Uxin Ltd (UXIN) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the quarter ended June 30, 2020. (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 earnings conference call for the quarter ended June 30, 2020. On the call today are D.K., our Founder and CEO; and Zhen Zeng, our CFO. D.K. will review business operations and company highlights, followed by Zhen, who will discuss financials and guidance. They both will 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 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 our filings with the SEC.

With that, I will now turn the call over to our CEO, D.K., please go ahead.

Thank you, Nancy. Hello, everyone. Thank you for joining our earnings conference call today. In the most recent 2 quarters, the impact of coronavirus pandemic continued to create challenges for overall economy. Given the current macro environment, we are glad that we successfully completed the divestiture of our loan facilitation business and relieved ourselves of the historical guarantee liability. With this business change in place, the financial impact of divesting the loan facilitation business, settling its financial guarantees and divesting the B2B business was and will continue to be reflected in our financial statements for the quarter ended June and September 30, 2020.

Along with this business divesture, we have shifted our business strategy from multi-business streams to core focus and shifted our growth strategy from being a financing-driven to one that is used car quality and service-oriented. Under the previous financing-driven approach, while we experienced the rapidly transaction volume growth, we were also weighed down by a significant underlying credit risk and constraint on cash flow because we had to take all the guarantee liabilities and buy back the defaulted loans when these delinquency assets met certain criteria. Now with this impediment behind us, we enter into a new phase of development as a transaction-oriented online used car dealer, where our focus is squarely on offering high-quality value-for-money used cars and premium purchasing services.

We believe that continuously enhanced used car quality and purchasing services is the best way to maximize customer value and gain more customer trust and word-of-mouth referrals. Although it takes time to build a reputation and grow at scale with this used car and service-oriented approach, we believe that this is the key to maintaining our long-term competitive advantages and achieving sustainable growth.

In order to create the best value and experience across the entire value chain for our customers, we upgraded our used car transaction process and migrated every sales step online. In transforming our business, we have upgraded the key points throughout our service process. We built a group of inventory selectors to curate value-for-money used car from across the country, ensure that the highest standards of car quality are met by careful inspection; simplify our pricing structure to facilitate customers' purchase decisions; offer professional consulting and purchasing services in a timely fashion from our online sales consultants; work with more financing partners to offer diversified used car finance product and improve overall loan approval rates for our customers; provide a well-rounded purchasing program and after-sale services; and make the entire purchasing process more convenient and efficient for our customers. All these efforts have translated into better customer satisfaction and greater trust in our Uxin brand, evidenced by our increased Net Promoter Score among our customers.

To further enhance the customer experience, we will reinforce our role as China's leading online used car dealer and begin to build our own inventory of used cars this month. This will help us better control our supply chain for used car and deliver higher transaction certainty to our customers.

As we move up the supply chain and assess used cars at more favorable acquisition price, we will have a greater flexibility in offering more competitive pricing to our customers, further building Uxin as a trusted and go-to online destination for buying used cars.

In contrast, to the local offline dealers' transitional way of acquiring inventory based only on individual experience and user case, our inventory advantage comes from our strong data and analytics capability. We will take a more scientific and systematic approach to procure used cars by analyzing the extensive user behavior, used car and transactional data aggregated on our platform over the years. We will selectively build our inventory based on our proprietary assessment of customer preference, a car's value-for-money performance as well as real-time market dynamics and trends.

In addition, we will offer refurbishment as a new service by reconditioning our car to a like-new condition before handing it over to our customers. This will be another key step in ensuring the best overall purchasing experience as reconditioning can further enhance a car's value-for-money performance.

We believe that our data-driven and quality-focused inventory strategy will further enhance customer satisfaction, while enabling us to achieve a fast inventory turnover. This will be another significant milestone for us in solidify our position as China's leading nationwide online dealer and offering high-quality value-for-money used car and premium services.

