Token Cat Ltd (TC) 2018 Q4 法說會逐字稿

Good morning, and good evening, everyone.

Thank you for standing by, and welcome to TuanChe Limited's Fourth Quarter and Full Year 2018's Earnings Call.

(Operator Instructions)

Now I will turn the call over to your speaker host today, Ms. Dana Cheng from TuanChe.

Please go ahead, ma'am.

Hello, everyone, and welcome to TuanChe's Fourth Quarter and Full Year 2018 Earnings Conference Call.

The company's 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 U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties.

As such our future results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in our earnings release and our registration statement filed with the SEC.

TuanChe does not assume any obligation to update any forward-looking statements, except as required by law.

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 provide additional details on TuanChe's performance, review the company's financial results and discuss the financial outlook.

Following management's prepared remarks, we will open up the call to questions.

So now turning the call over to our CEO, Mr. Wen.

[Please go ahead, sir].

Hello, and thank you, everyone, for joining us on our fourth quarter earnings call today.

During the fourth quarter of 2018, car sales in China continued to slide due to macroeconomic uncertainties.

According to the China Association of Automobile Manufacturers, car sales during full year 2018 fell by 4%, marking the first annual decrease since the turn of the century.

Despite unprecedented industry downturns, our growth engine remained intact as our quarterly net revenues nearly doubled year-over-year.

More importantly, we also improved our profitability as both our adjusted net income and our adjusted EBITDA improved to RMB 8.2 million and RMB 8.5 million, respectively, for loss -- from losses in the prior year period.

This accomplishment resulted from our efforts in strengthening our core auto show business and accelerating the development of our virtual dealership business in the fourth quarter.

First, in our core auto show business, we maintained our industry-leading market share in the top-tier cities, while actively expanding into lower-tier cities.

During the fourth quarter, we successfully organized 331 auto shows across 167 cities compared to 138 auto shows in 75 cities in the prior year period and 205 auto shows in 122 cities in the third quarter.

The significant increase in our auto shows' frequency and geographic coverage have once again demonstrated the power of our scale, brand recognition and the market leadership.

It's well known that auto markets in lower-tier cities are far from maturity and possess the potential future growth potential.

Fueled by the rising income and consumption aspiration of lower-tier city residents, demand for private car ownership in these areas has experienced a meteoric rise.

While our supply has been slow to catch up, thus leaving the market largely underpenetrated and underserved, the car ownership rate in Tier 3 cities and below is well behind that in Tier 1 and 2 cities where car ownership is much more prevalent and thus the market is more saturated.

Consequently, we believe that Tier 3 cities and below will become a significant driver of our future growth and profitable expansion.

Vehicles purchases in lower-tier cities are typically less expensive, and our auto shows in these areas are usually of a smaller scale than those in Tier 1 and 2 cities.

Meanwhile, despite the recent stagnation in the Chinese automobile market, our GMV increased in the fourth quarter.

Additionally, the cost of hosting auto shows in lower-tier cities is also significantly less than that in higher Tier 1s.

So we are able to maintain our healthy gross profit margins throughout our geographic expansion.

We will maintain a prudent approach in our geographic expansion and select cities with higher ROIs to ensure sustainable growth and margin improvement simultaneously.

As we enter 2019, we expect the current macroeconomic headwinds and industry-wide challenges to persist.

Facing an unprecedented industry downturn, most of the major OEMs are under significant pressure to reduce their marketing budget, while still increasing their sales.

Consequently, they have reevaluated their marketing strategies and are now shifting a greater portion of their limited budget towards automotive sales channels, like TuanChe for our higher ROI.

OEMs value our ability to generate accurate and highly relevant sales leads, which is particularly crucial in enhancing their sales performance amid a slow market.

We believe that we will continue to be a beneficiary of OEMs' strategic shift in marketing expenditure, and we are confident that our operating and financial performances will maintain their healthy growth trajectory as a result.

Now moving onto our virtual dealership's business.

Our virtual dealership business model is especially suitable for the market dynamics in lower-tier cities.

