Yeahka Limited (9923) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Yeahka Limited 2023 Interim Results Announcement Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'll now pass the call to Mr. Ben Zhao, Board Secretary and General Manager of Corporate Development and Capital Markets for the company. Please go ahead, sir.

Hello, everyone. Welcome to Yeahka's 2023 Interim Results Conference Call. Before we start, we would like to remind you that this presentation includes forward-looking statements that involve a number of risks and uncertainties. Information on general market conditions comes from a variety of sources outside of Yeahka. Now let me on the management team. First, Luke Liu, our Founder, Chairman and Chief Executive Officer, will kick off with an overview of our business. I will then go through our business review. John Yao, Chief Financial Officer, will conclude with a financial review before we open up the floor for questions, and Derek Lai, our Director of Finance, will translate for John. I will now turn the call over to Luke.

Thank you, Ben. Good evening, and good morning, everyone. In the first half of 2023, we once again delivered a strong performance as we benefited from the off-line consumption recovery, while synergy across our 3 main businesses expanded and gain traction. Our payment GPV and active merchants continued to grow as did the GMV in the highly competitive in-store e-commerce services segment. We further boosted merchant conversions from our [ one-stop ] payments to our merchant solutions services, and [ strengthened user ] visits through ongoing digital and AI-driven transformation. Meanwhile, we have applied foundation model technologies for in-store e-commerce, how to generate graphics and review promotional content to build merchant brands and boost sales or multiple traffic platforms. Now I will share some details on the progress we made in the first half of 2023. For payment services, we further solidified our marketing leading position. We outgrew GPV and number of merchants compared with the market. And [ cover ] with our enhanced fee rates, we delivered tremendous top line growth, reflecting our unique positioning rooted in value creation for both merchants and consumers. During the reporting period, we further enhanced our channel network, expanded our joint merchant acquisition cooperations with banks; penetrated our service coverage to key accounts, such as branded franchise and wholesale markets; and further enhanced our e-CNY capabilities. Payment continues to be the fundamental of our ecosystem as a traffic gateway. We are committed to a thriving payment business, both domestically and abroad, delivering greater scale and profitability for further fortifying our scalable ecosystem. For in-store e-commerce, the sector has become more diverse, with many traffic platforms playing a part in this highly dynamic market to better help merchants with marketing and brand exposure. We innovated our content offering capabilities by having live broadcasting and AI-powered interactive virtual hosts in addition to the AI-generated content products that auto-generates promotional material and short videos. Also, we served more brands while improving our financial performance. We widened our geographic coverage by partnering with local [ resource ] teams, namely our co-op model strategy. In this asset-light model, we provide a proprietary system that includes CRM, content generation, KOL matching and live broadcasting infrastructure to local partners, allowing them to focus on serving merchants only. We are in this RMB 35 trillion local lifestyle market for long term, and continue to be the go-to partner for merchants and platforms. As the market matures, the in-store e-commerce business will contribute more revenue and cross-sell opportunities for our other business lines. Our merchant solutions segment recovered gradually during the first half of 2023, rebounding from its low point in 2022 in terms of both user scale and revenue. As the consumption environment and overall macro economy improved, we are feeling an increasing willingness among merchants to adopt and use our value-added services and products, supported by conversions from our [ releasing ] [ one-stop ] payment service business. Looking ahead, we will continue to push the boundaries of innovation and expand internationally. We have already established our teams in markets such as Singapore and Indonesia. We are confident that the cutting-edge products, effective execution capabilities and unique business model will continue to propel growth in our customer base and inspire lasting merchant loyalty, supporting our long-term sustainable growth while creating value for our shareholders. I will now hand the call over to Ben, who will provide a detailed business review. Thank you.

