Good day, and welcome to the 360 Finance First Quarter 2019 Earnings Conference Call. [Operator Instructions] After today’s presentation there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded. I would like to now turn the conference over to George Shao, Head of Investor Relations. Please go ahead.

Hello, everyone, and welcome to our first quarter of 2019 earnings conference call. Our results were issued earlier today, and it can be found on the IR section of our website. Joining me today on the call are Mr. Jun Xu, our CEO; Mr. Haisheng Wu, our President; Mr. Jiang Wu, our CFO; Mr. Yan Zheng, our Vice President; and Fan Zhang, our General Council. Before we begin our prepared remarks, I would like to remind you the company's Safe Harbor Statement in connection with today's conference call. Except for any historical information the material discussed on this conference call may contain forward-looking statements. These statements are based on our current plans, estimates and productions and therefore you should not place undue reliance on them. Forward-looking statements contain both inherent risks and uncertainties. We caution that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the company's filings with SEC, including its registration statement. In addition, this call will also include discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated all figures mentioned during this conference call are in RMB. So with that, I'll now turn the call over to our CEO, Mr. Xu.

All right. Thank you, George and thank you all for joining us today. We're pleased to report another strong quarter and I will cover four aspects of the business. First, we keep setting new records in terms of growth. We originated a RMB41 billion loan, and the outstanding balance reached RMB53 billion, widening our leadership in the sector. We continued to invest heavily in the future. We added 3.5 million new users with credit line and 2.2 million of followers, both a new record for the company. We will continue the growth strategy for the next couple of years. We have less than 1% of the consumer lending market in China and the head room for growth is immense. The return on investment for new customer acquisition remains very attractive. We don't want to be a niche player. Our aspiration is to be a leading platform and serve most of the Chinese households with borrowing need for the time. We believe in our sector growth is a privilege for leading platforms rather than a choice. It requires a platform to possess the ability to solve new customers at scale, to secure sufficient funding and to manage credit risk well simultaneously. Therefore, we have been seeing the markets become increasingly concentrated in the last 18 months. And we anticipate the leading platforms will continue to grow faster than the industry average. Secondly, I'll talk about our credit quality. In spite of the faster growth, we continued to lead the industry in create quality, 90 day plus delinquent ratio was 0.94% as of March 31, 2019. The annualized vintage loss rate, which is the ultimate metric we look at, continued to be within our expected rate and lead the industry. In line with our aspiration to serve most of Chinese households with borrowing needs over time and leveraging our improved credit risk management skills, we proactively extended services to users with different risk adjusted returns. Although, this near-term segments carry higher charge-off rates that generates higher risk adjusted returns netting the effects of higher APIs and risk costs. In addition to serving more near prime segment customers, were also working on improving activities and efficiencies of the super prime segments. We created a dedicated team for it to make sure we provide more tailored lines and pricing for our best customers. We hope this will become another important source of growth for us going forward. Thirdly, I'll comment on the funding situation. In Q1 we substantially increased the number of funding partners. Most of the additions are national financial institutions that can do business across the country. I think from what we can see our needs for the year are multiple times covered by the National Financial Institutions by now. Through our internal stress testing even the rumored restriction on regional bank's ability to disperse loans nationally came into effect immediately. Our funding availability and the funding costs shouldn't be adversely affected. We're very pleased to report that on February 1, we issued our first ABS at Shanghai Stock Exchange at a funding cost of approximately 5%. In Q1, we gained the approval for RMB10 billion such securities in 2019 at both Shanghai and Shenzhen Stock Exchange. Thanks to the stimulating financial and liquidity environment in China, we observed downward trend in funding costs with our financial institution partners and believe that it will materialize into noticeable funding cost reduction in Q2 and the rest of the year. Lastly, I want to comment on the strategy of shift to financial technology platform. The percent of loans within take credit risks has risen significantly in Q1. And we expect this will further increase significantly over the rest of the year. We referred over 3 million customers to banks, consumer finance companies and other lending platforms in Q1, where we do not take any credit risks. We launched four financial technology products and covered credit scoring propensity to borrowing -- borrowing score, credit hungry scores and blacklist checking. This is a part of our efforts to open our capabilities to third party lenders. 15 institutions are testing the products at the moment, including banks like ICBC. So with that, I'll pass the call over to Alex Wu, our CFO to give the update on the financial situation.

