Yunji Inc (YJ) 2019 Q4 法說會逐字稿

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to Yunji's Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions)

With us today are Mr. Shanglue Xiao, Chairman and Chief Executive Officer; Mr. Chen Chen, Chief Financial Officer; Mr. Hui Ma, Chief Strategy Officer and Chief People Officer; and Ms. Kaye Liu, Investor Relations Director of the company.

I would now like to hand the conference over to our first speaker for today, Ms. Kaye Liu, IRD of Yunji. Please go ahead, ma'am.

Hello, everyone. Welcome to our fourth quarter and full year 2019 earnings call. Before we start, please note that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors affecting the industry. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, continue or other similar expressions.

For a detailed discussion of these risks and uncertainties, please refer to our related document filed with U.S. SEC.

Any forward-looking statements that we make on this call are based on assumptions as of today, and are expressly qualified entirely by cautionary statements, risk factors and details of the company's filing with the SEC. Yunji does not undertake any obligation to update these statements, except as required under the applicable laws.

With that, I will now turn over to Shanglue Xiao, Chairman and CEO of Yunji.

(foreign language) Good morning, and good evening, everyone. Welcome to our fourth quarter 2019 earnings conference call. During this time of great turbulence and uncertainty, it is worthwhile for us to survey the changing landscape and understand what strategy has served us well in the past, and what strategy we should implement in the future. Since the beginning of 2019, we have firmly upheld our merchandising optimization strategy of being inclusive, focused and differentiated when it comes to brand selection and product curation. We applied a set of stringent evaluation criteria by screening brands and curating products to be sold on our platform. Consequently, we're able to control the number of SPUs and make available on our platform and manage them very effectively. In addition, we select those brands that stands above the crowd in the terms of use [case] (added by company after the call) innovation, product quality and logistical advancements and form a much more extensive and deeper collaborative relationship with them. We provide them with marketing support and operational assistance so that we can streamline their entire operation and catapult their brand recognition and product appeal into the megahit category. In turn, the ultimate success feeds back into our growth engine and enable us to supercharge our own e-commerce business.

(foreign language) For the tailored individual preference segment, we seek to satisfy each individual members' unique demand through in-depth cooperation with innovative brands and product categories with high profit margin and high repeat purchase, such as skin care, beauty and cosmetics, health supplements, apparels, fruits, tea and daily households products. We have become the leading incubator of innovative brands in China through a combination of private labeling through internal development, joint venture with leading brands in their respective product categories and strategic partnership with product manufacturers. Developing those innovative brands has allowed us to provide our members with premium products of comparable quality to mainstream mega brands, but priced at much more affordable levels. It has also enabled us to generate above industry average gross margins and drive long-term benefit from those brands continued growth.

(foreign language) Secondly, in order to provide our members with better shopping experience, we have been upgrading our logistics and distribution capabilities. We are striking a balance between maximizing logistical efficiency and controlling operating costs. We are able to optimize our product time to market and replenishment speed. For those product categories suitable for market-based model, such as apparel and other asset light brand suppliers, we have migrated them onto our marketplace business platforms. Within a year of launch, our marketplace business platform has become a crucial contributor of our company's overall GMV growth and profit generation.

(foreign language) For the fast fashion apparel segment, we strive to accommodate our members' desire to pursue wide range of product selection and get fashion inspiration from watching how other people model various apparel items. As such, majority of our apparel items are sold through our marketplace business platform. By leveraging our service managers' marketing ingenuity in live streaming their own experience of trying on those products, we achieved a breakthrough in the fashion category during the fourth quarter of 2019,as apparel has become one of the highest GMV generating categories on our platform. After successfully increasing apparel percentage contribution to our overall merchandising mix. We believe that we can further improve its take rate in 2020 and drive higher gross profit for marketplace business platform.

