Yunji Inc. Q4 FY2020 Earnings Call

Hello, everyone. Welcome to our fourth quarter 2020 earnings call. Before we start, please note that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors of Yunji and its industry. These forward-looking statements can be identified by terminologies such as will, expects, anticipate, continue or other similar expressions. For a detailed discussion of these risks and uncertainties, please refer to our related documents filed with the U.S. SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and expressly qualified entirely by cautionary statements, risk factors and details of the company's filings with the SEC. Yunji does not undertake any obligation to update these statements except as required by applicable law. With that, I will now turn over to Shanglue Xiao, Chairman and CEO of Yunji.

Hello, everyone, and welcome to Yunji's fourth quarter 2020 earnings call. In the fourth quarter, we generated a total GMV of RMB11.7 billion and a total revenue of RMB1.33 billion due to our ongoing development of a differentiated supply chain and upgraded merchandising mix. As a result of augmented user business and increased activities of platform service managers, the number of transacting members on our platform increased to 13.3 million for the 12 months at the end of December 31, 2020. 2020 was a year of significant changes in terms of both the internal and external environment. At the end of the year, as usual, we will review our strategy and reflect on our achievements of the year. In 2020, under an increasingly competitive e-commerce environment, we identified a strategic path for Yunji to develop differentiated and aided supply chain, which can be leveraged to make more tactical, customized and specialized product offerings. As technology evolved, many industries embraced this intermediation and our business model is not about arbitraging product price differentials among various e-commerce platforms. Instead, we established our competitive strength through researching the optimal merchandising mix, engaging service managers to act as shopping curators, and enhancing our users' shopping experiences. Our differentiated merchandise mix of private label joint venture brands and emerging brands enjoys a longer product life cycle that can be constantly improved and may gradually develop into products and brands capable of generating tens of millions or billions in sales aligned with the improvement of our product offering. Our community also became more active as our members and users have access to more materials about products to share and discuss in general meetings. Over the course of 2020, our efforts in implementing supply chain differentiation and private-label development strategy have achieved meaningful results. For example, one of our private labeled weight loss products joined Yunji's million-dollar sales product category within half a year since its launch, as it generated over RMB6 million in sales. We will continue to improve these products according to user feedback and market demand to further enhance our user satisfaction. In February 2021, we also launched our first full city-focused private label called Li Ba Tian. Li Ba Tian launched its first product, Authentic Grilled Sausage, jointly with a renowned Food Research Institute in China called 5K Sausage Research Institution. On both sides of the 2020 Chinese New Year holiday season, we started selling two new batches of the Authentic Grilled Sausage, respectively. All of them sold out promptly upon market introduction. Besides food, we are also developing and promoting additional merchandising categories, including health ovens, personal care and health supplements. Most of our service managers are either soon-to-be mothers or mothers of children under the age of 12. We believe in the sales capability and creativity of these women when they work on our platform as service managers. By continuously improving our platform features, we provide our service managers with more competitive products to promote. In 2020, our service managers became substantially more active in sharing and promoting our products. In turn, they earned a better income and improved their own quality of life. We mainly focus on three growth initiatives for our community marketing. First, we provide our service managers with products that are easier to spread and share online. These highly sellable products can easily motivate the service managers to produce rich and unique content to attract more users. Second, we established communities for various product verticals and applied targeted marketing and sales strategies. For example, focusing mainly on our private label products in the beauty community and sharing different ways to cook Li Ba Tian grilled sausage in the food community. In the second half of 2020 in the popular health supplement community, we provided the members with tips on maintaining a healthy diet and improving their life habits. In the meantime, we also introduced weight loss products and health supplement products to help our members in the community become healthier and feel better about themselves. To help the sharing from our service managers stand out as trustworthy above numerous news feeds, we provided service managers with professional training in core communication skills, industry expertise, product origin, basics, etc. Third, we're correlating more content distribution channels, including short-form videos and live streaming sessions on our own and partnered platforms. Therefore, service managers who excel at live streaming can generate more attention and income through live streaming about our products, while service managers who are good at sharing can earn commissions from promoting purchase transactions through sharing related to live streaming. Through partnerships and collaborations, we actually channeled user traffic from third-party platforms to our own platform. For example, our private label beauty brand, P&X, developed a joint label product in cosmetics through our collaboration with Moschino, an established Italian luxury brand. We have also actively explored the live streaming channels. For instance, we partnered with online collaborators for two live streaming shows on a leading short-form video and live streaming platform in China. Both shows generated total sales of RMB120 million. During the Double 11 Shopping Festival, we also partnered with Douyin's top-selling collaborator to promote our products and achieved RMB50.90 million in sales through a single live streaming show. Most of our users are women and mothers who take care of their families. We have always paid great attention to the demands of this customer segment and continue to cultivate our platform capabilities to serve thousands of mothers. Based on their needs, we also developed high-quality products that the whole family could safely use and enjoy. On our platform, these mothers do not just buy a course to effective products but also receive caring services, a product that we hope they can enjoy at ease. Moving ahead in the coming year, we will continue to do listing alongside the right members and communities and advance forward together. With that, I will now turn the call over to our Vice President of Finance, Mr. Chengqi Zhang, who will go through the details of our financial performance in the fourth quarter.

