eHi Car's (EHIC) CEO Ray Ruiping Zhang on Q4 2015 Results - Earnings Call Transcript

| About: eHi Car (EHIC)
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eHi Car Services Limited (NYSE:EHIC) Q4 2015 Earnings Conference Call March 28, 2016 8:00 PM ET

Executives

Brandi Piacente - The Piacente Group, Inc.

Ray Ruiping Zhang - Chairman and Chief Executive Officer

Colin Chitnim Sung - Chief Financial Officer

Analysts

Leon Chik - JP Morgan

Justin Kwok - Goldman Sachs

Operator

Thank you for standing by. This is the conference operator. Welcome to the eHi Car Services Fourth Quarter and Full Year 2015 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to, Brandi Piacente, please go ahead.

Brandi Piacente

Hello, everyone, and welcome to eHi Car Services fourth quarter and full year 2015 earnings conference call. The Company's results have been posted online and were also issued via Newswire services earlier today. You can download a copy of the earnings press release or sign up for the Company's distribution list by visiting the IR section of its website at ir.ehi.com.cn.

Leading today's call is Mr. Ray Zhang, eHi's Founder, Chairman and Chief Executive Officer, who will provide operational highlights and updates regarding the Company's business strategy; Mr. Colin Sung, eHi's Chief Financial Officer will then review the Company's fourth quarter and full year 2015 financial results. After their prepared remarks, they will be available to answer your questions.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties as such the Company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company's prospectus as filed with the U.S. Securities and Exchange Commission.

The Company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that eHi's earnings press release and this call include discussions of unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. eHi's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to eHi's Chairman and Chief Executive Officer, Mr. Ray Zhang. Please go ahead.

Ray Ruiping Zhang

Thank you, Brandi. Hi, everyone. Thank you for joining us. 2015 was another year of a significant growth for eHi driven by considerable advancements in both Car Rentals and the Car Services businesses. Our net revenues increased by 70.4% in 2015 led by an 83.8% growth in Car Rentals segment and 38.7% growth in Car Services segment.

We also achieved a 71% year-over-year net revenue growth for the fourth quarter of 2015, which is historically a slow quarter. We expanded our period-end fleet size by over 92% to 38,070 vehicles at the end of 2015 and increased our average available fleet size by over 87% to 26,460 vehicles for 2015.

Despite the tremendous expansion in fleet size, we still manage to maintain a rental fleet utilization rate of 71% for the full year of 2015. Throughout 2015, we continued to leverage our established infrastructure to deepen network penetration in existing markets.

As of December 31, 2015, we directly operate a network of 1861 service locations in 151 cities including 369 stores and 1492 pick-up drop-off points compared with 1180 services locations in 99 cities including 324 stores and 856 pick-up drop-off pick-up points one year ago.

At the end of the 2015, we had increased our period-end rental fleet per store to 96 vehicles, compared with 87 vehicles per store at the end of the previous quarter and 57 vehicles per store at the end of 2014.

We also took strategic initiatives to widen our geographic coverage to additional select markets. The penetration rate of China car rental industry remains low at the single-digits compared with developed countries and the market is still highly fragmented.

In recent years, we have seen growing popularity and increased spending on leisure travel from domestic consumers including self-drive trips as well as booming demand for pick-up and drop-off locations as a result of the rapid expansion of China’s high speed transportation.

As a leading car rentals brand in China, we are able to leverage the strength of our one-stop comprehensive services model and establish a network to capture evolving market opportunities. In 2016, our network expansion strategy will remain focused on increasing the number of vehicles per store while strategically expanding into new markets.

Our goals are to create operating synergies among our service networks, capture opportunities from domestic travel demand and the rapid expansion of China’s high speed transportation and strengthen our branding and user stickiness.

Turning to our mobile initiative, with our advanced proprietary technology platform and the mobile infrastructure, thorough understanding of target customers’ needs and the behavior and the strong technology development capability, we are well positioned to capitalize on the market trends and the changing consumer preferences.

Our mobile and internet platforms gained impressive charging in 2015 as we introduced new features and made a number of improvements to enhance user experience. In 2015, around 62% of eHi’s car rental reservations were made via mobile devices and in total 92% of the reservations were made via mobile and our website. During 2015, we recorded around 3.2 million mobile application downloads.

