Uxin Ltd (UXIN) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Uxin's Fourth Quarter and Full Year 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'd 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 Fourth Quarter and Full Year 2019 Earnings Conference Call. On the call today are D.K., founder and CEO; and Zhen Zeng, our CFO. D.K. will review business operations and the company highlights followed by Zhen, who will discuss financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Before we start, I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are made -- are based on management's current knowledge and assumptions about future events that involve known or unknown risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements. 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. Go ahead please.

Thank you, Nancy. Hello, everyone. Thank you for joining our fourth quarter and full Year 2019 earnings conference call. We are pleased to finish off the year on such a solid note with our 2C revenue increased by 65% to RMB 388 million in the quarter. Not only did we record over 28,300 online used car transactions during the quarter but we also increased our total 2C take rate to 11.7%, which is equivalent to a per unit revenue of over RMB 13,700.

2019 marked an important milestone for Uxin as we shifted our strategic focus to 2C online transactions. Throughout the year, we continued to improve our platform by optimizing product and service offering, enhancing service quality and strengthening our fulfillment capability and infrastructure. What encourages us the most is we helped over 97,000 consumers by their car of choose online without the need to visit a dealership in person. This is a truly differentiated and innovative car buying experience for the average consumer in China when compared with the traditional way of spending weeks or even months visiting several dealerships to find the ideal car. With the national-wide online selection of inspected and certified used car, we help customers conveniently buy a car that might not be available in their local market and enable them to find better deals across the country by simplifying comparing each car's price-to-performance. Coupled with the professional service and the convenience we deliver, our business model offers consumers a unique value proposition that reinforce our competitive positioning in the market and increased barriers to entry. This will help us generate long-term sustainable growth going forward.

We are now currently focused on our 2C online transaction business. Divesting from the loan facilitation, salvage car, and 2B business will allow us to devote all our attention and resources towards developing and scaling up our 2C online business. In additional, the divestiture of our loan facilitation business enables us to drive further growth without incurring additional guarantee obligations or credit risk starting from November 2019. This will place us on a much stronger footing for the next stage of our development.

As we move further into 2020, we are keenly aware of the challenge created by both the softening macro environment and volatility created by the coronavirus outbreak. China's used car industry has been severely impacted by the pandemic with the disruption taking place across the industry's infrastructure and the supply chain. During the first quarter, we saw considerable barriers to the used car purchase process and fulfillment due to people reinforced from off-line activities, temporarily closed local used car markets and the dealerships and the challenging used car logistics and title transfer. As a result, our business operations during the fourth quarter were also severely disrupted. While the used car industry has been recovering steadily in recent weeks, and overall operations gradually returning to normal, it will take some time before the market completely digests the overall impact. With this in mind, we expect the outbreak will continue to weigh on our results for the second quarter.

That said, we believe the outbreak presents just as many opportunities as it does challenges and remain confident in our ability to seize the long-term growth opportunities in China's used car market. Buying used car online continues to trend upwards in China. Since we launched our 2C online used car transaction services in earlier 2018, we have been dedicated to transforming the entire buying process and transitioning online each step in the sales process. The outbreak is actually accelerating our online initiative as off-line activities remain significantly constrained. In response to the situation, we immediately implemented two strategies to adapt our business- "service model upgrade" and "cost structure optimization".

On the service model front, we upgraded our products, standardized fees and transformed the way consumers are served and procedures they go through to complete a purchase to facilitate the customers' self-help online buying experience. Instead of assigning a sales consultant to assist in an offline in-person purchase once a customer demonstrates their intention to purchase online. We are now offering online sales consulting and assistance services. Going forward, customer will be empowered to complete the purchase entirely online all by themselves, including learning about and selecting the car, making the payment and filling in all purchase-related documents. During the entire buying process, our online consultants are always available to address any issues that consumer may have in order to facilitate a smooth online transaction. As a result, the service model for online consumption and assistance will simplify the process of servicing customers, increased sales productivity and even truly enable us to significantly reduce sales headcount.

On the cost structure front, in response to outbreak of coronavirus, we immediately implemented a temporary workload based staffing program company-wide to fortify our cash flow and financial position by bringing costs and expenses under careful control. More important, we optimized our cost structure according to our current service model. On top of reducing sales expense by simplifying the buying and servicing process, we are also streamlining the corresponding corporate management structure and the processes. All these adjustments not only enable us to reduce costs and expenses for better unit economics, but also allow us to improve overall operation efficiency.

