FinVolution Group (FINV) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by for the third-quarter 2017 earnings conference call for PPDAI Group Inc., also known as Paipaidai. (Operator Instructions). Today's conference call is being recorded. I will now turn the call over to your host, Sally Huo, Investor Relations Manager for the Company. Sally, please go ahead.

Hello, everyone and welcome to the Paipaidai third-quarter 2007 (sic - 2017) earnings conference call. The Company's results were issued via newswire service early today and are posted online. You can download the earnings release and sign up for the Company's distribution list by visiting the IR section of our website at IR. PPDAI.com.

Mr. Cliff Jun Zhang, our chairman and Chief Executive Officer, and Mr. Simon Ho, Chief Financial Officer, will start home with their prepared remarks. Mr. Feng Zhang, our Chief Operation Officer, will join the call during the question-and-answer session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of US Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in the Company's filings with the US Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Finally, we posted a slide presentation on IR website providing details on our results for the quarter. I will now turn the call over to our CEO, Cliff. Please go ahead.

Hello, everyone. Thank you for joining -- we're pleased to report our first earnings as a public Company. For the third quarter 2017, we reported total operating revenues of RMB1.25 billion, an increase of approximately 245% over the same period last year. As of September 30, 2017, Paipaidai had 57.6 million registered users, and approximately 9 million cumulative borrowers, making us one of the largest online consumer finance marketplaces in China.

Our expanded user base led to robust growth in loan origination volume, which increased by 256.5% year-over-year, to RMB21 billion in the third quarter of 2017.

Our successful IPO in mid-November was an important milestone and testament to our consistent strategy and execution, continuous innovation, and solid 10-year track record, which is the longest operating history of any on online lending platform in China.

I'd like to take this opportunity to state a few key points about our business.

First, we are a technology driven marketplace platform that matches underserved borrowers who need consumer loans, with investors who have limited investment options in the market. Our growth is not limited by capital requirements, making our business highly scalable.

Second, we are a marketing leader and have a massive, proprietary dataset.

Third, we have proven technologies and core end-to-end capabilities ranging from our diversified and low-cost borrower acquisition, to our highly effective risk-management system. We deploy advanced big data and AI technologies across each stage of our business to improve operational efficiency and risk management capabilities.

Finally, we have a large and loyal retail investor base. Our strong retail investment business is a key competitive advantage and an important source of operational stability and sustainability, as we see retail funds being more stable than institutional funds. We plan to leverage our large investor base to build a wealth-management business and create a second engine for sustainable long-term growth.

Before I conclude my prepared remarks, I also want to say a few words on regulation.

We have always and will continue to fully embrace and implement government regulations. We believe an improved regulatory framework will lead to a more orderly and healthy competitive landscape. With our large scale and strong core business, Paipaidai is well-positioned to consolidate the market to gain market share in the long run and capture the massive opportunities in China's consumer finance market.

We will continue to fulfill our mission of utilizing the most innovative technologies to deliver highly accessible and convenient financial services solutions. With that I will now turn the call over to our CFO, Simon Ho, who will discuss our financial results and an update of our business. Thank you.

Thank you, Cliff, and hello, everyone. We delivered a strong quarter with excellent operational and financial performance. While many of our third-quarter operating metrics and financial results were disclosed in our IPO offering prospectus, I'd like to take this opportunity to draw attention to a few highlights.

In the third quarter we achieved significant improvement in our operational efficiency, as we continued to benefit from strong operating leverage provided by our technology driven and highly scalable marketplace platform. As such, our operating margin increased to 46.4% in the third quarter of 2017 compared with 33.1% in the same period of last year, and our operating income reached RMB579 million, representing a 375% increase year-over-year.

Before diving into a more detailed look at our financial results, I'd like to share with investors a few recent business developments. As investors know, recently issued government regulatory policy changes have placed a 36% cap on total, annualized borrowing costs. We fully embrace and endorse this new regulatory measure, and have adjusted our lending products to meet this 36% cap requirement.

