Earnings Call Transcript - UXIN Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to Uxin Earnings Call for the Fourth Quarter and Fiscal Year Ended March 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 objections, you may disconnect at this time. I'd 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.

Joyce Tang, IR Director

Thank you, operator. Hello, everyone. Welcome to Uxin's Earnings Conference Call for the quarter ended March 31, 2022. On the call today are DK, Founder and CEO, and John Lin, CFO. DK will review business operations and company highlights, followed by John, who will discuss financial 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 US 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 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.

Kun Dai, Founder and CEO

Now I will turn the call over to our CEO, DK. Please go ahead.

Joyce Tang, IR Director

Hello everyone. Thank you for joining our earnings conference call today. To better communicate with both domestic and international investors, my remarks today will be in both English and Chinese. In the first quarter last year, I elaborated on our growth strategies and business model transformation to provide our customers with a hassle-free used car purchase experience with massive high-quality and valuable vehicle connections, as well as superior before and after self-services. Having successfully transitioned from a third-party commission-based model to an inventory-only model, we opened here, IRC, our first vehicle inspection and reconditioning center, as well as a warehouse superstore. In the year 2022, we have continued in the same direction and remain committed to our mission of creating an industry-leading used car buying experience. The customer-centric approach has faced various challenges, such as the resurgence of COVID. We've made significant progress in our used car offering and customer-centric experience, as well as social responsibility. In fiscal year 2022, we achieved our business goals for the year. Total transaction volume for the year was 15,755 units, representing a 49% year-over-year growth. Total retail transaction volume for the year was 5,111 units. Continuing sequential growth momentum in our quarter of the year, total revenues were RMB 1,464 billion, representing a 149% year-over-year growth. Our Xi’an IRC operations were disrupted by COVID countermeasures in the fourth quarter, which is also the traditional used car off-season due to the Spring Festival holidays. However, we achieved a higher retail transaction volume as a result of the sales ramp-up in our Hefei IRC. While we still occasionally face COVID-related challenges, we are committed to executing our development plan and sustaining our growth momentum. After building our first IRC in Xi’an, we opened our second IRC in Hefei in November 2021. This is the first phase of our Hefei IRC. The whole Hefei IRC is backed by our joint investment of RMB 2.5 billion with the Hefei Changfeng government. Hefei is renowned for its booming auto industry with favorable policies, leading vehicle manufacturers, as well as mature upstream and downstream supply chains. Consolidating these resources, we plan to leverage our expertise and state-of-the-art technologies to recondition vehicles at a super-large scale. The designed production capacity is expected to be between 60,000 and 100,000 units annually to ensure a stable and reliable supply of high-quality and cost-effective used cars. The project is progressing well, and the completion of the Hefei IRC will serve as a solid foundation for Uxin to gain customer trust and fuel its sustainable business growth in the long term. In the past fiscal year, we have heavily invested in the refinement of our used car supply chain, especially in vehicle acquisitions and reconditioning. We have established acquisition channels to purchase used cars from individual consumers, auction platforms, auto manufacturers, and car dealerships. Direct purchases from individual consumers account for 30% of our total acquired vehicles in the fourth quarter. The increasing proportion of such direct purchases allows us to further reduce our acquisition costs, which will ultimately enable us to offer more competitive pricing to our customers. As for vehicle inspection, we have actively upgraded and optimized our inspection system powered by Chat Auto. Chat is our national patent for the used car inspection system to ensure that our retail vehicles fulfill all national standards. We further streamline workflows and introduce modern techniques. This initiative helps us improve vehicle quality at lower costs through economies of scale under our IRC operations. To maximize end-to-end supply chain efficiency, we have developed an integrated information system covering the whole process from vehicle acquisition, inspection, and reconditioning to sales and after-sales services. In anticipation of the rising era of new energy vehicles, Uxin is actively expanding its business in this domain. Our used car offerings now include mainstream brands, including Tesla and other popular electric vehicle brands. We are establishing strategic partnerships with electric vehicle manufacturers, suppliers of spare parts, and NEV dealerships. We are well prepared for the opportunities in the rising NEV market. Based