(foreign language) Also, we have made a number of innovations in our membership program as we adapt to the varied consumption habits of different [demographics] (corrected by company after the call). For example, like granting full membership benefit to those users surpassing certain spending thresholds, we're able to unleash the full spending potential of those users. In addition, beginning in the second half of 2019, we have started to cultivate localized user communities. We expect that in 2020, those local communities will help to increase our user stickness and user engagement on our platform.

(foreign language) 2019 marked the first year of Yunji to achieve positive adjusted net income both in the fourth quarter and for the full year. Such milestone achievement, especially momentum during the current time of great economic uncertainties, as it validates our business model and demonstrates our success in generating steady and healthy growth. In the fourth quarter of 2019, our GMV increased by 36.1% year-over-year, to [RMB 11 billion] (added by company after the call) and our total revenue reached [RMB 2.45 billion] (corrected by company after the call) as of December 31, 2019, our cumulative member count reached 13.8 million. Moreover, the number of our transacting member in the 12 months ended December 31, 2019, increased by 57.4% year-over-year.

(foreign language) During the COVID-19 outbreak in 2020, our business strategies and corporate values have enabled us to provide great solace to our employees, service managers, members, partners and the society at large. We have always given top priorities to protecting our employees' health and wellbeing. Consequently, we have provided advanced online technical support to enable majority of our employees to work from home efficiently. Ahead of our office reopening, we have secured ample supplies of disinfectant materials and protective gear for employees who are able to return to work. We were the first company in our office complex, Hangzhou Bay Information Park to resume operations.

(foreign language) In addition, we have leveraged our membership based e-commerce platform to promote the economic well-being of our members and service managers. During the epidemic lockdown, our platform has enabled them to earn some extra income on the side to cushion the impact of general economic downturns. Because hundreds of thousands of our service members and tens of millions of our members can share product information remotely with their friends and acquaintances through their social networks, they're able to provide remote member service support, conduct guided virtual shopping tours and engage in time product promotion conversation through our platform. While doing something they love to do as a hobby, they are completing a part time retail gig that could garner some much needed extra income.

(foreign language) At the same time, our extensive expertise and business know-how in merchandising, supply chain management has insulated us from the supply disruptions of essential goods such as rice, grains, flour, cooking oil, fruits, veggies, produce, disinfectants, and facemasks during the epidemic. While those goods become the most sought after items and were in short supply, we are able to maintain their constant availability on our platform. The combination of our private labels, joint venture brands and product partnerships have worked beautifully to ensure a steady supply of those much needed products on our platform. Not only we have stayed away from profiteering in daily essential products and epidemic containment materials, we have also maintained their price stability and prevented price gouging by establishing purchase limitation policies and providing exclusive supplies for residents of Hubei Province. In addition, we have established close cooperation with leading logistics providers such as SF Express and EMS. As a result, both our order fulfillment rates and delivery completion rates, remained at the industry leading level, even though the delivery speed of orders on our merchandise sales platform slowed a little during the epidemic.

(foreign language) All these aforementioned initiatives have improved our user attraction, user engagement and user loyalty over the long run. However, during the first quarter of 2020, our GMV may suffer temporarily as a result of our endeavor to ensure supply availability, maintain price stability and prevent price gauging for daily essential items and [epidemic] (corrected by company after the call) containment measures. Nevertheless, our strategies in merchandising optimization, operational improvement and efficiency enhancements have all started generally positive results, thus limiting the duration and the extent of the negative impact on our profitability.

(foreign language) 2019 was a year of transformation for us, while 2020 is a year of opportunities in the guise of challenges. Upholding our firm commitments to prudent product curation, we, together with our leading manufacturer partners, should be able to seize business opportunities, achieve steady growth and expand market footprints going forward.

With that, I will turn the call over to our CFO, Rex Chen, to go through the details of our financial results.

Thank you, Shanglue. Hello, everyone. Before I go through our financial results, please note that all numbers stated in the following remarks are in RMB terms and all percentage changes are on a year-over-year basis unless otherwise noted.

