Qfin Holdings Inc-a Stock

Ladies and gentlemen, thank you for standing by, and welcome to the Qfin Holdings Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Ms. Karen Ji, Senior Director of Capital Markets. Please go ahead, Karen.

Thank you, Asia. Hello, everyone, and welcome to Qfin Holdings Second Quarter 2026 Earnings Conference Call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Haisheng, our CEO; Mr. Alex Xu, our CFO; and Mr. Zheng Yan, our CRO.

Now I will quickly cover the safe harbor statement. Today's discussions may contain forward-looking statements, particularly statements about our business and financial results that are subject to risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor statement in our earnings release, which also contains a reconciliation of the non-GAAP financial measures to GAAP financial measures.

Now I will turn the call over to Mr. Wu Haisheng. Please go ahead.

Hello, everyone. Thank you for joining us today. Since the start of 2026, China's consumer finance industry has remained under pressure. According to the People's Bank of China, the outstanding balance of short-term household consumer loans fell by more than RMB 660 billion from the beginning of the year through the end of Q2, reflecting continued voluntary and involuntary deleveraging among households. Meanwhile, regulatory oversight continued to tighten. A series of measures were introduced to close regulatory gaps and promote a healthier, more compliant industry environment. These measures bring the entire credit industry under a stricter framework, covering pricing, marketing, funding, collections and payments.

In late June, an unexpected industry event then triggered a crisis of confidence in the loan facilitation sector. This caused liquidity to tighten sharply across the market. Against this backdrop of profound industry adjustment and structural shakeout, we remained committed to prudent operations, prioritizing compliance, risk management and efficiency over scale. By continuously optimizing our user mix and business structure, we further enhanced operational efficiency and strengthened the resilience of our business model.

As of the end of Q2, our AI-powered credit decision engine and asset distribution platform served 168 financial institutions. Delivering intelligent digital credit services to over 65 million credit line users on a cumulative basis, we maintained rigorous risk management standards while driving cost and efficiency improvements. In Q2, total loan facilitation and origination volume on our platform reached approximately RMB 63.4 billion, down 2.5% sequentially. Risk metrics continued to improve, accompanied by lower funding costs and greater operating efficiency. Amid a rapidly evolving industry landscape and broad-based contraction in consumer credit supply, we maintained a prudent balance across risk, scale and profitability, demonstrating strong operational resilience.

Risk management underpins every business decision we make and is critical to our ability to navigate industry cycles and achieve sustainable growth. Since the second half of 2025, risk optimization has remained our top priority. By expanding our base of high-quality users and optimizing our business mix, we have kept the risk level of new loans at historical lows. In Q2, our risk indicators continue to improve. The C2M2 ratio declined by 17% sequentially to 0.66%, approaching the level in Q2 last year. This improvement reflected the benefits of our earlier asset mix adjustments and risk strategy optimization as well as enhanced post-loan management capabilities.

During the quarter, we further refined our pre-loan and in-loan risk strategies with closer monitoring of multiple borrowing and the changes in customer liquidity. By analyzing multiple signals, including recent customer behavior, external borrowing exposure and changes in debt levels, we can quickly identify users with high debt burdens or declining income stability. This allows us to tighten risk strategies promptly and reduce our exposure to high-risk segments.

For post-loan management, we continued to refine our collection scorecard or C scorecard, improving our ability to segment users by risk level, willingness to repay and repayment capacity. We then tailored our outreach strategies and offer targeted relief or repayment plans based on each customer's risk profile and actual ability to repay. These measures have improved the customer experience and made our collection efforts more efficient. As a result, our 30-day collection rate improved each month throughout Q2 and averaged 88.1%, up 2.3 percentage points sequentially.

We also embedded risk discipline earlier in the customer acquisition process. Given the uncertain regulatory environment, we moderated the pace of acquisition spending and continue to optimize our customer and loan mix. In Q2, customer acquisition expenses decreased by approximately 13% sequentially, while high-quality users accounted for a larger share of loans issued to new users. We also maintained strict discipline on payback periods. By improving the user experience, we increased retention and repeat borrowing, which in turn raised user lifetime value.

In addition, we continue to scale back long-tail API channels with weaker customer quality and less stable returns. As a result, API channels share of new credit line users declined by 11 percentage points sequentially, while the API contribution to new loan originations fell by 3 percentage points. Following these adjustments, ROA for API channels improved by around 1.87 percentage points. As our user and the channel mix improved, the average pricing of new loans decreased further to 18.2% in Q2. The higher quality user mix allows us to align our assets more effectively with funding demand while further strengthening our asset quality.

On the funding front, we further optimized our funding mix by increasing the contribution of ABS to external funding and proactively scaling back marginal assets with higher funding costs. As a result, our overall funding costs declined by approximately 10 basis points sequentially in Q2, supported by our long track record of stable asset performance. Our ABS issuance increased 90% sequentially to RMB 5.5 billion in the quarter, while issuance costs decreased by around 20 basis points.

Following an unexpected industry event in late June, financial institutions have become increasingly risk-averse. Funding supply has fallen sharply, placing the industry under significant liquidity pressure. As a leading platform, we benefit from more diversified funding sources, stronger risk performance and asset pricing that aligns well with regulatory guidance. As a result, our funding supply has held up better than most of our peers. We expect funding conditions to remain tight in the second half of the year with funding costs to potentially increase.

We will continue to build on our asset strength and work to maintain stable funding supply. At the same time, we will better match funding with assets to improve capital efficiency and overall portfolio yields. Tighter funding conditions will also materially affect industry risk levels. To prepare for potential volatility ahead, we will continue refining our risk management and asset distribution strategies while proactively optimizing the allocation of our collection resources. These steps will help us maintain an adequate margin of safety in a volatile market environment.

On the regulatory front, new requirements covering comprehensive financing cost of personal loans disclosures and the online marketing of financial products are taking effect in Q3. Together, these measures establish higher standards for transparency and consumer protection across the industry. They also raised the bar for our operational execution. Meanwhile, an ongoing nationwide regulatory campaign targeting the collection industry has led to a severe shortage of collection capacity across the board and put significant near-term pressure on collection costs and efficiency. Over the longer term, however, these measures will help foster a healthier and more sustainable industry ecosystem.

We expect industry resources to increasingly concentrate among leading players with reasonable pricing, strong risk management and disciplined operations. As we strengthen the foundation of our credit business and refine our unit economics, we continued to advance our One Core, Two Wings strategy, extending our proven technology and credit capabilities to tech solutions for financial institutions and our overseas business.

In Q2, loan volume enabled by our tech solutions business reached RMB 10.5 billion, up approximately 515% year-over-year, while outstanding loan balance reached around RMB 16.1 billion at quarter end, up 313%. Through FocusPRO and other solutions, we embed our capabilities spanning customer acquisition, product, risk management, operations and post-loan management into the workflows of financial institutions, enabling banks to serve customer segments typically priced between 3% and 12%. Our AI plus credit strategy also made meaningful progress. Recently, we secured 2 AI agent development projects with banks covering marketing growth and credit risk management.

Our AI loan officer will be deployed across the bank's retail, SME and corporate banking businesses, supporting relationship managers from lead identification and customer engagement to conversion. Our AI credit officer will support SME lending in areas such as transaction analysis, audio and video due diligence and credit review and approval, which will help banks improve credit assessment and approval efficiency. These wins demonstrate growing recognition of our AI agent capabilities in real-world environments at financial institutions.

With both projects entering implementation, we are now positioned to provide deeper support for the digital and intelligent transformation of financial institutions. This progress comes as the regulatory framework for AI in financial services enters a new phase. Since July, regulators have issued a series of major policy documents, including guidance on the secure development and the use of AI in banking and insurance sectors. These policies mark that AI plus finance is shifting from encouraging innovation to prioritizing security and compliance. We believe this shift will create greater market opportunities for our AI solutions, which are secure, compliant and deeply integrated into real-world financial workflows.

Overseas markets represent a long-term growth opportunity for us. By combining the technology and know-how we have developed in China's credit market with strong local operations, we are trying to build an efficient and replicable model for overseas expansion. During the quarter, we continued to refine our risk models and deepen our understanding of the European and Latin American markets. Based on small-scale sample data, our models have already shown competitive performance in select markets. With continued iteration and refinement, we believe our strength in risk management and technology will set us apart in overseas markets.

In Southeast Asia, we are steadily advancing licensing efforts, exploring partnership opportunities and building local teams. We expect more progress in the second half of the year. At this stage, we are taking a disciplined approach to overseas expansion, carefully balancing risk and capital deployment to ensure efficient capital allocation. At the organizational level, we continued our transformation into an AI native company. We are gradually turning the knowledge and capabilities accumulated across our teams, documents and systems into organizational assets that AI can understand and use.

We have also begun building our proprietary agent platform. The value of AI native transformation extends beyond efficiency gains. It is about turning individual and team experience into shared reusable organizational capabilities and creating a new form of organizational leverage. Over time, this will accelerate learning and iteration across the organization while steadily raising both execution efficiency and the ceiling of what we can achieve.

Looking to the second half, industry adjustments are still underway, and the market volatility is accelerating the exit of weaker platforms. In the process, we have already seen many competitors leaving the market. As a result, customer acquisition costs have fallen sharply and the non-compliant practices are decreasing. Once the dust settles, we expect a more stable and predictable regulatory environment. We will remain disciplined and vigilant in our approach to both regulation and risk. Under the new regulatory framework, we will continue to strengthen our capabilities, refine our business model and improve operating efficiency.

Precedents from overseas markets suggest that as the market transitions from this order to order, even industry leaders often experience short-term pain. This is an inevitable part of the process. However, those that successfully navigate the transition will emerge better positioned for sustainable growth and long-term success. Going forward, we will remain firmly committed to our One Core, Two Wings strategy, anchored by our domestic credit business and supported by tech solutions commercialization and overseas expansion. As we advance this strategy, we will continue to pursue sustainable, high-quality growth. We are confident that we will thrive over the long term.

Thank you. With that, I will now turn the call to Alex.

Thank you, Haisheng. Good morning and good evening, everyone. Welcome to our second quarter earnings call. It was a very eventful quarter where unexpected crisis at some peers in late June triggered an industry-wide liquidity squeeze, compounded by increasingly stringent regulatory scrutiny, which caused significant changes in industry behavior and reshaped the landscape. For the time being, our managerial priority is to maintain financial discipline and focus on cost reduction and risk mitigation.

Total net revenue for Q2 was CNY 3.57 billion versus CNY 3.91 billion in Q1 and RMB 5.22 billion a year ago. Revenue from credit-driven service, capital-heavy, was CNY 2.6 billion in Q2 compared to CNY 2.96 billion in Q1 and CNY 3.57 billion a year ago. The year-on-year and sequential decline was mainly due to decrease in risk-bearing loans as well as a decline in average pricing of loans. Overall funding cost declined roughly 10 basis points Q-on-Q as contribution from ABS increased in funding mix and off-balance sheet loans further declined in Q2.

Revenue from platform service, capital-light, was CNY 969.8 million in Q2 compared to CNY 951.9 million in Q1 and CNY 1.65 billion a year ago. The year-on-year decline was mainly due to significantly lower ICE contribution due to drastic changes in market conditions. During the quarter, average IRR of the loans we originated and/or facilitated was 18.2% compared to 18.7% in the prior quarter. As we continued to focus on attracting and retaining high-quality users, looking forward, we may see modest fluctuation in average pricing under current regulatory framework.

Sales and marketing expenses declined 13% Q-on-Q and 40% year-on-year. We added approximately 830,000 new credit line users in Q2 versus 1.19 million in Q1. We took a more cautious view in customer acquisition and we will continue to maintain controlled pace to acquire new users in the near term in response to the volatile market environment and restrictive regulatory changes.

90-day delinquency rate was 2.83% in Q2 compared to 3.5% in Q1, which reflects improved risk performance early in 2026. As a reminder, 90-day delinquency rate is a lagging indicator and has little predicted power of future risk metrics. Day 1 delinquency rate was 5.6% in Q2 versus 5.7% in Q1. 30-day collection rate was 88.1% in Q2 versus 85.8% in Q1. C-M2, which represents the outstanding delinquency rate after 30-day collection was 0.66% in Q2 versus 0.8% in Q1. The noticeable risk improvement in Q2 was mainly related to our risk tightening measures and loan mix shift toward new loans.

While overall risk performance in July remained largely unchanged from June, the positive trend took a sudden reversal in August. The aftermath of the liquidity crisis at some peers and the nationwide regulatory action against the credit collection operations recently caused significant headwinds in the risk management across the entire financial service industry. In response to the drastically changing industry dynamic, most participants start to lift their risk bar in August, which in turn caused a further tightening of liquidity supply in the market.

We observed sharp upward swing of C-M2 in recent weeks, which may significantly impact our operation for the rest of the year. While we already took proactive measures since late June and even more decisive actions in August, it will probably still take at least 2 to 3 quarters to bring the C-M2 ratio back to a reasonable level. Given current macro environment and regulatory changes, we continued to take prudent approach to book provisions against potential credit losses.

Total new provision for risk-bearing loans in Q2 were approximately CNY 1.72 billion versus CNY 1.68 billion in Q1. New provision booking ratio, which is defined as total new provision divided by total quarterly risk-bearing loan volume reached a historical high at 5.36% in Q2. Write-backs of previous provisions were approximately CNY 649 million in Q2 versus CNY 308 million in Q1. Provision coverage ratio, which is defined as total outstanding provisions divided by total outstanding delinquent risk-bearing loan -- loan balance between 90 and 180 days were 472% in Q2 compared to 391% in Q1.