Paipaidai has a long operating history demonstrating a strong culture of compliance with industry regulations. I echo Cliff's earlier statement that we will always embrace and strive to implement government regulations. We believe this new policy of capping total annualized borrowing costs will not have a significant impact on our business.

Putting the requirement in perspective, it mainly affects our handy cash loan business, one of our smaller product lines that represented approximately 7% of our total revenues for the first nine months of 2017, and a small number of core standalone products for which we are now focusing on loan originations with longer terms of approximately 9 to 12 months. We have a wide and dynamic product portfolio and believe that, going forward, the impact to this small part of our business can be easily offset through product mix adjustments.

Secondly, in light of the tightening regulatory environment, we've decided that effective (technical difficulty) 2018, we will discontinue operating our investor reserve funds. We made this decision in a proactive manner, and believe it is well aligned with the new regulations and removes any chance of misperception in the minds of consumers, that the investor reserve funds provide an unlimited guarantee.

Practically speaking, this decision will not have a material impact on our operations, as going forward we expect the spread between the return on our underlying assets and the return we give to investors in our investment programs, will continue to exist and will continue to be reflected in our income statement. We are in close discussions with auditors regarding the future accounting treatment on this matter, and will update the market in due course.

Now, I'd like to walk you through our detailed financial results for the third quarter of 2017. As Cliff mentioned, the 245% year-over-year increase in operating revenues for the third quarter was primarily due to the increase in loan-facilitation fees, post-facilitation service fees, and other revenues as a result of the substantial increase in loan-origination volume.

Loan-facilitation service fees increased by 194% year-over-year, to RMB907 million for the third quarter of 2017, primarily due to the substantial increase in loan-origination volume and the number of unique borrowers on our platform.

Post-facilitation service fees increased significantly by 942% year-over-year to RMB200 million for the third quarter of 2017, primarily due to the substantial increase in loan-origination volume, and the rolling impact of deferred transaction fees.

Note that our post-facilitation service fees represent the portion of transaction fees received from borrowers in relation to services we provide after loan origination, such as the facilitation of loan repayments. This portion of transaction fees is deferred and recognized over the life of the loan.

Other revenue increased by 307% year-over-year, to RMB143 million for the third quarter of 2017, primarily attributable to an increase in loan-collection fees.

Net interest income and loan provision losses for the third quarter of 2017 was an expense of RMB3.4 million, compared with an income of RMB5.7 million in the year-ago period. This was primarily due to provisions for expected loan losses related to the trusts that were newly set up during the period.

Note that trusts are a method for institutional investors to invest on our platform, and we may co-invest with these investors. A provision reflecting the expected loan losses is made up front, while the income is a recognized over time, so there is a timing difference in recognizing the provisions and income.

Origination and servicing expenses increased by 172% year-over-year, to RMB298 million for the third quarter of 2017, primarily due to the increase in headcount, particularly for consumption loan products and loan-collection services. And to a lesser extent, an increase in referral fees paid to third parties for successful loan originations.

Sales and marketing expenses increased by 140% year-over-year, to RMB 225 million for the third quarter of 2017. The increase was primarily due to the increase in expenses associated with online customer acquisition costs, which mainly include expenses paid to Internet marketing channels for online advertising and search engine marketing, as well as to searching websites that enable Paipaidai to reach quality borrowers.

General and administrative expenses increased by 235% year-over-year, to RMB145 million for the third quarter of 2017, primarily due to the increase in staff costs. Other income increased by 30% year-over-year, to RMB121 million for the third quarter of 2017.

Other income primarily consisted of a RMB131 million gain from quality insurance fund resulting from the growth in loans facilitated on the platform that are protected by the quality assurance fund; a RMB42.4 million realized gain from financial guarantee derivatives due to the amount of investment programs maturing during the year; and a negative RMB67.4 million fair-value change of financial guarantee derivatives due to an upward adjustment in the expected default rate for loans underlying our outstanding investment programs resulting partly from our testing and experimentation in new products and customer segments.

