Lufax Holding Ltd (LU) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Ltd First Quarter 2022 Earnings Call. (Operator Instructions) Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker for today, Mr. Yu Chen, the company's Head of Board Office and Capital Markets. Please go ahead, sir.

Thank you, operator. Hello, everyone, and welcome to our first quarter 2022 earnings conference call. Our quarterly financial and operating results were released by our Newswire services earlier today and are currently available online.

Today, you will hear from our Chairman, Mr. Ji Guangheng, who will start the call with some general updates of our key achievements then address some focal issues for investors. Our Co-CEO, Mr. Greg Gibb, will then provide a review of our progress and details of our development strategies in the quarter. Afterwards, our CFO, Mr. James Zheng, will offer a closer look into our financials before we open up the call for questions. In addition, Mr. Y.S. Cho, our Co-CEO; and Mr. David Choy, CFO of Puhui, will also be available during the question-and-answer session.

Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Please also note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards, in our earnings release and the filings with the SEC.

With that, I'm now pleased to turn over the call to Mr. Ji Guangheng, Chairman of Lufax.

(foreign language)

[Interpreted] Hello, everyone, and thank you for joining our first quarter 2022 earnings conference call. I will start today's call with an update of our key achievements for the quarter and then share our views on those focal issues for investors. Due to the COVID-19 situation in Shanghai, my colleagues and I are dialing in separately from home. Please bear with us should we encounter technical difficulties during the call.

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[Interpreted] Key achievements.

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[Interpreted] Despite COVID-19 resurgence and macroeconomic slowdown, we achieved steady growth during the first quarter.

(foreign language)

[Interpreted] During the first quarter, our total income grew by 13.5% year-over-year to RMB 17.3 billion, and net profit increased by 6.5% year-over-year to RMB 5.3 billion. Our basic earnings per ADS for the quarter reached RMB 2.31. In April, we paid a dividend of USD 0.34 per ADS for the first time since we went public. We plan to return value to our shareholders in a variety ways going forward.

(foreign language)

[Interpreted] Second, key investor concerns.

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[Interpreted] We maintained open dialogue with the market and hosted over 60 investor events during the first quarter. Based on our data, roughly 60% of investor questions were about macro environment and business operations, 30% were about regulatory trends and the remainder were related to capital market development. In general, investors are concerned about Chinese ADRs. Many think that the panic selling has caused ADR's valuation to decouple from their fundamentals. Although recent public statements from Chinese regulators have instilled some confidence into the market, most investors are still taking a wait-and-see approach.

(foreign language)

[Interpreted] Presently, investors' key concern rests on our growth prospects in the current macroeconomic environment.

(foreign language)

[Interpreted] In March, China escalated its counter measures to contain the coronavirus. Shanghai, for example, has experienced lockdowns under the nationwide COVID zero policy. Impact by pandemic included economic slowdown. The financial services industry as a whole unavoidably suffered the deceleration in growth and deterioration in asset quality. Our own business was also impacted. Our analysis indicates that the impact from this year's pandemic is higher than that of 2020. In preparation for the challenge, our management has preemptively implemented a series of initiatives, including tightening our credit policy, enacting prudent cost control measures, shoring up cash flow management and many more. Greg will elaborate further on those details later.

(foreign language)

[Interpreted] Many investors have expressed concerns about the [April 29] ratification progress and the ADR delisting risk. Having completed the vast majority of our ratification-related initiatives, we have also devised detailed action plans for the remaining issues that require planned efforts. At the Financial Stability and Development Committee meeting on March 16, the Vice-Premier of the State Council, Mr. Liu He, made a call to press ahead with the ratification of large platform companies and to finish this task as soon as possible. On April 29, the Political Bureau of the Communist Party of China Central Committee also stated in their meeting that efforts should be made to advance the ratification of platform companies and promote the regulated and sound development of the platform economy. Judging from this information and insights, we believe that the regulatory ratification process is at the point of entering its final phase.

