Uxin Limited (NASDAQ:UXIN) Q2 2023 Earnings Conference Call December 30, 2022 8:00 AM ET
Company Participants
Jack Wang – Investor Relations
Kun Dai – Chairman of the Board & Chief Executive Officer
John Lin – Chief Financial Officer
Conference Call Participants
Tom Kerr – Zacks Investment Research
Fai Dai – TF Securities
Operator
Ladies and gentlemen, thank you for standing by. And welcome to Uxin’s Conference Call for the Quarter Ended September 30th 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, Mr. Jack Wang. Please go ahead, Jack.
Jack Wang
Hi, thank you, operator. Hello, everyone. Welcome to Uxin’s earnings conference call for the quarter ended September 30, 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 both 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.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] Hello, everyone. It’s a pleasure to have you join our earnings conference call today. For the convenience of both domestic and international investors, I will review our business progress in both English and Chinese.
During this call today, I will review our major business highlights of the past quarter and then share our recent business progress and our thoughts on long-term prospects.
Our retail transaction volume in the second quarter of fiscal year 2023, which ended on September 30, 2022 reached 3,109, representing an increase of almost 30% quarter-over-quarter and 203% year-over-year. 2022 has been a rather difficult year for China’s used car market. Specifically, the college students constantly disrupted business activities and decelerated economic activities and customer spending. As a result, in the quarter between July and September, China’s used car transactions fell 5% year-over-year, which was rarely seen in the past years. Despite facing those macro and industry-wide challenges, we continued to deliver significant business growth. This demonstrates the resilience and vitality of our IRC-based omni channel used car business model we have built.
On top of our rapid growth in transaction volume, our brand reputation and customer satisfaction levels also continued its growth. Since we launched our Hefei superstore at the end of last year, we have achieved the resounding success in Hefei’s regional market in less than a year. Our market share in Hefei is close to 10% and is expected to increase further, while our brand has occupied the most monitored from used car buyers in Hefei, as well as its surrounding cities. Our net promoter score or NPS was 61 in the past quarter, maintaining at the top of the industry. More than 25% of transactions in the quarter came from referrals by existing customers.
At the same time, our ongoing efforts in improving operation efficiency continued to yield results. On the vehicle acquisition front, our car sourcing channels worked fairly well, particularly in Xi’an and Hefei, where we established our IRCs and superstores, we have unrivaled capabilities to acquire high quality used car supplies. Close to 60% of our vehicle acquisitions came from individual customers. In September, we further accelerated our operation process between used car acquisitions and listing them for sales. These refinements in turn continue to accelerate our sales turnovers. Although we experienced severe COVID induced disruptions throughout October and November, our operations have returned to the level of September and we expect our operating metric to continue improving in 2023.
Today, I’m excited to share another key milestone we have achieved. As we have announced last week in December 2022, we completed the relocation and upgrade of [ROC] (ph) and IRC in superstore to better fulfill the market demand for used cars in the city of Xi’an and surrounding areas. The upgraded IRC and superstore we opened for business at the new location as the largest fully self-owned used car marketplace in Northwest China. The upgrade expanded the IRC’s total floor area to 150,000 square meters and is comprised of a used car reconditioning factory, as well as a warehouse power superstore. Powered by industry leading equipment and advanced reconditioning techniques, the reconditioning factory has an annual capacity of 40,000 units to ensure that Uxin has a super large scale supply of high quality used cars. The warehouse style superstore expanded its showroom capacity from 600 vehicles previously to 3,000 vehicles now to offer an extensive selection of used cars to our customers.
In addition, the IRC houses integrated customer service center and brought in a branch office of the vehicle administration office on-site. As such, customers can have access to auto financing, insurance, expanded warranty, accessories upgrade, as well as title transfer and registration services from the same base they purchase their vehicles for a comprehensive and efficient one-stop used car buying experience.
