Cango Inc (CANG) 2020 Q2 法說會逐字稿

Good morning, and good evening, everyone. Welcome to Cango Inc.'s Second Quarter 2020 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. 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 call today as management will make forward-looking statements. Please note, this call is being recorded.

With that, I will now turn the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

(foreign language)

[Interpreted] Hello, everyone. Welcome to Cango's 2020 Q2 Earnings Call.

(foreign language)

[Interpreted] The entire industry has been abruptly and dramatically impacted by COVID-19 since the beginning of 2020. The difficult conditions persisted through the end of the second quarter, and the recovery was slower than our previous expectations. The low- and mid-range market segments as well as domestic brands were impacted more than higher end segment and joint venture brands. Despite the unfavorable conditions, we continue to make meaningful progress in our strategic initiatives. It is worth noting that our insurance facilitation services delivered very strong performance in the second quarter.

(foreign language)

[Interpreted] In Q2, we booked CNY 274.1 million in revenue, exceeding the higher end of the guidance range by approximately 10%. In particular, aftermarket services revenue grew to RMB 52.5 million, accounting for 19.1% of the total. Thanks to efforts to optimize the cost structure and improve operating efficiency, the gross margin stayed at a healthy level in the second quarter. We also regained positive operating income, mainly attributable to effective cost control and improved asset quality as a result of the post-loan management. Overall speaking, our net profit increased to RMB 70.2 million.

(foreign language)

[Interpreted] In the second quarter, we continued to build on our core auto loan facilitation business. The aftermarket services facilitation also achieved an outstanding performance, mainly fueled by the strong growth of insurance facilitation business. Particularly the car insurance business that we have vigorously promoted grew significantly on a sequential basis, completing 18,000 transactions in the second quarter, more than double the previous quarter.

In addition, our health insurance products continued to gain in popularity, and we recorded more than 10,000 transactions in the second quarter. Insurance facilitation as a whole is no longer a sideline business. Instead, it holds promising growth potential as an independent business line. Looking forward, we will continue to explore more channels and categories to meet the increasingly diverse needs of consumers. In addition, we will expand our insurance product portfolio to include those that have higher transaction value.

(foreign language)

[Interpreted] Moving to our asset quality. In the first quarter, the COVID-19 pandemic has led to an uptick in our delinquency rate. However, in the second quarter, the overall delinquency has improved, thanks to resumption of economic activities and as well as our debt collection efforts. As of June 30, 2020, the M1+ overdue ratio has improved to 1.59% from 2% in the previous quarter. On the other hand, some of last quarter's M1+ delinquencies have moved to the M3+ category, but it is within a reasonable range. Overall, our customer delinquency has improved considerably in the second quarter compared with the first quarter, and we remain confident in our ability to maintain the quality of our assets going forward.

(foreign language)

[Interpreted] Since our inception, we have emphasized the importance of risk management and regard it as the cornerstone of our business development. We strive to create value for all parties in the auto transaction value chain by strictly managing risks, actively exploring innovative risk management methods and offering safe and professional one-stop auto finance services. With comprehensive risk controls, advanced technologies and methodologies for post-loan management, Cango facilitated auto loans have been performing well over the years. We will continue to develop our strength in risk management, remain committed to supporting all industry participants as they evolve, and drive innovation in the industry.

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[Interpreted] In July, at the 5th Annual China Auto Finance International Summit in Shanghai, Cango received the Best Auto Finance Risk Management Innovation Award. This summit is one of the most recognized and respected events in the auto finance industry. Candidates was carefully selected from the industry, including OEMs, dealers, auto finance companies, trusts, funds and banks. After vigorous reviews by a panel of experts from leading financial institutions, Cango stood out from competition with our innovative risk management system and received the risk management innovation award as a recognition of outstanding performance and relentless efforts in risk management.

(foreign language)

[Interpreted] This year marks Cango's 10th anniversary. In the past 10 years, we have grown from an auto finance company to a leading automotive transaction service platform in China. We have established partnerships with tens of thousands of auto dealers serving more than 1.5 million customers. We have participated in the rapid development and transformation of China's auto finance industry and witnessed changing consumer behavior and preferences in the past decade. As a pioneer in the industry, we will always remain true to our vision and values and we are excited to start a new chapter, leveraging Big Data and innovative technologies to provide customers with safe, professional and efficient auto finance services, while contributing to the development of the entire industry.

(foreign language)

[Interpreted] Looking ahead, given the changing consumer behavior, swift growth of fintech and emergence of new business models, we believe China's auto finance industry has very promising growth prospects. The government has also relaxed conditions for consumer credit applications for car purchases, which have helped unleash higher demand. Cango enjoys first-mover advantages in emerging markets in the lower-tier cities, both comprehensive product and service offerings and deep partnerships with financial institutions. We are in a very strong position to gain market share and strengthen our competitive advantages. With the rapid development of mobile internet, digital services are becoming one of the new drivers for auto finance. So we are actively advancing our online business with new tools such as e-contracts and online selling.

