Q4 2023 Uxin Ltd Earnings Call

Participants

Feng Lin; CFO; Uxin Limited

Kun Dai; Founder, Chairman & CEO; Uxin Limited

Fei Dai; Research Analyst; Tianfeng Securities Brokerage Co., Ltd., Research Division

Thomas Kerr; Research Analyst; Zacks Small-Cap Research

Unidentified Analyst

Jack Wang

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the Fourth Quarter and Full Fiscal Year Ended March 31, 2023. (Operator Instructions) Today's conference call is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the call over to your host for today's conference call, Mr. Jack Wang. Please go ahead, Jack.

Jack Wang

All right. Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the fourth quarter and full fiscal year ended March 31, 2023. 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 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 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

[Interpreted] Good day to everyone, and thank you for joining for your continued interest and support. It's a pleasure to welcome you on our earnings call today. To better communicate with our domestic and international investors, I will be discussing our performance over the last fiscal year as well as providing insights into our prospects in both Chinese and English.
The 2023 fiscal year, which spanned from April 2022 to March 2023, presented a myriad of challenges. Uxin, along with numerous other Chinese enterprises, had to navigate the societal and economic headwinds caused by the COVID-19 pandemic. Despite these obstacles, our online, off-line used car retail operations experienced the phases of growth, moments of stagnation and subsequent resurgence. Nevertheless, we managed to overcome these hurdles and delivered a commendable performance.
Our retail transactions increased to 10,703 units, recording a remarkable year-over-year growth of 105%. Notably, our Net Promoter Score, or NPS, remained consistently high at approximately 60 points over six consecutive quarters, solidifying our position as an industry leader. The excellent quality of our used car offerings, combined with our exceptional customer service, received increasing recognition from our expanding customer base. Furthermore, Uxin's offline superstores have become the benchmark for industry upgrades within China's used car sector.
China's flourishing used car market is a force to be reckoned with, already at a staggering trillion-RMB level. With a whopping 320 million vehicles, China boasts the world's largest car ownership. Each year, a significant number of vehicles enter the circulation stage, fueling the swift growth of the used car industry. In the first half of 2023, the nation witnessed a remarkable surge in used car transactions, reaching approximately 9 million units, showing a notable 15% increase compared to the previous year. Drawing from the mature market experience in the automotive industry, China is progressively pivoting towards a trajectory dominated by stock car transactions. We project that used car transactions in China will soon exceed 20 million units per year, with still a remarkable growth potential of 3 to 4x.
While the upgrade and consolidation of China's used car industry are still in the early stages, the unique characteristics of each vehicle be extremely fragmented market structure, and the lengthy intricate, transaction chains have all hindered the industry transition towards brand-oriented, large-scale and standardized development. Uxin's pioneering model of off-line superstore plus online nationwide purchase model, as a new format in the industry, has completed the leap from 0 to 1. This model, centered around advanced production, modern retail experience and data-driven operations has laid a solid foundation for the next stage of scalable profitability.
First state-of-the-art reconditioning factories with advanced equipment and technology guarantee the supply of top quality used car products. The supply of ultra large-scale, high-quality used cars is inseparable for modernized reconditioned factories with suitable production capacity. Following the launch of new Xi'an superstore, which is also the largest in Northwest China, with a scale of up to 3,000 units, The Transparent Factory 1.0 management system that Uxin has explored and developed for 1.5 years has also been put into use.
This system seamlessly integrates inspection, evaluation and repair processes, while employing an extensive range of digital monitoring tools to streamline the entire operational management spectrum. Full-scale efficiencies enhanced by the system's intelligent workshop planning, realtime tracking of vehicle and material status and authentic data on work hours and costs. By leveraging Uxin's Transparent Factory 1.0 system, we have established the most advanced reconditioning factory management system in China's used car industry.
Furthermore, we continue to upgrade our reconditioning techniques, introduce the latest technologies such as 3D printing, SMART repair and develop integrated parts supply system. As a result, the recondition time and cost per vehicle have been further reduced. Compared to a year ago, the time it takes for each car to go from factory intake to shelf sale has dropped by 70%, taking an average of only 4 days.
The second, superstore's focus on people, products and venues has reshaped the way consumers buy and sell used cars, a leapfrog consumer experience that surpasses traditional marketplaces. For the majority of consumers in China buying a used car can be a challenging and uncertain experience. Traditionally, the product involves visiting up to hundreds of shops scattered across a used car marketplace, searching for specific models, inspecting multiple vehicles and haggling with various dealers over prices. Yet this tedious process offers no guarantee of purchasing a reliable used car at a fair price or receiving adequate aftersales support.
In the past year, Uxin has revolutionized the used car buying experience by embracing modern retail standards. Our superstores offer consumers a relaxed and enjoyable car buying experience comparable to that of modern shopping malls. When customers step into our superstores, they will be greeted by a bright and spacious venue, filled with [thousands] of carefully selected exhibition vehicles. Our cars are conveniently displayed according to the modern retail shelf mode, making it easy to compare different models. We have implemented a scoring system based on the national standard, ensuring clarity and ease of understanding.
Customers can be certain that our prices are transparent with no hidden fees. Beyond the traditional dealership experience, we provide a one-stop solution for all your needs, including financing, insurance, extended warranty, accessory upgrade and other value-added services. To further enhance customers' convenience, we have an on-site Vehicle Administration Office, allowing customers to compete -- complete all transaction transfer procedures on the same day. This eliminates unnecessary delays and ensures a smooth and efficient process.
We are delighted to share that our superstores in Xi'an and Hefei have quickly become the go-to destinations for used car purchases in their respective cities. Within just 1 year of opening, we have established ourselves as the leading brand in local used car recognition. The positive word-of-mouth within the consumer group has created a network effect, attracting a steady stream of native traffic to our superstores.
Third, Uxin's end-to-end digital decision-making forms a highly competitive moat in large-scale used car operations. Uxin's business process is managed on a per-vehicle basis, with the system's capacity built upon the singular vehicle dimension, our proprietary Drip Irrigation system, like the irrigation practices in modern agriculture that cater to each individual crop, runs through every step of the used car transaction chain from car acquisition, reconditioning, sales and delivery to aftersales services. We make business decisions based on data at the vehicle level, which constitutes our core competitive advantage that sets us apart from traditional car dealerships.
Taking vehicle pricing as an example, Uxin has established an intelligent pricing model based on more than a decade of accumulated massive Chinese used car transaction data. The model determines the individual price of each vehicle based on it's age, condition, mileage, color and other parameters, while also considering factors such as customer demand, current inventory structure, off-line test drive feedback and real-time market conditions for dynamic adjustments. By continuously training relevance parameters and iterating the pricing system using large-scale actual transaction data, Uxin's initial pricing becomes more accurate, and the adjustment process becomes timelier. This leads to continuous improvement in sales efficiency with the average time from listing to sales being less than just 45 days.
As our sales volume increases, the number of parameters that can be input into the system also increases, enriching our price decision anchors and expanding the boundaries of our pricing capabilities. The flywheel effect of digital systems is scale-increasing, which is the key to continuously solidifying competitive advantages in our ultra large-scale used car operation system and one of our important moats.
Over the past year, in addition to progress in our business, our financial situation has also improved towards long-term health. At the beginning of this year, we completed the restructuring and repayment of the 2019 convertible notes, effectively resolving the majority of our historical debt and greatly optimizing the structure of our balance sheet. This allows us to better allocate resources to future business development. Furthermore, we have actively promoted cooperation with banks in credit supply chain financing, obtaining credit lines of approximately RMB 300 million from several reputable banks. These arrangements have facilitated the increased efficiency of our capital utilization. These efforts will support the achievement of our business plans for fiscal year 2024.
Looking ahead into the 2024 fiscal year, we will primarily focus on 3 key areas based on our current strategic planning. First, the launch of our new flagship superstore in Hefei. We would like to inform everyone that the construction of the flagship superstore, which is jointly invested by us and the Hefei government, has entered the final stage of equipment and system calibration after 1.5 years construction period. We plan to commence trial operations in August and have the grand opening within this calendar year. The new superstore has a total area of 450,000 square meters and consists of the world's most advanced used car reconditioning factory and the largest used car sales area, which can accommodate up to 10,000 vehicles for display and sale when reaching full capacity.
The Hefei flagship superstore serves as Uxin's central hub for our expansion plans in the used car industry, anchoring in Hefei but extending it's reach across the Anhui province and facilitating sales nationwide. It is an important joint initiative for both Uxin and the local government of Hefei to promote the development of automotive aftermarket industry in Anhui province and build a leading brand in China's used car industry.
Secondly, achieving profitability of our superstores. After over a year of consistent development, Uxin's superstores have continuously improved sales efficiency, increased gross profit margin and substantially improved overall cost structure. As a result, our gross profit margin is expected to be exceed 6% for the first quarter of fiscal year 2024. Our midterm gross profit margin target will be 10% or above. In the past few months, due to disturbances in the new car market, Uxin has maintained a prudent purchasing strategy and has not significantly increased inventory. Starting from August, we will accelerate the increase in vehicle inventory to generate more sales conversions. We have confidence in achieving positive EBITDA for the Xi'an and Hefei stores by the end of this year.
Thirdly, completing the expansion planning of 2 to 3 new superstores. Based on the proven success of Uxin's off-line superstore model, we are actively strategizing for expansion into new regions. We aim to finalize the location selection and operational preparations for 2 to 3 new superstores to further enhance our regional coverage and branding as well as improve synergy between cohesive online and off-line sales networks. These efforts will lay a solid foundation for our business growth in the coming years.
The Chinese used car sector is vast with significant potential and our tenacity will ensure our growth to be exponential. By holding our commitment to value creation, we believe there are spectacular opportunities ahead to serve consumers in the used car business we are passionate about, and to generate great returns for our shareholders, employees and society at large.
Once again, I extend my deepest gratitude for your unwavering trust and support. I sincerely welcome you to visit our superstores to experience it firsthand as well as explore our products and services on our mobile platform. We also look forward to achieving new milestones in the new fiscal year at Uxin.
And with that, I'd like to turn the call over to our CFO to walk you through our financial results. John, please?

Feng Lin

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 for the first quarter and fiscal year of 2023.
Looking back at the fourth quarter of fiscal year 2023, which covered the period from January to March 2023, the quarterly retail transaction volume reached 2,259 units, a growth of 22% year-over-year. We experienced a 23% decrease compared to the previous quarter, mainly due to the impact of the traditional weak season during the spring festival holiday with most of the used car transactions halted for nearly a month.
Also in March, the aggressive pricing promotion in China's new car sector also affected the used car market, with customers showing stronger wait and see sentiment. The total retail sales revenue for the fourth quarter amounted to RMB 264 million, a 17% year-over-year decrease. This was primarily attributed to the average selling price of retail vehicles dropping from RMB 173,000 in the same period last year to RMB 117,000 this quarter. The decline in ASP reflects our proactive optimization of inventory structure over the past year.
In terms of wholesale, the transaction volume for this quarter reached 1,348 units, a 32% decrease compared to the previous quarter. Based on our operational experience during peak and off-peak seasons, we proactively reduced the overall inventory acquisition before the spring festival, which led to a corresponding decrease in wholesale transactions. The ASP of wholesale vehicles also decreased from RMB 67,000 in the previous quarter to RMB 65,000 this quarter. Consequently, the total wholesale sales revenue for the fourth quarter amounted to RMB 73.6 million, a 44% quarter-over-quarter decrease.
So as a result of the above factors, total revenues for the fourth quarter was RMB 344 million, a 27% decrease compared to the previous quarter, mainly due to the impact of the Spring Festival offseason break -- off-peak season and fluctuations in the domestic new car market. Compared to the same period last year, there was a 32% decrease. While our retail transaction volume increased, this was offset by declines in our wholesale transaction volume and the average selling prices of the vehicles.
As we transition the post-COVID, our operations have realized to a healthy growth trajectory. The inventory structure gradually returns to a healthy level with sales turnover and profitability continuously improving. In the first quarter of fiscal year 2023, although we were dealing with the residual impact of the epidemic, our gross profit margin rebounded to 2.3% compared to 0.6% in the previous quarter and 0.2% in the same period last year. We believe there is still substantial headroom for growth in our gross profit margin. We anticipate that in the first quarter of fiscal year 2023, which is the 3 months between April and June 2023, our gross profit margin will rise to over 6%, reaching a new high in the past 3 years.
The total operating expenses for this quarter amounted to RMB 113 million with a 9% increase compared to the previous quarter. This was primarily due to a noncash expense of RMB 17 million from the impairment loss of historical financial assets. The accounting treatment for our historical financial assets has been mostly completed and it will no longer have a significant impact on our financial statements in the future. Excluding this onetime impact, operating expenses for this quarter were approximately RMB 100 million, a decrease of 3% compared to the previous quarter.
Non-GAAP operating loss for this quarter was RMB 46.7 million, a decrease of RMB 38.9 million compared to the previous quarter. This included a onetime gain of RMB 48 million from historical debt restructuring. If we exclude this impairment loss of financial assets and the gain from debt restructuring, non-GAAP operating loss for the fourth quarter decreased by approximately RMB 4 million compared to the third quarter.
Regarding the performance for the full fiscal year of 2023, despite the impact of the pandemic on our business development pace in the first 3 quarters, we still achieved a significant increase in retail transaction volume and revenue for the entire fiscal year. Our retail transaction volume for the full year was 10,703 units, a 105% year-over-year growth, and our retail sales revenue was RMB 1.31 billion, a 68% increase year-over-year. Total revenues were RMB 2.06 billion, a 26% increase year-over-year. Non-GAAP loss from operations for the full fiscal year was RMB 310 million, an increase of RMB 57 million compared to previous fiscal year, mainly due to the decline in gross profit margin.
Detailed information on our full year results can be found in the earnings release we just published and our upcoming annual report, so I won't go into further details here.
Turning to the current landscape. In the past few months, we have been delighted to see strong momentum in business development. With the end of the price work in the new car market, the overall situation in the used car market has stabilized, our inventory structure has become healthier and sales turnover has further accelerated. The penetration rate of our value-added services, such as finance, insurance, maintenance and accessory upgrades, which has high gross margins continued to improve. All of these have further enhanced the profitability of our business, laying a solid foundation for achieving our target of having our superstores break even this year.
In the past few months, Uxin's adopted a prudent acquisition strategy, maintaining a low level of inventory as we begin to rapidly expand our inventory scale, the profitability brought by sales conversion is only a matter of time, and we will make every effort to achieve positive EBITDA at both of our Xi'an and Hefei superstores by the end of 2023.
We have also taken active steps to enhance our financial planning and strengthen our cash position. We completed the restructuring and repayment of all 2019 convertible notes earlier this year, completely resolving the single largest historic burden. The structure of our assets and liabilities has been greatly optimized, allowing us to grow the business in a much better condition. Additionally, in July, we revised the stock warrant agreement with 2 investors, and the prospective financing is progressing on track.
Moreover, as D.K. mentioned earlier, we have established cooperation with several renowned banks and obtained RMB 200 million in inventory financing and credit. These partnerships will significantly increase the efficiency of using our own funds and provide robust financial support for inventory climbing and business expansion. Overall, our financial situation is moving towards long-term health.
Regarding our outlook for the first quarter of fiscal year 2024, which spanned from April to June 2023, we anticipate overall sales to return to a sustainable growth trajectory due to market stabilization and the increase in inventory vehicles. We project a retail transaction volume to be 1,600 units with a retail ASP of RMB 110,000. Post our transaction volume is projected to reach 1,600 units with a wholesale ASP of RMB 61,000. Our total revenues, including retail sales revenue, wholesale sales revenue and value-added service revenue are expected to range between RMB 270 million and RMB 290 million. Furthermore, we foresee a notable increase in our gross margin with expectations that our gross margin for the next quarter will exceed 6%.
And that concludes our prepared remarks for today. Operator, we are now ready to take the first question.

Question and Answer Session

Operator

(Operator Instructions) Our first question will come from Tom Kerr of Zacks Investment Research.

Thomas Kerr

Can you discuss any recent market trends or any significant changes in consumer purchasing behavior lately?

Kun Dai

[Interpreted] Indeed, as we highlighted during our previous earnings call, the onset of aggressive pricing strategies in the new car market since January had a significant impact on the used car sector. Consumers' increasing uncertainty over additional reductions in new car prices led to a noticeable hesitation, particularly when considering premium used car price over 10,000 -- sorry, RMB 100,000.
However, since June, we've seen the market start to stabilize, and our sales efficiency has been on an upward trajectory. Our inventory turnover rate of vehicles on sale in the last month, standing at approximately 40 days has surpassed the previous monthly record. As our brand presence amplified in the regions where our superstores are located, we will further strengthen the network effect among our consumer base. Looking ahead, we remain confident in our capacity to continue expanding our market share within those territories. And that's our answer to your first question, Tom.

Thomas Kerr

One more question. Can you provide further commentary on future IRC? Are you looking at many regions or any specific areas for expansion?

Kun Dai

[Interpreted] So as we've mentioned earlier, in an ongoing commitment to growth, we're marking out the establishment of 2 to 3 additional superstores in the fiscal year 2023. So in determining the new locations will be evaluating a range of criteria, including population density, the used car market size, regional economic vitality, geographical positioning and local government incentives. Each new establishment -- with each new establishment, our aim is to fortify Uxin's position as a leader in the local used car market, improving our penetration into off-line markets while bolstering our brand synergy with our online operations. So for more detailed information and also timely updates on our ongoing and future developments, I would encourage you and our investors to stay connected to our IR website or official WeChat account, Douyin or TikTok and Twitter.

Operator

Our next question comes from Fei Dai of TF Securities.

Fei Dai

[Interpreted] You mentioned in your earnings release that there will be a significant improvement in gross margin next quarter. Where that momentum for the gross margin expansion come from? What are your long-term gross margin target?

Feng Lin

[Interpreted] So this is the translation from our CFO, John. As you pointed out, our recent operational performance has been promising, especially the marked improvement in our gross margin. For the quarter, spanning April to June, as we've mentioned earlier, our gross margin had already reached 6%. So looking forward, we forecast further growth throughout the fiscal year of 2024 aiming for a midterm target of 10% with aspirations for even higher margin in the long term.
So our gross profit for retail vehicle primarily stems from 2 sources. The gross profit from vehicle sales and the gross profit from value-added services. We have seen marked improvements in both areas.
So the uptake in our vehicle sales gross profit is due to the combination of our sales margin steady recovery and the significant decrease in our reconditioning costs. The past 2 years presented challenges with the pandemic causing disruptions and dampening market activity. This led to an extended inventory sales cycle, significant inventory depreciation and a contraction in our sales margins. However, post pandemic, our inventory structure has improved with older vehicles making up a smaller fraction and the average sales cycle reducing to within 45 days.
Consequently, our sales margins are trending back to standard levels. Moreover, the inauguration of our CN reconditioning facility and the integration of the state-of-the-art reconditioning techniques, coupled with our transparent digital management system, has significantly elevated our overall efficiency. Under the scaled production, our reconditioning cost per vehicle -- per retail vehicle have dropped by an average of 70% compared to last year. Collectively, these elements have fueled our gross margin resurgence in vehicle sales.
Our high-margin value-added services, including the finance, insurance, repair and other value-added services have seen a continuously increasing penetration rates. Revenue generated from these services per retail vehicle has surged by above 30% compared to 6 months ago, making another key driver for our gross profit growth. Our cutting-edge large-scale reconditioning facilities empower us to offer a comprehensive suite of value-added services to our used car buyers, similar to what new car [brand] shops offer, but with a distinct cost advantage, using superstore, a large showroom model apart from traditional used car marketplaces and small used car dealerships.
We are heartened by the market enhancements in our gross margin, which bolsters our confidence in obtaining EBITDA profitability for our superstores this year. As we start scaling up our inventory, achieve profitability from our large-scale sales, it's just a matter of time. We're committed to achieving EBITDA profit from our 2 major superstores in Hefei and Xi'an within 2023. And that's our answer to your question.

Operator

The next question comes from Kai Kang of Citic.

Unidentified Analyst

Do you think that currently some auto dealerships trying to expand into the used car business, will intensify completion and post challenges to Uxin and compared to those leadership sales in used car sector, where are Uxin stand?

Kun Dai

[Interpreted] This is a translation from our CEO, D.K. So thank you for the question. The transformation and industry upgrade in China's used car market is well underway. We genuinely welcome all responsible participants committed to fostering trust with consumers and elevating the industry standard. Going forward, in China's used car landscape, those retailers who emphasize product quality, customer experience, integrity and compliance will undoubtedly be at the forefront. And collectively, we have the potential to steer the industry towards stronger growth and broader expansion.
So it's my belief that the used car sector is not a winner in (inaudible) market. Each retail model can find it's niche and flourish to draw from a mature market technology, considered the U.S. where CarMax is leading used car retailer and captures less than 3% of the market share, whereas branded dealerships represent around 40%. It's not about GoPro competition. Each player taps into their strength, catering to a specific brand or pricing segment, thereby nurturing their customer base and establishing mutual respect within the market. So compared to our U.S. peers, both we and new car dealerships in China still have significant growth potential in capturing market share.
And in comparison to new car dealerships, delving into the used car arena, our unique selling proposition is the contrast between our extensive superstores and the more niche specialty stores. So operating under a warehouse style superstore model, we emphasize volume and turnover. We pride ourselves on the vast array of choices available to customers with thousands of vehicles under a single roof. Moreover, we possess the industry's most advanced large-scale used car reconditioning factories with a streamlined reconditioning process and cutting-edge digital management. We offer a cost-effective solution without compromising on vehicle quality.
When comparing vehicle types and pricing with new car dealerships, we believe our portfolio is both compelling and competitively priced. And that essentially sums it up. Thank you for the question.

Operator

That concludes our call today. I will now hand the call back to management for any closing remarks.

Kun Dai

All right. Thank you. Thank you again for joining today's call and for your continued support for -- to Uxin. We look forward to speaking to you again very soon in the future. Thank you. Bye-bye.

Feng Lin

Bye-bye. Thank you.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live
Call.]