Thank you, Luke. Good evening, and good morning, everyone. As Luke mentioned, we've achieved a robust performance in the first half of 2023. Our non-IFRS adjusted EBITDA, a prime indicator of our core operating results and our overall financial performance, significantly improved year-on-year, reflecting our effectiveness in improving operational efficiencies. I will also provide more color on the development of each of the 3 business lines. Let's start with payments, our ecosystem's anchor. We delivered an exceptional performance from this segment during the reporting period with a 33.5% increase in GPV and a 44.3% increase in revenue, both year-on-year. We also recorded growth in daily peak app-based payment transactions to nearly 60 million and number of active payment service merchants to more than 9 million, both record-high numbers. Furthermore, we increased our overall fee rate during the reporting period from 12 basis points in the first half of 2022 to 12.9 basis points in the first half of this year. Adjusted for onetime-net-off item, on the actual operating level, the fee rate is actually more than 14 basis points, further demonstrating our market-leading position and pricing power because our main customers are small- and medium-sized merchants from a variety of industries, including retail, wholesale, food and beverage, et cetera, representing key components of the consumer staple sector, which are less affected by the turbulence in the macro environment. Our GPV also grew rapidly, demonstrating our business resilience and ability to thrive in the [ compressed ] environment. Given this strong showing, we can confidently reiterate our previous full year 2023 GPV guidance, which is between RMB 2.7 trillion and RMB 2.9 trillion. Our unique effective agent-based business model supported growth across the segment as we have accelerated our channel expansion by providing independent sales agents with additional incentives to help them capture the opportunities arising from the off-line consumption recovery. During the reporting period, we widened our agent network to nearly 19,000 ISOs and more than 4,000 cloud payment partners through the application programming interfaces. We have also made great strides in our joint merchant acquiring services, collaborating with over 100 commercial banks. This propelled the rapid expansion of our business scale in over 300 cities across China and accelerated our penetration of key account merchants in markets such as wholesale and chain retailers. At the same time, we've been exploring opportunities worldwide, to apply our domestic payment expertise to overseas markets, including cross-border and local payment and merchant solutions services, such as bank card and QR code acceptance, remittance, et cetera. We continue to explore digital currency payments with promising results. We developed a unified settlement solution so that e-renminbi payments do not need to be settled separately within a digital currency wallet. In the future, we'll continue to promote the innovation and progress of digital currency technologies and products. We remain confident that supporting digital currency payments will attract new customers and solidify our competitive edge. Moving on to in-store e-commerce services. Our GMV exceeded RMB 2.4 billion, reaching a record high. Our revenue decreased primarily due to the rollout of the co-op model strategy and the short-term implementation of the take rate discount for our merchants to encourage growth in GMV. However, with our leading market position, the gross profit margin increased to 76.9% in the first half of this year from 57.1% in the first half of last year. Net loss continued to narrow, decreasing by 83.8% year-on-year to RMB 25.9 million in the first half of this year. The competition intensified temporarily in the first half of 2023, as many small teams with local resources have been pouring into this market. To adapt, we focused on achieving our monthly breakeven goal as a top priority and adopted an effective co-op site strategy in March. In the first half of 2023, the GMV from our core model grew rapidly and accounted for nearly half of our total GMV. This enabled organization optimization and cost control and effectively narrowed our losses. We'll fully realize our advantages, including our relationship with major traffic platform partners and enhance existing merchant base within our ecosystem and our AI-focused research and development capabilities to gain market share and elevate profitability. As an example, on the traffic side, we have established relationships with Douyin, Kuaishou, [ Maimai ], Pindoudou, et cetera, for our merchants to reach their respective platform users. On the merchant side, we have nearly 9.2 million payment active merchants for us to help tell their brand story and bringing traffic to their stores offline. And finally, we have leveraged AIGC tools to auto-generate short videos and text, as well as AI-powered interactive virtual hosts in live streaming setting. These products have effectively increased our efficiency by 70% and reduced production cost by 90%. We are opening these proprietary capabilities to our core partners, particularly in lower-tier cities, where the asset-light model is more economical for us and where co-op partners have substantial merchant resources locally. According to iResearch, China's local lifestyle service market is expected to reach RMB 35 trillion by 2025, with an expected online penetration rate of 30.8%. The vast scale of the e-commerce -- the local e-commerce service market, along with the immense potential for online to off-line penetration growth, presents huge opportunities for us. So this year, we'll continue to focus on profitability while building our competitive moat through expanding co-op and traffic platform partners, leveraging our immense merchant base and progressing with tech innovation. As the market evolves, we foresee that less competitive players will eventually exit due to less efficient co-op operating model, and more content-driven traffic platforms will enter and seek partnerships with nationwide players like us. Consequently, as and when the competitive landscape eases up, market share will concentrate among the top players like us. We firmly believe this business segment is on track to contribute more revenue and cross-sell opportunities to our other business lines. The merchant solutions services experienced a solid recovery compared with 2022. We recorded a significant increase in the number of merchants utilizing our merchant solutions, reaching 1.5 trillion (sic) [ 1.5 million ] in the half -- in the first half of this year compared with 1.2 million in the second half of last year, thanks to our enhanced servicing capabilities and user adoption that naturally converts users from a one-stop payment services to merchant solutions. As a result, merchant solutions revenue for the reporting period increased by 65.7% half-on-half. The average revenue per user has also rebounded to almost the first half of last year level. We will continue cultivating merchants' usage habits and drive growth in our merchant base with intuitive low-cost tools that can add value. Lastly, we view sustainable development as a critical element of our long-term growth strategy and have further strengthened our ESG commitment. We are very proud to be selected for S&P's 2023 Sustainability Yearbook, China Edition, the first among our industry peers to receive this honor. As we advance, we'll remain dedicated to leading our industry to a more sustainable future. And thank you, everyone. With that, I will now pass the call over to John, our CFO, to go through our financial results. Our Director of Finance, Derek, will provide the translation.