(foreign language)

[Interpreted] In the second half, we will implement the following 4 strategic priorities. Firstly, we will continue to develop the aftermarket services as one of the primary revenue growth drivers. Secondly, for the core auto loan facilitation business, we will continue our efforts to expand into the higher-end segment with innovative product offerings. We have built a dedicated team to develop this segment. It is worth noting that during the second quarter, we served all [Tesla stores] in Shanghai, and we will further explore the untapped growth potential in this market segment.

Thirdly, we will continue to build up the auto transaction facilitation business. In the second quarter, we have assembled a special team focusing on these areas, and we expect to see stronger development in the coming quarters.

Finally, we will further improve our operating efficiency and optimize our cost structure. While we expand into mid- to high-end markets, we believe there is also a big opportunity for us to further improve the efficiency of our lower-tier dealer network. By the end of the second quarter, the number of registered dealers have reduced to 44,500 as we continue to optimize our network efficiency by terminating relationships with dealers that were not up to our standards in terms of operating risk and traffic generation capabilities.

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[Interpreted] We will plan forward, as we have done for the past decade, with our eyes set on the long term and plans to achieve more milestones along the way.

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

Thanks, Jiayuan. Hello, everyone, and welcome to our second quarter 2020 earnings call. Before I start to review our financials for the quarter, please note that, unless otherwise stated, all numbers are in RMB terms and all percentage comparisons are on a year-over-year basis. Amidst COVID-19 pandemic, we generated CNY 274.1 million in the total revenue in the second quarter of 2020, outperforming the high end of our previous guidance by approximately 10%. In addition, our aftermarket service facilitation business continued to serve as an important growth driver, generating CNY 52.5 million in revenues for the second quarter and accounting for approximately 19% of total revenue.

Now let's move on to our cost and expenses during the quarter. Total operating costs and expenses in the second quarter of 2020 were CNY 207.4 million compared to CNY 252 million in the same period of last year. This was in line with the decrease in company sales volume. Cost revenue in the second quarter 2020 decreased by 18.3% to CNY 102.8 million from CNY 125.8 million in the same period last year. As a percentage of total revenue, cost of revenue in the second quarter of 2020 was 37.5% compared to 37.4% in the same period of 2019. Sales and marketing expenses in the second quarter of 2020 was CNY 42.4 million compared to CNY 44.5 million in the same period last year. As a percentage of total revenue, sales and marketing expenses in the second quarter of 2020 increased to 15.5% from 13.2% in the same period of last year.

General and administrative expenses in the second quarter of 2020 were CNY 66 million compared to CNY 53.4 million in the same period 2019. As a percentage of total revenue, general and administrative expenses in the second quarter 2020 increased to 24.1% from 15.9% in the same period of last year.

Research and development expenses in the second quarter of 2020 were CNY 12.9 million compared to CNY 12.2 million in the same period last year. As a percentage of total revenue, research and development expenses in the second quarter of 2020 increased to 4.7% from 3.6% in the same period 2019.

Net gain on risk assurance liability in the second quarter of 2020 were CNY 42.9 million compared with a net loss of CNY 76.9 million in the first quarter of 2020. Net gain on risk assurance liability was mainly due to a decrease in the delinquent loan balance and default rate.

We recorded income from operations of CNY 66.7 million in the second quarter of 2020, compared with CNY 84.3 million in the same period last year. Net income in the second quarter of 2020 was CNY 70.2 million. Non-GAAP adjusted net income in the second quarter of 2020 was CNY 92.3 million. On a per share basis, our diluted net income per ADS in the second quarter of 2020 was CNY 0.47, and our diluted non-GAAP adjusted net income per ADS in the same period was CNY 0.61.

Moving on to our balance sheet. As of June 30, 2020, we have cash and cash equivalents of CNY 2 billion compared to CNY 2.7 billion as of March 31, 2020, mainly due to the dividend paid in May and the repayment of debt.

Looking ahead to the third quarter of 2020, we expect our total revenue to be between CNY 300 million and CNY 330 million. Please note that this forecast reflects our current and preliminary view on the market and operational conditions, which are made in considerations on uncertainties in the market caused by COVID-19 outbreak and are, therefore, subject to change. This concludes our prepared remarks.

Operator, we are now ready to take questions.

(Operator Instructions) Our first question will come from Shelley Wang with Morgan Stanley.

(foreign language)

[Interpreted] So I have 3 questions. I am from Morgan Stanley. The first one is about the Q3 performance. Well, actually, we are seeing the China's auto market turn for the better in -- starting from now, and we are also seeing strong growth in sales for some Chinese brands such as Changan and Great Wall. So my question is that how will [Listrone] help with our business in Q3?

And the second question is about overdue ratio. We do see that the overdue ratio for the second quarter improved; however, it still remained at a level higher than that of last year. So if overdue ratio continue to improve, will that generate more gains for risk assurance liabilities?

