Sissi Zhu - Director of Capital Markets Min Luo - Founder, Chairman, Chief Executive Officer Carl Yeung - Chief Financial Officer.

Charles Zhou - Credit Suisse Richard Xu - Morgan Stanley Daphne Poon - Citi Jinjin Qian - Needham & Company Binnie Wong - Merrill Lynch Meizhi Yan - UBS Alex Zhou - UBS.

Hello, ladies and gentlemen. Thank you for standing by for Qudian Inc.’s Fourth Quarter and Full-Year 2017 earnings conference call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded.

I would now like to turn the call over to your host, Ms. Sissi Zhu, Director of Capital Markets for the Company. Sissi, please go ahead..

Hello, everyone, and welcome to the fourth quarter and full-year 2017 earnings conference call for Qudian Inc. The Company’s results were issued via newswire services earlier today and are posted online.

You can download the earnings press release and sign up for the Company’s distribution list by visiting the IR section of our website at ir.qudian.com. Mr. Min Luo, our Founder, Chairman and Chief Executive Officer, and Mr. Carl Yeung, our Chief Financial Officer, will start the call with their 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 prospectus 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 on our results in the quarter.

We will reference those results in our prepared remarks, but will not refer to specific slides during our discussion. I will now turn the call over to our CEO, Min Luo. Please go ahead..

Thank you, Sissi. Hello, everyone. I would like to welcome all our investors and analysts, friends to our earnings conference call today. Today, I’m 35 years old, so today is something of a milestone for me, but I’m still young, excited to learn and I’m committed to working hard to make Qudian more successful.

I’m sure you will have heard from us today about the foregoing all compensation until company’s market capitalization reaches US$100 billion, which is [indiscernible] to myself, to push myself further. More importantly, it represents my commitment and confident in Qudian.

We have experienced many change in the fourth quarter in the Chinese internship as the regulatory environment developed. I believe this development pave the way that will better the long-term health operating industry, -[indiscernible] of anticipated regulation today is well positioned in industry and the impact.

We believe our competitive position has been [indiscernible] as many of smaller less competitive players are forced to exit the market and our business model successfully result two essential changes in online consumer finance industry.

But we use big data analysis and technology to determine the credit worthy of consumers who haven't established [indiscernible] credit metrics also known as credit undersect.

These understand the consumers' make up the majority of 1.4 billion of Chinese population less of access to stand at a credit data present as significant challenge for traditional financial institutions to sale these onset the consumers or to many are creditworthy, which in turn presents tremendous market opportunities for us.

The demand for access to credit remains strong this population and we believe the newly enacted industry regulations support our disciplined approach and strengthen our competitive position.

Through our strong beta and today's technology capabilities, we will continue to lead the management to make personalized credit access to hundreds of millions of people in China. Second, traditional financial institutions and other less efficient competitors finds more ticket shop duration credit transactions are profitable.

And their challenge is it can pass significant under 6% API cap. Therefore most of the players in the market offer very high and cheap rates.

The true power of our technology and efficient process is balanced by our ability to profitable initiate small sized high [indiscernible] whom we are making the transactions industry's regulatory requirements in turn making our credit offering a thoughtful to this consumers.

In fact to be ready for developing regulatory environment, we have [indiscernible] all-in service fee to use that [indiscernible] to 36% API or less across all our production as early as April 2017.

Therefore there is really no challenge for us to continue to operate substantially the same products and services while most of the smaller or non-compliant players that it cannot offer 36% API or less are forced to exit.

Now, directly related to the evolving regulatory environment in late 2017 as many smaller players are forced to exit, we saw reduced liquidity in online consumer finance, which in turn led to what we believe to be an industry-wide credit cycle.

As a result, this thoughtful coverage, we proactively check our credit to 38 specification volume in order to limit risk exposure during the credit down cycle. These lease action recent data are very encouraging as we have seen initial [indiscernible] price rates stable life. Then for new transactions facilitated in January.

This indicates an opportunity for us to grow our lease new base again. And Carl will discuss more of our operations, financials and regulatory impact shortly. But I'd like to take a moment and highlight start by auto. Our new business initiative impacted auto financing. In light of detailed guidance issued by letters in December.

We look for opportunities to continue to grow our business, that exceed well with regulators' objectives, while at the same time leverage our cost trends amounted over 62 million registered users or 26 million approved users only about 7 million users each quarter actively drew down on credit.

So leaving around 19 million high-quality credit approved users is active. They are either not unique post market by credit or haven’t found a suitable conception scenario to [indiscernible].

Since we do not have credit knowhow to do large unsecured cash credit, it was a natural decision for us to reengage these users through a large [indiscernible] asset back conception in installment scenario. We found our auto financial regime to be the [indiscernible] in November to test the market.

We are also know China’s new car transaction market is huge, but the penetration rate for financial leasing solutions in new card field is only 5% much lower compared with the 46% in the U.S.

In addition, China’s new car sales growth has been stagnant in recent years with first-Tier cities saturated while traditional dealerships find it’s not cost effective in further penetrate in lower tier cities.

