Cango - Earnings Call - Q1 2021

Transcript

Operator (participant)

Good morning and good evening, everyone. Welcome to Cango Incorporated First Quarter 2021 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 prepared remarks, we will conduct the Q&A session. 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. With that said, I am now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Jiayuan Lin (CEO)

[Foreign language] 大家好，欢迎参加灿古2021年第一季度财报电话会。

Hello everyone and welcome to Cango's 2021 first quarter earnings call.

[Foreign language] 迈入2021年，在中国经济稳定复苏以及促销促促消费政策的双重作用下，第一季度消费者购车意向呈呈现回暖态势，带动国内汽车市场的销量增长。但我们也关注到汽车零部件供应链问题，导致供给侧压力加剧，可能对车市的复苏进程带来较大的不确定性。

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 noted that the pressure on the supply side caused by auto parts shortage has increased and will likely bring uncertainties in the overall pace of the industry's recovery.

[Foreign language] 回到公司层面，我们的各业务条件在2021年一季度发展稳健，实现总收入人民币11.24亿元，超出我们之前给出的指引上限7%。公司营运利润继续保持良好的态势，达到人民币1.6亿元。去年同期营业亏损为人民币8,132万元。本季度由于受到理想汽车股价波动的影响，产生投资公允价值变动损失人民币4.47亿元，导致本季度净亏损人民币2.74亿亿元。

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 moment 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] 自公司成立起，灿古灿古就将自己定位为汽车流通领域的服务平台。在我们看来，通过聚合经销商、金融机构、主机厂等多方资源，为消费者提供令人欣喜的产品和服务，并助力推动汽车行业的大发展，是始终未变的初心，也是灿古的核心价值所在。在过去的这个季度，我们按照公司的长期愿景，稳步推动各项业务的发展，在汽车交易服务、汽车后市场服务和汽车贷款促成三大领域，继续深入布局，逐渐形成服务闭环，从而重新塑造汽车交易中人货厂三者关系，为汽车流通价值链上的各方参与者创造价值。

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 I've continued to steadily advance our business development plans during the quarter, further deepening our roots across our three 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] 首先说一下汽车交易服务业务。作为公司重要的增长引擎，我们的车交易服务业务在第一季度的收入总额达到5.72亿元人民币，占比总收入近50.9%。作为供与需的连接者，凭借科技驱动的线上平台和深深扎下沉市场的线下渠渠道网络，灿古已同多家传统车厂和新能源厂商建立深度合作，并在此基础上聚合汽车交易环节的各方参与者，共同探索灿古特色的下沉市场新渠道策略。

Let me expand. First, I would like to start with our car trading transactions 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. Bridging 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] 今年4月，灿古与郑州日产签署战略合作协议，围绕汽车交易、金融和品牌营销多元领域展开深入合作。协议下，双方将发挥各自优势，在下沉市场汽车产销、市场推广营销方面展开合作和创新，打造下沉市场双赢局面。与此同时，灿古还将向郑州日产品牌旗下所有认证二级经销商门店购车客户提供金融分析产品及服务。此外，我们与更多主机厂的合作商谈也在推进之中。

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's certified secondary dealer stores. Meanwhile, we are currently in negotiations for potential collaborations with various other OEMs.

[Foreign language] 一季度，我们在车交易及服务的基础能力上持续投入。首先，灿古打造自己的获客渠道及私域流量的经纪人模式，进一步在全国拓展。截至一季度末，已推广至10个省份。目前，我们的注册经纪人已超过1万名，并为其配置了456个支点经销商。传统经经销商及渠道叠加经纪人网络的不断拓宽加深，将助力灿古有效触达下沉市场的消费者，并为之提供更优质的产品和服务。其次，我们将继续完善仓储物流布局。截至一季度末，已累计合作建立101个前置仓，合计容量近3.3万个车位，覆盖全国79个地市，加速了我们在下沉市场的分销网络布局。

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 in 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 continue to improve the layout of our warehousing and logistics. By the end of the first quarter, we had co-developed 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] 车是由增量切换存量，汽车后市场及服务业在汽车流流汽车流通价值链中比例不断攀升，依托于全国近5万家汽车经销商网络和逾180万车贷客户的资源。汽车后市场服务在灿古汽车交易服务平台全业务版图上也构成重要一块。第一季度，以保险促成为主的汽车后市场业务继续对公司营收产生重要贡献，当季共计收入人民币6,253万元。本季度，我们将我们继续优化保险直销团队的组织结构和内部运营体系，显著提高了人均产能。同时，我们和新能源车制造企业的合作也进一步深化，通过将车险产品和服务嵌入到新能源厂商的车主服务APP中，协助其为客户提供更优质的保险产品及服务，并提升整体效率。此外，今年我们也将继续开拓汽车后市场维修保养服务，目标涵盖更广泛的后市场版图，打造人车生活的全新产业生态。

As China's auto market enters a new phase of development after years of high-speed growth, it transitions from meeting the needs of first-time purchases to the replacement and upgrade needs, further boosting the growth potential of aftermarket services. Relying on a 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 construction services platform. In Q1, aftermarket services facilitation revenues were RMB 62.5 million. We continue 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] 最后，作为我们主要业务板块的汽车住贷业务，在一季度发展稳健。第一季度，公司完成新增汽车贷款贷款额人民币103.95亿元，同比上涨134%。汽车住贷业务收入人民币4.12亿元，同比上涨243%。截至一季度末，再贷余额累计达人民币475.34亿元。

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 31st, the total outstanding balance of financing transactions facilitated by the company reached RMB 47.5 billion.