The new Xi’an IRCs that benchmarked representation of Uxin’s business philosophy of driving the transformation of China’s used car industry through advanced manufacturing, new retail experience and digital empowerment.
As we empower our reconditioning process with advanced equipment, technology and supply chain capabilities, we can ensure a solid supply of high quality used cars and create more value opportunities for used cars as product. With the mass production we conducted in our own IRC factory, we have refined control over the manufacturing process and can significantly reduce the reconditioning costs driven by economy of scale.
Our superior store environment, massive selection of used cars, and comprehensive services made our superstore a top brand and a mass fee for consumers shopping for used cars. Our high quality used car offerings and one-stop used car buying experience are our key competitive advantages over the traditional used car market.
When we entered this traditional industry with digital and intelligent technologies, we spent over 11-years to build digitized processes and management systems from inspection, reconditioning to exhibition and sales we leveraged our system and data to standardize the business processes, which had long been a non-standard categories, such digitized systems and standardized processes significantly improved our efficiency in operating our used car business. Our technology advantages constitute our unique capability to manage used car businesses at a super larger scale in China, setting us apart from the highly fragmented small used car dealers.
We have complete confidence in the business model we developed, as well as in the future prospects of the used car industry. We are invoicing a massive revolutionary opportunity in China’s used car market. We experienced stringent COVID control measures in October and November. We look forward to a rebound in the Chinese economy in 2023, as China has begun easing COVID restrictions. As regulators continue to implement more industry boosting policies across the nation, we will carry out further efforts for expanding our business footprint through our original IRC network, our strong brand equity, as well as leading product and service capabilities will enable us to continue driving the transformation of China’s used car industry into the next development stage.
John, please. And with that, I’d like to turn the call over to our CFO, John to walk you through the financial results. Please turn.
John Lin
[Foreign Language]
Jack Wang
[Interpreted] Thank you, D.K., and hello, everyone, since we have both domestic and foreign investors attending our call. Our remarks will be delivered in both Chinese and English for everyone’s convenience. Now I will provide a closer look at our financial results from the second quarter of fiscal year 2023, which is the three months ended September 30, 2022.
While China’s used car industry faced major challenges in the quarter, we still maintained robust growth momentum in our retail business. Our retail transaction volume grew by an impressive 203% year-over-year and 29% quarter-over-quarter to reach 3,109 this quarter. At the same time as we further optimize our inventory structure, our average selling price or ASP decreased from RMB145,000 in the previous quarter to RMB120 this quarter, a RMB120,000 this quarter.
Retail vehicle sales revenue totaled RMB330 million, up 7% sequentially and 79% year-over-year. We have completed major inventory restructuring and expect that our retail ASP will stabilize between RMB110,000 and RMB120,000. In addition, with continuous improvements in our used car inspection and reconditioning capabilities, as well as capacity for our showrooms, we were able to sell a higher portion of our acquired vehicles through retail channels. Vehicles we sold through retail had exceeded wholesale for the first time in the past six quarters and we expect higher retail sales contribution in the coming quarters.
Wholesale transaction volume was RMB3,000 this quarter essentially flat, compared to the previous quarter. During the quarter, we reconditioned an increasing number of acquired vehicles to meet our retail standards. As more vehicles were sold through retail, the ASP of wholesale vehicles also declined from RMB860,000 in the previous quarter to RMB81,000 this quarter. Wholesale vehicle sales revenue for the second quarter was RMB238 million, down 10%, compared to the previous quarter.
Our total revenues including both retail and wholesale remained relatively stable, compared to the previous quarter as RMB619 and up 79% year-over-year. Retail vehicle sales revenue contributed to 60% of our total revenues this quarter and we expect continuous growth for this percentage in the quarters ahead.
Gross margin for the quarter was 1.3%, up slightly from 1.1% in the previous quarter. During the market slowdown, we recorded a price impairment on some of our inventories. Meanwhile, we also optimized our inventory structure and accelerated the turnover of high priced vehicles through various pricing strategies between July and September. These proactive actions hindered our gross — our margin expansion and capped our gross margin at a low percentage level.
