Uxin Ltd (UXIN) 2018 Q3 法說會逐字稿

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

Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the call over to Nancy Song, Investor Relations Director of Uxin. Please go ahead.

Thank you, operator.

Hello, everyone. Welcome to Uxin's third quarter 2018 conference call. Today, DK, our Founder and CEO; and Zhen Zeng, our CFO, will discuss our financial results for the third quarter. Following the prepared remarks, Henry Tsai, our Head of Corporate Finance, will join DK and Zhen to address any questions.

Before we start, I would like to remind you that our statements today will contain forward-looking statements that we'll make under the safe harbor provision 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 obligation to update any forward-looking statements, except as required under applicable laws. For more information about the potential risks and uncertainties, please refer to the company's filings with the SEC.

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

Thank you, Nancy.

Hello, everyone. We are pleased to report another strong performance for the third quarter of 2018. Our focus on providing a broad selection of used cars, digital transparency and a one-stop solution continues to translate into an outstanding user experience and a growing demand from both consumers and dealers.

We again delivered a robust top line growth with revenue up 60% year-over-year, which exceeded the high end of our guidance. This reflects increases in the transaction volume number of loans facilitated and the take rate during the quarter.

Our 2C business remained the primary growth driver for the business. The revenue for our 2C business, including both transaction facilitation and the loan facilitation, increased by 109% year-over-year. Transaction volume for our 2C business reached 129,000 used cars, up 53% year-over-year. This is equivalent to GMV of RMB 10.2 billion.

Our transaction facilitation take rate was 1.4% compared to 0.7% in Q3 last year. The increase reflects the strength of our brand and the pricing power as well as the increasing traction of our service among user. As a result, our transaction facilitation revenue increased by 165% year-over-year during the quarter.

Loan facilitation continued to be important for consumers and increased together with the growth in volume of transactions. The average service fee rate for loan facilitation increased to 6.9%, up from 6.1% a year ago with loan facilitation revenue growing by 96% year-over-year. The increase in service fee rates was mainly due to the ongoing diversification of our loan products.

We also enhanced our risk management through analysis of the large volume of transaction and user behavior data collected on our platform, as well as enhancement in our pre- and post-financing management capabilities. This led to an improvement in our M3+ delinquency rate to 1.43% as of the end of Q3 2018, from 1.53% as of the end of Q2 this year.

Now let me share some updates on key areas of our operations before Zhen gives greater detail on our financial performance shortly.

First, enriching selection of used cars. Uxin is dedicated to providing consumers with the broadest selection of used cars from different regions across China. At the end of the third quarter, we had 290,000 cars available to be purchased real-time via our network.

Second, digital transparency. We are also committed to setting the industry benchmark for transparency by standardizing and digitalizing used car inspections and increasing the accuracy of used car evaluation. Through our standardized and proprietary inspection process and the recently-launched VR-enabled online car viewing experience, we differentiated ourselves by bringing a more professional and interactive experience to our users. In addition, our Manhattan pricing system analyzes data from over 5.8 million car inspections and 1.8 million transactions to accurately estimate used car values. This enables us to reduce information gap between sellers and the buyers and bring much greater price transparency.

Last but not least, we continue to focus on making Uxin a one-stop service platform. On top of offering a broad, cross-regional selection of used cars, we are also able to provide car financing options, arrange title transfer and used car delivery with the support of our service and fulfilment network. This full suite of offerings enable us to deliver a seamless and comprehensive used car purchasing experience on one platform.

With our determination to enhance value propositions for our users, we are confident that we can extend our market leadership in China's underserved used car market and build a sustainable business over the long term.

Now I'd like to turn the call over to our CFO, Zhen Zeng, to talk through our financials.

Well, thanks, DK. Hello, everyone. Thanks for joining us. Now let me walk you through our financial performance in the third quarter of 2018. Note that all numbers are in RMB unless otherwise stated. Also, please note that some numbers I refer to are non-GAAP. You can find a reconciliation of these numbers in our earnings release.

In the third quarter, total revenues increased by 60% to RMB 864 million from RMB 541 million in the third quarter of 2017. The increase was primarily due to the increase in the transaction volume, amount of loans facilitated and the take rate, particularly from our 2C business.

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

2C transaction facilitation revenue was RMB 139 million, an increase of 165% from RMB 52 million in the third quarter of 2017, primarily due to a 53% increase in the transaction volume and a 35% increase in GMV of used cars sold through our 2C business. Our 2C transaction facilitation take rate was 1.4% in the third quarter of 2018, up from 0.7% in the third quarter of 2017.

