Qudian Inc (QD) 2017 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Qudian's third-quarter 2017 earnings conference call. (Operator Instructions). Today's conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Sissi Zhu, Director of Capital Markets for the Company. Sissi, please go ahead.

Hello, everyone, and welcome to the third-quarter 2017 earnings conference call for Qudian Inc. The Company's results were issued via newswire services earlier today and are posted online. You can download the earnings press release and sign up for the Company's distribution list by visiting the IR section of our website at IR. Qudian.com.

Mr. Min Luo, our Founder, Chairman, and Chief Executive Officer; and Mr. Carl Yeung, our Chief Financial Officer, will start the call with their prepared remarks.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the 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 prospectus as filed with the US Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statement except as required under applicable law.

Please also note that Qudian's earnings press release and this conference call includes discussions about audited GAAP financial information as well as unaudited non-GAAP financial measures. Qudian's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

Finally, we posted a slide presentation on our IR website providing details on our results in the quarter. We will reference those results in our prepared remarks, but will not refer to specific slides during our discussion.

I will now turn the call over to our CEO, Min Luo. Please go ahead.

Hello, everyone, and thank you for joining our quarterly earnings conference call today. Before we start, we want to welcome our new shareholders and thank everyone for the support as we became a publicly listed company on the New York Stock Exchange. Our successful IPO in October was an important milestone for Qudian. And we are pleased to report strong financial results for the third quarter, our first time reporting as a public company. We believe the key to Qudian's success is its strong technology and high-capacity operational efficiency. We continue to experience strong demand from our customers and see exceptional growth opportunities, reflecting our leading market position in online consumer credit.

The third quarter results were achieved with a self-enforced, all-in service fee to users that translates to 36% APR or less across all our products. We also continue to practice a disciplined and effective yet user-friendly collection effort. We believe this approach is in line with our core values to set the best practices in developing consumption credit market. And our goal is to have users access credit responsibility -- responsibly, and while remaining competitive and delivering sustainable growth for our investors.

Also, we spoke to many of you a few weeks ago during our IPO roadshow. I want to reiterate a few key points. First, we see a very large opportunity for consumer credit. Although we are already growing very fast, reaching 7.5 million active followers in the third quarter, we have significant room to further penetrate and make our consumption credit accessible to hundreds of millions of young consumers in China.

We are also expanding our product offering to include more value enhancing consumption installment scenarios, focusing on our core user base that has a monthly income range of RMB3,000 to RMB5,000. This includes further expanding our established consumption installment service, while, at the same time, testing the market with new installment scenarios such as affordable budget auto installments.

Second, we continue to strike a healthy balance between growing revenues and managing credit risk.

And finally, we have established a best practice in an industry and standard operating procedures with our automated systems and staffed call centers for dealing with delinquent loans. We follow [specific] steps with regard to collecting delinquent payments, all of which are described in our prospectus filed with the SEC. As of September 13, 2017, we had approximately 300 employees primary responsible for collections. And they are mainly based in our call center in Jiangxi Province.

In short, we are excited about the future and we will continue to explore new growth opportunities, develop new data technologies, and offer enhanced services for our users while operating within the developing regulatory framework.

And with that, I will now turn the call over to our CFO, Carl Yeung, who will discuss our key operating metrics and financial results.

Thank you, Min, and hello, everyone. First I'd like to touch base on a couple of highlights for the quarter. We delivered excellent results in the quarter, with year-over-year revenue growth of 308% and net income growth of 322% as a result of our strong operational efficiency. With total registered users reaching 56.6 million, and approved users of 23.6 million, the significant growth in active borrowers to 7.5 million led to a strong year-over-year transactional growth. Most notably, sales commission contributed 20% of total revenues in the quarter, up from 5% last year, resulting in higher profitability in the quarter.