[Foreign language] 资产质量方面，截至到2021年3月31日，公司所有已完成并在存续期的汽车贷款的M1加和M3加预期率上升至1.23%和0.54%。针对预期率上升的问题，我们进一步加大现场风控和渠道风控的力度，便联合特征识别引擎以及改善模型等数字手段，达到差异风控的目的效果。同时，我们也已成立专案小组，提升代后催收的效率和效果。

Turning to asset ecology, as of March 31st, the M1 Plus and M3 Plus overdue ratio increased to 1.23% and 0.54% respectively. To address rising overdue ratio, we continue to strengthen onsite and channel risk controls, along with additional digital measures such as feature 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] 渠道方面，这一季度我们继续对经销商结构优化调整，对服务标准、客群质量或流量不达标的经销商做下限处理。截至一季度末，灿古合作的汽车经销商总数为47,017家。提升下沉市场运营效率的同时，我们通过创新产品切入更高端的渠道及更优质的客群。截至3月底，我们高端品牌团队已进驻包含奔驰、宝马在内的40多家和知极高端品牌的超过9,000家4S店，并与多家大型经销商集团开始了合作。

In terms of dealership network, we continue 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 segment with innovative product offerings. As of March 31st, we have covered more than 9,000 foreign dealers of approximately 40 high-end OEMs, including Mercedes-Benz and BMW, and established partnerships with several leading dealer groups in China.

[Foreign language] 在刚过去的2021年上海车展上，智能新能源汽车成为当之无愧的主题。在政府大力推动下，中国连续多年成为全球最大的新能源汽车生产国和第一大市场。中国新能源汽车保有量占全球一半以上，灿古一直看好新能源汽车市场的巨大发展前景，并积极推动与国内领先造车新势力和新能源制造企业的深度合作，以其优势互补，共同探索下沉市场销售新通路。

Modern new energy vehicles features 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 NEVs in the world. Cango has always been optimistic about a huge potential in this market and actively 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] 展望未来，受供应链影响，汽车行业缺芯情况将可能持续较长时间，料将对我们整体业务产生一定的影响。同时，国内金融供给状况及监管环境也在发生深刻变化，我们将密切关注并积极应对，顺势而为调整业务形态，通过创新产品紧跟行业变化趋势，并坚定地朝着既定的战略目标逐步迈进。

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 environments 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 places us on a step-by-step pace to achieve our established strategic goals.

[Foreign language] 接下来，有请我们首席财务官张永毅来回顾一下公司在本季度的财务表现。

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

Michael Zhang (CFO)

Thanks, Jiayuan. Hello everyone, and welcome to our first quarter 2021 earnings call. Before I started 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 transactions 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 auto financing facilitation and aftermarket services facilitation were also robust at RMB 411.7 million and RMB 62.5 million, respectively, in the first quarter. Now, let's move on to our costs and expenses during the quarter.

Total operating costs 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 the 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 of 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 of 2020. 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 relevant revenues was around 35.6% in the first quarter of 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 of 2020. As a percentage of total revenue, sales and marketing expenses in the first quarter of 2021 was 5.1%, compared to 18.6% in the same period of 2020. General and administrative expenses in the first quarter of 2021 were RMB 61.4 million, compared to RMB 57.4 million in the same period of 2020. As a percentage of total revenue, general and administrative expenses in the first quarter of 2021 was 5.5%, compared to 23.3% in the same period of 2020. Research and development expenses in the first quarter of 2021 were RMB 13.6 million, compared to RMB 12.6 million in the same period of 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 of 2020. Net loss on risk assurance liability in the first quarter of 2021 was RMB 21.7 billion, compared to a net loss of RMB 76.9 million in the same period of 2020. Net loss on risk assurance liability in the first quarter of 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 operations 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 31st, 2021, we had cash and cash equivalents of RMB 1.6 billion, compared to RMB 1.4 billion as of December 31st, 2020. As of March 31st, 2021, the company had short-term investment of RMB 2.6 billion, compared to RMB 4.3 billion as of December 31st, 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 (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Your first question comes from Shelley Wang with Morgan Stanley. Please go ahead.

Shelley Wang (Equity Research VP)

[Foreign language] 管理层好，我是摩根士丹利的Shelley。有两个问题想请教一下。第一个是想请教一下管理层对于下半年整个汽车的需求的展望，因为这个肯定会影响我们主要的车贷业务，然后尤其是在低线城市的汽车需求的展望是怎么样。第二个是想请教一下，我们在跟新能源那些造车新势力合作一些车贷、保险产品的时候，因为我的理解就是他们可能是直销模式跟传统的经销商不太一样，我们跟他们去合作这些车贷保险的时候，合作模式跟传统的车企有什么不一样？就这两个问题，谢谢。

Operator (participant)

Okay.

