Earnings Call Transcript - CANG Q4 2022

Operator, Operator

Good morning and good evening, everyone. Welcome to Cango, Inc.'s Fourth Quarter and Full Year 2022 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. 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 be making forward-looking statements. With that said, I'm now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Jiayuan Lin, CEO

Hello, everyone, and welcome to Cango's Fourth Quarter and Full Year 2022 Earnings Call. 2022 was a challenging year, with multiple headwinds, including the COVID pandemic, supply chain disruptions, and chip shortages, continuing to create significant uncertainties in the auto industry. In addition, political and economic turmoils worldwide have profoundly impacted all aspects of society, including China's auto industry. Despite this complex and challenging external environment, Cango has made progress along its new strategic roadmap, demonstrating strong resilience. Cango underwent significant transformations in 2022. For the new car trading transaction business, we launched our Cango Haoche APP in June following the successful debut of the Cango Haoche mini-program in 2021. We gradually integrated an array of standardized specific products into the multisystem all-in-one platform in October, providing dealers with a one-stop comprehensive car trading solution centering on car sources. For the used car trading transaction business, we launched our Cango U-Car mini-program in May and developed our Cango U-Car APP at the end of 2022. Cango U-Car APP encompasses functions such as vehicle sourcing, online car research, online options, transaction support services, and other digital services to meet the diverse needs of used car dealers. As a result, our automotive transaction service platform covering both the new car and used car market has been largely established. Strong market feedback and dealer demand testify to the validity of our transformation into a transaction service platform with a new proposition. Total revenues in the fourth quarter of 2022 were RMB 490 million, up 17% quarter-over-quarter. Revenue from car trading transactions was RMB 430 million, up 24.2% quarter-over-quarter, accounting for over 88% of total revenues. The whole year total revenues were RMB 1.98 billion, of which revenue from car trading transactions was RMB 1.6 billion, accounting for over 80%. Currently, automotive financing facilitation is not our primary focus, but it was our launch pad and continues to strongly support our transformation into an automotive transaction service platform. By optimizing our automotive financing facilitation business, we have continuously improved the quality of assets, resulting in a healthy balance sheet. The total outstanding balance of financing transactions we facilitated decreased from CNY 46.7 billion as of December 31, 2021, to CNY 25.6 billion as of December 31, 2022. We expect this number to decrease further over 2023. In addition to ensuring our stable operation, the ever-decreasing risk exposure, healthy assets, and strong cash reserves give us the confidence to fully embrace our transformation and grasp new opportunities in the post-pandemic world. Now I would like to take you through more details of our business development. Now let's begin with the new car trading transactions business. As of December 31, 2022, Cango Haoche has engaged 10,112 dealers, up 58% year-on-year. During the fourth quarter, we sold a total of 3,938 cars, up 11.8% from the previous quarter. For the full year 2022, we sold a total of 16,490 cars. The conversion rate was 2.1%, on par with the industry. Also, during the full year 2020, accumulated page views and unique visitors on Cango Haoche APP were over 660,000 and 57,000, respectively. For our self-owned new cars, we have established cooperation with various OEMs and car suppliers, expanding our vehicle sources while also diversifying by brand and model. Specifically, we forged deep collaborations with GAC Mitsubishi, Dongfeng Motor Group, FAW-Volkswagen, and FAW Audi in the fourth quarter. Furthermore, our sales teams continue to develop vehicle sources and sales models based on the characteristics of each regional market, prompting a steady increase in the number and stickiness of channels. With respect to our transaction facilitation services, we have largely completed Cango Haoche service product metrics with the addition of several upgraded intelligent tools and products during the fourth quarter, further improving facilitation efficiency and dealer experience. Dealers can easily access a wide range of transactions supporting services on the platform, including customer leads generation, logistics financial services, and insurance services, among others. All of our platform services are gaining traction and have made good progress by the end of the year. While enhancing our new car platform, we also continue to build our used car platform, following the launch of our Cango U-Car mini-program. In mid-2022, we focused on acquiring new users and increasing engagement. At the same time, by leveraging our advantages such as abundant used car sources and one-on-one matching services, we grew dealers' behavior on our platform and improved their platform stickiness. We also established professional technician teams and car service teams across the country in the fourth quarter, providing dealers and customers with one-stop value-adding services, including car viewing, car inspection, and car loan transfers to further improve our matching conversion rate. At the end of 2022, there were 4,492 registered dealers on Cango U-Car. We expect the number of transactions on the platform to pick up over time. As of December 31, 2022, the accumulated page views and unique visitors on Cango U-Car mini-program were over 410,000 and 23,000, respectively. In January 2023, we officially launched Cango U-Car APP, catering to dealers' evolving demands with five functional modules covering vehicle sourcing, car searching, online auctions, transaction support services, and other digital services. Moving forward, we will continue to improve Cango U-Car and its related products and services. Through Cango U-Car's digital platform, we aim to form a broad and deep network for the used car segment, efficiently connecting used car sources, customers, and funds, supplemented by standardized support services spanning the entire transaction chain. With these advantages, Cango can promote truly efficient cross-regional circulation of used cars across the country, streamline the used car transaction process, and increase dealers' operating profit. Going forward, we will continue to advance the platform's digitalization, creating a closed-loop transaction ecosystem integrating online and offline services. Through this ecosystem, we can move offline services online and further standardize them to help standardize the used car profits and services. Meanwhile, we will redouble our efforts to improve dealer stickiness and enhance their engagement on our platform, leveraging Cango's solid channel network and customer base developed over 10 years to provide them with premium car resources. New digital infrastructure is an essential part of our transformation. In 2022, we continued to enhance our R&D efforts to holistically improve our digital business capabilities. By building a proprietary information and digital center that integrates information, digital, and intelligent technologies, Cango has created a unique competitive advantage to propel the sustainable development of our automotive transaction service platform. Cango's dual platform framework has taken shape, and we expect to steadily increase our operational capacity and efficiency as we improve each function. Navigating new parts through uncharted territory is never easy as we transform from a leading auto financing service provider to an integrated automotive transaction service platform. Both the scope of our offerings and our business model have undergone a significant change. However, we have never wavered in our determination to support small and medium-sized dealers in lower-tier markets on our journey to success and empower them to achieve their goals by providing them with the products and services they need. When we established Cango 12 years ago, we focused on the huge consumption potential and the imbalance between supply and demand in the lower-tier markets. Taking automotive financing facilitation services as our launch pad, Cango gradually built a solid network covering nearly 50,000 dealers nationwide, and we have worked closely with our dealers to provide premium financing facilitation services to our customers ever since. A decade later, many of the small and medium dealers we partnered with have grown into larger and more diversified businesses with multiple services and diverse needs. We have been with them every step of the way, continuously pushing our business boundaries to offer effective solutions to address their unmet needs, as well as one-stop services to help our dealers lower their operating costs and refine our business efficiency. As always, our ultimate goal is to make car purchases easy, simple, and enjoyable. The macro economy and the overall auto industry are undergoing profound and lasting changes. Although we still see challenges ahead in 2023, we have high expectations for the future and are very confident in the long-term development of China's auto industry. Cango will continue to focus on our vision and mission while further improving our standardized automotive transaction service ecosystem. Together with our dealer partners, we remain dedicated to promoting the recovery and development of the overall industry. Next, I will turn the call over to Michael Zhang, our CFO, who will take you through the company's financial performance.

