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Qudian, Inc. (NYSE:QD)
Q4 2017 Earnings Conference Call
March 12, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for Qudian, Inc's Fourth-Quarter and Full-Year 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Sissi Zhu, Director of Capital Markets for the company. Sissi, please go ahead.

Sissi Zhu -- Director of Capital Markets

Hello, everyone, and welcome to the Fourth-Quarter and Full-Year 2017 Earnings Conference Call for today. 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 the IR section of our website at ir.qudian.com. Mr. Min Luo, our Founder, Chairman, and Chief Executive Officer, and Mr. Carl Yeung, our Chief Financial Officer, 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 risk and uncertainty. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospect page and 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 laws.

Please also note that Qudian's earnings press release and this conference call include discussions of our audited GAAP financial information as well as our audited 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 of 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 -- Founder, Chairman, Chief Executive Officer

Thank you, Sissi. Hello, everyone. I'd like to welcome all our investors and analysts to our earnings conference call today. Today, I turn 35 years old, so today is something of a milestone for me, but I'm still young, excited to learn, and am committed to working hard to make Qudian more successful. I'm sure you have heard some news today about my forgoing compensation until the company's market capitalization reaches $100 billion USD. This is a birthday gift to myself to push myself further. More importantly, it represents my commitment and confidence in Qudian.

We have experienced many changes in the fourth quarter in the Chinese fintech [inaudible] as a record [inaudible] involvement developed. I believe this development paved ways that will better the long-term health of the industry. With the recent implementation of anticipated regulations, Qudian is well-positioned in the industry, and in fact, we believe our competitive position has been strengthened as many smaller, less competitive players are forced to exit the market.

At its core, our business model successfully resolved two essential changes in the online consumer finance industry. First, we used big data analytics and technology to determine the creditworthiness of consumers who haven't established standard credit metrics, also known as credit-underserved. These underserved consumers make up the majority of the 1.4 billion Chinese population. Lack of access to standard credit data presents a significant challenge for traditional financial institutions to serve these underserved consumers. Also, many are creditworthy, which in turn presents tremendous market opportunities for us.

The demand for access to credit remains strong in this population, and we believe the newly enacted industry regulations support our key client approach and strengthen our competitive position. Through our strong data and safe technology capabilities, we will continue to lead the market to make personalized credit accessible to hundreds of millions of people in China.

Second, traditional financial institutions and other less efficient competitors behind small-ticket circulation credit transactions aren't profitable, and that change is compounded significantly under the 36% APR cap. Therefore, most players in the market offer very high interest rates. The true power of our technology and efficient process is demonstrated by our ability to be profitable and initiate small-sized, [inaudible], wholly automated transactions under strict regulatory requirements, in turn making our credit offering affordable to these consumers.

In fact, to be ready for the developing environment, we have self-enforced an all-in service fee to use that ability to effect a 36% APR or less across all our products as early as April 2017. Therefore, there is really no challenge for us to continue to operate substantially the same product and services while most smaller or noncompliant players that cannot offer 36% APR or less are forced to exit.

Now, directly related to the evolving regulatory environment in late 2017, as many small players were forced to exit, we saw reduced liquidity in online consumer finance, which in turn led to what we believe to be an industrywide credit downcycle. As a responsible corporation, we proactively tracked our credit to 38 presentation volume in order to limit risk and exposure during the credit downcycle. With this action, the data are very encouraging, as we have seen initial delinquency rates stabilize for new transactions facilitated in January. This indicates an opportunity for us to grow on this new base again. And, Carl will discuss more of our operations and the financial and regulatory impact shortly, but I would like to take a moment and highlight Dabai Auto.

A new business initiative in budget auto financing, but in light of detailed guidance issued by regulators in December, we looked for opportunities to continue to grow a business that could fit well with regulators' objectives while, at the same time, leverage our core strengths, allow our 62 million registered users or 26 million approved users. Only about 7 million users each quarter activate Qudian on credit, leaving around 19 million high-quality credit-approved users inactive. They are idle, not in need for market-price credit or haven't found a suitable consumption scenario to draw up the credit.

Since we do not have credit knowhow to do long and short cash credit, it was a natural decision for us to reengage with users through a logically defined yet effective consumption in this common scenario. We thought our auto financial leasing to the be the most fitting and launched our first Dabai new retail showroom in November to test the market. We also know China's new car transaction market is huge, but the penetration rate for financial leasing solutions in new car sales is only 5% or 10%, much lower compared with 46% in the U.S.

In addition, China's new car sales growth has been stagnant in recent years with first-tier cities saturated while traditional dealerships find it's not cost-effective to further penetrate in lower-tier cities. We make cars affordable to a large population of young people who have strong desire for cars but previously could not afford to buy one because they could not get access to financing. We use technology to serve young consumers responsibly and in a very transparent manner so that they can enjoy consumption without overleveraging themselves by turning to black markets or feeling embarrassed by turning to parents and family members.

We are creating a unique and very convenient user experience related to traditional auto sellers. We have placed our shops in the most populated downtown areas of Tier 2 to Tier 5 cities and created attractive and comfy environments in our showrooms with well-trained staff members. To further differentiate our services, we do not have hidden fees for users. Our preliminary times are shorter than peers and we take care of all the compact steps in the car buying process, such as insurance, car payment, licensing, purchase tax, et cetera.

