Cango Inc.
Q4 2019 Earnings Call Transcript

Published: 24 Mar 2020

[Operator:]

Good morning and good evening, everyone. Welcome to Cango Inc.'s Fourth Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. 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. Following management's prepared remarks, we will conduct a 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:]

Hello, everyone. Thank you for joining us today on Cango's fourth quarter 2019 earnings call. Despite macroeconomic uncertainty and a downturn in China's automotive market we ended the year on a high net, even for [ph] exceptional financial and operational results in the fourth quarter on a back of steady growth and business expansion. Notably total revenues in the fourth quarter increased to RMB438.5 million representing a year-on-year increase of 36.6%.Our robust performance in the quarter demonstrates our continuous progress in the following areas. Firstly, upgrading our auto loan facilitation services to bolster our market leadership; secondly, refining our core selling strategy to drive growth in our aftermarket business, facilitation business; and thirdly, strengthening our existing relationships with core strategic partners and seeking out new opportunities to diversify funding sources and revenue streams.Firstly, for our auto loan facilitation business, we implemented a series of initiatives to bolster our market leadership. During the quarter for example, we focused on growing the reach of our dealership network by adding approximately 1,800 new dealers to our network. At the same time, we begin to actively refine our network efficiency. As such, we have terminated relationships with approximately 2,000 dealers that did not meet our standards for operating risks and traffic generation capabilities. As on December 31, 2019, the company has covered a total number of 49,238 dealers across 363 cities nationwide.We also continue to make progress in the implementation of our direct coverage model during the quarter. As we further the penetration of our model, our sales team is growing the number of directly covered dealers in our network. Currently we maintain direct coverage of 94.6% of our dealers in our network. The high penetration of our direct coverage combined with our removal of underperforming dealers, has enabled us to standardize and augment the quality of our service offerings across our network. During the quarter these advances helped increase the total number of financial transactions facilitated to RMB9.575 billion in this quarter.On the funding side, we continue to work closely with our existing financial partners to ensure full compliance with the latest market regulations. In addition to our established partnerships, we have begun to work with other financial institutions such as Bank of China, MyBank and Ping An OneConnect. Going forward, we plan to work with institutions to develop new financing products that will further diversify our block [ph] of service offerings.Second, today in in order to accelerate the growth of our aftermarket service business we actively refined our cross selling strategy during the quarter. In particular, our car insurance facilitation business has responded exceptionally well to lead efforts. During the quarter, for example, the number of car insurance transactions that we completed increased to 10,800 transactions in total, representing an increase of 56.8% on a sequential basis. This uptick demonstrates the substantial progress that we have made in establishing a foothold within China's car insurance market.Further evidence of these trends was illustrated by the quarterly performance of our aftermarket services business, which recorded RMB89.6 million in revenue representing 20.4% of the total revenues in this quarter.Thirdly we continue to strengthen our relationships with our strategic partners as the first auto financing service platform to completely interface with ICBC's system for new car purchases, our cooperation with ICBC continued to make good progress during the quarter. As of December 2019, the total non-subsidized loan volumes made through our cooperation with ICBC exceeded RMB3.1 billion. As for OEM certified products, we also continued our joint efforts and expect to launch these products to the market soon.The success of our relationship with ICBC and highly attractive value proposition has enabled us to forge additional collaborations with key players in China's auto industry. In November, for example, through our coordination with ICBC, we've started providing services to Tesla. Upon reaching an agreement we promptly implemented our services in all of Tesla's dealerships throughout Shanghai. Despite being at an early stage the corporation has already begun to show encouraging results based on our positive experience with Tesla customers in China and a growing popularity of electric vehicles we are optimistic about our ability to develop additional collaboration with other EV manufacturers in the future.We also continue to strengthen our existing partnerships with OEMs. As mentioned in previous quarters OEMs value the opportunity to act as our well-developed dealership network and a broader pool of automotive customers. In doing so OEMs are not only able to boost their sales, but also empower to diversify their product offerings. This value proposition is particularly attractive in the context of a macro slowdown, during which OEMs are increasingly interested in alternative selling solutions. Going forward, we plan to continue exploring further cooperation opportunities with OEMs in retail, wholesale, car sourcing and other areas.As an update for our Didi partnership we successfully facilitated 737 car purchase transactions for licensed Didi drivers during the fourth quarter. In addition, we continue to provide Didi drivers with a complete suite of auto solutions including car sourcing, auto financing insurance products and operator licensing.In summary, during 2019, the challenges we faced from macroeconomic pressure and underwhelming markets for automobiles in China tested the strengths of our facilitation business model. Importantly, our successful navigation through these adverse conditions have provided us with opportunity to further cement our industry leadership and grow our suite of automotive facilitation services throughout the industry's value chain.I'd like now to take a moment to discuss the impact of the COVID-19. Firstly, we would like to express our support to those who have fought and continue to fight on the frontlines of the epidemic. Their contributions to society are enormous and will not be forgotten. At Cango, we give top priority to protecting the health and well-being of our employees. Consequently, we are allowing employees to work from home remotely until our health authorities deem it safe for the general public to return to work. We also mobilized our procurement team to secure and distribute face masks and other protective gear to our colleagues and their families across China, especially those currently residing in the region's most impacted by the outbreak.In addition to these items, we are also providing free COVID-19 personal insurance to all employees. To ensure that our staff remains up to date, we have set up a special support team to provide consultation to our employees and their families during the epidemic on a daily basis. We have also implemented a number of measures to help thought leaders in our platform to resume operation as soon as they deem to be feasible.Through our partnership with an insurance company, we were able to set up the special purpose funds to pay for a considerable portion of our dealers and their families special health insurance policies. In addition, we are actively collecting and sharing information regarding the outbreak and dealership operations to keep our partner dealers updated.For customers, we resumed operation on February 10th [ph] to ensure normal services to our customers and dealers except for Hubei province. In terms of our business performance, the academic has severely disrupted auto dealers operation so far in the first quarter of 2020. As the situation evolves, we will continue to closely monitor the automotive market and assess the outbreak's impact on both our current and future operations. However, regardless of the track automotive sales in the short-term, we remain fully confident in the strength of our business model and health of our underlying fundamentals.Such confidence is not based on blind faith, but our track record. For example, in the past year during the previously mentioned challenges -- despite the previously mentioned challenges, we were still able to outperform expectations and achieve double digit results due to our proven business model leading market position, increasing economies of scale and refined operating capabilities. In addition, our effective cost control positive, cash flow and large cash balance has afforded us the ability to survive temporary challenges and to thrive. Going forward, we will remain committed to maximizing our market share through strengthening of our dealership network, expansion of our partnership base and diversification of our service offerings.We believe that the long term demand for automobiles remains intact in China. COVID-19 may temporary suspend but will not eliminate such demand. Once the epidemic is contained the pent-up demand growth will revive. Though the COVID-19 virus may delay the transformation and growth of China's auto financing market, it's progress towards consolidation is inevitable. As it has been said, winter will eventually pass and spring is sure to come.With that, I will now turn the call over to our CFO, Michael Zhang to review our financial performance in the quarter.

