Earnings Call Transcript - CANG Q3 2023

Operator, Operator

Good morning and good evening, everyone. Welcome to Cango Inc's Third Quarter 2023 Earnings Conference Call. 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. Before we begin, I refer you to the safe harbor statement and the company's earnings release, which also applies to the conference call today as management will make forward-looking statements. As a reminder, today's conference is being recorded. With that said, I am now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Jiayuan Lin, CEO

Joining us today are Mr. Jiayuan Lin, Chief Executive Officer, and Mr. Yongyi Zhang, Chief Financial Officer of the company. Before we begin, I refer you to the safe harbor statement and the company's earnings release, which also applies to the conference call today as management will make forward-looking statements. As a reminder, today's conference is being recorded. With that said, I am now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Unidentified Company Representative, Company Representative

Hello, everyone, and welcome to Cango's Third Quarter 2023 Earnings Call. In the third quarter of 2023, both production and demand continue to be under strength. Despite the introduction of economic stimulus measures, overall consumer confidence has yet to fully recover.

Jiayuan Lin, CEO

Unidentified Company Representative, Company Representative

The automotive market in China is characterized by intricate dynamics. Although the post-pandemic era in 2023 saw a resurgence in consumer demand for automobiles, it has been slow to pick up pace. As a result, major auto manufacturers have rolled out discount policies on new car purchases, leading to a sustained decrease in retail prices. In the first three quarters, the overall sales in the automotive market exhibited a modest recovery with new energy vehicles, NEVs in short, and exports serving as the primary driver of market growth.

Jiayuan Lin, CEO

The post-pandemic era in 2023 saw a resurgence in consumer demand for automobiles, but it has been slow to pick up pace. As a result, major auto manufacturers have implemented discount policies on new car purchases, leading to a sustained decrease in retail prices. In the first three quarters, the overall sales in the automotive market exhibited a modest recovery, with new energy vehicles and exports serving as the primary driver of market growth.

Unidentified Company Representative, Company Representative

On distribution, the profitability of car dealers have been severely impacted by pricing wars. Consequently, they have transitioned towards an on-demand vehicle purchasing to alleviate inventory accumulation and operational stress. As per data released earlier by the China Automobile Dealers Association, 50% of auto dealers reported losses in the first half of this year, the highest level in recent years. Indeed, the impact extends beyond car dealers. All parties in the automotive value chain, including Cango, have faced unprecedented pressure.

Jiayuan Lin, CEO

The automotive industry has been significantly affected by pricing wars. As a result, businesses have shifted to an on-demand vehicle purchasing model to reduce inventory buildup and operational strain. According to data from the China Automobile Dealers Association, half of the auto dealers reported losses in the first half of this year, marking the highest rate in recent years. The impact is felt across the entire automotive value chain, including Cango, which has also experienced immense pressure.

Unidentified Company Representative, Company Representative

In Q3 2023, the company's total revenues amounted to RMB 354 million, marking a year-on-year decline of 15.1%. Despite incurring a net loss of RMB 49.09 million due to goodwill impairment, our overall operating efficiency and reduced financial provisions helped us achieve a smaller net loss compared to RMB 130 million in the same period of last year. As of September 30, 2023, we managed to shrink the total outstanding balance of financing transactions to RMB 13.1 billion while maintaining M1+ and M3+ at a steady rate of 2.42% and 1.24%, respectively.

Jiayuan Lin, CEO

The year-on-year decline was 15.1% to 354 million. Even though we faced a net loss of RMB 49.09 million due to goodwill impairment, our improved operating efficiency and lower financial provisions allowed us to reduce our net loss compared to RMB 130 million from the same period last year. As of September 30, 2023, we successfully decreased the total outstanding balance of financing transactions to RMB 13.1 billion while keeping M1+ and M3+ stable at rates of 2.42% and 1.24%, respectively.

Unidentified Company Representative, Company Representative

Since the beginning, we have strived to gain an in-depth understanding of dealers' needs. In 2022, we initiated a significant transformation of our business by venturing into the automobile trading segment. To facilitate new car trading activities, we launched the Cango Haoche App and mini program and gradually introduced standardized service products from October 2022. With our multisystem, all-in-one platform, Cango offers a comprehensive one-stop solution for automotive transactions across the country. Presently, we have built a robust network of warehouses and logistics operations in nearly 100 cities across 31 provinces with over 11,000 registered new car dealers.

Jiayuan Lin, CEO

We launched the Cango Haoche App and mini program to support new car trading activities and gradually introduced standardized service products starting in October 2022. With our multisystem, all-in-one platform, Cango provides a comprehensive one-stop solution for automotive transactions nationwide. Currently, we have established a strong network of warehouses and logistics operations in almost 100 cities across 31 provinces, working with over 11,000 registered new car dealers.

