Cango Inc (CANG) 2021 Q1 法說會逐字稿

Good morning and good evening, everyone. Welcome to Cango Inc.'s First Quarter 2021 Earnings Conference Call. (Operator Instructions) 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 make forward-looking statements.

With that said, I'm now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

(foreign language)

[Interpreted] Hello, everyone, and welcome to Cango's 2021 First Quarter Earnings Call.

(foreign language)

[Interpreted] China's gradual economic recovery and various targeted stimulus policies are set to more widely revive auto consumption across the country in 2021. As a result, auto sales surged as consumer spending continued to gain momentum in the first quarter of 2021.

On the other hand, we also noticed that the pressure on the supply side caused by auto part shortage has increased and will likely bring uncertainties in the overall pace of industry's recovery.

(foreign language)

At Cango, we made steady progress across our business lines in the first quarter, as total revenues grew to RMB 1.1 billion, surpassing the high end of our previous guidance range by approximately 7%. Operating income sustained its growth movement in the quarter and came in at RMB 160 million compared to a loss from operations of RMB 81.3 million in the same period of 2020. Net loss for the quarter was RMB 274 million, primarily attributable to an investment loss of RMB 447 million in Li Auto.

(foreign language)

[Interpreted] Since we first launched, Cango has devoted itself to building a reliable, efficient and exceptional automotive transaction services platform. Those core values and aspirations remain just as important to us today as we aim to provide consumers with creative products and the best customer service experience while also propelling China's automotive industry forward by connecting dealers, financial institutions, OEMs and other industry resources.

We remain firmly committed to our long-term vision and have continued to steadily advance our business development plans during the quarter, further deepening our roots across our 3 main business lines: car trading, transactions, aftermarket services facilitation and automotive financing facilitation, and form a close loop with our services. As a result, we are revolutionizing the relationships among different parties along the auto value chain while also empowering and creating value for all of them.

(foreign language)

[Interpreted] Let me explain. First, I would like to start with our car trading transaction business as Cango's main growth driver. Car trading transactions generated revenues of RMB 572 million in the first quarter, accounting for approximately 50.9% of total revenues. [Brilliant] supply and demand in the auto market and relying on our technology-driven online platform and extensive dealership network in the lower-tier markets, we have formed close partnerships with various traditional car manufacturers and new energy vehicle makers. Building on this foundation, we have integrated all the participants along the car trading transaction chain to jointly explore innovative channel strategies in the lower-tier markets.

(foreign language)

[Interpreted] in April, Cango entered a strategic agreement with Zhengzhou Nissan to jointly develop a new retail model for automotive transactions in China's lower-tier markets. Under the terms of the agreement, both parties will collaborate and innovate in areas of automotive sales and marketing in lower tier markets through the development of a new automotive retail model. Additionally, Cango will also provide auto financial products and services to all customers of Zhengzhou Nissan-certified secondary dealer stores. Meanwhile, we are currently in negotiations for potential collaborations with various other OEMs.

(foreign language)

[Interpreted] During the first quarter, we also continued enhancing our service capabilities related to car trading transactions. First, our independent sales reps currently cover more than 10 provinces and bring private traffic flow that targets more segmented customer groups. At the end of the first quarter, we had more than 10,000 independent sales reps and 456 sub-dealers. The continuous expansion of our traditional dealership network plus the private traffic generated by our independent sales reps helps us effectively reach our customers and offer more quality products and services in the lower-tier markets.

In addition, we continued to improve the layout of our warehouse and logistics. By the end of first quarter, we have codeveloped 101 warehouses with a total capacity of approximately 33,000 parking spaces and covering 79 cities across the country, boosting the expansion of our distribution network in the lower-tier markets.

(foreign language)

[Interpreted] As China's auto market enters the new phase of development after years of high-speed growth, it transitions from meeting the needs of first-time purchasers to the replacement and upgrade needs, further boosting the growth potential of aftermarket services. Relying on the network of nearly 50,000 registered dealers nationwide and more than 1.8 million automotive financing customers, aftermarket services facilitation is now an integral part of our auto transaction services platform.

In Q1, aftermarket services facilitation revenues were RMB 62.5 million. We continued to optimize the organizational structure and operating mechanisms of our sales reps -- I mean, our direct sales team during the quarter, achieving a significant increase in per capita productivity. We are also simultaneously deepening our cooperation with NEV manufacturers by embedding auto insurance products and services into their mobile apps to help them better provide insurance products and services to their customers and improve overall efficiency. We are also exploring aftermarket services deeply to discover more opportunities and create a brand-new industrial ecology of people, auto and life.