And the third question is about the longer-term growth strategy. Right now, we have covered 45,000 dealers. So what about your growth expectation in 2 or 3 years' time? How many dealers do you expect to cover? And what are the new growth drivers for the longer term? Are you going to cover more ForEx stores? Are you going to work with more auto brands? And also, I mean, what is the longer-term growth strategy for the business?

(foreign language)

[Interpreted] Thank you, Shelley, for your questions. I will take your first question and then our CFO will answer the next 2 questions. Okay. About your question on the impact of the growth of Chinese brands sales on our business. Well, we see that the recovery trend is similar to what we have observed in the second quarter. And actually, compared with the first and second tier cities, there is no significant improvement in demand in the lower-tier cities yet, and actually Cango is the strongest in those lower-tier markets. So -- and also for the growth in sales of these Chinese brands, actually they are mainly attributable to the sales in ForEx stores. So there is some support to our business, but limited indeed.

(foreign language)

[Interpreted] I'd like to add some point to the first question. Well, yes, we also observed the recovery in sales for Chinese brands such as Changan and Great Wall, and we also are seeing positive contribution by this recovery to our business growth in the second quarter. Actually, by the end of the second quarter, we already saw this positive impact. However, as we said earlier, Cango focused mostly on the lower-tier markets. And in these lower-tier markets, I think it will take -- it will still take some time for the demand to recover. In particular, we need to see a stronger rebound in the purchasing power of the consumers. So yes, indeed, we expect to see positive contribution to our business growth in Q3 and in the longer term from the recovery of the Chinese auto brands and other brands as well. But indeed, for the real impact on our business to happen, we still need to see the better purchasing power in the lower-tier cities.

(foreign language)

[Interpreted] And about second question, that is the overdue ratio improvement and its impact on gains in the risk assurance liabilities item. Well, in the second quarter, thanks to our post-loan management, in particular, our debt collection efforts, we have seen an improvement in our overdue ratio. Actually, the -- I mean some overdue ratios, in particular, M1+ ratio has dropped significantly over the second quarter. And this is mainly attributable, as I said earlier, to our post-loan management effort. And that's why in the second quarter, we have recognized about CNY 40 million gains in the changes of the fair value of the risk assurance liabilities. And in early -- starting from early Q3, we are seeing continuing improvements in these post-loan management metrics. And if this trend continues, we actually do see an opportunity to recognize more gains in risk assurance liabilities.

And in Q1, when the pandemic was at its peak, Cango, in fact, aggressively made more provisions for the -- for our assets. And that's why you are seeing higher provisions in our Q3 on our books. But thanks to resumption of economic activities and also thanks to our post-loan management effort, we are seeing better asset quality in the second quarter and throughout the early Q3. So with these trends going on, we expect to see lower provisions in the future, and we could reverse some of the revisions that we made earlier and recognize them as gains in our risk assurance liabilities.

(foreign language)

[Interpreted] About your third question on our future growth strategy, let me, first of all, talk about the channel side. Well, we will continue to explore opportunities to increase our dealer partners in the next few years. Well, first of all, we will continue to optimize our relationship with the non-ForEx stores in the lower-tier cities. And as you heard earlier, we are now gradually terminating partnerships with those dealers who do not meet our standards on service level and also in traffic generation capabilities. And these are all efforts by us to improve the operating efficiency in the lower-tier city network.

And on the other hand, we are also working on building relationships with ForEx stores of the higher-end brands, and we have established a dedicated team to develop this market segment. And so we are actively exploring this new channel, and we are investing heavily to expand our relationships with the ForEx stores. So overall speaking, in the next 3 years, we expect the number of dealers who work with us to increase to about 60,000, 45,000 of which will be the non-ForEx stores in the lower-tier cities and about 15,000 of which will be ForEx stores of the higher-end brands.

(foreign language)

[Interpreted] In addition, we will further improve our product and service offerings with our dealers in order to improve the productivity as well as traffic generation activities of our dealers because we should not just look at the number of dealers who we are working with. It's also very important for us to improve the per-store activity and also per-store productivity because these metrics will have a direct bearing on our business growth. So this -- these are some of the priorities we are going work out in the near future.

(foreign language)

[Interpreted] And thirdly, well, the core business of Cango has been the auto loan facilitation business. At the same time, we are investing heavily to grow our aftermarket business. Actually, as you can see from our results, the contribution from this business to our revenue has increased quite significantly. And also in the aftermarket business line, the insurance facilitation business has performed outstandingly. And you can see that the contribution by this insurance facilitation business, where revenue has grown significantly. So we expect that to actually -- we expect this insurance facilitation business to grow into a core and an independent business line of Cango in the future.

(foreign language)

[Interpreted] In addition, we have also set up a dedicated team to grow our auto transaction facilitation business. So thanks to our efforts and investment, we expect the auto transaction facilitation business to make positive contribution to our business as well as to our revenue growth in the third quarter and in the following quarters. Thank you.

(Operator Instructions) We have no further questions at this time. I will hand the call back to management for closing remarks.

(foreign language)

[Interpreted] Thank you all for your participation. That closes today's earnings call.

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.]