The volume of data we collect and process continues to grow in scale and velocity, with over 26 million credit drawdowns facilitated in quarter, which provides us a significant competitive advantage in the risk models we build to analyze the Chinese consumption credit users. In addition, we continue to set industry-leading responsibility practices in areas that protect user data, and help our users borrow responsibly, while expanding the market of providing consumption credits to the underserved. Finally, as Min mentioned, we are proud to reiterate that since April of this year, the all-in annualized interest rate fees charged for all our products have been capped at 36%.

Now I'd like to walk you through our detailed financial results in the third quarter of 2017. Total revenue for the quarter increased by 308% to RMB1.45 billion from RMB355.6 million in the prior-year period, primarily due to the increase in financing income as a result of the substantial increase in the number of transactions we processed in the quarter. Financing income totaled RMB1.05 billion for the quarter, increasing 214% from RMB335.7 million for the third quarter of 2016.

Sales commission fees increased to RMB294.8 million for the quarter. That's nearly 15 times the same period a year ago. The significant year-over-year increase in sales commissions was driven by an increase in merchandise credit utilized by borrowers to purchase merchandise on our marketplace, and an increase in the fee rate on sales commissions we charge our merchants. We believe that one of the factors contributing to the strong year-over-year growth was the expansion of products we offered on the marketplace.

Total operating costs and expenses increased by 358.7% to RMB757.5 million for the quarter from RMB165.1 million for the third quarter of 2016. Cost of revenues increased by 278.5% to RMB258.9 million for the quarter from RMB68.4 million for the third quarter of 2016. This year-over-year increase was primarily the result of higher interest expenses on borrowings because we had a larger proportion of funding coming from institutional funding partners, as well as a higher payment processing and settlement fees.

Sales and marketing expenses increased by 384.7% to RMB187.9 million for the quarter from RMB38.8 million for the third quarter of 2016. The increase was primarily a result of higher borrower engagement fees in the third quarter of 2017 compared with the same period last year.

General and administrative expenses increased by 336.9% to RMB51.1 million for the quarter from RMB11.7 million for the third quarter of 2016. This increase was primarily attributable to higher professional service fee expenses, higher share-based compensation expenses for the general and administrative personnel, and higher salary and benefits paid to such staff.

Research and development expenses increased by 342.6% to RMB52.7 million for the quarter from RMB11.9 million for the third quarter of 2016. The increase was primarily due to higher salaries and benefits and higher share-based compensation expenses for such staff. We have increased our spending on R&D with the goal of enhancing our data analytics and research on risk management capabilities.

Income from operations for the quarter was RMB695.8 million, representing a 259.2% increase from RMB193.7 million for the same period last year. Income tax expenses increased by 19% to RMB45.9 million in the quarter from RMB38.6 million in the prior-year period, primarily due to the increase in taxable income. Now, because of the foregoing, net income totaled RMB650.7 million for the quarter, up 321.8% from RMB154.3 million for the third quarter of 2016. Net income attributable to the Company's shareholders per diluted share was RMB2.2 (sic - see press release, "RMB2.24") compared to RMB0.51 in the prior-year period.

Adjusted net income attributable to the Company's shareholders, which excludes share-based compensation expenses, increased by 329.9% to RMB663.3 million from RMB154.3 million in the prior-year period. Adjusted net income attributable to the Company's shareholder per diluted share increased to RMB2.24 from RMB0.51 in the same period last year.

As of September 30, 2017, the Company had cash and cash equivalents of RMB1.48 billion compared to RMB785.8 million as of December 31, 2016. The Company also had restricted cash of RMB2.04 billion compared with nil as of September 31, 2016 (sic - see press release, "December 31, 2016"). This restricted cash is mainly representing the cash in consolidated trusts that can only be used to fund credit drawdowns or settle these trust obligations. Such restricted cash is not available to fund the general liquidity needs of the Company. As of September 30, 2017, the Company had established more than 30 trust structures in collaboration with trust companies.

As of September 30, 2017, that Company had short-term amounts due from related parties of RMB599.7 million compared with short-term amounts due from related parties of RMB585.9 million as of December 31, 2016. Such amounts include RMB596.7 million and RMB404.6 million deposited in our Alipay account as of September 30, 2017, and December 31, 2016, respectively. Such amount is unrestricted as to withdrawal and use, and is readily available to the Company on demand.

