Lubys Inc (NYSE:LUB) Q3 2022 Earnings Call Transcript

Lubys Inc (NYSE:LUB) Q3 2022 Earning Call Transcript November 24, 2022

Lubys Inc misses on earning expectations. Reported EPS is $0.08 EPS, expectations were $0.17.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lufax Holding Limited Third Quarter 2022 Earnings Call. 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. Lu Xin Yang, the company’s Head of Board Office and Capital Markets. Please go ahead, ma’am.

Unidentified Company Representative: Thank you very much. Hello, everyone, and welcome to our third quarter 2022 earnings conference call. Our quarterly financial and operating results were released by our newswire services earlier today and are currently available online. Today, you will hear from our Chairman and CEO, Mr. Y.S.Cho, who will provide an update of the macroeconomic and the COVID impact, our latest business strategies and the recent regulatory developments. Our co-CEO, Mr. Greg Gibb, will then go through our third 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.

Please also note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in our earnings release and the filings with the SEC. With that, I’m now pleased to turn over the call to Mr. Y.S.Cho, Chairman and CEO of Lufax.

Yong Suk Cho: Thank you for joining. The third quarter has been challenging. Our core small business owner segment, which makes up 87% of our new loans facilitated excluding customer finance loans, has been significantly impacted by the deteriorating macro environment in the third quarter. In periods of macroeconomic change, small businesses are typically the hardest to be impacted ahead of customer finance and other lending. As a result, our profitability has been negatively impacted due to rising credit impairment losses and credit enhancement costs. Ongoing pandemic controls and strong economic growth impacted credit quality in the third quarter. Our lead indicator for credit quality, the C-M3 ratio, which estimates the percentage of loans that will be called nonperforming at the end of 3 months, increased by — increased by 0.

1% quarter-on-quarter to 0.8% this quarter. Our C-M3 ratio stood at 0.4% in the third quarter of 2021, indicating that credit quality has worsened considerably versus a year ago. In the third quarter of 2022, data from market analysts suggest that GDP share of cities with high- and medium-risk pandemic controls increased versus the second quarter, which we believe is having a broader impact on small businesses, given a backdrop of declining business and customer confidence. While credit quality situation advanced across the — the third quarter, we retained growing differences in economic resilience in various regions, which led to significant divergence in credit performance by region. Taking Shanghai for example, the C-M3 ratio for general unsecured loans spiked to 2.

3% in second quarter of this year. But after a short period of time, after reopening, clearly returned to pre-lockdown level of 0.5% in third quarter 2022, demonstrating strong resilience. In comparison, C-M3 ratio for some other regions, in particular, lower-tier cities were worse and probably will take much longer to recover. Let me provide a sense of this by comparing credit quality for unsecured loans. On average, the C-M3 ratio for top-performing regions which mainly consists of cities and regions with strong economic foundations, such as Beijing and Shanghai, improved by 1 basis point in the third quarter compared to second quarter. While the C-M3 ratio for average performing regions and less desirable performing regions deteriorated by 13 and 20 basis points, respectively, during same period.

This geographic divergence is fundamentally reshaping the map for well sustainable lending can be enabled midterm. Today, about 2/3 of our existing business is in cities and regions where we believe the economic foundations are stronger and likely to be more resilient in recovery. Small businesses contribute to 60% of GDP and 80% of job creation, while receiving only 26% of financing as of 2021 year-end. We believe long-term demand will remain substantial. As a small business owner segment is expected to be agile and responsive when the macro environment improves, we are confident that we are well positioned to risk at when the time is appropriate, leveraging our existing strengths, including extensive channels and institutional partnerships and a strong capital position.

However, medium term, we must force or just our business strategies by keeping our focus on well-rated small business owners in more resilient cities with increased resilience on our direct sales force channel. The increased focus resulting reduced gross revenue in midterm, but will improve the profitability and sustainability .We must go through a period of digesting credit losses on the existing vintages as they run down, while building up the more sustainable and profitable new portfolio. This process will likely result in u-shaped recovery pattern for our business. In the near term, we expect this adjusted strategy will generate new loan facilitation volumes at approximately 2/3 of the volumes we have generated in recent years. If the volumes will be determined by the overall timing of macroeconomic recovery, which remains uncertain at this moment.

