Cango Inc

NYSE:CANG

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, and good evening, everyone. Welcome to Cango, Inc.'s First Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. The 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 in the company's earnings release which also applies to the conference call today as management will make forward-looking statements.

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

[Jiayuan Lin, CEO]

Hi everyone. Welcome to Cango's first quarter 2023 earnings call. Due to a variety of issues, notably COVID-19, the automotive industry remained slow throughout 2022. The macro economy began to show indications of steady recovery in 2023, the first year of the post-pandemic era, made a hopeful basis for a revival in China's auto sector. Despite this encouraging trend, the market remained weak in the first quarter due to constrained consumer spending caused by factors such as the Spring Festival Holiday, the loss of national subsidies and a price war that began in March.

According to China Passenger Car Association, retail sales volume of passenger vehicles declined 13.4% year-on-year in the first quarter. We predict the overall passenger vehicle market to remain volatile into 2023 owing to persistent pressure from weaker market demand.

Cango reacted promptly to changing macro economic and industry conditions by using our resources and constantly expanding our capacity to capture long term growth opportunities. Our Cango Haoche and Cango U-Car apps are now fully operational showcasing our capacity to successfully develop a full service automotive transaction ecosystem centered on both new and used cars by refining our service capabilities and enhancing our operating skills.

In the first quarter of 2023, our overall revenues of RMB540 million, down 31% year-on-year but up 11% quarter-on-quarter. Revenues from car trading transactions were RMB430 million, accounting for 79% of total revenues, reinforcing our position as a strong growth engine.

Our company's net income for the first quarter was RMB78.8 million, primarily due to an increase in gain on risk assurance liabilities, and the newly implemented accounting standards and the reversal of credit impairment loss due to asset quality improvement. The entire outstanding balance of financing transactions we facilitated have reduced from RMB25.6 billion as of December 31, 2022 to RMB20.7 billion as of March 31, 2023, with our M1 + and M3 + percentages falling to 2.33% and 1.29% respectively.

We anticipate that the ongoing reduction in our outstanding balance of financing transactions, together with our robust balance sheet will provide significant support for Cango's healthy long term growth prospects.

Next, I would like to provide some specifics on the significant progress we've achieved with our company. Let's begin by discussing the new car trading transactions. The first quarter is typically considered the offseason for automobile sales, and when combined with macro economic and industry challenges, the overall market remains subdued. Nevertheless, our new car trading transactions business demonstrated a robust performance in the first quarter, exhibiting enhanced operational capabilities and efficiency.

During this period, a total of 3,867 cars were sold on Cango Haoche maintaining stability compared to Q4 2022. As of March 31, 2023, the total number of dealers participating in Cango Haoche rose to 10,469, marking a 14.8% [ph] increase year-on-year. By the end of the first quarter Cango Haoche app had accumulated over 877,000 page views and attracted more than 78,000 unique visitors.

Our distinct vehicle inventory advantage has significantly contributed to the success of Cango Haoche, which has been warmly received by dealers since its inception. Diverging our vehicle inventory we have concentrated on our commitment to delivering superior service to dealers through a diverse range of high quality offerings. Since the start of this year, we have further refined our services to accurately address the challenges and unique requirements of small and medium sized dealers, equipping them with effective support to grow their business and achieve profitability.

In mid-February Cango Haoche introduced a new membership service. This incentive-based program merges a membership repay policy with card dealer tiers aiming to boost the repurchase rate of service products and foster dealer engagement.

In addition to enhance our online survey efficiency, we introduced an intelligent AI customer service on Cango Haoche in April. This 24/7 service has not only significantly improved our service quality for dealers and increased their satisfaction rates, but also boosted our operational capabilities and efficiency. Moreover Cango Haoche's multi-store model was specifically designed to foster horizontal extension by attracting more high quality third party auto service providers to open online stores.

In April Cango Haoche saw the launch of its first online store by third party service provider, JL Car Tuning [ph]. We anticipate the introduction of auto accessories for these [ph] stores in the second half of 2023, empowering dealers to better serve and retain customers with a diverse range of products and services.

Moving forward, fueled by Big Data and digitalization Cango Haoche will persist in deepening its multi-store extension strategy, welcoming more upstream and downstream participants from the auto transaction value chain to join us. In doing so, we aim to fully actualize resource sharing across industry by eliminating barriers between small and medium sized dealers and automotive service providers and achieving bi-directional or two way empowerment through digitalized service processes.