We make cars affordable to a large population of young people who have strong desire for cars, but previously could not afford to buy one, because this could not get access to the financing, we use to acknowledge to set young consumers responsibly and in a very transparent manner, so that they can enjoy [indiscernible] without over leveraging themselves by tending to black market or fully embarrassed by tending to parents and family members.

We are creating a unique and very convenient user experience related to traditional auto sales. We are placed our shops in the most populated downtown areas of Tier-2 to Tier-5 cities and created effective and [indiscernible] environment in our showrooms with well trained staff members.

To further differentiate our services, we do not have hidden fees for users.

Our preliminary time and shorter than peers and we take care of all the complex steps in the car buying process, such as insurance, car paint, licensing, purchase tax, et cetera with a firm belief in much opportunity and outstanding quality and [indiscernible] of our team’s execution.

We established 175 showrooms in 175 Tier-2 to Tier-5 cities across China by the end of January 2018, embarrassing our 62 million existing high-quality users and supported by our strong balance sheet thereby entered into the market rapidly with a nationwide sales owned network, which enables us to reach [indiscernible] to serve our users with seamlessly merchant online and offline credit conception experience.

We have successfully reached out and delivered over 4,800 cars as of March 10, 2018, another very encouraging tactic for new born business.

We believe that will instill new energy into the auto retail industry and transform the consumer finance experience for China’s car buyers through our data technology and the breakthroughs in consumer focused sales model and we [indiscernible] this motivation to be profitable in the first few years of operations.

So looking ahead, we are excited about the result of our efforts, which we will began to see in the back half of 2018 and beyond and we will continue to adhere to our strict internal discipline and follow regulatory guidelines to grow and explore conception based installment scenarios.

And before I hand the call over to Carl, I want to reaffirm again my personal commitment and confidence in Qudian’s future. I also think the Board is supporting my decision to focal all compensation and until market capitalization reaches a US$100 billion.

This sounds like a big goal from where we are today, but I believe it is achievable enough to make commitments to not take any compensation until we get there. With that, I will now hand the call over to our CFO, Carl Yeung, who will discuss our key operating metrics and financial results..

Thank you Min and hello everyone. First I would like to touch base on a couple of highlights for the quarter. We delivered strong results in the quarter with year-over-year revenue growth of 108% and net income growth of 80%. A result of the strength of our business model and the fast expansion of transaction volume.

In the fourth quarter, we recorded total registered users of 62 million among which 26 million users have been approved of credit and 7 million users actively transact with us.

We cumulatively facilitated over 130 million credit transactions on our platform by the end of December 2017 which represents over 130 million actual transaction and delinquency data points. The most valuable type of data for credit assessment.

Possessing such a huge library of a project data, our risk management systems significantly outperformed most of the other platforms who don’t have such volume of data. Before going into detailed financials, I would like to spend a couple of minutes providing more update in three major areas regarding the new regulatory guidelines.

First, the 36% all-in APR cap. As Min mentioned, we have been self enforcing and all-in service fee to users that translate it to 36% APR or less across all of our products since April 2017. Being the first in the industry to implement this requirement, we think this 36% all-in APR cap will force many players to exit and it did.

Since December, we believe many players have exited, which leaves us with bigger opportunity, but there are short-term trade-offs and a rise of short-term delinquencies that I would discuss shortly.

Second, the new regulatory guidelines discouraged lending activities with all consumption scenario, a specific purpose and promote scenario and purpose base consumption installment businesses.

We are fully committed to grow and explore more consumption based installment scenarios, administrated by the launch of Davai Auto, our budget auto financing business. I will provide more details on Davai as well.

Third, new regulatory requirements also outlined the financial institutions are not allowed to outsource credit assessment or accept guarantees from lending platforms. Third-party platforms are also not allowed to charge interest or transaction fees from borrowers directly.

In light of the above, we have been in the process of adjusting our funding arrangement so that through the end its only the facilitator during the process. We have complied with all the requirements of seeding cash credit funding collaborations with financial asset exchanges.

Now these requirements will essentially mean our consumption credit business will migrate more and more from a principle base model to an agency model. It will also mean potential increases of funding or guarantee cost across the markets.

Now with these changes, we have noticed an industry-wide credit declines in December 2017 and an increase in a delinquency rate. In an effort to manage credit risk responsibly, we swiftly implemented a conservative strategy of reducing credit volume since December of 2017 to protect our credit quality.

This action was effective as the initial delinquency for new credits facilitated in January stabilized, providing us a new basis for credit volumes to grow again after Chinese New Year.

In addition, our team's strong execution capability is evidenced by the successful launch of 175 retail locations, supported by over 600 newly hired high-quality staff by end of January 2018 from the exploratory stage in November 2017, building over a very short time what we believe to be one of the most competitive auto distribution channels that offer financing in China today.

This effort will position us more favorably in the developing consumption credit regulatory environment and at the same time, open up a large opportunity in emerging auto finance base.

We also believe comparative traditional auto distribution to significantly lower operating cost of running a nimble showroom type distribution channel will mean increase of CapEx in 2018, but as we quickly ramp sales Davai Auto will turn profitable in the first year of operations.

Before reviewing the financials, I would like to provide an update on our relationship with Alipay. In response to announced API policy's limitation by Alipay last year or at the end of last year, we implemented measures to promote the use of our mobile applications.

