Cango - Earnings Call - Q1 2020

Transcript

Operator (participant)

Welcome to the Cango Inc. first quarter 2020 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 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 remarks, we'll conduct the Q&A session. Before we begin, I'll 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. With that said, I will now turn the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Jiayuan Lin (CEO)

[Foreign language]

Hello everyone, welcome to Cango's first quarter 2020 earnings call.

[Foreign language]

For the past few months, the COVID-19 outbreak has swept the globe and caused severe disruptions to our normal way of life and work. On behalf of all of us here in Cango, I'd like to extend our gratitude towards those medical workers, community workers, and many more working on the front lines of this pandemic. The courage you have shown in the face of such adversity is truly inspiring. The work all of you have done in support of the greater good continues to motivate us every day.

[Foreign language]

The auto industry in China was definitely impacted by the outbreak in the first quarter, which has triggered a broader structural change in the industry. This was largely in line with our expectations. As a result of the pandemic's economic impact, the demand for passenger cars has reduced significantly. At the same time, although people are more interested in buying cars as a result of the pandemic, it has not been enough to offset the greater loss of purchasing power across Chinese households. In particular, low and mid-range car models, as well as cars produced by domestic manufacturers, were impacted more than high-end car models and those manufactured through joint ventures with foreign firms.

[Foreign language]

We expect the market to begin a slow recovery in the second quarter and do not forecast it returning to its pre-pandemic levels until at least the third quarter of this year. Of course, as the situation continues to evolve, we expect to have more visibility on the general health of the industry and to refine our outlook in time.

2020[Foreign language]

For the first quarter of 2020, due to the severe disruptions caused by the pandemic, our total revenues decreased by 30% year-on-year. However, we maintained the gross margins at a healthy level through our effective cost controls, which helped us hedge the inferences caused by the pandemic.

[Foreign language]

Another impact of the pandemic was that businesses were forced to suspend their operations, which led to an overall decline in household income across the country. The combination of this decline, along with travel restrictions across the country, caused a massive delinquency rate during the quarter. Nevertheless, throughout the pandemic, our asset management teams were able to maintain our debt collection efforts by working from home. At the same time, we optimized the organizational structure of our collection department and introduced a temporary incentive to ensure the optimal efficiency of our teams. In addition, we also assisted eligible customers with their applications for delayed repayments as required by domestic banking regulations. Currently, as China gradually reopens for business, the overall repayment capacity of our clients has recovered significantly, and therefore, customer delinquency has improved considerably, while our overall asset quality has remained at a manageable level.

Looking ahead, we expect our delinquency rate to return to more normal levels within three to six months, and we are confident in our ability to sustain the manageability of our assets going forward. For the very small percentage of customers who do not intend to repay their loans, we will resolve the matter through the appropriate legal process.

[Foreign language]95.6%。

Dealers which interact directly with car buyers and are also hit particularly hard by the pandemic. In the first quarter, most of the dealers across China began to gradually resume their operations. However, generally speaking, dealers in first and second-tier cities resumed their operations earlier and recovered faster, as they are mainly involved in the distribution of high-end car models and luxury brands. In comparison, dealers in lower-tier cities, secondary dealers, auto trade stores, as well as those dealers distributing low and mid-range car models and domestic brands, have been slower to restore their operations and sales performance. We are closely monitoring our dealership network and are looking for opportunities to provide our dealers with the assistance they need to the greatest extent possible. Meanwhile, we continue to refine our network efficiency.

As such, we have terminated relationships with dealers that do not meet our standards for operating risk and traffic generation capabilities to further optimize the efficiency of our dealership network. By the quarter end, we had approximately 45,700 registered dealers. Notably, 95.6% of dealers in our network were under our direct model in the period, as compared to 94.6% in the previous quarter.

[Foreign language] 6,700 [Foreign language] 3,980 [Foreign language] 4,906 [Foreign language] 23.3%。

In addition to strengthening our auto loan facilitation business, we also focused on developing our aftermarket facilitation business with a focus on insurance facilitation service. In particular, we placed an increased amount of emphasis on car insurance in the first quarter. As a result, we ramped up the number of car insurance transactions by 2.8% on a sequential basis to about 11,100 in total. Furthermore, during the pandemic, we launched a health insurance product in partnership with ZhongAn Insurance, which accounted for approximately 6,700 insurance transactions in the first quarter. As a result of these efforts, our aftermarket services revenue in the first quarter grew by 23.3% to about RMB 49.1 million, from RMB 39.8 million in the prior year period.

