Hello, and welcome to the X Financial Second Quarter 2021 Earnings Conference Call. All participants will be in a 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 Tanya Wen. 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. Kan Li, President; and Mr. Frank Zheng, Chief Financial Officer. Mr. Li will give a brief overview of the company’s business operations and highlights, followed by Mr. Zheng, who will go through the financials. They are all available to answer your questions during the Q&A section. 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 company’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.

For the information regarding risks 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. Kan Li. Mr. Li, please go ahead.

Hello, everyone.

We are very pleased to deliver another strong quarter of operational and financial results. In the second quarter, total loan facilitation amount hit a historical high since our inception and our bottom line continue to indent strong growth momentum on both a year-over-year and quarter-over-quarter basis, in line with our guidance.

During the quarter, we reduced the fees we charge for our loan facilitation service, which matches institutional funding partners with borrowers as well as lower the weighted average total borrowing cost for our loan products to attract and retain borrowers.

With the effective management of our cost control policy, we continue to maintain strong momentum of profitable growth.

On the regulatory front, in April, The National People’s Congress Standing Committee released a second draft of the Personal Information Protection Law for public comments, demonstrating that the Chinese government is determined to strengthen user data security and privacy protection.

We have always placed a high value on user data protection and continue to improve our self-regulated internal mechanisms.

We continue to closely monitor regulatory developments, and adjust our strategy and services in compliance with government policies and evolving market trends.

During the second quarter, our total loan facilitation amount reached RMB12.8 billion, an increase of 108.6% year-over-year and 18.2% quarter-over-quarter. This was mainly driven by the strong growth in the loan facilitating amount of Xiaoying Card Loan, which increased 180.1% year-over-year and 18.2% quarter-over-quarter. Xiaoying Card Loan has contributed 100% of our total loan facilitation amount since the first quarter of 2021.

As of June 30, 2021, the total outstanding loan balance of Xiaoying Card Loan reached RMB20.4 billion, an increase of 24.9% compared with the previous quarter. Recently, the Chinese government has been gradually introducing guiding principles for lower lending rates to the market to stimulate economic growth, which is expected to put some pressure on our revenue.

For the second half of the year, we will continue to be fully compliant, but will mitigate policy pressures by devising feasible solutions with our institutional funding partners. At the same time, we remain in active negotiations with existing funding partners to reduce funding costs, and our team continues to improve our risk management capability and taking proactive measures on cost control. In conclusion, we are encouraged by the solid progress we made during the first half of the year, and we’ll continue to execute on our proven strategy to driving sustainable long-term growth.

We expect to commence operation of our Microcredit business in the third quarter of 2021. Consumer confidence in China’s economy has continued to trend upward as we see rise in demand for consumer finance solutions.

We are confident of leveraging our technology and service capability to capture the vast opportunities ahead us and bring more valuable returns to our shareholders.

Now I will turn the call to Frank, who will go through our financials.

Thank you, Kan, and hello, everyone.

We continue to deliver strong financial performance during the second quarter. The total net revenue increased 140.4% year-over-year to RMB932.4 million. With a combination of effective cost control and increased economics of scale, our net income further improved to RMB223.2 million from a net loss of RMB343.6 million in the second period of the last year, and a net income of RMB192.8 million in the previous quarter.

We continue to experience steady improvement in our asset quality.

As of June 30, 2021, the delinquency rates for all outstanding loans that are past due for 30 to 60 days were 0.677% and a decrease from 0.82% as of March 31, 2021, and 1.8% as of June 30, 2020, a clear demonstration of our risk management capabilities and the premier borrower base.

We also continued to strengthen our cooperation with third-party financial guarantee companies during the quarter. Thereby the proportion of loan amount facility that was covered by those financial guarantee companies increased to 49.8% from 48.1% in the previous quarter.

Moving forward, we will continue to invest in the development of our technology capabilities, further improve operational efficiency and expand the collaboration with more institution funding partners.

We expect to maintain the growth momentum in our operational performance in the third quarter.