With a firm belief in market opportunity and outstanding quality and speed of our teams' execution, we established 175 showrooms in 175 Tier 2 to Tier 5 cities across China by the end of January 2018, embarrassing our 62 million existing high-quality users and supported by our strong balance sheet, Dabai, and headed to market reputably with a nationwide self-owned network which enables us to reach, stay close to, and serve our users with seamlessly merged online and offline credit consumption experience.

We have successfully leased out and delivered over 4,800 cars as of March 10th, 2018, a not very encouraging statistic for a newborn business. We believe that will instill new energy into the auto retail industry and transform the consumer finance experience for China's car buyers through our data technologies and breakthroughs in consumer-focused service models, and we expect this new division to be profitable in the first year of operation.

So, looking ahead, we are excited about the results of our efforts, which we will begin to see in the first half of 2018 and beyond, and we will continue to adhere to our strict internal discipline and follow regulatory guidelines to grow a strong consumption-based installment scenario. Before I turn the call over to Carl, I want to reaffirm again my personal commitment and confidence in Qudian's future. I want to thank the board in supporting my decision to forego all compensation until the market capitalization reaches $100 billion USD. This sounds like a big goal from where we are today, but I believe it is achievable enough to make a commitment to not take any compensation until we get that. With that, I will now turn the call over to our CFO, Carl Yeung, who will discuss our key operating metrics and financial results.

Min Luo -- Founder, Chairman, Chief Executive Officer

Thank you, Min, and hello, everyone. First, I'd like to touch base on a couple of highlights for the quarter. We delivered strong results in the quarter with year-over-year revenue growth of 108% and net income growth of 80%, a result of the strength of our business model and the fast expansion of transaction volume. In the fourth quarter, we recorded total registered users of 62 million, among which 26 million users have been approved for credit and 7 million users actively transacted with us in the quarter. We cumulatively facilitated over 130 million credit transactions on our platform by the end of December 2017, which represents over 130 million actual transactions and delinquency data points, the most valuable type of data for credit assessment. Possessing such a huge library of proprietary data, our risk management systems significantly outperformed most of the other platforms who don't have such volume of data.

Before going into detailed financials, I'd like to spend a couple minutes providing more updates in three major areas. First, the 36% all-in APR cap. As Min mentioned, we've been self-enforcing an all-in service fee to users that translated to 36% APR or less across all of our products since April 2017. Being the first in the industry to implement this requirement, we think this 36% all-in APR cap will force many players to exit, and it did. Since December, we believe many players have exited, which leaves us with a bigger opportunity, but there are short-term trade-offs in the rise of short-term delinquencies that I will discuss further.

Second, the new regulatory guidelines discourage lending activities without a consumption scenario, a specific purpose, and promote scenario- and purpose-based consumption installment businesses. We are fully committed to grow and explore more consumption-based installment scenarios, demonstrated by the launch of Dabai Auto, our budget auto financing business. I will provide more details on Dabai as well.

Third, new regulatory requirements also outlined that financial institutions are not allowed to outsource credit assessments or accept guarantees from lending platforms. Third-party platforms are also not allowed to charge interest or transaction fees from borrowers directly. In light of the above, we have been in the process of adjusting our funding arrangements so that Qudian is only the facilitator during the process. We have complied with the requirements of seeding cash/credit funding collaborations with financial asset exchanges. These requirements will essentially mean our consumption credit business will migrate more and more from a principal-based model to an agency model. It will also mean potential increases of funding for guarantee costs across the market.

Now, with these changes, we have noticed an industrywide credit decline since December 2017 and an increase in the delinquency rate. In an effort to manage credit risk responsibly, we swiftly implemented a conservative strategy of reducing credit volume since December of 2017 to protect our credit quality. This action was effective, as the initial delinquency for new credits facilitated in January stabilized, providing us a new basis for credit volumes to grow again after Chinese New Year.

In addition, our team's strong execution capability is evidenced by the successful launch of 175 retail locations, supported by over 600 newly hired high-quality staff by the end of January 2018 from the exploratory stage in November 2017, building over a very short time what we believe to be one of the most competitive auto distribution channels that offers financing in China today. This effort will position us more favorably in developing consumption credit regulatory environments, and at the same time, open up a large opportunity in emerging auto finance base. We also believe compared to traditional auto distribution, the significantly lower operating costs of running a nimble showroom-type distribution channel will mean increase of CapEx in 2018, but as we quickly ramp sales, Dabai Auto will turn profitable in the first year of operations.

Before reviewing the financials, I would like to provide an update on our relationship with Alipay. In response to announced APR policy limitations by Alipay at the end of last year, we implemented measures to promote the use of our mobile applications. These marketing efforts have been very successful, with now the absolute majority of transaction orders occurring on our app directly. We are pleased by this trend with the use of our app since the additional APR flexibility provided by those transactions broadens the base of the credit-invisible populations. We can get regulatory-compliant players on the Alipay consumer-facing interface.

We continue to believe Alipay is the most far-reaching, secure online payment mechanism in China with the best user experience, and our relationship with Alipay remains unchanged. We are committed to this ecosystem with these vibrant services and continue to utilize the unmatched capabilities to make transactions seamless. As such, Alipay remains our sole accepted payment and disbursement partner for consumption credit transactions regardless of where a user chooses to initiate a transaction.

We are more confident with our position today from what was frankly a more unsteady operating environment in the last few months. Based on this current information, we expect consumption credit to return to a stable growth track in 2018 and anticipate Dabai Auto to turn profitable within the first year of operations, establishing a strong case for the company to initiate full-year 2018 guidance, which I will offer after discussing fourth-quarter results.