Looking ahead, with our strategy focuses on delivering strong and organic growth, we will also explore potential strategic co-operations and investment opportunities to enhance our operating synergies and the competitive position.

We believe our integrated business model, strong brand awareness and the proprietary mobile infrastructure position us to meet the diverse and evolving needs of a growing community of loyal consumers and support long-term sustainable growth for eHi.

We also stand to benefit from China’s rapidly rising domestic tourism industry surging public awareness of car rentals and car services, and increasing use of internet and mobile devices.

With that, I will now turn the call over to our Chief Financial Officer, Mr. Colin Sung, who will discuss our financial results. Colin?

Colin Chitnim Sung

Thank you, Ray, and hello, everyone. We are pleased to finish 2015 with a strong note by achieving a year-over-year growth of 70.4% in net revenues for the full year of 2015 and 71% for the fourth quarter of 2015. We also improved our gross margin to 21.6% for the full year of 2015 from 15.6% for the full year of 2014, and non-GAAP adjusted EBITDA margin to 39.5% for the full year 2015 from 33.1% for the full year of 2014.

Let’s begin by looking at our key operating metrics in the fourth quarter of 2015. Our average available fleet size increased by 97.8% year-over-year to 32,255 vehicles from 16,305 vehicles for the fourth quarter 2014 with total fleet size increasing to 30,070 vehicles as of December 31, 2015.

Total fleet RevPAC decreased to RMB142 from RMB164 for the fourth quarter of 2014. RevPAC for car rental and car services was RMB116 and RMB482 respectively for the fourth quarter of 2015 compared with RMB127 and RMB597 respectively for the fourth quarter of 2014. The decrease in RevPAC was mainly due to increased operating fleet size in the fourth quarter of 2015.

In the fourth quarter 2015, our rental utilization rate was 70.4% compared with 73.1% for the fourth quarter of 2014.

Now let me walk you through our fourth quarter financial results in more detail. Net revenue for the fourth quarter 2015 were RMB421.5 million or US$65.1 million, up 71% year-over-year.

Net revenue from car rental for the fourth quarter were RMB321.5 million or US$49.6 million, up 83% year-over-year primarily driven by growing average available fleet size, for car rental and customer demand.

Net revenue from car services for the fourth quarter were RMB100 million or US$15.4 million, up 41.2% year-over-year, primarily driven by increased demand from the company’s existing and new customers for car services.

Cost of revenue or vehicle operating expenses for the fourth quarter was RMB319.4 million or US$49.3 million, up 45.4% year-over-year, primarily due to increased depreciation and labor cost and partially offset by saving in vehicle insurance expenses.

In the fourth quarter 2015, 1002 vehicles – used vehicles was disposed. 900 used vehicles were under sales contract pending title transfer. The company recorded a loss of RMB1.6 million or US$200,000 in aggregate for the loss of 1909 vehicles. The loss was recognized as an adjustment to the vehicle-related depreciation expenses as part of cost of revenues.

Gross profit for the fourth quarter of 2015 were RMB102 million or US$15.8 million up 280.6% year-over-year. Gross profit margin for the fourth quarter of 2015 was 24.2% compared with 10.9% for the fourth quarter of 2014. Salary and marketing expenses for the fourth quarter of 2015 were RMB25.2 million or US$3.9 million up 125.4% year-over-year, primarily due to increased channel marketing and promotional fee as the company expanding branding and channel promotional activities in the fourth quarter 2015.

General and administrative expenses for the fourth quarter 2015 were RMB56.2 million or US$8.7 million, up 34.1% year-over-year, primarily due to increase in employee-related costs, such as salaries and welfare expenses, outside professional services, as well as unrealized exchange loss.

Profit from operation for the fourth quarter was RMB23.5 million or US$3.6 million compared with a loss from operations of RMB22 million in the fourth quarter 2014. Net loss for the fourth quarter of 2015 were RMB12.4 million or US$1.9 million compared with a net loss of RMB45.5 million for the fourth quarter of 2014.

Non-GAAP adjusted EBITDA for the fourth quarter of 2015 was RMB166.7 million or US$25.7 million, up 131.5% year-over-year. Non-GAAP adjusted EBITDA margin for the fourth quarter of 2015 was 39.6%, compared with 29.2% for the third quarter of 2014.

