Cango Inc. (NYSE:CANG) Q3 2022 Earnings Call Transcript

Cango Inc. (NYSE:CANG) Q3 2022 Earnings Call Transcript November 30, 2022

Cango Inc. misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $0.06.

Operator: Good morning and good evening, everyone. Welcome to the Cango, Inc.’s Third Quarter 2022 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. Yong Yi 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 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 and welcome to Cango’s third quarter 2022 earnings call. In the third quarter market conditions in China’s automotive industry remain challenging due to COVID-19 resurgences across the country and the complex external operating environment. However, the change in consumption behavior brought on by the pandemic with consumers shifting to online shopping, it’s reshaping the transaction model of the whole automotive industry. Beyond that policies released in the last two quarters, that if it imposed new and used car sales have not only boosted confidence among industry participants, but also improved the order of the industry, laying a solid foundation for the sustainable development and prosperity of China’s automotive industry.

In the face of these evolving market trends and regulatory changes, we remain focused on our car trading transaction business during the third quarter and continue to implement our dual platform strategy covering both the new and used car markets. We further improved our service capabilities and enhanced our supply chain stickiness through service standardization taking full advantage of our over 10 years of industry expertise, deep insights into the lower tier markets and outstanding supply chain support. Meanwhile, we continue to empower downstream medium to small sized dealers with high margin product offerings to further strengthen our platforms instrumental row as customer acquisition and delivery channel. We delivered a solid operational performance in the third quarter with our total revenues reaching RMB 420 million, of which revenues from car trading transactions was about 350 million, accounting for over 83% of total revenues.

Photo by Matthew Henry on Unsplash

Next, I’d like to share some highlights of our third quarter business performance. Let’s begin with the new car trading transactions business, for our self-owned new cars, we expanded our vehicle inventory while also diversified by brand and model. We have made good headway in our ongoing negotiations with large OEMs including GAC Mitsubishi, FAW Volkswagen and FAW Audi. More and more OEMs are recognizing the value of our deep industry know-how and full-service capabilities around auto transactions especially in lower tier markets. Furthermore, we have sharpened our team skills in evaluating car models and prices empowering us to further increase vehicle diversity and stock and sell cars that better align with local demand, which in turn enhances our localized competitive advantages.

With respect to transaction facilitation services, we continue to create and commercialize services to meet dealers’ needs with a focus on standardization. We have launched a series of payment functions and products to improve dealers experience on that platform reinforcing their stickiness. Our Cango Haoche Platform progressed steadily during the third quarter with 9350 dealers in 31 provinces and 305 cities on the platform as of September 30, 2022. Our self-owned inventory on the platform currently includes 43 vehicle models across 23 auto brands and the 30-model series. We sold a total of 12,639 cars during the first nine months of 2022 including 7677 new energy vehicles resulting in the penetration rates of EVs exceeding 60%. In addition to a steady supply of high-quality new cars, we continue to refine our online product offerings for dealers.

We unveiled several key standardized products in October, including deposit guarantee, Chinese name is called and also hassle-free vehicle replacement and maintenance service to wheel as well as customer lead generation service or . These enriched services have encouraged an increase in the frequency and a variety of dealers online activities leading to form new online transaction behavior and increasing the stickiness on our platform. In the third quarter the cumulative number of car source is posted and car search entries on our platform more than quadrupled, quarter-over-quarter to nearly 10,000. It is also worth mentioning that since the Cango Haoche app was launched at the end of the second quarter of this year, it has attracted over 300,000 pageviews and more than 27,000 unique visitors in total by the end of September.

We also integrated a one-click connection to our aftermarket and automotive financing facilitation services during the quarter. Dealers can easily access our efficient and high-quality aftermarket and financial services on the Cango Haoche app. Speaking of aftermarket services, we met dealers, multifaceted insurance needs with a comprehensive industry, I mean insurance product metrics centered on auto insurance alongside customized non-auto insurance products. Regarding automotive financing facilitation, the overdue ratios rose slightly a quarter-over-quarter in the third quarter due to pandemic recurrences in various regions. As the outlook on our future qualitative performance remains cautious. We plan to tighten risk controls and strengthen post the management.

We are confident that by improving operational efficiency and asset quality in the business, we can keep our overall overdue ratio within a relatively safe range. From supply chain disruptions to data store closures, the pandemic has brought unprecedented volatility and uncertainty to China’s auto market. Against this backdrop, we are striving to build a new digital supply chain with the Cango Haoche platform provided diverse solutions for auto dealers to address their needs across car sourcing, logistics, vehicle registration and other car trading related business. Technology empowered car transaction platform ecosystem can not only improve dealers’ operational models, but also significantly alleviate traditional dealers’ capital logistics and inventory constraints.

