NaaS Technology Inc. Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for being here and welcome to NaaS's Second Quarter 2022 Earnings Conference Call. All participants are currently in listen-only mode. Please note that this conference is being recorded. I would now like to hand it over to your first speaker today, the Vice President of Strategy. Thank you, and please continue.

Thank you, everyone, for joining us for NaaS's second quarter 2022 earnings conference call. We released our results earlier today and they are available online. With me on the call are Cathy Wang Yang, our Founder and Chief Executive Officer; Lei Zhao, Chief Financial Officer, along with other team members. Today, Cathy will present an overview of our recent performance and highlights, and Lei will go over our financial results. I would like to mention our safe harbor statement included in the earnings press release, which covers forward-looking statements. Additionally, this call will touch on certain non-IFRS financial measures, and our earnings release includes a reconciliation of those measures to the most directly comparable IFRS measures. Lastly, please be aware that all figures mentioned during this call are in renminbi. Now, I will hand the call over to our CEO, Cathy Wang, whom I will translate for.

Greetings everyone. I'm NaaS's CEO, Yang Wang, and I’m pleased to share our earnings report for the second quarter and first half of 2022. First, looking at our financial performance: our net revenue for the second quarter increased significantly, growing by 5.9 times. Overall, total revenues rose by 47%, and while our losses increased by 5%, this indicates an improvement in our operating efficiency. The macroeconomic environment in the first half was tough, impacted by various COVID lockdowns and a drop in demand for chargers. Despite these challenges, NaaS's overall revenues surged by 90%, reaching RMB1.8 billion. In the first half, net offline services revenue grew by 4.3 tons, with a 5.6 ton increase in the second quarter, driven by substantial growth in offline charging station earnings and charger sales. Next, an overview of our charging performance: total charging volume reached 1.06 GWh, an increase of 160%. According to the latest data, during the first half of 2022, China’s public and specialized charging market expanded by 26%. NaaS's charging volume exceeded 1,062 GWh, reflecting a year-over-year growth of 160%, more than doubling the previous market figures. By June, we had established ourselves across China with 258 million connections, 44,000 charging stations, and 400,000 chargers. Over the last four quarters, we achieved a compound annual growth rate of about 22.4% in charging, with the number of active chargers increasing by 75% in the second quarter. We are leveraging AI technology and our operational capabilities to collaborate with China's southern power grid, helping drivers efficiently locate reliable chargers and addressing issues such as overcapacity and underutilization in the charging market. As a new energy service provider, we are offering innovative energy solutions to our OEM partners, logistics companies, and major internet firms. In the first half of 2022, we signed agreements with several companies, including FAW, Volkswagen, and Li Auto among others. Our sales reached RMB 17.84 million, marking a 71% increase. Sales typically show seasonal variation, and we expect to see a more significant rise in the third and fourth quarters. In the first half of the year, we provided electricity procurement services to 77 customers, facilitating a virtual connectivity ecosystem. Looking at the new energy market globally, sales of electric vehicles rose by 71%, with China’s total EV count surpassing 10 million. In the first half of 2022, new passenger EV sales in China reached 2.34 million, capturing 66% of the global market. By the end of June, the total number of EVs in China exceeded 10 million, with the penetration rate of used passenger EVs at 26.7% in July. Forecasts indicate that total passenger EV sales in China will reach about 6 million this year, driven by supportive government policies. Total profitability remains a vital focus, as international markets see similar rapid growth. Globally, EV sales totaled 4.21 million in the first half of 2022, reflecting a 71% increase. Various countries are implementing stringent regulations and plans for zero-emission vehicles by 2035 or 2040, amid challenges within their markets. In China, we’re facing heatwaves leading provinces to limit electric vehicle use, highlighting the need for public charging to dominate the market compared to private charging in the U.S. or Europe. By 2030, China’s total EVs might hit 80 million, requiring about 1 million charging piles, which could create substantial supply challenges. Establishing a smart charging network and virtual electric provider for operations and transactions will be essential. NaaS aims to collaborate with various stakeholders to enhance market efficiency. Finally, regarding our guidance: we anticipate charging volumes will exceed 2.7 billion or 2.2 tons compared to 2021 levels. As a leading EV charging grid in China, we continue to offer a variety of services including site selection, charger procurement, and operations, providing comprehensive solutions for EV charging needs. We forecast that NaaS's total electricity charged in the second half of the year will increase by 99% year-over-year, aiming for 2,700 GWh from the 2021 charging volume. Total charger sales for the year are expected to reach between RMB 130 million and RMB 150 million, a rise of 2.5 tons from 2021. Transportation in China is responsible for 10.4% of total carbon emissions. Our goal is to enhance energy efficiency, aiming to reduce carbon emissions by 10% and lower China’s overall emissions by 1%. Now, I’ll hand it over to our CFO, Lei Zhao, to discuss our financial performance.

Thank you, Cathy. As we mentioned, we are very proud to announce our record second quarter for our first reporting quarter as a public company. In the interest of time, we will now go over each individual line of the financial statements and focus on the key highlights. For additional details, please refer to our earnings press release. Our total gross revenue for the first half reached RMB 108 million, representing year-over-year growth of 90%. Net revenue grew by 4.5 times year-over-year to raise RMB 18.1 million for the first half of the year. It should also be noted that our final results will be impacted by one-time costs associated with our merger and leasing. Our non-IFRS net loss for the first half was RMB 140.3 million, representing year-over-year growth of 19%. Our non-IFRS net loss rate was 130%, decreasing from 209% for the same period last year. Additionally, I'm pleased to announce that we have secured an additional RMB 400 million in new financing from China's construction plan, and the proceeds from this financing will be used to further develop our charging operations and services as well as to improve our charger sales. With that, I conclude our prepared remarks. Operator, please proceed with the question-and-answer session.

