Cango Inc. Q1 FY2021 Earnings Call

Good morning and good evening, everyone. Welcome to Cango Incorporated First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. This call is also being broadcast live on the company's IR website. Joining us today are Mr. Jiayuan Lin, Chief Executive Officer; and Mr. Yongyi Zhang, Chief Financial Officer of the company. Following management's prepared remarks, we will conduct the Q&A session. Before we begin, I refer you to the safe harbor statement in the company's earnings release, which also applies to the conference call today as management will make forward-looking statements. With that said, I'm now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Joining us today are Mr. Jiayuan Lin, Chief Executive Officer, and Mr. Yongyi Zhang, Chief Financial Officer of the company. Following management's prepared remarks, we will conduct the Q&A session. Before we begin, I refer you to the safe harbor statement in the company's earnings release, which also applies to the conference call as management will make forward-looking statements. With that said, I'm now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Hello, everyone, and welcome to Cango's 2021 first quarter earnings call. China's gradual economic recovery and various targeted stimulus policies are set to more widely revive auto consumption across the country in 2021. As a result, auto sales surged as consumer spending continued to gain momentum in the first quarter of 2021. However, we also noticed that the pressure on the supply side caused by the auto part shortage has increased and may bring uncertainties in the overall pace of the industry's recovery. At Cango, we made steady progress across our business lines in the first quarter, with total revenues growing to RMB 1.1 billion, surpassing the high end of our previous guidance range by approximately 7%. Operating income maintained growth in the quarter and came in at RMB 160 million, compared to a loss from operations of RMB 81.3 million in the same period of 2020. The net loss for the quarter was RMB 274 million, primarily due to an investment loss of RMB 447 million in Li Auto. Since our inception, Cango has focused on building a reliable, efficient, and exceptional automotive transaction services platform. These core values remain crucial to us as we aim to provide consumers with innovative products and excellent customer service, while also advancing China's automotive industry by linking dealers, financial institutions, OEMs, and other industry resources. We are firmly committed to our long-term vision and have continued to steadily implement our business development plans during the quarter, deepening our presence across our three main business lines: car trading, transaction services, and automotive financing facilitation, forming a closed loop with our services. Consequently, we are transforming the relationships among different stakeholders along the auto value chain while creating value for all. Let me elaborate. First, I would like to discuss our car trading transaction business, which is Cango's main growth driver. Car trading transactions generated revenues of RMB 572 million in the first quarter, accounting for approximately 50.9% of total revenues. By bridging supply and demand in the auto market and leveraging our technology-driven online platform and extensive dealership network in lower-tier markets, we have formed close partnerships with various traditional car manufacturers and new energy vehicle makers. Building on this foundation, we have integrated all participants along the car trading transaction chain to explore innovative channel strategies in lower-tier markets. In April, Cango entered a strategic agreement with Zhengzhou Nissan to jointly develop a new retail model for automotive transactions in China's lower-tier markets. Under this agreement, both parties will collaborate and innovate in automotive sales and marketing in those markets by developing a new automotive retail model. Additionally, Cango will provide auto financial products and services to all customers of Zhengzhou Nissan's certified secondary dealer stores. Meanwhile, we are currently negotiating potential collaborations with various other OEMs. During the first quarter, we also continued to enhance our service capabilities related to car trading transactions. Our independent sales representatives now cover over 10 provinces, bringing private traffic flow that targets more segmented customer groups. By the end of the first quarter, we had more than 10,000 independent sales reps and 456 sub-dealers. The ongoing expansion of our traditional dealership network, combined with the private traffic generated by our independent sales reps, allows us to effectively reach our customers and offer higher quality products and services in lower-tier markets. Furthermore, we have improved the layout of our warehouse and logistics. By the end of the first quarter, we had co-developed 101 warehouses with a capacity of approximately 33,000 parking spaces, covering 79 cities across the country, enhancing our distribution network in lower-tier markets. As China's auto market transitions from meeting the needs of first-time buyers to addressing replacement and upgrade demands, there is significant growth potential in aftermarket services. With a network of nearly 50,000 registered dealers nationwide and over 1.8 million automotive financing customers, aftermarket services facilitation has become an essential part of our auto transaction services platform. In Q1, aftermarket services facilitation revenues reached RMB 62.5 million. We optimized the organizational structure and operational mechanisms of our sales team during the quarter, leading to a notable increase in per capita productivity. We are also deepening our cooperation with NEV manufacturers by embedding auto insurance products and services into their mobile apps, helping them better serve their customers and improve overall efficiency. Additionally, we are exploring aftermarket services more deeply to uncover new opportunities and create a new industrial ecology of people, auto, and life. Lastly, our automotive financing facilitation business showed steady growth this quarter. We facilitated RMB 10.4 billion in financing transactions, representing a 134% year-on-year increase. Our automotive financing facilitation revenues were RMB 412 million, up 243% year-on-year. As of March 31, the total outstanding balance of financing transactions facilitated by the company reached RMB 47.5 billion. Regarding asset quality, as of March 31, the M1+ and M3+ overdue ratios increased to 1.23% and 0.54%, respectively. To address the rising overdue ratio, we are enhancing on-site and channel controls, alongside implementing additional digital measures such as feature recognition engines and model improvements for better risk management. We have also established a dedicated team focused on improving the efficiency of post-loan collection. In terms of our dealer network, we are striving to enhance network efficiency. Consequently, we have terminated relationships with dealers that do not meet our standards for client service, traffic quality, and traffic generation capabilities. By the end of the first quarter, we had 47,017 registered dealers. We have also expanded into higher-end segments with innovative product offerings. As of March 31, we covered over 9,000 foreign dealers from approximately 40 high-end OEMs, including Mercedes-Benz and BMW, and established partnerships with several leading dealer groups in China. Recently, smart and new energy vehicles were prominently featured at the 2021 Shanghai International Auto Show. With government-supported policies, China has become the world's largest manufacturer and market for NEVs for several consecutive years, accounting for over 50% of the global total. Cango remains optimistic about the vast potential in this market and is collaborating with leading NEV makers in China to leverage each other's strengths and explore new distribution channels in lower-tier markets. Looking ahead, we anticipate that the impact of international supply chain uncertainty will persist. The chip shortage in the automotive industry is likely to continue for an extended period, which could affect our overall business. Simultaneously, the domestic financial supply and regulatory landscape is undergoing significant changes. We will closely monitor the situation and actively respond, proactively enhancing our efforts to address uncertainties and keep up with evolving industry trends through continuous product innovations, which positions us to achieve our established strategic growth goals. With that, I will now turn the call over to our CFO, Michael Zhang, for a detailed review of our financial performance.

