Qudian Inc. (NYSE:QD) Q3 2019 Results Earnings Conference Call November 18, 2019 7:00 AM ET

Company Participants

Ben Zhao - CEO Assistant
Min Luo - Chairman and Chief Executive Officer
Carl Yeung - Chief Financial Officer

Conference Call Participants

Sanjay Jain - Aletheia Capital
John Cai - Morgan Stanley
Jacky Zuo - China Renaissance
Alan Kuang - Aletheia Capital
Daphne Poon - Citi

Operator

Hello, ladies and gentlemen, thank you for standing by for Qudian Incorporated's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded.

I will now turn the call over to your host, Mr. Ben Zhao, CEO Assistant for the company. Ben, please go ahead.

Ben Zhao

Hello, everyone, and welcome to Qudian’s third quarter 2019 earnings conference call. The Company’s results were issued via newswire services earlier today and were posted online. You can download the earnings press release and sign up for the Company’s distribution list by visiting our website at ir.qudian.com.

Mr. Min Luo, our Founder, Chairman and CEO; and Mr. Carl Yeung, our CFO, will start the call with their prepared remarks.

Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company’s results will be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company’s 20-F as filed with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please note that Qudian’s earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Qudian’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. We also posted a slide presentation on our IR website, providing details on our results in the quarter. We will reference those results in our prepared remarks, but will not refer to specific slides during our discussion.

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

Min Luo

Thank you, Ben. I want to first thank all our investors, analysts and the media, who have taken an interest to join today’s call. I would like to walk you through some of the key factors in our business performance, before handing it over to Carl, who will take you through more details.

This quarter marked our successful evolution to a balance sheet independence technology servicing fee-driven business. In the quarter we saw peak earnings quality improvement as our risk independent open platform became the largest revenue contributor and delivered staggering 150% growth from the previous quarter. By using our technology as a service offering, we are enabling the regulated licensed institutional partners to really lower their costs to access the massive lending service, inclusive consumer finance opportunity.

We are leading the technology application in high-speed precision processing of micro loans, while at the same time syndicating each individual user to multiple lenders. This allows all our lender partners to lower risks while providing enhancement in the credit side, allowing open platform to focus on higher quality borrowers.

We also continue to empower our funding partners credit assessment decisions with our fixed data [ph] credit application including regulatory compliance, customer behavior pattern, complex networks, adjust verifications, [indiscernible] stability, biometric confirmation, machine learning, AI helped collection, and the real-time credit performance based risk challenges, the results have been impressive.

As of the end of the third quarter, our open platform has linked over 1 million outstanding borrowers with 11 licensed regulated funding partners, both more than doubling from last quarter. The rapid uptake and acceptance by qualified borrowers and licensed to regulate it. Financial service providers through a firm [indiscernible] presents as a leading consumer finance technology platform.

Recently there have been noises along nationwide P2P reinstall collection practices and user status private. In this evolving and complex regulatory and commercial red tape, we are confident that Qudian has made the right upgrades to ensure our leadership in the industry. We take regulatory compliance as the number one priority. Our first efforts in the early adoption of Circular 141, complete avoidance of P2P business model, 100% institutional funding base, disciplined in how approach to collection and strict respect of our customers' data privacy have all cumulated to our open platform solution.

Our approach to work only with licensed and regulated financial institutions lets them lend and be responsible for borrowers which while QD provides a full step of transactions, services, using cutting edge technologies to enhance analytics, user experience, reduce customer acquisition and engagement costs, is very likely to be the ultimate form of regulatory compliant fintech in China.

We have seen similar user interface and experience as our well proven loan book business out of users that were qualified to draw loan again in open platform in the third quarter. The [indiscernible] staying well above 30% now very close to 80% overall at the end of the third quarter 2019 our registered users base grew to 28.3 million and total outstanding borrowers reached 6.3 million, both the highest in our company's history, illustrating the sustainability and the stickiness of our user demand.

We are excited by the prospects of our tech-driven business model and delivering the right risk free, independent and regulatory compliant approach to our RMB achieving consumer credit opportunity in China. I very much look forward to continue to share with you the remarkable and sustainable financial results and returns from our open platform initiative.

I'll turn it to Carl for more details.

Carl Yeung

Thank you, Min and hello everyone. First, I'd like to touch base on a couple of highlights from the third quarter. We delivered another solid quarter of Non-GAAP net income of RMB1.06 billion, a 52.9% year-over-year increase. Despite the overall industry credit weakening driven by macroeconomic environment and reduced liquidity as non-compliant players exit the credit markets.

This came as a result of our risk independent open platform initiative really taking off. Generating RMB993.3 million in revenues for the third quarter, representing a staggering 150% quarter-over-quarter growth. This risk independent fee-based revenue contributes now to over 90% of our net profit as it carries little marginal operational costs and we assume no credit risk.

The number of outstanding borrowers in open platform also increased to over 1 million from 415,000 in the second quarter, driving total outstanding borrower base throughout our ecosystem to 6.3 million, a new record in the company's operating history. In the third quarter 669,000 first-time borrowers drew loans from our platform and to us with minimum customer acquisition costs, demonstrating that an innately affordable and attractive service does not require costly marketing to successfully grow.

