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Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding second quarter 2026 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Ms. Xinyan Liu, the company's Head of the Board Office and Capital Markets. Please go ahead, ma'am.

Thank you very much. Hello, everyone, and thank you for joining us on today's call, the company's first investor conference call in almost two years. Our financial and operating results were released by our Newswire services earlier today and are currently available online. This represents a key milestone as we return to a normal reporting cadence. Today, you will hear from our Director and CEO, Mr. Ji Xiang, who will provide an update of the recent developments and strategies of our business. He will also provide details on our financial performance and the business operations. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I am now pleased to turn over the call to Mr. Ji Xiang, Director and CEO of Lufax. Please.

Thank you, Xinyan. Thank you all for joining our second quarter 2026 earnings call. Today's release marks the first step towards a normal, predictable reporting cadence of Lufax. We very much appreciate the continued patience and support of our shareholders and the broader investor community throughout the process. I want to begin with updating you on the progress our management team has made in restoring Lufax financial reporting and strengthening our governance. Since taking on our roles, we completed the re-audit for 2022, 2023 financial statements and completed audits for 2024 and 2025, with all financial reports now published. As a result, we have brought our SEC periodical filings current and regained compliance with New York Stock Exchange continued listing standards.

We engaged Deloitte Consulting (Shanghai) Co., Ltd. as our new independent internal control consultant to conduct a comprehensive review of our internal controls and to provide rectification recommendations to enhance our internal control system. We have implemented corresponding remedial measures to address identifying internal control deficiencies in accordance with Deloitte's recommendations. Beyond engaging Deloitte, we also strengthened our corporate governance through a restructuring of our board and the establishment of the position of Chief Compliance Officer. Independent non-executive directors now make up a majority of our board, and our Chairman, Mr. Dicky, is an independent non-executive director himself. Going forward, we remain committed to further strengthening our internal controls, including through our new company-wide compliance initiative and the compliance culture we're building across the organization. We are equally committed to delivering long-term value to our shareholders as we return to a normal, predictable reporting cadence.

As you may note, while our ADSs have been trading normally on the New York Stock Exchange, our ordinary shares remain suspended from trading on The Stock Exchange of Hong Kong Limited. A matter we continue to work through with The Stock Exchange of Hong Kong Limited. Now moving on, let me share a bit of update on the macro and regulatory environment. Amid numerous external uncertainties and instabilities, China's overall economic growth continued to moderate in the second quarter, with GDP growing 4.3% year-over-year. The operating environment for small and micro enterprises stayed difficult, and financing demand remained weak. Tsinghua Business School SME Development Index fell month-over-month during the quarter and dropped below the 50-point boom-bust line in June. This basically reflects a challenging environment for our core small business customer base. Consumer finance demand was similarly soft.

Household consumer loan balances were down 1.7% year-over-year as of the end of June. On the regulatory side, regulators have issued a number of guidelines, policies since 2025, covering a wide range of things such as collection practices, data securities, and personal information protection. Oversight now spans the full value chain from pricing and customer acquisition through risk management, post-loan operations, and data governance. Combined with continuous interest rate compression and the fee transparency requirements, industry margins are narrowing. The previous business model of offsetting high risks with high fees is no longer sustainable. We see this as near-term pressure on growth and profitability. Over time, however, we believe such tightened regulatory requirements will support healthier and more disciplined competition across the industry, and enhance competitive advantage of top players with proper licenses and compliance mechanisms. Now, let me turn to our operating strategy.

Given the environment, we are remaining a prudent strategy characterized by selective customer strategy and AI-powered refined operations. Our selective customer strategy is focusing on shifting our customer mix towards lower-risk borrowers. Meanwhile, we aim to improve our performance through AI-powered refined operations. We are now focused on customer segmentation and on deepening our relationship with existing customer base. We launched our Industry+ product, which deploys differentiated product and operational priorities tailored to local industries and customer across different regions. So basically, the plus is industry, plus region, or even at a country level. We develop customized financing solutions based on the unique operational characteristics and funding needs of different sectors, enabling more precise and customized support to satisfy the financing needs of our SBO, mobile owners customer base. Moreover, we are using AI to further improve our operational efficiency. We introduced AI-powered digital twin.

This supports our direct sales team across acquisition, product recommendation, post-loan management, and customer engagement, improving both service quality and operational efficiency. We are also improving our customer management model, going from single product sales towards full lifecycle account management, leveraging our direct sales team expertise and interaction with customers. We believe this effort will enable long-term customer value cultivation. Turning now to our operating results. Total new loan sales in the second quarter were RMB 51.1 billion. This was up 4.6% year-over-year and up 4.8% from the first quarter. This growth was driven by consumer finance, where new loan sales grew 27.6% year-over-year to RMB 36.9 billion. We continue to gain share in a pretty contracting market.

Our total outstanding loan balance was RMB 167.3 billion as of the end of the second quarter, down 13.5% year-over-year, reflecting continued weak demand in the SBO business segment, combined with our prudent underwriting approach. Turning to asset quality. We prioritize improvement of our intelligent risk control system by further optimizing our risk strategy and upgrading our models. On the post-loan side, we expanded our collection model reforms and broadened the use of AI-powered collection. These efforts delivered improvement in asset quality on a sequential basis. Our CM3 flow rate was 1.0% in the second quarter, down from 1.2% in the first quarter.

CM3 flow rate of unsecured loans was 1%, and secure loans was 0.9% as compared to 1.2% and 1.0% respectively in the first quarter. DPD 30+ delinquency rate, excluding consumer finance subsidiary, was 5.8%, down from 6.1% sequentially. As of the end of the second quarter, the NPL ratio for consumer finance loan was 1.3% as compared to 1.4% as of March 31st, 2026. Now let me turn to pricing and funding costs. The average pricing of Rongyi loans, previously known as Puhui loans before the rebranding in 2025, was 20.4% in the second quarter, slight sequentially and up slightly year-over-year. The average pricing of consumer finance loan was 19% in the second quarter. On funding, we continue to optimize our costs.

We leverage our long-term relationships with our banking partners to reduce funding costs under our guaranteed model. Our cost of funding by balance, including consumer finance, was 3.8% in the second quarter, down around 90 basis points year-over-year. As for consumer finance loans enabled by our consumer finance subsidiary, we continue to access low-cost funding in the interbank market, leveraging our license advantage and consistent with broader downward trend in the interest rate. All right. Now, let me briefly discuss the key business drivers behind our second quarter results. On the top line, total income declined by 15.5% year-over-year, driven primarily by decrease in the balance of our Rongyi loans as small business owners demand remained weak. And we maintained a prudent underwriting approach in light of the increased risk associated with certain long-tail customers.

This was partially offset by continued growth in our consumer finance loan balance, which grew nearly 20% year-over-year. On the bottom line, while our net loss narrowed sequentially from the same period last year, we recorded net loss for the quarter continue to reflect credit costs that remain elevated relative to our income base. This is heightened by the challenged macro environment for small business owners and by tightened regulatory requirements that impacted supply of high-priced products. While we believe such tightened regulatory requirements will benefit the development of industry in the long run, in the short term, the reduction in supply to high-risk customer segments adversely impacted their repayment capability and increased our credit costs. Going forward, we remain focused on disciplined execution, strengthening our governance and controls, and on building a sustainable high-quality growth path for Lufax.

Again, we very much appreciate your continued support, and this concludes our prepared remarks for today. Operator, we are now ready to take any questions.

We will now begin the question-and-answer session. To ask a question, please press star then one. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two. In addition, I would like to remind you to please mute yourself after stating your question. Thank you. The first question today comes from Richard Xu with Morgan Stanley. Please go ahead.