While we hope that recovery will come sooner, our immediate plans assume a status quo in the current operating environment.Our optimization of resources, including further cost restructuring, will be completed over the next several quarters. During this time, we assume that our credit impairment losses and CI credit enhancement cost will remain at elevated levels, while the underperforming portion of existing vintages run down, clearly impacting profits. Taking uncertainties into account, we believe that timing for a notable improvement in our bottom line performers is more likely in 2024 than in 2023.This is clearly a challenge for us, but we are confident in our ability to execute. We use this business reply prioritization to continue to upgrade our technology, operations and the risk management with the objective of strengthening our long-term market leadership in the small business owner segment.

Given our resources, given our customer access, strong balance sheets and long-term partnerships with financial institutions, we have the necessary advantages to navigate through this difficult period. While the operating environment demands change, the regulatory environment is now stabilizing. The rectification process led by PBOC and CBIC has now transitioned to normalized regulation oversight without substantial outstanding issues for the company. Our bank guarantee model, under which we bear 22.5% credit risk on the outstanding balance of loans we facilitated as of the end of September is distinct from a lending facilitation platform and in line with prevailing requirements. Looking forward, we expect our portion, our portion of risk sharing with financial partners to increase to at least 30% over the next several quarters.

As I stated before, the use of our guarantee company also allows us to share required data direct with funding partners. On , the CBIC released a regarding the industry, where credit guarantee insurance or core component of our business model is playing a positive role in helping small businesses increase their funding availability. Finally, I have an update on change to our Board. In consideration of potential Hong Kong listing requirements and to improve our ESG standing, we have added 2 new female directors, namely Ms.Cai Fangfang and Ms.Fu Xin to the Board. In addition, we are pleased to welcome Mr.to join our Board as a director again. All 3 new directors are Ping An executives. We are forming the ongoing support from our largest shareholder.

The new Board source continues to be made up of 9 members with 4 current independent directors, 2 current company directors, myself and Greg, and the 3 new directors who are Ping An executives. Under the new structure, we are reducing 1 independent director and adding an additional director nominated by Ping An. I will now turn the call over to Greg for more details on our operating results and business priorities.

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Gregory Gibb: Thank you, Y.S.I will now provide more detail on results and our operational focus. Please note all figures are in RMB, and all comparisons for the third quarter on a year-over-year basis, unless otherwise stated. Third quarter results were negatively impacted by deterioration in credit quality. As a result, third quarter profit was CNY 1.4 billion, declining 67% versus a year ago. As a result of progressively tightened credit standards, new loan volumes were CNY 123 billion, declining 27% versus a year ago. Credit impairment losses totaled CNY 4 billion, increasing 137% year-over-year. Overall profitability has also been negatively impacted by higher insurance premiums. Total expenses, including credit impairment losses, asset impairment losses, finance costs and other losses decreased by 12.

7% as a result of tighter cost control. Third quarter revenues declined by 17.2% versus a year earlier to CNY 13.2 billion, and our outstanding balance of loans facilitated declined by 1.3% versus a year earlier to CNY 636 billion as of September 30, 2022.We’ve entered what we expect to be a U-shaped profitability pattern driven by the credit quality issues that Y.S. detailed. Our historical loan businesses are now experiencing higher credit losses given the macro environment. As a result of progressive credit tightening, new business initiated in the last couple of quarters has demonstrated better performance. But we must now follow a path of continuing to strengthen our collection on existing businesses while building up more sustainable and profitable new portfolio.

While at the same time, we continue to refine our channel management to optimizing our direct sales force that we can be more nimble and efficient and select selecting and targeting a higher quality customer base with the most productive workforce. This will mean reduced new business volumes and gross revenues in the medium term, but new business should be able to generate better results as compared to the historical loan vintages as a whole. We believe bottom line profit recovery will be driven by 3 factors: evolving credit performance of the historical vintages; runoff speed of the historical vintages; and growth rate of the prioritized new business. At this stage, we can’t accurately predict how long the historical businesses will see elevated credit impairment as the drivers are fundamentally macro in nature.