Now let's shift our focus to used cars, building on the success of the Cango U-Car mini program which was introduced in May last year. The Cango U-Car app was launched in early January this year. The app operates in tandem with the Mini programs providing a seamless experience. Both the app and the mini program have been specifically designed to offer comprehensive technology-driven services that are more secure, reliable, diverse and efficient for used car dealers and individual used car owners alike. By refining these services we have been able to better understand and cater to the unique needs of various industry players offering a one-stop-solution for all their requirements.

Powered by our enhanced used car transaction services and optimized digital capabilities, Cango U-Car now provides a range of functions including historic vehicle condition reports, vehicle appraisals, online options, online car searches, used car listings, self-operated used car inventory repurchases and other services such as logistics, financing and insurance. By the end of the first quarter of 2023 our network has included nearly 6,000 register used car dealers across 479 cities in 29 provinces nationwide.

The accumulated page views and total unique visitors on the Cango U-Car app and mini program were over 513,000 and 26,000 respectively by the end of the first quarter of 2023. Maintaining a stable advanced inventory as well as a transparent pricing structure are crucial for used car dealers. Thanks to our extensive dealer network across lower tier cities and decades of industry experience we have ample sources of high quality used cars such as trade-ins from our auto financing customers and repossessed cars from our asset management department. These represent unique advantages for our used car transaction services and specifically address one of the primary challenges for used car dealers.

In addition to overdue customers Cango has potential inventory of approximately 20,000 used cars from customers whose payments ended normally each month, powered by our in house capabilities in used car acquisition and transaction conversion these potential inventory resources along with repossessed cars will further strengthen the competitive edge of Cango U-Car in terms of used car resources.

In May 14 [ph] Cango U-Car successfully obtained its online auction qualification with upgraded auction services in addition to auctioning your individual and repossessed vehicles, all registered dealers nationwide can now list their used cars for B2B auctions through our platform. As far as we know, this capability is the first of its kind available in the market. In other words, we can now provide all small and medium sized used car dealers with additional technology enabled sales channel, enabling them to achieve better prices and faster inventory turnover.

Vehicle inspection plays an important role in improving the used car transaction experience. We have well established in house technician teams to not only improve our capabilities, but also offer professional services to dealers and consumers, including vehicles condition checks, pricing and license verifications. In April of this year, we entered into a group level partnership with China Grand Auto to provide a suite of professional after sales services for all its used cars.

Going forward, we will continue to accelerate digitalization and enhance our differentiated services in the OTA market. These efforts will provide a foundation for Cango's sustainable growth. We remain committed to standardizing our offerings and deepening our penetration across the automotive value chain powered by Big Data and technological innovation.

We will continue strengthening our competitive advantages across the supply chain, covering car transactions, aftermarket services and building a closed loop ecosystem. With these initiatives Cango is well positioned for resilience as we strengthen our place in China's automotive industry with evolution powered by digital technology.

Next I'll turn the call over to our Chief Financial Officer, Michael Zhang for a review of the company's financial performance.

[Yongyi Zhang, CFO]

Thanks, Jiayuan. Hello everyone and welcome to our first quarter 2023 earnings call. Before I start to review our financials, please notice unless otherwise stated, all numbers are RMB terms and all percentage comparisons are on a year-over-year basis.

Our total revenues for the first quarter was $542.6 million, among which our trading transaction business delivered revenues of RMB429.8 million, further demonstrating its solid position as our major revenue driver.

Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in first quarter 2023 were $419.8 million compared with $976.8 million in the same period 2022. Cost of revenue in the first quarter 2023 decreased to $480.5 million from $687 million in the same period 2022. As a percentage of total revenues cost of revenue in its first quarter 2023 was 88.6% compared with 87.2% in the same period 2022.

Sales and marketing expenses in first quarter 2023 decreased to RMB12.5 million from RMB53.8 million in the same period 2022. As a percentage of total revenues, sales and marketing expenses in the first quarter 2023 was 2.3% compared with 6.8% in the same period 2022. General and administrative expenses in the first quarter of 2023 decreased to RMB39.8 million from RMB15.9 million in the same period 2022. As a percentage of total revenues, general and administrative expenses in the first quarter 2023 was 7.3% compared with 6.5% in the same period 2022.