As the impact of outbreak beginning to fade, we believe the used car market will gradually bounce back in the coming quarters catalyzed by people's growing preference for owning their own car and pent-up demand for used cars the outbreak has created. With an upgraded service model and optimized cost structure already in place, we will benefit from further growth opportunities once the market rebounds. With our focus squarely on becoming a one-stop online destination for buying used car, we are confident we will be able to further solidify our market-leading position as a national wide online used car dealer and create long-term value for our shareholders.

Before I turn the call to Zhen for our financial details, I want to extend our deepest sympathies to all those who faced and continue to face extreme difficulties as a result of the coronavirus outbreak. I want to also express our sincere gratitude to those who fought and continue to fight on the front line to combat the disease. Thank you.

With that, I'd like to turn the call over to our CFO to walk you through the financial results, Zhen, please?

Okay. Thanks, D.K. Hello, everyone. Thanks for joining us today. As D.K. already highlighted we are pleased to see our continuing business generate solid and consistent top line growth and the gross margin improvement throughout 2019. If not taking into account loss from guarantee liabilities and the provision for credit losses, which are primarily associated with our historical financial assets, our adjusted loss from continuing operations continued to narrow for the fourth consecutive quarter of RMB 135 million in the fourth quarter of 2019.

As we continue developing our 2C online used car transaction business without incurring additional credit risks going forward, as a result of the divestiture of our loan facilitation business, we have also taken active measures to assess and manage the impact from the guarantee obligations associated with our historical loans that were not transferred to Golden Pacer.

In the fourth quarter of the last year, a series of regulations in relation to lending and debt collection including the prohibition on extreme debt collection practices were jointly issued by the relevant authorities. This adversely affects the delinquency rate as well as the collection and repossession rate in the connection with our historical loans. After reevaluating the loan performance, we made a significant provision for the credit losses and incurred additional loss from guaranteed liabilities for the fourth quarter. Moving into the first quarter of 2020, in response to the new accounting standard for credit losses effective on January 1, 2020, and the outbreak of coronavirus, we have fully reviewed the quality of our historical financial assets again and carefully assessed other relevant impacts. As a result, a significant provision for credit losses and loss from guarantee liabilities will be provided for the first quarter of 2020. But we believe the impact from the fluctuation of asset quality on our future cash flow will be limited with careful control and proper solution already in place to manage the guarantee obligations associated with this portion of loans. Under the current arrangement with our financing partners, we believe the cash outflow for buying back future defaulted loans as a result of our historical guarantee obligations will be carefully controlled at a limited level going forward.

Looking ahead, as D.K. just mentioned, the transformation of our service model will help us effectively reduce corresponding costs and expenses and improve operational efficiency. In addition to reducing sales headcount by providing online consulting and assistance services, we are also able to reduce the inspection-related costs by focusing on selecting and inspecting higher price-to-performance used car based on our accumulated experience and knowledge in the inventory.

Benefiting from the streamlined cooperation management structure and process, we are able to bring our headquarters-related expenses to an optimized and efficient level. In addition, our cash position will be strengthened in the coming quarters as a result of our recent divestiture and sufficient to support our business development in the next 12 months. This will provide us a greater flexibility to invest in our future and generate long-term sustainable growth.

Now let me walk you through our financial details for the fourth quarter and full year 2019. Please note that the results I will discuss are related 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 at the bottom of our earnings release.

In the fourth quarter, total revenue increased by 61% to RMB 466 million from RMB 289 million in the same period last year. The increase was primarily due to the increases in 2C transaction volume, GMV, commission rate and VAS take rate.

Our total 2C revenue was RMB 388 million, up 65% year-over-year from RMB 236 million in the same period last year. Online used car transaction volume increased by 26% year-over-year to 28,302 units, and its corresponding GMV increased by 32% year-over-year to RMB 3,308 million.

Looking at two revenue streams of our 2C business. Commission revenue was RMB 207 million, up 69% from RMB 123 million in the same period last year, primarily due to the increase in the transaction volume, GMV and commission rates. The unique value proposition we are now able to offer consumers, along with an improved user experience and higher pricing power, resulted in the commission rate expanding to 6.3% from 4.9% in the same period last year.

Value-added service revenue was RMB 180 million, up to 60% from RMB 113 million in the same period last year primarily due to the increases in the transaction volume, GMV and VAS take rate. VAS take rate increased to 5.5% in the fourth quarter of 2019 from 4.5% in the same period last year, primarily due to our higher pricing power as a result of our increasingly optimized and diversified services.