Unidentified Company Representative, Company Representative

In relation to used car transactions, we launched the Cango U-Car mini program in May 2022. And by the end of 2022, we introduced the Cango U-Car App to the market, equipped with a range of features, such as used car listings, car searches, online auctions, transaction support services and digital services. Cango U-Car introduced a wide array of business needs for used car dealers. To date, the total number of registered used car dealers on our platform has surpassed 7,000.

Jiayuan Lin, CEO

In relation to used car transactions, we launched the Cango U-Car mini program in May 2022. By the end of 2022, we introduced the Cango U-Car App to the market, equipped with a range of features, such as used car listings, car searches, online auctions, transaction support services, and digital services. Cango U-Car introduced a wide array of business needs for used car dealers. To date, the total number of registered used car dealers on our platform has surpassed 7,000.

Unidentified Company Representative, Company Representative

As we are continuing to expand our product and service offerings across the entire industry value chain and strengthen our partnerships with dealers, we are gaining a more precise understanding of the market. The new car market in China is reaching saturation with a significant decline in first-time new car buyers. However, we noticed an increasing trend among consumers to expand their car collection as well as a growing demand for vehicle replacement upgrades. Both foreign exchange and non-foreign exchange dealers are exploring used car business. While used car dealers are venturing to the sale of new cars, traditional boundaries between car sales channels are becoming increasingly blurred.

Jiayuan Lin, CEO

The new car market in China is reaching saturation with a significant decline in first-time new car buyers. However, we noticed an increasing trend among consumers to expand their car collection as well as a growing demand for vehicle replacement upgrades. Both foreign exchange and non-foreign exchange dealers are exploring the used car business. While used car dealers are venturing into the sale of new cars, traditional boundaries between car sales channels are becoming increasingly blurred.

Unidentified Company Representative, Company Representative

In light of the changing market trends and demand, we have made some adjustments to our strategy. Our goal is to offer a comprehensive end-to-end service for both new and used car dealers across the country. To achieve this, we have integrated our offerings on the Cango Haoche platform into the Cango U-Car platform. This integration upgrade will allow us to focus our resources on Cango U-Car and significantly enhance operational efficiency. Moving forward, we aim to develop a multi-store model and expand our ecosystem beyond self-operated stores. This will include vehicle sources, insurance services and more by welcoming more third-party stores to our platform. As of now, some regional logistics companies and car generation service providers have already joined our community. Their feedback is highly valuable as it allows us to continually refine our offerings and improve our supply chain services, ultimately enabling downstream dealers to better serve end customers.

Jiayuan Lin, CEO

We aim to implement a multi-store model and broaden our ecosystem beyond self-operated stores. This will involve vehicle sources, insurance services, and more by integrating additional third-party stores into our platform. Currently, several regional logistics companies and car generation service providers have already become part of our community. Their feedback is invaluable as it helps us enhance our offerings and improve our supply chain services, ultimately allowing downstream dealers to better serve end customers.

Unidentified Company Representative, Company Representative

During the third quarter of 2023, we sold 2,399 new cars, including 27 vehicle models across 18 auto brands at 23 car series. In the first nine months of 2023, we sold a total of 12,138 cars, including 3,151 new energy vehicles. In terms of used cars, the auction transaction volume on the Cango U-Car platform reached nearly 300 in the third quarter of 2023, doubling quarter-over-quarter. We also facilitated over 600 transactions, marking a 20% increase quarter-over-quarter.

Jiayuan Lin, CEO

Unidentified Company Representative, Company Representative

As we continue to improve our online services and supply chain management while fostering greater synergies across online and offline operations, we are building a self-reinforcing, closed-loop ecosystem. In addition to strategic and service upgrades, we remain committed to accelerating our digitalization and leveraging advanced technologies to empower business. With a focus on big data and technological innovation, we are fully dedicated to standardizing our services and optimizing our processes. Our ultimate goal is to achieve heightened productivity and operational excellence, in turn enabling our partners to achieve increased efficiency. In September, our innovative digital product, AI Asset Guard, won the 2023 CDI Product Digital Innovation Award. This recognition is a testament to the digital innovations that we have implemented across our business operations.

Jiayuan Lin, CEO

We are fully dedicated to standardizing our services and optimizing our processes. Our ultimate goal is to achieve heightened productivity and operational excellence, enabling our partners to achieve increased efficiency. In September, our innovative digital product, AI Asset Guard, won the 2023 CDI Product Digital Innovation Award. This recognition is a testament to the digital innovations that we have implemented across our business operations.