These marketing efforts have been very successful with now the absolute majority of transaction orders occurring on our app directly. We are pleased by this trend with the use of our app since the additional API flexibility provided by those transactions broadens the base of the credit invisible populations we can profitably serve.

Today, we remain one of the most innovative yet regulatory compliant players on the Alipay consumer finance facing interface. We continue to believe Alipay is the most far reaching secure online payment mechanism in China, with the best user experience. And our relationship with Alipay remains unchanged.

We are committed to this ecosystem where it's buy in services and continue to utilize unmatched capabilities to make transactions seamless. As such, Alipay remains our sole accepted payment and disbursement partner for consumption credit transactions regardless of where a user chooses to initiate a transaction.

With the above, we are more confident with our position today, from what was frankly a more and steady operating environment in the last few months.

Based on these current information, we expect consumption credit to return to a stable growth track in 2018 and anticipate Davai Auto to turn profitable within the first year of operations establishing a strong pace for a company to initiate full-year 2018 guidance, which I will offer after discussing fourth quarter results.

Now I'd like to walk you through our detailed financial results in the fourth quarter of 2017.

Total revenue for the quarter increased by 108% to RMB1.5 billion from RMB716 million in the prior year period, primarily due to the increase in financing income as a result of the substantial increase in a number of transactions we processed in the quarter.

Financing income totaled RMB1.1 billion for the quarter, increasing 73% from RMB604 million for the quarter of 2016, representing the fast growth of our on-balance sheet transaction volumes.

Loan facilitation income and others increased to RMB149 million for the quarter, up 587% from the prior year period, as a result of the substantial increase in off-balance sheet transaction volume. Sales commission fees increased to RMB251 million for the quarter, now that’s a 212% increase from the same period a year ago.

The significant year-over-year growth in sales commissions was driven by an increase in merchandise credit utilized by borrowers to purchase merchandise on our marketplace. We believe that one of the factors contributing to the strong year-over-year growth was expansion of products we were offering on the marketplace.

Revenues from sales-type leases was RMB26.1 million, representing revenue generation in the first quarter of launching Davai Auto. The total operating cost and expenses increased by 164% to RMB943 million for the quarter from RMB357 million from the fourth quarter of 2016.

Cost of revenues increased by 173% to RMB305 million for the quarter from RMB112 million for the fourth quarter of 2016. This year-over-year increase was primarily the result of higher interest expenses on borrowings because of increased use of funds from institutional funding partners.

Sales and marketing expenses increased by 39% to RMB94 million for the quarter from RMB68 million for the fourth quarter of 2016.

This increase was primarily a result of higher expenses associated with the establishment of a nationwide network of showrooms for Davai Auto as well as higher borrower engagement fees compared to the same period last year. G&A expenses declined by 25% to RMB64 million for the quarter from RMB86 million for the same period last year.

The decline was primarily attributable to the decrease in salaries and benefit expenses, which was partly offset by the increase in administrative service fees we have to pay to trust companies as a result of increased use of trust funding in the fourth quarter of 2017.

Research and development expenses increased by 36% to RMB37 million for the quarter from RMB27 million for the fourth quarter of 2016. This increase was primarily due to the higher salaries and benefit expenses for such staff. We have increased our spending on R&D with a goal to further enhance our data analytics and risk management capabilities.

Provision for loan principal, financing service fee receivables and other receivables increased by 435% to RMB338 million for the quarter from RMB63 million for the fourth quarter of 2016.

The increase was primarily due to an increase in the M1+ overdue loan principals and financing services fees receivables, which we intended to provide sufficient allowances to cover. We have cumulatively provided RMB519 million allowances for principal and financing service fee receivables at 1.3 times covering the M1+ offshore overdue loan balance.

Our M1+ delinquency by vintage for the new credit transaction facilitated in the first three quarters of 2017 still stays less than 0.9% as of December 31, 2017. Therefore, income from operations for the quarter was RMB559 million, representing a 52% increase from RMB368 million during the same period last year.

Income tax expenses declined by 71% to RMB19 million in the quarter from RMB64 million in the prior year period, primarily due to the increase of tax refund. Now because of audit of us net income totaled RMB540 million for the quarter up 80% from RMB300 million for the fourth quarter of 2016.

Net income attributable to the Company’s shareholders per diluted share was RMB1.67, compared to RMB0.99 in the prior year period. Adjusted net income attributable to the Company’s shareholders, which excludes share-based compensation expenses, increased by 74% to RMB559 million from RMB322 million in the prior year period.

Adjusted net income attributable to the Company’s shareholders per diluted share increased to RMB1.73 from RMB1.06 in the same period last year. As of December 31, 2017, the Company had cash and cash equivalents of RMB6.8 billion, compared to RMB786 million as of December 31, 2016.

The Company additionally also had restricted cash of RMB2.3 billion, compared with nil as of December 31, 2016. Now restricted cash mainly represents the cash in consolidated trusts that can only be used to fund credit draw downs or settled these trust obligations.

