Thank you, and welcome to Yirendai's Second Quarter 2016 Earnings Conference Call. Our earnings press release and supplemental presentation slides are now available on the website. Hope you all have the chance to review the materials by now..

Today's call features presentations by our Chief Executive Officer, Ms. Yihan Fang; and our Chief Financial Officer, Mr. Dennis Cong; Mr. Huan Chen, Director of Yirendai and Chief Strategy Officer of CreditEase; and Mr. Yang Cao, our Chief Operating Officer and Chief Technology Officer, will join the presenters in the Q&A session..

Before beginning, we would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Such statements are subject to risks, uncertainties and factors that may cause actual results to differ materially from those contained in any such statements. Further information regarding potential risks, uncertainties or factors is included in Yirendai's filings with the U.S. Securities and Exchange Commission.

Yirendai does not undertake any obligation to update any forward-looking statements, except as required under applicable law..

During this call, we will be referring to several non-GAAP financial measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP.

For information about these non-GAAP measures and reconciliation to GAAP measures, please refer to our earnings press release..

With that, I will turn the call over to our CEO, Yihan, please begin. .

Thanks, Matthew, and thank you all for joining the call today. The first half of 2016 has been strong for the industry, with a positive development of regulation, the industry consolidation has begun. At the same time, the total outstanding balance for lending platforms in China has increased almost 50% since last December.

As an industry leader, Yirendai has been actively participating in the regulation development, which in turn, enhances our leading position among market players..

We're pleased to see continued momentum of business growth in the second quarter of 2016. Our solid results were primarily attributable to the strong demand for our products and services, which was supported by our well-recognized brands, expanded product offering and improved customer experience..

In this quarter, we provided products and services to 265,000 borrowers and investors, with loan volume of RMB 4.5 billion. This brings our cumulative number of customers to about 1 million and our cumulative loan borrowing to RMB 20 billion..

In Q2, 58% of the 69k borrowers we served were acquired from online channels. 39.2% of the RMB 4.5 billion loans were facilitated through our mobile application. We stayed committed to expanding product offerings and improving user experience. .

Total amount of our Housing Provident Fund product exceeded RMB 100 million after only 90 days of official launch. We also continued to streamline our loan application process to provide more convenient services to borrowers. We extended the coverage of the FastTrack 1.0 product to cover 22 provinces..

During the quarter, we experienced robust investor demand and increased customer stickiness. We facilitated RMB 5.2 billion lending for about 200,000 investors. We have also seen improving lender stickiness as we added more customer engagement features to our marketplace, such as user check-in and membership reward system..

In this quarter, average investment tenure was increased to almost 13 months. As a strategic move to better address growing investor demand, we intend to broaden Yirendai's business scope towards more comprehensive and integrated financial services.

In addition, we will build on the success of our first tranche of ABS issuance to connect with more institutional funding, which will enable us to serve high-credit quality borrowers with lower cost products as well as diversify funding sources. We continue to strengthen our data and technology capabilities..

During the quarter, we expanded our technology team by recruiting talents with experience in related fields. In June, we announced the appointment of Mr. Yang Cao as the COO and the CTO to lead our technology, products and engineering divisions and oversee business operations..

In terms of risk management, in addition to our continuous refinement of the risk management system, we are enhancing our antifraud system to leverage latest machine learning technologies to more effectively detect and intercept new fraud patterns..

Our strategy for the second half of 2016 is clear. We will continue to focus on developing our online marketplace platform and the risk management system to better serve our customers and further expand our market leadership position..

Several exciting online new products and deep partnerships are on the way. We will expand our strong lender base and make it a more significant revenue driver by offering more investment products and services. We will continue to diversify funding sources and optimize the platform [indiscernible]..

We believe that all these data and technology-driven efforts and the initiatives are important pillars for Yirendai's business growth and will strengthen our leadership. We are committed to delivering more value and a great user experience to our customers..

With that, I'd like to turn the call over to Dennis, to discuss about our Q2 financial results. .

Thanks, Yihan. I will now go over our second quarter financial results. Overall, we had a very strong quarter in Q2 2016. We facilitated RMB 4.5 billion worth of loans, an increase of 118% year-on-year from Q2 2015. This quarter, we also achieved a milestone by crossing the RMB 20 billion mark in loan origination..

As of June 30, 2016, we have facilitated total USD 3 billion loan since our inception. We billed a total of RMB 1.1 billion in fees during the quarter, an increase of 131% when compared with Q2 2015. .