Again, our open platform makes our service now even more attractive as the higher-quality borrowers can now access more appropriately sized credit rather than before the frankly our previously over conservative credit sizes, because we have self restrained limits per borrower by underwriting using our own balance sheet only.

The total balance through the ecosystem, including open platform, has grown further to RMB38.4 billion, despite what we believe to be a temporary credit down-cycle and it solidifies our strong execution capabilities to succeed by quickly navigating the various changes in macro-environment, online consumer finance industry, regulatory environment and partnership landscape.

Building on the innovations in the open platform we will continue to pursue our tech driven growth strategy to connect the 300-million plus creditworthy, but underserved consumers in China to over 5000 licensed domestic financial institutions. In the risk taking side of the business, as a result of our commitment to delivering risk adjusted returns, and our overall conservative risk appetite, we swiftly reduced credit volumes and paused credit trial programs.

The proactive management of market-driven risk was proven effective in stabilizing delinquency rates. To enhance comparability to peers and transparency in our disclosures, our M1+ vintage measured by current receivables at risk stayed below 3.4%, while our M6+ vintage charge-off rate was below 1.6%. We look to continuously enhance transparency and we'll continue to disclose both, total and current receivables at risk standards, while current at risk may be a more direct comparison to some of our peers' disclosure standards.

Although risk remains well-managed, we believe the recent exit of many smaller players may create further liquidity pressure for the Chinese consumption credit sector. As such, we expect to continue a conservative approach on our risk-taking book into the final quarter of 2019. Thus revised our full-year guidance accordingly to RMB4 billion representing a significant 57% increase from RMB2.55 billion for what we achieved in 2018.

Now given the strong momentum in our open platform and its risk-free fee-based business model, we think we have established a solid basis for an opportunity to security to be revalued at a more reasonable valuation, while current market value approximates net assets. Therefore, another U.S.$195 million of shares were announced and most recently fully repurchased under our accelerated stock repurchase program, bringing our total buyback amount to U.S.$572 million since we became a public company. This very large cumulative share buyback since we became public reflects our confidence in Qudian's growth prospects and upholds our commitments in creating shareholder value.

Since our inception in 2016 we have gone through stages of business and regulatory compliance upgrades from license-based lending to risk undertaking loan facilitation for financial institutions, to now becoming a technology-based, fee-driven platform. Our consistently strong financial results have demonstrated our long-standing commitment to deliver value to our shareholders and we are honored to be only of the three U.S. listed Chinese stocks selected to soon join the MSCI China Index, one of the most influential indices that tracks stocks with exceptional liquidity and widespread investors interests.

Now let me share with you some key financial results. In the interest of time, I will not go over line-by-line item. For more detailed discussions of our third-quarter 2019 results, please refer to our published earnings press release. In addition, our most recently updated PowerPoint presentation, deciphering all the numbers are uploaded in our website.

Total revenues were RMB2590.9 million or U.S.$362.5 million which increased by 34.3% from RMB1.9 billion for the third quarter of 2018. Transaction service fees and other related income substantially increased two RMB993.3 million or U.S.$139 million from nil in the third quarter of 2018 as a result of the fast ramp up of open platform initiatives.

Cost of revenues decreased by 70.5% to RMB206.3 million or U.S. $28.9 million from RMB698.5 million for the third quarter of 2018. Primarily due to the decrease in costs incurred by the Dabai Auto business and a decrease in funding costs associated with the on-balance sheet portion of our loan book business.

Sales and marketing expenses decreased by 45.4% to RMB65.5 million or U.S. $9.2 million from RMB120.1 million for the third quarter of 2018. This decrease was primarily due to the scaling down of the Dabai Auto business. Non-GAAP net income attributable to Qudian's shareholders increased by 52.9% to RMB1.06 billion or U.S. $148.6 million or RMB3.34 or U.S. $0.47 per diluted ADS.

This concludes our prepared remarks. We'd like to open the call to questions. Operator, please kindly go ahead.

Question-and-Answer Session

Operator

Thank you, presenters. [Operator Instructions] Your first question comes from the line of Sanjay Jain from Aletheia Capital. You can now ask a question.

Sanjay Jain

Hello everyone, can you hear me?

Carl Yeung

Hi Sanjay, good to hear from you.

Sanjay Jain

Hi, thank you so much for this call and congratulations on great results, especially the performance in open platform. I just wanted to clarify the economics of this business, so as I understand the APR in open platform is closer to 36% and they are paying you 9.5% in the third quarter. So in percentage of loan terms that is 15% to 16%. So your partner is roughly left with 15% to 20% and then they have to bear a cost of funding of their own which is say 3, 4, 5% and so the only way this economics work for your partner is if the credit loss is relatively quite low, I'd say 5% to 6% and currently I believe it is even lower than that.

But when I come to the profile of the customers, that's where I'm trying to basically understand, find out what is the difference between open platform and loan facilitation. I believe open platform the income is 4000 to 6000 per month instead of 3000 to 5000 in loan facilitation. But you are lending 15,000 per borrower versus 5000. And if I remember correctly, you used to keep the monthly installment to RMB300, but now it must be around 1000.

And I believe you are restricting the number of platforms a customer would have borrowed from to 4.7% to 5.2% or that is the range actually under open platform that they would have borrowed on average from five platforms versus six or seven or more in loan facilitation. So I'm just trying to understand the differential in income versus the differential in monthly installments and then the 5% credit costs here versus you know 10% or more in loan facilitation. How does it work?

