Ladies and gentlemen, thank you for standing by, and welcome to Cango Inc.'s Third Quarter 2018 Earnings Call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 23rd of November 2018. I now like to hand the conference over to your speaker host today, Ms. Caroline Li, IR Director of Cango. Please go ahead.

Thank you, operator. Good morning, and good evening, everyone. Welcome to Cango's Third Quarter 2018 Earnings Conference Call. Joining us today are Mr. Jiayuan Lin, CEO; and Mr. Michael Zhang, CFO of Cango. For today's call, management will first provide a review of the quarter, and then we will conduct a Q&A session. The third quarter 2018 financial results and webcast of this conference call are available at ir.cangoonline.com. A replay of this call will also be available on our website in a few hours. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as well as we will make forward-looking statements. Now I will turn the call over to Mr. Jiayuan Lin, CEO of Cango, to provide you a business update. Then Mr. Michael Zhang will go over the details of our financial results of the quarter. Please go ahead, sir.

Thank you, Caroline. Hello, everyone, and welcome to our call. [Foreign Language]

During the third quarter of 2018, as the Chinese economy came under pressure, new car sales have declined year-on-year for each of the last 5 months. China new car sales for the first 10 months of 2018 were down 12% year-on-year. We focus on our core competitive advantage and execution. Despite the market headwind, we are deepening our cooperation with founding partners. We're enhancing our dealership coverage and service. We adhere to our long-term growth strategy and are making steady progress in our new growth initiatives. During the quarter, our revenue stabilized to positive year-on-year growth. Sales from aftermarket service, which was launched less than a year ago, contributed 14% of total revenues. The strategic partnership with ICBC is progressing as planned. We complete the system integration. At the end of October, we started to facilitate auto loans for ICBC.

[Foreign Language]

Allow me to share with you a review of the quarter and business outlook in 3 areas: the core business of auto loan facilitation, the aftermarket service and significant growth potential from ICBC and Didi partnerships. First, auto loan facilitation, our core business. We provide the consumers with auto loan product as a loan facilitator. We connect auto buyers with our 11 funding partners, and then we reach out to these buyers via our network of over 44,000 car dealers. The majority of these dealers are now authorized as small dealers. Most of them are located in China's lower-tier cities. The majority of auto loans are for domestic car brands, and over 90% of them are for new cars. Year-to-date, the overall auto market has been weak, and domestic brands have declined even more. Domestic carmakers launched their own interest subsidy programs to help improve the sales. Such programs compete with the loan products we facilitate, creating competitive pressure for us.

[Foreign Language]

Under such market conditions, we focus on optimizing our products and services, expanding our dealer network and emphasizing per dealer productivity. By quarter end, we have more than 44,000 registered dealers in 353 cities, a 10% quarter-on-quarter growth by dealer account. More importantly, more than 80% of these dealers are now directly covered by our sales force, an improvement from 60% last quarter. Direct coverage model, combined with our SaaS system launched in May, allows us to be more deeply involved in dealers' daily operations. Building on our core service of loan facilitation, we now cross-sell value-added service to dealers, such as car sourcing and supply chain financing. Such win-win cooperation improves dealers' productivity and creates new revenue potentials for Cango.

[Foreign Language]

Second, aftermarket service. We built this business on the base of core auto loan facilitation as a cross-sell opportunity. It allows us to further monetize the lifetime value of end customers. During the quarter, this segment has contributed 14% of total revenues. Because such sales incur minimum additional labor and system costs, they have relatively high profit margin.

[Foreign Language]

Third, our strategic partnerships with ICBC and Didi. We see significant growth potential from this new business initiative. As mentioned before, our current market exposure is mainly for domestic car brands and non-authorized dealers and in lower-tier cities. We aspire to raise our market share in this large market segment in Tier 1 and Tier 2 cities with authorized dealers. Our strategic partnership with ICBC, entered in July at a national level, will allow us to jointly develop auto loan product targeting the segment, also known as the carmakers subsidized loan segment. ICBC brings sufficient funding at competitive cost, while Cango brings extensive dealer coverage, solid service capabilities and deep auto loan industry expertise to the partnership. We have completed the initial system interface between Cango and ICBC. We are fine-tuning the integrated workflow, including billing and payment systems. Meanwhile, we move on to target qualified with automakers. We believe our entry into this market segment could eventually bring about a new magnitude of loan facilitation volumes for Cango that greatly enhances our competitive advantage and solidify our market leadership.

[Foreign Language]

Moving on to our partnership with Didi. This strategic partnership covers a broader value chain, including auto transaction, financing and aftermarket service, thus diversifying our revenue sources. During the third quarter, we established a presence in 39 major ride-sharing cities across China. In the pilot city of Changzhou, we gained valuable experience in driver recruitment, car sourcing, auto financing and aftermarket services. We have since replicated this experience to another 6 cities as the second phase.