2C loan facilitation revenue increased by 96% to RMB 474 million, primarily driven by the increase in the volume and amount of loans facilitated. Our service fee rate was 6.9% during the quarter, up from 6.1% in the third quarter of 2017. The increase in service fee rates was primarily driven by the ongoing diversification of our loan products with more tenure and down-payment options. The attach rate of loan facilitation services remained relatively stable at around 46% in the quarter.

In terms of our 2B business, our 2B transaction facilitation revenue reached RMB 191 million, representing an increase of 21% year-over-year primarily due to the increase in take rate. Our take rate for 2B transaction facilitation was 4.5% in the third quarter of 2018, up from 3.2% in the third quarter of 2017. As we noted last quarter, we have adopted a different approach to serving consumers with car selling needs. Excluding this impact, our B2B business achieved 18.6% year-on-year growth in the number of transactions.

Cost of revenues increased by 56% year-over-year to RMB 305 million for third quarter of 2018 compared to RMB 196 million in the same period last year. The increase was primarily due to the increase in the number of the personnel engaged in our car inspection, quality control, customer service and aftersales services as well as the cost of title transfer, registration and fulfilment expenses, which was in line with the increase in our transaction volume.

Gross margin was 65% in the third quarter of 2018 compared to 64% in the same period last year.

Total operating expenses was RMB 1,102 million. Non-GAAP operating expenses, excluding share-based compensation, was RMB 1,025 million, representing a 40% increase year-over-year.

Sales and marketing expenses increased by 40% year-over-year to RMB 755 million compared to RMB 541 million in the same period last year. The increase was primarily due to an increase in the number of employees, which was partially offset by a decrease in the branding expenses.

- Branding expenses decreased to RMB 211 million.

- We also saw an increase in conversion efficiency, which reflected more accurate consumer targeting and the ramp-up of sales consultants' productivity.

- As a result of increasing operating leverage, sales and marketing expenses, excluding share-based compensation expenses, as a percentage of total revenue decreased to 88% during the quarter, from 100% in the third quarter of 2017.

G&A expenses increased by 3% year-over-year to RMB 266 million in the third quarter of 2018 from RMB 259 million in the same period last year. The increase was primarily attributable to the increase in the number of employees and office expenses, which was partially offset by the decrease in share-based compensation expenses.

- G&A expenses, excluding the impact of share-based compensation expenses, was RMB 190 million, representing 22% of total revenues in the quarter, compared to 23% in the third quarter of 2017.

The R&D expenses increased by 68% year-over-year to RMB 82 million in the third quarter of 2018 from RMB 49 million in the corresponding period last year. The increase was primarily due to the increase in salary and benefit expenses of employees engaged in research and development as well as the expenses related to the development of our IT business.

- R&D expenses, excluding the impact of share-based compensation expenses, were RMB 82 million, representing 9% of total revenues in the quarter, at the same level of quarter 3 of 2017.

We are confident that our increasing operating leverage and prudent approach to expense management will continue to improve our profitability over time.

Gain from the guarantee liability was RMB 2.4 million compared to a loss of RMB 19 million in the prior year period. The slight gain was the result of a relatively stable delinquency rate compared to that of the second quarter of 2018.

Loss from operations in the third quarter of 2018 was RMB 543 million, compared to a loss of RMB 523 million in the prior year period. Non-GAAP loss from operations, which excludes the share-based compensation expenses, was RMB 466 million compared to RMB 385 million in the same period last year. Non-GAAP loss from operations as a percentage of total revenues was 54% in the third quarter of 2018, decreased from 71% in third quarter of 2017.

The change in fair value of derivative liabilities was nil in the third quarter of 2018 compared to a loss of RMB 238 million in the same period last year. We no longer see any impact of derivative liabilities as the preferred shares were converted into ordinary shares at the time of IPO.

Net loss in quarter 3 2018 was RMB 594 million compared to a net loss of RMB 766 million in the prior year period. The narrowed net loss was primarily due to the decrease in loss from the fair value change of derivative liabilities.

Non-GAAP adjusted net loss, which excludes share-based compensation expenses, was RMB 517 million in the quarter compared to a loss of RMB 390 million in the prior year period. Non-GAAP adjusted net loss as a percentage of total revenues was 60% in quarter 3 of 2018, decrease from 72% in the third quarter of 2017.

Now turning to our cash position.

As of September 30, 2018, Uxin had cash and cash equivalents of RMB 677 million compared to RMB 292 million as of December 31, 2017. The company also had restricted cash of RMB 1,838 million compared to RMB 1,617 million as of December 31, 2017.

Finally, turning to guidance.

For the fourth quarter of 2018, we expect the total revenues to be in the range of RMB 1.02 billion to RMB 1.06 billion. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks.

Thank you, Mr. Zeng. Operator, we'd like now open the call for questions.