[Foreign language]

Prior to this partnership, we continue to deepen our relationship and make good progress on a number of fronts. During the period, we formed partnerships with MYbank and OneConnect of Ping An. As an essential part of any financial service ecosystem, MYbank boasts a unique combination of data analytics and technology capabilities. By incorporating MYbank's state-of-the-art technologies into our nationwide dealership network, our partnership will not only further enhance the company's competitive edges, but also enable us to reach high-end customers more effectively. At the same time, we have been in business discussions with more financial institutions, such as China Construction Bank and China Agricultural Bank, to name just a few, to develop new financial products, expand our service coverage, and upgrade our product offerings.

[Foreign language]

Our strategic partnership with ICBC as of March 31st, 2020. The total volume of non-subsidized loans made by our cooperation with ICBC exceeded RMB 3.57 billion. In addition, we continue to work with ICBC to develop low-end subsidized products, and we expect to launch these products starting the second half of 2020. As the first auto financing platforms completely interface with ICBC's loan system for new car purchases, we are optimistic about this cooperation's progress to date and confident about its potential for ongoing success in the future. Additionally, through our work with Didi, we also continue to provide Didi work drivers with car purchase transaction facilitation services and a complete suite of auto solutions.

[Foreign language]。

It is worth noting that following the establishment of our partnership with Tesla in late 2019, we have been providing services to all of Tesla's stores in Shanghai during the quarter. Currently, we are actively exploring more collaboration opportunities with other EV manufacturers. We believe there is still untapped growth potential in the EV market, and we will continue to explore opportunities in this area.

[Foreign language]

I would now like to take a moment to touch on our future growth plans. Despite the pandemic's impact on the industry, the fundamentals of China's economy remain strong, and the long-term growth prospects of the Chinese auto market remain promising. On our core auto loan facilitation business, we will continue to strengthen our footprint in lower-tier markets. In addition, we aim to develop new innovative product offerings through our partnership with MYbank, which will enable us to further penetrate and expand into the high-end and luxury segments of the auto market.

[Foreign language]

Through our aftermarket services facilitation business, which is a crucial component of our overarching growth plan, we will perfectly make our car insurance facilitation service to be the primary driver of this business. Additionally, we will continue to explore other insurance transaction channels and categories to meet the increasingly diverse needs of consumers, as well as to expand our insurance product offerings to include those insurance categories that have higher transaction values, such as health insurance.

[Foreign language]

Moreover, we are actively collaborating with internet platforms that have massive levels of online traffic, such as Tmall, Autohome, and Didi, to explore partnership opportunities in developing online solutions for car transactions and auto financing. By effectively integrating online and offline resources, we believe that these partnerships will enable us to reach our target customer pools and provide a full suite of services more efficiently.

[Foreign language]

As we continue to improve our core competitiveness, we remain focused on improving our operating efficiency. Our platform's increasing network demands will enable us to further augment our negotiating leverage. On the user acquisition front, we will continue to refine our corporate structure with an emphasis on enhancing our team's operating efficiency. While we maintain our commitment to implementing effective cost control measures, we will now continue our efforts to enhance our R&D, develop new business initiatives, and drive technical innovation forward.

[Foreign language]

Looking ahead, the impact of the pandemic is far from over, and we expect the industry to remain under pressure. Nevertheless, we are ready to face the challenges of the fastest market environment head-on. While we maintain our first-mover advantage in emerging markets through our lower-tier services, we are also committed to expanding to the high-end segment of the market through our introduction of innovative product offerings. Furthermore, we will continue cultivating our aftermarket services business as our new growth driver, particularly insurance facilitation services. Meanwhile, we are also developing our technological capabilities, integrating online and offline resources to explore effective marketing approaches. On the operations front, we will continue to further improve our operating efficiency, refine our cost structure, and invest in technology and innovation.

[Foreign language]

Our persistence, combined with our constant pursuit of growth, will enable us to address the current market uncertainties and emerge in a stronger position. By leveraging our competitive advantages in power and all industry participants and fueling the development of the entire automotive industry value chain, we will continue to lay the foundation for lasting growth and the generation of shareholder value.

[Foreign language]

With that, I will now turn the floor to our CFO, Michael Zhang, to review our financial performance in this quarter.

Yongyi Zhang (CFO)

Thanks, Jiayuan. Hello everyone, and welcome to our first 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. During the first quarter of 2020, as expected, the Chinese automotive industry was significantly impacted by the COVID-19 outbreak. As a result of these unprecedented operating challenges, our total revenue in the first quarter was RMB 246 million compared to RMB 351.7 million in the same period of 2019. However, as mentioned earlier, we made solid progress in expanding our insurance service offerings during the period. Consequently, our aftermarket services facilitation business continued to perform well, with its revenue growing to RMB 49.1 million or 19.9% of total revenues in the period. Now let's move on to our costs and expenses during the quarter.