But as Y.S. stated, timing for a notable improvement in our bottom line performance is more likely in 2024 than 2023 as new business volumes replace vintage volumes and policy changes potentially lead to improvement in the macro environment. Recently, we have witnessed plans of signals around commitment by the banking system to support some key indices, including real estate. We believe these developments could potentially bring positive impact to the macro environment and our business, although the exact timing impact is yet difficult to predict. As we navigate through the current downturn, we will continue to strengthen our operating capabilities and financial institution partnerships. We have recently launched our new small business owner ecosystem.

Its intent is to engage potential customers at an earlier stage, deepen our interaction with existing customers and create both new cross-selling opportunities and a new source of customer referrals. As the first step, we launched the testing version of our new and improved LuDianTong app in October 2022.LuDianTong has an open platform design and is being populated with digital operating tools and industry-focused content for SBOs to operate their businesses more effectively. LuDianTong builds a recap moment like a social network, connecting our direct sales force with existing and prospective SBOs, and helping these SBOs to better serve their existing and prospective customers to deliver more impactful marketing, more frequent engagement and more direct feedback with their customers.

Compared with other players, we believe that our extensive offline direct sales network would allow us to acquire users more efficiently and offer more differentiated value to users. We are also continuing to develop LuDianTong, which helps banks with strong risk capabilities acquire borrowers directly through dispersed sourcing agents nationwide. Under this model, the company does not provide or participate in credit risk sharing. Year-to-date, LuDianTong provided online services to more than 10,000 active agents in their efforts to facilitate loans to partner finance institutions. For funding partners under our risk-sharing model, we have increased 16 new bank partners compared to the same period last year. We continue to explore development of new data and technology solutions to share with our partner institutions in the areas of fitted customer matching, risk analytics, portfolio management and collection services.

Our risk sharing reached 22.5% of the total portfolio as of September 30, 2022.The guarantee company’s net capital stood at CNY 47.8 billion at the end of the third quarter, operating with a leverage ratio of 2.1x.More broadly, our net assets stood at CNY 95 billion with CNY 46 billion cash on hand, figures which provide confidence to our financial partners in this otherwise challenging environment. Our current guidance for the full year 2022 is total income CNY 57 billion to CNY 58 billion, with net profits ranging CNY 8.5 billion to CNY 8.9 billion. New loan sales for the full year are expected to reach CNY 490 billion to CNY 495 billion. Wealth Management client assets are expected to end the year between CNY 390 billion and CNY 430 billion.

These projections are below our previous estimates and reflects both the macroeconomic environment and our strategy to be more selective in credit selection. These forecasts reflect our current views of the market and operational conditions, which are subject to change. Finally, we would like to thank our shareholders for their continued support to our business. In October, we distributed our first half 2022 dividend of CNY 0.17 per ADS, and we will continue to deliver value to our shareholders. We also continue to stay close with regulators and remain ready to initiate a Hong Kong listing plan as soon as permissible, subject to regulatory approvals. With that, I would like to hand over to David to elaborate on our financial performance in greater detail.

David Choy: Thanks, Greg. I will now provide a close look to our financials. Please note, all numbers are in the renminbi terms, and all comparisons are on a year-on-year basis, unless otherwise stated. Our total income for the third quarter was CNY 13.2 billion, while net profit was CNY 1.4 billion. Our total expenses for the first quarter grew by 11.5%.The increase in the total expenses was primarily driven by the increase in credit impairment costs, while our operating-related expenses actually decreased by 12.7% due to operating efficiencies and optimizations. Let’s take a close look at our revenue. First of all, our revenue was negatively impacted by the economic environment, resulting in a 17.2% decrease in our top line this quarter.

