Cango Inc. (CANG) Q1 2019 Earnings Call Transcript

Cango Inc. (CANG)
Q1 2019 Earnings Call
May 28, 2018, 9:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and good evening, everyone. Welcome to Cango Inc.'s first 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 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 not going to turn the call over to Mr. Jiayuan Lin, CEO of Cango, please go ahead, sir.

Jiayuan Lin -- Chief Executive Officer 

[Translator] Hello, everyone. Welcome to our first quarter 2019 earnings conference call. As you know, 2018 marks China's first decreasing annual car sales in the last two decades. In the first quarter of 2019, driven by the escalating US trade war and a softening economy, car sales in China continued to slow down. In fact, according to industry reports on the Chinese market, passenger car sales fell in March for the tenth straight month and in the first quarter with a 13.7% year-on-year decline in sales.

Despite the industry and macroeconomic headwinds, we maintained our healthy growth trajectory in previous quarters, demonstrating the effectiveness of our growth strategies to date. During the quarter, we continued to focus on strengthening our core competencies in auto loan facilitation services, accelerating the development of our aftermarket services, extending our collaborations with strategic partners, and establishing new partnerships with financial institutions and OEMs.

As a result, our total revenues increased by 41.3% year-on-year to RMB 351.7 million in the first quarter and our aftermarket services facilitation business remained a major source of growth in the first quarter, contributing 39.8 million RMB or 11.3% to our total revenues.

Now, I will provide an update on the progress we achieved in the first quarter as well as the growth prospects for our core auto loan facilitation business, aftermarket services, and new business initiatives.

First, as the primary driver of our growth, our auto loan facilitation business continued to deliver solid results. In the first quarter, the total amount of financing transactions facilitated reached 6.55 billion RMB and a total outstanding balance of financing transactions facilitated was 35.75 billion RMB. On the funding side, we signed a collaboration agreement with First Automobile Finance, or in short, FAF, a subsidiary of FAW Group. Under these agreements, we must utilize our extensive sales network, especially in lower-tier cities to promote and distribute FAF's auto financing products.

Moving forward, we will work toward further collaboration with FAW's Groups, domestic OEMs, as well as its joint venture manufacturers. At the same time, we are also actively establishing partnerships with the leading banks in China. Recently, we signed a collaboration agreement with China Minsheng Bank and we are currently in negotiations with potential funding partners such as China Construction Bank, China Citibank, Bank of China, and Shanghai Pudong Development Bank.

Meanwhile, we continue to expand our dealership network and improve our service quality. At the end of the first quarter, we had more than 47,000 registered dealers in 353 cities representing a 27% year on year increase in dealers. This expansion of our network consolidated our market-leading position as the largest auto transaction service platform in China in terms of new car dealership coverage.

Moreover, we continue to implement our direct coverage model in which our sales teams are made responsible for individual dealers, allowing us to provide highly customized for support. So far, this model has excelled at improving dealer-specific [inaudible] and network efficiency. By the end of the first quarter, over 90% of our dealers were directly covered by our sales teams.

Secondly, we continue to expand our aftermarket services business. While we worked to ensure the strong growth of our core auto loan facilitation business, we also focused on utilizing our cross-selling mode to accelerate the development of our aftermarket segment. As a result, our aftermarket services business maintained its high conversion rate and contributed 39.8 million RMB or 11.3% to our total revenue in the first quarter.

Since completing the acquisition of a licensed insurance brokerage firm in the previous quarter, we are actively setting up insurance brokerage branches across China. As of the end of the first quarter, we've already set up two branches in Hunan and Gansu, respectively. In addition to the introduction of active insurance for auto loan payments and anti-theft assurance services in 2018, we stepped up our efforts to promote our car insurance for business. A total number of 3,091 transactions were completed in this quarter, representing a sequential growth of 73.3%.

Finally, we have depend our cooperation with core strategic partners. With respect to ICBC, following the system interface with ICBC, we continued our negotiations with major OEMs this quarter. In Q1 2019, we incorporated our systems with both [inaudible] Automobile and [inaudible] Automobile.

This collaboration enabled us to offer OEM subsidized auto financing and promotion services nationwide by liberating our dealership network. Meanwhile, we are close to finalizing our negotiations with China's Suzuki Automobile as well as [inaudible] Automobile. We expect to start working with these OEMs in the second quarter of 2019.