We have long recognized that due to their limited resources, most domestic automakers and their franchised dealerships tend to solely concentrate on top-tier cities and neglect the opportunities in lower-tier cities.

We launched our virtual dealership network in June 2018 to correct this market misallocation through connecting OEMs and their franchised dealerships with local secondary dealers.

In September, we branded our virtual dealership network as TuanTuan Auto so that secondary dealers on our platform can leverage the collective branding and combined scale of our network.

TuanTuan Auto attained more market acceptance and partner endorsement during the fourth quarter, establishing itself as a new engine of our long-term growth.

In summary, despite the economic uncertainties and industry-wide auto sales decline, we have been able to augment our market leadership by offering a compelling value proposition to OEMs and taking advantage of the significant unexplored growth potential in lower-tier cities.

Looking ahead into 2019, we are confident that we have the right strategy in place to sustain our growth and margin expansion in any market conditions.

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

Thank you, Wei.

Hello, everyone.

Before I start, please note that all numbers stated in my following remarks are in RMB terms, unless otherwise noted.

Our total revenues in the fourth quarter nearly doubled to CNY 226.4 million from CNY 114.0 million in the same period last year, despite the recent stagnation of automotive industry in China.

The growth was mainly driven by the strong performance in the revenue growth of our auto shows.

Our auto shows business remained the primary growth driver in the fourth quarter as auto show revenues increased by 97.1% year-over-year to CNY 221.5 million from CNY 112.4 million in the same period last year.

The growth was mainly driven by the increased number of auto shows that we organized, the cities that we operated in and the number of booths that we offered to our industry customers.

Although new car sales in China continued to decelerate, our total gross merchandise volume of new automobiles sold through our auto shows increased by 8.1% to CNY 16.1 billion from CNY 14.9 billion in the same period last year.

Meanwhile, the number of automobile sales transactions facilitated during our fourth quarter increased by 26.4% to approximately 117,000 from approximately 93,000 in the same period last year.

In addition to our core auto show business, we continue to ramp up our new business operations in the fourth quarter.

Revenues from our virtual dealership, demand-side platform and others reached CNY 4.9 million during the fourth quarter, maintaining its solid growth rate.

Our gross profit in the fourth quarter increased by 101.1% year over year to CNY 163.3 million from CNY 81.2 million.

And our gross margin expanded to 72.1% from 71.2% in the same period last year.

The margin improvement was driven by the enhanced efficiency of our auto show organization process, our improved bargaining power with third-party vendors as well as the lower cost of operations in lower-tier cities.

In the fourth quarter, selling and marketing expenses increased to CNY 144.9 million from CNY 75.1 million in the same period last year, primarily due to an increase in headcount and our advertising and promotional activities as we further strengthened our brand influence.

Selling and marketing expenses for the fourth quarter include share-based compensation expenses of CNY 16.2 million.

General and administrative expenses increased to CNY 29.8 million from CNY 8.2 million in the same period last year due to an increase in the headcount as a result of our business expansion in the fourth quarter as well as increased professional fees associated with the company's initial public offering completed in November 2018 and ongoing expenses as a public company.

General and administrative expenses included share-based compensation expense of CNY 10.1 million in the fourth quarter.

Research and development expenses increased to CNY 5.9 million from CNY 3.8 million in the same period last year.

Consequently, our loss from continuing operations was CNY 17.3 million in the fourth quarter compared to CNY 5.9 million in the same period last year.

Excluding the effect of share-based compensation expenses and the fair value loss of warrant, adjusted net profit attributable to the company's shareholders was CNY 8.2 million in the fourth quarter compared to a loss of CNY 6.9 million in the same period last year.

Adjusted diluted earnings per share was RMB 0.04 in the fourth quarter compared to a loss of RMB 0.07 in the same period last year.

Adjusted EBITDA improved to CNY 8.5 million in the fourth quarter from a loss of CNY 5.7 million in the same period last year.

Before moving on to our balance sheet and the guidance for the first quarter of 2019, let me briefly go over our full year 2018 results.