Unidentified Company Representative, Company Representative

In the future, we will leverage the power of big data and digital technologies to more accurately classify our dealer partners and launch value-added products and services tailored to their specific needs. Additionally, we will actively explore new areas to seek growth opportunities, including the potential expansion into used car markets abroad. By continuously refining our business operations, elevating profitability and strengthening our core competitive edges, we are confident that we can secure the sustained momentum required to navigate the ever-evolving business environment.

Jiayuan Lin, CEO

We will accurately classify our dealer partners and launch value-added products and services tailored to their specific needs. Additionally, we will actively explore new areas to seek growth opportunities, including the potential expansion into used car markets abroad. By continuously refining our business operations, enhancing profitability, and strengthening our core competitive advantages, we are confident that we can maintain the sustained momentum required to navigate the ever-evolving business environment.

Unidentified Company Representative, Company Representative

Next, I will hand over to Michael Zhang, our CFO, for a review of the company's financial performance.

Yongyi Zhang, CFO

Thanks, Jiayuan. Hello, everyone, and welcome to our third quarter 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. Our total revenues for the third quarter were RMB 353.6 million. Among them, revenues from the car trading transaction business were RMB 263.8 million or 74.6% of total revenues. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the third quarter 2023 were RMB 441.4 million compared with RMB 608.8 million in the same period 2022. Cost of revenue in the third quarter 2023 was RMB 304.6 million compared with RMB 388.7 million in the same period 2022. As a percentage of total revenues, cost of revenue in the third quarter 2023 was 86.1% compared with 93.3% in the same period 2022. Sales and marketing expenses in the third quarter 2023 decreased to RMB 9.9 million from RMB 17.9 million in the same period 2022. As a percentage of total revenues, sales and marketing expenses in the third quarter 2023 were 2.8% compared with 4.3% in the same period 2022. General and administrative expenses in the third quarter 2023 decreased to RMB 34.7 million from RMB 57.8 million in the same period 2022. As a percentage of total revenues, general and administrative expenses in the third quarter 2023 were 9.8% compared with 13.9% in the same period 2022. Research and development expenses in the third quarter 2023 decreased to RMB 7 million from RMB 10.2 million in the same period 2022. As a percentage of total revenues, research and development expenses in the third quarter 2023 were 2% compared with 2.4% in the same period 2022. Net loss on contingent risk assurance liability in the third quarter 2023 was RMB 3.5 million. Net recovery of provision for credit losses in the third quarter 2023 was RMB 66.9 million. The recovery was primarily due to the positive impact from the collections of financing receivables. Impairment loss from goodwill in the third quarter 2023 was RMB 148.7 million. The provision for goodwill impairment is based on the profit forecast associated with historical trends and the prevailing current conditions of market downturn. We recorded loss from operations of RMB 87.8 million in the same period 2023 compared with RMB 192.3 million in the same period 2022. Net loss in the third quarter 2023 was RMB 49.1 million. Non-GAAP adjusted net loss in the third quarter 2023 was RMB 41.2 million. On a per-share basis, basic and diluted net loss per ADS in the third quarter 2023 were both RMB 0.45, respectively, and non-GAAP adjusted basic and diluted net loss per ADS in the same period were both RMB 0.38, respectively. Moving on to our balance sheet. As of September 30, 2023, we had cash and cash equivalents of RMB 665.6 million compared with RMB 589.4 million as of June 30, 2023. As of September 30, 2023, the company had short-term investments of RMB 2.43 billion compared with RMB 2.06 billion as of June 30, 2023. Looking ahead to the fourth quarter of 2023, we are now predicting our total revenues to be between RMB 100 million and RMB 150 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. Operators, we are now ready to take questions.

Operator, Operator

And today's first question comes from Peng Yu with CIC Securities.

Unidentified Analyst, Analyst

Let me translate my question. My first question is about how do we think about the auto market for the fourth quarter 2023. And what about next year? And will the price war between the OEMs continue? My second question is about what's our dividend plan for this year?

Jiayuan Lin, CEO

This concludes our prepared remarks. Operators, we are now ready to take questions. And today's first question comes from Peng Yu with CIC Securities. Let me translate my question. My first question is about how we think about the auto market for the fourth quarter 2023. What about next year? Will the price war between the OEMs continue? My second question is about our dividend plan for this year?

