Hello, and welcome to the X Financial Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. . I would now like to turn the conference over to Jennifer Zhang, Investor Relations. Please go ahead..

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. Simon Chang, President; and Mr. Kevin Zhang, Chief Financial Officer. Mr.

Chang will give a brief overview of the company's business operations and highlights followed by Mr. Zhang, who will go through the financials and the guidance. They are all 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 the management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual 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 on the law.

It is now my pleasure to introduce Mr. Simon Cheng. Mr. Cheng, please go ahead..

Hello, everyone. We are pleased to report a good quarter with strong financial and operational performance. In particularly, I would like to highlight the following significant progress we have made across our business. Personally, we believe that controlling the credit risk at origination is critical.

Over the past 6 months, we have tightened our credit policies and have shifted our customer segment to higher-quality segment to prepare for difficult regulatory and economic environment. Delinquencies of our portfolio have decreased. This helped us to achieve a more stable business and reduced loan defaults in the longer time.

Secondly, we are very pleased to report that institutional spending accounted for 35.7% of the loan facilitated through our platform in the third quarter, increasing from 26.7% in the previous quarter. Particularly, the portion of funding from institutions increased to 52.4% of the total loan facilitated in October 2019.

We expect institutional investors to fund almost all our new loan originations. From the beginning of next year, a P2P platform are gradually to phase out.

We have been actively negotiating with our funding partners, including CITIC Trust, Kunlun Bank, Blue Ocean Bank, Huishang Bank, Yantai Bank and the others to further lower our funding costs and provide the best facilities to our customer.

Lastly, it is very encouraging to see our revolving loan products, previously Xiaoying Wallet growing very transacting volume for just significantly to RMB1.4 billion this quarter from RMB971 million last quarter. And that the outstanding low balance increased to RMB949 million as of September 30, 2019, for RMB578 million first half of June 30, 2019.

The number of transactions for in the third quarter of 2019 increased to CNY3.8 million from CNY2.9 million in the second quarter. The number of active users of Yaoqianhua was around 330,000, representing an increase from 220,000 as of June 30, is a 50% increase.

We believe that number of Yaoqianhua users will keep rest growing the business will gradually account for a large percentage of revenue plus the revolving product has a longer customer lifetime and offers multiple types of cross sales opportunity.

Furthermore, for the user of Yaoqianhua, we are able to offer more diversified service to enhance the user experience. We are gradually -- we are planning to gradually transition from our pure financial service provider to a comprehensive service provider.

Overall, with our customer segment will be shifted to higher-quality customers, more and more our income will come from comprehensive service fees such as the merchant fee, fee, et cetera, in addition to loan facilitating fee. At the same time, there will be a lower delinquencies down the road and lower funding costs.

In conclusion, we are very confident in our future growth prospect and our capabilities to create long-term value for our investors and the shareholders. Thus the industry is consolidation. There will be fewer players who can seriously provide the user-friendly and convenient personal financial service to the borrowers in China.

China's consumer finance market is huge and growing. The interest rate and the funding cost is in the declining trend. We believe there is an enormous potential for our business to grow after this consolidation period. I will turn the call to Kevin, who will go through our financials..

An increase in expense for the cumulative effect of the growing business; and second, continuous investments in customer acquisition, especially for the recently launched revolving credit product at Yaoqianhua.

The sales and the market expanding the third quarter of 2019 decreased by 43% to CNY76 million from CNY45 million in the same period of 2018, primarily due to our restructuring in and advertisement expenses since we are model.

The non-GAAP net income in the third quarter of 2019 decreased from CNY117 million, which is mainly resulting from our continuous investments in customer acquisition. We believe that such investment will benefit us in the long run, both for the high cost customer and the longer user life cycle. Now turning to guidance.

We expect that the total loan facilitation for the fourth quarter of 2019 CNY8 billion to CNY9 billion. This amount is the volume of consumption, the segment of the Yaoqianhua, which will not generate revenue, so that the guidance would be a better indicator for our financials.

This forecast reflects the company's current and the preliminary views, which are subject to change. Now this concludes our prepared remarks, and I would like to open the call to questions.

Operator, please?.

[Operator Instructions]. The first question comes from John Cai of Morgan Stanley..

I have three questions. I guess the first one is about our risk performance. I think our reported delinquency rate decline on a sequential basis due to the tightening of the credit policy previously.

So how do we think of the current sector risk? Meaning that do you see it it's a time -- because we have already controlled the previous existing rates, is it time for us to take more risk now? On how is the environment on risk environment that the management seen? And so any statements on the current rateage? And how does that empower growth? That's the first one.

The second one I would like to know more about our product segment. So you see that we provide more details about the term loan and the revolving loan in this quarter.

So just wonder if the management can share about the economics of the term loan versus the revolving loan? And I think there's changes, essentially -- it should be a positive changes on the take rate for this quarter.

So if the management can comment about the rate changes that they would be helpful as well? And the third question is a bit technical on the revenue side, I see that the loan facilitation income from the intermediary model pick up for these two quarters.

I'm not sure why is that? Because my understanding is the most of the facilitation fee should be under the direct model. Yes, that is my question..

Thank you, John. This is Kevin. I'll answer the first question regarding the credit quality and the Kevin can answer the last two regarding the financials. We have tightened our credit policies. And more importantly, actually, we keep our customer segment to high-quality segment. So the number will see our delinquency keep going down.

