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Edited Transcript of XYF.N earnings conference call or presentation 19-Aug-19 12:00pm GMT

Q2 2019 X Financial Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of X Financial earnings conference call or presentation Monday, August 19, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Zhang

X Financial - IR

* Jie Zhang

X Financial - CFO

* Shaoyong Cheng

X Financial - President & Director

* Yue Tang

X Financial - Founder, CEO & Chairman

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Conference Call Participants

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* John Cai

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Hello, and welcome to the X Financial Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to your host today, Jennifer Zhang. Please go ahead, ma'am.

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Jennifer Zhang, X Financial - IR [2]

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Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results were released earlier today and are available on the company's IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Justin Tang, Founder, Chairman and CEO; Mr. Simon Cheng, President; and Mr. Kevin Zhang, CFO. Mr. Tang and Mr. Cheng will give a brief overview of the company's business operations followed by Mr. Zhang, who will go through the financials. They are all available to answer your questions during the QA session.

I remind you that this call may contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law.

It is now my pleasure to introduce Mr. Justin Tang, Mr. Tang. Please go ahead.

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Yue Tang, X Financial - Founder, CEO & Chairman [3]

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Thank you, Jennifer. Hello, everyone. We are pleased to report a solid quarter, where we made significant progress across a number of different aspects. Our business momentum remains strong with quality of loans facilitated on our platform improving slightly and funding from the institutional investors expanding.

I'd like to highlight some of these achievements. First, the industry regulatory environment is still challenging during the second quarter of this year. No matter what the regulator -- regulation trends are, we are making ourselves thoroughly prepared to be qualified and in compliant with the new regulation in order to protect investors' and shareholders' benefits.

The P2P industry continues undergoing so-called check-and-audit process per regulators' requirements, and we are complying of regulators' so-called [3] decline requirement by decreasing our loan balance and a number of active lenders. There are a few potential outcome for the P2P industry at this moment is remain unclear. So we are not sure if the so-called registration will ever be completed, but at same time, we are working with local regulators to explore the possibility to transform part of our business into micro credit loan company.

Second, the high-quality loans on our platform and our strong reputation is helping us to attract more institutional investors. During the second quarter of 2019, funding from nonindividual investors account for around 26.7% of the loans facilitated through our platform, a significant improvement from 10.4% in the first quarter. Demand from institutional investors for our high-quality assets remain strong and will gradually reduce our funding cost over time.

Financial institutions have extended credit line to us in an amount approximately RMB 26.4 billion for us to facilitate loan transaction on our platform, which reflects the trust that financial institutions have in the quality of our assets and the strengthened -- strength of our risk management. So we are pretty confident that, if necessary, we can use institutional funding to maintain the stable growth of our business without any interruption.

Third, our delinquency rate improved on a sequential basis as we continued to invest in our risk management system and the technology. We are diversifying our customer acquisition channels as well through partnership with e-commerce platform and other channels with better customer quality.

Lastly, Xiaoying Wallet, our recently launched revolving credit product, grew rapidly during this quarter, with transaction volumes jumping significantly to RMB 970 million (sic) RMB 971 million from RMB 200 million in the last quarter and outstanding loan balance increased to RMB 578 million as of June 30, 2019, from RMB 177 million as of March 31, 2019. Xiaoying Wallet was developed with the needs of our customers in mind and we leveraged our sophisticated data analysis capabilities and advanced technology infrastructure to offer the best industry -- best product in the industry.

In conclusion, we are confident in our future growth prospects and the ability to create a long-term value for our investors and shareholders. We will continue to provide the best user-friendly and convenient financial services to borrowers and help them to meet demand for consumption and grow our online consumer lending business. This will conclude my remarks.

Now I will turn over to Simon Cheng, our President.

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Shaoyong Cheng, X Financial - President & Director [4]

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Thank you, Justin. Hello, everyone. We are very pleased to see the quality of our loans has improved and the delinquency rates for both 30 to 90 days and 90 to 100 (sic) 90 to 180 days went down sequentially, which reflects our strong risk management capability. Since later 2018, we have taken prudent approach in our credit policies, and it is very good to see stable and improved credit quality during this uncertain macro environment.

We will continue our prudent approach in our credit policies in later part of 2019. Besides, we have expanded our funding channels to banks, trust companies and other financial institutions, which will further strengthen our funding costs and diversify our funding sources.