Research and development expenses in the first quarter 2023 decreased to RMB8.1 million from RMB14.5 million in the same period of 2022. As a percentage of total revenues, research and development expenses in the first quarter 2023 was 1.5% compared with 1.8% in the same period 2022. Net gain on contingent risks assurance liabilities in the first quarter 2023 was RMB1.6 million. The gain was recognized due to the release of publications from the contingent aspect of the risk assurance liabilities.

Net recovery on provision for credit losses in the first quarter 2023 was RMB48.6 million. That recovery was primarily due to the positive impact from the collections of financial receivables. We recorded income from operations of RMB51.8 million in the same in the first quarter 2023, compared with our loss of RMB189.1 million in the same period 2022. Net income in the first quarter 2023 was RMB78.8 million. Non-GAAP adjusted net income in the first quarter 2023 was RMB92.8 million.

On a per share basis basic and diluted net income per ADS in the first quarter of 2023 was RMB0.58 and RMB0.56 respectively, and non-GAAP adjusted basic and diluted net income per ADS in the same period was RMB0.69 and RMB0.66 respectively.

Moving on to our balance sheet, as of March 31, 2023 we have cash and cash equivalents of RMB696.6 million, compared with RMB378.9 million as of December 31, 2022. As of March 31, 2023 the company had a short term investment of RMB2 billion compared with RMB1.9 billion as of December 31, 2022.

Looking ahead to the second quarter 2023, we are now predicting our total revenues to be between RMB600 million and RMB650 million. Please note that this forecast reflects our current and preliminary view on market and operational conditions which are subject to change.

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

[Operator]

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

[Shelley Wang, Morgan Stanley]

Good morning. I have two questions. The first question is that beginning this year many OEMs suggest that they have strategies. What do you think of a structural opportunities for AEVs, new energy vehicles and also internal combustion engine vehicles in short, ICEVs. My second question is the say overdue ratios of Cango's financing facilitation business dropped. Is this a sign of reduced credit risk in the market and gradual economic recovery? Thank you.

[Jiayuan Lin, CEO]

Thank you for your questions. About the first question, the automotive industry was sluggish in the first quarter. According to China Passenger Car Association, retail sales or passenger vehicles decreased 13.4% year-on-year and consumer demand began slowing since late 2022 as incentives ended. The impact of China 6b emission standards and industry wide price competition further constrained consumer spending.

Although NEV sales slowed in Q4 2022, NEV penetration exceeded 30%. The CPCA forecast NEV penetration may reach 36% nationwide in 2023. At the recent Shanghai Auto Show over 100 of the more than 150 new models launched were NEVs.

In addition, government campaigns encouraging rural and EV purchases and expanding charging stations there indicate lower tier markets have a huge opportunity and potential for NEV sales, a growing trend.

For ICEVs the announcement in May that some ICEVs received a grace period under the China 6b emission standards mitigated some of the sales pressure for automakers.

As of the end of first quarter, the total outstanding balance of financing transactions we facilitated were RMB20.7 billion with our M1+ and M3+ ratios down to 2.33% and 1.29% respectively, and our overdue ratios decreasing quarter-over-quarter. Overdue ratios dropped mainly because we strengthened our collection efforts of non-performing assets leading to a decrease in value of numerator and denominator for calculation when the loans were prepaid.

By the end of March our existing customers had already made payments for around two years with an average of 14 months remaining on their repayment contracts. This led to our lower overdue ratios from this customer cohort. While our outstanding balance of financing transactions continues to decrease our risk exposures have been shrinking. The credit cycle and risk exposure of the entire market remain unclear. Therefore we will remain cautious and prudent.

[Shelley Wang, Morgan Stanley]

Thank you. That's all your questions from my side.

[Operator]

Thank you. Your next question comes from [indiscernible] from Goldman Sachs. Please go ahead.

[Unidentified Analyst]

Thank you. I have two questions as well. The first question is that a price war that began in March weighed on the whole industry? Could you please provide some colors around where the market is heading and your next moves for vehicle inventory? And the second question is that in addition to car trading transactions business, could you shed some light on the development of your other value-added services?