Thank you, Shanglue. Hello, everyone. Before I go through our financial results, please note that all numbers stated in the following remarks are in Renminbi terms, and all comparisons are on a year-over-year basis unless otherwise noted. During the fourth quarter, we continued to focus on improving our margins by launching more private label brand products and utilizing our unique membership-based community to increase sales across different social channels. As a result, we continue to steadily improve our platform's operating efficiency during this quarter, with total operating expense decreased by 44%, and the loss from operations decreased by 54%. Now let's take a closer look at our financials. Total revenue in the fourth quarter of 2020 was CNY1.3 billion compared to CNY2.4 billion in the same period of 2019. Our GMV for the fourth quarter of 2020 was CNY11.7 billion compared to CNY11 billion in the same period of 2019. Revenue from net sales of merchandise in the fourth quarter of 2020 was CNY1.2 billion compared to CNY2.1 billion in the same period of 2019. Revenue from our marketplace business in the fourth quarter of 2020 was CNY153 million compared to CNY169 million in the same period of 2019. The trends in our total revenue and the GMV were in line with our ongoing efforts to improve both our internal operating efficiency and the operating efficiency of our merchants as we continue to transfer business activities to our marketplace business model, while expanding our user coverage through innovative partnerships with other platforms. During the fourth quarter, the year-over-year decrease in our total revenue was mainly attributable to lower commission rates as a result of our efforts to protect platform membership value by providing subsidies to products from certain large brands in response to increased competition during the e-commerce shopping festival period. Besides, as we implemented our own coverage expansion strategy, our commission rates during the quarter were also affected by our increased promotion for new partnerships on our platform, such as live streaming events on our external live stream platform. Revenue from our membership program in the fourth quarter of 2020 was CNY40,000 compared to CNY146 million in the same period of 2019. Revenue from our membership program consisted entirely of deferred revenue from prior paying members as a result of our decision to refine our membership enrollment system. Gross margin in the fourth quarter of 2020 expanded to 26% compared to 24% in the same period of 2019. This increase was due to our decision to introduce more private label products with higher gross margins on our platform during the quarter as well as our improved product mix and enhanced operating efficiency. Now turning to our operating expenses. Overall, total operating expenses in the fourth quarter of 2020 decreased by 44% to CNY368 million from CNY662 million in the same period of 2019. Fulfillment expenses in the fourth quarter of 2020 decreased by 52% to CNY92 million. This decrease was mainly due to decreased warehousing and logistics expenses resulting from lower merchandise sales and improved logistics efficiency, decreasing third-party payment transaction fees due to the lower charge rates that we secured, lower personnel costs due to a headcount reduction, as well as decreased share-based compensation expenses, which included our previously recognized reversal of CNY6 million in share-based compensation expenses. Sales and marketing expenses in the fourth quarter of 2020 decreased by 45% to CNY167 million. This decrease was primarily driven by our reduction in management fees due to our improved member management efficiency, partially offset by higher business promotion expenses from our increased business development activities in this period to attract more popular brands and merchants to our marketplace business. Technology and content expenses in the fourth quarter of 2020 decreased by 41% to CNY44 million, mainly due to reduced server costs as we secured a better contract term with our server provider as well as decreased personnel costs as we refined our staffing structure. General and administrative expenses in the fourth quarter of 2020 decreased by 26% to CNY64 million, primarily due to the ongoing refinement of our staffing structure. As a result, we reduced our loss from operations in the fourth quarter of 2020 by 54% to CNY22 million compared to CNY47 million in the same period of 2019. Our net loss in the fourth quarter of 2020 was CNY77 million compared to CNY5 million in the same period of 2019. The adjusted net loss in the fourth quarter of 2020 was CNY63 million, compared to adjusted net income of CNY25 million in the same period of 2019. The year-over-year decrease was primarily attributed to our income tax expense of CNY44 million in the fourth quarter of 2020 compared to an income tax benefit of CNY5 million in the same period of 2019. It was also due to a net financial loss of CNY7 million in the fourth quarter of 2020 compared to net financial income of CNY39 million in the same period of 2019. Basic and diluted net loss per share attributable to ordinary shareholders in the fourth quarter of 2020 were both CNY0.04. Now turning to our cash and liquidity position. In order to satisfy the ongoing demand of our operations, we continue to maintain a healthy level of working capital. As of December 31, 2020, we had a total of CNY1.3 billion in cash and cash equivalents, restricted cash, and short-term investments. Looking ahead, we remain focused on growing our marketplace and the merchandise sales model, extending our differentiated supply chain, forging more partnerships, and enhancing our social community. Such efforts will help to fortify our financial performance, augment our total profitability, and fuel sustainable growth of our operations over the long term. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

