Cango Inc. (CANG) Q1 2020 Earnings Report, Transcript and Summary

Good evening, everyone. Welcome to the Cango, Inc. First Quarter 2020 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. Following management's prepared remarks, we will conduct the Q&A session. Before we begin, I refer to 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 will now turn the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

Hello, everyone. Welcome to Cango's First Quarter 2020 Finance Call. Over the past few months, the COVID-19 outbreak has spread the globe and caused severe disruption to our normal way of life and work. On behalf of all of us here at Cango, I want to extend our gratitude towards the clinical workers, community workers and many more working on the frontline of the pandemic. The courage you have shown in the face of such adversity is truly inspiring. The work all of you have done in support of the greater good continues to motivate us every day. The auto industry in China was definitely impacted by the outbreak in the first quarter, which has triggered some broader structural change in the industry. It was largely in line with our expectations. As a result of the pandemic economic impact, the demand for passenger cars has reduced significantly. At the same time, although people are more interested in buying cars as a result of the pandemic, it has not been enough to offset the greater loss of purchasing power across Chinese homes -- Chinese households. In particular, low- and mid-range car models as well as costs produced by domestic manufacturers were impacted more than high-end car models and those manufactured through joint ventures with foreign firms. We expect the market to begin a slow recovery in the second quarter and demand forecasted returning with its pre-pandemic levels until at least the third quarter of this year. Of course, as the situation continues to resolve, we expect to have more visibility on the general health of the industry and to provide our outlook in turn. For the first quarter of 2020, due to the severe disruptions caused by the pandemic, our total revenues decreased by 30% year-on-year. However, we maintained the gross margins at a healthy level through our effective cost controls which helped us catch the differences caused by the pandemic. Another impact of the pandemic was particularly since they're forced to suspend their operations, which led to an overall decline in household income across country. The combination of this decline, along with travel restrictions across the country, caused the market in our delinquency rates during the quarter. Nevertheless, throughout the pandemic, our asset management team were able to maintain our debt collection efforts by working from home. At the same time, we optimized the organizational structure of our collection department and introduced temporary incentives to ensure the optimal efficiency of our teams. In addition, we also assisted eligible customers with their applications for delayed repayment as required by domestic banking regulations. Currently, as China gradually reopened for business, the overall repayment capacity of our clients has recovered significantly, and therefore, customer delinquency has improved considerably, while our overall asset quality has remained at a manageable level. Looking ahead, we expect our delinquency rate to return to more normal levels within 3 to 6 months, and we are confident in our ability to sustain the manageability of our assets going forward. For a very small percentage of customers who do not intend to repay the loans, we will resolve the matter through the appropriate legal process. Dealers which interact directly with car buyers were, therefore, hit particularly hard by the pandemic. In the third quarter, most of the dealers across China began to gradually resume their operations. However, generally speaking, dealers in high-tier cities resumed their operations earlier and recovered faster as they are mainly involved in the distribution of high-end car models and luxury brands. In comparison, dealers in lower-tier cities, secondary dealers, auto trade stores as well as those dealers distributing low- and mid-range car models and domestic brands have been slower to restore their operations and sales performance. We are closely monitoring our leadership network and are looking forward -- and are looking for opportunities to provide our dealers with the assistance they need to the greatest extent possible. Meanwhile, we continue to refine our network efficiency. As such, we have terminated relationships with dealers that do not meet our standards for operating risks and traffic-generation capabilities to further optimize the efficiency of our dealership network. By the quarter end, we had approximately 45,700 registered dealers. Notably 95.6% of dealers in our network were under our direct model in the period as compared to 94.6% in the previous quarter. In addition to strengthening our core auto loan facilitation business, we also focused on developing our aftermarket deliveries facilitation business with a focus on ensuring facilitation service. In particular, we placed an increased amount of emphasis in car insurance in the first quarter. As a result, we ramped up the number of car insurance transactions by 2.8% on a sequential basis to about 11,100 in total. Furthermore, during the pandemic, we launched a health insurance product in partnership with Ping An Insurance, which accounted for approximately 2,700 insurance transactions in the third quarter. As a result of these efforts, our aftermarket services