Uxin Ltd (UXIN) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Uxin's Second Quarter 2018 Earnings Conference Call. (Operator Instructions)

I would now like to hand the call over to Trista Ren, Investor Relations Manager of Uxin. Please go ahead, Ms. Ren.

Thanks, operator. Hello, everyone. Welcome to Uxin's Second Quarter 2018 Conference Call. Today, DK, our Founder and CEO; and Michael Zeng, our CFO, will discuss our financial results for the second the quarter. Following the prepared remarks, Henry Tsai, our Head of Corporate Finance, will join DK and Michael to address any questions.

Before we start, I would like to remind you that our statements today will contain forward-looking statements that we make under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on management's current knowledge and assumptions about future events that involve risks and uncertainties, which could cause actual results to differ materially from our expectations. Uxin does not undertake any obligations to update any forward-looking statement except as required under applicable laws.

For more information about the potential risks and uncertainties, please refer to the company's filing with the SEC.

With that, I will now turn the call over to our CEO, DK.

Thank you, Trista. Hello, everyone. Welcome to Uxin's first earnings call as a public company. Before I begin, I would like to take this opportunity to thank our shareholder community and all our partners who have supported us so far. Our listing on NASDAQ was an important milestone in Uxin's history, but we are still only at the beginning of our journey to transform the used car industry in China.

We are pleased to report a robust top-line growth of 80% year-over-year, primarily driven by increases in transaction volume, number of loans facilitated, and take rate during the quarter.

In particular, we continue to see strong demand for our 2C services. The revenue for our overall 2C business, including both transaction facilitation and loan facilitation, increased by 86% year-over-year. During the quarter, the transaction volume for our 2C business reached 96,000, representing 50.4% year-over-year growth. This is equivalent to GMV of RMB8 billion.

In addition, we were also able to increase our transaction facilitation take rate to 1.2% compared to 0.8% in last Q2, showing our strong brand value and pricing power. As a result, our transaction facilitation revenues increased by 94% year-over-year during the quarter. Along with the increase of the number of transactions, we similarly were able to increase the number of loans facilitated. Along with our increase of loan facilitation service fee rate from 4.8% in Q2 last year to 7.1% in Q2 this year, the 2C loan facilitation revenue's year-over-year growth was 83%. What is important to highlight is that we have demonstrated our capabilities to ensure stable credit performance with an improved M3+ delinquency rate, which was 1.53% during the quarter, compared to 1.56% in Q1. This resulted in a slight gain from guarantee liabilities.

The healthy top-line growth continues to enhance our position as the number one player in the used car e-commerce market in China. We also continued to gain operating leverage, as we expanded the scale of our business and improved efficiency.

In the second quarter, we maintained our focus on increasing the number of choices for consumers, improving digital transparency, and providing a one-stop solution for used car buyers. I will walk you through some of the drivers of our business and progress during the quarter.

First, the choice. Uxin's platform is focused on making it easier to buy used cars. Instead of choosing from the limited cars available in the local used car market, Uxin gives users the choice of more than 200,000 vehicles from all across China. Second, we bring unmatched digital transparency to the transaction by providing video inspection reports and covered over 300 checking points per car. Third, we offer a one-stop solution for our users that includes title transfers, finance options, insurance, national-wide delivery, and industry-leading warranty program.

One of the most important drivers of our success is our leading technology capabilities, which enable Uxin to increase transaction efficiency and solve many of traditional pain points in the used car market.

Since we started, we have accumulated a huge volume of proprietary data with over 4.5 million inspections and over 1.2 million transactions. With AI and machine learning, we can analyze this data to,

- first, provide digital transparency of the vehicle condition, price, and residual value;

- second, better match buyers and sellers with personalized recommendation; and

- third, improve credit risk assessment capabilities.

While we continue to refine this technology, we are also exploring other cutting-edge technology, such as virtual reality, that will enhance the user experience. We are confident that VR technology will allow users to enjoy the same quality of online shopping experience as that of offline, if not better. We will share more details on this and other technologies in future quarters.