on our in-depth understanding of customers’ used car purchasing behaviors in China, we have upgraded our sales channels from online-only to an omni-channel approach. In 2018, we launched the Uxin nationwide online shopping mall, making us the first to offer cross-region purchase services in the used car industry in China. After four years of operation, we have achieved best-in-class cross-region online transaction capability and experience for our customers. On top of our leading online model, the overall IRC includes NCM, a type of warehouse superstore. The IRC enables regional customers to have a direct in-store experience through leasing, selecting, consulting, test driving, and purchasing their favorite car. The first phase of our IRC is currently the largest self-owned used car center in China. The IRC has a total floor area of nearly 100,000 square meters and the capacity for 2,500 retail vehicles, covering a luxury remodel from 62 brands. Our NCI and IRC and warehouse store have become popular used car driving centers in their respective regions. Both stores have gained leading regional market shares, and they are still growing. The regional brand recognition and reputation among customers will enhance our capability nationwide and boost our online sales. Our commitment to providing high-quality vehicle products and superior customer service is paying off. We are now one of the most effective used car companies in China. In the fourth quarter, our net promoter score (NPS) increased by 45% year-over-year to 61%, marking the sixth consecutive quarter of NPS improvement. We rigorously analyze and respond to customer feedback across all aspects, from sales to delivery and after-sales services. We are encouraged by the NPS increase and will remain focused on further improvements. Uxin believes that reputation among customers is the ultimate driver of sustainable and high-quality business growth. The used car industry is an integral component of China's special economy. The healthier population of new cars extends the vehicle lifestyle and maximizes their residual value. We also play a role in lowering production waste, reducing possible pollution, and improving resource utilization. As an industry leader, Uxin takes its concept of environmental protection seriously and acts as a pioneer in energy conservation and emission reduction. In July 2022, we released our inaugural ESV report highlighting how we integrate sustainable development principles into our business planning, IRC design and construction, and daily operations. Uxin aspires to lead China's used car industry to evolve in the most socially responsible manner and under regulation. China's used car market is experiencing its golden age of growth. It is reported that China has become the world's largest auto market, measured by vehicle units, by 2021. Building on that, China's used car market is already massive, with more than 17 million units sold in 2021. It also has tremendous growth potential compared to developed markets. The used car industry has become a key area of focus for regulators, who have introduced supporting policies in the past four years. Notably, in July 2022, the mainstream of commerce, along with other state departments, published an official notice to stimulate auto circulation and consumption. This notice included comprehensive measures to remove regional restrictions and simplify accounting treatments and invoice issuance, effectively removing restrictions on used car business operations. In 2021, government policy required the digitization of car documents, with more than 300 cities implementing electronic title transfer and registration. In 2020, the used car suspension ad test was reduced from 2% to 0.5%. All these policies and initiatives demonstrate strong regulatory guidance to build a unified national market for used car transactions. Additionally, these policies also focus on promoting strong brands, large scale, and compliance within used car companies in the industry. We have been deeply rooted in the industry for over 11 years as a used car eCommerce company with nationwide coverage and regional market penetration. We believe that Uxin is a well-branded, super-logical scale, and highly socially responsible company in the used car industry, which will thrive when the tailwind arrives. In the new fiscal year 2023, we will focus on the following three areas: First, to extend our brand recognition and credibility among customers to boost sales and market shares, we aim to gain more customers by enabling them to experience our products and services. Second, to further upgrade the end-to-end supply chain information system, including systems intelligence and inventory management, at an individual vehicle level. Third, to continuously optimize operational efficiency to control costs and experience expenses with a target of possibility in the mid to long term. Once again, I would like to thank our customers and every member of our Uxin family for their hard work. I am so grateful for the strong support from our shareholders and Uxin. We will stay committed to the industry in the new era and deliver sustainable returns to our shareholders on our journey toward high-quality growth. I'd like to turn the call over to our CFO to run you through the financial results. John, please.