As we are dedicated to build up a more sustainable business model, the total income mix of our credit, retail credit — business continue to evolve. During this quarter, while technology platform-based income decreased by 30.3% to CNY 6.7 billion, our net interest income grew 21.5% to CNY 4.6 billion, and our guaranteed income grew by 44.1% to CNY 1.9 billion. As a result, our retail credit facilitation platform service fees, as a percentage of the total income, decreased to 47.8% from 57.1% a year ago. And as the Trust funding model provided lower funding costs through the use of asset-backed securities, we continue to utilize them more in our funding mix. As a result, income from consolidated trust is recognized as net interest income. Our net interest income as a percentage of total income actually increased to 35% from 33.9% a year ago. Moreover, we continue to better utilize our guaranteed company’s abundant capital to bear more credit risk ourselves, instead of through our P&C insurance partners. As a result, we generated more guaranteed income, reaching 14.1% of total income compared with 8.1% a year ago. In terms of wealth management, our platform transactional service fees decreased by 22.1% to CNY 364 million in the first quarter from CNY 467 million in the same period of 2021.This decrease was primarily caused by the decline in fees generated from our current products, partially offset by the increase in fees generated from platform service. Our other income, which mainly includes account management fees, collections and other value-added services charged our credit enhancement partners as part of the retail facilitation process, was negative CNY 129 million in the third quarter of 2022 compared to CNY 997 million in the same period of 2021.

The majority of the decreases were due to a refund of account management fees to our primary credit enhancement partner as a result of worse-than-expected collection performance and narrowing down of service group, the change of fee structure that we provided charged for our primary credit policies this quarter. Turning to our expenses. We continue to prudently manage our operational expenses. Our total expenses, excluding credit and asset impairment losses, finance costs and other losses decreased by 12.7% year-over-year to CNY 6.7 billion in the quarter. In the third quarter, our total expenses grew to CNY 11.1 billion from CNY 9.9 billion a year ago. This was primarily driven by an increase in credit impairment losses of CNY 2.3 billion year-over-year.

Our total sales and marketing expenses, which mainly include expenses for borrowers and investor acquisition costs as well as general sales and marketing expenses, decreased by 11.7% to CNY 4.1 billion in the third quarter. This decrease was driven by the decrease in the new loan sales and optimization of our commission base compensation structure. In addition to that, the continued optimization of productivity of our direct sales force also provides us the flexibility in our cost structure. Our general and administrative expenses decreased by 36.8% to CNY 592 million in the third quarter from CNY 937 million in the same period of 2021, thanks to our stringent cost control measures. Our operations and services expenses decreased by 3.6% to CNY 1.

6 billion in the first quarter from CNY 1.7 billion a year ago, mainly due to the decrease of transparent management expenses and our effective expense control measures. Our credit impairment losses increased by 137.7% to CNY 4 billion in the third quarter from CNY 1.7 billion a year ago. This was mainly driven by 2 factors: one, the profession indemnity losses driven by the increased risk exposure as we move towards a more balanced risk pricing model; and second, as a reference, the company will risk on 22.5% of its outstanding balance, up from 14.8% as of September of 2021.Second, the change in credit performance due to the impact of COVID-19 efforts also contributed to the increase in credit impairment losses. Our asset impairment also decreased to CNY 68 million in the third quarter from CNY 410 million a year ago.

The number for the third quarter of 2021 was unusually high mainly due to impairment losses of intangible assets and goodwill. Our finance costs increased by 82.1% to CNY 306 million in the first quarter of 2022 from CNY 168 million in the same period of 2021, mainly due to the increase in interest expense. Other losses were CNY 7 million in the third quarter compared to the other gains of CNY 36 million a year ago, mainly due to the foreign exchange losses. As a result, our net income decreased to CNY 1.4 billion to the third quarter from CNY 4.1 billion in the same quarter of 2021.Meanwhile, our basic and diluted earnings per ADS during the first quarter were both RMB 0.58 or USD 0.08.On the balance sheet side, our balance sheet remains strong and solid as our cash at bank bonus increased.

As of September 30, 2022, we had a cash balance of CNY 45.8 billion in cash bank as compared with CNY 34.7 billion as of December 31, 2021.In addition, liquid assets maturing in 90 days or less amounted to CNY 46.5 billion as of the end of September 2022.As of the end of September 2022, our guaranteed company leverage is only at 2.1x, whilst regulatory requirements allowed us to leverage up to 10x.All these provide strong support for the company to remain resilient in the face of economic .That concludes our remarks for today. Operator, we are now ready to take questions.