[Foreign Language]

[Interpreted] Thank you, Ben. Now let me briefly go through the highlights of our financial results for the first half of 2023.

[Foreign Language]

[Interpreted] Our total revenue reached RMB 2,062 million in the first half of 2023 from RMB 1,600 in the same period of 2022, representing a year-on-year increase of 25.6%.

[Foreign Language]

[Interpreted] The increase was mainly attributable to our one-stop payment services.

[Foreign Language]

[Interpreted] Gross profit decreased by 30.9% year-on-year from RMB 529 million in the first half of 2022 to RMB 366 million in the first half of 2023, of which, gross profit of one-stop payment services accounted for 47.4% and fell to RMB 174 million in the first half of 2023 from RMB 266 million, a year-on-year decline of 34.6%.

[Foreign Language]

[Interpreted] Gross profit margin decreased from 32.2% to 17.7%, of which, the gross profit margin of one-stop payment services reduced from 20.9% to 9.5%, and the gross profit margin of in-store e-commerce services improved from 57.1% to 79.9%.

[Foreign Language]

[Interpreted] Our research and development expenses decreased by 8.4% from RMB 134 million in the first half of 2022 to RMB 123 million in the first half of 2023, primarily due to the decrease in system development costs.

[Foreign Language]

[Interpreted] Our adjusted EBITDA increased 317% year-on-year to RMB 291 million in the first half of 2023 from RMB 70 million in the first half of 2022.

[Foreign Language]

[Interpreted] The year-on-year improvement of adjusted EBITDA was mainly due to the significant increase in GPV and fee rates of one-stop payment services and the sharp year-on-year reduction in the net loss of in-store e-commerce from nearly RMB 160 million in the first half of 2022 to less than RMB 26 million in the first half of 2023.

[Foreign Language]

[Interpreted] In the future, we will continue to pursue the healthy growth of our 3 major businesses.

Thank you, everyone. That's it for our prepared remarks. We will now open the call for questions. Operator, please go ahead.

[Operator Instructions] This question comes from the line of Vicky Wei from Citi. Please ask your question.

[Foreign Language] I have 2 questions. Would management share some color about the latest consumption trend in the summer holiday and different category performance? My second question is related to the in-store e-commerce business performance in the summer holiday as well. So will management share some latest trend? And also, would love to hear your thoughts about competition within this business segment between, for example Meituan and Douyin, and its impact to Yeahka?

