Jimmy Tan - IR Director Cliff Zhang - Chairman and CEO Simon Tak Leung Ho - CFO Feng Zhang - COO.

Alice Lee - Credit Suisse Daphne Poon - Citi Sanjay Sakhrani - KBW Matthew Larson - Wells Fargo.

Hello, ladies and gentlemen. Thank you for standing by for the First Quarter 2018 Earnings Conference Call for PPDAI Group Inc. also known as Paipaidai. At this time all participants are in listen only mode. After managements prepared remarks there will be a question-and-answer session. Today's conference call is being recorded.

I will now turn the conference over to Mr. Jimmy Tan, Investor Relations Director for the company. Jimmy, please go ahead. .

Hello everyone and welcome to Paipaidai’s first quarter 2018 earnings conference call. The company's results were issued via newswire services earlier today and are posted online. You can download the earnings release and sign up for the company's distribution list by visiting the IR section of our website at ir.paipaidai.com. Mr.

Cliff Zhang, our Chairman and Chief Executive Officer; and Mr. Simon Ho, our Chief Financial Officer will start a call with their prepared remarks. Mr. Feng Zhang, our Chief Operation Officer will join the call during the question and answer session.

During this call, we will be referring to several non-GAAP financial measures to review and access our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP.

For information about these non-GAAP measures and reconciliation to the U.S. GAAP measures, please refer to our earnings press release. 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 this and other risks and uncertainties is included in the company's filing 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 laws. Finally, we posted a slide presentation on our IR website providing details on our results for the quarter. I will now turn the call over to our CEO, Cliff. Please go ahead..

Hello, everyone, and thank you for joining our earnings conference call today. We are pleased to report a solid start to 2018 as we continue to utilize our over 10 years of experience to drive results and maintain regulatory compliance in evolving consumer lending environment.

As widely noted, and as we highlighted in March on our fourth quarter call, we experienced a rise in delinquencies late last year as the industry digest the changes in the regulatory environments and the consumers adjusted to the new framework.

Despite those challenges, in the first quarter, our operating revenue grew 37% year-over-year, while non-GAAP operating income grew 48% versus the same period of 2017. In addition, the count of registered users and cumulative borrowers continues to grow.

The proactive steps we took to manage risk through this cycle impacting loan volume in the quarter. But despite slower volume growth our efficiency gains helped us generate a solid increase in operating profitability in the quarter.

We believe the credit cycle bottomed earlier this year, and we started resuming loan origination growth in March, resulting in improving trends following the typical slowdown in activity during Chinese New Year. Encouragingly market demand remains strong, and we saw those improving trends continue into April and early May.

Our performance in the quarter testament to the resilience of our core business model, the strength of our established brand and the deep industry knowledge of our team.

While we are aggressively resuming loan origination growth, we are also investing in new engines of growth through the monetization of our core competencies and competitive advantages.

And just one example, we see opportunity to capitalize on our technological capabilities massive amount of data and accumulated expertise garnered throughout our 11 year of operating history, to provide a suite of cutting edge technologies as a service to third party financial service providers.

Those services include online customer acquisition, fraud detection and loan connection tools. We hope to share more on these new engines of growth on future calls.

As an industry leader with the longest operating history in the sector, we are focused on capitalizing on the tremendous growth opportunities we see both in our core business and through logical extensions as the industry continues to evolve.

We are well positioned to react to any future regulatory change, while monitoring and mitigating the risks associated with the credit cycle. With that, I will now turn the call over to our CFO, Simon Ho, who will discuss our financial results and an update of our business..

Thank you, Cliff and hello everyone. Our results in the quarter reflect our proactive efforts to manage our loan book risk through the industry wide credit down cycle that began late last year. Loan origination growth slowed year-over-year and was down sequentially from the fourth quarter as we tightened standards in response to rising delinquencies.