In the fourth quarter, our continuous efforts to unleash the profitability of both our sales and marketplace business model have been shown in our better-than-expected improvements in our financial results. GMV in the fourth quarter of 2019 increased by 36.1% to CNY 11 billion from CNY 8.1 billion in the same period of 2018. Revenues in the fourth quarter of 2019 were CNY 2.4 billion compared to CNY 4.5 billion in the same period of 2018. In addition, we achieved non-GAAP net profit for the full year of 2019 and increased our non-GAAP net profit in the quarter by 174.1% year-over-year. Since establishing our marketplace business platform in the first quarter of 2019, an increasing number of merchants have shown interest in accessing our [enormous] (added by company after the call) pool of users. As a result of some merchants our merchandise sales platform transitioning into our marketplace business platform and taking responsibility for their own inventory management, a portion of our revenues previously generated on our merchandise sales platform and recognized on gross basis was recorded on our marketplace business platform, which recognizes sales on a net basis.

Revenues from net sales of merchandise in the fourth quarter of 2019 were CNY 2.12 billion accounting for 86.7% of our total revenues in the period. Revenues from our marketplace business in the fourth quarter of 2019 increased to CNY 169.2 million, as we continued to attract more quality brands and merchants to our platform as well as increase our take rate by strengthening our partnerships with existing brands. Notably, since the second quarter of 2019, the take rate of our marketplace business keep growing over the past 3 quarters. Revenues from our membership program in the fourth quarter of 2019 were CNY 145.9 million as compared to CNY 930.2 million in the same period of 2018, which was caused by the membership program optimization adjustments made to diversify our member base and increased transactions.

Gross profit margin in the fourth quarter in 2019 expanded to 24.3% from 18.1% in the same period of 2019 -- '18, which was mainly attributable to our increased sales of high-margin products, development of products from emerging brands and our own brands and the shift in percentage of sales from a gross basis to a net basis as a result of the increasing number of brands moving from merchandise sales to our marketplace business.

Let's now move to our operating expenses. Fulfillment expenses in the fourth quarter decreased by 48% year-over-year, which was mainly attributable to our improvements in logistics efficiency and the reduction of our logistic expenses as a result of our optimized merchandise strategies. Sales and marketing expenses decreased by 10.9% year-over-year to CNY 306.5 million, which was attributable to the decrease in member management fee resulting from our adherence to target commissioning fee allocations and the distribution of bonuses to service managers. We also continued to invest in research and development talent during the quarter, while further optimizing our staffing structure to enhance employee performance through incentive bonuses and improved employee working efficiency.

Also in the fourth quarter, technology and the content expenses increased to CNY 74.9 million, while general and administrative expenses were CNY 86.5 million or 3.5% of total revenues compared to CNY 33.2 million in the same period of 2018. Overall, total operating expenses in the fourth quarter of 2019 decreased by 17.7% to CNY 662.4 million from CNY 804.4 million in the same period of 2018. This reduction was a result of our ongoing improvements to operating efficiency accomplished through the improvement of our subsidy allocation in support of those brands and the suppliers meeting our criteria. Loss from operations in the fourth quarter of 2019 was CNY 54.4 million compared with an income from operations of CNY 2.5 million in the same period of 2018.

Net loss in the fourth quarter of 2019 decreased by 42.6% to CNY 4.9 million from CNY 8.6 million in the same period of 2018. Adjusted net income in the fourth quarter of 2019 increased by 174.1% to CNY 25.3 million from CNY 9.2 million in the same period of 2018. Basic and diluted net loss per share attributable to ordinary shareholders in the fourth quarter of 2019 were CNY 0.002 compared with CNY 0.60 in the period of 2018.

Now let's also take a look at our cash and liquidity positions. As of December 31, 2019, we had a total of CNY 1.7 billion in cash and cash equivalents, restricted cash and short-term investments on our balance sheet.