revenue in the first quarter grew by 23.3% to about RMB49.1 million from RMB39.8 million in the prior year period. For our existing partnerships, we continue to deepen our relationships and make good progress on a number of fronts. During the period, we formed partnerships with MYbank and OneConnect of Ping An. As an essential part of Ant Financial's service ecosystem, MYbank boasts a unique combination of data analytics and technology capabilities. By incorporating MYbank's state-of-the-art technologies into our nationwide dealership network, our partnership will not only greatly improve the company's competitive advantage but also enable us to reach high-end customers more effectively. At the same time, we have been in business discussions with more financial institutions such as China Construction Bank, China Agricultural Bank, to name just a few, to develop new financial products, expand our service coverage and upgrade our product offerings. Our strategic partnership with ICBC as of March 31, 2020. The total volume of nonsubsidized loans made by our cooperation with ICBC exceeded RMB3.57 billion. In addition, we continued to work with ICBC to develop OEM-subsidized products, and we expect to launch these products starting the second half of 2020. As the first auto financing platform to completely interface with ICBC's loan system for new car purchases, we are optimistic about the cooperation progress to date and confident about its potential for ongoing success in the future. Additionally, through our work with Didi, we also continue to provide Didi work drivers with car purchase transaction facilitation services and a complete list of auto solutions. It is worth noting that following the establishment of our partnership with Tesla in late 2019, we have been providing services to all of Tesla's board in Shanghai during the quarter. Currently, we are actively exploring more collaboration opportunities with other EV manufacturers. We believe there is still untapped growth potential in the EV market, and we will continue to explore opportunities in this area. I would now like to take a moment to touch on our future growth plan. Despite the pandemic impact on the industry, the fundamentals of China's economy remains strong, and the long-term growth prospect of the Chinese go-to-market remains promising. On our whole auto loan facilitation business, we will continue to strengthen our foothold in lower-tier markets. In addition, we aim to develop new innovative product offerings through our partnership with MYbank, which will enable us to further category and expanding to the high-end and luxury segment of the auto market. For our automotive division facilitation business, which is a crucial component of our overarching growth plan, we will concentrate our car insurance facilitation service to be the primary driver of this business. Additionally, we will continue to explore other insurance transaction channels and categories to meet the increasingly diverse needs of consumers as well as expand our insurance product offerings to include those insurance categories that led to higher transaction value, such as health insurance. Moreover, we are actively collaborating with Internet platforms such as massive platforms of online traffic such as Tmall, AutoHome and JD to explore partnership opportunities in developing online solutions for car transactions and auto financing. By tactically integrating online and offline resources, we believe that these partnerships will enable us to reach our target customer pool and provide a full suite of capabilities and more effective efficiency. As we continue to improve our core competitiveness to remain focused of improving our operating efficiency, our platform's increasing network defense will able us to further augment our negotiating leverage. On the user acquisition front, we will continue to refine our corporate structure with an emphasis on enhancing our team's operating efficiency. While we maintain our commitment to implementing effective cost control measures, we will not continue -- we will now continue our efforts to enhance our R&D, develop new business initiatives and drive technical innovation forward. Looking ahead, the impact of the pandemic is far from over. Week by week, many industries remain under pressure. Nevertheless, we are ready to face the challenges from this diverse market environment head-on. While we maintain our first-mover advantage in emerging markets through our lower-tier cities, we are also committed to expanding to the high-end segment of the market through our introduction of innovative product offerings. Furthermore, we will continue cultivating our aftermarket services business as our new growth driver, particularly insurance facilitation services. Meanwhile, we are also developing our technological capabilities, integrating online and offline resources to explore effective marketing approaches. On the operations front, we will continue to further improve our operating efficiency, refine our cost structure and impact technology and innovation. Our persistence combined with our constant pursuit of growth will enable us to weather the current market uncertainties and emerge in a stronger position. By leveraging our competitive advantages, empower all industry participants and building the development of the entire automotive industry value chain, we will continue to lay the foundation for lasting growth and the generation of shareholder value. With that, I will now turn the call over to our CFO, Michael Zhang, to review our financial performance in the quarter.

