Good morning, and welcome to the X Financial Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Jennifer Zhang. Investor Relations for X Financial. Ms. Zhang, please go ahead..

Okay. Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results were released earlier today and are available on the company's IR website at ir.xiaoyinggroup.com. On the call today from X Financial are Mr. Justin Tang, Founder, Chairman and CEO; Mr. Simon Cheng, President; and Mr. Kevin Zhang, Chief Financial Officer.

Mr. Tang and Mr. Cheng and also Kevin will give a brief overview of the company's business operations and highlights and also financials and guidance. They are available to answer your questions during the Q&A session.

I remind you that this call may contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements are based on management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other risks -- and others factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law.

It is now my pleasure to introduce Mr. Justin Tang. Mr. Tang, please go ahead..

Hello, everyone. We are pleased to report our financial and operating results for 2018. Despite a volatile market environment, we facilitated CNY36,913,000,000 in loans in 2018, generated RMB3.5 billion in revenue and RMB1 billion -- RMB1.05 billion in non-GAAP profits, representing an increase of 98% and 155%, respectively, from the prior year.

Since the second half of 2018, the industry has been under strict government oversight, with many small and illegal lending platforms gradually being weeding out of the market. We are confident that our well-regulated industry will provide significant future growth opportunities and generate a strong borrower demand for our personal finance products.

We strongly support the government's new regulations and believe they will help us to improve our overall risk control and management capability, enhance industry reputation, reduce over-leverage by the borrowers and provide the best-in-class personal financing solutions.

Since the outlook of registration of P2P lenders remains unclear, over the past few months, we have been diversing our funding sources and strengthening our cooperations with financial institutions.

We started new corporation with CITIC Trust, the largest trust company in China; Kunlun Bank; and the China Foreign Economy and Trade Trust, just for a couple of examples, as well as the major funding intermediaries, such as JD Finance, Baidu Finance, and Ping An Technology.

We are also in discussion with other national renowned financial institutions and trusts. Given that the majority of products are covered by ZhongAn Insurance, financial institutions have been eager to cooperate with us. At this moment, we have significantly more institutional funding demand than we could provide.

Looking ahead into 2019, we expect to have a significant portion of our new funding coming from institutional source. On operating side, we made several big improvements over the past few months. First of all, we launched our new revolving credit product, Xiaoying Wallet, after significantly investing in R&D and testing.

Revolving product is much more complicated than simple loan product. We believe this product demonstrates our leading technology capabilities and swift strategic execution, and it should have enormous growth potential to better meet the needs of our customers. We have around 50,000 active cardholders now.

Our goal in 2019 is to reach 1 million active users through our revolving product. We will continue to leverage our technology expertise and understanding of financial product to improve our business performance and achieve sustainable and healthy development.

Second, we were pleased to engage Citic AIBank as our custodian bank to independently manage all borrowers and investor funds. It took us 3 months to complete the switch from the Harbin Bank to Citic AIBank. We were able to finish this with minimal service interruption. This demonstrates our strong technology and financial execution capabilities.

AIBank is a highly respected institution that has developed the cutting-edge technology and algorithm that will further strengthen trust and the security of our online lending platform, improve our overall competitiveness and ensure we are complying with the new regulations.

Third, we were one of the few P2P platform to begin sharing credit information with Baihang Credit, which will integrate, save and process data collected from us and multiple other partner companies.

Together with our upgraded version of social network data, this will strengthen our credit assessment system and allow us to quickly and accurately assess the creditworthiness of borrowers, target our broader user base for financial services and reduce the cost of risk management.

Overall, we were pleased with the significant progress we have made, and I strongly believe that we are ideally positioned to continue benefiting from enormous growth opportunities in China's personal finance industry.

We will continue to invest in our technology to strengthen our risk management capability and develop partnerships with corporate and institutional investors to further diversify our funding sources and generate a long-term sustainable growth.

Lastly, I'm pleased to announce that the Board of Directors has declared a cash dividend of $0.10 per ADS for full year 2018 as part of our new annual dividend policy.

We believe that dividend scheme will demonstrate the strong growth potential of our business and the future business prospect, and the company's strong desire to reward our shareholders. With that, I will turn the call over to Simon, who'll further discuss our business prospects..

Thank you, Justin. Hello, everyone. We continued to deliver solid growth during difficult macroeconomic environment while maintaining healthy credit quality in 2018 Q4. We have also made investments in our risk management infrastructure and customer acquisition and service capabilities during past quarter, which will benefit our future growth.