Income tax expense was RMB158 million for the third quarter of 2017, compared with RMB21.3 million for the third quarter of 2016. The increase was primarily due to the improved profitability in the third quarter of 2017. Because of the foregoing, net profit increased to RMB541 million for the third quarter of 2017, from RMB134 million in the year-ago period.

Net loss attributable to ordinary shareholders of the Company was RMB279 million for the third quarter of 2017, compared with net income attributable to ordinary shareholders of RMB60.8 million in the year-ago period, due to the accretion losses on our Series A, B and C preferred shares.

Turning to our balance sheet, we have a solid balance sheet and ample liquidity. As of September 30, 2017 we had cash and cash equivalents of RMB750 billion, and short-term investments, mainly in money market funds, of RMB1.5 billion. These figures exclude the USD271 million of proceeds raised in our IPO and the concurrent private placement.

It is important to note that our investor-protection programs are adequately funded. Firstly, the total balance of our quality-assurance fund -- which includes restricted cash of RMB930 million, and the quality assurance fund receivable of RMB975 million, was equivalent to 16.6% of the total outstanding loans protected by the quality-assurance fund.

Secondly, the total balance of our investor reserve funds, which includes restricted cash of RMB194 million and the financial guarantee derivative of RMB245 million, was equivalent to 4.5% of the total outstanding loans protected by the investor-reserve funds.

I'd like to turn next to provide an update pertaining to an accounting-treatment change. To fully comply with a recent regulatory announcement since last week, since last week we have discontinued charging upfront transaction fees on all our loan products and changed to a monthly fee model. We are now collecting transaction fees to be repaid over the first three months of the loan.

This adjustment will impact the accounting treatment for the recognition of our loan-facilitation service fees for the remainder of December, in accordance with existing US GAAP accounting standards. I say for the remainder of December, because effective January 1, 2018, new US GAAP revenue-recognition standards take effect, that will allow us to recognize how long facilitation service fees as revenues up front upon loan origination.

So in essence, from an accounting perspective, it is only for the brief period in December that our accounting treatment is impacted. To be clear, there will be a small impact in the fourth quarter, but it will only be limited to three to four weeks in December.

Because the revised GAAP recognition standards become effective January 1, the adjustment to our transaction-fee model will not have any meaningful impact on our reported revenues in 2018. We have undergone extensive discussions with our auditors on the new standards, and they are in agreement with this treatment.

Now, before we turn the call to questions, I'd like to close with a few comments on our business trends.

In light of the recent uncertainty in the market, we have begun to take a more conservative stance on our lending activities, in an effort to manage our risk. Overall, the industry is currently undergoing a tightening that could have an impact on our business in the short term, as some players adjust and some players exit the market.

Having been through multiple lending and economic cycles, we know the current market uncertainty is just a bump in the long road that is before our industry. We see this development as necessary growing pains that always precede development and eventual maturity. Ultimately, we believe these changes will lead to consolidation in the market, and allow for healthy growth in the long term.

In view of these current conditions, we expect fourth-quarter loan volumes will be approximately 15% to 25% south of third quarter 2017 levels. We believe this is only temporary, and we have taken appropriate cost-structure adjustments during this time. At the same time, we are closely monitoring industry trends to be agile in making adjustments market cycles occur.

We fully expect our industry will continue to go through changes that are necessary to create a healthy environment, not only for companies in our space, but for all consumers in China. As Cliff has said many times in the past, we have just begun our evolution as a public company and we will remain focused on the long-term growth and prosperity of our Company.

China has over 440 million people underserved by the traditional banking system. This is larger than the total population in the US and presents a significant growth opportunity for us. As a technology-driven marketplace, our goal is to continue to grow and flourish as a leader in the online consumer finance marketplace industry and stay at the forefront of change and innovation.

Finally, I'm pleased to announce -- as disclosed earlier today in a press release -- that Paipaidai has entered into a joint cooperation partnership with Sun Hung Kai & Co. to jointly explore collaboration opportunities, including new products, Internet technologies, as well as asset and funding sides for each party.

