NaaS Technology Inc. Q3 FY2023 Earnings Call

Thank you, operator. Hello, everyone, and welcome to NaaS Third Quarter 2023 Earnings Conference Call. The company's results were issued earlier today and are posted online. Joining me on the call today are Ms. Cathy Wang Yang, our Chief Executive Officer; and Mr. Alex Wu, our President and Chief Financial Officer. For today's agenda, Ms. Wang will provide an overview of our recent performance and highlights. And Mr. Wu will discuss our operating and financial results. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to today's call on forward-looking statements. Also, please note that this call includes discussion of certain non-IFRS financial measures, please refer to our earnings release, which contains a reconciliation of non-IFRS measures to the most relevant IFRS measures. Finally, please note that unless otherwise stated, all numbers are in RMB terms. I will now turn the call over to our CEO, Ms. Cathy Wang Yang. Cathy, please go ahead.

Hello, everyone. It’s my pleasure to share NaaS third quarter 2023 earnings results with all of you and discuss our recent developments. In the third quarter of 2023, our total revenues increased by 536% year-over-year to reach RMB 171 million. Our non-IFRS net margin attributable to ordinary shareholders narrowed by 256 percentage points compared with the same quarter last year. The total charge volume transacted through our network during the quarter increased year-over-year, reaching 1,383 gigawatt hours. This accounted for 21.8% of all charging volume completed through public chargers in China during the same period. Since the beginning of 2023, NaaS has undergone a fundamental shift in its revenue structure. In the second quarter of 2023, the proportion of offline and innovation service revenue exceeded 50% for the first time, reaching 53.4% in the third quarter. Revenue from EPC Energy storage and other solutions accounted for 81% of the total revenues. We affirm our full year 2023 revenue guidance to be between RMB 500 million to RMB 600 million. And we expect our full year 2024 revenue to be between RMB 2 billion to RMB 3 billion, a growth of 4 to 5 times. NaaS is transforming from a new energy service company into a new energy leader. In the third quarter, NaaS secured RMB 204 million in energy storage orders. In addition, we won the bid for the MG Green and low-carbon supply chain construction project, creating the global EV storage and charging swapping benchmarking project for highway trucks. NaaS International business is forging ahead, contributing 32.7% of our total revenue. In October, NaaS became one of the first batch of strategic partners with the Hong Kong SAR office for attracting strategic enterprises. On September 22, we received the highest ESG entity score in China, ranking 22nd in Asia and 50th worldwide. On October 23, NaaS joined the United Nations Global Compact organization, and we embrace open source technology, open data access, and an open ecosystem. This commitment paves the way for our global initiative towards carbon neutrality. We look forward to joining hands with our partners to advance our vision of empowering the world with Green Energy. Now I will turn the call over to Alex, our President, for a closer look at our operating and financial performance. Thank you.

