Cango, Inc. (CANG) Q4 2020 Earnings Call Transcript

Cango, Inc. (NYSE: CANG) Q4 2020 earnings call dated Mar. 12, 2021

Corporate Participants:

Jiayuan Lin — Founder and Chief Executive Officer

Yongyi Zhang — Chief Financial Officer

Analysts:

Shelley Wang — Morgan Stanley — Analyst

Derek Su — Goldman Sachs — Analyst

Presentation:

Operator

Good morning, and good evening, everyone. Welcome to the Cango, Inc.’s Fourth Quarter and Full Year 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 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 today, as management will make forward-looking statements.

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

Jiayuan Lin — Founder and Chief Executive Officer

Thank you. [Foreign Speech] Good morning, and good evening, everyone, and welcome to Cango’s Fourth Quarter and Full Year 2020 Earnings Call.

In 2020, the unexpected pandemic at the beginning of the year brought the industry to a standstill. But China’s economy picked up speed in the second half of the year, and the auto market recovered steadily [Technical Issues] pressure on the auto industry, it also accelerated its pace of transformation.

With the unleashed pent-up demand from the lower-tier markets and continuous progress across our business lines, we are pleased to report that Cango’s overall business rebounded significantly during the second half of this year — of the year, I mean, 2020. As a result, total revenues in the fourth quarter grew to a record RMB 1,097 million, surpassing the high end of our previous guidance range by about 46%. Thanks to our effective cost control initiatives, operating income sustained its growth movements in the quarter and came in at RMB 198 million. Net income for the quarter was RMB 1.6 billion, primarily attributable to an investment gain of about RMB 1.5 billion in the auto.

The year 2020 marked Cango’s 10th anniversary, a significant milestone opening a new chapter of growth for the company. 10 years ago, we founded Cango as we saw unmet demand in the auto transaction value chain, specifically in the lower-tier markets, and this prompted us to create a one-stop platform to connect and empower all parties along the auto value chain while offering an easy and enjoyable car purchasing experience to our customers.

After originating our business in auto financing, we have also deepened our roots in the lower-tier markets. And today, we have a network of nearly 50,000 registered dealers nationwide, making Cango a leading technology-based automotive transaction services platform in China. Building on this solid foundation, we are actively expanding the upstream and downstream of industry value chain, extending our reach to the car trading transactions and aftermarket services facilitation segment, pressing forward toward the goal of better serving customers and the auto industry as a whole.

We are always looking for ways to further advance the overall development of the industry, and we remain dedicated to our vision and mission, which is to make car purchases easy and enjoyable and become an auto service platform of choice for consumers.

As of now, Cango has three main business lines: auto loan facilitation, car trading transactions and aftermarket services facilitation. Through the development of a complete service ecosystem, we connect and empower dealers, OEMs, consumers and other industry participants.

About our car trading transactions business, in the fourth quarter, this business line generated revenue of RMB 547 million, accounting for about 50% of our total revenue. It has become an important growth driver. It is worth mentioning that our car trading transactions business has positive gross margin. In the past decade, when we were actively exploring lower-tier markets and building a nationwide dealership network, we recognized the difficulties of local dealers and the needs of OEMs looking to expand their sales network and channels.

Today, with our strong foothold in the lower-tier markets and service capabilities in auto transactions, we have developed a transaction service platform that effectively connects supply and demand in the lower-tier markets. At the same time, new energy vehicles, in short NEVs, have emerged as an inevitable future trend as technology leads the rapid transformation of all industries, including the auto industry.

NEV manufacturers, which usually adopt the direct operations and sales model, are actively seeking traffic in the lower-tier markets and professional traffic operation support. Cango’s extensive dealership network in the lower-tier markets and efficient service platform puts us in an ideal position to meet their needs.

Cango’s car trading transactions platform has improved the efficiency and convenience of the car transactions by benefiting both car buyers and car dealers and OEMs.

On our car trading connections — I mean, on our car trading transactions platform, we have made solid progress in advancing our service capabilities in the past few quarters. First, in addition to our traditional dealership network, initiatives by our independent sales reps brought in private traffic flow to target more segmented customer groups and did a good job in the fourth quarter. By the end of the fourth quarter, we have had 315 sub-dealers and more than 7,000 independent sales reps across the country. The continuous expansion of our traditional dealership network plus the private traffic generated by our independent sales reps will help us deepen our car trading transactions and aftermarket services facilitation businesses in the lower-tier markets.

