Uxin Ltd (UXIN) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to 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 2019 Earnings Conference Call. Today, D.K., our Founder and CEO; and Zhen Zeng, our CFO, will discuss our financial results for the third quarter. Following the prepared remarks, D.K. and Zhen will be available to answer your 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 the 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 statements, except as required under applicable law. 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, D.K., please.

Thank you, Nancy. Hello, everyone. Thank you for joining our third quarter 2019 earnings conference call. We are pleased to report a solid set of results for this quarter. Our total revenue increased by 33% year-over-year to RMB 461 million, exceeding the high end of our previous guidance. In particular, 2C revenue recorded another robust year-over-year growth of 247%. And even more encouragingly, our adjusted net loss narrowed notably by 40% year-over-year and 19% quarter-over-quarter to RMB 268 million, demonstrating the results from our strong commitment to control costs, enhance operating efficiency and improve margin profile.

Looking at our 2C business in further detail. We completed over 23,500 online used car transactions during the quarter, reflecting strong year-over-year growth of 107%. As some cities and regions have adopted the new emission standard China Six starting from July and don't allow car with lower emission standards to register locally, we did experience a certain impact from this policy change, which resulted in relatively flat quarter-over-quarter transaction volume. Despite the impact, we are very pleased that our unique value propositions and strong monetization ability helped to further increase our 2C take rate to 11.6% from 11.2% in the second quarter and 7% a year ago. This translated into per-unit revenue of around RMB 14,000 for the third quarter, up from about RMB 13,000 in the second quarter.

Looking ahead, the used car market is typically quite resilient. As more used car inventory meeting the new emission standard becomes available on the market, the sector will gradually digest the impact from policy changes. We are also confident that we will be able to deliver strong sequential and year-over-year growth for online transaction volume in the coming year-end peak season. Underpinned by our key customer values, we believe our monetization ability will also get stronger along the way.

On the franchise model front, we continued to penetrate into lower-tier cities by expanding the franchise network to over 1,200 stores. Our franchisees contributed over 35% of total 2C transaction volume for this quarter.

Moving on to our 2B business. We recorded a transaction volume of over 30,000 used cars from our B2B auction platform. Although the volume declined year-over-year as a result of the continuing shift of our strategic focus towards our 2C business, we slightly increased our 2B take rate to 4.7% in this quarter from 4.5% in the prior year period. Well known as one of the most efficient channels for dealers to source their inventory, our B2B auction platform will continue to serve as part of our important product and service offerings to our dealer customers.

Before Zhen provides a deeper overview of our third quarter financial details, I'd also like to highlight the key areas we have been and will continue focusing on, in order to achieve sustainable growth over the long term.

First, we are fully concentrated on executing our strategy of focusing on online used car transactions. To drive our already leading position as an online used car dealer, we are focused to maximize our key value propositions for consumers, which are a nationwide selection of used cars, better prices, a one-stop online purchasing experience and high-quality professional sales consultant services. We believe these values differentiate us in the market and will enable us to stay ahead of the competition, which in turn will further enhance our ability to monetize online used car transactions.

Second, we are committed to continuing to enhance operating efficiency. We have been and will continue to streamline our business operators -- operations across the board. To highlight a few of our ongoing initiatives in these areas --

In term of inspection, we continued to improve the inspection-to-sales conversion, which is to sell more used cars while keeping the number of cars inspected stable or even reduced to some extent. We have been continuously optimizing the inventory mix inspected and listed on our platform by selecting the inventory which meets our customers' preference and has desirable cost preference. For example, we focus more on inspecting the cars which meet our target price range and better cater to our customers' demographic. We also prioritize inspection on those which meet certain price-to-performance criteria or freeze inspection on those which we already have quite enough SKUs available for the moment. This makes our real-time inventory essentially get more exposure and become more marketable, which in turn saves our inspection resources and effectively increase productivity.

In terms of fulfillment, we are able to continuously enhance logistics planning as our transaction volume is growing on a much larger scale than previously. With more used cars sold and delivered through our network, we have not only gained stronger bargaining power to get better terms when negotiating with car shipping companies but also become better positioned to optimize route planning to make sure each delivery truck can be loaded as fully as possible for car transportation. This has effectively lowered our per-unit delivery cost.