Our partnership with DD -- during the first quarter, we completed over 180 car purchase transactions for licensed DD drivers across eight cities in China. We have also established our presence in 41 Chinese cities where we will be able to provide DD drivers with a complete suite of auto solutions, including car porting, auto financing, insurance products, and operator licensing.

Furthermore, we've been exploring comprehensive partnership opportunities with OEMs, first utilizing our extensive dealership network in lower-tier cities to expand sales channels for OEMs. Secondly, helping OEMs further diversify the product offerings so as to further direct the demands of the broader customer base, thirdly, wholesaling and retailing of cars.

During the first quarter, we signed collaboration agreements with Roewe, Dongfong Automobile, and Chery and Jianghuai. We are also currently in the process of establishing partnerships with additional OEMs, including BYD, JAC, Fiat Chrysler, Chery Automobile, and Southeast Motor. And hopefully, our OEMs subsidize the products while being able to be promoted and distributed across all its channels.

In closing, we are confident in our strong market position despite the persistent macroeconomic uncertainties of 2019. We plan to continue liberating our capabilities in greater analysis, technology innovation, and competitive service quality. These core competencies alongside our strong cash position will sustain our growth momentum while further cementing our leadership position in the Chinese automotive transaction market.

Now, over to our CFO, Michael Zhang, for a recap of the quarter.

Yongyi Zhang -- Chief Financial Officer

Thanks, Jiayuan. Good morning and thanks to all of you for joining us today. Before I begin, please note that unless otherwise stated, all numbers are in RMB and all comparisons are on a year over year basis.

As management earlier, despite the macroeconomic industry environment remained quite challenging, this has been a productive quarter for Cango. Our total revenues in this first quarter 2019 were 351.7 million RMB, representing a year over year increase of 41.3%, outperforming the high end of the company's guidance by 6.6%. Our upmarket services facilitation business continued to contribute stable revenues. As its revenues were 39.8 million RMB, interest facilitation services remained a key driver for growth for our upmarket services facilitation segment.

Cost of revenue in the first quarter 2019 were 130.8 million RMB. As a percentage of total revenues, cost of revenues in the first quarter 2019 increased to 37.2% from 32.5% in the same period of last year. This increase was due to a higher average amount of commissions paid to dealers in each financing transaction.

Sales and marketing expansion in the first quarter 2019 increased to 45.5 million RMB from 34.8 million RMB in the same period last year. The increase was due to increases in staff compensation. As a percentage of total revenues, sales and marketing expenses in the first quarter of 2019 decreased to 13% from 14% in the same period of last year, remaining stable.

General and administrative expenses were 64.8 million RMB or 18.4% of total revenue. In the first quarter of 2019, compared with 26.7 million RMB or 10.7% of revenue in the same period of last year. The increase was mainly driven by increasing stock compensation, including share-based compensation expenses as the company expanded its business.

Research and development expense in the first quarter of 2019 increased to 13.3 million RMB from 6.5 million RMB in the same period last year as we continued to expand our R&D team and invest in product innovation. Due to the increase in cost of revenues and operating expenses, our net income was 74.4 million RMB compared to 84 million RMB in the same period of last year.

Our non-GAAP adjusted net income, which excludes the increase of share-based compensation expenses increased by 6.7% year over year to 89.6 million RMB in the first quarter of 2019. Our diluted net income per ADS was RMB of 0.5 and our diluted non-GAAP adjusted net income per ADS was RMB of 0.6 in the first quarter of 2019.

Moving on to our balance sheet of the end of March 2019, we had cash and cash equivalents of 2,178 million RMB compared with 2,912.9 million RMB at the end of 2018. Looking forward to the second quarter 2019, we expect our total revenue to be between RMB 290 million and RMB 315 million. This forecasts the fact of our current and preliminary review on market operational conditions, which are subject to change.

With that, we are now open for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press * then 2. We please ask you ask your question first in Chinese then translate to English. At this time, we will pause briefly.

Your first question today comes with John Cai with Morgan Stanley. Please go ahead.

John Cai -- Morgan Stanley -- Analyst

Thanks, management for taking my questions and congratulations on the results. I have four questions. The first one is on the strategic cooperation with DD and ICBC. Can the management share more details on the low volumes and the take rate? The second question is on the new car facilitations. What are the trends on the [inaudible] and the funding costs?

