Cango Inc

NYSE:CANG

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good morning and good evening, everyone. Welcome to Cango Inc's Third Quarter 2023 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. Yongyi Zhang, Chief Financial Officer of the company. [Operator Instructions] 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. As a reminder, today's conference is being recorded. With that said, I am now turning the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Hello, everyone, and welcome to Cango's Third Quarter 2020 Earnings Call.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] In the third quarter of 2023, both production and demand continue to be [ under strength ]. Despite the introduction of economic stimulus measures, overall consumer confidence has yet to fully recover.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] The automotive market in China is characterized by intricate dynamics. Although the post-pandemic era in 2023 saw a resurgence in consumer demand for automobiles, it has been slow to pick up pace. As a result, major auto manufacturers have rolled out discount policies on new car purchases, leading to a sustained decrease in retail prices. In the first 3 quarters, the overall sales in the automotive market exhibited a modest recovery with new energy vehicles, NEVs in short, and exports serving as the primary driver of market growth.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] On distribution, the profitability of car dealers have been severely impacted by pricing wars. Consequently, they have transitioned towards an on-demand vehicle purchasing to alleviate inventory accumulation and operational stress. As per data released earlier by the China Automobile Dealers Association, 50% of auto dealers reported losses in the first half of this year, the highest level in recent years. Indeed, the impact extends beyond car dealers. All parties in the automotive value chain, including Cango, have faced unprecedented pressure.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] In Q3 2023, the company's total revenues amounted to RMB 354 million, making a year-on-year decline of [ 15.1% ]. Despite incurring a net loss of RMB 49.09 million due to goodwill impairment, our overall operating efficiency and reduced financial provisions helped us achieve a smaller net loss compared to RMB 130 million in the same period of last year. As of September 30, 2023, we managed to shrink the total outstanding balance of financing transactions to RMB 13.1 billion while maintaining M1+ and M3+ at a steady rate of 2.42% and 1.24%, respectively.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Since the beginning, we have strived to gain an in-depth understanding of dealers' needs. In 2022, we initiated a significant transformation of our business by venturing into the automobile trading segment. To facilitate new car trading activities, we launched the Cango Haoche App and mini program and gradually introduced standardized service products from October 2022. With our multisystem, all-in-one platform, Cango offers a comprehensive one-stop solution for automotive transactions across the country. Presently, we have built a robust network of warehouses and logistics operations in nearly 100 cities across 31 provinces with over 11,000 registered new car dealers.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] In relation to used car transactions, we launched the Cango U-Car mini program in May 2022. And by the end of 2022, we introduced the Cango U-Car App to the market, equipped with a range of features, such as used car listings, car searches, online auctions, transaction support services and digital services, Cango U-Car [ introduces a ] wide array of business needs for used car dealers. To date, the total number of registered used car dealers on our platform has surpassed 7,000.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] As we are continuing to expand our product and service offerings across the entire industry value chain and strengthen our partnerships with dealers, we are gaining a more precise understanding of the market. The new car market in China is reaching saturation with a significant decline in first-time new car buyers. However, we noticed an increasing trend among consumers to expand their car collection as well as a growing demand for vehicle replacement upgrades. Both [ ForEx and non-ForEx ] dealers are exploring used car business. While used car dealers are venturing to the sale of new cars, traditional boundaries between car sales channels are becoming increasingly blurred.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] In light of the changing market trends and demand, we have made some adjustments to our strategy. Our goal is to offer a comprehensive end-to-end service for both new and used car dealers across the country. To achieve this, we have integrated our offerings on the Cango Haoche platform into the Cango U-Car platform. This integration upgrade will allow us to focus our resources on Cango U-Car and significantly enhance operational efficiency. Moving forward, we aim to develop a multi-store model and expand our ecosystem beyond self-operated stores. This will include vehicle sources, insurance services and more by welcoming more third-party stores to our platform. As of now, some regional logistics companies and car [ generation ] service providers have already joined our community. Their feedback is highly valuable as it allow us to continually refine our offerings and improve our supply chain services, ultimately enabling downstream dealers to better serve end customers.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] During the third quarter of 2023, we sold [ 2,399 ] new cars, including 27 vehicle models across 18 auto brands at 23 car series. In the first 9 months of 2023, we sold a total of 12,138 cars, including 3,151 new energy vehicles. In terms of used cars, the [ auction ] transaction volume on the Cango U-Car platform reached nearly 300 in the third quarter of 2023, doubling quarter-over-quarter. We also facilitated over 600 transactions, marking a 20% increase quarter-over-quarter.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] As we continue to improve our online services and supply chain management while fostering greater synergies across online and offline operations, we are building a self-reinforcing, closed-loop ecosystem. In addition to strategic and service upgrades, we remain committed to accelerating our digitalization and leveraging advanced technologies to empower business. With the focus on big data and technological innovation, we are fully dedicated to standardizing our services and optimizing our processes. Our ultimate goal is to achieve heightened productivity and operational excellence, in turn, enabling our partners to achieve increased efficiency. In September, our innovative digital product, AI Asset Guard, won the 2023 CDI Product Digital Innovation Award. This recognition is a testament to the digital innovations that we have implemented across our business operations.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] In the future, we will leverage the power of big data and digital technologies to more accurately classify our dealer partners and launch value-added products and services tailored to their specific needs. Additionally, we will actively explore new areas to seek growth opportunities, including the potential expansion into used car markets abroad. By continuously refining our business operations, elevating profitability and strengthening our core competitive edges, we are confident that we can secure the sustained momentum required to navigate the ever-evolving business environment.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Next, I will hand over to Michael Zhang, our CFO, for a review of the company's financial performance.

