Uxin Ltd Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Uxin’s Earnings Conference Call for the Quarter Ended December 31, 2020. At this time, all participants are in a listen-only mode. And after management’s prepared remarks, there will be a Q&A 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 your host for today's conference call to Eric Yuan. Please go ahead, sir.

Thank you, operator. Hello, everyone. Welcome to Uxin’s earnings conference call for the quarter ended December 2020. On the call today are D.K., 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 will both be available to answer your questions during the Q&A session. 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 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 and under the 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, sir.

Thank you, Eric. Hello everyone. Thank you for joining our earnings conference call today. We are pleased to report that we have completed our strategic transformation into an inventory-only model in the quarter ended December 31, 2020. The majority of online new car transactions in December were sold from our own inventory. This successful transaction reflects our commitment and ongoing efforts to better serve our customers with our online products and services. Operating as a nationwide online used car dealer, we have our own inventory. We now have much stronger control and management over the entire services and supply chain. From the selection and quality of our used cars inventory to online car consulting for buyers and customer services, as well as our own delivery and after-sales services nationwide. To strengthen our ability to provide a used car of high quality and value for money, we are building our own inspection and reconditioning center or IRC, where we can refurbish selected inventory to like-new condition. Our first IRC in Xi’an has been operating since March 2021. Through our new network of IRCs, we can facilitate in-house refurbishing for better control of quality and consistency so that the used cars meet our own quality standards. We are also able to better serve the market with reviews from each IRC location. Moreover, with this ongoing improvement to our products and services offerings, we have been closely monitoring our net promoter score or NPS. We have seen our NPS increase to 42 during the reporting quarter, up from 30 in the quarter ended September 30, 2020, and only 10 in the quarter ended June 30, 2020. The significant improvement in NPS reflects the recognition by our customers of the value proposition that we are providing, offering even higher quality, value-for-money used cars and best-in-class online car services. It also gives us greater confidence that we have the right development strategy in place and are heading in the right direction with our online business. The increasing NPS score has also strengthened our referral strategy, providing a foundation for further growth and generating solid, sustainable long-term growth, reinforcing our brand and market position in China. The Chinese used car market has huge growth potential, and the government continues to introduce preferential policies for the industry. The value-added tax on used car sales has been cut to 0.5% from 2% in May 2020. The General Office of the State Council has recently required all regions to remove restrictions on cross-region transactions and the title transfer of used cars. The government has also published its blueprint for the digital documentation of used cars. Registration and other documentation will be completely digitized for online transmission. This will simplify the documentation process, reduce title transfer costs, and increase the efficiency of cross-region used car transactions. Digital documents will be tested in designated regions in June, expanded to major cities in September, and will be adopted nationwide in the first half of next year. As the leading online used car dealer in China, Uxin believes these policies will create a more efficient and sustainable environment for the used car business in the long run. We will closely monitor government policies, improve vehicle quality, and develop services to a high level to contribute to the transaction of the Chinese used car industry. Last week, we entered into a strategic partnership with JD.com to launch our self-operated online store for used car transactions through JD's platform. The collaboration will provide customers with a one-stop online used car purchasing solution, including used car inspections, purchasing insurance, and after-sales services and includes plans for joint development of data management technology, inspection standards, and integrated supply chain in the used car business. We are committed to using big data and internet technology to empower the used car industry in order to raise industry standards and the level of services. We believe cooperation with JD.com will offer our customers a higher quality and more reliable used car purchasing experience than currently exists in the market. As a result, we are very pleased with the progress we have made this quarter. We are also encouraged by the recognition of our success by two well-established Asian firms, and we have entered into a binding term sheet for a potential investment of up to $300 million. These investors have expressed a strong belief in the potential of the Chinese used car market. They have acknowledged Uxin’s leading market position, strong branding, and capacity to provide high-quality cars and services to customers. We are glad that they also share the same risk factors for Uxin’s business model, growth, and execution plans. Currently, financing is proceeding as expected. We will work closely with these investors to transform the Chinese used car industry and create long-term value for our customers. With that, I'd like to turn the call over to our CFO to walk you through the financial results. Zhen, please.

