Cango - Earnings Call - Q3 2020

Transcript

Operator (participant)

Good morning and good evening, everyone. Welcome to Cango Inc's Third 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. 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 make forward-looking statements. With that, I am now turning 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 Third Quarter 2020 Earnings Call.

[Foreign language]

In the second half of this year, China's auto market has regained momentum with gradual recovery in the lower tier cities. With steady progress across our business, we are pleased to see a significant rebound in both our financial and operational performance. Total revenue in the third quarter was approximately RMB 435 million, outperforming the high end of our guidance range by approximately 32%. In particular, our aftermarket service facilitation revenue grew to RMB 68.9 million, accounting for nearly 15.8% of total. Our car trading transaction business also contributed considerable revenue in this quarter, reaching RMB 70.4 million. Operating income sustained its growth momentum from the previous quarter and came in at approximately RMB 135 million, mainly attributable to our effective cost control initiative. Finally, our net income of this quarter was close to RMB 1.8 billion, mainly attributable to the significant investment gain from the auto.

[Foreign language]

Our deep and wide coverage of dealership network, continuous upgrades and innovations of products and services are the main drivers for our sustained growth. We are committed to building an integrated platform that serves all parties in the automotive value chain while offering safe, professional, and efficient auto transaction-related products and services to our customers. By implementing our key growth strategy and successfully expanding our core and new businesses, we are witnessing increasing demand for our products and services, which is leading to improved operating efficiency and gaining market share.

[Foreign language]

Let's start with our core auto loan facilitation business. In the third quarter, we facilitated RMB 7.5 billion financing transactions, up 30% from the same period of last year, marking the first period of year-on-year growth since the pandemic outbreak. As of September 30, 2020, the total outstanding balance of financing transactions the company facilitated reached RMB 38.9 billion.

[Foreign language]

In terms of the dealership network, with our proactive expansion in foreign stores and introduction of new products, the number of new dealers is growing again. By the end of this quarter, we have had a total of 46,248 registered dealers nationwide, maintaining our leading position in auto financing with the most extensive coverage of dealers for new cars in China.

[Foreign language]

More importantly, after optimizing the efficiency of our lower-tier dealership network over the past quarters by terminating relationships with dealers that were not up to our standards for operating risks and traffic generation capabilities, we have seen a significant improvement in the overall operating efficiency in the lower-tier markets. Additionally, by providing more diversified products and services, our dealers are becoming more active, and along with the auto market recovery, transaction volumes steadily increase.

[Foreign language]

Earlier this year, we mentioned that future consumer demand is expected to diverge significantly with more consumers and customers pursuing higher-end brands. For Cango, we plan on expanding into high-end and luxury segments of the market while furthering our foreign stores network. With this goal and strategic plan in mind, we have set up a dedicated team to target high-end brands. Since the inception of this plan in July, we have established partnerships with Mercedes-Benz, BMW, and Audi, to name just a few, and the number of foreign dealers partnering with us is rapidly increasing. In the third quarter, business volume contributed by foreign stores has been doubled month by month, and our efforts to develop the business of foreign stores enables us to capture potential in this market and help Cango gain further market share. Going forward, we plan to deploy more resources to improve its coverage.

[Foreign language]

Turning to asset quality, during the third quarter, the overdue ratio was continuously improved, and the overall asset quality was close to the pre-pandemic level. As of September 30, 2020, the M1+ overdue ratio decreased to 1.11% from 1.59% as of June 30, 2020, and the M3+ overdue ratio decreased to 0.53% from 0.84% during the same period.

[Foreign language]

In addition to strengthening our core auto loan facilitation business during the third quarter, we also continued our pursuit of expanding our aftermarket services facilitation business. In particular, our insurance facilitation services achieved an outstanding performance during the quarter. It is worth noting that we successfully built our key account sales team and call center for our insurance business in the third quarter, which greatly improved the conversion rate of our overall insurance facilitation business. The team acquires new customers mainly from outside of our registered dealership network, including repair shops and other aftermarket service providers. Now, KA sales of our insurance products have become an important driver for our future growth.

[Foreign language]

Our insurance facilitation services have showed great growth potential. Looking ahead, we will continue to explore other premium 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 of higher transaction values. As our products become more diversified and tailored to the needs of customers and consumers, the entire service experience will become more enriched for them. Our next step is to focus on aftermarket services, in which we will further enhance our technology service capabilities to improve the customer experience, stickiness, and engagement. At the same time, the KA sales business model mentioned above will help us further expand our customer base and bring new growth opportunities.