Before I turn the call over to our CFO, Michael, I'd like to briefly update on a change to part of our business model. Historically, we provided inspection and other complementary services in our C2B business that enabled consumers to sell used cars through our 2B business--Uxin Auction. In the second half of the year, we will take a different approach and directly connect these consumers with quality dealers, without us providing inspection and other services. This will enable us to continue to create value for our users, as well as increase our operating efficiency. Please note, however, the change of business approach will mean that we will no longer include the corresponding GMV from C2B services in future quarters. Our 2B business going forward will include only our B2B business.

Looking forward, we are very excited about the opportunities ahead of us. The Chinese auto market is extremely under-penetrated relative to mature markets such as the US, and we expect to see sustained growth for many years.

Now, I would like to turn the call over to our CFO, Michael, to talk through our financials.

Well, thanks, DK. Hello, everyone. Thanks for joining us.

Now, I will walk you through our financial performance in the second quarter of 2018. Note that all numbers are in RMB unless otherwise stated. Also, please note that some numbers that I refer to are non-GAAP. You can find a reconciliation of these numbers in our earnings release.

So in the second quarter, total revenues increased by 80% to RMB666 million from RMB371 million in the second quarter of 2017. The increase was primarily due to increases in the transaction volume, amount of loans facilitated, and take rate.

Drilling down to our 2C and 2B business units:

- 2C transaction facilitation revenue was RMB94 million, an increase of 94% from RMB48 million in the second quarter of 2017. Our 2C transaction facilitation take rate was 1.2%, increased from 0.8% and 1.1% in Q2 2017 and Q1 2018 respectively.

- 2C loan facilitation revenue increased by 83% to RMB322 million from RMB175 million in the same period last year. Our service fee rate was 7.1% during the quarter, compared to 4.8% and 6.9% in Q2 2017 and Q1 2018 respectively.

In terms of our 2B business,

- Our 2B transaction facilitation revenue reached RMB161 million, representing an increase of 48% from RMB109 million in Q2 2017. Our take rate for 2B transaction facilitation was 3.5% in the second quarter, compared to 2.7% and 3.5% in Q2 2017 and Q1 2018 respectively.

Our ability to increase take rate is a clear demonstration of our increasing brand value, scale, and pricing power.

Cost of revenues increased by 58% year-over-year to RMB259 million compared to RMB164 million in the same period last year. The increase was primarily due to the increase in the number of personnel engaged in our car inspection, quality control, customer service and after-sale service, cost of title transfer and registration, and cost of new cars sold.

Gross margin was 61% compared to 56% in the same period last year. The margin expansion was the result of higher take rate and operating efficiency of our inspection personnel.

Total operating expenses were RMB1,711 million. Non-GAAP operating expenses, excluding share-based compensation, were RMB811 million.

- Sales and marketing expenses increased by 31% year-over-year to RMB610 million, compared to RMB465 million in the same period last year, primarily due to the increase in employee compensation.

- Of these, branding expenses remained relatively stable compared to the year-ago period at RMB201 million.

- This resulted in a substantial gain in operating leverage. As a result, sales and marketing expenses excluding share-based compensation expenses decreased as a percentage of total revenue to 92% during the quarter, from 125% and 98% in Q2 2017 and Q1 2018 respectively.

- G&A expenses increased by 930% year-over-year to RMB1,024 million from approximately RMB99 million in the same period last year. The increase was primarily due to the increase in salary and benefit expenses and share-based compensation, which had two major components -- RMB226 million of options granted to management and employees that vested upon the completion of the IPO, and the issuance of RMB620 million of restricted shares. The vast majority of share-based compensation was one-time and won't recur in the future quarters.

- G&A expenses excluding the impact of share-based compensation was RMB141 million, representing 21% of total revenues in the quarter, compared to 27% and 25% in Q2 2017 and Q1 2018, respectively.

- R&D expenses increased by 64% year-over-year to RMB82 million in Q2 from RMB50 million in the corresponding period last year. The increase was primarily due to the increase in salary and benefit expenses and share-based compensation.

- R&D expenses, excluding the impact of share-based compensation, were RMB66 million, representing 10% of total revenue in the quarter, compared to 14% and 11% in Q2 2017 and Q1 2018 respectively.

Overall, our increasing operating leverage and prudent approach to expense management will continue to improve our profitability.

Gains from guarantee liability has resulted in a gain of RMB5.1 million. The gain is the result of a slight improvement in delinquency rate as compared to that of Q1 2018.

