Ladies and gentlemen, thank you for standing by, and welcome to the 360 DigiTech Fourth Quarter 2020 Earnings Conference Call. Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Mandy Dole, IR Director. Please go ahead, Mandy.

Thank you. Hello everyone and welcome to our Fourth Quarter and full year 2020 Earnings Conference Call. Our results were issued earlier today and can be found on our IR website. Joining me today are Mr. Wu Haisheng, our CEO and Director; Mr. Alex Xu, our CFO and Director; and Mr. Zheng Yan, our CRO.

Thank you, Mandy. Hello everyone. I am very pleased to report another exciting quarter with growth over the year with another set of record-breaking results and continued the growth momentum since 2020 Q4. For Q4 total loan facilitation was RMB69 billion up 29% year-over-year. Outstanding loan balance increased by 27% year-over-year to RMB92.1 billion. Total revenue was RMB3.34 billion, up 39% year-over-year. Non-GAAP net income was RMB1.31 billion, up 155% year-over-year. For the full year, total loan facilitation was RMB246.8 billion exceeding the upper end of our guidance range, which was RMB242 billion to 244 billion by RMB2.8 billion. Total revenue was RMB13.6 billion up 47% year-over-year. Non-GAAP net income was RMB12.8 billion up 38% year-over-year. We delivered outstanding results despite a challenging year hurt by the COVID-19 pandemic. This is an important testament to the resilience of our risk management system and efficiency of our overall operations. We are more confident than ever that we will be able to maintain sustainable and solid growth. Meanwhile, these results are a testament of our strategy and we plan to diversify customer base and our resilient channels. We are expecting accelerating growth in 2021. While exceeding strong growth in key operational and the financial metrics, the quality of earnings in our overall business also improved meaningfully. Capital-Light and other cap solutions and new milestones contributing 34.1% of total loans facilitation in Q4. Recently, the fixed ratio reached over 50% on a monthly basis. Moreover, the quality improvement of our earnings indicate that we have succeeded in our milestone phase of cap driven strategy upgrade.

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our quarterly earnings call. So in the interest of time, I will not go over all the financial line items on the call. Please refer to our earnings release for the details. Strong business momentum continued in Q4 and into the New Year, as consumer confidence and economic activities remain on a steady upward trend. We have experienced robust consumer demand for credit, along with a further improvement in asset quality. Total net revenue for Q4 was RMB3.34 billion versus RMB3.7 billion in Q3 and RMB2.4 billion a year ago. Revenue for credit driven service, cap-heavy was RMB2.56 billion, compared to RMB2.96 billion in Q3. The sequential decline was in part due to facilitation volume mix change, as cap-lite contribution increased significantly. And the decline in take rate, as we lowered our average interest rate in Q4 to 25.3% from 25.9% in Q3, following the Supreme Court ruling in late August. However, we are expecting interest rates to gradually recover somewhat throughout 2021 as the 4xLPR rate cap is no longer applicable to institutional lending according to the Supreme Court latest judicial interpretation. Revenue from credit driven services was also negatively impacted by a one off reassessment of early repayment discount. Revenue from platform service, cap-lite was RMB782 million compared to RMB748 million in Q3. If you recall, in Q3, there was RMB150 million one-time reversal of previous charges related to certain loans, risk performance versus performance benchmark, set by the revenue sharing agreement between us and our partners. Aside from this reversal charge in Q3, for apple-to-apple comparison, the sequential growth of platform service revenue in Q4 was approximately 33%. The growth was mainly due to higher volume under cap-lite model as well as better contribution from the ICE model and the underlying take rate for the platform service also improved in Q4. For the full year 2020, platform service revenue grew about 80% as cap-lite percentage contribution to total volume nearly doubled.

Thank you. First, we have Jacky Zuo, China Renaissance. Jacky, your question please?

So let me translate my questions. So, congrats on the strong results. I have three questions to ask. Number one is about our loan guidance. So we gave a very strong full year guidance, just want to try to understand the rationale behind the guidance. Do we expect a larger budget for sales marketing? How much contribution were from the MSE lending and what is the run rate for the first quarter so far? And second question is about the customer acquisition channels. Trying to understand in terms of the channels, how much will be from the cooperation with leading internet platforms, as well as the offline sales and also the traditional online traffic channels? And third question is about our take rates. I'm surprised the Capital Heavy model our take rate was a bit lower in the first quarter. So I saw probably the impact is from lower APR and also late payment impact. I just want to understand the rationale about the lower take rate and what's the outlook for this year 2021? Thank you.

Thank you, Jacky very much for your question. I will handle the first two and our CFO, Alex Xu, try to address your third question. For the first question as the fundamentals of our loan guidance, we are building this guidance considering in the past few years we have successfully achieved a decent growth, and considering the macro environments and the industry policy will tell you for the whole industry development. That's how we developed these 24% to 36% year loan origination guidance.

