Uxin Ltd Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the Quarter Ended December 31, 2022. 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 questions, you may disconnect at this time. I'd now like to turn the call over to your host for today's conference call, Mr. Jack Wang. Please go ahead, Jack.

Hi. Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the quarter ended December 31, 2022. On the call with me today, we have D.K., our Founder and CEO; and John Lin, our CFO. D.K. will review business operations and company highlights, followed by John, who will discuss our financials and guidance. They will also be available to answer your questions during the Q&A session that follows. Before we proceed, I would like to remind you that this call may contain forward-looking statements which are inherently subject to risks and uncertainties that may cause actual results to differ from our current expectations. For detailed discussions of the risks and uncertainties, please refer to our filings with the SEC. Now with that, I will turn the call over to our CEO, D.K. Please go ahead, sir.

Thanks, Jack. Hello, everyone. Thank you for joining our earnings conference call today. I will provide an overview of our business progress in both English and Chinese. I'll begin by reviewing the key focal points of our efforts this quarter and then share an update on the direction we're pursuing along with recent market trends. During the third quarter of fiscal year 2023, from October to December 2022, the stringent COVID control measures significantly impacted the market. Despite this, our retail sales volume for the quarter reached 2,928 units, representing an impressive 77% year-over-year growth. This quarter, we have focused on enhancing customer service, optimizing supply chain efficiency, and managing costs to strengthen Uxin’s competitive position in the used car industry. As we continue to reinforce our customer service capabilities and improve the car-buying experience, our solid reputation and growing recognition among customers have advanced. From October to December 2022, our NPS score of 60 maintained the top level in the industry for four consecutive quarters. This is a testament to our success in building a product and service system that effectively meets our customers' needs over time, driven by our commitment to elevated hospitality, improved car-buying experiences, and refined vehicle standards, quality, and aftersales services. To enhance operational efficiency, we manage every step of vehicle circulation on an hourly basis and have reduced the waiting time vehicles spend on the production line. By standardizing processing hours and upgrading our dynamic time tracking system, we reduced the time from acquiring a used car to listing it for sale to around a fixed base by the end of 2022, achieving a 60% reduction compared to the same period last year. Moving forward, we will continue to optimize our production process, strengthen cross-team coordination, and automate spare part management. Our goal is to establish an industry-leading transparent factory for used car reconditioning to maximize production efficiency. We are also committed to fine-tuning our production management to systematically enhance cost control capabilities. Utilizing our large-scale used car operations, we have implemented a DRIP irrigation system that evaluates and assigns various tasks or actions to each individual car, akin to modern agricultural practices. This approach allows for the development of balanced reconditioning tasks for each vehicle based on factors like price, mileage, conditions, and branding. By making precise judgments on all intermediate cars and implementing customized reconditioning solutions, we have significantly reduced our overall reconditioning cost. Additionally, in December 2022, we upgraded our Xi'an superstore, making it the largest fully self-operated used car superstore in Northwest China. The revamped Xi'an IRC features a used car reconditioning factory and a warehouse-style superstore with in-house business offerings such as vehicle inspection, reconditioning, exhibition and sales, value-added services, and DNB services. This store model sets the foundation for large-scale replication in the future. Recent months' performance data indicates that our Xi'an IRC operations are performing well, leveraging comprehensive advantages over traditional used car dealers. Our sales conversion rate has consistently improved, and customers have highly appreciated our convenient one-stop car-buying experience as we gradually build up inventory. The Xi'an IRC is expected to increasingly contribute to our sales growth this year. Regarding the current market conditions, we have noticed a recovery in the economic environment and consumer confidence with China reinstating COVID policies. The Chinese auto market has seen significant price fluctuations in the first three months of 2023. Starting in January, Tesla announced substantial price reductions. Our AI pricing system analyzed vehicle salability and determined that such reductions would trigger price volatility. Consequently, we implemented cautious vehicle acquisition strategies throughout the quarter to minimize the impact of these new car price fluctuations in February and March. In April, we observed the auto market stabilizing. Looking ahead, with our strong reputation, growing brand recognition, improved efficiency, and reduced production costs, we are confident in maintaining high-quality sales performance and achieving profitability on a single store basis in 2023. Now, I will turn the call over to our CFO, John, to discuss the financial results. John, please?