Total operating costs and expenses in the first quarter of 2020 were RMB 327.3 million compared to RMB 282.3 million in the same period of last year. The increase in operating costs and expenses was due to the significant increase in net loss on risk assurance liabilities, mainly caused by the COVID-19 pandemic. Cost of revenues in the first quarter of 2020 decreased by 30.7% to RMB 90.6 million from RMB 130.8 million in the same period of last year. As a percentage of total revenues, cost of revenue in the first quarter of 2020 decreased slightly to 36.8% from 37.2% in the same period of last year. Sales and marketing expenses in the first quarter of 2020 increased slightly to RMB 45.8 million from RMB 45.5 million in the same period of last year.

As a percentage of total revenues, sales and marketing expenses in the first quarter of 2020 increased to 18.6% from 13% in the same period of 2019. General and administrative expenses in the first quarter of 2020 decreased by 11.4% to RMB 57.4 million from RMB 64.8 million in the same period of last year. As a percentage of total revenues, general and administrative expenses in the first quarter of 2020 increased to 23.3% from 18.4% in the same period of 2019. Research and development expenses in the first quarter of 2020 decreased by 5.9% to RMB 12.6 million from RMB 13.3 million in the same period of last year. As a percentage of total revenues, research and development expenses in the first quarter of 2020 increased to 5.1% from 3.8% in the same period of last year.

Net loss on risk assurance liability in the first quarter of 2020 increased to RMB 76.9 million from RMB 19.9 million in the same period of 2019. The increased net loss on risk assurance liabilities was mainly due to uptick in delinquent loan balance and default rate. In addition, the pandemic also made it more difficult for in-person visits with delinquent car buyers and vehicle repossession, which resulted in an increase in loss given default ratio. This was in line with industry trends and our previous stated expectations. Due to the COVID-19 pandemic, we recorded loss from operations of RMB 81.3 million in the first quarter of 2020 compared to an income from operations of RMB 69.3 million in the same period of last year. Net loss in the first quarter of 2020 was RMB 34.7 million. Non-GAAP adjusted net loss in the first quarter of 2020 was RMB 11.4 million.

On a per-share basis, our diluted net loss per ADS in the first quarter of 2020 was RMB 0.25, and our diluted non-GAAP adjusted net loss per ADS in the same period was RMB 0.1. Moving on to our balance sheet, as of March 31st, 2020, we had a cash and cash equivalent of RMB 2.7 billion compared with RMB 2 billion as of December 31st, 2019, mainly due to the asset-backed security issued by our subsidiary, Shanghai Chejia Financial Leasing Corporation Limited, in the first quarter of 2020. Looking forward to the second quarter of 2020, we expect our total revenue to be between RMB 230 million and RMB 250 million. Please note that this forecast reflects our current and preliminary view on the market and operational conditions, which are mainly in consideration of the uncertainty in the market caused by the COVID-19 outbreak and are subject to change.

This concludes our prepared remarks, and operator, we are now ready to take questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. When asking a question, please state your question in Chinese first, then immediately repeat your question in English for everyone's convenience. Your first question comes from Lucy Li with Goldman Sachs. Please go ahead.

Lucy Li (Executive Director of Private Wealth Management)

[Foreign language]. I have three questions in here. The first one is on the basis of Q2 outlook. We read from the earnings statement that we are expecting revenue in between RMB 230-RMB 250 million in second quarter, which implies roughly flat quarter-on-quarter. However, I think from the macro or overall consumption perspective, there has been a pretty significant recovery or improvement in the past two months. Wondering if management could share with us the numbers you have observed, for example in terms of facilitation volume or dollar amount in April and May. The second question is on asset quality.

Given that the asset quality could be improving going forward, could the management, one, share the latest delinquency trends, and secondly, on the net loss on risk assurance liability, if the work is behind us, shall we anticipate much less significant number going forward or potentially can we expect any write back? Thirdly, on the business strategy going forward, the first part on MYbank and OneConnect, can you share with us the business model and, related to that, the likely fee rate for the loans originated with MYbank? Secondly, on the online strategy, if you can add more color. Thank you.