In terms of traffic acquisition, we continued to optimize our traffic acquisition channel mix by allocating more resources to those generating higher-quality and more cost-effective sales leads. With our enhanced sales productivity and expanded salesforces team in both our direct and franchise model, we are confident that we will gradually increase the lease-to-sales conversion going forward as we drive higher transaction volume without having to invest more in traffic acquisition than our current level.

All these efforts in cost control and efficiency measures contributed to the improved gross margin and narrowed losses in the third quarter.

With respect to the near term, as we continue to execute on these top priorities, we are confident that we will be able to drive topline growth, improve margins and narrow losses as this year concludes.

And with respect to the long term, we are committed to building the best destination for consumers to buy used cars online in China. We believe the growing traction from our target customers, coupled with our efforts to effectively manage our business, will translate into our long-term sustainable growth and profitability in the coming years, which, in turn, will create long-term value to our shareholders.

With that, I would like to turn the call over to our CFO to go over the financials. Zhen, please.

Okay. Thanks, D.K. Hello, everyone. Thanks for joining us today. As D.K. highlighted, we are very pleased to report a solid third quarter, during which our gross margin further improved and operating and net losses significantly narrowed.

In addition to the cost control and efficiency efforts D.K. mentioned, we have also streamlined our headquarter-related operations, such as the administrative management and R&D processes by optimizing internal online business management systems.

Moving forward, prudent cost control and operating efficiency will be an ongoing focus area for us. We are confident that this, coupled with our superior monetization ability, will help to further narrow our losses towards the end of this year.

At the same time, we are confident that our business is well supported by our current cash position. First, divesting the loan facilitation-related business will significantly lower our cash requirement. Second, we believe our losses will continue to narrow as a result of our ongoing efforts in cost control and enhancing operating efficiency. Third, pursuant to the definitive agreements we entered into with Golden Pacer, the working capital associated with the divested loan facilitation business that we advanced to certain financing partners on behalf of Golden Pacer during the third quarter will be returned back to us in due course when the transaction is closed. Fourth, we expect to receive an aggregate cash consideration of USD 100 million after the closing of the transaction.

All of this will contribute to our cash position, and coupled with our continuous efforts to enhance our monetization ability and operating efficiency, we believe we can build a more sustainable and profitable business over the long run.

Now let me walk you through our financial details for the third quarter. Please note that the financial impact of the proposed divestiture has already been reflected in our third quarter results, and all I will discuss relates to continuing operations only. All numbers are in RMB unless otherwise stated. Also, please note that some numbers I refer to are non-GAAP numbers. You can find a reconciliation of these numbers in our earnings release.

In the third quarter, total revenues increased by 33% to RMB 461 million from RMB 346 million in the prior year period. The increase was primarily due to the increases in 2C transaction volume, GMV, commission rate and the value-added take rate.

Drilling down to our business pillars.

In terms of our 2C business, total 2C revenue was RMB 328 million, representing an increase of 247% year-over-year from RMB 94 million in the prior year period.

Online used car transaction volume increased by 107% year-over-year to 23,566 units, and its corresponding GMV increased by 110% year-over-year to RMB 2,828 million.

Moving on to more details:

Commission revenue was RMB 176 million, representing an increase of 193% from RMB 60 million in the same period last year, primarily due to the increases in the transaction volume, GMV and commission rate. Benefiting from our stronger value propositions to consumers, improved user experience and higher pricing power, the commission rate increased to 6.2% from 4.5% in the same period last year.

Value-added service revenue was RMB 151 million, representing an increase of 342% from RMB 34 million in the same period last year, primarily due to the increases in the transaction volume, GMV and VAS take rate. The VAS take rate increased to 5.4% from 2.5% in the same period last year due to our higher pricing power brought by our optimized and diversified services.

In terms of our 2B business:

2B transaction facilitation revenue was RMB 72 million, representing a decrease of 63% year-over-year. Our take rate for 2B transaction facilitation slightly increased to 4.7% from 4.5% in the prior year period.

Cost of revenues increased by 10% year-over-year to RMB 207 million. The increase was primarily due to the increases in salaries and benefits of employees engaged in car inspection, quality control, customer service and after-sales service, as well as the increase in fulfillment cost, which was correspondingly driven by the increase in the transaction volume.

