UXIN: Update on the company’s 3rd fiscal quarter results which were broadly in line with expectations. Strong unit sales growth occurred despite difficult market conditions.
NASDAQ:UXIN
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On April 11th, 2023, Uxin (NASDAQ:UXIN) reported fiscal 3rd quarter operating and financial results for the three-month period ending December 31, 2022. Total revenues decreased to $68.2 million, which was a 24.0% decrease from the fiscal 2nd quarter and a 7.1% decrease from the prior year period. Unit volume was 4,897 vehicles in the quarter, a decrease of 19.1% from 6,050 units in the last quarter and an increase of 0.7% from 4,865 units in the prior year period.
The higher margin retail transaction volume was 2,928 units, a decrease of 5.8% from 3,109 units in the last quarter and an increase of 76.7% from 1,657 units in the same period last year. The quarter-over-quarter decreases were largely driven by the decline of retail transaction volume due to the nationwide COVID-19 resurgence during this quarter. The year-over-year increases were driven by the retail transaction volume growth as the company improved its brand image by continuously increasing comprehensive marketing efforts through its Hefei and Xi’an IRCs which expanded Uxin’s customer base and boosted retail vehicle sales.
Wholesale vehicle sales revenue was $19.1 million for the three months ended December 31, 2022, a decrease of 44.5% from the last quarter and a decrease of 50.3% from the same period last year. For the quarter, wholesale transaction volume was 1,969 units which was a decrease of 33.0% from 2,941 units last quarter and a decrease of 38.6% from 3,208 units in the prior year period. Wholesale vehicle sales are cars purchased by the company from individuals that do not meet the company’s retail standards and are subsequently sold through online and offline channels. However, with the company's efforts to enhance inventory capacity and reconditioning capabilities at its IRCs, an increasing number of acquired vehicles are being reconditioned to meet retail standards, rather than being sold through wholesale channels. As a result, the company expects that wholesale transaction volume will gradually represent a smaller portion of total transaction volume.
Gross margin was 0.6% for the 3rd fiscal quarter compared with 1.3% in the last quarter and 4.1% in the same prior year period. Uxin has been addressing changing customer preferences to improve inventory turnover which involved reassessing its pricing strategies to accelerate the sales of vehicles with a long sales cycle caused by the COVID-induced disruptions. These efforts resulted in lower of cost or market reserve adjustments which decreased gross margin percentage from the prior year period.
Loss from operations was ($14.0 million) in the 3rd quarter and non-GAAP adjusted loss from operations which excludes the impact of stock compensation was ($12.4 million).
Balance Sheet and Liquidity
As of December 31, 2022, the company had $15.1 million in unrestricted cash and cash equivalents with total debt and borrowings of $114.8 million.
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 has recently taken actions to improve its liquidity and cash position. A definitive agreement was entered into among the company, NIO Capital and Joy Capital in January 2023 to extend the expiration date of certain warrants from January 12, 2023 to January 12, 2024, which entitled the warrant holders to subscribe to the company’s convertible preferred shares of up to $165 million. In March 2023, the company also entered into inventory-pledged financing agreements with two prominent banks with an aggregate facility amount of RMB250 million, with which the banks will finance the company’s future purchases of used car inventories.
The company is also entitled to an investment amount of US$100 million from NIO Capital for NIO Capital’s subscription of the company’s senior convertible preferred shares, out of which US$18.4 million had been received by March 31, 2023.
In April 2023, the Company and NIO Capital entered into additional agreements regarding the outstanding purchase price. To date, NIO Capital has fulfilled its obligation in an aggregate amount of $80 million of the outstanding purchase price and the company is expected to receive the remaining $20 million balance no later than June 30, 2023 as originally scheduled. Meanwhile, the company also fulfilled all of its obligations under its long-term debt outstanding of $61.6 million, including a current portion of $23.1 million and a non-current portion of $38.5 million.
The company continues actively seeking new external financing plans to further improve its liquidity position. In addition, Uxin continues to optimize its cost and expense structure to improve the capital efficiency of its business operations. These plans to address liquidity issues include working on new external financing initiatives, negotiating with the warrant holders to exercise their warrants, and restructuring existing obligations to reduce cash payments.
Xi'an IRC Upgrade
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.