Thanks, Jiayuan. Hello, everyone, and welcome to our first quarter 2020 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. During the first quarter of 2020, as expected, the Chinese automotive industry was significantly impacted by COVID-19 outbreak. As a result of these unprecedented operating challenges, our total revenue in the first quarter was CNY246 million compared to CNY351.7 million in the same period of 2019. However, as mentioned earlier, we made solid progress in expanding our insurance service offerings during the period. Consequently, our off-market services facilitation business continued to perform well with its revenue growing to CNY49.1 million or 19.9% of total revenues in the period. Now let's move on to our cost and expenses during the quarter. Total operating costs and expenses in the first quarter of 2020 was CNY327.3 million compared to CNY282.3 million in the same period of last year. The increase in operating cost and expenses was due to the significant increase in net loss on risk assurance liabilities, mainly caused by the COVID-19 pandemic. Cost of revenues in the first quarter 2020 decreased by 30.7% to CNY90.6 million from CNY130.8 million in the same period last year. As a percentage of total revenues, cost of revenue in the first quarter of 2020 decreased slightly to 36.8% from 37.2% in the same period last year. Sales and marketing expenses in the first quarter of 2020 increased slightly to CNY45.8 million from CNY45.5 million in the same period of last year. As a percentage of total revenues, sales and marketing expenses in the first quarter of 2020 increased to 18.6% from 13% in the same period of 2019. General and administrative expenses in the first quarter of 2020 decreased by 11.4% to CNY57.4 million from CNY64.8 million in the same period last year. As a percentage of total revenue, general and administrative expenses in the first quarter of 2020 increased to 23.3% from 18.4% in the same period of 2019. Research and development expenses in the first quarter of 2020 decreased by 5.9% to CNY12.6 million from CNY13.3 million in the same period last year. As a percentage of total revenues, research and development expenses in the first quarter of 2020 increased to 5.1% from 3.8% in the same period of last year. Net loss on risk assurance liability in the first quarter of 2020 increased to CNY76.9 million from CNY17.9 million in the same period of 2019. The increased net loss on risk assurance liabilities was mainly due to uptick in delinquent loan balance and default rates. In addition, the pandemic also made it more difficult for in-person visits with delinquent car buyers and vehicle repossession, which resulted in an increase in loss given default ratio. This was in line with industry trends and our previous stated expectations. Due to the COVID-19 pandemic, we recorded loss from operations of CNY81.3 million in the first quarter of 2020 compared to an income from operations of CNY69.3 million in the same period last year. Net loss in the first quarter of 2020 were CNY34.7 million. Non-GAAP adjusted net loss in the first quarter of 2020 was CNY11.4 million. On a per share basis, our diluted net loss per ADS in the first quarter of 2020 was CNY0.25, and our diluted non-GAAP adjusted net loss per ADS in the same period was CNY0.1. Moving on to our balance sheet. As of March 31, 2020, we had cash and cash equivalents of CNY2.7 billion compared with CNY2 billion as of December 31, 2019, mainly due to the asset-backed securities issued by our subsidiary, Shanghai Chejia Financial Leasing Corporation Limited, in the first quarter of 2020. Looking forward to the second quarter 2020, we expect our total revenue to be between CNY230 million and CNY250 million. Please note that this forecast reflects our current and preliminary view on the market and operational conditions, which are mainly in consideration of the uncertainty in the market caused by the COVID-19 outbreak and are subject to change. This concludes our prepared remarks, and operator, we are now ready to take questions.

[Operator Instructions]. Our first question comes from Lucy Li with Goldman Sachs.

I have three questions in here. The first one is on the basis of Q2 outlook. We read from the earnings statement that we are expecting revenue between RMB230 million to RMB250 million in second quarter, which implies roughly flat quarter-on-quarter. However, we think from the macro or overall consumption perspective, there has been a pretty significant recovery or improvement in the past 2 months. So wondering if management could share with us the numbers you have observed, for example, in terms of facilitation volume or dollar amount in April and May? The second question is on asset quality. Given that the asset quality could be improving going forward, could the management, one, share the latest delinquency trends? And secondly, on the net loss on risk assurance liability, if the work is behind us, should we anticipate like a much less significant number going forward? Or potentially, can we expect any buyback? And then thirdly is on the business strategy going forward. The first part on MYbank and OneConnect. Can you share with us the business model? And related to that, the likely fee rate for the loans originated with MYbank? And secondly is on the online strategy, if you can add more color.