Non-GAAP net profit was CNY 455 million in Q2 compared to CNY 946 million in Q1 and CNY 1.85 billion a year ago. The significant year-on-year decline in profitability was mainly due to lower loan volume and pricing and the deleveraging in operation. In Q2, we incurred a one-off tax-related expense of approximately RMB 500 million, which was caused by a change in tax treatment of certain entity based on the updated interpretation of related tax regulation by the tax authorities. As a result, the effective tax rate for Q2 was 60.3%, significantly higher than normal. Based on the tax authorities' guidance, we now expect the effective tax rate for the operations to be around 20% going forward.

Leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity was 2.1x in Q2 versus 2.4x in Q1 due to the lower risk-bearing loan balance. We expect to see leverage ratio fluctuated around this level in the near future. We generated approximately CNY 1.09 billion cash from operations in Q2 compared to CNY 2.1 billion in Q1. Total cash and cash equivalents and short-term investments were CNY 10.63 billion in Q2 compared to CNY 10.79 billion in Q1.

In Q2, we in aggregate repurchased approximately 463,000 of our ADS in open market for a total amount of approximately USD 7 million, inclusive of commissions at the average price of CNY 15.19 per ADS. We suspended the repurchase in late June due to the sudden outbreak of the liquidity crisis at some peers that triggered industry-wide liquidity squeeze and the panic. In accordance with our current dividend policy, our Board has approved a dividend of USD 0.23 per Class A ordinary share or USD 0.46 per ADS for the first half of 2026 to holder of record of Class A ordinary share and ADS as of the close of the business day on September 9, 2026, Hong Kong time and New York Time, respectively. The dividend payout ratio is approximately 30%.

As we have discussed, given the volatile market environment and serious mishaps among some peers and intensifying regulatory scrutiny, we continue to face heavy headwinds in the coming quarters. We believe the top priority for the company and the management at this point in time are to mitigate risks, streamline operation, cut costs, support strategic initiatives. Meanwhile, we may need to build additional financial buffer in the intermediate term to counter any unexpected industry volatility. In the long run, though, we still believe that optimized capital allocation is a key to drive long-term value for the company and stakeholders.

Finally, regarding our business outlook, given the macro and the regulatory headwinds, we will take extra cautious approach in business planning for the rest of 2026. For the third quarter of 2026, the company expects to generate non-GAAP net income between RMB 400 million and RMB 500 million, representing year-on-year decline between 67% and 73%. This outlook reflects the company's current and preliminary view, which is subject to material changes.

With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

[Operator Instructions] The first question comes from Richard Xu with Morgan Stanley.

[Interpreted]

Essentially, I have 2 questions. One is on the liquidity tightening in third quarter. Essentially, the company has taken measures to control the credit quality and what is the expected vintage loss increases? And also, are there room in the provisions to cushion the impact?

Second is, given the tightening of the collection policies, what's the expectation of the recovery ratio? And what are the measures the company has taken to mitigate the problems?

Okay. Thank you, Richard. I think both of the questions is regarding to risk management and collection issue. So I'll pass it over to Mr. Zheng Yan, our CRO.

[Interpreted]

I will briefly translate for Mr. Zheng. The current uptick in risk was indeed triggered by a chain reaction set off by a well-known industry incident, compounded by the nationwide crackdown on the collection industry that began in late July. Since early July, financial institutions have visibly tightened their risk appetite, leading to a widespread funding shortage across the industry. Smaller platforms with weaker qualifications have faced even more severe funding constraints. Funding conditions tightened further in August and have shown no sign of improvement to date. At the same time, the ongoing nationwide regulatory campaign targeting the collection industry has created severe shortages in collection capacity with a notable impact on recovery efficiency. This is a challenge faced universally across the industry.

On the risk front, overall performance remained relatively stable in July with C2M2 remaining largely flat compared to June. However, risk levels began to rise in August. Based on early-stage risk indicators of FPD 3 and FPD 7 for August, we have seen an increase of approximately 20% month-over-month. We expect C2M2 for August to increase by roughly 25% sequentially. Based on our discussions with peers, most platforms experienced a sharp spike in risk in August and have been actively adjusting their risk strategies. That said, the observed risk trends are still relatively short term in nature, and we will need more time to assess the ultimate risk level taking into account evolving market conditions and actual collection performance.

As such, risk management has become our top priority in recent months. Based on our ongoing monitoring of evolving market conditions, we have progressively escalated our response from a precautionary tightening stance in late June to early July to an accelerated tightening approach in August. We moved swiftly to deploy measures across 2 key areas: risk strategy and post-loan management.

In terms of risk strategies, we will further strengthen the identification of high-risk customer segments with a particular focus on those activating multi-platform borrowing, exposure to mid- and lower-tier platform distress, liquidity strength, frequent short-term delinquencies and on stable income profiles. We will accelerate the iteration of our short-term risk models, increasing the update frequency of key models from monthly to weekly to enhance our ability of identifying inflection point in customer risk behavior. At the same time, we are tightening underwriting standards across new originations and optimizing our customer mix.

We are reducing risk exposure across 3 dimensions: customer engagement, transaction approval and asset distribution by lowering credit limits, tightening approval rates and raising the bar for both on balance sheet and capital-heavy loan facilitation assets. Going forward, we will continue to monitor early-stage risk metrics such as FPD 3 and FPD 7 for new loans as well as DPD 7 for existing portfolios while tracking risk divergence across different customer segments and channels. Should these indicators do not stabilize, we plan to further tighten segment-specific screening criteria and asset distribution controls by late August to early September.

On the post-loan management front, our near-term priority is to stabilize staffing and collection capacity, optimizing case allocation and prevent further deterioration in both delinquency inflow and collection rates. For high-risk segments, such as those with significant multi-platform borrowing, repeat delinquencies or high risk work from our collection scorecard, we are intervening early with dedicated personnel and offering relief plans. Over the medium term, we aim to build a sustainable post-loan management capability that balances recovery performance with regulatory compliance through intelligent negotiation tools, differentiated relief solutions and closer integration between pre-loan and post-loan processes.

And now I will pass over to CFO for the questions regarding provision.

Okay. On provision, given the current market condition, the volatility and the significant challenge to asset quality, we have maintained a very prudent provision approach, right? In Q2, as I mentioned, new provision as a percentage of risk-bearing loan reached a historical high at approximately 5.4%. As you may know, our normalized risk control target is to keep a vintage loss largely within the range of 3% to 3.5%. And historically, we only have 2 quarters to reach that level to be around 4%. So basically, even under the most extreme assumptions, we believe our current provision level are more than sufficient to cover potential losses in any dramatic industry or market events.

Operator, next one.

The next question comes from Alex Ye with UBS.

[Interpreted]

So I'll translate for my question. So what's the current loan volume run rate for your July and August? So how much does it decline from the Q2 level? And was this decline largely due to the shortage of funding supply or is it more due to your proactive risk appetite control? And so should we take this as a temporary shock given the ongoing industry difficulties? And let's say, if we do see the funding supply getting normalized afterwards, should we expect this loan volume to somehow recover to your Q2 level?

Okay. Alex, let me take this one. In terms of loan volume, starting in July, we saw a significant tightening of industry-wide funding supply. Our ICE business was the most affected segment. The capital-light model experienced a minor impact, while funding for on-balance sheet and capital-heavy loans remained relatively unaffected. The liquidity issue caused about 10% direct impact on our loan volume in July. At the same time, given early signs of customer borrowing and liquidity stress, we're also proactively tightening some risk exposure. Combined, these factors led to a 15% decline in July loan volume.

In August, ICE funding tightened further, while funding for on-balance sheet loans and capital-heavy and capital-light loan remained sufficient. However, given our own risk performance and our assessment of current market environment, including liquidity pressures and constraints to collection resources, we decided to adopt a more conservative risk strategy and tightened further from July. As risk optimization takes time, we expect to remain cautious on origination throughout Q3. So the volume decline in July was partly due to funding availability, while the pullback in August and September is more about our own risk appetite tightening.

As a leading platform, we have more diversified funding, stronger risk performance and regulatory aligned pricing, giving us far greater funding resilience than most peers. Based on past experience, risk optimization typically takes 2 to 3 quarters. So we don't expect the loan volume to return to Q2 levels anytime soon. On the funding side, with regulatory uncertainty still there and the shakeout of smaller players still ongoing, we will stay cautious and prioritize the asset quality in the near term. We will revisit growth after the industry environment stabilizes.

The next question comes from Emma Xu with BofA Securities.

[Interpreted]

So given the deteriorating industry environment, coupled with tightening regulatory trends, will the company adjust the shareholder return policy?

Okay. Emma, I will take on this one. While we are still generating decent earnings and solid operating cash flow, the ongoing industry adjustment has clearly put pressure on our profitability and cash flow for the next few quarters. In the near term, as regulatory uncertainty lingers and market volatility intensifies, we have established a clear set of priority in terms of capital allocation. Our first and foremost priority is to weather the storm and safeguard the safety of the company as well as the company's long-term operational stability.

In addition, we will continue to put resources to our long-term strategic initiatives. And of course, in the long run, we still intend to maintain a reasonable shareholder return policy. And going forward, as the industry and the regulatory environment evolves, we will continuously assess and optimize our capital allocation strategy based on our sustainable normalized earnings and cash flows. Thank you.

The next question comes from Cindy Wang with China Renaissance.

[Interpreted]

So I have 1 question. Could management tell us the main assumptions behind the Q3 guidance? And what are the key factors behind the changes? And how does management view the long-term trend of these metrics?

Okay. Cindy, I will take this one as well. In Q3, we are obviously operating in a very highly volatile market environment. Funding supply across the industry has become extremely tight with the severe liquidity pressure on market players. The implementation of the multiple new regulatory policies also adding operational uncertainty. At the same time, a wave of small platform is facing accelerated exiting due to the funding depletion and deteriorating asset quality, further amplifying the market volatility. In such an environment, I think we must remain highly disciplined. Risk control and efficiency comes first and growth take a back seat. okay?

For Q3, in terms of loan volume, we are assuming a meaningful decline from Q2 as we have tightened our risk control measures significantly in this challenging market condition, okay? However, given the liquidity pressure and the impacts on ongoing regulatory campaign on collections and the fact that the major platforms are all pulling back at the same time, we still expect the C-M2 for Q3 to rise noticeably from Q2 level. On provision, as I mentioned earlier, we will continue to take a prudent approach to reflect actual risk performance and the changes in the market dynamic.

And in terms of funding cost, we've already seen funding cost -- external funding costs increased by around 25 basis points in July and August. We expect the recent risk volatility in the -- to heighten the funding partners' concern and further tightening the funding supply. At the same time, some institution investors have become more risk-averse in their ADS subscription. As a result, we anticipate overall funding costs will trend up in the second half of the year. And we take a more conservative approach to customer acquisition, as Haisheng mentioned earlier. Rather than pursuing volume, we will focus on sharpening the acquisition efficiency, improving customer quality and enhance user life cycle value.

Over the past 2 months, nearly every key element of our business has changed dramatically and all in the ways that interconnect to each other and hard to entangle. This is not a company-specific issue. It's an industry-wide phenomenon, making our operational environment far more complex. That said, as industry consolidate plays out, we expect consolidation condition to normalize and most of these factors to come back to their normal trajectory over the course of the next few quarters. Thank you.

The next question comes from [ Yoyo Fan ] with CICC.

[Interpreted]

This is Yoyo Fan from CICC. Two questions here. Firstly, lots of small to medium platforms are now facing liquidity pressure. So how do you view the current market environment and the competitive landscape? And what's your customer acquisition and growth strategy for the second half of the year?

Secondly, we have seen quite a big shift in the domestic operating environment over the past 6 months. How do you consider about building up the overseas strategy? Could you walk us through the latest update on the overseas market? These 2 questions.

Okay. Thank you, Yoyo. Let me take both as well. In terms of competition, the well-known incident has tightened industry funding and driven acquisition spending down across the board. Industry-wide spending fell nearly 50% month-over-month in July with another 20% in August. Today, only a handful of platforms, including us, are still spending meaningfully. Most peers have pulled back sharply and long-tier players are even leaving market. So purely on acquisition cost and spending intensity, market competition has clearly moderated compared to the past.

From our perspective, however, liquidity remains tight, regulations are still evolving and the quality of new customers also require ongoing monitoring. We are, therefore, focusing on the actual return from acquisition spending. At this stage, we place greater emphasis on the returns from our acquisition spending rather than simply pursuing new customer volume. We aim to enhance the long-term value generated by each dollar spent on acquisition while maintaining a disciplined approach to risk.

On execution, we are bidding differently by user risk and value, prioritizing higher LTV users while keeping acquisition costs in check. We are also improving user experience and engagement to lift retention and repeat rate. On API channel, we are reallocating resources dynamically based on profitability, cutting back on long-tail channels with weaker quality and stability to build a safety margin. Following our adjustment in the first half of the year, ROE for API channel improved by more than 1 percentage point, further strengthening the resilience of our overall business against the market volatility.

Looking into the second half, we expect industry adjustment and the exit of weaker platforms to continue for some time. Our near-term focus is, therefore, to strengthen the fundamentals of our business, improve our customer and channel mix as well as enhancing the efficiency of funding merchant. Over the longer term, we believe the industry will become healthier after this round of adjustment. And market share is likely to become increasingly concentrated among leading platforms. For us, this is not only a process of refining our business structure, but also an opportunity to further strengthen our competitive position. Once the market becomes more sensible and competition returns to a normal level, we will be well positioned to adjust our market spending timely and capture new growth opportunities.