Secondly, we are also — we have also greatly improved our logistics and supply chain capabilities. Our self-developed warehouses complement our local partners’ warehouses, allowing us to solve the efficiency problems in the lower-tier markets. By the end of the fourth quarter, we have developed approximately 80 warehouses together with several local infrastructure service providers with a total capacity of more than 30,000 parking spaces, covering 73 cities across the country. This has become an important part of our strategic development to grow our car trading transactions business.

Lastly, as a pioneer and leader in China’s technology-based auto service field, Cango has been committed itself to big data and technological innovation as the core driving force. While we are building a technology-based dealership management system to provide multilevel integrated guidance and services for our dealers to cover the entire car transaction process, we also greatly improved our service capabilities and efficiency.

In 2021, we will further strengthen our service capabilities, covering more car models and expanding our product offerings. Simultaneously, leveraging our technological know-how, we will continue empowering auto dealers by enhancing their transaction capabilities while promoting their branding so as to develop an efficient and effective car transaction model suitable for the lower-tier markets.

In the fourth quarter, our auto loan facilitation business rebounded strongly during the quarter. With in-depth cooperation with large financial institutions, we upgraded and launched advanced products for our target customers, resulting in improved customer service experience and customer base. In the fourth quarter, we facilitated RMB 10.82 billion financing transactions, up 13% year-on-year. Our automotive financing facilitation revenues were RMB 398.1 million, up 51.8% from the same period of last year, recovering to pre-pandemic levels and returning back to the growth track. As of December 31, 2020, the total outstanding balance of financing transactions facilitated by the company reached RMB 43.5 billion.

About asset quality, as of December 31, 2020, the M1+ overdue ratio decreased to 0.98% from 1.11% as of September 30, 2020, and the M3+ overdue ratio decreased to 0.42% from 0.53% as of December 30, 2020.

In terms of our financial performance, our margins and profitability remained stable as business volumes grew.

Finally, our aftermarket services facilitation revenues in the fourth quarter was RMB 70.76 million, strongly supporting total revenue growth. While the auto insurance premium reforms in the fourth quarter put some pressure on the overall insurance industry and may potentially impact Cango’s insurance business in 2021, as a response, we are actively upgrading our traditional offerings and exploring new products.

Looking ahead, we will extend our cooperation with large insurance companies and introduce more diversified product offerings to meet the needs of different customer segments while also expanding our key account sales team to drive the sustainable growth of our insurance business.

In addition, backed by our insurance business, we will continuously help match the upstream and downstream businesses of the auto value chain and dig deep into aftermarket services, such as auto repair and maintenance services.

In terms of our dealership network, by the end of the December 2020, we have had a total of 48,487 registered dealers nationwide. During the quarter, we started to work with some dealer groups and further expanded 4S dealers. With more customers pursuing high end brands, we will further our efforts in this market segment and help Cango gain additional market share.

Dedication and hard work are always recognized and rewarded. Cango always puts customers’ needs first and offers differentiated auto financing products and services.

In the fourth quarter, we won numerous important industry awards. Among them, for the second year in a row, Cango was awarded the Innovative Auto Finance Service Enterprises award by China Automobile Dealers Association. And for the third year in a row, Cango was awarded the Best Auto Finance Service Provider by the China Automobile Golden Engine Award.

Going into 2021, we remain committed to our customer-centric value proposition, rely on our extensive experience in auto financing services, a powerful network of nearly 50,000 dealers and bridged industry resources, we will continue to develop and provide a wide range of high-quality products and services centered around auto transactions and customer demand scenarios and develop ourselves to making car purchases easy and enjoyable for customers.

Our new journey has just begun, and I would like to conclude with the Chinese saying: “Where there is a will, there is a way.”

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

Yongyi Zhang — Chief Financial Officer

Thanks, Jiayuan. Hello, everyone, and welcome to our fourth quarter and full year 2020 earnings call. Before I start to review our financials, please note that, unless otherwise stated, all numbers are in RMB terms and all percentage, comparisons are on a year-over-year basis.

Our continuous and steady progress across business fueled top line expansion in the fourth quarter, with total revenues coming at RMB 1.1 billion, once again outperforming our previous guidance range. Notably, we saw a shift in our revenue streams during the quarter as contribution from our car trading transaction increased to approximately 50% of total revenues. This business has become an important revenue contributor.

