Qudian Inc. (NYSE: QD) Q1 2020 Earnings Call Transcript

Qudian Inc. (QD) Q1 2020 earnings call dated May 26, 2020

Corporate Participants:

Wen Li — Capital Markets Department

Min Luo — Chairman and Chief Executive Officer

Sissi Zhu — Vice President, Investor Relations

Analysts:

John Cai — Morgan Stanley — Analyst

Vincent Yu — Needham & Company — Analyst

Sanjay Jain — Aletheia Capital — Analyst

Steven Chan — Haitong International — Analyst

Yiran Zhong — Credit Suisse — Analyst

Jacky Zuo — China Renaissance — Analyst

Daphne Poon — Citi — Analyst

Presentation:

Operator

Hello, ladies and gentlemen, thank you for standing by for Qudian Incorporated First Quarter 2020 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to your host, Ms. Wen Li [Phonetic] from Qudian’s Capital Market Department. Wen, please go ahead.

Wen Li — Capital Markets Department

Hello, everyone, and welcome to Qudian’s first quarter 2020 earnings conference call. The company’s results was 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 Chief Executive Officer and Ms. Sissi Zhu our VP of Investor Relations 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 provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such, the company’s results may be materially different from the views expressed today. Further information regarding these — other risks and uncertainies is included in the company’s 20-F as filed with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as under applicable law.

Please also 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 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 — Chairman and Chief Executive Officer

Thank you, Wen. I want to thank all investors, analysts and the media who have taken an interest in joining today’s call. In the first quarter, we effectively executed our prudent strategy on our loan book business and achieved positive strength in new initiatives, all while facing a difficult operating environment since beginning of 2020. In response to refer the downturn of the credit cycle, we implemented more bigger credit standard for our risk taking business. Such measures have swiftly reduced the loan book transaction volume in the first quarter compared while with the first quarter of 2019, and have us maintained our leverage ratio as lower than 1.5 times. We believe that these actions have enabled us to efficiently reduce risk exposure and protect our net asset amidst the market headwind.

In addition, as we have mentioned previously, we would like to apply our increased liquidity levels for investment in new areas of growth with positive views on a long-term growth potential of China’s luxury construction industry. In late March, we actually launched Wanlimu, a luxury e-commerce platform offering a wide range of high-end products for customers in China. We said that we dispatched softer performance in the second quarter of 2020 due to the proactive reduction in transaction volume, hightening provisions for the mounting delinquency rate as as well as our investment in promising initiatives. As we continue to operate, amidst challenging macro headwinds, we are proactively executing our strategies to protect net assets and at the same time laying foundation for broader based growth in the future.

Now, here is Sissi for more details on our results.

Sissi Zhu — Vice President, Investor Relations

Thank you, Min, and good morning and good evening everyone. To echo what Min said, we focussed on minimizing risk exposure and protecting our net assets with a more conservative strategy in light of the challenging start of 2020 where the COVID-19 pandemic further accelerated the macro economic slowdown and the downtrend of the credit cycle. These adverse factors drove up our D1 delinquency rate to around 20% as of the end of first quarter, representing a considerable increase from approximately 13% at the end of 2019. Under such circumstances we remained prudent in executing our conservative strategies to more stringent credit standards and assessment procedures. This practice has substantially reduced the transaction volume of our loan book business by approximately 53% quarter-to-quarter. In particular we lowered the off-balance sheet transaction volume by over 90% in this quarter compared with the fourth quarter of the previous year.

Consequently, the outstanding loan balance of our loan book business decreased by over 30% sequentially as of the end of the first quarter. However, we believe it is the only right course of action for us under this circumstance. With this prudent strategy we have stabilized the D1 delinquency rate at around 20% in April and May so far. At the same time financial partners on our open platform also implemented stricter credit standards given the overall high delinquency rate in the credit market, which in turn decreased the amount of transaction on open platform by over 68% compared with the fourth quarter of 2019.

As Mr. Luo mentioned, we are exploring additional opportunities and investing in new areas of growth. Recently in late March, we were pleased to introduce our new initiative the Wanlimu, e-commerce platform targeting the significant luxury consumption market in China. We have positive views on the long-term growth prospects of this market and believe the Wanlimu platform will fulfill the tremendous need for online luxury consumption, especially when travel and offline shopping are restricted due to the containment measures for COVID-19.