The third question is on the asset quality. In the first quarter, I've noticed this increase in the risk assurance liability while the delinquency rate seems to be stable, is there any reason to [inaudible] the increase of the risk assurance liability? The final question is about the new business -- do we see any new revenue growth drivers besides the new auto sales loan facilitations and also the insurance costs? Thank you very much.

Jiayuan Lin -- Chief Executive Officer 

[Translator] Thank you for your questions. I will take your first and second questions. Okay. In terms of the first quarter, that is our strategic partnerships with ICBC. Actually, we have been working with ICBC, mostly on the products which guarantees our deposits. Our products with ICBC include both subsidized products and also non-subsidized products. Now, the take rate -- the take rate for subsidized products is about 2% to 3% with deposit cash and for non-subsidized products, the take rate is about 5.5%, again, with deposit cash.

Most of the revenue so far, actually, comes from the non-subsidized products. As of the end of March, the loan origination amount backed by ICBC [inaudible] 32 million RMB and by the end of April, that amount reached 83 million RMB. And in Q1 2019, we have already incorporated our system with [inaudible] Automobile.

These collaborations enabled us, all the OEM-subsidized auto financing and promotion services nationwide by liberating our dealership network. Meanwhile, we are close to finalizing our negotiations with China Suzuki Automobile as well as the Guangzhou Automobile. We've got to start working with these OEMs in the second quarter of 2019.

Also, I need to call your attention to this fact -- that is while in terms of the transaction volume of the OEM-subsidized products, right now, it is still relatively at a low level because it takes time for us to change the habit or behavior patterns of our dealerships and [inaudible] and also, it takes time and effort for us to expand coverage or [inaudible] train a sales staff, and optimize service processes so that the transaction volumes reach high levels over the reasonable period of time.

And about our partnership with DD -- in the first quarter, we completed over 180 car purchase transaction for licensed DD drivers across eight cities in China and we have also established our presence in 41 Chinese cities where we will be able to provide DD drivers with a complete suite of auto solutions, including car sourcing, auto financing, insurance products, and operator licensing.

Our collaboration with DD covers the comprehensive package of professional services. I believe that these services will be very helpful in furthering our loan facilitation business as well as aftermarket insurance services. We are very confident in the prospect of the collaboration and partnership. In terms of transaction volume resulting from the DD cooperation, we do not yet expect it to be significantly reflected in our overall performance across the year.

On your second question about the cost of funding and also, the product pricing, while for both metrics, we are seeing a downward trend. Now, I'll hand over to Michael to answer your further questions.

Yongyi Zhang -- Chief Financial Officer

[Translator] Okay. I will briefly answer your third question. While you may have noticed, actually, our overall delinquency rate has always been at a very stable level, you may also have noticed, actually, that since this year, there have been some changes in the regulatory frameworks.

For example, in terms of the loan servicing, while for the car production, there have been some changes in the regulatory requirements. So, that's why we are seeing some changes in the car production rate. That's why for Cango, we have increased our provisioning for these issues. So, that's why in the first quarter, you are seeing some increase in the guaranteed liabilities. So, we have made up for the shortfall in our provisioning.

Operator

Thank you. Your next question comes from Lucy Li with Goldman Sachs. Please go ahead.

Lucy Li -- Goldman Sachs -- Analyst

Thank you. The first question is on the slightly longer view on the ICBC OEM collaboration, I would want to know the amount of loan facilitation as well as the revenue contribution, for example, in 2020. And the second question is on auto sales and in particular the domestic car brand auto sales for the brands for the year going forward. Correspondingly, how is that going to impact the auto loan needs of our final customers? Thirdly is on the auto financial service fees and the related policies. Thank you.

Jiayuan Lin -- Chief Executive Officer 

[Translator] Okay. I will take your first question. That is the first contribution by ICBC to subsidize the products to our 2020 revenue growth. I'm very sorry that I cannot give you an exact estimate. However, we are very confident in the prospects. While I cannot give you the exact estimate because there are many influencing factors.

Firstly, it depends on the competencies of Cango. For example, how much market share we will be able to get in the future and how we can persuade the dealers to work with us and to subscribe to our services. So, that's the first influencing factor. The second factor, actually, more amounts to the OEMs, while as we described, now, we are facing a lot of challenges in a macroeconomic environment, for example, like the final US trade war and also the decrease of sales in car sales in China.

