Token Cat Ltd (TC) 2018 Q3 法說會逐字稿

Good morning and good evening, everyone. Thank you for standing by and welcome to TuanChe Limited Third Quarter 2018 Earnings call. (Operator Instructions).

Now, I will turn the call over to your speaker host today, Ms. Dana Cheng, from TuanChe, the Company's Investor Relations Director. Thank you. Please go ahead.

Hi, everyone, and welcome to TuanChe's third quarter 2018 earnings conference call. The Company's third quarter earnings results were released earlier today and are available on the Company's IR website as well as on the Newswire services.

Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involved inherent risks and uncertainties, as such our results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is and will be included in our filing with the SEC. The Company does not assume any obligation to update any forward-looking statements, except as required under applicable laws.

Today, you will hear from Mr. Wei Wen, the Company's Chief Executive Officer, who will comment on our operating results. He will be followed by Mr. Zhihai Mao, the Company's Chief Financial Officer, who will review the Company's financial results and discuss the financial outlook. Following management's prepared remarks, we will open up the call to questions.

With that said, I would now like to turn the call over to TuanChe's CEO. Mr. Wen, please go ahead.

Thank you, operator. Hello, everyone, and welcome to TuanChe first earnings conference call as a U.S.-listed Company. Given with the recent market volatility, we successfully completed our IPO in late November, marking an important landmark for our Company.

On behalf of everyone at TuanChe, I would like to express my gratitude to our existing and new shareholders for your vote of confidence in our business model and growth prospects. And we continue to implement our growth strategies and realize value for our shareholders. We're confident that more investors will recognize our potential and join our cause to transform China's automotive industry.

Recently, we have observed a slowdown in the global economy which has softened consumer spending in China. The Chinese auto market in particular has experienced a 4% year-over-year decline in passenger car sales in the first 11 months of 2018. By the end of November, passenger car sales in China declined year-over-year for six consecutive months, however, we're confident about the long-term growth prospects of the industry and our company.

The increasing amount of new car purchases in China is mainly fueled by the growing traveler demand and the greater consumption power of residents in lower-tier cities. According to the iResearch report, the new automobile sales volume in tier 3 and below cities is expected to grow at a CAGR of 7.3% from 2017 to 2022 to 16.1 million.

Our growth strategies to expand our services and products such as auto shows into lower-tier cities, is in-line with the market trend. But those potential in the automotive industry is immense to capture the market opportunities and ensure that our business can overcome as much obstacles in the future.

We will continue to focus on the following two areas, one, the expansion of our core auto show business to solidify our market leadership; and two, the development of new initiatives to fully utilize our network of car dealerships nationwide.

First, for our auto show business, we continue just to ramp up the frequency of our events and expand our geographic coverage. Unfortunately, our event schedules were hampered by severe weather conditions in the third quarter. The unfavorable weather not only forced us to cancel 38 outdoor events but also reduced the attendance of our industry customers and other affected the auto shows.

In addition, we hold most of our auto shows during this weekend -- during the weekend. The timing of the Chinese holidays this quarter reduced the number of weekends in the quarter. That's negatively impacting our event schedules.

Despite these challenges, we successfully organized 205 auto shows across 122 cities, compared to 76 auto shows in 43 cities in the same quarter last year, and 219 auto shows in 116 cities in the second quarter.

Although the [quarter] number of auto shows we organized that decreased sequentially the number of events per weekend has also been on a healthy trajectory, increasing from 16.2 in the last quarter to 16.4 this quarter.

Moreover, we have taken active steps to minimize the impact of inclement weather on our auto shows in the future. Currently, we are arranging an indoor backup venue and a temporary outdoor facility to ensure the smooth operation of our events. With this preemptive measure now in place, we are confident that we will resume the sequential growth in the number of events in the fourth quarter.

During the quarter, we not only continued our effort to expand our business but also focused on improving the user experience and our value proposition. Our ability to aggregate a large number of prospective consumers combined with our established industry reputation enabled us to negotiate favorable prices with dealerships and the automakers.

In the first half of 2018, we helped consumers to save an average of 7.3% on their car purchases when they placed their orders during our auto shows. Furthermore, for any given event, we always make sure that all consumers are paying the same price for the same car. The transparency allows our consumers to skip time-consuming negotiation processes with dealers so that they can focus on selecting the cars and after-sale services that best fit their needs.

Our operating metrics have definitely reflected the increasing efficiency of our auto shows. In the third quarter, we facilitated 81,700 automobile sales through auto shows, up 77.5% from 46,000 in the same quarter last year. The total GMV of new cars sold during our events increased to RMB10.6 billion from RMB7 billion in the same quarter last year.

Our uniquely attractive value proposition to both car buyers and the industry customers establishes a healthy and natural self-reinforcing cycles. Our extensive consumer base and the brand influence make our auto shows one of the most desired destinations for industry customers. This strong negotiating power allows us to save our consumers a meaningful amount of cash. These savings combined with the comprehensive suite of services offerings available at our events further helped us to enhance the consumer experience. In fact, we ranked number one among Chinese automotive marketplaces in terms of the consumer experience, according to a survey by iResearch. We were voted as the most trusted omni-channel automotive marketplace in China.