In May we engaged with five well known celebrities in China as our brand ambassadors and launched a live streaming sales campaign, which has attracted a cumulative viewship of 130 million, nearly on it’s first day event, it generated a GMV of more than RMB30 million. As this platform is still in its early development stage, we’re still need to incur significant increases in inventory cost and sales and marketing expenses in order to enhance our brand awareness and boost our user acquisition. Overall, we expect the second quarter of 2020 will still be a tough period. This is as a result of decreasing transaction among both loan book business and open platform loan facilitation combined with higher provisions, guarantee in a risk assurance liabilities, as well as increased promotional incentives and marketing expenses for the development of Wanlimu. We believe it is the best approach to maintain a conservative strategy for our loan book business amidst the unfavorable operating environment.

Given the uncertainties of credit market dynamics, it is also necessary for us to explore other opportunities to supplement our business and propel future growth. In addition, our strong cash position enables us to carry out these initiatives with sufficient capital deployment. Last but not least, we have repurchased an aggregate principal amount of US$117 million convertible bonds from the open market since the first quarter to capitalize on our undervalued securities at attractive prices. This repurchase has improved the financial condition for the company.

Now, let me share with you some key financial results. In interest of time, I will not go over it line by line for a more detailed discussion of our first quarter 2020 results. Please refer to our earnings press release. Our total revenue in the first quarter were RMB957.9 million, down 54.3% from the approximately RMB2.1 billion for the first quarter of 2019. Our financing income totaled RMB622.7 million, a decrease of 38.4% from approximately RMB1 billion for the first quarter of 2019 as a result of a decrease in average on-balance sheet loan balance. Our loan facilitation income and other related income decreased by 34.4% to RMB422 million from RMB644 million for the fourth quarter of 2019. As a result of a decrease in amount of off-balance sheet transactions, which is partially offset by reclassification of guarantee income of RMB387.5 million. As the new accounting policy ASC 326, which became effective for the company on January 1 this year requires the fee income earned on the non-contingent aspect of a guarantee to be recognized separately from the expected credit loss.

Transaction service fees and other related income was a loss of RMB150.4 million, compared with an income of RMB158.7 million for the first quarter of the previous year. As a combined result of number one, positive income of RMB112.9 million for the transactions facilitated during the first quarter this year. Number two, a income of RMB24.1 million for the proposed — post-origination services of transactions facilitated in the previous year. And number three, a revaluation loss of RMB287.4 million for contract assets incurred for the transactions facilitated in 2019. The revaluation was due to adverse changes occurred in the first quarter of 2020 that led to the deterioration of the estimated likelihood of receiving borrowers actual repayment of service fees as of March 31, 2020.

Provision for receivables and other assets increased by 183.9% to RMB1.1 billion from RMB390.4 million for the first quarter of 2019. The increase was primarily due to an increase in the past due on balance sheet outstanding principal receivables compared to the first quarter of 2019, as well as an increase in the loss rate estimates in our roll-rate model due to macroeconomic and credit cycle downturn in the first quarter of 2020. Our net loss attributable to Qudian’s shareholders was RMB486.5 million or net loss per diluted ADS of RMB1.92 per share compared to net income of RMB949.6 million in the same period last year.

Our non-GAAP net loss attributable to Qudian’s shareholders was RMB907.5 million or non-GAAP net loss per diluted ADS of RMB3.57 compared to non-GAAP net income of RMB974.3 million in the same period last year. I also want to add some color on the accounting policy changes regarding ASC 326 measurement of credit losses. In general this newly adopted accounting policy requires timely reporting of expected credit losses on loans and other financial instruments, and the most significant impact of this new standard related to the accounting for risk assurance liabilities. Therefore we recorded RMB1,093 million increase through risk assurance liabilities at the beginning of this year. The other leg of this double entry after tax adjustment was recorded in retained earnings through accumulated effect adjustments. And this RMB1.1 billion well in be released into our changes in risk assurance liabilities P&L line items throughout the remaining period of the relevant loans.

The other major impact on our P&L presentation was, as I mentioned above, the reclassification of guarantee income from the changes in risk assurance liabilities to the revenue line. This guarantee income was deferred at the origination of the off-balance sheet loans and recognized when the guarantee service desk performed over time. The reclassification were very possibly unlimited. The new accounting policy will very possibly have limited impact on our new off-balance sheet loans this year, because, number one, we reduced our off-balance sheet loan volume dramatically this year. Number two, from the second quarter, our off-balance sheet loans will be accounted for at credit derivatives in accordance with ASC 815 and measured at fair value.

