Cango Inc. Q1 FY2022 Earnings Call

Good morning and good evening, everyone. Welcome to Cango, Inc.'s First Quarter 2022 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. Michael 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.

Hi, everyone. Welcome to Cango's First Quarter 2022 Earnings Call. The global situation brought by the pandemic and the very large economic and geopolitical uncertainties can be described as complex and evolving during the first quarter. Domestically in China, we are also facing a challenging macro environment. In particular, the outbreak of Omicron has affected the nation since March, with lockdowns in certain regions bringing great pressure and impact on society as a whole, including individuals and businesses alike. The automotive industry is still under the shadow of a chip shortage, which is disrupting industrial production and the supply chain caused by the COVID-19 resurgence. On the supply side, auto companies in Shanghai and Jilin have stopped manufacturing at a large scale since mid-March. Although many OEMs have accelerated the resumption of operations and manufacturing since April, the overall decline in auto production is still difficult to reverse. A greater challenge comes from the demand side. Consumer confidence has been severely impacted, and their enthusiasm for purchasing has dropped sharply. Since the beginning of the year, the overall market environment has been tougher than we had anticipated. The phased decline in consumer credit levels and repayment ability, caused by an economic downturn and an evolving regulatory regime, has prompted us to make strategic adjustments since last year. We are shrinking the size of our traditional automotive financing facilitation business, strengthening risk control measures, and enhancing our efforts within overdue asset collection to strictly control risks. At the same time, we have established a new strategic goal, which is to focus on building a tech-enabled car trading platform, with car trading transaction business at its core and monetizing through multiple channels, including financing and insurance. Turning to our first-quarter financial performance, we achieved total revenues of RMB 788 million, beating the high end of our guidance. Revenues from our car trading transactions business were about RMB 599 million, accounting for over 76% of total revenues, becoming our major revenue contributor. Revenues from our automotive financing facilitation and aftermarket services facilitation businesses were about RMB 110 million and RMB 25.78 million, respectively. NEVs totaled about RMB 440 million, mainly due to increased provisions for credit losses. As of March 31, 2022, the M1+ and M3+ overdue ratios for all financing transactions that remain outstanding and were facilitated by the company were 176% and 0.8%, respectively. The slide could clearly show the increase of M1+ was consistent with the overall trend of the economy and the market. In the meantime, the gross margin of our car trading transaction business is on the low side at present. While our investments in early-stage infrastructure development for our platform are relatively high, which, to some extent, drags on the bottom line. I would like to share some information on the progress of both platform business and traditional non-platform business. Our initiatives and efforts in the past few quarters are bearing fruit. We are very pleased that our automotive transaction services platform has been taking shape in the first quarter. The platform's efficiency and operating capacity continued to improve. As the main online traffic entrant to the platform, our B2B WeChat Mini Program can combine various services efficiently, covering proprietary car sources, third-party car sources, transaction facilitation, warehousing, and logistics services, etc. Since its launch, Cango Haoche has established a positive reputation among dealers. The cumulative number of deals for Cango Haoche has exceeded 2.76 million. As of the end of the first quarter, Cango Haoche has engaged with 7,435 dealers in 31 provinces and 306 cities. There are 33 proprietary vehicle models on Cango Haoche, including 9 car brands and the selling car series. In the first quarter, we continued to expand dealer coverage and enhance their activity. This quarter, the newly registered dealers on our platform grew by more than 50% quarter-over-quarter, mainly driven by the increase of 4S dealers, which accounted for more than two-thirds of the newly registered dealers within the quarter. At the same time, thanks to the combination of online operation and offline marketing, the daily activity of our platform users in the first quarter rose month by month, and quarterly dealer activity increased by 9% from the previous quarter. With the expansion of our dealer coverage, we have also expanded our offline warehouse and logistics network further. As of the end of the first quarter, a total of 103 warehouses have been established in 33 provinces and 98 cities across the country. At the same time, our logistics operation capacity has also improved. In the first quarter, the logistics order demand and transaction volume on Cango Haoche increased by 120% and 227%, respectively, from the previous quarter. In order to better understand the needs of the dealers and customize our services in the first quarter, we conducted in-depth profile analyses of our dealers in the network. We classified and graded them based on our locations, sizes, historical transaction preferences, etc. This analysis then guided our activities such as brand cooperation, car sourcing, and warehousing and logistics allocation, thus helping us provide more customized