And for your second question, in terms of overseas expansion, we have made steady progress in Europe and Latin America, deepening market knowledge, localizing risk models and balancing growth and risk through diversified business model. In Latin America, our self-build models are already showing encouraging early results, and we are iterating our models and user selection strategy. In Europe, we have deployed our own models and are leveraging local credit bureau and open banking data to sharpen risk detection. In Southeast Asia and other high potential markets, we are advancing license, building teams and exploring partnerships.

In every overseas market, we treat regulation and risk with deep respect. We also know that risk model validation and unit economics refinement take time. We are still early in all this market with small teams, small capital, modest team test and learning on business model, customer acquisition and risk control, watching risk rewarded closely. As we prove our capabilities, we will bring in external funding to reduce the burden on our own balance sheet. For us, overseas expansion is a long game, and I think we have enough patience. That's all. Thank you.

There are no further phone questions at this time. I'll now hand it back to management for closing remarks. Please go ahead.

Okay. Thank you again for joining us. If you have additional questions, please reach us offline. Thank you.

Thank you.

That does conclude our conference call for today. Thank you for participating, and you may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call]

Ladies and gentlemen, thank you for standing by, and welcome to the Qfin Holdings First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the conference over to Ms. Karen Ji, Senior Director of Capital Markets. Please go ahead, Karen.

Thank you, Darcy. Hello, everyone, and welcome to Qfin Holdings First Quarter 2026 Earnings Conference Call. Our earnings release was distributed earlier today and is available on our IR website. Joining me today are Mr. Wu Haisheng, our CEO; Mr. Alex Xu, our CFO; and Mr. Zheng Yan, our CRO.

Now I will quickly cover the safe harbor statement. Today's discussions may contain forward-looking statements, particularly statements about our business and financial results that are subject to risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor statement in our earnings release, which also contains a reconciliation of the non-GAAP financial measures to GAAP financial measures.

Now I will turn the call over to Mr. Wu Haisheng. Please go ahead.

Hello, everyone. Thank you for joining us today. Since April 2025, China's consumer credit industry has undergone profound structural adjustments under regulatory guidance. Entering Q1 this year, demand for consumer credit remained soft and asset quality faced broad-based pressure. Household short-term consumer loan balances declined for the fifth consecutive quarter, decreasing by approximately RMB 470 billion or 5% sequentially. In this challenging industry environment, we have upheld compliance, prudence and high quality as the core principles of our operations.

Rather than pursuing scale, we proactively optimized our user and asset mix to strengthen overall health and long-term resilience of our business. Building on the proactive measures we implemented in the second half of last year to enhance risk management and business operations, we delivered a resilient performance in Q1 with notable improvements in risk indicators and operation efficiency. As of the end of Q1, our AI-powered credit decision engine and asset distribution platform served 167 financial institutions, delivering intelligent digital credit services to over 64 million credit line users on a cumulative basis.

In Q1, we maintained rigorous risk standards against the backdrop of a softening retail credit market. As a result, total loan facilitation and origination volume on our platform declined by approximately 7.5% sequentially to RMB 65 billion. Non-GAAP net income declined by 11.6% sequentially to approximately RMB 950 million, while non-GAAP EPADS on a fully diluted basis decreased by 6.4% to RMB 7.70. Excluding one-off items, take rate improved sequentially.

In the second half of 2025, we continuously tightened risk policies, and this forward-looking strategy began to translate into tangible results in Q1. During the quarter, we further iterated and optimized our underlying risk capabilities across the entire credit life cycle. As a result, our FPD 7, a leading risk indicator for new loans declined by approximately 20% in Q1 compared with Q4 last year.

As legacy loans continue to run off, portfolio level risk metrics also improved month-over-month. By March, C2M2 ratio, the risk indicator that measures the outstanding delinquency rate after 30 days of collection returned to levels seen in July and August 2025. For the quarter as a whole, C2M2 ratio decreased by roughly 17% sequentially to 0.8%, largely achieving our risk optimization targets. Specifically, these improvements were driven by the following initiatives. In the pre-loan and in loan stages, we further strengthened our ability to identify high-quality customers while proactively screening out higher-risk segments.

In the pre-loan stage, we upgraded the income and drawdown prediction models in our application scorecard or A scorecard to more accurately assess user income and borrowing intent, which enabled us to serve more high-quality users. In the in-loan stage, we further refined our behavior scorecard or B scorecard, enabling targeted strategies such as credit line adjustments, rate reductions and flexible repayment options for high-quality borrowers.

We also continuously updated our risk models to capture potential risk exposures. For example, when previously low-risk borrowers experienced income fluctuations or take on multiple loans, our system could quickly detect these changes and proactively mitigate risk by reducing credit lines or raising approval thresholds. As a result of these efforts, average FPD 7 for loans issued between January and March declined by approximately 5% compared to that in December last year, which provides a solid safety cushion against potential market volatility.

In the post-loan stage, we continue to optimize our collection strategies during the quarter. Since January, our Day-1 delinquency rate has shown an overall downward trend with the Q1 rate decreasing by roughly 7% sequentially, easing pressure on our collection front. Against this backdrop, we scaled back less cost-effective collection efforts and improved the efficiency of our resource allocation. At the same time, we upgraded the capabilities of our collection scorecard or C scorecard by incorporating new features that reflect recent market conditions and shifts in user behavior. This enabled us to differentiate users more accurately by risk level and repayment willingness and to match each segment with the most appropriate collection approach.

Through these efforts, we were able to manage risk while optimizing costs, effectively enhancing our collection efficiency. Together, these measures contributed to a steady month-over-month improvement in our 30-day collection rate during the quarter with a quarterly average of 85.8%, up 1.8 percentage points sequentially. On the customer acquisition front, we maintained a disciplined approach, continuously optimizing acquisition channels and improving efficiency.

In Q1, our overall acquisition costs fell by approximately 17% sequentially, with unit acquisition costs remaining largely stable compared to Q4. In parallel, we strategically increased marketing spending on high-quality users to further refine our user mix and build a pipeline of high-quality assets. In Q1, spending on this segment increased by approximately 40% sequentially. High-quality users tend to carry much lower risk than regular segments with higher utilization, steadier long-term demand and more repeat borrowing. This shift in our user mix will strengthen our portfolio quality and build a more resilient and sustainable moat for our business. Meanwhile, we substantially cut back on underperforming channels within the embedded finance model, helping to improve the risk and return profile of new users.

On the funding front, the industry continued to face liquidity pressure during the quarter. By further increasing the proportion of ABS in our funding mix, we were able to reduce funding costs by approximately 10 basis points sequentially. In Q1, ABS issuance totaled RMB 2.9 billion, up 16% from the prior quarter. For the remainder of the year, we will align the pace of our ABS issuance with on-balance sheet loan origination to maximize capital efficiency.

Since April, as industry adjustments continue, liquidity in the funding market has also tightened. To navigate the periodic market volatility, we will continue to optimize our funding structure and diversify our partnership with financial institutions to ensure sufficient funding supply in a volatile market while striving to keep our overall funding costs stable.

Turning to our tech solutions business. We have continued to deepen collaboration with financial institutions and actively cultivate our enterprise-facing technology offerings as another long-term strategic pillar, supporting banks in serving customer segments priced between 3% and 12%. At this stage, we are focused on validating these capabilities at scale, which will lay a solid foundation for long-term commercialization opportunities ahead. In Q1, loan volumes empowered by our tech solutions business reached RMB 9.96 billion, representing sevenfold year-over-year growth.

This demonstrates that our tech-driven capital-light model is steadily gaining industry recognition and being validated across multiple use cases. Our credit-focused AI agents have also entered initial commercial deployment. For example, one of our core AI agents, AI Loan Officer is being deployed at a city commercial bank covering its retail, SME and corporate business lines. With our FocusPRO credit solution, we help banks serve small businesses and individual customers more efficiently by applying digital and intelligent tools across their full credit life cycle from customer acquisition and risk profiling to day-to-day operations.

This not only expands the scope of our business, but also reflects our commitment to supporting the real economy and promoting financial inclusion. At the technology foundation level, we set a more ambitious long-term goal to fully transform the company into an AI-native organization. Central to this strategy is deep knowledge modeling. We are converting all historical documents, strategy, libraries and operational experience into structured context for large language models, creating a truly queryable knowledge base.

With this foundation, departments across risk management, product, design, marketing and engineering can integrate AI into their core operations. This not only provides assistance in day-to-day work, but also fundamentally enhances the professional competence, decision-making quality and professional boundaries of personnel across all departments. Cost savings and efficiency enhancements often highlighted by the market will be a natural byproduct of this evolution toward an AI-native organization.

For example, AI coding tools have achieved impressive adoption across our engineering teams. As of May, 98.4% of technical personnel were using AI tokens with key roles consuming tens of millions of tokens per person per day. This indicates that AI adoption within our engineering has reached penetration levels comparable to those at top-tier Internet companies in China. Token usage has also shown a clear correlation with productivity gains.

Looking ahead, we will steadily extend this AI leverage to more business scenarios, accelerating our evolution into an AI-native organization. As we continue to strengthen our core domestic business, we are also accelerating overseas expansion while carefully managing risk along the way. In Q1, we successfully launched operations in the new emerging markets and continued to fortify local teams and refine risk models in the market where we are already active.

Leveraging our combined strengths in global capital, advanced technology and local operational expertise, we aim to build a robust international presence, expanding efficiently and operating safely across multiple markets. Looking ahead, as the industry continues to adjust and restructure, we expect short-term uncertainties to persist. That said, the ongoing shakeout is creating a more structured and efficient market environment, offering a prime opportunity for industry leaders to strengthen and consolidate their positions. We remain committed to our One Core, Two Wings strategy with our domestic credit business as a core and tech solutions, commercialization and overseas expansion as the 2 wings, driving sustainable, high-quality growth over the long term.

Thank you. With that, I will now turn the call over to Alex.

Thank you, Haisheng. Good morning, and good evening, everyone. Welcome to our first quarter earnings call. It was another quarter of challenging macro conditions and tightening regulatory scrutiny, which caused further changes in industry landscape and the participants' behavior. We continue to focus on mitigate risks, improve efficiency and reduce cost under such macro headwinds.

Total net revenue for Q1 was RMB 3.91 billion versus RMB 4.09 billion in Q4 and RMB 4.69 billion a year ago. Revenue from credit-driven service, capital heavy was RMB 2.96 billion in Q1 compared to RMB 3.43 billion in Q4 and RMB 3.11 billion a year ago. The year-on-year decline was mainly due to decrease in off-balance sheet loan volume more than offsetting the increase in on-balance sheet loans. The sequential decline was due to lower overall capital-heavy loans as well as a decrease in average pricing of the loans.

Overall funding costs declined roughly 10 basis points Q-on-Q as we further optimized the funding mix with increased percentage contribution from ABS in Q1. Revenue from platform service, capital light, was RMB 951.9 million in Q1 compared to RMB 660 million in Q4 and RMB 1.58 billion a year ago. The year-on-year decline was mainly due to significantly lower ICE contribution in response to the regulatory changes. The sequential increase was mainly due to better ICE take rate due to improved risks.

During the quarter, average IRR of the loans we originated and/or facilitated was 18.7% compared to 19.5% in prior quarter. As we continue to focus on attracting high-quality users in the coming quarter, looking forward, we may see modest fluctuation in average pricing under current regulatory framework. Sales and marketing expenses declined 17% Q-on-Q and 23% year-on-year. We added approximately 1.19 million new credit line users in Q1 versus 1.45 million in Q4.

We took a more cautious view in customer acquisition, and we'll continue to maintain controlled pace to acquire new users in the near term in response to the changing regulatory direction and still uncertain macro condition. 90-day delinquency rate was 3.5% in Q1 compared to 2.71% in Q4, which reflects the elevated risk level near the end of 2025. Again, 90-day delinquency rate is a lagging indicator and internally, it's not a metrics we care much about. Day-1 delinquency rate was 5.7% in Q1 versus 6.1% in Q4. 30-day collection rate was 85.8% in Q1 and versus 84.1% in Q4.

C-M2, which represent the outstanding delinquency rate after 30 days collection was 0.8% in Q1 versus 0.97% in Q4. The noticeable risk improvement in Q1 was mainly related to our risk tightening measures and loan mix shift toward new loans -- and we saw continued modest improvement in the overall risk performance in recent months. Given current macro conditions and regulatory changes, we continue to take a prudent approach in booking provisions against potential credit losses.

Total new provisions for risk-bearing loans in Q1 were approximately 1.68 billion versus 1.92 billion in Q4. The decline in new provision was mainly due to lower risk-bearing loan volume, partially offsetting by increased provision booking ratio despite improved new loan risks Q-on-Q. Write-backs of previous provision were approximately RMB 308 million in Q1 versus RMB 274 million in Q4. Provision coverage ratio, which is defined as total outstanding provision divided by total outstanding delinquent risk-bearing loan balance between 90 and 180 days were 391% in Q1 compared to 481% in Q4.

The temporary decline in provision coverage ratio was mainly due to higher risk level in Q4, driving up the delinquent risk-bearing loan balance between 90 and 180 days in Q1 as total outstanding provision were largely unchanged Q-on-Q. Non-GAAP net profit was RMB 946 million in Q1 compared to RMB 1.07 billion in Q4 and RMB 1.93 billion a year ago. The significant year-on-year decline was in profitability was mainly due to lower loan volume and lower pricing, higher credit costs and deleveraging in operations.

