Cango Inc (CANG) Q1 2022 Earnings Call Transcript

Cango Inc (CANG 0.72%)
Q1 2022 Earnings Call
Jun 09, 2022, 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 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. Michael 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 -- Chief Executive Officer

[Foreign language]

Unknown speaker

Hi, everyone. Welcome to Cango's first quarter 2022 earnings call.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

The global situation brought by the pandemic and very large economic and geopolitical uncertainties can be characterized as complex and evolving during the first quarter. Domestically in China, we are also facing a challenging macro environment. In particular, the outbreak of omicron has brought cross-nation since March with lockdowns in certain regions, bringing great pressure and impact on the society as a whole, including individuals and businesses alike. The automotive industry is still in the shadow of a chip shortage and placing the disruption of industrial production and supply chain caused by the COVID-19 resurgence.

On the supply side, auto companies Changan and [Inaudible] have stopped manufacturing a large scale since mid-March. Although many OEMs have accelerated the resumption of operation and manufacturing since April, the overall decline in auto production is still difficult to reverse. A greater challenge comes from the demand side. Consumer confidence has been severely impacted and their enthusiasm for purchasing cars has dropped sharply.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Since the beginning of the year, the overall market environment has been tougher than we had anticipated. Phasing decline in consumer credit level and repayment ability caused by the economic downturn and evolving regulatory regime, we have been proactively making strategic adjustments since last year, shrinking the size of our traditional automotive financing facilitation business, strengthening risk control measures, and enhancing efforts within overdue asset collection to strictly control risks. At the same time, we have established a new strategic goal, which is to focus on building a tech-enabled car trading platform with car trading transaction business at its core and monetizing through multiple channels, including financing and insurance.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Turning to our first quarter financial performance. We achieved total revenues of RMB 788 million, beating the high end of our guidance. Revenues from our car trading transaction business were about RMB 599 million, accounting for over 76% of total revenues, becoming our major revenue contributor. Revenues from our automotive financing facilitation and aftermarket services facilitation businesses were about RMB 110 million and RMB 25.78 million, respectively.

Net loss was about RMB 140 million, mainly due to increased provisions for credit losses. As of March 31, 2022, the M1+ and M3+ overdue ratios for all financing transactions that remain outstanding and were facilitated by the company were 1.76% and 0.8%, respectively. The slight sequential the increase of M1+ was consistent with the overall trend of the economy and the market. In the meantime, the gross margin of our car trading transactions business is on the low side at present, while our investments in early stage infrastructure development for our platform is relatively high, which, to some extent, drags down the bottom line.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Next, I would like to share some information on the progress of both platform business and traditional nonplatform business.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Our initiatives and efforts in the past few quarters are bearing fruits. We are very pleased that our automotive transaction services platform has been taking shape in the first quarter. The platform efficiency and operating capacity continue to improve. As the main online traffic entrance to the platform, our B2B WeChat Mini Program, Cango Haoche efficiently combines various services, covering proprietary car sources, third-party car sources, transaction facilitation, warehousing and logistics services, etc.

Since its launch, Cango Haoche has established a positive reputation among dealers. The cumulative number of deals for Cango Haoche has exceeded 2.76 million. As of the end of first quarter, Cango Haoche has engaged with 7,435 dealers in 31 provinces and 306 cities. There are 33 proprietary vehicle models on Cango Haoche, including nine car brands and 13 car series.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

In the first quarter, we continued to expand the dealer coverage and enhance their activity. This quarter, the new registered dealers on our platform grew by more than 50% quarter over quarter, mainly driven by the increase of 4S dealers, which accounted for more than two-thirds of the newly registered dealers within the quarter. At the same time, thanks to the combination of online operation and offline marketing, the daily activity of our platform users in the first quarter was on the rise month by month, and quarterly dealer activity increased by 9% from the previous quarter.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

With the expansion of our dealer coverage, we have also expanded our offline warehouse in our logistics network further. As of the end of first quarter, a total of 103 warehouses that have been established covering 33 provinces and 98 cities across the country. At the same time, our logistics operation capacity has also been improved. In the first quarter, the logistics order demand and transaction volume on Cango Haoche increased by 120% and 227%, respectively, from the previous quarter.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

In order to better understand the needs of the dealers and customize our services, in the first quarter, we conducted in-depth profile analysis of our dealers in the network. We classified and graded them based on our locations, sizes, historical transaction preferences, etc., these analyses then guided our activities such as brand cooperation, car sourcing, warehousing, and logistics allocation thus helping us provide more customized services to dealers. Going forward, we will continue to improve the platform operating efficiency based on big data analysis.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