(foreign language)

[Interpreted] Regarding the delisting risk, the U.S. Securities and Exchange Commission provisionally identified Lufax as a Commission-Identified Issuer under the Holding Foreign Companies Accountable Act on May 9, 2022. Over 100 Chinese ADRs have been included on the SEC's provisional list. More importantly, we have been delighted by the positive market signals indicating that the PRC and U.S. authorities are moving closer towards an agreement. During the recent 2022 Boao Forum for Asia Annual Conference, Vice Chairman of the China Securities Regulatory Commission, Mr. Fang Xinghai, stated that negotiations between Chinese and American regulators over other issues involving U.S.-listed Chinese companies have proceeded smoothly so far and that a cooperation agreement appears to be possible. We are confident that the delisting risk will likely diminish further.

(foreign language)

[Interpreted] Third, Lufax' mid- to long-term development.

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[Interpreted] Despite the short-term challenges caused by COVID-19, what I would like to reiterate here are the 4 key competitive advantages that we possess, namely: alignment with policy direction, tremendous market potential, unique business model and abundant capital reserves. These advantages have given us confidence that we should be able to navigate through the current economic cycle.

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[Interpreted] Alignment with policy direction.

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[Interpreted] Because small and micro businesses are part of the core engine powering Chinese economy, they get a thorough and comprehensive policy support and thus enjoy enormous growth potential. At the same time, they often encounter 3 hurdles when trying to get funding. We characterize those hurdles as 3 excesses, 3 deficiencies and 3 difficulties.

(foreign language)

[Interpreted] The 3 excesses refers to the excessively high cost, high pricing and high risk that small and micro businesses face when they apply for loans. The 3 deficiencies are the lack of financial statements, credit scores and collateral that these businesses typically face. The 3 difficulties represent the difficulties in unification, standardization and promotion of financial services to small and micro businesses.

(foreign language)

[Interpreted] As a result, it is difficult and costly for small and micro businesses to borrow from traditional banks. As the leading financial services provider for small and micro businesses, we'll continue to align with regulatory directions, remain true to our mission of offering inclusive financing services and deliver solutions to solve small and micro businesses' financing difficulties.

(foreign language)

[Interpreted] Enormous market opportunities.

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[Interpreted] Domestic financial services targeting small and micro businesses can be characterized as high growth and low penetration. According to statistics from the People's Bank of China, the balance of inclusive loans to small and micro businesses grew at 29% CAGR from 2019 to 2021 and constitute roughly 10% of total loans. Although the industry is growing rapidly, it still has a long way to go to catch up with its peers in developed countries where 30% of total loans are lent to small and micro businesses. Such a gap presents an enticing opportunity for the industry to develop under a variety of supportive policies.

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[Interpreted] Unique business model.

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[Interpreted] Over the past 18 years, we have been providing integrated online to offline financing services to satisfy small and micro businesses' needs. Our technology, combined with our online operational experience, have equipped us with an effective mechanism to reach borrowers and manage risks. Led by a team of seasoned executives with extensive expertise in technology and finance, rich experience in operational management and global vision in corporate development, we have broken down barriers and achieved important breakthroughs. We believe that our unique business model will support and continue to serve as a solid foundation for our steady growth and steer us through market fluctuations.

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[Interpreted] Abundant capital reserves.

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[Interpreted] As of March 31, 2022, we have ample capital reserves of roughly RMB 100 billion in net assets and over RMB 40 billion in cash, thus ensuring our smooth navigation through economic cycles and consistent returns to our shareholders. Despite the challenges brought by COVID-19 this year, we will maintain our per ADS dividend amount at the same or above level than that in 2021.

(foreign language)

[Interpreted] In summary, despite this year's challenging macro environment, our advantages in regulatory compliance, market potential, business models and capital reserve have positioned us well to navigate through the current economic cycle while executing our mission of serving small and micro business owners. Going forward, we'll remain fully in sync with China's national policy directive of supporting the growth and development of small and micro businesses and the real economy at large.