As of September 30, 2017, the total balance of outstanding principal for the on-balance-sheet transactions which any installment payment was more than 30 calendar days past due was RMB194.6 million. The balance of allowance for principal and financing services fee receivables at the end of the period was RMB247.3 million, indicating an M1+ delinquency coverage ratio of 1.3x. Net cash provided by operating activities for the third quarter of 2017 was RMB889.4 million.

Now this concludes our prepared remarks. We will now open the call to questions. Operator, please kindly go ahead.

(Operator Instructions). Charles Zhou, Credit Suisse.

Congratulations on your excellent results. I think you beat by -- the market's expectation by 15% to 16%, so congratulations. I have two questions. The first one is: we know there's a lot of the regulations, talking about in the local news. So can you also share with us about the regulatory direction? And also, how will the Company cope with the potential changes?

Meanwhile, I also want to just confirm again that you are fully complying with the regulations now; that your APR interest rate is capped at 36%, and also no violence collection as well.

The second question is also, what is the relationship with Alipay? Do you see any changes with so much media coverage on the Company and also the sector? Thank you.

Thank you, Charles, and we really appreciate the comment. We have, in fact, achieved a new milestone with the third-quarter results, and I'm glad to see the market is reacting quite positively to that. Regarding your question, first of all on regulation and directions, the regulatory environment in China for emerging consumption credit is developing and emerging, so it is difficult to specifically say what it is. But as far as we are concerned, we practice the industry's best practices, including a strict limit on the all-in interest rates we charge to our users.

From April on -- and now this is the third quarter; the full quarter -- all products have been confirmed to be within the 36% APR rule, and enforced internally by us. And we believe this is one of the very few companies practicing this in the entire industry.

Secondly, we have no violent collection efforts. We practiced disciplined yet user-friendly collection. The most we will do is currently do a phone call to a user to remind them to repay. We believe these best practices are in line with potential regulatory requirements. And we will be in the best shape if such regulations become enforced.

The second question relating to Alipay: we continue to have a strategic relationship and a healthy relationship with Alipay. In this single quarter, we have provided a new milestone in terms of cashless transactions, all facilitated on the Alipay platform; as well as feeding back a new record of data back to the Alipay ecosystem. In addition, the [two] campus business continues to grow and thrive as a strategic partnership between Alipay and us. We believe that nothing has changed between us and Alipay, and we will maintain the healthy relationship.

But just as a reminder to all listeners to the call: we are a -- one of the partners on Alipay, a strategic partner. But Alipay is a fair platform, and we transact on an arm's-length basis.

Richard Xu, Morgan Stanley.

Couple questions on the expense side. Just noticed basically the provision has increased quite notably during the quarter. Could you talk a little bit why that's the case? Basically any changes in risk profile or risk preference during the quarter? Secondly, we've also noticed that sales and marketing expenses also almost doubled during the quarter. Just wondering whether there's any marketing initiative; whether that's also related to the notable increase in the sales-commission-related fees, as well, during the quarter. Thank you very much.

Thank you, Richard. Thank you for the questions. First of all, related to the provisions we made in the quarter, our Company continues to practice a balance of risk versus return that can allow us to have sustainable, profitable growth. In the quarter, we actually -- you see two things: number one, the increase in the merchandise component of our business. Because the merchandise transactions have a longer duration on average, they will have a slightly higher delinquency performance. But, by nature, the risk is the same. It's the same homogeneous, diversified user group that we're targeting. So it's just the duration is longer; it will lead a slightly higher delinquency. But the merchandise profitability is significantly higher, so we can achieve a new milestone in terms of profits this quarter.

And in general, the Company believes that we will be sitting in a faster growth pace, a better user experience, as well as profitability as we increase that M1+ delinquency to approximately 1%. We believe that currently, at 0.5% or less, it is probably too conservative within the known risk that we're dealing with. So we will be targeting a medium term of 1% as a delinquency on a proactive basis.