Now, I would like to walk you through our detailed financial results in the fourth quarter of 2017. Total revenue for the quarter increased by 108% to RMB1.5 billion from RMB716 million in the prior year period, primarily due to the increase in financing income as a result of the substantial increase in the number of transactions we processed in the quarter. Financing income totaled RMB1.1 billion for the quarter, increasing 73% from RMB612 million for the quarter of 2016, representing the fast growth of our on-balance-sheet transaction volumes.

Loan facilitation income and others increased to RMB149 million for the quarter, up 587% from 2016, the result of a substantial increase in off-balance-sheet transaction volume. Sales commission fees increased to RMB251 million for the quarter, and that's a 212% increase from the same period a year ago. The significant year-over-year growth in sales commissions was driven by an increase in merchandised credit utilized by borrowers to purchase merchandise on our marketplace. We believe that one of the factors contributing to the strong year-over-year growth was the expansion of products we were offering on the marketplace. Revenues from sales-type leases was RMB26.1 million, representing revenue generation in the first quarter of launching Dabai Auto.

The total operating cost and expenses increased by 164% to RMB943 million for the quarter from RMB357 million from the fourth quarter of 2016. Cost of revenues increased by 173% to RMB305 for the quarter from RMB112 million for the fourth quarter of 2016. This year-over-year increase was primarily the result of higher interest expenses on borrowings because of increased use of funds from institutional funding partners. Sales and marketing expenses increased by 39% to RMB94 million for the quarter from RMB68 million from the fourth quarter of 2016. This increase was primarily a result of higher expenses associated with the establishment of a nationwide network of showrooms for Dabai Auto, as well as higher borrower engagement fees compared to the same period last year.

SG&A expenses declined by 25% to RMB64 million for the quarter from RMB86 million from the same period last year. This decline was primarily attributable to the decrease in salaries and benefits expenses, which was partially offset by the increase in administrative service fees we had to pay to trust companies as a result of increased use of trust fundings in the fourth quarter of 2017.

Research and development expenses increased by 36% to RMB37 million for the quarter from RMB 27million for the fourth quarter 2016. This increase was primarily due to the higher salary and benefits expenses for such staff. We have increased our spending on R&D with the goal to further enhance our data analytics and risk management capabilities.

Provision for loan principal, financing service fee receivables, and other receivables increased by 435% to RMB338 million for the quarter from RMB63 million for the fourth quarter 2016. The increase was primarily due to an increase in the M1-plus overdue loan principles and financing service fees receivables, which we intended to provide sufficient allowances to cover.

We have cumulatively provided RMB590 million allowances for principal and financing service fee receivables, a 1.3x covering the M1-plus actual overdue loan balance. Our M1-plus delinquency by vintage for the new credit transactions facilitated in the first three quarters of 2017 still stays less than 0.9% as of December 31st, 2017. Therefore, income from operations for the quarter was RMB559 million, representing a 52% increase from RMB368 million during the same period last year.

Income tax expenses declined by 71% to RMB19 million in the quarter from RMB64 million in the prior year period, primarily due to the increase of tax refunds. Now, because of all this above, net income totaled RMB540 million for the quarter, up 80% from RMB300 million for the fourth quarter of 2016. Net income attributable to the company's shareholders per diluted share was RMB1.67 compared to RMB0.99 in the prior year period.

Adjusted net income attributable to the company's shareholders, which excludes share-based compensation expenses, increased by 74% to RMB559 million from RMB322 million in the prior year period. Adjusted net income attributable to the company's shareholders per diluted share increased to RMB1.73 from RMB1.06 in the same period last year. As of December 31st, 2017, the company has cash and cash equivalents of RMB6.8 billion compared to RMB786 million as of December 31st, 2016.

The company additionally also had restricted cash of RMB2.3 billion compared with nil as of December 31st, 2016. Now, restricted cash mainly represents the cash in consolidated trust that can only be used to fund credit drawdowns or settle these trust obligations. As of December 31st, 2017, the company had short-term amounts due from related parties of RMB551 million compared with short-term amounts due from related parties of RMB586 million as of December 31st, 2016. Such amount includes RMB550 million and RMB405 million deposited in our Alipay accounts as of December 31st, 2017 and December 31st, 2016 respectively. Such amount is unrestricted to withdraw and use, and it's readily available to the company on demand.

As of December 31st, 2017, the total balance of outstanding principal for on-balance-sheet transactions for which any installment payment was more than 30 calendar days past due was RMB404 million, yet the balance for allowance for principal and financing service fees receivables at the end of the period was RMB519 million, indicating an M1-plus delinquency coverage ratio of 1.3x. Net cash provided by operating activities for the fourth quarter of 2017 was RMB742 million.

To be mindful of the length of this earnings call, for the full year 2017 financial results, I would like to point the listeners to refer to our earnings press release that was recently disclosed. Looking forward, for the full year 2018, we currently expect adjusted net income to be more than RMB2.5 billion and the number of vehicles leased out for 2018 to be more than 100,000 cars. This outlook is based on current market conditions and reflects the company's preliminary estimates of regulatory, market, and operating conditions as well as customer demand, which are all subject to change. Now, this concludes our prepared remarks and we'd like to open the call to questions. Operator, please.

Questions and Answers:

Operator

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press *1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *2. For the benefit of all participants on today's call, if you wish to ask a question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble the roster. And, the first question comes from Charles Zhou with Credit Suisse.