In addition to that, we are expanding our borrower base by cooperating with other fintech companies. We are very happy to see Xiaoying Wallet, our recurring consumption product, is growing in the importance of our business as a result of strong demand in the market. As Justin had mentioned, the number of transaction of Xiaoying Wallet in the second quarter increased by 347% quarter-over-quarter. The number of regs and approved user of Xiaoying Wallet was 542,752 as of June 30, 2019, increased from 192,891 as of March 31.

Xiaoying Wallet is expected to maintain strong growth momentum and gradually account for a larger percentage of our overall business. We are very confident we will continue to deliver good results going forward in the challenging environment.

I will turn the call to Kevin, who will go through our financials.

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Jie Zhang, X Financial - CFO [5]

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Yes. Thank you, Simon. We delivered solid financial results during 2019 second quarter despite the regulatory uncertainties remain. And the non-GAAP net income attributable to X Financial shareholders increased to CNY 342.5 million during this quarter, a 57% increase compared to our results in the first quarter. We continued to expand our relationships with banks and the trust companies as well as other institutional funding partners. 26.7% of our funding in the second quarter is from the nonindividual investors, and we expect 45% and over [60%] of the funding will be supported by the nonindividual investors in the third and the fourth quarters, respectively.

The overall funding costs remained stable, while we foresee a decreasing funding costs from financial institutions in the second half year of 2019 as low as 8% annually. In the interest of time, I will not walk through every detailed line. Please refer to our earnings release for further details.

Net revenues in the second quarter of 2019 is CNY 810 million, a 4.2% increase quarter-over-quarter. The revenue tax rate is 7.96%, slightly 0.1% decrease compared to the revenue tax rate in the fourth quarter since the product mix is relatively stable and the APR of our main product, card loan, remains unchanged. The origination and service expense as a percentage of loan volumes facilitated increased by 0.65% from 3.5% in Q1 to 4.15% in Q2, primarily due to an increase in customer acquisition costs for the recently launched revolving credit product, Xiaoying Wallet. We are pleased to see one of our major subsidiaries classified as a software enterprise in May 2019, while makes it fully tax exempt of Enterprise Income Tax of 2018 and is subject to a preferential EIT tax rate of 12.5% from 2019 to 2021. This contributed to our income tax benefit of CNY 114 million during this quarter, and we expect that the effective tax rate will be around 15% in 2019, a 45% decrease compared to just in 2018.

Besides, we expect that the loan facilitation for the third quarter of 2019 to be approximately RMB 10.5 billion. This forecast reflects the company's current and preliminary view, which are subject to changes.

In conclusion, we are pleased with our operational and financial performance this quarter, and we will continue to roll out initiatives and apply technology across our business to improve operational efficiency and create long-term sustainable value for our shareholders.

Now this concludes our prepared remarks. And I would like to open the call to questions. Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from John Cai with Morgan Stanley.

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John Cai, Morgan Stanley, Research Division - Research Associate [2]

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I have a few questions. I think the first one is on the regulations. Can you talk about what's the latest communications with the regulators? What are their expectations on the pace of the [3] decline? And also Mr. Tang mentioned that they were -- you were talking about transiting some of the business to a micro credit lending license. So just wonder if there is any colors or further details and if so, how many portion will go there? And do we expect the license -- when do we expect the license to be resumed because I think U.S. suspend it?

And the second question is about the growth essentially. You mentioned that the risk has improved sequentially, and we also have over CNY 20 billion institutional funding standby. So just wonder what kind of loan balance growth can we expect for the second half for this year.

And the third question is on the product. I think we have seen very strong momentums of the Xiaoying Wallet. Based on my calculation, the ticket size seems to be very small of around RMB 300 to RMB 400. Can the management also share some take rates, tenures and profit contribution of this product, in particularly in relations to the customer acquisition cost because we also see that origination and servicing cost has also increased? So just wonder, if we look at this Xiaoying Wallet stand-alone, can they break even after deducting the customer acquisition costs. And what sort of profit contributions do we expect in the future?

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Yue Tang, X Financial - Founder, CEO & Chairman [3]

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Yes. John, thanks. So I will address the first and the second question, and Simon and Kevin can answer the third question, yes. In terms of regulation, like I mentioned in the call, at this moment, the prospect of the registration basically remains unclear. Basically, we are working with the local regulators, require us to decrease, like, say, decrease our loan balance on our P2P platform and also decrease the number of active lenders, and we are complying with that. At this moment, out of our CNY 20 billion loan balance, we have just over 60%, around 65% -- under 65% in our P2P platform. And so -- and we have declined by around CNY 500 million to CNY 800 million every month. And then when we'll go ahead with this registration process, we don't know yet.

