Uxin Limited
Q1 2020 Earnings Call Transcript

Published: 24 Jul 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Uxin's Earnings Conference Call for the quarter ended March 31, 2020. At this time, all participants are in a listen-only mode. After managements 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 Nancy Song, Investor Relations Director of Uxin. Please go ahead.

[Nancy Song:]

Thank you, operator. Hello, everyone. Welcome to Uxin's Earnings Conference Call for the quarter ended March 31, 2020. On the call today are D.K., Founder and CEO; and Zhen Zeng, CFO. D.K. will review business operations and the company highlights, followed by Zhen, who will discuss financials and guidance. They will both be available to answer your questions during the Q&A session. 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 made – 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 the company's filings with the SEC. With that, I will now turn the call over to our CEO, D.K. Please go ahead.

[Kun Dai:]

Thank you, Nancy. Hello, everyone. Thank you for joining our earnings conference call today. So far this year 2020 has presented just as many challenges for our business, as it has created exciting achievements, making another significant milestone for Uxin. In addition to the divestiture of the loan facilitation business, we also successfully removed all historical guarantee obligations, as we transferred XinWang Bank-related loans to Golden Pacer, and settled the remaining guarantee liabilities associated with the historically facilitated loans for the other major financing partners of ours. These achievements have enabled us to fully resolve our auto financing-related issues, so we can focus squarely on our streamlined 2C online used car transaction business, we are driving sustainable growth for our shareholders. As a first mover in China's used car market, we believe that auto financing is a natural and convenient option to facilitate the desire to buy a used car. Built on the foundation of this behalf and our expertise in the used car industry, we initiated partnership with our financing partners under the business model of loan facilitation, but we needed to provide guarantees, for all facilitated loans. As much as the market opportunity is for used car financing, and as much as our financing-related volume grew rapidly in recent years, these guarantee liabilities have in fact put significant pressure on our cash flow. We also experienced a tightening regulatory environment for the overall financing industry, and all over economics downturn, which only intensified the pressure we faced. As we continue to operate in this environment, we believe that well-funded banks and licensed financial institutions are better positioned to play their role as a loan provider we are also taking on the credit risk given their strong skills in risk management and capacity for higher risk tolerance. With the drag of guarantee liabilities behind us, Uxin ushers in a new phase of development. We have evolved from a financing-oriented platform to a transaction-centric online used car dealer, who offers quality value-for-money used cars, premium purchasing services, and online one-stop convenience. These key value propositions have reshaped our core customer base into a group of consumers, who are willing to pay for quality and premium services. To further enhance customer experience, we upgraded our used car transaction value chain and migrated every sales step online. We developed a team of inventory selectors to discover the highest quality cars that offer the best value for money, from a national wide pool car -- pool of cars. Only these qualified cars are then eligible to be inspected and saleable on our platform. We are also in the process of planning advanced refurbishments to further enhance car quality. We replaced our offline sales team, with an online consulting team that delivers timely vehicle consulting services and facilitates, a seamless self-service purchasing experience. We also enhanced the responsiveness and quality of our after sales services to ensure high customer satisfaction. Our differentiated product and servicing -- service offering is critical for easing customers' concern about, buying used cars online. Our expanded value proposition has strengthened the Uxin brand, built trust in our service, improved the customer experience and increased NPS among customers. We strongly believe that, creating meaningful customer value and earning customer trust are keys to establish a stronger competitive advantages and barrier to entry. And this is a core strategic goal that will allow Uxin to drive sustainable long-term growth. Equally as important, I want to highlight that, the transformation of our business and service model is not just about cost savings, but it rather about fundamentally optimizing our overall cost structure, increasing long-term operational efficiency and improving cash flow. Our focus on selecting best value used cars, effectively reduce inspector headcount. So we only need to dedicate inspection resources to a smaller number of better-value-for-money cars. In addition, a simplified transaction process, coupled with transparent price, lowers the reliance on salespeople, who used to meet customers in person to navigate the complex process of buying a used car. As a result, our current online sales team is only about one-tenth the size of previous offline team. With a fundamentally optimized cost structure in place, we believe, we have created a clear path to profitability. And thus are better positioned to create long-term value, for our shareholders. We are confident that, the net effect will reinforce our competitive advantages and further differentiate us from our peers. We believe that online purchasing of used cars in China will continue to grow. And we are excited about the opportunity going forward. While focused on future growth, we are also aware of the challenges we are facing. The first one related to how we can better serve customer who need a financing plan. When we provide loan facilitation services and took on the credit risk, we had better control on loan approval rates, approving efficiency and flexibility of financing options. Without providing this services and providing guarantees, we now rely on developing a best-in-class used car financing supermarket, to meet customers' diversified needs. Given the current weakened, economic environment banks and financial institutions, all tend to take a more conservative approach in carrying out financing business. As a result, it will take some lead time before approval rates reach a satisfactory level and more financing options are available in the supermarket. We are actively working with our financing partners to find the right balance between, growing scale and managing the risk. The second challenge is that, it takes time to build Uxin as a trusted online dealer. On top of quality value-for-money used cars we must focus on providing the best possible service to each of our customers. To achieve this long-term goal, we will have to pass on selling those cars that have – seemingly competitive pricing but are unable to meet our quality requirement. Building reputation takes time but a trusted brand will create a more sustainable growth path. China's used car market has great growth potential but customers have been underserved for quite a long time. With a determination to become our customers' most trusted online car vendor, we aim to become the first company in the industry, who wholeheartedly creates a meaningful and long-lasting customer value. We will only sell a car to our customers that we would also sell to our most loved friends and family. This is our pledge and thought we understand the challenge in taking this approach, we firmly believe that it is the best way to achieve sustainable success. For almost a decade Uxin has built a well-known brand focused on developing strong and integrated capability in conducting professional and high-standard car inspections, providing service across the supply chain and offering well-rounded warranty programs and after sales services. All have been building blocks in bolstering the strategic online transformation of our business and service model. There is no better time than now to face our challenge head-on and capture the opportunity before us. We believe this approach underpins the long-term strategy that will elevate Uxin to the next stage of growth and development and we are excited about our ability to create unique and optimal customer value and by so doing also generate sustainable long-term value for our shareholders. With that I'd like to turn the call over to our CFO to walk you through the financial results. Zhen, please?