John Lin, CFO

Okay. Thanks DK. Hello everyone. Thank you all for joining us today. I will walk you through some key financial results for the quarter ended March 31, 2022, as well as the full fiscal year 2022. During the fourth quarter, despite the COVID and off-season impacts detailed earlier, our total revenues were RMB 507 million, pretty much the same level compared to the third quarter since the retail sales volume ramped up in the survey IRC. Specifically, our retail revenue was RMB 319 million, representing a 37% quarter-over-quarter growth and 156% year-over-year, driven by higher retail. As for the overall fiscal year 2022, it was our first full year of operation under the inventory ownership model. Driven by our continued sales growth momentum, our total transaction volume was 15,755 units, representing a 49% year-over-year growth, and our total revenues for the year were RMB 1.6 billion, representing a 150% year-over-year growth. When we look at the gross margin in the fourth quarter, as you can see in the three quarters, our gross margin was stable at around 4%. However, in the fourth quarter, it fell to 0.2%. The reason was the experience of IRC lockdown for more than one month due to COVID, and February was the traditional Chinese New Year off-season, so used car transactions almost froze for that month. We helped to proactively restructure our inventories and accelerate the sales of the long-aged vehicles through pricing adjustments. The inventory management actions compressed our gross margin in the first quarter. As a result, the overall gross margin for fiscal year 2022 was 2.9%. We observed after the Chinese New Year a clear upward trajectory in our retail sales, and we expect our gross margin to gradually return to a reasonable level in the following quarters. We continued our stringent expense management in the fourth quarter. The total operating expenses were RMB 119.4 million, relatively stable compared with the first quarter. As I have repeated every time, the culture of reducing unnecessary spending is already part of our company's culture at Uxin. We have proactively sought opportunities to optimize organizations, increase operational efficiency, and promote cost-effective technology. As a result, our fiscal year 2022 operating expenses were RMB 409 million, representing a 48% decrease year-over-year. Consequently, the non-GAAP adjusted loss from continuing operations was RMB 96.1 million in the fourth quarter compared with RMB 8.6 million in the third quarter. The full fiscal year non-GAAP adjusted loss from continuing operations was RMB 96.1 million, which was substantially narrowed by 56% compared with fiscal year 2021. Other than the financial results, I would like to share some of our recent developments in financing and reliability to restructuring. Last year, we announced a USD 350 million investment by Neo Capital, of which we have received USD 150 million. The remaining USD 165 million is in the form of warrants. The investors still retain the right to exercise the warrants for a total amount of up to USD 165 million. Additionally, yesterday, we closed an additional USD 100 million follow-on investment from Neo Capital. Moreover, we also recently completed the exchange of ordinary shares with 58.com in exchange for the full release of the company's USD 63 million obligations under the convertible notes issued to 58.com. We believe that closing these transactions allows us to substantially streamline our financial resources and devote more focus to the execution of our long-term growth strategies. We plan to accelerate the pace of our expansion, strengthen our recognition capabilities, and further digitize our supply chain. We are confident that our investment in these areas will enable us to provide customers with more eco-friendly selections and a better, hassle-free shopping experience. The detailed financial statements were published in our earnings release online, so I will not repeat the numbers here at this time. But I do want to emphasize one thing: in the fourth quarter, similar to the past quarters, there was a fair value impact related to our financing transactions. The share price was USD 1.02 per ADS as of March 31, 2022, compared to USD 1.57 per ADS on January 3, 2022. This resulted in a non-cash gain of RMB 476.8 million from the fair value change of the warrant liabilities and forward liabilities on our balance sheet. I would like to emphasize again that this fair value impact was a non-cash gain and not a result of our operations. In regards to the first quarter guidance for fiscal year 2023, we currently expect our total revenues to be in a range of RMB 600 million to RMB 620 million for the three months ending June 30, 2022. Please note that this forecast reflects our current preliminary views on the market and operational conditions, which are subject to change. So this concludes our prepared remarks. Thanks everyone, and operator, we're ready to receive the questions.

Operator, Operator

We will now start the question-and-answer session. Our first question will come from Karl Birkenfeld with American Trust Investment Services. Please go ahead.

Karl Birkenfeld, Analyst

Good evening, gentlemen. Congratulations on your outstanding financial performance in light of the circumstances with COVID. I am the Managing Director at American Trust and I have coverage in China. I have two questions. The first is, regarding news media reports in the United States, we know that China continues to maintain a COVID-zero policy that restricts travel and lockdown in potential risk areas. What's the economic outlook in consumer sentiment? Will this affect Uxin's business going forward?