Thank you for taking my question first. Two questions. One on strategy. I just want to see from the view of management team, what will be the top two or three priorities over the next two to three years? Will there be any material changes versus previous strategy? Secondly, is on the loan growth and business mix. New loans return to positive in second quarter. Obviously, the consumer finance accounting for a rising share of business. Is this sustainable, there is still a lot of policies trying to obviously influence the growth in this area's pricing. Under the new strategy, what should be the long-term balance between consumer and, I guess, the SME loan portfolio? Thank you very much.

Thank you, Richard. Thank you for your questions. Basically, the first question is around strategy, right? Over the next two to three years, our top priorities are pretty clear, right? First, growing the mid- to low-risk customer base. We want to focus on high-quality customers across three segments. Small business owners, which is really the stronghold of Lufax over the years. Individually owned businesses or self-employed. That is basically a new customer segment we want to broaden. And salaried employees, right? Through consumer finance, we see some good momentum and want to see that to continue. By increasing the proportion of mid- to low-risk customers, build a more diversified product matrix, right? Deepen refined operations by customer segment and achieve improvement in risk and profitability. So that is our basically the very much the top line priority.

Second priority, with all the pricing compression and sort of credit cost going up in the market, we want to continue to optimize our cost structures. We are going to comprehensively apply and promote AI applications across business to optimize customer acquisition, risk, operating costs, and create more rooms for improved profitability while we are lowering the price. Third, strengthening internal controls and compliance, right? Like what Xinyan Liu said, it has been two years, we have not been able to talk to you. So we want to strengthen internal control and compliance, strictly implement regulatory requirements to achieve a long-term sustainable development. The previous strategy, as is set out in 2024, two years ago in the earnings call, centered around two pillars. Number one, prudent operation, prioritizing asset quality over scale growth. Number two, business diversification, growing consumer finance, expanding our non-SBO consumer base.

Going forward, this is still the sort of the strategy we are basically trying to implement. We will further strengthen our due engine strategy for small business lending and consumer finance, while also relying on our new selective customer strategy to optimize customer base, drive growth in the business scale, and improve profitability. When it comes to the second question, right? The second question around, we have the consumer finance going up, whether that is sustainable with the proportion between the consumer finance business and SME. Our strategy is to build two growth engines. One is small business lending, the other is consumer finance, with resources concentrated on the two core consumer segments. As you can see, consumer finance is a new growth engine and will continue to be the driver for growth.

We are testing new customer acquisition models as we speak and product combinations to serve higher quality customers. We believe this growth is sustainable. When it comes to small business lending. Small business lending, we see that as our traditional strength. Our focus there is to return to growth through improved customer acquisition efficiency and broadened product portfolio and stronger risk management capability. We see small business lending and consumer finance complementary. They have different demand characteristics and risk profiles. So going forward, we will endeavor to continue to optimize our business mix based on market conditions to achieve balanced growth.

The next question comes from Emma Xu with Bank of America. Please go ahead.

Thank you. Thank you for the opportunity to ask the question. I have two questions. The first one is about the regulation. Following recent stress amongst the smaller online lending platforms, has management observed any tightening in institutional funding or borrower refinancing conditions, and how will you deal with this? The second one is about the capital return. Given the large free cash balance and improving operating trajectory, what level of capital do you consider is necessary to support this business under the full guarantee model? Once sustainable profitability is restored, should investors expect the existing 30%-40% payout framework to remain the base policy? Under what conditions would you consider additional capital distribution? Thanks.

Yeah. Thank you for the question. Basically, first of all, talking about the regulation. As well, the sizable players in the market, we fully welcome the tightened compliance regulation, et cetera, right? Strengthened compliance across the industry is inevitable trend. Recent policy changes are aimed at comprehensively strengthening compliance requirements, protecting consumer rights, and promoting the healthy and sustainable development of the industry. We will continue to implement the adjustment in line with regulatory requirements at our full strength. The tightened regulatory requirements will bring some pressure to our business in the short term, for sure. We will accelerate our selective customer strategy, strengthen cost management, optimize cost structure, and improve capital efficiency, among other measures, to continue optimizing customer acquisition, risk, and operating costs. This will further create room to lower pricing while ensuring stable profitability.

Nevertheless, over midterm to long term, this trend will help healthy growth of the industry. Compliant leading platforms, such as Lufax, will benefit from further optimization of the industry landscape and gain market share. In short-term, we do feel pressure, in terms of our business performance. But we are also optimistic around midterm and long-term performance because a more compliant market will benefit players such as us. You also have a question around capital return, right? Management believes our current cash position is appropriate relative to the scale of our business. It reflects both the capital requirements and the applicable financial regulations, and the need to maintain a buffer to support future growth. Management is focused on executing our strategy, right? Our top priority is returning to profitability as soon as possible in order to create long-term value for shareholders.

Our dividend policy, once we achieve our profitability target, management will review the dividend policy together with the board and to decide whether we should have payout per month.

The next question comes from Alex Ye with UBS. Please go ahead.

Hi, many thanks for taking my question. Two questions from me. First one is regarding our unit economics. Now with our transition to the full guarantee model largely complete, can you give us more color about underlying profitability of the new loans and what is the expected net rate for this new full guarantee business? Second question is on asset quality. We have seen some early indicators, including CM3 and consumer finance NPL ratios improved quarter-on-quarter in Q2. Some of the lagging indicators still remain elevated. We have also seen there has been some risky banks across the smaller platforms in the industry since the end of Q2. Could you comment a little bit on the latest asset quality trend? Thank you.

Sure. This is first time that I talk to our shareholders, investors, analysts. However, the new strategy has been implementing, I would say, since the earlier beginning of the year. With the new strategy, we have seen improvements in the asset quality of new Rongyi loans enabled in 2026. We believe our overall profitability will continue to improve as we continue to implement the new strategy. What I can see for this call is the new loans we have issued over the first half of the year have improved profitability over the assets we have accumulated in the year of 2025. That leads us to asset quality. Since the start of this year, we have upgraded our risk control measures. We actually take a very prudent approach. We also refined our risk strategy and enhanced our risk models.

On the post-loan side, we have broadly rolled out collection models reforms and expanded the use of AI-powered collection. All this initiative has delivered initial positive results with sequential improvement in asset quality in the second quarter. Asset quality has been gradually worsening since the second half of last year. However, as you can see, in the second quarter, our CM3 flow rate declined notably compared to the first quarter. The management is expecting the trend to continue over the second half of the year. Thank you.

The next question comes from You Fan with CICC. Please go ahead.

Okay. Thanks management for taking my questions. This is You Fan from CICC. I also have two questions here. The first one is about customer communication. We noticed that the secured loans of Rongyi price around 17%. Do the credit characteristics of these customers qualify them for bank loans? For the relatively high-quality customers, how does the company compete with banks or other lower price channels? The second question is about Hong Kong trading. I just wonder how is the processing of the resumption of our trading in Lufax Hong Kong sales, and could you share, is there any better visibility on the trading resumption timeline? These are my two questions. Thank you.

Yeah. Thank you. First of all, we don't see ourselves competing head-to-head with most of the banks, right? Our Rongyi product targets small business owners and individually owned businesses, a customer base that different from typical bank customers. Why I say different? Many of these customers either cannot access bank loans or cannot obtain sufficient loan amount from the bank. Basically, Rongyi fills this supply gap and complements bank rather than competing head-to-head. Rongyi and bank products are priced differently, which allows the two to complement each other well. Our products differentiated advantage, including higher loan amounts, a more convenient process, and typically take less than a day, and flexible repayment terms, which better meets customer supplementary and emergency financing needs. On refined operation, we launched our Industry+ initiative, which is tailored to the distinct operating characteristics and financing needs of different regions and industries.