Looking at other businesses. Other revenue is RMB 79 million in the fourth quarter of 2019, up 46% from RMB 54 million in the same period last year.

Cost of revenues increased by 21% year-over-year to RMB 190 million. The increase was primarily due to an increase in salaries and benefits for employees engaged in car inspection, quality control, customer service and aftersales services as well as the increase in the fulfillment cost driven by an increase in transaction volume.

Gross profit increased by 109% to RMB 276 million from RMB 132 million in the same period last year. Gross margin increased to 59% in the quarter from 46% in the same period last year, driven by the growing economies of scale and optimized cost structure.

Total operating expenses was RMB 862 million. Non-GAAP operating expenses, excluding the impact of share-based compensation were RMB 853 million.

Sales and marketing expenses decreased by 31% year-over-year to RMB 255 million. The decrease was driven by our continuous effort to enhance operating efficiency. Share-based compensation expenses associated with the sales and marketing expenses were 0 during the quarter. As a percentage of total revenue, sales and marketing expenses excluding share-based compensation expenses decreased to 55% from 127% in the same period last year.

And G&A expenses increased by 20% to RMB 125 million. The increase was mainly due to an increase in salaries and benefits as well as the professional fees. G&A expenses excluding share-based compensation expenses were RMB 8 million were RMB 116 million. As a percentage of total revenue, G&A expenses excluding share-based compensation expenses were 25% compared with 12% in the same period last year.

R&D expenses increased by 26% to RMB 41 million. The increase was primarily due to the increase in IT infrastructure services related expenses. R&D expenses excluding share-based compensation expenses of RMB 0.6 million were RMB 40 million. As a percentage of total revenues, R&D expenses excluding share-based compensation expenses were 9%, a decrease from 11% in the same period last year.

Loss from guarantee liabilities were RMB 170 million. We incurred guarantee liabilities associated with the remaining guarantee obligations from the portion of historical facilitated loans, which were not transferred to Golden Pacer. In addition, due to the impact from a series of regulation relating to the lending and debt collection in the fourth quarter of 2019, the performance of the aforementioned portion of loan were adversely affected, which led to a significant loss from guarantee liabilities in the reported quarter.

Provision for credit losses was RMB 271 million, compared with 0 in the same period last year. Due to the impact of aforementioned new regulations in relation to lending and debt collection, an impairment was incurred as a result of adversely affected performance of the company's financial assets, which mainly includes loans are recognized as result of payment under the guarantee and financial lease receivables.

Loss from the continuing operations was RMB 586 million, compared with RMB 368 million in the same period last year. If not taking into account guarantee liabilities and provision for credit losses, loss from continuing operation would be RMB 144 million.

Non-GAAP loss from our continuing operations, which exclude the impact of share-based compensation was RMB 577 million, compared with the RMB 300 million in the prior year period. If not taking into account guarantee liabilities and provision for credit losses, non-GAAP loss from continuing operation would be RMB 135 million.

Net loss from continuing operation was RMB 589 million, compared with RMB 392 million in the same period last year. If not taking into account guarantee abilities and the provision for credit losses, net loss from continuing operation would be RMB 148 million.

Non-GAAP net loss from continuing operations which exclude the impact of share-based compensation was RMB 580 million in the quarter, compared with RMB 323 million in the same period last year. If not taking into account guarantee liabilities and provision for credit losses, non-GAAP net loss from continuing operation would be RMB 139 million.

Turning to our cash position. As of 31st of December 2019, we have a cash and cash equivalent of RMB 478 million. That's our fourth quarter results.

Now let me briefly go through some highlights of our full year results.

For full year 2019, total revenues increased by 141% to RMB 1,588 million from RMB 659 million in the prior year. Total 2C revenue was RMB 1,347 million, up 265% year-over-year from RMB 370 million in the prior year. Online used car transaction volume increased by 154% year-over-year to 97,100 units, and its corresponding GMV increased by 155% year-over-year to RMB 11,268 million.

Looking at the two revenue streams of our 2C business, commission revenue was RMB 711 million, up 250% from RMB 203 million in the prior year. Commission rate increased to 6.3% from 4.6% in the prior year. Value-added service revenue was RMB 636 million and up 282% from RMB 166 million in the prior year. VAS take rate increased to 5.6% from 3.8% in the prior year.

Gross profit increased by 274% to RMB 899 million from RMB 240 million in the prior year. Gross margin increased to 57% in 2019 from 36% in the prior year.

Loss from continuing operations was RMB 1,292 million, a decrease from RMB 2,488 million in the prior year.