Transaction fees from borrowers accounted for 92% of total fees billed. Net revenue in Q2 was a record RMB 734 million, an increase of 140% year-over-year and 32% on a sequential basis. This increase was primarily driven by the growth in loan origination volume due to strong customer demand for our product and services..

Looking at our revenue mix, we recognized RMB 713 million for loan origination services provided upfront and RMB 17 million for post-origination services. RMB 363 million in fees billed associated with Risk Reserve Funds were net included in our income statements..

In terms of our loan product portfolio during the quarter, 83.1% of our new loans facilitated for product D, slightly down from 84% in the previous quarter, with a 27.6% average transaction fee rate. And the product volume mix for product A, B and C, were 5.5%, 3.8% and 7.6%, respectively, with transaction fee rate ranging from 5.6% to 24.8%..

On the investor side, we started to introduce lower yield products. Our 12 months Yidingying average investment yield on our platform in Q2 2016 is 8.5%, down from 9.0% in Q1 2016. An average investment tenure is 12.3 months, up from 11.6 months in Q1, as we continue to benefit from our strong brand and market leadership..

Turning on to operating expenses. Sales and marketing expenses were RMB 355 million for the quarter or 8% of loan origination volume, compared with 7% in Q1 2016. Origination and servicing costs were RMB 43 million for the quarter or 1% of loans facilitated similar to that in Q1 2016.

Our G&A costs were RMB 73 million for the quarter, or 10% of net revenue, compared to RMB 68 million or 11% of net revenue in Q1 2016..

Our profitability further improved in Q2 2016 with EBITDA at RMB 265 million or 36% EBITDA margin compared with RMB 112 million in Q2 2015. Net income during the quarter was RMB 261 million, with 36% net income margin, compared with RMB 80 million and 26% margin during the same period last year.

This is attributable to the increase in net revenue and timing of revenue recognition due to product mix and income tax deductibility of Risk Reserve Fund payout..

The one-time net income gain from historical Risk Reserve Fund payout tax deductibility is RMB 59 million. And the net income gain from Risk Reserve Fund payout tax deductibility during the quarter is RMB 39 million.

Excluding all the net income gain from Risk Reserve Fund payout tax deductibility, the net income for the quarter would have been RMB 163 million..

We continue to see solid credit performance from our portfolio. The recent delinquency rates and vintage charge-off performance are well within our expectation. And charge-off performance for 2015 vintage loans have shown stable trends, which demonstrates our capability in credit underwriting and risk management..

Specifically, as of June 30, 2016, the overall delinquency rate for the loans that are 15 to 89 days past due was 1.7%, improved from 1.8% as of March 31, 2016. The charge-off rate for loans originated in 2015 was 4.4% as of Q2 2016, compared to 2.6% as of Q1 2016 as the loans further mature. .

The charge-off rate for each vintage from Q1 to Q4 2015 is improving, as indicated in the Cumulative M3+ Net Charge Off Rate curve on Slide 25 of the Q2 2016 management presentation uploaded on our IR website, indicating strong credit performance of all products in our loan portfolio..

As of June 30, 2016, the outstanding balance of liabilities from Risk Reserve Fund guarantee is at 6.7% of remaining principal of performing loans, up from 6.5% in Q1 2016.

We expect the solid credit performance to continue as we further refine our risk pricing model, expand our product portfolio into high-quality asset and improving delinquency management..

Recently, in early July, during our regular credit underwriting process, we have discovered potential credit card statement fraud behavior from certain group of applicants for a certain type of our online fast track loans. We stopped offering this product and conduct immediate investigation.

After thorough study and analysis, including systematic data checks and in-person offline investigation works, we have preliminary concluded that there is likely an organized fraud incident that impacts on a group of approved borrowers mainly in early July, with total contract loan volume of RMB 72 million. .

Since then, we have implemented more stringent antifraud rules and taken extra technology measures to prevent similar frauds and prepared strong collection efforts and legal actions to minimize the loss. Now we have gradually restarted offering of this type of loans, with tight risk and antifraud policies..

On the balance sheet side, we had a very strong cash position, with about RMB 1.3 billion in cash and cash equivalents. Additionally, we also had RMB 793 million in restricted cash in our risk reserve fund account and trust account. We also booked RMB 176 million in loans at fair value as a result of consolidating the trust and ADS..

RMB 928 million in liabilities from Risk Reserve Fund guarantee; and RMB 166 million, payable to investors at fair value as a result of consolidating the trust and ADS..