I'm Shelley Wang from Morgan Stanley. I have two questions. The first question is, what is your outlook for the demand in the second half of 2021? 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. 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. In your collaboration with these NEV makers, based on your observation, how is their model different from traditional car manufacturers? I mean, how is your collaboration with them different from your collaboration with traditional car manufacturers?

Jiayuan Lin (CEO)

[Foreign language] 关于第一个问题，目前看来下半年汽车需求端还是比较旺盛，但更大的问题在于供给端，车源的压力会持续较长时间。芯片及零部件紧张的形势下，高端品牌及核心城市的失业证的需求会被优先保障。我们也确实感知到国产自主品牌以及下层市场的压力会比较大。

To answer your first question, so far we see demand in the auto market remains strong, but we have concerns about the supply side. We think that the pressure of insufficient supply will likely persist for some time to come. There is this issue of chip shortage, and we think that the needs of high-end brands and foreign stores in megacities will be prioritized. We expect the domestic auto brands and lower-tier markets to face more pressure in the second half of this year.

[Foreign language] 关于第二个问题，与传统车企合作，我们是通过覆盖全国的经销商网络进行线下车贷保险业务的展业。在于新造车新势力的新能源的合作中，因为新能源的合作是线上化的，新造车新势力多为直销模式，建设自营展厅，在线上通过极简流程完成试乘试驾以及车辆订购。目前我们将车贷保险产品以及服务是嵌入到新能源厂商的车主服务的APP中，协助其为客户提供够优质的保险产品及服务，不仅提升了整体效率，也契合其线上化、直营化的特点。直销模式下，我们的车贷保险服务是嵌入车主平台的，有助于份额的提升。

To answer your second question, with traditional auto manufacturers, we expand our automotive financing facilitation business through our nationwide dealership network. This is mostly an offline collaboration. In terms of collaboration with NEV manufacturers, it is an online-based model because the NEV manufacturers adopt a 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. We are currently deepening our cooperation with NEV manufacturers by embedding auto insurance products and services into their mobile apps, for example, to help them better provide insurance products and services to their customers. This kind of collaboration model not only improves overall efficiency, but also conforms to our partners' business models.

Under the direct selling model, our automotive financing facilitation service is embedded into the car owners' platform, and this helps boost our shares. Thank you. Your next question comes from Derek Ku with Goldman Sachs. Please go ahead.

Derek Ku (VP)

[Foreign language] 哎，观众朋友好，我是来自高盛的 Derek。我有两个短的问题。第一个是关于我们的车交易的服务，我想了解一下我们的 margin 的情况，就是我们是大概进货价和出货价都是什么样子的，然后我们对 2021 年的一个展望。然后第二个是关于我们的汽车后市场服务，就是我们现在是否有任何去扩展我们这个服务品类的计划，就比如说跟维修厂有更多的合作。我来翻译一下吧。

This is Derek from Goldman. I have two short questions. First, it's 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? The second question is about the aftermarket services. Do we have any plan of expanding the services besides insurance sales, such as collaboration with repairing stores?

Question is okay. Sorry.

Jiayuan Lin (CEO)

[Foreign language] 谢谢 Derek. 关于第一个问题，车交易。关于进货和出货价格，不同的车型以及不同的区域，定价策略都是不一样的，取决于公司的业务团队调研和专业的判断。我们更重视的是赋能经销商，尽可能地从主机场拿到大客户基材价，把更多的利润分享给经销商，以提升他们的交易能力。就第一季度数据来说，我们一季度的毛利率 1.3%，较上季度有所提升。我们预计汽车行业的芯片短缺会对我们车交易业务的车源供应产生一定的压力。同时我们也积极推进与多家主机厂的总对总战略合作的落地。如果进展顺利，预计今年的交易量将达到 45,000 台。

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

[Foreign language] 第二个问题，关于我们的保险和汽车后市场服务业务。目前我们还是以保险产品为主，但我们也在尝试向车主服务和维修保养服务延伸，现阶段还未起量。今年开始，我们已经在部分区域开拓试点汽车送返修服务。随着我们流量的积累，未来我们会整合资源，标准化和规范化修理厂的管理和服务，筛选优质伙伴，逐渐开拓汽车配件、汽车美容保养以及代价等业务，目标涵盖更广泛的后市场版图。

For your second question, our service range in the aftermarket business. The focus of our aftermarket service facilitation remains on insurance products for now, while we are also trying to expand 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 invest more in selecting the right partners and gradually develop auto parts component services, as well as auto care service and also definitive driving business. Overall speaking, we plan to cover a wide range of services facilitation business.

That's all from me.

Operator (participant)

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

Jiayuan Lin (CEO)

[Foreign language] 好，谢谢大家。第一季度财报电话会到此结束，谢谢。

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.