Thank you, Vicky, for your question. I'll address the first one first. In relation to the off-line consumption trend that we see during the summer holiday. First, we have to understand that Yeahka's core merchant base is within the offline space, and particularly within the more -- on the retail side and also on the catering service side. And very notably, if we look at a lot of the macro data, the catering services is one of the pretty outstanding growth items among the other metrics or other segments. So that's definitely beneficial for the company. If we look at the monthly data from May to July and even up to today, we do see month-over-month growth, very healthy growth month-over-month. And that will be very beneficial to our overall GPV growth, as demonstrated in the first half numbers of the GPV over RMB 1.4 trillion. And we are very confident to achieve very healthy year-on-year growth that's within the range of RMB 2.7 trillion to RMB 2.9 trillion. So I think the catering services continues to be very strong as people go out and dine and just have very good food in general. And we'd also see the traveling gradually pick up as well during the summer holiday as a lot of the students, they have summer vacations, they will travel with their families. So that will also show up in a lot of our merchant base. So that's on the first question. So on the second question is actually related, because for the local lifestyle services segment that we operate in, we actually focus on serving, one is the catering services, and two is more on the retail side or on the travel and leisure side. So these segments also are benefited from the summer holiday, where -- when a lot of the travelings happen and a lot of activities that go on during the summer holidays. So we do see a pretty healthy growth on the local lifestyle services as well. And particularly during these times when the competitive environment is actually pretty heavy, so what we did was, in the first half of the year, we introduced a co-op model. The co-op model is essentially a very asset-light way for us to expand our market share. So in a lot of lower-tier cities, so there are a lot of the small players who have local resources and they have strong merchant relationships locally, even stronger than if we establish team there. So what we do is we empower them in a lot of different ways, including our AIGC tools, including our relationship with the KOLs, including how we can help them to be more efficient in promoting in a variety of traffic platforms. So they work with us, and they will obviously hire their own business development staff. They will be responsible for their own expenses, various expenses. And what we do is we do a revenue sharing, we take a percentage of GMV from them so that we can grow our market share in these lower-tier cities in a more sustainable, more profitable way. So that will also be very beneficial for our GMV growth in the second half of the year. And in terms of the competition between the traffic platforms, yes, that's a very keen observation. And for us, because our positioning is a sort of like an aggregation platform, so in-store e-commerce aggregation platform. Just like payments, right, where we work with WeChat and Alipay, so it's very similar here. We have relationships with the merchants and strong capabilities to operate and serve these merchants to help them to build their brand story and to help the merchants to bring in traffic. So the more platforms, the traffic platforms, the more traffic platforms there are, the better positioning that we have, right, because they will all seek for partnerships with companies like us because we have the strongest supply chain and we have the strongest content generation and operating capabilities. So we'll be happy to work with these variety of different traffic platforms going forward.

[Operator Instructions] Our next question comes from the line of Hang Suzhou from CICC.

[Foreign Language] My question is, how you think of the further competition in the payment business? And could you please share some points on the midterm growth rate of the payment volume?

Right. Thank you for the question. So we obviously were very strong in the payment space, and we realized a very strong growth on the GPV for the first half of the year. And that's for the -- that's -- in total, that's more than 33% of the year-on-year growth. And I think we benefited a lot from the off-line consumption recovery, as mentioned in the last question, right, when we see the strong growth in the catering services segment and also the retail segment. So because we are focusing on the small and medium-sized merchants, and particularly in the app-based services, we see a lot of data points across the board, also among our peers. Our daily number of transactions reached 60 million. So that's a record-high number for us. And that also -- I believe that's also top within the segment. So I think, with that pricing power, with that leading industry position, we are able to grow in a faster pace than the industry average, as demonstrated in the first half. And we're also confident to continue in that -- with that growth rate going into the second half of the year. So in the long term, I think the industry growth, there are still a lot of opportunities. As we penetrate into lower-tier cities and we convert a lot of the small merchants who are using their personal QR code to accept payments, we are converting them into using a more convenient and more compliant, unified QR code, merchant acceptance QR code, to do their daily business. So there's a huge market, increasing market over there. So we do think we should be able to maintain a very strong growth in the next 3 to 5 years in the payment space.

[Operator Instructions] Our next question comes from the line of Manyi Lu from DBS.

[Foreign Language] My question here is that -- like how much percentage of the GMV comes from the co-op model? And what is the take rate of the in-store e-commerce business, which is operated by Yeahka itself? And like how do we balance the revenue versus the profitability in mid to long run of the in-store e-commerce business?

