Edited Transcript of TC.OQ earnings conference call or presentation 2-Jul-20 12:00pm GMT

Aug 1, 2020 (Thomson StreetEvents) — Edited Transcript of TuanChe Ltd earnings conference call or presentation Thursday, July 2, 2020 at 12:00:00pm GMT

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to TuanChe Limited First Quarter 2020 Earnings Conference Call. (Operator Instructions)

Today’s conference call is being recorded. I would now like to turn the conference call over to your host today, Ms. Cynthia Tan, IR Director of the company. Please go ahead, ma’am.

Thank you, and hello, everyone. Welcome to TuanChe First Quarter 2020 Earnings Conference Call. We have released our earnings results earlier today, and it is now available on our IR website as well as on newswire services. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such, our future results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in our earnings release and our registration statement filed with the SEC. TuanChe does not assume any obligation to update any forward-looking statements, except as required by law. Today, you’ll hear from Mr. Wei Wen, the company’s Chief Executive Officer, who will provide an overview of our growth strategies and business development, who will be followed by Mr. Chenxi Yu, [Ronnie], the company’s Deputy Chief Financial Officer, who will provide additional details on the company’s financial results and discuss the financial outlook. Following management’s prepared remarks, we’ll open up the call to questions.

With that said, I would now like to turn the call over to our CEO, Mr. Wei Wen. Please go ahead, sir.

Hello, and thank you, everyone, for joining us today on our first quarter 2020 earnings call. In the first quarter of 2020, we experienced significant challenges stemming from the COVID-19 outbreak, which resulted in substantial year-over-year net revenue decline and a widening net loss. In response, we swiftly adjusted our operations to meet the evolving demands of the challenging environment. During this quarter, we focused our efforts on several key priorities, including: first, ensuring the health and safety of our employees and the customers. Second, accelerating our online strategy through forming a relationship with Baidu Youjia, Baidu’s information Service app

in the automobile vertical, depending our collaboration with Tmall Auto and the completing the acquisition of Longye International. And third, managing our cost structure to maintain sufficient cash balance and liquidity.

Let’s take a look now at the first quarter results of our business segments, while also providing additional detail on our strategic and operational priorities. First, our offline marketing services, as we have expanded in press release prior to today, out of concern for public health and in accordance with all national and the local regulatory guidelines on COVID-19 prevention and control, both our auto shows and the special promotion events was suspended for both February and March due to the COVID-19 outbreak, resulting in 95% year-over-year revenue decline for offline marketing services. In April, we held few offline events for the best interest of public health in order to fully support the government’s guidance — guidance on the pandemic prevention and control. That being said, we are pleased to report that since May as the COVID-19 outbreak gradually subside and the Chinese government started to relax preventative and the control measures, our offline business began to steadily recover. From a strategic perspective, we have adjusted the pace of our business expansion, while staying committed to enhancing our core auto show business with a focus on generating high ROIs to ensure healthy margins and a sustainable growth for our business. By leveraging our deep insights in automotive transactions, we can further develop our customized spatial promotion events for each auto dealer and OEM, helping them further improve the customer experience, ultimately, leading to improved sales conversion rates and increased monetization of their customer bases.

Next, let me move on to our growth initiative in virtual dealership and online marketing services. In the first quarter of 2020, we made encouraging progress in advancing our online business in response to the COVID-19 outbreak, recording revenues of RMB 3.7 million for virtual dealership and online marketing services, increasing of 12.3% year-over-year. Compared to general consumer goods, the purchasing decision surrounding a car is obviously a much more complex and a protected process due to the higher costs and the longer life cycles involved. This makes it challenging for the auto transaction to be done completely through online channels. As such, a combination of online infrastructure and offline capabilities is critical to the success of online auto sales. Our power for offline presents — and expertise in data analytics position us well to not only become a player in the auto sales industry, but potentially a driving force in reshaping the automotive retail landscape altogether.