Adopting fin-tech technologies to promote micro SME lending and consumer lending is clearly stated by the Chinese regulator, and X Financial's capability to generate high-quality asset from online micro lending is well recognized and welcomed in retail investment community through P2P and institutional investors across China.

X Financial is well positioned to work with our partners in this growing area in 2019 as a leading fin-tech player in China. I will turn the call to Kevin, who will go through our financials..

Thank you, Simon. Hello, everybody. We delivered solid results during the fourth quarter and the whole year of 2018. We are happy to see our business begin to recover starting in the fourth quarter, following the loss of the third quarter of 2018.

The total loan facilitation amount in the fourth quarter of 2018 was RMB9.5 billion, exceeding our previously announced guidance of RMB8 billion to RMB8.5 billion, and an increase of 25% for loan facilitated in Q3, which demonstrates strong market demand and our industry-leading position. Our weighted average APR for whole year of 2018 was about 25%.

For transparency consideration, I will now go over every line items of our financials. For more detailed discussion, please refer to our earnings press release.

Net revenue for the full year 2018 increased by 98% to RMB3.5 billion from RMB1.8 billion in 2017, driven by our focus on the core product Xiaoying Card Loans whose volume is more than doubled of that in 2017. Our operating unit efficiency has increased in the Q4 2018.

Operating cost and expenses, which are comprising of origination and servicing cost, G&A costs, and the sales and marketing expenses, as a percentage of loan volume facilitated in Q4 is 4.7% compared with 5.3% in Q3. The group effective tax rate for the full year of 2018 is 19.3% compared to 28.9% in 2017.

Most subsidiaries of the group are now enjoying the 15% favorable income tax rate as being recognized as a tech company. Our non-GAAP net income was RMB280 million and RMB1.05 billion in the fourth quarter of 2018 and the full year of 2018, respectively. Net income per ADS for the full year 2018 was RMB5.82 on a fully diluted basis.

The non-GAAP fully diluted net income per ADS was RMB6.94. Besides, X Financial currently expects that the total loan facilitation for the first quarter of 2019 to be approximately RMB9 billion. This forecast reflects the company's current and preliminary views, which are subject to change.

Now this concludes our remarks and we'd like to open the call to questions.

Operator, please?.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from John Cai with Morgan Stanley. Please go ahead..

Hi, management. Thank you for taking my questions. I have 3 questions. The first one is on our product mix. So I think the portion of card loan has declined in the fourth quarter, and also I think the ticket size of the overall loan facilitation has already -- has also declined.

So I just wonder what's driving that? Is there any product mix change? And if there is any, what's the rationale behind this change? So and the second question is on the balance sheet, actually, I think particularly on the financial guarantee derivatives.

I think, in the fourth quarter it is in liability, but in the fourth quarter it seems you have turned this into an asset and the amount is notable, more than RMB350 million. So I just wonder what's driving that change? And also a few other P&L -- I am sorry, balance sheet items such as the short-term borrowing.

Why we need to do some short-term borrowing given the cash we have on hand? So that's the second one on the balance sheet. And so the final question is on the customer acquisition.

So I just wonder what's our acquisition cost for the first quarter? What's the current trend? And also this 315 Festival Gala on last Friday that seems to have some impact on this loan supermarket, I'm not sure whether that would impact our customer acquisition activities. Thank you very much. .

Yes. Thanks, John. This is Justin. I will answer your first and third questions. I will have Kevin to answer your second question. So for the first question, the average loan size actually decreased during the Q4. And the reason we actually reduce our average ticket size is really our data-driven risk management capability.

During the last year, obviously, because the economic situation in China had become more challenging as well as the credit situation become more contracted, so the delinquency situation, obviously, worsened for the whole industry.

So as a result, starting from somewhere in Q3, we're starting to reduce average loan size we give to our creditors, and this to improve our loan performance, which already turned out positive results as we see right now.

We see the new loan will start looking out, starting from the Q4, starting to show positive performance than the loan we extended through the most of the 2018.

In terms of our credit card balance transfer loan account for a smaller percentage of our business in Q4, the key reason is, actually, the whole P2P industry experienced funding crunch during the Q3, but then in Q4, the leading platforms like us rebounded very strongly. So we actually have more than sufficient investor demand for our product.

