Hello, ladies and gentlemen, thank you for standing by for Qudian Inc. Fourth Quarter and Final Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded.

I will now turn the call over to your host, Mr. Ben Zhao, CEO Assistant for the Company. Ben, please go ahead..

Hello, everyone, and welcome to Qudian’s fourth quarter 2019 earnings conference call. The Company’s results were issued via newswire services earlier today and were posted online. You can download the earnings press release and sign up for the Company’s distribution list by visiting our website at ir.qudian.com. Mr.

Min Luo, our Founder, Chairman and Chief Executive Officer; and Ms. Sissi Zhu, our VP of Investor Relations, 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 will be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company’s 20-F as filed with the U.S. Securities and Exchange Commission.

The Company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please 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, Ben. I want to first thank all our investors, analysts and the media, who have taken an interest to join today’s call. We finished in the year 2019 with the focus to reduce risk and protect net assets in light of challenging market condition and further evolving regulatory environment.

We pleased the consumer credit cycle had entered into a down head during the fourth of 2019. Operationally, we monitored day one delinquency rate as a real time indicator for our portfolio asset quality. We saw this measure to gradually increase to around 13% as of the end of fourth quarter of 2019.

Since then, we were conservative and took measures to deleverage by quickly reducing loan approval rates to low-single digit in the fourth quarter of 2019 and proactively shrinking the outstanding balance of our loan book by RMB3.5 billion compared to the end of the third quarter of 2019.

Furthermore, since the beginning of 2020, the coronavirus had caused further uncertainties and unpredictable impact on national economic. At this point of the credit cycle, we will continue to focus on protection of our net assets, reduce our loan book aggressively and maintain a leverage ratio of lower than 1.9x.

We look to continue this conservative approach until it is clear the credit cycle is over and we tend to resume growth up our loan book upwards. With this current operating strategy, the capital freed up will be used toward our repurchase programs and exploratory investment for new areas of growth.

Today, we also announce that our CFO, Carl is resigning for personal reasons. On behalf of the board and management team, I want to thank him for many contributions over the years. We have put together a successful team including Yan Gao whom we’re promoting to VP of Finance and Sissi Zhu to VP of IR.

They will together serve as key financial management as we continue our journey as a public company. Here is Sissi for more details on our results..

Thank you, Min, and good morning and good evening everyone. As we mentioned, the start of 2020 is challenging in light of the combined impact from the macroeconomic slowdown, regulatory developments, and now impacts from coronavirus.

We believe our plan to adhere to the strategy to deleveraging and reducing transaction volume by implementing more rigorous credit approval standards at this time is the only viable path to long-term sustainability.

As a result, our average monthly transaction volume in January and February, this year, has further reduced by approximately 50% and 61% in our loan book and open platform business respectively, compared to the average monthly transaction volumes in the fourth quarter of 2019.

The outstanding loan balance of our loan book has also declined over RMB4 billion since the end of 2019 up to now.

With overall productivity in China still in virus containment mode combined with our own efforts to reduce loan book, we expect delinquency as measured by M1+ vintage and D1 day one delinquency rate to continue to decline for the near-term.

We have already seen our day one delinquency rate to double to 20% in February from approximately 10% for the first quarter of 2019. Therefore, higher provisions and guarantee and risk assurance liabilities have to be taken to reflect near-term assets quality deterioration.

In addition, open platform loan transaction volume has declined as all industry participants are on a tightened risk control mode. As a result of the Company's revenue recognition policy under ASC 606, this decrease will have a pronounced impact on the Company's revenue for the first quarter of 2020.

As such, with origination volume decline and higher provisions, loss of guarantee and risk assured liabilities, it is expected that a material loss will be generated in the first quarter of 2020.

Given the rapidly developing market dynamics and regulatory framework, we believe our practice of not providing guidance allows us the necessarily flexibility to adjust our transaction volume in response to the other changing risk level and evolving regulatory environment.

Quick reduction in loan books in the last quarter of 2019 and into the first quarter of 2020 will have a near-term impact to quarterly results. Now, we also believe it is the only right course of action for us right now. Now, let me share with you some key financial results in the interest of time, I will not go over line by line.

For more detailed discussion of our fourth quarter 2019 results, please refer to our earnings pressure. Our overall Q4 results were a bit weaker than the first quarter last year.

We have gone through a series of challenging market conditions and regulatory environment, including constraints of loan collection and data collection and data usage as well as requirements for remaining P2P business is to exit.