Michael Zhang, CFO

Thanks, Jiayuan. Hello, everyone, and welcome to our fourth quarter and full year 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. Our fourth quarter performance once again illustrates the strength and resilience of our strategy and business model. Fourth quarter total revenues were CNY 487.1 million. The car trading transaction business delivered revenues of CNY 431.1 million, continuing to play an essential role in our platform. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the fourth quarter of 2022 were CNY 698.7 million compared with CNY 1,207.6 million in the same period of 2021. The cost of revenue in the fourth quarter of 2022 decreased to CNY 481.7 million from CNY 880.7 million in the same period in 2021. As a percentage of total revenue, the cost of revenue in the fourth quarter of 2022 was 98.9% compared with 83.8% in the same period of 2021. The change was primarily due to a higher contribution from our car trading transaction to total revenues. The car trading transaction normally presents a higher cost-revenue ratio, thus pushing up the overall ratio. Sales and marketing expenses in the fourth quarter of 2022 decreased to CNY 19.2 million from CNY 73.8 million in the same period of 2021. As a percentage of total revenues, sales and marketing expenses in the fourth quarter of 2022 were 4% compared with 7% in the same period of 2021. General and administrative expenses in the quarter of 2022 decreased to CNY 66.2 million from CNY 86.1 million in the same period of 2021. As a percentage of total revenues, general and administrative expenses in the fourth quarter were 13.6% compared with 8.2% in the same period of 2021. Research and development expenses in the fourth quarter of 2022 decreased to CNY 8.4 million from CNY 23.6 million in the same period of 2021. As a percentage of total revenues, research and development expenses in the fourth quarter were 1.7% compared with 2.2% in the same period of 2021. Net loss on risk assurance liability in the fourth quarter of 2022 was CNY 62.8 million compared with CNY 84.6 million in the same period of 2021. We recorded a loss from operations of CNY 211.6 million in the fourth quarter of 2022 compared with CNY 157 million in the same period of 2021. The net loss in the fourth quarter was CNY 558.9 million. The non-GAAP adjusted net loss in the fourth quarter of 2022 was CNY 539.9 million. On a per share basis, diluted net loss per ADS in the fourth quarter of 2022 was CNY 4.13, and diluted non-GAAP adjusted net loss per ADS in the same period was CNY 3.99. For the full year 2022, our total net revenues were CNY 2 billion. Total operating costs and expenses were CNY 2.9 billion. The net loss was CNY 1,111.2 million, and the non-GAAP adjusted net loss was CNY 952.7 million. Diluted net loss per ADS was CNY 8.11, and diluted non-GAAP adjusted net loss per ADS was CNY 6.95. Moving on to our balance sheet. As of December 31, 2022, we had cash and cash equivalents of CNY 378.9 million compared with CNY 745 million as of September 30, 2022. As of December 31, 2022, the company had short-term investment of CNY 1.9 billion compared with CNY 2.7 billion as of September 30, 2022. Looking ahead to the first quarter of 2023, we're now predicting our total revenues to be between CNY 450 million and CNY 500 million. Please note that this forecast reflects our current 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.