Sun Hung Kai & Co. is a leading Hong Kong-based investment firm with a diverse portfolio of financial services business and became Paipaidai's strategic investor at the time of our IPO. We are excited to be collaborating with Sun Hung Kai & Co. and I encourage investors to reference today's press release on this announcement for further details.

With that, I will conclude my prepared remarks. We will now open the call to questions. Operator, please go ahead.

(Operator Instructions). Alice Li, Credit Suisse.

Thanks for taking my question. This is Alice from Credit Suisse. So, I have two questions. The first question is about the rate cap. So, you mentioned that you have made adjustments to comply with the 36% borrowing-cost limit. Could you please explain more about the adjustments, and how does this affect your transaction-fee rate? This is my first question.

And my second question is about your asset quality. Because we know that the vintage delinquency ratio for the second quarter loan was higher than before, and the delinquency ratio in terms of the balance saw a similar trend. So what are the main reasons?

And you also mentioned that the recent tightened regulations led to some -- the exit of many payday loan players. So, I would like to know what is the latest trend of your delinquency ratio and how are you mitigating that impact. Thanks very much.

Thank you, Alice, for your question. I will take the first question, and Feng, our COO, will take the second question.

Regarding your first question, with respect to what changes have we made, we obviously for loan tenors we are now originating on the longer end of our range for our standard loan products, limiting to 6 to 12 months but mostly 9 to 12 months. We have adjusted the quality-assurance fund contributions slightly higher for certain categories to protect against risk.

With regards to the take rate, we have made some adjustments, but it's too early to confirm eventual impact, because it's only been a week since the change. So far from what we have seen, the impact on our transaction fee has been relatively neutral. It's been little changed versus before we made our changes.

Specifically, we have lowered our fee rate for higher-risk credit levels but have offset this with slight increases for lower-risk credit levels. So it's still too early to confirm the trend because, as you can see, the mix of the originations between the various credit levels is also an important factor that determines the overall transaction fee that you see. But so far, from what we've seen, the change has been relatively neutral. And I'll hand over to Feng for the second question.

Sure, thanks, Alice. This is Feng. I think there are really two parts to your question. One is that we are seeing some delinquency rise as of September 2017 from our portfolio vertical loss level table. And the second question is what's the significant risk level, and given the recent regulatory development.

For the first question, it is really, as we have communicated in the road show as well, we have a targeted risk target of 4% to 6%, and if we saw our vintage loss curve, our loss level for the past two years, vintage level is around 4% to 5%.

So given that, we have been doing some testing and experimenting with new products and our customer segments in the first half of the year, and that drives a certain level of delinquency rise as we observed in Q3 2017, which is well expected -- within our expectations.

Now, for the second part of your question, yes, we've seen an increase recently due to recent regulatory development. And I would say it is a still very early observation and it is too early to call ultimate impact. Now we are very closely monitoring and have proactively taken some measures, including tightening our credit policy for new bookings.

I believe the impact will be short-term, as there is a credit squeeze caused by some payday loan players quitting market and making adjustments. And the payday loans have very short period -- very short durations.

We have been -- I want to call out, we had been very conservative in risk management in the past years and have developed a very healthy risk reserve, including the two protection funds, as Simon has mentioned in his earlier remarks.

Now, going forward we also believe tighter regulation will lead to a healthy environment, and overall the market opportunity remains vast, and Paipaidai as a leader is well-positioned to consolidate the market and resume product development after a temporary, short period.

Thanks very much. And so, could I have a follow-up question here?

Sure, go ahead, please.

Yes, you mentioned that the impact on the delinquency ratio or the rise of the delinquency ratio might be short-term, but do you have an estimate on how long the credit cycle will last or how long could we see the peak of the delinquency ratio?

Alice, that's a good question. I'm afraid I think at this stage it is just very, very early, and it's very, very difficult to call. I think our guess is it probably will last maybe like one, two, three, four months. And the guess was truly based on the fact that most payday loan players, their loan tenor is around one month, two or three months.