At the same time, we are working with regulators to explore the possibility of transforming part of our business into the micro credit company. But this need to be worked together between the local regulator and the [regional] regulator. So we are working pretty actively with them. And if and when that will happen, we don't know yet.

But again, we are pretty well prepared in all fronts. No matter how the regulation will go, we will be able to maintain the scale of our business without much interruption.

So second, in terms of growth prospect, we will give guidance for the third quarter. You see our second quarter, we have some small sequential growth from the first quarter. I think in Q3, you will see some further sequential growth from Q2, single digit. I think in Q4 will be that as well. At this moment, we only give as a visibility for the second half of this year. We just don't want to make a premature prediction for the business next year because external economic environment still is fairly uncertain and the general credit environment is still very challenging. But the funding is not a bottleneck at all. We actually have sufficient funding to support the growth of our business. I think the key really is to acquire the quality loan demand, and we are very careful in terms -- only we will facilitate the quality loan demand, yes. And Kevin or Simon can answer the wallet question, yes.

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Shaoyong Cheng, X Financial - President & Director [4]

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Yes. Xiaoying Wallet is a recurring consumption product. So it means the customer is supposed to use the product very frequently and with a lot of transactions. Our general transaction size is about CNY 300 to CNY 400. This is a small-ticket transaction, but the customer will continue to use it for longer time, which means the longer lifetime for the customer because it is a consumption loan and it also has better credit quality. And also because it will last for quite a long time, then our revenue source will be quite diversified. It's not only from the interest income.

So with all this strong benefit from this product feature, actually currently we are trying to increase the volume of these active frequent consumption users for our product. We see very strong demand in the market. We see a very strong growth in the future. So our focus right now is not profitability, but we -- given the data we have, we expect that the customer we acquire can generate positive revenue after a year.

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Jie Zhang, X Financial - CFO [5]

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Yes. I would give some more details about this product after Simon. Actually, when we are talking about Xiaoying Wallet, we are categorizing for 3 subsegment. One is consumption and the second one we call the kind of installment. The third will be catch-up loans. For about 3.8 million number of transactions of Xiaoying Wallet product, about 2.7 million will be the consumption and the ticket size for the consumption is only about, as Simon mentioned, CNY 200 to CNY 300 per transactions. But when we are talking about the installment and cash advance, it will be around CNY 1,000 to CNY 3,000 per transaction. When we -- for the consumption just like we use our credit card to, say, purchase in a store or et cetera, so actually, we will provide around 7 days' worth period. So the tenure for those transaction will be very short. So when we're talking about installment and the cash advance, it will be around 7 to 9 months, a little bit similar to [about those] product of card loans. And as we know, those recycling products usually have a longer user life compared to our loan products. So at the first several months, we usually would like to invest more on customer acquisition costs. And that means, at the first 7 months, we expect that will be an opportunity loss for the segment, but after around 1 or -- 1 year or 1 to 2 years operating, we expect we -- and the total payments will be breakeven.

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John Cai, Morgan Stanley, Research Division - Research Associate [6]

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Yes, yes. Can I have a follow-up on the customer acquisition costs?

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Yue Tang, X Financial - Founder, CEO & Chairman [7]

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Yes.

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John Cai, Morgan Stanley, Research Division - Research Associate [8]

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So just wonder what's the trend and what's the cost we are paying for every Xiaoying Wallet customer. And a new question, actually, is about our cooperation with ZhongAn. What's the mix at the moment? And what's the cost? And any new partners we are working with?

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Jie Zhang, X Financial - CFO [9]

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Okay. I will provide some colors first and then maybe Simon and Justin can help me to summarize. Actually, when we are talking about customer acquisition cost, we now tend to invest about CNY 150 to around CNY 200 to acquire a new active customer for the Xiaoying Wallet, okay. And we expect and the average acquisition cost will be remain stable in the following -- in the second half of 2019, and that's our foreseeable view for the customer acquisition cost for the Xiaoying Wallet.

When talking about our cooperation with ZhongAn, yes, actually, we are now -- only about 80% of our payment was now secured by ZhongAn insurance and in the Q1, it's about 82%. That's [negatively] -- in this quarter was slightly improved -- was improved slightly. And now we are still seeking the cooperation with other insurance company and the guarantee companies to increase the percentage of transactions supported by other partners, but we are still in -- we're still on the way, but we do have some time lines in our pipeline to negotiate about it.