Despite the slower growth we continue to drive operating profitability through control of sales and marketing expenses and operational improvements designed to enhance operating margin. In particular, we are leveraging AI technologies to improve operating efficiency through the deployment of chat box in customer service and loan collections.

Currently about 40% of our total customer inquiries and our loan collection efforts on early delinquencies are being handled by bots [ph]. Also in the first quarter, we experienced more repeat users, which are more profitable than new borrowers. Combined these factors allowed us to achieve a healthy non-GAAP operating margin of 44% in the quarter.

We are executing well and our business model remains strong after adjusting to the new regulatory framework. As we work to restore growth, we are well positioned to capitalize on opportunities provided by a large and growing industry in a healthier and less competitive environment.

Now let me walk you through our detailed financial results for the first quarter. But before I start I'd like to remind you we adopted the new revenue recognition policy ASC 606, effective January 1, 2018.

And as a result, we recognized an increase of approximately RMB176 million to the opening balances of retained earnings, and an increase of approximately RM170 million in operating revenues for the first quarter 2018. These adjustments were mainly due to the timing of revenue recognition for transaction fees collected in monthly installments.

As you may recall, we changed transaction fee collections in December 2017 from upfront to monthly installments and the new ASC 606 revenue standard recognizes that revenues earlier than the previous standard.

Under ASC 606 we have also allocated loan collection fees of RMB110 million in the first quarter of 2018 from other revenues to loan facilitation service fees and post facilitation service fees.

This is because the new standard considers certain loan collection fees as variable consideration related to loan facilitation and post facilitation performance obligations. Now, I’ll continue the discussion.

Operating revenues for the first quarter of 2018 increased by 37% to RMB917 million from RMB669 million in the same period of 2017, primarily due to the increase in loan facilitation service fees, post facilitation service fees and other revenues, as a result of an increase in loan origination volume, and also the adoption of the new revenue recognition standard ASC 606 effective January 1, 2018.

Loan facilitation service fees increased by 23% to RMB621 million for the first quarter of 2018, from RMB505 million in the same period of 2017, primarily due to an increase in loan origination volume and the adoption of ASC 606.

Related to the adoption of ASC 606, loan collection fees of RMB83 million have been allocated from other revenues to loan facilitation service fees. The average rate of transaction fees charged to borrowers increased slightly to 6.32% in the period compared to 6.24% in the fourth quarter of 2017.

Post facilitation service fees increased significantly by 166% to RMB227 million for the first quarter of 2018 from RMB85 million in the same period of 2017, primarily due to the increase in loan origination volume and the rolling impact of deferred transaction fees and also the adoption of ASC 606.

Related to the adoption of ASC 606 loan collection fees of RMB27 million have been allocated from other revenue to post facilitation service fees.

Other revenues decreased by 12% to RMB69 million for the first quarter of 2018, from RMB78 million in the same period of 2017, primarily attributable to the adoption of ASC 606, which as mentioned just now, loan collection fees of RMB110 million have been allocated to loan facilitation and post facilitation service fees.

This impact was offset by an increase in management fees from investment programs that invested loans protected by the quality assurance fund.

Net interest income and loan provision losses for the first quarter of 2018 was an income of RMB27 million compared to RMB0.5 million in the same period of 2017, mainly due to the increase in trust setup in 2017 for the purpose of serving institutional investors.

Origination and servicing expenses increased by 43% to RMB247 million for the first quarter of 2018, from RMB173 million in the same period of 2017, primarily due to the increase in headcount related costs. Sales and marketing expenses increased by 10% to RMB151 million for the first quarter of 2018, from RMB137 million in the same period of 2017.

The increase was primarily due to the increase in expenses associated with online customer acquisition, which mainly include expenses paid to internet marketing channels, for online advertising and search engine marketing as well as to searching websites that enable PPDAI to reach quality borrowers and enhance branding.

