Uxin Ltd Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Uxin Earnings Call for the Quarter Ended December 31st, 2021. At this time, all participants are in a listen-only mode. 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 will now 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 December 31st, 2021. On the call today are DK, Founder and CEO of Uxin, and John Lin, CFO of Uxin. DK 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 Provision 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, DK. 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 will be in both English and Chinese. We are pleased that our business maintained its robust growth throughout the third quarter of fiscal year 2022, which spans from October to December 2021. Total transaction volume grew by 111% year-over-year to 4,879 units in the quarter, and grew by 33% compared with last quarter. Retail transaction volume was 1,671 units, an increase of 61% compared with last quarter. Although the resurgence of COVID-19 led to a city-wide lockdown in Xi'an last December, the growth movements of our second IRC in Hefei, which launched in mid-November 2021, helped mitigate some of the negative impacts from the disruptions in Xi'an. We have optimized our operational processes through a series of upgrades and improvements, equipping our IRC with an omnichannel sales model that integrates online sales into its warehouse-style operation. We offer our customers a diverse collection of high-quality and cost-effective vehicles, premium transaction services, and no-hassle after-sales guarantees. This creates a superior shopping experience that has been widely welcomed by customers since its opening. As evidence of our improved customer experience, our NPS continues to rise for the fifth consecutive quarter, reaching a new record high of 59 in the third quarter from 56 in the prior quarter. This is a testament to our persistent efforts in optimizing all aspects of our operation to better serve customer needs, from vehicle sourcing to transaction, delivery, and after-sales services. Going forward, we will continue to refine and upgrade our products and services, which will be key for driving high-quality sales growth through customer retention. In terms of vehicle sourcing, we are actively increasing the number of cars we purchase from consumers. For example, around 25% of used cars in our retail inventory were procured from customers in this quarter. Notably, we further strengthened our used car purchasing services from local consumers, enabling us to reduce procurement costs while boosting sales conversion rates. We will continue to expand our sourcing channels to purchase vehicles from consumers. We also rolled out our used NEV business in this quarter and have developed core NEV inspection capabilities, such as battery and motor inspection. We currently have five of the best-selling NEVs wholesale, including Tesla, Leo, Lee Auto, BYD, among others. Additionally, continuous optimization of our supply chain has yielded encouraging results. By improving synergies throughout the supply chain cycle, we reduced the time needed to make the cars we procure ready for sale by 30% this quarter. Leveraging our big data analytics of market dynamics and consumer preferences ensures we keep an optimal selection of cars in our inventory. As we opened the Hefei IRC this quarter, we ramped up our new marketing strategy by leveraging live streaming and video content on popular platforms, successfully reaching our target customers and improving marketing efficiency while reducing costs. Now, moving on to our expectations for Q4 of fiscal year 2022. During these three months ending March 31, 2022, we experienced a lockdown in Xi'an, as well as the expected spring festival off-season. However, driven by robust performance from our Hefei IRC, we expect our retail sales to continue growing in Q4. Although the impact of the epidemic in Xi'an has posed new challenges, I have full confidence in our team's capabilities to overcome these obstacles. We have a strong team with experience, skills, and unity, and we are grateful for everyone's hard work and dedication. We have the right strategy in place and will continue to provide customers with high-quality products and services. Our commitment to driving high-quality growth through customer loyalty and creating long-term value for our customers and shareholders will always serve as the foundation of our business vision. With that, I'd like to turn the call over to our CFO, John, to walk you through the financial results. John, please.