Unidentified Company Representative, Company Representative

Thank you very much for your questions. To answer your first question on our outlook for the auto market for next quarter and next year. In the third quarter, we saw a slowdown in passenger vehicles retail sales volume growth, and sales for the fourth quarter were boosted by the National Day holiday and the Singles' Day shopping festival. As the market is approaching year end with strong sales promotions, we expect the strong discounts to continue driving a quarter-over-quarter increase in sales volumes. And for our outlook for next year, well, I would like to share my thoughts from two perspectives. First, we think new energy vehicles will continue to outperform according to the CPCA, that is China Passenger Car Association, data. As of the end of September, NEVs market penetration rate has already reached 36.9%. And their growth momentum is expected to continue throughout next year driven largely by more targeted and effective incentive policies for national and regional governments. Secondly, on the used car market, we expect it to continue to grow. For the first nine months of this year, used car total sales volume exceeded 13 million with the total market gross market value close to about RMB 860 billion. This is a $1 trillion market, and we expect our China used car market still has great growth potential.

Jiayuan Lin, CEO

Foreign Language

Unidentified Company Representative, Company Representative

On your second question about the dividend payment, well, since our IPO, Cango has distributed cash dividends totaling nearly USD 500 million. Meanwhile, since April 2021, the company has been actively rewarding our investors, improving stock value in various ways, including share repurchase program. Looking ahead, Cango will remain prudent regarding financial management and continue to enhance capital allocation efficiency. We will prioritize investments in areas with high ROI and value, creating long-term shareholder value.

Operator, Operator

And our next question comes from Emerson Zhou with Goldman Sachs.

Unidentified Analyst, Analyst

The company has been actively rewarding our investors and improving stock value in various ways, including a share repurchase program. Looking ahead, Cango will remain prudent with financial management and will continue to enhance capital allocation efficiency. We will prioritize investments in areas with high ROI and value, creating long-term shareholder value. Our next question comes from Emerson Zhou with Goldman Sachs.

Unidentified Company Representative, Company Representative

The first question is, has the dealers' operational environment improved in the lower-tier markets after pandemic restrictions had been lifted? And the second question is what is the rationale behind the merge of the Cango Haoche platform and the Cango U-Car platform? Could you elaborate on this?

Jiayuan Lin, CEO

The first question is whether the dealers' operational environment has improved in the lower-tier markets since the lifting of pandemic restrictions. The second question asks for the reasoning behind merging the Cango Haoche platform with the Cango U-Car platform. Can you provide more details on this?

Unidentified Company Representative, Company Representative

On your first question on the lower-tier market, well, Cango's customers are primarily based in third tier and fourth tier cities. So we have deeply felt the changes in the lower-tier markets over the past two years. According to CPCA's data, 40% of dealers in China shut down their businesses in 2022. More than half of dealers are now operating at a loss. And on average, about 11 foreign exchange stores close down every day. Small and medium auto dealers are having an even greater difficulty staying afloat. They have either merged with others to survive or switched to the used car transactions. Some are also trying new sales channels, such as live streaming and e-commerce. At the same time, consumer demand differs from region to region. NEV sales volume is higher in south markets compared to the north, for example, and NEV's penetration rate is also higher in cities with more charging stations. Furthermore, a zero class and below as well as luxury cars are selling better than other classes.

Jiayuan Lin, CEO

Some companies have either merged with others to survive or transitioned to used car transactions. Others are exploring new sales channels, like live streaming and e-commerce. Meanwhile, consumer demand varies by region. For instance, NEV sales volume is stronger in southern markets than in the north, and the penetration rate of NEVs is also greater in cities that have more charging stations. Additionally, vehicles in the zero class and below, as well as luxury cars, are performing better than other categories.

Unidentified Company Representative, Company Representative

Our decision to integrate Cango Haoche offerings into the Cango U-Car platform is primarily based on our deep market insights gained over the past two years. We noticed that China's new car market is near saturation. On consumption, there is a noticeable decline in first-time new car buyers, while there is an upward trend in consumers looking for additional cars and rising demand for vehicle replacement and upgrades. On the distribution side, the foreign exchange dealers and used car dealers have begun establishing their own used car sales channels in response to changing consumer needs. This is a blurred area now because the boundary between traditional new car and used car sales channels are becoming increasingly integrated. So that's why we are integrating the two platforms, Cango Haoche and Cango U-Car, so that customers can now purchase new cars while trading in their used cars on the same platform. This integration, we believe, will not only greatly improve our operational efficiency but also will enable us to better serve our car dealers. I think that's all from my side.

Operator, Operator

And ladies and gentlemen, there are no further questions. I'd like to turn it back to management for closing remarks.

Jiayuan Lin, CEO

We are integrating the two platforms, Cango Haoche and Cango U-Car, so that customers can now purchase new cars while trading in their used cars on the same platform. This integration, we believe, will not only greatly improve our operational efficiency but also enable us to better serve our car dealers. That’s all from my side. There are no further questions. I would like to turn it back to management for closing remarks.

Unidentified Company Representative, Company Representative

Thank you all for joining us. Thank you all for your support. That concludes today’s earnings call.

Operator, Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.