Uxin Ltd Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the Quarter Ended September 30, 2021. At this time, all participants are in a listen-only mode. 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, Ms. Joyce Tang, IR Director of the company. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the quarter ended September 30, 2021. On the call today are D.K., Founder and CEO of Uxin; and John Lin, CFO of Uxin. D.K. will review business operations and company highlights, followed by John, who will discuss financials and guidance. They will both 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 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. D.K., please go ahead.

Hello, everyone. Thank you for joining our earnings conference call today. To better communicate with both domestic and international investors, my prepared remarks today will be in both English and Chinese. In the second quarter of fiscal year 2022, which ended on September 30, we maintained solid growth in terms of both sales volume and revenue. Total transaction volume in the quarter was 3,648 units, which is an increase of 21% compared with last quarter. The retail transaction volume was 1,027 units, an increase of 51% compared with last quarter. In terms of our reputation with customers, our persistent efforts to improve vehicle quality and service experience are yielding tangible results. In the quarter, our Sales Net Promoter Score, or NPS, increased for the fourth consecutive quarter to 56, a new record high versus 42 in the previous quarter. Going forward, we will continue to optimize and upgrade the quality of our products and services to provide the best-in-class one-stop purchasing experience to our customers and drive high-quality sales growth through positive word of mouth. We completed an important milestone in our business development in November with our IRC successfully launched and running. We launched our second IRC in Hefei, Anhui Province. With China having the largest volume of used car transactions, Hefei Province is one of the fastest-growing areas for car consumption in the region. The rollout of our second IRC in Hefei marks a key strategic step in our business expansion. Specifically, this Hefei IRC covers a total area of about 1,000 square meters with a warehousing capacity of up to 2,000 vehicles. Currently, the combined number of vehicles available for sale in Hefei is roughly 1,500, covering 52 brands in a wide collection of economic and luxury models. As far as we know, this represents the largest sales of used car IRC in China. Compared to Xi’an IRC, the Hefei IRC demonstrates our improvements in service quality, regional management, and service systems. Since we began operating in mid-November, the new Hefei IRC has been well-received by our customers for its vehicle quality and services. The vehicle sales volume has been growing steadily week-over-week. When the construction is fully completed, the Hefei IRC will be one of the most advanced used car production centers that feature streamlined operations, automation, digitalization, and business intelligence. It will be a one-stop used car sales destination offering vehicle acquisition, inspection, refurbishment, demonstration sales, and after-sales service. In terms of vehicle sourcing, we have expanded our pool of vehicles to include leading domestic and foreign electric vehicle brands. We are establishing sourcing channels, inspection standards, and refurbishment processes specifically designed for electric vehicles. This will enable us to provide high-quality and reliable used electric vehicles to our customers. We believe this will provide new growth drivers for Uxin in the coming era of electric vehicles. Meanwhile, we also hope to leverage our extensive inspection and reconditioning capabilities to drive the healthy development of the used electric vehicle market in China. In terms of vehicle reconditioning capability, we continue to optimize and streamline our work processes to improve both quality and efficiency. Based on our market research, the majority of used car dealers in China offer only a limited or basic level of reconditioning service before selling the vehicle to customers. We have accumulated an integrated database of reconditioning standards and processes through years of operations. This allows us to utilize our skilled advantage in procurement to optimize reconditioning costs and offer our customers high-quality vehicles at attractive prices. Meanwhile, we actively invest in reconditioning equipment and technology to further boost our efficiency. In the Hefei IRC, our average time and costs required for reconditioning a car have improved by more than 50% compared to when Xi’an IRC was just launched. We will continue to focus on improving every business process to strike a good balance among quality, cost, and efficiency. Recently, we have closed part of the second tranche of the financing process ahead of the original schedule. Following our development plan, we will extend vehicle acquisition, enhance refurbishment capability, and optimize our supply chain. Investment in these key areas will enable us to increase available car inventory and further improve the car purchasing experience for our customers. Finally, I would like to once again thank our customers and shareholders for their continued support and our team for their hard work and dedication. This will be a long and fruitful journey, and we have a long way to go. The smooth operations of the Xi’an IRC over the past six months and the newly launched Hefei IRC have given us great confidence in our business. Going forward, we will remain committed to our current development directions and contribute to the long-term and healthy development of the Chinese used car industry. We believe all our efforts and investments today will pay off in the future. With that, I would like to turn the call over to CFO, John, to walk you through the financial results. John, please go ahead.