For example, I've been to province such as Shandong, such as Guangdong, et cetera. At a county level, they typically have industries which are basically serving the entire nation. Right? For example, cooking wares in a particular county in Shandong and lighting facilities in a particular county in Guangdong. Right? We are basically leveraging our direct sales to penetrate it to county level. This allows us to design dedicated product solutions that more precisely address small business finance needs across different sectors. Right? You also asked a question around Hong Kong trading resumption. We have now completed the receipt of our 2022, 2023 financial statements, the audits of 2024 and 2025, right? With all reports now published and released, we now also completed the internal control review and upgrades with the help of external professionals.

The company is still responding to outstanding questions and comments raised by The Stock Exchange of Hong Kong Limited regarding the relevant fundings. We will keep investor updated on any developments in a timely manner, and will make appropriate announcements as necessary.

Thank you. That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks.

Thank you, operator. This concludes today's call. Thank you for joining the conference call. If you have more questions, please do not hesitate to contact Lufax IR team. Thanks again.

Thank you. The conference is now concluded. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Third Quarter 2024 Earnings Call. [Operator Instructions] After the management's prepared remarks, we will have a Q&A session. Please note this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan the company's Head of Board Office and Capital Markets. Please go ahead, ma'am.

Thank you very much. Hello, everyone, and welcome to our third quarter 2024 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and the strategies of our business. Our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance and the business operations. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax, please.

Thank you for joining us today for our third quarter 2024 earnings call. During the third quarter, while Puhui loan demand remained weak as small business owners continue to face a complex macro environment, we saw ongoing growth in our consumer finance business. We are hopeful that policy stimulus measures introduced by the Chinese government in late September will help improve the macro environment and have a positive impact on our business performance in the long run. Meanwhile, we plan to stay vigilant and prudent in the execution of our business strategies in light of the increased risk exposure on the 100% guarantee business model. Before we discuss the business details, let me share some updates on the macro environment. In the third quarter, the macro environment remains challenging for small business owners. The SME development index declined by 0.3 points quarter-over-quarter to 88.7 in September. The Business Conditions Index published by the Cheung Kong Graduate School of Business also declined from 49.3 in June to 46 in September, suggesting persistent challenges faced by small business sector. On the other hand, we are encouraged by signs of mild recovery in the consumption sector during the third quarter as the CPI showed improvement from 0.2% in June to 0.4% in September. In late September, we are glad to see that the Chinese government announced a number of new stimulus policies, including measures to help to the recovery of the real estate sector and increase liquidity, such as the cut to reserve requirement ratio and the lowering of existing mortgage rates. Local governments also launched a series of stimulus initiatives relating to real estate and consumption to boost consumer confidence and strengthen the economy. We believe all of these efforts will have a positive impact on SBOs in China. Meanwhile, we recognize it will take time for SBOs to benefit from these measures and improve performance, so we remain prudent as we execute our business strategies in the short term. Furthermore, we also put more emphasis on our non-SBO customers and continue to grow our consumer finance business. This should help us take full advantage of gradual effects of consumption recovery, and we'll be in a solid position for our future growth. Now let's turn to our operating results. First, let's take a look at our loan volume. Total new loans sales in the third quarter were RMB 50.5 billion, flattish year-over-year and improving by 11.7% from last quarter. The quarter-on-quarter growth despite the macro challenges, was mainly attributable to the continued growth of our consumer finance business, which offset the ongoing weakness in Puhui loan demand from high-quality SBOs. New consumer finance loans increased by 27.8% year-over-year and accounted for 52% of our total new loans sales in the third quarter as a result of our continued efforts to roll out smaller tickets and revolving product structures. Balance-wise, our total loan balance stood at RMB 213.1 billion as of the end of third quarter, of which consumer finance loans took up 22%. Turning to asset quality. Our tightened risk control policies and enhanced risk assessment systems have helped maintain stable asset quality. The C-M3 flow rate of Puhui loans remained at 0.9% during the third quarter despite a decrease of total balance as compared to the second quarter. The asset quality of our consumer finance loans also stayed strong, with NPL ratio further decreasing to 1.2% from 1.4% in the second quarter. As loans enabled under the 100% guarantee model kept increasing as a percentage of total loans, our balance take rate rose by 1.9 percentage points year-over-year to 9.7% during the third quarter of 2024. Cost of funds continued to decrease driven by both monetary policy stimulus and our diversified license strategy. As mentioned during our last earnings call, we acquired a nationwide small lending license in July. We started to provide new loans under this newly acquired nationwide small lending license in August. As of the end of third quarter, we have provided more than RMB 1 billion in new loans under this new license. We believe our small lending license has a potential to further reduce our funding costs, diversify our product portfolio and improve our capital management efficiency. Finally, I want to provide an update on Ping An Group's mandatory general offer. On September 27, Ping An Group dispatched offer document and commenced the offer period. If there are no additional requirements from regulators, the offer period will end on October 28. As stated in the offer document, Ping An Group is making the offer solely to comply with applicable rules and has no intention to privatize Lufax. The intention is that Lufax will continue to remain an independent entity listed on the New York Stock Exchange and Hong Kong Exchange. Looking ahead, we seek to continue to deepen our synergies with Ping An Group, leveraging its brand, reputation, technological resources and extensive network to strengthen our market position. I will now turn the call over to Peiqing, who will provide more details on our financial performance and business operations.

Thank you, Y.S. I will now provide a closer look into our third quarter results. Please note, all numbers are in RMB terms and all comparisons are on a year-on-year basis, unless otherwise stated. In the third quarter of 2024, our total income decreased by 31.1% to RMB 5.5 billion from RMB 8.1 billion, mainly due to a decrease of outstanding loan balance by 41.8%, partially offset by our increased take rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 19.2% to RMB 6.3 billion from RMB 7.7 billion, among which the total operating expenses declined by 35.9% to RMB 3 billion from RMB 4.7 billion. And credit impairment losses increased by 9% to RMB 3.3 billion from RMB 3 billion. Operating efficiency improved, with our operating expenses to income ratio decreasing from 53.8% from 57.8% in the third quarter of 2023. The increase in credit impairment losses was mainly due to increased provision related to our loan book and certain investment assets. As a result, we recorded a net loss of RMB 725 million for the third quarter. Turning to the unit economics of our loan business. Our APR by balance decreased 19.5% from 20.1%. Despite the decrease in APR, our take rate by balance increased to 9.7% from 7.8%, primarily due to the removal of negative impact from high CGI premium to our transition to the 100% guarantee model, and also thanks to the decrease in our funding costs. We expect that the take rate will further increase as the percentage of the loans enabled under the 100% guarantee model continues to increase and that funding cost will continue to decrease as we continue to optimize our funding structure by leveraging our consumer finance and small lending license. On the expense side of the unit economics, while sales and marketing expenses remained stable, credit costs and other operating expenses were a drag on our net margin. Credit costs increased primarily due to the increased risk exposure and provision for our loan book. As discussed before, while we anticipate loans under the 100% guarantee model will be lifetime profitable, it's important to note that these loans may incur accounting losses in the first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability but is expected to lead to improved long-term financial performances as the loan portfolio matures. The increase of other operating expenses was primarily due to the contraction of our loan balance and the reduced economies of scale. Now let me highlight a few key P&L items. During this quarter, our technology platform-based income was RMB 1.6 billion, representing a decrease of 49.9%, mainly due to a decrease in retail credit service fees as a result of 41.8% decrease in outstanding loan balance. In addition, it was also negatively affected by cessation of the Lujintong business in April 2024. Our net interest income was RMB 2.7 billion. a decrease of 18.8% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guarantee income was RMB 818 million, a decrease of 13.1%. In terms of revenue mix, technology platform-based income accounted for 29.5% of our total revenue, down from 40.5% in the same period of last year. Net interest income and guarantee income accounted for 48.5% and 14.7% of total revenue in the third quarter, respectively, as compared to 41.1% and 11.7% in the same period of last year. In terms of expenses, our credit impairment losses increased by 9% to RMB 3.3 billion, mainly due to increased provisions related to loans as we applied a more prudent approach in our ECL model to reflect the complex macroeconomic environment in the third quarter as well as increased provision related to certain investment assets. Our total sales and marketing expenses, which include expenses for borrower acquisition costs as well as the general sales and marketing expenses decreased by 49.9% to RMB 1.1 billion, mainly due to reduced loan-related expenses resulting from the decrease in new loan sales and outstanding loan balance as well as the elimination of expenses associated with our Lujintong business. Operation and servicing expenses decreased by 25.8% to RMB 1.1 billion as a result of our continued effort to control expenses and decreased loan balance, partially offset by increased commission associated with the improved collection performance. Our finance costs increased by 48.9% to RMB 59 million from RMB 40 million, mainly due to the decrease of interest income from bank deposits, partially offset by the decrease of interest expenses after repayment of our C-round convertible promissory notes upon the maturity on September 30, 2023. In terms of capital, as of the end of September 2024, our main operating entities remain well capitalized. Our guarantee subsidiary's leverage ratio stood at 2.6x and our consumer finance subsidiary's capital adequacy ratio stood at 14.9% as compared to the 10.5% regulatory requirement. As we deal with the complexity of the broader economic environment, we are now seeing encouraging signs in terms of asset quality and in the growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term sustainable future operations, and we'll uphold the commitment to bring value to our shareholders. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] The first question today comes from Betty Li with CLSA.

