Earnings Call Transcript - CANG Q4 2021

Operator, Operator

Good morning, and good evening, everyone, and welcome to Cango, Inc.’s Fourth Quarter and Full Year 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 Investor Relations 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 a 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 today as management will make forward-looking statements. With that being said, I’m now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Jiayuan Lin, CEO

Hi, everyone. Welcome to Cango’s Q4 and full year 2021 earnings call. During 2021, the ongoing COVID-19 pandemic and the fluctuating global political and economic landscape presented numerous challenges for individuals, businesses, and society as a whole. The automotive industry faced several obstacles, including chip and power shortages and persistent supply chain disruptions, with COVID-19 becoming a part of the new normal. Despite these challenges, we actively adapted to the changes and implemented significant adjustments within our organization. We initiated a transformation of our business by enhancing our platform strategy, and we are pleased to report substantial progress over the past year. We experienced impressive growth and notable advancement in our car trading transactions business, leveraging our extensive leadership network of nearly 50,000 car dealers, primarily serving lower-tier cities, alongside a wealth of industry expertise accumulated over the last decade. We utilized high-quality vehicle sources as an entry point, complemented by integrated automotive supply chain services to further support our dealers. This approach has led us to promote a comprehensive transformation of our business into a one-stop automotive transaction services platform. Simultaneously, in light of economic changes and stricter regulations, we have proactively adjusted our traditional automotive financing facilitation business since the end of Q2 2021 by closely managing our business scale and focusing on productivity enhancement. These efforts have improved the profitability of our traditional operations, allowing us to offer better quality services to dealers and enhance their loyalty. Our proactive business initiatives have effectively helped us navigate the challenging economic and market environment. In spite of these difficulties, we reported total revenues of RMB 1.05 billion in the fourth quarter, exceeding our guidance. Revenues from our car trading transactions were RMB 704 million, representing nearly 67% of total revenues. Our automotive financing facilitation and aftermarket services contributed RMB 252 million and RMB 36.73 million, respectively. Our net income for Q4 was RMB 124 million. For the full year, total revenues reached RMB 3.92 billion, reflecting an increase of over 91% year-on-year. During this transitional period, our car trading transactions business has been vital in establishing an ecosystem centered around Cango’s car trading platform, which has also been a key focus for us in 2021. Over the past year, we continued investing in developing both self-owned and third-party vehicle sources while enhancing our transaction-matching services. Our goal is to create diversified vehicle sources to satisfy dealer demand, particularly in lower-tier markets, while also attracting more dealers to join our platform and increase their commitment. In Q4 2021, revenues from car trading transactions grew by 28.7% year-on-year, with total revenues for the full year nearly quadrupling compared to the previous year. Within just one year, our car trading transactions business has become a significant driver of revenue growth and pivotal to our business transformation, accounting for 67% of total revenue. Last May, we launched our B2B WeChat mini program called Cango Haoche, which serves as the main gateway to our platform. It organically combines a digital intelligence platform with a ground service network to create a closed loop of online matching and offline transactions for dealers, offering comprehensive services across transactions, logistics, finance, and insurance. By the end of Q4, Cango Haoche engaged with 6,394 dealers across 31 provinces and 305 cities. Since its launch, Cango Haoche has garnered over 2 million cumulative views, and 31% of dealers actively utilized the service in Q4. Our platform features 53 self-owned vehicle models, including 13 car brands and 24 ranges of models. Among these brands, nine are new energy vehicle brands. We have also strengthened our in-house warehousing and logistics capabilities, establishing 93 warehouses across 91 cities by the end of Q4. Through Cango Haoche, dealers can find their desired car models in as little as 30 minutes, with automatic matching to the nearest warehouse, often resulting in same-day delivery. Additionally, our low-cost vehicle