Looking to 2020, we will continue to improve the operating efficiency of our marketplace business model while leveraging our merchandise sales offerings to bolster the competitiveness of our user value proposition and connect our expansive pool of users to quality suppliers. Importantly, these efforts should also help us to make progress towards healthy profitability. In addition to these measures, we also plan to utilize our strong cash position. Going forward, we will make prudent use of this resource and create a more desirable brands and the products, invest into and empower more leading manufacturers, boost the quantity and efficiency of transactions on our platform and implement additional marketing campaigns to grow our user base.

This concludes our prepared remarks for today. So operator, we are now ready to take questions.

(Operator Instructions) Your first question comes from the line of Andre Chang of JPMorgan.

(foreign language) So let me repeat my question. The company has rolled out free membership starting from January 1 -- January this year. So I'd like to ask whether this will mean the membership program revenue will drop to 0 this year in exchange for faster sale of merchandise revenue growth and also membership growth? And also whether that will mean some impact on the gross margin as the membership revenues generally usually have a higher margin?

Andre. So I will take these questions. So I can give you some background information first. Because as a first membership based social e-commerce company listed in the U.S. So we need to take the responsibility together with the local government to continue to refine the standard of this industry and make the new ecosystem better. This new measure we just published has been widely praised by local government and are followed by our competitors. So for this new member recruitment method, it's easier for our existing members to invite and build offline communities based on location. We still believe this kind of connection based on location will be more solid and active than the connection through Internet only. And -- but the nature of our business model has not changed. So our driver of our business growth are still based on the supply chain upgrades as our CEO just stated in his remarks and secondly, the social interaction between members. So for your questions. So first of all, the revenue -- of membership revenue, yes, because we changed the -- we can -- we changed the recruitment method. So the membership revenue will decrease, of course. And the second for the margin. Because although the membership revenue decreased, but as we mentioned in both CEO and CFO remarks, because we will -- our supply chain -- core value of our supply chain to develop -- to cooperate with the best emerging brands and factories in China and to find their best SKUs. So our margin will come from the emerging brands and our own brands. So we believe the gross margin and operating margin in 2020 will not be negatively impacted by the cancellation of the member fee.

Your next question comes from the line of Ivy Liu of Crédit Suisse.

(foreign language) I will quickly translate myself. My question is on membership as well. So can management elaborate a bit more on the existing new strategies or tactics to acquire new members. And the channels that Yunji is investing in and how that will impact the sales and marketing line in 2020? And also is there a specific growth target for the membership in 2020?

Thank you, Ivy. So for this question, first, from 2020, we will not only do Internet-based membership -- member recruitment, we will also use off-line measures to promote our members. So based on the location and based on the different living communities all around China, we will encourage our members to get -- to do the offline promotions. So -- and for the cost of each new members, we do not change the incentive program. So for each new members invited by the existing members will provide the new members [RMB 4 -- 5] (corrected by company after the call) coupons, so that's our cost to have -- with new members. So this policy did not change it. And so we believe the sales and marketing expense will not increase significantly. And -- but we will continue to monitor the quality of the members from the -- from a new member recruitment approach. So we can -- we will monitor that and we can discuss this with you after 1 quarter we see the data.

And for the total member forecast, because we did not provide the guidance. So we cannot disclose the detailed numbers, but we can foresee the total new members joining in through the new policies will increase compared to the previous policies. But as we said, our focus is on -- always on how to get the quality transacting members, but not only the members. So we will through the -- so for our members, how we can increase the transacting numbers, we'll keep creating the -- through the supply chain side, we will keep creating the top SKUs of the mainstream brands with competitive prices, and we're also developing better SKUs from emerging brands to compete with these mainstream brands with lower price and higher margins. So through this deep cooperation with emerging brands and factories we will provide our members more values to make the new members to become quality transacting members. So our focus is still -- is not only on the number of members, but on a number of the quality transacting members. So we will have -- we will spend more and more efforts to transfer the member to the transacting member quarter-by-quarter.

There are no more question at this time. I would now like to hand the conference back to the management team for the closing remarks. Please go ahead.

Thank you, everyone, for joining us today and see you next quarter. Thanks.

Ladies and gentlemen, that does conclude our conference for today. 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.]