(foreign language)

[Interpreted] With that, I will turn the call over to Greg, who will share our business update in detail.

Thank you, Chairman Ji. In the first quarter, we built on the solid foundations of 2021 to deliver stable operational results in an increasingly challenging environment. Cognizant of the negative impact brought by COVID's resurgence, we have recently launched critical actions for the more difficult market conditions ahead.

Before turning to our COVID response, let me highlight a few key figures for the first quarter. Please note that all numbers are in RMB terms unless otherwise stated.

In the first quarter, we generated RMB 17.3 billion of total income and RMB 5.3 billion of net profit, both figures exceeding our prior guidance. The take rate in our retail credit facilitation business remained steady at 9.7% this quarter versus 10% a year ago. By the end of the first quarter, the wealth management business saw stable client assets of RMB 433 billion despite volatile markets, and the revenue take rate in this business reached 53.9 basis points in March.

Operational costs were held steady while we continue with technology investment to empower our direct sales productivity in the loan facilitation and to optimize online customer management in wealth. In the first quarter, about 40% of our new direct sales hires for lending facilitation met our upgraded target profile for the ongoing channel transformation. First quarter direct sales productivity for lending increased 4.8% versus a year ago.

Now turning to the resurgence of COVID. We believe the multicity lockdowns that started in March will likely have a deeper impact on the economy and our operations than seen prior in 2020. Our 18 years of credit experience has taught us that rapid changes in the environment requires decisive preemptive steps to both minimize downside risks and to be best positioned for growth when the environment recovers.

Under the current zero COVID policy, we believe that simultaneous rolling lockdowns across multiple cities will likely remain rooted in the landscape through most of the remainder of 2022. We entered this landscape facing a weaker macro economy than in 2020. The 2 months plus long lockdown of Shanghai, its interregional -- interprovincial highways, its supply chains is creating much larger ripple effects than those seen in Wuhan during 2020. Through the lens of our data and experience, we can now roughly profile the impact of Shanghai's lockdown on our lending facilitation business. We forecast that C-M3 flow rates will triple during the lockdown period, gradually returning to pre-lockdown levels 6 months after the lockdown ends.

However, as zero COVID policies and restrictions are constantly evolving, it's difficult to [decipher] impact on other cities. Furthermore, we think it's only prudent to assume that during the second half of the year, more cities could be placed under the varying degrees of lockdown. From our vantage point, we are unable to estimate the exact number of cities that could be affected, and thus the overall impact is extremely difficult to assess at this point.

While there remain uncertainties ahead, we are nonetheless confident that the array of measures we have implemented nationwide will mitigate the challenges posed by this operating environment. These measures include targeting higher-quality customers, providing more customized products and improving our risk management efficiency.

First, we are continuing to target higher-quality customers and tightening our credit policy by utilizing a differentiated approach. On the one hand, we are gradually seizing serving high-risk profile customers. For non-small business owners or industries that are likely to be hardest hit by COVID, for example, travel related, we have tightened our credit policies nationwide. On the other hand, we've adopted a differentiated approach based on risk performance. For geographies and channels with stronger credit performance entering this landscape, we've made smaller adjustments. And for geographies with below C-M3 flow rates, we only target new businesses and loan top-ups for the highest quality customer segments.

Second, we are providing a greater number of customized products to mitigate any potential sales losses created by our adoption of higher quality standards. For those customers who represent too high a credit risk for us to provide unsecured loans, we encourage them to pledge collateral and apply for secured loans. For those small business owners who have higher-quality risk profiles, we provide them with lower APRs, longer tender period products and more flexible payment schedules to relieve their financial burden and to help them overcome their current difficulties.

Finally, we are improving our risk management efficiency. Our collections team are equipped with our risk management system, remote working platforms, technology tools and deep experience they gained in 2020 through their work. By leveraging these tools and abilities, they can work remotely to monitor the status of borrowers, proactively identify potential loans at risk and take immediate action on loan collection. Our proprietary data-driven collection force of 10,000 agents is deployed across 10 cities. This team, together with our more than 57,000 direct sales agents is fully deployed to help manage and mitigate any or all risks.