(foreign language)

[Interpreted] Finally, our automotive financing facilitation business grew steadily in this quarter. We facilitated RMB 10.4 billion financing transactions, up 134% year-on-year. Our automotive financing facilitation revenues were RMB 412 million, up 243% year-on-year. As of March 31, the total outstanding balance of financing transactions facilitated by the company reached RMB 47.5 billion.

(foreign language)

[Interpreted] Turning to asset quality. As of March 31, the M1+ and M3+ overdue ratios increased to 1.23% and 0.54%, respectively. To address rising overdue ratio, we continued to strengthen on-site and channel risk controls, along with additional digital measures such as speech recognition engines and model improvements to deliver differentiated risk controls. At the same time, we have assembled a dedicated team to improve the efficiency of post-loan collection.

(foreign language)

[Interpreted] In terms of dealership network, we continued to work on improving our network efficiency and, as a result, we have terminated relationships with dealers that do not meet our standards for client service, traffic quality and traffic generation capabilities. By the end of the first quarter, we had 47,017 registered dealers. Meanwhile, we have expanded into the higher-end segments with innovative product offerings. As of March 31, we have covered more than 9,000 4S dealers of approximately 40 high-end OEMs, including Mercedes-Benz and BMW and established partnerships with several leading dealer groups in China.

(foreign language)

[Interpreted] Smart and new energy vehicles featured in recently held 2021 Shanghai International Auto Exhibition. With the government-supported policies, China has become the world's largest manufacturer and market for NEVs several years in a row and accounts for over 50% of the total number of the NEVs in the world. Cango has always been optimistic about the huge potential in this market and that [it] cooperates with leading NEV makers in China, aiming to leverage each other's advantages to explore new distribution channels in the lower-tier markets.

(foreign language)

[Interpreted] Looking ahead, we see the impact of international supply chain uncertainty lingering. The chip shortage in the automotive industry will likely persist for a long time. This is expected to have an impact on our overall business.

Concurrently, domestic financial supply and regulatory environment are also undergoing profound changes. We will closely watch and actively respond to the situation as it develops, proactively step up efforts to cope with any form of uncertainty and keep pace with the changing industry trends through continuous product innovations, which place us on a step-by-step pace to achieve our established strategic growth.

(foreign language)

[Interpreted] With that, I will now turn the call over to our CFO, Michael Zhang, to review our financial performance in more detail.

Thanks, Jiayuan. Hello, everyone, and welcome to our first quarter 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.

We are excited about our solid start to the year, as first quarter revenues surged 357% year-over-year to reach a new record high of RMB 1.1 billion, once again exceeding our guidance range.

Our car trading transaction business continued to perform well and served as a crucial growth driver with revenue contribution climbing to more than 50% of total revenue at RMB 571.6 million. Revenues from our auto financing facilitation and aftermarket services facilitation were also robust at RMB 411.7 billion and RMB 62.5 million, respectively, in the first quarter.

Now let's move on to our cost and expenses during the quarter. Total operating cost and expenses in the first quarter 2021 were RMB 964.2 million compared to RMB 327.3 million in the same period of 2020. The increase was mainly due to the related costs incurred by our car trading transaction business primarily as a result of increase in revenues from our car trading transactions. Sales and marketing expenses, general and administrative expenses, and research and development expenses each decreased as a percentage of total revenue in the first quarter of 2021 compared to the same period last year.

Cost of revenue in the first quarter of 2021 increased to RMB 769 million from RMB 90.6 million in the same period 2020. As a percentage of total revenue, cost of revenue in the first quarter was 68.4% compared to 36.8% in the same period 2020, and the change was primarily due to an increase in the amount of car trading transactions. For automotive financing facilitation and aftermarket services facilitation, cost of revenue as a percentage of revenues was around 35.6% in the first quarter 2021.

Sales and marketing expenses in the first quarter of 2021 were RMB 57.8 million compared to RMB 45.8 million in the same period 2020. As a percentage of the total revenue, sales and marketing expenses in the first quarter of 2021 was 5.1% compared to 18.6% in the same period 2020.

General and administrative expenses in the first quarter 2021 were RMB 61.4 million compared to RMB 57.4 million in the same period 2020. As a percentage of total revenue, general and administrative expenses in the first quarter 2021 was 5.5% compared to 23.3% in the same period 2020.

Research and development expenses in the first quarter 2021 were RMB 13.6 million compared to RMB 12.6 million in the same period 2020. As a percentage of total revenues, research and development expenses in the first quarter of 2021 was 1.2% compared to 5.1% in the same period 2020.

Net loss on risk assurance liabilities in the first quarter of 2021 was RMB 21.7 million compared to a net loss of RMB 76.9 million in the same period 2020. Net loss on risk assurance liabilities in the first quarter 2021 was mainly due to an uptick in delinquent loan balance and default rate since the beginning of 2021.

