Cango Inc

NYSE:CANG

Earnings Call Analysis

Company Slashes Costs, Sees Q4 Loss and Issues Q1 Revenue Forecast

In the fourth quarter (Q4) of 2023, the company significantly reduced its operating costs to CNY 159.1 million from CNY 698.7 million in the same period in 2022. Cost of revenue was down substantially to CNY 110.9 million, representing 85.1% of total revenues, compared to 98.9% in the same period a year ago. Sales and marketing, general and administrative, as well as research and development expenses also saw reductions. Despite cost-cutting measures, the company experienced a net loss of CNY 103.8 million, and a non-GAAP adjusted net loss of CNY 99.2 million. For Q1 of 2024, the company predicts revenue to be between CNY 50 million and CNY 100 million, cautioning that these figures are preliminary and could change.

A Year of Resilience Amidst Challenges

In 2023, despite headwinds affecting global economies and a dampening of consumer confidence, the company demonstrated resilience. The auto sector saw the traditional vehicle market shrinking, while new energy vehicles (NEVs) gained market share, leading to a competitive environment rife with price wars and industry restructuring. The company navigated these challenges by delivering a total revenue of CNY 130 million for Q4 and CNY 1.7 billion for the full year. Additionally, the company maintained stable delinquency rates and fortified its financial position with RMB 3.33 billion in cash reserves by year's end.

Strategic Integration and Expansion

The fourth quarter marked the successful merger of Cango Haoche into Cango U-Car, enhancing operational efficiency and resource optimization. The unified platform streamlines the used car transaction process, supports a robust ecosystem of services and attracts upstream third-party sellers. By Q4, the platform facilitated significant dealer and transaction volumes, signifying substantial growth in this division of the company. Furthermore, the company continues to enhance its offerings, including AI-driven optimization for vehicle inventory and financing. These initiatives are part of a bigger ambition to lead in the automotive value chain and capitalize on China's potential as a robust used car exporter.

Financial Performance Metrics

The company reported total revenue of CNY 130.2 million in Q4 2023, a notable decrease from CNY 487.1 million in the same period of 2022. However, this was a year of cost optimization, with total operating costs and expenses reduced to CNY 159.1 million in Q4 from CNY 698.7 million in the same quarter of the previous year. The cost-cutting measures impacted all departments, notably reducing general and administrative expenses as well as sales and marketing expenses. Despite these efforts, the company netted a loss of CNY 103.8 million in Q4, but it stands on more solid ground, with an end-of-year cash and cash equivalents position of CNY 1 billion.

Future Revenue Forecast

Looking to the future, the company projects Q1 2024 revenues to be in the range of RMB 50 million to RMB 100 million. This projection considers the current market and operational conditions, which are acknowledged to be subject to change. The company's strategy in the face of market demands and its ability to continuously adjust will be critical in reaching these revenue targets.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and good evening, everyone. Welcome to Cango Inc.'s Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] 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 be making 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]

Hello, everyone, and welcome to Cango's Fourth Quarter 202 Earnings Call. 2023 proved to be a year of resilience in the face of headwinds. While a long-term economic recovery remained on the horizon, the confluence of domestic and international factors caused a temporary slowdown. This resulted in slower-than-anticipated growth and dampened consumer confidence.

In the automotive sector, the traditional vehicle market contracted steadily, while new energy vehicles or NEVs experienced a surge in market share, sparking fierce competition within the segment. Price wars became a norm in the auto sales landscape triggering a necessary restructuring within the industry. This shift favored larger players and accelerated a, "survival of the fittest," scenario. Dealerships, particularly smaller ones in lower-tier markets faced significant operational challenges, especially in the latter half of the year.

Despite a challenging market environment in 2023, Cango delivered total revenue of CNY 130 million in Q4 and CNY 1.7 billion for the full year. The company strategically reduced its total outstanding financing balance of facilitated financing transactions to approximately RMB 10 billion by year-end. Our quarterly metrics remain stable with M1+ and M3+ delinquency rates at 2.66% and 1.37%, respectively, reducing our risk disposure further. And to mitigate this dynamic market, Cango implemented strict cost reduction measures and efficiency enhancements, successfully lowering operating expenses.