[Yongyi Zhang:]

Thanks Jiayuan. Hello everyone, and welcome to our fourth quarter to 2019 earnings call. Before I start to review our financials for the quarter please note that unless otherwise stated all numbers are in RMB terms and all percentage comparisons are on a year-over-year basis. In the face of macroeconomic headwinds and ongoing contractions of domestic automotive industry, we maintained our gross momentum in the fourth quarter of 2019 to deliver strong financial and operating performances.Our total revenues increased by 36.6% to RMB438.5 million from RMB321.1 million in the same period of 2018, outperforming the high end of the company's guidance by 9.6%. Our off market services facilitation business also continue to ramp up in the fourth quarter as its revenue grew to RMB89.6 million or 20.4% of our total revenue. Cost of revenue in the fourth quarter of 2019 increased by 1.8% to RMB157.2 million or 35.9% of total revenue to RMB154.5 million or 48.1% of total revenue in the same period 2018.As a result, gross margin in the fourth quarter of 2019 expanded to 64.1% from 41.9% in the same period of 2018. Such expansion was mainly attributable to the successful implementation of a series of cost control initiatives and our increased average as a result of our growing economies of scale.Sales and marketing expenses in fourth quarter of 2019 increased by 17.5% to RMB55.2 million from RMB47 million in the same period 2018. As a percentage of total revenue, sales and marketing expenses in the fourth quarter of 2019 decreased to 12.6% from 14.6% in the same period of 2018. This decrease further illustrates our commitment to improve our sales and marketing efficiency while continuing to drive revenue growth.General and administrative expenses in the fourth quarter 2019 increased by 26.3% to RMB66.1 million from RMB52.3 million in the same period of 2018. This increase was mainly caused by higher share-based compensation expenses during the quarter. As a percentage of total revenue, our general and administrative expenses in the fourth quarter of 2019 decreased to 15.1% from 16.3% in the same period of 2018.Research and development expenses in fourth quarter of 2019 decreased to RMB18.6 million from RMB19.9 million in the same period 2019. As a percentage of total revenue, our R&D expenses in the fourth quarter 2019 decreased to 4.2% compared to 6.2% in the same period of 2018. As a result of our strong revenue growth and successful optimization of cost management, income from operations in the fourth quarter of 2019 increased by 231% compared to the same period of 2018.Net income in the fourth quarter of 2019, increased by 96.8%, while non-GAAP adjusted net income in the fourth quarter of 2019 increased by 86.7% compared to the same period of 2018. On a per share basis, our diluted net income per ADS in the fourth quarter of 2019 was RMB0.62 and our diluted non-GAAP adjusted net income per ADS in the same period was RMB0.76.Moving on to our balance sheet, as of December 31, 2019, we had cash and cash equivalents of RMB2,002.3 million, compared with RMB1,851.2 million as of September 30 2019.Looking forward to the first quarter of 2020, we expect our total revenues to be between RMB180 million and RMB210 million. Please note that this forecast reflects our current preliminary views on the market and operational conditions, as well as the uncertainty in market caused by the COVID 19 offerings, which are subject to change.This concludes our prepared remarks. Operator, we are now ready to take questions.