Non-GAAP net income per fully diluted ADS was RMB 7.7 in Q1 compared to RMB 8.23 in Q4. Effective tax rate for Q1 was 21.6% compared to our typical ETR of approximately 15%. The higher-than-normal ETR was mainly due to withholding tax on dividend distribution from onshore to offshore and more prudent tax provision under tightened tax regulatory scrutiny. Leverage ratio, which is defined as risk-bearing loan balance divided by shareholders' equity was 2.4x in Q1 versus 2.7x in Q4 due to lower risk-bearing loan balance. We expect to see leverage ratio fluctuated around this level in the near future.

We generated approximately RMB 2.1 billion cash from operations in Q1 compared to RMB 3.15 billion in Q4. Total cash and cash equivalents and short-term investments was RMB 10.79 billion in Q1 compared to RMB 10.72 billion in Q4. In Q1, we continued to buy back our outstanding CBs. As of May 26, 2026, the company had repurchased approximately USD 577 million in aggregate principal amount of the CB for USD 502 million in cash on the open market and in off-market privately negotiated transactions. Approximately USD 113 million in aggregate principal amount of the CB remained outstanding.

The repurchase of the CB allowed us to reduce our long-term debt obligation and associate interest payment at favorable terms, potentially strengthen our financial position and flexibility. We will continue to optimize our capital allocation strategy to reflect the changing macro dynamic to support business initiatives and to return to shareholders. As we maintain a progressive DPS dividend policy, we may start to opportunistically look into an entry point to resume share repurchase, even though the macro and the regulatory environment is still unsettled.

Finally, regarding our business outlook, while we are encouraged by the noticeable improvement in risk metrics, macro uncertainty and the regulatory pressure will likely persist in the near future. We will continue to take cautious approach in business planning for 2026 and focus on risk control, efficiency improvement and cost cutting. For the second quarter of 2026, the company expects to generate non-GAAP net income between RMB 900 million and RMB 980 million, representing a year-on-year decline between 47% and 51%. This outlook reflects the company's current and preliminary view, which is subject to material changes. With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

[Operator Instructions] Your first question comes from Richard Xu with Morgan Stanley.

[Foreign Language]

Two questions from me. Just observing the average pricing of the loans, continue a downward trend relative to relatively stable pricing at the peers. What was the rationale and thinking behind that? And also where the average loan pricing will eventually settle later this year? And also based on the current business model, what's the average demand as well as business scale going forward and how that will impact shareholder returns?

Okay. Thank you, Richard. Let me take your first question, and Alex may maybe take the second one. In terms of pricing, first, as we currently in rate cut cycle, lower financing costs help improve the households balance sheet and unlock healthy consumption demand. And as we mentioned before, this is overall positive for the industry as it is accelerating market consolidation. Long-term platforms that relied on high prices to cover high risk and aggressively grow their market shares in the past will eventually exit the market.

At the same time, this set a higher bar for the market participants. Over the longer term, companies with more precise user profiling and better risk-based pricing capabilities are likely to take the market shares. With this in mind, we proactively adopted targeted pricing to optimize our user mix. Since Q4 last year, we have put more efforts to acquire high-quality users. This quarter, our spending on that segment was up by about 40% sequentially. As a result, the share of high-quality users in our new customer loan volume jumped 25 percentage points from Q3.

At the same time, we also optimized pricing for our existing users with better risk profile. By giving them more competitive offers, we intended to increase their stickiness on our platform. In addition, we also expanded their borrowing capabilities reasonably to help build a stable long-term LTV. As a result of these efforts, our average pricing was down 80 basis points sequentially. Based on our observation so far, high-quality users tend to carry lower risk than regular segments with higher utilization, more repeat borrowing, steadier long-term demand and therefore, much healthier LTV.

Going forward, we will continue iterating our models to better identify higher-quality users, improve risk performance and using flexible pricing strategies. Together with a great user experience to drive retention and repeat borrowing. All of this will further improve LTV for this segment. Strengthening our capabilities to serve high-quality users is a long term play. In the short term, it requires investment, but in substance, it is a trade-off between near-term profit and long-term sustainable value. By building these capabilities, we are also reshaping our business model, making it healthier and better positioned to navigate a more complex and fast-changing market environment.

On the outlook of pricing, first, we increased our investment in acquisition and conversion rate of high-quality users starting in Q4 last year. Over the past 2 quarters, we have seen a step change increase in share of high-quality customer segments in total loan volume with pricing trends moving in the same direction. As a result, our pricing has declined by 2.2 percentage points over this period.

Going forward, we expect to maintain a relatively steady pace on acquisition and offer strategy. As the user life cycle continues to evolve, our mix will gradually shift to higher-quality users. Meanwhile, we will continue to optimize pricing strategy for high-quality users and regular users so as to strike a balance between risk and profit. Over the longer term, we will remain flexible and adjust our pricing strategy based on regulatory and market changes. At the same time, we will continue to improve our risk model and operational efficiency to strengthen profitability.

Okay. Richard, I will take the second part of your question. So I think the landscape changing of the consumer finance industry is still ongoing and the near-term macro and the regulatory environment remain pretty complicated. On our side, we are actively adjusting our asset mix and exploring ways to diversify our business. Market demand is always there. And as we keep upgrading our capability in serving high-quality users, we are confident that in our ability to meet more credit need over time.

However, at this stage, I would say our focus probably remains about the healthy and sustainability of the business as opposed to the scale of the business. In terms of shareholder returns, our balance sheet is still pretty robust, and we have a strong capital base to support both the business growth and shareholder returns. At the same time, our business continued to generate substantial profit and healthy positive cash flow, which steadily build up our capital base.

Both dividend and buybacks are considered as options for us. At this stage, we see dividend as a way to give shareholders certainty in an uncertain environment. And assuming that a stable regulatory environment, we will maintain a progressive DPS policy and achieving this through flexible adjustment to the dividend payout ratio.

On the buyback side, we believe our current valuation is very attractive, obviously. And our net assets far exceed our market cap, and we have strong conviction in our intrinsic value. Although there is still uncertainty around the macro and regulatory environment and our business model continue to evolve, we believe share buyback once again becomes a viable option for shareholder returns at this juncture. Thank you.

Your next question comes from Alex Ye, UBS.

[Foreign Language]

So my question is regarding the loan growth outlook. So given the stabilization of asset quality, and we have already shifted our customer mix towards the higher quality customers. So when could we expect the company to increase its risk appetite a little bit? And shall we expect loan volume to return to some sequential growth in the coming quarters?

Okay. Alex, thank you. First, the structural change we have made to risk management and our user mix have delivered clear results. Since the second half of 2025, we have implemented a series of risk tightening measures, significantly reallocating resources towards the acquisition and engagement of high-quality users. These initiatives have led to a market improvement in both of our asset structure and asset quality. In Q1, our risk metrics improved month by month. C2M2 ratio in March has returned to levels seen in July and August of last year.

In April and May, C2M2 ratio stayed stable and continues to improve marginally. While keeping risk stable and improving, we're also exploring structural growth opportunities. For example, for customers with a solid safety margin based on our risk models, we dynamically adjusted our approval and credit line rules. Within a safe range, we improved our conversion rate and effectively served more credit demand. We're also optimizing our asset distribution strategy and working with funding partners to explore innovative compliant business model to improve the acceptance rate at partners end.

In addition, we've also expanded our product offerings to serve long-tail customers throughout their life cycle, improving our ability to serve them while maintaining a healthy risk buffer. That said, there is still some uncertainty around the regulatory environment and near-term adjustments are still ongoing. Therefore, we will continue to maintain a prudent approach in our overall business strategy.

At this stage, our focus is on improving our user mix, asset health and operating efficiency. We won't chase volume growth blindly, and we won't rush to loosen risk standards just because of short-term improvement in asset quality. By continuously improving our asset mix and the overall platform resilience, we will be better positioned to navigate potential market volatilities in the future.

Your next question comes from Cindy Wang with China Renaissance.

[Foreign Language]

I have 2 questions here. First, could you give us some color on domestic risk performance in April and May? Is overall credit risk continue to improve from third quarter? Second, what is the trend in customer acquisition cost? What customer acquisition channels are currently being used to acquire high-quality customers? And what is the risk performance from new customers?

Okay. Zheng Yan, can you take the first one, and I will take the second one.

[Foreign Language]

Okay let me briefly translate Mr. Zheng's answers above.

Our risk metrics improved meaningfully in Q1 with C2M2 ratio down 17% sequentially to 0.8%. By March, the ratio have returned to the levels seen in July and August last year. Overall, the improvement was greater than we had expected, and we have largely achieved our risk optimization target. This was mainly driven by our continuous optimization of risk strategies and the iteration of our models. First, we started tightening risk standards since the second half of last year. At the underlying capability level, we kept upgrading A and B scorecards to better separate high-quality users from high-risk ones.

As a result, the FPD 30 metric for new loans has continued to improve. FPD 30+ decreased by 18% in Q4 compared to Q3 and further decreased by approximately 22% in Q1 compared to Q4. Moreover, based on early performance of new loans issued in April, FPD 7 was roughly flat versus March, continuing to stay at a desirable level. Meanwhile, our average loan tenure is around 10 to 11 months as new loans with lower risks take a larger share and legacy loans gradually roll off, our asset quality will improve eventually. And this cycle usually takes about 2 to 3 quarters. Given this time line, our turnaround in Q1 asset quality was fully expected.

[Foreign Language]

Secondly, on the collection side, we also upgraded our C scorecard over the past 2 quarters. We added new features that capture recent market conditions and changes in user behaviors. Based on risk tier, we also matched collection strategies more precisely, including better user reach out and more tailored prepayment solutions. This data-driven approach has worked very well. Our collection rate improved month by month with Q1 collection rate increased by 1.8 percentage points sequentially.

Going forward, we will continue to refine our strategies to make collection management more efficient while keeping collection rates steady. Based on the risk performance we currently observed in April and May, we expect the C2M2 ratio to remain generally stable with a positive trend compared to March. If everything processes normally in June, we will anticipate further risk improvement for Q2 compared to Q1.

However, regulatory uncertainty remains, and the industry will also face some adjustments as certain policies take effect. Therefore, we will stay cautious on risk policy for now. We will keep optimizing marginal assets and acquisition channels to build some buffer against potential market headwinds going forward. Thank you.

And in terms of customer acquisition, our overall strategy this year is to spend cautiously as we aim for structural growth and constantly improving marketing efficiency. In Q1, we kept prudent marketing spending while reallocating resources. We cut back our spending on regular segments for which we lowered the acquisition cost and focused on higher-quality users. The upfront bidding costs for high-quality users are typically higher. But thanks to our improved marketing efficiency, we kept our blended acquisition cost roughly flat sequentially while further improving our user mix.

In Q1, our spending on higher-quality users was up about 40%, while spending on regular segments came down significantly. We leveraged similar channels such as feed to acquire high-quality users while using upgraded acquisition models to help us precisely identify users with strong credit profiles and stable repayment ability. Meanwhile, we have higher tolerance for bidding prices for acquiring these customers. As a result, the share of high-quality users among new credit line users was up 6 percentage points sequentially.

High-quality users not only have better early risk performance, they also show more stable operating metrics later on, like more stable repeat borrowing rates and higher balance retention. That said, we are still in the early stage of building our know-how to serve this segment. Going forward, we will keep iterating our risk model based on our user behavior and use more refined operations to steadily improve their lifetime value.

Looking ahead, we will stick to this acquisition strategy by focusing on high-quality users and keep optimizing marginal channels and assets. And I want to emphasize that customer acquisition cost is just a number, which is heavily impacted by channels and acquisition mix. Therefore, we don't simply chase a low absolute CAC. Instead, for every dollar we spend, we track payback period and user LTV and measure efficiency based on ROI. For API channels, the acquisition cost is more tied to loan volume. So we measure ROA on each loan to ensure every single loan is profitable. At the end of the day, we want to make sure every dollar we spend delivers solid returns. Thank you.

Your next question comes from Yujie Jing with CICC.

[Foreign Language]

I have 2 quick questions. First, do we have further room to cut operating and funding costs? Second, any update on the overseas business?

Okay. I will take the first part, and then Haisheng will address the overseas expansion. So first of all, regarding the funding cost, as we discussed in prior -- previous comments, even though the industry is still undergoing quite a lot of changes, and we do face a little bit of liquidity pressure, we are optimizing our funding mix by maintaining high percentage contribution from the ABS funding.

In Q1, for example, ABS issuance reached RMB 2.9 billion, up 16% sequentially. The portion of the ABS in our external funding went up 6 percentage points sequentially. With a more optimized funding mix, we were able to reduce our funding cost by about 10 basis points sequentially. Looking ahead, in the coming quarters, we will continue to seize ABS issuance windows and align the pace with on-balance sheet loan origination demand. We aim to maintain sufficient funding supply in a volatile market while keeping overall funding costs stable.

And regarding the operating cost, since the end of 2025, we have been improving operating efficiency across all functions, including front, middle and back office operations. On the direct cost side, our core approach is to dynamically manage operating resources. We align them with business needs and continue to optimize the cost structure. Take collection costs as an example. As mentioned earlier, our portfolio risk metrics improved throughout the Q1. This greatly eased pressure on the collection side. After seeing this trend, we quickly scaled back those high-cost, low marginal yield strategies and adjust our collection resource mix further improved our overall collection efficiency. As for customer acquisition costs, Haisheng already covered in previous questions, so I'm not going to go over detailed here.