Well, number -- first point, for the existing customer acquisition channel which is online traffic channels this year we will increase largely in terms of skill while maintaining stable customer acquisition cost. If your benchmark across the whole market, as some of our peers disclosed the CPS cost, we have very strong competitive edge on this brand. Second point, as we mentioned in my remarks, that we will spend more efforts on embedded finance customer acquisition channel this year, thanks to our input last year we will embrace rapid growth on this channel in this year with fast customers, new customers, well new customer from this channel will contribute 30% this year. The third driver for our growth strategy this year is SME loans. There are two parts of the growth. The number one is our transition from existing high quality individual consumers from our existing customer base. The second part is the newly acquired SME and . In total, these two parts adding up will contribute around 10% of total loan book this year. The fourth growth driver comes from the RM SaaS service products. As we mentioned in the remarks, we are expanding the cooperation with KCB and ramping up this kind of smart risk management service to more and more financial institutions. As for the custom, our diversified customer acquisition channels, number one is the online traffic customer acquisition. Number two is the embedded same path our embedded finance customer acquisition, with that these two contribute 30% this year. Number three is the offline teams, currently base offline team contributes 15% of new customer acquisition. Besides that, the SME assumptions and narrow will be an additional channel. Our CFO, Alex Xu, will address your third question.

Okay, thank you Haisheng. I just want to add one small color to the earlier questions regarding the customer acquisition costs. Some of our peers disclosed their CPS cost and we look at the same logic and the same methodology to calculate it. We are running roughly 40% below that number, so that's just a small color on that customer acquisition cost. In terms of take rate for Q4, yes the Q4 take rate, particularly on the cap-heavy side was impacted by basically three or maybe two major items. One is really the interest rate cap causing the lower rate, as I mentioned in the prepared remarks, we lowered to 25.3% versus 25.9% in Q3, so that hurt the take rate on the cap-heavy side. The other one is more like a one off item. If you recall, around November of 2019, the regulator put out a ruling or requirement basically allow customers to make early repayment without any meaningful penalty in there. So we started to change our practice along with other companies in the industry to adopt that. But at the time, when we get into the, like Q1 and Q2 of this of 2020, we don't know exactly how many or how much of the impact this early repayment will be. So from a financial kind of a planning or accounting perspective, we have to put out a best estimate in there. Back then the estimate was about early repayment discount ratio, we put in as about 12% and we need to wait for the full loan cycle finish for this batch of particular customers to fully understand what the real impact of the discount will be. Once we get into the fourth quarter, keep in mind our average loan term is somewhere around nine months, so once we get to the fourth quarter, we saw the whole performance of the entire batch of a customer. And back then we realized the actual early repayment ratio or discount ratio was higher than the, our estimate in previous quarters. So from an accounting perspective, we need to basically kind of take almost like a take a charge to reflect the actual repayment discount ratio. This charge amount in Q4 accounted for roughly RMB170 million to RMB280 million. So that I would say it's a one off hit to the top line there. And then the third overall impact to the top line is really the mix change, meaning like the increased contribution from cap-lite and the decreased contribution from cap-heavy. We do a back of the envelope kind of a calculation. For every $10 we facilitate under cap-heavy model, we roughly can make about $3 in the bottom line. But if we want to make the same $3 in the bottom line, we only need $6 in cap-lite facilitation. So, if you do the quick calculation, if you can get let's say 30% earnings growth for 2021, we only need 10% revenue growth to reach that. It is just because the mix change will continue throughout this year and actually pretty fast. So that's why in my prepared remarks I asked all analysts as well as investors to change your financial model. It's gradually moved toward a kind of more cap-lite driven model with relatively slower revenue growth versus the low volume growth, but improving margin that drive the comparable earnings growth versus the volume growth.

That's very clear. Thank you, Haisheng

Thank you.

Thank you, Jacky. Next we have Xu from Morgan Stanley. Xu, your question please?

Basically two questions, basically with the clear clarity on the interest rate environment, I just want to know whether the interest rates, and how much the interest rates will rebound, what will be the proper level for the interest rates given there's still some window guidance and stuff like that? Secondly, on the loan volume growth, what will be the long-term thinking? There's also some, I guess, regulatory focus on the pace of consumer credit growth, what will be the, I guess more sustainable proper pace for the longer-term? Thank you.