Thanks, D.K. Hello everyone. Thanks for joining us today. I will walk you through the financial results for the quarter ended December 31, 2020. Our online used car transaction volume was 2,307 units this quarter, with the majority sold from our own inventory. Since we shifted to an inventory-only model, our revenue recognition and the structure of costs and expenses are more in line with our industry peers. We believe this will facilitate the understanding of our business and our financials. Also, since we have settled the majority of our remaining liabilities in July 2020, the impact of the discontinued loan facilitation business on operating expenses has been minimized. As a result, our financial performance will better reflect our core business. Moreover, during this quarter, we improved overall operational efficiencies through strict cost management. We target to grow the business at the most efficient cost level. We believe our ongoing cost-saving efforts will be productive and enhance our financials in the coming quarters. Now let me walk through the financial details for the quarter ended December 31, 2020, which is the third quarter of our fiscal year 2021. All numbers are in RMB unless otherwise stated. Total revenue was RMB323 million. This is recognized on a gross basis as a result of the transformation into the inventory only model. Our total Q2 revenue was RMB303 million, with the majority of the revenue coming from our vehicle sales. Gross margin was 2.9% compared with negative 22.4% last quarter and 59.2% in the same period last year. Due to the adoption of the inventory only model, revenue recognition and the components of costs were significantly different from the corresponding period in 2019 and also the last quarter. However, we believe this is more comparable with our industry peers. With the transformation completed, we expect that gross margin will rise gradually in the coming quarters. Total operating expenses were RMB188 million compared with RMB318 million last quarter and RMB862 million in the same period last year. Total operating expenses decreased mainly due to our continuing actions in cost-cutting and also the decrease in the past related to liabilities for historically facilitated loans. To discuss more about costs and expenses, we also improved overall operational efficiencies through various cost management strategies. As part of our strategy, we aim to grow our business at the most efficient level. The marketing expenses decreased by around 50% year-over-year, and expenses related to professional fees decreased by 72% compared with the corresponding period in 2019. Due to the adoption of the inventory-only model, most salaries and benefits for employees engaged in car sourcing, inspections, and after-sales services have been reclassified as sales and marketing expenses, whereas before such items were classified as cost of revenues. Overall speaking, the labor expenses of total operating expenses this quarter may not be comparable with previous quarters. Overall, costs and expenses excluding severance pay and labor costs decreased by 63% year-over-year and 9% quarter-over-quarter. Looking ahead, we believe our ongoing cost-saving measures will be productive and benefit our financials in the long run. Non-GAAP adjusted loss from continuing operations excluding the impact of share-based compensation was RMB162 million for the three months ended December 31, 2020, compared with RMB178 million last quarter and RMB577 million in the same period last year. The net loss was RMB173 million for the three months ended December 31, 2020, compared with RMB259 million last quarter and RMB967 million in the same period last year. Regarding our cash position, as of December 31, 2020, we had cash and cash equivalents of RMB288 million compared with RMB219 million as of September 30, 2020. Assuming the potential investment of up to $300 million is completed, our cash position will be significantly improved. We believe that this will help alleviate the ongoing concerns about continuing operations. This investment is subject to the company's fulfillment of the terms in the term sheet. That sums up our results for the three months ended December 31, 2020. Moving to our guidance, the quarter ended March 31, 2021, is typically the traditional offseason in the Chinese used car market due to the spring festival holiday. With the adoption of the inventory-only model, we expect our total revenue to be in the range of RMB119 million to RMB200 million for the three months ended March 31, 2021, with continued focus on cost and expense management. Gross margin is expected to increase to around 5% and the non-GAAP adjusted loss from continuing operations is expected to be less than RMB110 million. This forecast reflects our current and preliminary views on the market and also the operational conditions which are subject to changes. That concludes our prepared remarks. Thanks.

Thank you. Our first question comes from an unidentified capital firm. Your line is open. Please go ahead.

Hi everyone. Thanks for taking my question. We're happy to see the work you've been doing and your strategic transformation. Would you give us more color on what's happening with your IRC in Xi’an, your inspection reconditioning center? Thank you.

Thanks for your question. We began selecting the location and constructing the Xi’an IRC in December 2020, and it became operational this past March. The IRC spans approximately 24,000 square meters, including an official warehouse zone and a refurbishment zone. Once fully operational, it will accommodate over 1,000 vehicles, making it the largest flagship store for used cars under a single brand in Northwestern China. Currently, we have already stored hundreds of vehicles in the exhibition hall, and the IRC is set to officially open for business this May. This facility marks a significant advancement in our development as a nationwide online used car dealer, allowing us greater control over the service and supply chain, thereby providing our customers with high-quality used cars and a full range of solutions. Regarding reconditioning, our team is conducting this process in about 40 cities across China, with only around 20% making it into our in-house inventory. Each week, our inventory undergoes more than 300 tests as part of the inspection process. By utilizing our professional testing equipment and extensive inspection expertise, we effectively help customers select quality vehicles. Additionally, we use our in-house technology to refurbish the vehicles, enhancing their quality before they go to market. Our Xi’an IRC serves various purposes, including warehousing, inspection, refurbishment, and vehicle demonstration. It also offers vehicle registration services, providing customers with a comprehensive car purchasing experience. Local customers can visit our IRC to see the cars in person and can pick them up on-site rather than waiting for delivery. Overall, the development of the Xi’an IRC aligns with our previous expectations, and we believe it will make a positive impact on the used car market in Northwestern China once it officially opens. Thank you.

Thank you. Ladies and gentlemen, that does conclude the conference for today, and thank you for participating. You may now all disconnect.