So as a result, in the Q4, we started to direct more of our business to provide the funding to other major Fintech platforms. So other major Fintech platforms started to refer their borrowers to us, the companies such as Rong360, for example, those kind of major platform, they refer their borrowers to us.

They start to account for a bigger portion of our business, and that's the key driver for our credit card loan account for a smaller portion of our business. Your third question is, our customer acquisition cost actually remained very manageable. You have to look on both sides. One is on the investor side.

Our investor side, actually we started to see the customer acquisition cost even going lower. One of the reason is China now have regulations to require the P2P platform to maintain their balance at a certain amount. So at this moment, we have a much significant -- significantly more investor funding demand than we could provide.

So as a result, actually in February, we reduced the interest rate that we provide to our investors. For example, the 1-year product, we reduced the interest from 8% to 7.2%, so that reflects a strong investor demand to our product which we could not satisfy. On the borrower side, our customer acquisition cost remained stable.

I actually believe we are benefiting from 315, this consumer day, because there are -- those loan supermarket before they provide their traffic to irregular lenders. Now the irregular lenders actually have been kicked out of the market. So those traffic platform are more inclined to provide traffic to the more complying company, such as us.

So I think actually it will work towards our favor. So I think going forward for the 2019, we believe the customer acquisition cost for our existing business will be very manageable. In 2019, one of the area we're going to make investment is our revolving credit business. We believe this is a long-term fundamentally important business for us.

There are several hundred millions of people in China who could not get a credit card. And if we could be one of the first player to provide them with a mobile revolving credit line, this is a fundamentally important product. So we will invest pretty aggressively for customer acquisition for revolving product.

I like saying in the call, we target to reach like 1 million active users by end of 2019. So that's the answer for your first and third question. I will turn to Kevin for your second, financial-related question..

Thank you, Justin. Hi, John. I remember that with regard to your question 2, you have actually had 2 small questions. I would first answer your -- answer the second part, which is most important.

Actually, the short-term borrowing is actually related to what we call [Foreign Language] It's kind of how we use our proceeds we raised in our IPO and piggyback in China. That means we will get our current deposits, U.S. dollar current deposits pledged overseas and we have the local bank to get some short-term borrowings. That's [Foreign Language].

Okay. And that's why you also see on our balance sheet, we have restricted cash. Actually, we have pledged our U.S. dollar current deposit for around RMB400 million.

And in December 2018, we've got RMB200 million borrowings from local bank, and in the early January, we got another RMB200 million short-term borrowings, that's what the impact of [Foreign Language]. And with regard to the increase of financial derivatives -- guarantee derivatives, it's a little complicated.

As you know, when we're talking about what we attract from our borrowers, there are some portions that would be the interest, and then there will be the insurance fee paid to ZhongAn.

And we also have some guarantee fee we collect from the borrowers, but which would be compensated to ZhongAn and a certain cut as a kind of reimbursement for ZhongAn as a compensation to the investors.

And we noted that the delinquency rate for the loan facilitated in June, July of 2018 actually increased a lot in Q4, and that's resulted in a significant compensation for ZhongAn and we need to reimburse ZhongAn and that gap.

But when we talk about delinquency rate, it occurred after the first couple of months of the total tenure, but we took a borrower guarantee fee to collect on a monthly basis in the following 12 months. So actually we -- after the several months, we compensated ZhongAn more than we collected from the borrowers.

So that's why we have a better balance on our balance sheet. And in the past, we all decreased the -- in the next few months, there will be less competition to ZhongAn and we will get more guarantee fee from the borrowers. I hope this will resolve your questions..

Yes, thank you, Justin. And thank you, Kevin. So just 1 quick follow-up on the product mix. So I think we do more Internet trend, as I mentioned -- as I recall, that means we facilitate almost for the borrowers from the other platforms. I think that has like a lower take rate than our current products.

So I think this product mix might lead to some decline in the take rate, and obviously that's what we can see as in the revenue over the loan facilitation in the first quarter decline on a quarter-on-quarter basis.

Just wonder if that's the pure reason or there is any other reason that driving the sequential decline in the take rate? Thank you very much..

Kevin, go ahead..

Okay. I will try to answer the question, and Justin and Simon can add some more points. Actually the decrease of the take rate is partially due to the product mix change, and also we had to increase a little bit of the insurance fee and the guarantee fee portion in the Q4 from the borrowers, and the APR remains equal.

So the total service fee rate will decrease a little bit for our card loans..