Secondly, on the sales and marketing side, as we all know, as disclosed in the prospectus, since April of 2017 we have been added to the front landing spot in the Alipay application. With that, it comes with a sales and marketing cost we have to pay to that platform. That payment was on a cost-per-click basis in the second and third quarter. Therefore we were, in fact, paying for all traffic visiting our store, visiting our assets, regardless if it results in a transaction or not. Therefore, you see the sales and marketing increase in both second quarter and third quarter.

We expect that to be more reasonable going into the forward period since we have changed the transaction basis from a cost-per-click to another market rate which is a cost-per-sale basis since October 1. And we believe that sales and marketing as a percentage of our transaction will actually be lower, going to the fourth quarter.

Victor Wang, CICC.

(spoken in foreign language) My question is regarding the plans to -- how to utilize the proceeds coming from recent IPO, given the size is bigger than USD1 billion. And also if you look at the second-quarter 2017 delinquency rate, it seems that in the second and third months, the delinquency rate trend is picking up quite substantially. Is that related to the fast growth of merchandise product?

Thank you, Victor, for the questions. Relating to the use of proceeds, we have disclosed in the prospectus exactly what our use of proceeds are. And we'll stick with that for the foreseeable period until we make another disclosure on such. Basically, we don't plan to use that use of proceeds to fund our current credit drawdowns. Our Company strategy is to continue to be a -- operating a light business model to [court our] institutional funding partners to fund the credit transactions that we facilitate. So the use of proceeds is largely targeted for general corporate purposes, and our potential sales and marketing efforts to enhance our brand, as well as potential strategic investments. As of this moment, we don't have any target in mind.

Regarding delinquency rate, yes; it has increased in both second and third quarter. You can see the delinquency by vintage line has been a bit more trending up. And that is actually a direct result of our proactive increase to take on more known risk so we can approve more users. You will see, in the third quarter, we have approved a record number of approval rates -- in terms of approval rate. At the same time, we have increased our merchandise sales significantly, and that's driving that delinquency rate up.

Now, as stated just now in the previous question from Richard, our medium-term delinquency rate by vintage is approximately 1%. And 1% is still industry-leading in terms of how low it is. Thank you.

May Yan, UBS.

(spoken in foreign language). Oh, sorry. Okay, my question -- okay, two questions. One is on collection. We saw in the announcement that about -- there are about 300 call center people that focus on collection. Are these people part of the 1,000 employee that have been disclosed before, and they are full-time collection people? Or they're doing sort of these part-time? And secondly -- and also what's the recovery rate for the collection recently?

And then secondly, my other question is on the provisioning that, as mentioned before, longer-term is going to target to increase to about 1%. And then I saw the coverage right now is about 1.3 times. So as the delinquency is going up over time, is that the target that you -- that the Company try to maintain? Or is it going to be going down to 1 time or maybe 2 times? Where will be the target level? Thank you.

Thank you, May. I appreciate the questions. The first question relating to the 300 staff that we mentioned in the earnings call script, or earnings call dialogue, is all these 300 staff is full-time employees of the Company and is within the disclosed number of staff in the prospectus. So these staff are sitting in the call center in Jiangxi Province, collecting by phone, helping users to repay by calling and reminding them there's a payment to be made. So these are our full-time staff. We currently do not outsource any collection efforts, to control that good user experience, and to make sure that we stay regulatory compliant in terms of collection efforts.

And then number two, regarding the provision coverage ratio, we've mentioned that we have a target of about 1% in terms of M1+ delinquency. And the current third-quarter provision coverage ratio by the amount of balance that has been provided for under the P&L is 1.3 times of real M1+. And we believe that 1.3x is a good, stable number. Over the longer period, we believe 1.1 times, just slightly over coverage, is the best way to reflect a true P&L; not being conservative, not being aggressive from an accounting perspective. Thank you very much, May.

John Davis, Stifel.

Just wanted to follow up on credit as well. Carl, I think we've talked a lot about this 1% delinquency. Can you help us? Is this something that's going to happen in the next quarter or two, or is this a year out? Just trying to figure out, timing-wise, as far as how long you think it will take to get to that 1% level on the M1 delinquencies.