Charles Zhou -- Credit Suisse -- Analyst

I think Mr. Luo said something very shareholder-friendly, that he will not receive any compensation from the company before the valuation reaches $100 billion USD. However, we also know the company has made some changes in its business priorities. We know that during the listening, the company was talking about small credit and big data about the cash loans, and now we also see a new, very fast-growing auto financing. So, my question for Mr. Luo is do you think that the two sectors are big enough for you to achieve these goals? If they are not big enough, do you expect that you may also enter other industries -- maybe another sector -- next year, and how long do you think you can achieve this goal?

My second question is on the auto financing side. Based on my understanding, the funding cost on auto financing is over 8%, and they also charge net interest yield around 10%, so, roughly speaking, QD does not make too much money from the spread business and the majority of the earnings come from the sales commission of the cars. So, for me, I think this requires two capabilities. The first thing is about selecting the right model because we all know that in the auto industry, when the new model comes, the old model may become less popular, and it may also become very difficult to sell. Because Qudian does not apply all the presale models, some of the cars may also become inventory which may become an impairment on your balance sheet.

The second thing is also about how can you get a car -- so, for car models which are very popular, if you cannot get enough cars, this may also maybe limit your expansion for your business in the future as well. So, just to summarize, can you tell us about your key competitive advantages in selecting the cars and getting the popular cars? My last question is how about your share buyback in Q4 last year, and also, Q1 this year? Thank you.

Min Luo -- Founder, Chairman, Chief Executive Officer

[Speaks Mandarin]

Sissi Zhu -- Director of Capital Markets

Let me summarize what Min just said. So, regarding your second question, Min himself has over ten years of e-commerce experience, and we believe that e-commerce has a lot of similarities with the auto retail business that we are engaging right now. So, it's not that we started this year without any experience, but we have already accumulated a lot of experience in this area, and achieving a sales number of over 100,000 vehicles this year comparing to the total new car sales in China of over 20 million is still a small number, so this is quite achievable.

And then, regarding your first question, the two factors -- the consumer finance as well as the auto loans -- are already two very huge sectors that will help us achieve over $100 billion USD market cap as well as we can perform well in these two sectors. Regarding your question relating to whether we will have a third or fourth other business, in order to become a large platform, we will find the right time to explore outside our boundaries. We won't rattle our approach. We'll find other, better battlefields in the right time.

Carl Yeung -- Chief Financial Officer

Charles, thank you for your questions. If I may just supplement, the company has yet to disclose our share buyback amounts, but we have been buying in the market last year and we'll continue to enter the market at what we believe to be the right price at the right time. So, we didn't just issue a plan. We actually issued the plan and did buy a meaningful number of shares.

Charles Zhou -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you. The next question comes from Richard Xu with Morgan Stanley.

Richard Xu -- Morgan Stanley -- Managing Director

Thank you for the opportunity for the question. I've got two questions. First of all, on the cash loan business, we've seen some pickup on M1 overdue loans, and there's already some slowdown in the industry loan balance, so I guess the question is where is management seeing the industry trending? Are we seeing stabilization already with the overdue loans or are we expecting more pressure over the next few months and stabilizing after that? At the same time, given the industry trends, what are the loan balance allocations? How much capital will deploy to the cash business in 2018? Any changes from the previous plans after we started the auto business?

The other thing is on the auto business. Could you share a little bit of the breakdown in terms of profitability so far on the auto business in terms of cost? What's the planned provision? Obviously, there are the commission fees, and then there's spread, so some rough estimates or rough guidance on the overall profitability of the auto business, and that will probably help us to understand the breakdown of the RMB2.5 billion profit guidance for 2018 and how we break into separate business segments. Thank you very much.

Carl Yeung -- Chief Financial Officer

Hello, Richard. Thanks for the questions. We're glad you asked the cash/credit trend in the market. We have seen a quite sharp increase in delinquency rates as soon as the regulation came out on December 1st, and it highlights the strength of the nature of our business. It's a very short duration, very small credit backed by large data analytics. Therefore, we're able to quickly adjust and shrink our outstanding balance to not get exposed while this external credit cycle is happening. We did get affected a little bit, so therefore, you're seeing that Q4 delinquencies pick up. The way we do our accounting actually will mean this pickup will continue into Q1.

But, if you look at -- as we operate the business, we're looking -- as we look at the underlying vintage delinquencies of the new transactions happening in January and February, it is extremely encouraging. Because of the strong execution of our data analytics, we have been able to avoid a lot of the risk that's going in the market, and the initial vintage delinquencies for the January and February cohorts are actually returned to pre-regulatory environment rates, and these data give us tremendous encouragement and confidence to really give us the opportunity to grow our loan volume as well as loan balance again. This visibility gives us further confidence to really why we're initiating a full-year guidance this time. Although we're a young public company, this is really the first time we're giving full-year guidance, and it's these raw data that are churning and telling us this information firsthand that gives us this encouragement.

Now, regarding autos, we believe -- as we just mentioned -- that in the first year of operations, this unit should be profitable. We've done a lot of discussion internally, and calculation, and modeling on why it could become profitable. Now, if you just look at 100,000 units of cars, based on varied industry benchmark statistics, it will generate approximately 5%-well, 100,000-unit sales volume translates to just about RMB10 billion of transaction dollar volume, and at the standard industry commission provided by OEMs at 5%, that will give us approximately RMB500 million in revenue just for sales commission alone.