As of December 31, 2017, the Company had short-term amounts due from related parties of RMB551 million, compared with short-term amounts due from related parties of RMB586 million as of December 31, 2016. Such amounts include RMB550 million and RMB405 million deposited in our Alipay account as of December 31, 2017 and December 31, 2016, respectively.

Such amount is unrestricted to withdraw and use, and is readily available to the Company on demand. As of December 31, 2017, total balance of outstanding principal for on-balance sheet transactions for which any installment payment was more than 30 calendar days past due was RMB404 million.

The balance of allowance for principal and financing service fee receivables at the end of the period was RMB519 million, indicating an M1+ Delinquency Coverage Ratio of 1.3 times. Net cash provided by operating activities for the fourth quarter of 2017 was RMB742 million.

To be mindful of the length earnings call for the full-year 2017 financial results, I would like to point the listeners to refer to our earnings press release that was recently disclosed. Looking forward.

For the full-year 2018, we currently expect adjusted net income to be more than RMB2.5 billion and the number of vehicle leased out for this 2018 to be more than 1,000 cars.

This outlook is based on current market conditions and reflects Company’s preliminary estimates of regulatory market and operating conditions as well as customer demand which are all subject to change. Now this concludes our prepared remarks and we would like to open the call to questions. Operator, please..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] For the benefit of all participants on today’s call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time we will pause momentarily to assemble the roster.

And the first question comes from Charles Zhou with Credit Suisse..

[Foreign Language] So my question is I think Mr. Luo said something very shareholder friendly that he will not receive any compensation from company before the evaluation reached US$100 billion. However, we also know that the company has to make some changes in his business priorities.

We know that during the listing, the company is talking about small credit, big data about the cash flow and now we also see a new, very fast growing the auto financings. So my question for Mr.

Luo is that, so do you think that the two sectors is big enough for you to achieve this growth if not big enough, do you expect to you know that you may also enter other industries say maybe just another sector next year and et cetera.

And how long do you think you can achieve this goal? [Foreign Language] So my second question is about the on the auto financing side, based on my understanding the funding cost on auto financing is about over 8% and they also charge net interest yield around 10%.

So roughly speaking QD does not make too much money from this spread business and the majority of the earnings come from the sales commission of the cars.

So for me, I think this requires two capabilities, the first thing is about selecting the right model, because we all know that in auto industry the new model so when the new model comes you know the old model may become less popular and it may also become very difficult to sale, because Qudian does not apply all the same model.

So some of the cost may also become say for example if auto becomes an inventory which may also become impairment on your balance sheet.

And the second thing is also about how can you gather this if you know show for some car mount so because if you cannot get enough cost and this may also maybe limit your expansions for you business in the future as well.

So just to summarize, so can you just tell about your key competitive advantages in selecting the car and also getting the popular cars. [Foreign language] My last question is so how about your share buyback in the Q4 last year and also Q1 this year. Thank you..

[Foreign Language]..

Let me briefly summarize what Min just said. So regarding your second question, Min himself has over 10 years of e-commerce experience. And we believe that e-commerce has a lot of similarities with auto newly held business that we are engaged in right now.

So it's not that we started this new business without any experience, but we have already accumulated a lot of experience in this area. And achieving a sales number over 100,000 behold this year, comparing to the total new car sales in China up over 20 million is though a small number, so this is quite achievable.

And then regarding your first question, the two sectors, the consumer finance as well as the auto loans are already two very huge sectors that will help us achieve over US$100 million market cap as well as we can perform well in these two sectors. And regarding the question whether we will have a third or fourth other [indiscernible].

So in order to become a large company, a large cap one, we will find the right time to explore outside our boundaries. We won't [indiscernible] our approach, we will find other better - in the right time..

And this is Carl, the CFO of the company. Charles, thank you for the questions. If I make just the supplement regarding answering your third question on share buyback. The Company is yet to disclose our share buyback amounts, but we have been buying in the market last year.

And we will continue to enter the market at what we believe to be the right price at the right time. So within didn’t just issue a plan, we actually issue the plan did buy a meaningful number of shares..

Thank you..

Thank you, Charles..

Thank you. And the next question comes from Richard Xu with Morgan Stanley..

Thank you for the opportunity for the question. I have got two questions. First of all, I guess on the cash flow business. So we've seen some pick up on I guess M1 overdue loans and then there is some already slowdown in the industry loan balance.

So I guess the question is, where management seeing, I guess the industry is treading, are we seeing stabilization already with the overdue loans, or are we expecting still some more pressures over the next few months and then stabilizing after that? And at the same time, given the industry trends, I guess, what was the loan balance allocation, how much capital will be deployed to the cash business in 2018, any changes from the previous plans, I guess, after we started the auto business? And I guess the other same thing is on the auto business, could you share a little bit of breakdown in terms of profitability so far on the auto business in terms of cost and then I guess, what is the plan provisions, obviously, there is a conversion fees, there is spreads, there was some rough estimates or rough guidance on the overall profitability of the auto business and that probably help us to understand the breakdown of RMB25 billion, I guess profit guidance for 2018 and probably for different business segments.

Thank you very much..

Hi, Richard. This is Carl again. Thanks for the questions. We are glad that you asked the cash credits trend in the market.

