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Cango Inc (CANG 5.39%)
Q4 2019 Earnings Call
Mar 23, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and good evening, everyone. Welcome to Cango, Inc.'s Fourth Quarter 2019 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; Mr. Yongyi Zhang, Chief Financial Officer of the Company. Following the management's prepared remarks, we will conduct a Q&A session.
Before we begin, I refer you to the Safe Harbor Statement of 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 -- Founder and Chief Executive Officer
[Foreign Speech] Hello, everyone. Thank you for joining us today on Cango's fourth quarter 2019 earnings call.
[Foreign Speech] Despite macroeconomic uncertainty and a downturn in China's automotive market, we ended the year on a high note, delivering exceptional financial and operating results in the fourth quarter on the back of steady growth and business expansion. Notably, total revenues in the fourth quarter increased to RMB438.5 million, representing a year-on-year increase of 36.6%.
[Foreign Speech] Our robust performance in the quarter demonstrates our continued progress in the following areas. Firstly, upgrading our auto loan facilitation services to bolster our market leadership. Secondly, refining our cross-selling strategy to drive growth in our after-market service facilitation business. And thirdly, strengthening our existing relationships with core strategic partners and seeking out new opportunities to diversify funding sources and revenue streams.
[Foreign Speech] Firstly, for our auto loan facilitation business, we implemented a series of initiatives to bolster our market leadership. During the quarter, for example, we focused on growing the reach of our dealership network by adding approximately 1,800 new dealers to our network. At the same time, we began to actively refine our network efficiency. As such, we have terminated relationships with approximately 2,000 dealers that did not meet our standards for operating risks and traffic generation capabilities. As on December 31, 2019, the Company has covered a total number of 49,238 dealers across 353 cities nationwide.
[Foreign Speech] We also continued to make progress in the implementation of our direct coverage model during the quarter, as we further the penetration of our model, our sales team is growing the number of directly covered dealers in our network. Currently, we maintain direct coverage of 94.6% of our dealers in our network. The high penetration of our direct coverage combined with our removal of underperforming dealers has enabled us to standardize and augment the quality of our service offerings across our network. During the quarter, these advances helped to increase the total number of financial transactions facilitated to RMB9.575 billion in this quarter.
[Foreign Speech] On the funding side, we continued to work closely with our existing financial partners to ensure full compliance with the latest market regulations. In addition to our established partnerships, we have begun to work with other financial institutions, such as Bank of China, MYbank and Ping An OneConnect. Going forward, we plan to work with these institutions to develop new financing products that will further diversify our catalog of service offerings.
[Foreign Speech] Secondly, in order to accelerate the growth of our after-market services business, we actively refined our cross-selling strategy during the quarter. In particular, our car insurance facilitation business has responded exceptionally well to these efforts. During the quarter, for example, the number of car insurance transactions that we completed increased to 10,800 transactions in total, representing an increase of 56.8% on a sequential basis. This uptick demonstrates the substantial progress that we have made in establishing our foothold within China's car insurance market. Further evidence of these trends was illustrated by the quarterly performance of our after-market services business, which recorded RMB89.6 million in revenue, representing 20.4% of the total revenues in this quarter.
[Foreign Speech] Thirdly, we continue to strengthen our relationships with our strategic partners. As the first auto financing service platform to complete the interface with ICBC's loan system for new car purchases, our cooperation with ICBC continue to make good progress during the quarter. As of December 2019, the total non-subsidized loan volumes made through our cooperation with ICBC exceeded RMB3.1 billion. As for OEM subsidized products, we also continued our joint efforts and expect to launch this product to the market soon.
[Foreign Speech] The success of our relationship with ICBC and highly attractive value proposition has been enabled us to forge additional collaborations with key players in China's auto industry. In November, for example, through our coordination with ICBC, we've started providing services to Tesla. Upon reaching an agreement, we promptly implemented our services in all of Tesla's dealerships throughout Shanghai. Despite being at early stage, the cooperation has already begun to show encouraging results. Based on our positive experience with Tesla customers in China and a growing popularity of electric vehicles, we are optimistic about our ability to develop additional collaborations with other EV manufacturers in the future.
[Foreign Speech] We also continue to strengthen our existing partnerships with OEMs. As mentioned in previous quarters, OEMs value the opportunity to access our well-developed dealership network and a broader pool of automotive customers. In doing so, OEMs are not only able to boost their sales, but also empower to diversify their product offerings. This value proposition is particularly attractive in the context of a macro slowdown during which OEMs are increasingly interested in alternative selling solutions. Going forward, we plan to continue exploring further cooperation opportunities with OEMs in retail, wholesale car sourcing and other areas.
[Foreign Speech] As an update for our Didi partnership, we successfully facilitated 737 car purchase transactions for licensed Didi drivers during the fourth quarter. In addition, we continue to provide Didi drivers with a complete suite of auto solutions, including car sourcing, auto financing, insurance products and operator licensing.