For the full year of 2018, our total revenues grew by 131.9% to CNY 651.0 million, with revenues from auto shows increasing 144.1% to CNY 644.3 million.

Our gross profit during the full year of 2018 increased by 139.9% to CNY 467.6 million, while our gross margin further expanded to 71.8% from 69.4% in 2017.

Adjusted net income attributable to the company's shareholders improved to CNY 3.3 million from a loss of CNY 87.4 million in 2017.

Adjusted EBITDA improved to CNY 7.5 million from a loss of CNY 84.0 million in 2017.

Now turning to our balance sheet.

At the end of December 2018, we had cash and cash equivalents of CNY 578.6 million.

For the first quarter of 2019, we expect our net revenues to be between approximately CNY 113 million and CNY 114 million, representing a year-over-year approximate growth of 29.3% to 30.4%.

This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks for today.

Operator, we are now ready to take questions.

(Operator Instructions) The first question comes from the line of James Jang from Maxim Group.

I guess, you guys had a good start to -- good end to 2018 and it seems like you guys are on track.

So can you tell us a little bit more about what happened with the virtual dealer network?

Have you been able to penetrate additional OEM partners or what's the status right now?

(foreign language)

(foreign language)

I will just translate from what Mr. Wen has said just now.

So ever since our virtual dealership business started, we have been establishing our offline presence in more than 10 cities around Beijing, and we have successfully built up more than 10 stores named TuanTuan Auto in those cities.

And also, we are still trying to penetrate deeper into Tier 4 to Tier 6 levels of the cities, especially -- levels of the counties.

And also in terms of the OEM partnerships, we're now in contact with -- in close contact with more than 10 OEMs, discussing on the corroborative details and we will release that information as soon as we close on the deal.

Okay, great.

And for the 10 OEMs that you're currently in contact with, are they domestic, international?

Can you give us a little color on that?

(foreign language)

(foreign language)

They're mostly domestic brands.

(foreign language)

Also including some (inaudible) between domestic and foreign brands.

Got you, right.

So with the tariffs of the U.S., have you seen more interest from international or foreign brands looking to work with TuanChe since car sales are -- new car sales are becoming a little more difficult right now?

Do you mean -- do you say more marketing activities from those brands?

Yes.

Are those brands reaching out to you to help with their sales?

Have you seen more activity around that?

(foreign language)

(foreign language)

He just said that the tariff isn't really impacting much on the Chinese auto markets because the imported car sales in China is really taking a very small part of the overall market.

(foreign language)

So the current issue with the trade war between U.S. and China is mostly on the psychological level of the customers and the purchasing decisions that the customers are taking.

Okay, great.

And so I know you guys are trying to get into the lower-tier cities.

So what is the plan?

Is it really to go out to Tier 4 first, Tier 5 first?

Or I mean, or is it just -- I mean how are you guys identifying which tiers to go after right now for the virtual dealership model?

(foreign language)

(foreign language)

As we're just starting on the virtual dealership business, we actually are utilizing the existing business of auto shows and leveraging what we have in Tier 4 cities to establish the network of our virtual dealership.

So Tier 4 first because we have already established our auto show business there.

But of course, in terms of the market size of the virtual dealership, we are actually identifying even deeper into Tier 5 or even Tier 6 because there is really fewer coverage of the franchised dealership there.

We're -- they're really great needs -- great amount of the potential customers.

Okay, great.

And also when we look at the first quarter, how are -- can you give us any updates on how you're trending?

Because first quarter, you have Chinese New Year.

Is that a good indicator for sales, or is that more indication of slowdown in sales?

Do you want to take it first?

Sure.

This is Zhihai Mao.

Let me answer your question.

Definitely, during the first quarter, we have Chinese New Year definitely.

Typically, first quarter has a bigger impact on our business operations.

For example, for the whole quarter, we nearly have 1 month or even more than 1 month period of time we want to be able to host auto shows surrounding the Chinese New Year.

So we will see very strong seasonalities, typically lowest starting in the first quarter.