Thank you, Richard for your question. I will answer your first question. Yes, after new ruling of Supreme Court at the end of last year 2020, we did see some, a little bit rebound of the interest rate on our product level. However, as you mentioned, considering the whole regulatory environment and as a company with social or society responsibility, we intend to carry out the long-term downward trend in price. Yes, we -- it can be showed on our several new business initiatives. For example, we are exploring products covering more better quality prime clients, as well as you see we are heading into the SME loan business, both new products have a lower interest rate compared to the existing products we are operating. Yes, we will take a comprehensive consideration while operating our business. The price is just a one brand. Actually, we take more focused on the lifetime value of our customer. Yes, considering the diversification of geography range and different attitude of local regulators across China, where we as a loan facilitation platform our purpose is to facilitate the demand and need between the borrowers and financial institutions. There are some financial institutions they have the demand for higher pricing range, that's why we cover more broader price range products. Well as for your second question compared to the industry giants, who had already trillion loan balance, we are still at a very -- at a comparatively early development stage compared to them. Therefore, in the view of regulators we are not the target they will regulate in terms of the antitrust progress . As we mentioned in the remarks, SME loans are very important the business driver for us this year. This is very consistent with the government promoting policy to provide that visibility and financial service to SMEs. Thank you.

Thank you. Next on the line we have Steven Chan from Haitong. Steven, your question please?

My question focus on two things, one is about there could be potential big increase in cash position, especially now we're moving towards Capital Light. I believe that probably the demand for restricted cash may likely to reduce and if that's the case with increasing balance of cash position, what will be our plan in the coming years, we can see the TEU pay off some of the cash as dividends like what like our peers did? The that's the first question. And second question is, what is your current plan of returning back to Hong Kong for leasing? Thanks.

I will answer your first question. In terms of the use of the cash, the number one very important aspect, as we are still growing our business aggressively we will invest in the new business areas, for example, the cost of that product development and new customer acquisition. Well, in the long term, we expect there will be a balanced mix for these fintech players. There will be -- the mix will be majority loan book comes from the capital-light model, there will be a portion of the transitional loan facilitation model. And as well, there will be a portion for the own balanced loans of clients, self financed. There are a few reasons to increase their own balance sheet business; number one it returns with very high ROE about 40%. The third important use of cash is some major equity investments. For example, one of our favorite, the internet insurance company with rapid growth and the promising prospects; secondly, we are actively looking at some target investment targets with great potential synergy. The third aspect of cash use is regarding to the license. There might be capital rejection into our micro-lending license or guarantor license, as well as we may consider to repurchase more license. Yes, okay.

Sure, Haisheng. Basically Haisheng sort of covered the cash usage throughout this year supporting our business growth, get the proper license, get sufficient registered capital under a certain licenses, and also some potential M&A, although mostly, most likely, relatively smaller size. And with all these considered, of course, we're also looking at the operations because we're expecting operations continue to generate very strong cash flow throughout this year. And, at some point, at some time, when we look at the cash position, when we satisfy all these needs, if they is still, “kind of free cash” available to us, we're not ruling out any other sort of return to shareholders kind of the activity down the road. But right now the priority, like we always said, is focus on expand our operation, get ourselves ready for this market. And then, in terms of the Hong Kong listing, we are still in the process of dealing with some technical kind of problem solving. As you know, the requirements by Hong Kong Exchange VIE structure, voting power and everything is slightly different than the U.S. So we need to make some changes, in some cases some small restructuring under these new requirements, we are doing it as we speaking, and those process take time because some of them needs government time to sign up on that. Once we finish these technical issues we will be more kind of sort of the push, the official push for the listing. Right now it is still in the, what they call the pre A1 stage there. I think we're almost running out of time. We can take one more question.

Thank you. We will be taking the last question from Ethan from CLSA. Ethan, your question please?

So my question is on the of your current ratio. It will be helpful if management can help us put that down into Capital-Heavy and Capital Model, so we can observe the trend here. Thank you.

I’ll hand this question to our CRO, Zheng Yan. Zheng Yan, please.

Our last quarter rate has been improved this quarter and and for temporary taking notice this performance of Capital Light is taking note.

Hi sorry, this is Alex. We've heard a little bit break down of the voice. I'll just do the translation again for the audience. So basically, our D1 delinquency at this point is standard about 4.8%, which is obviously the best level in our corporate history. And then the 30-day kind of a collection rate in the first quarter we were about 90%. Right now we are continuing to improve slightly from that level. The difference between cap-lite and cap-heavy, by definition the cap-lite we try to kind of offloading relatively lower kind of quality assets out. So the cap-lite delinquencies was slightly worse than the cap-heavy, but not a huge difference there basically.

Well, I just want to add some color to our asset quality. Yes, the market what our investors will look at the risk management matters for them how do they want delinquency or delinquency or M1 delinquency rate. However, I want to point out that maybe you better look at the whole picture of our business together with asset quality operating metrics. Considering how much customer we acquire from customer acquisition channels, then how much, how many customers got approved the credit line, then plus, considering the asset quality metrics. In short, we acquire more customers and we have a higher approval rate. And then we still maintain very stable a superior risk, risk management performance. Compared to some of other peers, because they acquire less customer and they have lower growth rates, that in logic and naturally they have better risk management performance.

Sure, I got it and towards that balance.

Okay, I think that --thank you. Thank you for everyone joining us for the conference call. If you have additional questions, please feel free to contact us through our IR team and thank you. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.