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Edited Transcript of QK.OQ earnings conference call or presentation 6-Jan-20 12:30pm GMT

·20 min read

Q4 2019 Q&K International Group Ltd Earnings Call Aug 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Q&K International Group Ltd earnings conference call or presentation Monday, January 6, 2020 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Guangjie Jin Q&K International Group Ltd. - Founder, Chairman & CEO * Jackie You Q&K International Group Ltd. - CSO & SVP * Frank Sun Q&K International Group Ltd. - CFO ================================================================================ Conference Call Participants ================================================================================ * Lewis Wang Annunciation Research - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Q&K International Group Limited Fourth Quarter and Fiscal Year 2019 Earning Conference Call. (Operator Instructions) I must advise you that this conference is being recorded. I will now like to hand the conference over to your first speaker today, Mr. Tip Fleming. Thank you, please go ahead. -------------------------------------------------------------------------------- Unidentified Speaker Q&K International Group Ltd. - Unknown [2] -------------------------------------------------------------------------------- Thank you, Operator. Hello, everyone, and thank you for joining us today. Qingke's Fourth Quarter and Fiscal Year 2019 earnings release was distributed earlier today and is available on the Company's IR website, at ir.qk365.com, as well as on GlobeNewswire services. On the call today from Qingke, we have Mr. Guangjie Jin, Founder, Chairman and Chief Executive Officer; Ms. Jackie You, Chief Strategy Officer and SVP; Mr. Frank Sun, Chief Financial Officer, and Mr. Scofield Li, the Investor Relations Manager. Mr. Jin will review the business operations and Company highlights. He will do the prepared remarks in Chinese and Ms. You will deliver the same content in English. Mr. Sun will with discuss the financials and guidance. They will be available to answer your questions during the Q&A session that follows. Before we begin, I'd like to remind you that this conference call contains forward-looking statements as defined in the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations in current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many which are beyond the Company's control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements. For further information regarding these and other risks, uncertainties or factors, they are included in the Company's filings with the U.S. SEC. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law. It is now my pleasure to introduce the CEO and CSO, Bill and Jackie, please go ahead. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Thank you Tip, and thanks to everyone for joining our earnings call today. (Speaking in Chinese). Jackie, please. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [4] -------------------------------------------------------------------------------- Before we begin, I'd like to point out that we just announced that we made a few management changes. I'm proud to announce that we promoted Jackie from Chief Financial Officer to Chief Strategy Officer and Senior Vice President, and we promoted Frank from Finance Director to Chief Financial Officer. We couldn't be happier with the changes and know that these are both well-deserved promotions. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- (Speaking in Chinese). -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [6] -------------------------------------------------------------------------------- With that, I'll go back to our prepared remarks regarding our operating key points in the fourth quarter. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [7] -------------------------------------------------------------------------------- (Speaking in Chinese). Jackie, please. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [8] -------------------------------------------------------------------------------- I'm delighted to report a solid quarter, despite the challenge in environment in the midst of China-U.S. trade war and domestic macro economic control in the second half of 2019. We achieved a reasonable growth while narrowing our losses in the fourth quarter. In addition, although we experienced softness in our rental spread margins when compared among the industry, we further widened our overall leadership, evidenced by the number of awards granted to us by prominent industry organizations in recognition of our asset quality. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [9] -------------------------------------------------------------------------------- (Speaking in Chinese). Jackie, please. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [10] -------------------------------------------------------------------------------- During the fourth quarter, we adopted a defensive strategy after a prudent assessment of the broader macroeconomic environment. As a pioneer in China's long-term apartment rental market, we have the most experience managing our business through the economic cycle. Our experience tells us that during economic downturn, more important than aggressive extension is consolidating our internal resources, further improving our operation efficiencies and focusing on asset quality improvement. During this time, we witnessed a series of bankruptcies of companies within the industry who have been pursuing aggressive expansion while disregarding their asset quality. We believe that as the industry weeds out weaker players through the economic downturn, the industry will become more mature and rational, with the remaining companies valuing growth with asset quality and operating efficiencies. We believe we will be able to capture abundant opportunities with our widened advantages when the time comes. Despite all these difficulties in the fourth quarter, our revenues still increase 13% year over year, and our net loss, attributable to the Company, decreased 29% percent to 125 million from last year. Non-GAAP EBITDA loss narrowed by 58% year-over-year. Our average month-end occupancy rate in Q4 reached 95.8%, increasing 360 basis points year over year. And our average occupancy rates for Q4 was 94.4%, an increase of 320 basis points year over year. The fourth quarter is typically the peak season of the year, in terms of occupancy, even by peak season standards, we made a new record in occupancy rate. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [11] -------------------------------------------------------------------------------- (Speaking in Chinese). Jackie, please. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [12] -------------------------------------------------------------------------------- Such results demonstrate our abilities in weathering economic downturns. We owe such resilience to our strategic position. We address the market segment with monthly rental below RMB2,000, which accounts for approximately 80% of the market in China. Geographically speaking, we are focused on the Yangtze megacity cluster centered around Shanghai, which is a strategic region of China with vibrant growth. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [13] -------------------------------------------------------------------------------- (Speaking in Chinese). Jackie, please. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [14] -------------------------------------------------------------------------------- Although the long-term apartment rental industry will not be spared from challenges related to broader economic pressures, we should recognize that it is still a nascent industry. As the central government makes housing policies a priority nationwide, such as housing for living, not for speculation and allowing renters to enjoy the same rights as homeowners, both the supply and demand in the rental housing market are on the rise in China. As such, China's long-term apartment rental market is expected to double from 2018 to 2024 to RMB3 trillion, or approximately $447 billion US dollars, according to CIC. In addition, a slew of new rental housing regulations are being introduced by the government, which will raise the entry barriers to the industry. This will help to increase the market penetration of branded long-term apartment rental operators with the penetration rate projected to increase from 2% in 2018 to 11% in 2024, according to CIC. We believe that the highest quality industry leaders will be able to increase their market shares meaningfully in the next stage of the industry development. Regionally, as local governments increasingly compete in attracting young population, long-term apartment rental operators will continue to be strongly supported by local government policies. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [15] -------------------------------------------------------------------------------- (Speaking in Chinese). Jackie, please. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [16] -------------------------------------------------------------------------------- As China's first long-term apartment rental platform listed in the U.S., we believe we are a clear leader in terms of asset quality and operating efficiency. As we continue to strengthen our technology and management capabilities to further improve our user experience while scaling our business, we aim to become the standard setter of China's long-term rental industry. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [17] -------------------------------------------------------------------------------- (Speaking in Chinese). -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [18] -------------------------------------------------------------------------------- Next, I'll pass the call over to our CFO, Frank, to discuss our financial results. Thank you. -------------------------------------------------------------------------------- Frank Sun, Q&K International Group Ltd. - CFO [19] -------------------------------------------------------------------------------- Thanks Bill & Jackie. Now let's go over the fourth quarter financial results in detail. We believe year-over-year comparisons are the best way to review our performance. All percentage changes I'm going to give will be on that basis. Once again, please note that all figures I mention will be RMB. And as a reminder, we just completed our fourth quarter of fiscal year 2019, which ended on September 30th. Total net revenues increased by 13% to RMB336 million. Breaking this down, rental service revenues increased by 15% to RMB296 million from RMB258 million in the same period of last year, mainly driven by an increase in our number of occupied rental units and increase of our period-average occupancy rate, partially offset by a decrease in rental spread margin after discount for rental prepayment. Net revenues from value-added services and others increased by 2% to RMB39 million from RMB38 million in the same period from last year, primarily due to an increase of revenues from broadband internet and utility services which is in line with increase in our occupied rental units and our period average occupancy rate, partially offset by decrease in revenue from indemnity. A decreased number of tenants and landlords terminated their leases with us before expiration of the lock-in period and we forfeited their deposits or received compensation from them for such termination. Total operating costs and expenses were RMB437 million, compared with RMB435 million in the same period of last year. In particular, operating cost increased to RMB346 million from RMB296 million last year, which is generally in line with our revenue growth and business expansion. Selling and marketing expenses decreased to RMB33 million from RMB42 million in the same period of last year, primarily due to our cost-saving efforts and improvement in sales personnel efficiencies. G&A expenses increased to RMB32 million from RMB27 million in the same period of last year, mainly due to increase in our management personnel costs for strengthening our management capabilities and increased expenses related to our initial public offering. Pre-operation expenses decreased to RMB5.6 million from RMB28 million in the same period of last year, primarily due to fewer new rental units being developed in the fourth quarter of fiscal year 2019, in contrast with the fast expansion in the same period of fiscal year 2018. Impairment losses decreased to RMB13 million from RMB30 million in the same period of last year, primarily due to sufficient provision was provided in the first three quarters in fiscal year 2019. All-in-all, loss from operations declined to RMB101 million from RMB138 million in the same period of last year, mainly due to all of the factors I just mentioned. Interest expenses net increased to RMB24 million from RMB21 million in the same period of last year, primarily attribute to increase balances of capital lease and other financing and the bank borrowings. Fair value change of contingent earn-out liabilities was loss of RMB1 million compared with loss of RMB17 million in the same period of last year. Loss before income taxes decreased to RMB125 million from RMB176 million in the same period of last year. Adjusted EBITDA was negative 31 million, compared with negative 59 million in the same period of last year. As of September 30, 2019, we had cash and cash equivalents of RMB160 million, and restricted cash of RMB91 million. I will now quickly run through a few key financial results for our