On the G&A side, we took active steps in Q1 to improve efficiency, mainly around optimizing redundant or inefficient roles. This helped us make our teams linear and execution more efficient. The positive financial impact of these initiatives will be gradually reflected into the coming quarters. And we are also using AI to upgrade our organization, as Haisheng mentioned earlier. Right now, we are feeding our past data strategies and experience into AI model. This builds a queryable knowledge base to support all our teams. This is going beyond just helping with the day-to-day tasks is help our people improve skills, improve the decision quality and professional capability across the board. As we use AI more, the cost efficiency that the market cares about will come naturally as a byproduct where we evolve to a true AI native company.

Okay. In terms of global market, yes. Overseas expansion is a key part of our One Core, Two Wings strategy. This year, we will allocate more resources to overseas business and accelerate the pace of our international process. Based on extensive research into global markets, we have identified several target markets with great potential in terms of credit demand.

In this market, our data-driven risk management capability will make us stand out in markets we've already entered like the U.K. and a Latin American country launched in Q1 this year. Our current focus is on localizing risk models by gradually adding local credit data, open banking data to improve our risk-based pricing. Early results are broadly in line with our expectations. In other high-potential regions such as Southeast Asia, we are actively planning for the next steps.

Overall, our international business is still in early-stage investment and capability building, but we are very patient about the long-term opportunities. We will leverage global capital, cutting-edge technology and local expertise to drive substantial long-term growth in more of overseas markets over the next several years, while keeping risk under control. We are confident that with solid execution over the next 3 to 5 years, we will become a truly global fintech company. Thank you.

There are no further questions at this time. I'll now hand back to management for closing remarks.

Okay. Thanks again for everyone joining us today. That concludes our conference call. If you do have any additional follow-up questions, please contact us offline. Thank you.

Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Qfin Holdings Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Please also note that today's event is being recorded.

At this time, I'd like to turn the conference over to Ms. Karen Ji, Senior Director of Capital Markets. Please go ahead.

Thanks, Darcy. Good morning, and good evening, ever. Welcome to Qfin Holdings Fourth Quarter 2025 Earnings Conference Call. Joining me today are Mr. Wu Haisheng, our CEO; Mr. Alex Xu, our CFO; and Mr. Zheng Yan, our CFO.

Before we start, I will quickly cover the safe harbor statement. Today's discussions may contain forward-looking statements, particularly statements about our business and financial outlook that are subject to risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor statements in our earnings release.

On this call, we will also discuss certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP financial measures to GAAP financial measures.

Now I will turn the call over to Mr. Wu Haisheng. Please go ahead.

Hello, everyone. Thank you for joining us today. In 2025, China consumer finance industry underwent a systemic restructuring under regulatory guidance, the introduction of several key policies, including new loan facilitation rules, window guidance for consumer finance companies and guidelines on comprehensive financing cost management for micro lenders. In the near term, these measures tightened market liquidity, which in turn suppressed credit demand and put unprecedented pressure on both loan growth and risk management across the industry.

Over the longer term, however, we expect the ongoing consolidation will facilitate a healthier and more efficient market environment, creating broader opportunities for leading credit tech platforms. We have proactively pivoted our strategy to embrace regulatory changes, by [indiscernible] compliance and risk management at the core of our strategy. We concluded 2025 with resilient financial and operational results.

As of the end of 2025, our AI-powered credit decision engine and asset distribution platform served 167 financial institutions, delivering intelligent digital credit services to over 63 million credit line users on a cumulative basis. The rollout of new loan facilitation rules in Q4 led to a further contraction in market liquidity. In response to the dynamic market conditions, we further tightened our risk standards while continuing to optimize our business structure. As a result, total loan facilitation and origination volume on our platform decreased by 21.8% year-over-year to RMB 70.3 billion in the quarter.

Non-GAAP net income in Q4 decreased by 45.7% year-over-year to RMB 1.07 billion, and non-GAAP EPADS on a fully diluted basis decreased by 39.8% year-over-year to RMB 8.23%. We delivered on our previously issued Q4 guidance despite the challenging market environment.

Turning to the full year. Our performance remains resilient and stable overall. Total loan facilitation and origination volume reached approximately RMB 327.1 billion, representing a year-over-year increase of 1.6%.

Non-GAAP net income declined by 1% year-over-year to RMB 6.35 billion while non-GAAP EPADS on a fully diluted basis increased 10.4% year-over-year to RMB 46.8.

In the second half of 2025, the consumer credit industry saw a sector-wide risk elevation amid significant business adjustments. Our risk metrics also experienced notable volatilities. Although leading risk indicators for new vintages improved meaningfully in Q4, legacy portfolios continued to face headwinds.

Our C2M2 ratio, which measures the outstanding delinquency rate after 30 days of collection, increased to 0.97%, the highest recorded since COVID in 2020. Against this challenging backdrop, we prioritize risk management and promptly adjusted risk strategies across the entire credit life cycle to ensure sustainable, high-quality growth.

First, we continued to strengthen the acquisition and the engagement of high-quality users by optimizing our credit approval framework and pricing strategies. We drove higher utilization and retention among high-quality borrowers. The proportion of loan volume from this group rose by 6 percentage points sequentially in Q4. At the same time, we enhanced our ability to detect and guard against the multi-borrowing risks. For example, when our models detect that a user is submitting loan applications across multiple platforms within a short period, the system interprets this as a sign of potential financial stress and automatically triggers an alert. We will take proactive measures such as lowering credit limit or restricting loan disbursements to mitigate potential risks before they materialize. These enhancements improved our area under curve or AUC by 10% to 15%, reflecting a stronger ability to differentiate risk tiers. With this due approach, we maintain stable originations to high-quality borrowers while strategically contracting higher-risk segments, resulting in a meaningfully improved asset mix. As a result, our FPD 30, a leading risk indicator for new loans declined by approximately 18% sequentially in Q4.

Second, on the collection front, we optimize the resource allocation towards high-performing partners to boost productivity by refining borrower profiling analysis, we improved our ability to assess borrowers' willingness and capacity to repay, allowing for more tailored collection strategies. As a result, our 30-day collection rate improved marginally month-over-month in both November and December, indicating steady recovery in collection efficiency.

In late December, the PBOC introduced a onetime credit remediation policy, which allows eligible individuals to fix damaged credit records by the 31st of March 2026. We have seamlessly incorporated this policy into our collection strategy metrics to further support asset recovery. This has partially incentivized repayment intent among borrowers, and we expect it to have some positive impact on our collection efforts in Q1.

Despite a challenging industry environment, our risk strategies continue to deliver tangible results. FPD 30 for December vintages was close to our historical lows over the past 2 years as new loans constitute an increasing share of our portfolio, our CM2 ratio remained broadly stable after peaking in October. As of January 2026 supported by continued asset mix optimization and the runoff of legacy assets, C2M2 ratio declined by 8.2% month over month from December. Based on our recent observation, we expect C2M2 ratio in February to broadly return to the levels seen in July and August 2025.

Looking ahead, given the uncertainty around the regulatory environment and industry liquidity in the coming months, we will continue to dynamically adjust our risk strategies to bolster business resilience amid market volatility. On the funding front, underpinned by our diversified financial partnerships and strong market standing, we achieved a modest reduction in ABS issuance costs despite liquidity contraction in Q4. As ABS comprised a larger proportion of our risk-bearing funding mix, our overall funding cost fell by another 20 basis points from Q3 to a historical low. For full year 2025, total ABS issuance grew [ 40.8% ] year-over-year to RMB 21.4 billion, while the average issuance cost declined by 72 basis points from last year, supported by our robust asset quality and long-standing partnerships with financial institutions.

Looking to 2026, the funding environment remains challenging, which may cause short term volatility in our funding costs. However, our track record of consistent asset performance has enabled us to build a strong, trusted partnerships with financial institutions, ensuring a well-positioned funding access relative to industry peers. Looking ahead, we will continue to diversify our funding channels, and optimize our funding structure to ensure stable liquidity and competitive funding costs amid market volatility.

In user acquisition, we maintained a prudent approach with a continued focus on high-quality users. At the same time, we proactively expanded into lower pricing borrower segments to further optimize our customer mix. While these segments entail slightly higher up-front acquisition costs than those of our mainstream segments, their demand tends to be more stable over time, and their risk profiles are more predictable.

We also optimized our embedded finance channel mix by phasing out underperforming channels and concentrating on high-value channel partners. As a result, FPD 30 for new loans from embedded finance channels improved sequentially in both November and December.

In 2026, our priority remains increasing the proportion of high-quality users in our acquisition mix. At the same time, we will further refine underwriting and pricing strategies to improve acquisition efficiency and maintain a relatively stable customer acquisition cost.

Our Technology Solutions business exhibited strong growth momentum in 2025 with total loan volume up by approximately 448% year-over-year. Our business scale has reached a new milestone with outstanding loan balance approaching RMB 11.7 billion by year-end, built on our deep technological capabilities and fintech expertise, Focus Pro, our proprietary lending solution tailored for financial institutions helps banks serve customer segments priced typically between 3% and 12% by applying digital and intelligent tools across the entire credit life cycle from customer acquisition and marketing to product design, risk identification and process optimization.

Focus Pro enables banks to expand beyond traditional customer segments and efficiently serve the financing needs of underserved small businesses and individuals. This initiative not only broadens our business scope but also underscores our commitment to supporting the real economy and advancing financial inclusion.

Under our AI+ credit strategy, our 2-core AI agents, the AI Loan Officer and AI Credit Officer, have delivered encouraging early results across multiple use cases. As these products continue to evolve, we plan to gradually extend them beyond retail credit into a broader set of business scenarios.

Looking ahead to 2026, we will remain committed to One Core, Two wings strategy, strengthening our operating capabilities and enhancing resilience on the evolving regulatory framework. For our credit business, serving high-quality users will remain a long-term strategic priority.

By leveraging dynamic pricing and a superior user experience, we will continue to grow the proportion of high-quality users within our customer mix, maximizing customer lifetime value and ensuring stable asset quality. We are witnessing a regulatory-driven restructuring that will likely accelerate industry consolidation over the next 2 years.

As a leading credit tech platform, we embrace this evolution as an opportunity to upgrade our core competencies and build the foundation for sustainable long-term growth. By navigating this cycle, we expect to emerge as a stronger and more resilient industry leader with deeper structural moats.

Our technology solutions business is entering into a new phase of growth. After 2 years of refinement, its value proposition has been validated through extensive institutional partnerships. Leveraging our AI technologies and full life cycle credit expertise developed over the years, we are integrating these capabilities deeply into bank's inclusive lending value chain. Through flexible collaboration models across a diverse range of business scenarios, we help financial institutions strengthen their in-house risk management and operations capabilities while advancing our shared mission of financial inclusion.

2025 marked the successful launch of our international business. This year, we will actively pursue opportunities across several overseas markets to accelerate global expansion, including Europe, Latin America, Southeast Asia and so on. Our vision is to become a globally respected fintech company that leverages technology to promote financial inclusion and elevate the quality of financial services worldwide. We look forward to sharing more progress in the coming quarters.

Finally, on capital allocation. In 2025, we returned approximately USD 200 million in dividends and USD 680 million via share repurchases, representing 98% of our 2024 GAAP net income. Since the start of 2024. we have cumulatively repurchased 40 million ADS, equivalent to 25.4% of our outstanding shares at the start of 2024.

Looking ahead to 2026, we will remain committed to delivering decent shareholder returns through a progressive dividend policy. Capital allocation efficiency is one of our top priorities. Going forward, we will continue to strike a balance between growth initiatives and shareholder returns to deliver sustainable long-term value for our shareholders.

With that, I will now turn the call over to Alex.

Thank you, Haisheng. Good morning, and good evening, everyone. Welcome to our fourth quarter earnings call. We closed the year in a drastically changing operating environment, challenging macro conditions combined with intense regulatory scrutiny, put significant pressure to the consumer finance industry, causing noticeable liquidity squeeze and rising risks in Q4.

Our operational focus has shifted towards efficiency improvement and cost reduction as well as a continuous effort to manage risk exposure. Total net revenue for Q4 was CNY 4.09 billion versus CNY 5.21 billion in Q3 and CNY 4.48 billion a year ago.

Revenue from credit driven service, capital heavy was CNY 3.43 billion in Q4 compared to CNY 3.87 billion in Q3 and CNY 2.89 billion a year ago. The year-on-year increase was mainly due to the increase in on-balance sheet loans more than offsetting the decline in off-balance sheet loans. The sequential decline was also due to significant lower off-balance sheet loans. Overall funding costs declined 20 bps Q-on-Q as we rely on less external fundings in Q4.

Revenue from platform service capital light was CNY 660 million in Q4 compared to CNY 1.34 billion in Q3 and CNY 1.59 billion a year ago. The year-on-year and sequential decline was mainly due to significantly lower ICE contribution in response to the regulatory changes and lower ICE take rate due to the rising risks.

During the quarter, average IRR of the loans we originated and facilitated declined about 150 bps versus prior quarter. Looking forward, we may continue to see gradual decline in average pricing as we focus more on high-quality and low-priced users in the coming quarters.

Sales and marketing expenses declined 17% Q-on-Q. We took a more cautious view in customer acquisition given the higher overall risks. We added approximately 1.45 million new credit line users in Q4 versus 1.95% in Q3. We will likely maintain controlled pace to acquire new users in the near term in response to the changing regulatory directions and still uncertain macro condition.