Revenues from automotive financing facilitation and aftermarket service facilitation were RMB 398.1 million and RMB 70.8 million, respectively, in the fourth quarter.

Now let’s move on to our cost and expenses during the quarter. Total operating cost and expenses in the fourth quarter of 2020 were RMB 899 million compared to RMB 320.8 million in the same period of 2019. The increase was mainly due to the related costs incurred by the car trading transactions business, primarily as a result of the increase in revenues from 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 fourth quarter of 2020 compared to the same period of 2019.

Cost of revenue in the fourth quarter of 2020 increased to RMB 723.8 million from RMB 157.2 million in the same period of 2019. As a percentage of total revenue, cost of revenue in the fourth quarter was 66% compared to 35.9% in the same period of 2019, and the change was primarily due to an increase in the amount of car trading transactions.

For automotive financing facilitation and aftermarket service facilitation, cost of revenue as a percentage of relevant revenues was around 30% in the fourth quarter of 2020.

Sales and marketing expenses in the fourth quarter of 2020 were RMB 65.8 million compared to RMB 55.2 million in the same period 2019. As a percentage of total revenue, sales and marketing expenses in the fourth quarter of 2020 was 6% compared to 12.6% in the same period 2019.

General and administrative expenses in the fourth quarter of 2020 were RMB 90.1 million compared to RMB 66.1 million in the same period 2019. As a percentage of total revenue, general and administrative expenses in the fourth quarter of 2020 was 8.2% compared to 15.1% in the same period 2019.

Research and development expenses in the fourth quarter of 2020 were RMB 23 million compared to RMB 18.6 million in the same period 2019. As a percentage of total revenue, research and development expenses in the fourth quarter of 2020 was 2.1% compared to 4.2% in the same period 2019.

Net gain on risk assurance liabilities in the fourth quarter of 2020 was RMB 18.8 million compared to a net loss of RMB 6.5 million in the same period 2019. Net gain on risk assurance liabilities was mainly due to a sequential decrease in default rate since the third quarter of 2020.

We recorded income from operations of RMB 198.4 million in the fourth quarter of 2020 compared to RMB 117.7 million in the same period 2019. Net income in the fourth quarter of 2020 was RMB 1,568.5 million. Non-GAAP adjusted net income in the fourth quarter of 2020 was RMB 1,588 million.

On a per share basis, diluted net income per ADS in the fourth quarter of 2020 was RMB 10.4 and diluted non-GAAP adjusted net income per ADS in the same period was RMB 10.53.

For the full year of 2020, our total net revenues increased by 42.5% to RMB 2.1 billion. Total operating cost and expenses were RMB 1.7 billion, net income was RMB 3.4 billion and non-GAAP adjusted net income was RMB 3.5 billion. Diluted net income per ADS and diluted non-GAAP adjusted net income per ADS was RMB 22.17 and RMB 22.69, respectively, in 2020.

Moving on to our balance sheet. As of December 31, 2020, we had cash and cash equivalents of RMB 1,426.9 million compared to RMB 1,423.3 million as of September 30, 2020. As of December 31, 2020, the company had short-term investments of RMB 4.3 billion compared to RMB 1.1 billion as of September 30, 2020. The increase was mainly due to the change in fair value of the company’s investment in the auto and the company’s reclassification of such investment from long-term investments to short-term investments.

Looking ahead to the first quarter 2021, we expect our total revenues to be between RMB 1,000 million and RMB 1,050 million. Please note that this forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Shelley Wang from Morgan Stanley. Please go ahead.

Shelley Wang — Morgan Stanley — Analyst

[Foreign Speech] First of all, congratulations to the management on yet another year of strong performance. I’m Shelley Wang from Morgan Stanley. And so I have three questions. The first question is on the car trading transactions business line. What is your outlook for the business in 2021? For example, how many cars do you expect to complete facilitation in 2021? And also, some dealers may be — they may be able to get cars directly from the OEMs. So what kind of value do you generate with your car trading transactions service to the dealers?

My second question is about the independent sales rep model. How do you manage risk for this model? For example, how do you verify the ability to repay the loans by the customers? And how do you make sure that the loans are indeed used to buy cars?