Thank you, John. Appreciate the question. Yes, one really strong part of our culture is execution, and doing things faster than any industry participants, as you can see from our results in the third quarter. We have grown faster than any other company in the sector. And our execution culture will also reflect in our targets. For example, this 1% delinquency we expect to achieve in the short term -- in the next one or two quarters, rather than a year or two out. So we will deliver on what we say.

Okay. That's very helpful. And then I also wanted to touch on the commission rate. That I think came in a little bit higher than what I had expected and what's been historic. Can you just comment on what's driving that higher, and is that sustainable longer-term? Thanks.

Thank you, John. The commission rates was approximately 16% in the third quarter. So it has been a new high for the amount of commissions we can achieve from our merchandise partner. This is in reflection out several things. Number one, it's a substantial growth in our merchandise platform business, which makes it an attractive marketplace to be for our merchandise partners, so they're willing to share more economics to us.

Secondly, the shift of traditional handset focus, higher weight, has been adding -- we have been adding substantially more alternative products beyond handsets, such as light luxury, which has higher sales commission margins. Some items we sell -- like watches, like luxury handbags -- they carry a 40%-plus sales commission margin. Those two combined has been helping us in achieving new sales commission milestones. Thank you, John.

Thank you.

Mayank Tandon, Needham & Company.

This is Jinjin on for Mayank. I just had a question about the funding side of the business. Since your IPO, do you see it help bring more funding partners to you platforms? And maybe update us on the net adds. I think previously you mentioned you had 21 funding partners. Maybe how many do you have now? And also in terms of percentage funding from on-balance-sheet versus off-balance-sheet, could you give us an update on that? And maybe remind us in terms of the funding cost, on-balance-sheet versus off-balance-sheet. Thank you.

Thank you, [Jinjin], and really appreciate the questions. As of September 30, we have grown a new milestone also in the number of funding partners. So we've grown from 21 partners as of June 30, 2017, to now 26 partners by September 30. We've continued growing that beyond September 30 as well.

And the funding mix for a total loan balance in terms of mix is -- as of September 30 -- is 23% is our own equity; 30% from our trust structures; 19% from asset exchanges; about 10% from others, such as asset management companies. And we have grown to a record percentage contribution of an 17% in terms of off-balance-sheet, which is contributed by banks and consumer finance companies.

This is directly in line with what we want to achieve from a strategic perspective, as we disclosed in the prospectus: increasing the institutional funding partners, as well as increasing the off-balance-sheet so that we become a pure play data and technology-focused company to help funding partners provide credit to users. So again, we're delivering what we say. Thank you.

Sorry, one more to add. I know you had a question regarding the funding costs. The funding cost has remained pretty much stable from June 30, 2017. Thank you.

Binnie Wong, Merrill Lynch.

Congratulations, Min and Carl, on a strong quarter of results. My question is coming on the user acquisition strategy. Can you share with us more on the -- in terms of, like, how are you -- because we also have our e-commerce platform -- how you see that later on? How much of this traffic you think you can grow organically? And then also maybe from directing traffic now currently from Alibaba, will you consider also maybe working with other platforms?

And then my second question is on the breakdown that you just mentioned, on the on-balance-sheet and the off-balance-sheet. Given the interest rate environment now, how will you see potentially what are some of the strategies we have to manage down the borrowing costs? Thank you.

Thank you, Binnie. Appreciate the questions. Regarding user acquisition strategy, we believe the Alipay ecosystem remains the most attractive ecosystem to reach this underserved user in China, so we're committed to that ecosystem. But even if you look into that ecosystem (technical difficulty).

I'm sorry.