services to dealers. Going forward, we will continue to improve the platform operating efficiency based on big data analysis. In addition to the progress of the platform operations I've just mentioned, in the first quarter, we also continued to invest in building the platform proprietary products and services, including proprietary vehicle sources supporting financial insurance supply chain services as well as third-party products and services such as third-party vehicle sourced listings, car search, logistics, and other management services. On the proprietary services side, in the first quarter, 6,827 vehicle units were sold, including 5,193 new energy vehicles. Helping small and medium-sized NEV brands to penetrate into the lower-tier markets is one of the priorities of our car trading transaction business going forward. In terms of third-party products and services, the platform's activity increased significantly in this quarter, with the number of third-party vehicle listings and car search entries increasing by 624% and 22%, respectively, on a quarter-by-quarter basis. At the same time, during the transition process to an auto transaction services platform, the positioning of our traditional automotive financing facilitation business and insurance facilitation business has also changed. We no longer develop these businesses as independent segments. Instead, we integrate them into a full package of supply chain capabilities centered around auto transactions. Specifically, in combination with the strategic transformation and current market conditions, we have reduced the size of our financing facilitation business. Meanwhile, we are reengineering the business process to make it more efficient, coupled with our car trading transactions business. The adjustments are also reflected in our numbers. In the first quarter, revenues from our automotive financing facilitation business declined quarter-by-quarter to RMB 106 million. On the dealer side, we have encouraged our offline dealers to leverage our platform to publish car inventory searches for vehicles and engage with other dealers online. In the meantime, for high-quality car dealers on our platform, we took the initiative to match them with financing, insurance, and other supply chain services to increase their stickiness. As of the end of the first quarter, we have worked with 44,771 car dealers throughout China, of which 8,687 were 4S dealers. We have also been gradually promoting the migration of these dealers to our Cango Haoche platform. Similarly, in the aftermarket services sector, we have also restructured the business process centering on car transactions, and we are looking to promote the closer integration of car transaction financing and insurance to provide more integrated supply chain solutions for dealers. In the third quarter, the number of auto insurance orders remained flat quarter-by-quarter. But what's worth mentioning is that following the reform of the auto insurance premiums, the business potential in this area has been quickly compressed, and the main opportunities we see our presence are in the field of NEVs. So in the past few quarters, we have been exploring cooperation opportunities in terms of insurance products for NEV brands. Our presence in system integration with DOT and Hi-Fi has been completed, and negotiations with more NEV brands such as Neta, Saloon and Pixo J are in progress. At the same time, we have launched a pilot program in several provinces, including Liuzhou and Shanxi, to help auto maintenance stores and car garages explore opportunities in new cars and used car selling. This initiative has expanded our offline presence in the aftermarket services sector and enhanced our capability in providing delivery and after-sale services for NEV brands in the lower-tier markets. As mentioned earlier, whether it's automotive financing or insurance business, we will rely on the car trading transaction business to achieve monetization, which will be our core strategy going forward. The current round of the pandemic has lasted for more than two months. The provision and control measures have had a great impact on the economy in the second quarter. There are a lot of uncertainties in the global economy, and the impact of the international supply chain continues. We expect the economy to face greater downward pressure in the coming quarters. For the automotive market, losses caused by the pandemic in key areas are substantial, with the year-on-year decline in total vehicle sales as high as 47.6% in April. The decline slowed in the first half of May; sales volume still fell by more than 20% year-on-year, while the pandemic is gradually being brought under control and work on production is gradually resuming. The impact on consumption and consumer confidence is longer-term, and it will take time to recover. Overall, we believe the pandemic's impact will be medium to long-term, and it will have a major impact on our overall business. We expect revenues to continue to decline sequentially in the second quarter, which is expected to be in line with the decline in the overall automotive market. We are also cautious about full-year 2022. In the face of a more complex macro environment, we will continue to strengthen business risk management in all areas and continue to develop our platform capabilities. Lastly, we are close to completing the development of our independent car trading services app, Cango Haoche, and we expect it to go live very soon. We will update you on this progress in our second-quarter earnings call. Now I will turn the call over to our Chief Financial Officer, Michael Zhang, for a review of the company's financial performance.

Thanks, Jiayuan. Hello, everyone, and welcome to our first-quarter 2022 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. Entering 2022, the economic upheaval, global chip shortage, and the resurgence of COVID-19 in China have brought immense challenges to companies across all industries. Together with the deliberate strategic steps taken to adjust our traditional automotive financing facilitation business, these factors have significantly impacted our top-line revenues in the first quarter. Looking at the quarterly performance of our three businesses, our car trading transactions division, which delivered revenues of RMB 599.3 million, plays an essential role in our transformation to a platform model. In addition, revenues from our automotive financing facilitation and aftermarket service facilitation businesses were RMB 105.9 million and RMB 25.8 million, respectively. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the first quarter of 2022 were RMB 976.8 million compared with RMB 964.2 million in the same period of 2021. Cost of revenue in the first quarter of 2022 decreased to RMB 687 million from RMB 769 million in the same period of 2021. As a percentage of total revenue, cost of revenue in the first quarter of 2022 was 87.2% compared with 68.4% in the same period of 2021. The change was primarily due to an increase in car trading transactions sharing of total revenues. Car trading transactions normally present a higher cost revenue ratio, thus pushing up the overall ratios. For automotive financing facilitation and aftermarket service facilitation, cost of revenue as a percentage of relevant revenue was around 54.2% in the first quarter of 2022. Sales and marketing expenses in the first quarter of 2022 were RMB 53.8 million compared with RMB 57.8 million in the same period in 2021. As a percentage of total revenue, sales and marketing expenses in the first quarter of 2022 were 6.8% compared with 5.1% in the same period of 2021. General and administrative expenses in the first quarter of 2022 were RMB 50.9 million compared with RMB 61.4 million in the same period of 2021. As a percentage of total revenue, general and administrative expenses in the first quarter of 2022 were 6.5% compared with 5.5% in the same period of 2021. Research and development expenses in the first quarter of 2022 were RMB 14.5 million compared with RMB 13.6 million in the same period in 2021. As a percentage of total revenues, research and development expenses in the first quarter of 2022 were 1.8% compared with 1.2% in the same period of 2021. Net loss on risk assurance liabilities in the first quarter of 2022 was RMB 98.9 million compared with RMB 21.7 million in the same period of 2021. Net loss on risk assurance liabilities was mainly due to a sequential increase in the default rate since 2021. We recorded a loss from operations of RMB 189.1 million in the first quarter of 2022 compared with income of RMB 159.5 million in the same period of 2021. Net loss in the first quarter of 2022 was RMB 136.2 million. Non-GAAP adjusted net loss in the first quarter of 2022 was RMB 113.3 million. On a per-share basis, diluted net loss per ADS in the first quarter of 2022 was RMB 0.98, and diluted non-GAAP adjusted net loss per ADS in the same period was 0.81%. Moving on to our balance sheet. As of March 31, 2022, we had cash and cash equivalents of RMB 2.1 billion compared with RMB 1.4 billion as of December 31, 2021. As of March 31, 2022, the company had short-term investments of RMB 1.9 billion compared with RMB 2.6 billion as of December 31, 2021. Looking ahead to the second quarter of 2022, the related COVID surge has drawn China's car market into disarray with factory shutdowns and sales plunging, and we, along with our dealers, are facing a much more difficult operating environment. We are now predicting our total revenue to be between RMB 250 million and RMB 300 million. Please note that this forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Operator, we are now ready to take questions.

Our first question will come from Shelley Wang with Morgan Stanley. Please go ahead.

I'm Shelley from Morgan Stanley, and I have three questions. The first question is about the impact on demand and supply from the government policy to have the car sales tax. For example, on the demand side, in the second half of this year, do you think there will be more demand for your car trading business and also car loan facilitation business, and what do you expect the extent of the impact to be? On the supply side, we actually continue to expect chip shortage in the second half of this year, so that will have an impact on the supply of cars even after the demand for cars goes up in the second half of this year. Do you expect adequate supply of cars in the second half of this year for your car trading business? Also, do you see any signs of improvement based on data from the first week of June? The second question is, we noticed that in the first quarter, your car financing facilitation business went downward. Is this a temporary phenomenon, or is it part of your permanent strategic transformation process? The third question is also on strategy. What part of the business will be your priorities in the next three to five years?

Thank you, Shelley, for your three questions. I will answer them one by one. Firstly, regarding the supply of petrol cars, there is still a supply shortage of traditional petrol cars, and we don't expect the issue to be resolved in the short term. The problems stem from a mismatch of supply and demand. For those models with lot inventory, it’s still difficult to sell in the market, while for popular car models, we cannot find enough supply. To address this issue, we will continue to work on sourcing new energy vehicles and address the problems of loan inventory vehicles while trying to find more sources for used cars. On your second question, yes, the traditional car loan facilitation business is reducing, and this is part of our strategic transformation. Our strategic vision now is to become the customers' car purchase platform of choice by building a constantly evolving data-enabled car trading platform centered around our car trading transaction business and supported by our insurance and financing business as multiple monetization channels. We expect our car loan facilitation business to go through this process. In the shorter term, it will decline quite quickly, but after reaching a plateau, its growth will stabilize, and then it will continue to grow steadily.

Our next question will come from Sophia Xu with Goldman Sachs. Please go ahead.

Sophia from Goldman Sachs. I have three questions covering two areas regarding business development. The first question is on car trading transactions. First of all, congratulations on your Q1 revenue performance. Your Q1 revenue actual revenue beat your expectations. On car trading transactions, many players in this area have started to adopt the B2B2C model. What about Cango? Do you have any plans to adopt this B2B2C model as well? If you do, what kind of organizations will be included in the B side? What types of dealers do you plan to involve in this model? The second and third questions are on the car loan or car financing facilitation business. The second question is that during the last earnings call, you mentioned that the company would scale down the auto financing facilitation business to manage risks. What about the overall deal ratio performance of the new loans in Q1? Is it showing signs of improvement? What about the overall overdue ratio trend in Q1? Do you see any slowdown in these overdue ratios? The third question is again on the auto loan or financing facilitation business. If you continue to downsize your financing facilitation business, what do you expect the impact on your revenues and profitability to be in the future?

Thank you, Sophia, for your questions. On your first question, the B2B2C model will be our endpoint as we transform our platforms. Over the past decade, we have worked hard to connect different participants in the platform and have integrated them into our B2B models, including banks, insurance companies, and dealers. Our ultimate goal is to build a sustainable platform for all these various players. Therefore, we are working diligently to integrate all those participants into our value chain. Specifically, our parties could include the auto OEMs, banks, insurance companies, mid- and small-sized dealers, and, of course, the car owners or consumers. Additionally, we are also collaborating with warehousing and logistics service providers, and they are our partners. Regarding your second question, we have ramped up our efforts on underwriting and approving loans. In other words, we are stricter than ever before in approving those loans. The quality of the loans should be much better than before. However, it is too early to tell the exact quality of the loans, and we still need at least nine months for the loans to demonstrate their performance. So right now, it's still too early to say. We are also working on collections, and as a result, we have seen a slight improvement in our M1+ ratio over the past few months, while we have seen improvement in the M3 ratio thanks to our collection efforts. However, the M1+ ratio has gone up slightly, largely because of the pandemic. On your third question, this restructuring is part of the company's strategic transformation. If you look at the economic indicators, they clearly reflect this conclusion. There is strong evidence showing that our strategic transformation is in line with market development. While in the short term, a reduction in our highly profitable auto loan facilitation business will have a negative impact on profitability, this is only a short-term concern. We are working diligently to control our costs. In the long term, as we continue to expand our business, particularly our car trading business and related insurance and aftermarket services, we expect profitability to rise again. Overall, we expect profits to decline in the short term, but in the long term, profitability and revenue will recover and trend upwards.

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

Thank you all for your attention and participation.

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