(Operator Instructions)

Our first question comes from the line of Eddy Wang from Morgan Stanley.

So I have 3 questions. The first one is about the 2C business take rate. We have witnessed a quite impressive increasing trend of 2C take rate this year. Especially for the third quarter, take rate increased around 20 bps sequentially, while the volume growth was also higher than that of the year's second quarter. So will you please give more details about how you are managing to achieve this and how we could expect the take rate trend in the fourth quarter and onwards? This is my first question. And my second question is about the delinquency rate. The third quarter delinquency rate also improved 10 bps versus the second quarter. So also, I would like to management give more details about how we can achieve this and how is the trend in the next few quarters. On a separate note, I noticed that the restricted cash balance at third quarter end actually are quite similar at the -- versus the second quarter end. So I'm just wondering if there is any -- I mean, the -- our auto finance partners have lowered their requirements in terms of the deposit as a percentage of the outstanding loan balance we facilitated. So basically which means that if there's any -- the more favorable terms from this -- our auto finance partners. This is second one. And the last question is about the overall market because we have noticed that the new car industry demand in the third quarter has been weak. So do you expect any negative impact from this weak demand to the used car industry in the short term? Although so far, I think our third quarter volume growth and fourth quarter guidance seems quite immune from this weak demand in China, but just want to hear your thoughts about any -- the -- thoughts of the weak new car auto demand, the impact to the used car industry.

Okay. Thank you, Eddy. This is DK. And all right, we get all your questions. I think I would like to take your question 3 first and just -- okay. Is that okay? I turn into Chinese and Henry will help me to translate. Okay.

(foreign language)

Sure. Thanks, Eddy. I think, number one, that was a great question. New cars obviously saw an impact on the broader economy in Q3. For the first time we saw new cars worldwide trend actually declined in 2018. Now obviously, as we look at our business in used cars, we feel that used car environment is a lot more constructive than new cars, especially when a lot of consumers are very focused on affordability, which actually plays to used car strength.

Okay. (foreign language)

And then in terms of our own business, we feel that our model is unique in a way whereby we are providing users with a great used car purchasing experience by moving people's buying behavior from offline to online. So now actually we are accelerating our own growth. And also with our strength and scalability of business model, we continue to expand our market share. So we feel that not only is used cars more constructive than in broader -- new car environment, we will continue to outgrow the broader used car market as well.

Okay, Eddy. It's Michael here. So I would like to address your questions on take rate and delinquency rate and also the cash. So for the 2C take rate drivers, in this quarter, our 2C transaction facilitation take rate was 1.4% compared to 0.7% in the same period last year. This is mainly because we have been enhancing our service capabilities to better cater to car buyers' different needs. This also demonstrates consumers' higher appreciation of Uxin's unique value proposition. That is, a broader car selection enabled by the cross-regional transactions and a better car condition and the price transparency and one-stop services. With this integrated offering, we have been able to gain greater pricing power while increasing scale. This also enable us to deliver more value to dealers as we help them increase inventory turnover efficiency. And for the loan, our service fee rate for our loan facilitation also increased to 6.9% in this quarter compared to 6.1% in the third quarter last year. This is mainly because we provided more diversification selection of loan products to meet various consumer needs and continue to optimize our loan product offering mix. And for the long run, we are confident that we can continue to increase our 2C take rate by adding more value-added service and optimizing our product mix.

And for the delinquency rate improvement, so in this quarter, our M3+ delinquency rate continued to improve as we are enhancing our risk management capability as well as the pre- and post-financing management capability. We're also taking a prudent approach to credit assessment, especially when entering new fields. As China's largest used car transaction platform, Uxin has aggregated massive transaction and user behavior data as well as used car condition data. We have a deeply understanding not only of the vehicles, but also for the people, which gives us unique advantages in evaluating used car residual value and assessing user creditworthiness of risk profile. As we're expanding our used car financing business, we have also accumulated rich experience in risk management and kept optimizing our pre- and post-financing management capabilities. So we will continue to invest and strengthen our risk management system and strive to enhance credit performance to loan facilitation through our platform.

For your last question for the restricted cash. Our financing partner has been pleased with the credit performance of our user and our collateral management capability. As a result, we have been able to negotiate a better term with them, such as deposit values required to hold advanced escrow account. We are confident that as they learn more about our platform and get more confident of our track record, we will be able to continue to improve the terms. In addition, we are looking for a new way to work together with financing partners that will enhance our liquidation -- liquidity position. We will have more updates for you in the coming quarters.

(Operator Instructions) As there are no questions at this time, I'll hand the call back to Nancy. Please continue.

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 near future. Thank you.

Thank you.

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