So the squeeze is really caused by most of these players making adjustments, or some of those credit markets. And if that is the case I think the peak is probably going to be in the next quarter or so time.

But again, I think it is very early; it is very difficult to predict. I think what we will do is, we will very closely monitor the trend, checking on the leading indicators, keep nimble and keep agile, and adjust our strategies accordingly and very quickly.

Daphne Poon, Citi.

So, I've got a three-part question here. The first one is regarding the investor reserve fund. So, as we are stopping the IRF, as you mentioned, is to remove any, like, regulatory concern regarding the offering of guarantee. Does that mean any chance that we will -- we may also stop offering the quality-assurance fund in the future due to further regulatory tightening, as that is also sort of like a credit enhancement to the investors?

And regarding the IRF, what will we do with the remaining core funds in the IRF? And also, how will that impact on the investor return for the investment program after we stop the IRF arrangement?

And the second question is regarding the APR cap, so given that we notice that actually most of our standard loans under credit level grade 4 to 7, they are mostly well above the 36% APR, so will we actually consider reducing loan exposure to these riskier borrowers and shifting to more prime borrowers?

And, given that you are trying to lengthen the loan duration to get around the APR cap, how do you see that impacting on our delinquency rate and our borrower stickiness going forward?

And the third part of the question is regarding the partnership with Sun Hung Kai Group. So, can you share with us more detail regarding what are the exact initiatives in terms of this cooperation? Thanks.

Okay, Daphne, I will try to remember all your questions. So the first question, if I remember correctly, is about whether our quality-assurance fund will remain or not. And we have not received any specific regulatory notifications to stop or change our quality-assurance fund.

And our belief is that the -- our belief and understanding is that the regulator does not object to investor protection, but are against platforms providing unlimited guarantees. I think that's sort of where we think things are.

The second part of your first question is about the investor reserve fund and how -- basically what impact will this have. And we are still discussing internally how this new system will work in the future. But we don't believe investor protection -- investor-protection systems will go away, and we will obviously continue to monitor any feedback we get.

And also from a financial perspective, as I said before, we expect the spread between the return on our underlying assets and the return we give to investors in our investment programs, it will continue -- this spread will continue to exist and will continue to be reflected in our income statement. So overall, we don't expect this change to have a material impact on our business.

Now, to your second question -- if I get it right, your second question was firstly whether we are originating higher-quality credits as opposed to previously, is that correct?

Yes.

Yes, I think in this environment we have obviously leaned on the conservative side. We are generally being much more conservative than earlier in the year. And yes, so the answer is yes, we are leaning towards the higher-quality borrowers at this stage. And sorry, and the second part of your question was --?

It's about the measure to lengthen the loan duration; how do you see that impacting on your delinquency rate and also your borrowers' stickiness, like the repeating ratio?

Yes, the repeat ratio will suffer a little bit as a result, because previously, as you remember, in the first nine months of the year our average long duration in the platform was about I think close to 8 months, okay? However, I think moving from an average tenor of 8 months to between 9 to 12 or 9 to 10 ultimately, we don't think is going to have a material impact on the risk profile of our business.

And Daphne, on the final question on Sun Hung Kai, so I think the reason -- just to give you a bit of background of course, Sun Hung Kai through UA Finance, they have a proven track record in consumer finance with a leading position in Hong Kong and 10 years of history in Mainland China.

Obviously they -- is a strategic investor in us, and we believe their strategic partnership with us is a clear validation of our business model and core capabilities. It is early days, and we are obviously trying to look into areas to collaborate across the range of our business lines, so it is -- we are looking at this at the moment.

Okay, thanks. Actually, can I follow up for a bit on the IRF? So actually, is the move to suspend the IRF arrangement due to regulatory pressure? Like any notice from the regulator, or is it our own proactive approach to suspend?

So, Daphne, so as disclosed in our IPO prospectus, the authorities have commented on our IRF before and they've asked to change the way we market this protection system in order to avoid misperception by investors that our investment programs are fully guaranteed. And as I said, our understanding is not that the regulator objects to investor protection and we have therefore decided to proactively discontinue our IRF to avoid any potential misperception.