display service with free shipping enables dealers to diversify their showroom models and enhance their customer attraction and retention. More than 400 dealers have expressed interest in this display service, with nearly 100 currently utilizing Cango display vehicles. Besides our established dealership network, we have expanded our customer base through our independent sales representative initiative, bolstering our own private traffic acquisition and operational capabilities. By the end of Q4, our sales reps network was active across 12 provinces, involving over 21,000 sales representatives and 905 sub-dealers. During Q4, we hosted nine in-person experience events featuring new energy vehicle brands in six provinces, showcasing brands such as ARCFOX and Xpeng, resulting in numerous matched orders. By integrating online private traffic with offline community experiences, our online-to-offline model has proven to be successful, creating a tightly-knit traffic group. Regarding our traditional automotive financing facilitation business, anticipating market and regulatory shifts, we made strategic adjustments since the end of Q2 2021. We have shifted our focus from scale to quality, aiming to strengthen our resilience and operational efficiency through technological tools and process restructuring. In Q4, we facilitated financing transactions totaling RMB 5.733 billion, a decline of 7.7% quarter-over-quarter. As of December 31, 2021, the total outstanding balance for Cango facilities financing transactions was RMB 46.702 billion. In terms of our dealer network, by the end of last year, we collaborated with 45,930 car dealers across China, with 9,844 being foreign dealers, including 846 luxury brand dealers. In terms of asset quality, our M1+ and M3+ overdue ratios saw slight increases to 1.62% and 0.86%, respectively, primarily influenced by product mix adjustments and challenging macroeconomic conditions, but we anticipate these ratios to stabilize in the coming quarters. Turning to our aftermarket services segment, we continued to seek additional collaboration opportunities with new energy vehicle manufacturers during Q4 through our insurance facilitation services. We integrated the Cango insurance service portal into Li Auto’s app and will complete integration with the Hi-Fi system in March, with discussions ongoing with other NEV manufacturers. Additionally, as a key supply chain offering of our auto transaction services platform, we are focused on enhancing our dealer service capabilities in the aftermarket segment. Our insurance portal has been incorporated into Cango Haoche and Cango Go Plus dealer tools. In the last quarter, we bundled auto insurance products with vehicle group sales, successfully launching customized insurance products for foreign dealers. Moving forward, we will continue to expand our auto service network to increase dealer engagement and activity. The market volatility stemming from COVID-19 and chip supply chain issues significantly impacted the car market, especially in lower-tier cities, in 2021. This year marked a significant shift in our complete focus towards becoming a car trading platform. Faced with unprecedented market changes, we took a deliberate approach to assess internal impacts and navigated uncertainties to set our goals. At the China Automotive Industry Summit 2021, we received the Outstanding Car Transaction Innovative Service Provider Award, highlighting industry recognition of our successful transformation into a platform business. In the next stage of our platform development, we will continue to strengthen our core competencies. We will leverage Cango’s established channel networks and service capabilities within lower-tier markets and develop sales capabilities for new energy vehicles in these areas. This will involve providing dealers with differentiated vehicle sources that align with local demand and supporting NEV manufacturers with last-mile services in lower-tier markets. We will also implement a mechanism to enhance dealer loyalty through systems that ensure prompt online responses and effective offline service implementation to directly tackle their challenges. Our plan is to extend the three major business segments to offer competitive supply chain services that effectively empower our dealers with the resources and support necessary for their development. Looking ahead, we will work on optimizing the ecosystem of our car transaction services platform, utilizing our supply chain and vehicle sourcing advantages while continuously enhancing our systems, tools, and service operational capabilities. Our commitment is to further empower our dealership partners and deliver high-quality branded auto-related services to consumers. Next, I'll hand the call over to our Chief Financial Officer, Michael Zhang, to review our financial performance.