Notably, Cango maintains a solid financial position backed by robust liquidity and ample cash reserves. As of December 31, 2023, the company boasted RMB 3.33 billion in cash, cash equivalents and showed an investment as well as recruited cash that is bank deposits held for shortened investments. This strong financial foundation provides a springboard for the sustainable growth of our existing businesses and fuels our exploration of new ventures.

To adapt to evolving market conditions and capitalize on industry trends, we took proactive steps to streamline our operations. This included clearing our new car inventory and consolidating our platforms into a single powerful solution. In Q4, we successfully merged our new car platform, Cango Haoche into Cango U-Car, our used car platform. This strategic move optimizes resource allocation and boosts operational efficiency. The upgraded Cango U-Car app now functions as comprehensive online marketplace. It connects upstream vehicle suppliers, aftermarket service providers and downstream more dealers in lower-tier cities.

This integrated platform offers users a full suite of services throughout the used car transaction process, catering to 3 main scenarios that is online auctions, dealer-to-dealer transactions and broker-assisted deals. Cango U-Car goes beyond facility trucks facilitating transactions. We provide a robust ecosystem of services. This includes access to historical vehicle reports, vehicle evaluation and inspection, logistics and delivery, insurance solutions and supply chain financing. Our revenue streams will primarily come from upstream store rentals, membership subscriptions and transaction-related service fees.

We streamlined operations within the integrated Cango U-Car platform in Q4. This included the introduction of a fixed price end-to-end transaction service for cross-regional used car purchases with innovative service, simplified and secure long distance transactions by offering price verification, vehicle inspection, guarantees and delivery services.

By Q4, 38 upstream third-party sellers have set up stores on Cango U-Car, offering a comprehensive collection of vehicles, including new and used cars along with traffic generation services. By leveraging our expertise in sales funnel management, we identified 9,887 potential business deals -- leads in Q4. We successfully converted a significant portion of these leads, providing services to 3,499 online small dealers and facilitating 530 used car transactions.

Besides attracting third-party services, we are also maximizing engagement and exploring new opportunities through our self-operated stores. These stores offer a diverse range of services in 4 key areas: first, they repossess car management. We handle repossessed vehicles primarily sourced from our auto financing business and collaborations with other lenders. Secondly, C2B lead conversion. We transform individual customer leads into tradable assets, facilitating transactions between them and dealers on our platform. We initially focused on existing financing customers, but now we have expanded lead sources in Q4 to boost conversion rates.

Thirdly, B2B transaction facilitation. We provide transactional logistic support for small dealer-to-dealer sales. And fourthly, we have expanded our insurance services. Our insurance teams offers comprehensive coverage, including auto insurance and as of Q4, nonauto options like work injury and [ work ] insurance for key regional clients.

At Cango U-Car, we understand superior user experience hinges on the strong technological foundation. In Q4, we deployed a central AI platform, leveraging our digital expertise to optimize resource matching for vehicle inventory, customer leads and auto financing. This powerful tool, combined with our standardized streamlined and intelligent transaction services, aims to create a nationwide network for efficient used car circulation.

Furthermore, we remain dedicated to empowering small dealerships. We offer services that help them reduce operating costs and diversify revenue streams, especially during challenging market conditions. Ultimately, our goal is to enhance their survival rates and overall success. Cango's vision remains steadfast, to become an industry leader by continuously refining and offering top-notch services and products across the entire automotive value chain.

Cango U-Car's online marketplace is just 1 step in our overall our growth strategy. We see significant potential in China's burgeoning used car [ accessible ] market, unlike the fierce competition within the domestic market. China, as the world's largest auto manufacturer and consumer, possesses a vast pool of used cars, a good mine for exporters. Additionally, government policies are fostering a more transparent regulated used car market. This translates into higher quality and more reliable vehicles that are competitive internationally.

Furthermore, China's robust auto manufacturing and parts supply chain keep used car prices competitive globally. Leveraging its position as the top international trading nation, China's a well-developed logistics network, ensuring efficient and secure delivery of used cars to international buyers.

China's position as the world's leading auto exporter with over 5 million vehicles shipped in 2023 on a projected upward trend presents a compelling opportunity for the used car export market. Recognizing this potential, Cango is actively pursuing this exciting new venture. Leveraging our extensive experience and network within China's domestic auto market, combined with the advantage of being a U.S.-listed company, which brings us access to capital and broader market reach, we've launched a comprehensive used car information exchange and export service platform.

