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Cango Inc (NYSE:CANG)
Q1 2021 Earnings Call
Jun 1, 2021, 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 Incorporated's First Quarter 2021 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 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, and welcome to Cango's 2021 first quarter earnings call.

[Foreign Speech] China's gradual economic recovery on various targeted stimulus policies are set to more widely revive auto consumption across the country in 2021. As a result, [Technical Issues] auto sales surge and consumer spending continue to gain momentum in the first quarter of 2021. On the other hand, we also noted that the pressure on the supply side caused by auto parts shortage has increased and will likely bring uncertainties in the overall pace of industry's recovery.

[Foreign Speech] At Cango, we made steady progress across our business lines in the first quarter, as total revenues grew to RMB1.1 billion, surpassing the high-end of our previous guidance range by approximately 7%. Operating income sustained its growth movements in the quarter and came in at RMB160 million compared to a loss from operations of RMB81.3 million in the same period of 2020. Net loss for the quarter was RMB274 million, primarily attributable to an investment loss of RMB447 million in Li Auto.

[Foreign Speech] Since we first launched, Cango has devoted itself to building a reliable, efficient, and exceptional automotive transaction services platform. Those core values and aspirations remain just as important to us today, as we aim to provide consumers with creative products and the best customer service experience, while also propel in China's automotive industry forward, by connecting dealers, financial institutions, OEMs and other industry resources. We remain firmly committed to our long-term vision and have continued to steadily advance our business development plans during the quarter, further deepening our roots across our three main business lines; car trading, transactions, aftermarket services facilitation and automotive financing facilitation and form a close loop with our services. As a result, we are revolutionizing the relationships among different parties along the auto value chain, while also empowering and creating value for all of them.

[Foreign Speech] Let me expand. First, I would like to start with our car trading transactions business, that's Cango's main growth driver. Car trading transactions generated revenues of RMB572 million in the first quarter, accounting for approximately 50.9% of total revenues. Bridging supply and demand in the auto market and relying on our technology-driven online platform and extensive dealership network in the lower-tier markets, we have formed close partnerships with various traditional car manufacturers and new energy vehicle makers. Building on this foundation, we have integrated all the participants along the car trading transaction chain to jointly explore innovative channel strategies in the lower tier markets.

[Foreign Speech] In April, Cango entered a strategic agreement with Zhengzhou Nissan to jointly develop a new retail model for automotive transactions in China's lower tier markets. Under the terms of the agreement, both parties will collaborate and innovate in areas of automotive sales and marketing in lower-tier markets through the development of a new automotive retail model. Additionally, Cango will also provide auto financial products and services to all customers of Zhengzhou Nissan's certified secondary dealer stores. Meanwhile, we are currently in negotiations for potential collaborations with various other OEMs.

[Foreign Speech] During the first quarter, we also continued enhancing our service capabilities related to car trading transactions. First, our independent sales reps currently cover more than 10 provinces and bring in private traffic flow, that target more segmented customer groups. At the end of the first quarter, we had more than 10,000 independent sales reps and 456 sub-dealers. The continuous expansion of our traditional dealership network plus the private traffic generated by our independent sales reps helps us effectively reach our customers and offer more quality product and services in the lower-tier markets. In addition, we continue to improve the layout of our warehousing and logistics. By the end of first quarter, we have co-developed 101 warehouses, with a total capacity of approximately 33,000 parking spaces and covering 79 cities across the country, boosting the expansion of our distribution network in the lower-tier markets.

[Foreign Speech] As China's auto market enters the new face of development after years of high-speed growth, with transitions from meeting the needs of first-time purchases to the replacement and upgrade needs, further boosting the growth potential of aftermarket services. Relying on a network of nearly 50,000 registered dealers nationwide and more than 1.8 million automotive financing customers, aftermarket services facilitation is now an integral part of our auto transaction services platform. In Q1, aftermarket services facilitation revenues were RMB62.5 million. We continue to optimize the organizational structure and operating mechanisms of our sales reps, I mean, our direct sales team during the quarter, achieving a significant increase in per capita productivity. We are also simultaneously deepening our cooperation with NEV manufacturers by embedding auto insurance products and services into their mobile apps, to help them better provide insurance products and services to their customers and improve overall efficiency. We are also exploring aftermarket services deeply to discover more opportunities and create a brand-new industrial ecology of people, auto and life.

[Foreign Speech] Finally, our automotive financing facilitation business grew steadily in this quarter. We facilitated RMB10.4 billion financing transactions, up 134% year-on-year. Our automotive financing facilitation revenues were RMB412 million, up 243% year-on-year. As of March 31st, the total outstanding balance of financing transactions facilitated by the company reached RMB47.5 billion.

[Foreign Speech] Turning to asset quality. As of March the 31st, the M1+ and M3+ overdue ratio increased to 1.23% and 0.54%, respectively. To address rising overdue ratio, we continue to strengthen on-site and channel controls, along with additional digital measures such as feature recognition engines and model improvements to deliver differentiated risk controls. At the same time, we have assembled a dedicated team to improve the efficiency of post-loan collection.

[Foreign Speech] In terms of dealership network, we continue to work on improving our network efficiency. And as a result, we have terminated relationships with dealers that do not meet our standards for client service, traffic quality and traffic generation capabilities. By the end of first quarter, we had 47,017 registered dealers. Meanwhile, we have expanded into the higher-end segments with innovative product offerings. As of March 31st, we have covered more than 9,000 foreign dealers of approximately 40 high-end OEMs, including Mercedes-Benz and BMW and established partnerships with several leading dealer groups in China.

[Foreign Speech] Smart and new energy vehicles featured recently held 2021 Shanghai International Auto Exhibition, with the government-supported policies, China has become the world's largest manufacturer and market for NEVs several years in a row and accounts for over 50% of the total number of the NEVs in the world. Cango has always been optimistic about the huge potential in this market and that -- this incorporates with leading NEV makers in China, aiming to leverage each other's advantages to explore new distribution channels in the lower-tier markets.

[Foreign Speech] Looking ahead, we see the impacts of international supply chain uncertainty lingering, the chip shortage in the automotive industry will likely persist for a long time. This is expected to have an impact on our overall business. Concurrently, domestic financial supply and regulatory environments are also undergoing profound changes. We will closely watch and actively respond to the situation as it develops, proactively step-up ever to cope with any form of uncertainty and keep pace with the changing industry trends through continuous product innovations, which place us on a step-by-step pace to achieve our established strategic growth.

[Foreign Speech] With that, I will now turn the call over to our CFO, Michael Zhang, to review our financial performance in more detail.

Yongyi Zhang -- Chief Financial Officer

Thanks, Jiayuan. Hello, everyone, and welcome to our first quarter 2021 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.

We are excited about our solid start to the year as first quarter revenues surged 357% year-over-year to reach a new record high of RMB1.1 billion, once again exceeding our guidance range. Our car trading transactions business continued to perform well and served as a crucial growth driver with revenue contribution climbing to more than 50% of total revenue at RMB571.6 million. Revenues from auto financing facilitation and aftermarket services facilitation were also robust at RMB411.7 million and RMB62.5 million respectively, in the first quarter.

Now, let's move on to our cost and expenses during the quarter. Total operating cost and expenses in the first quarter 2021 were RMB964.2 million compared to RMB327.3 million in the same period of 2020. The increase was mainly due to the related costs incurred by our car trading transaction business, primarily as a result of increase in revenues from our car trading transactions, sales and marketing expenses, general and administrative expenses and research and development expenses, each decreased as a percentage of total revenue in the first quarter of 2021 compared to the same period of last year.

Cost of revenue in the first quarter of 2021 increased to RMB769 million from RMB90.6 million in the same period 2020. As a percentage of total revenue, cost of revenue in the first quarter was 68.4% compared to 36.8% in the same period 2020. And the change was primarily due to an increase in the amount of car trading transactions. For automotive financing facilitation and aftermarket services facilitation, cost of revenue as a percentage of relevant revenues was around 35.6% in the first quarter 2021.

Sales and marketing expenses in the first quarter of 2021 were RMB57.8 million compared to RMB45.8 million in the same period 2020. As a percentage of the total revenue, sales and marketing expenses in the first quarter of 2021 was 5.1% compared to 18.6% in the same period 2020. General and administrative expenses in the first quarter 2021 were RMB61.4 million compared to RMB57.4 million in the same period 2020. As a percentage of total revenue, general and administrative expenses in the first quarter 2021 was 5.5% compared to 23.3% in the same period 2020. Research and development expenses in the first quarter 2021 were RMB13.6 million compared to RMB12.6 million in the same period 2020. As a percentage of total revenues, research and development expenses in the first quarter of 2021 was 1.2% compared to 5.1% in the same period 2020.

Net loss on risk assurance liability in the first quarter of 2021 was RMB21.7 million compared to a net loss of RMB76.9 million in the same period 2020. Net loss on risk assurance liability in the first quarter 2021 was mainly due to an uptick in delinquent loan balance and default rate since the beginning of 2021. We recorded income from operations of RMB159.5 million in the first quarter of 2021 compared to a loss from operation of RMB81.3 million in the same period of last year. Due to the fair value change of the company's investment in Li Auto, we recorded net loss of RMB273.9 million in the first quarter of 2021. Non-GAAP adjusted net loss in the first quarter of 2021 was RMB254 million. On a per share basis, diluted net loss per ADS in the first quarter of 2021 was RMB1.84 and diluted non-GAAP adjusted net loss per ADS in the same period was RMB1.7.

Moving on to our balance sheet. As of March 31st, 2021, we had cash and cash equivalents of RMB1.6 billion compared to RMB1.4 billion as of December 31st, 2020. As of March 31st, 2021, the company had short-term investment of RMB2.6 billion compared to RMB4.3 billion as of December 31st, 2020. The decrease was mainly due to the partial disposal and the change in fair value change of the company's investment in Li Auto. Looking ahead to the second quarter of 2021, we expect our total revenues to be between RMB900 million and RMB950 million. Please note that this forecast reflects our current and the preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Shelley Wang with Morgan Stanley. Please go ahead.

Shelley Wang -- Morgan Stanley -- Analyst

[Foreign Speech] Okay. I'm Shelley Wang from Morgan Stanley. I have two questions. The first question is what is your outlook for the demand in the second half of 2021. And in particular, it has something to do with your business of auto loan facilitation. So that's why I asked this question. Also, in particular, I would like to know about your outlook for the demand in the lower-tier cities?

And the second question is about your partnership and collaboration with new energy vehicle manufacturers. We understand that actually these manufacturers usually adopt a direct sales model. So in your collaboration with the NEV makers, based on your observation, how is their model different from traditional car manufacturers, I mean, how is your collaboration with them different from your collaboration with traditional car manufacturers?

Jiayuan Lin -- Founder and Chief Executive Officer

[Foreign Speech] So to answer your first question, so far, we see demand in the auto markets remain strong, but we have concerns about the supply side. We think that the pressure of insufficient supply will likely persist for some time to come. And also, there is this issue of chip shortage. And we think that the needs of high-end brands and foreign stores in mega cities will be prioritized. So we expect the domestic auto brands and lower-tier markets to face more pressure in the second half of this year.

[Foreign Speech] And to answer your second question, with traditional auto manufacturers, we expand our alternative financing facilitation business through our nationwide dealership network, so this is mostly an offline collaboration. But in terms of collaboration with NEV manufacturers, it is an online-based model. Because the NEV manufacturers, they adopt direct selling model and they have their own showrooms and also, they have a very simple and easy process that enables customers to complete test driving and vehicle ordering online. So we are currently deepening our cooperation with the NEV manufacturers by embedding auto insurance products and services into their mobile app, for example, to help them better provide insurance products and services to their customers. And this kind of collaboration model not only improves overall efficiency, but also confirms to our partners' business models. So under the direct selling model, our automotive financing facilitation service is embedded into the car owners' platform, and this helps boost our shares.

Operator

Thank you. Your next question comes from Derek Su with Goldman Sachs. Please go ahead.

Derek Su -- Goldman Sachs -- Analyst

[Foreign Speech] This is Derek from Goldman. I have two short questions. First is about the car trading business. I would like to understand more about the margin. Generally speaking, how much is the cost of purchasing cars and how much is ASP, and what is the guidance for 2021? And the second question is about the aftermarket services. Do we have any plan of expanding the services besides the insurance sales such as collaboration with repairing stores?

Jiayuan Lin -- Founder and Chief Executive Officer

[Foreign Speech] Thank you, Derek. So to answer your first question, we have different pricing strategies across car models and regions for our car trading transaction business. It really depends on the results of our research and also the judgment of our team. For us, it is more important to empower dealers by getting low prices from OEMs and sharing more profits with dealers to improve their trading capacity. And for the car trading transaction business gross margin, in the first quarter, it has improved up to about 1.3% in Q1 this year. And we expect the chip shortage in the auto industry to continue and this will definitely have an impact on our car trading transaction business. But at the same time, we are pushing ahead our partnerships with various OEMs. So if all goes well, then the annual trading volume is expected to reach 45,000 units.

[Foreign Speech] And for the second question, our service range in the aftermarket business, while the focus of our aftermarket service facilitation remains on insurance product for now, while we are also tying get to information referral and maintenance services. However, so far, it is still in the early stage of development. Since the start of this year, we have introduced pilot vehicle delivery and repair services in some regions. As we develop more business, as we expand our market in the future, we will integrate resources and try to standardize the management and service of our partner workshops. Of course, we will [Technical Issues] invest more in selecting the right partners and gradually develop auto part [Technical Issues] component services as well as auto care service and also like, facilitate driving business. So overall speaking, we plan to cover a wide [Technical Issues] facilitation business.

Derek Su -- Goldman Sachs -- Analyst

[Foreign Speech] That's all from me.

Operator

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

Jiayuan Lin -- Founder and Chief Executive Officer

[Foreign Speech] Thank you for joining us. That closes the Q1 2021 earnings call.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Jiayuan Lin -- Founder and Chief Executive Officer

Yongyi Zhang -- Chief Financial Officer

Shelley Wang -- Morgan Stanley -- Analyst

Derek Su -- Goldman Sachs -- Analyst

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