It can also accept the rights the technological development and digitization of the circular automotive market while facilitating business transformation throughout the automotive industry. Now moving on to our latest progress in used car transaction business. Based on the operational experience of Cango Haoche platform we are officially launched our Cango U-Car WeChat mini program to provide dealers with more convenient used car transaction services. As of the end of the third quarter Cango U-Car mini programs has accumulated over 290,000 pageviews and 15,000 unique visitors with more than 3000 registered dealers. Self-owned used car model is one of Cango U-Car’s primary advantages and also the focus of our ongoing exploration in the used car market.

Thanks to our massive dealer network across newer tier cities as well as industry experience. We have abundance sources of high-quality used cars, such as vehicles replaced by our financing facilitation customers, repossessed cars from our asset management department and wholesale used cars from our OEM partners. Furthermore, our self-owned car model exhibits strong user stickiness and manageable risks. Given these positives, we plan to prioritize and promote this model going forward. Our high-quality used car sources are also Cango U-Car’s with dealers combined with our professional one-on-one matching services, Cango U-Car has highly improved dealers trading experience, and the used car transaction efficiency. Since the launch of Cango U-Car mini program dealers have gradually developed online transactions behavior, and their engagement on the platform is increasing daily.

Given the growing popularity of the WeChat mini program among dealers, we are developing a net version of Cango U-Car and expect to launch it within a year with the goal of delivering more comprehensive and convenience services. Looking at the future of the used car market favorable policies released in quick succession earlier this year energized the used car sales. In early July, 17 government departments jointly unveiled measures to facilitate the trading and circulation of used cars. For example, restrictions on the cross regional transfer of used vehicles that meet national five emission standards were lifted nationwide beginning August 1. Temporary ownership registration by dealers will be allowed as of October 1. While the number of used car transactions by individuals will be limited starting in 2023.

These measures will be 10 changes in used car transactions shifting competitive fields from price to quality, service and user interest protection. Furthermore, used cars play a critical role in the circulation of the car market. Restrictions on used car sales deter car owners from replacing or upgrading their cars bringing on new car sales. Therefore the efforts to promote the orderly and healthy developments of the used car industry will also be significant in boosting new car sales. In short Cango U-Car represents an important strategic component of future development plans. We are confident that by harnessing the power of our rich industry expertise and well established a lower tier marketing network, we can leverage Cango Haoche to capture policy driven opportunities in the used car market, while providing dealers with better products and services.

Meanwhile with our dealers as the touch point Cango Haoche can bring more high-quality cars and standardized services to our broad user base in lower tier markets. For the foreseeable future, we expect sporadic and COVID-19 resurgences and a complex global macroeconomic environment to continue to create many uncertainties in China’s automotive industry. In the face of such uncertainty, we will remain prudent with our vision always in mind. Meanwhile, we will leverage our longtime strengths to develop our new and used car businesses in parallel and elevate our one stop platform service capabilities, creating value for OEMs and dealers alike and making car purchases simple and enjoyable. Next, I will turn the call over to our Chief Financial Officer, Michael Zhang for a review of the company’s financial performance.

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Michael Zhang: Thanks, Jiayuan. Hello everyone and welcome to our third quarter 2022 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. Our third quarter performance showcased the resilience and strength of our car trading transaction business even in a challenging environment. We recorded a total revenue of 416.4 million, outperformed our previous guidance. Car trading transaction business delivered revenues of 347.2 million continued to play an essential role in our platform. Now let’s move on to our costs and expenses during the quarter. Total operating costs and expenses in the third quarter 2022 were 608.8 million compared with 839.6 million in the same period 2021.

Cost of revenue in the third quarter 2022 decreased to 388.7 million from 610.5 million in the same period 2021. As a percentage our total cost of revenue in the third quarter 2022 was 93.3% compared with 76.3% in the same period 2021. The change was primarily due to an increase in car trading transaction share of total revenues. Car trading transaction normally present a high-cost revenue ratio thus pushing up the overall ratio. Sales and marketing expense in the third quarter of 2022 decreased to 17.9 million from 46.8 million in the same period 2021. As a percentage of total revenue, sales and marketing expenses in the third quarter 2022 was 4.3% compared with 5.8% in the same period 2021. General and administrative expenses in the third quarter 2022 decreased to 57.8 million from 64 million in the same period 2021.

