Tony Hung - Senior Director of Capital Markets Jay Wenjie Xiao - Founder, Chairman and Chief Executive Officer Craig Yan Zeng - Chief Financial Officer Ryan Huanian Liu - Chief Risk Officer Zhou - Senior Financial Director.

Tian Lu - Goldman Sachs Jackie Zhou - Deutsche Bank Ella Ji - China Renaissance Ryan Roberts - MCM Partners.

Ladies and gentlemen, thank you for standing by and welcome to the LexinFintech Fourth Quarter and Full-year 2017 Earnings Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions]. I must advice you that this conference is being recorded today.

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

Thank you operator. Hello everyone and welcome to Lexin’s fourth quarter and full-year 2017 earnings conference call. The Company’s results were issued earlier today and are first in online. Joining me today on the call are Mr. Jay Xiao our founder Chairman and Chief Executive Officer, Mr. Craig Zeng; our Chief Financial Officer Mr.

Ryan Liu our Chief Risk Officer; Mr. Zhou our Senior Financial Director and the members of our team. For today’s agenda, Mr. Xiao will provide an overview of our recent performance and highlights. Mr. Xin will discuss our financial results and Mr. Liu will discuss our credit performance.

Before we continue, I refer you to our safe harbor statement in the earnings press release which applies to this call as we will make forward-looking statements. Also this call includes discussions of certain non-GAAP financial measures.

Please refer to our earnings release which contains a reconciliation of non–GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in Reminbi. I will now turn the call over to our CEO Mr. Xiao, whom I will translate for..

[Foreign Language] Hello everyone today is the first opportunity since our IPO to discuss with everyone Lexin’s development.

I’m very happy to say in a changing regulatory environment with increased regulation, we are able to benefit greatly from our past commitment to investing in our financial technology and we have established a strong competitive advantage.

We were able to leverage on our financial technology and these competitive advantages to make rapid progress this past year. Our user base doubled from 2016, at the same time, we were able to achieve scale and profitability. We are very pleased with this strong performance.

[Foreign Language] In 2017, Lexin’s R&D expense increased significantly by 85% over 2016 to reach RMB235 million or 28% of our operating costs. We also established AI and block chain laboratories. Today, Lexin is using AI in every part of our operations to increase efficiency for our customers.

To-date, over 98% of our orders through AI can be automatically audited which can save us substantial processing costs. [Foreign Language] This past year was also one of steady expansion of our e-commerce business.

We established our e-commerce platform in 2013, and as a pioneer in China’s installment e-commerce business, the Fenqile e-commerce platform has been a foundation of heart of Lexin’s business. In 2017 the Fenqile e-commerce platform contributed close to 50% of our total revenues.

And at the end of 2017, our Fenqile e-commerce platform’s total SKUs reached 900,000, representing an increase of 50% year-on-year. The development of these additional consumption scenarios can satisfy the needs of our customers and allow the Fenqile brand to gain greater mindshare among China’s educated young adults.

Overall, our e-commerce customers increased 22.5% versus 2016. During November 11 and December 12, Fenqile e-commerce platform achieved very strong sales. This year, on March 1st, our annual screen installment purchase day were able to greatly improve on our December 12 sales record reaching a single day record high.

[Foreign Language] This past year was one where we also embraced regulatory changes and built a stable and complaint business.

In the fourth quarter of 2017, Fenqile average effective APR declined from our third quarter APR of 25.3% to 22.8% one of the lowest APRs among China’s ne financial platforms and contributing to the future development of more ubiquitous finance in China.

In addition, we developed an additional system of consumer protections to promote the healthy and orderly development of the industry. [Foreign Language] Our continuing investments in technology have allowed us to provide constant improvements to our customer experience.

This combined with the lower APR has allowed us to win over even more high quality customers. At the end of 2017, Lexin’s registered users reached 23.9 million versus 12 million at the end of 2016. Our growth in users continues to be a key part of our rapid growth.

[Foreign Language] As a technology platform, Lexin not only attracted more and more financial partners. We also helped more and more platforms with consumption scenarios provide financial services, enabling consumer credits to be more convenient for everyone. This in turn encourages consumption in such China’s real economy.

[Foreign Language] In 2018, we will continue our commitment to investing in research and development and to using our proprietary and highly effective financial technology to provide better credits to China’s educated young adult customers.

We believe that in the future our commitment to technology will enable us to develop even stronger competitive advantages and enable us to continue our healthy growth. Next, I would like to invite our CFO, Craig to discuss with everyone our results..

Thank you, Jay and hello everyone. I’m pleased to announce that we have continued our robust growth trend and delivered a strong portfolio on a full-year 2017 results. Our strong performance is a reflection of our commitment to providing superior customer service to our customers in China and to continue to grow with our customers.