It's also important to note, as Chairman Ji just did now, that our strong balance sheet and cash position provide us with resilient ability to overcome challenges. As of the end of the first quarter, our net assets stood at RMB 98.3 billion, and our leverage ratio for our [guarantee income] stood at less than 2x, positioning us well to handle risk fluctuations. Our credit insurance partners are also in a strong capital position to handle associated risks, although they will certainly reprice credit insurance fees as we move through the cycle.

The financial strength of the underlying credit enhancement and risk sharing that we have with our funding partners provides them with little burden in the ongoing loan servicing small business owners. We believe this notable strength will enable stable funding availability through this challenging time and further distinguish Lufax versus other platforms who may now charge higher prices, encounter higher risks and have less capital resources to protect operational resilience. Being a relatively -- being in a relatively strong position with strong partners will enable faster resumption of growth when the macro environment stabilizes.

While we are selectively putting on the brakes on new loan growth to be prudent near term, we also remain focused on executing our longer-term strategic priorities. The channel transformation has continued at pace in the first quarter with our direct sales making up [57%] of new sales in the first quarter versus 49% a year ago, underpinning the improved productivity. Also within the direct sales team, we recruited more high-quality talent and dismissed below-average performing ones. As a result, high-quality accounts accounted for 40% of new hires in the first quarter, and we believe this proportion will continue to grow. More broadly, we sense the regulatory environment is placing increased focus on funding availability for small business sector, indicating likely greater stability and regulatory requirements this year versus the past year.

Taking all these points together does lead us to revise guidance for the first half of 2022, and we will provide full year guidance when we get more clarity. Our renewed guidance in this very dynamic environment is based on the principle that it is better to be conservative early rather than sorry later. Hence, we are revising our new loan sales growth for the first half of 2022 to decrease between 7% and 10%.

For our wealth management business forecast, we remain largely unchanged that we'll continue to monitor domestic capital performance, which impacts investor CA and overall investment sentiment. We expect our first half revenue growth to be 8% to 10% year-on-year. We believe the impact of the lockdown in multiple cities, the volatility we see in foreign exchange rates and our increase in credit losses where we bear risk will be higher than previous guidance. Thus, our net profit for the first half is likely to decrease between 11% and 13% year-on-year. If noncash foreign exchange losses were excluded from calculation of net profit, then the company's expectation for the first half profit will be a decrease of 3% to 4%. As Chairman Ji just said, we are confident that we will successfully navigate through the current cycle and are committed to maintaining our 2022 per ADS dividend amount at or above the level in 2021.

Last but not least, our CFO James has decided to take an early retirement. James has been with the company for 8 years, and we really want to thank him for his great contribution to the company. The company has started a search for a new CFO. And during the interim period, Mr. David Choy will assume the finance function of the company.

With that, I'll turn the call over to James Zheng, our CFO, to go over the financial details. James?

Thank you, Greg. I will now provide a closer look into our first quarter results. Please note that all numbers are in RMB terms and all comparisons are on a year-over-year basis unless otherwise stated.

We achieved solid financial results in the first quarter as we continue to drive growth in both the top line and the bottom line. During the quarter, our total income was RMB 17.3 billion, up 13.5% year-over-year, and our net profit increased by 6.5% to RMB 5.3 billion year-over-year.

Let's have a closer look at our operating numbers. First, we maintained a stable unit economics for our retail credit facilitation business while further reducing our APR. Our loan balance APR was 21.8% in the first quarter of 2022, a 3 percentage point decline from 24.8% in the first quarter of 2021. In comparison, our loan balance take rate was 9.7% in the first quarter of 2022, only a 0.3 percentage point decline from 10% in the first quarter of 2021 our continued efforts to diversify funding sources, engage with more banking partners, reduce credit insurance premiums on our loan portfolio and improve customer charging mechanisms to diminish the impact from the early loan repayments enabled us to maintain stable unit economics and drive further enhancements for our sales and operating efficiency despite APR declines.

