Hello, ladies and gentlemen. Thank you for standing by for Qudian's Inc. Third Quarter 2020 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 would now like to turn the call over to your host from Qudian's. Please go ahead..

Hello, everyone, and welcome to Qudian's third quarter 2020 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 provision 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 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 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..

Hello, everyone. I would like to thank you all for joining today’s call. In the third quarter, amid an evolving regulatory environment, we maintained prudent operations with regard to our cash credit business while still generating RMB5 billion transactions in our loan book business, which was in line with our expectations.

In this quarter, we are delighted to see meaningful improvement across our delinquency rate compared to the first half of this year. Stringent credit approval standards bolstered our ability to navigate the ever-changing operating environment in the online lending landscape.

The recent shout to seek public opinion for in-company [ph] measures for administration of online small credit business may potentially heighten the industry’s near-term volatility.

However, we do not expect the proposed regulations for online small credit business to affect our business, and we do not authorize small credit companies to extend loans. We will continue to closely monitor the regulatory developments in our industry.

Besides the credit loans business, we continue to invest in and make steady progress in new initiatives, while further exploring growth opportunities. Early childhood education is an exciting new area for us, and we look forward to updating you with our progress in the coming quarters.

Now, I would like to turn the call over to Sissi for more details on our results..

Thank you, Min. And good morning and good evening, everyone. In this quarter, we're encouraged to see a significant improvement in our profitability on a sequential basis. Notably, our net income increased by approximately 231% quarter-over-quarter to RMB592 million.

This is a great indicator of our ability to overcome challenges and deliver long-term value to our stakeholders. In light of fluctuating market conditions, and ongoing regulatory developments, we have been executing a cautious and conservative strategy in our Loan business by performing rigorous credit assessments on our platform.

As a result, our efforts to improve credit quality drove an improvement in our credit performance, evidenced by a decrease in the Day-1 delinquency rate. Our overall Day-1 delinquency rate reduced to approximately 17% by the end of September, from around 20% by the end of June, which further decreased to 13% by the end of November 2020.

We also continued pursuing potential growth channels outside the cash credit business backed by our robust onshore renminbi liquidity position. We are optimistic about the long term growth prospects of our new initiative related to providing early childhood education services, and we'll be happy to share more details when we have concrete progress.

We are keeping a close watch on other factors that may impact our business, including the evolving regulatory regime for online cash credit business. Meanwhile, we've been actively adapting to the rapidly changing environment and are confident that our strong fundamentals will help us pursue and sustain long term growth.

Now, let me share with you some key financial results. In the interest of time, I will not go over them line by line. For a more detailed discussion on our third quarter 2020 results, please refer to our earnings press release. So, our total revenues were RMB849 million, representing a decrease of 67% from RMB2.6 billion for the third quarter of 2019.

Our financing income totaled RMB487 million, representing a decrease of 39% from RMB798 million for the third quarter of 2019 as a result of a decrease in average on-balance sheet loan balance.

Loan facilitation income and other related income decreased by 70% to RMB177 million from RMB583 million for the third quarter of 2019, as a result of the reduction of transaction volume of off-balance sheet loans during this quarter, partially offset by reclassification of guarantee income in accordance with ASC326.

Transaction services fee and other related income decreased to RMB6.6 million from RMB993 million for the third quarter of 2019, mainly as a result of a substantial decrease in transaction amounts of open platform.

Our sales income increased to RMB139 million from RMB135.5 million for the third quarter of 2019, mainly due to the launch of the Wanlimu e-commerce platform, partially offset by the reduced sales income from the Dabai Auto business.

Total operating costs and expenses decreased by 93% to RMB100 million from RMB1.4 billion for the third quarter of 2019. Provision for receivables and other assets decreased by 87% to RMB90 million from RMB691 million for the third quarter of 2019.

The decrease was primarily due to a decrease in past-due on-balance sheet outstanding principal receivables compared to the third quarter of 2019. Net income attributable to Qudian's shareholders was RMB592 million or RMB2.22 per diluted ADS. Our non-GAAP net income attributable to Qudian's shareholders was RMB576 million or RMB2.16 per diluted ADS.

With that, I will conclude my prepared remarks. We will now open the call to questions. Operator please continue..

Thank you. [Operator Instructions] Our first question comes from the line of Jacky Zuo from China Renaissance. Please ask your question..

[Foreign Language] So I will translate my questions. So thanks for taking my question. I have a couple of questions to ask. Number one is about the regulation. I understand a majority of our current lending is using our own capital, and management just mentioned the new online microlending document.

So just want to understand whether this document will affect our current lending model. Second question is about our new loans and new borrowers. I observed that we actually saw a recovery of loan origination in the third quarter.

So, can management share some color regarding new acquisition - new borrower acquisition and the new borrowers number in the third quarter? And lastly is about our new business in the early child education, so any color will be helpful? Thank you..

Thank you, Jacky, for all the questions. I'll address them one by one. So as you know, we – we are not using the Microcredit license for our loan disbursement. Instead, we are using the trust structures, and all the funding is from our own equity.