Now I would like to brief some financial performance. Please note that all numbers stated are in RMB. The total net revenue in the second quarter of 2021 increased by 140.4% to RMB932.4 million from RMB387.9 million in the same period of 2020, primarily due to an increase in the total loan facilitation amount of the Xiaoying Card Loan this quarter compared with the same period of 2020. Origination and servicing expenses in the second quarter of 2021 increased by 1.7% to RMB520.9 million from RMB512.4 million in the same period of 2020, primarily due to the increase in commission fees resulting from the increased total loan facilitation amount in this quarter compared with the same period of 2020, and partially offset by the decline in the collection expenses resulting from the decrease in delinquency rate. Provision for accounts receivable and contract assets in the second quarter was RMB25.2 million compared with RMB28.3 million in the same period of 2020, primarily due to a decrease in the average estimated default rate compared with the same period of 2020, and partially offset by an increase in amount receivable from the facilitation services as a result of the increase in total loan facilitation amount in the second quarter of 2021. Reversal of provision for loans receivable in the second quarter of 2021 was RMB1.1 million, compared with provision for loans receivable of RMB110.5 million in the same period of 2020, primarily due to a increase in the average estimated default rate compared with the same period of 2020. The income from operations in the second quarter of 2021 was RMB337.7 million, compared with loss from operation of RMB341.5 million in the same period of 2020. Net income attributable to X Financial shareholders in the second quarter of 2021 was RMB223.2 million, compared with net loss attributable to X Financial shareholders of RMB343.7 million in the same period of 2020. Non-GAAP adjusted net income attributable to X Financial shareholders of RMB343.7 million in the same period of 2020. Non-GAAP adjusted net income attributable to X Financial shareholders in the second quarter of 2021 was RMB241.9 million compared with non-GAAP adjusted net income loss attributable to X Financial shareholders of RMB325.9 million in the period of 2020. Cash and cash equivalent was RMB1,183.9 million as June 30, 2021 compared with RMB799.8 million as of March 31, 2021.

Now for our business outlook.

For the third quarter of 2021, we expect total loan facilitation amount to be in the range of RMB14.5 billion to RMB15.5 billion and net income attributable to X Financial shareholders to be no less than RMB230 million. This forecast reflects our current and preliminary views, which are subject to changes.

Now this concludes our prepared remarks, and we would like to open the call to the questions. Operator, please.

[Operator Instructions] And the first question comes from Mason Bourne with AWH Capital. Please go ahead.

Good morning, thanks for taking questions.

You mentioned that you plan to start using your new credit – Microcredit license in Q3. Could you describe the steps that you took to obtain that license? And then maybe what opportunities that opens up for you?

Sure. After – this is a very long progress, and we – I think we first submitted our application in the late 2019. The overall process has been fairly opaque and – but finally, we got it. And it’s – because there’s really no fixed guidelines on how to obtain the license, but we are the first batch who was able to successfully repay all our B2B investors of their investment and got the license.

You asked about opportunities.

I think, at this moment, the opportunity is fairly difficult to evaluate. And the management team is still in the early process in determining what is the best strategy of utilizing that license.

As of now, we just began to use – we just began to offer loans through the license.

Okay. Thanks. And then I guess, to follow up on that, your total loan facilitation volume was up over 100% year-over-year and now appears to be growing kind of high teens from Q1 and then also based on your guidance going forward.

So with that, how large do you view your market opportunity? And kind of what are the – I guess, what’s driving that growth?

I think it’s difficult to compare our growth compared to the last year because of the COVID-19 situation in China, which is very different from the other countries around the world. Last year was the worst in terms of COVID-19. And since then, we are basically in the recovering stage. And as a result, last year, our loan volume has been severely withheld, largely due to our own choices.

So right now because of the COVID-19 has – I would say has since long passed the China so the economy in the Chinese market has been fairly benefit to our business. That is why we are able to maintain such a strong growth. It’s very difficult to forecast what the growth in the future will be. But if you are following the Chinese market closely than you will notice that the supervisional committee that they have been gradually persuaded those people who are not qualified to exit the market. And as a leading company in the Chinese market that we – basically we are able to maintain our continuous operations.

So I think the opportunity is good. It’s really dependent on the management team to take advantage of the opportunities.

Great. And then the last thing I had, so by my math now, book value per ADS is roughly $9.75 [ph]. Shares are trading up a little bit this morning. But you have $3.27 [ph] for ADS in cash now and then an annual run rate of earnings, based on your guidance, is roughly $2.50 [ph] per ADS.

So with that in mind, how do you think about capital allocation and potentially returning capital to shareholders or buying back shares?

Yes.

I think, we are still in the growth period and the micro license, at this stage – actually in November, we need to put another RMB500 million into the capital. And I think we – but that is still lower than the temporary – the requirement – the ruling is – our original issues require for about RMB5 billion for the license.

So we will use the – put aside some capital for the case – in case they need another funding for the license purpose also.

So we have – for the forceable future, we don’t have a stock buyback or something like that kind of thing for the near future to answer your question directly.

Okay.

So that would be going from – I guess that would just be allocated as a restricted cash balance. And I was just speaking more to the cash and equivalents, but you’re saying that more of that cash will be tied up due to this new license. Am I understanding that correctly?

Yes. Yes.

Okay, well that’s all I had. Thanks for taking my questions. I pass it on.

Okay.

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

Thank you everyone for joining us today on the call.

If you haven’t got a chance to raise your questions, we will be pleased to answer them through follow-up contact. We look forward to speaking with you again in the near future. Thank you.

The conference is now concluded. Thank you for attending today’s presentation.

You may now disconnect.