Michael Zhang, CFO

Thanks, Jiayuan. Hello, everyone, and welcome to our fourth quarter and full year 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. During the quarter, macroeconomic headwinds continued and the global chip shortage has directly impacted China’s automotive industry. Facing external pressure, we continue to make steady progress in the fourth quarter with top line beating our previous guidance. Fourth-quarter total revenue was RMB 1,050.5 million. Looking at the quarterly performance of our three core businesses, revenues from car trading transactions were RMB 703.9 million, continuing to serve as an important growth driver and playing a key part in our business transformation through our platform model. Revenues from automotive financing facilitation and aftermarket services facilitation were RMB 252 million and RMB 36.7 million, respectively. Now let’s move on to our cost and expenses during the quarter. Total operating costs and expenses in the fourth quarter 2021 were RMB 1,207.6 million, compared to RMB 899 million in the same period in 2020. This was mainly due to the related costs incurred by the car trading transactions business. Cost of revenue in the fourth quarter of 2021 increased to RMB 880.7 million from RMB 723.8 million in the same period 2020 as a percentage of total revenue. Cost of revenue in the fourth quarter of 2021 was 83.8%, compared to 66% in the same period 2020. The change was primarily due to an increase in the number of car trading transactions. For automotive financing facilitation and aftermarket services facilitation, cost of revenue as a percentage of relevant revenues was around 54.1% in the fourth quarter of 2021. Sales and marketing expenses in the fourth quarter 2021 were RMB 73.8 million, compared to RMB 65.8 million in the same period in 2020. As a percentage of total revenue, sales and marketing expenses in the fourth quarter of 2021 were 7%, compared to 6% in the same period 2020. General and administrative expenses in the fourth quarter 2021 were RMB 86.1 million, compared to RMB 90.1 million in the same period in 2020. As a percentage of total revenue, general and administrative expenses in the fourth quarter of 2021 remained flat at 8.2% compared with the same period 2020. Research and development expenses in the fourth quarter 2021 were RMB 23.6 million, compared to RMB 23 million in the same period in 2020. As a percentage of total revenue, research and development expenses in the fourth quarter of 2021 were 2.2%, compared to 2.1% in the same period 2020. Net loss on risk assurance liability in the fourth quarter of 2021 was RMB 84.6 million, compared to a net gain of RMB 18.8 million in the same period of 2020. The loss was mainly due to a sequential increase in default rates over the last quarters. We recorded a loss from operations of RMB 157 million in the fourth quarter of 2021, compared to an income of RMB 198.4 million in the same period 2020. This decrease was mainly due to loss on risk assurance liabilities and provision for credit loss, as well as the decrease in gross profit margin of our automotive financing facilitation and aftermarket services facilitation business. Due to the fair value change of the company’s investment in Li Auto, net income in the fourth quarter of 2021 was RMB 124.1 million. Non-GAAP adjusted net income in the fourth quarter of 2021 was RMB 147.3 million. On a per-share basis, diluted net income per ADS in the fourth quarter of 2021 was RMB 0.87 and diluted non-GAAP adjusted net income per ADS in the same period was RMB 1.04. For the full year of 2021, our total net revenue increased by 91.1% year-over-year to RMB 3.9 billion. Total operating costs and expenses were RMB 3.9 billion. Net loss was RMB 8.5 million, and non-GAAP adjusted net income was RMB 79.1 million. Diluted net loss per ADS was RMB 0.06, and diluted non-GAAP adjusted net income per ADS was RMB 0.54. Moving on to our balance sheet. As of December 31, 2021, we had cash and cash equivalents of RMB 1.4 billion, compared to RMB 906.4 million as of September 30, 2021. As of December 31, 2021, the company had a short-term investment of RMB 2.6 billion, compared with RMB 3.6 billion as of September 30, 2021. Looking ahead to the first quarter 2022, we expect our total revenue to be between RMB 700 million and RMB 750 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.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question will come from Shelley Wang with Morgan Stanley. Please go ahead.