We recorded income from operations of RMB 159.5 million in the first quarter of 2021 compared to a loss from operation of RMB 81.3 million in the same period of last year. Due to the fair value change of the company's investment in Li Auto, we recorded net loss of RMB 273.9 million in the first quarter of 2021.

Non-GAAP adjusted net loss in the first quarter of 2021 was RMB 254 million. On a per-share basis, diluted net loss per ADS in the first quarter of 2021 was RMB 1.84 and diluted non-GAAP adjusted net loss per ADS in the same period was RMB 1.7.

Moving on to our balance sheet. As of March 31, 2021, we had cash and cash equivalents of RMB 1.6 billion compared to RMB 1.4 billion as of December 31, 2020. As of March 31, 2021, the company had short-term investment of RMB 2.6 billion compared to RMB 4.3 billion as of December 31, 2020. The decrease was mainly due to the partial disposal and the change in fair value change of the company's investment in Li Auto.

Looking ahead to the second quarter of 2021, we expect our total revenues to be between RMB 900 million and RMB 950 million. Please note that this forecast reflects our current and preliminary views 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 Instructions) Your first question comes from Shelley Wang with Morgan Stanley.

(foreign language)

[Interpreted] Okay. I'm Shelley Wang from Morgan Stanley. I have 2 questions. The first question is, what is your outlook for the demand in the second half of 2021. And in particular, it has something to do with your business of auto loan facilitation. So that's why I asked this question. Also, in particular, I would like to know about your outlook for the demand in the lower-tier cities.

And the second question is about your partnership and collaboration with new energy vehicle manufacturers. We understand that actually these manufacturers usually adopt a direct sales model. So in your collaboration with the NEV makers, how is their -- based on your observation, how is their model different from traditional car manufacturers? I mean how is your collaboration different from your collaboration with traditional car manufacturers?

(foreign language)

[Interpreted] So to answer your first question, so far, we see demand in the auto market remains strong, and we have -- but we have concerns about the supply side. We think that the pressure of insufficient supply will likely persist for some time to come. And also, there is this issue of chip shortage, and we think that the need of high-end brands and 4S stores in mega cities will be prioritized. So we expect the domestic auto brands in the lower-tier markets to face more pressure in the second half of this year.

(foreign language)

[Interpreted] And to answer your second question, with traditional auto manufacturers, we expand our automotive financing facilitation business through our nationwide dealership network. So this is mostly an off-line collaboration. But in terms of collaboration with NEV manufacturers, it is an online-based model because the NEV manufacturers, they adopt direct selling model, and they have their own showrooms. And also, they have a very simple and easy process that enables customers to complete test driving and vehicle ordering online.

So we are currently deepening our cooperation with NEV manufacturers by embedding auto insurance products and services into their mobile app, for example, to help them better provide insurance products and services to their customers. And this kind of collaboration model not only improves overall efficiency but also conforms to our partners' business models. So under the direct selling model, our automotive financing facilitation service is embedded into the car owners' platform, and this helps boost our shares.

Your next question comes from Derek Su with Goldman Sachs.

(foreign language) This is Derek from Goldman. I have 2 short questions. First is about the car trading business. I would like to understand more about the margin. Generally speaking, how much is the cost of purchasing cars and how much is ASP? And what is the guidance for 2021?

And the second question is about the aftermarket services. Do we have any plan of expanding services besides the insurance sales such as collaboration with repairing stores?

(foreign language)

[Interpreted] Thank you, Derek. So to answer your first question, we have different pricing strategies across car models and regions for our car trading transaction business. It really depends on our -- the results of our research and also the judgment of our team. For us, it is more important to empower dealers by getting low prices from OEMs and sharing more profits with dealers to improve their trading capacity.

And for the car trading transaction business, gross margin in the first quarter, it has improved up to about 1.3% in Q1 this year. And we expect the chip shortage in the auto industry to continue, and this will definitely have an impact on our car trading transaction business. But at the same time, we are pushing ahead our partnerships with various OEMs. So if all goes well, then the annual trading volume is expected to reach 45,000 units.

(foreign language)

[Interpreted] And for the second question, the -- our service range in the aftermarket business. While the focus of our aftermarket service facilitation remains on insurance product for now, while we are also [trying to set to] information, referral and maintenance services. However, so far, it is still in the early stage of development. Since the start of this year, we have introduced pilot vehicle delivery and repair services in some regions. As we develop more business, as we expand our market in the future, we will integrate resources and try to standardize the management and service of our partner workshops.

Of course, we will also invest more in selecting the right partners and gradually develop auto [part and] component services as well as auto care service and also like [definitive] driving business. So overall speaking, we plan to cover a [wide range of aftermarket services] facilitation business. That's all from me.

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

(foreign language)

[Interpreted] Thank you for joining us. That closes the Q1 2021 earnings call.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]