Thank you. Our first question today will come from Skyler G. with Credit Suisse. Please go ahead.

Could you please elaborate on the role of the Company in the cooperation with charging operators like TGOOD and the downstream OEMs like Li Zhang, Xiaopeng, and NIO?

Yes. So thank you for your question. In terms of who we are, we're a service provider within the industry value chain. First, with regard to the companies you mentioned for the upstream, we are partners with the State Grid, TGOOD, or Star Charge. So, with regards to how we serve players in the upstream, we have strong relationships with thousands of partners. We are essentially offering a one-stop solution to address all their needs and problems. We can help them with site selection for the development of a charging station, additional consultation, and procurement. This procurement extends not only to purchasing chargers and charging piles but also includes electricity procurement. We assist with their daily operations, including full outsourcing as well as providing additional retail services, including F&B and massage chairs, for example. What we're ultimately offering is a single-stop solution. Given that we provide a full menu of services, naturally, what we offer to the players will vary depending on each individual player. For example, a small or medium enterprise may choose five or more services from us, whereas a larger regional player may select the same or offer less. For downstream players such as auto OEMs, logistics companies, and other similar types of large companies, we provide digital solutions and the ability to digitize. For major auto OEMs such as Li Xiao and Dongfeng, we offer a one-stop solution to address their key concerns regarding new energy vehicles. For purchasers, they don't go searching for automobiles; they will be able to access the charger stations through their platform and app, finding the chargers they need to charge their cars, addressing the anxieties associated with purchasing the vehicle. In the back end, for many of these companies, we will provide the services needed. In the future, as we continue to expand our relationship with OEMs, we will also participate in self-driving efforts and offer new solutions. Surveys of potential EV purchasers indicate that their main concern has historically been convenience regarding charging. Thus, we will offer additional solutions to address these issues. To summarize, NaaS is an industry service provider connecting all different types and segments of the industry, whether it's the OEMs or upstream companies. We are connected; we are the industry service provider, and we are leading in providing these services to everyone. Thank you for your question. I hope we have addressed it.

And our next question will come from David Gu with CICC. Please go ahead.

How do we expect to price more in the U.S. market?

First, the Chinese market is undergoing a transition from oil to electric. Currently, we're looking at 400 million ICE vehicles in 300 million cars, and in the future, we will be reaching 600 million to 700 million. If I got some of the numbers wrong, please correct me.

It's okay.

It's important to emphasize that we are undergoing a transition. We shouldn't describe ourselves as a challenger or disruptive, but as the transition occurs, we need to encourage more people to adopt the new model. Electric prices will be affected as a result, but ultimately, growth is key, especially in the long term. If we compare costs, when we talk about cars that are used publicly, the charging costs could be a quarter of gas. For private cars, those that can charge at home, it could be a tenth of gas. As the transition continues, these trends will persist, but before the transition concludes, we expect some price wars to end. As the saturation rate for EV vehicles in the market reaches a certain stage, we believe electric prices will return to a more rational or normal level. Many of the 10 million EVs sold in China, particularly for public charging, are used for business purposes, not private cars. For those available with private charging, we believe that this will not be the mainstream. In the mainstream, public and business use will dominate. Looking at pricing, as the number of private EVs increases, private vehicle owners are less sensitive to price compared to business users. They care more about time and the services available while charging. If there are amenities available during charging, they are less price-sensitive. Finally, summarizing your question directly, we believe in two things: as the market transitions from traditional ICE to EV, when it reaches a certain point, electric prices will become more rational; and as the number of private cars continues to rise, the sensitivity to pricing for electricity will decrease, leading to better pricing for electricity.

And our next question will come from Gong with Caitong Securities. Please go ahead.

So my question is about the cost advantages available to the Company with centralized power procurement.

Thank you very much for the question. First, it's important to point out that the liberalization of the market has only occurred recently, particularly in the electricity market. Different provinces will exhibit varying levels of restrictions regarding liberalization. For example, in some provinces, you need to have a certain amount of value, let's say over 50 million. Others may be more liberal. Currently, we are involved in transactions and procurement in certain provinces where we have centralized purchases, allowing us to potentially save on procurement costs for various parties. However, as mentioned, due to the levels of liberalization across different provinces, the savings will vary. Yes, centralized procurement can lower costs for our customers and partners, but differences will exist depending on usage time, for example, peak usage and location. Cost savings can range from several renminbi to mere cents. When considering methods to reduce procurement costs for electricity, these centralized approaches represent only one method. We believe that there are other areas that will generate greater savings for our customers and partners, such as working with various renewable energy sources or enhancing virtual power generation, along with better supply management through AI and greater efficiencies in downstream through digitalization. Longer-term prospects, we feel that those methods will provide the largest cost savings. I'd like to share a little story I saw earlier today in a user group. Given current conditions in certain provinces, there are limits on electric use. Two EV drivers got into a tussle over a single charger. Looking forward to 2030, with an estimated 80 million EVs, we will require significant infrastructure, including many more chargers. Correct me if I'm wrong, but that could suggest needing a vast increase in quantity and capacity in terms of charging requirements. Hence, the pressure on the electrical grid and network will be immense. In summary, while the current procurement does lower costs for our customers, we believe that longer-term, the larger savings will arrive from better virtual power generation and improved connections between upstream and downstream.

And ladies and gentlemen, that does conclude the question-and-answer session, and also today's conference call. Thank you for participating. At this time, you may all now disconnect.