Shelley Wang, Analyst

Thank you. I’m Shelley Wang. I have three questions. First, what is your outlook for the contributing transactions business in 2022, specifically regarding sales and gross margin? Second, in Q4, I noticed the company made quite high provisions, and in Q1 this year, I observed that the company's revenue guidance is quite conservative. On what basis did you create such a cautious forecast? Is it due to a more negative outlook on macroeconomic conditions, which could impact demand, or is it related to concerns about the consequences of the company's business transition? Which factor is more significant in your projections? Lastly, can you provide an update on your collaboration with NEV manufacturers? Are there any new business partnerships? Thank you.

Unidentified Company Representative, Company Representative

So Mr. Lin said that he will take the first and third question, and Michael will take the second question.

Jiayuan Lin, CEO

Okay. In 2021, we sold around 23,000 vehicles, which included 5,742 NEVs. The total sales volume for the year was 23,166. Currently, our gross margin is approximately 1%. Although the gross margin on car transactions is low right now, there is significant potential for Cango in lower-tier markets, which we are well-positioned to pursue due to our strengths in market size and marketing capability. Looking ahead to 2022, we anticipate continued pressure on the auto market due to the global chip shortage, although the impact on NEVs is expected to be less severe. We will concentrate on enhancing our NEV sales capabilities in lower-tier markets and aim to establish a system that increases dealer loyalty. Additionally, we will implement training programs for dealers to strengthen our brand image and foster dealer commitment. Regarding our collaboration with NEVs, we have maintained close relationships with NEV manufacturers over the years and are working to integrate our products into their systems. We plan to purchase battery power from our NEV partners and expand our partnerships. In terms of car trading with NEVs, we have been leveraging our extensive network, particularly in lower-tier cities, to connect dealers with car buyers on our platform. We are collaborating with various NEV brands like ARCFOX and Xiapeng, focusing on integrating dealer and consumer resources in lower-tier markets to create a service loop that enhances our offerings, including car sourcing, financial services, and insurance. This is the foundational idea behind our business. Now I will pass it to Michael.

Michael Zhang, CFO

Okay. I will take the second question and divide my answer into two parts. The first part concerns our provision for bad debt in Q4. You are correct that we have increased our provision for bad debt in Q4 for two main reasons. First, we've seen signs of deterioration in the credit cycle within lower-tier markets, which includes a decline in our customer base and an increase in the overdue ratio when looking at the numbers quarter by quarter. The second reason relates to collection efforts. Due to the pandemic's outbreak in various regions of China, our collection performance has been negatively affected, contributing to the rising overdue ratio. Based on a prudent approach, we've opted to increase our provisions for Q4 to account for the changes in asset quality and the external environment. The second part addresses our conservative revenue guidance for Q1, based on two key factors. Firstly, we anticipate weak demand from lower-tier markets, particularly for our trading services and facilitation business, given the various market pressures. Overall, we are not optimistic about market demand in 2022. Secondly, our internal strategic transformation is a factor. Last year, we shifted our strategy from a focus on the facilitation business to one that prioritizes car trading, service, and aftermarket capabilities. Consequently, we have been reducing the facilitation business, which carries higher credit risks, especially in light of the changes in the credit cycle. Moving forward, we will place less emphasis on high-risk business lines and more on trading and service operations. This strategic shift will, in the short term, negatively impact our expected revenue. Combining these two factors—market demand expectations and the strategic transformation—has led to our new revenue guidance for Q1.

Operator, Operator

The next question will come from David Pan with Goldman Sachs. Please go ahead.

David Pan, Analyst

Thank you. I have three questions. The first question is about your outlook for the loan facilitation business. In Q4, we observed some changes in this business, both year-on-year and quarter-over-quarter. You have also mentioned changes in asset quality and the pressures you are facing. What is your future plan for the loan facilitation business? Currently, the company is doing well with your strategic transformation, but I've noticed that the contribution from the loan facilitation business to your total revenue has decreased, and the growth trend has also changed. What is your plan for the loan facilitation business over the next few years? Will you continue this business or consider exiting it? My second question concerns cash and cash equivalents. By the end of 2021, the company still held approximately RMB 1.43 billion in cash and cash equivalents. What is your plan for utilizing this cash? Lastly, my third question is about the Holding Foreign Companies Accountable Act and the regulations regarding the listing of holding foreign companies. Could you discuss the impact of this new act on your business?