This RMB500 million in revenues from commission alone will well cover the 175 retail locations plus the staff that we have built for running it this year, and this is a very nimble, new retail model which is very low-cost at city centers. So, that covers that. Any additional financing revenues we can charge on users on the loan outstanding balance on the vehicle itself will essentially mean profit to us. That's why we have confidence this unit is profitable, again, building the case for us to really provide a full-year 2018 guidance for the first time.

Richard Xu -- Morgan Stanley -- Managing Director

I see. Just a follow-up question on the cash flow a little bit more -- certainly, the trend is encouraging, that it's picked up a little bit and has returned to the pre-regulation delinquency rate. I remember when we discussed previously, there was -- at the time -- a planned slowdown. It seems like that plan has changed a little bit. We're going to accelerate the growth in cash loans again. Any sort of outlook or guidance in terms of the growth? Certainly, probably not the same as the original guidance on cash loans before all the regulations started, but it seems like better than some of the guidance or expectations during the peak of uncertainty, during the financial regulatory scrutiny in the sector. So, where are we now in terms of our plan for the cash loan balance or volume for 2018?

Carl Yeung -- Chief Financial Officer

Thank you for the question, Richard. Unfortunately, we only provide a bottom-line guidance, but just in terms of the rough shape of things, as you can do the calculation, last year's loan balance average was about RMB10 billion. We're sitting here at the stage where we can see a significant growth from that in terms of the average loan balance we can achieve this year. In fact, we're already at above -- our current outstanding loan balance that generates revenues is already above last year's average at this stage, so we're quite comfortable with growth. Anything further in terms of specific numbers, unfortunately, we don't guide.

Richard Xu -- Morgan Stanley -- Managing Director

Got it. Thank you.

Operator

Thank you. The next question comes from Bethany Poon with Citi.

Daphne Poon -- Citigroup Research -- Analyst

Hi, management. My first question is about the funding side. Can you provide us an update in terms of the funding situation for your cash loan business, in particular the funding partnership with banks and trust companies after the new cash loan rule has come out, and how have the funding mix and funding cost been changing? My second question is about the auto finance business. So, regarding your full-year guidance of 100,000 car sales this year, we also looked at the run rate in the first quarter of 2018 so far is only 4,800 cars, so the target sounds a little bit aggressive. So, will you explain to us more about how would you achieve this full-year target, for example, in terms of your sales and market efforts? And also, will there be any further store opening plans going forward? Thank you.

Carl Yeung -- Chief Financial Officer

Thanks, Daphne. Regarding the funding side, I think the first objective is to get regulatory compliance. So, with respect to some things that are prohibited by the regulators, such as financial asset exchange, we essentially now have a zero balance with financial asset exchanges. We've actually increased significantly the amount that is off balance sheet. Right now, it contributes approximately 25% of our actual loan book, which is significant growth from last year. This is beyond this current year in February.

So, as of today, I want to remind you that the regulations issued in December actually have no timetable. We're doing this all proactively to get ourselves ahead of actual regulatory so-called enforcement. So, our current loan book essentially looks like this: A portion that is self-funded, which is going through our licensed small loan company, a portion which is going through our financial asset exchanges, and a portion that is going through our off-balance-sheet arrangements.

Sorry, I don't have anything going through our financial asset exchanges -- actually, through trust. So, trust essentially banks through off-balance-sheet arrangements as well as our own small license, so that's all regulatory compliant. In terms of cost, we expect that for the rest of this year, the actual cost will increase by a very little bit, maybe 0.5% to 1% over the raw funding cost we would have gotten last year, but that's all we're expecting, so there shouldn't be any big impact. So, that's the funding side.

And then, regarding 100,000 cars as a target for us in this guidance, we announced that we sold 4,800 cars by essentially just two days ago from the launch, essentially building that network by the end of January. It's actually a very fast run rate that we achieved 4,800 car sales essentially with just two months of operation. Mind you, we actually experienced Chinese New Year, essentially a whole one and a half weeks in China where nobody does anything, and we still sold 4,800 cars, so 100,000 units of cars is something we've done the ramp analysis on, and we believe 1). 175 locations will sufficiently satisfy about 100,000 units of car sales this year.

Let me remind you that we do have 62 million registered online users on our platform, of which approximately 19 million have not drawn down on their approved credit, so in the context of 100,000 units of 19 million people, just in terms of the raw probabilities, it's likely achievable. That's why we are throwing these numbers out. While we do have plans to continue to explore additional distribution channels, if it allows us to sell more than 100,000 cars at a reasonable profitability, we will do so.

Daphne Poon -- Citigroup Research -- Analyst

Thank you. Just a follow-up on the funding side. So, I'm aware that earlier this year already, regulations to cash loans first came out. There have been some funding constraints in terms of the partnerships from banks and trust companies, so I just want to check whether there has been any improvement in the funding situation with banks and trusts. And, also regarding that, because new regulations require basically everything to be off the balance sheet while Qudian will serve as a pure platform, so do you have any update with your progress of moving the loans off balance sheet, for example, by partnering with any third-party guarantees, and if there are any, what would be the pricing on that?

Carl Yeung -- Chief Financial Officer

Thank you again, Daphne. To follow up on this, essentially, what we saw in December last year in terms of the players that we work with, they continue to work with us today. We really haven't seen drop-offs from the number of funding partners that work with us. The only drop-off is the financial asset exchanges, which is directly mentioned by the regulations that we cannot work with them anymore, so we don't.

