Earnings Call Transcript - NAAS Q4 2022

Cynthia Tan, Senior IR Director

Thank you, operator. Hello, everyone, and welcome to NaaS Fourth Quarter and Full Year 2022 Earnings Conference Call. The company's results were shown earlier today and are posted online. Joining me today on the call are Ms. Kathy 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 industry trends and recent performance 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 this call as we will make forward-looking statements. Also, please note that this call includes discussion of certain IFRS financial measures. Please refer to our earnings release which contains a reconciliation of non-IFRS measures to the most comparable IFRS measures. Finally, please note that unless otherwise stated, all figures mentioned during the conference call are in RMB. I will now turn the call over to our CEO, Ms. Kathy Wang Yang.

Kathy Wang Yang, CEO

Hi. Good morning, everyone. I hope you are great. I'm Kathy Wang, the CEO of NaaS. It's my pleasure and such an honor to share NaaS' Fourth Quarter and Full Year of 2022 Earnings Result. Discuss our recent development with all of you. Firstly, I'd like to discuss with you the long-term trend of energy transformation as well the potential for new energy development and the context of the global consensus on carbon neutrality. Elon Musk recently announced part 3 of Tesla's master plan, as you may be aware. In a nutshell, this is a plan for fully replacing traditional energy with new energy. The traditional energy faces issues of environmental pollution and low efficiency, while new energy offers clear advantages in terms of being clean, environmentally friendly, safe, and efficient. The energy transition is an inevitable global trend. So developing clean energy, reducing carbon emissions, and building a green planet have become the most significant area of consciousness among countries throughout the world, including China, the United States, Europe, and the Middle East. EV sales in China reached 3.9 million units in 2022, accounting for 30% of total global sales. This year, that number is expected to reach 9 million. According to CIC, the number of ICE cars in China will peak around 2025. While EV sales will continue to grow, the number of EVs is expected to surpass ICE cars by 2036. The total number of cars in China is predicted to exceed 424 million by 2050, with the number of EVs over 328 million. At the same time, the total investment in the supporting EV-charging industry will exceed RMB 30 trillion. In 2022, China became the global leader in terms of the existing number of EVs, EV incremental growth, and EV export volume. 2022 was also an important year for NaaS as we completed our netback lifting and strengthened our leadership position in the charging service network. In 2022, our Chinese charging network expanded rapidly with a year-over-year rise in total charging volume of 115%, accounting for 20% of China's total public charging volume. At the end of 2022, we had connected 515,000 chargers in 50,000 charging stations across over 330 cities. We take advantage of this growth in our recharging network. We expand our one-stop service to energy outside operation, providing end-to-end one-stop solutions covering the entire cycle of charging station construction, operation, and upgrading, serving enterprises throughout the new energy value chain. Looking ahead, as the leading player in the world's largest EV market, we aim to seize the historical opportunities of energy transformation by leveraging our unique business model and industry position and committing to working together with partners to promote core initial reductions in transportation and strive toward the goal of carbon neutrality. Now I will turn the call over to Alex, our President and CFO, for a closer look at our operating and financial performance.