Second, we continue to penetrate our core and targeted customer segments. On the retail credit side, we continue focusing on serving small business owners. During the first quarter, excluding our consumer finance subsidiary, 83.5% of new loans facilitated were dispersed to small business owners, up from 75.7% in the same period of 2021. On the Wealth Management side, despite the negative impact of P2P and online deposit products runoff, we managed to grow our total client assets by 2.7% to CNY 432.6 billion, as of March 31, 2022. Client asset contribution from mass affluent customers investing more than CNY 300,000 increased to 81.3% as of March 31, 2022, up from 76.3% as of March 31, 2021.

Third, we continue to drive for the evolutions of our risk-sharing business while maintaining vision on asset quality changes. In line with prevailing regulatory requirements, we bore credit risks for 20.4% of the new loans we facilitated in the first quarter of 2022, up from 12.5% in the first quarter last year. All the affirmation operating metrics exclude those of our consumer finance subsidiary.

Due to the slowdown of macroeconomic growth and the COVID-19 pandemic, we saw some deteriorations of overall asset quality. However, thanks to our risk management system, the negative impact on our risk indicators are limited. Excluding consumer finance subsidiary, our DPD 30+ and DPD 90+ delinquency rates were 2.6% and 1.4% for the total loans we facilitated as of March 31, 2022, compared to 2.2% and 1.2% as of December 31, 2021. We will remain vigilant and to be prudent on our borrower acquisition and risk management strategy.

Now let's take a closer look at our first quarter financial numbers. At the highest level, our total income in the first quarter grew by CNY 2.1 billion or 13.5% year-over-year growth, while total expense increased by CNY 1.6 billion or 19.1% year-over-year growth. Net income grew by 6.5% year-over-year to reach CNY 5.3 billion. If no cash foreign exchange losses were excluded from the calculations of the net profit, then the year-over-year net profit change would be 2.1%. While operating related costs continue to remain flat due to efficiencies, total expense increase is primarily driven by credit impairment costs due to higher risk taking and increased risk in impairment provision rate related to loans.

Next, let's go to the financial numbers line by line. As the total income mix of our retail credit facilitation business continued to change, thanks to the evolution of our business and risk-carrying model, total income increased by CNY 2.1 billion or 13.5% year-over-year. During the quarter, while platform service fees decreased by 9.7% to CNY 9.3 billion, our net interest income grew 71.2% to CNY 5 billion, and our guaranteed income grew by 245% to CNY 1.9 billion. Other income decreased to CNY 704 million in the first quarter from CNY 1 billion in the same period of last year. As a result, our retail credit facilitation platform service fees as a percentage of total income decreased to 50.2% from 63.4%.

Because consolidated trust plans provide lower funding costs, we continued to utilize them in our funding operations, enabling our net interest income as a percentage of total income to increase to 28.8% from 19.1% a year ago. Moreover, as we continue to get more credit risk, we generated more guaranteed income, reaching 11% of total income compared to 3.6% a year ago.

Our investment income decreased by 11.2% to CNY 435 million in the first quarter from CNY 490 million in the same period of last year, mainly due to the decrease of investment assets partially as a result of share buyback. In terms of wealth management, our platform transactions and service fees decreased by 5.3% to CNY 592 million in the first quarter from CNY 625 million in the same period of 2021. This decrease was mainly driven by the runoff of legacy products, which was partially offset by the increase in fees generated from our current products and services.

Turning to our expenses. In the first quarter, our total expenses grew by CNY 1.6 billion or 19.1% to CNY 10.2 billion from CNY 8.5 billion in the same period of 2021, primarily driven by the increase of credit impairment costs. Total expenses, excluding credit and asset impairment losses, finance costs and other losses increased by 2.7% to CNY 7.2 billion in the first quarter of 2022 from CNY 7.1 billion in the same period of 2021. Remained almost the same as we further improved operating efficiency.