As a percentage of total revenue, general and administrative expenses in the third quarter 2022 was 13.9% compared with 8% in the same period 2021. Research and development expenses in the third quarter 2022 decreased to 10.2 million from 17.4 million in the same period 2021. As a percentage of total revenue, research and development expenses in the third quarter 2022 was 2.4% compared with 2.2% in the same period 2021. Net loss on risk assurance liability in the third quarter 2022 was 85 million compared with 55.5 million in the same period 2021. Net loss on risk assurance liability was mainly due to a sequential increase in a default rate since 2021. We recorded loss from operations of 192.3 million in the third quarter 2022 compared with 39 million in the same period 2021.

Net loss in the third quarter of 2022 was 130.3 million, non-GAAP adjusted net loss in the third quarter 2022 was 110 million. On a per share basis, diluted net loss per ADS in the third quarter 2022 was 0.96 and diluted non-GAAP adjusted net loss per ADS in the same period was 0.81. Moving on to our balance sheet, as of September 30, 2022, we had cash and cash equivalent of 745 million compared with 1250.7 million as of June 30, 2022. As of September 30, 2022, the company had short-term investments of two 2.7 billion compared with 2.1 billion as of June 30, 2022. Looking ahead to the fourth quarter 2022, we are now predicting our total revenue to be between 450 million and 500 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, operator, we are now ready to take questions.

Q&A Session

Operator: . We have our first question from Shelley Wang with Morgan Stanley. Please go ahead.

Shelley Wang: Hi, I’m Shelly from Morgan Stanley. I have three questions. The first question is about your outlook for 2023 car market, because we are expecting some reopening policies for China in the following months, because we are seeing some restrictions are being gradually released. So what is your outlook for 2023 China auto market? And the second question is, could you elaborate on the progress of your transformation? When do you expect to complete the transmission process and when do you expect to breakeven? And the third question is about the used car market. We are seeing the issuance of many favorable policies from the government on used cars. So what is your expectation of the used car business. What are your plans for used car market and could you elaborate on some specific initiatives that you’re going to take to drive the used car business?

Jiayuan Lin: Thank you, Shelley. I will take your three questions. So let’s talk about your first question on outlook for 2023 car market. From the supply side, OEMs are growing variety of new car models, which has given the consumers more choices and has also stimulated car consumption of different demographics in various market segments. However, due to chip constraints and also semiconductors, long production cycles and the continual production reduction, the production capacity in the overall automatic market will remain under pressure. And on the demand side consumption will likely remain weak with the pandemic continued impact. Consumers purchasing behavior next year will largely depend on pandemic controls and also their perception of the pandemic development.

Okay. About your second question, the development of our transformation program. Well, we have gradually launched our standardized products on the Cango Haoche app including reliable car search while we call and also logistics services and deposit guarantee what we call , as well as insurance and also customer leads generation service, which we call . As dealers use these products on a trial basis, we have been refining these services to enhance the user experience. In addition based on our new car transaction business model, we have validated the viability of our used car business, so we have also been investing resources to develop a transaction platform for used cars which we expect to launch by the end of the year. Over time the business logic validation of our entire transaction platform proves the viability of the business supported by our processes.

We have completed our infrastructure and backend IT operations support. We are also beginning our in-depth cooperation with the major OEMs. According to our data revenues from car trading transactions now account for about 80%, actually over 80% of our total revenues. This means that solid transformation to a car transaction platform is effectively complete. The next milestone will be the scale up of our business model which we will endeavor to complete next year, while consistently improving its replicability, sustainability and profitability. About your third question on the used car market, while the used car market is quickly expanding. First, the government is paying more attention to this market as demonstrated by a series of documents published by the Ministry of Commerce to encourage the development of the used car market segment.

Second, the growing number of used cars will translate to larger pool of used cars going forward either amid the pandemic, the used car market has maintained steady growth therefore we believe the used car market will keep expanding for a long time to come. Thank you. That’s all from me.

Operator: Your next question comes from Sophia Xu with Goldman Sachs. Please go ahead.

Sophia Xu: Thank you. I have two questions. The first question is related to the automotive financing facilitation. Well, based on the data, we can see that the company’s incremental revenue from car loans is already very small. So does that mean that you are going to stop lease business completely? And why do you decide to do so? And another related question is about the overdue ratio, we are seeing that the overdue ratio continued to grow. So when do you expect that inflection point to appear? That is, when do you expect the overdue ratio start to go down? And my second question is relating to the dealership network. And as you have mentioned before that the company now serves nearly 50,000 dealers in the lower tier markets. So what is the size of the dealer network that a company expects to reach? And well, what will be the market share?