Okay. Thanks, D.K. Hello, everyone. Let me walk you through our financial performance for the quarter ended September 30, 2021. The business was growing steadily in this quarter. We started to increase our available for sale inventory in Xi’an IRC since we received the first tranche of the new investment in early July and then reached full capacity at around 600 cars in mid-August. The improved inventory level enabled us to ramp up our retail sales volume. The retail volume increased by 51% quarter-to-quarter and overall sales volume increased by 21% quarter-to-quarter. As a result, our revenues increased by 24.5% compared to last quarter. Meanwhile, we spent a tremendous amount of effort to minimize our cost and expense structure, build a lean organization, and drive efficient operational processes. The impact has been reflected in our continuously improving operational line. I would like to comment specifically on the fair value adjustment impact resulting from the issuance of senior convertible preferred stock as a result of our financing deal with NIO Capital and Joy Capital. The stock price rose significantly since we announced entering into agreements with these two investors on April 1, 2021. This led to a paper loss of RMB 1,654.9 million, or U.S. $256.8 million, which impacted the net profit. This loss is purely driven by accounting treatment, it is a non-cash item, and it does not affect our cash flow. Additionally, this is not related to our business operations. Regarding the financing transaction with NIO Capital and Joy Capital, as part of the closing of U.S. $50 million, we have received U.S. $27.5 million cash ahead of schedule. We expect to receive the remaining U.S. $22.5 million in the coming months as planned. As D.K. said earlier, we will utilize the capital to continue investing in key business initiatives including increasing car inventory, optimizing reconditioning technologies, and improving our supply chain to drive further high-quality business growth. As we announced earlier, Uxin has been included in the MSCI Global Small Cap Index, China Index, effective on November 30, 2021. This is the first time Uxin has joined the MSCI Index. We see this as recognition of Uxin's business performance and the potential of China's used car industry. The used vehicle industry in China has huge opportunities, and we believe Uxin is well-positioned to lead the dynamic growth of this promising market. Full details of the quarter ended September 30, 2021, are available in our earnings release. Now, I will run through some key numbers. All numbers are in RMB unless otherwise stated. Transaction volume was 3,648 units for the three months ended September 30, 2021, compared with 3,011 units last quarter and 2,653 units in the same period last year. Total revenue was RMB 345.9 million for the three months ended September 30, 2021, compared with RMB 277.8 million last quarter and RMB 76.4 million in the same period last year. Gross margin was 4.2% for the three months ended September 30, 2021, compared with 4% last quarter and a negative 22.4% in the same period last year. The loss from continuing operations was RMB 45.9 million for the three months ended September 30, 2021, compared with RMB 50.7 million last quarter and RMB 162.6 million in the last year. The non-GAAP adjusted loss from continuing operations was RMB 43.2 million for the three months this quarter, compared with RMB 44.6 million last quarter and RMB 178.3 million in the same period last year. The fair value impact of the issuance of senior convertible preferred shares resulted in a loss of RMB 1,654.9 million for the three months ended September 30, 2021. As discussed earlier, the impact was mainly due to the significant rise in the stock price following our announcement about entering into the deal. The fair value impact was a non-cash charge. Driven by this, the net loss from continuing operations was RMB 1,714.6 million for the three months ended September 30, 2021, compared with RMB 258.9 million in the same period last year. If removing the fair value adjustment impact, the non-GAAP adjusted net loss from continuing operations was RMB 156.9 million for the three months ended September 30, 2021, compared with RMB 274.6 million in the same period last year. Now about our cash position. As of September 30, 2021, we had cash and cash equivalents of RMB 230.6 million. Moving on to our guidance, we expect our total revenues to be in a range of RMB 480 million to RMB 500 million for the three months ending December 31, 2021. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Thanks.