Our total sales and marketing expenses, which include expenses for borrowers and investor acquisition as well as general sales and marketing expenses, increased by 5.9% to CNY 4.5 billion in the first quarter. Our general and administrative expenses decreased by 15% to CNY 726 million in the first quarter from CNY 854 million in the same period of 2021. This decrease was mainly due to our expense control measures.

Our operation and servicing expenses increased by 4.5% to CNY 1.6 billion in the first quarter from CNY 1.5 billion a year ago, primarily due to the increase of trust plan management expenses, which resulted from the increase in consolidated trust plan. Our technology and analytics expense increased by 0.2% to CNY 448 million in the first quarter of 2022 from CNY 447 million in the same period of 2021 mainly due to the company's ongoing investments in technology, research and development.

Our credit impairment losses increased by 168.2% to CNY 2.8 billion in the first quarter from CNY 1.1 billion a year ago. This was mainly driven by 2 factors: one, increase of provision and indemnity loss driven by increased risk exposure. As a reference, including the consumer finance subsidiary, the company bore risk of 19.4% of this outstanding balance from 8.7% as of March 31, 2021; two, change in credit performance due to the impact of COVID-19 outbreak.

Our finance costs decreased by 25.7% to CNY 211 million in the first quarter from CNY 284 million a year ago, mainly due to the increase in interest income resulting from the increase in deposits. Additionally, our effective tax rate was 26% during the first quarter of 2022, remain the same as the same period of 2021.

Other gains were CNY 118 million in the first quarter of 2022 compared to other losses of CNY 138 million in the same period of 2021, mainly due to the foreign exchange gain in the first quarter of 2022. We have noticed that the volatility of foreign exchange rate between renminbi and the U.S. dollar has increased and special volatility could have both positive and negative impact on our quarterly net profit in the future.

As a process of asset management factors, our net income increased by 6.5% to CNY 5.3 billion during the first quarter from CNY 5 billion in the same quarter of 2021. Meanwhile, our basic and diluted earnings per ADS during the first quarter were CNY 2.31 and CNY 2.14, respectively.

As of March 31, 2022, we had a cash balance of CNY 40.6 billion in cash at bank as compared to CNY 34.7 billion as of December 31, 2021. In addition, liquid assets maturing in 90 days or less amount to CNY 52.1 billion as of March 31, 2022.

During the first quarter of 2022, the overall economics in China was impacted by the regional lockdown and the current 0 COVID policy. We believe that rolling lockdowns simultaneously across multiple cities will likely remain rooted in the landscape throughout most of 2022, thus exerting severe lending influences towards the entire economy and the credit business. As the overall impact is extremely difficult to assess, we would like to provide our revised first half guidance to account for the near-term macro headwinds, and it will provide full year guidance when we get more clarity.

For the first half of 2022, as we become more prudent in underwriting, we expect new loans facilitated to decrease between 7% to 10% year-over-year to the range of CNY 294 billion to CNY 301 billion. Client assets to grow by 1% to 3% year-over-year to the range of CNY 425 billion to CNY 434 billion. Total income to grow by 8% to 10% year-over-year to the range of CNY 32.5 billion to CNY 33.1 billion. Credit-related provision will increase given the deterioration of asset quality, driven by the COVID impact and higher risk exposure.

Other losses will increase due to foreign exchange volatility. Operation-related costs will decrease as we continue to improve our efficiency. As a result, we expect the net profit to decrease between 11% to 13% year-over-year to the range of CNY 8.5 billion to CNY 8.6 billion. If noncash foreign exchange losses were excluded from the calculation of the profit, then the company's expectation would be for a decrease in net profit for the first half of 2022 of between 3% to 4%.

The profit growth rate will pick up once the channel optimization impact starts to come through and the credit costs are normalized on an annual basis.