Non-GAAP loss from continuing operations, which exclude the impact of share-based compensation, was RMB 1,208 million, a decrease from RMB 1,486 million in the prior year.

Net loss from continuing operation was RMB 1,328 million, compared with RMB 1,352 million in the prior year.

Non-GAAP net loss from continuing operations, which exclude the impact of share-based compensation was RMB 1,243 million into 2019, a decrease from RMB 1,535 million in the prior year.

Moving on to our guidance. For the 3 months end of March 31, 2020, taking into account of the factors mentioned earlier regarding the coronavirus and the business divestiture, we expect our total revenue from continuing operations to be in the range of RMB 80 million to RMB 85 million. This forecast reflects our current and primary view on the market and operational conditions and is based upon the current situation and uncertainty associated with the coronavirus outbreak, which are subject to change.

That concludes our prepared remarks.

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

(Operator Instructions) Your first question comes from the line of Ronald Keung from Goldman Sachs.

(foreign language)

So 2 questions. Firstly, it's just given the current virus situation and your first quarter guidance of revenue down around 78% to 79%, which is the RMB 80 million to RMB 85 million. Just want to hear how are we seeing the March trends and the recovery path recently in April? And when do we see or expect levels to return to more normalized level through the year? And my second question will be on your loan business, which has been divested, but it seems like there's still some that haven't moved on to Golden Pacer. So at the current situation in the current level what should we expect to see on impact more on a cash flow perspective or from now on? Or would it be more on noncash P&L, well I just want to hear, is there anything from the cash flow on your cash that we should be aware of?

(foreign language)

[Interpreted] So because of the outbreak of the coronavirus, the used car sector in Q1 has been significantly disrupted mainly because the close of the used car market and the vehicle bureau locally, they don't go back to full operation. And the second thing is that because of some of the highway has been closed, we cannot deliver the car to the consumers. So the fulfillment has been constrained during the period of time. So basically, all the transaction volume in Q1 happened in January before the Chinese New Year. So volume in February and March, basically there is no transaction volume happened in these 2 months.

(foreign language)

[Interpreted] Yes. So entering into April, we didn't see significant pickup in the volume. So based on our current knowledge, we think it will be the second half of the year we will see significant recovery in our volume. So in Q2, basically, the transaction volume will be constrained by 3 factors. The first one is because -- although the outbreak has been largely contained in China, but there are a few local governments have adopted strict measures in response to the outbreak. And also because of the softening macro environment, consumers' ability to afford to buy the car will be the situation now.

(foreign language)

[Interpreted] Yes. For those consumers who are very eager to buy a car at the very moment they normally want to have the car within a couple of days but our current fulfillment period time normally lasts for around 2 weeks, so including the logistics, title transfers and vehicle registration, et cetera. So we are not able to meet this type of demand for consumers who are not willing to wait.

(foreign language)

[Interpreted] So the overall used car demand in the market now is basically are the cars with price range at low end or to mid-end but if you look at our average selling price on our platform is basically RMB 120,000. So our used car selection price range is basically mid- to high end. So this type of cars, if we look at our transaction volume, it will recover a little bit slower than the low priced end cars.

(foreign language)

[Interpreted] Yes. Our full recovery will depend on the development of the outbreak. So based on current situation, we expect to see a significant recovery starting from the second half of this year. If we use last December as the normalized level, we expect to see we can return back to that level in the first half next year 2021.

Ronald, this is Michael here. So I'll address your second question. So for the cash flow and the provision for guarantee and credit risk, so given the regulatory changes in the last fourth quarter and the coronavirus outbreak in the first quarter, we have fully reviewed our historical financial assets and assessed the relevant impact on the asset quality. In the Q4 last year, we made a provision for credit losses of about RMB 270 million and incurred a loss from guarantee liabilities of RMB 170 million. In this Q1, taking into the account of the new accounting standards for credit losses, which, at the same time, taking consideration of the coronavirus outbreak, we will provide a significant provision for credit losses and loss from guarantee liabilities as well to sufficiently reflect the impact.

This item will hit our P&L but won't affect the cash flow too much. Overall speaking, so as we have divested our loan facilitation business since last November, starting from this point, we don't need to take any guarantee obligations for the new loans referred through our platform. So we now can drive our business growth without incurring any guaranteed credit risk or cash outflow in our guarantee obligations.