General and administrative expenses increased by 89% to RMB146 million for the first quarter of 2018 from RMB77 million in the same period of 2017, primarily due to the increase in staff costs. G&A expenses for the period also included share-based compensation of approximately RMB50 million.

Operating income increased by 42% to RMB400 million for the first quarter of 2018 from RMB281 million in the same period of 2017. Non-GAAP adjusted operating income, which excludes share-based compensation expenses was RMB450 million, representing an increase of 48% from RMB281 million in the same period of 2017.

Other income was RMB132 million for the first quarter of 2018, compared with RMB209 million in the same period of 2017. Other income primarily consisted of a gain of RMB60 million related to the quality assurance fund due to the increase in loans facilitated on our platform that are protected by the quality assurance fund.

And a gain of RMB72 million from a fair value change of financial guarantee derivatives, offset by a RMB45 million realized loss from financial guarantee derivatives due to the amount of investment programs maturing during the period.

Note that the company reevaluates the fair value of outstanding guarantee derivatives at each balance sheet date to reflect market participants’ view on the expected default rate based on the latest market changes. Income tax expenses was RMB95 million for the first quarter of 2018 compared with RMB74 million in the same period of 2017.

Because of the foregoing net profit increased by 5% to RMB438 million for the first quarter of 2018 from RMB417 million in the same period of 2017.

Net profit attributable to ordinary shareholders of the company was RMB439 million for the first quarter of 2018 compared with net loss attributable to ordinary shareholders of RMB285 million in the same period of 2017 due to the accretion losses on the company Series A, B and C preferred shares in the first quarter of 2017.

Turning to our balance sheet, we maintained a solid balance sheet and ample liquidity. As of March 31, 2018 the company had cash and cash equivalents of about RMB1.5 billion and short-term investments, mainly in wealth management products of about RMB2.3 billion. Our quality assurance fund remains well funded.

The total balance of the quality assurance fund, which includes restricted cash of about RMB1.2 billion and the quality assurance fund receivable of about RMB1.3 billion, was equivalent to 19% of the total outstanding loans protected by the quality assurance fund.

We announced a US$60 million share repurchase program in March and since then we have repurchased approximately 0.5 million ADSs for a total of US$3.6 million. Now before we turn the call to questions, I’d like to close with a few comments in our business outlook.

Despite a somewhat slow start for the year in loan originations, we continue to expect to achieve a full year volume target range of RMB70 billion to RMB80 billion, with a heavier weighting towards the back half of the year. We have steadily been increasing our monthly loan volume and are encouraged by the results.

Our outlook assumes we receive registration approval later this year and we are in a good position to meet the necessary requirements. However, timing is uncertain and we recently became aware that central regulatory authorities have postponed P2P registrations. We are closely monitoring the situation and will provide updates as we receive them.

In the meantime, as I mentioned we are pleased by our monthly loan volume trends and continue to actively pursue ways to further our growth. With that, I will conclude my prepared remarks. We will now open the call for questions. Operator, please go ahead..

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Alice Lee with Credit Suisse. Please go ahead..

Hi, yes, thanks for taking my question. I have two questions, the first one is about peer-to-peer registration, as you mentioned that the P2P registration is likely to be delayed.

So how will this affect your business operation? Also as you mentioned that your long volume guidance, you assume that you will receive the registration approval later this year. So if the registration is later than expectation how will you mitigate the negative impact and trying to achieve the growth? This is my first question.

And my second question is that is about your borrower acquisition costs, so your new borrower acquisition has slowed down, what’s the churn of your approval rate and acquisition costs per new borrowers this year? And given the 36% rate cap have you upgraded your borrower group, also under what conditions will you feel more comfortable to acquire the new borrowers? Thanks.

.

Thanks, Alice. So, as I mentioned just now, your first question on the peer-to-peer registration and the impact on our business, as to obviously how long the P2P registration will be postponed for, we don’t know there is no revised time schedule as yet.