Now I would like to review our operating and financial results for the full year of 2015. Looking at the full year key operating metrics. Our average available fleet size increased by 87.5% year-over-year to 26,460 vehicles from 14,111 vehicles in 2014.

Total fleet RevPAC decreased to RMB150 from RMB165 in 2014. RevPAC for the Car Rental and Car Services were RMB123 and RMB508 respectively in 2015, compared with RMB127 and RMB598 in 2014. The decrease in RevPAC was mainly due to increased operating fleet size in 2015. In 2015, our rental utilization rate was 71.4% compared with 71.8% in 2014.

Now let me walk you through our full year 2015 results in more detail. Net revenue for the full year 2015 were RMB1,450.6 million or US$223.9 million, up 70.4% year-over-year. Net revenue from Car Rental for the full year of 2015 was RMB1.6 billion or US$169.9 million, up 83.8% year-over-year, primarily driven by the growing average fleet sizes for car rentals and customer demand.

Net revenue from car services for the full year 2015 were RMB350.1 million or US$54 million, up 38.7% year-over-year, primarily driven by increased demand from new and existing customers for car services.

Cost of revenue or vehicle operating expenses for the full year of 2015 is RMB1.138 billion or US$175.7 million, up 58.3% year-over-year primarily due to increased depreciation and labor cost.

In 2015, 4140 used vehicles was disposed and 907 used vehicles were under sales contract pending title transfer. The company recorded a loss of RMB5.1 million or US$800,000 in aggregate for the 5047 vehicles. The loss was recognized as adjustment for the vehicles related to depreciation expenses as a part of the cost of revenues.

Gross profit for the full year 2015 were RMB312.7 million or US$48.3 million, up 136% year-over-year. Gross profit margin for the full year of 2015 was 21.6% compared to 15.6% for the full year 2014.

Selling and marketing expenses for the full year 2015 were RMB65.1 million or US$10 million, up 84.2%, compared with the full year of 2014, primarily due to increased sales and promotional activities.

General and administrative expenses for the full year 2015 were RMB183.5 million or US$28.3 million, up 38.9% compared with the full year of 2014, primarily due to increasing employee-related costs such as salary and welfare expenses and to a lesser extent increasing outside professional service fees.

Profit from operation for the full year 2015 was RMB74.8 million or US$11.5 million, compared to a loss from operation of RMB17.9 million for the full year 2014. Net income for the full year 2015 was RMB696.3 million or US$107.5 million, compared with a net loss of RMB93.1 million for the full year 2014.

Net income for the full year 2015 including a net gain of RMB736.8 million or US$113.7 million related to the sale of the investment assets. Non-GAAP adjusted EBITDA for the full year 2015 were RMB573.7 million or US$88.6 million, up 103.9% year-over-year.

Non-GAAP adjusted EBITDA margin for the full year 2015 was 39.5% compared with 33.1% for the full year 2014. As of December 31, 2015, our cash, cash equivalents and restricted cash totaled RMB2.8 billion or US$434.9 million.

Before turning to guidance, I would like to spend a few minutes discussing our recent developments. On December 8, 2015, we complete the offering of the company’s three year US$200 million senior unsecured notes. The notes will issue in a yield of 7.75% and bear a fixed interest rate of 7.5% per annum with interest payable semi-annually in arrears.

Through this offering, we have further expanded our funding sources and created financial flexibility. We intent to use the net proceeds of this offering for capital expenditure and other general corporate purposes including refinancing outstanding investors.

In July 2015, we announced that we enter a five-year framework agreement with China Development Bank, which include a financial product for an amount up to RMB1.5 billion. As of today, we have drawn down an aggregate amount of RMB220 million bank loans under this framework agreement, which have a term of three years and are used for company’s fleet expansion.

In January 2016, the company entered an agreement to extend an trust bank loan of RMB50 million to Shanghai Chenghuan Car Rental Company Limited, a middle to high-end car rental and car service provider in the local market.

The loans have a term of one year and bear interest rate of 7.75% per annum. Shanghai Chenghuan shareholders and the affiliate companies providing certain security interest, after one year, we have the option to convert our creditor rights into equity interest in Shanghai Chenghuan at pre-determined valuation.

We are also considering potential collaboration opportunities with Shanghai Chenghuan in marketing and brand promotion that leverage our respective strengths.