Sanjay Sakhrani, KBW.

Yes, thank you and congratulations on the IPO. I guess I'm trying to pull up and think about 2018, and the respective implications. It sounds like the handy cash loan you think you can offset doing the standard loan product. The IRF, Simon, you're saying is not a material impact. So when we think about the implications to 2018, is it just the origination volumes and whatever impacts there might be to credit and how it affects the QAF and the IRF?

Yes, I think, Sanjay, as you know, our top line is obviously heavily dependent on loan-origination volumes, and I think your assessment would be largely correct.

And then, when we think about this 15% to 20% decline in originations you're expecting, I mean, that's how we should think about 2018 or is it too early to say?

As we've previously discussed, I think it's -- clearly it's too early to say. As our COO has said, we are keeping nimble, agile, we are paying close attention to all the indicators of our business and will adjust accordingly.

okay. I'm also trying to understand the IRF piece and sort of the resetting of it and how it will work going forward. Maybe you could just go back and explain, Simon, sort of what happens with the IRF on a go-forward basis. And then what happens in terms of the wind-down of the excess that's in there, given you are discontinuing that fund?

I think, Sanjay, as we said before, we are still looking internally on how this new system will work, and we are still in discussions with our auditors in terms of how the accounting treatment will play out in the future. So at this moment, I think it would be premature to try to give too much, too many comments on this piece.

okay. And I want to be clear, the QAF -- that would be a part of the rate cap that they have instituted, is that correct?

Yes, we have assumed and we built that into the 36% cap.

okay, so to the extent that you guys wouldn't do the QAF, you can enhance the yield in some capacity to account for the risk that you are taking on?

I guess technically yes, because we have been running a policy of requiring higher contributions from borrowers into the QAF than our expected payout. So, if you -- what you're implying is that without the QAF then there is none of this excess contribution required, right? From that perspective I think your logic may be correct.

Okay. I'm sorry, I (multiple speakers).

Again, I think we are speculating too much here.

No, understood, understood. There's a lot in flux, I understand. And two more questions. Just on the funding again, and as far as the IRF is concerned, a decent amount of your investors take the IRF. As we look ahead, do you think it affects their appetite to want to invest with you all?

And then as you've sort of deemphasized the retail channel, for now, how are you staying relevant and engaged with those people so that they come back when you need them?

Yes, I think in terms of the volume mix, the IRF portion of the volumes have been coming down and we would anticipate that it will run at a lower level than before. And in terms of how our investors will react, again, we no longer market the IRF protection to our investors. But as I said earlier, we don't believe our investor-protection systems will go away and, as such, we will continuously monitor investor feedback and minimize any impact that we can see.

Okay. My final question is just on the peer-to-peer license and sort of where we are, if there were any updates. Have there been any constructive movements along that path or anything that you can discuss with us and share?

Yes, we believe we remain on track for registration as a marketplace vendor. And we -- in line with what we've been telling investors during the IPO, is we do hope to receive registration approval in the first half of 2018.

And just to add on top of that, we do not require an online micro-credit license to operate, so -- because there has been a lot of news lately about online micro-credit companies and licensing.

okay. Well, great; thank you very much. Those are my questions.

(Operator Instructions). Chris Birney, JPMorgan Asset Management.

My question is about the wealth management initiative that you mentioned. As I understand it, wealth management products are specifically not allowed to be sold by peer-to-peer platforms. So I'm just -- I guess you probably didn't mean literally WMP products in that form, but can you elaborate more on where you're going with business? This initiative?

Hi, Chris, this is Feng. I will say like the situation has not changed much since we last spoke in the IPO process. I think at this point we -- as you correctly point out, that wealth management requires a certain license, and we are still in the process of acquiring certain licenses.

Was there a follow-up, Mr. Birney?

No, I guess I'll leave it there.

Matthew Larson, Wells Fargo.