We have a few babies joining. (laughter)

Yes, probably some new user or potential new user, right? (laughter). Sorry. (multiple speakers)

Exactly. It's always fun to have something. So yes, I will continue on. So even if we -- within the Alipay ecosystem -- so Alipay is in open platform. And we are one of the participants in that platform. When we look at new borrower engagement, almost 50% comes from word-of-mouth, which they search by us; so through the service window or through our own apps. So for the foreseeable future, we don't see user acquisition strategy to change that much. Because as Alipay grows and remain an open platform, it is still the best place to be.

Secondly, regarding the breakdown on the on- and off-balance-sheet question -- sorry, I got thrown a little bit off [there]. Yes, and then the breakdown is in the -- by the balance, by September 30, of off-balance sheet funding is 17%. It's actually a significant increase from 11% by June 30. So again, this Company is executing on what we talked about.

And then by -- how do we manage our overall funding cost down is by continuing to generate the most attractive asset class in the entirety of China. Our assets represent diversified, small ticket size, short duration, low-delinquency credit that is inaccessible until we have come to the market. We'll continue to provide access to this asset class. And we, by having that most attractive asset class, are funding partners who fight to get a piece of it. And that's how we have managed and make sure our funding cost stay low. So thank you, Binnie.

Thank you. Just a quick follow-up on the user acquisition side. If you think about that over -- we will be getting more new users; because we have been saying that, as more getting the users that are mostly unserved by the traditional finance channels, say traditional banks. How do we think about going beyond our core user group? Saying going into, like expanding more into middle-class, or maybe going into more white-collar, beyond just our core young, young generation? How do your company see that evolved?

Thank you, Binnie, for the question. It's felt very good question. And we have thought about it for a long, long time. Our position and our strategy is to stay within the class of users that are making RMB3,000 do RMB5,000 a month. Because that is where our Company can possess the largest competitive advantage in terms of costs, efficiency, and serving their consumption credit needs. Going to the larger ticket size would be very easy for us. In fact, it is very easy for us to make money there. But we believe the larger ticket size not a market that we can really demonstrate our strong -- super strong competitive advantage in terms of costs when the ticket size becomes very, very large.

Now, in the small ticket size, we're still just at a drop in the pond in terms of potential market that we're penetrating. As disclosed in the current quarter, we had 7.5 million active borrowers, but we're looking at a market with approximately 400 million users. So there's a lot of penetration still to go. So we remain focused, and a long way to go from here. Thank you.

Got it. (technical difficulty) Thank you.

Linda Sun-Mattison, Bernstein.

Carl, I really appreciate your statement, just now, about staying to your core customer segment and being -- offering the small ticket. I think probably that's one of the key concerns from the investors I have talked to, that the credit cost being low, and it's very dependent on small ticket and the short duration. So I'm very pleased to hear the Company stay focused on the core business.

I have a question regarding the regulation risk. And I noticed, and as you said, the off-balance-sheet funding went up from 11% to 17%, and that will help reduce your reliance on your own capital and on-balance-sheet loans. That's a good thing. But on the other side, we know the biggest problem with Chinese banking system and the regulator is so-called shadow banking system. With off-balance-sheet assets or funding, it often comes with the worry that this is a channel, so-called (spoken in foreign language), that is channeling an asset that has implicit guarantee and a moral hazard, all these kind of thing.

And so, I'm just wondering how you see the off-balance-sheet -- whether you see a ceiling or cap on off-balance-sheet funding. And on the same kind of string, I want to ask your perspective, both Min and Carl's perspective: what is the unknown risk, regulatory risk? We know the known risk: for example, interest rate, debt collection, funding; all of these kind of things. Are there any thing that could be the blind spot for the investors? Thank you very much.

Thank you very much, Linda. This is a very good question regarding the regulatory risk regarding our funding structure. As you can see, our Company strategy is to diversify our funding structure so that any single funding channel which may face volatility will have other channels to cover the shortchange in that specific -- if there's any volatility in any specific one. So yes, it has -- our off balance sheet funding has increased from 11% to 17%. But we have also diversified into other funding channels such as trust structures, asset exchanges, directly with licensed asset management companies; as well as we have a very strong balance sheet of our own cash in the worst-case scenario.