So here’s all our prepared remarks. Operator, please open the floor for questions.

Wen Li — Capital Markets Department

Hello, Albert. Are you still there?

Questions and Answers:

Operator

Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of John Cai from Morgan Stanley. Your line is now open.

John Cai — Morgan Stanley — Analyst

Hi. Thank you for taking my questions. I have a few. I think the first one is on the latest operating trends. So we have seen the D1 delinquency have stabilized, but also the loan balance based on based on the size, it seems — continue to decline. So just wonder what’s the latest — so is there any update on the latest facilitation volume or loan balance in the loan business in the open platform? And related to that I think is about the asset quality of the new loan. So where sort of the expected loss we assume for the new loans issue in 2020. Given we have already implemented the conservative strategy. And secondly, is there a — clarification on the reclassification for guarantee income. So I think if we take that out, it seems the facilitation income is rather low and I assume that’s because of the accounting change. So is there an apple-to-apple facilitation income we can see or is there — assume take rate that we can use to have an apple-to-apple, year-on-year comparison? And finally, is on the provision. So just wonder, given we have already made significant provision for two quarters already, do we still expect more in the second quarter? Thank you very much.

Sissi Zhu — Vice President, Investor Relations

Thank you, John. It’s great to hear from you. I’ll address your questions one by one. And this is Sissi. So number one, the operating trends, and our — with regards to our delinquency and balance in volume. So as we posted a slide on our website, the D1 delinquency so far remains at around 20%, because we started to deleverage very early last year. You may also notice that the D1 delinquency of our loan book business has a sign of declining recently because of our deleveraging strategy. We continue to adopt this conservative and prudent strategy in the second quarter, so our loan balance for the on-balance sheet and off-balance sheet loans will continue to decrease and our loan volumes for our open platform is — will continue to decrease in the second quarter as well.

As regards to the magnitude of the open platform volume, it will decrease around 60% to 70% in the second quarter. Our open platforms partners also notice the hike in our delinquency rate. And same as the other players in the industry, both us and our open platform partners will choose to adopt a very prudent loan origination and facilities and strategy.

Your second question regarding the new loan asset quality. As I just mentioned, if you take a close look to the D1 delinquency charts on our PowerPoint, you may notice that our own balance sheet, D1 delinquency started to decrease a little bit in the recent period, which is a result of our prudent strategy and our more stringent risk assessments strategy.

Number three, the classification on guarantee income and a apple-to-apple comparison. So, if we take out the guarantee income from the loan facilitation income, we will get a loan facilitation income up 35 — approximately RMB35 million. So the take rate of this RMB35 million over our loan facilitation volume was about 58% compared with 8% in the fourth quarter, because we apart from the day one recognition of the revenue, we also have post, which the post origination service income earned on the historical lows. That’s why our take rate for the off-balance sheet facilitation or presentation is relatively high in the first quarter, although we didn’t disburse much loans off- balance sheet in the first quarter.

And you’re the last question is regarding to the provisions. So we actually reassess, revaluate our balance sheet, both the provision, the risk, the guarantee liabilities and the risk assurance liabilities at each period end. So as of the end of each period, we believe — our management believe we have incorporated all the data available and our views for the macro factors available into our roll-rate models. So we believe at the end of March, we have provided sufficient provisions, but we cannot be so sure about the future. At each period end, we will reevaluate our risk assurance and provisions to make sure our provisions are sufficient. Thank you for your question.

John Cai — Morgan Stanley — Analyst

Hi. Thank you, Sissi. So just to please follow-up. I think — so we are already under the CECL approach right now. So, I think — so the first quarter provision also factor in our expected lifecycle loss for all the loans in our portfolio. Is that the right way to think about it?

Sissi Zhu — Vice President, Investor Relations

Sorry, John. I didn’t quite catch your question.

John Cai — Morgan Stanley — Analyst

Yes. So just, as of end of March, I think we made provision with all the information available. And so, but in starting this year obviously, we are under the CECL approach. So I think that would mean that we try to weather in as much as the loss over the lifetime included in the future. So just on the — if I understand that correctly. So, if the situation didn’t deteriorate further, we should make sufficient provision given the loan portfolio and our expectation of their future performance?