[Foreign Speech] In summary, during 2019, the challenges we faced from macroeconomic pressure and underwhelming markets for automobiles in China tested the strength of our facilitation business model. Importantly, our successful mitigation through these tougher conditions has provided us with opportunity to further cement our industry leadership and grow our suite of automotive facilitation services throughout the industry's value chain.
[Foreign Speech] I would like now to take a moment to discuss the impact of the COVID-19.
[Foreign Speech] Firstly, I would -- we would like to express our support to those who have fought and continue to fight on the front-lines of the epidemic. Their contributions to society are enormous and will not be forgotten.
[Foreign Speech] At Cango, we gave the top priority to protecting the health and well-being of our employees. Consequently, we are allowing employees to work from home remotely until our health authorities deem it safe for the general public to return to work. We also mobilized our procurement team to secure and distribute face masks and other protective gears to our colleagues and their families across China, especially those currently residing in the region's mostly -- most impacted by the outbreak. In addition to these items, we are also providing free COVID-19 personal insurance to all employees. To ensure that our staff remains up-to-date, we have set up a special support team to provide consultation to our employees and their families during the epidemic on a daily basis.
[Foreign Speech] We have also implemented a number of measures to help car dealers in our platform to resume operation as soon as they deem to be feasible. Through our partnership with an insurance company, we were able to set up a special purpose fund to pay for a considerable portion of our dealers and their families special health insurance policies. In addition, we are actively collecting and sharing information regarding the outbreak and dealership operations to keep our partner dealers updated.
[Foreign Speech] For customers, we resumed operation on February 10 to ensure normal services to our customers and dealers except for Hubei province.
[Foreign Speech] In terms of our business performance, the epidemic has severely disrupted auto dealer's operation so far in the first quarter of 2020. As the situation evolves, we will continue to closely monitor the automotive market and assess the outbreak's impact on both our current and future operations. However, regardless of the drag on automotive sales in the short-term, we remain fully confident in the strength of our business model and health of our underlying fundamentals.
[Foreign Speech] Such confidence is not based on blind faith, but our track record. For example, in the past year during the previously mentioned challenges, despite the previously mentioned challenges, we were still able to outperform expectations and achieve double-digit results due to our proven business model, leading market position, increasing economies of scale and refined operating capabilities. In addition, our effective cost control, positive cash flow and large cash balance has supported us the ability to survive temporary challenges and thrive. Going forward, we will remain committed to maximizing our market share through the strengthening of our dealership network, expansion of our partnership base and diversification of our service offerings.
[Foreign Speech] We believe that long-term demand for automobiles remains intact in China. COVID-19 may temporarily suspend, but will not eliminate such demand. Once the epidemic is contained, the pent-up demand growth will revise. Should the COVID-19 virus may delay the transformation and growth of China's auto financing market, its progress toward consolidation is inevitable. As it has been said, winter will eventually pause and spring is sure to come.
[Foreign Speech] With that, I will now turn the call over to our CFO, Michael Zhang, to review our financial performance in the quarter.
Yongyi Zhang -- Chief Financial Officer
Thanks, Jiayuan. Hello, everyone, and welcome to our fourth quarter 2019 earnings call. Before I started to review our financials for the quarter, please note that unless otherwise stated, all numbers are in RMB terms and all percentage comparisons are on a year-over-year basis. In the face of macroeconomic headwinds and ongoing contractions on domestic automotive industry, we maintain our growth momentum in the fourth quarter of 2019 to deliver strong financial and operating performances.
Our total revenues increased by 36.6% to RMB438.5 million from RMB321.1 million in the same period of 2018, outperforming the high-end of the Company's guidance by 9.6%. Our after-market services facilitation business also continue to ramp up in the fourth quarter, as its revenue grew to RMB89.6 million, or 20.4% of our total revenue. Cost of revenue in the fourth quarter of 2019 increased by 1.8% to RMB157.2 million, or 35.9% of total revenue from RMB154.5 million, or 48.1% of total revenue in the same period 2018. As a result, gross margin in the fourth quarter of 2019 expanded to 64.1% from 41.9% in the same period 2018. Such expansion was mainly attributable to the successful implementation of a series of cost control initiatives and our increased leverage as a result of our growing economies of scale.
Sales and marketing expenses in the fourth quarter of 2019 increased by 17.5% to RMB55.2 million from RMB47 million in the same period 2018. As a percentage of total revenues, sales and marketing expenses in the fourth quarter of 2019 decreased to 12.6% from 14.6% in the same period of 2018. This decrease further illustrate our commitment to improve our sales and marketing efficiency, while continuing to drive revenue growth.
General and administrative expenses in the fourth quarter 2019 increased by 26.3% to RMB66.1 million from RMB52.3 million in the same period of 2018. This increase was mainly caused by higher share-based compensation expenses during the quarter. As a percentage of total revenue, our general and administrative expenses in the fourth quarter of 2019 decreased to 15.1% from 16.3% in the same period of 2018.