Thanks for taking my call. Isn't the real question about investing with your firm and related firms, is that the prices have come down dramatically from where they were just a few weeks ago because of some of these initiatives? But -- which might truncate some of your top-line growth near-term.

But isn't the real investment thesis, is that this is a long term coming because it's been pretty much of a Wild West-type of industry. But in the long term it should be quite a positive for well-capitalized, established companies like your firm? Because there's probably thousands of these, of short-term consumer lenders and only a few hundred will probably survive. So in the long-term it would seem to me you would just make it up on volume even if it's at a slightly reduced fee structure.

And also the quality of your borrower is going to be better, because some of the borrowers who are effectively able to borrow funds now will be excluded, because people aren't going to be interested in lending them money at a slightly reduced maximum rate. Is that the simple investment thesis going forward?

Yes, yes, I think you pretty much hit the nail on the head, and the reality is that the addressable market remains very significant. The underserved population in China, as we said earlier, is larger than the population in the US, and a lot of lending will move online. The barriers to entry is rising very rapidly due to regulations. The amount of competition will reduce, already happening right now.

And clearly the number of well-capitalized listed players are few and we are one of them. We are already one of the largest in this space in China, with a 10-year operating history, with a proven track record and very strong core capabilities from customer acquisition to risk management.

And so, we are very optimistic about the long-term future of the industry and of Paipaidai's position in that industry. And we anticipate that we should be able to consolidate greater market share in what is a healthier competitive environment going forward.

All right, thank you. Appreciate it.

(Operator Instructions). Chris Birney, JPMorgan Asset Management.

So this is a different question, which is about if you think the clearing out of so many competitors and the kind of cooling off of the market, does that help at all on the expense side about getting ad placement or getting rankings on financial supermarkets, things like that? Like, I was on the Jianpu Technology and they said they don't think their pricing is going to move. But I wonder if you think this will produce any benefit from the cost side.

Yes, thank you, Chris. In terms of customer-acquisition costs, again, because a lot of these elements in the industry have been very, very recent, so we say that it's too early to see any sustainable -- real sustainable trends and being able to really quantify where things will settle.

In the short term I can describe to you what we expect of some of the trends, is we do expect that the CPA -- this is the cost per registered account -- in the market will decline. But also our conversion rate in the near-term will also decline as we tighten our credit-risk standards, okay? So there's two offsetting items here in the near-term, but in the longer term as the industry consolidates, we do believe there is room for customer-acquisition costs to be more efficient going forward.

Tian Hou, TH Capital.

Good evening, management. I have two questions related to the recent regulations, and two things. One is, so the regulation rate crashed. The type of business you guys are in needs a consumption scenario, (speaking Chinese). So, I wonder how you guys are going to deal with that issue. That's number one.

And number two, in your press release you said you guys are going to cease to collect upfront transaction fees. So I wonder, what's the impact of this ceased upfront transaction fees going to have on your future business? That's my two questions. Thank you.

Yes, thank you very much. I think your first question is about whether there requires a consumption scenario for our type of lending, and the answer is no, there is no such requirement. The requirement that you read and you see being reported, only applies, from our understanding, to micro -- online micro-credit companies. This is not a requirement for online peer-to-peer lenders, okay? That's the first question.

Your second question is about the upfront transaction fee. I'm assuming I don't need to repeat the accounting impact, right? You're just asking whether users and borrowers will -- will there be an impact. Well, we've been testing this is the last several months well before the regulations come out, and we believe this is well-manageable; we don't see a significant impact, and of course the entire industry is moving in this direction anyway.

This is Feng; I'd just add, like, this is actually a better customer experience for the borrowers, because it's very understandable, right? I mean, you borrow for CNY10,000 and now you get CNY10,000. And you can pay the fees in three installments. So, we actually saw better acceptance rates by making this change.

Okay, I see. Thank you for the answer. It's clear to me now.

This concludes our question-and-answer session. I would like to turn the conference back over to the Company for any closing remarks.

Thank you once again for joining us today. If you have any further questions, please feel free to contact Paipaidai Investor Relations through the contact information provided on our website.

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