Loss from operations was RMB1,304 million, compared to RMB388 million in the prior year period. Non-GAAP loss from operations, which excludes share-based compensation expenses, was RMB404 million, compared to RMB388 million in the same period last year.

The change in fair value of derivative liabilities resulted in a gain of RMB1,544 million in the second quarter of 2018, compared with a loss of RMB183 million in the same period last year. The change was mainly due to the change of value of the Company before the IPO. This is a one-time accounting impact due the conversion features of preferred shares and redemption features of redeemable non-controlling interests. As all these shares were converted into ordinary shares at IPO, the accounting impact will not recur in the future.

Net income was RMB210 million compared with a net loss of RMB570 million in the prior year period, primarily due to the gain from the change in fair value of derivative liabilities.

Non-GAAP adjusted net loss, which excludes share-based compensation and the change in fair value of derivative liabilities, was RMB434 million in the quarter, compared to a loss of RMB387 million in same period last year.

Now turning to our cash position. As of June 30, 2018, Uxin had cash and cash equivalents of RMB829 million, compared with RMB292 million as of December 31, 2017. The Company also had restricted cash of RMB1,806 million, compared with RMB1,617 million as of December 31,2017. In July, the Company received net proceeds of US$308 million from the IPO and the issuance of convertible bond.

Finally, turning to guidance.

For the third quarter of 2018, we expect total revenues to be in the range of RMB810 million to RMB850 million. This forecast reflects the Company's current and preliminary views on the market and operational conditions, which are subject to change.

That concludes our prepared remarks.

Thank you, Michael. Operator, we'd now like to open the call for questions.

(Operator Instructions) Our first question comes from the line of Eddy Wang from Morgan Stanley.

Thank you for taking my questions. Firstly, let me congratulate on the strong results. So I have two questions. The first one is regarding the 2C business. We noted that we have delivered a very solid 2C business growth in terms of the transaction volume and the take rate of the transaction facilitation and the loan facilitation also improved.

So in my view this is quite impressive, especially that the China auto market is relatively weak, especially in the second quarter and third quarter. So can you give us more color on how we can sustain this strong growth into the third quarter? Because that do you have give quite strong third quarter guidance in terms of revenue and this guidance actually implies an accelerating 2C business growth in the third quarter. This is my first question.

And my second question is regarding the 2B business. The take rate of the 2B business has been stable at 3.5%, as Michael mentioned earlier, in the first half of this year. So this is much higher than the level of last year. So expect for the leading position, our leading position, in 2B business, what else have we done to achieve this? And do you expect further improvement of the take rate to improve in the second half of this year or to 2019?

Thank you, Eddy. This is Henry. With respect to the first question, we plan to drive our growth in the second half of the year. I think number one, as you have all seen from our past quarters, that revenue growth is a result of, number one, increasing transaction volume in GMV and to our ability to increase take rate. With us entering to the second half of the year, we see a strong demand for our 2C services. So we are seeing actually accelerated growth from 2C in prospective. I think that's from volume -- on the volume side. And, two, we have been able to steadily increase our transaction facilitation take rate and we see that continue to go forward in the second half of the year. So all in all, I think the drivers remain the same, and we're seeing robust growth in the second half.

I think second question is on 2B business with take rate of 3.5%. And 2B business is the mature one. We obviously monetize it as to grab more services to our users. So as we identify more needs, we'll create more services. Now, we want to take a step back and focus everyone on our 2C business given that it's a growth area. 2B business will remain to be stable with modest growth going forward. Thanks.

Our next question comes from the line of Ronald Keung from Goldman Sachs.

Two questions from my side. Firstly, would love to hear just any update on the competitive landscape given the fundraisings in our peers like Guazi. I just want to hear how have we seen our competitors, particularly on the sales and marketing initiatives. What is our outlook for the industry and how do we see the consolidation happening? Just any big picture or any longer terms sharing, particularly given the changes in the past few months on fundraising for different players.

And my second question would be the very healthy trends in your provisions in the second quarter, this was sort of on the back of, we think, very impressive given that the macro and a lot of different P2P incidences in China over the second quarter. So how do we see this trend going forward, particularly in the second half? Thank you.

Okay. Hello, Ronald. I think for the competition, we won't comment on other companies as we don't have their numbers. So we continue to be the market leader in China. And also despite interest into the used car market from the various players. So we will continue to develop and solidify our position.