We have seen quite sharp increase in delinquency rates as soon as the regulation came out in December 1, and it highlight the strength in the nature of our business, it’s a very short duration, very small credit backed by large data analytics.

Therefore we are able to quickly adjust and shrunk our outstanding balance to not get exposed while this external credit cycle was happening. We did get effected a little bit. So therefore, you’ve seen the Q4 delinquency tick up. And the way we do our accounting actually will mean, this tick up will continued into Q1.

So if you look at as we operate the business, as we look at the underlying vintage delinquency of what is the new transaction happening in January and February, it is extremely encouraging because of the strong execution of our data analytics we have been able to avoid a lot of the risk that’s going in the market and initial vintage delinquencies for the January and February cohorts are actually returned to pre-regulatory environment rates.

And these data gives us tremendous encouragement and confidence to really now give us the opportunity to grow our loan volume as well as loan balance again. And this visibility gives us further confidence to really why we are initiating a full-year guidance this time.

Although we are the public company, this is really the first time we are giving full-year guidance and this raw data that is churning and telling us information first-hand that gives us this encouragement. Now regarding autos, we believe as we just mentioned that in the first year of our operations, this unit should be profitable.

We have done a lot of discussion internally in calculation and modeling on why it could become profitable.

Now if you just look at 100,000 unit of cars, based on vary industry benchmark statistics, it will generate approximately 5% - well 100,000 unit of car sales volume translates to just about RMB10 billion transaction dollar volume and as the standard industry commission provided by OEMs at 5% that will give us about approximately RMB500 million in revenues just for sales commission alone.

This RMB500 million in revenues from commission alone will well cover the 175 retail locations plus the staff that we have built for running this, this year. And it’s a very nimble new retail model which is very low cost at city centers so that covers that.

And any additional financing revenues we can charge on usage on the loan outstanding balance in the vehicle itself will essentially mean profit to us. That’s why we have confidence this unit is profitable. Again, building the case for us to really provide a full-year 2018 guidance for the first time..

I see. I mean just a follow-up question on the cash flow a little bit, certainly that the trend is encouraging that is ticked up a little bit is returned to the free regulation I guess delinquency ratio again. So I remember when we discussed previously there is probably I guess at that time the plan slowdown.

Seems like that plan has changed a little bit we are going to reaccelerate the growth in cash flow again, any sort of outlook or guidance in terms of the growth, certainly probably not the same as our regional guidance on the cash I mean before all the regulations started but things like better than some of the guidance or expectation during the peak of uncertainty during the financial regulatory [indiscernible] in the sector.

So where are we now in terms of our plan for the cash balance or volume for 2018?.

Thank you for the question, Richard. Unfortunately, we only provide a bottom-line guidance, but just in terms of the rock shape of things as you can do the calculation last year’s loan imbalance on average was about RMB10 billion.

We are sitting here at this stage where we can see a significant growth from that in terms of an average balance we can achieve this year. In fact we are already at above currently - our current outstanding balance that generates revenues is already above last year’s average at this stage. So, we are quite comfortable with growth.

Anything further in terms of specific numbers unfortunately we don’t guide..

Okay. Got it. Thank you..

Thank you, Richard..

Thank you. And the next question comes from Daphne Poon with Citi..

Hi management. This is Daphne from Citi. So my first question is about the funding side.

So can you provide us an update in terms of the funding situation for your cash and business in particular like the funding partnership with banks and trust companies after the new cash [indiscernible] will have came out and how has the funding mix and also the funding cost been changing? And my second question is about the auto finance business.

So regarding your full-year guidance of 100,000 cars sales this year, but we also look that the runway in the first quarter of 2018 so far is only 4,800 cars. So this tacks us a little bit aggressive.

So would you explain to us more about how would you achieve this full-year target, for example in terms of your sales and marketing efforts and also will there be any further store opening plans going forward? Thank you..

Thanks Daphne. Regarding the funding side, I think the first objective is to get regulatory compliance. So with respect to funding are prohibited by the regulators such as Financial Asset Exchange. We essentially now have a zero balance with Financial Asset Exchanges. We have actually increased significantly the amount of balance sheet.

Right now, it contributes approximately 25% of our actual loan book which is significant growth from last year. This is beyond - this currently in February. So as of today, I want to remind you that the regulation issued in December actually has no time table.

We are doing this all proactively to get ourselves ahead of actual regulatory so called enforcement.

So our current loan book essentially looks like this, a portion that is self funded which is going to our licensed small loan company, a portion which is going to our Financial Asset Exchanges and a portion that is going to our off balance sheet arrangements. Sorry, I don’t have anything going to Financial Asset Exchanges, it’s actually to trust.

So trust, essentially banks to off balance sheet arrangements as well as our own small license, so that’s all regulatory compliant.

In terms of costs we expect that maybe for the rest of this year, the actual cost will increase by very bit maybe 0.5% to 1% over what the overall funding cost, we would have done last year that’s all we are expecting so there shouldn’t be any big impact.

So that’s funding side and then regarding 100,000 cars as a target for us in the guidance, we announced that we sold 4800 cars by essentially just two days ago from the launch of essentially building that network by January end. It’s actually a very, very fast run rate that we achieved 4800 car sells essentially with just two months of operation.