So, the total revenue for our fourth quarter 2019 were RMB1.9 billion, representing a decrease of 25% from the third quarter of 2019 and an increase of 7% from the same period of 2018.

Our loan facilitation income and other related income decreased by 21% quarter-on-quarter and decreased by 20.6% year-over-year to RMB460 million, as a result of a decrease in the amount of all balance sheet transactions.

Transaction service fees and other related income, which relates to transaction services and in traffic with borrower services provided by the companies open platform decreased by 34.6% Q-on-Q as a result of funding partners taking a more conservative stance on prior risk and increase substantially year over year to RMB649 million as a result of the ramp up of the open platform initiative.

Our financing decreased by 10% quarter-on-quarter and decreased by 26% year-over-year to RMB717 million as a result of a decrease in average own balance sheet loan balance. Provision for receivables and other assets increased by 2% quarter-over-quarter and increased by 220% to RMB707 million from RMB220.8 million for the fourth quarter of 2018.

This increase was primarily due to an increase in past due on balance sheets outstanding principal receivables. Our net income decreased by 87.7% quarter-over-quarter and decreased by 83.3% year-over-year to RMB127.9 million for the fourth quarter last year, or RMB0.49 per diluted ADS.

Non-GAAP net income decreased by 85.2% quarter-on-quarter and a decreased by 79.9% year-over-year to RMB156.9 million or RMB0.59 per diluted ADS. So that's our prepared in March. Let's move on to Q&A session. Operator, please..

Certainly, ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of John Cai from Morgan Stanley. Please go ahead..

Hi, management. Good evening. Thank you for taking my questions. So, I have three. The first one is about delinquency. So, it's 20% day one delinquency now. So just wonder, how does that translate to like M1 or maybe M6 and the ultimate loss? Just want to get a sense of the losses here because I know M1 probably the largest scope.

And then related to that is my second question about provisions. So, I think that we have made around RMB1.4 billion credit-related losses including the guaranteed loss and a provision in the first quarter. And I think in 3Q, we make around RMB1 billion and now we probably expect still high level in Q1.

So just wonder, what's our reserve level at the moment? And meaning that, after Q1, do we still need to make further, if just assume the delinquency stay at around 20%? And the final question is on the strategy.

So, I think we have around RMB6 million outstanding borrower and then we have 20% day one delinquency probably loss rate is right to say, but 20% of them is probably the customer that we don't want to work with anymore. And then, we will have a reducing customer and also we are having this devaluation effort.

So at this point, can you tell us, what's the target leverage going forward? And then I think that this also mentioned about free up capital and this potential exploration of the new areas of growth. Is there any more color behind that? Thank you very much..

Thank you, John, for the question. Let me answer them one by one. So for you first question, our day one delinquency rate as you know is a real-time figure that we -- management internally used to monitor the situation on a daily basis.

There is no direct formula that we can use to translate D1 delinquency to vintage or to our accounting provisions, but they're coordinated for sure. So when your day 1 delinquency increase from like 10% to 13% to the current 20%, it will give you a sense of the magnitude of the potential increase of our loss range.

And, as we have started the elaborate agencies last year, when the portfolio side went down, if quantity delinquency rate typically will be degenerated as the higher quality borrowers pay off their loans and indeed and why the delinquent borrowers remain in the portfolio.

So, we might continue to see a high level of D1 delinquency rate for the short-term survey. And for your second question, thanks for the keen observation, we had around 1.4 billion provision plus other credit losses in the fourth quarter.

So as for the sufficiency of our prohibition, if you look at our slide, our coverage ratio for the M1 plus delinquencies, actually 1.6 times at the end up on the fourth quarter. However, we also believe that the impact of coronavirus on our loss rate in the first quarter is still material.

Because when our users, stay in the home because of the virus, their willingness to repay and their ability to repay both get deteriorated. So that's why we see this 20% D1 delinquency in Q1 as well. And then, you'll start question regarding the strategy. As you know, our current leverage ratio is about 1.9 times, that at the end of 2019.

So, we continue to deleverage in the first quarter where we will see a ratio even lower than that. We are among the most low levers players in the market, I believe, which will give us the ammunition at the right time when the credit cycle is gone and when we need to come back to market.

So, we believe this is the only right course of action right now to stay low leveraged. We also mentioned that we will see freed up capital this year. That's true because although our revenues get recognized in one time, according to accounting rule 606 users, we actually get repayment from usage in cash this year. So our cash flow is kind of okay.