Sissi Zhu — Vice President, Investor Relations

Yes, John, you’re correct. If the situation didn’t get deteriorated further, we believe we have provided sufficient provision already. And you’re right, on your first point as well. As of the end of March, we have already adopted a new accounting policy, which requires us to — instead of the incurred loss model, we also have to provide credit loss for the non-contingent part of our guarantees. So, yes, you’re right. We have already incorporated all available information into our model.

John Cai — Morgan Stanley — Analyst

Okay. Thank you.

Sissi Zhu — Vice President, Investor Relations

Thank you, John.

Operator

Thank you. Our next question comes from the line of Vincent Yu from Needham & Company. Your line is now open, Vincent.

Vincent Yu — Needham & Company — Analyst

Thank you. Thank you management for taking my question. So first question is also for the — basic for the Q1. Thinking about the D1 delinquency rate, how should we expect to be in second quarter, how are we seeing in the first about like two models? My second question is about what percentage are currently staff — are kind of stuff is for this project and how much more investments we think are we going to spend on these in this year. Thank you.

Sissi Zhu — Vice President, Investor Relations

Thank you, Vincent. Regarding our delinquency rate, although we posted the D1 delinquency rate online, there is no direct formula for our D1 delinquency to our final loss. But we can make a similar comparison. For last year our D1 delinquency rate was only 10% to 13% but this year starting from February — the end of February, when an outbreak of virus happened, the D1 delinquency rate raised up to 20%. And as we started to deleverage it very early, the impact is limited, has been proven to be limited as we have maintained our D1 delinquency to approximately 20% so far in May.

And with regard to your second question for Wanlimu, we currently deployed around 200 staff mainly the R&D staff for the Wanlimu platform right now. There will be some more in that sense, but we are very prudent in our — these acquisitions. We pay a lot of attention to user retention and ultimately profitability. We are not a company that’s burning cash for GMV that’s not our style. We will continue to leverage on our past entrepreneurial experience and on our technology capabilities to work on this new business opportunities, but we are not spending like too materially for a huge amount of users. We will be very prudent.

Vincent Yu — Needham & Company — Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Sanjay Jain from Aletheia Capital. Sanjay, your line is now open.

Sanjay Jain — Aletheia Capital — Analyst

Hi everyone. Thank you for the presentation. Can you hear me.

Sissi Zhu — Vice President, Investor Relations

Yes. Sanjay. How are you doing?

Sanjay Jain — Aletheia Capital — Analyst

Very well. Thank you. So a few quick questions. First is on the online lending business. Would you say that you are gradually exiting the business, particularly the open platform? Or if you see a rebound and you will focus back on this then what kind of volumes and growth we can expect, say in the second half or next year?

Sissi Zhu — Vice President, Investor Relations

Sure. So Sanjay, we are absolutely not exiting our core business, the online lending segment. Although we currently will see declines in our loan book business as well as our open platform business, but we believe this is the only right positive action for now during this vast macro environment. But in the future, when our delinquency rate gets better and when time is right, we will bounce back with sufficient assets to do this business. And what’s your second question again. Sorry.

Sanjay Jain — Aletheia Capital — Analyst

So let me just ask one by one. So what kind of growth could we expect once you start becoming more confident about asset quality and the macro backdrop?

Sissi Zhu — Vice President, Investor Relations

Sure. As — actually its a very tough question. We don’t have a very good expectation or forecast on how soon the credit cycle will be over, is a very — it’s very hard to predict. And it is our company’s policy not to give guidance this year. So unfortunately I don’t think we have that growth number right now. But we will grow as we see. If the delinquency gets better, we will start by testing some volumes one step by one step.

Sanjay Jain — Aletheia Capital — Analyst

And you expect the delinquencies to start improving in the third quarter or fourth quarter?

Sissi Zhu — Vice President, Investor Relations

For our loan book business, we have already started to see a slight turnaround — a slight signal of turnaround. If you look at our D1 delinquency chart. So it is a good guess to say that our second half of 2020 will be much better than our first half of this year.

Sanjay Jain — Aletheia Capital — Analyst

Okay. So that’s on our own lending and loan facilitation and open platform, also from the third quarter or?