So I have two questions. The first one, could you kindly express what will be the impact of the new policy stimulus on your business? The second is, could you share more about the business outlook for this year and beyond?

Thanks, Betty. About stimulus policy, it is surely a positive impact, I think, on our economy and in our SBO segment as well. But knowing small business owners in general are in difficulty now, it will take more time for them to benefit from these measures and improve performance. So in the near term, we remain prudent and put asset quality over quantity for SBO lending. But at the same time, we’ll take full advantage of the gradual recovery by putting more emphasis and focus on non-SBO segments and expedite small- and medium-sized ticket loan growth using our CF license, consumer finance license, and the newly acquired small lending license with their funding cost advantage and customer experience advantage of our guarantee model. And then about your outlook question, so our volume guidance of RMB 190 billion to RMB 220 billion and loan balance of RMB 200 billion to RMB 230 billion, that remains unchanged. On a single account basis, we know that due to the upfront provision of the 100% guarantee model, so profitability is under pressure in the very first calendar year. But going forward, we know and we believe the overall lifetime profitability will surely improve than before.

The next question comes from Judy Zhang with Citi.

I have two questions. The first question is regarding asset quality. I understand that Lufax has been derisking the loan book for some time, which is bearing fruit in the recent quarters. Could management share a bit more color on our latest asset quality performance? And how has our low rate delinquency rate been trending since 3Q? And second question is, does management have any plan to announce another round of special dividend this year or any other measures that you are considering to boost the shareholders' return?

Okay. Thanks, Judy. The asset quality indicators remained stable in the third quarter, with C-M3 flow rate of our Puhui loans remaining at 0.9% despite decline on balance. So while our consumer finance NPL ratio continued to improve from 1.4% to 1.2%, knowing that our loan balance reduction will come to an end a few months later and the portfolio account mix in terms of account vintage, that mix will continue to optimize, so I believe we’ll be able to demonstrate more obvious asset quality improvement measured by net flow not before long. So in that, we have confidence. About shareholder return, we do not have any specific plan yet after our special dividend this year, but the management team is committed to provide long-term shareholder returns as always, and we consider all positive ways to return value to shareholders going forward.

The next question comes from Yada Li with CICC.

My first question is regarding the credit impairment loss. Could you please share a little bit more about why the credit employment losses increased this quarter, while the risk indicators remained stable? And secondly, I was wondering, what is the trend of the funding costs going forward? That's all.

Thank you, Yada. I’ll try to answer the first question. The increase is mainly to the provision associated with our loans and certain investment assets. Increase of loan provision was driven mainly by the upfront provision of loans under 100% guarantee model, as we discussed, right, and also the prudent approach in our model to reflect our conservative forecast based on the macro environment in the third quarter. We’re still seeing some uncertainties in the macro economy. And as to the second question, I know you’re interested about our funding cost trend, right? And our funding costs further decreased in the third quarter, thanks to the favorable monetary policy and our diversified license strategy. And also we try to spend more time to work with our partners and try to cut down some of the funding cost in terms of different products. And also, we expect funding costs will further decrease as we continue to optimize our funding structure by leveraging our consumer finance and small lending licenses.

That concludes our question-and-answer session for today. I will now turn the call back over to management for closing remarks.

Thank you. This conference is now concluded, and thank you for joining today’s call. If you have any more questions, please do not hesitate to contact our IR team. Thanks again.

Thank you. The conference has now concluded. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam.

Thank you very much. Hello, everyone, and welcome to our second quarter 2024 earnings conference call. Our financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the recent developments and the strategies of our business; our CFO, Mr. Peiqing Zhu, will then provide more details on our financial performance and business operations. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax. Please.

Thank you for joining us today for our second quarter 2024 earnings call. In the second quarter, the macroeconomic environment remains complex for small business owners. Despite this, we saw continued improvements in asset quality across both our Puhui and customer finance businesses as we continued to implement our prudent business strategies. We believe this will provide a solid foundation for our future growth. Let me provide some updates on the macro situation before we discuss the business details. The SME development index trended down by 0.3 points quarter-over-quarter to 89 in June. Meanwhile, the Business Conditions Index published by the Cheung Kong Graduate School of Business declined from 50.1 in March to 49.3 in June, falling below the 50 threshold and reaching its lowest level for the first half of 2024. These indicators underscore the persistent challenges faced by the small business sector. Now let me provide some updates on our operating results. First, let's take a look at our loan volume. Our total new loan sales in the second quarter of 2024 were CNY 45.2 billion, representing a 15.5% year-over-year decline. The decline was mainly caused by a 35% year-over-year decrease of Puhui loans, which comprised 51% of total new loan sales in the second quarter, reflecting our continued emphasis on quality over quantity and sluggish demand for Puhui loans on high-quality SBOs. Meanwhile, our consumer finance business continues to grow and delivered a solid performance during the quarter. Consumer finance loans saw a 23.6% year-over-year increase in new loan sales, representing 49% of our new loan sales. As a result of our continuous efforts to roll out smaller tickets and revolving product structures. Furthermore, we are pleased to observe a notable improvement in asset quality as we adopt more stringent credit standards with focus on higher-quality customer segments and resilient geographies bolstered by our enhanced risk assessment system. For Puhui loans, the C-M3 flow rate improved to 0.9% from 1.0% in the previous quarter, mainly driven by the improvement of C-M3 ratio of unsecured loans. Our consumer finance loans also saw asset quality improvements with NPL ratio decreasing to 1.4% from 1.6% in the first quarter. Next, let's take a look at our loans under the 100% guarantee model. As discussed previously, since the fourth quarter of 2023, all new Puhui loans have been enabled under the 100% guarantee model. As our Puhui loan balance increasingly represents loans enabled under this model, our balance take rate has trended upwards, reaching 9.3% during the second quarter, as a negative impact from our high CGI premiums has been eliminated. Thanks to this improved asset quality, our credit costs have remained stable despite increased risk exposure. However, it is worth noting that due to decrease in loan balances, our unit operating expenses have increased, which has become a key drag on our unit profitability. Let me now provide some updates on our newly acquired PAObank. By leveraging strategic synergies, with Lufax following the acquisition, PAObank delivered solid growth in the first half of 2024, its total loan balance stood at CNY 2.4 billion by the end of second quarter, representing a 45% year-over-year increase. Going forward, PAObank is planning to roll out new initiatives, including insurance, wealth management products to better serve SME and retail customers. To reinforce the strong license strategy we have discussed in the past, we recently acquired a nationwide small lending license. We believe this new license will help further reduce our funding costs, diversify our products and improve our capital management efficiency. Now turning to the progress of our special dividend. I am pleased to announce that we completed the distribution of special dividends at the end of July as scheduled. After receiving the dividend, Ping An Group's ownership increased to 56.8% and Ping An Group now consolidates our financial results. Lufax will remain an independent entity listed on New York Stock Exchange in Hong Kong. Meanwhile, we seek to enhance synergies with Ping An Group, primarily in the following 3 key areas. First is branding. Ping An Group is a Fortune 500 company and a leading global financial institution, with a strong global reputation and financial standing we serve as a powerful endorsement for Lufax, deepening trust among our customers and funding partners. This enhanced brand association will improve our domestic and international standing and can potentially have lower funding costs. Second is technology. We will leverage Ping An Group's extensive technological resources, including its advanced AI systems to further strengthen our risk management and fraud prevention measures. Our goal is to provide small business owners and consumers with efficient, secure and cost-effective financial services. So these channel resources while adhering strictly to applicable laws and regulations, we aim to expand our reach by tapping into Ping An Group's extensive nationwide network for online and off-line channels. This expansion will complement our efforts to strengthen our direct sales force. In summary, our expanded relationship with Ping An Group will help us better serve our SBO customers, using their difficulty and expense of financing. With our strengthened capabilities, we strive to be a benchmark company with an unique law in supporting the growth of China's vital, small and micro enterprise economy. While the macro environment remains complex, we are encouraged by the improvements in asset quality and the products of our strategic initiatives. We remain committed to our deliberate strategic approach as we continue to navigate the economic landscape and have set our sights on achieving sustainable quality growth. I will now turn the call over to Peiqing, who will provide more details for our financial performance and business operations.