Thank you, Manyi, for your question. So the in-store e-commerce business, the GMV is growing pretty healthily. And obviously, among them, as mentioned in my previous announcement, the co-op model is actually close to 50% of the total GMV. So that's a very asset-light way and very successful execution for us to penetrate into lower-tier cities in a more sustainable and profitable way. So for our self-operated sites, actually, our operating efficiencies have been improving very strongly in the past few months. So very notably, for example, our previous largest expense is actually the BD cost, the BD expenses. So the number of the off-line business development staff that we have. So in the -- I think in last year, the maximum number of the BD staff that we have is close to 3,000 and now we have close to 500. So with that 500 BD staff, we are able to achieve more than half of the GMV that we achieved in the first half of the year. So that's a very healthy operating leverage that we are able to achieve. And on the take rate side. So the competition is actually pretty heavy in the first half of the year as there are a lot of small players that come in. But what we see in our self-operated sites is the take rate, it's coming down slightly in the first half of the year. But we do believe, with the latest developments that we see that are offered by Douyin and a lot of the other traffic platforms, the competition, it should solidify, right? I think the market share, it will eventually concentrate into the top players, just like us. So we are -- we remain very confident in our self-operating sites that are operating in higher-tier cities, that the take rate should return to the 2022 numbers within 1 to 2 years. So we are very confident on that. And operating efficiency-wise, we're obviously becoming more efficient. And if you look at the net losses in the first half of the year, the total net loss was a mere RMB 26 million, compared with in the first half of last year, we actually lost RMB 160 million in developing this business. So now the business model is more sustainable and more healthy. And I think in the second half of the year, we'll continue to put profitability as our first focus, while also grow our GMV healthily by, one, increasing our efficiency in the self-operated sites; and two, continue to develop our co-op model by identifying more resourceful local teams and also empowering them with a variety of capabilities that we offer.

[Operator Instructions] Our next question comes from the line of Yuxuan Chen from Huatai.

[Foreign Language] I got one question. Could you give us more color about the recent development of the overseas business?

Okay, I will answer the question. So the overseas business, I think it's smoothly -- we're running the business -- overseas business smoothly. Currently, we are developing 3 products. Number one is acquiring business. Just as we do domestically, we have merchants to accept QR code payment and do the settlement for them. The second business is remittance. We try to develop products that can support, overseas, people can transfer money easily between regions. And the third product is online payment. We already got a license in different areas, which can support -- we can do the online payment as well. So we put R&D resources in this area. Now -- and I can also show some detail, some numbers we have done in Singapore. Last month, we further -- acquiring business, the total GMV, we reached RMB 20 million equivalent on the -- it means our team now have the capability that can support the -- I mean, the real operation in the overseas country now. So I think that's the progress we have made, and I will keep disclosing the performance we got in following our new course. Thank you.

Our next question comes from the line of [ Tina Wang from Essen Securities. ]

[Foreign Language] My question is regarding in-store e-commerce. Can management give some more color on GMV trend in the second half? And also since a monthly breakeven is our priority, how do you think about the breakeven visibility in the second half and the year of 2024?

Sure. Thank you for your question, Tina. I think on the in-store e-commerce services, we are very close to breakeven monthly -- on a monthly basis, and thanks to our very successful execution of the co-op strategy. And obviously, we are very confident to achieve growth in the second half compared to the first half, but only after we -- only on the basis of achieving a sustainable business model and profitable business model. Because at this point, we don't think expanding by putting a lot of self-operated sites is economical. So that's the baseline. But a very positive trend that we see is, we see some traffic platforms, they started to give out licenses in specific cities. So that would mean, in one specific city, there are only a very limited, and the strongest companies or teams that can operate in that city. In comparison to what we see today, whoever wants to be in this business, they can simply enter. So I think that's a very positive trend, and we are in a very good pace to take that opportunity, to capture that opportunity with the city licenses to continue to expand and to absorb the market share of these small teams, that they're not -- that do not get the licenses. So that's a very positive trend that we see in the space. So going forward, I think the -- as mentioned, the monthly breakeven, we are very close to achieve that. And hopefully, in the next year, we'll -- this local lifestyle services will contribute good profits for our overall business.

And that concludes the question-and-answer session. I would like to turn the conference back to the management team for any additional or closing comments.

Thank you once again for joining us today. If you have any further questions, please feel free to contact the Investor Relations department through the company information on our website, and thank you for your time.

That concludes today's conference call. 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.]