Yongyi Zhang (CFO)

[Foreign language] Lucy，[Foreign language] guidance，[Foreign language] lower-tier city [Foreign language] CS [Foreign language]

Thank you, Lucy. I will take your first two questions. Mr. Lin, Jiayuan will take your third question. The first question you ask about the rationale behind our guidance. We have provided guidance for two reasons. Firstly, indeed it meets balancing, I mean based on our divisions of the market in April and May, we do we also do see some recovery in the consumer demand. However, as we indicated in Mr. Lin's statement, in terms of the lower-tier cities, the recovery has been much slower than expected.

In the first-tier cities and the second-tier cities and also in the 4S stores and for those distributors, dealers of the luxury brands, they are recovering much faster than their counterparts in the lower-tier cities and non-4S stores as well as those dealers who distribute the nested brands and also lower and mid-range cars. Overall speaking, based on what we observed, the consumer demand in the lower-tier cities has been quite soft and has been recovering much more slowly. Although we expect the business volume in Q2 to rebound, we do not think it will rebound significantly, mainly because of the slower recovery pace in the lower-tier cities.

[Foreign language]

The second reason is because of a change of the partnership model with WeBank. In the past, our partnership model with WeBank is deposit-based, that is, we take risk, but now we have changed to a non-deposit model, that is, we do not take risk, and this has resulted in a change in our fee structure, particularly the take rate. After we adopt the new partnership model, the one-off net take rate has reduced compared to the previously arranged provision take rate. Throughout the lifecycle of loans, we will look at the loan quality, loan quality, that is, the asset quality, and then we decide on the appropriate loan servicing rate. This is just a rough explanation, a general explanation of the new take rate structure.

All in all, because we no longer take risk, the day one one-off net take rate, well, be reduced as a result.

[Foreign language] revenue [Foreign language] guidance。

It is because of these two factors that we have issued the revenue guidance that you see for Q2.

[Foreign language]

Regarding the second question, the delinquency rate, in Q1 indeed because of the pandemic our collection efforts have been disrupted. However, since then we have seen an improvement, especially after the resumption of work. In Q1 because of the disruption, the delinquency rate has indeed increased. However, after the resumption of work we invested a lot of resources in improving our loan servicing efforts. That is why in March and April we have seen improvements in our M1 plus and M2 plus numbers. Actually, the M1 plus and M2 plus numbers have basically almost recovered to the pre-pandemic level of about late 2019.

[Foreign language] M1 plus and M2 plus, it's M1 and M2.

I'm sorry, M1 and M2 numbers.

[Foreign language] M3、M4，[Foreign language] M3、M4 [Foreign language] category [Foreign language]

However, we are still under the influence of the pandemic. Though M1 and M2 numbers have improved, we expect that some loans which used to be M1 and M2 will downgrade, that will migrate downwards to M3 and M4. For the next period our collection efforts will be focusing on those loans that are delinquent by three months or four months. This will be the focus of our efforts. What are we going to do? We will pay more in-person visits and we will also resort to legal processes if necessary.

[Foreign language]

Overall for the next quarter, that is in Q2, we expect the M1 plus number to improve. However, the M3 plus, the numbers that is M3 plus delinquency rate, will increase.

[Foreign language]

Based on all the decisions, we do not see further impact on the P&L by these delinquent loans. There will be no further impact on the gain and losses on P&L, so we do not see a necessity to increase our provision on the net loss on this assurance liability in the near term.

[Foreign language]

We believe that with our collection efforts such as the in-person visits, we will be able to collect more loans back and that will also help reduce the loss given default rate for us, and that will of course allow us to reverse back the previously made provision.

[Foreign language]

Of course, these expectations is based on the current situation based on for including the macroeconomic conditions and as well as the rates of recovery or resumption of work and the resumption of production.

[Foreign language]

Thank you.

Jiayuan Lin (CEO)

[Foreign language]

There was the third question that is our partnership model with MYbank. Thanks to our strong reputation and track record and our partnership with Alipay, our partnership with MYbank and Ant Financial as a whole has successfully reduced the cost of funding for us.

[Foreign language]

The third benefit of our partnership with MYbank is that we are now technologically much more capable and also we have improved the customer experience significantly. For example, when the customer applies for our services, we have been able to realize full automation of the whole process from application to loan origination to contract signing. Everything is done automatically without any manual work.

[Foreign language] Cango [Foreign language]

Thirdly, by leveraging Alipay's capabilities, Cango now are much more effective and efficient in exploring our offline customer segment, now we are able to reach the higher end segment of the market such as the 4S stores.

[Foreign language] banner [Foreign language] banner [Foreign language]

We are exploring more opportunities in our partnership with MYbank, Alipay, and Bank Financial as a whole. We are still thinking should we be, you know, part of the nine components of Alipay or should we, you know, use the Ant Financial banner, we are still discussing with our partners.