Thank you, Y.S. I will now provide a closer look into our Q2 results. Please note that all numbers are in RMB terms and all comparisons are on a year-on-year basis, unless otherwise stated. In Q2 2024, our total income decreased by 35.5% to CNY 6 billion from CNY 9.3 billion in Q2 2023, mainly due to a decrease of outstanding loan balance by 44.8% from CNY 426.4 billion as of June 30, 2023, to CNY 235.2 billion as of June 30, 2024, partially offset by our interest increased take rate as loans enabled under 100% guarantee model constitute a higher proportion of our total loan book. Meanwhile, our total expenses decreased by 20.3% from CNY 8 billion to CNY 6.3 billion, among which the total operating expenses declined by 29.7% from CNY 5 billion to CNY 3.5 billion, and credit impairment losses decreased by 14.6% from CNY 3 billion to CNY 2.6 billion. The gap between the decrease of revenues and operating expenses was mainly caused by the decreased economy of scale, which resulted in increased fixed expenses to income ratio. The decrease of credit impairment losses was mainly due to the decrease in actual losses of loans as a result of improvement of credit performance, partially offset by the upfront provision from loans and 100% guarantee model. As a result, we recorded a net loss of CNY 730 million for the second quarter. Turning to our unique economy for Puhui business. Our APR by balance decreased from 20.3% in the Q2 2023 to 19.6% in Q2 of 2024, primarily due to the change of customer mix as we continue to prioritize high-quality customers. Despite the decrease in APR, our take rate by balance increased to 9.3% from 7% in Q2 2023 due to our successful transition to the 100% guarantee model. We expect the take rate will further increase as the percentage of loans enabled under 100% guarantee model continues to increase. In addition, our funding cost also decreased slightly, thanks to the favorable monetary policy and the support of our funding partners. On the other hand, while sales and marketing expenses remain stable, credit costs and other operating expenses flat on our net margin. This was primarily due to the contraction of our loan balance. Furthermore, while the actual losses decreased as a result of improvement in asset quality, we recorded more upfront provision for loans enabled under 100% guarantee model, as discussed before. While we anticipate this part of the loans will be lifetime profitable, it's important to note that these loans may incur accounting losses in their first calendar year due to higher upfront provisions. This accounting treatment affects our short-term profitability, but it is expected to lead to improve long-term financial performance as the loan portfolio matures. Now let me highlight a few key P&L items. During this quarter, our technology platform-based income was CNY 2 billion, representing a decrease of 51%, mainly due to the decrease in retail credit services fees as a result of 44.8% decrease in outstanding loan balance. In addition, it was also negatively affected by the close of the Lujintong business in April 2024. Our net interest income was CNY 2.7 billion, a decrease of 19.3% from the same period last year. The relatively lower decrease in net interest income was the result of an increase in consumer finance revenue. Meanwhile, our guarantee income was CNY 850 million, a decrease of 26%. In terms of revenue mix, technology platform-based income accounted for 33.4% of our total revenue, down from 44% in the same period last year. Net interest income and guarantee income accounted for 45.4% and 14.2%, respectively, of total revenue in Q2 as compared to 36.3% and 12.4% in the same period last year. In terms of expenses, our credit impairment losses decreased by 14.6% to CNY 2.6 billion. Our total marketing expenses, which includes expenses for acquisition costs as well as general sales and marketing expenses, decreased by 46% year-on-year basis to CNY 1.4 billion in Q2. The decrease was mainly due to reduced loan-related expenses resulting from a decrease in the new loan sales and outstanding loan balances as well as the elimination of expenses associated with our Lujintong business. Operation and service expenses decreased by 15.8% year-on-year to CNY 1.3 billion in Q2, as a result of decreased loan balance and our continued efforts to control expenses, partially offset by increased commissions associated with improved collection performance. Our finance costs decreased by 90.2% to CNY 13 million in Q2 from CNY 136 million in the same period of 2023, mainly due to decreased interest expenses after the repayment of C-Round convertible promissory notes and other debts, partially offset by the decrease of interest income from bank deposits. In terms of capital at the end of June 2024. Our main operating entities remain well capitalized. Our guarantee subsidiary's leverage ratio stood at 2.4x and our consumer finance subsidiary's capital adequacy ratio stood at 14.7%, well above the 10.5% minimum regulatory requirement. As we deal with the complexity of the broader economic environment and our strategy -- strategic shift to the 100% guarantee model, we are seeing encouraging signs in terms of asset quality and in growth of our consumer finance business. We will remain committed to our prudent strategy as we seek to build a solid foundation for long-term, sustainable, future success. I will uphold our commitment to bringing value to our investors. That concludes our prepared remarks for today. Operator, we are ready to take questions.

[Operator Instructions] The first question comes from Emma Xu with Bank of America Securities.

Actually, I have two questions. So the first question is about the loan demand. So how is the overall loan demand currently? So we see that in second quarter, you granted RMB 45.2 billion new loans and the cumulative amount of the new loans issued in the first half reached RMB 93.3 billion, accounting for around 42% to 49% of your full year guidance at the beginning of the year. So do you think you are still on track to meet your full year target? And when will we see the turning point of the loan growth recovery? And the second question is that, congratulations on the continued improving asset quality. So your M3 flow rate has declined 2 quarters in a row and down to 0.9% in the second quarter. So do you think you can continue to see the improvement in the flow rate? And how will management try to sustain this good trend?

