FLJ Group Ltd

NASDAQ:XHG

Ladies and gentlemen, thank you for standing by, and welcome to the Q&K International Group Limited Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded.

I would now like to hand the conference over to your first speaker today, Mr. Tip Fleming. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Qingke's Fourth Quarter and Fiscal Year 2019 earnings release was distributed earlier today and is available on the company's IR website at ir.qk365.com as well as on GlobeNewswire services.

On the call today from Q&K, we have Mr. Bill Guangjie Jin, Founder, Chairman and Chief Executive Officer; Ms. Jackie You, Chief Strategy Officer and SVP; Mr. Frank Sun, Chief Financial Officer; and Mr. [ Scofield Lee ], Investor Relations Manager.

Mr. Jin will review the business operations and company highlights. He will do the prepared remarks in Chinese. And Ms. You will deliver the same content in English. Mr. Sun will then discuss the financials and guidance. They will be available to answer your questions during the Q&A session that follows.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements as defined in the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. For further information regarding these and other risks, uncertainties or factors, they are included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

It is now my pleasure to introduce the CEO and CSO, Bill and Jackie, please go ahead.

Thank you, Tim. And thanks to everyone for joining our earnings call today. [Foreign Language] Jackie, please.

[Interpreted] Before we begin, I'd like to point out that we just announced that we made a few management changes. I'm proud to announce that we promoted Jackie from Chief Financial Officer to Chief Strategy Officer and Senior Vice President, and we promoted Frank from Finance Director to Chief Financial Officer. We couldn't be happier with the changes and know that these are both well-deserved promotions.

[Foreign Language]

[Interpreted] With that, I'll go back to our prepared remarks regarding our operating key points in the fourth quarter.

[Foreign Language] Jackie, please.

[Interpreted] I'm delighted to report a solid quarter despite the challenging environment in the midst of China-U.S. trade war and the domestic macroeconomic control in the second half of 2019. We achieved reasonable growth while narrowing our losses in the fourth quarter. In addition, although we experienced softness in our rental spread margin, when compared among the industry, we further widened our overall leadership, evidenced by the number of awards granted to us by prominent industry organizations in recognition of our asset quality.

[Foreign Language] Jackie, please.

[Interpreted] During the fourth quarter, we adopted a defensive strategy after a prudent assessment of the broader macroeconomic environment. As a pioneer in China's long-term apartment rental market, we have the most experience managing our business through the economic cycle. Our experience tells us that during economic downturn, more important than aggressive extension is consolidating our internal resources further improving our operational efficiencies and focusing on asset quality improvement. During this time, we witnessed a series of bankruptcies of companies within the industry who have been pursuing aggressive expansion while disregarding their asset quality. We believe that as the industry reads out weaker players through the economic downturn, the industry will become more mature and rational with the remaining companies valuing growth with asset quality and operating efficiencies.

We believe we will be able to capture abundant opportunities with our widened advantages when the time comes. Despite all these difficulties in the fourth quarter, our revenues still increased 13% year-over-year, and our net loss attributable to the company decreased 29% to CNY 125 million from last year.

Non-GAAP EBITDA loss narrowed by 58% year-over-year. Our average month-end occupancy rate in Q4 reached 95.8%, increasing 360 basis points year-over-year. And our average occupancy rate for Q4 was 94.4%, an increase of 320 basis points year-over-year. The fourth quarter is typically peak season of the year in terms of occupancy. Even by peak season standards, we made a new record in occupancy rate.

[Foreign Language] Jackie, please.

[Interpreted] Such results demonstrate our abilities in weathering economic downturns. We owe such resilience to our strategic position. We addressed the market segment with monthly rental below RMB 2,000, which accounts for approximately 80% of the market in China. Geographically speaking, we are focused on the Yangtze mega-city cluster centered around Shanghai, which is a strategic region of China with vibrant growth.

[Foreign Language] Jackie, please.

[Interpreted] Although the long-term apartment rental industry will not be spared from challenges related to broader economic pressures, we should recognize that it is still a nascent industry. As the central government makes housing policies a priority nationwide, such as housing for living, not for speculation and allowing renters to enjoy the same rights as homeowners, both the supply and demand in the rental housing market are on the rise in China.

As such, China's long-term apartment rental market is expected to double from 2018 to 2024 to RMB 3 trillion or approximately USD 447 billion according to CIC. In addition, a slew of new rental housing regulations are being introduced by the government, which will raise the entry barriers to the industry. This will help to increase the market penetration of branded long-term apartment rental operators with the penetration rates projected to increase from 2% in 2018 to 11% in 2024, according to CIC.

We believe that the highest quality industry leaders will be able to increase their market shares meaningfully in the next stage of the industry development. Regionally, as local governments increasingly compete in attracting young population, long-term apartment rental operators will continue to be strongly supported by local government policies.

[Foreign Language] Jackie, please.