Operator: We now have our first question from Alex Ye of UBS.

Alex Ye: I have two. The first one is on your asset quality. So can you give us some color in terms of your C-M3 free growth rate into the October and November as well as the outlook for the coming few quarters? I understand that there could be substantial uncertainty around the macro front. Perhaps can you also talk about how is it likely to involve under different scenario? For example, assuming the current lockdown, rolling lockdown across different city states as it is today? And second, perhaps assuming we have a material easing on reopening from Q2 of next year.And second question is on your take rate outlook. So I understand arrangement has been tightening good criteria. So when should we expect the take rate to broaden and start to improve? I guess there are different moving parts to that equation.

For example, the CGI premium has increased a lot this quarter. Given there could be some lagging effect on the CGI pricing, so should we expect further material uptick in Q4? And in terms of your loan pricing, we have been declining for over 1 year and has been quite stable lately.

Yong Suk Cho: Okay. Let me answer your question.If I miss any, please let me know later. So the first question is about asset quality and our C-M3 net flow trends. Our flow rate increased by 0.1% to 0.8% in third quarter this year from 0.7% in the second quarter. And then considering the resurgence of COVID-19 and then regional lockdown recently, the flow rate in the near term and midterm, we believe it will stay at a relatively high level. And then looking at October, November number, it seems like it’s stable. It’s just — does not change much. And then we believe the — of COVID policy and then reopening, it will surely boost up consumption and investment, both critical for the economy that is driven by confidence level. And given we are a focused, we understand the small business are typically the hardest to be impacted ahead of customer finance and other lending in a downturn.

We are more sensitive to COVID control measures as shown in our C-M3 net fluctuation risk. But likewise, we believe their rate performance will respond to the relocation of COVID control policy quickly. So once policy gets loosened, and then we believe the performance will improve relatively quickly. And then the third question about — the third question about our take rate, in relation with the CGI premium. We hope early covenant will come soon. For example, at is aha, where we experienced almost 3 months consecutive lockdown. Our current performance is one of the best, almost 35 branches we have. So the regional economy, the regional — the environment is now hugely different. But you know overall, we hope like Shanghai, the other regions can recover quickly with the less pandemic control measures.

But we assume, so we assume a status quo in the current operating environment. So in fourth quarter and early 2023, we also met our CGI credit enhancement cost will remain at high levels, and then it affects our take rate for sure.So to mitigate this impact on take rates, we continue to optimize our funding cost, which is now less than 6%.And then we also keep reducing our operating costs to offset the impact from rising cost. And we believe the timing for multiple usage implement in our take rate, imports to the COVID control policies. And then if we see your actions, then we believe we see more likely in 2024 than 2023.That is that fair estimation. And the last question was about loan pricing. Our corporate loan balance is well in line with the policy guidelines, and then it’s now 21% in the third quarter, which is reduced from 21.

4% from the second quarter. But if you look at new laws, it’s already less than 20%.So by now, we believe — we strongly believe we are in full compliance with the regulations and window guidance given from CBC regarding APR. And that we haven’t received any for notification on reducing A product. And in addition to compared with regulatory requirements and guidance, the decrease of APR is also driven by our own strategy to target higher-quality segments. And in near term, we maintain our over APR level for new loans, while we focus more high-quality SBO segments in more economically resilient regions.

Unidentified Company Representative: Alex, any follow-up question on that?

Alex Ye: That’s all for me.

Operator: We now have our next question from Emma Shu of Bank of America Merrill Lynch.

Emma Shu: I have three. So the first one is about your third quarter results and fourth quarter. So we noticed that your third quarter result is much weaker than previous guidance. And you also revised out your full year guidance and now implied losses in fourth quarter. So could management explain a little more detailed what lead to the weak business performance in third quarter and the weak 4Q guidance and a weak 4Q guidance now? And the second question is about the outlook. So management just said that you expect the recovery to happen more likely in 2024 than 2023.But could you give us more details? For example, do you still expect this business continue to decline in 2023? And when do you expect it — when do you expect the performance to button? Yes.