Jiayuan Lin, CEO

Thank you, David, for your questions. I will address the first question and leave the second and third to Michael. Due to changes in macroeconomic conditions, we have decided to reduce the size of our loan facilitation business. However, we will not completely abandon this segment, as non-facilitation businesses are crucial to the fundamentals of our group. Moving forward, we will focus more on lower-risk options within loan facilitation to enhance efficiency. Additionally, as we evolve into a trading platform, we will still depend on the loan facilitation business to drive our growth. Providing trading services requires us to maintain the loan facilitation aspect as well. We will continue to see loan facilitation as a key contributor to our future growth. Now I’ll hand over to Michael.

Michael Zhang, CFO

Thank you, David, for your questions. I want to address the first question briefly. Yes, as Jiayuan mentioned, we will continue the loan facilitation business, but we are redefining its role within our overall business strategy. We are now focusing more on trading and the service platform. In our updated business model, trading takes precedence, and loan facilitation will be integrated as a part of trading for our customers. Essentially, the loan facilitation business will serve as an extension of our trading and service platform, providing us with additional revenue opportunities. We are committed to enhancing productivity and efficiency in the operation of this loan facilitation business, particularly in terms of cost control. This outlines our future approach to the loan facilitation business. Regarding your second question about our cash balances, we will prioritize using cash to support our strategic development needs. We will assess where cash is required to facilitate our business growth and to cover capital expenditures as we transition our business model. Additionally, we plan to use our cash resources to capitalize on potential external partnership opportunities. As for your third question regarding HFCAA, we have seen some media coverage on this act. However, we have not received any inquiries from the NYSE or any regulators. We will continue to monitor regulatory developments and plan accordingly in response to regulatory changes in various markets. For now, our primary focus will be on maintaining open communication with regulators and collaborating with them.

Operator, Operator

The next question comes from Tim Moore with Zacks. Please go ahead.

Tim Moore, Analyst

Thank you. I have four questions, which I’ll ask individually. My first question is similar to what Shelley was asking about. Your revenue growth guidance for the first quarter seems a little bit light. We’re aware of the macro slowdown and the Olympics and Chinese New Year impacts. So what I was really kind of wondering is, are you skipping or turning away possibly half of the business opportunities in the loan facilitation business as part of your transformation and in order to avoid maybe some write-downs from credit cycle tightening in some cities? I just want to get a better sense of how active and intentional you’re really skipping business on the loan side rather than macro pressure.

Unidentified Company Representative, Company Representative

We recognize the macroeconomic slowdown and the effects of the Olympics and Chinese New Year. I'm curious if you are intentionally bypassing potentially half of the business opportunities in loan facilitation as part of your transformation to avoid write-downs from tightening credit cycles in certain cities. I’d like to understand how much of your decision to skip business in loans is based on strategy versus macroeconomic pressures.

Jiayuan Lin, CEO

Well, as we explained earlier, we decided to contract or reduce the size of this loan facilitation business partly because of the macroeconomic condition changes as well as the changes in the credit cycle. However, we will not give up this business. Because we still have a lot of core competencies in the loan facilitation business. We will not simply give them up. So our plan is that when the market is down – in a downturn, we will contract our business correspondingly. However, when the market recovers, we will expand our business again. In addition, as I’ve explained earlier, we are transforming our business model. And in transforming ourselves into a trading platform, the financial services or loan facilitation business is actually an inseparable part of these trading services. So that’s it from me. I will now hand over to Michael.

