Earnings Call: Q2 2021

Aug 17, 2021

Earnings release

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to the Highway Show International Company Limited Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this call is being recorded. I will now turn the call over to the first speaker today, Mr. Jeremy Gee, Director of Corporate Development and Investor Relations of the company. Please go ahead, sir. Thank you. Hello, everyone, and welcome to Hapuishou, A2 Renew's Q2 2021 earnings conference call. With us today are Mr. Carrie Chen, our Founder, Chairman and CEO and Mr. Rex Chen, our CFO. Our Q2 2021 financial results were released earlier today and are available on our company's IR website at ir.aihuishou.com. For today's agenda, Cary will share his thoughts on the Q2 performance, followed by Rex, who will discuss the financial highlights for the Q2 of 2021. Both Carrie and Rex will join the Q and A session. Before we continue, I refer you to our Safe Harbor statements in the earnings press release, which applies to this conference call. Any forward looking statements that the company makes on this call are based on the assumptions as of today, and the company does not undertake any obligations to update these statements. Also, this call includes discussions of certain non GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non GAAP measures to GAAP measures. Finally, please note, unless otherwise stated, all figures mentioned during this conference call are in renminbi and all comparisons are on a year over year basis. With that, I will turn the call to Cary for business and strategy updates. Please go ahead. Okay. Hello, everyone, and thank you for joining us on our first earnings call as a public company. We are very pleased to have the opportunity to share our business update and strategy with you as we implement our mission to give a second life to all idle groups. Our IPO on the New York Stock Exchange in June marks a major milestone in our 10 year development history. As a technology driven, pre owned consumer electronic transactions and services platform. Our 4 business lines, namely AHS Recycle, PJT Marketplace, Pipeline Marketplace and AHS Device, span across the entire industry value chain. These offerings connecting all industry participants to realize the closed loop value chain cover both the supply and the demand side of the industry. Our platform combines C2B, B2B and B2C capabilities to provide standardized recycling, inspection, grading, pricing and after sales services. In the past decade, we have dedicated our efforts to improving the scalability, standardization and efficiency of pre owned consumer product transactions. Our second quarter results exceeded expectations. 2nd quarter GMV reached RMB7.8 billion, up 69.6 percent from the same period last year. Total net revenue recorded RMB1.87 billion, which represented a year over year increase of 56 percent 1 0.2%. The number of consumer products transacted on our platforms was 7,800,000, up 27.9%. These results are a testament to the enormous growth potential of the point on consumer electronics transaction industry and a demonstration of our supply chain capabilities and our efforts in setting the industry standards as well are well acknowledged. Our GMV for the last 12 months increased by 64.9 percent to RMB 26,000,000,000 LTM revenue increased by 46 0.2 percent to RMB6.4 billion and the LTM number of consumer products transacted increased by 33.7 percent to over RMB28 1,000,000. Dollars. Turning to strategic areas. 1st, on our 1P business. We expanded our geographic coverage and trading channels rapidly during this quarter. We continued to optimize user experience for device trade ins with our strategic partner JD Group to cultivate consumer willingness to participate in the trading process. We aim to make our one stop trading experience as the go to solution for new phone purchases in China. Also to better address the issue of rising retail prices for new devices, we cooperated with JD Group during the June 18th shopping festival to launch a multi device trading campaign that awarded discounts for the trading of multiple devices. These efforts allow us to offer consumers trading at more attractive prices and enhance our ability to source more supplies. As a result, the year over year increase in GMV for our 1 stop trading business exceeded 170%. 2nd, we continue to expand our service coverage, open new offline stores and expand third party merchant services in lower tier cities. As of June 30, 2021, the number of offline stores further increased to 862, covering 184 cities in China. Among them, 48 5 were self operated AHS stores, 365 were jointly operated AHS stores and 12 were pai pai selection stores. Our business philosophy is to open quality stores and manage them well. Stores raise our brand awareness and fulfill the online to offline trading orders and they build a strong mode of efficient sourcing. By integrating our online platform with offline stores and services, we are able to provide an optimal trustworthy user experience. Furthermore, the well established stores generate solid cash flow and profit. These are great assets. In the Q2, we accelerated the penetration of city level operation stations. As of June 30, 2021, we have 30 city level operation centers. Backed by our pre owned consumer electronic supply chain capabilities, we integrate offerings at our offline PayPay selection stores and online sales channels to establish a new city level distribution model for PayPay Marketplace. We expect this to become a new driving force for our business growth in the second half of twenty twenty one. In terms of our online marketplaces, we continue to go deep, expanding our reach to buyers and sellers in lower tier cities. During the quarter, we acquired over 10,000 registered sellers on PJT Marketspace. As for Petai Marketsafe, we sourced additional devices from deferred suppliers and performed integrated quality inspections and operations before selling directly to individual consumers, thus further consolidating the industry chain. 