We are well positioned for regulations, and regulations will be positive going forward we believe for leading players like ourselves. In the near-term it is obviously unclear whether the loan balance gap imposed by the Shanghai authorities will continue to remain throughout this period or not.

We are actively pursuing ways to grow and drive profits even in this environment. So for example we are looking to expand the institutional funding on our platform since the loan balance gap is mainly imposed on retail funded loans.

We will also look to use our micro credit company, which we completed acquiring in the fourth quarter of last year to originate loans on its balance sheet. And we will continue to communicate with the authorities to see if there is room for relaxation for leading players like ourselves.

And we will continue to use technology to drive efficiency and develop new businesses. Our first quarter results demonstrates how we can continue to be nicely profitable even without significant loan volume growth. As to -- does this help answer your first question.

Alice?.

Yes.

And may I ask what your latest funding breakdown is or say in the first quarter what’s the long volume -- what percentage of the long volumes funded by the institutional funding?.

Sure. In the first quarter, we are roughly running -- roughly about 10% of our -- the funding platform is coming from institutions. And actually I forgot you had questions on customer acquisition costs and loan approval rates and let me just come back to there.

So, the trend in acquisition costs -- customer acquisition costs in recent months have mostly follow of the trend in our so called conversion rate, which is the percentage of registered users that became a trans active borrower.

The average cost of a new borrower has increased in the first quarter to around RMB150 to RMB160 per new borrower that’s up from roughly around RMB120 to RMB130 in the fourth quarter. The cost in the first few months of this year has risen further partly because of the decline in our loan approval and conversion rates.

Okay, there has been some improvement lately as we have increased our conversion rate as we are now resuming growth. And so as a result, we believe our customer acquisition costs may have peaked in the near-term..

Thanks very much. .

The next question comes from Daphne Poon with Citi. Please go ahead. .

Hi, thanks for taking my questions. So, my first question is actually a follow-up to the previous question about the -- on the funding side.

So, I would like to get an update on the funding costs for both institutional side and the retail funding? And also you mentioned the micro credit company you acquired in 4Q, 2017 so may I know what is the registered capital and lavish cap there? So what is like the maximum amount of loans that we can fund for that MCC license? And my second question is regarding the average loan size, so we see that the loan size has actually been up quite a bit over the past two quarters.

So, would be great if you can help us understand what’s the reason or the drivers behind and also the outlook on that? Thanks..

Sure, I'll take the first number one and number three and I'll allow our COO, Feng to take the micro credit company question. The first quarter is about the funding cost, or the rather now platform what the returns investors are earning.

Currently those returns are around low double-digits and the cost is pretty similar between institutional and retail money at a moment. And your third question is about the average loan size, you've noticed that it's gone up to around RMB3,000 in the first quarter versus about RMB2,004, RMB2,005 I think in the previous quarter.

This was mainly due to the discontinuation of our handy cash loan product, which has a much lower average ticket size, typically of maybe RMB1,000 or even less than that. So, when you take this business out, then the average loan ticket size on the overall platform goes up to about RMB3,000. So that's really the main reason.

And I'll hand over to Feng to address your micro credit company..

Yes, this is Feng, currently the capital for the micro lending company is RMB50 million and we are actively working on adding more capitals to up to about RMB500 million. So that would allow us to issue loans in the range of RMB500 million to RMB1 billion..

Okay. Also can I have a follow-up as what will be your actual percentage of funding generated from the institutional side. So because recently there has been new sourcing that probably the P2P registration make that delayed for one year or one year and half.

So if the delay is like longer than expected and the loan balance cap is increased for say the next 12 months what would be your like targeted funding that you seek to -- you think you can manage to get from the institutional side to support your loan growth?.

Yes, I think first of all I just want to remind you clearly that we -- the vast majority of the investments in our platform have are and have been from individual investors.