Sissi Zhu — Vice President, Investor Relations

For our loan facilitation portion of the PBOC actually, we don’t have any need to use outside money to do our business right now. It is — as you will — as you may also notice we have abundant cash on our book. So right now, we can just be deploying our own equity to do the loan book business, but in the future if our volume gets higher, we of course will welcome outside money. For our open platform business, the delinquency actually went up much faster than our loan book business. The D1 delinquency for our open platform business was around 10% at the end of last year and doubled to about 20% recently. So that’s probably why our open platform partners as well as ourself have decided to adopt a very prudent strategy right now. But in the future if the delinquency rates get back, we believe the channels, the tools are still there. We have well connected technology — technologically, so if our open platform partners are happy to come back, we are happy to welcome them back for the open platform.

Sanjay Jain — Aletheia Capital — Analyst

Okay. My second question was on open platform. So, if I understood your numbers correctly, you had — I’m not sure whether you call it a provision or a write-back or income of some RMB250 million. This is on the expected fee income, which you had booked, but you might not receive now. So is it fair to say that of the RMB2.2 billion open platform income you booked last year or RMB250 million, you are not going to receive?

Sissi Zhu — Vice President, Investor Relations

Correct. That’s the current expectation. You know, although open platform impact has no credit risk on the principles, we do have a expectation of the recoverability of getting our share of the service fees. So previously we estimate that we can — a discount of 10% to 20% on the liquidity of our — on the capability of our share of the receivables. But currently we have to make discounts on this number. So that’s why there is a negative revenue on the slide this year — this quarter.

Sanjay Jain — Aletheia Capital — Analyst

No, no. I’m impressed, the rest of the partners are paying up. It’s only RMB250 million, which is lost, or your expectation. But looking at this behavior, perhaps you could revisit the income or revenue recognition and book it on a monthly basis rather than booking the open platform expected fee upfront, since the actual payment by the partner happens on a monthly basis rather than upfront. Anyway, moving to the question on Wanlimu, could you explain or Mr. Min Luo could explain his thought process behind that. But more importantly what synergies do you see in terms of is it in terms of product or I know you said technology, but what it is the synergy there. And are you going to be providing financing to those buyers who buy those luxury items on your platform.

Sissi Zhu — Vice President, Investor Relations

So with regard to the synergies for wanting more in our licensing platform, you’re right about the first point. We have the technology capacities that is as a result of our past experience in building up our technology platforms, and we can utilize that for the new platform. That’s number one and number two, yes, you’re also right that in the future in may be a possibility that financing solutions can be introduced to the Wanlimu platform. But right now it’s still a baby, it’s still too young to have a financing solution for that. And number three, we believe, as a result of the entrepreneurial experience of our founders or our management team, we always have this appetite to try new things. And we believe our e-commerce background of our founders and the management team will be a good benefit to the new projects.

Sanjay Jain — Aletheia Capital — Analyst

But your biggest strength is basically the 80 million customers users who are on your — who are registered with you. But that does not appear to be any compatibility between the e-commerce business, luxury versus your online lending type of customers?

Sissi Zhu — Vice President, Investor Relations

Right. They are basically, different type of users. We target at high income group of users who are awaiting platform. So far we have proved to the fact that we have the tools and ability to acquire users effectively. We launched a live streaming selling campaign during the Labor Day holiday, and the results are fascinating. We accumulate the accumulated viewership quarter starting campaign was 130 million. So as we have proved our ability through effectively acquire user, our next focus is how to retain these users, how to make them more loyal to our platform? So that’s currently our thinking about this new project.

Sanjay Jain — Aletheia Capital — Analyst

So what is your competitive strength. Are you offering greater discount than other e-commerce players or different brands or what is the differentiation?

Sissi Zhu — Vice President, Investor Relations

Right. So number one, our depreciation, number one, we have build up a strong supply chain because at our suppliers are either state-owned enterprise or directly from duty free shops. We haven’t minimized the intermediaries. We have direct connection to the duty free shops and the boutique shops in Europe to bring the authentic good back to China, and by doing this we have build up the ability to relax and evaluate the price globally, so that we can offer the best price available to our users. And number three, as we have this cross border e-commerce platform, our users can actually enjoy a lower duties or lower import tax. The import tax for winning more platform is around 9% for the cosmetic for us, but it can be 20% in other scenarios. So that’s why we can offer better price for our users and the price is very competitive in the market.