In addition to auto shows, we also implemented new initiatives to bolster our long-term growth. In June, we launched our virtual dealership network. Historically, automakers and their franchised dealerships neglected markets in lower-tier cities due to their lack of resources and the low operating leverage. With our full suite of virtual dealership services, we enable automakers and their franchise dealerships to connect with local secondary dealers.

A key advantage of our virtual dealership is our ability to penetrate these lower-tier markets without us having to expend the resources, setting up a permanent physical presence.

In September 2018, we branded our virtual dealership network as TuanTuan Auto. Now, every secondary dealer that uses our services enjoys the enhanced branding and the combined scale of our network. Our virtual dealership business has enhanced -- has enabled us to tap into the largely underpenetrated and underdeveloped auto markets in China's lower-tier cities, especially for domestic car brands.

Meanwhile, its commission fee model minimizes our overhead risk while we work to rapidly expand its business scale. As a result, we expect that our virtual dealership business will become an important growth driver for our Company in the coming years.

Lastly, to fully utilize the valuable consumer insight that we accumulated in the past eight years, we established a demand-side precision search platform or DSP in May 2018, leveraging our advanced search engine proprietary data analysis capabilities and the smart digital marketing systems. Our DSP helps our industrial customers improve their user acquisition efficiency and the cost effectiveness.

During the quarter, we upgraded the landing page of our DSP and further expanded its marketing channels. Now, we work closely with an extensive network of online and offline media outlets to effectively satisfy the sales and the marketing needs of our industry customers. As we accelerate the development of our DSP business, we will continue to garner access to additional sales leads and improve the effectiveness and the precision of our targeting system.

We are confident that we -- that the value our DSP offers to our industrial customers will further increase their loyalty to TuanChe which in turn will hereby expand our business operations and sustain our profitable growth.

In summary, our strategy to rapidly expand our auto show business while cultivating new growth engines has yielded encouraging results in the third quarter while we remain alert of some near-term headwind, we believe in the long-term growth prospects of the world's second largest automotive market.

Going forward, we will continue to invest in our efforts to attract and retain automotive consumers and industrial customers. We are -- we are confident that we have the strategy, technology and the management team in place to thrive under any market conditions.

With that, I will turn the call over to our CFO, Zhihai Mao, to go through our financial results in more detail.

Thank you, Wei. Hello, everyone. Before I start, please know that all numbers stated in my following remarks are in RMB terms unless otherwise noted.

Our total revenues in the third quarter more than doubled to RMB155.3 million from RMB75.4 million in the same period last year. The growth was mainly driven by the strong performances of our auto shows and our new businesses.

Since the first quarter of 2016, we started to shift our business focus from a group-purchase faciliation to transaction-based auto shows. As we have been allocating more resources to our auto show business, we increased the number of auto shows that we organized,

the cities that we operate in, and the number of booths that we offer to our industry customers. Due to the growing scale and sales oriented reputation of our auto shows, we attracted an increasing number of industry customers to participate.

As a result, revenues from auto shows in the third quarter increased year-over-year by 112.2% to RMB153.6 million. The total gross merchandise volume of new automobiles sold through our auto shows reached 10.6 billion, up from a 7.0 billion in the same period last year.

In addition, we started to ramp up our new business operations. We launched our new business virtual dealership in June and the demand-side platform in May 2018. During the third quarter, we generated RMB1.7 million in revenue from virtual dealerships and other initiatives.

Our gross profit in the third quarter increased by 117.0% year-over-year to RMB109.1 million and the gross margin expanded to 70.2% from 66.7% in the same period last year. The marketing improvements were driven by the increased revenue contribution from both of our auto shows at our new businesses as well as improved bargaining power with the third-party service providers and the economies of scale through enhancing the efficiency of our auto show organization process.

Selling and marketing expenses increased to RMB119.5 million, primarily due to an increase in our advertising and promotional activities as we further expand our auto show business.

Sales and marketing staff compensation was higher as well during the third quarter of 2018. Selling and marketing expenses for the third quarter included share base compensation expenses of RMB18.0 million.

General and administrative expenses increased to RMB23.0 million due to an increase in administrative headcount as a result of our business expansion in the third quarter. General and administrative expenses included the share-based compensation expenses of RMB12.0 million in the third quarter.

Research and development expenses increased to RMB5.5 million in the third quarter, mainly driven by the increase in R&D headcount as we execute our strategy to enhance our technology and the data analytics capabilities for our online channels and our new business.

As a result, our loss from continuing operations increased to RMB38.9 million in the third quarter from RMB21.5 million in the same period of last year. Excluding the effect of our share-based compensation expenses at a fair value loss of warrant, our adjusted net loss narrowed by 65.0% to RMB8.2 million in the third quarter from RMB23.4 million in the same period last year.

Our adjusted net loss per share narrowed to RMB0.08 in the third quarter from RMB0.25 in the same period last year. Our adjusted EBITDA narrowed by 66.5% to a loss of RMB7.6 million in the third quarter from a loss of RMB22.5 million in the same period last year.