Thank you, Cathy. Hello, everyone, and thank you for joining our call today. As Cathy mentioned, we delivered an excellent performance across our key operating and financial metrics in the third quarter. Our top-line growth was exceptional, and we remain the industry leader in China's growing charging services market. Simultaneously, we're expanding from a singular mobility connectivity business to a model that also monetizes our digital analytic capabilities. We're doing this by achieving a rapid expansion of our charging station operation and energy storage businesses, which will allow us to reach our goal of becoming a leading integrated new energy asset operation and management service provider in China and abroad. In line with our business expansion, we introduced a new revenue reporting structure in the third quarter. Income from mobility, connectivity, and self-operated charging stations has been consolidated under charging services revenue. Income from our integrated charging infrastructure, PV and energy storage now falls under Energy Solutions revenue, while income from our third revenue stream, electricity procurement services and other services has been classified as new initiatives revenue. To assist with comparison, we have adjusted historical periods accordingly. We can see our business transition taking shape in our stellar third quarter growth, and we're pleased to be able to show a more visible profitability trajectory. Our total revenues reached an all-time high in the third quarter of RMB 170.9 million. The bulk of this rapid growth came from our Energy Solutions revenue, which increased by 6 times quarter-over-quarter, accounting for 81% of our total revenue in the third quarter. The substantial growth is mainly attributable to the ongoing delivery of energy solution projects, providing renewable energy generation, energy management, and storage solutions. On a year-over-year basis, our financial efficiency has significantly improved in the third quarter. Gross margin increased to 27% from 6% year-over-year, and gross profit increased by 28-fold year-over-year as we started to reap benefits from our expanded know-how and capabilities in delivering and executing energy solution projects. Total operating expenses decreased to RMB 285.3 million in the third quarter from RMB 359.1 million in the last quarter. We are beginning to recognize advantages from economies of scale, enabling us to gain significant operating leverage. During the third quarter, we substantially improved our operating spend as a percentage of revenue. Our sales and marketing expense ratio dropped sharply to 94% from 252% in the third quarter of 2022, and 177% in the second quarter of 2023. Administrative expense ratio declined substantially year-over-year to 63% from 95% in the second quarter of 2022. The research and development expense ratio also declined to 10% of our total revenues compared with 28% in the same period last year. Our net loss attributable to ordinary shareholders was RMB 366.9 million for the third quarter of 2023 compared with a loss of RMB 109.1 million for the same period of 2022. While our non-IFRS net loss was RMB 175.7 million for the third quarter compared with RMB 96.5 million for the same period of 2022. Net margin improved from negative 406% to negative 214%, whereas non-IFRS net margin improved from negative 359% to negative 103%. As we diligently manage our operating costs and work to narrow our losses, we're looking towards our long-term prospects. Our trajectory of growth has come from our initiatives, both locally and internationally as we gain traction across our expanding business. Our network continues to experience high growth in China, and total charging volume increased by 66% year-over-year in the third quarter, reaching 1,383 gigawatt hours. The total number of orders rose by 58% year-over-year to nearly RMB 59.2 million. Furthermore, in terms of our assets under operation, we continue to carefully select high-quality charging stations to add to our portfolio. We are also making excellent headway with our energy storage initiatives, propelling the growth and maturation of PV storage charging station development. By the end of the third quarter, we had already launched 43 integrated charging stations with energy storage, covering cities including Hangzhou, Guangzhou, Chongqing, Wuhan, and Tianjin. On the other hand, our timely execution of the leading MG PV storage charging project, which entails the installation of a 4,200 kilowatt distributed PV system, 36 energy storage and charging stations, and two leading domestic heavy truck battery charging stations, will showcase our integrated solution, coupled with timely execution that continues to win us new business. On the international front, our recent acquisition is broadening our reach in Hong Kong and is already bearing fruit. Total international revenue for the third quarter accounted for more than 32% of our total revenues, compared with 22% in Q2, demonstrating our rapid progress and the strength of our acquisition strategy. As our business expands, we are attracting strong support that bolsters our momentum. We can see this in our alliances with OSS, ZSY, and China Construction Bank. For example, CCB will provide us with integrated financial service support encompassing overseas mergers and acquisitions, liquidity loans, project loans, inclusive loans, and financing for global renewable energy asset investment in charging stations, energy storage, PV, among others. This will empower us to extend our global presence in the new energy sector, fostering green, low carbon, and sustainable development in the energy industry. This recognition from our strategic partners is helping us advance in the new energy sector and its underlying infrastructure as we work to expand our presence in the new energy globally. I'm also pleased to provide an update on our recent financial activities in July and September 2023; we issued USD 30 million and USD 40 million convertible notes to LMR partners. As of today, USD 33 million has been converted into ADS, highlighting our upward momentum. The remaining principal amount of the notes totals USD 37 million. We appreciate the trust of LMR Partners, which further fuels our commitment to continued growth and success. Looking ahead, we are on track to deliver our previously announced full-year revenue guidance of between RMB 500 million and RMB 600 million, which is a 5 to 6 times increase from 2022. With our added visibility and new growth, we would also like to introduce our guidance for 2024. We currently expect full-year 2024 revenues to be between RMB 2 billion and RMB 3 billion. In summary, we're making considerable progress in establishing NaaS as a leading global provider of new energy asset operations and management services. We are broadening our one-stop charging services, advancing integrated energy systems, and leveraging our strategic acquisitions to increase our global footprint. On top of our robust top-line growth driven by both Charging Service and Energy Solutions, we also continue to drive a more favorable revenue mix with more high-margin business. Our operating margins are also improving rapidly, benefiting from economies of scale and optimized operating costs. Our margin expansion is a testament to our commitment to both financial efficiency and achieving sustainable growth. As we continue to grow our business both in China and abroad, we remain dedicated to providing sustainable new energy solutions while exploring new opportunities for growth that drive the industry forward. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Our first question comes from Kelly Zoot Jefferies.