This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.

That concludes our prepared remarks for today. Operator, we are now ready to take questions.

(Operator Instructions) Our first question comes from Winnie Wu from Bank of America.

So my question is regarding the COVID lockdown. I mean, apparently, management has been very prudent in terms of adjusting the growth target and lifting the lending standard. But just want to ask, is the impact on loan demand temporary? Or could this lockdown is leading to more prolonged damage to the demand from the SME sector that the growth outlook for even 2023, 2024 might be impaired?

And related to that, the second question is in terms of the impact on asset quality and impairment. Assuming the COVID situation can't get under control by, say, end of June, when do you think is the peak in terms of NPL formation, NPL ratio and/or impairment? I will do the translation. (foreign language)

[Interpreted] Thanks, Winnie. This time, COVID impact is quite different from 2020. This time, it takes a lot wider and longer. In 2020, it was quite limited to a certain area, and therefore, relatively short period of time. Our credit indicators also fully recovered back to pre-pandemic level only in 3 months' time in 2020. And already coming was in better shape back then, like no supply chain issue, no import/export issue, not a big issue in real estate sector, for example.

So I think we all believe, you'll agree that even after this pandemic control comes to end, the market environment will not be as good as pre-pandemic period at this time. So with the concern on economy downtown, which was shown from many indicators from second half last year, we're partly taking preemptive actions from fourth quarter last year. And that, as a whole, cut off more than 20% of our target segments and made the biggest impact on our last channel new sales. It dropped almost 40% from the same period last year as a result. But looking back, we believe we made the right decision. And it is not the lifetime, we think, to pursue revenue growth. Instead, we will be more prudent in new customer quality and our asset quality.

There are still quite much uncertainties to how this pandemic control play out and its final impact. For us, we provide -- that's why we only provide the first half guidance. Nonetheless, you know that we have more than 15 years for the record in consumer credit risk management, and we have more than -- as Greg said, we have more than 10,000 creditors nationwide who have remote work experience during lockdown situation with the best-in-market system support. Also, we can have 50,000, 57,000 offline directives engaged in offline collection and support for our collection team.

On the demand side, although recently, demand is -- demand on business operation loan is weakening, that's true. But we do not worry about the demand side because you know that the market space issues, and they will nearly take about 1% market share. And in the long run, we know that this sector will surely grow in line with the government's support and policy.

And then good news is, you asked about when is the peak of our credit loss or consolidation of net flow. And then when it will recover and then how long it will take. Still uncertain, but good news is the peak pandemic is already over. April was -- we saw the highest net flow ratio in terms of sequentially, and then it makes a clear process, clear improvement starting from May. So I believe, so now we're in the process of recovering already, including Shanghai.

Our next question comes from Thomas Chong from Jefferies.

May I ask a question with regards to our wealth management strategy as well as how consumer sentiment impacts the business trend? (foreign language)

Thanks for your question, sorry. Okay, on the wealth management side, we really continue to do 3 things. So one is continue to deepen our focus on the affluent and upper affluent customers and providing them with more content and service around the new product set, which is now that all products in China have moved away from fixed income into NAV-based mutual funds, private placement funds that have more volatility than fixed income, providing with more content, more upfront information, more post-investment services and really combining our relative expertise through online as well as through telecom services ready for these higher-end customers to really help them navigate this new environment.

So even though the markets have been in the A market, the Asia market, in China has been down 20% to 30% really through May now, we've seen quite good stability in the customer base and quite good stability in the CA overall. So we will continue to provide those services, continue to refine them, give customers more real-time input on their portfolios, helping them drive diversification, help improve their overall customer mix, so they can generate a steady return in a difficult environment.

We do have hope that now that the markets have come off quite a bit in the first half that we may have a chance for some recovery for customers in the second half, which would be very helpful as we continue to change this product mix to this target segment.