Thank you, D.K., and hello, everyone. Since we have both domestic and international investors on the call, we will present our remarks in both Chinese and English for everyone's convenience. I will now provide a detailed overview of our financial results for the third quarter of fiscal year 2023, covering the period of three months ended December 31, 2022. As D.K. mentioned earlier, our retail sales from October through November faced disruptions due to stringent COVID control measures. Although these measures were lifted in the second week of December, the used car market across regions continued to encounter challenges because of varying infection rates. However, we are pleased to report a significant rebound in our sales, which are surpassing industry trends for recovery. In December alone, we retailed 1,350 units, exceeding our pre-pandemic sales figures. Our retail transaction volume reached 2,928 units, only 6% lower than the previous quarter, and up 77% year-over-year. By contrast, the total used car transaction volume in China dropped 8% sequentially and 12% year-over-year during the three months from October to December. Our average selling price fell from RMB120,000 in the last quarter to RMB112,000 this quarter. Overall, our retail revenue amounted to RMB329 million, which is a 12% decrease sequentially, but a 41% increase year-over-year. Our wholesale transaction volume this quarter was 1,969 units, down 33% from the last quarter. During the pandemic, we dealt with an unfavorable market environment and adopted a cautious vehicle sourcing strategy. We took a more careful approach to pricing vehicles that did not meet retail standards and reduced our vehicle acquisition volumes. Consequently, the average selling price of wholesale vehicles dropped from RMB81,000 in the previous quarter to RMB67,000 this quarter. Our total wholesale sales revenue for the third quarter was RMB132 million, reflecting a 45% decline sequentially. Our total revenues, combining retail and wholesale, were RMB471 million, down 24% from the prior quarter, primarily due to decreased wholesale revenue. On a year-over-year basis, our total revenues declined by 7%. The gross margin for the quarter was 0.6%, a decrease from 1.3% in the last quarter. During the market downturn, we proactively refined our inventory structure, resulting in write-downs on some unsold vehicles. We also implemented various pricing strategies to accelerate the turnover of higher-priced vehicles between October and December. These measures had a temporary impact on our gross margin as we responded to challenging market conditions. Looking ahead, we expect to see improvements in our gross margin starting in the fourth quarter, anticipating it to exceed 5% in the upcoming year. Total operating expenses for the quarter were reduced by 11% from the previous quarter. Throughout the pandemic, we maintained a careful approach to our marketing expenses to effectively manage our overall operating costs. Even with rapid business growth, we are committed to reducing costs and improving efficiency in our daily operations. This strategy will allow us to grow our business with optimal return on investment while maintaining financial discipline. Our non-GAAP adjusted loss from operations stood at RMB85.6 million, down RMB6.9 million from the last quarter. The detailed financial statements are available in our earnings release online, so I will not reiterate the figures here. As in previous reports, there is a fair value impact related to our financing transactions. Changes in our stock price resulted in a RMB1.5 million gain due to the fair value change of warrants related to a financing agreement we signed in 2021. This gain is a non-cash item according to U.S. GAAP and does not reflect our operational performance. I am also pleased to provide an update on our financial position. In 2019, we secured $230 million in convertible financing from our investors. In 2021, we successfully restructured our payment plan. As of March 31, we have completed all remaining payment obligations totaling $61.6 million. This successful payment process on our convertible notes has cleared most of our significant historical liabilities, substantially strengthening our balance sheet and allowing us to enhance our financial flexibility and direct resources toward future business development opportunities. In June 2022, we signed a $100 million financing agreement with investors, and so far, they have completed an $80 million payment. The remaining $20 million will be paid according to the scheduled agreement. For the fourth quarter of fiscal year 2023, the Chinese New Year fell on January 22, with the holiday season typically extending until the Lantern Festival on February 5, creating an off-season for used car transactions in the intervening three weeks. Additionally, we noticed a trend of price reductions for new cars in China starting in the second week of March, causing potential buyers to hesitate in purchasing used cars. Despite recent price fluctuations, we have remained prudent in our vehicle acquisition strategies during January and February, allowing us to maintain a steady pace of inventory expansion. Currently, our retail inventory is relatively low, with about 800 units available for sale, compared to 2,400 used cars in our retail inventory in November 2022. This smaller inventory has helped minimize the effects of new car price changes on our business. Encouragingly, considering the market situation, our sales turnover efficiency has continued to improve, achieving better margin profiles compared to the third quarter. However, our low inventory levels have limited our sales performance, and we expect retail sales in the fourth quarter to decline compared to the third quarter. Taking into account seasonal and market factors, we anticipate a decrease in transaction volume for the fourth quarter of fiscal year 2023, which ends on March 31, 2023, compared to the previous quarter. We project our retail transaction volume to reach approximately 2,100 units, with an anticipated average selling price of RMB117,000 for retailed cars. Our wholesale transaction volume is expected to be around 1,300 units, with an average selling price of approximately RMB52,000. Our total revenues, including both retail and wholesale vehicle sales revenue along with value-added service revenue, are estimated to fall between RMB310 million and RMB330 million. In line with our fourth quarter forecast, we are now projecting for the full fiscal year of 2023, which will conclude on March 31, 2023. We expect our retail transaction volume to be around 10,500 units, reflecting a year-over-year growth of 104%. Meanwhile, our wholesale transaction volume is anticipated to reach approximately 9,300 units, representing a year-over-year decline of 9%. Additionally, we estimate our total revenues for the fiscal year, which will include retail vehicle sales revenue, wholesale vehicle sales revenue, and value-added services revenue, to range from RMB2.02 billion to RMB2.04 billion, indicating a year-over-year increase of 23% to 25%. That concludes our prepared remarks today. Operator, we are now ready to take questions.

Thank you.

Hi, operator. We're getting some feedback that there might be a technical issue on the call. So people are not able to join. So we'll take this opportunity to go over some questions we have received offline. And the first question, I will direct to our CEO, D.K. Are there any remaining COVID-19 issues, particularly in the region where the two IRCs are located?

From October to November in 2022, the COVID-19 pandemic had a significant effect on our business, impacting vehicle acquisition, sales, and logistics. However, since the second week of December 2022, following the lifting of epidemic prevention policies, the market has bounced back quickly. Currently, COVID no longer affects our operations.

I'll move on to the second question we received. Is the upgrade and build-out of the Xi'an IRC 100% complete at this point? And do you have any plans for future upgrades? I will also direct that question to our CEO, D.K.

The expansion and upgrade of our IRC in Xi'an is fully complete. As the largest used car superstore in Northwest China, with entirely self-owned inventory, we have increased our showroom capacity to 3,000 vehicles, which is five times larger than before. This larger inventory will offer customers a much broader selection, which will enhance our sales conversions. With the opening of our advanced used car reconditioning factory in Xi'an, we are now providing comprehensive after-sales maintenance services and a wide range of vehicle accessories, modifications, and upgrades to meet our customers' diverse needs. Additionally, we are now able to export our innovative used car reconditioning capabilities. The Xi'an IRC is our first fully developed IRC and superstore with complete features. All operations, including management processes, service standards, and business systems, can now be duplicated in other cities. As the auto market stabilizes in April, we will boost our inventory to promote sales growth. At the same time, we will continue to expand our IRC network steadily in alignment with our cash position and strategic planning. Our expansion plans are already in progress, and we look forward to providing updates on our advancements in the near future.

And I will move on to the next question, which comes from TF Securities. The question is about we think that the company has really fully repaid the $61.6 million convertible notes. So can you please provide more details on these arrangements and its impact on your future business developments? I will direct that question to John to answer.

That is correct. We have recently issued an announcement with two major updates. Firstly, we have received $80 million out of the planned total of $100 million from the subscription agreement of the senior convertible preferred shares signed with investors in June 2022. Secondly, we have announced our full repayment of the remaining $61.6 million convertible note balance. In 2019, we raised $230 million through convertible note financing and underwent several restructurings. As a result, about 60% of the convertible notes were converted into shares, with the remainder to be paid in installments. As of March 31, 2023, the outstanding liability of $61.6 million represented Uxin's largest historical debt. After comprehensive evaluation, we have decided to fully repay and clear the outstanding applications from the convertible note, which will bring three significant benefits to our company. Firstly, with the full repayment of the remaining convertible note, our balance sheet structure is greatly improved. After the payment, our historical debt that we need to pay in the future has been significantly reduced, which will enhance our financial safety and make the long-term financial structure of Uxin much healthier. Secondly, the complete repayment creates better conditions for potential financing in the future. The outstanding convertible note had been a major concern for potential investors interested in the company. With the full repayment, the investment risks of Uxin have significantly decreased, allowing future investment funds to focus on our business development rather than debt repayment. This repayment will enable us to plan for a series of capital market initiatives from a more favorable position. Thirdly, the complete repayment has laid the foundation for our cooperation with domestic financial institutions. We are actively collaborating with several well-known domestic financial institutions to implement various forms of supply chain financing partnerships. With the full repayment of convertible notes, it has cleared the way for smoother cooperation between us and financial institutions. Vehicle acquisition is a capital-intensive process in our business model. With the implementation of supply chain financing, it will significantly reduce the need for our own cash in the vehicle acquisition process. As we continue to expand into new areas and establish new superstores according to our business plan, our funding needs will be significantly reduced. This provides greater flexibility in our pace of business expansion, allowing us to move faster or slower as necessary while simultaneously bringing a higher return on investments to our business model. Finally, I would like to emphasize that at Uxin, we prioritize sustained growth and long-term value. Our financial management is also strategically planned in line with our long-term business development goals. With the successful receipt of NIO Capital's investment and the full repayment of our convertible note, we can move forward with greater agility and achieve our high-quality development in the future.

And that's the answer to the question earlier. Now we have another question from CITIC Security. The question is, how do you see the impact of price cuts in early March on the used car market? And what are your strategies in response to price cuts on both electric and gasoline cars? I will direct this question to our CEO, D.K., to address.

The market volatility became evident in early January when Tesla reduced its prices. At that time, the used car market was still rebounding from COVID, characterized by high demand and limited supply, which led most dealers to purchase cars at higher prices. Starting in late February, various brands across the industry began cutting new car prices. This caused consumers who initially planned to buy used cars to adopt a wait-and-see stance, creating turnover pressure on used car inventory and significantly impacting the market. We were minimally affected by the recent changes in new car prices. Our sophisticated big data analysis and information systems allow us to make informed decisions, guided by strict management governance. After COVID restrictions eased, the Chinese used car market saw a rapid recovery, with dealers paying elevated prices for vehicles in January and February. However, our AI pricing model continuously analyzed both internal and external market data, performing vehicle competitive analyses and determining that current acquisition prices had strayed from reasonable levels. Based on this analysis, we adopted a cautious vehicle acquisition strategy and maintained low inventory levels throughout the first quarter of 2023. With a controlled inventory scale and structure, we mitigated our risk related to new car price fluctuations, limiting their effects. Consequently, our inventory turnover efficiency during the first quarter of 2023 remained stable, and the profit contribution per vehicle increased. Our AI pricing capabilities, honed over more than 11 years, along with our systematic decision-making process, have successfully navigated extreme market conditions, especially in the past two years. This reinforces our confidence in our business model and management skills, laying a strong foundation for future growth. Now that the first quarter of 2023 has concluded, we've noticed that the new and used car markets in China have been stabilizing since April. We expect the rest of the year will not experience the same volatility seen earlier. Therefore, we project that used car sales in China will grow by approximately 15% year-over-year in 2023. Keeping this in mind, we intend to gradually increase our inventory and aim for a significantly higher growth rate than the industry average.

And that's the question; that's the answer to the earlier question. We have received another question from CITIC. The question is about our experience in Xi'an and Hefei and how long it takes for one of our stores to breakeven. We discussed single store breakeven earlier. What are the company's key plans to achieve that? I will direct that question to our CFO, John, to address.

After two years of diligent effort, we now have a clear understanding of our management systems, operational specifics, and growth paths for each of our IRC and superstores. When we set up a new superstore in a different area, we anticipate it will take approximately 12 to 18 months from launch to reach profitability. Currently, we can reach breakeven in the monthly retail sales of an individual superstore. When a store achieves around 1,000 units sold, we continue to enhance operations and aim for profitability at even lower sales volumes. This year, one of our primary goals is to achieve breakeven on a per-store basis. To accomplish this, we have pinpointed three key focus areas. First, we intend to boost our inventory levels while ensuring high sales turnover to increase retail transaction volume. As previously mentioned by D.K., in the first quarter of 2023, we adopted a careful acquisition strategy to limit negative impacts from market fluctuations, which has resulted in relatively low in-store inventory levels. However, our sales turnover has been steadily rising during the first three months of 2023. Starting in April, we will gradually increase our inventory and aim for a monthly retail sales volume of 1,000 units per store while keeping the sales turnover high. In September 2022, our Hefei superstore reached 1,000 retail sales. If we achieve similar or lower retail sales figures in 2023, this superstore would break even and start making a profit. The second focus area is to enhance the gross margin on each vehicle sold. Recently, we’ve seen significant growth in our gross profits from vehicle sales due to our advantages in product strength, service quality, and brand recognition. Furthermore, as we open new superstores and complete our advanced reconditioning facility, we plan to increase revenue and gross profit from high-margin value-added services like vehicle financing, insurance, aftersales maintenance, and accessory upgrades. The third focus area is to continue our efforts in lean management and emphasize cost reduction and efficiency improvements. We will keep refining our business and management practices, enhance our digital systems, incorporate advanced used car reconditioning technologies, and minimize operational costs throughout our operations. This will enhance our management efficiency to ensure each of our stores can achieve profitability with a monthly sales volume of 1,000 vehicles or less. As previously stated by D.K., we are confident in our ability to reach profitability for individual stores by 2023. Please stay tuned for updates on our progress toward this goal. Thank you.

Okay. That’s all the questions we have received from the investment community. We are sorry about the technical issue that you are experiencing. Hopefully, we get to sort this out when we talk to you next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.