Yes. I think we saw delinquency increases, an increase from Q3, and then particularly for our preferred loan. And that was part of our product mix. For that part, we needed to increase our insurance fee to cover additional loss. That's also a product mix-driven change in the take rate, because SME sector actually is hit pretty hard, actually, last year.

And we actually slowed down the business and recognize it's very few business left..

Okay. Thank you very much..

[Operator Instructions] The next question comes from Jacky Zuo with Deutsche Bank. Please go ahead..

Hi, good evening management. Thank you for giving me the chance to ask questions. I have 3 questions. First one, just wanted to follow up on the product mix. Just wondering if you can give us the percentage number of the loan volume from loan facilitation service to other platforms and also the preferred loans, that would be very helpful.

And the second question is, what is the active borrower number? Just wondering if you can provide that number, just want to compare with the previous quarter to see the borrowing number growth? And lastly, on the funding mix.

So can you give us any updates on the funding percentage from P2P and institutions for the fourth quarter? And given we have a loan origination volume guidance of CNY9 billion for the first quarter of this year, what will be the funding mix for that and maybe funding mix overall for 2019? Thank you. .

Yeah. Kevin, could you address these 3 questions? These are more number-related..

Yes, yes, yes. First -- I will answer. When we are talking about the product mix, actually in Q4 -- sorry, in Q4, the card loan representing about 68% of the total loan volumes, and our business for providing the funding to the other tech -- Fintech companies is about 33% -- 32% of the total loan volumes. Actually, I think....

It is 18% -- for other Fintech platforms it is about 18%, and for the preferred loan actually, even that is about 12%. So really talk about close to 70% are card loans and about 18% preferred loan and 12% -- 18% other platforms and 12% from preferred loans..

In forward-looking, we believe that the card loan [issued] comprises about 75% to 80% of the total loan volume, and our funding to the other Fintech companies those were representing about 15% to 20% of the total loan volume in 2019..

And the preferred loans will become less than that..

Sorry, I just forgot the second question..

How many active borrowers we have in Q4 and compared to the last quarter?.

Actually....

We don't have that. Let's answer the third question first, for the funding, okay..

I'd just like to take some time to check out the borrowers information, and let's go to the second question first.

So you would like to understand about our funding cost?.

Funding mix, funding mix..

Funding mix, in 2018, about 80% to 85% was from the funding from our P2P platforms, and 15% was from financial -- FIs, corporate investors and other companies. And when we go back to 2019, we would expect that about 40% of the total funding will be from the financial institutions for the full year of 2019..

Kevin, just a follow-up, for the fourth quarter, what was the percentage from institutions for the funding?.

15%..

15%, right. Thank you..

And we have enough headline institutional funding. The reason we have only 15% in the fourth quarter because we wanted to make sure our retail investors are getting enough investment.

So -- and after December, we have a cap on the P2P outstandings and then we switch our funding to institutional funding, and around the year we probably will have 50% of funding from institutional funding, and we are capable to do more than that because we have enough credit fund -- enough credit line there.

I think, Jacky, you are asking a question about the borrowers. Actually, we don't have that on hand. But I can say, actually in Q4, we have more borrowers in Q3, due to 2 reasons. One is, we lowered the ticket size for card loan. So that means, we -- in the same volume, we will have more borrowers.

And as the volume actually is increased in Q4 comparing to Q3. And secondly, our lending -- our lending through other platforms actually, that part actually increased in Q4, actually. I mean, they also had a lower ticket size, means we have more borrowers there. I think we can provide data later to you.

But actually, we do see more borrowers in Q4 than Q3..

No problem. Thank you so much. Just a follow-up on the ticket size. Wondering if you can provide us the ticket size number for card loan, standalone for card loan? And what's the trend in Q1 this year and going forward? Thank you. .

In the first half of the year for 2018, our card loan ticket size is around 16,000. It's pretty high in the industry for the online -- for pure online lending. And starting from June, we saw that the economic was deteriorating and with all these P2P platform issues, and we lowered the ticket size gradually to about 12,000.

And then we -- during the same time, in the second half of 2018, we do a lot of -- we invest more in our infrastructure, including we reviewed a more complicated model, we have more data -- third-party data from outside. And so our model actually becomes better and better. So for Q1, actually, we started to increase our ticket size.

The reason is actually, our approval rate has been decreasing since middle of last year. This is the same kind of tightening practice we had. So we decreased our approval rate. We increased -- we decreased our ticket size. This is what happened in the second half of 2018 to be prudent. So we were very cautious in this difficult environment.