Carl Yeung

I'm happy Sanjay and given your question, we really appreciate how much insight you have in our business most of which or substantially all of which are very, very accurate. So, you know our business very, very well and thank you for that. Now regarding the Open Platform Initiative, as you said the economics only makes sense to my funding partner if the loss rate is lower and it is lower now. Now why is it lower? There are several aspects that creates a better credit assessment. In addition it's our overall direction with our funding partners in an overall macroeconomic down-cycle to focus on the high quality borrowers.

Now how do we do that? Number one, the open platform borrower number that you can see is about 1 million. It is a subset of our total outstanding borrowing base of 6.3. We believe there is still substantial room to grow from that because we do have a credit line that are approved to over 33 million people of our customers. So there is still substantial room to grow.

Now in that subset we have created a very, very innovative and we're very excited by that so-called credit syndication process where all of our funding partners who have their own independent knowhow in credit assessment come to the same platform and they do their own independent credit underwriting.

With that, if my borrower may be borrowing from other platforms, one funding partner may not know, but another funding partner will know. Now we bring all that information together in a process where it's open, that's why it is called open platform and we share that information and quickly decide on a credit that the borrower can borrow.

So we're really bringing more heads to the table than before. And that's what explains the credit sort of delinquency to be significantly lower than just the loan book business. We're excited by how we created this using a lot of advanced technologies in transaction clearing and high-speed processing, position processing. And we're delivering the right service to our funding partners. And you can see that exciting growth.

We went from four funding partners in the second quarter to now 11 and we look to now grow close to 20 as we really found a solution to a problem that all my funding partners face. Number one, bring the cost down and we have achieved that consistently even with loan facilitation. Right? But number two, the core where we – for all, everybody who lends, mainly my regulator licensed financial funding partners is, how do you get a credit. And by bringing more heads together it just works. It just works really well. So that's that.

Now, we do believe there are substantial number of Chinese clients, let's forget all the acronyms. Okay, let's focus on the real user. There is a substantial massive amount of underserved or under bank, under credit borrowers that just have massive disposable income, but they may not have a disposable capital to buy what they want. You mentioned that at RMB15,000, which is the current loan balance right now across our open platform, it's right now about RMB14,000.

The actual monthly repayment is somewhere around RMB1,000 principal plus interest. Now does that mean pressure to my borrowers? In fact, not really, even if you look at a person who is making just on average RMB5,000, which is not massive a month RMB, a month, what's special about the Chinese under bank consumer space is what if you are a factory worker, if you are a construction worker, even restaurant waitress, one amazing thing that's different in China versus anywhere else in the world who will pay their loan situation is, they all have dormitories provided for, and they all have three meals provider for, which makes the entirety of the income truly disposable and they don't really have to worry about basic like things [ph], which makes this class of users safer and better.

It's just that we were not doing our business right before. The customers -- the high quality customers were there, but we were too self-constrained on risk. We were not letting people borrow over 10,000 even if they deserve 20,000, 30,000 and with the open platform, now we can achieve that. So we've opened up a gold mine that was already in our ecosystem. We just didn't mine it before. Did that help?

Sanjay Jain

Okay. If I can follow up. Yes, thank you very much. I mean, that is helpful, for sure. But one small observation on that, and one clarification, so the small observation is that, how do you define under-banked or under-served if these customers are the one who are borrowing from anywhere between 4.7 to 5.2 platforms as of now, when you're lending to them another CNY14,000 in the open platform? So that's just an observation. You don't have to respond to that.

But the bigger question I have is that you are making 15%, 16% off of this loan simply for reference and the bank is making another 7%, 8%, 9%, 10% return on that loan after their funding cost and credit cost, assuming that the credit cost remains in that range of 5% to 7%. So I'm just wondering whether, this is too profitable? I mean there is too many people in the food chain making too much money. How would you respond to that? How -- and how does it resolve itself?

Carl Yeung

Yes, thank you, Sanjay. First of all, we cannot agree with you more regarding your observation. We are a fairly transparent and a direct and honest Company. There is no doubt borrowers in the online industry space is stacking, okay. Let's not shy away from the reality and we would like to openly say that, right? But there are ways, if you think about these borrowers. Again, they may have taken two or three maybe even four or five loans, but the loan size per their monthly disposable income is still well manageable. You can see the losses that we have, even on the open platform is still fairly manageable, fairly well contained.

Now why is that? Because the traditional Chinese financial institutions as you are aware, like the traditional bank credit card issuers are generally quite conservative on personal credits. I have a personal experience, frankly, even with my type of income, one largest credit card issuer only grants me RMB50,000, okay, in my credit line. A more commercial global credit card issuer offered me over 20 times that amount, and I can definitely repay any of that.

So number one, the banks have been quite conservative on personal credit. Number two, even for the industry participants, we believe the Chinese consumer leverage taking our household is still at a very early stage of leverage. Admittedly, the growth is very fast. So the leverage opportunity is still massive. We still think that we are still far from the safety sort of red lines. Now how do you combat stacking with stacking? Right. Number one is, in the previous world there were too many small players, there were capital being deployed in the P2P space in which we were not involved. So we wouldn't know really the right number.