[Foreign Language]

Looking ahead, we remain cautious on China new car sales in the near term, but auto financing growth in the country should have better runway given the relatively low penetration. The market currently is fragmented. Cango, being the largest auto loan facilitator founded by industry pioneers, still has just single-digit market share. We see meaningful potential driven by both auto financing penetration and market share concentration. Despite recent softness in the auto market, we remain stable and profitable under our asset-light business model. Going forward, we will continue to enhance our core competency in data, technology and services, mine our best network of leaderships, monetize the lifetime value of consumers and benefit from strategic partnerships. We are well positioned to capitalize on the tremendous market opportunity. We are confident that we will be able to generate a continuous shareholder value. With that, I will turn the call over to our CFO, Michael Zhang, to go over our financial results in more detail.

Thank you, Jiayuan, and hello, everyone. Before I begin, please note that unless otherwise stated, all numbers are in RMB and all comparators are on a year-over-year basis. Despite softness in China auto transaction market, we have stabilized our revenue thanks to the meaningful contribution of aftermarket segment. Revenue in the third quarter of 2018 was RMB 285.2 million compared to RMB 278.4 million in the same period of last year. Our total revenue for the 9 months of 2018 were RMB 770.3 million, representing a 4% year-over-year growth. Aftermarket revenue in the third quarter was RMB 39 million, which accounted for 14% of total revenue. Cost of revenues in the third quarter of 2018 increased by 50.9% to RMB 113.5 million. As a percentage of total revenue, cost of revenue in the third quarter of 2018 increased to 39.8% from 27% in the same period of last year. The increase was due to a high average amount of commission paid to dealers in each financing transaction. Sales and marketing expenses in the third quarter of 2018 increased to RMB 48.5 million from RMB 23.3 million in the same period of last year. As a percentage of total revenue, sales and marketing expense in the third quarter of 2018 increased to 17% due to the rapid expansion of our sales team to improve the dealers' coverage and the dealers' stickiness. General and administrative expenses were RMB 40.7 million or 14.3% of total revenue in the third quarter of 2018 compared with RMB 16.5 million or 5.9% of revenue in the same period of last year. The increase was mostly because of the increase in our sales -- in our staff headcount and compensation as well as share-based compensation expenses. Research and development expenses in third quarter of 2018 increased to RMB 10.8 million from RMB 3.8 million in the same period of last year, mostly due to the expansion of the company's research and development team. Our net income was RMB 106.3 million, and our non-GAAP adjusted net income was RMB 120.2 million in the third quarter of 2018 compared to RMB 135.5 million in the same period of last year. Our diluted net income per ADS was RMB 0.73, and our diluted non-GAAP adjusted net income per ADS was RMB 0.82 in the third quarter of 2018. Now turning to our balance sheet. As of September 30, 2018, we had cash and cash equivalents of RMB 3,643 million compared with RMB 3,121 million as of June 30, 2018. Looking forward to the fourth quarter of 2018, we expect our total revenues to be between RMB 280 million and RMB 295 million. This forecast reflects our current and preliminary view on market and operational conditions, which are subject to change. And this concludes our prepared remarks. And so operator, we would now like to open up the floor to questions. Thank you.

[Operator Instructions] Your first question comes from Michael Li from Bank of America Merrill Lynch.

[Foreign Language] So my name is Michael Li. I'm from Bank of America Merrill Lynch. So from the strategic cooperation with ICBC, we know actually this is the largest bank in China and it has its own auto loan businesses and branches and client bases. So why did ICBC choose Cango as its partner? So what Cango could contribute to ICBC and ICBC could not do by itself? So comment and also update the progress of the project and target of sales in 2019. What kind of fee ratios that Cango could charge in the cooperation with ICBC, and what are major challenges?

[Foreign Language]

Michael, our strategic partnership with ICBC was signed at a national headquarter-to-headquarter level. What ICBC values about Cango is our leading position in auto loan facilitation markets, our vast geographical coverage, our solid execution at a highly compliant and standard level including credit assessment, risk management and our service capability for car dealers and the consumers. You have to understand the integration of system between us and ICBC is a complex and big project. It takes time. We have completed integration of workflow and the system, including the fund flow payment system, billing and payment. While specific timetable could be subject to impact of many factors, the synergy between Cango and ICBC is very clear, and growth potential is highly visible. Now as for specific order volume in next year, we would closely monitor the progress of our cooperation and integration with ICBC as well as OEMs. Again, we believe here the growth potential can be tremendous, but we will be very focused on our execution and closely monitoring the progress.

Your next question comes from Eddy Wang from Morgan Stanley.

[Foreign Language] My first question actually is about the new car demand. As you mentioned, new car demand has been weak this year, especially in the lower-tier cities. I would like to know your expectation for the auto demand in the lower-tier cities in last year. Have you witnessed any parts of size that could be a boost -- that could boost the overall demand? My second question actually is about competition. We have noticed that some of these competitors, such as AutoHome and Yixin, had been more focused on the auto finance transaction participation at the level 2 dealers. Have you seen more intense competition given the average commission to the dealers have been higher in the third quarter? And how we expect such competition to be in 2019? Yes, that's my question.