In January 2020, we formed a partnership with Baidu Youjia, Baidu’s information service app in the automobile vertical. Through this partnership, we will be able to combine Baidu’s tremendous network traffic and a vast user base and the Youjia’s automotive ecosystem with our strong and extensive relationship with OEMs and dealers and our accumulated expertise and the data in customer transactions. We also continued to make progress on our collaboration with Tmall Auto. While our offline events were affected by the pandemic, we captured the opportunities presented by the significant increase in online traffic during the pandemic period and proactively launched online live streaming auto shows and special promotion events on Tmall, leveraging our expertise in contexture live auto sales and marketing in addition to our nationwide sales network, we were able to offer our customers one-stop purchase services. And seamless combined online vehicle selection with offline vehicle pickup as well as attractive promotion discounts. Furthermore, we’ve completed the acquisition of Longye International Limited, a leading social CRM cloud system provider for China’s automotive industry, further enhancing our capability to empower OEMs and the dealers to reach customers more effectively and efficiently. Aside from developing our online strategy in response to the material impact of the COVID-19 pandemic, we implemented measures to adjust the pace of our operation expansion and conserve resources, such as furlough arrangements and scaling back our recruitment budget and employee size and may resort to other cost-cutting measures, if the outbreak of COVID-19 and its impact persists. I should also note that when our offline activities was suspended, the variable costs associated with our renew sales and the customer acquisition will also significantly reduced as a result of our cost control measures and reduced variable costs, our operating expense — expenses were RMB 61.8 million during the first quarter, decline 47% year-over-year.

In summary, during the first quarter, we’re firmly focused on executing our online strategy and cost containment, while prioritizing the health and the safety of our customers and employees. The actions we took in the first quarter reflected our ability to respond quickly and our ability to execute. While the COVID-19 outbreak prevented significant challenges, it has also accelerated the ongoing consumer transition towards online channels, we will and continue to be — we are positioned to take full advantage of this shift by further developing our omni-channel initiatives. Going forward, we will continue to focus on effectively leveraging our offline operations and applying our expertise in facilitating auto transactions online Through a hybrid, brick-and-mortar and online business model, we strive to provide our customers with both the security and the quality they are accustomed to when purchasing in-store and in person as well as the convenience of a customized experience there, expect from online shopping.

Lastly, I’m pleased to introduce our Deputy CFO, Mr. Yu Chenxi, [Ronnie]. He was our Financial Controller since August 2019. [Ronnie’s] in-depth knowledge and extended experience in corporate, accounting and financial reporting, make him an excellent choice for this important role, and we are confident that he will effectively help further strengthen on our finance function.

Now I will turn this call over to Ronnie for a closer look at our financial performance, in the first quarter.

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Chenxi Yu, TuanChe Limited – Deputy CFO & Financial Controller [4]

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Thank you for the introduction, Mr. Wen, and hello, everyone. Thanks for joining us. I’m very excited and privileged to begin my new role with the company. I’m confident in our ability to navigate through this challenging period, while at the same time, continue laying the foundation for omni-channel approach to achieving long-term growth. Please note that all numbers stated in my following remarks are in RMB terms unless otherwise noted.

Now I would like to work through our first quarter 2020 financial results. Our total revenues in the first quarter were RMB 9.7 million, decreasing 92.1% from RMB 122.9 million in the same period last year. This was a result of the adverse impact of the COVID-19 pandemic and the sluggish Chinese economy. The decrease was partially offset by the steady growth of virtual dealership and online marketing services, materially and negatively impacted by the suspension of all auto shows and special promotion events scheduled in February and March of 2020. Our offline marketing services revenues generated from auto shows in the first quarter of 2020 decreased by 95.2% to RMB 5.7 million from RMB 118.8 million in prior year period. Revenues generated from special promotion events in the first quarter of 2020 were RMB 0.3 million compared with RMB 0.8 million in prior year period. Revenues from our virtual dealership, online marketing services and others reached RMB 3.7 million during the third quarter of 2020 compared with RMB 3.3 million in the prior year period, primarily due to our continuous online marketing services expansion and revenue contribution from the company’s completion of acquisition of Longye International Limited on January 13, 2020.