So, our goal is not to leverage our cash and equity to provide loans. But in the very worst case scenario, we have ourselves two licenses to make Internet microloans. And we can quickly inject capital to make sure your growth is not affected if any single structure is impeded.

But to get back to the off-balance-sheet problem, we actually do not see any potential regulatory hurdles right now, but it's difficult to guarantee. As of right now, we work exclusively with licensed banks and consumer finance companies. And they have their own internal regulatory compliance procedures that they have done to ensure these structures are satisfying current regulatory requirements.

Now, if the regulatory requirements change, I'm sure we can have ways to adapt to these new changes because we are industry-leading players. We intend to keep our licenses. And we intend to make sure this large opportunity is captured within the framework of our regulators being able to see what's going on. So I think we're in a very good position there. And our strategy is to continue to diversify the number of partners, the type of channels; so we don't see any potential risk there at the moment.

Now, the second question regarding anything that is unknown on the regulatory side, my response is, unfortunately, it's unknown to us as well. So, I think everything that we know, I think everything the market knows, I think it's quite public. And we are already practicing all of our business operations within these regulatory guidelines, including 36% or below interest rate, including very civilized collection efforts; including having an institutionalized funding structure; not taking deposits. So from a known realm, I think we're in a very good shape. But anything unknown, I have to apologize. I can't comment. Thank you.

Yes. Sorry, just on the unknown risk, because currently I think your Company and generally the microlenders regulated by the central office, a kind of consortium by various regulators. I'm wondering whether you see any kind of risk or potentiality of you being regulated by CBRC, almost like a bank.

I think it's difficult to provide a comment on that because that is a decision by the Chinese regulators. But whatever that regulation is, I think our Company is confident in being able to meet these requirements, because we have been operating with self-enforced rules and guidelines ahead of potential regulations.

Thank you very much, Carl.

Alex Zhou, UBS.

Carl, I have two questions. The first is regarding user approval rates. We noticed approval rate has gone up quite a lot in the third quarter, up to 55% right now. So we're wondering where the target level is going forward. And also, can you confirm whether Qudian is still only lending to customers with a Sesame score that is over 600? Also, could you please expand a little bit on the implication for asset quality, in the sense that if we are targeting a M1+ delinquency ratio of 1%, does that relate in any way to the approval rate?

The second question is regarding loan volume. We noticed, in the third quarter, our results actually beat the market consensus I think by 15% or to 20%, in terms of loan volume. And we just noticed that Alibaba, Taobao has a very successful Double 11 campaign. So, can you give us some guidance in terms of loan volume into the fourth quarter? Thanks.

Thank you so much, Alex, for the question. And thank you again for observing our increasing approval rates. This is in line with our strategy to continue to increase the approval rate as our Company is in the business of inclusive finance; it's to help people with -- underserved by their traditional credit providers, and give them credit. We do have a longer-term approval rate target of approximately 80%. That will have an impact on increasing our model, our Company's delinquency rate. That's why we have a longer-term target of 1% as a delinquency ratio.

But what will see as we approach 80% approval rate and 1% delinquency ratio, we'll continue to reach new profitability milestones because our driver of profit is coming from merchandise sales. And that is, again, significantly higher a profitability and margin structure. So, we see that as a healthy way to grow our business: to reach out to more users, have more and more users in our pocket, as well as grow profitability from these users. So that's all in line with our strategy. So 80% is our target.

On loan volume growth, yes; we have grown our business again, reaching a new milestone of loan volume in this third quarter. Unfortunately, as a policy of the Company, we do not provide forward-looking guidance specifically to financial metrics. So we want the industry and the investor community to think of this opportunity longer-term. We're just at the beginning of the unfolding of the Chinese consumption credit opportunity. We're literally at the very early stages of it. So instead of from quarter to quarter, I think we will want investors to think longer-term.

But yes; fourth quarter is traditionally a seasonally strong quarter, as you can see from last year. So we expect our fourth quarter to reach new milestones again. Thank you very much.

So thank you, Operator.

As there are no further questions, now I'd like to turn the call back over to the Company for closing remarks.

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