3rd, in terms of new distribution channels of Piaitai other than JD dotcom, including ZaoYin and Kuaishou, our strategic investments into this field exceeded $20,000,000 We have built up our partnerships with Kuaishou, the leading live streaming platform. As we empower small merchants on Kuaishou with our 35.1 consumer electronic supply offerings, inspection and operation capabilities, we are able to effectively establish live streaming driven sales channels. In mid July, we launched the recycle portal on Kuaishou through Kuaishou. Going forward, we will enhance our collaboration with live streaming channels to provide users with premium recycling services and integrate ticket level operation centers to establish our new digital distribution model for the online marketplaces. Notably, we have also strengthened our corporate governance by establishing an ESG committee under the Board of Directors and releasing our 2020 ESG report, which is currently available on our IR website. The report establishes an index of GRI standards based on characteristics of the pre owned consumer electronics industry and outlines an industry leading calculation methodology for carbon emissions in the sector. In accordance with China's 14th 5 year plan for the development of the circular economy released by the National Development and Reform Commission in July, We aim to further develop our supply chain capabilities for pre owned electronic devices to promote sustainability and standardization of the industry. Looking ahead, we will continue to improve our ESG initiatives, optimize corporate governance and operate our business with strict risk management measures to anticipate and adapt to regulatory changes. As we move forward into the Q3 and beyond, we will continue to enhance our supply chain capabilities, increase the penetration rate for China's trading services and improve the recycling and trading experiences for consumers. We believe that supply chain constraints on quality devices continue to be the bottleneck for the industry's development. We also continue to diversify our supply chains in lower tier cities, empower merchants with our service offerings and maintain strong growth momentum for our platform businesses. Metrics 3rd, we will continue to improve operational capabilities and reduce fulfillment expenses through investment in automated testing and grading. We are pleased to report that Matrix 2.0, the 2nd generation of our automated inspection system was put into trial operation at our Chengdu operation center. It brings automation rates to the next level. Matrix 2.0 fortifies the foundation for upgrading our automated operation center in South China later this year. For future expenses saved from improved operating efficiency, we intend to invest in long term business development. Furthermore, we will accelerate the exploration of new initiatives. We remain optimistic about the growth potential of our live streaming e commerce channels, PayPay selection stores and overseas markets. Leveraging our competitive strength in integrated online and offline platforms, we are confident in achieving our potential operational growth goals and reinforcing our industry leading platform. We will continue to execute on our principles as we enhance our supply chain and technology to empower the entire industry. We believe that the greater the social value our business creates, the greater the economic value the business will have. We aim to build AT Renew into a business that's social good in addition to generating long term shareholder returns. With that, I will hand the call over to our CFO, Rex, to go over the financials. Thanks. Thanks, Carrie, and hello, everyone. Before sharing details on our Q2 financial results, please note that all amounts are in RMB and all comparisons are on a year over year basis unless otherwise not stated. During the Q2, our increasing scale led to strong revenue growth, narrowed GAAP operating loss margin and further improvements in our free cash flow. Total GMV increased by 69.6%, among which GMV for product sales increased by 72.7%. The increase was mainly driven by the rapid growth in our trading business collaboration with JD Group, the opening of new stores, the efficient operation of existing stores and the fast sales growth of 1P devices on PayPay. Keep in mind that new stores were opened midway through the Q2 and are still at an early stage. We expect improvements in efficiency in the following quarters. GMV for online marketplace, including Pajita and Pappai, increased by 68.6%, mainly driven by strong customer demand and the continued expansion of our platform's network effects. In the Q2, total revenues increased by 56.2 percent to RMB1868 1,000,000. Product sales revenue increased by 53.1 percent to RMB1603 1,000,000, while our service revenue increased by 77.9 percent to RMB274 1,000,000. As our platform service capabilities improved, Service revenue grew faster than product sales revenue and the revenue mix continues to develop in a more beneficial direction. The contribution from service revenue increased to 14.2 percent of total revenue during the Q2, compared to 12.4% in the Q2 2020. Notably, GMV for consumer model accounted