So, operator, we are ready to receive the questions. Thank you.

Certainly, we will now begin the question-and-answer session. We have the first question from Fei Dai from TF Securities. Please go ahead.

Could you please repeat my question in English? Based on the financial results from last quarter, it appears that the wholesale vehicle business has increased its contribution to the company's overall revenue. This quarter seems to show further optimization in this area. How does the company view the development of this business, and what future impact might it have on the retail vehicle business? Thank you.

In Uxin, the current sales distribution between our retail and wholesale operations is 1:2. Due to our brand recognition and market standing, we attract numerous customers looking to sell their used vehicles. However, we do not currently sell all the used cars sourced from individual owners through our retail business for several reasons. Firstly, we must consider our space capacity, while also wanting to manage the amount of cash tied up in our inventory. Additionally, we need time to enhance our sales capacity. Thus, for those cars that do not qualify for our retail standards and those that exceed our inventory limits, we will sell them through our wholesale business to expedite our inventory turnover. Over time, this sales mix will shift as we increase our retail inventory levels. With the operational launch of the Hefei and Xi'an IRCs, we expect our retail sales to grow steadily. Our goal is to transform the sales ratio between retail and wholesale to 2:1, ideally having retail sales double those of wholesale sales.

Thank you. Shall we go to the next question?

Operator, please go ahead to the next question.

Certainly. We have the next question, this is coming from the line of Jay Jin from China Securities. Please go ahead.

I have two questions. The first one is about the net loss; could you explain how the fair value change impacts the net loss? The second question is about the cash flow. What are the expectations for the cash flow in the next quarter?

This is a paper loss related to our financing transaction announced earlier this year. It is purely an accounting adjustment under U.S. GAAP. The change in stock price after the deal announcement with NIO Capital and Joy Capital led to a loss on our income statements. However, this is a non-cash item and will not affect the company's cash flow or relate to our business development. After receiving funding from our investors, we have a strong cash position. We received the first tranche of $100 million in July and are closing the second tranche of $50 million ahead of schedule, showing investor confidence in our operations. Additionally, the follow-on warrant associated with the transaction has performed well as we collaborate closely with our investors. This funding will enable our future business development. Currently, our business is doing well and expanding, with continuous growth in our vehicle inventory. Overall, after outlining our cash usage plan, I believe our cash balance is adequate.

Operator, please go ahead to the next question.

Certainly. We have the next question, this is coming from the line of Tengwei Liu from CITIC Securities. Please go ahead.

And my question is about the electric vehicle used cars. On one hand, there is rapid growth, but there are also challenges such as pricing discounts and valuing the vehicles. I would like to hear about our plans and perspectives regarding the secondhand electric vehicles. Thank you.

We have launched our used electric vehicle business. Electric vehicles are a major trend in the auto industry. While the total number of existing EVs is still limited, there is clear evidence that the demand from EV owners to switch or upgrade their vehicles is on the rise, making used electric vehicles increasingly popular and marketable. The potential market size for used electric vehicles may rival that of conventional gasoline-powered used cars, despite some differences in inspection, reconditioning, pricing, and sales processes. We are already offering used EVs from several well-known brands. At the same time, we are enhancing our electric vehicle service systems and improving our capabilities in areas such as pricing and after-sales service. Additionally, we are innovating how we sell used electric vehicles. Our goal is to support the healthy development of the used electric vehicle market in China by utilizing our extensive expertise and capabilities developed over many years of operation.

Thank you. We have no further questions at this moment. I would like to hand the conference back to our host for any ending remarks. Please take over.

Thank you, operator. Thank you to all the investors joining us today. We look forward to seeing you next time. Goodbye.

Goodbye.

Goodbye. Thanks.

Thank you. That concludes our conference call for today. Thank you all for your participation. You may disconnect now.