[Interpreted] As China's first long-term apartment rental platform listed in the U.S., we believe we are a clear leader in terms of asset quality and operating efficiency. As we continue to strengthen our technology and management capabilities to further improve our user experience while scaling our business, we aim to become the standard setter of China's long-term rental industry.

[Foreign Language]

[Interpreted] Next, I'll pass the call over to our CFO, Frank, to discuss our financial results. Thank you.

Thanks, Bill and Jackie. Now let's go over the fourth quarter financial results and details. We believe year-over-year comparisons are the best way to review our performance. All percentage change I'm going to give will be on that basis. But once again, please note that all figures I mention will be RMB. And as a reminder, we just completed our fourth quarter of fiscal year 2019, which ended on September 30.

Total net revenues increased by 13% to RMB 336 million. Breaking this down, rental service revenue increased by 15% to RMB 296 million from RMB 258 million in the same period of last year, mainly driven by an increase in our number of occupied rental units and increase of our period-average occupancy rate, partially offset by decrease in rental spread margin after discount for rental prepayment.

Net revenues from value-added services and others increased by 2% to RMB 39 million from RMB 38 million in the same period from last year, primarily due to an increase of revenues from broadband Internet and utility services, which is in line with the increase in our occupied rental units and our period average occupancy rate, partially offset by decrease in revenue from indemnity. A decreased number of tenants and landlords terminate their leases with us before expiration of the lock-in period, and we forfeit their deposits or receive compensation from them for such termination.

Total operating costs and expenses were RMB 437 million compared with RMB 435 million in the same period of last year. In particular, operating cost increased to RMB 346 million from RMB 296 million last year, which is generally in line with our revenue growth and business expansion.

Selling and marketing expenses decreased to RMB 33 million from RMB 42 million in the same period of last year, primarily due to our cost-saving effort and improvement in sales personnel efficiencies.

G&A expenses increased to RMB 32 million from RMB 27 million in the same period of last year, mainly due to increase in our management personnel costs for strengthening our management capabilities and increased expenses relating to our initial public offering.

Pre-operation expenses decreased to RMB 5.6 million from RMB 28 million in the same period of last year, primarily due to fewer new rental units being developed in the fourth quarter of fiscal year 2019, in contrast with the fast expansion in the same period of fiscal year 2018.

Impairment losses decreased to RMB 13 million from RMB 30 million in the same period of last year, primarily due to sufficient provision was provided in the first 3 quarters in fiscal year 2019.

All in all, loss from operations declined to RMB 101 million from RMB 138 million in the same period of last year, mainly due to all of the factors I just mentioned.

Interest expenses net increased to RMB 24 million from RMB 21 million in the same period of last year, primarily attributed to increased balances of capital lease and other financing and bank borrowings. Fair value change of contingent earn-out liabilities was a loss of RMB 1 million compared with a loss of RMB 17 million in the same period of last year. Loss before income taxes decreased to RMB 125 million from RMB 176 million in the same period of last year.

Adjusted EBITDA was negative RMB 31 million compared with negative RMB 59 million in the same period of last year. As of September 30, 2019, we had cash and cash equivalents of RMB 160 million and a restricted cash of RMB 91 million.

I will now quickly run through a few key financial results for our full 2019 fiscal year. Further details can be found in our earnings release. All comparisons are to fiscal year 2018. Net revenues increased to RMB 1.2 billion from RMB 890 million. Total operating costs and expenses increased to RMB 1.7 billion from RMB 1.3 billion, primarily due to increase in operating costs, selling and marketing expenses and G&A expenses, partially offset by decrease in pre-operation expenses.

Loss from operations increased to RMB 448 million from RMB 426 million.

Adjusted EBITDA was negative RMB 179 million, a decrease of 19% from negative RMB 221 million. Basic and diluted loss per share were both RMB 1.87, compared with a basic and diluted loss per share of RMB 1.55 for fiscal year 2018.

Turning to the guidance. Based on current macroeconomic and operating conditions, for the first quarter of fiscal year 2020, we expect net revenues to be between RMB 310 million and RMB 325 million.

This concludes our prepared remarks.

Now I would like to translate my part into Chinese. [Foreign Language]

Operator, we are now ready to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Lewis Wang, Annunciation Research.

Congratulations on the performance. So we have 2 questions here. First one, I think you guys already gave some color on the first quarter performance. And also you gave of the whole year, but we want to see -- or could you give more color on the whole year of 2020, the financial performance? And this is the first one. And the second one, so we read some of news from China and some are kind of negative of the whole industry. Could you give some ideas on your company or strategy how to fit in this kind of environment?

Thank you, Lewis. First, let me translate the questions into Chinese, and then we'll start to address the questions one by one. [Foreign Language]

[Interpreted] So let me take a stab at your first question. In terms of our outlook for 2020, we -- currently, we are -- like you mentioned, we are actually in a very eventful time of the industry. On the one hand, there are a lot of companies being wiped out if they lacked the necessary discipline. And on the other hand, the government is coming out with a lot of regulations to put more orders into the market. And for us, we think that in the near term, the industry will go through a lot of events, and there are a lot of cross currents. So the visibility is not great at this point for us to give the outlook for the entire year. But we did provide some guidance on the top line for the first quarter.