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. mentioned, in completing the online transformation of our transaction process, we have also restructured our cost and expenses to adapt to the new business and the service model. We now have a streamlined inventory sourcing and a car inspection team, online sales consultant team and back-office support teams. In addition, higher customer satisfaction and more word-of-mouth referrals also translates into more organic traffic and lower the need for external traffic acquisition. All these factors will enhance our long-term operational efficiency as we achieve greater scale over time.

Thanks to the tax cut that was implemented in China since May this year, used car dealers now only need to pay 0.5% of used car sales. This means we now have a more accommodative fiscal environment in which operate as a actual dealer. We will work with financial institutions in the form of inventory of financing to selectively build our own inventory, so that it will allow us to adequately manage our cash flow.

Accessing used cars at more attractive acquisition costs by moving up the supply chain will not only reinforce our control over inventory, but also help us to potentially drive margin expansion over the long run. We believe this revamped inventory strategy will better position us to generate long-term value for our shareholders while maximizing the customer value and experience.

Now let me walk you through our financial details for the quarter ending in June. Please note that the results I will discuss 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 the reconciliation of these numbers at the bottom of our earnings release.

In the 3 months ended June 30, 2020, total revenues were RMB 62 million compared with RMB 389 million in the same period last year. The decrease was primarily due to the decrease in the 2C transaction volume and GMV as a result of economic downturn caused by the COVID-19 pandemic as well as the lead time that we need to fully ramp up its upgraded transaction process.

Our total 2C revenue was RMB 52 million compared with RMB 341 million in the same period last year. Online used car transaction volume is 3,887 units for the 3 months ended June 30, 2020, and its corresponding GMV was RMB 426 million.

Looking at the two revenue streams of our 2C business, commission revenue was RMB 29 million compared with RMB 179 million in the same period last year, primarily due to the decreases in the transaction volume in GMV. Our commission rate expanded slightly to 6.7% from 6.2% in the same period last year as a result of our continuous effort to offer a nationwide selection of best value-for-money used cars as well as the quality transaction services to customers.

Value-added service revenue was RMB 23 million compared with RMB 162 million in the same period last year, primarily due to the decreases in the transaction volume and GMV. VAS take rate decreased slightly to 5.4% from 5.7% in the same period last year as a result of pricing adjustments during the COVID-19 period.

Looking at other business. Other revenue was RMB 11 million for the 3 months ended June 30, 2020, compared with RMB 48 million in the same period last year. The decrease was mainly due to the divestiture of the company's salvage car-related business in January 2020.

Cost of revenues decreased by 53% year-over-year to RMB 80 million. The decrease was primarily due to the decrease in salaries and benefits for employees engaged in car inspection, quality control, customer service and after-sales services as well as a decrease in fulfillment cost due to a decrease in the transaction volume.

Gross margin was negative 28.4% for the 3 months ended June 30, 2020, compared with a gross margin of 55.9% in the same period last year.

Total operating expenses was RMB 151 million. Non-GAAP operating expenses, which exclude the impact of share-based compensation, was RMB 156 million.

Sales and marketing expenses decreased by 61% year-over-year to RMB 116 million. The decrease was mainly due to a decrease in salaries and benefits expenses as a result of the adoption of the flexible workload-based staffing program and some termination of employee contracts resulting from our business model upgrade as well as the decrease in the traffic acquisition cost. Sales and marketing expenses, excluding the impact of our share-based compensation, were RMB 111 million.

G&A expenses decreased by 29% to RMB 87 million. The decrease was mainly due to a decrease in salaries and benefits as a result of adoption of a flexible workload-based staffing program and some termination of employee contracts result on our business model upgrade as well as the decrease in the share-based compensation expenses and partially offset by the severance costs as a result of some termination of employee contracts and a goodwill impairment of RMB 9.5 million recorded in the reported quarter. G&A expenses, excluding the impact of share-based compensation, was RMB 98 million.