This is Terence from First Trust Group. I have a few questions. My first question is, as we can see the increase in the proportion of Yunji's Marketplace business, what's the separate percentage of your mainstream brands, emerging brands, and private labels? And how would you optimize the marketed metrics? My second question is based on the transformation toward the marketplace business, what will be the company's target for the future? My last question is, we noticed the transaction members continue to grow. So would you please share some details on your monetization plan?

So thank you for your questions. And today, most of our products are coming from the mainstream brands, and only 10% are our private labels. As for the expectations, we hope that as our business grows, we could increase the percentage of mainstream brands to 60%. Because we know that it is quite expensive for those mainstream brands to attract traffic online. Later, we hope that those mainstream brands are going to provide exclusive products and have cooperation plans where the price is going to be cost-effective for our platform. We are working on both private labels and mainstream products. We hope that in the next three years, we could increase the percentage of mainstream brand products to 60%, with 20% as exclusive products. For the private label products, they are going to account for 20%. In China, we know that we have 150 million mothers and we hope to help them improve their quality of life, aiming to have 1/3 of those mothers as our members. We aim to offer cost-effective products and a better service experience. We recognize that our customer segment has various aspirations, such as improving their income and generating social value, so we wish to provide them with professional services and a platform. Our members could become professionals in their areas, for example, having good knowledge in cosmetics or healthcare products. By providing professional knowledge for sales managers, they can become experts in their segments, and in this way, help them increase their income and provide internet-based employment opportunities. We realized that in the past years, numerous sales managers were busy promoting products but still couldn't generate much income. Thus, we are committed to providing more professional training so they can excel in their areas and improve their interaction with fans and users, thereby increasing their sales and income. Thank you for your question.

Thank you for joining us today. Please do not hesitate to contact us if you have any further questions, and we look forward to talking to you next quarter. Thanks. Bye.

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