Cango Inc

NYSE:CANG

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and good evening, everyone. Welcome to Cango Inc.'s Second Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is also webcast 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 am now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

[Jiayuan Lin, executive]

[Interpreted] Good morning, everyone, and welcome to Cango's Second Quarter 2024 Earnings Call.

In the second quarter of 2024, the automotive market remained sluggish, presenting significant challenges for the industry. According to the China Association of Automobile Manufacturers, vehicle production and sales in June reached [ 2.520 million ] and 2.552 units, respectively, reflecting a year-on-year decline of 2.1% and 2.7%, respectively.

Passenger vehicle sales in June fell by 2.3% year-on-year, although sales of new energy vehicles continue to outpace the market, their growth has not been sufficient to alter the industry's overall downward trajectory.

In response to these challenges, we continue to implement strict cost control and risk management strategies reinforcing our financial stability through disciplined expense management and cost-efficiency measures. Meanwhile, we maintain meticulous oversight of current assets and liabilities closely monitoring our risk exposure.

As of June 30, our total outstanding loan balance stood at approximately RMB 6.2 billion with M1+ at 2.93% and M3+ at 1.57%. Our credit risk exposure has been decreased to a low level with only RMB 0.7 billion of outstanding balance of loans where the company bears credit risks have not been provided with full debt allowance or full risk assurance liabilities.

As the new car market growth rate, we are increasingly recognizing the used car markets immense potential opportunities. As such, we have further streamlined our business processes, enhanced service quality and strengthen the customer experience. Over the past quarter, we focused on enhancing the competitiveness of Cango U-car by ensuring a consistent supply of high-quality vehicles, optimizing dealer experience -- I mean optimizing dealer service experiences and supply chain management and improving the convenience and security of cross-regional deliveries, which drove steadiness growth. By the end of the second quarter, our Cango U-car app has accumulated over 130,000 page views. During the quarter, we facilitated the transaction of 266 vehicles, successfully auctioned to 124 vehicles across our platform.

Meanwhile, we identified and onboarded new partners with a strong reputation and abundance vehicle inventories to ensure a diverse range of listings on Cango U-car. To enhance operational efficiency, we implemented rigorous management practices, refined key processes such as vehicle listing, transaction facilitation and customer service. These efforts have increased resource, utilization efficiency and improved overall operational effectiveness.

We also established strategic partnerships with numerous major used car markets nationwide in the second quarter, enabling real-time synchronization of their vehicle listings with Cango U-car to better meet users' specific demand. Currently, Cango U-car hosts over 260,000 vehicle listings. By integrating extensive offline vehicle inventory, we have effectively enhanced user engagement on the Cango U-car app.

We have further enriched our user experience by establishing exclusive member communities through private traffic management regularly providing members with benefits and event updates to boost user engagement and loyalty. We have also established a set of refined operational processes and management guidelines focused on safeguarding solid dealer rights. This includes implementing streamlined transaction rules and risk prevention mechanisms as well as providing comprehensive training and support, all of which are designed to help sell the dealers improve their operational efficiency.

Next, I will highlight some key advancements that Cango has been made in the area of cross-border used car transactions. Since China began allowing the export of used vehicles in 2019, export volumes have surged over tenfold with a significant increase in the average value of exported vehicles. Supportive guidelines and favorable policies from government department authorities have fostered the growth of the used car expo sector. We are optimistic about the promising prospects in the expo market for used vehicles, particularly those in the [ NDD ] segment.

Since its launch in March 2024, our international used car platform, autocango.com, has quickly gained traction among global audience. To date, it has attracted over 180,000 visits with more than 20,000 registered users across 207 countries and regions worldwide. Autocango.com hosts over 85,000 high-quality used car SKUs offering more than 60,000 different models. In the second quarter, we significantly expanded autocango.com's market coverage as well as range of products and services offerings.

Under our traffic-first strategy, Cango has been focusing on establishing a primary traffic gateway connecting China's used car dealers with overseas buyers. We believe that this streamlined asset-light and traffic-focused operational approach will enable us to control operating costs while creating same value across our core business. Our website has overseas buyers to more contingency and directly access China's high-quality used car inventories, and we envision this website as a premier gateway for exporting Chinese e cars.

Moving forward, Cango will continue to deepen our partnership with overseas markets, further refining Autocango's functionality and services to better serve car users, both at home and abroad.

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

[Yongyi Zhang, executive]

Thanks, Jiayuan, and hello, everyone, and welcome to our second quarter 2024 earnings call. Before I started to review our financials, please note that unless otherwise stated, all numbers of the RMB terms and all percentage comparisons are on a year-over-year basis.

Total revenue in the second quarter 2024 were RMB 45.1 million compared with RMB 675.4 million in the same period 2023. Guaranteed income, which represented fee income earned on the noncontingent aspect of guarantee was RMB 20.9 million in the second quarter of 2024. This was presented separated from the contingent aspect of a guarantee pursuit to the adoption of ASC 326 January 1, 2023.

Now let's move on to our cost and expenses during the quarter. Cost of revenue in the second quarter decreased to RMB 26.5 million from RMB 615.8 million in the same period of 2023. As a percentage of total revenues, cost of revenue in the second quarter 2024 was 58.8% compared with 91.2% in the same period 2023.

Sales and marketing expenses in the second quarter decreased to RMB 4 million from RMB 12.2 million in the same period of 2023. General and administrative expenses in the second quarter were RMB 39.2 million compared with RMB 36.8 million in the same period 2023.