Adjusted EBITDA is calculated as net loss before depreciation and amortization of the property, equipment and the software as well as interest expenses. It also excludes share-based compensation expenses and a fair value loss of a warrant.

Now, turning to our balance sheet, at the end of September 2018, we had a cash and a cash equivalent and a restricted cash of RMB494.6 million compared to RMB77.8 million at the end of December 2017.

Towards the end of the year, consumer purchases in China are expected to rise along with the demand for booth spaces in our auto shows. For the first quarter of 2018, we expect our net revenues to be between approximately RMB230 million and RMB250 million, representing a year-over-year approximated growth of 101.8% to 119.3%.

This forecast reflects our current and our preliminary views on the market and the operation conditions which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). We thank you for your patience.

Our first question comes from the line of James Jang from Maxim Group. Please ask your question.

So, there's a lot of news about the VAT being cut. So, with that in place, have you seen an uptick for attendance at the auto shows?

(Spoken in foreign language). Hi, James. This is translated from what our CEO has just said.

(interpreted) He said that, we see VAT taken in place. We can expect that the cost of the OEM could be decreased as well, which also leads to the potential decrease of the car price.

But compared with the cut -- tax cut of the purchase tax, it will have lower impact on the industry because from the precedence, we have seen that this is -- we have seen the precedence of tax cut of the purchase tax and which has stimulated the growing demand of the customers. But compared with that, the VAT cut will have limited impact on the -- on the market.

So not a boost in new car sales?

(interpreted) We'll have -- we'll definitely will do but will have limited power compared with the purchase cut -- the purchase tax cut. And for sure, it will lead to the car price decrease.

Okay. Because we're expecting in the past when the VAT was cut new car sales increased, right? So --

(interpreted) Right, but that's the purchase -- that's the purchase tax.

Okay.

(interpreted) That's the tax, the one you have to pay when you purchase a car, instead of the VAT tax that is tax burden of the OEMs. So, the VAT tax cut will impact the cost of OEMs which further leads to the car price decrease. But compared with the direct tax cuts on the consumers' end, it will have a lower impact.

Yes.

(interpreted) Yes.

Okay. So, then do you think the VAT cut will help the virtual dealer segment in 2019? Since the cost is lower, it should be cheaper for the people in the lower-tier cities to purchase new cars, right?

Right. (Spoken in foreign language).

(interpreted) So, he said that whether the consumers find it cheaper or more inexpensive to buy a car in the lower-tier cities, it doesn't really solve the problem of the OEMs. That is only half the franchise dealership network that is established in those lower-tier cities.

So, if this really helps the OEMs to lower their cost and further decrease the car price, this will have -- this will help us help the consumers to see a car price decrease and further help us to grow our virtual dealership in those lower-tier cities.

Got you, okay, perfect. And I know you guys have pretty strong expansion in the number of auto shows in a number of cities. Can you tell us which tiers your expansion occurred? Was it tier 2, 3, 4, 5?

(Spoken in foreign language).

(interpreted) It's more in tier 3 and below cities.

Okay. Do you know offhand what are -- was it more tier 3 or 4?

(Spoken in foreign language).

(interpreted) I will say both tier 3 and the tier 4 cities enjoy the expansions.

Okay.

(interpreted) Maybe half and half.

And just a little bit in tier 5, right?

(interpreted) Yes, very few in tier 5.

Okay. And in terms of the Company's focus in 2019, are you targeting more tier 3 and 4 or is it just you'll see what the consumers are -- consumer demand is?

(Spoken in foreign language).

(interpreted) All right. Yes. We are targeting the tier 3 and 4 cities in the coming year. And as you may have known, these are the tiers of the cities which we are expanding to establish our virtual dealership network.

Yes, got you. Okay. And so, I know that you guys did -- you guys didn't do much -- you guys didn't do anything in group-buying and it's not a major focus. But is there any plans to do group-buying events in 2019 or how should we be looking at that segment moving forward?

(Spoken in foreign language).

(interpreted) So, compared with auto shows when we -- which we have initiated and planned these shows on our own because as you may have known, for the conduction of our auto shows, we firstly initiate and plan the shows and invite the industry customers to come to our shows.

But for the group-purchase events, we play more passively in this business section because usually it's the OEM -- per the OEM's request, we would, on their behalf, organize some single brand sales events or group-purchase events per their request. So, we don't really proactively conduct the group-purchase but we will definitely do so per the OEM's request.

Okay, got you. All right. And just one final one, how many shows were canceled this quarter?

(Spoken in foreign language).

(interpreted) 38 auto shows were canceled in this quarter.

Okay. And that's all due to weather, right?

Yes, mostly due to weather, but it's also because of fewer weekends on the third quarter because of the holiday planning.

All right. Okay, great. Well, this is a nice start for you, guys. That's all I have. I'll jump off now. Thank you.

(Operator Instructions). There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

Okay, thank you all for attending the call today and we look forward to speaking with you in the next quarter's earnings call. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.