Total loan originations in full-year 2017 reached RMB47.7 billion, up 115% from RMB22.2 billion in 2016. And total loan originations in the fourth quarter of 2017 reached RMB15.4 billion, up [100%] (Ph) from RMB8.2 billion in the same period of 2016. Both these numbers demonstrate our continued strong growth.

At the end of 2017, our total outstanding loan balance reached RMB19.3 billion, up 21% from RMB15.9 billion at the end of third quarter 2017. Total operating revenue for the fourth quarter of 2017 reached RMB1.6 billion driven by strong financial service income growth, which grew 62.3% over same period 2016.

Loan facilitation and service fee increased by 668% from RMB24.9 million in the fourth quarter 2016 to RMB191 million in the fourth quarter of 2017 due to primarily to the significant growth in off-balance sheet growth.

Our growth in financial service income is a reflection of an increase in both the number of active customers and average offset increasable balance per customer.

We have seen a demonstration of this growth in our updated performance of the cohort, which we applied in the first quarter of 2015, whose balance has risen to RMB9738 and whose 30-day delinquency rate has dropped below 1% to 0.9% while maintaining a very stable level of quarterly active rate at 48%.

Our overall average credit limit has raised to RMB8201. Funding cost increased by 47.5% from RMB151 million in the fourth quarter 2016 to RMB222 million. The increase was primarily due to the increase in our funding debt to fund our balance sheet loan originated on our platform.

At the end of the quarter, approximately 53.5% of our funding came from our usually tight platform. And 46.5% of our funding came from institution funding partners. Our overall effective funding costs was 8.5% with on balance sheet portion of our portfolio for the quarter.

Financing and service cost increased by 77.9% from RMB38.4 million in the fourth quarter of 2016 to RMB68.3 million in the same quarter of 2017 due to net increase in salary and the personnel related costs as well as increases in fees and other costs which results from our strong growth.

Probation for credit loss increased by 102% from RMB93.5 million in the fourth quarter of 2016 to RMB198 million. The increase was due primarily to the growth of the balance of on balance sheet loan, primarily as a result of our strong growth.

Gross profits for the fourth quarter reached RMB434 million representing an increase of 79.5% from the year before. Sales and marketing costs decreased by 8.7% from RMB118 million in the fourth quarter of 2016 to RMB108 million in the fourth quarter of 2017. The decrease was primarily due to the decrease in advertising cost.

Our sales and marketing expense is also a reflection of our highly efficient and cost effective customer acquisition strategy. Customer acquisition costs per active customer were RMB99 for the full-year 2017 and 85 for the fourth quarter of 2017.

Research and development expenses increased by 47.2% from 45.5 million in the fourth quarter of 2016 to 67 million in the fourth quarter of 2017. This increase was primarily due to the increase in payroll and headcount.

General and administrative expenses increased by 105% from RMB27.6 million in the fourth quarter of 2016 to RMB56.6 million in the fourth quarter of 2017. This increase was primarily due to the increase in the headcount and payroll. Net income for the fourth quarter was RMB100 million, as compared to a loss of RMB12.9 million a year ago.

Adjusted net income was RMB126 million, an increase of 436% from the fourth quarter of 2016. Net income per ADS for the fourth quarter of 2017 was $0.29 fully diluted basis. Our non-GAAP EBIT reached RMB237 million, which was an increase of the 322% compared with the same period in 2016.

For the full-year 2017 number, please refer to the earnings release. Our increasing profitability is a strong reflection of our increased operating leverage.

As operating expense, as a percentage of average loan balance decreased to 5.3% in the fourth quarter now advertisement marketing at pricing, G&A and R&D decreased to 0.7%, 1.3% and 1.5% of average loan balance reflected. We currently have over 7.6 million users with credit line, up from 4.5 million at the end of 2016.

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

Thank you, Craig. In the fourth quarter of 2017, we continued our sale focus on [indiscernible] and according the right customer. Our 90 plus delinquency ratio remains lower at 1.14% and we continue to stay [indiscernible].

As our lifetime target ratio remains around 2% in 2017, our NPL ratio for on balance sheet loans was1.61% and our NPL target ratio was RMB101.8 million. In addition, we have seen the strength of our strategy in growing with our customers.

As Craig mentioned earlier, our delinquency ratio for the cohort which we acquired in the fourth quarter of 2015 is now only 4.9%, which was actually quite lower for this cohort. This demonstrates the growth in the [indiscernible].

The continued strong performance in [indiscernible] asset loans has a potential, new initiative and product and the service to our customers. We have and we will continue to make additional improvement to [indiscernible] one of our key distributors. [indiscernible] models by integrating the latest AI and the Big Data technologies.

We can better assess customers in [indiscernible] With greater accuracy, that allowing us to better customize until [indiscernible] for each of our customers. With that, I conclude our prepared remarks. We will now open the call for questions, operator, please go ahead..