Gross profit increased by 61% to RMB 255 million from RMB 158 million in the prior year period. Gross margin increased to 55% in the quarter, compared to 46% in the prior year period, driven by better economies of scale and optimized cost structure.

Total operating expenses were RMB 510 million. Non-GAAP operating expenses, excluding the impact of share-based compensation, were RMB 511 million.

Sales and marketing expenses decreased by 26% year-over-year to RMB 330 million. The decline reflects our continuous efforts to enhance operating efficiency. Sales and marketing expenses, excluding share-based compensation expenses of nil, as a percentage of total revenues decreased to 72% during the quarter from 130% in the prior year period.

G&A expenses decreased by 24% to RMB 126 million. The decrease was primarily attributable to the decrease in share-based compensation expenses. G&A expenses, excluding share-based compensation expenses, were RMB 126 million, representing 27% of total revenues in the quarter, relatively flat compared to the prior year period.

R&D expenses increased by 58% to RMB 54 million. The increase was primarily due to the increase in salaries and employee benefit expenses. R&D expenses, excluding the impact of share-based compensation expenses, were RMB 55 million, representing 12% of total revenues in the quarter compared to 10% in the prior year period.

Loss from continuing operations was RMB 253 million, a decrease from RMB 490 million in the prior year period.

Non-GAAP loss from continuing operations, which excludes the impact of share-based compensation, was RMB 254 million, a decrease from RMB 418 million in the prior year period. Non-GAAP loss from continuing operations as a percentage of total revenues was 55%, a significant decrease from 121% in the prior year period.

Net loss from continuing operations was RMB 267 million, a decrease from RMB 517 million in the prior year period. The narrowed net loss was primarily due to the better economies of scale and greater operating leverage generated from our continuing efforts to streamline business operations and enhance operating efficiency.

Non-GAAP net loss from continuing operations, which excludes the impact of share-based compensation, was RMB 268 million in the quarter, a decrease from RMB 445 million in the prior year period. Non-GAAP net loss from continuing operations as a percentage of total revenues was 58%, decreasing significantly from 129% in the prior year period.

Turning to our cash position. As of September 30, 2019, we had cash and cash equivalents of RMB 627 million.

Moving on to guidance.

Factoring in the divestiture of our loan facilitation related business to Golden Pacer, we expect total revenues for the fourth quarter of 2019 to be in the range of RMB 540 million to RMB 560 million.

As we are focused on cost control and efficiency measures to build a more sustainable and profitable business in the long run, we will also provide guidance on near-term operating profit expectations going forward. We expect non-GAAP adjusted loss from continuing operations to be in the range of RMB 150 million to RMB 170 million for the fourth quarter of 2019.

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

(Operator Instructions) The first questions comes from the line of Eddy Wang from Morgan Stanley.

(foreign language) I have 2 questions. The first is about ASP. We have witnessed that the ASP of the 2C business actually has been increased in the past 3 quarters. So in the third quarter, I think the ASP has almost reached around RMB 120,000, which is almost the same level as the average ASP of new car in China. What do you think of the trend of this ASP in the next few years? And how do you balance the ASP versus the transaction volume? And what do you think the implied revenue per unit level in the near term and in the long term?

The second question is about the competition. Since we have achieved a narrow loss in this quarter and our guidance also implies that a further narrow loss in the next quarter. So I think the overall -- the cross-regional transaction business model have been proven. So that's why I think some of the major competitors are actually also launched this cross-region transaction business. Have you viewed any direct competition from these competitors in the similar business? Or do you think it's just in the -- it's still have a lot of room for us to gain share even if there's the competition from the major competitors?

(foreign language)

[Interpreted] Yes. So our -- on our platform, we actually provide a very full price range for our cars from RMB 30,000 to up to RMB 1 million. So our current ASP is -- like you said, it is around RMB 120,000. So I think mainly it comes from 2 reasons. The first one is regarding to the relatively higher car price range, it's more with younger car age. So these used cars more catered to the clientele who care more about the services or the -- aftersales guarantees or wider selection of used cars.