We are assessing how to optimize our capital structure dynamically. So if the credit cycle gets away, when things gets normalized, we will utilize more into the lending business. If the credit cycle stays for a relatively longer period, we will utilize assets of cash to some short term or long-term investment ideas.

And we also announced that buyback program out there. So it can it may also be used for the execution. Regarding the new investment ideas, as I mentioned, is still not material and very early and exploratory stage. We will make appropriate disclosure when things get material according to the listing rule. Thank you John again..

Thank you. The next question comes from the line of Jacky Zuo from China Renaissance. Please go ahead..

Hi, good evening management. Thanks for taking my questions. So, first of my questions related to asset quality as well. As you mentioned, the day one delinquent rates actually rose to about 20%. That's -- I think that's for loan book business.

So just wondering what's the latest day delinquency rate for the open platform business? And also was the recovery rate so far we've seen for the open platform business. So just try to make assessments of the asset quality trend or delinquent trend for the open platform business. And second question is related to our buyback program.

And understand that previously were in blackout periods. So, just try to understand our buyback program process after the results and then possibility to repurchase the CP given our CP is trading at depressed valuation. And last question is about the future plan for the new customer acquisition.

I observed that our current customer base was not growing fourth quarter, and then I understand that's due to our assessments for the current credit cycle. So just wondering what will be the indicator for us to reopen the customer acquisition in the future? Thank you..

Thank you, Jacky. Good to hear from you. So regarding your first question, the D1 delinquency rate for our open platform is about 6% currently. It's also increased during the past few months. As all industry participants are seeing the same kind of trend throughout the market. Your second question regarding the buyback program.

So, we have been in blackout period after we announced the $500 million buyback. After a cooling down period, after today's call, we would have a window to the buyback, but we cannot disclose like exact time and price before we take action, otherwise the market will not be there.

As you also noticed, our CP price currently is having a really high yield. So CP instrument is one of the things that we have in mind as well we are open-minded. So, as I've mentioned as well, we are continue to assess how to utilize our capital in a optimal method.

So, all the buyback programs are in our discussion radar, and we will make appropriate disclosure according to these two listing rules, after we have done such transactions. Your third question about user acquisition. So, it's actually not urgency of us to open up to new users right now.

We tend to hope to work with our eight 15 users because we have seen their proven transactions and the payments history, while new users tend to have higher delinquency rate the first time we accept them. So that's why you will notice, that we currently have a very low single digit new user approval rate.

We basically hope to keep a very low risk appetite and to work with our existing users first.

So if the time gets right when we get out of the credit cycle, when they see our delinquency rate full and our advantage fall, we will bounce back and very luckily we had already started to deleverage last year, so we would bounce back faster with more ammunition probably than other peers. Hope that answers your question, Jacky..

Thank you. The next question comes from the line of Sanjay Jain from Aletheia. Please go ahead..

Hi. Thank you for taking my question. So, first question is on the transaction volume or loan balance for the first quarter.

What is the level at which you would have, say zero profit in the first quarter? What level of transaction or loan balance would you need for that, for the balance sheet, loan facilitation, open platform broadly?.

Regarding the transaction volume, actually, as I mentioned in our prepared remarks, we'll be seeing a loss in the first quarter that it doesn't actually matter to disclose what the loan volume and accomplish should be. You know that in the fourth quarter last year, our process was about a 428 million.

So after a very rough calculation, if we remove our open platform venue contribution of about 600 million from the bottom line, you will see that our loan book business was already making a loss.

So I think this will give you, I can't give you the exact numbers because we have the Company policy, not the guidance to see it but that I think will help you to gauge the magnitude of the losses..

Fair enough, and in fact, compared to the fourth quarter, as you explained, the provisioning and the losses have actually gone up in the first quarter on your own ending and facilitation.

But is there any theoretical calculation or kind of like breakeven volume overall? So I'm not asking for your actual volume in the first quarter, but some theoretical numbers..

Right, it is a very difficult question. So it actually depends on how the losses will be. We are in a coronavirus situation. It's very hard to see how the final loss rate will be for the loans that we disbursed this quarter yet. We don't have that visibility yet..

I can understand that okay. My second question is on the open platform and the asset quality days, as Jacky was asking.

What is that 6% D1 rate which you mentioned, would it translate to something like maybe 9% or 10% loss rate very roughly? And secondly following from there, are you making up for the extra loss over and above the initial or original assumption made by your partner when they participated in the referral program..

The 6% D1 delinquency does not directly translate into any accounting provisions. For the reason being, the reason being, D1 delinquency is a very early leading indicator, but we usually have a long about 10 or 11 months long.