There is nowhere - no where we can seek to help. But now as more and more larger platforms become compliant, copying our business model from loan facilitations and are talking something similar, like our risk-free open platform, more and more of them are supported by regulated licensed banks, and we share a lot of these funding partners and these funding partners know the best. That's why we are going in the direction of open platform. These funding partners from the licensed banks, consumer finance companies, trust companies who participate in this industry would know this better than us.

So they will be more equipped to handle stacking, they are more conservative in handling the type of risk. While, we can significantly add on the value of significantly reducing user acquisition engagement costs, the transaction clearing, billing as well as collection service. So it's really bringing the best of both worlds together. And this transaction, if you think about the syndication process can only happen at our platform or maybe a third-party platform independent of just one single bank doing this.

So, one platform reduced the risk for 10-11 banks now, right. So it just makes sense. I do observed you had a comment about the massive probability that we are enjoying under the current model. My view is a conservative view is that over time, the margin must come down. We're not going to be taking close to 10% of the transaction dollar volume. We may be taking closer to somewhere between 5% to 8% over the longer period. Now so far though, my take rate in the first quarter to second quarter to now third quarter that we've initiated and now the loan balance we've created from our partner is not small, it's over RMB12 billion, has been consistently close to 10%.

So, so far my partners are happy with it. They are happy to share this economics with us, helping them build, it includes a finance infrastructure to bring the technology into the game. So they can actually have a chance to access this market. But over time as competition sort of increases, we would see the take rates come down, frankly speaking.

Sanjay Jain

Yes, it makes sense. I mean, this is right now a fantastic situation for you with competition eroding in the marketplace and quite possibly your partners probably don't even understand fully the economics of this business, especially the economic...

Carl Yeung

No, they do, they are a bank, they're very sensitive on the interest fees.

Sanjay Jain

Good for you, if they don't - but anyway. Thanks a lot. That's very, very helpful. If I may also get a second question on credit trial program, how many borrowers do you have outstanding from that now and the loan amount or percentage of loans from the credit trial program? And the asset quality, what would it be excluding the credit trial program borrowers, please?

Carl Yeung

Sure. So, I'm not at liberty to disclose that specific amounts. But it's not big, because we have seen delinquency basically kept at a steady stable right now at about D1 of 10% to 12% range. So as we pause the credit program, it just paused. And we see that actually to improve over the next year. Our strong conviction, the credit delinquency D1 will improve over the next year as a smaller non-compliance by sector.

Now, how much of it from a user or loan balance perspective? It's not the majority obviously. Just giving you a sense of range it is about probably 20% from each angle, that are outstanding right now. So we did enjoy a very large uptake in obviously you observed the active borrower base, over the last two, three quarters. And we will go through that, and through the end of this year and that quality will improve significantly in the next year.

Sanjay Jain

Yes, that's very nice. And I must say that you have a number of newer borrowers is quite impressive despite the shutdown of the trial programs, in the third quarter. So, if I can have one small clarification on the loan syndication part, when you do a loan syndication with multiple partners, will your share of the syndication be subordinate to the other partners? Will there be a waterfall concept? And is that the mechanism through which you cover credit risk or not?

Carl Yeung

No, we follow very, very strict practice of not subordinating, because if we were to subordinate, if you look at that loan as a whole we would be basically a first off-takers. And we would have to bring that all risk - the whole risk into our balance sheet. So, we do not actually provide any subordination. There was actually a very good commercial reason why we do not subordinate, because the loan had a certain capacity, right, you don't want to over extend the borrower, right, and each funding partner knows that, they are experts in lending, these are banks.

But the problem is, each person has a specific limited capacity and it's a first-come-first-serve. So if you're at the back of the queue, number one, you may not be get - you may not be the one getting your money into the hands of a good borrower. Number two, if a loss does take place, what happens is, the first lenders get paid first of the first dollars. So, you don't want to be the last in the queue either.

And this absolutely explains why the massive growth in open platform, because my funding partners are rushing to the best borrowers as quickly as possible, right, because they don't want to be the ones left behind. There is a really good commercial reason, why. We've designed it the way so that it encourages growth. We do not take any risk, and I think, this is the real ultimate form of fintech in China.

Sanjay Jain

Very, very interesting. So you would be the first lender, if you want to be in every case, I imagine, because you are the one who is originating the customers and suppose there are three lenders, and in one of the months, the borrower does not pay CNY1,000 as he is supposed to, but say he pays CNY500, how will that be allocated among the three lenders then?

Carl Yeung

Yes, it's - it will be separated in several different bills, basically whoever puts up the credit first will be first in line. Okay, so that obviously, it's a syndicated process, yes, but there is a slight timing gap difference between different lenders reporting back to the platform, how much they're willing to lend. So, the first dollar, the first CNY500, always goes to the first lenders.

Yes, in a lot of cases we would be participating and we'd probably be the first in queue. This would tremendously enhance our credit quality. Just bear with me, over time, because we are now in the risk assessment gain, not a loan anymore. All my banks are helping us and we are helping each other. This is the wonderful part of syndication.

In the previous sort of non-fintech world, syndication does happen over a big loan portfolio, but the buyers or the lenders get - holding a bag, don't know what's the asset inside. What we've done is, we created a technology to know, so that all my partners know exactly what they're dealing with, on the very detailed single individual borrower level.