Okay, thanks DK. Hello, everyone. Thank you all for joining us today. I will walk you through our financial performance for the quarter that ended December 31st, 2021. In this quarter, our retail sales volume increased by 61.3% quarter-over-quarter, and our overall sales volume increased by 33.4% quarter-over-quarter. As a result, despite the COVID-19 impacts starting from mid-December, our revenue grew by 46.5% quarter-over-quarter, exceeding the revenue guidance we had previously provided. Contribution from our Hefei IRC was the key driver of our sales and revenue growth in the third quarter. The new IRC significantly boosted the scale of our retail inventory. In the second quarter, we had only one IRC in Xi'an with a total inventory of about 600 cars, while the newly added Hefei IRC can accommodate up to 2,500 cars. This increased inventory has allowed us to ramp up sales, enhance operational efficiency, and improve the one-stop car shopping experience for our customers. Thanks to the opening of Hefei IRC, we maintained our retail growth momentum both in Q3 and expect this to continue into Q4. However, with the opening of the Hefei IRC in Q3, we incurred additional costs related to construction, renovations, site rentals, and new employees. We also invested in additional marketing for customer acquisition in Hefei City and throughout Anhui Province to maximize our brand's reach in regional markets. Additionally, we continue to operate our business in the leanest way possible. We plan carefully and invest only in key areas that enhance vehicle acquisition, improve our technological leadership, and refine our supply chain system. Our business progress and operational optimization have steadily followed our long-term development plan, and we received a capital injection from our strategic investors. Respecting the financing transaction with NIO Capital and Joy Capital, we received $10 million on March 25th, 2022, from the second tranche and expect to receive the remaining $12.5 million soon. In addition, we are progressing with the execution of the $165 million warrant. Now I will go through some key financials. Our revenue was RMB 506.65 million, representing a quarter-over-quarter growth of 46.5% and a year-over-year growth of 56.9%. Our gross margin was 4.1%, stable compared to 4.2% in the prior quarter. Total operating expenses were RMB 120 million compared to RMB 285.9 million in the prior quarter, and RMB 188.3 million in the same period last year. In this quarter, we incurred expenses related to preparing to launch the new Hefei IRC and invested additionally in marketing. The non-GAAP adjusted loss from continuing operations was RMB 68.6 million compared to RMB 43.2 million in the last quarter, and RMB 162.5 million in the same period last year. Similar to last quarter, there was a fair value impact related to our financing transaction, which resulted in a non-cash gain of RMB 1.36 billion from changes in the fair value of warrant liabilities reported on our balance sheet. I would like to clarify that this fair value impact was non-cash and not a result of our operational performance. Consequently, net income from continuing operations was a net gain of RMB 1.28 billion in this quarter, recovering from a net loss of RMB 1.71 billion in the last quarter and a net loss of RMB 172.9 million in the same period last year. If we exclude the fair value adjustment, the non-GAAP adjusted net loss from continuing operations was RMB 80.2 million compared with a net loss of RMB 56.9 million in the previous quarter and a net loss of RMB 171 million in the same period last year. Regarding our cash position as of December 31st, 2021, we had cash and cash equivalents of RMB 161.3 million. Now moving on to our Q4 guidance. In the fourth quarter, we are facing two major challenges: the citywide lockdown in Xi'an from late December to late January and the traditional spring festival off-season. We expect our total revenues to be in the range of RMB 440 million to RMB 460 million for the three months ending March 31, 2022. Although our revenue growth may slow down slightly, we anticipate our retail sales volume to continue to increase. Please note that this forecast reflects our current and preliminary views on market and operational conditions, which are subject to change. With that, I conclude our prepared remarks. Thanks.

And our first question comes from Marcol Rickenfell with American Trust.

Okay. Yes. Given the recent increased COVID-related lockdown in China, what is the impact on your vehicle inventory center and retail sales growth for 2022 going forward? I'm sorry, I don't speak Chinese.

No problem. I understand your question. This is DK. I'll respond in Chinese, and my colleague will translate into English. Our business was significantly impacted by the resurgence of COVID-19 and the off-season of the Chinese New Year. Specifically, the operations of our Xi'an IRC were heavily disrupted by COVID-19. However, following the successful launch of our Hefei IRC in November last year, its strong performance helped us alleviate some of the effects. After the Chinese New Year holiday, our IRC has returned to a growth trajectory, with sales volumes surpassing pre-COVID levels. In the fourth quarter, our Xi'an IRC continued to face disruptions from the lingering effects of COVID, but the strong performance of our Hefei IRC has allowed us to offset some of those impacts and maintain growth in retail sales volumes. For the entire fiscal year of 2022, we anticipate solid sequential growth in both retail and total sales volumes. We have mechanisms in place to conduct business nationwide when certain regions are affected by COVID. Our integrated online and offline sales model enhances resilience by spreading risks and minimizing the impact of COVID-19. Thank you for the question.

Our next question comes from Yin Ying with China Securities. Your line is open, you can ask your question, Yin Ying. If your line is muted, could you please unmute it? You can go ahead and ask your question.

Okay. Please allow me to translate those questions to English. The first question is, can you share more details on the trend of inventory turnover and the average selling price during 2021? Also, what's your view on the current competition with other market players as well as traditional car dealers?

For your first question on turnover, our IRCs are at different stages of development and maturity. We launched our Xi'an IRC in March 2021 and our Hefei IRC in November 2021. Overall, our inventory turnover is around six days. Regarding the average selling price, our current price of the retail vehicles is around RMB 140,000. Going forward, we will continue to diversify our selection of vehicles, which we believe will reduce the average price to around RMB 100,000 to RMB 120,000, making it more suitable for the diverse needs of our customers. Regarding competition, we and our peers are focused on developing business models that can facilitate our growth. The used vehicle market is highly fragmented, and we all share the common goal of bringing innovation to this traditional industry, creating a better shopping experience for our customers. Our advantage lies in our customer-focused approach, having the largest self-operated network to provide customers with a wide selection of vehicles. Additionally, we have a reconditioning center with industry-leading technology and capabilities. All vehicles undergo several inspections and conditioning processes to ensure the highest standards of quality. Furthermore, we were the first in China to sell used cars online nationwide, effectively removing geographical barriers for customers. Our vehicles are delivered to customers’ doorsteps in over 200 cities across China, within four days. Our centralized warehouse-style model results in cost efficiency. Now, regarding the next question from Yin Ying, what are your plans for future expansion?

As we mentioned earlier, we signed a financing agreement with NIO Capital and Joy Capital in July 2021 for a total of $300 million. We received the first tranche of $100 million in July 2021. The second tranche will total $15 million. On March 25th this year, we received $10 million of the second tranche. In total, we have received $137.5 million from the financing and expect to receive the remaining $12.5 million soon. Additionally, we received warrants totaling $155 million from our investors. We are currently coordinating with them on the warrant program based on our expansion pace and cash injection needs. With this funding, we aim to continue strengthening our IRC network and support our long-term business growth while addressing the rising demand for used car products and services. Thanks for your questions.

For the next question, we turn to Fei Dai with TF Securities.

Allow me to repeat my question in English. According to the financial report, Hefei IRC has positively impacted the company's performance. As the company expands, will it become more reliant on offline assets? What are your views on the future development of the Chinese used car market? How will the company respond to the current changes?

Our offline investments are primarily focused on our IRC and reconditioning centers. This investment enhances our reconditioning capabilities, allowing us to manage processes more effectively and centralize the procurement of reconditioning materials, which gives us increased negotiating power with suppliers. Simultaneously, we are consistently improving our reconditioning technologies and processes, resulting in higher efficiency and cost reductions. Our commitment to IRC strengthens our competitive advantage. We are dedicated to an omnichannel sales model that combines online sales with warehouse-style operations. Whether customers purchase online or visit a physical store, the quality and pricing of vehicles remain uniform. Over the years, we have established a strong online reputation as China's top destination for used car shopping. We are speeding up our regional market penetration while also expanding our offline presence. In 2021, the used car market in China continued to grow, with sales surpassing 70 million units, amounting to RMB 1 trillion in transaction value. The growing used car segment highlights the market's significance. Currently, no single used car dealership captures more than 1% of the market share in sales volumes across China. The unresolved challenges in traditional used car industries have created opportunities for our operational model. Therefore, we are improving our self-operated used car sales model to enhance our reconditioning and service capabilities while investing in reliable products to meet customer needs. We will uphold our operational efficiency and continue to invest in strengthening our core competitiveness.

Thank you. We have reached the end of the question and answer segment. I will now turn the call back to management for any closing remarks.

Thank you for joining our conference call today. We look forward to seeing you next time.

Thank you for joining our conference call today. We look forward to seeing you next time.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.