And then, that's kind of our funding partner. In fact, we're seeing more and more potential interest to join our platform, as we are currently offering an asset package or access to these credit-underserved users that no other platform can offer at this scale, this cost structure, and this data [inaudible]. There will be additional platforms and funding partners, such as banks, that will join this platform, and that's funding in terms of partnership side.

In terms of costs, when we're putting guarantees, our quoted market rate is about 0.5% or 1% annualized on top of what the funding partners will ask for, so roughly around 8.5% to 9% of what our external funding partners are asking for will become 9% to 9.5%, I guess. So, not much impact there as well.

Daphne Poon -- Citigroup Research -- Analyst

So, this is including the credit risk that the partner will bear, right?

Carl Yeung -- Chief Financial Officer

That's right.

Daphne Poon -- Citigroup Research -- Analyst

Okay, got it. Thanks.

Operator

Thank you. The next question comes from Jinjin Qian with Needham.

Jinjin Qian -- Needham and Co. -- Vice President

Thank you for taking my questions. First, could you give us an update on your user acquisition strategy since the Alipay policy change? We saw the user growth slow a little bit in Q4. What are you planning to do to reaccelerate user growth in '18 and beyond? And, second question is on the auto loan 100,000-car target, what is your strategy? Are you primarily planning to achieve the target through your existing 60 million users? What is your marketing strategy for '18? Are you planning for any large-scale branding campaign, as you did earlier this year? Lastly, on the housekeeping, could you share the growth rate of the merchandised credit or the take rate on the merchandised credit business? Thank you.

Carl Yeung -- Chief Financial Officer

Okay. So, thank you for the question. 1). User acquisition as a platform as a whole. As just announced, we now have 62 million registered users. Not many platforms in China have this kind of user scale. Based on just this number alone, we should be happily achieving this guidance that we're providing of RMB2.5 billion of net income. We only have to serve 6 million to 7 million users a quarter to get to RMB2.5 billion of net income, and 62 million is a very large user pool. We don't have the intention to expend a significant amount of marketing dollars to drive that registered user growth. We have enough users, period.

Obviously, we will continue to see user growth backed by 1). We offer the most user-friendly, user-experienced, and affordable credit you can find today in the market. So, this 62 million should naturally grow on whatever platform. We continue to exist on the Alipay platform and our app continues to grow its traffic naturally -- not at the same high rate as last year, but it continues to grow. So, just given these, we believe the guidance we're providing should be well achieved.

The second question regarding 100,000 units of cars -- based on our internal user registration base plus some natural traffic associated with having that offline presence in these populated retail locations should get us to 100,000 units without significant marketing expense. And, thank you for following us. We did implement a test marketing campaign with an online question game. We didn't spend much money at all. In the grand scheme of things, we spent about RMB1 million to 2 million, which was essentially nothing, but sometimes, media like to blow things up, as we all know. So, it wasn't a big spending at all.

Your last question is the merchandise growth rate and sales commission. Now, as we are all familiar with our model, the merchandise credit exists because we have a very large beta of credit from cash transactions, and recently, in the last couple of months, industry delinquency has increased. Therefore, we reduced our credit for cash transactions, therefore, we have become more cautious about merchandise volumes overall because we have to extend a larger credit to these users. Because data is changing in the underlying situation, we had to pull back on the credit that we offered to users, so merchandise volume is affected, and it will continue to affect at least in the first or second quarter of 2018.

And, as our transaction volume for cash credit continues to improve and stabilize and credit quality increases, we could see merchandise volume grow again, but you see, Dabai Auto is different. When we sell a merchandise credit -- for example, like a laptop or cellphone -- that's an unsecured credit. If the user is delinquent, they're delinquent. But, auto is an asset-backed asset. That is why, as we do more and more volume of the autos, it will actually drive down delinquency. In terms of take rate, our 2017 average take rate for the fourth quarter was approximately 17%, so it's consistent with what was happening, basically, in the third quarter.

Jinjin Qian -- Needham and Co. -- Vice President

Thank you, Carl.

Operator

Thank you. The next question comes from Dexter Hsu with Macquarie Securities.

Dexter Hsu -- Macquarie Securities -- Analyst

Hi. I have a question on -- your company has already opened about 175 branches by the end of January. I'm wondering what's the trend of the per-store unit sales for your store in January and after Chinese New Year. Thank you.

Carl Yeung -- Chief Financial Officer

Thanks for the question. The per-store unit sales... How can we...?

Dexter Hsu -- Macquarie Securities -- Analyst

Each day.

Carl Yeung -- Chief Financial Officer

How can I give you information without disclosing something unnecessary? In fact, we really only launched this with 175 stores at the end of January, and into January, we quickly ramped to approximately 80 units of new car sales every day, which is a significant achievement given that it's a newly set up distribution network. So, at Chinese New Year, our volumes had to come down because we couldn't actually sell cars as people go on holidays, but we're recently back to approximately 89 units of daily volume again, so the trends are pretty good. Actually --

Dexter Hsu -- Macquarie Securities -- Analyst

Sorry to interrupt. How about the change in daily sales of the outlets opened last year and how do they perform right now?

Carl Yeung -- Chief Financial Officer

Okay. We were selling average per day in late December of 0.04 new cars sold in every store a day, and now, we're doing ten times that. Actually, Min would like to add.

Min Luo -- Founder, Chairman, Chief Executive Officer

[Speaks Mandarin]

Sissi Zhu -- Director of Capital Markets

So, in the first quarter, as we launched our auto business, we were doing some testing. We haven't aggressively ramped up our business yet because we want to focus more on user experience before we ramp up this business. So, in Q1, it has been a low rate, and in Q2, the channel will be much better.