for 19.7% of Packback's GMV in Q2. We believe that our gross margin will improve in the medium to long term as we increase the proportion of 1P recycled products that can be sold to individual consumers by PiePipe. And more importantly, we can further increase the commission rate over time with great adoption of PayPay's Xamarin model and the more value added services provided to merchants of Pajita and Pajita. Next, turning to our operating expenses to provide greater clarity on the trends in our actual operating based expenses, we'd like to share the trends of our non GAAP expenses, which better reflects the views of management and the non GAAP measure, which excludes share based compensation expenses and amortization of intangible assets resulting from business acquisitions, total operating expenses increased by 55.7 percent to RMB1923 1,000,000. Merchandise costs increased by 56.9 percent to RMB1395 1,000,000. We didn't have any non GAAP adjustments to merchandise costs. Fulfillment expenses increased by 84.4 percent to RMB276 1,000,000. In addition to the immediate recognition of share based compensation expense resulting from options granted to employees with an IPO performance, which we refer to SBC. The increase was mainly due to, 1st, the growth of personnel related expenses as an increased number of property center personnel with growth of core business. And second is the increase in logistic expenses and operation center related expenses, which were in line with the increase in sales of pre owned consumer electronics. Non GAAP fulfillment expenses, excluding SBC, increased by 56 percent to RMB233 1,000,000. Due to the revenue mix of WEN people that sales revenue and the 3P service revenue, WEN metrics to evaluate the profitability of our platform is non GAAP fulfilled gross margin, which remained stable at 12.8% compared with the Q1 2021. Selling and marketing expenses increased by 60.3% to RMB316 1,000,000. In addition to SBC, the increase was mainly due to an increase in promotion expenses, advertising expenses and sales commissions paid to JD Group in connection with traffic acquisition and the sourcing of pre owned devices. In addition to our performed payments to merchants as our way to promote the consumer model of Popeye Marketplace, we invested in sales promotions during the June 18th shopping festival as well as new distribution channels, including Douyin and Kuaishou. Non GAAP selling and marketing expenses, excluding SBC and the amortization of intangible assets resulting from business acquisitions, increased by 78.8% to RMB 214 1,000,000. G and A expenses increased by 593.2 percent to RMB310 1,000,000. Increase was mainly due to the immediate recognition of SBC. Non GAAP G and A expenses, excluding SBC, decreased by 37 percent to RMB28 1,000,000. The decrease in the GAAP G and A expense reflected an improved cost efficiency in middle and back offices. Technology and content expenses increased by 144.5 percent to RMB82 1,000,000. In addition to the SBC, the increase was mainly due to an increase in personnel related expenses in connection with the expansion of the R and D team to improve our technological capabilities. Non GAAP technology and the content expenses, excluding SBC and amortization of intangible assets, increased by 65.1 percent to RMB53 1,000,000. As a result, our non GAAP operating loss increased by 39.3 percent to RMB51 1,000,000 in the Q2 of 2021. Non GAAP operating margin narrowed to negative 2.7% compared with negative 3.1% in the same period last year. As of June 30, cash, cash equivalents, restricted cash and short term investments added up to a total of RMB2.8 billion. We believe that the sufficient liquidity on hand will be able to fuel our business development and strategic partnerships, which generate lasting shareholder value. Now turning to Autorock. First, we expect the growth momentum for the fiscal year 2021 to remain unchanged. For the Q3 of 2021, the company currently expects its total revenues to be between RMB1.87 billion and RMB1.93 billion. This forecast fully reflects the company's current and preliminary views on the market and operational conditions. However, there might be mild uncertainties, for example, the occurrence of the COVID-nineteen delta variant in multiple regions in China, which might adversely impact our offline stores and business. This concludes our prepared remarks for today. Operator, we are now ready to take questions. Yes. Thank you. At this time, we will begin the question and answer session. And the first question comes from Lucy Li with Goldman Sachs. I have two questions in here. The first one is regarding COVID related travel restrictions. We see that the Q3 guidance is still quite strong. But considering the COVID related travel restrictions, I would wonder if management could further help us to understand what kind of impact that would impact to that will create on our business. And the second question is with regard to a collaboration with JD and Kwaishou. Management has already shared with us key strategies on one stop trading with JD and that we have already opened up the recycling channel on Kuaishou stores. I wonder if you can further help us to understand, for example, helping to improve the build and improve the 3 key recycling infrastructure and supply chain capabilities on KwaZhong stores? Thank you. Okay. Thank you, Lucy. To answer your first question, in July, the COVID-nineteen delta variant appeared in multiple regions in China. The company immediately arranged a swipe test for employees passing through high risk areas and worked from home to ensure the safety of the working environment. At