Uxin Ltd Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Uxin’s Earnings Conference Call for the Quarter Ended June 30, 2020. And at this time, all participants are in listen-only mode. And after management’s prepared remarks, there will be a question-and-answer session. 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 the 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 two quarters, the impact of the coronavirus pandemic continued to create challenges for the 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, certainly 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 divestiture, we have shifted our business strategy from market business teams to a core focus and shifted our growth strategy from being financing-driven to one that’s focused on used car quality and service. Under the previous financing-driven approach, where we experienced rapid transaction volume growth, we were also weighed down by significant underlying credit risk and cost constraints on flow, because we had to take on all the guarantee liabilities and buy back default loans when their delinquent assets met certain criteria. Now, with this data behind us, we are entering 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 enhancing 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 key points throughout our service process. We built a group of inventory selectors to curate value-for-money used cars from across the country, ensure that the highest standards of car quality are met by careful inspection, simplify our pricing structure to facilitate customer purchasing decisions, offer professional consultants and purchasing services in a timely fashion from our online sales consultants, and work with more financing partners to offer diversified used car financing products and improve overall loan approval rates for our customers. We will run programs and provide after-sales services to 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 cars and deliver higher transaction certainty to our customers. As we move up the supply chain and assess used cars at more favorable acquisition prices, we will have greater flexibility in offering more competitive pricing to our customers, further establishing Uxin as the go-to online decision for buying used cars. In contrast to the traditional way local offline dealers acquire inventory based solely 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 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 preference, as well as real-time market dynamics and trends. In addition, we will offer refurbishments as a new service by reconditioning our cars to like-new condition before handing them 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 faster inventory turnover. This will be another significant milestone for us in solidifying our position as China’s leading nationwide online dealer, offering high-quality, value-for-money used cars and premium services. With that, I would 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 costs and expenses to adapt to the new business and service model. We now have a streamlined inventory sourcing and car inspection team, online sales consultant team, and back-office support teams. In addition, higher customer satisfaction and more word-of-mouth referrals also translate into more organic traffic and lower 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 implemented in China since May this year, used car dealers now only need to pay 0.5% on used car sales. This means we now have a more accommodating fiscal environment in which to operate as actual dealers. We will work with our financial institutions in the form of inventory financing to selectively build our own inventory, allowing 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 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 relate 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 a reconciliation of these numbers at the bottom of our earnings release. In the three months ended June 30, 2020, total revenues were RMB62 million, compared with RMB389 million in the same period last year. The decrease was primarily due to the decline in the 2C transaction volume and GMV as a result of the economic downturn caused by the COVID-19 pandemic, as well as the lead time needed to fully ramp up our upgraded transaction process. Our total 2C revenue was RMB52 million compared with RMB341 million in the same period last year. Online used car transaction volume was 3,887 units for the three months ended June 30, 2020, and its corresponding GMV was RMB426 million. Looking at the two revenue streams of our 2C business, commission revenue was RMB29 million compared with RMB179 million in the same period last year, primarily due to the decrease in transaction volume and GMV. Our commission rate expanded slightly to 2.7% from 6.2% in the same period last year due to our continuous efforts to offer a nationwide selection of the best value-for-money used cars as well as quality transaction services to our customers. Value-added service revenue was RMB23 million compared with RMB152 million in the same period last year, primarily due to decreases in transaction volume and GMV. VAS decreased slightly to 5.4% from 5.7% in the same period last year due to pricing adjustments during the COVID-19 period. Looking at other business, other revenue was RMB11 million for the three months ended June 30, 2020, compared with RMB48 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 RMB80 million. The decrease was primarily due to a decline in salaries and benefits for employees engaging in car inspection, quality control, customer service, and after-sales service, as well as a reduction in fulfillment costs due to a decrease in transaction volume. Gross margin was negative 28.4% for the three months ended June 30, 2020, compared with a gross margin of 55.9% in the same period last year. Total operating expenses were RMB151 million. Non-GAAP operating expenses, which excluded the impact of share-based compensation, were RMB156 million. Sales and marketing expenses decreased by 61% year-over-year to RMB116 million. The decrease was mainly due to a decline in salaries and benefits expenses as a result of the adoption of the flexible workload-based staffing program and some combination of employee contracts resulting from our business model upgrade, as well as a decrease in traffic acquisition costs. Sales and marketing expenses, excluding the impact of our share-based compensation, were RMB111 million. General and administrative expenses decreased by 29% to RMB87 million. The decrease was mainly due to a decline in salaries and benefits as a result of adopting a flexible workload-based staffing program and some combination of employee contracts resulting from our business model upgrade, as well as a decrease in share-based compensation expenses, partially offset by surveillance costs due to some terminations of employee contracts and a goodwill impairment of RMB9.5 million recorded in the reported quarter. G&A expenses, excluding share-based compensation, were RMB98 million. Research and development expenses, excluding the impact of share-based compensation, were RMB24 million. Gain from the guarantee liabilities was nil for the three months ended June 30, 2020. We incurred the guarantee liabilities associated with the remaining guarantee obligations from its historical facilitated loans that were transferred to Golden Pacer. We adopted Accounting Standards Update of 2016-13 Financial Instrument, Credit Losses, for the measurement of the 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 liabilities was accounted for under the greater of the amount determined under ASC 460 and the amount determined under ASC 450. After the adoption of ASC 326, expected credit losses from a contingent guarantee liability shall be accounted for separately from the stand-ready guarantee liabilities accounted for under ASC 460, and the provision for the contingent guarantee liabilities is currently recorded within the provision for credit losses, and the relief from the stand-ready guarantee liabilities accounted for under ASC 460 is currently recorded within other operating income. Provision for credit losses, net, was RMB74 million for the three months ended June 30, 2020. The reversal of the provision for credit losses was primarily due to the release of guarantee liabilities of RMB86 million as a result of a supplemental agreement reached between us and one of our major financing partners in April 2020 with regard to our historically-facilitated loans. Pursuant to this supplemental agreement, this financing partner agreed to set a cap on the amount of cash we would need to fulfill its guarantee liability with this financing partner from 2020 to 2022. Loss from continuing operations was RMB128 million compared with RMB223 million in the same period last year. Non-GAAP adjusted loss from continuing operations, which excludes the impact of share-based compensation, was RMB133 million compared with RMB196 million in the same period last year. Net loss from continuing operations was RMB152 million compared with RMB241 million in the same period last year. Non-GAAP adjusted net loss from continuing operations, which excludes the impact of share-based compensation, was RMB157 million in the quarter compared with RMB214 million in the same period last year. Turning to our cash position, as of June 30, 2020, we had cash and cash equivalents of RMB241 million. That sums our results for the three 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 begun selecting value-for-money used cars in the market, procure these cars, and arrange for the reconditioning and refurbishment to operate them in 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 the three months ended September 30, 2020, considering the continuous impact of the COVID-19 pandemic, upgrade progress of our business model, and the completed business divestitures, excluding the revenues to be recognized from selling our own inventory starting from September 2020, we expect our total revenues from continuing operations to be in the range of RMB33 million to RMB35 million, which includes commission revenue, value-added service revenue, and other revenue. If considering part of the revenues to be recognized from selling our own inventory, for which a portion of the revenues generated in September 2020 may be recognized on a gross basis, we expect our total revenues from continuing operations for the three months ended September 30, 2020 to rise to a range of RMB65 million to RMB70 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 an inventory-owning business model, which may be subject to refinement and revision. That concludes our prepared remarks.