In addition to the progress of the platform operations I've just mentioned, in the first quarter, we also continued to invest in building the platform's proprietary products and services, including proprietary vehicle sources, supporting financial insurance supply chain services, as well as third-party products and services such as third-party vehicle sourced listing, car search, logistics, and other matching services. On the proprietary services side, in the first quarter, 6,827 vehicle units were sold, including 5,193 new energy vehicles. Helping small and medium-sized NEV brands to penetrate into the lower-tier markets is one of the priorities of our car trading transaction business going forward. In terms of third-party products and services, the platform's activity increased significantly in this quarter with the number of third-party vehicle listings and car search entries increasing by 624% and 22%, respectively, on a quarter-by-quarter basis.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

At the same time, during the transition process to an auto transaction services platform, positioning of our traditional automotive financing facilitation business and insurance facilitation business has also changed. We no longer develop these businesses as independent segments. Instead, we integrate them into a full package of supply chain capabilities fitting around auto transactions.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Specifically, in combination with the strategic transformation and current market conditions, we have reduced our financing facilitation business size. Meanwhile, reengineering the business process to make it more efficiently coupled with our car trading transactions business. The adjustments are also reflected in our numbers. In the first quarter, revenues from our automotive financing facilitation business declined quarter by quarter to RMB 106 million.

On the dealer side, we have encouraged our offline dealers to leverage our platform to publish car inventory search for vehicles and engage with other dealers online. In the meantime, for high-quality car dealers on our platform, we took the initiative to match for all financing, insurance, and other supply chain services to increase their stickiness. As of the end of first quarter, we have worked with 44,771 car dealers throughout China, of which 8,687 were 4S dealers. We have also been gradually promoting the migration of these dealers to our Cango culture platform.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Similarly, in the aftermarket services sector, we have also restructured the business process, centering on car transactions, we are looking to promote the closer integration of car transaction financing and insurance so as to provide more integrated supply chain solutions for dealers. In the first quarter, the number of auto insurance orders stayed flat quarter by quarter. But what's worth mentioning is that following the reform of the auto insurance premiums, the business potential in this area actually has been quite compressed and the main opportunities we see our present are in the field of NEVs. So in the past few quarters, we have been exploring the cooperation opportunities in terms of insurance products for NEV brands.

At present, the system integration with Li Auto and HiPhi have been completed, and negotiations with more NEV brands such as [Inaudible] Neta are in progress. At the same time, we have launched a pilot program in several provinces, including Guizhou and Shaanxi to help auto maintenance stores and car garages explore opportunities in new cars and used car selling. In this -- this initiative has expanded our offline presence in the aftermarket services sector and enhance our capability in providing delivery and after-sale services for NEV brands in the lower-tier markets. As mentioned earlier, be it automotive financing or insurance business, we will rely on the car trading transactions business to achieve monetization, which will be our core strategy for business going forward.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

The current round of the pandemic has lasted for more than two months. The provision and control measures have had a great impact on the economy in the second quarter. There are a lot of uncertainties in the global economy and the impact of international supply chain continues. We expect economy to face greater downward pressure in the coming quarters.

For the automotive market, losses caused by the pandemic operating key areas are huge with the year-on-year decline in total vehicle sales as high as 47.6% in April. Although the decline slowed in the first half of May, sales volume -- I mean, sales volume still fell by more than 20% year on year. While the pandemic is gradually being brought under control and work on production is gradually resuming, the impact on consumption and consumer confidence is longer term and it will take time to recover.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Overall, we believe the pandemic impact will be medium to longer term, and it will have a major impact on our overall business. We expect revenues to continue to decline sequentially in the second quarter, which is expected to be in line with the decline in the overall automotive market. We are also cautious about full year 2022. In the face of a more complex macro environment, we will continue to strengthen business risk management in all areas and continue to develop our platform capabilities.

Lastly, we are close to completing the development of our independent car trading services app, Cango Haoche, and we expect it to go live very soon. And we will update you on its progress in our second quarter earnings call.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Next, I will turn the call over to our chief financial officer, Michael Zhang, for a review of the company's financial performance.

Michael Zhang -- Chief Financial Officer

Thanks, Jiayuan. Hello, everyone, and welcome to our first quarter 2022 earnings call. Before I started 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. Entering 2022 economic upheaval, global chip shortage, and the resurgence of COVID-19 in China has brought immense challenge to companies across all industries.

Together with the deliberate strategic steps taken to adjust our traditional automotive financing facilitation business, these factors have significant impact on our top line revenues in the first quarter. Looking at the quarterly performance of our three businesses. Our car trading transactions division, which delivered revenues of RMB 599.3 million plays an essential role in our transformation to a platform model. In addition, revenues from our automotive financing facilitation and aftermarket service facilitation business were RMB 105.9 million and RMB 25.8 million, respectively.