Firstly, congratulations on your strong third quarter results. I have two questions. Firstly, is about the revenue guidance you just mentioned to us about the revenue targets? So can you share more color about the growth drivers of your Energy Solutions business in China and also the overseas market? And the second question is about the margin outlook. So can you share more color on your margin improvement? Basically helping us to know how to forecast the margin trend of your Energy Solutions business going forward?

Okay. Thank you, Kelly. Those are two very good questions. For your first question regarding the Energy Solutions business and its growth drivers, let's look at what it's doing right now. We have seen significant contributions from Energy Solutions in Q3 revenues; the Energy Solutions business has contributed RMB 139 million, which is year-over-year growth of 500%. If we look at the drivers, there are basically three segments that we're looking at in that business. Number one is what we call the EPC. The EPC driver effectively gives us the data advantage. We have the industry know-how, and we have a very strong customer base that enables us to build complex projects. This also gives us the ability to help our customers pick the right spots to build those charging stations. Number two is the Energy Storage. For the Energy Storage revenue driver, there are two main points. The first is that this year, we have 380 contracted stations for building energy storage solutions. In Q3, we have delivered 43 out of the 380 stations. So the lion's share of the contracted stations will be delivered in Q4 this year. For the medium term, we've identified 1,880 stations out of the 73,000 connected stations with good candidates for building the Energy Storage Solutions. The next step is to get those stations constructed. So that's for energy storage. For overseas, we already see that overseas revenue contributed 32% of our overall revenue in Q3 this year, and we expect it to increase to about 40% of our 2024 revenue. In the short term, we know that we've secured a RMB 70 million backlog that's committed. We just need to get them delivered in Q4. We also know that we're rapidly expanding into EV charging, having won 3 out of 5 contracts under the EHSS, which is the government-sponsored EV charging project. We can see clear synergy coming from NaaS after our acquisition, with evident financial support and EV know-how integrated into our Hong Kong operations. Overall, we see clear growth momentum and very clear growth drivers for the Energy Solutions business. For your second question regarding margin, you're absolutely right. We have witnessed a favorable margin trend in this quarter. In Q3 2023, we are driving margin improvement through two main levers. First is the revenue mix, and the second is operating leverage. In Q3 2023, 81% of our revenue came from Energy Solutions, which has a profitable margin. The Energy Storage business, for example, has an EBITDA margin between 10% to 15%. The same EBITDA margin applies to the Center Power business. So as we get more business in those lines, we expect to see higher margin. The second lever is operating leverage. Our total operating expense ratio has declined significantly from 385% in Q3 2022, to 170% in Q3 2023. By combining these two factors, we anticipate seeing improved margins going forward, alongside improving profitability in the next couple of quarters.

Your next question comes from Yizhen Du from CICC.

First of all, congratulations on an excellent performance in the third quarter. I have two questions this time. The first one is that you just shared the 2024 revenue guidance, which shows a significant increase compared to this year's guidance. So could you explain how NaaS will achieve such rapid growth in 2024? This is the first question. The second one is about the overseas business. We all know that you previously acquired a company and what is the recent progress of the overseas business? How would you predict the revenue contribution of overseas charging pile sales in 2023 and 2024? Thank you.

Okay. Thank you, Yizhen. These are good questions. So the first question is about our 2024 revenue guidance. To set the stage, based on a CIC report, the public charging market in China is expected to grow 20 times by 2030, and public charging volume will be growing 25 times by 2030. We clearly see EVs entering the market at a rapid speed. NaaS is China's largest EV charging network with 73,000 charging stations, covering about 50% of the market share, and 768,000 charges connected, representing 42% market share with charging of 1,383 gigawatt hours of electricity in just one quarter, which accounts for about 21.8% market share. Additionally, we have strong analytic capabilities, a rapidly growing customer base, and we are working hard to move to the asset operation business, which allows us to monetize our data analytics and user traffic more efficiently. Regarding different segments, we aim to see a significant increase in chargers under management by the end of 2023 and in 2024. The chargers will be selected from the existing 768,000. Our goal is to grow those under management significantly due to several ongoing projects. For Energy Storage, we plan to deliver about 1,500 stations with Energy Storage Solutions in 2024. We've carefully selected these stations based on our data analysis. In terms of overseas, we have already seen 32% revenue contribution from overseas. We aim to increase that to about 40% in 2024, benefiting from favorable macro conditions and strong growth drivers in that sector. Importantly, we are focused on integrating our acquisitions to maximize their contributions to overall growth.