[Jiayuan Lin, CEO]

Thank you for your questions. On your first question, China's automotive industry began moderating in 2019. With the pandemic impact recovery has been unstable and sluggish. The highly anticipated rebound has yet to materialize in the first half of 2023. According to the National Bureau of Statistics, Ministry of Finance in April, retail sales of automotive consumer goods were RMB362 billion, down 15.1% quarter-over-quarter. Collected vehicle purchase tax was RMB21.3 billion, down 9.7% quarter-over-quarter.

And China Automobile Dealers Association data show that from January to April, the retail passenger vehicle sales was about RMB5.895 million, down 1.3% year-on-year. In summary, the auto market still faces considerable downward pressure with little evidence of recovery so far.

Despite improvements in supply and demand, recovery on the demand side was too moderate for the new supply. Against this backdrop, and coupled with the withdrawal of subsidies, Wuhan started a price war as production capacity resumed amid weak consumer demand. The appropriate intervention by non-market participants exacerbated the situation. The price war disrupted market order and impacted the used car market as well. Lower price has ultimately hindered rather than help the situation.

Early this year, we reduced inventory in anticipation of China's 6b emission standards. This proved a very wise decision safeguarding us from auto market disruptions and losses. In the second half, we will maintain a low inventory level, enhance service and product functions, but refine our business management and upgrade the data experience as well as improve operational efficiency.

On your second question, in addition to revenues from car sales, our services and products mainly aim to enhance the dealer experience. We hope these services will empower dealers, attract more small and medium sized data to our platform and generate more traffic.

Going forward, we will leverage Big Data and technological innovations to refine our products, to refresh our service portfolio and offer more accessible and diversified functions so as to improve the dealer experience. And we believe that these will more effectively support small and medium sized dealers across lower tier markets. Thank you

[Operator]

Thank you. Your next question comes from [indiscernible] from Citic Securities. Please go ahead.

[Unidentified Analyst]

Thank you. I'm [indiscernible], Citic Securities. I have two questions. The first question is that yes, indeed, in March and April, the car market has not been performing very well. However, in May based on data we have seen some pickups in both the traffic to the stores as well as the car purchases. So what about in a lower tier markets? Have you observed any similar demand recovery in the lower tier markets? And that's my first question.

And the second question is about the used car market. Based on what I've heard, I understand that the company mainly provides services to customers for used car purchases. Do I understand that in the right way? And also what about, could you give us more colors on your plans for your used car business? And what are your thoughts on the used car market? Thank you.

[Jiayuan Lin, CEO]

Thank you for your two questions. Let me take on the first question first. Overall economic indicators and total finance ratio led to improvement in April and May. So recovery in lower tier markets have just begun. Public data show that Tier 3 and Tier 4 city households disposable income was 17% to 18% below national average and rural households disposable income was 40% that of urban levels.

According to CADA data 61% of dealers reported declining transactions and 36.5% reported flat transactions and only 12.5% reported increased transactions.

Based on our frontline experience in lower tier markets, many dealers closed stores, while remaining dealers saw much lower sales volumes then expected. Our sales team interacting with the clients noted that consumers mostly postponed car purchases.

On your second question on used car market, well the reason new car price war pushed the prices to all time lows causing rare but substantial depreciation in used car values. It has also impacted the used car markets. The new car price war has led to a 5% drop in average used car prices in March and also 1.56 million used car trades nationwide in March, up 7.4% quarter-over-quarter is lower rates than in previous years.

All-in-all the used car market is rapidly expanding due to favorable government policies encouraging used car businesses, and also causing the new car market increasing the supply of used cars. Despite COVID-19's negative impact the used car market saw steady growth overall. We believe the used car market will maintain sustainable long term growth due to government policy support and also increasing supply of used cars as the new car market expands.

And at Cango we launched Cango U-Car app in Q1. And this app has been offering vehicle condition reports, evaluations, online auctions, car searches, listing, inventory purchases and also logistics and financing and insurance services. By the end of Q1 our dealer network included nearly 6,000 used car dealers in 179 cities across 29 provinces. Cango U-Car saw monthly active users above 35%, transactions doubling monthly from January and also 513,000 accumulated page views and 26,000 total unique visitors.

And in April Cango U-Car obtained online auction qualifications and we also upgraded the auction services. Now this upgrade allows individuals and repossessed vehicles to be auctioned, and all registered dealers nationwide to list the use cars for B2B auctions. Thank you.

[Operator]

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

[Jiayuan Lin, CEO]

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

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.