And then the third question is about your share buyback. We noticed that your share prices has dropped a lot this year, but it seems that the buyback activity has stopped in recent quarters. So could management tell us why the buyback activity stopped recently? And a related question about your dividends. So do you still think that you can maintain a stable dividend DPAs? Or is there still room for you to increase the payout ratio and then maintain a relatively stable dividend? Yes. So this is my 3 questions.

Yong Suk Cho: Thanks, Emma. Regarding your first question on our third quarter results, you see, this is weaker than expected. Then our main change is really macro challenges on our SBO sector due to pandemic control and then macro uncertainties. The operating environment has been fundamentally reshaped to our SBO segments. And then this is also expected to continue in the near — and then near to midterm, we think. COVID resurgence in various key cities really affected our operation in sales and collection, in branches or centers. And then customer confidence level remains low, indicating overall weak market demand. So basically, we got quite immediate that hit from the macro environment change. And then having those in mind, we just did our risk policy and growth plan, focusing more on quality segments.

So that as a result, decreased our new sales volume recently. Then — so what COVID measures, to deal with the situation, we will continue to prioritize quality over volume in the meantime and focus on sustainable profitability, meaning less scale, but we go after profitable and then sustainable segments.And we tighten our credit standards policy and focus on customers with higher risk rating and then particularly customers in more developed regions.See less — low grow and go charge ratio and then also customers in better performing segments. And then lastly, channel-wise, we will develop more direct sales channels and their leadership panels for other channels because we see higher customer quality from our own U.S.channels. Do you have some questions about the outlook.

Gregory Gibb: So on the outlook, as we put forward this morning, we do think it is a U-shaped pattern. So let me explain a little bit more how this plays out. So the existing portfolio which was acquired as early as 2020, which is still in force. So we have 2020, 2021, ’22, which makes up our existing portfolio. Over the last 3 quarters, we have progressively tightened our credit standards. But there is part of the portfolio which was brought into pre-tightening. That part of the portfolio is experiencing elevated levels of impairment and credit cost. And that will continue to play through over the next couple of quarters. The business that we have acquired in the last couple of quarters, as Y.S. outlined, has been done at a much higher credit standard, right? So that part of the business is performing better.

So what you have to kind of visualize is that we have, if you will, the legacy book gradually running off over the next 12 to 18 months. And then the new book that we’ve been building up over the last couple of quarters as well will grow with a higher level of profitability. But as we have tightened our credit standards, the absolute volume in the near term will be less. So you can envision the legacy running off, that’s 1 line; and the building of the new book with new credit standards increasing, that’s another line. And when those 2 lines crossed that will determine, if you will, the turning point in our U-shaped bottom line profit recovery. Now the exact timing for that really depends a little bit on whether there is real progress on policy change, including COVID.

Because we believe as soon as you have any policy change, the small business owners will respond quite quickly. And then 2 things will happen. The first is that the quality of the legacy business, if you will, the business initiated over the last couple of years, should actually show demonstrated improvement. That’s number one. Number two, is our willingness to accelerate new business growth at the higher standard will also increase. So it’s very hard to call right now, which quarter is going to be the bottom. But if we think about this over the next year to 18 months, we know it’s somewhere in that period. And for us, what is most important is to make sure that even if we assume the worst case, which is nothing changes for the next 12 months, that we are in a very good position in terms of our capital base, in terms of our funding partners, in terms of the network and how we’re prioritizing our channels.

So as soon as it does change, we can step on the gas pedal again, and be very strong financially and fundamentally in our footprint and in our chosen segments. So we are doing a lot of preparation for that day when that comes where we have confidence that we can hit that bottom in the U, and it’s really have to accelerate. We do believe that if we look around the industry that at that time, our competition will most likely be less, and our relative leadership in the market will be intact, and our ability to extend it should come at that time.So it’s very hard to call, as you know, in a market at the bottom, but we are relatively clear that it should be within the course of 2023.And therefore, 2024 is really where you could see the billable improvement.