[Zhen Zeng:]

Okay. Thanks, D.K. Hello, everyone. Thanks for joining us today. We are glad that we have removed the remaining guarantee obligations for the remaining outstanding loan balance of RMB 12 billion. The cash outflow associated with this portion of loans will be limited in the next few years under a scheduled payment plan. In addition, we have settled a maturing US$50 million of a convertible note with PacificBridge, which will leave us of a near-term data obligation. Both settlements create a more favorable business environment for our long-term growth. As D.K. highlighted, we are more confident now than ever in the prospect of further growth as a result of the transformation of our business and the service model. Under our fundamentally optimized cost structure, we will be able to achieve monthly operating breakeven at a much lower volume level as compared with last year. Therefore we will be in even better position to create long-term value for our shareholders. Now let me walk you through the – our financial details for the quarter ending in March. Please note that the results I will discuss related to continuing operations only. All numbers are in RMB unless otherwise stated. Also please note that some numbers I refer to are non-GAAP numbers. You can find a reconciliation of these numbers at the bottom of our earnings release. In the three months ended March 31, 2020 total revenues were RMB 104 million compared with RMB 336 million in the same period last year. The decrease was primarily due to the decreases in the 2C transaction volume and GMV, as a result of disruption caused by the COVID-19 pandemic on our business operations. Our 2C revenue was RMB 88 million compared with RMB 284 million in the same period last year. Online used car transaction volume is 6,584 units for the three months ended March 31, 2020 and its corresponding GMV was RMB 723 million. Looking at two revenue streams of our 2C business. For the commission revenue was RMB 48 million compared with RMB 149 million in the same period last year primarily due to the decreases in the transaction volume and GMV. The unique value proposition we are now able to offer our customers along with the improved user experience and higher pricing power resulted in the commission rate expanding to 6.6% from 6.3% in the previous quarter. Value-added service revenue was RMB 40 million compared with RMB 135 million in the same period last year, primarily, due to the decreases in the transaction volume and GMV. VAS take-rate slightly increased to 5.6% from 5.5% in the previous quarter. Looking at other businesses. Other revenue was RMB 15 million in the three months ended March 31, 2020 compared with RMB 51 million in the same period last year. Cost of structures decreased by 29% year-over-year to RMB 111 million. The decreases was primarily due to the decreases in the salaries and benefits from the employee engaging in car inspection, quality control, customer service and aftersales services as well as a decrease in the fulfillment cost due to a decrease in transaction volume. Gross margin was negative 6.6% for the three months ended March 31, 2020 compared with a gross margin of 53.4% in the same period last year. Total operating expenses was RMB 2,235 million. Non-GAAP operating expenses excluding the impact of share-based compensation were RMB 2,267 million. Sales and marketing expenses decreased by 45% year-over-year to RMB 190 million. The decrease was mainly due to a decrease in salaries and benefit expenses. Share-based compensation expenses associated with the sales and marketing expenses were nil during the quarter. G&A expenses decreased by 14% to RMB 75 million. The decrease was mainly due to a decrease in salaries and benefits as well as the share-based and compensation expenses. G&A expenses excluding share-based compensation expenses of negative RMB 13 million were RMB 105 million. R&D expenses decreased by 4% of RMB 31 million. The decrease was primarily due to a decrease in salaries and benefits expenses. R&D expenses excluding share-based compensation expenses of negative RMB 2 million were RMB 33 million. Loss from guarantee liabilities was nil for the three months ended March 31, 2020. We incurred the guarantee liabilities associated with the remaining guarantee obligations from our historically-facilitated loan which were not transferred to Golden Pacer. We also adopted the Accounting Standards Update of 326 during the period on which further information can be found in our earnings release. After the adoption of ASC 326, expected credit losses for contingent guarantee liabilities shall be accounted for in addition to and separately from the stand ready guarantee liabilities, account for under the previous accounting standard. The provision for the contingent guarantee liabilities is currently recorded within provision for credit losses and the gain released from the stand ready guarantee liabilities account for under ASC 460 is currently recorded within other operating income. Provisions