Alex Wu, President and CFO

Thank you, Kathy. Hello, everyone, and thank you for joining our call today. Our strong performance in the fourth quarter capped off a year of rapid growth for NaaS. Riding on the tailwinds of the explosive EV market, we continued to solidify our leadership across our charging service network and significantly scaled our client base for our one-stop charging solutions, nearly doubling our net revenues year-over-year in the fourth quarter. To effectively address the industry's pain points, NaaS offers one-stop services including online and offline charging solutions and other innovative businesses for charging stations, auto OEMs, and other enterprises across the new energy value chain. Thanks to strong customer endorsement of our one-stop EV charging solutions, our net revenues increased by 177% year-over-year in the full year of 2022, reaching RMB 92.8 million. Online charging services are the cornerstone of our business. Our high-quality services, aided by network effects, have driven our rapid market share expansion in the EV charging service industry. In 2022, gross transaction value through NaaS network reached RMB 2.7 billion, representing an increase of 119% year-over-year, with net take rate expanded by 3.74 bps. Building on the foundation of our EV charging network, we focused on expanding our services to provide one-stop EV charging solutions, which cover each stage of our business lifecycle. These range from construction to operation and upgrades, and they will be our growth engine and source of profitability going forward. Since 2022, we have made significant strides in our business across these stages, gathering recognition from an increasing number of customers with offline EV charging solutions, which contributed 44% of our revenue in 2022. In the construction stage, we leveraged our big data-backed industry insights, operational expertise, and strong execution to offer site selection, hardware and software procurement, and EPC turnkey construction solutions. As one of our ongoing projects, we provide one-stop EPC turnkey service to build charging stations in Wuhan, commencing operations on March 26, 2023. Our first charging station is equipped with 16 DC fast chargers for a total installed capacity of 3,600 kilowatts and a total CapEx of over RMB 5 million. From completion onwards, we provide operation and maintenance solutions to help clients reduce their operating costs and further improve efficiency and profitability while simultaneously increasing our recurring revenue. In the operations stage, we digitalize and upgrade key aspects of our charging stations' operation and management, working in concert with our capable offline services team; the online intelligent operation and maintenance system we built for our charging stations responds to users' operation and maintenance needs, improving our charging stations' repair and maintenance efficiency. Our product offerings not only boost our customer service quality and operational efficiency, but they also help our customers stand out among local competitors. We are currently providing maintenance services for over 15,000 parking spaces at 2,100 charging stations in 186 cities. In the upgrade stage, we help Chinese stations deploy energy storage upgrades. In January of this year, we partnered with HyperStrong, a leading energy storage system integrator and system service provider, to establish a joint venture focusing on energy storage. Meanwhile, we plan to launch our virtual power plant platform by mid-2023 to facilitate the establishment of a modern energy system for Charging stations. Our virtual power plant platform can promote energy efficiency and optimization, participate in the power trading market, and provide various supporting services, such as peak shaving and value feeding of the broader power grid to achieve smart power dispatch. Altogether, these efforts have facilitated the construction of a modern energy system. Thanks to its effectiveness in addressing the industry's pain points and improving ROI, our one-stop solution has attracted a growing roster of leading enterprises to establish strategic partnerships with us. A recent example is smart charging, a joint venture we established in March 2023 with a smart order and internet platform in the lodging industry. We are jointly building a shared destination charging service network for EVs to address drivers' last-mile charging problems during road trips. With respect to R&D, in March, we launched our self-developed automatic charging robot empowered by technologies, including deep learning, 5G, V2X, SLAM, perception, and regulation. Our robots can connect with the underlying APIs of major OEMs, thus automatically opening the charging cover, accurately detecting the position of the charging port, and automatically moving the charger in and out through the auto charging system of a mechanical arm. This smart and unmanned charging service can be easily deployed in parking lots without charging facilities at this time and will provide unmanned replenishment service for autonomous driving in the future. We have also started to explore overseas markets by establishing our Asia Pacific and European headquarters in Singapore and Amsterdam, respectively. We're delighted to have Allen Dong on our team as the General Manager for our European and Middle Eastern operations. Having worked for a leading energy company and ABB previously, with over a decade of experience in EVs and in charging infrastructure in particular, I believe Allen's deep insights and passion for the EV industry will provide a strong boost to our development in the overseas market. On top of the considerable progress we have made in our business, we continue to actively fulfill our social responsibilities. In 2022, we released our first ESG report which showcased our data and achievements in four areas: low-carbon operation, active innovation, employee care, and public well-being. In 2022, we achieved a carbon emission reduction of about 1.85 million tons, up 106% year-over-year. Next, I will go over some of our financial results for the fourth quarter. I will address financial highlights here and encourage you to refer to our earnings press release, which is posted online for additional details. Our total net revenues reached RMB 29.5 million in the fourth quarter, up 95% year-over-year. The rapid increase was mainly the result of increases in platform order volumes and continued improvements in operations. Our total operating costs were RMB 151.1 million in the fourth quarter. This was preliminarily due to our significant business expansion. Our net loss for the fourth quarter of 2022 was RMB 126.9 million as compared with a net loss of RMB 57.2 million for the same period of 2021. Turning to guidance for full year 2023, we expect our net revenues to be in the range of RMB 500 million and RMB 600 million, growing by 5x to 6x from 2022. This forecast considers the company's current preliminary view on the business situation and the market conditions, which are subject to change. Looking ahead, as Kathy mentioned, we are very optimistic about the EV energy service market. We continue to gear for strong growth through our one-stop EV charging solution and continue to take a disciplined approach to cost management, prioritizing investment initiatives that deliver healthy ROIs and drive efficiency gains across our organization.