But I really want to emphasize, when we face an environment like this, the first thing to do is to really make sure that you assume the worst and our going not only survive but prosper when it recovers. And so that is the way we prioritize who we’re selecting to serve now, how we’re managing costs, where we’re putting resources. So in light of that, to your follow-up question on buybacks. So we have bought back over time now about 110 million shares, represents more than USD 800 million that we bought back progressively being listed. It is — in the current environment, we believe we want to place obviously, liquidity is #1.Obviously, we have a lot of it, which is important, I think, just giving confidence to our financial partners. Two, we would then prioritize dividend.

And then three, we would look at other ways to create value for shareholders. In terms of dividends, obviously, our policy is a cap of 40%.That’s something we will look at as needed over time.But we will prioritize dividend over maybe other aspects in the near term.

Emma Shu: Yes, that is very helpful. Just one quick — just one quick follow-up. You mentioned that the U-shaped recovery depends on — depends on the running of your legacy portfolio, which is extended before the tightening of credit policy. So could you tell us the percentage of this legacy portfolio in your existing portfolio?

Gregory Gibb: We haven’t disclosed those specifics, but I think Y.S. gave a pretty good indication of the following concept, which is even in our legacy portfolio, we have seen a greater regional differentiation in credit performance. And so as we look across the existing book, even within the existing legacy book, we think about 2/3 of it is placed in geographies which are reasonably economic resilience, which means that of the existing book that was initiated back in 2020, 2021, it’s going to be in regions which are poor performing, right? So that doesn’t give you the exact number because we haven’t disclosed it, but it gives you a sense of magnitude, right? So we’re not saying the entire legacy book is that a lot of it is actually quite well positioned.

And as we build the new book, it is actually prioritized in those stronger geographies as well. So if we’ve done our strategy right with the way we tuned our credit policy, the way we’re doing new business, that should help us on the upside of the U as soon as the environment improves.

Operator: We now have our next question from Yada Li of CICC.

Yada Li: I am Yada from CICC. So I have 2 questions for today. And the first one is regarding the cost side. I saw the growth of the lower origination volume has been slowing down and how are you able to control the operational cost of the large direct sales team in the future? And additionally, looking forward, what is the trend of our credit insurance costs specifically? And the second one is about — can you give us more color on the updates or any potential time line on the HK secondary listing.

Yong Suk Cho: Well, thank you, Yada, for the questions. I guess you mentioned about the cost control operating costs and also about the CGI that. So first, simply put, for the cost control empathetical DPD, I think key words is to keep focused and be nimble and efficient. We have replaced an increasing focus on optimizing and improving the quality of our direct sales team. And we also observed a more significant improvements in our productivity in regions where we are successful in hiring high-quality DST. So we will keep decision as we are now getting more selective in taking a higher customer base. In terms of the CGI percentage and cost, I think we have mentioned before, while we do hope recovery will come sooner, but as at today, we announced assuming a sales growth scenario which, in medium term, we assume our credit enhancement cost will still remain at — levels, and our spend will be at pretty much the same level we have right now.

Gregory Gibb: On the question of potential Hong Kong listing, we still see it as a very important thing to be ready for. And the — getting ourselves ready is something that we have been focusing on. In terms of earliest timing, we would have to do it off of the back of our 2022 financial results. And we’re staying very close to regulators’ understanding whether or not any other communications required for actually initiating the process. I think that the — as Y.S. talked about, the rectification completion, the rectification completion, I think has created greater certainty. You’ve seen some other movement in the industry on this front. And so as soon as this is viable from both our financials being ready in terms of your financials, that’s something we would obviously prioritize.

Unidentified Company Representative: So this concludes…

Gregory Gibb: Operator, any other questions?

Operator: Thank you. This concludes our Q&A session for today. I will now hand the call over to our management for the closing remarks.

Unidentified Company Representative: Okay. 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 team offline. Thanks again.

Gregory Gibb: Thank you.

Operator: Thank you. This concludes today’s call. Thank you, everyone, for joining, and you may disconnect your line now.