Mind you that we actually Chinese New Year, essentially a whole one and a half week in China where nobody does anything and we still sold 4800 cars. So 100,000 unit cars is something that we have done to ramp analysis on and we believe number one 175 locations will sufficiently satisfy about 100,000 unit car sales this year.

Let me do remind you that we do have 62 million registered online users on our platform of which approximately 19 million have not draw down on the approved credit. So in the context of 100,000 unit of 19 million just in terms of the raw probabilities is likely achievable. That’s why we are showing these numbers out.

While we do have plans to continue to explore additional distributed channels, if it allows us to sell more than 100,000 cars at a reasonable profitability, we will do so..

Okay. Thank you. Just a follow-up on the funding side, so I’m aware that like earlier this year or well [indiscernible] there has been some funding cost things in terms of the partnership from banks and trust committees.

So just want to check whether there has been some any improvement in funding situation with banks and trust and also regarding that because the regulations they require basically everything to be off balance sheet [indiscernible] pure platform.

So do you have any update like in your progress of moving the long off balance sheet for example by providing or partnering with third-party guarantees and if there is any, what would be the pricing on it like..

So thank you Daphne again to follow-up on this. Essentially what we saw in September last year, in December last year in terms of the players that we work with have continued to work with us today. We really haven’t seen drop-offs from the number of funding partners that work with us.

The only drop-off is the financial asset exchanges which was directly say mentioned by the regulations that we cannot work with anymore, so we don’t.

And then that’s kind of funding partner, in fact we are seeing more and more of potential interest to join our platform as we are currently offering an asset package or access to these credit underserved users that no other platform can offer in this scale, in this cost structure in this with the data attached.

So there will be additional platforms with funding partners such as banks that will join this platform and that’s the funding in terms of partnership side. In terms of cost when we put in guarantees, our quoted market rates so far is about 0.5%, 1 % annualized on top of what the funding partners will ask for.

So roughly around 8.5% to 9% or what was our external funding partner is asking for. It will become 9% to 9.5% I guess. So not much impact there as well..

So this is including like the credit we expect the funding partner will bear, right?.

That’s right, that’s right, yes..

Okay got it. Thanks..

Thank you. And the next question comes from Jinjin Qian with Needham..

Thank you. My question is, first could you share or give us an update on your user acquisition strategy since the Alipay policy change. We see kind of the user growth slowed a little bit in Q4. What are you planning to do kind of to reaccelerate user growth in 2018 and beyond? And second question is on the auto loan 100,000 cars target.

What is kind of your strategy? Are you primarily kind of planning to achieve the target through your existing 60 million users or what is kind of your marketing strategy for 2018? Are you planning for any large scale kind of branding campaign as you did already at this year? And then lastly on the housekeeping, could you share the growth rate on the merchandizing credit or maybe the take rate on the merchandized credit business? Thank you..

Okay. So thank you for the question. Number one, user acquisition as a platform as a whole, as just announced we now have 62 million registered users not many platforms in China have this kind of user scale. Based on just this number alone, we should be happily achieving this guidance that we're providing of the RMB2.5 billion net income.

We are only servicing, we only have to serve 6 million to 7 million users a quarter to get to RMB2.5 billion of net income, and RMB62 million is just a very, very large user pool. We don't have intention to expand significant amount of marketing dollars to drive that registered user growth we have enough user period.

Obviously we will continue to see user growth backed by number one, we offer the most user friendly user experienced and affordable credit we can find today in the market. So this RMB62 million should naturally grow whether we're on whatever platform.

We continue to exists on the Alipay platform and our app continue to grow its traffic naturally, not at the same high rate as last year, we will continue to grow. So just given this we believe, the guidance we're providing should be well achieved.

Yes, the second question regarding a 100,000 units of cars, based on our internal user registration base, plus some natural traffic associated with having that offline presence in these retail population - populated retail locations should get us to 100,000 units without significant marketing spend. And thank you for following us.

We did implement a test marketing campaign with online questions gained. We actually stopped that, we didn't spend much money at all-in the context of the grand scheme of things we spent about RMB1 million RMB2 million which was essentially nothing. But sometimes media like to blow things up as usual as you all know. So it wasn't a big spending at all.

Your last question is the merchandized growth rate and sales commission. Now, as you all familiar with our model. The merchandize credit exists because we have very, very large data of credit from cash transactions. And recently in the last couple of months industry delinquency has increased therefore we reduced our credit for cash transactions.

Therefore we had become more cautious about merchandized volumes overall, because we have to extend a larger credit to these users. And because data is changing and the underlying situation, we have to pull back on the credit that we offer to user. So merchandize volume is affected.

And it will continue to affect at least in the first or second quarter of 2018. And as our transaction volume for cash credit continue to improve and stabilize and credit quality increases, we could see merchandize volume grow again. But you see Davai Auto is different.

When we sell a merchandize credit for example like a laptop or cell phone that's an unsecured credit, user delinquent to delinquent. But auto is an asset-backed asset, that's why it will actually as we do in more and more volume of it auto it would drive down delinquency.