Thank you. [Operator instructions]. Your first question comes from the line of Mr. Lu of Goldman Sachs. Please ask your question. Mr. Lu, your line is open now, go ahead..

[Foreign Language] So my question was actually about credit quality, so against the backdrop of the tightening, regulatory tightening in the space in late last year was longer [indiscernible] seen from platforms that was getting hurt from the tightening in particular.

If the Management could share some of the recent credit quality trends, that will be great..

[Foreign Language] Yes, so overall, as you understood from Ryan and I translated to the team briefly, because we are targeting the educated young adults population the cohort, we don’t have limited impact from regulation. In fact, if you look at our latest numbers from end of the year, the credit performance has actually improved in certain respects.

And so the performance this year, overall we think that it will be relatively speaking steady. It will be basically within the expected limits.

Tian, do you have another question?.

[Foreign Language].

[Foreign Language] So overall, the regulations have clearly impacted the situation here in China for the various new LexinFintech Company. That’s impacting everyone in a orderly way as to was it compliant and everyone has to draw and adjust accordingly. But you can see clearly from our fourth quarter results that had relatively limited impact.

Our growth is very much still there. We may need to make certain adjustments accordingly and perhaps in the future we may not be able to grow quite as fast. But overall again, there is very limited impact given the overall nature of our business, which you can see in the fourth quarter..

[Foreign Language].

[Lucy] (Ph), can you translate the question?.

Yes, sure. So the question is on the Fenqile platform. We know that the Fenqile platform is a very good way to attract customers, but we also notice that online sales is lower in 2017 versus 2016. Does it mean that Fenqile platform becomes less important going forward.

Another note, can the management briefly help us to breakdown the - how the channels of new customer acquisitions..

[Foreign Language] Yes Lucy, so on the first quarter that you have regarding our overall e-commerce platform. Well overall we look at if whether it’s a GMV perspective or an SKU perspective or the third-party marketplace, hasn’t really gone down as we shifted more towards commission focus.

And of course we have communicated in the past the growth isn’t the key here. It really depends on or customers needs and how the e-commerce overall fits into that situation. Now, overall as you know as we have disclosed e-commerce continues to be important.

And regarding the second question on the channels yes e-commerce is still an important channel as everybody know and as we have disclosed the referral system continues to take up about 50% overall customer acquisition.

So this is still basically a very key part of our overall assessment acquisitions as our particular target cohort is socially connected.

Also another thing that we mentioned that we have done is to work with their parties including other e-commerce channels and finally of course we have got our own ground base sales force which is actually working directly and cooperating with [indiscernible] and you can see that our customer acquisition and our number of customers have increased significantly.

At the same time, customer acquisition cost, that's really on a per customer basis has actually gone down or remain steady at around RMB100. Now what emphasized here is that our focus is not on dropping this cost, but rather on developing new customers and the right customers.

[Foreign Language] So overall, if you look our customer acquisition, there has been no real change, it’s been fairly steady. But in the future, we are anticipating that there is going to be more in terms of third-party cooperation working with other organizations and in particular other financial institutions.

So we believe that in the future, a significant portion of growth will actually come from this third-party cooperation..

Thank you. Next question comes from the line of Jackie Zhou with Deutsche Bank. Please ask your question..

[Foreign Language] So my first question is regarding to the APR trend. So we saw the first quarter APR was actually lower than the first nine months of last year. So what is the reason behind, is that because the increasing portion of existing customers or because of the change of our product offerings, so what is the trend going forward.

And second question is regarding to the - full up question regarding to the loan growth. So do we have a loan growth guidance for this year? So could you provide us the average loan size for the fourth quarter? Thank you..

[Foreign Language] So, Jackie, overall the decrease in APR is definitely part of our long-term plan and the long-term is quite simple for those who have better credit and who are establishing better credit, they will get a better APR and this will increase our competitiveness to help us better compete with our competitors.

And we all know that bad credit actually don’t care about the APR, whereas those with good credit do. So here, we have to focus on continue to give our good customers with a good credit and better APRs. Therefore, increasing our competitiveness. And this again is very much part of our long-term plan.

And so overall, because we can provide the lower APR, we can also merely take better customers, which is why you see that in spite of everything that you heard and are seeing in the industry, our credit performance hasn’t really been affected and this again comes from the fact that we are able to offer very competitive APRs.

So Jacky regarding your questions, with regards to the ticket size, overall, we very much have a strategy of growing with our customers and continuing to grow with our customers. So for example, the ticket size on average customer probably grew around 40% in the fourth quarter. You can also get a sense of this and also how to look at our numbers.