(foreign language)

[Interpreted] Yes. So if we look at the mature market in the U.S. like CarMax or Carvana. For CarMax, their average selling price is about USD 22,000. For Carvana, it's about USD 21,000. But for -- if we look at the overall market in the U.S., the average selling price is about only USD 10,000. So this is quite similar to China's market condition. So for us, we feel very encouraged is that -- we are very encouraged by our current ASP because we can sell like RMB 5,000 used car or a RMB 120,000 used car, but the cost incurred is quite similar regarding the inspection cost or delivery cost. But different car price equals to different per unit revenue we can earn if we look at -- if we charge the same take rate.

(foreign language)

[Interpreted] Yes. So in terms of the volume and car price, I think it's not the one or the other. So our current focus is more to maximize our revenue scale and healthy and sustainable profitability that comes along with this high-quality revenue.

(foreign language)

[Interpreted] Yes. So our revenue -- per unit revenue increase is actually an evidence of consumers' recognition of our values brought by our online used car transaction product offerings. So we won't drive the volume by compromising per unit profitability. Instead, we will drive the volume growth as we continue to enhance our online used car transaction services. And the more consumers naturally will be attracted to buy cars online from us. So we believe this will help us to reach a sustainable profitability in the longer term.

(foreign language)

[Interpreted] Yes. We do observe some of our peers in the market are copying our online used car transaction model at pixel level. So this is actually a strong proof that we did the right thing 2 years ago to choose such business model.

(foreign language)

[Interpreted] So we believe online used car transaction is definitely the future trend. So we believe online -- this market is still a blue ocean market. So it's large enough to have a second player.

(foreign language)

[Interpreted] Yes. So the competition in the online used car transaction area is actually multidimensional. So it has set a very high bar for company's ability to organize, operate and manage the business in a highly efficient manner, so -- and the abilities to provide high-quality customer services as well as to operate a highly efficient and stable supply chain. So as the first mover in the market, we have accumulated massive know-how and expertise and build strong competitive advantages here. So we are very confident to win this competition for sure. Thank you.

The next questions comes from the line of Ronald Keung from Goldman Sachs.

So I had 2 questions, and then I will translate it to Chinese. Firstly, it's on the industry. As you mentioned, the [China Five/China Six] (corrected by company after the call) has impacted sort of industry growth this year, not only new cars, also used car, do we see any signs of this bottoming? Or do we -- will this impact kind of drag on for a few more quarters before we see any potential uptick? And within the growth in this quarter, can you share just how the lower-tier city growth has been versus high-tier city? I just want to see how growth has been trending for these markets, particularly, you mentioned about the strong volumes from the franchisees.

My second question would be, given that the Golden Pacer restructuring is mostly behind us, can you share just how the current management team, D.K. and rest of team how you are spending your latest focus and time into -- with the finance business now not -- no longer with the group, what are we focusing on in -- particularly in the cost side and in user experience? I just want to hear how the management team is doing in the latest restructured entity.

(foreign language)

(foreign language)

[Interpreted] Yes. So we did see the new car market is declining and it's worsening now. So the used car market also took some hit. For the used car market, specifically it -- the growth rate is slowing, mainly because of 2 reasons. One is, like you said, the new emission standard adopted in a few regions like Zhejiang province or Hebei or Guangdong province. So for us, it affected about 25% of our Q3 volumes.

(foreign language)

[Interpreted] We won't expect the policy will be further adopted by other cities because in -- back in 2016, the state government have already issued the regulation to lift the restriction on the car transported into -- across regionally, so.

(foreign language)

[Interpreted] Yes. We will see the market will be digesting the policy changes. And in the next 2 or 3 quarters, the market will be picking up, so -- mostly because there will be more used car inventories meeting the new emission standard will be available on the market.

(foreign language)

[Interpreted] So the other factor is actually from the new car price declining side. So from mid this Q2, we did see the new -- automakers have been cutting their new car prices to boost sales. So this will put some short-term pressure on the used car market because it affects the price to performance of the used cars.

(foreign language)

[Interpreted] Well, I think the new car price cut has already reached to bottom to some extent. So the impact from new car market will be minimizing over time over into next year.