In terms of take rates, our 2017 average take rate for the quarter was approximately 17%. Yes. So, it’s consistent with what was happening basically in the third quarter..

Thank you, Carl..

Thank you..

Thank you. And the next question comes from [indiscernible] Securities..

Hi. I have a question actually on the - your company have already doing by about 175 franchises at the end of January and I’m wondering like what is the trend of the per store daily sales for your store like in January and [indiscernible]. Thank you..

Thanks for the question. The per store unit sale is - I mean, how can we….

By each day?.

How can I give you information without disclosing something unnecessary. So, yes, in fact, you see we really only launch this with 175 stores at the end of January. And into January, we quickly ramped to approximately 80 units of new car sales every day, which is a significant achievement given that it’s new lead setup distribution network.

So at the Chinese New Year, our volumes have to come down, because we couldn’t actually sell cars as people go on holidays. But we are recently back to approximately 80, 90 units of daily volume again. So the trends are pretty good..

Actually, sorry to interrupt..

Yeah. Please, go ahead..

How about the trend, the day sales of the outlet opened in last year and how to they perform right now?.

Yes. So, okay, we were selling average per day in December, where it like 0.04 new cars sold every store a day. And now, we are doing 10 times of that. Yes..

Okay..

Okay. Actually, our CEO would like to add. Yes..

[Foreign Language] A - Sissi Zhu So in the first quarter, we launched our auto business. We were doing some testing. We haven’t aggressively ramped up our business yet, because we want to focus more on user experience before we ramp up this business. So Q1 is testing period and in Q2, the sales will be much, much better..

And let me put things also in context. If you are familiar with the Chinese auto leasing industry, there are other players they have been doing this for the two, three years and I’m sure you know the statistics. They are probably selling about 100 to just under 200 cars a day. So, they have been doing this for two, three years.

We did achieve these kind of numbers in basically two months..

Understand..

Thank you..

Thank you. And the next question comes from Binnie Wong with Merrill Lynch..

Hey, thank you management for taking my questions.

My question here is that, how do you see in terms of your strategy compared to some of the auto verticals extending into auto financing versus your current strategy, how do you see a competitive edge in terms of previous acquisitions or in terms of credit risk assessment, any color on that in terms of how do you think your competitive budgets will compare to with the ware household? Thank you..

Thank you, Binnie. This is a really good question because we have re-innovated the user experience. You see we built 175 retail locations which is center to shopping centers. Really we have brought the purchase experience to service experience through the users rather than having users go out five, 10 kilometers away to these four distribution centers.

This gives you tremendous access and basically a much better user experience. We have the capital. As you see we have over RMB9 billion of cash sitting on our balance sheet today, which I don’t think any of the auto verticals have. We have exceptional local execution power. We built these 175 stores essentially around 80 days.

I don’t see any others players do this..

[Foreign Language].

Right. So you are familiar with our history, we are not the first one who entered into the [indiscernible] consumer finance factor that we the number one in the sector within one year of launch and then we were not the first one and the online consumer finance sector so it gives us only one year to become the number one in that sector as well.

So now, we think that [indiscernible] auto we are already in the Tier-1 players group, already in the auto financial leasing sector and in the future we want to be the number one not only in the auto financing but also in the overall cars sales and distribution. The key to success is our team.

We have a quite a lot of talent in capital and we have not forgotten about our gene, about our DNA that is moving that fact. Thank you..

Hi. May I just have a quick follow-up here? How about in terms of credit assessment and also in terms of the quality of the loans, how will you compare to your competitors? Thank you..

Thanks Binnie. The credit assessment is actually something that we would actually have a slight advantage, because we have 130 million actual transactions in delinquencies that no other players have. In addition, we will do the standard offline stuff like bank credit tax that all of our peers would do.

So our advantage lives in actually addition to that that we have. In terms of performance of delinquency having sold 4,800 cars we only seen 10 days payments and they haven’t really gone to bad debt any way.

So the delinquency rate we expect because of the asset-backed situation we would see it to be significantly better than standard unsecured cash credit or merchandise..

Okay. Thank you. That’s very helpful. Thank you..

Thank you. And the next question comes from Meizhi Yan with UBS..

[Foreign Language]. Okay. I will translate briefly. So basically an update on the Alipay relationship and [indiscernible] credit company by the government it seems like individual credit companies are not allowed to provide services on credit to clients.

So healthy relationship I guess with Alipay and then secondly on the profit breakdown what is the contribution from car loan business in which the contribution is expected from the cash loan or the credit side of the business in 2018. Thank you..

Thanks. Very quickly in terms of the cash credits, we are operating in a fully regulatory required compliance rate. So for example we enforce the required users to put in a purpose when they apply for credit.

And once these credits are formed, we actually are basically as going to our small loan license company or off balance with banks and trust and all these arrangements are reviewed by appropriate regulators. So these are okay.

36% is an all-in one service fee that we charge, we actually do something that is very conservative call a Average Reducing Balance Rate. So we actually target one of the most conservative base in the market. There is only one fee, nothing else, very, very user friendly as well.