So up to now, we don't have any – we haven’t noted any regulations regarding this kind of trust structure loan disbursement yet. But as you know, the regulatory environment is ever changing – it’s fast changing in China. We’ll pay a close look on the regulation changes, and if anything changes, we will adapt very fast.

Your second question regarding the new borrowers, actually we - our approval rates for the new borrowers is close to zero in this quarter and the same as last quarter. So the number of new borrowers is very minimal. Your third question regarding our new business initiative is actually still in a very early stage.

The business is about the consolidated offline early childhood education centers. We will give you - give the investors, provide more color when we have a more concrete business there. Thank you. Thank you, Jacky, for all the questions..

Thank you, Sissi. Very helpful..

[Operator Instructions] Our next question comes from the line of Sanjay Jain from Aletheia Capital. Please ask your question..

Hi. Thank you for the presentation. Just a couple of questions. The first one is, can you give us some idea about your growth plan on the lending side in the fourth quarter and next year? I know the regulatory landscape is evolving. But your lending seems to have turned the tide.

So, if you can give us some idea of how the loan book overall, the origination, and the balance could grow? And the second question is on Wanlimu. The sales of about $20 million in the third quarter seems to be very small for a business that in theory should be doing well, you know, e-commerce is booming.

And due to COVID, people are probably ordering more stuff online. So are you happy with the progress of Wanlimu so far? And when do you think or in what kind of levels of scale or conditions will you be able to share the economics of that business? Thank you..

Thank you, Sanjay. I will address your questions one by one. So first of all, as you know, that industry landscape is ever changing. So its working [ph] to get crystallized. We'd like to still keep our status quo. So the loan volume in the fourth quarter will be very similar to the level in the third quarter.

We don't have the visibility for next year yet. So sorry, but I can't answer your question about looking into next year. The second question about our luxury e-commerce platform. We didn't spend much money on the promotional spending and subsidized on this luxury platform.

So that's why you may notice that the sales income from the Wanlimu platform isn't as much as the previous quarter. Before we see a very strong demand and repeat purchase on this platform, we will maintain - we will keep a low and a small scale of operations for the luxury business. I hope this answers your question..

Okay. Thanks. One follow up on the lending side, you know, for the first quarter, second quarter, you were saying you are not sure of the asset quality trends, you are not sure of the demand. And now, of course, there is a regulatory uncertainty as well. But at least from the asset quality side, it looks like things have clearly improved.

So why are you not getting more confident about growth, at least on balance sheet side? And do you intend to restart open platform or some other model once you become or feel more confident? So and - that you are still going to be present in the lending business for next year?.

Sure. Actually, we do see quite a number of statements from the regulators recently. Most of them doesn't have any impact on our current business. But as we can see from the statements, the tone from the regulator is kind of more towards the tightening side for this online cash credit business, but we're not sure either.

So for now, we'll just stay where we are on the loan volume for the fourth quarter was very similar to the previous one, although we see a good improvement in our asset quality. We do not rule out the possibility that we may restart growth again. But right now when regulators are still in this changing status, we just hope to keep our status quo..

Okay. Thank you..

Thank you, Sanjay..

Your next question comes from the line of Steven Chan from Haitong International. Please ask your question..

[Foreign Language] I'll translate it into English.

First of all, I would like to ask, what is the latest lending rate of your new loans? Have you lowered to below 30% as most of your peers have already cut their lending rate of their new originations in Q3? And what will be the outlook of your lending rate in the coming quarters? That's the first one.

And second question is, in case your loan growth in Q4 or loan volume in Q4, mainly related to - on balance sheet - on equity basis.

So will that imply that for the line of the loan facilitation income and other related income, especially related to guaranteed income and line related to changes in guarantee liabilities and risk assurance liability, which is related to some write back in provisions will move towards zero in final quarter? Thanks..

Thank you, Steven. So regarding your first question, we didn't change our pricing policy, yet, so its still less than 36%. And for the second question regarding the off balance sheet guarantee income and change in gain of guaranteed liabilities? The answer is, no, it's not going to be totally exactly zero.

Because as you know, the off balance sheet for - regarding the off balance sheet loans, we book a portion of initial revenue and the others will be released into our revenue line later as a guaranteed income.

Because as we see better than expected delinquency trends, the changes in gain and loss of guaranty liability [ph] might be a gain in the next - in the fourth quarter, if the trend continues..

Thanks, Sissi. But my question is that based on my rough estimation, all balance sheet, guarantee business, the remaining amount, just maybe around 0.4, maybe around for 400 million or 400 billion so - and your average tenor, talking about you know just around four months.

So even if the two lines may not be zero, but it will be - will definitely continue to decline very minimal and do you expect further write back in provisions?.

It's very possible. As we can see the D1 delinquency continues to - continue to reduce up to now..

Thanks..

[Foreign Language] Thank you. As there are no further questions, I'd like to turn the call back to the company for closing remarks..

Thank you everyone once again for joining us today. If you have further questions, please feel free to contact Qudian's Investor Relations team. Thank you..

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