Regarding our historical loans, more than half has been transferred to Golden Pacer already, and the rest are still with us, but we already have a proper solution in place to manage the guarantee obligations and corresponding cash flow. Xinwang bank-relatable loans are the portion that has been transferred to Golden Pacer. So for this part, the Golden Pacer will take fully guarantee obligations for this historical portion, and be held responsible for buying back further default loans. So there won't be any cash outflow from us. Instead, we can have additional cash inflow going forward from this portion of loan when Xinwang bank-related restrict cash can fully cover the actual loss from the guarantee liabilities. Meaning if there eventually will be a net cash inflow after the majority of this portion of loan, we will be entitled for 85% of such amount of net cash.

Regarding the loan that we do not transfer, over 90% are loans for WeBank and the remaining small portion sitting on our own balance sheet. So for the WeBank portion under the current arrangement with our financing partner, --the future cash outflow as a result of corresponding guarantee will be controlled at a limited level and won't impact our cash position much.

For the remaining small portion on our own balance sheet, it represents the loan we historically bought back and the guarantee. So going forward, we will only be cash inflow from this depending on how much we can collect back. So overall, we believe the impact of the rest loan facilitation on our operating cash flow will be limited. It also will ease out, along with the majority of all these things. Additionally, our cash position can be strengthened as we will receive additional cash as a result of a business divestiture and sufficient to support our business development in the next 12 months.

Your next question comes from the line of Eddy Wang from Morgan Stanley.

(foreign language) Please let me translate myself. So as you mentioned that the COVID-19 outbreak has accelerated your transformation of the entire buying process and transaction online of each step in the sales process, would you please elaborate more about have you witnessed any long-term trend in the used car industry that you believe such online transformation will benefit? And how do you compare with the online transformation model versus your major competitors?

(foreign language)

[Interpreted] And so our key strategy for 2020 is to accelerate our progress and degree of enabling online car transactions.

(foreign language)

[Interpreted] Yes. So we believe the online car transactions can bring unparalleled customer value at the same time can create great growth opportunities for ourselves as well.

(foreign language)

[Interpreted] With our online used car transaction model through our online national wide collection of used cars and services, we can provide consumers with high price-to-performance used cars as well as a simplified and transparent purchase process as well as the well-rounded aftersales warranty services.

(foreign language)

[Interpreted] One way of connecting online to a higher degree, our operations will become more efficient, which will bring our cost and expenses to a much lower level. So on one hand, the consumers can enjoy better prices, on the other hand, we can also continue to improve our financial performance during the process.

(foreign language)

[Interpreted] The outbreak actually accelerated the transition to online used cars transactions because of being very cautious about personal offline contact amidst the outbreak and the consumers' growing preference for online purchases, their acceptance for buying used cars online actually also get increasingly higher as well.

(foreign language)

[Interpreted] Following the outbreak, we have fully devoted ourselves to upgrading our online transaction model, so we have been working on 3 areas. The first one is we transformed and upgraded our product and service process so consumers will be able to complete the online purchase in a more simplified and straightforward way while without the need to be assisted by our offline sales.

(foreign language)

[Interpreted] Yes, so second, based on our analysis in our transaction data we have accumulated extensive activities and the know-how in selecting high-performance used car inventory. So it will not only help consumers to find a car of their choice more quickly and accurately, in return, it can also help us to reduce our inspection-related costs.

(foreign language)

[Interpreted] So the third one is we upgraded our service package. So now consumers can have a 3-day free test drive, also we extended our 30-days quality lease return policy to one year and extended the warranty coverage as well. So all of these will eliminate consumers' concerns to buy a used car online.

(foreign language)

[Interpreted] With all these measures in place, our cost structure will be significantly changed and therefore optimized with more accurate selection of used car inventory, and the consumers preference of online service, we are able to reduce cost and the expenses accordingly. Our present sales conversion and the simplified service process will also help us improve our operational efficiency, all of this will eventually be reflected in our optimized cost structure.

(foreign language)

[Interpreted] Our upgraded strategy this year is actually of long-term significance. Our optimized cost structure will enable us to narrow our losses and take us to the breakeven point at a lower volume level and will strengthen our profitability as well.

(foreign language)

[Interpreted] At the same time, we now can develop more resources and energy to create customer value for our consumers. So all these changes will not only ensure our business continuity during the coronavirus outbreak, but also creates more solid conditions for our future growth once the market rebounds.

(Operator Instructions) There are no further questions at this time. I would like to hand the conference back to Ms. Nancy Song. Please continue.

Thank you again for joining our call today and for your continued support in Uxin. We look forward to speaking to you soon in the future. Thank you.

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

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