Research and development expenses in the second quarter 2024 decreased to RMB 1.7 million from RMB 7.7 million in the same period of 2023. Net gain on contingent risk assurance liability in the second quarter was RMB 10.3 million compared with a net loss of RMB 1.6 million in the same period 2023. Net recovery of provision for credit losses in the second quarter was RMB 33 million compared with a net loss of RMB 10.2 million in the same period 2023.

We recorded RMB 47 million in income from options in the second quarter 2024 compared with a loss of RMB 8.9 million in the same period in 2023. Net income in the second quarter of 2024 was RMB 36 million. Non-GAAP adjusted net income in the second quarter of 2024 was RMB 90.7 million. On a per share basis, basic and diluted net income per ADS in the second quarter of 2024 were RMB 0.83 and RMB 0.76, respectively, and non-GAAP adjusted basic and diluted net income per ADS in the same period were RMB 0.87 and RMB 0.8, respectively.

Moving on to our balance sheet. As of June 30, 2024, the company had cash and cash equivalents of [ RMB 949.5 million ] compared with RMB 1.2 billion as of March 31, 2024. As on 30, 2024, the company had short-term investment of RMB 2.7 billion compared with RMB 2.3 billion as of March 31, 2024. Looking ahead to the third quarter of 2024, we are now predicting our total revenue to be between RMB 20 million and RMB 25 million. Please note that this forecast reflects our current 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.

[Operator]

[Operator Instructions] The first question comes from [ Way Lung Jiang with SDIC Securities].

[Unknown Analyst]

[Interpreted] I'm Jiang from Citic Securities. I have 2 questions on used car market development. So my first question is, how is your strategic partnership with major used car markets help improve your market position? And what about the contribution by these partnerships to your financial performance?

[Jiayuan Lin, executive]

[Interpreted] Thank you for your question. So by collaborating with major used car markets, we have expanded our supply channels and diversified our vehicle offerings. In addition, these partnerships allow us to leverage their geographic coverage and market penetration, providing our customers with a broader range of choices. So our extensive offerings comprehensively address our clients' evolving needs, increasing their stickiness on our platform.

And as our vehicle inventory growth and market coverage expands, our transaction volume has naturally increased. This higher volume not only creates economies of scale, reducing unit costs but also strengthens our bargaining power. This enhanced position has enabled us to negotiate more favorable terms with suppliers and customers alike, further improving our profit margins.

Thank you very much for your third question.

[Unknown Analyst]

[Interpreted] And my second question is that the Chinese government has actually published a lot of favorable policies to support the development of used car markets. So what about the challenges that a company faces in promoting the used car cross-border transactions?

[Jiayuan Lin, executive]

[Interpreted] Thank you for your questions. So for the challenges, first of all, the cross-buy transactions come -- usually come with relative high-logistics costs, including expenses for transportation, for insurance and also for warehousing. And to better cut these costs, we have partnered with third-party companies who have established and well-established cross-border logistics capabilities.

And secondly, tariff policies and trade barriers in different countries greatly impact the import and export of used car vehicles -- I mean used vehicles. On this, we work on to monitor policy changes and develop flexible strategies to adapt to these changes. At all vehicles traded meets the standards of the target markets.

In addition, used car transactions very often involve a relatively long transaction cycle due to their unique market characteristics, including but not limited to vehicle condition assessment, selection buyers, multiple rounds of price negotiations and necessary legal and financial reviews. Buyers typically need more time to look into the vehicles maintenance history, performance and pricing before making a purchasing decision. So naturally, these extended transaction cycle also poses a challenge for cross-border used vehicle transactions. Thank you. That's for your second question.

[Operator]

The next question comes from [ Emerson with Goldman Sachs ].

[Unknown Analyst]

[Interpreted] I have 2 questions. The first question is on finance. So I noticed that the company has decreased your revenue guidance. So will you continue to do that in the future? And the second question is how will the management balance your long-term strategy against your short-term performance pressure?

[Jiayuan Lin, executive]

[Interpreted] Okay. On your first question on our guidance of revenue, we are strategically scaling back our existing. We have reallocated the company's resources, optimized staffing and we have also implemented effective measures to reduce operational costs in response to market changes and internal demand.

Moving forward, we will continue to evaluate business development from a strategic perspective where we are leveraging our unique business model to drive ongoing cost reduction and efficiency improvements. We are confident that these adjustments and refinements will enable us to respond more agile to market changes and deliver greater value to our shareholders.

On your second question, well, firstly, we've adopted an integrated approach to strategic planning. We have established a comprehensive strategic planning process to ensure alignment between short-term performance goals and our long-term vision. This involves maintaining continuous communication to ensure all stakeholders have a clear understanding of the company's strategy and direction. In the short term, we will focus on enhancing execution, efficiency, controlling costs and driving revenues to ensure robust financial performance.

Second thing, we have broken down our goals into different phases and also made flexible adjustments. So we have established a very clear objectives and targets for different phases that supports both short-term performance and long-term strategic implementation. At the same time, we maintain our strategic flexibility, allowing us to adapt our plans in response to market and technological change and swiftly respond to external environmental shifts. Thank you.

[Operator]

And that concludes the question-and-answer session. Thank you once again for joining Cango's Second Quarter 2024 Earnings Conference Call today. Have a great day.

[Jiayuan Lin, executive]

[Interpreted] thank you all for your participation. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]