Thank you, Jun. Hopefully you all have had a chance to take a look at our earnings release already. So I will try to keep my comments short. So we have more time for the Q&A. As Jun just mentioned, we saw 235% growth on our top line on a year-over-year basis, 303% growth in operating income and 335% growth in our non-GAAP operation income, 340% growth in our net income and 382% growth in our non-GAAP net income. So not only are we growing extremely quickly, we are also gaining more operating leverage as we continue to scale our business. Breaking this down a little bit more, our total net revenue was mainly driven by loan facilitation services, which increased 248% compared with the first quarter of 2018. The rise was mainly due to an increase in loan origination facilitated by our platform, which increased 179% for the same period last year and increased 25% from last quarter. In terms of the cost structure it mainly includes three items, origination servicing, sales and marketing and G&A expenses. Given all the numbers disclosed in the report, let me just give you a little bit more flavor on the details. The percentage of the operating and servicing expense obviously excluding share-based compensation over revenue was 10.6% compared to 14.1% last quarter, and percentage of G&A expense, excluding SBC over revenue was 2.4% compared to 2.7% last quarter. This speaks to our increasing operating efficiency. While the percentage of the sales and marketing expense excluding share-based compensation expense over revenue was 34.3% compared to 30.1% last quarter. The increase of these percentage was due to -- was because we view our sales and marketing expense more of a long-term investment, since each new customer to our platform will continue to our business -- contribute to our business on an ongoing basis. In terms of margins, our non-GAAP operating margin in the first quarter was 46.2%, which is a solid improvement from 35.6% in the first quarter of last year. Our net margin in the first quarter was 35.8%, which was higher than the 27.3% level we hit in the same quarter last year. On a non-GAAP basis, when we take out the share-based compensation that I mentioned earlier, our net margin goes up to 39.3% for first quarter. Again, this number speaks to not only the greater economics of scales, as we grow our business, but also the hard work we have put in to streamline our operations and improve efficiency. And finally moving over to the balance sheet, our total cash stands at RMB3.4 billion, including cash, restricted cash and security deposits prepaid to the third parties. Our total cash increased 20% compared with the number by the end of 2018, which provides a solid foundation for -- to our growing business and daily operation. One other item -- line item that I would like to point out is our loan receivables. This jumped from RMB888 million at the end of the year to RMB1.9 billion by the first quarter of this year. This was mainly because we increased our cooperation with trust and issued ABS to diversify our funding source as, Jun, just mentioned. And we do plan to issue more ABS in the future. All-in-all, we believe we have a very solid financial performance that gives us both a substantial cushion and significant firepower as we expand our business. With that, I will conclude our prepared remarks and we would be happy to take your questions now.

[Operator Instructions] Our first question today comes from Jerry Xu [ph] with Morgan Stanley. Please go ahead.

Hello, management. Thanks for taking my questions. I basically have three questions. The first one is regarding to the cash management noted that a decrease of RMB106 million cash balance in the first quarter, does the management see some further decline, maybe in the next few quarters? Or does the company have an internal mandate cash ratio as a percentage of total loan balance or something like that? And the second one is regarding to the take rate. We -- our calculated take rate show some improvement in the first quarter, as the management mentioned is because of the higher facilitating service fee and post origination service fee and et cetera. I just want to ask if there is any change on the product pricing, funding costs or credit costs. And the third one is on the acquisition front -- customer acquisition front, we notice a RMB700 million sales and marketing expenses in the first quarter and just want to check if the management’s outlook on the customer acquisition going forward, both on the cost and acquisition channel front. Thank you.

Okay. So on the cash position, Alex, would you like to take that?

Sure. Thanks, Joey. This is a very good question; actually we want to address that. As I mentioned in our remarks, when you read our cash position, you should look at three items. The first item is the cash and cash equivalents. The other one is the restricted cash. And the third one is the security deposit prepaid to third party guarantee companies. Basically all these three items are our cash. The reason they put in the different categories just because our business nature for $100 -- in the rough says for $100 loan origination, we need to putting $5 as some kind of a deposit to the institution working with us. So it's not a cash position decrease in the past quarter, it's in total actually increased by 20%. It just most of the cash went into the restricted cash and security deposit prepaid to third party guarantee companies. Hopefully, this will answer your question.

Yes.

On the take rate and the price, the funding cost, credit costs, overall, the pricing and the funding cost has remained quite stable compared to the previous quarter. The credit cost actually has improved over the previous quarter and it's below our expectation for Q1. So net-net we see the APR has been stable funding costs to as I mentioned earlier is trending down and we will see some noticeable numbers in Q2 and the rest of the year hopefully. And credit costs were positive will stay stable and remain well below our internal budget. I’ll pass to our President Haisheng to address your question on customer acquisition.

Our general counsel, Fan will translate for Mr. Wu.