Your next question comes from Zoe Feng at TF Securities.

Hello, this is Zoe. Your Q3 financial results were very impressive, but based on your current results, you still need to achieve significant revenue growth in Q4. Can you share more color on how you plan to achieve that? That was my first question. The second question is about the major contract in the Energy Storage business. Can you share some updates on the progress of that contract?

Great. Thank you, Zoe. So first question is about Q4 growth. Just to recap, we delivered significant revenue growth; Q3 revenue is RMB 171 million, which is a year-over-year growth of more than 500%. Most importantly, within that RMB 171 million, we see September single-month revenue exceeding RMB 100 million. I believe this is a major step-up in our growth trajectory, and I believe we will be able to maintain this revenue magnitude for the rest of Q4. In Energy Storage, we have more than 300 stations to be delivered that we plan to deliver in Q4. Regarding solar power, we have a clear backlog of committed projects that we've started construction on. We also won 3 out of 5 contracts under the EHSS project, which we can deliver fairly quickly. Regarding the EPC business, we've disclosed a RMB 67 million OneStop PV storage project and expect to deliver parts of that in Q4. We are also cooperating with local governments on high-tech charging stations to share more news soon. For the Chinese station operation business, we achieved a 10% improvement in charging volume after management from the data-driven analytical capabilities of our operations team on 13 pilot stations, proving our operational efficiency. We will focus on increasing the number of stations under management starting from Q4 into 2024. In summary, all segments indicate clear drivers for continued growth in Q4. For the energy storage contract worth RMB 200 million, we are contracted to build energy storage solutions in 380 charging stations, employing 580 storage boxes with a total capacity of 130-megawatt hour. We delivered 43 out of the 380 stations as of late September and aim to deliver most stations by year-end using our proven methodology on the 73,000 connected stations.

Your next question comes from Alice Mara at UBS.

Thank you for the opportunity to ask this question. My question is actually about your revenue classification. Can we understand that the online business in the past classification is very much similar to the current charging service revenue, except that we have another kind of business model like card full station operation model? Can you further elaborate on the full station operation model, like what the business model is, and how it could impact your revenue and margin going forward?

Thank you, Alex. This is an excellent question because it’s an important business model for us. To understand the operation business model, we operate these stations more efficiently than the current asset owners. There’s the layer for asset owners that have invested in and own assets and another layer on top for asset operators, like us, who don’t own assets but have the unique capabilities to operate them more efficiently. In the charging business, operation is heavily linked to digital capabilities, analytics, and pricing. With our extensive charging network and data collected from these chargers, we can derive optimal operating models for charging stations. We achieve higher efficiency through strategic pricing at various times of the day. As demonstrated in pilot projects involving 13 stations across 7 provinces, we achieved a 10% improvement in charging volume after we took over operations. The potential here is huge; our network comprises 73,000 charging stations that we can operate. Our goal is to identify the ones that show the highest potential for efficiency improvement and secure operating rights from asset owners. Furthermore, this number is not fixed; as the market grows, so does our opportunity to operate more stations. We are facing a unique growth opportunity in the rapidly expanding public charging market, which is projected to grow 20 times by 2030. Combining our capabilities with the macro growth creates a very unique opportunity.

Your next question comes from Chile New at Casa Securities.

Hello. Can you hear me?

Yes, please.

Okay. I'm the analyst from indiscernible. My question is about NaaS and its long partnership with China Construction Bank. Can you elaborate on how the partnership could support your business?

Thank you for your question. That's a very good question. As a context, NaaS and its parent company have entered into a partnership with China Construction Bank, one of the largest banks in China, to provide a credit line of up to RMB 2.5 billion. This collaboration will surely strengthen our financial position in this fast-growing phase. Having the support from one of the biggest banks in China will facilitate the energy transition and new energy adoption in our value chain. This partnership will accelerate production speed, benefiting all parties involved. We believe this is a mutually beneficial partnership, empowering more businesses within our ecosystem. We are excited about this collaboration and proud to have the support from CCB.

That concludes our question-and-answer session. I'd like to turn the call back to the company for closing remarks. Thank you.

Thank you all for joining our call today. Please feel free to contact us if you have any further questions. Good night, and goodbye.

Thank you. That concludes today's conference call. You may now disconnect your lines. Thank you.