Cash flows in Q2 2016 were also very healthy. We generated RMB 196 million in cash from operating activities, which was mainly generated from transaction fees charged to borrowers. RMB 105 million received in investing activities, which was mainly related to the redemption of short term investments..

With that, let me go over our guidance for the third quarter and full year 2016. We expect loan origination volume for the third quarter of 2016 to be in the range of RMB 5.2 billion to RMB 5.4 billion.

Net revenue in the range of RMB 800 million to RMB 850 million and the third quarter EBITDA in the range of RMB 140 million to RMB 160 million, with the consideration of our product mix shift, customer acquisition cost trends and potential need to reserve contingent risk reserve liability in relating to the early July credit card statement fraud incident.

We have also revised our full year 2016 outlook..

Loan origination volume is expected to be in the range of RMB 19 billion to RMB 20 billion, equivalent to USD 2.9 billion to USD 3 billion, up from original guidance of USD 2.8 billion to USD 2.9 billion.

Full year net revenue in the range of RMB 3 billion to RMB 3.1 billion, equivalent to USD 451 million to USD 466 million, up from USD 400 million to USD 410 million guidance. And EBITDA from RMB 800 million to RMB 850 million, equivalent USD 120 million to USD 128 million, up from previous guidance of USD 100 million to USD 105 million. .

That concludes my remarks. I'd now like to turn the call back to operator for the Q&A session. .

Our first question comes from Richard Xu of Morgan Stanley. .

My question is regarding the future strategy. Given the receivable of the tax deductibility for the charge-off, that certainly will provide some competitive advantage on the cost side.

So just wondering whether that would accelerate some, I guess, product shift to maybe product C or B or A product, given some reduction on the cost side from the tax expenses perspective?.

Yes, sure. Thanks, Richard, for the question. Yes, as we benefit from the tax policy as well as our continued decreasing funding cost on the investor side, we will be able to provide more competitive rate of loan products to serve more higher quality of borrowed base.

So we have a better, more diversified borrower portfolio, more balanced portfolio performance. And we believe that it will also enable us to invest more resource into new technology development, new product development and new business models. .

Any -- I guess, any change in product shift guidance in terms of product mix at the moment? Or probably still take some time to digest the change in the tax rate and everything to update the planning?.

Sure. I think, right now, in terms of the credit performance of various pricing rate of our loans, they continue to perform very, very well. So we believe this transition will take them gradually. One example is that our online percentage of our loan origination has been growing up from 34% into 40% in Q2.

So you probably see the trend up is continuing to grow in the near future, given that we have more diversified product portfolios on online products. You will see the gradual transition for -- to a more balanced relevant mix of issued -- a different pricing rate of products. .

Our next question comes from Blake Wu [ph] of Juhe Capital [ph]. .

This is Blake from Juhe Capital speaking. I have a question about the delinquency rates for the type D loans. Actually, we all know that macro economy environment in China is quite challenging now. But I noticed that the delinquency rates for the Yirendai's type D loans is actually very low.

Although, it's a little bit higher than the first quarter, but it's still very low like. And I also noticed that it is even lower than the delinquency rates for the type A and type B loans.

So I want to know like, how do Yirendai conduct your risk control strategy to keep that rate low?.

Yes. I think you're referring to our net charge-off rate table in our earning press release that showing the vintage performance of each year and by different pricing grid category. First, these vintages are still maturing, i.e., they are still growing. So it's not the lifetime charge-off of these loans yet, so that's why you see that.

The loans start from a low point and continue to grow quarter-over-quarter. For example, right now, the D type of loans in -- from 2015 vintages is at 4.2%, but that's not the lifetime charge-offs of these type of loans. And as the portfolio mature, you will see this gradually grow.

On the other side, you do see the -- these -- the different pricing-grid loans have somewhat similar -- our charge-off performance. We will have to let -- inform you that the actual risk pricing model implementation was started late of 2015.

So in most of the 2015 vintages, you're actually probably going to see more similar performance of the ABC type of loans. But the D type loans will be different from the ABC type of performance. However, given that the short duration or the aging of the loans that the full charge-off has not developed yet.

Even so, we believe that as the market leader and pioneer of the online lending platform, we have accumulated, benefiting from credit is historical, risk management experience, meaning data that we have been benefit from that we've developed the industry-leading risk management capability to be able to achieve low charge-off performance on the average of our portfolios.

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Our next question comes from Ming Zhao of 86Research. .