90-day delinquency rate was 2.71% in Q4 compared to 2.09% in Q3. Day 1 delinquency rate was 6.1% in Q4 versus 5.5% in Q3. 30-day collection rate was 84.1% in Q4 versus 85.7% in Q3.

Another key metric, C-M2, which represent the outstanding delinquency rate after 30-day collection was 0.97% in Q4 versus 0.79% in Q3.

With our latest risk tightening measures in place, we started to see marginal improvement in overall risk performance in recent months. Given current macro conditions and the regulatory changes, we continue to take a prudent approach to book provisions against potential credit losses. Total new provisions for risk-bearing loans in Q4 were approximately CNY 1.92 billion versus CNY 2.58 billion in Q3. The decline in new provision was mainly due to lower risk bearing loan volume and improved new loan risks Q-on-Q.

Write-backs of the previous provision were approximately CNY 274 million in Q4 versus CNY 785 million in Q3. Provision coverage ratio, which is defined as a total outstanding provision divided by total outstanding delinquent risk-bearing loan balance between 90 and 180 days were 481% in Q4 while declined sequentially and still well above historical average. Non-GAAP net profit was CNY 1.07 billion in Q4 compared to CNY 1.51 billion in Q3 and CNY 1.97 billion a year ago. The significant year-on-year and sequential decline in profitability was mainly due to lower loan volume, higher quite cost and deleveraging in operations.

Non-GAAP net income per fully diluted ADS was RMB 8.2 in Q4, which brought non-GAAP EPADS for the full year of 2025 to RMB 46.8, a year-on-year increase of 10.4% as substantial share count reduction continued to create EPADS accretion.

Efficient tax rate for Q4 -- effective tax rate for Q4 was 11.3% compared to our typical ETR of approximately 15%. The lower than normal ETR in Q4 was mainly due to the typical year-end adjustments. Leverage ratio, which is defined as a risk-bearing loan balance divided by shareholders' equity was 2.7x in Q4 versus 3x in Q3 due to lower risk-bearing loan balance. We expect to see the leverage ratio fluctuated around this level in the near future.

We generated approximately CNY 3.15 billion cash from operations in Q4 compared to CNY 2.5 billion in Q3. Total cash and cash equivalents and short-term investment was CNY 10.72 billion in Q4 compared to CNY 14.35 billion in Q3.

During the Q4, we, in aggregate, repurchased approximately 8.7 million ADSs in open market for a total amount of approximately 168.8 million, inclusive of commissions at the average price of $19.4 per ADS. As such, we had completed substantially all of the $450 million 2025 share repurchase plan, combined with the $227 million share repurchase we completed in connection with our CB issuance in March 2025. For full year 2025, we have in aggregate repurchased approximately 21.1 million ADSs for a total amount of approximately USD 677 million, inclusive of the commission at the average price of USD 32.1 per ADS, representing a 14.8% of our total share outstanding at the beginning of '25.

In Q4, we took market opportunities to start to buy back our outstanding CBs as of March 17, 2026, we had repurchased approximately USD 460 million in aggregate principal amount of the CB for USD 399 million in cash. On open market and in off-market product negotiated transactions, approximately USD 230 million in aggregate principal amount of the CB remains outstanding.

The repurchase of the CB allowed us to reduce our long-term debt obligation and associated interest payments at favorable terms, potentially strengthening our financial position and the flexibility and meanwhile, realizing cash gains.

In accordance with our current dividend policy, our Board has approved a dividend of USD 39 per Class A ordinary share or USD 78 per ADS for the second half of the 2025 to holders of record of Class A ordinary share at ADSs as of close of business on April 22, 2026, Hong Kong time and New York Time, respectively.

We will continue to optimize our capital allocation strategy to reflect the changing macro dynamic to support business initiative and to return to the shareholders. As we maintain a progressive DPS dividend policy, we will also opportunistically look into a managing point to resume share repurchase when macro and regulatory environment become more stable and settled.

Finally, regarding our business outlook, where we start to see some tentative signs of improvement in some operating metrics, macro uncertainty and regulatory pressure persist in the foreseeable future. We will continue to take a cautious approach in business planning for 2026 and focus on efficiency and cost cutting.

For the first quarter of 2026, the company expects to generate non-GAAP net income between RMB 900 million and RMB 950 million, representing a year-on-year decline between 51% and 53%. This outlook reflects the company's current and preliminary view, which is subject to material changes.

With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

[Operator Instructions] Your first question today comes from Richard Xu from Morgan Stanley.

[Foreign Language] Basically, two questions for me. One is considering the regulatory efforts to reduce the funding loan yield? What are the some of these medium-term long-term outlook for the pricing of loans? And also, what are the average or sustainable net take rate levels going forward?

Second question is on the shareholder return, whether how do you balance dividends and a buyback and are there [indiscernible] -- is the dividend [indiscernible] is thank you.

Okay. Richard, let me take you and let Alex can take the second one. And for the first one, over the past year, a series of new regulations and window guidance were rolled out to drive down overall borrowing costs. As the industry evolves, small platforms with high pricing are quickly exiting the market. In the long run, these policies will reduce the burden of barriers and create a healthier market. This will lead to industry consolidation and support the growth of the consumption sector.

Following the regulatory guidance, we are proactively focusing on high-quality users. In the fourth quarter, our average pricing dropped by 140 basis points. In 2026, we will continue to build our strength in serving these high-quality users. By using flexible pricing and a better user experience, we can gradually increase the portion of high-quality users and customer mix, thus ensuring stable asset quality and better LTV.

As we improve our asset structure, we expect some room for further downward adjustment in our average pricing for 2026. In the medium to long term, our pricing will depend on changes in the market and the regulatory environment.

In terms of the take rate, our Q4 take rates were 3.5%. Excluding onetime items, the operational take rate was slightly below 3%. We believe there is still substantial room to optimize this through better risk management and the efficiency improvement. Since Q4, our proactive measures have already shown clear results.

Looking ahead, if the regulatory environment stays stable, we aim to maintain our take rate of about 3%.

Okay. Richard, I will take the shareholder return part. As you know, we have always been putting the shareholder return as one of the top items when we're making the critical decision-making in the company.

In 2025, the cumulative dividend payout and the share buyback we're close to $200 million and $680 million, respectively. That basically gives us a total payout ratio about 98% as a percentage of our 2024 GAAP net income. And since the beginning of 2024, we have brought back approximately 40 million ADSs in total, accounting for about 25% -- 25.4% of the total share count at the beginning of 2024, and this payout ratio as well as the combined yield is probably still the highest among the Chinese ADRs.

In the future, as we mentioned in the prepared remarks, we will intend to maintain the progressive DPS policy in the foreseeable future. So that can give the shareholders an expectable kind of dividend yield with that policy support.

Regarding the buyback, I think at this point, I would say we take a little bit more cautious view approach for this, just given what's happening in the macro environment and also as well as the regulatory dynamic there, but we are open-minded. And as you know, we have an outstanding buyback program not being fully utilized yet. And if the opportunity arises, meaning when the macro conditions become more stable and the regulatory environment becomes more settled, we will restart the buyback program.

Some people are concerned that with the buyback of the CDs, we sort of used up all the CD kind of proceeds at this point. But in reality, if you look at our balance sheet, we still have plenty of cash on the balance sheet to support any of the potential shareholder return programs there.

So for the longer term view, I think we will continue to balance between investing in the long-term business growth and shareholder returns and to maintain a decent ROE and create long-term value to the shareholders. Thank you.

Your next question comes from Emma Xu from Bank of America Securities.

[Foreign Language] First question is about the risk. What has been the trend of risk indicators so far this year? And how do you foresee the future trend of risk changes?

The second question is about business structure. Given the latest market environment, how should we waive the choice between asset heavy and [indiscernible] business models? What is your outlook on the proportion of the heavy versus asset-light structure for this year?

I will probably refer to the first risk question to our CRO, Mr. Zheng.

[Foreign Language]

[Interpreted] Okay. I will do the brief translation. So in the fourth quarter, the industry faced huge pressure due to tightened liquidity. We took proactive steps in both underwriting and collections. And by far, we have seen clear results.

For underwriting, we quickly tightened our pricing and credit limit standards. We also improved our ability to identify multi-platform borrowing risks. This has helped us exclude high-risk groups early and focus more on high-quality customers, which has largely improved our customer structure.

For collection, we addressed our strategy on a timely basis. First, we started manpower intervention in collection earlier for high-risk users. Second, we offered fee discounts or waivers for customers with temporary financial difficulties. Third, we increased incentives to boost the performance of our teams.

[Foreign Language]

[Interpreted] Thanks for these efforts. Our FPD therefore new loans in Q4 dropped by 18% Q-on-Q. The FPD 30 for December cohort was close to its best level in the past 2 years. This positive trend continues in 2026. Our January data shows that the FPD settlement improved by another 10% from December, also reaching a 2-year best.

As new loans make up a larger share of our portfolio, our overall risk is improving, and we also see our C-M2 ratio peaked in October and stayed stable in November and December.

In January, the C-M2 dropped by 8.2% month-on-month. Based on [indiscernible], we will expect February C-M2 ratio to return to the levels of July and August '25. I.

[Foreign Language]

[Interpreted] Of course, the macro environment is still undergoing changes with ongoing industry adjustments. We will closely monitor early risk signals and remain flexible to adjust our strategy and environment changes. Thank you.

And Emma, I will take the second part regarding the business mix. As you know, the second line and Capital Heavy have their own sort of pros and cons. We normally will adjust the mix between the two, depending on the macro condition and outside environment. Normally, in the upcycle, we intend to do more capital heavy because it's generally speaking, generating higher return a higher take rate, where in the down cycle, we prefer offloading more risks. So we prefer the capital life side of the model.

Consider that given the current regulatory and the macro environment, we probably want to have more flexibility and more diverse risk and so this year, meaning 2026. We probably will directionally moving towards capital light a little bit. In '25, for example, the -- on the loan volume side total top line was about 44% at the total volume in '25. This year, most likely, we will see this number moving up. But that said, we're not going to set a fix target in terms of mix between the light and heavy. It's more like a dynamically changing target from time to time given the end market condition there. Thank you.

Your next question comes from Alex Ye from UBS.

[Foreign Language] I have two questions here. First one is about the ICE business. So we have seen the Q4 referrals. Obviously, it was down by 85% Q-o-Q. So could you help us understand the reason behind? And with the new loan fetal regulation. So how should we expect this ICE business the take rate to evolve going forward and the business outlook?

Second question is about the funding cost. So with the new micro loan regulation in a 4x cap on loan pricing. So how does that impact our ABS issuance plan for this year and the implication for our overall blended funding cost for the year?

Okay. Alex, I will take the first part, and then Haisheng will take over the funding cost side of saying. So yes, the first quarter, our revenue contribution from ICE declined pretty meaningfully. Basically, there are 2 factors to drive that. First of all, the volume. Because the under the new regulatory setting the funding partners in the ICE segment become much more cautious in terms of providing funding. And also this the ICE targeted segment overall as in the industry declined significantly. And this caused our ICE volume declined by 41% Q-on-Q and ICE only account for roughly 20% of our total loan volume in

Secondly -- the second driver is actually the take rate decline. As you know, most of the users are what we consider the marginal customers in terms of a risk level tend to be higher than other users. We -- to maintain a sustainable business relationship with those ICE partners, we basically proactively lowered our take rate a little bit to ensure the reasonable conversion rate and also to ensure the partner still can run a sustainable business. So although a short term look at it, we sacrificed some of the take rate there but longer term, I think it's a good way to maintain a sustainable relationship and sustainable business in terms of ICE in the challenging period.

Looking forward, we still believe ICE is a very important part of our platform strategy. We want to serve a broader user base as possible. By different using different models, we match we can match assets with the right funding in the most efficient way. Even though pricing dynamics changed quite significantly, still, the ICE segment can still serve some of the users that in compliance with the current pricing environment. So our future focus is to explore the diversity in need of the long-term customers will stay in compliance. And by offering more valuable value-added services, we will improve their stickiness to and long-term value. This will ensure the long-term profitability of our ICE businesses. Haisheng?

Okay. Let me tell you your second question about the funding cost. Given the macro and regulatory environment uncertainty this year, the marketing liquidity remains tight. This is putting pressure on our funding costs.

First, regarding ABS funding costs, the implementation of full-time [indiscernible] are making investors more cautious. They may ask for higher returns on macro loan assets. As a result, both our issuance amount and the funding costs will face some uncertainty this year.

Second, regarding funding of loan facilitation business, many financial institutions have received regulatory guidance to be more careful about deploying capital into this segment. This will also lead to a tighter funding supply to some extent.

In terms of funding structure, if our ABS issuance goes smoothly, the proportion of our on-balance sheet loan will remain at a steady level, and we expect the overall funding structure to stay stable as well.

Our strategy is to continue expanding our financing channels and operating in our structure. We aim to keep our funding supply stable and our cost competitive throughout the whole year. Thank you.

Your next question comes from Cindy Wang from China Renaissance.

[Foreign Language] And I have two questions here. First, management mentioned that the C-M2 level improved significantly in January and February. So can we conclude that the rate has stabilized? And what is management's outlook for new loan volume growth in Q2 this year and beyond?

Second is -- the question is related to the overseas market expansion strategies. Please give us an update on the latest development in overseas markets, especially in the U.K. Are there any plans to enter new markets this year?

Okay, Cindy. Yes. Indeed, the risk control measures we took in Q4 have shown clear results recently. Especially in February, the fee ratio returned to the level of last July and August. However, we need some more time to see if this improvement is sustainable.