(foreign language)

[Interpreted] So the transaction volume on our platform from the lower-tier cities in Q3 was basically similar to our Q2 level, about 40% of our total volume. And the growth rate between high-tier cities and lower-tier cities on our platform are also pretty similar.

(foreign language)

[Interpreted] Yes. So the first action we take is we leverage big data analytics to improve our inventory mix available online on our platform. So to target the most suitable inventory, we can actually downsize the number of cars impacted. So we can see, this year, we actually inspected less cars than last year. But the transaction volume is actually quite higher than last year's level. So this will help us to reduce the per unit inspection cost, and we can also help consumers to better identify the better price-to-performance cars on our platform as well.

(foreign language)

[Interpreted] Yes. So the second action we take is we enhance the customer satisfaction in terms of the fulfillment such as the timeliness of delivery and the consistency of the car's condition between consumers see the video inspection report online and the actual car they see when they receive the car. So the increase in satisfaction actually help us lower our current turn rate effectively.

(foreign language)

[Interpreted] Yes. So buying cars online is a pretty -- very new way. So our sales consultants need to be fully prepared to convert the consumer to buy cars online. So we also upgraded our CRM system by leveraging the AI technology so we can better recommend the cars to our consumers. And we also build up this very high -- highly effective sales consultant -- sales assistance system to enhance the professionalism of our sales reps. So this will also enhance our customer satisfaction and the conversion rate as well.

(foreign language)

[Interpreted] Yes. So the fourth area is on logistics. So we optimized our logistics planning by upgrading the former 2-part logistics to 3-part logistics. We increased the portion of the main road versus the brown road. So currently, the main road accounts for about 60% of our total logistics distance. So it will effectively lower the per unit delivery cost and also increase the full-load rate as well, and also make sure the car can be delivered to the consumers' doorstep as soon as possible in a timely manner.

(Operator Instructions) The next questions comes from the line of Ashley Xu from Crédit Suisse.

(foreign language) I have 2 questions. One is about users' acceptance on online car purchase without seeing the cars off-line. Is there any user metrics that could be shared? And second question is on the cash position. How much receivables would we have from Golden Pacer in 4Q, given we have made some deposits on behalf of them? And also what's our plan on the use of the cash together with the USD 100 million proceeds from the transaction?

(foreign language)

[Interpreted] Yes. So it's true that still there are many consumers go off-line to check the car and buy the car. Buying cars online is a totally new experience for consumers. So it will take some time for consumers to shift their shopping habit. But what we do see is that there are increasing number of consumers buying cars online from Uxin. So this year, we are looking at 100,000 online used car transactions from our platform, so equals to the same number of consumers actually accepted this way of buying cars online.

(foreign language)

[Interpreted] Yes. So buying cars online is definitely the future trend. So buying cars online also have the noncomparable advantages over going off-line. So we can provide a much wider selection of used cars from nationwide and also because we don't have a fixed cost of the off-line stores, we can offer better prices to consumers. So we are able to also provide a one-stop solution online to consumers, which cannot be provided by the off-line stores. So the convenience we can deliver to the consumer also help us.

Okay. Thanks, Ashley. I'll address your second question. So I more likely to give you the overall cash position of our current status. So I think our business is well supported by our current cash position. First of all, divesting the loan facilitation business has significantly lowered our cash requirements. We no longer need to put cash deposits as restrictive cash with the financing partner or buyback the default loans. So both will lift the pressure on our working capital.

So second is that without the loan facilitation business under the listco, our bottom line will be a reasonable indicator of our cash flow performance. As we continue to take cost control measures and enhance efficiency, we believe we can keep narrowing the losses and minimizing the cash outflow in distance.

And address your question per the definitive agreements we entered into with Golden Pacer, this quarter, we still advanced some working capital associated with the divestiture. After the transaction is closed, the portion of the cash will be returned back to us in due course.

Last, we also expect to receive an aggregated cash consideration of USD 100 million associated with the divestiture after the closing.

So collectively, all of this will contribute to our cash position. Again, with our focus on enhancing monetization ability and operating efficiency, we believe all will contribute to our long-term sustainable growth. Thank you, Ashley.

We have reached the end of question-and-answer session. I would now like to hand the conference back to Nancy for closing remarks.

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.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]