Our gross profit in the first quarter was RMB 5.7 million, decreasing 93.6% year-over-year from RMB 88.9 million in conjunction with revenue declines. Our gross margin decreased to 58.6% from 72.4% in the same period last year. In the first quarter, selling and marketing expenses decreased to RMB 31.7 million from RMB 86.1 million in the same period last year, primarily due to the decrease in staff compensation and promotion expenses mainly resulted from fewer offline events held.

General and administrative expenses increased to RMB 24.3 million from RMB 22.9 million in the same period last year, largely due to the increase in amortization. Research and development expenses increased to RMB 8.6 million from RMB 7.5 million in the same period last year, primarily due to an increased headcount as a result of the company’s online operation expansion for future development. Consequently, our loss from continuing operations was RMB 59 million in the first quarter compared with RMB 27.6 million in the same period last year. Excluding the effects of share-based compensation expenses and fair value loss of warrants, the adjusted net loss attributable to the company’s shareholders was RMB 51.9 million in the first quarter compared with RMB 15.5 million in the same period last year. Adjusted basic and diluted net loss per ordinary share were both RMB 0.17 in the first quarter compared with RMB 0.05 in the same period last year. Adjusted EBITDA was a loss of RMB 50.7 million in the first quarter compared with a loss of RMB 17.7 million in the same period last year.

Now turning to our balance sheet. At the end of March 2020, when cash and cash equivalents, time deposits and short-term investments of RMB 205.2 million. For the second quarter of 2020, we expect our net revenues to be between approximately RMB 47 million and RMB 52 million, representing a year-over-year approximate decrease of 76.9% to 74.4%, mainly due to declines of the number of offline events, including auto shows and promoting events in the second quarter of 2020 compared with prior year periods as a result of the COVID-19 pandemic, although we are seeing a gradual recovery of our offline events in the second quarter. This forecast reflects the company’s current and preliminary views on the market’s operational conditions as well as the inflows of the COVID-19 pandemic which are subject to change.

This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Laura Liu from Stone Street Group.

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Laura Liu, Stone Street Group LLC – Co-Founder [2]

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So I have a question, like, can you just share with us more updates on the current financials of the auto market and also the impact of this coronavirus?

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Cynthia Tan, TuanChe Limited – IR Director [3]

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No problem, please let me translate. (foreign language)

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Wei Wen, TuanChe Limited – Co-Founder, Chairman & CEO [4]

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[Interpreted] In the first quarter, China automobile sales declined by 42.5% year-over-year, with passenger cross-sales further declined by 45.4%, mainly due to the extensive quarantine measures in responding to the COVID-19 pandemic. This has resulted in consumer postponing their vehicle purchase activities.

As there is no new pandemic cases reported in most domestic regions, and the government is gradually easing the containment measures, coupled with a lot of newly launched auto markets stimulus policies in various regions. Domestic auto sales are gradually recovering in China market. The total car transaction number in China has seen a year-over-year 4.4% growth and 14.5% growth increase, respectively, in April and May. While the passenger car sales still slightly declined by 2.6% in April, but it also rebounded in — by 7% in May.

Starting in May, our offline business is also gradually recovering in some regions. However, we still face significant uncertainties in terms of the pace of the recovery. Due to recent new COVID-19 cases reported in June in Beijing area, that this will continue to give rise to uncertainties affecting the company’s operational and financial performance.

Our progress in returning to normal operations will continue to depend on the specific situation regarding the pandemic in different regions. We will continue to monitor the degree and duration of the macroeconomic impact by the pandemic going forward.

On our cost control side, while our offline activities are reduced, the variable costs associated with our revenue, our sales and customer acquisition are also reduced accordingly. The rest of our quarter expense is mostly related to staff salaries.

As we face the challenge brought by the pandemic, we implemented measures to adjust the pace of operation expansion and direction. We’ll conserve our results including for long arrangements, going back our recruitment budget and employee size, and may result to other cost-cutting measures if the outbreak of COVID-19 and its impact persists or escalate.

Does that answer your question, Laura?