The other thing that we are doing as well is increasing our focus. This is something we've been working on for more than a year now on the insurance product set as well. Because certainly, as China goes through its overall changes, given our average customer age is about 39 years old on the wealth side, pension-related issues, where pension reform is advancing, insurance and pension services are becoming increasingly important, and that's an interesting area because it is a nice margin business to have.

So overall, we continue to drive it online. We continue to drive new customer growth. We continue to focus on the upper end and change the product mix to continue to drive up the overall net margin in the business. If you look, as we stated at the end of March, we're at about 53, 54 basis points income over CA, which is up quite a bit from a year ago. So this is an area that we continue to drive. And over the longer term, we hope that it will become a larger contribution to both, and the holdings as a whole.

Our next question comes from Hans Haishuo Fan from CLSA.

My question is mainly about the direct sales reform progress. As we know that since end of last year, Lufax has launched the progress to reform the direct sales team. Just wondering what's the progress now, and how long should we expect this reform to be largely completed?

And also just to follow up, a question regarding the breakdown of the customer acquisition. Can you share the percentage in terms of -- coming from the direct sales team, coming from the insurance team of Ping An and also from the telephone sales? (foreign language)

Thanks, Hans. Let me first share the progress with live channel actions. Live channel, the fourth quarter new sales dropped by almost 40% from the same period last year, and now it takes about 20% of our new sales contribution. And direct sales, the fourth quarter new sales increased by about -- roughly about 10% from the same period last year, and the e-mail takes 57%. So regarding the channel mix, live is contributing 20% and then direct sales almost 60% now. And the rest 20% are from telemarketing, especially for our (inaudible) customers reborrowing. So it's a mix.

Before I get into the DS term reform, I'm sure someone asked about live China. You know that we took a series of risk mitigation actions from fourth quarter 2020. So 40% sales drop in fourth quarter this year is big but it's not a huge surprise for us, it's intended. And now if you look at the live channel new customer quality in fourth quarter 2020, after we took all those actions, we measure new customer quarter by like DPD 1+ MOBf3 while DPD 30+ MOBf3. It is now even slightly better than direct access channel. It's very promising.

And total number of live agents, now you see that it gets stabilized. It does not decrease further and much. So we believe life term contribution through new sales, which has already reached the bottom, it cannot be lower than this. And we believe this will rebound slowly going forward. So this is update about live channel action. And then I want to say that we have a hope that this will contribute more new sales going forward.

And then coming to direct sales reform. This is ongoing reform, it takes time. As of March end, total number of direct sales we have is 57,000. That includes 2 leaders and other supporting staff. It was 57,000, exactly the same number a year ago. So a number of direct sales didn't increase at all for a year, yet China sales volume increased by almost 10%. That well indicates our peer productivity improves, continuously improves.

Although we tighten -- we continuously tighten underwriting policy and reduce target market to achieve better asset quality, we continue to focus on optimizing DS team mix with priority. This year, we said we do not pursue rapid sales growth for balanced growth. By taking this opportunity, we focus more how we can optimize our sales team mix. We try to get more we call it (foreign language), whose retention rate is 2x higher than (foreign language) at among 12, meaning after 1 year they joined us. And whose productivity is normally more than 20% higher than (foreign language). So we focus on how we can get (foreign language) group versus (foreign language), and then change the mix of our direct sales.

As Greg mentioned, the recent hiring shows that our (foreign language) portion, it takes up to more than 40% out of total new hire. It was just 1 digit last year, so we are making progress. And also, we are providing a lot more tech enablement through our sales and upgrades to enhance their sales efficiency. And also, we are now trying to gradually removing middle layer, which takes about 10% of total sales headcount. So that naturally will further improve our sales productivity.

So this year, we focus on building stronger direct sales team for this reform. And then this will lay a foundation, solid foundation for our rapid growth from probably next year after we get through this difficult time.

Thank you. I will now hand over to the management team for closing remarks.

Thank you, everyone, for joining the conference call. If you have more questions, please do not hesitate to contact the company's team offline. Thanks again. Bye-bye.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.