Operator, Operator

Your first question comes from Shelley Wang from Morgan Stanley.

Shelley Wang, Analyst

I have two questions. The first question is as Cango has optimized its automotive financing facilitation business; we have also observed a significant decrease in the company's risky assets. So how does this positively impact the company's transformation? And the second question is based on the data disclosed by Cango appears that the company has made substantial progress in transformation towards a car trading transaction service platform. What are your advantages compared with your industry peers like other platforms? And also what are your advantages compared with dealers in this industry?

Jiayuan Lin, CEO

I will take your two questions. Thank you, Shelley, for your two questions. To answer your first question, our automotive financing facilitation business generated assets on a larger scale and has significantly affected the company's cash flow and could even directly impact our viability. The total outstanding balance of financing transactions we facilitated decreased from CNY 46.7 billion as of December 31, 2021, to CNY 25.6 billion as of December 31, 2022. We expect this number to decrease further over 2023, and we plan to invest freed-up cash flow in our expansion of self-owned vehicle inventory. On your second question, currently, both our new car and used car platforms have taken shape and are generating transactions with a lot of data for us to refer to. In addition to validating the logic behind our transformation, the data shows the capabilities and processes that are required to support our car trading transaction business. Once this new model is fully running and smoothly, our next steps will be to holistically scale up the business operations and improve profitability. Thank you. That's all from me.

Operator, Operator

Your next question comes from John Li from Goldman Sachs.

Unidentified Analyst, Analyst

Thank you for giving me this opportunity to ask questions to the management. I have two questions. The first question is what is your outlook for China's auto market in 2023? Specifically, what is your outlook for your automotive transaction service platform in 2023? The second question is, could you give us more color on the development of the current used car business in detail?

Jiayuan Lin, CEO

Thank you, John. I will take your two questions. On the first question regarding the demand side, three years of pandemic policies have created a backlog of consumer demand, and we believe this pent-up demand for car purchases will gradually be released. Of course, this is subject to the overall level of economic recovery and policy support. On the supply side, traditional car brands launched many new models at the beginning of the year, and NEV, new energy vehicle production costs have also decreased as lithium battery supply prices have fallen. Furthermore, NEVs will continue to enjoy an exemption from vehicle purchase taxes. So in 2023, we expect to see more auto market transactions compared with 2022. Regarding your second question about our used car business, we launched the Cango U-Car APP at the start of 2023, including an exceptional range of functions covering historical vehicle condition reports, vehicle evaluation, online auctions, online car searching, used car listing, and other digital services. As of the end of 2022, there were 4,492 registered users on Cango U-Car. As of December 31, 2022, the accumulated page views and unique visitors on Cango U-Car mini-program were over 410,000 and 23,000, respectively. We expect the number of transactions on the platform to pick up over time. By leveraging our abundant used car sources, some of which come from consumers and repossessions, we have successfully fostered the dealers' platform usage behavior and improved their platform stickiness. We also established professional technician teams and car service teams across the country in the fourth quarter, providing dealers and customers with one-stop value-adding services such as car viewing, car inspection, and car loan transfers, etc.

Operator, Operator

Your next question comes from Brent Lee.

Unidentified Analyst, Analyst

I'll just ask a question directly in Chinese. My question is only abandoned car sources is one of the company's strongest advantages. How will the company leverage and consolidate this advantage in the future?

Jiayuan Lin, CEO

Thank you, Lee, for your question. You are absolutely right that car sources are one of our strongest advantages in our new car and used car service platforms. Our goal is to provide a better service experience to car buyers and car dealers through our car trading transaction business. With a more diversified vehicle supply, we can better meet the individual needs of customers in the lower-tier markets. We hope to leverage our advantages in car sources to increase customer stickiness and encourage customers to use other services on our platform. Regarding new car sources, we will step up our efforts to explore and develop further our collaborations and partnerships with OEMs. In the fourth quarter, we secured collaboration with GAC Mitsubishi, Dongfeng Motor, FAW-Volkswagen, and FAW Audi. We also became the most important sales platform for GAC Mitsubishi's new Outlander model. On the used car sources, historically, we have the advantage of having access to many repossessed cars. In the future, we will use this as leverage to further grow and scale up our used car business. Thank you.

Operator, Operator

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

Jiayuan Lin, CEO

Thank you all for joining us. That closes today's call. Thank you.