the same time, anti epidemic materials were delivered to those cities. We do not rule out the further impact of urban lockdowns or travel restrictions and its short term or continuous impact on our warranty business. By referring to the Q2 performance last year, as long as the hard lockdown is eased, our trading business resumes very quickly. In addition, we need to say that the launch date of the iPhone 13 series is uncertain either it will fall in the Q3 or the Q4. So there might be seasonality of revenue growth year over year. Also we would recommend you to compare the results of the second half of the year with the same period of last year. So we would also like to mention about the successful one stop trading services. This resulted in continued growth momentum in both GMV and revenue. Also, we will continue to innovate and to strengthen the partnership with JD dotcom. One thing to highlight is on the 10th August, we've launched a 3 d service project as a pilot project with Jingdong Retail. And also we started from the pilot city of Shanghai and undertake the last mile delivery of some models such as iPhone, which is provided by our offline store employees. And also these employees will provide users with screen protectors, extended warranty services. And we also wanted to cover the nearby 2 to 3 kilometers to buy the offline stores to cover the fulfillment of JD New Phone Sales and we would like to expect successful collaboration from this. Okay. To answer your question regarding Kuaishou, Kuaishou invested in our pre IPO round in May 2020. We are one of the new few investments Kuaishou made this year. The cooperation with Kuaishou mainly includes 3 aspects, opening the recycling entrance from Kuaishou, providing quality inspection for the 3rd party merchants leveraging our operation centers and the supply to CLLs and Kuaishou provides traffic sources to us. The cooperation with Kuaishou can broaden our B2C sales channels outside jd.com. Since we only reached cooperation with Kuaishou in June, the corporation is still in the stage of speeding up exploration and improving business process. In mid June, we launched the recycle channel on Kuaishou through Kuaishou. And from a city level model perspective, we are still accelerating business exploration. We have made additional investments this quarter with more than $30,000,000 with more than $20,000,000 in new sales channels this quarter. And in addition to the CEE model, we would like to clarify that we stick to the strategy of building the integrated platform. Over the past few months, we have continued to deepen the capabilities of our integrated platform by integrating the capabilities of operation center, JD channel, new channels such as Douyin and Kuaishou and Taipei selection stores on a city level basis and continues to explore and validate Pipeline New Retail's integrated city model. To form Pipeline's integrated city model, we set up a city level operation stations to provide quality inspection and certification services locally. For small merchants with local sourcing of supply, we developed them as franchisees and authorized them to use the brand of Taipei selection, so that they can open source and operate in a standard manner. Franchisees obtain secondhand mobile phones supplies in the city and send them to the local operation station for quality inspection. For those that are not qualified to retail, rapid distribution will be carried out through PJT marketplace. And this model is in line with the group's with ATReynew integrated platform strategy. In a more detailed city level dimension, various capabilities such as JD China, Daewing Keishou China and PJT Marketplace, Operations Center Quality Inspection and Tai Tai Selecting Stores should be integrated into a more efficient way to form and integrate overall capability locally. And regarding the city level model projects and their pipeline new retail, the upfront investment by us in a single quarter exceeded RMB20 1,000,000. Relying on city level operation stations in 30 cities, we have opened 12 pipeline selection stores that provided online and offline sales. In the second quarter, GMV for new channels reached $170,000,000 with the sequential quarter over quarter growth of more than 100%. While good results and validation, we will continue to explore and solidify this model with cautious optimism and hope to have more data to share with you in the next quarterly earnings results, Rizin. Thank you. And the next question comes from Goryeju with Bank of America. I will translate it by myself. My first question was regarding the outlook for the Q3. What assumptions in terms of the iPhone new model launch and also the promotions together with the platform having been baked in this forecast and how should we look at the visibility of this quarter for next quarter and the Q4? The second question was related to the gross margin. It seems like you know declined sequentially slightly and would like to get more colors on it and also would like to have more insights in terms of going forward trends? Thanks a lot. So to answer your question regarding your launch of new iPhone model, we do have an assumption that the date might fall in mid September to early October. However, we would like to make a conservative assumption that launch date will be in late September. And this shall be minimizing the impact on our Q3 and Q4 earnings results. And we might make adjustments to our assumptions regarding the actual launch date of the new model of iPhone. Regarding the collaboration with jd.com, we would also continue the collaboration regarding trading services in the Q3 and going