So, how OEMs are going to respond to those challenges, this is another very important influencing factor. So, overall speaking, we are very confident in the collaboration and also, the growth in the future. But I'm sorry that I cannot give you the exact numbers yet.

Your second question is about our outlook on the sales of a domestic brand or the domestic OEM cars. Well, if China-US trade war continues in [inaudible] as a precondition, my personal view is that this will help boost the sales of domestic brands.

And about your third question, that is the [inaudible] and the impact on Cango -- [inaudible] no impact on Cango. Cango has always been operating in strict compliance with corporate ethical standards and laws and regulations. In fact, in terms of the [inaudible] incidents, I think there are two key issues here.

The first one is that has the company or has the source been giving very clear information to the customers in terms of its financial services fees and its revenues. While, in terms of this, Cango has always given very clear information and has always been very transparent in terms of our fee explanation and fee disclosure to our customers.

The second key issue here is whether the company or the source has been paying the taxes as required by the law. Again, Cango has always been very strictly in compliance with the relevant laws and regulations. We have been paying the taxes as the laws require. We actually have been doing this since day one.

So, overall speaking, there is no big impact on Cango.

Lucy Li -- Goldman Sachs -- Analyst

So, the question is on the cost of revenue -- I noticed that it's stated in the earnings statement that there is an increasing average amount of commissions paid to dealers per individual transaction, financing transaction. So, my question is what is the proportion of dealer commission within the cost of revenue? Related to that, with the commission rate we're paying, is it still around 1%? Thank you.

Jiayuan Lin -- Chief Executive Officer 

[Translator] Okay. I will take your question, Lucy. Thank you for your question. In terms of the contribution by dealer commission to the cost of sales, right now, it's about 45% to 50%, so, quite a large percentage indeed. In terms of its contribution to service or as a percentage of sales, I think the commission to dealers is about 18% of sales. Right now, the dealer commission rate to extend at about on average 1.2%, a slight increase over the same period of last year.

Operator

Thank you. Your next question comes from Anna Zhou with Bank of America Merrill Lynch. Please go ahead.

Anna Zhou -- Bank of America Merrill Lynch -- Analyst

So, the first question is do we bring in new founding stores in the first quarter and is there any change in the cooperation model? And the second question is we noticed that Cango just issued the first ABN where we continue to issue the [inaudible] and will it have any impact on the company's business model?

Jiayuan Lin -- Chief Executive Officer 

[Translator] Thank you. I will first of all answer your first question. In terms of the funding side, we recently collaboration agreements with First Automobile Finance and China Minsheng Bank.

For First Automobile Finance, it's a non-guaranteed product and also, for Minsheng, it's with guarantee. So, in terms of cooperation with financial institutions, we have not seen significant changes on this side. At the same time, we are negotiating with other potential funding partners such as China Construction Bank, Citibank, and Shanghai Pudong Development Bank.

Thank you. I will take your second question. That is the issuance of ABS products or [inaudible] securities. While, as you have noticed, we have just issued ABN, these products are issued in the public market, the exchange market, and we are now in the process of issuing ABS products in the exchange market, which will be the main focus market of our ABS products in the next stage.

Also, I have to call your attention to the fact the issuer of ABS products is Shanghai [inaudible] Financial Leasing Company, which is our wholly owned subsidiary. The assets are all on balance sheet. Also, I have to call your attention to another fact. I think that 2018 only contributed 80% to Cango's total revenue. What it means is that the issuance of ABS product won't have material impact on Cango's business model and the auto loan facilitation business will remain our core business.

Operator

Thank you. Once again, if you have a question, please press * then 1. There are no further questions at this time. This concludes our question and answer session. I would like to turn the conference back for any closing remarks.

Yongyi Zhang -- Chief Financial Officer

Thank you, everyone for participating in Cango's first quarter conference call. Thank you very much. See you in our next quarterly conference call. Thank you very much. Have a nice day.

Duration: 45 minutes

Call participants:

Jiayuan Lin -- Chief Executive Officer 

Yongyi Zhang -- Chief Financial Officer

John Cai -- Morgan Stanley -- Analyst

Lucy Li -- Goldman Sachs -- Analyst

Anna Zhou -- Bank of America Merrill Lynch -- Analyst

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