This platform, integrating both online and offline resources, cater specifically to auto dealers in emerging and developing countries. By partnering with Cango, these international dealers gain easy access to China's vast pool of used vehicles, a significant advantage in today's global market. AutoCango, our cross-border used car information exchange platform, or www.autocango.com was launched in early March 2024 with earnings prices inventory exceeded 75,000 SKUs. This platform is constantly growing with approximately 500 to 1,000 new vehicles added weekly. Leveraging cutting edge AI technology, AutoCango empowers users with an intuitive search experience, making it easier than ever to find the perfect car.

Furthermore, our platform prioritizes user interaction, ensuring it caters to each customer's evolving needs. Transparency, efficiency and security are at the core of AutoCango. We are committed to providing a seamless and secure experience for all users, with the ultimate goal of becoming a go-to platform for overseas buyers, seeking high-quality used cars from China.

While acknowledging the current market complexities, we remain bullish on the long-term potential of China's auto industry and the strength of Cango's end-to-end service model. In 2024, we are committed to solidifying our position within the auto transaction market, pioneering digital innovation and leveraging AI to enhance our platform and user experience. As well as expanding our offerings by introducing new products and services across the entire value chain. By working along with our dealer partners, these initiatives will allow us to create significant value and become a key player in China's dynamic technology-driven automotive landscape.

Now I'll hand 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 fourth quarter and full year 2023 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.

Total revenue in the fourth quarter of 2023 were CNY 130.2 million, compared with CNY 487.1 million in the same period 2022. Guarantee income, which represents the fee income earned on a noncontingent aspect of a guarantee was $42.1 million in the fourth quarter.

Now let's move on to our cost and expenses during the quarter. Total operating costs and expenses in the fourth quarter of 2023 were CNY 159.1 million, compared with CNY 698.7 million in the same period 2022. Cost and revenue in the fourth quarter decreased to CNY 110.9 million from CNY 481.7 million in the same period 2022. As a percentage of total revenues, cost of revenue in the fourth quarter of 2023, was 85.1% compared with 98.9% in the same period 2022.

Sales and marketing expenses in the fourth quarter decreased to CNY 4.4 million from CNY 19.2 million in the same period in 2022. As a percentage of total revenues, sales and marketing expenses in the fourth quarter 2023, were 3.4% compared with 4% in the same period 2022. General and administrative expenses in the fourth quarter decreased to CNY 45.6 million from CNY 66.2 million in the same period 2022. As a percentage of total revenues, general and administrative expense in fourth quarter 2023 were 35% compared with 13.6% in the same period 2022.

Research and development expenses in fourth quarter decreased to CNY 7.3 million from CNY 8.4 million in the same period in 2022. As a percentage of total revenues, research and development expenses in fourth quarter 2023 were 5.6% compared with 1.7% in the same period 2022.Net loss on contingent risk assurance liability in the fourth quarter were CNY 22.2 million. Net recovery on provisions for credit losses in the fourth quarter were CNY 31.2 million. The recovery was primarily due to the positive impact of collections of financing receivables.

We recorded CNY 28.9 million in loss from operations in the fourth quarter of 2023 compared with CNY 211.6 million in the same period 2022. Net loss in the fourth quarter was CNY 103.8 million. Non-GAAP adjusted net loss in the fourth quarter was CNY 99.2 million. On a per share basis, basic and diluted net loss per ADS in the fourth quarter of 2023 were both CNY 0.95, respectively. And non-GAAP adjusted basic and diluted net loss per ADS in the same period were both CNY 0.91, respectively.

For the full year of 2023, our total net revenue were CNY 1.7 billion. Total operating costs and expenses were CNY 1.8 billion. Net loss was CNY 37.9 million, and non-GAAP adjusted net income was CNY 0.6 million. Basic and diluted net loss per ADS were both CNY 0.31. Non-GAAP adjusted basic net income per ADS was CNY 0.01 and non-GAAP adjusted diluted net income was CNY 0, respectively.

Moving on to our balance sheet. As of December 31, 2023, the company had cash and cash equivalents of CNY 1 billion, compared with CNY 665.6 million as of September 30, 2023. As of December 31, 2023, the company had a short-term investment of CNY 635.1 million, while the company had restricted cash. Current bank deposit held for short-term investment of CNY 1.7 billion. As of September 30, 2023, the company had a short-term investment of CNY 2.4 billion.