of credit losses was RMB 1,940 million for the three months ended March 31, 2020. Due to the impact of COVID-19 pandemic, a significant impairment of RMB 1,039 million was incurred as a result of adversely affected performance of our historically facilitated loans mainly including loan recognized as a result of the payment under guarantee. After the adoption of ASC 326 a provision of RMB 804 million for contingent guarantee liabilities measured under the current expected credit losses model is recorded within the provision for credit losses. Loss from continuing operations was RMB 2186 million compared with RMB 295 million in the same period of last year. Loss from the continuing operations was primarily due to a significant provision for credit losses of RMB 1940 million recorded for this quarter. Non-GAAP loss from continuing operations, which exclude the impact of share-based compensation was RMB 2218 million compared with RMB 245 million in the prior year period. On a non-GAAP basis, loss from continuing operation was also materially impacted by a significant provision for credit losses recorded for the quarter. Net loss from continuing operation was RMB 2034 million compared with RMB296 million in the same period last year. Net loss from continuing operations was primarily incurred by a significant provision for credit losses of RMB 1940 million recorded for this quarter. Non-GAAP net loss from continuing operations which excludes the impact of share-based compensation was RMB 2066 million in the quarter compared with RMB 246 million in the same period last year. On a non-GAAP basis net loss from continuing operations was also materially impacted by a significant provision for credit losses recorded for this quarter. Turning to our cash position. As of March 31st, 2020, we have cash and cash equivalents of RMB 343 million. That sums up our results for the three months ended March 31st, 2020. Moving on to our guidance for the three months ended June 30th, 2020. Taking into the account all the factors mentioned earlier regarding the coronavirus and the business divestiture, we expect our total revenue from continuing operations to be in the range of RMB 60 million to RMB 65 million. This forecast reflects our current and preliminary views on the market and operational conditions and it's based upon the current situation and uncertainties associated with the coronavirus outbreak which are subject to change. That concludes our prepared remarks.

[Nancy Song:]

Thank you, Mr. Zhen. Operator, we'd like to open the call for questions now. Thank you.

[Operator:]

[Operator Instructions] Your first question comes from the line of Eddy Wang of Morgan Stanley. Please ask your question.

[Eddy Wang:]

[Foreign Language] Hi, management. Thank you for taking my question. My question is about actually big picture question. So, we have noted that the business model of the company had been more initiatives, especially for move some of the off-line to the online, especially in the first half of this year. So, I just want to -- if you can give more color about, especially on the backdrop of the used car industry. We know that because of COVID-19 the first quarter, so in the second quarter the markets are not that good. And we expect that in the second half of this year maybe the market will not recover that strong. And in the longer term, I think it will still take time for the used car industry to have very strong significant growth in the longer term. So, your business model change actually I think you have -- you have thought through a lot of this. And just want your thoughts, especially under the used car industry regarding your business model improvement. Thank you.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yeah. So, I think -- second -- last year, we've witnessed or experienced an economic downturn and also starting -- entering into this year, we see the COVID-19 brought the overall macroeconomy going into a downturn as well. So, in the first half of the year -- first half of this year, the main responsibility or job for us is to get rid of all that guarantee -- historical guarantee liabilities. So, we no longer subject to our historical loan book of about RMB 37 billion. So, all of the guarantee liabilities, now no longer with us. So this is the parts we are moving -- keep away from the credit risk. And this is our way to address or face the economic downturn. So also, -- but considering the overall delinquency of the -- in the financing industry this has also helped us to improve our overall cash flow.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yeah. So in the first half of this year, the used car market also take a big hit from the macroeconomy also considering the economic downturn we are in now. And also the other factor is that we see the new car market, the new car price has been reduced significantly which has also -- have a significant impact in all the residual value of used cars.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