Thank you, Mr. Zhen. Operator, we would like to open the call for questions now.

Thank you. We have our first question from Eddy Wang of Morgan Stanley. Please go ahead.

Hi. This is Michael. Thank you for taking my question. 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. In that context, what’s the advantage of the inventory-taking business model we will adopt? I just want to hear your thoughts on that. Thank you.

In the past 1 or 2 years, upgrading product quality and services has been a key theme in every consumer-facing industry and sector, and high-quality production and satisfied services are the foundation of selling more to customers and building reputation. Under this environment, where individuals are highly connected with each other and information exchange is highly effective, building a reputation and gaining word-of-mouth referrals is key to our company’s long-term sustainable growth. This is particularly true in the used car industry, which, after over a decade of development, unfortunately still has a less-than-satisfactory reputation. We believe that being honest and sincere when servicing customers and offering them high-quality used cars and premium services is the best way to transform the entire industry and achieve healthy and long-term growth for the sector. Over the past 1 or 2 years, more and more consumers are turning away from new cars and choosing to buy used cars. This is not simply because they cannot afford to buy a new car, but more about they now have a more rational consumption philosophy. They want to spend less on a used car but still get a like-new condition, which is almost as good as a new car. With this trend, more and more used car dealers will emerge willing to offer high-quality used cars and premium services. In turn, this will encourage more consumers to choose to buy used cars as well. Affected by the soft macro economy, the overall used car industry will see a very slow growth rate in the short term, but we expect it will gradually recover to a double-digit growth rate in the next year or two. Our decision to build our own inventory of used cars now is actually encouraged and driven by our quality focus and customer referral strategy. We believe that offering high-quality value for money in used cars and premium purchasing services will lead to higher customer satisfaction and improved reputation. Increased customer trust and word-of-mouth referrals will not only boost our car sales but also enhance our ability to drive long-term market expansion as a result of the quality premium our customers are willing to pay. We are starting to build our inventory now because we believe we have three or four significant advantages. The first one is our digitalization and intelligent data analytics, where both our historical and current transactions exist in digital form, including our customers' behaviors and preferences. This enables us to better manage supply and demand as well as selling prices with completely different decision-making capabilities from traditional used car dealers. Our current digital capabilities allow us to accurately predict the monthly sales of certain car makes and models, even to forecast the turnover of specific models, which guides us in selecting cars to build our own inventory. The second advantage is our ability to conduct purely online used car transactions and services. Currently, in China’s used car market, we are the only one capable of selling cars completely online. Our customers can easily make purchase decisions after reviewing our used car digital profiles online. Furthermore, our customers can make these decisions without the need for assistance from offline sales staff throughout the entire process. Our fulfillment capability covers over 300 cities and counties across China, ensuring our customers receive their cars that meet or even exceed their expectations within days after making an online purchase. Our pure online sales approach significantly strengthens our ability to match cars with consumers on a nationwide level, ensuring faster turnover. The third advantage pertains to our cost structure, which fundamentally differs from that of traditional offline dealers. Unlike them, we do not need extensive offline physical showrooms or a large offline sales team, enabling us to grow into a national online used car dealer with strong operational efficiency and potential for scalability. Given the current macro environment, it’s actually a good timing for us to take this approach, as the new used car taxation creates a more favorable environment for building our inventory. Since May of this year, the tax cut allows dealers to only pay 0.5% of used car sales as tax compared to 2% previously, thus significantly reducing our overall tax expenses. Additionally, for the cars we procure upfront, the car cycles are in our favor. Therefore, we can collaborate with financial institutions on inventory financing. So, as everything ramps up, the macro environment supports our decisions. Thank you, Eddie.

Thank you.

Thank you. I would now like to hand the conference back to Ms. Nancy Song for closing remarks. Please go ahead.

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