So, we can really predict the final loss by looking at the D1 delinquencies, it just an indicator that we can look at day-by-day to see how the overall portfolio is performing. With regard to your second question regarding the actual losses from the open platform, we actually take no risk on the open platform business.

So I am not sure whether I understand your question regarding the actual losses..

Okay. Fair enough. So, the partners with whom you had done business in the second or third quarter, for example, and if the losses are now higher than what they had assumed initially, then they are the ones who are still taking the loss and they are still willing to work with you. They are not kind of like backing off with the partnership..

I guess your question. So Jay, as I also mentioned, our open platform volume also declined in the first quarter already, because all the participants are experiencing the same level of same trend, same downward trend as we are experiencing. So everyone suffered the pain in the period in this special period.

Our take rate as you can also deduce from our accounting statement articulate for open platform decreased from 10% in third quarter to 8% in the fourth quarter. And we believe it will continue to decrease in the first quarter of this year as all the participants are seeing higher loss rate..

And, again, a follow up on one of the questions asked earlier. Of the 34 million customers you have with a credit line sanctioned by you.

How many would you see, are really high quality, and how meaning you would be willing to lend to them since you have their track record with you? And how many of them are actually approaching you for a loan right now.

So what's the kind of like the demand environment?.

Right, so out of the 34 million users with pretty light, all of them have approached us because they have to approach us first and give us their some of their applications before we can approve their credit line..

In the last one or two months, have they approached you for additional loan?.

Right, for the last quarter we actually were serving our -- mostly of our existing instead of new users instead of new users. So, basically, I don't have the exact number for you right now who are the height really high quality one just out of our register user base about 18 million.

We haven't reached to all of them yet, so we don't really have a exact number regarding the number of high quality ones and the low quality ones..

Okay.

And the number of applications for fresh loan in the last say in the month of February has it gone up a lot or not? Or do you track that? You may have rejected the application but has the application come in?.

So, over the past few months and quarter, our demand is kind of stable on we see stable BAU and other metrics for people who looking to borrow loan on our platform..

Okay.

And my final question very quickly if you want to address it now, the impact of some of the provincial governments, appearing to be moving towards 24% APR, I guess like now with the dividers and governments have a lot of other things on mind, but if this happens, are you preparing for this or how would your business model evolved under a 24% limit..

Okay. Actually, we have seen a regulation specifically saying that, the government allows 36% APR basis. We are upholding a high level of compliance, as a company and we actually being under IRR of 36%, which translates into a 20% APR basis for 12 months tenure. So we're fine with that regulation..

Thank you. We have the next question from the line is Steven Chan from Haitong International. Please go ahead..

Good evening management. This is Steven Chan here. Three quick questions, if I may, the first one is about in view of the rising and delinquency rate. Did you see any withdraw or funding from the funding partners or exits or funding partners? That's the first one. And second one.

I think, the other one is talking about you disclosed just about the provision all along the impairment charge. You tried to energize that there's around 20% something critical. So my question is that if you single out the on balance sheet, some facilitation business, if you include funding cost as well as the long impairment charge.

Does it imply that your own balance sheet, long facilitation business, actually making loss if you use so called the term effective tech rate after factoring in the credit cost? And if that’s the case so we also apply it to the off-balance sheet facilitation business because we don't know the actual guarantee cost you you're paying, but you see similar rise in guarantee calls that you have seen for your own balance sheet like your own balance credit calls for your off-balance sheet loan facilitation business? And, I think finally, I wanted to get a sense of, because you mentioned that you will not pay a much effort on customer acquisition, but at the same time we seen similar amount of sales and marketing expenses for each quarter.

So, I understand that that could be related to loan collection. So, should that imply that in keys, if you are going to see further decline in loan volume in first quarter? You will actually seeing the lower the loan volume the more these economies of scale you will likely to suffer. So, they imply that that means that.

If we use the term like best like cost income ratio, your cost income ratio will likely to increase quite substantially if your loan volume actually is declining drastically. So, I think these are my three questions..

Thank you, Steve for all the three questions. So, for the first one as I have already mentioned, our open platform funding partner also experienced the upheaval that uprising of delinquencies. And that's why the volume of open platform has dropped in the first quarter as well.

Regarding our loan book business, we actually are supporting all the loan book transaction volume by our own equity right now because the market has closed down and we have sufficient funds. So it doesn't matter whether the other funding, funders want to still cooperate with us for our loan book business.

Regarding your second question, the provision rate. So, we would not advise you to look at our own balance sheet transaction and off-balance sheet transaction separately. They are basically stating transfer of user and we basically undertake ordering.