Thank you, Lucy. I will take your first 2 questions. And Mr. Lin Jiayuan will take your third question. Well, for the first question, you asked about the question now behind our guidance. Well, we've provided guidance for 2 reasons. Firstly, while indeed, it needs balancing -- I mean based on our observations of the market in April and May, we do -- we also do see some recovery in the consumer demand. However, as indicated in Mr. Lin's statement, in the sense of the lower-tier cities, the recovery has been much slower than expected. While in the first-tier cities and the second-tier cities and also in the foreign stores and low distributors, these dealers of luxury brands, they are recovering much faster than those -- than their counterparts in the lower-tier cities. Now foreign stores and [indiscernible] those dealers distribute domestic variants and also lower- and mid-range cars. So overall speaking, based on what we have observed, the consumer demand in the lower-tier cities has been quite soft and has been recovering market more slowly. So although, we expect the business volume in Q2 to rebound, we don't think it will rebound significantly, mainly because of the slower recovery pace in the lower-tier city. And the second reason is because of a change of the partnership model with WeBank. While in the past, our partnership model with WeBank is deposit-based, that is we take risk. But now, we have changed to a nondeposit model, that is we do not take risk. And this has resulted in a change in our fee structure, particularly the take rate. Well, after we adopt the new partnership model, the one-off net take rate has reduced compared to the previously arranged provisioned take rate. So throughout the life cycle of loans, we will look at the loan quality, that is the asset quality, and then we decide on the corporate distribution rate. So this is just a rough explanation -- a general explanation of the new take rate structure. So all in all, because of the lower take rate, the day 1 of net take rate will be reduced as a result. So it's because of these two factors that we have issued the revenue guidance that you see for Q2. But regarding your second question, the delinquency in rate. Well, in Q1, indeed, because of the pandemic, our collection efforts have been disrupted. However, since then, we have seen an improvement, especially after the resumption of the work. Well, in Q1, because of the local disruption, the delinquency rate has indeed increased. However, after the resumption of work, we invested a lot of resources in improving our loan servicing efforts. So that's why in March and April, we have seen improvements in our M1+ and M2+ numbers. Actually, the M1+ and M2+ numbers have almost recovered to the pre-pandemic levels or about late 2019. Sorry, M1 and M2 numbers. However, we are still under the influence of the pandemic. Though M1 and M2 numbers have improved, we got some loans which used to be M1 and M2 -- well, downgrade. That will all migrate downwards to M3 and then 4. So for the next period, our collection efforts will be focusing on the loans that are delinquent by three months or four months. So this will be the focus of our efforts. So what we are going to do? We will pay more in-person visits and we will also resort to the legal processes as necessary. So overall, for the next quarter, that is in Q2, we expect the M1+ number to improve. However, the M3+ plus numbers, that is M3+ delinquency rates, will increase. Well, based on our expectations, we don't see further impact on the P&L by these delinquent loans. There will be no further impact in the gains and losses on P&L., so we don't see it necessary to increase our provision on the net loss on risk assurance liabilities in the near term. So we believe that with our production efforts, such as the in-person visits, we'll be able to collect more loans back. And that will also help reduce the loss given default rate for us. And that will also then, of course, allow us to revert back the previously made provisions. So of course, this expectation is based on the current situation based on -- including the macroeconomic conditions as well as the rates of recovery -- or resumption of work and the resumption of production. I will take your third question, that is our partnership model with MYbank. Well, thanks to our strong reputation and track record and our partnership with Alipay, our partnership with MYbank and Ant Financial as a whole has successfully reduced the cost of funding for us. The certain benefits of our partnership with MYbank is the fact we are now technologically placed, much more capable and also, we have improved the customer experience significantly. For example, when the customer applies for our services, well we have been able to realize full automation of the whole process from applications to loan origination, to contract funding. Everything is done automatically without any manual work. And thirdly, by leveraging Alipay's capabilities, Cango now is much more effective and efficient in exploring our offline customer segment. Now we are able to reach the higher end segment of the market, such as the foreign stores. We are exploring more opportunities in our partnerships with Mybank, Alipay and Ant Financial as a whole. We are still thinking should we be part of the 9 consumers of Alipay, or should we use the Ant Financial banner. We are still discussing with our partners.