Forecast
The 4th fiscal quarter ending March 31, 2023 coincided with the Chinese New Year holiday season lasting until the Lantern Festival, and is traditionally a low season for used car transactions. Additionally, a widespread reduction in new car prices (largely driven by Tesla) across China’s auto industry during the entire quarter caused potential buyers to hesitate with their purchase decisions. In response to these dynamic market conditions, Uxin adopted a prudent vehicle acquisition strategy from the beginning of calendar year 2023, enabling the company to maintain a healthy and stable inventory of vehicles structure while minimizing the impacts of price volatility. Although the company's reduced inventory size may temporarily limit sales performance in the fourth fiscal quarter, Uxin expects its sales turnover efficiency to remain stable, with an improved margin profile compared to the third quarter of fiscal year 2023.
For the three months ended March 31, 2023, the company expects retail transaction volume to be approximately 2,100 units and the average selling price for retail cars to be around RMB117,000. The company also expects its wholesale transaction volume to be around 1,300 units with an expected average selling price ASP of approximately RMB52,000. The company expects its total revenues for the quarter to be within the range of RMB310 million to RMB330 million. These forecasts reflect the company’s current and preliminary views on the market and operational conditions which are subject to changes. The company indicated that China’s new and used car markets have been stabilizing since April and that they anticipate that throughout the rest of the calendar year will not see the same level of volatility that occurred earlier in the year. The company expects China’s used car sales to grow by approximately 15% year-over-year in 2023. The company plans to gradually increase inventory levels and achieve a much higher growth rate than the industry average.
Summary
CEO and Founder Kun Dai stated: “During the third quarter of fiscal year 2023, which ended on December 31, 2022, we successfully navigated a challenging operating environment characterized by fluctuating COVID policies in China that heavily impacted the used car market. Despite these challenges, we achieved a remarkable 76.7% year-over-year increase in retail sales, with 2,928 units sold. Our Net Promoter Score also remained strong at 60, marking the fourth consecutive quarter that we have received the highest level of customer satisfaction in the industry. This further underscores our solid reputation and growing brand recognition among consumers, as we continue to enhance our customer service capabilities. Notably, in December 2022, we completed the upgrade and transformation of our Xi'an superstore. The new Xi’an superstore will further contribute to our sales growth as our inventory levels ramp up.”
Mr. Dai additionally commented: “Following the swift easing of COVID restrictions, we have observed a recovering economic environment and an increase in consumer confidence in China. Despite significant price volatility in the Chinese auto market during the first three months of 2023, our sales efficiency continued to improve, driven by our prudent pricing strategies and well-acknowledged brand reputation. Our used car business has been rigorously tested in harsh environments. As the market stabilizes in April 2023, and our inventory as well as sales ramp up, we are confident in achieving profitability on a single-store basis by the end of the calendar year.”
CFO Feng Lin said: “Despite the volatile macro and market conditions, we remained committed to prudent financial strategies that support high-quality business growth. Over the past quarters, we have dedicated massive efforts towards optimizing the unit economics of our business. In addition to optimizing our inventory structure and improving revenue streams, we also continued refining our business and operation processes. As a result, we have significantly lowered our costs per vehicle, laying a solid foundation for achieving single-store profitability in the calendar year of 2023. Furthermore, we have received the investment funds from our investor as planned and have fully discharged all remaining debts under the convertible notes. This will significantly improve our balance sheet, allowing us to maintain a healthy financial structure and focus our resources on future business development opportunities.”
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.
The company now has much stronger control and management over the entire value chain with the improved ability to provide high-quality used car products and premium services. The company’s omni-channel model which includes online and in-person purchases of used vehicles gives them a competitive advantage over smaller competitors. Uxin’s proprietary advanced technology platform that provides inspection, reconditioning, pricing and logistics also gives them a leg up on competitors and improves the customer experience. In addition, the company is led by a seasoned management team with multiple areas of expertise.
We are optimistic the company will show strong revenue growth rates in fiscal year 2024, however we lower our target value for Uxin stock to $4.50 due to past Covid-19 disruptions, the potential for future disruptions, a higher share count, and higher prevailing interest rates affecting our discounted cash flow (DCF) calculation as well as affecting vehicle purchases.
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