Following the stringent COVID control in various Chinese regions during October and November, China relaxed the many of the control measures in December and the infection rates are approaching their peak. These sweeping changes have had substantial impacts on the domestic used car market. However, we’re pleased to see that our sales performance has rebounded rapidly ahead of the market with various operating metrics in December starting to return to previous highs we have seen. Moreover, we expect our gross margin to continue improving after the initial COVID infection peak passes to return to a reasonable level in the calendar year 2023.
Total operating expenses for the quarter were basically flat, compared to the previous quarter. While we are currently in a stage of rapid business growth, we remain committed to implementing cost reduction and efficiency improvement initiatives into our daily operations for business expansion at optimal ROI.
As D.K. mentioned earlier, the completion of our Xi’an IRC upgrade was a major milestone for us. We expect that the accelerated sales growth in Xi’an and its surrounding areas combined with our continued cost optimization will enable us to or will enable our operated Xi’an superstore to generate positive operating profit on a single store basis within 12-months.
Our non-GAAP adjusted loss from continuing operations increased by approximately RMB7.5 million from the last quarter to RMB92.4 million this quarter. The detailed financial statements were published in our earnings release online, so I will not repeat the numbers here. However, same as before, I will explain the fair value impact related to our financing transaction. The changes in our share price between the end of this quarter and the end of last quarter resulted in a loss of RMB11.5 million, due to the fair value change of warrants related to the financing agreement we signed in 2021. This is a non-cash loss based on U.S. GAAP financial treatment and does not reflect our business operations.
Now moving on to our guidance for the next quarter, during October and November COVID outbreaks in both Xi’an and Hefei, where our IRCs are located resulted in intense control measures and citywide lockdowns, which largely impacted our sales growth momentum. After China started lifting COVID restrictions in December, infections in Xi’an, Hefei and many other cities are reaching estimated peak levels. Although market consumption has been slow to recover, our December retail transaction volume has rebounded through September level.
Based on these impacts, we expect our total transaction volume to slightly decline in the third quarter of fiscal year 2023, which is the three month ending December 31, 2022. Our retail transaction volume is expected to be around 2,800 units, representing a 65% year-over-year growth, while the ASP for retail vehicles is expected to be around RMB110,000. We also expect our wholesale transaction volume to be around 2,000 units with ASP expected to be around RMB70,000. We estimate that our total revenues, including retail vehicle sales revenue, wholesale vehicle sales revenue and value-added service revenue to be in the range of RMB450 million to RMB460 million. Once the peak of this COVID infection cycle passes, and the economy begins to recover, we believe that our business will return to its high quality growth trajectory in the coming New Year.
And that concludes our prepared remarks today. Operator, we are now ready for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And for the benefit of everyone on today’s call, please ask your question first in Chinese and then repeat it in English. [Operator Instructions] And today’s first question comes from Tom Kerr at Zacks Investment Research. Please go ahead.
Tom Kerr
Hello. Can you provide more details on the COVID disruptions? And how it affected consumer purchasing, in other words did it improve the online purchasing part of the business? Thank you.
Jack Wang
Alright. Thanks, Tom. Let me translate that question first. [Foreign Language]
Kun Dai
Okay. Thank you, Tom [Foreign Language]
Jack Wang
[Interpreted] So COVID definitely had a significant impact on used car consumption.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] COVID’s near-term impact on the economy has affected consumers’ demand and willingness for car purchases. During stringent containment measures, delivery, logistics and off-line operations were also constantly disrupted. So consumers had no way to complete their purchases. Now that we are at the peak of the first COVID infection cycle after the COVID restrictions were lifted, so many in-customers are staying at home dealing with their infections.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] So from our perspective, we are obviously proud of our ability to deliver impressive business growth between July and September, where our retail transaction volume more than tripled in such a challenging environment. But in October and November, we experienced COVID controls and city lockdowns in Xi’an and Hefei and that’s where our IRCs are located. And this disruption certainly impacted our sales. However, as China started easing COVID control measures in December, our sales performance has recovered ahead of the market, as many of our operating metrics in recent couple of weeks have exceeded our previous highs.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] Since China relaxed the COVID control measures, we have already seen a strong market recovery, that’s why we are excited about opportunities in 2023. Once the peak passes, we believe that the entire used car market will see a strong rebound.