Yixan Du, Analyst

Yes, yes. This is Yixan from CICC. Maybe first, congratulations on the great performance in the last year. And I have two questions regarding our future development. The first one is about the offline EV charger solutions. I'm curious about the guidance of the liabilities. In other words, what do you think of the revenue growth of offline business in this year and next year? Besides, we all know that there are several different parts in the offline business. Which one or two or three parts do you think would support this growth? This is the first question. My second question is about your EV charging robots. You know that EV charging robots are a very popular topic within China. We've seen that you launched the Lab smart charging robot; way to go! What do you think of the application scenario and market space of this new project? You mentioned it just now that we need more details as this is my two questions.

Alex Wu, President and CFO

Thank you, Yixan, for your questions. Let me address them one by one. So, first, regarding the offline business space, I think let me reiterate what services we provide to our customers in the offline space. We provide one-stop turnkey solutions to charging stations across the life cycle of the charging station in three stages: initial building, operating and upgrading stage. In the initial building stage, we provide support for big data-backed site selection, hardware and software procurement, and EPC, which involves the design and construction of the site. In the operating stage, we offer services like user acquisition, operation maintenance, and non-charging services, such as fast food and auto vending machines. In the upgrading stage, we help our customers implement technological upgrades, including energy storage, solar PV, virtual power plants, and electricity trading. During 2023 and 2024, we will continue to build our capabilities and assist our customers in establishing these key skills through our services. All of these services have significant potential regarding the amount of support we can provide them. Specifically, I see areas such as operations, user acquisition, hardware and software procurement, EPC, operation and maintenance, and definitely energy storage as being pivotal in the short to mid-term. I believe we will be able to generate substantial revenue from these services. These revenues will support our growth for this year and next year, and I think as China's growth potential for charging station building and operation continues to expand, we will have ample opportunities in the coming years to deliver results. Currently, we already have quite a few projects either running or in the pipeline for us to acquire. So that's the answer for the first question. For the second question regarding the charging robot, thanks a lot for your interest. Since we released the charging robot a couple of weeks ago, we've received considerable interest from all over the world, really from Australia, Japan, and the Middle East. The current charging robot we've shown in the video is a prototype which we plan to commercialize in the next 3 to 4 months as a fully commercial product. Currently, we plan to continue expanding the laboratory capacity of the charging robots. In terms of use cases, I think there are two types of use cases. In the near term, the use case will be specific to enclosed areas like charging ports, commercial properties, and industrial parks. In the long term, I believe the charging robot will be an excellent option for autonomous driving. We believe that autonomous driving clearly represents the future, and with autonomous driving, we will require automated charging. So the two key functions of the charging robots are: one, that it's capable of connecting to all types of APIs from different OEMs because those OEMs are already using our APIs to locate the charging service. We've established these connections already. That’s number one. And number two: the charging robot has state-of-the-art technologies to help detect and plug in the charging gun into the vehicle, which has been a technological challenge. We've managed to address both successfully. So I think the technology empowers us to cater to autonomous driving in the future where automated charging will be essential. These are the two use cases I see: one in the short term and one in the long term. But for the next step, we will test this charging robot in areas where there is interest, and we will prepare the charging robot for commercial use in some of those scenarios.

Eugene Haier, Analyst

This is Eugene Haier from Macquarie. Kathy, Alex, I appreciate your time to answer our questions. I have two questions. First, I'd like to understand more about how we think about the current and future profitability differences between the two major business segments: the online EV charging platform and the offline EV charging services, and how do you see that developing over the next few years?