Now turning to guidance. We estimate that net revenue for the full year 2016 will increase approximately 50% from 2015 and total period-end fleet size will reach approximately 57,000 vehicles as of December 31, 2016.

These forecasts reflect the company's current and preliminary view, which may subject to change. We expect 2016 will be another record year for the revenue growth for our overall business while at the same time we will remain disciplined in managing cost and improving operating efficiency.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Leon Chik from JP Morgan. Please go ahead.

Ray Ruiping Zhang

Good morning, Leon.

Leon Chik

Hi.

Colin Chitnim Sung

Good morning, Leon.

Leon Chik

Good morning, Ray and Colin. It’s pretty good set of results. Just to clarify, the total of the vehicles, 38.700 that’s both rental and servicing?

Ray Ruiping Zhang

That’s our total fleet, that’s correct.

Leon Chik

Yes, okay. And your cost of goods sold just proportionately went down a lot, so I am just calculating your fourth quarter only GPM. It looks like improved like from 11% to like 24%, so that’s like a 13% increase and third quarter it’s only a 6% increase. So are you saving like, is it like a one-off savings from insurance or it’s pretty much permanent?

Ray Ruiping Zhang

This will be a continued cost saving particularly relating to insurance cost and to a certain extent the degree we will see some improvement in the depreciation in the percentage of the net revenues. So for those areas in overall operating costs it will give a certainly column scale. So I think, as going forward basis, we will see – as we stated in the statement as well as the press, we monitor the efficiency and the return of our assets.

Leon Chik

Is it mostly this insurance thing or is I, because your number of shops only increased by one, so, it’s only like 0.3% Q-on-Q. So, like, is it – I am just seeing if this improvement is, is this insurance or just like amortizing your fixed shop cost over more vehicles? I mean, which is more important?

Ray Ruiping Zhang

I think important that we mentioned before, I think in the current stage, since the second quarter or third quarter this year we are focusing on increasing the fleet size to our local current existing infrastructure. So, I mean, that is reflecting the saving on the margin expansion. So going forward basis, I think it’s relatively fixed costs and variable costs. So in terms of fixed costs we will maintain or at least control the current level, while we are looking for a certain geographic expansion. But, I think in starting 2015, and going forward, the company is more focusing on the efficiency of return and as we say earlier.

Leon Chik

And my last question, so I think your selling cost is higher than your sales and you mentioned this in the fourth quarter, like promotion. Could we expect this longer term or is it more just like heavy in the fourth quarter?

Ray Ruiping Zhang

I think in the percentage-wise, we will probably control at the current level in the total SG&A including selling marketing and the company intent to giving the economy to other fleet expansion, intention to lower in the percentage but on the absolute dollar-wise we may see some increase particularly related to our fleet expansion and the customer demand, but in overall, we will not see a material increase from a percentage-wise, no.

Leon Chik

Okay, all right. I’ll join the queue. Thanks.

Ray Ruiping Zhang

Thank you.

Colin Chitnim Sung

Thank you.

Operator

[Operator Instructions] Our next question comes from Justin Kwok from Goldman Sachs. Please go ahead.

Ray Ruiping Zhang

Hi, Justin.

Justin Kwok

Hi, good morning. Ray and Colin, good morning. I guess I have a couple of questions, perhaps I will start with some of the numbers of verification first. Well, do you mind to give more color on your RevPAC for the two segments respectively? The rental side and also the services side, and how you are seeing that trend moved on a sequential or year-over-year basis?

Colin Chitnim Sung

The sequential-wise, we see a RevPAC as little bit dropping on the car rental side. I think the reason due to we are increasing our operating fleet sizes, particularly in Q4 towards the end of Q4 to anticipate the Chinese New Year for the Q1 season. So, to a certain degree, those vehicles we are adding in the Q4 is not generally revenue or at least partial revenue in Q4. Those kind of skew our RevPAC for the Q4 rental. From the car services side, it’s – we see an improvement from the RevPAC from Q3 to Q4. I think we see increase from 440 in Q3 of this year to 482 of RevPAC for this Q4 in the 2015 and that reflects a certain corporate demand or corporate user as the more heavier during the travel season or business conference session in the Q4 versus the concentrate on the B2C car services the company start with the channel marketing partnership in Q3. So in overall, we believe, the whole RevPAC for car services will be paying off improve to above RMB500 RevPAC and then car rental side, we are able to maintain in the range around the current level around 120 to 125 range.