Alipay insurance relationship remains the same as our last discussion, as the last quarter. We are one of the partners, or one of the ecosystems partners, there are many, many other players so that relationship is basically still the same, two campus is still there.

And I already mention that for transactions originated from Alipay platform in itself, there is a 24% API cap. And then for our own app originated transaction is 36% complied to regulatory requirements. Currently the all of the majority of transactions are happening on our app.

Therefore we see very little in fact immaterial impact to the average rate that we can charge. So in terms of credit data, we are participating in the newly formed government required credit system. In fact, we are one of the very few players with 130 million transactions, we don't need to rely on external credit data.

The actual users transacting and delinquent is more valuable than any single credit score out there. We know these users better than any other data provider out there. So we don't need to rely on a credit scoring system per say we have our own.

And it works, it works because we are the first in the market to react to a credit down cycle and we are the first that will recover and grow again through this credit down cycle.

In terms of cars, how much it will contribute to the RMB2.5 billion, I obviously have a number, but unfortunately we only disclose that RMB2.5 billion of that profit is our 2018 guidance..

Thank you. Can I ask your follow-up? So all-in charges of 36% or 24%. How is it being collected by the partnered financial institutions that you work with or these are the three or micro loan companies? And so you basically use your own micro loan company to charge.

When you partner with the other financial institutions who will collect these and how they actually pass I guess this is to you? And how much they keep I guess that's the financing cost..

Yes. So the arrangement is really the same as what we were practicing in September with regards to our balance sheet arrangement. They are specifically off-balance because the fees are first collected by our funding partners, then they distribute the fee to us.

So for example, if the interest fee all-in is 36% our funding partners will first collect 36%. And then for that fee that finance it for example that their cost is 8% they would take away 8%, they will keep 8% and then remit the remaining 28% to us. So that's kind a how off balance sheet funding works in the first place.

And it's been the same since essentially we initiate off balance sheet arrangements, since as early as August last year. So that hasn't changed. And then if it's a loan that's originated or credit that's originated through our small loan licensed and we collect everything, we don't need to pay anyone anything..

So I guess the banks are willing to collect 36% on that loans. There is no objections, so there is no sort of negative view or actions on charging too high by bank of 36%..

In fact banks have been charging service fees plus interest for a very, very long time, so it's worked this way Yes. Credit card charge additional annual fees based on top of API. What we have done is, we let the banks work with an API that make sense for them and they can charge additional service fee, but all-in it has to be under 36%..

Thank you..

Thank you. And the next question comes from Alex Zhou with UBS..

Hey, Carl. Thanks for taking my question. I'll be quick since we are running out of time. So my first question is that, can you give us a quick update on the approval rate in the fourth quarter.

So I guess my question is that are we still targeting a 80% approval rates in the future and especially given the recent credit cycle and regulatory changes? The second question is a quick follow-up on Meizhi question regarding - credits.

Our understanding is that because of the establishment of [indiscernible] the end financial is no longer allowed to provide credit to third-party lenders such as Sesame.

So my question is, currently, are you still using consumer credits and if so, when would current contract expire in the future? And then how do you think it will affect your credit assessment process, especially for new users which you haven’t borrowed from a platform yet? And the third question is regarding tax rates, can you give us more detail on why there has been such a significance tax refund in the third and fourth quarter this year, and what is the outlook going forward, basically what is the baseline if that’s the tax rate should we put in our models.

Thanks..

Thanks. Those are really good questions. First of all, our actual user approval rates in the fourth quarter were 55.8%. So, in fact, it was higher in October and November but once we saw December 1 credit card decline we quickly shrunk back to give average of 55.8%.

So we were actually achieving close to 70%, 80% in October, November, but we actually very quickly envisaged the beautiful nature of small credit [indiscernible] data. So we no longer have 80% approval rate. This only works if the market liquidity and market situation favor that.

So we will continue to adjust these targets as long as it makes sense for us. So hopefully, as the industry stabilize, we will get back to these approval rates to offer more inclusive credit to more underserved users. Okay so that kind of that.

In terms of the Sesame credit score, I’m not at a position to disclose specific relationship arrangement regarding contract with Alipay.

But I can assure you that without external credit scoring, we have complete capability in serving our users as evidenced by what you see in terms of actual - us getting the credit volume controlled in January, February and now in March in a position to grow our credit volume again.

I can tell you none of the external data credit score per say play a very strong role in our credit model anymore. We just have too much data to have ourselves. Tax rate, yes, the tax rate in fourth quarter of 2017 is not high.

We have been able to negotiate several favorable long-term tax refund arrangements with local municipal governments, which are supportive of our technology and things like that. So we believe over the next year or two, a conservative tax rate of around 10% is probably a good kind of guideline. Yes..

Thanks. I appreciate it..

Thank you..

Thank you. And as the Q&A session is over, I would like to return the call back to the Company for any closing comments..

Yes. Ladies and gentlemen, thank you very much for sticking with us for almost 1.5 hours. We really have to let Min go for his birthday. So thank you for your interest and support in the Company. We look forward to talking to all of you again in our next update on earrings..

Thank you very much, operator..

Thank you. Thank you very much..

Thank you. This concludes today’s conference call. Thank you for attending today’s presentation. You may now disconnect..