Thanks, Jiayuan. Hello, everyone, and welcome to our first quarter 2021 earnings call. Before I start to review our financials, please note that unless otherwise stated, all numbers are in RMB terms and all percentage comparisons are on a year-over-year basis. We are excited about our solid start to the year as first quarter revenues surged 357% year-over-year to reach a new record high of RMB 1.1 billion, once again exceeding our guidance range. Our car trading transaction business continued to perform well and served as a crucial growth driver with revenue contribution climbing to more than 50% of total revenue at RMB 571.6 million. Revenues from our auto financing facilitation and aftermarket services facilitation were also robust at RMB 411.7 million and RMB 62.5 million, respectively, in the first quarter. Now let's move on to our cost and expenses during the quarter. Total operating cost and expenses in the first quarter 2021 were RMB 964.2 million compared to RMB 327.3 million in the same period of 2020. The increase was mainly due to the related costs incurred by our car trading transaction business primarily as a result of increase in revenues from our car trading transactions. Sales and marketing expenses, general and administrative expenses, and research and development expenses each decreased as a percentage of total revenue in the first quarter of 2021 compared to the same period last year. Cost of revenue in the first quarter of 2021 increased to RMB 769 million from RMB 90.6 million in the same period 2020. As a percentage of total revenue, cost of revenue in the first quarter was 68.4% compared to 36.8% in the same period 2020. The change was primarily due to an increase in the amount of car trading transactions. For automotive financing facilitation and aftermarket services facilitation, cost of revenue as a percentage of relevant revenues was around 35.6% in the first quarter 2021. Sales and marketing expenses in the first quarter of 2021 were RMB 57.8 million compared to RMB 45.8 million in the same period 2020. As a percentage of the total revenue, sales and marketing expenses in the first quarter of 2021 was 5.1% compared to 18.6% in the same period 2020. General and administrative expenses in the first quarter 2021 were RMB 61.4 million compared to RMB 57.4 million in the same period 2020. As a percentage of total revenue, general and administrative expenses in the first quarter 2021 was 5.5% compared to 23.3% in the same period 2020. Research and development expenses in the first quarter 2021 were RMB 13.6 million compared to RMB 12.6 million in the same period 2020. As a percentage of total revenues, research and development expenses in the first quarter of 2021 was 1.2% compared to 5.1% in the same period 2020. Net loss on risk assurance liability in the first quarter of 2021 was RMB 21.7 million compared to a net loss of RMB 76.9 million in the same period 2020. Net loss on risk assurance liability in the first quarter 2021 was mainly due to an uptick in delinquent loan balance and default rate since the beginning of 2021. We recorded income from operations of RMB 159.5 million in the first quarter of 2021 compared to a loss from operation of RMB 81.3 million in the same period of last year. Due to the fair value change of the company's investment in Li Auto, we recorded a net loss of RMB 273.9 million in the first quarter of 2021. Non-GAAP adjusted net loss in the first quarter of 2021 was RMB 254 million. On a per share basis, diluted net loss per ADS in the first quarter of 2021 was RMB 1.84 and diluted non-GAAP adjusted net loss per ADS in the same period was RMB 1.7. Moving onto our balance sheet. As of March 31, 2021, we had cash and cash equivalents of RMB 1.6 billion compared to RMB 1.4 billion as of December 31, 2020. As of March 31, 2021, the company had short-term investments of RMB 2.6 billion compared to RMB 4.3 billion as of December 31, 2020. The decrease was mainly due to the partial disposal and the change in fair value change of the company's investment in Li Auto. Looking ahead to the second quarter of 2021, we expect our total revenues to be between RMB 900 million and RMB 950 million. Please note that this forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks.

Your first question comes from Shelley Wang with Morgan Stanley. Please go ahead.

I'm Shelley Wang from Morgan Stanley. I have two questions. The first question is about your outlook for demand in the second half of 2021, specifically related to your business in auto loan facilitation. Additionally, I would like to know your outlook for demand in lower-tier cities. The second question concerns your partnership and collaboration with manufacturers of new energy vehicles. We understand that these manufacturers typically use a direct sales model. How does your collaboration with these NEV makers differ from your work with traditional car manufacturers?

To answer your first question, we see that demand in the auto markets remains strong, but we have concerns about the supply side. We believe that the pressure from insufficient supply will likely continue for some time. Additionally, the chip shortage is an issue. We think that demand for high-end brands and foreign stores in major cities will be prioritized, which means that domestic auto brands in lower-tier markets are likely to face more pressure in the second half of this year. To answer your second question regarding traditional auto manufacturers, we are expanding our alternative financing facilitation business through our nationwide dealership network. This collaboration is primarily offline. However, when it comes to working with NEV manufacturers, we utilize an online-based model. NEV manufacturers adopt a direct selling approach and have their own showrooms, accompanied by a straightforward process that allows customers to complete test driving and vehicle ordering online. We are currently enhancing our partnership with NEV manufacturers by integrating auto insurance products and services into their mobile app, which helps them better provide these offerings to their customers. This collaboration model not only enhances overall efficiency but also aligns with our partners' business strategies. In the direct selling model, our automotive financing facilitation service is integrated into the car owners' platform, which contributes to an increase in our shares.

Your next question comes from Derek Su with Goldman Sachs. Please go ahead.

This is Derek from Goldman. I have two short questions. First, regarding the car trading business, I would like to know more about the margin. Specifically, what is the cost of purchasing cars and what is the average selling price? Additionally, what is the guidance for 2021? My second question pertains to aftermarket services. Do we have plans to expand services beyond insurance sales, such as collaboration with repair stores?

Thank you, Derek. To address your first question, we have various pricing strategies for our car trading transaction business that differ by car model and region. Our approach is informed by our research results and our team's judgment. Our priority is to support dealers by securing low prices from OEMs and sharing more profits with them to enhance their trading capabilities. In the first quarter, the gross margin for our car trading transaction business improved to approximately 1.3%. We anticipate that the ongoing chip shortage in the auto industry will affect our operations, but we are also advancing our partnerships with several OEMs. If everything proceeds as planned, we expect the annual trading volume to reach 45,000 units. In response to your second question regarding our aftermarket service range, we are currently concentrating on insurance products, but we are also exploring information referral and maintenance services. This initiative is still in its early development stages. Since the beginning of the year, we have launched pilot vehicle delivery and repair services in select regions. As we continue to grow our business and expand our market, we aim to integrate resources and standardize management and services across our partner workshops. We will also invest in selecting suitable partners and progressively develop auto part components services, auto care services, and vehicle driving services. Overall, we intend to offer a comprehensive array of services for our aftermarket facilitation business.

Thank you. We have no further questions at this time. I will hand the call back to management for closing remarks.

Thank you for joining us. That concludes the Q1 2021 earnings call.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.