Thank you, Emma, for your question. The first question, loan demand. Yes, loan demand overall is still weak. For loan growth recovery, it largely depends on macro environment improvement. So while we keep our prudent strategy on SBO lending, we see that from our CF business, the consumption loan demand is actually more and stable. So we focus more on consumer finance and relatively large [indiscernible] consumption loan to cope with declining SBO loan demand in near term, especially in the regions where our loan volume consumption is more significant. And for your second question, we all know that it is not easy to improve C-M3 flow rates while loan balance keeps declining. But with continuous portfolio mix improvement, what I mean is, now we see them more and more accounts from 2023 and 2024 takes a bigger part of the whole portfolio, which is [indiscernible] account. So we believe our asset quality measured by C-M3 flow rate with continuous improvements. And also, we put tremendous efforts in our risk model – underwriting model and also collection model upgrade and then asset quality management process. So all in all, we are confident that about sustainability of our asset quality going forward. Thank you.

The next question comes from Yada Li with CICC.

I have four questions today. Firstly, I was wondering in what areas do we see more collaboration potential in the future with the Ping An Group? And secondly, I'd like to ask do we have any plans to further increase the shareholder returns? Looking at the cash at hand and the future loan size, what could be the potential amount available to distribute to the investors? Third, I will notice that the funding cost decreased slightly in the second quarter, and I was wondering what's the outlook for the future funding cost? And I'll ask -- I want to ask why the OpEx to income ratio hiked in the second quarter? Do we see any room to further improve this ratio? That's all.

Okay. Let me answer your -- this question on 1 to 3. Thanks, Yada. Let me see my notes. So after special dividends, Ping An Group's ownership increased much close to 57%, so 56.8%. And that we have been working closely with Ping An Group from the very beginning in a few key areas like customer sourcing, right, using their online, offline channels and technology developments and then brand maturing. But with increased Ping An Group ownership now, we expect it will help us to reduce funding cost in [indiscernible] finance standing. So actually, your third question is about funding costs. We believe funding cost is cumulatively decreasing or optimizing. We believe this trend will continue. And also with the acquisition of that nationwide small loan lending license, that lending license, that comes with better low-funding cost going forward. So we are confident about the funding cost further improvements. And then about the second question, although the Board of Directors has determined that no semiannual dividend will be paid at this time because we made a net loss recorded for the first half of 2024, but management is dedicated to returning value to shareholders. We always seek out potential ways to increase shareholder returns as demonstrated in this special dividend this time. And our annual dividend policy, which is 20% to 40% of net profit and we pay semiannually, that policy does not change, remain unchanged.

Okay. About the funding cost, I would like to share some of my view. For our Puhui loan, we expect that just because of the APR policy, the Central Bank released the variable monetary policy to the market and support -- that will definitely support our partners. And of course, they were partnered to our companies. So together with the synergy of the Ping An Group will enable -- which will enable us to enjoy a low funding cost. For consumer finance loans, I believe that we will continue to such a lower interest rate in the incumbent market. That actually, you can see the trend also in [indiscernible] market, right, the rate was led by the Central Bank to going down. And we expect that funding cost to remain at a relatively low level. And generally, we will say that we are optimistic to our overall funding cost that will continue to decrease. And another question about to our income ratio increased in the second quarter. Although we remain committed to the cost optimization, our OpEx to income ratio trended upwards during this quarter. This was mainly due to our loan scale contraction, that led to a decline in economy of scale. In addition, some of the fixed expenses contributed to the increase. Looking forward, we will continue to improve our operational efficiency by leveraging the technology and synergy and the digitalization and the work together with the Ping An Group and our internal efforts. Thank you.

That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks.

Thank you. This concludes today’s call. Thank you all for joining the conference call. If you have more questions, please do not hesitate to contact Lufax’s IR team. Thanks again.

Thank you. This conference has now concluded. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to Lufax Holding Limited First Quarter 2024 Earnings Call. [Operator Instructions] After the management's prepared remarks, we will have a Q&A session. Please note, this event is being recorded. Now I'd like to hand the conference over to your speaker host today, Ms. Liu Xinyan, the company's Head of Board Office and Capital Markets. Please go ahead, madam.

Thank you very much, operator. Hello, everyone, and welcome to our first quarter 2024 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S. Cho, who will provide an update of the macroeconomic trends and the recent development and the strategy of our business. Our co-CEO, Mr. Greg Gibb, will then go through our first quarter results and provide more details on our business priorities. Afterwards, our CFO, Mr. David Choy, will offer a closer look into our financials before we open up the call for questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which also applies to this call as we will be making forward-looking statements. With that, I'm now pleased to turn over the call to Mr. Y.S. Cho, Chairman and CEO of Lufax, please.

Thank you for joining today's call. In the first quarter, we witnessed an improvement in our early risk indicators. However, high-quality loan demand from small business owners remained subdued. While our increased risk exposure stemming from our 100% guarantee model means, we'll be prudent and patient in new business development. Our emphasis continues to be on quality over quantity. Before diving into business performance, let's take a look at the macro environment. Overall, the environment showed signs of improvement during the first quarter. The Purchasing Managers' Index or our PMI, which measures prevailing trends in the manufacturing and service industries, both trended positively. The index increased from 49 in December 2023, to 50.8 in March 2024 for manufacturing, while it increased from 49.3 to 52 for services. Despite improvement in the macro environment, the SBO segment recovered at a relatively slow pace. For example, the SME development index published by the China Association of Small and Medium Enterprises was 89.3 for the first quarter of 2024 compared to 89.1 for the fourth quarter of 2023 and 89.3 for the first quarter of 2023. Now regarding this development, as discussed in our fourth quarter earnings call in 2023, we completed five major de-risking and diversification actions, including four mix changes and one business model adjustment. Thus far, these actions have yielded signs of improvement in asset quality, although we believe operational prudence remains critical to ensure long-term growth and sustainability. During the first quarter, total new loans sales decreased by 15.6% year-on-year, mainly due to weak quality loan demand from SBOs and our own emphasis on prudent operations. As we shifted our focus from SBO launch to a more diversified approach, new loan sales of our consumer finance business grew to RMB20.3 billion in the first quarter, representing an increase of 46% year-over-year. On the other hand, new loan sales of Puhui business continued to face pressure from a lack of high-quality SBO loan demand and decreased by 35.5% year-over-year. As mentioned previously, we successfully completed transitioning to our 100% guaranteed business model for the Puhui business by the end of third quarter of 2023. Starting from fourth quarter of 2023, all the new loans were integrated by our consumer finance subsidiary as own balance sheet loans were enabled by our guarantee company under the 100% risk-bearing business model; as a result, our risk being increased from 39.8% of the total outstanding balance as of the end of 2023 to 48.3% as of the end of the first quarter of 2024. While the switch to 100% guarantee model will exert a positive impact on our take rate, as it alleviates the effect of elevated CGI premiums, our profitability will take a longer time to recover due to higher up-front provisioning. Now let's turn to asset quality. After successful execution of our de-risking adjustments to the mix of segments and products, region, channel and industry, together with improvements in the macro environment and removal of short-term negative impact caused by restructuring of our direct sales and branches, we witnessed improvement in our early risk indicators in the first quarter. The C-M3 flow rate for Puhui business, decreased from 1.2% in the fourth quarter of last year to 1%, or 1.0% in the first quarter of this year. The NPL ratio of our consumer finance loans also remained stable. While we are pleased with such improvements in asset quality, we are taking a patient and prudent approach to ensure this success is sustainable. In terms of broader strategy, we are pleased to announce that we completed acquisition of Ping An OneConnect Bank in early April, as part of our strategic initiative to leverage on strong licenses. These licenses have the potential to underpin a more expanded set of service offerings, allowing us to provide more dynamic services and to further diversify our business. I also -- I would also like to provide an update on the special dividend arrangement that we announced earlier. On March 21, we announced a special dividend plan of USD 2.42 per ADS or USD 1.21 per ordinary share. This special dividend remains subject to shareholder approval at the Annual General Meeting or AGM, which will be held on May 30, 2024. The record date for the Annual General Meeting is April 9, 2024. To sum up, in the first quarter, we encountered preliminary improvements in asset quality, which demonstrate that our de-risking and diversification initiatives are starting to bear fruit. Despite this, we remain -- we maintain a prudent approach in our operations as we see continued weakness in high-quality SBO loan demand. Last but not least, our CFO, David, will resign for personal reasons with an effective date of April 30. David has been with the company for nearly six years, and we thank him for his tremendous contributions to the company. We have appointed our Zhu Peiqing as our new CFO, who will assume the CFO role effective from April 30. Peiqing has extensive experience in finance industry, especially in audit and financial management. We look forward to his onboarding and future contributions. I will now turn the call over to Greg to share more details in our -- on our operating results.