Having said that, in terms of the long-term outlook, we think it's very positive. And if we look at -- assess the current situation through the lens of the overall industry growth curve, this is a very healthy thing to go through a correction and having the remainder of the players of the industry go to the next level and the industry will become stronger. So we think there are a lot of currents behind us to support the long-term growth. And we certainly expect that we will continue to strengthen our -- widen our advantages in this time. And this time in itself offers a lot of opportunities. So we are taking advantage of this time with access to the global capital market. And we believe that we will widen our advantage and be able to capture a lot of fantastic opportunities when time comes.

So this is the answer to your first question. Now let me turn the call to Bill, our CEO to address the second question. Actually, Lewis, may I clarify? What kind of negative news are you referring to? Could you specify a little bit?

Yes. I think that news are -- it's -- news are recently -- probably yesterday? It's about -- okay, let me do it in Chinese. [Foreign Language]

[Interpreted] Yes. Let me translate the question into English for the rest of the audience first. So the question was recently, there have been news about a lot of companies going out of business. And also, there is news about Q&K revisiting rental arrangements with landlords. So Lewis would like to have our take on our strategy in the environment.

[Foreign Language]

[Interpreted] Yes. First of all, we view this as a great opportunity in that when a lot of the players leave this market, there is more room for the existing players like us to address the market that is now left open. And we think that we will be in a position to offer more order to the market and standardize the market.

[Foreign Language]

[Interpreted] Yes. As a general practice for us as a company, we do evaluate our inventory from time to time and look at the profitability. And for the bottom layer of our assets, we do have the opportunity to revisit the price arrangements with the landlords. And as we disclosed in our prospectus, in the year 2019, we have -- for all of the contracts that we signed, we actually have put in a new clause, which is -- should the lease-in price be higher than the lease-out price for over 6 months, we have the right to revisit the prices with the landlords. So this is a way for us to protect ourselves against negative industry trends such as this.

[Foreign Language]

[Interpreted] And lastly, in 2020, we will continue to improve our user experience by offering more services. For example, we are going to offer personalized cleaning services and the cleaning area can extend from the common area to the private room upon their permission or request in order to improve the user experience.

[Foreign Language]

[Interpreted] And we take the feedback from our tenants and landlords very seriously. So for the stories that are covered by the media or brought to our attention one way or another, if it -- if the details are available, we do reach out to our users and communicate with them and sort out the detailed problems and solutions. And by doing so, we will also treat problems of the same sort, not just specific to one client, but to a type of issues in a broad stroke.

[Foreign Language]

[Interpreted] And in 2020, we will improve our operating [ menu ] and improve the procedures. And no matter what type of environment we're in, in 2020, we do aim to be the best in the industry in terms of service quality.

[Foreign Language]

[Interpreted] Yes. So the first question is in terms of the average duration of the leases. Lewis, I assume you're referring to the tenant side?

Yes.

Okay. And the second question is, when the lease expires and at the time of extension, what is our bargain power? What is the price change at the point of extension? I will ask our CFO, Frank, to address this question first.

Thanks, Lewis, for your first question. Our average like the tenants stay with us for the -- so we have, like a lock-in period for 12 months, the contract with our tenants. And so in fact, our actual -- our tenants stay us with average for like 11.3 months for fiscal year 2019. So that's your first question. Right. And for the second question is the banking power?

At the time of extension, what's the price change?

So like -- for the bargain power, I assume you are asking the bargain power with our tenants. So this is -- so I think this question is a little bit like complicated. We will do that on a case-by-case like scenario since the things are changed differently. So if you terminate like your lease terminate in the -- like the peak season, we will possibly raise our like the rates with the tenants. But if you fall with like the -- like not a peak season, maybe we can provide a lower prices since we prioritize our occupancy rate over our price to just fill the gap.

So on average, if you look at our earnings release for 2019, our average prices after discount for the rental prepayments is 19.1% versus like 25.7% compared with 2018, that reflects the macroeconomics for fiscal year 2019. So that's for your second question for year 2019.

Yes. And I would like to add to that, that in the recent past, the economic environment has been fairly weak. There have been a lot of layoffs and salary cuts and whatnot. So in the short term, the price increase may be quite mediocre. But if we look at the history, our track record, and projecting forward, usually over time, things will normalize. And because we pick areas that have a lot of organization development going on, the -- our ASP rise over time can actually be at or above CPI.

[Operator Instructions] There are no further question at this time. I would now like to hand the conference back to Mr. Tip Fleming. Please continue.

Thank you, operator. In closing, on behalf of the Qingke management team, we'd like to thank you for your participation on today's call. If you require any further information or are keen to visit the company in China, please do let us know.

Thank you for joining us today. This concludes the call. Goodbye.

Thank you all for attending.

Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]