But definitely, we will see the -- expect a stronger pickup from Q2.

So you'll definitely see stronger seasonalities throughout the year for the 4 quarters.

Got you, okay.

And also, so you guys are guiding to about CNY 113 million, CNY 114 million for the first quarter.

So the way we are looking at it is the bulk of that's still going to come from the auto shows and there's going to be minimal impact or probably a little less than what you did in the fourth quarter for the virtual dealer side.

Is that a good way to look at this, that there could be a dip in virtual dealer revenue in the first quarter?

Yes.

We'll definitely have virtual dealership and demand-side platform revenue contributing to the first quarter revenues.

But of course, as you mentioned, the bulk part of the contribution definitely from auto show business.

Perfect, okay.

And as you guys move into the lower-tier cities, Tier 4, 5, 6, should we expect a larger SG&A or CapEx cost just because of the traditional advertisements, TV, radio and billboards that you guys will have to use?

Would that be fair or...

Yes.

As we expand our sales network and operations in lower-tier cities, we typically will see lower customer acquisition costs, typically by utilizing off-line media resources because those media resources cost us a lot less than online customer acquisition channels.

Got you, okay.

And the last question I have is, there's a number of incentives that the government is trying to push to help increase car sales.

Have you seen that impact overall so far in '19?

Or do you think that will flow through a little later on in the year?

(foreign language)

(foreign language)

So we actually haven't released the specific incentives -- the regulatory incentives released by the government specifically to the auto markets, but we do see that they have already decreased all the value-added taxes.

So that actually indirectly influence the auto markets, but only to a less degree.

So we do expect and we do hope that the Chinese government will release some specifically designed to -- designed regulations or incentives to increase -- to boost the auto markets.

But for now, we don't want to be...

Next question comes from the line of Laura Liu from Stonestreet.

So I have just one question.

So can you please explain more about the synergy between the auto shows and virtual dealership business?

(foreign language)

(foreign language)

Yes.

There is synergy there that, I think, auto shows and virtual dealership are creating.

The auto show business can actually provide a renewal on a monthly visits for the secondary dealers under our virtual dealership banner and also showcasing the demo cars without having to have a permanent showroom.

And also, this could greatly increase their customer acquisition efficiency and maximize their return on the marketing expenditures.

And this is in line with what we are offering to all of our inventory customers.

(foreign language)

For the virtual dealership business to our auto shows, as you might have known, lower-tier cities have faster growth potential with fewer franchised dealers in the top-tier cities in China, which is why our focus of the virtual dealership is mainly in lower tiers.

So were we to have auto shows in these cities, the secondary dealers of our virtual dealership network and the automakers who we source inventories from will help us in enrich the transactions of auto shows and increasing customer experience at the same time.

(foreign language)

So in addition to the synergies they create together, those 2 business lines are also complementary to each other, as auto shows and virtual dealership business develop.

Also leveraging our Big Data system, we are now leading up a comprehensive online platform for auto transaction purposes, benchmarking Meituan but in auto industry.

(foreign language)

The auto transaction and services platform that we are dealing right now is based on the Big Data and AI technologies.

Starting from users wants and needs and their experiences, we are providing personalized solutions on top of this standardized process.

And our auto show business is a marketing scenario and product to satisfy users off-line experiences in all levels of the cities.

But the solutions to close the deal are different.

(foreign language)

In Tier 1 to Tier 3 cities, its the franchised dealers who close the deal and the transaction will -- but in Tier 4 to 6, its our virtual dealerships who do so, including the delivery, insurance and aftersales.

In a ecosystem like this, the platform can accumulate the users, while the Big Data and AI techniques can help optimize the users' experience.

As a result, during our users' life cycle, we're able to maintain continuous utilization of sales leads and a higher conversion rate.

(Operator Instructions) There are no further questions at this time.

I'd like to hand the call back to management for closing remarks.

Thank you all for joining us on today's call.

We look forward to speaking with you in the next quarter.

Thank you.

Ladies and gentlemen, that concludes the conference for today.

Thank you for your participation.

You may now disconnect.