R&D expenses decreased by 29% to RMB 23 million. The decrease was primarily due to a decrease in salaries and benefit expenses as a result of the adoption of the flexible workload-based staffing program and some termination of employee contracts resulting from our business model upgrade. R&D expenses, excluding the impact of our share-based compensation, was RMB 24 million.

Gain from the guarantee liabilities was nil for the 3 months ended June 30, 2020. We incurred the guarantee liabilities associated with the remaining guarantee obligations from its historical-facilitated loans that were now transferred to Golden Pacer. We adopted Accounting Standard Update 2016-13, Financial Instruments -- Credit Losses: Measurement of Credit Loss on Financial Instruments on January 1, 2020 under a modified retrospective method. Before the adoption of ASC 326, gain or loss related to guarantee labilities accounted for the under the greater of the amount determined on ASC 460 and the amount determined under ASC 450 was recorded as gain or loss from guarantee liabilities. After the adoption of ASC 326, expected credit losses from contingent guarantee liabilities shall be accounted for in addition to and separately from the stand ready guarantee liabilities accounted for under ASC 460, and the provision for the contingent guarantee liabilities is currently recorded within provision for credit losses; and the gain released from the stand-ready guarantee liabilities accounted for under ASC 460 is currently recorded within other operating income.

Provision of credit losses, net was RMB 74 million for the 3 months ended June 30, 2020. The reversal of the provision for credit losses were primarily due to the release of guarantee liabilities of RMB 86 million as a result of the supplemental agreement reached between us and one of our major financing partners in April 2020 with regards to our historical-facilitated loans. Pursuant to this supplemental agreement, this financing partner agreed to set a cap on the amount of cash we would use to fulfill its guarantee liability with this financing partner from 2020 to 2022.

Loss from continuing operations was RMB 128 million compared with RMB 223 million in the same period last year.

Non-GAAP adjusted loss from continuing operations, which excludes the impact of share-based compensation, was RMB 133 million compared with RMB 196 million in the same period last year.

Net loss from continuing operation was RMB 152 million compared with RMB 241 million in the same period last year.

Non-GAAP adjusted net loss from continuing operations, which exclude the impact of the share-based compensation, were RMB 157 million in the quarter compared with RMB 214 million in the same period last year.

Turning to our cash position. As of June 30, 2020, we have cash and cash equivalents of RMB 241 million.

That sums our results for the 3 months ended June 30, 2020.

Moving on to our guidance. Starting this month, September 2020, we will build our own used car inventory. We have started to select value-for-money used cars in the market, procure these cars and arrange for reconditioning and refurbishment to upgrade them to a like-new condition before selling them to our customers.

We are currently assessing relevant revenue recognition in accordance with ASC 606 for selling our own inventory. For this 3 months ended September 30, 2020, taking into account the continuous impact of the COVID-19 pandemic, upgrade progress of our business model and completed business divestiture, excluding the revenue to be recognized under selling our own inventory starting from September 2020, we expect our total revenue from continuing operations to be in the range of RMB 33 million to RMB 35 million, which include the commission revenue, value-added service revenue and other revenue.

If taking into consideration part of the revenue to be recognized under selling our inventory for which a portion of the revenue generated in September 2020 may be recognized on a gross basis, we expect our total revenue from continuing operations for the 3 months ended September 30, 2020, to rise to a range of RMB 65 million to RMB 70 million. This forecast reflects our current and preliminary view on the market and operational conditions and is based upon the current situation and uncertainties associated with the COVID-19 pandemic, which are subject to change. This forecast is also based on our preliminary accounting assessment of such inventory-owning business model, which may be subject to refinement and revision.

That concludes our prepared results.

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

(Operator Instructions) We have our first question from the line of Eddy Wang of Morgan Stanley.

(foreign language) Let me translate myself. So my question is about the long-term outlook of the used car industry in China, especially for the next few years. Under that background, what's the advantage of the inventory taking business model we will adopt? Yes, just want to hear your thoughts on that.