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Shaoyong Cheng, X Financial - President & Director [10]

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Yes. As Kevin just said, actually, ZhongAn still the largest -- our largest insurance partner at this moment, and we have very good relationship with ZhongAn. And at the same time, quarter-by-quarter, the loan insured by ZhongAn has decreased. We are actively seeking other partners, including insurance companies or some guarantee companies. We have got a good response from their part as well. We would continue to diversify the guarantee partner for our business.

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Operator [11]

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And the next question comes from [Matthew Larson] with National Securities.

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Unidentified Analyst, [12]

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I got on the conference call a little late. So if I'm asking a question that you addressed, I apologize. You gave guidance in the earnings release for the third quarter. Do you have guidance for the full year?

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Jie Zhang, X Financial - CFO [13]

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Yes...

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Yue Tang, X Financial - Founder, CEO & Chairman [14]

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Yes -- Kevin, go ahead.

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Jie Zhang, X Financial - CFO [15]

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Okay. Actually, we foresee a very stable [loans] in the fourth quarter. So when we're talking about the whole year, we expect around CNY 40 billion to maybe CNY 41 billion loans acquisition and -- amount for the whole year. Yes.

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Unidentified Analyst, [16]

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All right. And so it's reasonably flat, and that's because you're replacing your peer-to-peer funding with more institutional funding. Is that why that's the case?

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Shaoyong Cheng, X Financial - President & Director [17]

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I think that's not the major driver because actually we took a very prudent approach in our credit policy. At this moment -- the environment is quite uncertain at this moment, so we really try to make sure we have good quality for our asset. So we have stable or slightly increased digital plan at this moment.

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Unidentified Analyst, [18]

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Okay. And by the end of the year, what -- could you give me your goal as far as what percentage of your business will be institutionally funded?

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Jie Zhang, X Financial - CFO [19]

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We expect by the end of this year over 60% of our funding will be from the financial institutions.

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Unidentified Analyst, [20]

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Good. Was that 60% or 50% did you say?

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Jie Zhang, X Financial - CFO [21]

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60%, 60%.

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Yue Tang, X Financial - Founder, CEO & Chairman [22]

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60%. Yes, which is...

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Unidentified Analyst, [23]

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6-0. Okay. All right. And it seems to me that's what the regulators are pushing for, so that sounds like a majority and a big move up from where you were this time last year. Let me see, your stock, which came public at '14, is $2.60, trades well below book value and at my -- the estimates I'm using maybe from my previous caller, the Morgan Stanley analyst, you -- well, at this point, it looks like you're trading at 2.5x earnings, maybe thereabouts. Is there any thought of dividend or buying back some shares at this low level in addition to the other work you're doing?

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Yue Tang, X Financial - Founder, CEO & Chairman [24]

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We made $15 million dividend for fiscal year 2018. I think we'll continue to make a dividend in 2019 as well. We have not done stock repurchase yet. One of the reason is the liquidity of our stock is fairly low, and so it's pretty hard for us to buy much. And if we're buying, we will further reduce the liquidity in open market. It's not going to be good. And the second also is that because there are different possible outcomes for the regulation, we want to reserve some cash on hand in terms -- in case we need to fund some financial institution current requirement. So at this moment, I think, we're just going to have a pretty stable dividend policy.

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Unidentified Analyst, [25]

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All right. That sounds good. And when do you expect to announce the dividend for '19?

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Yue Tang, X Financial - Founder, CEO & Chairman [26]

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We do that once a year, so it will be after fiscal 2019, yes.

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Unidentified Analyst, [27]

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Oh, after the fiscal '19, it will be -- okay, so 6 months at least.

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Yue Tang, X Financial - Founder, CEO & Chairman [28]

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Yes.

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Unidentified Analyst, [29]

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Okay. Well, it looks like your business is humming along pretty well, and I guess the uncertainty is -- the regulatory rules that everybody is waiting for, but I would assume a well-capitalized firm like yourself with a large cash balance, which is trying to raise their institutional funding would be one of the survivors in a business that is consolidating, and you would pick up market share at one point, so that's what I would be expecting. Appreciate it.

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Yue Tang, X Financial - Founder, CEO & Chairman [30]

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Thank you. Yes, we certainly think so. Yes, thank you.

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Operator [31]

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And it's all the time that we have for questions. I would like to return the floor to Jennifer Zhang for any closing comments.

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Jennifer Zhang, X Financial - IR [32]

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Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we'll be pleased to answer them through follow-up contact. We look forward to speaking with you again in the near future. Thank you very much.

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Yue Tang, X Financial - Founder, CEO & Chairman [33]

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Thank you.

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Operator [34]

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Thank you. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.