My question is really about your parent company, CreditEase.

So I wonder if you could tell us a bit more, specifically, do they also have a P2P lending business? And if so, what's the relationship between your P2P business and your parent company's P2P business? Eventually, should we think parent company will sell all its P2P business to you? So any color on that on their default rate compared with yours? And any related product transaction during the quarter? That will be very helpful.

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Okay. Sure. CreditEase is one of the largest financial service platform in China. It has many product services, including online -- including a peer-to-peer lending business. However, as we have mentioned during our previous communication, that the -- Yirendai has very unique market segmentation, which we serve.

The salary workers with credit card population for the unsecured consumer lending business. And the CreditEase platform will not serve this population so that we have a separation in terms of a business practice. And we believe both platform will continue to develop business independently. Of course there's synergies in terms of working together.

We do get customer referral from CreditEase offline sales network. We do exchange or share our risk management data. And also, Yirendai have benefit from the offline collection service that CreditEase provides. So that's the 3 business area that we have benefit from the relationship with CreditEase. .

My follow-up question is if you are doing the lower risk segment, they're doing the higher risk segments, so their default rate could be a lot higher than yours? And how is that possible for them? And are they going to do any strategic change regarding this kind of segmentation? So to the investors we talk to worry about if this is sustainable for this kind of segmentation?.

I think from CreditEase's perspective, there's many different type of loans business, including secured, unsecured, leasing. So the risk behavior is quite different from the unsecured lending that Yirendai has. So the performance, the risk performance of the CreditEase loan portfolio is very, very healthy.

In terms of the cost of borrowings in China, I think the #1 is really the difficulty of a funding source in China because the China market situation, there's less developed credit infrastructure. There's also high cost of fundings and inefficiency in terms of quality borrower sourcing.

Those all contribute to certain higher level of the funding cost in China. That adds actually exactly what Yirendai operating is working on by leveraging online data sources to better assess the borrower's credit worthiness, their risk profile to provide more accurate assessment and more accurate pricing towards their credit worthiness.

And also, as we grow our platform, to be able to source lower cost of capitals, including connecting to the funding source from institutions, we will be able to lower the overall borrowing cost for the creditworthy borrower base. .

Was there any related party transaction during the quarter? And what's the nature of that?.

I think it has been already disclosed before, in our IPO prospectus as was the recent annual report, that we sourced customers from the CreditEase offline sales network that we will pay them commission. And then, we would also pay CreditEase for the offline collection work that they provide for Yirendai. .

Our next question comes from Adam Zhou (sic) [Evan Zhou] of Finance S. (sic) [Credit Suisse]. .

This is Evan Zhou from Credit Suisse. So actually, 2 questions for me. So first one is you mentioned about the roughly RMB 72 million of loans that maybe got affected in early July that you have actually taken to consideration of your 3Q guidance.

I just want to make it clear that you actually -- because when I look at 3Q guidance, the EBITDA seem to be quite a bit low compared to the 2Q level. So can we assume that you basically are writing that by RMB 72 million, roughly, loan volume off within the third quarter? And I have follow-up question. .

Sure. Yes, I think, Evan, you're correct. From a very prudent policy perspective, we've taken the full loan amount as a consideration when we project the EBITDA guidance for the Q3 2016. .

I see.

So would it be like a withdrawal from the Risk Reserve Fund? Or it's not going to go through that? It's just going to be a direct charge-off on our P&L?.

This will be extra cash being a reserve on top of the current Risk Reserve Fund practice. .

I understand. All right. That sounds pretty prudent. And the second question is a more strategic one.

I think, because we do achieve pretty impressive possibility in cash flow in the past couple of quarters, have we -- do we have any, like, strategic source around potential overseas acquisitions? We do have see a lot of examples in other part of the entire world like in gaining space like Tencent bought Supercell, like Giant bought Playtika.

So I was wondering, like, if this sort of how our global peers seems like their kind of valuation went down a lot already. So I was wondering any kind of thoughts from management will be helpful. .

Yes, Evan. Yes, we are actually looking at different opportunities. We are more interested in like data and the technology-driven companies as well as apps that have, like, our targeted users. We're actively looking, but until there's a good fit, we wouldn't pull the trigger. .

Yes. Also, I think, given the current regulatory environment, as the market leader, we're in a very good position. I think there is some consolidation opportunities in China that we will be opportunistic going forward. Yes. .

And this concludes the question-and-answer session, and this also concludes today's conference call. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..