We are within an enormous consumer credit market. We have potentially 1 billion users. And right now we are only in a position of acquired over 10 million users. Honestly we do think we are in an early stage of development. And as our CEO mentioned, our headroom for growth is immense. Our return on investment and customer retention is looking very good. What we believe is our current expenses spending on marketing is a long-term investment for the future. And our -- as to our outlook for costs of new customer acquisition, I think we're going to -- our future spending is going to be in line with what we just mentioned our belief in the future. As to new channels, well, we are exploring different new channels on the basis of utilizing our current channels. We are keeping a very open minded, right now we are exploring several new channels some of which looking very promising. For example, our experiment with [indiscernible] and Tencent channels have become very effective. Also, we are exploring in the e-commerce platform.

Our next question comes from Jiang Zhang with China Renaissance. Please go ahead.

Hi guys. Good evening and congrats on a good quarter. So I have got two questions. One is regards to the mix of the institutional funding partners. So within that, like how much of that is national and how much of that is regional financial institutions? And the second question I have is maybe just provide more color on the ABS products and give us a sense of like what kind of scale are you guys are looking to achieve in the next two to three years? Thanks.

Okay. Thanks. In terms of institutional funding, what we look at is not the actual composition, what we’re focused on is among all the funding partners working with us now. How many of them are national, how many them are regional. As I said earlier, from what we can see now, our demand for funding this year are multiple times covered by national advise, we have relatively lower cost of funding. So unless something dramatic happens to the overall financial and liquidity situation in China, we're pretty positive about our funding availability and funding costs for the rest of the year. As I said earlier, the funding costs are trending down and we'll be able to report from actual numbers going forward. In terms of ABS for this year we’ve gained the approval for RMB10 billion ABS issuance with Shanghai and Shenzhen Stock Exchange. We're also in the meantime discussing ABNs, ABN is another form of ABS that's issued on the interbank market. So for this year, we're looking at, at least RMB10 billion [ph] and going forward would like to make ABS much more important. It's also funding as our assets have become more well-known to the institutional investors. So we do anticipate ABS as a source of funding will become much more important for the next two or three years.

Okay, great. Thank you very much, guys. And congrats again.

Thank you.

[Operator Instructions] Our next question today comes from Daphne Poon with Citi. Please go ahead.

Hi, thanks for taking my questions. So, first I would like to actually have a follow-up on the sales and marketing expense. So if we look at it on a per new user basis, we see that actually has gone now close to RMB200 for new user based on our calculation. So I'm wondering is that -- you see that as more of an industry trend because of increasing competition, or is this more because you're doing a more aggressive customer acquisition efforts in the quarter? And second is on the vintage delinquency rate. So if we look at the vintage loss rate for the 2Q 2018 cohort, we actually see the curve has gone up a little bit steeper, while we see the loan duration is actually pretty stable. So I'm wondering, how should we interpret that or any particular reasons behind. And lastly is on the [indiscernible] last quarter we talk about new initiatives on the SME lending like partnering with banks, so wondering if there's any update on the progress on that front? Thank you.

Okay, I'll start with the first two, and ask Alex, our CFO to answer your third question. On customer acquisition cost, yes, that’s gone up a little bit. It's within our budget. It's also in line with our observation of the rising acquisition costs across the market. And in particular this year as funding situation has improved for the sector we see more competition on the traffic front. But again, if you look at return on investments, we're still very, very positive about this kind of spending. And this is actually below our internal budget in terms of customer acquisition cost, unit cost. On the delinquency rate, it's not that our risk has deteriorated, it’s driven by the shifting mix of our portfolio, as I mentioned, as we gained more confidence, and experiences with our credit model, we increased the share of near prime customers where we priced them close to 36 APRs as a percentage of the portfolio. And as I mentioned, although their charge-off rate is a little bit higher, but the APRs more than enough offset that effect. So if you look at the same pricing cohorts, as I mentioned earlier, the credit costs actually has improved in Q1 compared to the previous quarter. Alex?

Let me take. In the past quarter, we're still testing this product, we’re basically focus -- right now we have the focus on the existing borrowers, we will check their behaviors and see whether they are more like SME or more like individual. That is our key pilot product at this moment. At the meantime, we are trying to find more scenarios and to get more familiar with different scenario and help the small SMEs in the specific scenario to increase their business skills. Given that there was no numbers disclosed in our quarterly report, we can't disclose any details. But what we can say is in these small businesses, SME business is on the right track. We will give you more updates when it’s mature enough to show its individual data.

[Operator Instructions] As there are no further questions at this time, this concludes our question-and-answer session. I would like to turn the conference back over to George Shao for any closing remarks.

Okay. That concludes our call for today. So thank you for joining this conference. So please don't hesitate to reach out to us directly if you have any further questions. So thank you all.

Thank you.

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