[Yongyi Zhang, executive]

Thanks, Jiayuan. Hello, everyone, and welcome to our third quarter 2023 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. Our total revenues for the third quarter were CNY 353.6 million. Among them, revenues from the car trading transaction business were CNY 263.8 million or 74.6% of total revenues.

Now let's move on to our cost and expenses during the quarter. Total operating costs and expenses in the third quarter 2023 were CNY 441.4 million compared with CNY 608.8 million in the same period 2022. Cost of revenue in the third quarter 2023 was CNY 304.6 million compared with CNY 388.7 million in the same period 2022. As a percentage of total revenues, cost of revenue in the third quarter 2023 was 86.1% compared with 93.3% in the same period 2022. Sales and marketing expenses in the third quarter 2023 decreased to CNY 9.9 million from CNY 17.9 million in the same period 2022. As a percentage of total revenues, sales and marketing expenses in the third quarter 2023 were 2.8% compared with 4.3% in the same period 2022. General and administrative expenses in third quarter 2023 decreased to CNY 34.7 million from CNY 57.8 million in the same period 2022. As a percentage of total revenues, general and administrative expenses in the third quarter 2023 were 9.8% compared with 13.9% in the same period 2022.

Research and development expenses in the third quarter 2023 decreased to CNY 7 million from CNY 10.2 million in the same period 2022. As a percentage of total revenues, research and development expenses in the third quarter 2023 were 2% compared with 2.4% in the same period 2022. Net loss on contingent risk assurance liability in the third quarter 2023 was CNY 3.5 million. Net recovery of provision for credit losses in the third quarter 2023 was CNY 66.9 million. The recovery was primarily due to the positive impact from the collections of financing receivables. Impairment loss from goodwill in the third quarter 2023 was CNY 148.7 million. The provision for goodwill impairment is based on the profit forecast associated with historical trend and the prevailing current conditions of market downturn.

We recorded loss from operations of CNY 87.8 million in the same period 2023 compared with CNY 192.3 million in the same period 2022. Net loss in the third quarter 2023 was CNY 49.1 million. Non-GAAP adjusted net loss in the third quarter 2023 was CNY 41.2 million. On a per share basis, basic and diluted net loss per ADS in the third quarter 2023 were both CNY 0.45, respectively, and non-GAAP adjusted basic and diluted net loss per ADS in the same period were both CNY 0.38, respectively.

Moving on to our balance sheet. As of September 30, 2023, we had cash and cash equivalents of CNY 665.6 million compared with CNY 589.4 million as of June 30, 2023. As of September 30, 2023, the company had short-term investment of CNY 2.43 billion compared with CNY 2.06 billion as of June 30, 2023.