We would like to actually consider the on balance sheet and off-balance sheet businesses as a same tranche with the same kind of credit costs. And yes, they face serious similar credit losses. And you are absolutely right out there.

If you look at our fourth quarter number, if we single out our open platform business, we are actually experiencing a loss for our loan book business. That's correct. Your third question, our self-marketing expenses include all the staffing our call center, which includes a collection effort as well. So you are absolutely correct.

When we see a lower volume, our unit economics for spending actually get deteriorated. That is will have a higher figure for our expenses percentage if our loan balance gets lower. That's right..

Thank you. The next question comes from the line of Lucy Lee from Goldman Sachs. Please go ahead..

Thank you management for taking my questions, and thank you for sharing a lot of numbers. I'll just follow up on a little bit asset quality. So do we have knowledge on how much of the work in asset equity is related to a virus outbreak and how much is not.

So I was just trying to trying to argue that sometime later as we stripped out the virus impact and what's the longer term steady state, we'll be out -- or what looked like. And related to that, given that we are now tightening the credit policy, what's the average APR or take rate like going forward? Yeah, those are my question..

Thank you, Lucy. Regarding the accessibility is still too early to see how this industry downward chin and how this virus situation will evolve in the future. It’s very difficult to judge what will final losses will be.

If we split out this virus situation, actually we are earning a net return on our book about like we are having a credit loss off about 13% going, if we remove the virus situation. But actually there's no way that we can know and actually no one can actually tell when the virus situation will be gone. So it’s hard to tell.

Regarding your second question Lucy, the APR take rates, so the take rate for our open platform business has declined from 10%, to 8% in the fourth quarter, and it will continue to decline in the first quarter because for one thing we are experiencing the downward trend of the industry and we hope to leave some cash table for our open platform participants.

So we are getting a lower sharing of the profits. Regarding the take rates for our own book business is kind of stable in the current year. We are, charging users at less than 36% IRR basis..

The next question comes from the line of Livy Lyu from HSBC. Please go ahead..

Hello management. I have three questions here. First one is that, when do we expect from that we can recover from the net loss in first quarter? And actually this is accounting question because for example, let's assume the situation gets better in June and people started to repay their, defaulted loans in July.

So when we right off the bad loans immediately in July or we'll be there in maybe four quarters. So how can we expect the delay or the recovery speed from the loss, from the first quarter going forward? And my second question is about the business strategy. So, going forward that for this year, we have two men business right now.

One is the off-balance sheet and one is the open platform. So which one do we see more funding pressures right now in which one will be our strategy focus for 2020? And my third question, I think this is also a lot of investors will be also curious about this. It's the resignation of our CFO, immediately before that quarterly results announcement.

So can we have more detailed explanation for that, for example the China LNG example like having a higher paying job or how do we process the succession or we say we will have CP to sign on the audited annual results for the April or are we looking for a new CFO going forward? Thank you..

Thank you, maybe with regards to the accounting, we actually have different accounting treatments for our own balance sheet and on and off-balance sheet transactions.

For our off-balance sheet transactions, as we were recognizing revenue, the multiple revenues, on day one of the transaction, we actually have to assess the fair value of the geyser identity from day one. So, basically, we have to consider the final loss from day one.

So, our own balance sheet transactions, we recognize the revenue each month after each month on accrual basis. So, we use a low rate lottery model to model the provisions each at each month end. Your second question regarding the funding cash for all balance sheet loans and open platform loans that's not one of our concerns right now.

Because as for open balance sheet loans, we do not support it with our own funds and that's we're purely taking we are purely taking no risk owner opens platform business and for our of balance sheet loans, we have very limited open balance sheet transactions in this quarter because as we are the leveraging our own equity is sufficient to support our loan book business right now.

Regarding our example calls, recommendations is due to his personal reasons and we have a succession team Ms. Carl Yeung, who is our Finance Controller and being promoted to VP Finance and Ms. Carl Yeung will be signing on our 2019 documents. The succession team also invited me to see you as the VP of Investor Relations team.

You will be able to please feel free to contact our Investor Relations team and our contacts are available or we will continue to serve as the key financial management of the Company as we continue to be a properly listed company..

Thank you. As there are no further questions, I would like to turn the call back over to the Company for any closing remarks. Please go ahead..

Thank you, everyone for joining the call today. If you have any follow-up questions, please feel free to contact our IR investor relations teams and sign-up for our email list. Thank you everyone..

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