Looking ahead to the first quarter of 2024, we are now predicting our total revenues to be between RMB 50 million and RMB 100 million. Please note that this forecast reflects our current and preliminary view on the market and operating -- operational conditions, which are subject to change.

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

[Operator]

[Operator Instructions] Your first question comes from Pingyue Wu, from [ Goldman Sachs ].

Your next question comes from Emerson Zhao from Goldman Sachs.

[Unknown Analyst]

[Interpreted]

I'm Emerson from Goldman Sachs. I have 3 questions. First question, we noticed that the company has entered a strategic partnership with Caocao Mobility. Can the management share some details on these progress? And second question is that we noticed the company currently holds a substantial cash position while the company issue dividends -- distribute dividends. My third question is what are the differences in Cango U-Car before and after integration?

[Jiayuan Lin, executive]

[Interpreted]

Thank you, Emerson, for your questions. The first question, while Caocao Mobility is a leading domestic shared mobility platform, it provides users with smarter, greener and healthier travel experiences. And Cango is a powerhouse in automotive trading and aftermarket services. Our extensive network and vast vehicle inventory will enable us to jointly pursue business opportunities in China's high-growth, lower-tier markets. Currently, IT teams from both parties are working together on the back-end system and program development. We will provide regular updates to keep everyone in front of the latest developments as they unfold.

On your second question, since going public, we've established a track record of rewarding shareholders with consistent dividends to further solidify confidence in Cango's long-term growth trajectory. For further dividend plans, we will maintain a prudent approach, carefully considering factors like overall strategic plans, business environment and our cash flow position to ensure a sustainable dividend policy.

On your third question, prior to integration, Cango U-Car functions as a stand-alone platform dedicated to used car transactions. This included sourcing vehicles, facilitating car switches and hosting online auctions. Following the integration, Cango U-Car has evolved beyond the used car platform in our both the comprehensive marketplace featuring third-party sellers offering new car sales insurance and traffic generation services. We are committed to continue expanding this ecosystem by integrating even more third-party vendors, fostering a more dynamic and enriching user experience. Thank you.

[Operator]

Your next question comes from Pingyue Wu from Citic Securities.

[Pingyue Wu, analyst]

[Interpreted] I'm Pingyue from Citic Securities. I have 2 questions. The first question is, could management share your insights for 2023 automotive market and provide outlook for 2024? My second question is on the used car export business. What about the progress? And has the company considered working with some KOLs?

[Jiayuan Lin, executive]

[Interpreted] Thank you for your questions. On your first question, despite the sluggish start in 2023, the automotive market accelerated towards the latter part of the year and into early 2024. This momentum was built by a series of promotional activities launched by car manufacturers. We anticipate these price reductions to persist for some time. However, the intense competition within the industry has resulted in margin pressure for various players throughout the supply chain.

2024 outlook. AAV penetration rate has been surging over the years and rose from 28% in 2022 to 35% in 2023 and is expected to reach 40% by 2024. This rapid shift is intensifying competition within the NEV segment as well as the conventional fuel vehicle segment. While traditional gasoline-powered vehicles remain profitable. their market share is contracting rapidly. NEVs are experiencing robust sales growth, while manufacturers are currently absorbing significant losses. So these contrasting dynamic presents substantial pressure on the overall market.

On your second question, our used car export business in March 2024, we launched AutoCango, the first of its kind cross-border information exchange platform for used car market. Auto Cango bridges the gap in information services by connecting domestic Chinese used car dealers with foreign buyers, specifically targeting auto dealers in left-hand drive markets across emerging economies.

Leveraging China's position as the world's largest auto market, AutoCango empowers its international buyers with easy access to a vast pool of quality used cars. Powered by innovative AI technology, our platform streamlines the user experience, enhancing vehicle discovery, search efficiency and user interaction to precisely meet evolving customer needs. AutoCango prioritizes transparency, efficiency and securities throughout the entire transaction process, ensuring a smooth and secure experience for all parties involved.

On partnerships, we are open to partnership opportunities that align with the following criteria: firstly, profitability. We prioritize ventures with clear business models and transparent cost structures. And secondly, long-term growth potential. However, to ensure efficient resource allocation, we conduct regular assessments within defined time frames. Thank you.

[Operator]

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

[Jiayuan Lin, executive]

[Foreign Language] [Interpreted]

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

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