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Laura Liu, Stone Street Group LLC – Co-Founder [5]

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Yes, that’s great. Just have another question. Can you also provide some more details regarding the online strategy, especially in response to the COVID-19?

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Cynthia Tan, TuanChe Limited – IR Director [6]

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Okay. Please wait. Let me translate. (foreign language)

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Wei Wen, TuanChe Limited – Co-Founder, Chairman & CEO [7]

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[Interpreted] Our strategy in response to the pandemic is mainly to proactively expand our online business. In the first quarter, we formed a strategic partnership with Baidu Youjia. Which is Baidu’s information service app in the automobile vertical.

We also further deepened our cooperation with Tmall with Taobao. We have launched a number of new online products, such as online live streaming special promotion events on Tmall Live and leveraging our years of solid track record in offline sales and marketing to build a new and contextual model for marketing service online.

In addition to that, we completed the mergers and acquisitions with Longye in the first quarter of 2020. Longye’s 4S store social CRM system can help our dealers better track their sales leads, obtain online like through our live streaming auto shows and increased conversion rates, when customers are unable to visit the dealer stores during the pandemic period.

Does that answer your question, Laura?

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Laura Liu, Stone Street Group LLC – Co-Founder [8]

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Yes.

Operator, we’ll have our next question, please.

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Operator [9]

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The next question comes from Jack Vander Aarde from Maxim Group.

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [10]

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I just want to say welcome and congrats to [Ronnie] on your new role of CFO as well. A couple of questions from me. I’ll start with — you guys provide a lot of detail and helpful color of the macro environment. So I’m going to start with Q1 revenues just because Longye was explicitly mentioned as a contributor. Are you able to provide an explicit contribution of revenue or a rough estimate of what Longye actually contributed to the quarter?

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Cynthia Tan, TuanChe Limited – IR Director [11]

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Please let me translate first. (foreign language)

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Chenxi Yu, TuanChe Limited – Deputy CFO & Financial Controller [12]

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Hello Jack, and thank you. And we are not ready to disclose in detail as Longye’s calculated revenues in GAAP figure. But we can tell you that it contributed to our first quarter’s revenue amount, and it will continue to be a steady growth to the company’s total revenue stream.

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Cynthia Tan, TuanChe Limited – IR Director [13]

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Jack, does that answer your question?

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [14]

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Yes. That’s fair enough. And then as a follow-up, I have a couple more questions. If I look at your 2Q revenue guidance, it implies another large decline year-over-year, which is no surprise, but I’m positively surprised by that the decline is far less severe than I was expecting. So it’s a positive surprise. And since the second quarter technically just finished, is there any preliminary data points you could share maybe in terms of how sales have trended on a weekly basis throughout the quarter, maybe from like early April, through May, through the end of June. Is there anything you could share on just kind of the trend of sales, what you’ve seen? And were there any auto events, offline auto shows hosted in June?

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Cynthia Tan, TuanChe Limited – IR Director [15]

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Please let me translate first. (foreign language)

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Chenxi Yu, TuanChe Limited – Deputy CFO & Financial Controller [16]

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So Jack, for your question, our April revenue was relatively slow, affected by the pandemic. But from May and June, we are steadily recovering, and we hosted a number of auto shows and promotion — special promotion events in both May and June. That’s the — well, as for weekly change, we’re — well, all I can tell you is that we are seeing steady growth each week. And that’s also in conjunction with the macro automobile industry, as earlier mentioned by Mr. Wen as we are seeing rebounding figures for the macro automobile industry.

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Cynthia Tan, TuanChe Limited – IR Director [17]

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Yes. For your further reference, that would be — in April, that will be a 4.5% rebound. And for May, there will be a 14.5% market transaction rebound, but the June data is yet to come out. And our recovery trend is like — you can use that as a reference data.

Does that answer your question?

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [18]

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Sure. Just to clarify, those data points for April and May, you just provided, is that in terms of the industry? Or is that in terms of TuanChe specifically?

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Cynthia Tan, TuanChe Limited – IR Director [19]

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That would be the total China automobile transaction data, that will be for the industry.

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [20]

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Got it. That’s helpful. And then okay, as a follow-up here, perhaps I’m getting ahead of myself. But if we were to assume China’s overall economic and auto environment returns to a healthier normalized consistent level, are you able to speak to maybe how many auto show events, and kind of what level of potential revenues you think could be achieved realistically in 2021? What I’m trying to get out is, do you expect revenue to kind of grow out the 2018 base for the 2021? Or would you expect the overall trajectory of revenues to kind of be lower given the 2020 difficult environment?

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Cynthia Tan, TuanChe Limited – IR Director [21]

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Let me translate first. (foreign language)

Jack, our CEO, Wei will take the questions.

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Wei Wen, TuanChe Limited – Co-Founder, Chairman & CEO [22]

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[Interpreted] We still cannot provide any forward-looking statement regarding the 2021 revenue. We don’t even provide an annual forecast right now.

As you can also understand, like just like in United States, the China pandemic is actually much more eased right now, but still — we still didn’t expect any vaccine coming out right away.

Yes, because there are huge uncertainties regarding the pandemic’s development, like just — we thought the pandemic is under control in all around China, but we have spotted new cases recently in June in Beijing, and that will have some really material impact on our business.

If the pandemic is under control for the year of 2021, then we’ll expect our business, especially our offline promotion events and offline auto shows will actually recover from the 2020 COVID situation, but we still don’t have any — like we don’t have — we cannot provide any comparison to the year of 2018 or 2019 because that’s — that would be a total different market situation back then.

Does that answer your question, Jack?

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [23]

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Yes. That’s very helpful. And I appreciate you taking a shot with my question as helpful as it could be. I understand we’re very early on. And then just one more question, kind of bigger picture. In terms of the strategic value proposition, historically, TuanChe has, on average, I believe, helped consumers save somewhere a little over 7% or so on average on the purchase price. When consumers purchase a vehicle at a TuanChe event versus, say, a third-party dealer or non affiliated dealer. Given the recent pandemic and its impact on the industry, is there any reason to expect that 7% or so savings that you’ve historically achieved to change in the future? And if so, what would be driving that?

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Cynthia Tan, TuanChe Limited – IR Director [24]

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Let me translate first. Thank you. (foreign language)

Mr. Wei will take the question.

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Wei Wen, TuanChe Limited – Co-Founder, Chairman & CEO [25]

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[Interpreted] Yes, this is a very good, but not very easy question.

Under current market situation, a lot of different OEMs have divided into 2 parties. One of them are still very stable and still even can achieve some kind of growth, but the other group may have suffering from current market situation.

For those really strong brands, that under very healthy situation the discounts may even like become smaller than previous years.

Just let me say the expense. The parts and even the whole car is imported as a whole. So under this current situation of pandemic, the actual inventory of imported cars is getting — the inventory is lower, so that the price are even stronger and more stable than ever.

And for some of the brands who is totally built domestically and for those brands who are very weak right now in the market, the discount is actually getting bigger.

From this point of view, overall, from our observations, the number of the OEMs that are under, like, difficulty or trouble is a little bit more than those who are more stable. So overall, from our perspective, the discount is getting larger.

But with the recovery of the auto market and when most of the OEMs actually survive this impact, the discount may shrink back to the normal situation or even smaller than we previously expected.

Does that answer your question, Jack?

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [26]

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Yes. Yes, it does. That was very helpful. I appreciate the color. That’s all my questions for now, guys.

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Cynthia Tan, TuanChe Limited – IR Director [27]

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Operator, do we have any more questions?

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Operator [28]

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No, there are no more questions in the queue. Is there a further — there are no further questions. Now I’d like to turn the call back over to management for closing remarks.

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Cynthia Tan, TuanChe Limited – IR Director [29]

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Thank you once again for joining us today. If you have any further questions, please feel free to contact TuanChe Investor Relations through the contact information provided on our website or the TPG relations. Thank you.

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Operator [30]

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This concludes the earnings conference call. You may now disconnect your line. Thank you.

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

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