[Foreign language]

In terms of our cooperation with strategic partners, the OEM subsidized products we made via our cooperation with ICBC were launched to the market in July 2020, with Dongfeng Nissan, FAW-Volkswagen, and GAC Honda included in our first batch.

[Foreign language]

As China's leading technology-based automotive transaction services platform, we are always closely monitoring the latest market trends and taking them into consideration when developing our growth strategies. New energy vehicles, or NEV, is an inevitable trend in the evolution of the automotive industry. We have firm confidence in this market and have begun to invest in this field. Our investment in Li Auto back in 2018 is expected to bring significant investment returns and strategic cooperation opportunities following its listing on NASDAQ. Our investment in Li Auto was not only made for financial returns but also from a strategic perspective. On one hand, our business model is highly aligned with the NEV operation model and leveraging our extensive industry experience, China's largest offline new car dealership network, and our industry know-how and capabilities.

We are able to empower the NEV manufacturers and help them realize the last mile of their direct sale model. At the same time, our wide lower-tier network and on-the-ground service capabilities enable us to provide additional value by helping those NEV move the whole process online and truly provide our customers with efficient, affordable, transparent, and simple one-stop services.

[Foreign Language]

We are currently Li Auto's service partner nationwide and cover all Tesla stores in Shanghai. Leveraging our successful experience and increasing popularity of NEVs, we are looking forward to establishing close partnerships with more NEV OEMs in the future. We have high confidence in the growth potential of NEVs, and we will continue to deepen our exploration in this field and accelerate the healthy development of the whole industry.

[Foreign language]

Next, I would like to discuss our new independent sales rep initiative. This new sales rep network is completely independent of our dealership network. Through social vision, by utilizing each agent's social relations to amplify our marketing efforts and maximize the consumer growth in a cost-effective way, it creates direct access to our target customers and builds up our private traffic, forming a closed transaction loop. Through our technology platform and by utilizing social tools, we are offering product services and technological power. Through this registered agent network on our platform, we can reach consumers in lower-tier markets more effectively and directly, and in return, provide them with better products and services. Since we started our pilot project in Yunnan Guizhou area in this July, we have seen very satisfying results.

As of now, we have more than 4,000 registered agents, and we expect to expand this new business model in China's other regions in the future.

[Foreign language]

Turning now to our car trading transactions business, we have made a lot more effort in this area since the beginning of this year, and we have built up our definite team and business process in the third quarter. The head of this business segment is an industry veteran with over 15 years of experience in this area, and we expect to see stronger developments and more meaningful revenue contributions in the coming quarters.

[Foreign language]

Since the beginning of 2020, COVID-19 and resulting market volatilities have created a lot of opportunities for us to explore new business models. We are very pleased with our performance at this stage. Our consistent exploration and innovation demonstrate our management team's business acumen and our ability to follow industry trends, as well as strong management and execution capabilities. Looking ahead, we remain committed to providing a more user-centered product mix around automotive financing and transaction, while at the same time further deepening our dealership network and extending our service footprint.

[Foreign language]

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

Michael Zhang (CFO)

Thanks, Jiayuan. Hello everyone, and welcome to our Third 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. Total revenues came in at RMB 434.9 million in the third quarter of 2020, once again outperforming our previous guidance range. In addition, our aftermarket services facilitation business continued to serve as an important growth driver, generating RMB 68.9 million in revenues for the third quarter, and accounting for approximately 16% of total revenue. Car trading transactions business also became a meaningful growth driver this quarter, contributing RMB 70.4 million in revenues. Now let's move to our cost and expenses during the quarter. Total operating cost and expenses in the third quarter of 2020 were RMB 300.4 million, compared to RMB 261.6 million in the same period 2019.

This was in line with the increase in the company's sales volume and related costs incurred by car trading transactions. Cost of revenue in the third quarter of 2020 increased by 44.2% to RMB 180.9 million from RMB 125.4 million in the same period 2019. As a percentage of total revenues, cost of revenue in the third quarter of 2020 was 41.6%, compared to 35.7% in the same period 2019. Excluding the financial impact from the car trading transactions, cost of revenue as a percentage of total revenue was 30.3% in the third quarter of 2019. Sales and marketing expenses in the third quarter of 2020 were RMB 41.9 million, compared to RMB 47.6 million in the same period 2019. As a percentage of total revenue, sales and marketing expenses in the third quarter of 2020 decreased to 9.6% from 13.5% in the same period last year.