And our strategy has always been relying on mostly in retail investors, because we see having a strong retail investor base is important to us, that we see this is a competitive advantage. Of course however to grow our business in the near-term we may need to rely more on institutional investors.

And while as we are currently running roughly around 10% of loans of the funding from institutional, this percentage may head towards 20%, 30% level. I mean, we’ll have to see how things go, I think. It's not a hard and fast rule, but clearly we're dealing with a number of unknowns, but this is the direction we’ll heading. .

Okay. Alright, that's helpful. Thanks..

The next question comes from Sanjay Sakhrani with KBW. Please go ahead. .

Thank you, good morning. Just a couple of follow-up questions, Simon, just to your last comment on dealing at the number of unknowns, I mean, how soon do you expect to get some clarity on how you’ll proceed going forward? And I have some follow-up questions just on the postponement and the technicalities as well..

Yes, Sanjay, it is only been recent that obviously the news about registration postponement came through. So at this moment we don't have any new information we can share on the timing as such..

Okay.

I mean, was there any specific reason why it’s been postponed and have other institutions gotten approval for registrations previous to this postponement?.

No, I mean, even they were -- it may not be valid, but my understanding is no, I mean, as you know the original time schedule was to -- for local governments to achieve or complete the P2P registration process by the end of June this year.

Now, some of the reasons -- and this has been widely reporting to the media I'm just repeating what’s been out there, there has been obviously some concerns that because the implementation of the P2P registration is being done locally at the local government level even though the large framework on the principles have been given from Beijing at the central government level the execution of such is done at the local government level, and there are differences in standards between different jurisdictions.

And it’s been well known that somewhere like Shanghai has one of the most strict and the strictest and tightest requirements in the whole country. And as a result you’ve started to also see it seems that there are obviously some platforms starting to display some form of arbitrage going on.

So I think that’s possibly a reason why the authorities might want to take another look at this process..

Okay.

And then when we think about your originations guidance, how much risk is there to use succeeding in that given all the technicalities and complexities in the market?.

Yes, clearly the reason why we’re mentioning this topic is there are -- we acknowledged that there are some risks, we are working very hard towards the RMB70 billion target that we’ve given out.

However obviously in a pessimistic scenario, right, where the loan balance cap remains in place longer than expected we’re unable to attract additional institutional money. We believe our quarterly loan volume rate will still run higher than the first quarter level. I think we can sustain that level.

And we estimate that our loan volume for the full year will still be close to the lower end of our RMB72 billion target for 2018. So again this is a short-term constraint and of course in the longer term regulations I think will be -- lead to a less competitive environment, more consolidated and help players like ourselves..

Okay. One last question, I mean, just in terms of the previous restrictions around funding I seem to recall that you could sustain the amount of retail funding that you had and just couldn’t grow it.

Has that now changed so that you’d have to sort of plan some of that with institutional funding and where exactly is this institutional funding coming from is it banks or is it some other means? Thanks..

Yes, so the institutional partners that we are dealing with right now are primarily mostly trust companies and they have also been active on our platform last year. The -- after obviously some of the regulations that came out towards the end of the year there has been some reassessment.

However, I think as long as these trust companies, third parties maintain certain requirements they can continue to invest on our platform..

Okay.

And I mean, on the retail caps like is there -- can you now not replace the retail funding that you had with new one or you just cut-off from basically accumulating retail funding?.

Yes, so I think you are right the constraint is not that you have to decrease. So I think the request from the government was maintaining the retail funding outstanding at certain level and do not grow it. And this became a constraint as our volume growth and we pick up growth as loss environment normalize and we get back to growth mode.

That’s what Simon was mentioning that additional growth assuming that cap remain in place and I do think there are some possibilities in the new environment that for some -- for leading players like us this may open up a little bit, but assuming it remain in place than once we hit that level additional outstanding growth need to come from institutional funding..

Okay. Great, thank you very much. .

[Operator Instructions] The next question comes from Robbie Lee [ph] with Generation Capital. Please go ahead..