Carl Yeung -- Chief Financial Officer

Let me put things also in context. If you're familiar with the Chinese auto leasing industry, there are other players that have been doing this for two or three years, and I'm sure you know the statistics. They're probably selling about 100 to just under 200 cars a day. So, they've been doing this for two or three years. We did achieve these numbers in basically two months.

Dexter Hsu -- Macquarie Securities -- Analyst

I understand. Thank you.

Operator

Thank you. The next question comes from Binnie Wong with Merrill Lynch

Binnie Wong -- Merrill Lynch -- Vice President

Thank you, management, for taking my questions. My question here is how do you see in terms of the strategy compared to some of the auto verticals extending into auto financing versus your current strategy? How do you see your competitive edge in terms of fair use acquisitions or in terms of credit risk assessments? Any color on that in terms of how you think your competitive purchase will compare would be very helpful. Thank you.

Carl Yeung -- Chief Financial Officer

Thank you, Binnie. This is a really good question because we innovated the user experience. We've built 175 retail locations, which is central to shopping centers. Really, we've brought the purchase experience -- the service experience -- to the users rather than having users go out 5 or 10 kilometers away to these core distribution centers. This gives us tremendous access and basically a much better user experience. We have the capital. As you see, we have over RMB9 billion of cash sitting on our balance sheet today, which I don't think any of the other verticals have. We have exceptional local execution power. We've built these 175 stores essentially in around 80 days. I don't see any other players doing this.

Min Luo -- Founder, Chairman, Chief Executive Officer

[Speaks Mandarin]

Sissi Zhu -- Director of Capital Markets

You are familiar with our history. We are not the first ones to enter into the tempered consumer finance sector, but we are No. 1 in the sector within one year of launch. And then, we were not the first ones to enter the online consumer finance sector, but it took us only one year to become No. 1 in that sector as well. So, now, we think that within two months of launching Dabai Auto, we are already in the Tier 1 player's group in the auto financial leasing sector, and in the future, we will be No. 1 not only in online auto financing but also in the overall car sales industry. The key to success is our team. We have acquired a lot of talents and capital, and we have not forgotten about our genes, about our DNA. That is moving very fast.

Binnie Wong -- Merrill Lynch -- Vice President

Thank you. May I have a quick follow-up here? How about in terms of credit assessment and also in terms of the quality of the loans? How would you compare to your competitors? Thank you.

Carl Yeung -- Chief Financial Officer

Thanks, Binnie. The credit assessment is actually something that we would have a slight advantage because we would have 130 million actual transactions and delinquencies that no other players have. In addition, we will do the standard offline stuff, like bank credit checks, that all other peers would do. So, our advantage lies in the additional data that we have. In terms of performance of delinquency, having sold 4,800 cars, we've only seen ten late payments, and they haven't really gone to bad debt anyway, so the delinquency rate we expect -- because of the asset-backed situation, we would see it to be significantly better than standard unsecured cash/credit or merchandise.

Binnie Wong -- Merrill Lynch -- Vice President

Okay, thank you. That's very helpful.

Operator

Thank you. The next question comes from May Yan with UBS.

May Yan -- UBS Investment Bank -- Managing Director

Hi, Carl. [Speaks Mandarin]

Carl Yeung -- Chief Financial Officer

Hi, May. Very good, we can hear you.

May Yan -- UBS Investment Bank -- Managing Director

Basically, an update a bit on the Ali relationship, and it seems now would be a [speaking Mandarin] -- to set up a [speaking Mandarin]-- a credit company by the government, it seems like individual credit companies are not allowed to provide services on credit to clients. So, how's the relationship with Ali? And then, secondly, on the cars, on the profits breakdown, what's the contribution from the car loan business and what's the contribution expected from the credit-side business in 2018? Thank you.

Carl Yeung -- Chief Financial Officer

Thanks, May. Very quickly, in terms of the cash/credit, we are operating in a fully regulatory-compliant way. So, for example, we enforce -- we require users to put in their purpose when they apply for credit. Once these credits are formed, we actually are basically either going through our small loan license company or off balance sheet with banks and trusts, which -- all these arrangements are reviewed by the appropriate regulators, so these are all OK. 36% is an all-in-one service fee that we charge. We actually do something that is very conservative called an average reducing balance rate. So, we actually charge one of the most conservative rates in the market. There's only one fee, nothing else. Very user-friendly as well.

Alipay and Qudian's relationship remains the same as our last discussion in the last quarter. We are one of their ecosystem partners. There are many other players, so that relationship is basically still the same. The canvas is still there. We generate -- now, I already mentioned that for transactions originated from Alipay's platform in and of itself, it's subject to a 24% APR cap, and for our own app, originated transactions are 36%, combined with current regulatory requirements. Currently, the over-majority of transactions are happening on our app, therefore we see very little in material impact to the average rates that we can charge.

So, in terms of credit data, we are participating in the newly formed government-required credit system. In fact, we are one of the very few players with 130 million transactions. We don't need to rely on external credit data. The actual users transacting and delinquenting are more valuable than any single credit score out there. We know these users better than any other data provider out there. So, we don't need to rely on a credit scoring system per se. We have our own, and it works. It works because we are the first in the market to react to a credit downcycle and we are the first that will recover and grow again through this credit downcycle. In terms of cars, how much it will contribute to the RMB2.5 billion -- I obviously have a number, but unfortunately, we only disclose that RMB2.5 billion of net profit as our 2018 guidance.