You can refer to the first quarter 2015 cohort, which we acquired, which we have also given an update on. You can see how their average loan balance has increased when originally around RMB3, 500 to around RMB9, 000.

Now overall, in terms of bigger picture guidance unfortunately it’s probably wouldn’t be fair for us to give that at this time in this uncertain environment. We very much want to be able to do what we say we will do. So as a result in this current environment, it’s probably fairer for us to not give a direct guidance..

Thank you. Your next question comes from the line of Ella Ji with China Renaissance. Please ask your question..

[Foreign Language] First, I wonder if management can provide an update regarding the detailed execution of order policies announced in December last year, where are we seeing in terms of - the local government enforcement of these policies, and before the 2018 what is the policy outlook? And then second question is, if management can go through law economics for us from APR to funding cost to provisions, to maybe sales and marketing and customer acquisition cost.

Can you give us a trend in 2018 comparing to 2017? Thank you very much..

[Foreign Language] So overall Ella, with regards to your two questions. Big picture one on regulation, and two on the overall economic.

First on the regulation, obviously financial regulations are ongoing continuing process given that this is a new industry, whether in China or the world over, the regulations and the regulatory authorities, will continue to look at the market.

That said, even though, there are other things to come potentially, the big trends are clear, the direction is clear from the government, high APRs are No, No. [indiscernible] selection is a No, No. These are things that we know to be obvious and that’s the clear direction.

That said, this is a complex industry, there are different operating models out there, and hence the regulatory authorities would need to also look at each very carefully. Now that said, the key to all this is that, whatever company is involved in this industry must be able to meet all the requirements of the regulatory authorities.

That company must have a good base, and a good record. Must have the right tools in order to be compliant and if you look what [indiscernible] has and what we have done in the past, this is very clear from all the statistics and all the things that we have available to us. With regards to your second question on overall loan economics.

Overall in the fourth quarter, we are probably starting off still at around 23% to 25%, the big trend is in terms of the consumer finance, the cost can be relatively less sensitive, but big picture for the whole market is that it may go up. On the credit cost, as Ryan has already mentioned, it’s quite manageable.

We may adjust things based on the needs at that time and of course, it also is a situation where inherently this is a business where you don’t avoid risk rather you manage risk and hence we will adjust depending on the situation and the returns.

Now what I also like to emphasize in terms of what you are asking with regards to loan economics and the overall future performance of our Company. In the fourth quarter, our operating costs, our overall loan balance is down to 5.3%.

This shows basically what we have done in terms of achieving scalability as well as profitability, and the scalability and profitability will only grow overtime. Overall, the cost of capital for everybody in this industry can be relatively clear, it’s fairly transparent. What is less obvious of course is the amount of risk that people are taking on.

And there is where basically we would need to be careful and focus that in our scale.

Ella, do you have more questions?.

No. Thank you. I will get back into queue..

Thank you. Your next question comes from the line of Ryan Roberts of MCM Partners. Please ask your question..

Good evening management and thank you for taking my question. Just I have two short ones. My first question is actually a follow-up on the regulatory topic. I actually want to get management’s thoughts on kind of how this is going to impact sort of the mix between individual and institutional funding sources.

I think that’s been something that Lexin can discuss a little bit kind of in the industry, how it’s going to impact the future and I’m curious what that means specifically for Lexin.

My second question is on I guess the split between on and off-balance sheet loans that trend appears to be in place since 2015 kind of gradual mix, I’m just kind of curious where we are on that change in mix, additionally one final housekeeping thing just the number of customers at the end of Q3, active customers at the end of Q4? Thanks..

Ryan, give me a second here to translate for the team. Alright. So first question is what the percentage of – we are talking about percentage of our user and funding partners. I think the thing is you see all the kind of regulation on the whole financial industry, but it’s not only on our sector for Lexin.

We will see it the institutions while they are connecting to a new business, they become kind of slower. The whole bunch of things have to go through the regulation on all the different kind of products they are working on. So this is the whole financial industry kind of issue.

What impact us is it may take us longer to have more like financial institutions coming in. the approval process is probably just months, now probably it take a little more or maybe two months. So that’s what we see. Overall you still see a trend for the increase of the percentage of the financial institutes.

If you compare our number versus end of third quarter, you will see we have a more percentage coming from financial institute. And we will balance the costs and source from the [indiscernible] and the financial institute in the future.

Regarding the back half on the off-balance sheet, that if we will closely follow all the new regulations and also we see a trend of [indiscernible] more off-balance sheet in the future for our business..

Active customers..

Active customer I think you have to see our earnings release, I mean [indiscernible] information there..

Ryan, do you have any more questions..

No, sorry, that’s all for me. Management thank you very much and congratulations on the first quarter..

Thanks Ryan..

Thank you. Ladies and gentlemen that does conclude a conference for today. Thank you for participating. You may all disconnect..