Alex Wu, President and CFO

Okay. Thanks, Eugene. Let me address this question. I think we have a clear path to profitability on both online and offline EV charging solutions, but the paths will be different for each business. For the online charging platform, let's first discuss the current performance. The net transaction income has been continuously improving for the past couple of quarters, with an improvement of about 3.74 bps in 2022, and we see this trend continuing in the first quarter of 2023. The way to perceive the online charging business is fairly straightforward. We have two sets of customers: the operating vehicles and the private vehicles. The operating vehicles are cost-sensitive but provide significant charging volume. In contrast, the private vehicles are less sensitive to pricing but charge less frequently. The operating vehicles can be thought of as our VIPs. Their charging doesn't make money directly, but their presence contributes to our royalty fee. As the number of EVs continues to rise significantly year-over-year, we believe the percentage mix of EVs will shift towards private vehicles. This transition will naturally lead to higher net transaction income, eventually reaching a break-even point and generating profit. We've already observed a clear trend in quarter-to-quarter and year-over-year comparisons, and we are optimistic about this trend continuing. For the offline solutions, the situation is more transparent because we provide B2B services, which carry a positive gross margin for all of our services across the three stages we offer. Therefore, we believe we can generate profit from our offline solutions.

Eugene Haier, Analyst

One more question from me. You mentioned in the prepared remarks that you've hired Allen, and you've also opened offices in Singapore and Europe, looking at the Middle East. Could you provide a bit more color on overseas expansion plans and maybe some timing on when you expect those to materialize?

Alex Wu, President and CFO

Sure, sure. Thank you. This is a great and significant initiative for us. We are a NASDAQ-listed company and we always view ourselves as a global company. We don't see ourselves solely as a China-based organization. Ever since our listing, we have initiated our overseas expansion plan. We've done our homework and compared the experience that people like Allen have in the European market with the ecosystem of the Chinese EV charging market. We find striking similarities between the two markets. That gives us confidence that the charging ecosystem in China is the most advanced and mature, and we should be able to replicate some of the best practices we’ve accumulated in China over the years into other less developed markets in terms of EV charging. That's our strategy moving forward. We have already marked key regions, including Europe, the Middle East, and Asia Pacific. We plan to utilize different strategies for each of these three markets. Allen is our General Manager for the Middle East and Europe. For Europe, which is mature, we are looking at a potential M&A strategy that will help us acquire brand presence. In the Middle East, we aim to collaborate with local governments to help construct their charging networks. The Middle East is a unique market; to succeed there, we must work with the local ecosystem. For Southeast Asia and Japan, we are collaborating with some energy companies to understand how we can leverage their existing networks in the energy supply system to build the charging network, which we believe is a strategy that offers the most leverage. We're engaging with these energy companies, and we expect to see some results this year. This year, our objective is to clearly establish our presence in the overseas market and successfully land one or two major projects.

Eugene Haier, Analyst

Thanks so much. If you don't mind, just one more. I'm interested in understanding a bit more about the relationship with the parent company, Newlink, and where you feel there could be some synergies.

Alex Wu, President and CFO

Sure. Thanks, Eugene, for that question. The parent company is called Newlink Group. Newlink Group is an energy digitalization and energy asset operation company, and it's China's largest energy digital service company. Currently, they service 300 million users through their digital app and cover 25,000 gas stations across China. There are a couple of notable synergies that we can clearly identify. First, from a customer perspective, the application called Tuanyou has 300 million registered users. These drivers of ICE vehicles are gradually transitioning to EVs. We’ve analyzed that among users of our EV services, there’s a 70% overlap. Thus, the 300 million drivers provide an excellent user conversion pipeline for our online solutions. The second point pertains to gas stations: Newlink Group operates about 25,000 gas stations, and many of the owners are either engaged in the charging station business or are seriously considering it. We conducted a survey indicating that about 30% of gas station owners are interested in constructing charging stations. These individuals possess the land and resources for local networks, and they require our expertise to assist them in implementing charging stations. We already have established relationships with them, making them strong candidates for our station pipeline. Additionally, Newlink Group has an established local network in many cities due to its successful fueling business. This local network will be beneficial for our charging and charging station management operations, as they are already assisting NaaS in our maintenance and service business.

Kathy Wang Yang, CEO

Thank you once again for joining us today. If you have further questions, please feel free to contact us.

Operator, Operator

Thank you. That does conclude the conference call. You may now disconnect your lines. Thank you.