Justin Kwok

Okay, so, does it mean that the fourth quarter RevPAC for the car rental size is about 120 or do you think?

Colin Chitnim Sung

Car rental side for the – 116 for Q4, but if you look at the full year RevPAC for car rental, it’s around 123, compared to 2014 of 127. So, if you look at the blended average, RevPAC has significant decrease and we believe that rate should be giving the company expansion of the vehicle depends on the model and mix where we may see some improvement going forward.

Justin Kwok

Since we are already at the end of March, do you have any guidance or color on what’s trending in the first quarter of 2016?

Ray Ruiping Zhang

We just gave the full year guidance. Again, that is based on the current view on the Q1, that’s the reason we’ve given full year. So relatively, we will be announcing our Q1 result probably in a month or two. So, we will see a more current, but again, the guidance for the 2016 reflects the current Q1 financial result already.

Justin Kwok

All right. Okay, thank you. The other thing is, on the opening remarks and also in the statement you mentioned about the strategic cooperation investment opportunities and you also mentioned investing in the convertible bond and the Shanghai player, do you mind to talk a bit more and what you are expecting from these investments? Are you seeing more opportunity for you to do M&A or are you actually seeing opportunities to join to some of the other guys doing different part of your value chain or what are you seeing in the market? And how investors view that? Whether you want – you still want to grow organically or you are actually going out for M&A for smaller players?

Colin Chitnim Sung

Okay, I’ll start first and then Ray can add to my comments. So for that particular topic, I think the company will continue focusing organic growth mainly the car rental business, we believe the market potential as Ray mentioned earlier in his remarks we have a potential market and the company growing at much faster a rapid pace than the industry average. So car rental side we are – the company is more focusing on the organic growth. If you look in the car services, the company started the first initial stage of investment in the related business in the car rental, particularly in those certain niche area the company is lacking what we need to be more focused on, but in another topic, I think, Justin you mentioned, if you look at the whole ecosystem of the value chain, the company is also looking at opportunities in this space to support company – the growth not only in the car rental, but also in the car service segment. So, basically, in answer sure, and way to answer your question, yes we are do looking both – concentrating on organic growth, but looking opportunity in the value chain or certain niche market companies in the car service segment.

Ray Ruiping Zhang

Hi, Justin, this is Ray. I think in 2016, we will keep our eyes open on the opportunities that we think will potentially benefit eHi’s core business and given our strong balance sheet, we do have some flexibilities to do some of the potential M&As or any other opportunities that will relate whether it’s upstream or downstream that it will potentially benefit, or be beneficial to eHi’s main business. So that’s what we are looking at. But we don’t have any specifics at this moment and we will let people know when we are ready.

Justin Kwok

All right. Thanks, perhaps my last question is, I remember back in the third quarter, management stretched that that was the first quarter of a net profit on a clean basis. But entering to the fourth quarter you are switching back to a marginal loss for the fourth quarter, is it something more related to seasonality or is it something you are expecting or did you see some changes when you make the comment back in November or December time. I just want to get a sense on what you are seeing into operations I would say. Thanks.

Colin Chitnim Sung

The loss for the fourth quarter mainly contributed two factors. One is the cost or interest related to our fund insurance meaning that US unsecured notes and then second part to a lesser degree is a certain foreign currency loss giving the RMB devaluation incurred in the second half of 2015. So the – I would say, all of the close to RMB12 million is contributed to those two factors. Obviously, as going forward basis, the company is giving the economic scale expanding our presence and we would like to cover that this is [Indiscernible] towards, still it’s company’s focus, at least a main focus for us in 2016.

Justin Kwok

Thank you.

Ray Ruiping Zhang

Thank you, Justin.

Operator

[Operator Instructions] There are no more questions at this time. So this concludes the question and answer session. I would like to turn the conference back over to Brandi Piacente for any closing remarks.

Brandi Piacente

Thank you once again for joining us today. If you have further questions, please feel free to contact us at the Piacente Group for the Investor Relations services. Thank you.

Colin Chitnim Sung

Thanks.

Ray Ruiping Zhang

Thank you.

Operator

This concludes today’s conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.

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