Sanjay Jain — Aletheia Capital — Analyst

Okay and just the final question on Wanlimu. Is it being done in the main company Qudian itself. So what kind of cash burn or impact on P&L are you expecting? And eventually, do you have any thoughts in mind about what kind of revenue share and profit share would you have for the two businesses?

Sissi Zhu — Vice President, Investor Relations

So, Wanlimu is actually a wholly owned subsidiary under this — under Qudian. So regarding the second question for the revenue share. We don’t think that actually matters. If one gets larger, we will disclose their the revenue lines in the segment reporting separately, but just right now it only started in late March, not very big right now and we haven’t really spent a lot of money on it, except for marketing. So right.

Sanjay Jain — Aletheia Capital — Analyst

Sure. So in relation to the revenue — current revenue of the company and current level of profits, it wouldn’t be — especially in the first year, the losses wouldn’t be very big?

Sissi Zhu — Vice President, Investor Relations

We don’t have the visibility for that yet. If we see a good trend in our user retention and our user loyalty, we may ramp up this business much faster than expected. But currently we are still casting different use acquisition channels and improving our fulfilment service for our users.

Sanjay Jain — Aletheia Capital — Analyst

Okay. And final question from me. On the convertibles which you have bought back, the profit how much is that and will it be booked in the second quarter?

Sissi Zhu — Vice President, Investor Relations

Right. So on profit impact, as you may already seen from our table was RMB435 million in the first quarter. For the second quarter, I’m afraid I can’t disclose it right now, because we haven’t finished our program yet, but it will be a good profit increase to our second quarter result as well.

Sanjay Jain — Aletheia Capital — Analyst

Okay. Okay, thank you very much.

Sissi Zhu — Vice President, Investor Relations

Thank you. Sanjay.

Operator

Thank you. Our next question comes from the line of Steven Chan from Haitong International. Your line is now open Steven.

Steven Chan — Haitong International — Analyst

Good evening. I think, I mainly have two follow-up based on John and Sanjay’s question. First of all, going back to that revaluation loss of RMB288 million — RMB287 million, can I clarify again that it is related to some of the upfront revenue of only the open platform business that you have recognized in 2019. Because, do you think that you are unlikely to get this revenue eventually. So that’s why you have to book this revaluation loss of RMB287 million? And the related question is, I heard that Sanjay say that to you, under the new accounting policy, you say that you will no longer book the revenue, you will no longer adopt so-called upfront revenue recognition any more in 2020, is that correct? And again a related question for that is, I still find that we have around RMB1.5 billion of contract assets in the balance sheet, so does it imply that that could still be a chance of revaluation loss to be booked in the coming quarters. So that’s the first question related to this revaluation loss.

And the second question, I think related to what John mentioned about the provision, whether a sufficient or not, you mentioned that covered the non-contingent part of guarantee. And then that could be similar to what banks [Phonetic] has been adopting for IFRS 9. But I want to clarify two things. One, what is the current new loans delinquency rate. And two, do you have to make provisions for the delinquent new loans, even though you mentioned that you have made sufficient provision for Q1, but in case if your new loans start to become delinquent. So for example 20%. Do you still have to make further provisions in the second quarter or we should assume this number to be zero in the coming quarters. So just these two follow-up question.

Sissi Zhu — Vice President, Investor Relations

Sure. Thank you, Steven. So for your first question regarding the revaluation loss. So, what I wanted to clarify is that, we’ll still have this day one recognition of revenue from our open platform and loan facilitation income. However, the new accounting policy, the prices recognized the earnings slower. So the new accounting policy in fact represent a timing difference. Previously under ASC 606, we have to recognize the majority part of the revenue at day one. But right now with this new accounting policy, the recognition will be much slower. Apart from the contingent part of the credit loss, we also have to carve out the non-contingent part of the credit loss at day one and release it gradually into the future. So in effect, the new accounting policy is a timing difference and it makes us — it makes our earnings recognition slower.

Regarding the RMB1.5 billion contract assets, we believe we had provided sufficient revaluation loss — revaluation to that contract assets at the end of March already. If the macroeconomic, our delinquency assumptions to the roll-rate model changed into the future, we may have to evaluate that. That’s why we have to do to the revaluation at each period end.