Thank you, Y.S. I'll provide more details on our first quarter 2024 results and our operational focus for this year. Please note, all figures are in renminbi unless otherwise stated. Let's begin with an overview of our first quarter performance. During the quarter, ongoing weakness in demand for high-quality loans from SBO, small business owners, combined with our continued emphasis on operational prudence weighed on new loan sales. New loan sales in the first quarter were RMB48.1 billion, representing a 15.6% year-on-year decline. Among the total new loan sales, 42% were contributed by our consumer finance business. This is up from approximately 24% in the same period last year. Revenue in the first quarter was RMB7 billion, a decrease of 30.9% year-over-year. Decline was mainly due to the decreases in our new loan sales and outstanding loan balance and was partially offset by our increased take rate as more of our book comes from the 100% guarantee model. Our net loss for the first quarter was RMB830 million, mainly due to increased tax associated with the special dividend. On a pre-tax basis, Lufax was marginally profitable in the first quarter. Earnings before tax were RMB447 million in the first quarter of 2024, which compares to RMB1.1 billion in the same period for last year. For this quarter, pre-tax profitability remains relatively under pressure as a result of declining loan balances and new business being loss-making in the first 12 months due to up-front provisioning under the 100% guarantee model. Partially offsetting these pressures were continued improvements in cost structure, reduction in credit costs and continued strength in our later-stage recoveries. As Y.S. mentioned earlier, we witnessed the impact of our de-risking and diversification initiatives on our asset quality during the first quarter of 2024. I will now walk through our operating metrics and how they've evolved in light of these strategic changes. First, in terms of product mix, we saw our consumer finance segment continued to grow. In the first quarter, consumer finance sales accounted for 42% of new loan sales, up from 24% in the same period last year. Concurrently, the proportion of unsecured loans and secured loans decreased to 37% and 21%, respectively, from 48% and 28% last year. In light of these changes, we have seen a gradual ongoing shift in our balance mix. Consumer finance balances, as a percentage of our total balance reached 14% as of March 2024 compared to 6% at the end of March '23. Meanwhile, the proportion of unsecured loans decreased to 64% from 72% at the end of March 2023, while the proportion of secured loans has largely remained flat. In terms of our business model, we continue to build up a roster of new loans under the 100% guarantee model. As we previously mentioned, this has reshaped our portfolio mix and increased our risk bearing. As of the end of the first quarter, 26% of Puhui's loan balance was enabled under our new 100% guarantee model and our risk-bearing by balance has grown to 48.3% as of the end of the first quarter, up from 39.8% as of the end of the fourth quarter of 2023. We also kept our focus on prioritizing sales in more economically resilient regions. In terms of our channel, we maintained our emphasis on excellence within the direct sales team, which continues to be our major sales channel and contributes to a majority of our new loan sales. Next, our asset quality, our overall C-M3 improved to 1% from 1.2% in the fourth quarter of 2023. This was mainly due to improvement in the macro environment, removal of temporary negative impact from our geographic and direct sales restructuring in third quarter and the vintage runoff as we build up a new book. While we observed improvement in C-M3 ratio during the first quarter, we remain cautious about the future sustainability of this trend. Given this and considering our heightened risk exposure, we will continue our prudent strategy of prioritizing quality over quantity during 2024. Now let's take a more detailed look at our unit economics of the Puhui business. During the quarter, funding costs remain stable. In addition, our overall APR decreased slightly to 19.7% as we maintained our focus on higher-quality customers. Our take rate, based on loan balance, has risen to 9% from 7.3% for the first quarter as loans under the 100% guarantee model comprises a slightly higher percentage of the total loan balance. While we anticipate that loans under the 100% guarantee model will be lifetime profitable, it is important to note that these loans may incur accounting losses in their first calendar year due to a standard but higher up-front set of provisions. Under our projected business scale, we believe we have a strong balance sheet to support the business, its operations, capital and liquidity requirements. At the end of the first quarter of 2024, our guaranteed subsidiaries leverage ratio was 2.4 times, mainly driven by the increase of our guaranteed balance associated with our increased risk exposure and the decrease of net assets due to the distribution of the special dividend. Our consumer finance capital adequacy ratio stood at approximately 15.1%, well above the required 10.5%. As for our balance sheet, we hold net assets of RMB92.8 billion with our cash bank balance amounting to RMB39.4 billion at the end of the quarter. I'll now turn over the call to David, our CFO, for more details on our financial performance.

Thank you, Greg. I will now provide a closer look into our first results. Please note that all numbers are in renminbi terms, and all company -- all comparisons are on a year-over-year basis unless otherwise stated. As Y.S. and Greg have mentioned, our performance was still impacted by broader economic conditions that have been exerting pressure on the small business sector throughout this period. While strategically shifting to 100% guarantee model with higher take rate, higher quality customer segments and more favorable geographical regions, we opted to forgo some of our business scale with the aim of enhancing the quality of our future loan portfolio, which we believe, it is important for the long run for the company. Our strategic transition unavoidably led to continued declines in our average loan balance and total income. Meanwhile, the expected credit loss provision, which must be accounted for up-front, on the first day, amplified the accounting loss in the early stages of the product life cycle under the new business model. In the first quarter of 2024, our total income was RMB7 billion, representing a decrease of 30.9%. During the quarter, our technology platform-based income was RMB2.6 billion, representing a decrease of 49%. Our net interest income was RMB2.8 billion, a decrease of 15% and guarantee income was RMB2.92 billion, a decrease of 34.7% or are basically in line with the decrease of outstanding loan balance, in which guarantee income decreased, by lesser matter too, due to the offsetting effect of an increase in risk borne by the company. Turning to our expenses, we remain committed to cost optimizations. I want to highlight that our total expenses, excluding credit losses, finance losses and other losses, decreased by 37% year-over-year to RMB3.6 billion this quarter as we continue to enhance operational efficiency. This 37% magnitude of decrease in expense is greater than that of the 30.9% decline in the total income. Let's highlight just a few of the key expense items. Our total sales and marketing expenses, which mainly include expenses for borrower acquisition costs as well as general sales and marketing expenses decreased by 50% to RMB1.5 billion in the first quarter. The decrease was mainly due to a decrease in loan-related expenses as a result of the decrease in new loan sales and decreased retention expenses as well as referral expenses from platform services attributable to the decreased transaction volume. Our credit impairment losses decreased by 8.6% to RMB2.9 billion in the first quarter, primarily due to the decrease in provision of loans and receivables as a result of the decrease of loan balance and improved asset quality. Our finance costs decreased by 69.3% to RMB58 million in the first quarter from RMB189 million in the same period of 2023, mainly due to the decrease of interest expense as a result of the payment of C-Round Convertible Promissory Notes and other debts and partially offset by the decrease of interest income from bank deposits. The key item in this quarter is really the income tax. Whilst we achieved the pre-tax profit of RMB447 million in the first quarter, our income tax expenses increased to RMB4.3 billion in the first quarter from RMB2.4 billion in the same period of 2023. This is mainly due to the increase in withholding tax associated with one-off dividends that were paid by our PRC subsidiaries in order to support potential distribution of the special dividend we announced on March 21, 2024 As a result, net loss for the first quarter was RMB830 million, compared with a net profit of RMB732 million in the same quarter of 2023. Meanwhile, our basic and diluted loss per ADS during the first quarter were both RMB1.52 or USD 0.21. Turning now to our balance sheet, as of March 31, 2024, we had net assets of RMB92.8 billion and a cash balance of RMB39.4 billion. In terms of capital as of the end of March 20, 2024, the two main operating entities were well capitalized. Our guarantee subsidiary's leverage ratio increased to 2.4x as driven by the increase of our guaranteed products associated with our increased risk exposure and also the decrease of net assets due to the different upstream to the parent companies. And our consumer finance company capital adequacy ratio well stood at approximately 15.1% and well above the required 10.5% regulatory requirement. All these factors provide significant support for the company to navigate fully evolving macroeconomic landscape and the business transition period while laying the groundwork for us to continuously rewarding our interests in the future. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator Instructions] Your first question comes from Emma Xu with Bank of America Securities. Please go ahead.