And my third question is more on the macro economy. So do you see the credit supply tightening in the new year? And how will that — I mean, based on your observation, how will that impact the demand for auto loans? Do you already see less demand for auto loans because of tightening credit supply?

Jiayuan Lin — Founder and Chief Executive Officer

[Foreign Speech] Okay, Shelley, I will answer your three questions. First of all, about the outlook for our car trading transaction in 2021. So we expect that in 2021 for the whole year, we will facilitate 45,000 to 50,000 car trading transactions.

And about the second part of your first question, that is what kind of value do we offer to the dealers? Well, we mainly target the non-authorized dealers in the lower-tier cities. So for these types of dealers, they don’t really have very solid supply of cars from the OEMs because they used to get their cars mostly from the car traders and large 4S stores. So for them, they have quite a lot of challenges in ensuring the supply of their cars. For example, the supply of cars is not very steady and reliable, and sometimes, it’s difficult for them to authenticate the source of cars, and the prices are not very competitive in the market, and the whole supply chain is inefficient.

So targeting these difficulties, we offer various values to the lower-tier city non-authorized dealers because we centralize the sourcing of cars from OEMs, and we also provide supplementary and complementary supply chain services to these dealers. And our services are able to help the dealers to streamline the whole process of car sourcing. And this actually not only helps the dealers but also is very valuable to different parties in the supply chain. It reduces the cost of operation for the dealers and also improves their ability to complete deals as well as their profitability. So in the future, we will continue to improve our logistic service capabilities so as to better empower the dealer partners.

On your second question, risk control for the independent sales rep model, well — for the aftermarket services business line and car trading transactions business line. Well, our independent sales reps, they are mostly helping the company to generate and operate traffic. So there is not much risk exposure to the company on these two business lines.

And then about auto loan transaction business line, we are strictly managing and monitoring the qualification as well as the eligibility of each and every sales rep. And we’re looking to the recommendation, and we also review their authorization levels as well as how they conduct in-person visits. So we have a very strict authorization level set up for all these independent sales reps. In addition, we control the supply of cars to the independent sales reps in terms of the auto loan facilitation business. So because we have strict control over the source of cars, we are able to ensure the authenticity of the transactions.

And thirdly, we are also adopting a more stringent risk control measures on these independent sales reps than for our lower-tier city auto loan facilitation business. And so far, the — if you look at the loan service management, in fact, the quality of the loan service management is close to the average level of the company.

As for your third question, the macro credit policy’s impact on our business. Well, if you look at the government — central government’s policies, for example, a 2021 State Council’s work report, it has been clearly proposed that measures will be taken to drive consumption in the rural areas of China and in the counties and smaller cities of China as well as to increase the supply of cars as well as to increase the demand of — for cars steadily. So definitely, the macro policies are in favor of companies like Cango.

And also, so far, based on observation, the tightening of credit supply has not really directly impacted on our business. Instead, the performance of the car market as a whole is a more direct factor impacting on our fundamental business.

So that’s all from me. Thank you.

Operator

Thank you. Your next question comes from Derek Su from Goldman Sachs. Please go ahead.

Derek Su — Goldman Sachs — Analyst

[Foreign Speech] Thank you. I’m Derek Su from Goldman Sachs. Congratulations for your strong performance in the fourth quarter. My question is about your partnership with the funding partners. So what is your outlook for take rate? And what is your outlook for interest rate, cost of funding, etc.?

Jiayuan Lin — Founder and Chief Executive Officer

[Foreign Speech] So I will invite Michael Zhang, our CFO, to answer these questions.

Yongyi Zhang — Chief Financial Officer

[Foreign Speech] Thank you, Derek, for your questions. Well, our strategy has always been to expanding the range of funding partners we have. We want to work with more and larger and higher quality funding partners. So we have been working very hard to keep the cost of our — we have been working very hard to keep the cost of our funding steady and even decrease. And with this, we will be able to offer more competitive products to our customers, thereby helping our customer acquisition strategy.

So we have also — we have been able to keep our take rate steady and stable. I mean, you probably understand the take rate is the fee paid by the bank to us. So for the future, we believe we will be able to keep our cost of funding steady and also our take rate steady as well.

Thank you.

Operator

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

Jiayuan Lin — Founder and Chief Executive Officer

[Foreign Speech] Thank you for joining us on this earnings call. Thank you all for your participation and your support.

So that concludes today’s earnings call. Thank you.