Jiayuan Lin: Thank you. I will try to take your two questions. The first question about the car, I mean, automotive financing facilitation business. Okay. So given the current macroeconomic conditions expanding this business actually may cause fluctuations in our rates leading to significant cash flow pressure and even threatening the company’s survival. So such an asset — business will be a huge challenge to our transformation. So we are not really giving up the automotive financing facilitation business but have proactively been reducing its size. Actually, we have incorporated these auto financing facilitation services into our Haoche app. In the third quarter, our overdue ratios rose slightly due to the pandemic’s impact based on our current business development strategy the overdue ratios will remain at the present level for some time to come as the existing those are settled however, the overdue ratios will drop to zero there’s not going to be an inflection point.

About your second question that is our dealership networking in the low tier markets. So far, our platform has a total of about 12,000 dealers, including both new car dealers and used car dealers. So at this stage, we are focusing on migrating dealers to our platform through promotions and developing the dealer’s habit of using our app, which will in turn, we believe drive improvements to our app functions and user experience, so that we can provide better services to our dealers. Thank you.

Operator: . Your next question comes from Brian Lantier with Zacks. Please go ahead.

BrianLantier: Good evening, gentlemen. Thank you so much for holding this call. It’s nice to see a little bit of stabilization in the business. I think that’s good news. The first question I guess is sort of big picture, ways to increase shareholder value for the company, you obviously had the two special dividends this year and you still have an incredibly strong balance sheet. Looking out, how does the company prioritize that at the management and board level, where are your preferences to try and drive shareholder value investments in R&D share buybacks, additional dividends, or perhaps even acquisitions in the future? Do you have an internal preference among those? And then secondly, we’re hearing after the third quarter from a lot of the Chinese auto manufacturers.

They’re ramping up production but we’re hearing the dealers sell through is going a little bit lower. So we’re hearing about some inventory build at the dealer level. Wondering how you think that could impact 2023, if there is excess inventory on dealer loss? Thank you.

Jiayuan Lin: Thank you, Brian, I will try to take your two questions. The first question actually is about the use of our capital. Well, actually we have always been committed to maximizing shareholder value. But with this commitment in mind all our decisions related to the allocation of our capital are made the following careful consideration. In fact, we don’t have any particular preferences. We distributed dividends twice this year, along with our ongoing share buyback program. And as far MMA and R&D investments, these decisions really depends on their compatibility with our business development plans. If the right opportunities come along, we definitely will consider them. That is to say we will plan our cash deployments from a holistic strategic perspective based on a company’s business position, business model development and our expenditure programs as well as of course external opportunities.

Your second question is about the inventory build-up and the market demand. Well due to the pandemic, consumers are uncertain about our future income, which has resulted in a decline in demand for the forecast with actual demand surprised by the uncertainties. So we will have to wait and see if these pent-up demand will be unleashed in the future. We are monitoring the situation very closely. It’s worth mentioning that the consumer demand for an EV is clearly on a rise. Although the some IC engine cars, internal combustion engine cars are becoming cheaper customers, I mean consumers they are still demanding more for an EV rather than for the ICE cars. So the consumer demand for these types — for the traditional ICE cars are declining. Thank you.

Operator: The next question comes from with Citi. Please go ahead.

Unidentified Analyst: Thank you. from Citi. I have two questions. The first question is that earlier, Mr. Lin mentioned the new partnerships with several traditional OEMs. So why do these OEMs choose to work with Cango? And what are the company’s competitive advantages? And my second question is about the Cango U-Car. You also mentioned that the self-owned used cars are an advantage of Cango U-Car, so does the company plan to build Cango U-Car into a purely self-owned car platform.

Jiayuan Lin: Thank you very much. I like your two questions. Earlier, I met with several OEMs and all of them concerned their recognition of our competitive advantages. Because over the decades, we have been serving small and medium sized dealers in lower tier markets. And thanks to our hard work, we have built up strong and rich auto sales expertise in these markets and the major OEMs, they have recognized our capabilities and also our deep penetration into the lower tier markets and they do hope to leverage our network in these markets to sell their vehicles. In addition to selling vehicles, we also provide a wide range of services including warehousing, logistics, delivery, financing facilitation and insurance. We can also customize our services to dealers based on the specific needs and geographical locations.

So such service capabilities are unique in the lower tier markets making us very different from our competitors and such capabilities have been widely recognized by both OEMs and dealers. So about your second question, a purely self-owned model will be asset heavy and requires large amount of cash flow and also investment, this is definitely not what we want. Right now we want to validate our business logic through the self-owned vehicle. I mean the self-owned model to attract more dealers so that we can build a used car transaction platform while we call Cango U-Car. And then we will address these challenges and enhance used cars efficiency with our platform. So the self-owned model will be one of our models rather than the only one. Thank you.

Operator: We have no further questions at this time. I’ll now hand back to management for closing remarks.

Jiayuan Lin: Thank you very much. That closes today’s earnings call.