full 2019 fiscal year. Further details can be found in our earning release. All comparisons are to fiscal year 2018. Net revenues increased to RMB1.2 billion from RMB890 million. Total operating costs and the expenses increased to RMB1.7 billion from RMB1.3 billion, primarily due to increase in operating cost, selling and marketing expenses and the G&A expenses; partially offset by decrease in pre-operation expenses. Loss from operations increased to RMB448 million from RMB426 million. Adjusted EBITDA was negative RMB179 million, a decrease of 19% from negative RMB221 million. Basic and diluted loss per share were both 1.87, compared with a basic and a diluted loss per share of 1.55 for fiscal year 2018. Turning to guidance, based on current macroeconomics and operating conditions, for the first quarter of fiscal year 2020, we expect net revenues to be between 310 million and 325 million. This concludes our prepared remarks. Now, I would like to translate my part into Chinese. (Speaking in Chinese). Operator, we are now ready to begin the Q&A session. Thanks. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Lewis Wang from Annunciation Research. Please ask your questions. -------------------------------------------------------------------------------- Lewis Wang, Annunciation Research - Analyst [2] -------------------------------------------------------------------------------- All right, thank you. Good morning, everyone, and management. Congratulations on the performance. So we have two questions here. First one, I think you guys already gave some color on the first quarter of performance and also you gave the whole year, but we want to see -- could you give more color on the whole year of 2020, the financial performance? And that's the first one. And the second one, so we read some of news from China and some are negative of the whole industry. Could you give some ideas on your Company or strategy how to fit in this kind of environment? Thank you. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [3] -------------------------------------------------------------------------------- Thank you, Lewis. First let me translate the questions into Chinese and then we'll start to address the questions one by one. (Speaking in Chinese). So, let me take a stab at your first question. In terms of our outlook for 2020, we -- currently, we -- like you mentioned, we're actually in a very eventful time of the industry. On the one hand, there are a lot of companies being wiped out if they lacked the necessary discipline, and on the other hand, the government is coming out with a lot of regulations to put more orders into the market. And for us, we think that in the near-term, the industry will go through a lot of events and there are a lot of cross-currents so the visibility is not great at this point for us to give the outlook for the entire year, but we did provide some guidance on the top line for the first quarter. Having said that, in terms of the long-term outlook, we think it's very positive, and if we assess the current situation through the length of the overall industry growth curve, this is a very healthy thing, to go through a correction, and having the remainder of the players of the industry go to the next level and the industry will become stronger. So we think there are a lot of currents behind us to support the long-term growth. And we certainly expect that we will continue to widen our advantages in this time. And this time in itself offers a lot of opportunities. So, we are taking advantage of this time with access to the global capital market. And we believe that we will widen our advantage and be able to capture a lot of fantastic opportunities when time comes. So, this is the answer to your first question. Now, let me turn the call to Bill, our CEO, to address the second question. Actually, Lewis, may I clarify? What kind of negative news are you referring to? Could you specify a little bit? -------------------------------------------------------------------------------- Lewis Wang, Annunciation Research - Analyst [4] -------------------------------------------------------------------------------- Oh, yes. I think that's news are recently probably yesterday. It's about -- okay, let me do it in Chinese. (Speaking in Chinese). -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [5] -------------------------------------------------------------------------------- Yes, let me translate the question into English for the rest of the audience first. So the question was, recently there have been news about a lot of companies going out of business, and also there is news about Q&K revisiting rental arrangements with landlords. So, Lewis would like to have our take on our strategy in the environment. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [6] -------------------------------------------------------------------------------- (Speaking in Chinese). -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [7] -------------------------------------------------------------------------------- Yes. First of all, we view this as a great opportunity, in that, when a lot of the players leave this market, there is more room for the existing players like us to address the market that is now left open. And we think that we will be in a position to offer more order to the market and standardize the market. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [8] -------------------------------------------------------------------------------- (Speaking in Chinese). -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [9] -------------------------------------------------------------------------------- As a general practice for us as a company, we do evaluate our inventory from time to time and look at the profitability. And for the bottom layer of our assets, we do have the opportunity to revisit the price arrangements with the landlords. And as we disclosed in our prospectus, in the year 2019, we have -- for all of the contracts that we signed, we actually have put in a new clause, which is, should the leads-in price be higher than the leads-out price for over six months, we have the right to revisit the prices with the landlords. So this is a way for us to protect ourselves against negative industry trends such as this. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [10] -------------------------------------------------------------------------------- (Speaking in Chinese). -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [11] -------------------------------------------------------------------------------- And lastly, in 2020, we will continue to improve our user experience by offering more services. For example, we're going to offer personalized cleaning services, and the cleaning area can extend from the common area to the private room upon their permission or request in order to improve the user experience. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [12] -------------------------------------------------------------------------------- (Speaking in Chinese). -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [13] -------------------------------------------------------------------------------- And we take the feedback from our tenants and landlords very seriously, so for the stories that are covered by the media or brought to our attention one way or another, if it's details are available, we do reach out to our users and communicate with them and sort out the detailed problems and solutions. And by doing so, we will also treat problems of the same sort, not just specific to one client, but to a type of issues in a broad stroke. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [14] -------------------------------------------------------------------------------- (Speaking in Chinese). -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [15] -------------------------------------------------------------------------------- And in 2020, we will improve our operating manual and improve the procedures, and no matter what type of environment we're in, in 2020, we do aim to be the best in the industry in terms of service quality. -------------------------------------------------------------------------------- Guangjie Jin, Q&K International Group Ltd. - Founder, Chairman & CEO [16] -------------------------------------------------------------------------------- (Speaking in Chinese). -------------------------------------------------------------------------------- Lewis Wang, Annunciation Research - Analyst [17] -------------------------------------------------------------------------------- Is it OK to ask another questions? -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [18] -------------------------------------------------------------------------------- Yes, OK. -------------------------------------------------------------------------------- Lewis Wang, Annunciation Research - Analyst [19] -------------------------------------------------------------------------------- Okay, thank you. (Speaking in Chinese). Thank you. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [20] -------------------------------------------------------------------------------- Yes, so the first question is in terms of the average duration of the leases. Lewis, I assume you're referring to the tenant side? -------------------------------------------------------------------------------- Lewis Wang, Annunciation Research - Analyst [21] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [22] -------------------------------------------------------------------------------- Okay, and the second question is, when the lease expires and at the time of extension, what is our bargain power? What is the price change at the point of extension? I will ask our CFO, Frank, to address this question first. -------------------------------------------------------------------------------- Frank Sun, Q&K International Group Ltd. - CFO [23] -------------------------------------------------------------------------------- Thanks, Lewis, for your first question. Our average like tenants stay with us and so we have like a lock-in period for 12 months in the contractor with our tenants. So in fact, our actual -- our tenants stay us with on average for like 11.3 months for fiscal year 2019. So that's for your first question. And for the second question, is there bargain power? -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [24] -------------------------------------------------------------------------------- At the time of extension, -------------------------------------------------------------------------------- Frank Sun, Q&K International Group Ltd. - CFO [25] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [26] -------------------------------------------------------------------------------- -- what's the price change? -------------------------------------------------------------------------------- Frank Sun, Q&K International Group Ltd. - CFO [27] -------------------------------------------------------------------------------- So for the bargain power, I assume you are asking the bargain power with our tenants. So I think this question's a little bit complicated. We will -- we will do that on a case-by-case scenario. As things change differently, so if you terminate your lease or terminate in the peak season, we will possibly raise our -- the rates with the tenants, but if you fall with or -- like that not in a peak season, maybe we can provide a lower prices, since we prioritize our occupancy rates over our price to just fill the gap. So our average -- if you look at our earning release for 2019, our average prices after discount for their rental prepayments is 19.1%, versus like 25.7% compared with 2018. That reflects the macroeconomics for fiscal year 2019. So that's for your second question for the year 2019. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [28] -------------------------------------------------------------------------------- Yes. And I would like to add to that that in the recent past, the economic environment has been fairly weak. There have been a lot of layoffs and salary cuts and whatnot. So in the short term, the price increase may be quite mediocre, but if we look at the history, our track record, and projecting forward, usually over time things will normalize. And because we pick areas that have a lot of urbanization development going on, our ASP rise over time can actually be at or above CPI. -------------------------------------------------------------------------------- Lewis Wang, Annunciation Research - Analyst [29] -------------------------------------------------------------------------------- Okay, thank you very much. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [30] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to [Mr. Tip Fleming]. Please continue. -------------------------------------------------------------------------------- Unidentified Speaker Q&K International Group Ltd. - Unknown [32] -------------------------------------------------------------------------------- Thank you, Operator. In closing, on behalf of the Qingke management team, we'd like to thank you for your participation on today's call. If you require any further information, or are keen to visit the Company in China, please do let us know. Thank you for joining us today. This concludes the call. Good-bye. -------------------------------------------------------------------------------- Jackie You, Q&K International Group Ltd. - CSO & SVP [33] -------------------------------------------------------------------------------- Thank you all for attending. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect.