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UXIN: Chinese used car retailer reports 2nd fiscal quarter results which were broadly in line with expectations. Profitable growth is expected to occur in calendar year 2023.

By Thomas Kerr, CFA

NASDAQ:UXIN

READ THE FULL UXIN RESEARCH REPORT

On December 30th, Uxin (NASDAQ:UXIN) reported fiscal 2nd quarter operating and financial results for the three-month period ending September 30, 2022. Total revenues increased to $87 million which was a 1.2% increase from the fiscal 1st quarter and a 78.9% increase from the prior year period. Unit volume was 6,050 vehicles in the quarter, an increase of 10.5% from the 1st fiscal quarter and an increase of 65.8% from the prior year period.

The higher margin retail transaction volume was 3,109 units, an increase of 29.2% from last quarter and a 202.7% increase from the prior year period. Due to the company’s efforts to optimize inventory, the average selling price decreased 17% compared to the 2nd quarter of fiscal 2022. As a result, retail revenues did not increase in proportion to retail transaction volume.

Wholesale vehicle revenues were $33.4 million, a decrease of 9.9% from last quarter. Wholesale transaction volume was 2,941 units, a decrease of 4.1% from 3,068 units during the last quarter. The wholesale segment represents vehicles that don’t meet the company’s retail standards and are sold through non-retail channels. As the company continued to improve its inventory capacity and reconditioning capabilities at its IRC facilities, an increased number of acquired vehicles will be reconditioned to meet retail standards.

The gross margin was 1.3% for the 2nd quarter compared to 1.1% last quarter and 4.2% for the prior year period. To deal with changing customer preferences and improve inventory turnover, the company re-assessed its pricing strategy to accelerate sales, particularly among higher priced vehicles. These actions resulted in lower of cost or market reserve adjustments which decreased gross margins compared to the prior year period.

The operating loss in the quarter was $15.0 million and net loss was $16.4 million. Net loss per share was ($0.01), however that is based on the share count before the reverse stock split occurred in October 2022. Pro forma for the new current share count, EPS was $(0.14).

As of September 30, 2022, the company had $3.4 million in cash and cash equivalents with a financing proceeds in transit receivable of $5.4 million that was subsequently received on October 8, 2022.

In order to pay off long-term debt that was due in December 2022, the company entered into a long-term loan agreement for a total of RMB293 million with a third party. This new borrowing will be due in December 2024. The long-term borrowing that was due in December had been fully repaid on time on December 15, 2022, upon receipt of the proceeds from the new loan agreement.

The company also obtained a working capital facility of RMB50 million from China Merchants Bank in November 2022 of which RMB20 million had been drawn down in November 2022. The remaining amount can be drawn as needed within the 1-year term of the facility.

Uxin is entitled to receive an investment amount of $100 million for the subscription of its senior convertible preferred shares. As of December 30, 2022, the company has received installments of $10 million. The second installment of $30.0 million that was expected to be received in December 2022 was rescheduled to be received no later than March 31, 2023. The remaining third installment of $20 million and fourth installment of $40 million will be received no later than March 31, 2023, and June 30, 2023, respectively.

The company is contractually obligated to pay liabilities of approximately RMB105.6 million (including the extended payables of RMB55 million) during the three months ended March 31, 2023. If the installment payments of $50 million are received as scheduled, the company believes that its current cash and cash equivalents, cash proceeds received (or to be received) from recent financing transactions and the anticipated cashflows from operations will be sufficient to meet its anticipated working capital requirements and contractual obligations for the next twelve months of operations.

Management's plan to address liquidity matters relating to the maturity of these obligations and expected negative operating cash flows include working on several new external financing initiatives, negotiating with the warrant holders to exercise their warrants, and restructuring existing obligations to reduce cash payments.

On December 22, 2022, the company announced the completion of the relocation and upgrade of its Xi'an IRC and used car superstore. The upgraded facility has an extended showroom capacity of up to 3,000 vehicles (a material increase from 600 previously) making it 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 comprising a used car reconditioning factory and a warehouse-style superstore. The reconditioning factory which is equipped with industry-leading equipment and advanced processes has an annual capacity of 40,000 units, which helps ensure a large-scale supply of high-quality used cars. The IRC also features an integrated customer service center and a branch of the Vehicle Administration Office on site. Car buying customers can access services such as auto financing, insurance, extended warranties, accessory upgrades, and title transfer, and registration services on the same day they purchase their vehicles. This provides an industry leading comprehensive and efficient one-stop used car buying experience.

With the accelerated development of the used car businesses in Xi’an and its surrounding markets combined with the company’s ongoing cost optimization efforts, Uxin expects the upgraded Xi'an superstore to generate positive operation profit on a single-store basis within 12 months after it commenced operations.

In October and November of 2022, COVID-19 outbreaks in both Xi’an and Hefei, where the company’s two IRCs are located, resulted in control measures and city-wide lockdowns which significantly impacted sales growth momentum. As China started to lift COVID-19 control restrictions since December, infections in many cities are reaching estimated peak levels. Although China’s overall used car consumption has been slow to rebound, the company’s retail transaction volume in December of 2022 has recovered to the same level as September of 2022.

For the three months ending December 31, 2022, the company expects its retail transaction volume to be approximately 2,800 units which is a decrease of 10% quarter over quarter and an increase of 69% compared to the prior year period. The average selling price (ASP) for retail cars is expected to be around RMB110,000. The company also expects its wholesale transaction volume to be around 2,000 units with ASP expected to be around RMB70,000. The company estimates that its total revenues including retail vehicle sales revenue, wholesale vehicle sales revenue and value-add-services to be in the range of RMB450 million to RMB460 million.

Despite the temporary setback from Covid-19 operational disruptions in the fall of 2022, we believe Uxin is poised for rapid profitable growth over the next 3-5 years and potentially beyond that as the used car market continues to develop and expand over time in China. As the world’s most populous country, the evolution of China’s expansion in the world’s largest used car market represents enormous opportunities for Uxin. The company expects the used car market in coming years will expand from 20 million transactions per year currently to roughly the same level as in the U.S. at about 45 million transactions per year.

We lower our target value for Uxin stock to $11.25 due to past Covid-19 disruptions, the potential for future disruptions, and higher prevailing interest rates affecting our discounted cash flow (DCF) calculation.

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