Research and development expenses in the fourth quarter of 2019 decreased to RMB18.6 million from RMB19.9 million in the same period 2019. As a percentage of total revenues, our R&D expenses in the fourth quarter 2019 decreased to 4.2% compared to 6.2% in the same period of 2018. As a result of our strong revenue growth and successful optimization of cost management, income from operations in the fourth quarter of 2019 increased by 231% compared to the same period of 2018.
Net income in the fourth quarter of 2019 increased by 96.8%, while non-GAAP adjusted net income in the fourth quarter of 2019 increased by 86.7% compared to the same period of 2018.
On a per share basis, our diluted net income per ADS in the fourth quarter of 2019 was RMB0.62 and our diluted non-GAAP adjusted net income per ADS in the same period was RMB0.76.
Moving on to our balance sheet. As of December 31, 2019, we had cash and cash equivalents of RMB2,002.3 million, compared with RMB1,851.2 million as of September 30, 2019.
Looking forward to the first quarter 2020, we expect our total revenues to be between RMB180 million and RMB210 million. Please note that this forecast reflects our current and preliminary views on the market and operational conditions, as well as the uncertainty in -- of the market caused by the COVID-19 outbreaks, which are subject to change.
This concludes our prepared remarks. Operator, we are now ready to take questions.
Questions and Answers:
Operator
Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from John Cai [Phonetic] with Morgan Stanley.
John Cai -- Morgan Stanley -- Analyst
Hi. [Foreign Speech] So my first question is about the virus outbreak impact on the delinquency and asset quality. So just wonder how much increase of the delinquency have we observed and what's the trajectory is and outlook. Do we see the risk to further pick up at this level? And when will be the peak?
So the second question related to the outbreak is on the volume recovery. So the first two months this year, we facilitated below 40,000 financing transactions versus in the same period last year we facilitated roughly 72,000. So just wonder what's the number in March. And what would be the recovery trend that we expect? And maybe in the second quarter, is it likely for us to recover to a normal volume? Thank you.
Jiayuan Lin -- Founder and Chief Executive Officer
[Foreign Speech] Thank you, John, for your questions. Well, let me take your two questions. Firstly, asset quality, while affected by the outbreak, we have seen an increase in overdue ratios and have taken a series of measures to control the impact on the asset quality, including enhancing recruitment efforts of collection staff, strengthening customers service support and assisting customers to apply for delayed prepayment in accordance with relevant banks requirement. So far the overall asset quality is under control and we have full confidence in maintaining this trend.
And regarding your second question, recovery of our business in Q1. Well, for the first quarter of 2020, we expect total revenues to be between RMB180 million and RMB210 million, approximately 40% to 50% low -- 40% to 50% lower than the same period of last year. While the situation in the second quarter depends on the containment of the epidemic and the resumption of our partner dealers. So our view is that the market will recover gradually from the second quarter of 2020, but we believe the turning point of the market won't be seen until at least the third quarter.
Yongyi Zhang -- Chief Financial Officer
John, I'd like to make some addition to your first question. And we do see that our overdue ratio is going up a little bit. We expect it to -- the M1+ may reach to a little bit over 1% at the end of -- or maybe first quarter. And also, for the M3+, we expect the ratio will reach very close to 0.5%. That's our expectation and based on the data is up to now. And we still need maybe one or two quarters to do more works. I mean, on the delinquent asset management to control the asset qualities. And you know that due to the COVID-19 outbreak in China, we -- the delinquent asset management, I mean, the work is not as usual due to -- I mean, the lockdown of the -- of all the works in China. So we started to resume the delinquent asset management work at the end of February. So we still need some time, but we are very confident that we will control and we will manage the quality of the assets -- credit asset, as well as we do before.
And as -- due to those -- I mean, due to the current situation, we already raised up our day one provision in the -- for the guarantee -- I mean, for the guarantee loans we facilitate for the bank in the fourth quarter of 2019, that means we already raised up our day one provisions, to reflect maybe the current status of our asset quality of the credit asset. Thank you.
John Cai -- Morgan Stanley -- Analyst
Thanks. [Foreign Speech]
Caroline Li -- Investor Relations Director
Sorry, I have to translate that into Chinese, sorry. [Foreign Speech]
Operator
Thank you. [Operator Instructions] All right. As there are no more questions at the present time, I would like to return the floor to management for any closing comments.
Jiayuan Lin -- Founder and Chief Executive Officer
[Foreign Speech] Well, if no further questions, I would like to announce that we call it a day for now. Thank you all for joining us.
Operator
[Operator Closing Remarks]
Duration: 35 minutes
Call participants:
Jiayuan Lin -- Founder and Chief Executive Officer
Yongyi Zhang -- Chief Financial Officer
Caroline Li -- Investor Relations Director
John Cai -- Morgan Stanley -- Analyst