Looking ahead to the fourth quarter of 2023, we are now predicting our total revenues to be between CNY 100 million and CNY 150 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. Operators, we are now ready to take questions.

[Operator]

[Operator Instructions] And today's first question comes from [ Peng Yu with CIC Securities ].

[Unknown Analyst]

[Interpreted] Let me translate my question. My first question is about how do we think about the auto market for the fourth quarter 2023. And what about next year? And will the price war between the OEMs will continue? My second question is about what's our dividend plan for this year?

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Thank you very much for your questions. To answer your first question on our outlook for the auto market for next quarter and next year. In the third quarter, we saw a slowdown in passenger vehicles retail sales volume growth, and sales for the fourth quarter were boosted by the National Day holiday and the Singles' Day shopping festival. As the market is approaching year end with strong sales promotions, we expect the strong discounts to continue driving a quarter-over-quarter increase in sales volumes.

And for our outlook for next year, well, I would like to share my thoughts from 2 perspectives. First, we think new energy vehicles will continue to outperform according to the CPCA, that is China Passenger Car Association, data. As of the end of September, NEVs market penetration rate has already reached 36.9%. And their growth momentum is expected to continue throughout next year driven largely by more targeted and effective incentive policies for national and regional governments. Secondly, on the used car market, we expect it to continue to grow. For the first 9 months of this year, used car total sales volume exceeded [ 13 million ] with the total market -- GMV, gross market value, close to about [ RMB 860 billion ]. This is a $1 trillion market, and we expect our China used car market still has great growth potential.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] On your second question about the dividend payment, well, since our IPO, Cango has distributed cash dividends totaling nearly USD 500 million. Meanwhile, since April 2021, the company has been actively rewarding our investors, [ improving ] stock value in various ways, including share repurchase program. Looking ahead, Cango will remain prudent regarding financial management and continue to enhance capital allocation efficiency. We will prioritize investments in areas with high ROI and value, creating long-term shareholder value.

[Operator]

And our next question comes from [ Emerson Zhou ] with Goldman Sachs.

[Unknown Analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] The first question is, has the dealers' operational environment improved in the lower-tier markets after pandemic restrictions had been lifted? And the second question is what is the rationale behind the merge of the Cango Haoche platform and the Cango U-Car platform? Could you elaborate [ on this ]?

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] On your first question on the lower-tier market, well, Cango's customers are primarily based in third tier and fourth tier cities. So we have deeply felt the changes in the lower-tier markets over the past 2 years. According to CPCA's data, 40% of dealers in China shut down their businesses in 2022. More than half of dealers are now operating at a loss. And on average, about 11 [ ForEx ] stores close down every day. Small and medium auto dealers are having an even greater difficulty staying afloat. They have either merged with others to survive or switched to the used car transactions. Some are also trying new sales channels, such as live streaming and e-commerce. At the same time, consumer demand differs from region to region. NEV sales volume is higher in south markets compared to the north, for example, and NEV's penetration rate is also higher in cities with more charging stations. Furthermore, [ a 0 class ] and below as well as luxury cars are selling better than other classes.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Our decision to integrate Cango Haoche offerings into the Cango U-Car platform is primarily based on our deep market insights gained over the past 2 years. We noticed that China's new car market is near saturation. On consumption, there is a noticeable decline in first-time new car buyers, while there is an upward trend in consumers looking for additional [ cars ] and rising demand for vehicle replacement and upgrades.

On the distribution side, the [ ForEx ] dealers and used car dealers have begun establishing their own used car sales channels in response to changing consumer needs. This is a blurred area now because the boundary between the traditional new car and used car sales channels are becoming increasingly integrated. So that's why we are integrating the 2 platforms, Cango Haoche and Cango U-Car platforms, so that customers can now purchase new cars while trading in their used cars on the same platform. This integration, we believe, will not only greatly improve our operational efficiency, but also will enable us to better serve our car dealers. I think that's all from my side.

[Operator]

And ladies and gentlemen, there are no further questions. I'd like to turn it back to management for closing remarks.

[Jiayuan Lin, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Thank you all for joining us. Thank you all for your support. That concludes today's earnings call.

[Operator]

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.