The decrease was a result of the company's effort to improve the efficiency of cost and marketing spending while growing its revenue concurrently. General and administrative expenses in the third quarter of 2020 were RMB 52.2 million compared to RMB 52.3 million in the same period 2019. As a percentage of total revenues, general and administrative expenses in the third quarter of 2020 decreased to 12% from 14.9% in the same period last year. Research and development expenses in the third quarter of 2020 were RMB 14.2 million compared to RMB 13.2 million in the same period 2019. As a percentage of total revenue, research and development expenses in the third quarter of 2020 decreased to 3.3% from 3.8% in the same period last year. Net gain on risk assurance liability in the third quarter of 2020 was RMB 12.9 million compared to a net loss of RMB 7.5 million in the same period last year.

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 RMB 134.5 million in the third quarter of 2020, compared with RMB 89.7 million in the same period last year. Net income in the third quarter of 2020 was RMB 1,769.4 million. Non-GAAP adjusted net income in the third quarter of 2020 was RMB 1,783.2 million. On a per-share basis, our diluted net income per ADS in the third quarter of 2020 was RMB 11.78, and our diluted non-GAAP adjusted net income per ADS in the same period was RMB 11.87. Moving on to our balance sheet as of September 30, 2020, we had cash and cash equivalents of RMB 1.4 billion compared to RMB 2 billion as of June 30, 2020, mainly due to the fact that the company invested a certain amount of cash in term deposit and repaid debt.

As of September 30, 2020, the company had a long-term investment of RMB 2.3 billion compared to RMB 551.5 million as of June 30, 2020. The increase was mainly due to the change in fair value of the company's investment in Li Auto. Looking ahead to the fourth quarter of 2020, we expect our total revenue to be between RMB 700 million and RMB 750 million. Please note that this forecast reflects our current and preliminary view on market and operational conditions, which are made in consideration of uncertainties in market caused by the COVID-19 outbreak and are therefore 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 star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. For the benefit of all participants in today's call, if you wish to ask your question to the company's management in Chinese, please immediately repeat your question in English. We will pause momentarily to assemble our roster. The first question today comes from Shelley Wang with Morgan Stanley. Please go ahead.

Shelley Wang (Analyst)

[Foreign language]

I think I will translate your question. First of all, congratulations to the management for your outstanding performance in the third quarter, and I actually have three questions. The first question is about your outlook for your fourth quarter performance and your performance for next year. If you look at the monthly sales of the car brands in China, we are witnessing strong rebound in China's auto market, in particular the China domestic OEMs such as Changan and Great Wall. Based on your presentation, your guidance for next quarter for your revenue is about RMB 700 million-RMB 750 million. Could you share with us your outlook on your performance in fourth quarter and for next year in more details, and also which business lines do you expect to contribute more to this growth in the fourth quarter?

Is it your core car loan business or new business?

Michael Zhang (CFO)

Hi, Shelley, [Foreign language]

Thank you very much, Shelley, for your questions. Indeed, from third quarter to fourth quarter, we expect the car market to continue its strong rebound, especially in the lower tier cities. In our previous quarter presentation, we mentioned that actually in the first half of this year, the lower tier market segments have been relatively slow in terms of their recovery. However, in the third quarter, these lower tier markets definitely picked up its recovery speed, especially the two brands that you mentioned, Changan and Great Wall. Your observations are the same as ours. In terms of our guidance for the fourth quarter, definitely we expect to see stable growth and steady growth in the fourth quarter in terms of our performance metrics.

On our guidance for the fourth quarter, actually in the third quarter, we already see equivalent revenue contribution from our new business lines. In the fourth quarter, we expect significant contribution to the top line from our car trading transaction business. Actually, in terms of the guidance for the fourth quarter, we expect the car trading transaction business contributing 40% to our business growth.

Shelley Wang (Analyst)

[Foreign language]

My second question is about the 4S dealership network. In your presentation, you mentioned that Cango plans on exploring and developing your footprint in the higher-end market segments. In the 4S market, we already see car financing services offered by the premium car brands such as BMW. How are you going to differentiate yourself in this competition? My third question is about the impact of the auto insurance policy launched in September. How are those policies going to impact on your business?

Jiayuan Lin (CEO)

[Foreign language]

Shelley, I will take your questions. The first question about how are we going to gain market share in the 4S dealership market? In China, the 4S dealership market is huge, and we are also seeing strong efforts by banks and the AFC auto financing companies to develop their footprint in this market. However, for our target market share, we are not very ambitious. We only aim for 10%-15% of the market share. How are we going to gain this market share? It is going to be on our differentiated services. First of all, we offer in-person services for our customers, and on the other hand, we also are different from offline service providers by offering strong service capabilities online, for example, like our partnership with Ant.

Actually, we have received very good feedback from our customers for our online services. This is how we are going to be different from the AFCs. Again, we are not going to compete directly against the AFCs because we are not so ambitious in terms of our market share.