Sanjay Jain

They're incredibly well designed product. I must say, incredibly - entirely in your favor, which is fantastic for me as a Qudian shareholder. Thank you very much for your clarifications. I appreciate that.

Carl Yeung

Thank you, Sanjay. I appreciate you always understanding our company very well.

Operator

[Operator Instructions] Your next question comes from the line of John Cai from Morgan Stanley. You may ask your question.

John Cai

Hi. Thanks management for taking my questions. So, I will focus on the risk, I see the PBT online that shows, the D1 delinquencies is rising up to 12% now if we exclude the open platform and then by the open platform probably around 11%. So just wonder what's the latest trend? Is it under control now and given this is the case, and we have make as a credit related loss including provisions and the guarantee related loss roughly, RMB1 billion in this quarter.

So, just wondering how much provisions we need to make going forward and what's the growth strategy under this risk environment? Thank you very much.

Carl Yeung

Thank you, John. And yes, and I really would encourage all interested parties to look at our presentation posted online. We've enhanced the disclosure to our company and we are holding the standard of what a fintech company should disclose in our presentation. So, a lot of information is there to help you understand the business and I think we're setting benchmarks across all our peers.

So on Page 23 of the presentation that's uploaded on the web, we want to be transparent and we disclosed our D1 delinquency, which represents a daily moving view time assessment of the entire portfolio's risk. One thing is right, John observed that, it's about 10% to 12% range and now it's stabilized around 12%. One thing I have to correct is, open platform is not at 10%. 10% is after blending open platform, the entirety of the loan book plus open platform, what the D1 delinquency rate will be.

Open platform D1 delinquency rate is significantly lower, due to the reasons I just discussed with Sanjay. So that's kind of that. So it's - we posted up there, it's a real-time, we updated frequently. We have seen a very good stabilization of that. So the acceleration, the climb of D1 delinquency up that curve, has stopped. So I think that's the first part.

And if, we look further into the strategies that we've deployed in the last two, three months, last quarter and the quarter before, we actually do expect that delinquency to stabilize into Q4, and will actually likely to reverse in Q1. Now, granted that the macro situation and liquidity remains constant. But, we are conservative on our view. As you know, we have always been a conservative company with lower leverage, our loan book-to-equity ratio with a more buffer on margins to protect equity from losses.

So, we are taking more provisions in the quarter. Our M1+ delinquency coverage ratio is actually covering real [ph] M1 by well over 120% in the quarter, and like John mentioned, that number is right, it's about RMB1 billion on and off balance sheet together. And we expect that number to be similar into Q4, and it would actually start to reverse into the next first quarter, second quarter 2020.

We have seen this before. Our company is well experienced in facing shocks in liquidity, although our, we are only a five-year old company, we have seen many credit cycles in the Chinese consumer credit sector. The first big client was in 2017, December. We've managed to do that, and we delivered still in this first quarter of 2018, RMB300 million plus of earnings.

We've seen another uptick with the P2P crack down through the summer of 2018, and this is, I think the final phase of P2P exiting. So the future beyond Q4 looks very optimistic. Is that helpful, John?

John Cai

Yes. And so, how does that impact our growth strategy? Just to follow-up, I mean for 4Q and the next year? Thank you.

Carl Yeung

Yes. So, we really appreciate this important question. I think our strategy is very clearly laid out in the third quarter results. Our company strives to be a technology company rather to be a lender. So over time, you expect our leverage to continue to decline. We're taking less and less risk on books over time because, we have found that, you know, our funding partner appreciates our sort of cost saving aspect of the business, just as much as the risk taking part of the business.

So given that demand is insatiable, given that we have the relationship, given we have the customers, all our focus now is to become a tech company, and I think that's the better way to go from the overall regulatory shifts and changes, our shareholders will be much more protected from any regulatory noise.

We've demonstrated this before. We've completely avoided the P2P business model. So the direction for us is clear; less and less and less and less of risk taking. If the opportunity allows, if the opportunity really allows, we wouldn't have a loan book at all.

John Cai

Sure. Yes, I think, so just one quick follow up on one number, I think I see this 6.3 million outstanding borrowers included in open platforms and the loan facilitation business. Just wonder, if, what's the number for pure loan facilitation, meaning excluding open platform? I'm not sure if you have it handy. Thank you.

Carl Yeung

It's about 6 million. It's about 6 million.

John Cai

Great, thank you very much.

Carl Yeung

Thank you, John.

Operator

[Operator Instructions] Your next question comes from the line of Jacky Zuo from China Renaissance. Your line is now open.

Jacky Zuo

Hi, Carl. Thanks for taking my question. Just two questions from me, firstly, about the customer acquisition strategy. I've seen that our sales and marketing expense actually have been quite low versus peers and some of our peers actually spent very aggressive sales marketing budgets, especially this year. So how do you view the user growth and the borrower growth, and especially when our competitors are very aggressive on this?

And second question is about the lending license. From the regulators, they've been discussing to give license to capable P2P or online lenders such as consumer finance company license or online micro lending license, will you consider that as an alternative business model in the future, to get the license and the license lender? Thank you.

Carl Yeung

Thank you, Jacky, and first of all, congratulations on your new role and great to hear from you in your new capacity.

Jacky Zuo

Thank you.