[Foreign Language]

Eddy, our CEO is taking your first question. In terms of the new car sales, we do not expect a significant growth driver in the near term. There is a lack of meaningful growth drivers that's visible to us. However, for our business, we still think there is a specific segment which could offer interesting growth potential. In the auto financing market, penetration rate still have room for growth in such market segments such as electric vehicles or major OEM subsidy program, especially in their nontraditional, non-authorized dealer, as you mentioned, the level 2 dealers. They are still not very well penetrated, therefore, offer growth opportunities for us. If you look at our business, Cango has maintained a stable market share. Now with the strategic partnership with ICBC, we are getting access to the joint venture brand, OEM subsidy program segment, which we currently have little presence. So we expect a significant potential in those segments.

Thank you, Eddy, and I would like to take your -- the second question. In fact, we have not experienced much direct competition from other listed auto financing companies within the territory of non-franchise dealers. Our end, I mean, Cango's competitive advantage has always been our service and product. Instead of following the commission campaign, we would like to offer the whole package of services and products to our dealers to enhance their trading capacity and improve their overall profitability. On the other hand, we will also monitor the market condition and making proactive adjustment to stay competitive in all fronts. We strive for the optimal balance between dealer commissions and business volume. And our philosophy, I mean, business philosophy, has and will always be to focus on profitability and strong cash flow. Thank you.

Your next question comes from Lucy Li from Goldman Sachs.

[Foreign Language] So firstly, I'll translate my questions. The first one is pertaining to the partnering bank. Can you name the top 2 or 3 banks that help to fund our auto loan in the past quarter? And do we still need to take the credit risk for the majority of the loan? And related to that, we noticed the improving asset quality with lower delinquency rates in the past quarter. Can you help to explain the reason? And do you think this is sustainable?

Thank you, Lucy. I will take your questions. And for the funding partners, as usual, we -- the funding partner, of course, is very diversified. And mainly, I think the Jincheng Bank, WeBank and Jiangnan Rural Bank, they are the major funding partners of Cango. And Bank of Shanghai and ICBC, the transaction is still limited in some cities at a very early stage. So I think for the transaction this third quarter, our funding partners -- I mean, the structure of the funding partners did not change a lot. And as for the nature of the loan facilitated, quarter-over-quarter, we did see a small increase in risk-taking loans as a percentage of total new loan facilitate. But as for now, the majority of the outstanding balance of the loan we facilitate is still now risk-taking part. Trend-wise, as ICBC product takes a large portion of our product mix, risk-taking loan will see a periodical uptick. And we always adopt conservative accounting policy to make sufficient provision for risk-taking loans. As you just mentioned, during the third quarter, our credit performance improved and our M3+ overdue ratios improved to 0.36% from 0.46% in second quarter. As we continued optimize our funding partner mix, we believe that the credit quality of our consumer improved as well.

[Operator Instructions] Your next question comes from Michael Li from Bank of America Merrill Lynch.

[Foreign Language] It's Michael Li again. So my question is also about overdue ratios. So based on our experience, in down cycle economy, usually we will see increase of NPL ratios or overdue ratios. But in our company by end of third quarter this year, M1+ and M3+ overdue ratios was declining compared to where it is by end of first half this year. So could management give out some guidance of like in mid-term, 1 to 2 years, what kind of overdue ratios we expect in this business? And what kind of coverage ratio we have are overdue loans now?

[Foreign Language]

Michael, CEO is taking your question on overdue delinquency and loan quality. First of all, the improvement in M3+ overdue ratio observed in the past quarter, it is an improvement, but our management view is this is within the normal range with small fluctuation. We are glad to see improvement, but we still consider this within the normalized range. Secondly, if you look at our funding source, we have to admit, ICBC and Bank of Shanghai, those are new entry into our funding partner mix. As we cooperate with them, we are taking a prudent approach in our credit approval process to build our credibility with those relatively new cooperating strategic partners. So that contributed to better overdue delinquency rate. You probably also noticed, because ICBC and Bank of Shanghai, they could provide funds at more competitive funding cost, this will allow us to tap into a better creditworthiness in terms of end consumers. So overall, the quality of our loan borrowers at the consumer level also improves as our funding partners' cost improves. Now in the long term, it's not easy to give a specific guidance, but management do not expect big delta in terms of the overdue delinquency ratio. We will always, always strive for an optimal balance between our business volume and our business risk, including credit risk.

And also, as we just mentioned, we adopt a very conservative accounting policy to make provision for our risk-taking loans. And we provide -- we made a provision at day 1 of the facilitation at 1.17% based on the principle of the loans we facilitate. So compared to the overdue ratio, we think -- we believe our provision is sufficient. Thank you.

Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Ms. Caroline Li for closing remarks.

Thank you all for your continuous attention to our business. As we said, we are striving to focus our core competence and the continued delivery of lasting shareholder values. Hope you continue following our company, and see you all during our next conference call.