So for your second question regarding the sufficiency of our provisions for the new loans. I also hope to clarify one point. In our loan portfolio we don’t distinguish new loans from the old loans. So, at each period end, we will look at the balance of our opening loan principal, the balance of our provision, we don’t distinguish the old from — the new from the old. We reassess the whole portfolio at the same time. So for now, what we can say is that at the end of March, we believe — our management believes and auditors have to review that we provide a sufficient provision for the loan balance back then. If the delinquency situation didn’t get any further — any risk further, we should be sufficient on that.

Steven Chan — Haitong International — Analyst

So Sissi, so you mean that in case there is no deterioration we may have zero provision or even write-back in the coming quarters.

Sissi Zhu — Vice President, Investor Relations

But if you see our loan portfolio — our loan balance at each period end — how should I put that, is actually a mathematical calculation for the loan provision. We calculate the balanced figure at each period end and the delta what would be the changes in our provision, in our P&L. So if the — it is actually a combined effect of too many factors. We are not sure whether there will be write-back or a more provision or zero provision in the future. It all depends…

Steven Chan — Haitong International — Analyst

Because my, sorry, my view is that you are expecting that the loan origination will go down and then loan outstanding balance will likely to go down. So you, based on the loan balance. Probably the loan balance, say for example, in June, compared with March will likely to be declining. So if you assume the provision balance remain the same in June and compare with March, then probably the equation that will imply that there will be zero provision unless you’re going to see fairly big write-off, which I don’t know. That’s why I’m asking, whether the way that the provisions is related to also — whether it is also related to the new loans to be made in the second quarter?

Sissi Zhu — Vice President, Investor Relations

I see what you mean. So we actually apply different loss rates for different age group of our loans. So for the new loans, which are not delinquent, we apply a relatively smaller loss rate to that. For the loans that are delinquent, 1 to 30 days, we apply a relatively larger loss rate for that. For the loans in age group of delinquent for over 30 days, we provide a — we apply a even larger loss rate on that.

Steven Chan — Haitong International — Analyst

I see. So in other words there could still be chance of a positive provisions even if the loan outstanding balance decline?

Sissi Zhu — Vice President, Investor Relations

Right. Just to make sure the positive, or zero or negative provisions. We have to look at that number by each period.

Steven Chan — Haitong International — Analyst

Thank you.

Sissi Zhu — Vice President, Investor Relations

Thank you.

Steven Chan — Haitong International — Analyst

I — if I remind a question, technical one, you have book provision adjustment in your retained earnings of around RMB0.9 billion. Any chance to have write-back on their part.

Sissi Zhu — Vice President, Investor Relations

That’s as a result of the new accounting policy 326 and that number in quotation mark will be released in through the future for the remaining period of the relevant loans.

Steven Chan — Haitong International — Analyst

And it will be booked in the P&L?

Sissi Zhu — Vice President, Investor Relations

Right, right. It will come back to our P&L.

Steven Chan — Haitong International — Analyst

Okay, thanks.

Sissi Zhu — Vice President, Investor Relations

Thank you Steven.

Steven Chan — Haitong International — Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Yiran Zhong from Credit Suisse. Your line is now open Yiran.

Yiran Zhong — Credit Suisse — Analyst

Hi. I think my questions mostly addressed by previous speakers. Just small follow-up. Can I verify what you said earlier Sissi that the future guarantee liabilities would be accounted as a derivative in accordance with 815? And secondly, I guess what’s the current assumption of lifecycle loss rate under the new CECIL or say at the end of March? That’s it.

Sissi Zhu — Vice President, Investor Relations

All right. Thank you Yiran. So for the future off-balance sheet loans. Yes, you’re right. We will — those loans will be counted under ASC 815 as derivatives the guarantee portion will be counted as derivatives and measured at no value, so it does not fall into the ASC 326 scope. And your second question, sorry, can you repeat that?

Yiran Zhong — Credit Suisse — Analyst

It’s, so under the new CECL, what’s the kind of — can I get an understanding of what’s the lifecycle loss rate that is assumed basically at the end of March?

Sissi Zhu — Vice President, Investor Relations

Actually it is not a single number for the lifecycle loss rate. We look into the portfolio by dividing them up to several dimensions. One, the different financial partners. The other one is the age group. And there are many other factors. So, there is no single number for the lifecycle loss rates. We have different number for the non-contingent part, for the contingent part, for even age groups and different funding partners.