[Foreign language]

Just one thing about our product offerings in the 4S market. We are also selling the bank's products to our customers in this market. Actually, compared with the local banks where 4S stores are located, our partner banks have a stronger financial position, and they are offering lower cost of capital.

Okay. [Foreign language]

About your third question, the impact of the insurance fee reform policies launched in September. Indeed, these new policies have put some pressure on our insurance facilitation business. However, we have already taken some countermeasures to mitigate the pressure on us. First of all, we are working with larger insurers to offer better products and services to our customers, thereby gaining market share in this industry transformation. Secondly, we are combining our insurance products and services with our car financing business. In other words, we are utilizing cross-selling strategies to offer a more diversified mix of products and services to our customers, improving their experience. In addition, we are stepping up efforts to build up our KA model, key account sales model, and we are able to integrate our resources in this regard and to prepare ourselves for market developments in the next year.

[Foreign language]

That's all from me.

Shelley Wang (Analyst)

[Foreign language]

Operator (participant)

The next question comes from David Pong with Goldman Sachs. Please go ahead.

David Pong (Analyst)

[Foreign language]

First of all, congratulations to the management on your outstanding performance in the third quarter, and we are also very excited by your outlook for the fourth quarter. My questions are mostly on industry competition. Could you give us more colors on the trends, the market trends in both the first market and in the lower tier markets since the third quarter, or in other words, the post-pandemic markets? My question is mostly on auto financing. The second question is, could you share with us your observations on the market, on your market share and development, and how it's going to be in the future?

Jiayuan Lin (CEO)

[Foreign language]

David, I will try to answer your questions. Actually, the pandemic and the market downturn have given us more time to rethink our business models and to initiate new measures to improve our business models. Over years, thanks to over 10 years of development, we are now well recognized by our partner banks for our high-quality service and very well-designed business process, which deliver very good experience to our customers and consumers. That is why banks working with us are happy to provide with us low-cost capital products. Thanks to these efforts, we are able to further improve and enhance our core business. That is for the core business.

For our new business lines, over the past few months, we have developed and implemented a series of initiatives to develop new business lines, and the initial results have given us more confidence in our future and our strategic directions. These new business lines or initiatives include our efforts to expand into the higher-end 4S stores and NEV markets, as well as setting up the sales rep initiative for our insurance products. In addition, we have successfully launched our car trading transaction business.

Michael Zhang (CFO)

[Foreign language]

Thank you. I would like to add a few observations from my side. First of all, on the demand side, in fact, during the pandemic and after the pandemic, in the lower tier markets, we are seeing the market conditions for the small dealers changing significantly. What I mean is that the smaller dealers in the lower tier markets, they are in a very disadvantaged position now. Although we are seeing rebound in market demand in the recent months, the conditions for the dealers have improved slightly. Still, the smaller dealers, they need strong partners to help them get access to more resources and to help improve their service capabilities. This is where Cango can offer value to our partners in the lower tier markets, and this is also where we see the value of the lower tier markets is.

This trend is very obvious in the pandemic. For us, the key is to help establish ecology based on our platform and offer a diverse range of services and products. This definitely will give us more room to grow and will also help the dealers in the lower tier markets to grow together with us. On the demand side, the second point I would like to make is about the higher tier or the first tier and the second tier cities and also the higher-end market segments, that is the 4S markets touched upon by Mr. Lin. Again, in these market segments, we are seeing some unmet needs here by our partners, for example, in terms of service efficiency and process efficiency. We do see a lot of opportunities for us to drive our growth.

Actually, since July, when we established our teams, in the past three to four months, we have already achieved new business growth for our partnership with 4S stores and luxury and premium brands. In the future, we believe that with our strong service capabilities and also our high-quality financing resources, we will be able to further drive the growth of our 4S market segment. On the supply side, Cango is China's leading auto financing platform. During the pandemic, we are seeing profound changes in industry competition. Actually, since last year, we already saw the trend of market consolidation, and this year the consolidation has picked up pace, in fact.

In the future, we believe only platforms that have their unique core competencies and that are able to deploy well-designed business strategies and that can offer strong products and services to customers will be able to survive and grow.

David Pong (Analyst)

[Foreign language]

Thank you very much for your answers, and congratulations again on your strong performance.

Jiayuan Lin (CEO)

[Foreign language]

Operator (participant)

Again, if you have a question, please press star, then one. We have no further questions at this time. I will now like to hand the call back to management for any closing remarks.

Jiayuan Lin (CEO)

[Foreign language]

That closes today's learning pool. Thank you all for your participation.

Thank you.

Operator (participant)

This conference is now concluded. Thank you.