Thank you for giving me the opportunity to ask the first question. I have two actually. So my first question is about your special dividend. Could you give us more update on the progress of your special dividend? So with the incurred tax, I guess the money should have been offshore. And what's the progress of this special dividend distribution? And then, in the longer term, do you have any mid-term plans for your future shareholder returns after this special dividend? And my second question is for your asset quality, so I do notice that your flow rate and your 30-day delinquency rate did achieve a notable decline in the first quarter. So do you think this improvement of the asset quality is sustainable into the coming quarters and then -- which can also lead to lower impairment losses in the coming quarters? Thanks.

Thank you. This is Y.S. speaking. So your first question about special dividends, we announced a special dividends plan on March 21. And we also announced, on March 25, that shareholders of record at the close of June 4, 2024, will be entitled to receive this special dividend. But it is subject to shareholder approval at the AGM, Annual General Meeting, which will be held on May 30 and then our long-term dividend policy, it remains unchanged, which is about 20% to 40% of the annual net profit. And then answering your second question about asset quality improvement; yes, we see that C-M3 net flow improved in fourth quarter, down to 1.0% from 1.2% in the last quarter of 2023. We believe our de-risking efforts taken in 2023, those gradually come into effect such as credit policy tightening, underwriting process, and then sales control measures strengthening, segment mix optimization and churn optimization and so forth. And also, the -- as Greg explained, the concentrated impact from geographic restructuring in the third quarter last year, that has been gradually fading away. And also our new portfolio we built from 2023 with better quality, with tightened underwriting policy debt, that portion will take, gradually, a larger part of total loan balance. So that will further help to improve going forward. However, while we observed this improvement in the third -- in C-M3 net flow in the first quarter, we still remain very cautious about the future sustainability of this trend. And we'll continue to take prudent action and approach, considering our higher risk exposure under this 100% guarantee model.

Thank you. Your next question comes from Chiyao Huang. Please go ahead.

Hi, good morning. Thanks, management. This is Chiyao from Morgan Stanley. Really happy to see some early improvement on the risk indicator and the pre-tax profitability in the quarter; so I have two questions. One is the -- on asset quality, you can see, there's an early improvement. What's the management view on the loan growth into the rest of the year? This is one. And the second question is on the unit economics. And how do management expect it to evolve as we transition to 100% of a guarantee model. Could you, management, discuss this a little bit during the previous talks? And could you give more color and more detailed color on the unit economics.

Thanks. Greg, here responding. So on the -- while we've seen the improvement, as Y.S. just outlined, which is clearly good news, in terms of demand by customers, particularly of the quality that we're targeting, that demand is still to be on a somewhat subdued, right? So when we look at the first quarter, we haven't seen an uptick, a meaningful uptick in the demand among strong borrowers. So that is really going to drive our continued prudence because we really want to see stronger demand before we would expand beyond where we are today in terms of volumes. Obviously, given that we're now transitioning, we have transitioned all new business to the 100% guarantee model and more and more of our total book will be that 100% guarantee model. We do want to observe, for a few quarters, what we think is right as we are taking on more risk, so we stick to -- in terms of the guidance we've given for this year, new loan volume, we expect to be still RMB190 billion to RMB220 billion, which at the end of the year would take us to an ending balance of about RMB200 billion to RMB230 billion. So that's the outlook, remains unchanged, I guess, since the last quarter and we gave guidance on this. In terms of Puhui, I think this is really the most important trend also to watch now that we've shifted fully to the 100% guarantee model. As we've said, if we look at our loan balance, given that more and more is coming from the 100% guarantee model, our take rate has increased now to 9% from 7.3%. And if you look at new business, that's now being done under the 100% guarantee model, the gross take rate is approaching 14 percentage points, right? So basically, it's effectively a doubling from where we were a couple of quarters ago as we shift from the CGI model now to, more and more, under the guarantee model. So this is a trend that we will expect to continue. So as we move throughout the course of this year, such that more and more of the book is 100% guarantee model, you should see the overall take rate converge up to about 14%. And then from there, it's a question of our cost management, and it's a question of continued improvement, hopefully, on the credit quality, which will then drive the bottom line. And we haven't given guidance on that yet. But just to highlight that we note, when we do new loans -- for example, in 2024, new loans under the 100% guarantee model, we do expect them to be lifetime profitable, but we also do expect that in the first calendar year, due to up-front standard provisions, they will have a negative P&L contribution but again, lifetime profitable. So that's our outlook on the unit economics side.

Your next question comes from Yada Li with CICC. Please go ahead.

Hello management, thanks for taking my questions. This is Yada with CICC, and my first question is regarding the risk of bearing percentage. Since last quarter, the company has completed the transition towards a 100% guarantee model. Looking forward, could you please give us more color on how to view the risk-bearing percentage at the end of this year and the future? Secondly, I was wondering if you could share more about the outlook for the bottom line. In addition, if possible, can you elaborate more about once we have gone through the transition period, what is the expected margin or the profit take rate for the SME loans? That's all.

Thanks, Yada, for your question. Let me pick up your first question, and then I will pass the second to David. The -- about 100% guarantee model transition, you know that started from fourth quarter, the fourth quarter last year, that all new loans that we booked were granted by -- either by customer finance company as on-balance sheet loans or was granted by our guarantee company on the 100% risk-bearing base model, right? And then knowing that, as of the end of fourth quarter this year, including safe business loans, the total loan balance, for which we are bearing risk responsibility is 48.3% out of total loan balance and then -- which is up from 39.8% from the previous quarter. And it is 26% of total Puhui loan balance, that was enabled on our new 100% guarantee model. And then going forward, surely, because this is our new model in place, so it gradually -- I mean, the portion of our risk-bearing balance will gradually and continues to grow.

All right. So Yada, thanks for the question on this quarter net loss. I think as we mentioned before, we did achieve a pre-tax for this quarter. The key item actually affecting this quarter is really on the income tax. Income tax expenses increased to RMB1.3 billion, as you know, in this quarter, from RMB7.4 billion in the same period of 2023. This is really mainly due to the RMB1.05 billion withholding tax, which associated with our cross-border dividend upstream from PRC operating entities to the immediate holding company offshore. So as I mentioned, this cross-border dividend upstream arrangement is primarily to support the distribution of a special dividend plan as we all called out, that we announced on March 21 and of course, for other general liquidity arrangement progress at offshore. That's my comment I want to make.

Thank you. That concludes our question-and-answer session for today. I will now turn the call back over to our management for closing remarks.

Thank you. This concludes today's call. Thank you for joining the conference call. If you have more questions, please do not hesitate to contact the company's IR team. Thanks again.

Thank you. This conference is now concluded. You may now disconnect.