Joyce Tang, IR Director

The implementation of COVID measures will still have an impact; city-wide lockdowns in particular will limit people's activities. We will certainly comply with all government COVID prevention policies. In terms of our financial results, the disrupted operation of our IRC did affect our financial performance; the closure of our IRC during the lockdown slowed our overall sales and compressed our gross margin in the fourth quarter of this year. However, this impact is temporary. This June, our business has fully recovered after China started lifting COVID restrictions and the Shanghai lockdown. That's the answer to this question. Thank you.

Karl Birkenfeld, Analyst

Great. Thank you very much. The second question is, can you break down your vehicle acquisition by source and what are the differences between these channels in terms of cost, average prices, and turnover?

Joyce Tang, IR Director

Our acquisition mainly includes individual car owners, auction companies, and dealerships of new cars. This dealership partners with us to help their customers trade in their vehicles. Regarding the cost, our acquisition cost only consists of the vehicle purchase price, and there are no other costs in the acquisition process. There are no material differences in the average selling price or turnover between these acquisition sources. However, purchasing directly from individual car owners simplifies the acquisition process, generating a higher gross margin. As such, we highly value individual car owners as acquisition sources, which contributed to 30% of our total acquisition, compared to 15% in the middle of last year. That percentage is expected to continue climbing going forward. That's the answer to the question. Thank you.

Operator, Operator

Our next question will come from an unidentified analyst with TF Securities. You may now go ahead.

Unidentified Analyst, Analyst

Repeat my question in English: in 2022, what optimization has the company made on the user-side online platform? What is the company's current arrangement from purchase to delivery of the car? What technical upgrading and optimizations have been made this year compared to 2021 regarding the online car buying platform? What kind of competitive advantages or diversifications does the company have? Thank you.

Joyce Tang, IR Director

We implemented several upgrades to the online purchase of our vehicles. One of these upgrades is a complete self-service online order and purchase process for customers. The process does not require any sales representatives' intervention and allows customers to make more independent and informed decisions. They can complete transactions smoothly. Another example involves displaying vehicle information; now customers can view each car's basic condition and ratings, as well as detailed vehicle condition reports that we implemented under the national standard. The display of these indicators enables customers to make a more comprehensive assessment of the vehicles online to facilitate purchase decisions. In terms of logistics and networks, our delivery network now covers 20 cities, and we also plan to gradually expand our network in the future. Our resources have higher quality as we have the highest standards for reutilization, which leads us to have the lowest return rate in the industry. After years of effort, we have built a robust system for vehicle delivery and local ownership registration, providing very high delivery efficiency. Usually, our customers can receive their vehicles around 72 hours after they place an order. Additionally, all of our vehicles are self-owned, which allows us to have better control over the vehicles and the transactions. That's the answer to the question. Thank you.

Operator, Operator

Our next question will come from Yin Ying from China Securities. You may now go ahead.

Yin Ying, Analyst

Thank you, Yin Ying from China Securities. Given that electric vehicle sales have surpassed those of gasoline cars, can you share more about your expansion plans in this market? Are the margins different from gasoline cars, and how many new energy vehicles do you have in your inventory?

Kun Dai, Founder and CEO

This is a critical area that we are focusing on and investing in. As you know, gasoline vehicles are built very differently. This is why, in the past few months, we have established separate systems and protocols for testing and maintaining used new energy vehicles. From a market perspective, China's used electric vehicle market is closely tied to the overall automotive ownership. As of 2021, China's passenger car ownership reached 300 million, while EV ownership was around 8 million or less than 3% of the total. Currently, new energy vehicles account for 5% to 6% of our inventory. From a business perspective, our NEV offerings are quite popular among customers. The sales performance of NEVs in our inventory is also strong. Furthermore, we have brands like Tesla, Nio, and Li Auto that are well-received by consumers. In the industry, we are leading in both self-capacity and the performance of new energy used cars. Thank you for your question.

Operator, Operator

Thank you. We have reached the end of the question-and-answer session. I would now like to hand the conference back over to Joyce for closing remarks.

Joyce Tang, IR Director

Thank you to everyone for joining our call today. We look forward to seeing you next time. Bye-bye.