I think healthy competition is good for long-term growth of the industry, and we have established a solid leading position in terms of transaction volume, growth, and brand awareness. We believe all these, together with our integrated online and offline approach and technology will continue to expand our leadership.

And, Ronald, with respect to your second question on our improved delinquency rate and how we are viewing the situations with the P2P industry. I think I would just want to highlight that, number one, we have a very different business model versus the P2P companies from funding sources perspective as well as users we are trying to serve. So we want to point out it's completely different. As a result, our performance has not been impacted by the same factors that has impacted the P2P industry.

Now, we maintained our M3+ delinquency rate at a relatively stable rate, and this is -- the improvement in the delinquency rate is due to our increased understanding of our user credit and risk profile, improving our credit assessment capabilities and our ability to collect loans. For example, we recently started using video conference to verify the identity of the users applying for loans which is actually more reliable than just verification by call. So we'll continue the investments in strengthening our risk control system and try to improve the credit performance for loan facilitation through our partners.

Our next question comes from the line of Nick Lai from JP Morgan.

It's Nick from JP Morgan. I have one very simple question. Can either Dai or Michael give us some guidance on the second half, either the take rate and -- take rate for both 2B and 2C operation. And also the branding expense seems to be pretty stable in the second quarter given the comment you just made. Should we expect the branding of both the sales and marketing expense to, excluding one-off item, would improve into the second half?

Hey, Nick. It's Michael here. So actually we don't want to give you the guidance on we see take rate. But actually, we will continuously improve our take rate in the long run. And you may see we continue focusing on, improve our [within our] service and improve our service quality, and we improve our efficiency. That all will drive our take rate to going higher.

And for your second question for the sales and marketing, and we'll keep our strategy, especially on branding. We will keep the absolute dollar amount, invest on the branding relatively fixed in the next quarters.

Nick, if I can please just add. This is Henry. In terms of take rate, while we don't give specific guidance, you have seen us being able to improve it in past quarters, and we believe that trend will continue.

(Operator Instructions) Our next question comes from the line of Pang Bo from China Renaissance.

So I have a couple questions. First one is on the cost of revenue line. So this number is sort of a little bit higher than expected. So if we look at the gross margin transaction business level, it doesn't seem to have too much leverage year-over-year. So I just want to have some update on the headcount numbers here and then how we should look at the leverage over time going forward. And where are we adding these people and how we set their KPIs, is the first question.

Second one is on our technology investment. So we noticed that we are increasingly invested in the VR technology. So can management elaborate a little bit more on, do we have any [AB] testing at this stage? And how should we think about the early effect of such an initiative going forward and its associated impact on our gross margin line?

And my third question is I just want to very quickly get an update on your banking partner account and any progress on boarding more banking partners down the road.

It's Michael here. So for your -- to address on your first question. So given the late arrival of the Chinese New Year in 2018, the Q2 top line was impacted by the late return of the dealers and the consumers to the used car market. With slight slower top line growth and the continued build-out of the inspection personnel in anticipation of the higher volume in the second half of the year, gross margin was lower than that of the Q1.

With the second half of the year traditionally being the season where used car transactions pick up and our ability to continue to increase the take rate, we expect to see the higher top line, along with improving operating efficiency, driving gross margin expansion. So in the next few quarters, especially for the Q3 and Q4 are the high season. And I think the labor efficiency will improve and the gross margin will improve as well.

I think about VR, we expect to offer 360-degree car viewing experience to our users in the next few months, and the relevant investment involves in building out the tent and the hardware in key markets that have meaningful used car volume, as well as research and the development related investment. The hardware investment per VR site or tent will be around, I think, RMB700,000. Thank you.

And third question with respect to our banking partners, I think, number one, is on top of our priority to discuss with various high quality tier-one financial institutions as our financing partners. As everyone can see that we have the common strategic partner with CITIC and ICBC during the IPO process, and we'll continue to discuss with them how we can best cooperate together. Once we have a meaningful update on the corporation details, we'll update everyone on coming quarters. Thank you.

(Operator Instructions) There are no more questions and I'll turn the call back to the presenter. Ms. Trista, please continue.

Yes. Thank you, everyone, for joining today's call and for your continued support for Uxin. We look forward to speaking to you again in the future.

Okay. Thank you. Bye.

Thank you.

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