And that’s the answer to Tom’s question. Operator, let’s move on to the next.
Operator
Absolutely. Our next question today comes from [indiscernible] with China Securities. Please go ahead.
Unidentified Analyst
[Foreign Language] Now I will speak in English. What is the impact of the upgrade of our Xi’an superstore on the company’s used car transactions? Is the current increase in the storage capacity from 600 units to 3,000 units sufficient from the supply perspective and will the customer demand for used cars improve following of easing of COVID restrictions?
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] All right. Thank you, [indiscernible]. Let me address your question about expanding our Xi’an superstore showroom capacity from 600 units to 3,000 units, a few aspects. First of all, our previous 600 used car showroom capacity was no longer enough to meet the demand for our customers in Xi’an.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] So we decided to expand the scale of our superstore, which benefits us in multiple areas.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] The expansion made our superstore the largest used car marketplace in China’s Northwest region, which further enhances our value propositions to our customers with a wider vehicle selection, larger store scale and better shopping experience. These improvements also strengthened our market share and market position in the region, which in time will continue to fuel our business growth. As such, we created additional headroom for our future sustainable sales growth.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] Additionally, the upgrade didn’t just expand our Xi’an superstore scale, we also developed an innovative used car model that combines our advanced reconditioning factory and warehouse style superstore. This combination enabled us to have a better control over the quality of our used car offerings and further refine our costs.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] Currently, our Xi’an superstore has fulfilled the market demand in Xi’an, as well as adjacent cities. So we believe that our current showroom capacity of 3,000 used cars is sufficient. We have an omnichannel sales network powered by our IRCs, and we have the flexibility to adjust our inventory supplies to balance the demand in different regions.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] Going forward, we will also continue to develop new IRCs for business growth and inventory expansion based on market conditions and our strategic plans.
Unidentified Analyst
[Foreign Language] Can management’s comments on the current used car market dynamics, including market size, competitive landscape, growth potentials and policy directions? Thank you.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] So I’ll break down our view of the market into two aspects as well. For the size of the market, China is already the world’s largest auto market in terms of vehicle ownership. All these vehicles on the road right now at some point will need to go through secondary market circulation. As a result, based on China’s current scale of car ownership, we believe that our used car market in the next few years will expand from 20 million transaction per year right now to the same level as in the U.S. at about 45 million transactions per year.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] On the competition front, the current market landscape is still relatively fragmented, where small dealers dominate the transaction market. We believe that some of them will gradually transit towards branded and standardized operations, but some of the small car dealers will run out of business. We have developed an innovative business model in the market as we provide customers with a new and improved shopping experience. Through our digital transformation, stronger production capabilities and higher vehicle quality, we believe that in the current competitive landscape, we have more significant advantages in all aspects.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] In terms of growth potential, our Hefei superstore has already proved that we have garnered about 10% of the market share in Hefei within a year of operation. Moreover, we still have a lot of headroom for further improvement, and we expect to gain about 20% market share in Hefei in the future. Importantly, our success in a single market will enable us to replicate the formula in other major cities nationwide, and we believe that Uxin has higher growth potential in China than our counterparts in the U.S.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] I will also briefly summarize some of the key policies. First, the government is clearly encouraging complying dealership operations, while strengthening oversight over unlawful practices. So for example, new regulations require that each individual can only trade less than two used cars in a year, and this policy restriction will eliminate the illegitimate operations that were largely unregulated in the industry before, thus standardizing the market and creating a healthier environment for compliant businesses to grow.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] Moreover, the reform of the used car tax system also significantly reduced the complexity of vehicle title transfers and also reduced the cost of our business operations. At the same time, the implementation of electronic vehicle profiles and online registrations also enabled us to further expand our access to used cars and improve transaction efficiencies.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] So overall, China has been implementing a large number of industry boosting policies. The regulatory support has definitely improved and will continue to improve the overall industry environment.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] Alright. That’s our answer to — all right. Thank you, that’s our answer to China Securities.