And this is one of the segment change in addition to our prudent credit control policies. The financials, Kevin can answer..

John, thank you for your questions. First, about our mix for the segment, I would ask, at this moment, the term loan will our key product and which will contribute more than 95% of the total revenue and our profit. And then you may see, when we're talking about at a low volume.

At the third quarter, they are about CNY1.4, CNY1.4 billion of the transaction volume will come from the revolving credit product, that's about 10% of the total transaction volume. But at this time, we ask you investing in this revolving credit loans.

So actually, the revenue contribution and the profit that you're for our recycled products And when we're talking about the rate, the for our term loan will be very similar to the total rate that means it's around 10%. And we -- and as a Yaoqianhua, the product, it's about 13%. our teRMBloans.

And actually our rate in the last quarter, as you see -- and our total pricing remains unchanged, and our operating costs. And we request relatively stable. So the sort of rate will be -- is very similar to Q2.

But I would like to joy your attention that, as previously mentioned by Simon, we are packaging high-quality customers and we are also changing our pricing mechanism. But instead of pure financial service income, we have now received comprehensive sales income by directing our user base into our membership systems from November.

So I see package of rise, which are can post opportunities and the financial rights will be to members so later on -- so our revenue will be actual split into two part, one our pure future loan revenues. And then the remaining will be some service income -- comprising service income that are direct charge to our customers.

And the comprehensive income, I'm not with the loans. So there would be a little change in the future. So at the moment -- so we have a different view about how other statistically change. That means in the Q4, the situation will be lower, but we have some additional comprehensive service income. Yes. I hope that this currently can your questions.

And your stock questions, when you're talking about there was -- sorry, the revenue from the intermediary model. Yes.

Actually, I mean, in Q2 and Q3, when we had the loan under the models, actually, some of we will have to transfer the from -- sorry, we will first issue the loans through our partner micro loan companies and then transfer to those institution funding commerce. So on the model, we will have more intermediary level revenue.

So that's why our revenue in intermediary level increasing in Q2 and Q3..

That's helpful. So if I may follow-up on the risk. So I just want to get a sense of the management assessment of the current environment because we've heard that some players are doing the rising risk. And it's also this regulatory item on connections, it data analytics, et cetera.

So what's the management assessment on the current risk level on the sector as a whole? So do we see that it's more risky now as compared to maybe a quarter ago? And how does the regulations impacted the overall collection efforts, recovery rate or delinquency rates? Yes, just any comments on that from the measure would be helpful..

Thank you, John. Actually, it's a very tough regulatory environment right now. There are a lot of changes recently. Overall, we believe that we're actually industry consolidation and some players will leave the industry under the new environment.

But for us, actually, we are prepared for these and as we -- as I said earlier, we are shifting now customer segment to high-quality segment, which means it has less issues with the recent regulatory developments. And also this better quality segment are more resilient to the economic chain. So this is our strategy.

And overall, we believe for certain segments there might be a deterioration situation, but for the segment that we are talking right now, actually, it's still quite healthy. And for improvement in China is quite stable and customer finance business for the high quality segment actually is still quite stable..

[Operator Instructions]. The next question comes from [indiscernible]..

My question is about the credit risk. We can see the risk items in like provision for account -- provisions for accounts receivable and fair value items related to financial guarantee derivatives and fair value adjustment related to consolidated that an increased compared by Q2.

But you mentioned that the delinquency ratio was improved compared with the Q2. So which slide showed the real credit risk..

Okay. Thank you for your questions. Actually, and in generally, our credit performance are stable or otherwise we mentioned has improved. But we're for example, you see might be confusing. For example, the provision for provision of customer increase in Q3 we maintained [indiscernible] Q2.

Actually customer are more across, and that means as a Q1, our credit performance are improved, but at that time, we are not assured of whether this will be sustainable. So actually, we cannot do a timely adjustment to focus all those credit adjustments.

So all of the impacts were actually -- are actually in the Q2, when we are more sure that our improvement of our credit control picture actually exists. So that means we have some -- so we can combine those items for the first half year, actually, you will see industrial whatever similar to those for in Q2.

I can give you more of an impact of our when we're doing some carry on some adjustments..

So you meant that you -- the items in P&L show the future risks, yes?.

I think our rate to our rate, but actually talk about -- so we'll come back to if you are comparing those with our performance in the same year 2018 or those with Q2 of 2019.

I'm not sure how -- which items you are comparing with?.

Compare with 2019 Q2..

2019 Q2 mentioned, for example, generally, our credit risk are improved and stable. But we are -- at the end of Q1, we actually see there are improvement not to lose those adjustments on our P&L because we are not sure whether this improvement will be sustainable. So I don't -- we are more prudent.

And at year-end of Q2, we see it's a very clear trend that our credit performance are more stable and are improving. So actually, all those impacts are definitely in Q2. So that means you will see some very small amount for those accounts receivable provisions in Q2.

But if you compare the amount of accounts receivable provision in Q3 with the average amount of 2Q. That means the average amount of that will be very similar. [indiscernible] volume..

[Operator Instructions]. That concludes our question-and-answer session. I would like to turn the conference back over to Jennifer Zhang for any closing remarks..

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

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