So, the transaction volume of used cars is relatively low in the first half of this year. But when we look at -- when the macro economy is stabilizing and as the new car price is stabilizing, we are expecting the new car market will be gradually picking up in the second half of this year.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yes. So under these circumstances even though the macro economy will be picking up, but not as good as previous years. So for us our -- the key thing for us is to focus. You can see we divested the noncore business in the previous quarters.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

So in terms of the customer base, previously we wanted to cover or service all of the car buyers in the market but now we only focus on the consumers who care more about the quality and services.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

So in terms of the business model, previously we cared more about the scale but now it's more about the quality of it.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yes. So our results actually comes from the quality we can deliver, the services we can deliver and also the standardization we can deliver, as well as the transparency of the whole buying process we can give or provide to the customers. All-in-all, we now need more of the word of mouth or the higher NPS scores from the customers. So the customer loyalty will be the key driver for our sustainable growth, especially under economic downturn or less favorable macro environment.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yes. So in terms of our sales team, we now replaced all of the offline sales by the online sales. So we will have higher operating efficiency from them.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yeah. So Chinese consumers have the highest acceptance of purchasing the -- go online to buy things. So we believe the online purchase for used car is basically there. And the buying used cars online can also bring lots of benefits for consumers such as the wide collection of used cars and a more convenient buying process without unnecessary cost incurred when they go offline to buy the car.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yeah. So we launched our pure online purchasing product this June. So we have seen pretty good acceptance from our customers. The challenges now actually come from the financing approval rates. Given we don't take guarantee anymore and started a new cooperation model with our financing partners, it actually takes time before we make the whole process more smooth. And if you look at the non-financing attached transactions, it has already recovered to about 60% of last year's level. So now the key issue is about -- all about the financing process. So the financing partners need time -- need to take credit risk by themselves now. So they need to develop new financing products to adapt to the current situations. And they also need more time to find a balanced approval rate. So -- but overall, the customers' acceptance of buying cars online, we don't see any problem here.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yes. That's all the answers. Thank you, Eddy.

[Operator:]

Your next question comes from the line of Ronald Keung of Goldman Sachs. Please ask your question.

[Ronald Keung:]

Thank you. Hey, D.K., Michael, Nancy. So I have two questions. So the first one is about your second quarter revenue guidance. Can you share some of -- what are the volume drivers behind that? How have we seen volumes trending and our expectations into the second half, particularly given now the kind of streamlined cost structure what kind of volume do we need to reach to reach a breakeven point? Second is on our lower finance approval rates that we've seen so far, what are we doing or what could we do to address or help drive on this challenge? Taking macro aside what can we do on outside to increase that approval rate? Thank you.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

Yes. Our pure online business model hasn't been fully available until this June. So under the new online service model, the starting point for us is the monthly transaction volume of 1,000 units. And our current breakeven point comes at a monthly volume of around 5,500 units. And we are expecting it will take like six to eight quarters before we reach this point.

[Kun Dai:]

[Foreign Language]

[Nancy Song:]

[Foreign Language] Yes. So, like Ronald mentioned, the key bottleneck now is the financing approval rate. And if we look at our non-financing tax volume is already returned to about 60% of last year's level. So, this relatively low approval rate is mainly because banks they changed their risk, control model because they have to take credit risk now all by themselves. For us, without taking the guarantees, actually, we are profiting with the banks and towards a direction more compliant with the current regulatory environment. And because the -- considering the macroeconomic environments and the higher delinquency rate over the past year, banks actually tend to be more conservative when they approve the loan. So the current approval which is -- the approval rate is relatively low now. And our approach to address this issue is to cooperate with more financing partners who have different risk appetite. So, it will take more time -- take time before we get the whole process more smooth and everything is ready and for banks themselves because our customer base has changed to higher-end or higher quality consumers, so their loan performance will be much better than before. And when the banks have seen this risk profile or customer profile, they will give us better approval rate. Thank you, Ronald.

[Nancy Song:]

And thank you again for joining our call today and for your continued support in Uxin and we look forward to speaking to you again during the future.

[Kun Dai:]

Bye-bye.

[Operator:]

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