forward. Thus, we are happy to provide more color on this later. Okay. Thanks, Joyce. I will take these questions. So if you look at the 1P gross margin rate, you will find that the gross margin of the 1P business decreased compared to prior quarters and also decreased compared to the same quarter of last year. If you look at the overall gross margin, you can see the Company's overall gross profit margin in Q2 remained stable at 25%, which was consistent compared with prior quarter and the same share in the last year. So contribution from service revenue in this quarter increased to 14.2% this quarter. This can bring higher margin and offset the impact of the decreasing 1P business margin of Q2. So we believe the overall gross margin will keep increasing gradually going forward. As we leverage multiple marketing campaign approach, we prefer to review the non GAAP operating profit margin. Non GAAP operating loss was RMB51 1,000,000 in this quarter and the operating margin was negative 2.7% compared with negative 3.1% in Q2 2020. We anticipate a positive non GAAP operating margin in Q4 this year. Once we can meet our internal target of non GAAP operating margin rate in certain quarter, we will invest additional resources to expand our scale as large as possible. So in this Q2, also due to the June 18 festival, we collaborated with JD and we directly increased the recycling price to attract more consumers to do the trading business instead of using other sales campaigns, resulted in a decrease in our OMP gross profit margin by 2%. Total additional amount of spend in this area was RMB36 1,000,000. If we do not increase the recycling prices to attract the consumers, but investing the same amount, RMB36 1,000,000 in selling and marketing activities, 1P gross margin of Q2 2021 would be 15.2 percent similar to that of Q2 2020, which was 15%. Of course, selling expense would increase accordingly. So basically, we believe the GAAP operating margin has already reached our internal target. So we spent additional money into the coupons to directly increase the recycling price, which showed decreasing gross margin of OMB Business in Q2. We believe overall gross margin will keep increasing gradually. Okay. Thank you. Thank you. And the next question comes from Ella G with Renaissance. Thank you. So I have two questions. The first one is, could management provide an update on the value added services such as fixture, etcetera in your marketplace? Just wanted to know the progress there. The second question is, can management give us the details of your take rate in your marketplace, specifically for both Paijitao and the Paijitao? What is the take rate for this quarter? And how is the year over year comparison for both of Thank you very much. Okay, Seguela. So for your first question, since late May, have launched value added maintenance services. So service fee totaled RMB1.4 million and increased overall commission rate of Payche Town Marketplace by about 0.1% per month. So in the future, we will continue to expand and diversify some value added maintenance services and increase corresponding take rate. So we expect additional take rate from the maintenance service can be around 7.2% by the end of this year. And also starting from August, we start to charge a logistic service fee, inspection service fee and design service fee to sell us on patented marketplace based on their size and if the goods will be shifting to our operation center. So we expect overall take rate from these 3 federal agencies, including logistics service, inspection service and the consignment service, can be around 0.6% in September 2021. So that means by the end of this year, we can charge additional 0.8% take rate from the Pajitao marketplace. And in Q2, the average take rate of Pajitao marketplace is still 4.5%, consistent with Q1 2021. So the private stock market base can take rate will be increased in the next 2 quarters, increase rate into Q4. So by Q4, the ticket rate can be around 5.3% of the pipeline marketplace. So for the growth rate of pipeline marketplace increased to 4.7% in Q2 from 4.2% of Q1. Particularly of the consignment model, our pipeline marketplace was 5.8% in Q2, while we barely charged any commission fee in Q2 2020. The 3P design model is expected to generate higher commission fees, and we expect to charge 8% to 10% take rate in the future. So by the end of this year, we expect we can the consumer model take rate can be around 6.5%. So the consumer model is being quickly adopted by the merchants. The reasons included the complexity and the fragmentation of the pre owned electronics transaction industry chain. Therefore, the recyclers face challenges when distributing the products to consumers, but the consummate model of PiePai eases the burden of retailing from small merchants. At the same time, the take rate of the PiePai Pop model for electronic devices also increased by 0.5% starting from this quarter. But the so take rate of the POM model will be stable within this year. So for the overall, the PayPay marketplace take rate increase will form the consumer model. So we expect the overall PayPay take rate can increase from current 4.7 percent of Q2 to around 5.2% in Q4 this year. Thank you. And this concludes our question and answer session. I would like to turn the call to Jeremy Ji for any closing comments. Thank you. Thank you again for joining. A replay of today's conference call will be available on our IR website shortly. If you have any additional questions, please feel free to e mail us at irahushou.com. Have a good day. Thank you. Thank you. The conference has now concluded. Thank you for attending