In addition, as the industry-wide adjustments continue and the regulatory uncertainty remains, we will keep a prudent risk strategy and focus on quality of loans. At the same time, we are working to attract higher-quality users and improve our operational capabilities to serve them better. To health needs and the sustainability of our business is more important than just volume growth. We have seen positive signals from the recent 2 sessions regarding consumption and credit support. In our view, the underlying logic of consumer credit-driven consumption remain unchanged. After the industry consolidation, we will become stronger and better positioned to capture long-term growth opportunities in the market.

And in terms of the overseas business, yes, overseas business will be a better part of our company's strategy to drive long-term growth and a diversified business structure. By [ reshaping ] our business mix, we will become more robust and defensive. Given today's market environment, this strategy is especially meaningful. Therefore, we will firmly invest more sources and set up our pace of overseas expansion.

In 2025, we took the lead and entered the material market. We used small scale volume to train our risk model and build our market know-how. This has already achieved early results. At the same time, we connected extensive and deep research on multiple global markets. We have selected the several market for preparation and one of them has started operations in 2026.

In 2026, we will actively explore multiple markets, including both mature and the development regions, such as Europe, Latin America and Southeast Asia. These 2 types of markets have different pros and cons. Mature markets have higher entry barriers, but we have established credit system and higher regulatory uncertainty.

Developing markets may not have perfect credit data yet, but we have a huge microscale and the lower barrier to enter. In this market, there is also a clear path to profit. Therefore, we rebalanced our resources between both types of markets. We expect our overseas teams to grow to about 200 people by the end of the year.

Over the past 2 years, based on our extensive research and studies in different overseas markets, we are extremely confident that our technology and risk model are best in class. With our deep credit know-how, AI and big data-driven technology and strong balance sheet, we are fully committed to our overseas strategy and aim to take a frog leap to become a leading global credit tech company in a forcible future. Thank you.

Thank you. There are no further questions at this time. I'll now hand back over for any closing remarks.

Sure. Thank you again for everyone to join the conference. If you have any additional questions, please feel free to contact us off-line. Thank you. Have a good day.

That does conclude our conference for today. Thank you for participating. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

Ladies and gentlemen, thank you for standing by, and welcome to the Qfin Holdings Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference over to Ms. Karen Ji, Senior Director of Capital Markets. Please go ahead, Karen.

Thank you, Ken. Hello, everyone, and welcome to Qfin Holdings Third Quarter 2025 Earnings Conference Call. Our earnings release was distributed earlier today and is available on our IR website.

Joining me today are Mr. Wu Haisheng, our CEO; Mr. Alex Xu, our CFO; and Mr. Zheng Yan, our CRO.

Before we start, I would like to refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP financial measures to GAAP financial measures.

Also, please note that unless otherwise stated, all figures mentioned in this call are in RMB terms. In addition, today's prepared remarks from our CEO will be delivered in English using an AI-generated voice. Now I will turn the call over to Mr. Wu Haisheng. Please go ahead.

[Interpreted] Hello, everyone. Thank you for joining us today. In the first 9 months of this year, China's economy and the consumer finance sector have both faced persistent headwinds. The outstanding balance of short-term consumer loans has declined for 3 consecutive quarters on both a year-over-year and quarter-over-quarter basis. Going into Q3, the industry is undergoing a series of regulatory-driven adjustments to improve consumer financial inclusion. We believe these changes will strengthen the sector's long-term prospects and sustainability, paving the way for healthier and more structured competitive landscape. As such, we view these adjustments not only a challenge but also an opportunity for Qfin.

As a leading credit tech platform in China, we continued to prioritize risk management, advance our AI capabilities and deepen collaboration with financial institutions. We believe these efforts will enable us to better serve inclusive finance needs and strengthen our leadership in the industry.

Now I'll walk you through the progress we made in Q3. By the end of the quarter, our AI-powered credit decision engine and asset distribution platform served 167 financial institutions, delivering efficient intelligent digital credit services to over 62 million credit line users on a cumulative basis.

To navigate the evolving regulatory environment, we dynamically fine-tuned our risk strategies to maintain a healthy balance between risk and growth. As a result, total loan facilitation and origination volume on our platform reached RMB 83.3 billion in the quarter, broadly in line with Q2. Despite the macro headwinds, we delivered steady financial results.

Non-GAAP net income reached RMB 1.51 billion, while non-GAAP EPADS on a fully diluted basis, came in at RMB 11.36, reflecting our solid profitability and operating resilience.

On the risk front, funding liquidity in the high-price segment continued to tighten in Q3, leading to an uptick in overall delinquency risk across the industry. To stay closely aligned with evolving market conditions, we further tightened our credit standards and optimized our customer mix by increasing the proportion of high-quality borrowers. In addition, we proactively refined our risk models and completed 611 iterations, implementing differentiated risk management and distribution strategies.

On the collection front, we improved efficiency through smarter resource allocation and deeper technology integration. For example, we allocated more resources to high-performing collection partners to ensure sufficient capacity and better productivity. For customers willing to repay but facing temporary financial difficulties, we offered measured concessions and flexible repayment options. In addition, we were able to assess repayment intent and capacity in real time through large language model algorithms, enabling more precise segmentation and more agile resource deployment. These efforts helped us maintain steady progress even as the broader industry faced rising collection pressure.

Our FPD 7, a leading risk indicator for new loans declined in September versus August. Since October, given the new regulations and heightened industry self-discipline initiatives, we expect risk indicators to remain volatile in the near term with current levels above historical averages. That said, having navigated multiple industry adjustment cycles in the past with prompt and effective responses, we remain confident that we can once again bring risk levels back within a reasonable range in a timely manner.

On the funding front, we have been white-listed by all of our active financial institution partners, ensuring a smooth and stable cooperation going forward. Despite a relatively tight funding environment driven by liquidity conditions and policy factors, we maintained the industry-leading pricing power and secured ample funding supply at stable costs. Our average funding cost for Q3 held steady from last quarter, remaining at historical lows.

In the ABS market, we issued RMB 4.5 billion during the quarter, up 29% year-over-year with issuance costs down by another 10 basis points. For the first 9 months of 2025, total ABS issuance grew 41% year-over-year to RMB 18.9 billion, further optimizing our funding structure. Looking ahead, we expect our funding costs to remain largely stable in the coming quarters.

For user acquisition, we continue to diversify our channels, enhance targeted operation and improve efficiency compared with last quarter. The number of new credit line users grew by 9% to $1.95 million while average cost per credit line user declined by 8%. The number of new borrowers also grew 10% sequentially to $1.35 million. We have seamlessly integrated convenient and efficient credit services into diversified channels and scenarios, including short-form videos, e-commerce, mobility, food delivery, and financial services.

In Q3, we further expanded our embedded finance network, adding 7 new strategic partners and expanding our presence across Internet and financial institution platforms. As a result, the number of new credit line users from the embedded finance channels increased by 13% sequentially, while loan volume up by 11%.

For placement strategy, we remain focused on onboarding high-quality users and optimizing our overall user mix. As such, our long-term strategic priority will focus more on our high-quality customers. Supported by AI-driven data models, we expect to gain deeper insights into user needs and behaviors and further refine products and services. This approach will allow us to deliver a superior user experience and improve both our unit economics and user lifetime value. We believe this focus is critical to strengthening our long-term competitive edge and cementing our leadership position in the industry.

In our Technology Solutions business, we continue to advance our AI plus banking strategy, empowering financial institutions in their digital and intelligent transformation. During the quarter, loan volume supported by this business achieved exponential growth, up by roughly 218% on a sequential basis. Our collaboration with banks continue to deepen, expanding from their proprietary channels to a broader range of Internet scenarios where we provide end-to-end technology support in customer acquisition and risk management.

Powered by our FocusPRO credit tech platform, our proprietary solution for SME lending which is built on a 3-tiered credit assessment system was adopted by several new banking partners and received positive feedback for its industry-leading performance. As part of our AI plus banking initiative, our 2 proprietary AI agents, the AI Credit Officer and AI Loan Officer, entered pilot testing with our first bank client. The engagement rate among the activated user base has reached around 50%, providing initial validation for the AI agent practical effectiveness in core credit scenarios.

Looking ahead, we will focus on strengthening our capabilities in multimodal recognition, voice data collection, lead management and feedback loops while expanding pilot programs and further improving user engagement. At the same time, we are seeing growing interest from financial institutions, laying a strong foundation for broader commercial rollout and scaled adoption in the next phase.

On October 1, the new rules officially came into effect. As a leading player in the industry, we have always held ourselves to the highest compliance standards with no exception this time. Working closely with our financial institution partners, we quickly optimized our business structure and product experience. While these measures may temporarily impact our loan volume and profitability, we believe that prioritizing value for users will eventually strengthen their trust and help us maintain more sustainable and resilient growth over the long term.

Meanwhile, certain new industry-wide regulatory measures may have some impact on the industry dynamics. That said, we believe our diversified business model and ample funding capacity will help position us to navigate these changes with limited disruption. Given the current phase of industry-wide adjustment, we will prioritize risk management over near-term growth, focusing on improving user quality and collection efficiency.

Since mid-October, we have already seen encouraging early signs of stabilization in asset quality. Over the years, we have a proven track record of emerging stronger from past challenges, including multiple industry-wide adjustments, and we are confident that this time will be no different.

Looking ahead, we will continue to advance our One Body, Two Wings strategy, further strengthen our AI capabilities and empower financial institutions in their digital transformation, driving efficient, healthy and sustainable development of our core business.

On the international front, we are actively exploring opportunities across multiple overseas markets. After extensive research, we are even more convinced that our fintech capabilities are among the best in the world. We view the international expansion as a challenging yet strategically sound path. Quality always comes from deliberate execution, and we are confident we will deliver.

In closing, short-term industry headwinds will not alter our long-term trajectory or our fundamental commitment to giving back to our shareholders. Going forward, we will continue to pursue efficient capital allocation and deliver value to our shareholders through compelling shareholder returns. With that, I will now turn the call over to Alex.

Okay. Thank you, Haisheng. Good morning, and good evening, everyone. Welcome to our third quarter earnings call. Unexpected China events in the last few months put significant pressure to our operations, and such headwinds may persist through the next couple of quarters as the consumer finance industry faces new round of regulatory scrutiny and the participants try to settle in the vastly different environment.

Total net revenue for Q3 was CNY 5.21 billion versus CNY 5.22 billion in Q2 and CNY 4.37 billion a year ago. Revenue from credit-driven service capital heavy was CNY 3.87 billion in Q3 compared to CNY 3.57 billion in Q2 and CNY 2.9 billion a year ago. The sequential and year-on-year increase was mainly driven by higher capital heavy loan balance. Overall funding costs remained stable Q-on-Q despite some liquidity shortage later in the quarter.

In the first 3 quarters, we issued a record-breaking CNY 18.9 billion ABS, an increase of over 40% year-on-year. Revenue from platform service capital light was CNY 1.34 billion in Q3 compared to CNY 1.65 billion in Q2 and CNY 1.47 billion a year ago. The year-on-year and sequential decline was mainly driven by lower capital light facilitation and ICE volume.

Platform service account for roughly 48% of our quarter-ending loan balance. We will continue to make timely adjustments to the business mix through the rest of the year to reflect the changing market dynamics and regulatory guidelines. During the quarter, average IRR of the loans we originated and/or facilitated was 20.9% compared to 21.4% in Q2. Looking forward, we may see further pricing decline as the new regulatory environment requirement being fully implemented across the industry, although the pace of the decline should be modest.

Sales and marketing expenses remained stable Q-on-Q, but unit cost declined by about 8% sequentially. We added approximately 1.95 million new credit line users in Q3 versus 1.79 million in Q2. We will likely to adjust the pace of the new user acquisition in the coming months given the volatile macro condition and further optimize our user acquisition channels and improve user engagement and retention.

90-day delinquency rate was 2.09% in Q3 compared to 1.97% in Q2. Day 1 delinquency rate was 5.5% in Q3 versus 5.1% in Q2. 30-day collection rate was 85.7% in Q3 versus 87.3% in Q2. C-M2, which represents the outstanding delinquency rate after 30 days collection increased Q-on-Q to 0.79% from 0.64%. As overall portfolio risk continued to increase in the last few months, we took additional measures to tighten the risk standard in September and October. While still a bit too early to reverse the trend, we start to see marginal improvement in new loans quality. It may take a few more months to see overall portfolio risk improves as the mix of the loans become more favorable.

In such a challenging backdrop, we took even more conservative approach to book provisions against potential credit loss. Total new provisions for risk-bearing loans in Q3 were approximately CNY 2.58 billion versus CNY 2.5 billion in Q2 despite lower risk-bearing loan volume Q-on-Q. Provision booking ratio hit another historical high. Write-backs of previous provisions were approximately CNY 785 million in Q3 versus CNY 1.18 billion in Q2. Provision coverage ratio, which is defined as total outstanding provisions divided by total outstanding delinquent risk-bearing loan balance between 90 and 180 days, remain near historical high at 613% in Q3.

Non-GAAP net profit was CNY 1.51 billion in Q3 compared to CNY 1.85 billion. Non-GAAP net income per fully diluted ADS was RMB 11.36 in Q3 compared to RMB 13.63 in Q2 and RMB 12.35 a year ago. At the end of Q3, total outstanding ADS share count was approximately CNY 130.2 million compared to CNY 132.4 million at the end of Q2 and CNY 144.2 million a year ago.

Effective tax rate for Q3 was 20.9% compared to our typical ETR of approximately 15%. The higher-than-normal ETR was mainly due to withholding tax provision related to the cash distribution from onshore to offshore. With higher contribution from capital heavy model, our leverage ratio, which is defined as a risk-bearing loan balance divided by shareholders' equity was 3.0x in Q3, still near the low end of historical range. We expect to see leverage ratio fluctuated around this level in the near term.

We generate approximately CNY 2.5 billion cash from operations in Q3 compared to CNY 2.62 billion in Q2. Total cash and cash equivalents and short-term investment was CNY 14.35 billion in Q3 compared to CNY 13.34 billion in Q2. Our strong cash flow and financial position should give us sufficient resources to navigate through the challenging environment and allow us to satisfy the commitments and obligations to the market.

We started to execute the $450 million share repurchase program in January 1. As of November 18, 2025, we had in aggregate purchased approximately 7.3 million ADS in the open market for the total amount of approximately $281 million, inclusive of commissions at the average price of USD 38.7 per ADS. We intend to resume the repurchase program after the window opened after this earnings call.

Finally, regarding our business outlook. Given the persistent economic uncertainty and fast-changing market dynamic, we will continue to take a cautious approach in business planning for the next couple of quarters, focusing on risk control of our operation. For the fourth quarter of 2025, the company expects to generate non-GAAP net income between CNY 1 billion and CNY 1.2 billion. This outlook reflects the company's current and preliminary view which is subject to material changes.

With that, I would like to conclude our prepared remarks. Operator, we can now take some questions.

[Operator Instructions] For those who can speak Chinese, please start your question in Chinese, followed by an English translation. [Operator Instructions] Thank you. Your first question today comes from Cal Huang from Morgan Stanley.

[Foreign Language]

We can't hear you clearly.

[Foreign Language] So basically 2 questions from me. One is after the new loan facilitation come into effect in October, how should the management think about the change to the business model or profit model of the loans? And what's the expectation for the take rate in 2026? And maybe over the long run, how should we think about the loan economics when they normalize?

And number two is how do management think about the competitive landscape after the loan facilitation rule taking effect?

Okay. Thank you, Zheong. And in terms of regulation and take rate, with the new rules in place, both on loan facilitation space and the broader consumer finance industry will need some time to adjust. In near term, the rules will have some impact on market size, risk levels and profitability. This is for sure. But in the long run, we believe the competitive environment will become more sustainable and healthier which is good to our industry.

As for the near-term impact, let me talk about what we are seeing right now. First, as the entire industry is lifting the risk bar, funding capacity for our ICE and referral businesses will come down. This means some users will no longer be [ there, ] and this will have some impact on our loan volume. For the rest of business, as we adjust pricing, the take rates will decline. But on the positive side, we expect to see better conversion, higher loan amounts and less early repayment. This will help you reduce some of the pressure on the net take rate.

Second, the liquidity pressure in the market is pushing overall risk higher for the broader consumer finance space. Our C2M2 was up to 0.79% in Q3 from 0.64% in Q2, and the net provisions were up about 36% compared to Q2. We expect this trend to continue at least in the next 1 or 2 quarters.

Based on our Q4 guidance, we are roughly talking about take rate of 3% to 4% because of pricing and the risk impact. Over the next 2 quarters, we expect the industry to remain volatile, and we are trying to get a better understanding on our take rate for in the new loan.

For 2026 and beyond, the take rates will depend on how things evolve from the Q4 baseline. Specifically, our focus will be a few things. First, we will continue to optimize our risk strategies and improve collection efficiency to enhance our risk performance. Second, we will further optimize costs in user acquisition and operations to improve overall efficiency. Third, we will also explore some new service offerings to further improve user conversion and retention. We hope these efforts could help improve our take rate over time.

And for your second question, for the competitive landscape, since the new rules came out in April, we have seen a major shakeup in the high pricing segment. New loan volumes in that market decreased a lot. Some smaller platform may not survive in the future. The rest of the platform are also shrinking their loan book. So entering Q4, we are actually seeing less competition for traffic. Looking ahead, some of the platform currently operating in high pricing segment may also try to move into the 18% to 24% range, but it is very difficult for them to be profitable in [ advance ] given the disadvantage in funding risk management and operational efficiency, So in longer term, we think some of these players will eventually leave the market.

We think that the market consolidation will benefit us in a few ways. With fewer smaller platforms competing for traffic, our marketing efforts will be more effective. We can acquire higher-value users more accurately with lower acquisition costs. In the new market environment, the user's multi-borrowing situation improves. We should be able to expect lower credit risk and better conversion rates. As such, users' lifetime value will improve in the longer term. So overall, we think the longer-term competitive environment will become more in our favor, and we see room to take more market shares over time. Thank you.

Your next question comes from Lincoln Yu at JPMorgan.

[Foreign Language] Okay. I will translate my question. So my question is on shareholder return. So given the recent share price volatility and the regulatory uncertainties, would there be any change in the company's execution of the existing buyback plans? We still have about like 170 million remaining from the announced like in last November. And also in longer term, what is the company's consideration on shareholder return?

Okay. Lincoln, I will take this question then. So just like you said, as of now, we still have about 170 million left under our 450 million program designed for this year. And we took a temporary pause during the third quarter, just given the incoming regulatory update and all the risk associated with that. Now after today's earnings call, the new window will open in terms of repurchase. We will resume the execution of this program to fulfill our commitment for the rest of the year.

And then regarding the dividend, we have been stated that our goal is to gradually increase dividend per ADS through the -- through each semiannual kind of a dividend payout. And right now, the Board-approved dividend payout ratio is 20% to 30%, which still gives us enough room to maintain that kind of a progressive dividend trend, even with the volatile kind of earnings movement for the next few quarters there. Eventually, we still aim to achieve that progressive dividend target for the foreseeable future.

In the long run, we still put the shareholder return as one of the top priorities for this company, although the mix between the buyback and dividend payout may change from time to time depending on the situation that we are facing at any given time. Okay. Thank you.

Your next question comes from Alex Ye at UBS.

[Foreign Language] So my question is regarding the asset quality trend. So just wondering how has been the trend -- monthly trends for October and September and November? Have we seen any rate deterioration in -- versus Q3? And assuming there's no further trends in regulatory framework, so how -- when does management expect the equity to stabilize and pick? What are the upside that we should be aware of?

[Foreign Language]

[Interpreted] So let me do the translation. Since the new rules started to take effect on October 1, high-cost fundings have tightened further. At the same time, industry risk levels have been going up in Q3. So pretty much all platforms, no matter the price level, have made risk management first and tightened their risk policies. This has made liquidity even tighter and pushed over risk levels further up. But we are also seeing some positive signs in November. The early risk indicators of new loans are showing signs of stabilization and slight improvement. The FPD7 delinquency rate for new loans in September decreased by 8% compared to that of July. In terms of the risk performance of overall loan portfolio, the 7-day delinquency rate observed in November has remained broadly flat compared to October with no further upward trend.

[Foreign Language]

[Interpreted] So right now, we mainly focus on 2 areas to lower rates. For pre and in loan processes, we are modestly increasing the share of high-quality users to optimize overall rate structure. We are also increasing operational resources for low-risk users and use large leverage model algorithms to improve pricing. With more tailored pricing, exclusive benefits and the [indiscernible] user journey, we intend to improve user conversion and retention.

For collection, we are adding more in-house capacity and increasing support for our partner agencies. We are also improving all profile users in match cases. So each case can go to the right team. Powered by large language algorithms, we can now get a better rate on borrower facility and willingness to repay, addressing their group tailored our approach to [indiscernible]

[Foreign Language]

[Interpreted] So looking ahead, although we have seen some early signs of stabilization, it's only been about 2 weeks into November. So we will need some more time to tell [indiscernible]. Our loan [ tenure ] is usually 9 to 10 months. So when we tighten risk strategies for new loans, it usually takes 2 to 3 quarters for the improvement to show up in the overall portfolio. But the market dynamic is still evolving, and the leading risk indicators for new loans haven't been down to our desired levels yet. So this adjustment cycle will likely take a bit longer than we expected.

On the financial side, our provisions and profit buffer of our business are both very solid. This gives us plenty of room to manage through the short-term industry headwinds. We have been through many challenges before. At each time, we were able to respond quickly and effectively. So we are confident we can bring risk levels back to a reasonable range once again.

Your next question comes from Emma Xu of BofA Securities. Please go ahead.

[Foreign Language] So according to recent media reports, regulators are starting new regulations for consumer finance companies that will lower the APR of newly issued loans to 20%. So although these regulations will not apply to loan facilitation firms, has the management evaluated the potential implications if the average APR will fall to below 20%? Could this lead to a slow down in loan growth and an increase in credit cost? In such a scenario, does the company has any measures in place to hedge against the impact on profitability?

Okay. Okay. Emma, let me take this one. Yes, on the pricing guidance for consumer finance companies, there's no formal document status at this point. just informal communication. As we understand, consumer finance companies are required to keep their average pricing below 20%. We think the logic behind this is quite close to the new rules on loan facilitation sector as the regulators' intention is also to reduce the borrowing costs for consumers and make credit more accessible.

In the near term, yes, it will have some impact on market size, risk levels and profitability. But over time, we think it will help create healthier competition and improve asset quality.

In terms of funding, our direct exposure to consumer finance companies is small. So the direct impact on us is limited. First, the consumer finance companies source their business from diverse channels. industry-wide, about 40% of their loans is self-operated and about 60% from API channels, mostly platform under other Internet companies. Our cooperation with them just accounts for a very small part.

In terms of funding, they only account for about 15% of our loan mix. Most of our funding comes from banks. So we are flexible to shift our funding structure if needed. As such, we think the direct impact on us is quite limited, but there is indirect impact. As consumer finance companies adjust their pricing, we may expect further pressure on liquidity in the short term, leading to risk volatility. In that case, we may continue to lift our part to mitigate the risk.

Our average APR in Q3 was 20.9%. Going forward, we need to strengthen our ability to serve higher-quality users. With a broader user base and a better mix, we should be able to optimize pricing and keep our risk well balanced. In the meantime, we will maintain our operation to improve overall profitability. The point is we care about -- we care more about our users' long-term value than certain profitability. Thank you.

Your next question comes from Cindy Wang at China Renaissance.

[Foreign Language] I have 2 questions here. First, during the opening remarks, CEO mentioned Technology Solutions loan volume up more than 200% quarter-over-quarter in Q3. What's the main drivers behind it? And what is the outlook of this business?

Second, in Q3, capital light accounted for 42% of the new loan volume, largely the same as Q2, but down 3 percentage points quarter-over-quarter to 48% of loan balance. So how do you expect the ratio of capital-heavy and capital-light business to new loan volume and loan balance in Q4 and 2026?

Okay. Okay. Thank you, Cindy. I can take a first one, and Alex, you can take the second one. So far, yes, so far, our tax solution business has partnered with over 20 financial institutions. In Q3, we facilitated around RMB 5.4 billion in loan volume through this model, up 218% quarter-on-quarter. And the outstanding balance has exceeded RMB 10 billion lately. Two main factors are driving this growth. First, loan volume with our same partners is steadily ramping up. Second, we are expanding the way we collaborate with financial institutions. Not only can we facilitate credit business within their ecosystem, but also across a broader set of online scenarios. This really highlights the value we bring in customer acquisition and risk management across diverse channels. We are also seeing strong demand from financial institutions for AI agents. Because of that, our solution is more than technology infrastructure. We are currently upgrading our FocusPRO product into our super credit AI agent.

Take our AI credit officer, an example. Traditional off-line credit products in banks have long complicated processes. Powered by large language model capabilities, AI Credit Officer can use the one single model to handle all kinds of documents processing tasks, do due diligence and credit approval states. This will streamline the process by removing overlapping models running in parallel. As a result, users do not need to resubmit their materials. The whole process can be accelerated and the approvals can be completed within the same day.

On the risk assessment side, by leveraging our [indiscernible] level risk decision data sets and multi-model large language model technology, the agent can identify risk in seconds, generate more precise user profiles within minutes and keep iterating based on feedback. In the pilot run with our bank partners, our AI agents are already making an impact in key areas like customer acquisition and approvals. The market feedback has also been very positive. We are also seeing interest from several other financial institutions in their products. We believe the future upside of our super credit AI agent is very huge. Thank you.

Cindy, to your second question regarding the mix between capital heavy and capital light. In the short term, as we are facing very volatile kind of market condition that we discussed earlier, we may need to make some flexible adjustments to the mix. On one hand, for example, in this kind of generally higher risk environment, we intend to do more capital light versus capital heavy. But on the other hand, the price cap on the '24 also limited our capability to do the IC side of the business. So those 2 forces probably will work together in the fourth quarter in particular. But directionally, I would say you probably will see a little bit more on the capital light side in the fourth quarter and as we intend to reduce the risk exposure.

And then the longer term, I think we still need to make from quarter-to-quarter or time to time, we still need to make timely adjustments based on the conditions we were facing based on the risk level the market presents and also based on the funding sources we're getting to decide what's the best solution or best mix for us in terms of mix. So I don't think there will be -- at least for the 2026, I don't think there will be a directional movement toward the light or towards heavy and most likely, we'll be sort of bouncing around the sort of the 50-50 line throughout the next year. Thank you.

Thank you. That concludes our question-and-answer session for today. I'd like to hand back for closing remarks. Thank you.

Okay. Thank you again for everyone to join us for the call. If you have additional questions, please feel free to contact us off-line. Thank you. Have a good day.

Thank you. That does conclude our call for today. You may now disconnect your lines. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]