Michael Zhang, CFO

Thank you, Tim. I want to add a few points on this. First, we have made significant changes to our loan facilitation business. We initiated a reduction in this area for reasons our CEO has clearly explained. Additionally, we believe we are at the beginning of a new credit cycle, and we aim to quickly lower our credit risk exposure in a short timeframe. Our current outstanding balance for the loan facilitation business is approximately RMB 45 billion, with RMB 25 billion to RMB 30 billion of that amount representing credit risk assurance liabilities we need to cover. Therefore, we need to implement rapid changes to the loan facilitation business to reduce our risk exposure, which is why we've made these substantial adjustments in our Q1 guidance. Lastly, our goal is to minimize credit risk as quickly as possible within our business model.

Tim Moore, Analyst

Okay. Thank you. That was very helpful for that point. My next question relates to your closed-loop one-stop shop, which is very differentiated including your logistics, warehousing, and last-mile service for dealers. I’m hoping that you could share some examples or actions that you’re taking or you plan to take to accelerate the penetration of auto trading into your dealer network. I believe you have auto trading in about 6,000 or so of your dealerships. And it seems like it could go to 15,000 or 20,000 over time, at least half the dealership base maybe a couple of years out. So just wondering maybe what you’re doing to really move that needle faster maybe on the auto trading penetration.

Unidentified Company Representative, Company Representative

I'm hoping you could share some examples or actions you're taking or plan to take to accelerate the adoption of auto trading within your dealer network. I believe auto trading is currently in about 6,000 of your dealerships, and it seems like it could potentially reach 15,000 or 20,000 over time, covering at least half of the dealership base in a couple of years. I'm curious about what you’re doing to expedite that growth in auto trading adoption.

Jiayuan Lin, CEO

Thank you, Tim, for your question. Our car trading business is a natural extension of the loan facilitation business we've built over the past 10 years. Through our efforts, we have developed strong capabilities in auto loan facilitation and insurance services. Additionally, we've established relationships with over 50,000 dealers in lower-tier markets and enhanced our in-person service capabilities, all of which are crucial for our car trading business. This sets us apart from many competitors. Regarding our specific initiatives, we have been organizing training programs for our service personnel to align with our car trading business development needs. For example, we focus on improving cooperation with car dealers. With continued investment in capacity and resources, we aim to utilize our traditional loan facilitation capabilities to support the growth of our car trading business. As for our last mile service for car dealers, one example is the display service we've implemented based on our understanding of dealer needs. In terms of warehousing services, we've created a robust system and database to effectively manage our facilities. For dealers without long-term relationships with us or for smaller orders, we offer a self-service option where they can visit our warehouse and pick up their vehicles. That's all from me, and I will now hand it over to Michael.

Michael Zhang, CFO

We have developed a system and a strong database to effectively organize our warehousing facilities. For dealers who don’t have a long-term relationship with us or for smaller purchase orders, we offer a self-service option that allows them to come to our warehouse and pick up the car themselves. That’s all from me, and I will now hand it over to Michael.

Tim Moore, Analyst

Great. Thank you for elaborating on that important topic. My other two questions were already answered, so I don’t have any further questions. Thanks.

Unidentified Company Representative, Company Representative

I don’t have a long-term relationship with us, and for some purchase orders that are not large in volume or value, we offer a self-service option for the dealers. They can come to our warehouse and pick up the car themselves. Now, I will hand over to Michael. Thank you for elaborating on that important topic. My other two questions were already answered, so I don’t have any further questions. Thanks.

Brent Lee, Analyst

Okay. I have just one question about the company. I noticed that the company has reduced its holding in Li Auto. What is your perspective on Li Auto's future development?

Jiayuan Lin, CEO

We reduced our holding in Li Auto as part of our investment decisions. However, we will continue to maintain our close strategic partnership with Li Auto. We remain optimistic about the development of new energy vehicles and the market, including the automotive sector. That concludes today’s conference call. Thank you all for your attention.

Michael Zhang, CFO

Okay. Thank you.

Operator, Operator

The conference call has concluded. Thank you for your participation. You may now disconnect.