Now let's move on to our cost and expenses during the quarter. Total operating costs and expenses in the first quarter 2022 were RMB 976.8 million compared with RMB 964.2 million in the same period 2021. Cost of revenue in the first quarter of 2022 decreased to RMB 687 million from RMB 769 million in the same period 2021. As a percentage of total revenue, cost of revenue in the first quarter of 2022 was 87.2% compared with 68.4% in the same period 2021.

The change was primarily due to an increase in car trading transaction sharing of total revenues. Car trading transaction normally presents a higher cost revenue ratio, thus pushing up the overall ratios. For automotive financing facilitation and aftermarket service facilitation, cost of revenue as a percentage of relevant revenue was around 54.2% in the first quarter of 2022. Sales and marketing expenses in the first quarter of 2022, were RMB 53.8 million compared with RMB 57.8 million in the same period in 2021.

As a percentage of total revenue, sales and marketing expense in the first quarter of 2022 was 6.8% compared with 5.1% in the same period 2021. General and administrative expenses in the first quarter of 2022 were RMB 50.9 million compared with RMB 61.4 million in the same period in 2021. As a percentage of total revenue, general and administrative expenses in the first quarter of 2022 was 6.5% compared with 5.5% in the same period 2021. Research and development expenses in the first quarter of 2022 were RMB 14.5 million compared with RMB 13.6 million in the same period in 2021.

As a percent of the total revenues, research and development expenses in the first quarter of 2022 was 1.8% compared with 1.2% in the same period 2021. Net loss on risk assurance liabilities in the first quarter 2022 was RMB 98.9 million compared with RMB 21.7 million in the same period 2021. Net loss on risk assurance liabilities was mainly due to a sequential increase in the default rate since 2021. We recorded a loss from operations of RMB 189.1 million in the first quarter of 2022 compared with income of RMB 159.5 million in the same period 2021.

Net loss in the first quarter of 2022 was RMB 136.2 million. Non-GAAP adjusted net loss in the first quarter of 2022 was RMB 113.3 million. On a per share basis, diluted net loss per ADS in the first quarter of 2022 was RMB 0.98 and diluted non-GAAP adjusted net loss per ADS in the same period was 0.81%. Moving on to our balance sheet.

As of March 31, 2022, we had a cash and cash equivalent of RMB 2.1 billion compared with RMB 1.4 billion as of December 31, 2021. As of March 31, 2022, the company had short-term investment of RMB 1.9 billion compared with RMB 2.6 billion as of December 31, 2021. Looking ahead to the second quarter of 2022, the latest COVID surge has drawn China's car market into disarray with factory shutdowns and sales plunging and along with our dealers, are facing a much more difficult operating environment. As we are now predicting our total revenue to be between RMB 250 million and RMB 300 million.

Please note that this forecast reflect 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.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] At this time, we will pause momentarily to assemble our roster. Our first question will come from Shelley Wang with Morgan Stanley.

Please go ahead.

Shelley Wang -- Morgan Stanley -- Analyst

[Foreign language]

Unknown speaker

Hi. I'm Shelley from Morgan Stanley. I have three questions. The first question is about the impact on demand and supply of -- from the government policy to half the car sales tax.

For example, on the demand side, in the second half of this year, do you think that there will be more demand for your car trading business and also car loan facilitation business, and how -- what do you expect the impact to be? Or I mean, the extent of the impact to be? And on the supply side, we actually continue to expect chip shortage in the second half of this year. But -- so that will have an impact on the supply of cars even after the demand for cars goes up in the second half of this year. So do you expect adequate supply of cars in the second half of this year for your car trading business. And also, do you see any signs of improvement based on the data of the first week of June? And the second question is, we noticed that in the first quarter, your car financing facilitation business goes -- I mean, went downward.

So is it a temporary phenomenon? Or is it part of your permanent strategic transformation process? And the third question is also on strategy. So which -- or what part of business will be your priorities in next three to five years?

Jiayuan Lin -- Chief Executive Officer

OK, sure, Shelley. [Foreign language]

Unknown speaker

Thank you, Shelley, for your three questions. I will answer them one by one. Firstly, well, about the supply of petrol cars. Well, right now, there is a still supply shortage of traditional petrol cars, and we don't expect the issue to be -- I mean, we don't expect the problem to be mitigated in the shorter term.