[Foreign language]

Thank you.

Operator (participant)

The next question comes from John Cai with Morgan Stanley. Please go ahead.

John Cai (Analyst)

[Foreign language]. My first question is also related to the asset quality. I think we have made most of the provision in the first quarter, so just want to get a sense of the loss as a percentage of the exposure. Probably, can the management provide us with the risk taken balance at the beginning and the end of the quarter? Related to that is, when we make the new loans, do we need to assign a higher loss ratio given the macro uncertainty in the coming quarters, and how would this loss assumption compare with the first quarter or maybe 2019? That is my first question, thank you.

Jiayuan Lin (CEO)

[Foreign language]

John, I will take your question. As of the end of March, for those loans which we take risk, that is, we provide deposit, the balance is about RMB 20 billion. In terms of provision adequacy, actually, since early this year after the outbreak of the pandemic, we have already done a full test on the adequacy of our provision rate, and based on our test, I think our provision for those loans with deposits, that is, loans where we take risk, is adequate.

[Foreign language]

In Q1 we do see a big impact by the risk assurance liability from our gain and losses, so we had to make necessary adjustments based on the asset in the box, that is our historical asset, and then we looked at our historical, our existing provision, and also, you know, looked at the impact of the pandemic. Based on our current expectations, outlook for the pandemic, and also for economic recovery, we think that our provision is adequate. If there is no further negative impact or negative trends in the economy, then we should be fine.

[Foreign language]

Thank you.

John Cai (Analyst)

[Foreign language]. My second question is about the competitive landscape. Firstly, I want to focus on the second level dealers. Just wonder, as we noticed there's a decline of the dealer coverage in the first quarter on a sequential basis. I understand that we have to make some proactive structural adjustments of our dealer mix, but would like to get some comments from the management on how they see the operating environments for these smaller dealers. Are they facing significant challenges, and should we expect these dealer coverage numbers to continue to go down? Also, related to the supply, I think, can the management comment on how we see the auto finance suppliers in the secondary dealer levels, and the key metrics is probably the commission paid to the car dealers. What is the number now versus maybe the past year? Thank you.

Jiayuan Lin (CEO)

[Foreign language]

Oh, okay. To take your question, firstly, based on my personal observation, the number of second-level or non-core dealers indeed decreased because of the pandemic and because of the slow growth of China's economy. We think that the non-core second-level dealers will face a lot of challenges. I mean, if you look at the resumption of work and production with these non-core stores, they are recovering much more slowly than their counterparts in the second- and first-tier cities.

[Foreign language]

Your second question is about the competitive landscape. What we are seeing, more and more, is smaller players, including, you know, financing platforms and also, you know, competitors, they are actually gradually exiting from these markets. We are seeing more consolidation, and we are seeing, you know, these smaller competitors reaching the peak of their performance, so they are gradually declining. Most of the competition markets are on prices, well, not just on the condition rate, in fact.

[Foreign language]

Thank you

John Cai (Analyst)

[Foreign language]. So my next question is about the luxury or the dealership markets. Just wonder what's our strategy to target the tier one, tier two city dealers. We mentioned the case of Tesla and it seems that it's based on our relationship with ICBC and then ICBC has a partnership with Tesla, and as a result we can offer the auto finance products in the Tesla stores in Shanghai. Just wonder if we follow a similar path to develop these tier one, tier two dealer coverage, and also in the case of Tesla, do we know how many auto finance suppliers in the Tesla stores in Shanghai? Thank you.

Jiayuan Lin (CEO)

[Foreign language]

For our strategy, we are targeting the higher end segment of the market, such as the higher end brands. We have not formalized our strategy for this market segment yet. However, we do see that customers in this segment demand high level experience, and this is where we are going to work on in the future. However, we have not finalized and formalized our strategy for this market segment yet, and we are still testing, we are still exploring opportunities.

[Foreign language]

Regarding your question on Tesla, actually Tesla has nine auto financing service providers in the country. Where do we compete? We compete on the service capabilities—that is, how we serve the Tesla customers and how we can help generate sales leads for the salespeople of Tesla. If we succeed on these two fronts, then we will get more market share.

[Foreign language]

John Cai (Analyst)

[Foreign language]

Operator (participant)

We have no further questions at this time. I'll hand the call back to management for closing remarks.

Jiayuan Lin (CEO)

[Foreign language]

Thank you all for your interest and thank you all for your support for Cango. That is all for today's conference call. Thank you.