(foreign language)

[Interpreted] In the past 1 or 2 years, upgrading product quality and services is a keynote in every consumer-facing industry and sector. And high-quality product and satisfactory services are the foundation of gaining more customers and building reputation. Under this environment, where individuals are highly connected with each other and the information exchange is highly effective, building reputation and gaining word-of-mouth referrals is key to a company's long-term sustainable growth. And this is also very true in the used car industry. After over a decade of development, where there lacked industry standards and honesty, the used car industry, unfortunately, had a less-than-satisfactory reputation. We believe being honest and sincere when servicing customers, offering them high-quality used cars and premium services is the best way to transform the entire industry and achieve a healthy and long-term growth for the overall sector.

(foreign language)

[Interpreted] Yes. So in the past 1 or 2 years, more and more consumers are turning away from new cars and choose to buy used cars. This is not simply because they cannot afford buying a new car, but more about they now have more a rational consumption philosophy. They want to spend less on a used car, but get a like-new condition, which is almost as good as a new car. With this trend, more and more used car dealers will come up, willing to offer high-quality used cars and premium services. And in turn, with this benefit, more and more consumers will also choose to buy used cars as well. And affected by the soft macro economy, overall used car industry will see a very slow growth this year. But looking at next 1 year or 2, we are expecting it will gradually recover to a double-digit growth.

(foreign language)

[Interpreted] We decided to build our own inventory of used cars now is actually encouraged and driven by our quality-focused and customer-referral strategy. We believe offering high-quality value-for-money used cars and premium purchasing services will win us higher customer satisfaction and reputation as well. More customer trust and word-of-mouth referrals will not only increase our car sales, but also improve our ability to drive long-term margin expansion as a result of the quality premium our customers are willing to pay us.

(foreign language)

[Interpreted] We started to build our inventory now because we think we have 3 core advantages. The first one is about the digitalization and intelligent data analytics, both our historical transactions and current transactions actually exist all in digital form, so do our customer behaviors and their preferences aggregated on our platform. So this enables us to well manage the supply and demand as well as the selling prices with totally different decision-making capabilities from the traditional used car dealers. And our current digital capabilities allow us to accurately predict the monthly sales of a certain car make and model even to predict the turnover of a specific model. And this perfectly guides us to selecting cars and build our own inventory.

(foreign language)

[Interpreted] And the second is about our capability to realize purely online used car transaction and services. Currently in China's used car market, we are actually the only one who is able to sell cars completely from online. Our customers can easily make the purchase decision after reading our used car's digital profile online. In addition, our customers are able to make these decisions without a need to be assisted by offline sales staff throughout the entire process. And also, our fulfillment capability covers over 300 cities and counties combined across China. Our customers can receive their cars that meet or even beyond their expectations within days after they make the purchase online. Our pure online way of selling used cars significantly strengthened our ability of managing cars with consumers on a nationwide level, which also ensures a higher chance of faster turnover.

(foreign language)

[Interpreted] The third one is about our advantages in the cost structure. And our cost structure is actually fundamentally different from that of traditional offline dealers. So unlike them, we don't need to have the expensive offline physical showrooms and we don't need a large offline sales team either. Such advantages actually enable us to grow into a national online used car dealer with strong operational efficiency and the potential to grow at scale.

(foreign language)

[Interpreted] So looking at the macro environment, now it's actually a good timing for us to take this approach, given the current used car taxation creates a more favorable environment for us to build the inventory. And since May of this year, the used car tax cut in China allows dealers only need to pay 0.5% of used car sales as tax compared with 2% previously. And with tax rate, our overall tax expenses won't increase much as compared with before. And in addition, for the cars that we procure upfront, the car cycles are actually with us, so we are able to work with financial institutions on inventory financing. So when everything ramps up, the macro environment actually also supports our decisions.

Thank you. I'd now like to hand the conference back to Ms. Nancy Song for closing remarks. Go ahead.

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

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