Hi, management. Congratulations on the solid result. I have two questions, so the first one is regarding the timing change. So I just wanted to know what is the exact impact of the time change on your first quarter bottom-line.

I mean, you've already highlighted in your prepared remarks that there will be around $170 million impact on revenue, but I just want to know the exact impact on the bottom-line for the first quarter? And the second question is, please give me more color on the origination and the servicing expense, why increased so much in the first quarter this year? I think that's it, thank you.

.

Yes, I think it's a good question. I think first of all on the accounting change. So first of all the ASC 606 as you are aware applies to all companies using U.S. GAAP. So we probably start to see this impact coming up.

And basically you’re mentioning there is $176 million that's one-off impact to the opening balance of our retained earnings, and there is $170 million impact during the first quarter of the year, which increased our revenues.

As I said both are due to the change in the way we collect our transaction fees beginning in December from an upfront model previously to monthly installments. And under the old accounting policy we would recognize the revenues only when we receive payment of the fees.

But under the new policy we recognize such revenues upfront upon loan origination even though the fees will be paid to us over a series of months. So if you want to say what the earnings impact is? It's really you could say it's $170 million benefit to our revenues and also to our bottom-line.

But this $170 million really is what if the old accounting policy continued in the first quarter of 2018. And there is only this difference occurs only because we changed our transaction fee model in December in order to meet regulatory requirements.

Does that help you address this question?.

Okay.

So there is $170 million one-off impact on the first quarter bottom-line, but there will be no such impact going forward, right?.

No, the accounting continues. So like we did in the first quarter we will continue doing in subsequent quarters, we will recognize revenues from our transaction fees upfront when the loan is originated. And this practice happens since January 1st and we will have to -- we will continue this practice of revenue recognition going forward.

This is the new accounting standard..

Okay, got it. .

Yes. So your second question is with regards to the origination service and expenses. So you'll see that the origination service expenses increased -- if you do on an annual yearly basis, you'll see it increased about 45% year-on-year.

And this is in part because of the headcount increase, which headcount that we experienced in the first quarter of this year versus the first quarter of last year.

The major movements in our headcount really was a sizable significant increase in loan collections headcount, given the scale of the business that's been increasing, plus also the credit cycle, the delinquency cycle that we ran into towards the end of last year, and where we beefed up our loan collections team significantly.

But offsetting that a decline was we had a consumption loan product, which was run -- which had offline sales agents and that was discontinued in the fourth quarter. So there were some headcount saving from there, but net-net there has been an increase in headcount primarily because of loan collections.

But on a sequential basis, on a quarter-on-quarter basis, you'll see that the origination and service and expenses actually declined about 15% quarter-on-quarter and a lot of that is because of actually headcount decline. Our headcount in March, end of March of this year, versus December last year, it was down around 10%.

And that is driven primarily from headcount savings in customer service, in loan collections. As I mentioned during the prepared remarks, we’ve been utilizing AI technology to drive operating efficiencies using box in both of these places has definitely helped us drive operating efficiency during the quarter..

So, you say will these headcount decrease trend sequential trend continue going forward, in the next few quarters?.

I think the outlook for our headcount -- I think for the rest of the year our headcount is unlikely to grow much or significantly and we will continue to leverage technology to drive these gains, I mean there is continues to be room for us to increase, continue the automation in some of these processes and areas..

Got it, thank you. Very helpful. .

The next question comes from Matthew Larson with Wells Fargo. Please go ahead..

Hi, thanks for taking my call. Though my question was answered, I appreciate it, thanks. .

Thanks. Thank you. .

As there are no further questions now, I’d like to turn the call back over to company for any closing remarks..

Thank you once again for joining us today, if you have any further questions, please feel free to contact PPDAI Investor Relations through the contact information provided on our website, or in our press release..

This concludes this conference call today. You may now disconnect your lines. Thank you..