are guys who cannot tolerate even $0.01 of difference. So it's not us. It takes them to build the systems. We're helping them. So I don't think the majority of the new partners we signed up will contribute directly into Q4 yet, it's more into next year. That's why we're always setting up for longer sort of future. So I think Q4 is -- we'll probably look at a good loan balance growth, but on loan origination, it could be around flat from Q3 because Q3 was a big step up. Since it's early stage for open-platform, it's more of a step function of growth rather than a linear function for growth. When we get a lot of new partners to come in, when the ecosystem becomes 20-plus partners, then you'll see more of a normalized linear quarter-to-quarter situation. Does that help, Alan? -------------------------------------------------------------------------------- Alan Kuang, Aletheia Capital [32] -------------------------------------------------------------------------------- Yes, that's very helpful. And just as a follow-up question. Can you share a little bit on the profile of these 17 funding partners you have? Like what kind of banks are they? Are they consumer finance companies? And I think more importantly, what percentage of the 17 banks actually are coming for your off balance sheet loan facilitation models? I believe some of the partners would be those partners you've worked with previously on the old business model. -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [33] -------------------------------------------------------------------------------- Yes. So first of all, there are 3 licensed direct banks. There are -- they have Internet license to do this. And we work in a very deep way with them because they've got the technology, they've got the risk models running. So they are the forerunners in Internet lending. And then you got the next set of around 10 to 12 consumer finance companies. And then there's a couple of Internet microlending license. So again, all of them have to be qualified as a licensed lender. And it takes time, it takes longer time for the consumer finance companies to build the technology around our open-platform, to build their risk models to work on this. And then the second part of the question relates to, I think, 90% of them or more worked on the -- for loan facilitation before. They got attracted to open-platform because, number one, it's the final form, it's a final shape and form of how fintech companies can work with banks. Regulatory compliance is a priority. Dollar profit to dollar profit, they would take open-platform. And more importantly right now, it's simple, open-platform helps them generate better risk-adjusted returns. On loan facilitation, the return that they are getting is around 9%, 9.5%. The open-platform return is around 18% plus. So why not? The key is, that's why there is some competitive advantage. Your company -- if we had a P2P model, we'll be much slower at this. Your company must move on to loan facilitation first to get the systems set up, right? And then they would get comfortable that the precision accounting and the transfers and the funding clearing is safe, is reliable. Your user cohorts are something that they accept, then they would consider moving to a open-platform model. I think, overall, over time, next 3 to 5 years, you see everybody copying us, just as they've done on loan facilitation in the past 2 years. -------------------------------------------------------------------------------- Alan Kuang, Aletheia Capital [34] -------------------------------------------------------------------------------- I see. Understood. That's quite helpful. And one very last question is about the accounting questions on -- for the open-platform. And I understood that the revenue from the open-platform has actually received. I don't recall this quite exactly if it's received monthly or quarterly, but the total revenue is booked upfront at inception of the loan. Is there any reason why such an accounting practice is -- I mean is there any reason why you guys have picked such an accounting practice? Or is there any way for you to change that? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [35] -------------------------------------------------------------------------------- Yes. Thank you, Alan. Actually, to make -- our company wants to be transparent as much as possible because it's dynamic, right? So in our online presentation from our earnings in the appendix, there is a page dedicated on, let's see, page -- give me a second, on Page 33, highlighting what every line of revenue means and what our revenue recognition policy is, okay? So for the sake of everybody else, please look at Page 33 on our presentation, it's -- we want to be very transparent as a company. Secondly, to answer your question, sorry about that, directly is the -- yes, the total fees over the life of this cycle alone is recognized on day 1, okay? It's recognized on day 1. And then the fees are paid to us in terms of the cash flow over the course of the loan's life cycle. Now as a management team, we actually don't want to recognize it on day 1 because it does create unnecessary earnings volatility as everybody who knows, right? Because if the volume drops off, this thing goes to -- very, very low. If the volume picks up, it just grows very, very fast. So we don't like this. But unfortunately, we have to fully respect SEC accounting guidelines. And because the way the contracts are structured, it -- this is the only acceptable accounting standard we can adopt, so we have to follow this. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- The next question comes from the line of John Cai from Morgan Stanley. -------------------------------------------------------------------------------- John Cai, Morgan Stanley, Research Division - Research Associate [37] -------------------------------------------------------------------------------- So basically, it's still about the volatile credit environment that we operate in. I understand the switch on and off, let me see the risk, we slowed down a little bit. But is there any way we can reduce the volatility of our portfolio and then, I mean, the equity where people just diversify? So as mentioned, that we could be targeting more high-quality borrowers in the future. And should we expect certain probably lower pricing for higher-quality borrowers? I mean positively because if you can keep the high-quality borrowers, even if you lower the prices, the incremental profit. So just what are your thoughts about how to reduce the volatility of our portfolio? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [38] -------------------------------------------------------------------------------- Thank you, John. Yes, unfortunately, the market doesn't like volatility, and I appreciate that. And that's why we're building a better business model on the open-platform, where we do have a portfolio of higher-quality borrowers where we can generate a consistent fee on this. Give us some time. We are at -- hard at work at doing this. Now -- and to answer your question in another way, another way to reduce volatility for the near term is very simple, we just keep piling on loan balance. It's a very -- this is the oldest trick in the book, right? You just pile on more new loans so that you're going into default borrowers, get a new loan and delinquency doesn't seem to be a problem. But when it becomes a problem, you will be in big trouble. So we rather do things right. We rather think that having a low leverage in a emerging kind of unsecured credit environment is the most conservative risk management tool that you should deploy and then diversify into a higher credit dollar. Leveraging what the banks do best on risk management together is a better business model. So we are deploying into -- we're going to the higher credit side, but we don't take any of that risk. And yes, we are developing lower IRR products. But I don't think there's much room to be honest. If you think about the difference, just dollar to dollar, okay? The difference on the 36% IRR versus a 26% IRR on a CNY 10,000 over 12 months' repayment, you know the difference of interest on a month, you know how big that difference is? It's less than CNY 50, it's approximately CNY 40 per month, difference in interest. And again, the loan principal is CNY 10,000. So I don't think that's a big difference. When you grow into CNY 20,000, CNY 30,000 category, then that sort of lower IRR would make a lot of sense. But right now I think it's a direction we're heading to diversify that portfolio in a responsible way. Thank you, John. -------------------------------------------------------------------------------- John Cai, Morgan Stanley, Research Division - Research Associate [39] -------------------------------------------------------------------------------- And just one -- really last question. Do you see any room to -- because we are seeing the risk is stabilizing. But us, as an outside investors or outside analysts, we are not able observe that. So is there any way we can be able to track these numbers on a more frequent basis? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [40] -------------------------------------------------------------------------------- Yes. We try to be as transparent as we possibly can. That's why we are disclosing all kinds of metrics from D1, M1, M6 charge-off and both M1 and M6 on both the total receivable at risk and current receivable at risk. So I think the kind of exposure maximum you should look at, and I think that's what really you should look at for a fintech company with a shorter loan duration in the unsecured market is total receivable risk. We've been disclosing that since day 1 we became a public company. So I think those are all good ways to look at things. And D1 is more of the really real, real, real time. Can we be more frequent? I don't want to have the community track us on a day-to-day basis. Give us some room. We want to be transparent. We are already leading the industry in transparency, I think. So whether we can do more? Let us -- give us some time to think about how we can be better at this. There's obviously still much work to do. But I think we already disclosed a higher standard in terms of disclosure. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- The last question comes from the line of Yaser Al Nimr from Emirates Bank. -------------------------------------------------------------------------------- Yaser Al Nimr, Emirates Bank [42] -------------------------------------------------------------------------------- Firstly, I wanted to understand what is the criteria based on which you decide, is it the loans to be on balance sheet or off balance sheet. (inaudible) the risk is still in your -- with you on your books? Secondly, the question is given that you're focusing -- going forward, you're going to be focusing more on the open-platform and the retail business. How do you see your on and off balance sheet loan book playing out the next year? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [43] -------------------------------------------------------------------------------- Thank you, Yaser. So whether it's on and off balance sheet, it's dependent on our risk appetite. The risk appetite is not about borrower delinquency, partially it is. We are optimizing because off balance sheet kind of funding requires interest payments, there's financing costs involved. So it's a slightly less profitable business than on-balance sheet. But because of the additional leverage you provide -- you get, you actually earn a greater absolute dollar in terms of total net income. So we're balancing that all the time. But overall, if things go really well on open-platform, we expect to deleverage completely away from any leverage. And that's where we want to be, just on-balance sheet only business, where we see these loans as an investment for cash optimization. Yes, that's kind of how we want to be in the context of open-platform. Yet, we will not let market opportunity escape us. We are constantly in a process to optimize risk-adjusted returns. If the total macro risk environment becomes suitable for more leverage, we would do so to earn that profit and activate more users. But as a guidance, we do not want to take on more than 3x leverage. This is a company internal risk control that we have so that we can kind of absorb any imaginable or unimaginable risk. -------------------------------------------------------------------------------- Yaser Al Nimr, Emirates Bank [44] -------------------------------------------------------------------------------- All right. So can we expect your on and off balance sheet loan book to remain roughly the same in terms of leverage, which is 2.3x? -------------------------------------------------------------------------------- Ka Hong Yeung, Qudian Inc. - CFO [45] -------------------------------------------------------------------------------- In fact, we are right now going into lower. We went from 2.3x in the second quarter to 2.2 in the third quarter, and we will go lower into the fourth quarter. And it's because open-platform can generate similar, if not better fees, because the risk is lower for everyone. And we can deliver a still fairly sizable earnings relative to our valuation and our book value. We will do that first. Yes. I think it's well past the hour. So -- and I think let's call that today a wrap. Is there any questions from investors, we would love to hear from you. Our contacts for our Investor Relations team is available on the web. We will try our very best to address each of your questions with tender, with transparency, with respect. Thank you. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.