Carl Yeung

First of all, your question on customer acquisition, it's always a question that all the smart analysts ask, and to us the answer has always been, we are not in a rush to acquire customers. We have always had a problem of too much demand. One number I don't disclose anymore, but I can still sort of roughly share this, is since the end of 2018 to now one small part of the open platform is about just referring customers away to other platforms.

That number stood at about 3 million at the end of second quarter, it grew to 5 million to end of third quarter. So not only we don't have a problem of client customers, we just have too many customers. We actually sent 5 million people to other interested parties. So, it just goes so far as to the demand that we're facing. So we're really in no rush to get customers.

We have some rough numbers in terms of how we think about next year and the year beyond. Anything further, I'll be lying to you. So we do have some sort of shape or form of next year and beyond. We believe, with our sales and marketing, we will be well positioned to deliver very attractive strong results, like we've done before for the next 12 to 24 months.

Beyond that, we have a strategy in place, which is the ecosystem part of the open platform where we've partnered with many, many app partners such as, we've talked about before [indiscernible]. We are also in addition to that in about eight different app ecosystems by now, pretty successful, because all my app partners are on their way to monetize.

But this is our view and our view only, we don't believe the current credit environment in China as P2P is unwinding and liquidity is shrinking is the right time to acquire customers. So we have the channels. We absolutely have the dollars. We have more cash and more profits than any of my peers and we can spend that any time we think is the right timing. So, as we don't expect there is a need to do this in the next 12 months, we would spend that dollar wisely at the right time, to deliver better results over the course of our growth cycle.

So number two, regarding lending license, we've had deep thoughts about this. We started our business with two proper Micro Internet lending licenses. And in fact, we've had pretty restrained use and froze them over that period. We are not too interested in new forms of licenses, because that could be policy driven and the regulatory structure behind that could be unstable over time.

We found a better way, the way where we do open platform, where we are allow licensed lenders, 100% licensed lenders, to lend, we don't touch the loan, and from a lending perspective, but we just service the loan, it's probably the better way to conduct FinTech. And it just makes us the better naïve [ph], it should make all of our shareholders better and naïve over time. So that's our direction to be a Tech company.

Jacky Zuo

Thank you, Carl. Thank you so much for your answers.

Carl Yeung

Thank you, Jacky.

Operator

[Operator Instructions] Your next question comes from the line of John Cai from Morgan Stanley. Your line is now open.

John Cai

Hi, thank you for taking my questions again. So I do find the presentation is really useful. Just noticed that there is a relatively new balance sheet item, which is called risk assurance liabilities, is there any more colors on these items because I noticed that on the presentation, Page 27, this -- about the breakdown of operating expense, it seems that these changes of risk assurance liabilities contribute positively to our income. So it's a negative - it's an income contribution instead of risks. So just, probably a little bit more explanations on these items and how it works, would be helpful. Thank you very much.

Carl Yeung

Sure, John, and thank you for the observation, that's very, very insight, and we love to explain that. This is absolute positive contribution to our net income. The specific amount is 160 million in the third quarter that grew from 32 million in the second quarter of 2019. Now the mechanism behind this is, we actually have a finance guarantee license. Okay? And that contributes to the part of this transaction structure in our loan facilitation, sort of the risk taking business model.

And as receivables go into this guarantee companies, just as the same as our loan facilitation, sort of all by banks, we actually have to recognize this income upfront, as well as the risk upfront. Okay? What happens is we have been consistently over conservative on the potential unrecoverable receivables from there. So as the loan performs much better than our original accounting assumptions, we have to reconcile that over that quarter basis, so we actually were a little bit too conservative on the risk assumption in - and it drove a 160 million positive contribution in Q3.

So it's the same thing as our loan facilitations, but it's part of the guarantee part of the transaction, that we provide under proper license, no less.

John Cai

Understand. Thank you very much.

Carl Yeung

Thank you, John.

Operator

Again your next question comes from the line of Alan Kuang from Aletheia Capital. Your line is now open.

Alan Kuang

Hi, Carl, thank you for taking my question. I just wanted to clarify my understanding of Qudian's growth strategy, because I believe during the previous Analyst Day, we have discussed about the D1 delinquency ratio and was saying that there was asset quality concerns. Hence, we are planning to derisk and reduce the credit exposure, in risk taking business.

And I do believe, which show 1x leverage at one point and it looks like based on the disclosure we saw in the presentation that there is still fair bit of off balance sheet loans on the risk taking business. I'm just wondering if the financing business and the growth strategy and if you will continue to reduce the off-balance sheet portion going forward because we understand that if you use your own funding to lend, you do not have to pay any funding costs. So the economics is a lot more attractive. Therefore, you are able to bear a lot more credit costs. I'm just wondering if there is any change in the growth strategy on that front?

Carl Yeung

Thank you, Alan and really again I appreciate - in fact, all my analysts that covers the stock to come to Xiamen and taking interest in us and understanding the company. The strategy remains the same as we discussed, and it's very clearly laid out now that we want to be a tech company and we can be a tech company given the capabilities.

So, number one, if you see my total loan book to equity ratio, that number was 2.3x in Q2 and now it's 2.2x in Q3, consistent with the deleverage sort of strategy. And this number is, frankly, the lowest amongst all my peers. So, we're better equipped to handle risk than any of the funding - any of my peers. So, talk about risk management, I think QD is really in a good position and we really know how to handle this.