The next question comes from John Cai with Morgan Stanley.

So my first question is also related to the asset quality. I think we have made most of the provision in the first quarter, so I just wanted to get a sense of the loss as a percentage of the exposure. Probably, can the management provide us with the risk taken balance at the beginning and at the end of the quarter? And related to that is when we make the move on this, do we need to assign a higher loss ratio given the macro uncertainty in the coming quarters? And how would this loss assumption compare with the first quarter of maybe 2019? That's my first question.

John, I'll take your question. Well, as of the end of March, for those loans, which we take risk, that is we provide deposits, the balance is about RMB20 billion. And in terms of provision adequacy, actually, since the early -- this early midyear after the outbreak of the pandemic, we have already done a full test for the adequacy of our provision rate. And based on our test, I think of our provision for those loans with deposits, that is loans where we take risk, is adequate. Well, in Q1, we do see a big impact by the risk assurance liability from our gains and losses, so we have made necessary adjustments based on the asset default. That is our historical assets and then we look at our historical -- our existing provision and also look up to the impact of the pandemic. So based on our current expectations, outlook for the pandemic and also for economic recovery, well, we think that our provision is adequate. So if there is no further negative impact or negative turn in the economy, then we should be fine.

So my second question is about the competitive landscape. Firstly, I want to focus on secondary dealers. Just wondered, as you noticed this decline of dealer coverage in the first quarter on a sequential basis -- I understand that we have made some proactive structural adjustments of our dealer mix, but I would like to get some colors from the management on how they see the operating environment for these smaller dealers. Are they facing significant challenges? And should we expect this dealer coverage number to continue to go down? And also related to the supply, I think, can the management comment on how we see the auto finance suppliers in the secondary dealer levels? And the key metric is probably the commission paid to the car dealers. What's the number now versus maybe the past year?

Okay, I will take your question. Firstly, based on my personal observation, the number of secondary or non-foreign dealers indeed will decrease because of the pandemic and because of the slow growth of China's economy. So we expect that the non-foreign or second-hand dealers will face a lot of challenges. I mean if you look at the resumption of work and production with the non-parts reports, they are recovering much more slowly than their counterpart in the second- and first-tier cities. Your second question is about the competitive landscape. Well, what we are seeing more and more smaller players, including financing platforms and also competitors. They are actually gradually exiting from this market. We are seeing more consolidation, and we are seeing these smaller competitors reaching the peak of their performance. So they are gradually declining. And most of the competition on markets are on prices. Well, not just on condition rate, in fact.

So my next question is about the luxury or other dealership markets. So just wondering what's our strategy to target these Tier 1, Tier 2-city dealers? And you mentioned in the case of Tesla and it seems that it's based on our relationship with ICBC. And then ICBC, hence, a partnership with Tesla. And as a result, we can offer the auto finance products in these Tesla stores in Shanghai. And just wonder if that's -- if we follow a similar path to develop this on Tier 1, Tier 2 dealer coverage. And also in the case of Tesla, do we know how many auto finance suppliers are in the Tesla stores are in Shanghai?

Okay. For our strategy, we're targeting the higher-end segment of the market -- well, such as the higher-end brands. While we haven't formalized our strategy for this market segment, yet, however, we do think that customers in this segment demand high-level experience. And so this is where we are going to work on in the future. However, we haven't finalized and formalized our strategy for this market segment yet. We are still testing, and we are still exploring opportunities. Regarding your question on Tesla. Well, Tesla actually has 9 auto financing service providers in the country. So where we compete -- where do we compete? Well, we compete on the service capabilities that is how we serve the Tesla customers and how we can help generate sales beat for the salespeople of Tesla. With these 2 fronts, then we will get more market share.

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

Thank you all for your interest, and thank you all for your support for Cango. That's all for today's conference call. Thank you.