Yiran Zhong — Credit Suisse — Analyst

Okay. Okay, got it, thanks.

Sissi Zhu — Vice President, Investor Relations

Thank you Yiran.

Operator

Thank you. Our next question comes from the line of Jacky Zuo from CR. Your line is now open Jacky.

Jacky Zuo — China Renaissance — Analyst

Hi. Thank you for taking my questions. I just have several follow-up questions. So first one is on the open platform business. So I observed in the PowerPoint slide, actually the reason day one delinquency rate for open platform business is actually higher than the loan book business. I’m just wondering why is that? And do we expect we should see better asset quality in the open platform business given we have those financial institution or funding partner to assess the risk on top of us? And also what is the latest take rates on our open platform?

And the second question is related to CECL as well. So just wondering, because we also increased our on-balance sheet provision because of CECL. So just wondering how much was the increase because of CECL, we can kind of separate the impact for CECL model versus the previous model? And the last question is Wanlimu. So, can you give us some guidance on the sales and marketing expense, we should expect in the second quarter or probably the following quarters? Thank you.

Sissi Zhu — Vice President, Investor Relations

Thank you, Jacky. I will take your questions one by one. So for open platform business, yes, you’re right. Our delinquency rate for our open platform business increased faster than our loan book business. One possible guess for the reason is that the open platform business ticket size and average hours per quarter is much, much larger than our licensee order loan book business, and a larger ticket size will attract larger amount of delinquency as in our historical experience. The take rate for open platform business will be single-digit. It was around 5% in the first quarter and it is a good guess to say that it will remain single-digit in the near future. The CECL ASC 326 accounting policies, the seperate impact for that, as we have also disclosed in our 20-F, we recorded a RMB1.1 billion increase in risk assurance liabilities at the beginning of this year and this number will get released gradually into this year. So we released around RMB287 million in the first quarter and it might be more in the future in the second quarter. So the accounting policy — the new accounting policity is actually P&L are positive for our business.

And the guidance for Wanlimu. Unfortunately it is our company’s policy not to provide guidance this year. For Wanlimu business, you will incur some purchases and spending for health and marketing this year. In the second quarter it won’t be a material number but not so significant compared to our core business.

Jacky Zuo — China Renaissance — Analyst

Thank you Sissi. Just a follow-up. So for the second question also, actually, I want to ask the impact from CECL new model on the on-balance sheet provision. The number was about RMB1.1 billion provision for the on-balance sheet loans in the first quarter. So do we have a comparison of this new CECL model impact. So what will be the number without CECL? Paul

Sissi Zhu — Vice President, Investor Relations

The CECL impact on our on-balance sheet provisions is relatively small. It’s actually very small, because originally even the policies we already recorded our provision for on-balance sheet business including the non-contingent part — including the non-delinquent part. So that the impact from CECL is only some adjustments on the macro factors, the adjustment on the roll-rate. It’s not that significant.

Jacky Zuo — China Renaissance — Analyst

Got it. Thank you, Sissi. Thank you.

Sissi Zhu — Vice President, Investor Relations

Thank you, Jacky.

Operator

Thank you so much. Our last question comes from the line of Daphne Poon from Citi. Your line is now open Daphne.

Daphne Poon — Citi — Analyst

Hi Sissi. Just have one question about your buybacks. So when can you share your thoughts about your plans about the further CPE buyback, whether there will be — whether you’re planning to buyback more or will there be any limitations in terms of the amount that you can repurchase? And also if we think about your use of cash, whether you would still prefer to use the cash for buyback or you prefer to reserve more cash to fund your future loan growth? Thank you.

Sissi Zhu — Vice President, Investor Relations

Thank you, Daphne. So with regards to the buyback program, we will continue to do this. However, I’m not going to disclose the execution plan or the price right now. The limitation for our buyback quarter will be determined by our lawyers and then separately each time. So I don’t have that number right now. The use of cash, we always have a profitability focus in our mind. So either we can do the buyback to gain short-term profitability profits, but if we spend this money wisely into — we can — into new opportunities or even our core credit business, we can have a better profitability in the future. We will consider in the balance, the short-term and long-term profitability internally. Thank you, Daphne.

Operator

Thank you. There are no further questions at this time. I’d like to turn the call over back to the company for closing remarks. Please go ahead.

[Operator Closing Remarks]