Secondly, the absolute dollar amount of on and off loan balance together as a loan book, dropped from slightly over RMB28 billion to now RMB26.1 billion into the third quarter. We expect that to continue to drop in the Q4 next year as we found a much better growth engine, the open platform. We can do the same business, focus on the high-quality borrowers, earning interest in fee, and carry on growth. So, we don't need to leverage. We don't need to take on risk. So, it's strategy consistent.

Alan Kuang

All right, cool, thanks for the answer.

Carl Yeung

Thank you, Alan.

Operator

[Operator Instructions] Your next question comes from the line of Daphne Poon from Citi. Your line is now open.

Daphne Poon

Hi, Carl, thanks for taking my questions, so two questions from me. The first one is regarding the delinquency rate, probably just a follow-up. So, can you help us to break down, like, how much of the rise in delinquency rate over the past quarter either in terms of the D1 delinquency rate or the M1+ loss rate, how much of that is related to the credit trial program or put it the other way, excluding the impact, like, from the credit trial program, what would be the loss rate for the first quarter?

And the second question is regarding the - on the income statement. So if we look at the financing income, I tried to calculate the takeaway by dividing that, like, by the average loan balance. It seems the takeaway has dropped quite a bit in per quarter. Like, previously it used to be around 24%, 25%. This quarter it is around 31%. But as with the industrial fee, like approximately to your APR, so would you help us understand what drives the decline here? Yes, so that's my questions. Thanks.

Carl Yeung

Sure, thank you, Daphne. Again, insightful questions, I appreciate that. Number one, the delinquency rate, assuming we were to take out the credit trial program, I partially answered that to Sanjay as well, it's about 20% less. It's is about 20% less, but we wouldn't disclose that number, because I don't think it's meaningful.

What's interesting is, if you look at my more full disclosure today, we disclosed M1, M6 on both total receivables and current receivables. We found that a lot of peers in our class actually just like to disclose current receivables. So, we'd like to post that number up, just to make things apple-to-apple, okay? So, any way that's a side one. It's about 20% lower.

We actually stopped the – paused the credit trial program because we do believe there is a sort of credit cycle going through. But it will finish perhaps by the end of this year, into the first quarter. So, that's why we are quite convinced that D1 delinquency rate is now stable and now in fact dropped into potentially Q1 and Q2 next year. So, that's I think hopefully helpful.

And number two, regarding the take rate on the balance sheet part, which is our on-balance sheet part of the loan book, which is the financing income, the take rate is around 33%, 34%. It's about the same. It's about range bound. So if - I think one thing is, one thing that could be driving this is maybe a slightly more use of trust structures in Q3 than the previous quarter.

But I have to – I have to double check on that. But in general the numbers should be roughly the same, given, number one, the financing costs to do this hasn't changed on balance sheet leverage. Number two, the channel costs really haven't changed and any provision is kept under the P&L below that line. So, I wouldn't see any reason for it. May be just - loan duration. I think loan duration may have some small impact to this. But it would just fluctuate around the 30%-35% range.

Daphne Poon

Okay, sure, thanks.

Operator

[Operator Instructions] Your next question comes from the line of John Cai from Morgan Stanley. You may now ask the question.

John Cai

Yes, it's me again. Thank you again. So, still about the risk and growth. So, probably about our assessment first on why we would expect the delinquency to come down in the next year? So, that's my first question.

So, secondly, obviously as mentioned, we rely on the open platform to grow in the coming years. So, from a customer perspective - so obviously, our total customer base reported roughly 10%, D1 driven delinquency. So, if we need to keep the delinquency rate at the open platform low, that probably means that we need to acquire some new customer.

So what's our strategies on basically to support the growth of open platform, particularly on the customer side? And funding seems okay at the moment, but if there is some color to add on the open platform funding, probably the management can give us more details on that as well? Thank you very much.

Carl Yeung

Okay, sure. Thank you, John. So regarding delinquency expectations or how we actually see that evolve; number one, the more recent uptake, partially due to macroeconomic environment, liquidity, as well as this credit trial program; two of the three factors, I think will roll over very soon. Especially, one thing that's under our control is the credit trial program, so that's paused. Number two, is the liquidity shrink from the P2P wind down should finish in the next two, three months, maybe even longer, four, five months, but it would be over soon. So, I think that all contributes well toward delinquency coming down. We've seen this before. It goes up and it comes back down fairly quickly.

Secondly, on a very fundamental basis, open platform has done some pretty interesting upgrades to our risk model over the past 10 months of experience we're running it. Because my funding partners are lending using their own credit model and then they decide to lend on - we know that lending does happen or not happen, we are getting much more insights on to the really high quality borrowers than before, okay.

We would, again, simply right, we were putting our one head to try to solve this problem. Now we have one plus 11 heads, we'll grow to 20 heads by the end of this year. So, we just have more sort of capable people doing this, as institutions.

So, I think we are going to start to see some pretty interesting good trends into Q1. Q4, will still be like a tail end of what's happening in 2019. By Q1, we should expect to see some fantastic results from doing all of this. Especially now, we can tap into the PBOC credit records, because it's all regulatory compliant, especially now that all my funding partners are supporting other platforms as well, like I said. We can solve the stacking problem much more – with more capable capability, so all that should help.