[Operator:]

[Operator Instructions] And the first question comes from John Cai [ph] with Morgan Stanley.

[John Cai:]

Hi. So my first question is, the virus impact on the delinquency and asset quality. So just wonder how much increase of the delinquency have we observed? And what's the potential trends [ph] and outlook we see the risk of further pick up at this level and then when will be the peak?So the second question related to the operating is on the volume recovery, so first two months this year, we facilitate below 40,000 financing transactions versus in the same period last year, we facilitated roughly 72,000. So just wonder what's the number in March? And what would be the recovery trend that we expect and maybe in the second quarter, is it likely for us to recover to a normal volume? Thank you.

[Jiayuan Lin:]

Thank you, John for your question. Well, let me take your two questions. Firstly, asset quality, well affected by the outbreak, we have seen an increase in overdue ratios and have taken a series of measures to control the impact on the asset quality, including enhancing recruitment efforts of collection staff, strengthening customer service support, and assisting customers who apply for delay free payments in accordance with one of the bank's [ph] requirements. So far, the overall asset quality is under control, and we have full confidence in maintaining this trend.And regarding your second question, recovery of our business in Q1, well, for the first quarter of 2020, we expect total revenues to be between RMB180 million and RMB210 million approximately 40% to 50% lower than the same period of last year. Well, the situation in the second quarter depends on the containment of the epidemic and the resumption of our partner dealers. So our view is that the market will recover gradually from the second quarter of 2020. But we believe the turning point of the market won't be seen until at least the third quarter.

[Yongyi Zhang:]

John likes to make some addition to your first questions. And we do see that our overdue ratio is going up a little bit. We expected the M1 plus may reach to a little bit over 1% at the end of maybe first quarter. And also for the M3 plus, we expect that maybe the ratio will reach very close to 0.5%. That's our expectation and based on the data up to now. And we still need maybe one or two quarters to do more works, I mean on the delinquent as a measurement to control the asset qualities. And you know that due to the COVID-19 outbreak in China with the delinquent asset management, I mean, and the work is not as usual, due to I mean, the lockdown of all the work in China.So we started to resume the delinquent asset management work at the end of the February. So we still need some time, but we are very confident that we will control and we will manage the quality of the credit asset, as well as we do before. And due to those -- I mean, due to the current situation, we already raised up our day one provision in the -- for the guarantee loans we facilitate for the banks in the fourth quarter of 2019. That means we already raised up our day one provisions to reflect maybe the current status of our asset quality of the credit asset. Thank you.

[John Cai:]

Thanks.

[Unidentified Company Representative:]

Sorry, I have to translate that into Chinese sorry.

[Operator:]

Thank you. [Operator Instructions] All right. As there are no more questions at the present time, I would like to return the floor to management for any closing comments.

[Jiayuan Lin:]

Well, if no further questions, I would like to announce that we call it a day for now. Thank you all for joining us.

[Operator:]

Thank you. The conference has now included. Thank you for attending today's presentation. You may now disconnect your lines.