And during the same time, our risk capability has strengthened. We have better model. We have better data. So our approval rate is still very low. Actually, we have a lower approval rate today, but we believe our model is better and then actually we started to -- for the remaining customers we approved, we started to increase our ticket size.

We believe, actually, because we have a better model and then what we approve today is much better quality than what we approved before, so these people deserve better ticket size.

So that will also help us actually in the market to attract more -- to attract better customers because we offer highest credit line in the online community, lending community and to better customers..

Yes, that's very helpful. So for the rest of this year, do you expect the ticket size will recover to the same level of the first half of last year? Thank you..

Yes, yes. Actually, absolutely. Actually, as we tightened our credit policy, we improved our risk management capability. Actually, we saw our delinquency rate decrease since January this year. After Chinese New Year actually, the accounts -- really the accounts which go to collection actually decreased a lot, much more than we anticipated.

And we have prepared much more -- we had prepared for much worsening economic environment, but it turns out it is much better. And so at this moment, I think we can pick up better customers with our ticket size, actually we'll recover and even prior than what we were at first half of 2018..

That's helpful. Thanks so much..

[Operator Instructions] The next question is a follow-up from John Cai with Morgan Stanley. Please go ahead..

Hi. Thank you for letting me ask the second round of questions. So I think to follow up on the institutional funding pipeline, is there any more colors we can get? Because if I look at the first quarter guidance, it's CNY9 billion and roughly at the similar level in the -- as compared to the fourth quarter.

And the fourth quarter, we did like more than CNY9 billion facilitation, yet balance is not really flat. So, yes, if there is anything more details on the institutional funding? And the second one is actually relevant questions to the institutional funding, because you mentioned that our products are covered by ZhongAn insurance.

So I think that would be attractive to institutions. So I was just wondering if there's any changes on our cooperation with ZhongAn insurance. And the final question is on the dividend. So it is great to see that we pay out dividends, just wonder what's the plan on that.

It is like annual dividends or quarterly, et cetera?.

Yes, John. The first question for institutional funding. So for our Q1, now we forecast we do about CNY9 billion in total loan facilitation. It's a similar amount to Q4 2018. But you will see institutional funding will account for a bigger percentage of the funding mix than Q4 last year.

So as a result, what you are going to see is actually the loan balance in our P2P platform will actually go down a little bit and the institutional funding side will increase. So basically that is generally in line with company's direction, which we want to be more balanced funding mix, have more of our funding come from institution.

And also to reflect there are just so many demands that come from institutions where we have to kind of sacrifice our retail investors allocation a little bit to satisfy our institutional's funding appetite. Second, our cooperation with ZhongAn has no change. We remain closely cooperative.

Although, we actually intentionally to increase our non-ZhongAn insured product more. Again, when we started this business, people very much relied on ZhongAn to purchase our product. Now there are more and more investors trust our brand and our product.

So they want to buy our product directly without ZhongAn's insurance to get a little bit better yield. And also it will reduce our potential concentration of ZhongAn, because at the end of the day, our business still will consume ZhongAn's capital. We don't want too much rely upon ZhongAn's capital.

For 2019, the insurance premium ZhongAn charge us will increase a little bit from 2018. Again, if on apples-to-apples basis, if I assume the delinquency rate remains the same, the apples-to-apples insurance premium they charge us will increase a little bit, but very much at a manageable level. It's a single digit increase in their premium, basically.

Yes. Third, in terms of dividend, it is annual dividend policy. Obviously, our business continues to generate cash and we expect to maintain this dividend policy for the foreseeable future..

Thank you very much. That's very clear..

So, Jacky, we checked and gathered the number of the borrowers in Q3 and Q4 now, and we can update it to you. In Q3, we have active borrowers for about....

600.

648 -- 641,000. And when you go to Q4, we had about 863,000. That means, about 20....

30%..

A 30% increase for the borrowers..

Kevin, that is the new borrowers, generally....

New borrowers, yes..

Not the total active borrowers. Our total active borrowers is not that number..

Yes, yes, yes. Actually, I just mentioned about the new borrowers, and that's related to the loans facilitated in the Q3 and Q4. Yes, that's true..

This concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Zhang for any closing remarks..

Okay. Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your questions, we will be pleased to answer them through our follow-up contacts. We look forward to speaking with you again in the near future. Thank you..

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect..