Cango Inc. Q4 FY2023 Earnings Call

Good morning and good evening, everyone. Welcome to Cango Inc.'s Fourth Quarter and Fiscal Year 2023 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 be making forward-looking statements. With that said, I am now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Hello everyone and welcome to Cango's fourth quarter earnings call. 2023 was a year marked by resilience despite various challenges. While long-term economic recovery is on the way, both domestic and international factors led to a temporary slowdown, resulting in slower growth and decreased consumer confidence. The traditional vehicle market continued to shrink, while new energy vehicles saw a rise in market share, intensifying competition. Price wars became commonplace in auto sales, prompting necessary industry restructuring. This environment favored larger companies, leading to a survival of the fittest scenario. Dealerships, especially smaller ones in lower-tier markets, faced significant operational hurdles in the latter half of the year. In spite of these market difficulties, Cango achieved total revenue of RMB130 million in Q4 and RMB1.7 billion for the entire year. The company strategically lowered its total outstanding financing balance of facilitated-financing transactions to around RMB10 billion by year-end. Our quarterly metrics remained stable with M1+ and M3+ delinquency rates at 2.66% and 1.37%, respectively, further reducing our risk exposure. To navigate this dynamic market, Cango implemented stringent cost reduction measures and enhanced efficiency, successfully lowering operating expenses. Importantly, Cango maintains a strong financial position supported by solid liquidity and ample cash reserves. As of December 31st, 2023, the company reported RMB3.33 billion in cash and cash equivalents, including investments and restricted cash. This robust financial foundation positions us well for sustainable growth in our existing businesses and enables exploration of new ventures. To respond to changing market conditions and seize industry trends, we took proactive steps to improve our operations, such as clearing new car inventory and consolidating our platforms into a single, powerful solution. In Q4, we successfully merged our new car platform, Cango Haoche, into Cango U-Car, our used car platform. This strategic move optimizes resource allocation and enhances operational efficiency. The upgraded Cango U-Car app now operates as a comprehensive online marketplace connecting vehicle suppliers, aftermarket service providers, and dealers in lower-tier cities. This integrated platform offers users a complete range of services throughout the used car transaction process, including online auctions, dealer-to-dealer transactions, and broker-assisted deals. Cango U-Car offers more than just transaction facilitation. We provide a comprehensive ecosystem of services that includes access to vehicle history reports, vehicle evaluation and inspection, logistics and delivery, insurance solutions, and supply chain financing. Our revenue will mainly come from upstream store rentals, membership subscriptions, and transaction-related service fees. We streamlined operations within the integrated Cango U-Car platform in Q4, introducing a fixed price end-to-end transaction service for cross-regional used car purchases with innovative services that simplify and secure long-distance transactions through price verification, vehicle inspection guarantees, and delivery services. By Q4, 38 upstream third-party sellers established stores on Cango U-Car, offering a diverse collection of vehicles, including new and used cars, alongside traffic generation services. Utilizing our sales funnel management expertise, we identified 9,887 potential business leads in Q4 and successfully converted a significant portion, providing services to 3,499 online small dealers and facilitating 530 used car transactions. In addition to attracting third-party services, we are enhancing engagement and exploring new opportunities through our self-operated stores. These stores offer diverse services in four main areas: repossession car management, C2B lead conversion, B2B transaction support, and expanded insurance services covering auto and non-auto options for key regional clients. At Cango U-Car, we recognize that an exceptional user experience relies on a strong technological foundation. In Q4, we launched a central AI platform that leverages our digital expertise to optimize resource matching for vehicle inventory, customer leads, and auto financing. This technology, combined with our streamlined and intelligent transaction services, aims to establish a nationwide network for efficient used car circulation. Furthermore, we are committed to supporting small dealerships by offering services that help them lower operating costs and diversify revenue streams during challenging market conditions, ultimately improving their survival rates and overall success. Cango's vision is to become an industry leader by continuously enhancing our services and products across the automotive value chain. Cango U-Car's online marketplace is just one facet of our growth strategy. We see considerable potential in China's expanding used car export market, which contrasts with the intense competition in the domestic market. China, as the world’s largest auto manufacturer and consumer, has a vast inventory of used cars, creating significant opportunities for exporters. Additionally, government policies are shaping a more regulated used car market, resulting in increased quality and reliability of vehicles that can compete globally. Coupled with China's strong auto manufacturing and parts supply chain, used car prices remain competitive worldwide. Moreover, China's leading position in international trade and well-developed logistics network ensures efficient and secure delivery of used cars to overseas buyers. In 2023, over 5 million vehicles were exported, with an upward trend anticipated—signifying strong prospects for the used car export market. Acknowledging this potential, Cango is actively pursuing this exciting new venture. By leveraging our extensive network within China's domestic auto market and our status as a U.S.-listed company, we have launched a comprehensive used car information exchange and export service platform. This platform integrates both online and offline resources specifically for auto dealers in emerging and developing markets. Partnering with Cango provides international dealers easy access to China's extensive pool of used vehicles, presenting a crucial advantage in today’s global market. We launched AutoCango, our cross-border used car information exchange platform, in early March 2024, boasting an inventory exceeding 75,000 SKUs. This platform continues to grow with approximately 500 to 1,000 new vehicles added weekly. Employing advanced AI technology, AutoCango offers users an intuitive search experience, simplifying the process of finding the ideal car. Furthermore, the platform emphasizes user interaction, ensuring it meets evolving customer needs. Transparency, efficiency, and security are central to AutoCango. We are dedicated to delivering a seamless and secure experience for all users, aiming to become the preferred platform for international buyers seeking high-quality used cars from China. While we recognize the current market complexities, we remain optimistic about the long-term prospects for China’s auto industry and Cango’s end-to-end service model. In 2024, we intend to strengthen our position within the auto transaction market, lead digital innovation, leverage AI to enhance our platform and user experience, and expand our offerings by introducing new products and services throughout the value chain. By collaborating with our dealer partners, these initiatives will enable us to create significant value and establish ourselves as a key player in China’s rapidly evolving technology-driven automotive sector. Now, I will turn the call over to our Chief Financial Officer, Yongyi Zhang, for a review of the company's financial performance.

Thanks Jiayuan. Hello everyone and welcome to our fourth quarter and full year 2023 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. Total revenue in the fourth quarter of 2023 was RMB130.2 million compared with RMB487.1 million in the same period of 2022. Guarantee income, which represents the fee income earned on a non-contingent aspect of a guarantee, was RMB42.1 million in the fourth quarter. Now, let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the fourth quarter of 2023 were RMB159.1 million compared with RMB698.7 million in the same period of 2022. Cost of revenue in the fourth quarter decreased to RMB110.9 million from RMB481.7 million in the same period of 2022. As a percentage of total revenues, cost of revenue in the fourth quarter of 2023 was 85.1% compared with 98.9% in the same period of 2022. Sales and marketing expenses in the fourth quarter decreased to RMB4.4 million from RMB19.2 million in the same period in 2022. As a percentage of total revenues, sales and marketing expenses in the fourth quarter of 2023 were 3.4% compared with 4% in the same period of 2022. General and administrative expenses in the fourth quarter decreased to RMB45.6 million from RMB66.2 million in the same period of 2022. As a percentage of total revenues, general and administrative expense in the fourth quarter of 2023 was 35% compared with 13.6% in the same period of 2022. Research and development expenses in the fourth quarter decreased to RMB7.3 million from RMB8.4 million in the same period of 2022. As a percentage of total revenues, research and development expenses in the fourth quarter of 2023 were 5.6% compared with 1.7% in the same period of 2022. Net loss on contingent risk assurance liability in the fourth quarter was RMB22.2 million. Net recovery on provisions for credit losses in the fourth quarter was RMB31.2 million. The recovery was primarily due to the positive impact of collections of financing receivables. We recorded a RMB28.9 million loss from operations in the fourth quarter of 2023 compared with a loss of RMB211.6 million in the same period of 2022. The net loss in the fourth quarter was RMB103.8 million. The non-GAAP adjusted net loss in the fourth quarter was RMB99.2 million. On a per share basis, basic and diluted net loss per ADS in the fourth quarter of 2023 was both RMB0.95 respectively, and non-GAAP adjusted basic and diluted net loss per ADS in the same period was both RMB0.91 respectively. For the full year of 2023, our total net revenue was RMB1.7 billion, total operating costs and expenses were RMB1.8 billion, net loss was RMB37.9 million, and non-GAAP adjusted net income was RMB0.6 million. Basic and diluted net loss per ADS was both RMB0.31, and non-GAAP adjusted basic net income per ADS was RMB0.01 and non-GAAP adjusted diluted net income was RMB0, respectively. Moving on to our balance sheet. As of December 31st, 2023, the company had cash and cash equivalents of RMB1 billion compared with RMB665.6 million as of September 30th, 2023. As of December 31st, 2023, the company had a short-term investment of RMB635.1 million, while the company had restricted cash. Current bank deposit held for short-term investment was RMB1.7 billion. As of September 30th, 2023, the company had a short-term investment of RMB2.4 billion. Looking ahead to the first quarter of 2024, we are now predicting our total revenues to be between RMB50 million and RMB100 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.

Thank you. Your first question comes from Pingyue Wu from Citic Securities. Please go ahead.

Thank you. Your next question comes from Emerson Zhou from Goldman Sachs. Please go ahead.

Thank you. I'm Emerson from Goldman Sachs. I have three questions. First, we noticed that the company has entered a strategic partnership with Caocao Mobility. Can the management share some details on the progress? Second, we observed that the company currently holds a significant cash position, while it also issues dividends. My third question is about the differences in Cango U-Car before and after integration.

Thank you, Emerson for your questions. The first question, while Caocao Mobility is a leading domestic shared mobility platform, it provides users with smarter, greener, and healthier travel experiences, and Cango is a powerhouse in automotive trading and aftermarket services. Our extensive network and vast vehicle inventory will enable us to jointly pursue business opportunities in China's high-growth, lower-tier markets. Currently, IT teams from both parties are working together on the back-end system and program development. We will provide regular updates to keep everyone informed of the latest developments as they unfold. Regarding your second question, since going public, we've established a track record of rewarding shareholders with consistent dividends to solidify confidence in Cango's long-term growth trajectory. For further dividend plans, we will maintain a prudent approach, carefully considering factors like overall strategic plans, business developments, and our cash flow position to ensure a sustainable dividend policy. On your third question, prior to integration, Cango U-Car operated as a stand-alone platform dedicated to used car transactions, including sourcing vehicles, facilitating car purchases, and hosting online auctions. After the integration, Cango U-Car has transformed from a used car platform into a comprehensive marketplace that features third-party sellers offering new car sales, insurance, and traffic generation services. We are committed to continuing the expansion of this ecosystem by integrating even more third-party vendors, fostering a more dynamic and enriching user experience. Thank you.

Thank you. Your next question comes from Pingyue Wu from Citic Securities. Please go ahead.

I'm Pingyue from Citic Securities. I have two questions. First, could management share insights on the 2023 automotive market and provide an outlook for 2024? My second question is about the progress of the used car export business. Has the company considered collaborating with some influencers?

Thank you for your questions. On your first question, despite the slow start in 2023, the automotive market gained momentum towards the end of the year and into early 2024. This growth was driven by various promotional activities from car manufacturers. We expect these price cuts to continue for a while. However, the fierce competition in the industry has led to margin pressures for many players across the supply chain. Regarding the outlook for 2024, the penetration rate of new energy vehicles has been increasing significantly, rising from 28% in 2022 to 35% in 2023, and is projected to hit 40% by 2024. This rapid change is heightening competition within both the new energy vehicle and conventional fuel vehicle markets. While traditional gasoline vehicles are still profitable, their market share is declining quickly. New energy vehicles are seeing strong sales growth, but manufacturers are currently facing considerable losses. These contrasting dynamics are putting significant pressure on the overall market. On your second question about our used car export business, in March 2024, we launched AutoCango, an innovative cross-border information exchange platform for the used car market. AutoCango connects domestic Chinese used car dealers with international buyers, specifically targeting auto dealers in left-hand drive markets across emerging economies. Leveraging China's status as the largest auto market globally, AutoCango provides international buyers with easy access to a wide selection of quality used cars. Our platform, supported by advanced AI technology, enhances user experience by improving vehicle discovery, search efficiency, and user interaction to meet changing customer demands effectively. AutoCango emphasizes transparency, efficiency, and security throughout the entire transaction process, ensuring a seamless experience for everyone involved. Regarding partnerships, we are open to opportunities that meet our criteria: first, profitability, as we focus on ventures with clear business models and transparent cost structures; second, long-term growth potential. To ensure efficient resource allocation, we also conduct regular evaluations within set time frames. Thank you.

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

Thank you all for your participation. That concludes today's earnings call.