Unidentified Analyst
Thank you.
Operator
Thank you. And our next question today comes from Fei Dai with TF Securities. Please go ahead.
Fai Dai
[Foreign Language]
Jack Wang
Hey, Fai Dai.
Fai Dai
[Foreign Language] I’ll translate my question in English. We saw your transaction volume grew by 60% in the second quarter, while the industry total transaction dropped by 5%. Can you elaborate on what’s behind your growth in a challenging market? Thank you.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] Sure, Dai Fei. The used car industry, like you said, and like many other industries experienced headwinds during July and September. As the industry recorded a rarely seeing year-over-year decline in transaction volume, it was particularly difficult for us to achieve a year-over-year growth of over 200% in our retail transaction volume under such market conditions. In addition to transaction growth, our customer satisfaction level also continued to improve.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] This was made possible by the execution efforts of the entire Uxin team. Our achievements also demonstrated the resilience and the vitality of the business model we built. Compared to traditional used car dealerships, our model has the complete advantages.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] The first is that we leverage our advanced reconditioning factory to develop our used car product offerings — product capabilities far ahead the traditional car dealers. We utilized our assembly line management advanced reconditioning equipment and processes to recondition our vehicles. Our advanced reconditioning factory ensures that we have a stable supply of high-quality used cars on a large scale. And high-quality used cars is an important reason that customers choose us in a challenging market environment.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] The second is that we have developed a very innovative new retail experience for used car purchases. Our fully self-owned superstore is far superior, compared to the traditional used car market in terms of vehicle selection, purchase process, service experience and after-sales services. In our superstore buying a used car is no longer like going to a farmers’ market, but more like going to a modern IKEA or POSCO or [SAMS] (ph) Club supermarket. Our customers can enjoy a one-stop experience starting from choosing a car, transferring the titles and accessing the after sale services in the store. We have become a [mystery] (ph) landmark for local east car consumers in every regional market we enter, whether it’s Xi’an or Hefei.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] And thirdly, we digitize the management of the entire process enabling us to better understand our customers and the market so we can dynamically adjust our operations based on market changes. With Uxin’s 11-years of development in the industry, we have developed the best database and digital technologies in China’s used car industry. Digitization allows us to better understand the needs of our customers, so we can better select our used car offerings. Our intelligent pricing system also enables us to dynamically adjust prices based on market changes, as such we can better optimize our inventory structure and improve precision of our user acquisition efforts through different channels. We also leverage our digital systems to execute better analysis and management of our business, thus creating our unique capability to manage used car operations at a super large scale.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] And that’s how we managed to deliver growth under a challenging market environment. We hope to drive and the — we hope to drive the upgrade and development of China’s used car industry to a more — much more stage through what we’re doing. And I’m fully confident, in our business model, as COVID passes and the industry as a whole starts to recover, we will sustain our high quality growth in 2023.
Kun Dai
[Foreign Language]
Jack Wang
[Interpreted] And that’s how we answer to TF Securities questions.
Operator
Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Jack Wang for closing remarks.
Jack Wang
Alright. Thank you, everyone, again, for joining our call today and for your continued support in Uxin. We look forward to speaking to you again soon in the future. We wish you all a nice day, and Happy New Year ahead.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.
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