May Yan -- UBS Investment Bank -- Managing Director

Thank you. Can I ask a follow-up? You said the fees only in charges of 36% or 24%. How is it being collected by the partner financial institutions that you work with? Or, are these through your microloan companies, so you basically use your own microloan company to charge? When you partner with other financial institutions, who collects fees, and how do they actually pass the fees to you, and how much do they keep? I guess that's the financing cost.

Carl Yeung -- Chief Financial Officer

The arrangement is really the same as what we were practicing in September with regards to our balance sheet arrangement. They are specifically off balance sheet because the fees are first collected by our funding partners, then they distribute the fee to us. So, for example, if the interest fee all-in is 36%, our funding partners will first collect 36%, and then, for that fee to finance it -- for example, if the cost is 8%, they will take away 8%, they will keep 8%, and then remit the remaining 28% to us. So, that's how off-balance-sheet funding works in the first place and it's been the same since we initiated off-balance-sheet arrangements in as early as August last year. So, that hasn't changed. And, if it's a loan that's originated or credit that's originated through our small loan license, then we collect everything. We don't need to pay anyone anything.

May Yan -- UBS Investment Bank -- Managing Director

So, the banks have no -- the banks are willing to collect 36% on the loans? There's no objection? There's no negative view or actions on charging too high for a bank of 36%?

Carl Yeung -- Chief Financial Officer

In fact, banks have been charging service fees plus interest for a very long time, so it's worked this way. Credit cards charge additional annual fees based on top of APR. What we have done is we let the banks work with an APR that makes sense for them and they can charge additional services, but all-in, it has to be under 36%.

May Yan -- UBS Investment Bank -- Managing Director

Thank you.

Operator

Thank you. The next question comes from Alex Zhou with UBS.

Alex Zhou -- UBS Investment Bank -- Analyst

Hey, Carl. Thanks for taking my question. I'll be quick since we're running out of time. My first question is can you give us a quick update on the approval rate in the fourth quarter? I guess my question is are we still targeting an 80% approval rate in the future, especially given the recent credit cycle and regulatory changes? The second question is a quick follow-up on May's question regarding [speaking Mandarin] credits. Our understanding is because of the establishment of [speaking Mandarin] an [speaking Mandarin], the end financier is no longer allowed to provide instrument credit to third-party lenders such as Qudian.

So, my question is are you currently using [speaking Mandarin] credits, and if so, when will the current contract expire in the future, and how do you think it will affect your credit assessment process, especially for new users which haven't borrowed from a platform yet? And, third question is regarding tax rates. Can you give us more detail on why there has been such significant tax refund in the third and fourth quarter this year, and what's the outlook going forward? Basically, what's the baseline effective tax rate we should be putting in our models? Thanks.

Carl Yeung -- Chief Financial Officer

Thanks. Those are really good questions. First of all, our actual user approval rates in the fourth quarter were 55.8%, so in fact, it was higher in October and November, but once we saw December 1st credit quality decline, we quickly shrunk that to get an average of 55.8%. So, were actually achieving close to 70% or 80% in October and November, but we reacted very quickly. This is the beautiful nature of small credit driven by big data. So, we no longer have an 80% approval rate. This only works if the market liquidity and market situation favor it, so we continue to adjust these targets as long as it makes sense for us. So, hopefully, as the industry stabilizes, we will get back to these approval rates to offer more inclusive credit to more underserved users. So, that's that.

In terms of the subsidy credit score, I'm not at a position to disclose a specific relationship or arrangement regarding contracts with Alipay, but I can assure you that without external credit scoring, we have complete capability in serving our users, as evidenced by what you see in terms of actual trust-getting or the credit volume controlled in January and February, and now, in March, in the position to grow credit volume again. I can tell you none of the external data credit score per se plays a very strong role in our credit model anymore. We just have too much data to hack ourselves.

Tax rate -- the tax rate in fourth-quarter 2017 is not high. We have been able to negotiate several favorable long-term tax refund arrangements with local municipal governments, which are supportive of our technology and things like that. So, we believe over the next year or two, a conservative tax rate of around 10% is probably a good byline.

Alex Zhou -- UBS Investment Bank -- Analyst

Thanks. I appreciate it.

Operator

Thank you. And, as the Q&A session is over, I would like to return the call back to the company for any closing comments.

Carl Yeung -- Chief Financial Officer

Ladies and gentlemen, thank you very much for sticking with us for almost 1.5 hours. We really have to let Luo Min go for his birthday, so thank you for your interest and support for the company. We look forward to talking to all of you again in our next update on earnings.

Min Luo -- Founder, Chairman, Chief Executive Officer

Thank you very much, operator.

Operator

Thank you. This concludes today's conference call. Thank you for attending today's presentation. You may now disconnect.

Duration: 90 minutes

Call participants:

Sissi Zhu -- Director of Capital Markets

Min Luo -- Founder, Chairman, Chief Executive Officer

Carl Yeung -- Chief Financial Officer

Charles Zhou -- Credit Suisse -- Analyst

Richard Xu -- Morgan Stanley -- Managing Director

Daphne Poon -- Citigroup Research -- Analyst

Jinjin Qian -- Needham and Co. -- Vice President

Dexter Hsu -- Macquarie Securities -- Analyst

Binnie Wong -- Merrill Lynch -- Vice President

May Yan -- UBS Investment Bank -- Managing Director

Alex Zhou -- UBS Investment Bank -- Analyst

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