Well, what are the problems exactly? I think this is -- there is a mismatch of supply and demand. And for those -- for a lot of inventory car models, I mean, it's still difficult to sell them in the market. And for those popular car models, on the other hand, we cannot find enough supply. So to address this issue, we -- on our side, we will continue to work on the sourcing of new energy vehicles and also address the problems of loan inventory vehicles and try to find more sources for used cars.

Jiayuan Lin -- Chief Executive Officer

OK. [Foreign language]

Unknown speaker

And on your second question, yes, the traditional car loan facilitation business is reducing and it is part of our strategic transformation. And our strategic vision now is to become the customer's car purchase, service platform of choice by building a constantly evolving data-enabled car trading platform centering around our car trading transaction business and supported by our insurance and financing business as multi monetization channels.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

So, we expect our car loan facilitation business to go through this process. That is in the shorter term, it will decline quite quickly. However, when they reach a plateau, then it will be -- the growth will stabilize. And then after that, they will continue to grow steadily.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Thank you. That's all for me.

Operator

Our next question will come from Sophia Xu with Goldman Sachs. Please go ahead.

Sophia Xu -- Goldman Sachs -- Analyst

[Foreign language]

Unknown speaker

Thank you. I'm Sophia from Goldman Sachs. Three questions covering two areas regarding business development. The first question is on car trading transactions.

First of all, congratulations on your Q1 revenue performance. Your Q1 revenue -- actual revenue beat your expectations. OK. So on car trading transactions, many players in this area actually have started to -- have started to adopt the B2B2C model.

So what about Cango? Do you have any plan to adopt this B2B2C model as well? And if you do, on B side, what kind of organizations will be included in the B sides? What types of dealers, for example, do you plan to into this model? And the second and third questions on the car loan or car financing facilitation business. Well, the second question is that during last earnings call, you mentioned that the company will scale down the auto financing facilitation business to manage risks. So what about the performance, the -- what about the overdue ratio performance of the new loans in Q1. Is it showing signs of improvement? And what about the overall overdue ratio trend in Q1, do you see any slowdown in these overdue ratios.

And the third question is on the -- again, on the auto loan or financing facilitation business. So if you continue to downsize your financing facilitation business. What do you expect the impact on your revenues and profitability be in the future?

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Thank you, Sophia, for your questions. So on your first question, actually, the B2B2C model will be our endpoint as we transform our platforms. Actually, over the past decade, more than one decade, we've been working very hard to connect different participants in the platform, and we have tried to integrate them into our B2B models, including banks, insurance companies and dealers. And our ultimate goal is to build a sustainable platform for all those different players.

And so, as a result, we are working very hard to integrate all those participants into our value chain. So specifically, the parties could include the auto OEMs, banks, insurance companies, mid- and small-sized dealers and, of course, the car owners or the consumers. In addition, we are also working with warehousing and logistics service providers, and they are customers, as well as our partners.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

On your second question, well, on the new loans in the Q1. Well, we have stepped up our efforts on underwriting and also on the approval of the loans. In other words, we are more strict and stringent than before in approving those zones. So technically, the quality of the loans should be much better than before.

However, it is still too early to tell the exact quality of the loans. We still need at least nine months for the loans to show its performance. So right now, it's still too early to say. So at the same time, we are working on collections.

And so as a result, we have seen a slight improvement in our M1+ ratio over the past few months. I mean -- and -- sorry, we have seen an improvement in the M3 ratio, thanks to our collection efforts. However, the M1+ ratio has gone up slightly, it's largely because of the pandemic.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

So on your third question, well, it is part of the company's strategic transformation. And of course, if you look at the economic indicators, well, it definitely shows that our conclusion. I mean it definitely shows that our strategy is well supported by the facts. And actually, there is strong evidence showing that our strategic transformation is very much in line with the development of the market.

And in the shorter term, of course, a reduction of our highly profitable auto loan transaction -- I mean auto loan facilitation business will have an impact or negative impact on our profitability, but this is only a short-term impact. And at the same time, we're working very hard to control our costs. So we expect the negative impact on our profitability to be only a near term. And on the other hand, we are -- we have to look at the strategic logic of our business.

So when we are continuing to expand our business, in particular, car trading business and also related insurance and aftermarket services business, then we expect [Inaudible] to go up again. So overall speaking, we expect the profits to go down in the shorter term. However, in the longer term, the profitability and revenue will recover and will go on the upward trajectory.

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

That's all from me.

Operator

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

Jiayuan Lin -- Chief Executive Officer

[Foreign language]

Unknown speaker

Thank you all for your attention and for your participation.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Jiayuan Lin -- Chief Executive Officer

Unknown speaker

Michael Zhang -- Chief Financial Officer

Shelley Wang -- Morgan Stanley -- Analyst

Sophia Xu -- Goldman Sachs -- Analyst

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