And then regarding the question on open platform on the customer side; we're not worried at all on that growth from the customer side, reason being quite simple; right now we have slightly over 1 million active borrowers on open platform. The next year, we're only shooting for slightly over 2 million, with an increase in loan balance to maybe around 20,000. And that would actually - just doing that itself will drive pretty interesting growth for us to become pretty much all risk-free platform.

So, we're not far from 2 million. The backdrop is not – again, not from us, my funding partners come and create this whitelist to all my sort of borrowers who we approve a credit limit and that whitelist stands at over 21 million people.

Not all of them will borrow, but 21 million, and we're shooting to get 10% all of that into next year, should be achievable. Granted, look, I want to be absolutely transparent, the growth of open platform is not like a linear shape. This is funding partners. These are massive license regulated financial institutions. And if they found something they love, they would grow the balance very quickly and then once they get to a certain balance, it will plateau. And then you've got to get the new funding partners to come in to come and bring that next level of growth, and we have achieved that.

We started the business with one, we had four in the second quarter, and now we've got 11 actively lending through the open platform. Granted, that about six of them, six, seven of them are too small. So, we're still growing those. So, that's the reason why we account for the risk. We account for the staggered growth of open platform. I do want to be slightly more conservative on 2019, but for a very temporary period. Does that help with the dynamics and the shape of strategies and growth, John?

John Cai

Yes, yes. So, I think because the funding partner has make a whitelist of 21 million people, seems we have good quality. Just wonder this sort of high-quality borrower reserve, we could probably utilize it because to basically avoid the risk environment at the moment, is that an option or not?

Carl Yeung

That's right. We're doing exactly what you mentioned. We are focused on the high-quality borrowers. We've just simply left that behind. If you compare our average loan balance on my loan book with any of my peers, we're talking about really Qudian being risk conservative, right?

My average loan balance on my loan book was what, 4,000; 5,000? Under 5,000 for sure. All my peers are close to 10,000 if not more. Okay? So, we are super conservative. We just didn't want to go beyond that. But with open platform, all of my good borrowers can now get access to the credit enhancements, get to a more appropriate credit size than before.

So, that's all it is. That's all it is. And these are the best quality borrowers. We're not just saying we're focused on quality borrowers, we're doing it and we're delivering it.

John Cai

Got it, thank you very much Carl.

Carl Yeung

Thank you, John.

Operator

Your next question comes from the line of Sanjay Jain from Aletheia Capital. You may now ask the question.

Sanjay Jain

Thank you. I'm encouraged by John in terms of follow-up question. Just one clarification on loan facilitation. So suppose one of your partners says that, look, I, on basis of the economics as I see today I am neutral between open platform and loan facilitation. But if as a sensitivity we consider a spike in credit costs, then I'm on the hook or I'm liable to incur more losses or less profits if the credit costs spike. So if a partner says, "I still want some or all of my partnership to be in loan facilitation", what do you say to them? Do you walk away or you will still do some?

Carl Yeung

Thank you, Sanjay. We take profitability as a serious consideration, because that actually, that margin helps us, help and protect us from our loan book risk. So, if we can generate a profit and we will. So, if the partner comes and they're sitting between the fence, obviously, we measure which side of the profitability it makes sense.

For now, actually open platform, we actually earn a greater yield. That yield it's really because the risk on open platform for us and all my peers, because we allow to do the syndication without the focus on the high-quality borrower is significantly lower and we share that upside, okay, that reduction in risk.

So, everybody makes more money. So right now in general, more and more of my partners are wanting to transfer to open platform because they make more money, face less risk. And most importantly, most-most importantly for us and all my funding partners, this is the most regulatory compliant structure, because there is no third-party involved in guaranteeing risk. The banks are doing exactly what they're supposed to do, lend and put stuff on balance sheet. So, I think if you consider that whole package, open platform should be more attractive and that's why you see more growth.

Sanjay Jain

Fair enough. But you have stopped the loan facilitation business completely?

Carl Yeung

We will decide. Now, obviously, we are - number one, we have a much lower leverage. So we do have that leverage capacity if we want. Right now it's not the time to leverage. If the time is right, we will absolutely leverage and deliver massive growth, but right now we want to be risk conservative. And the guidance of sort of where we want to be in terms of leverage is literally 1x to 2x, okay?

So, if open platform goes really well, we can possibly reduce to 1x from one aspect. If the risk continues to increase the market, we will deleverage to 1x, right, just to do a pure equity lending through my assistant [ph] lending model. So, it doesn't matter if the world falls apart tomorrow, we'll still be around. If the risk becomes right, we will leverage to earn that interest margin, to earn that spread, but we will not do it more than 3x, to keep things still the same. So that's kind of how we manage this business, manage that between 1x to 2x depending on risk.

Sanjay Jain

Okay. So, you have temporarily shut it down, but you can always bring it back if you feel that the risk has improved?

Carl Yeung

Yes. And that's how your specific number, if my D1 delinquency starts to drop below 10%, we will start leveraging up.

Sanjay Jain

Okay, thank you very much.

Carl Yeung

Thank you, thank you Sanjay.

Operator

There are no further questions at this time. I would now like to hand the conference back to the Management team. Please continue.

Ben Zhao

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

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.