Cango Inc. (NYSE:CANG) Q2 2020 Earnings Conference Call August 24, 2020 9:00 PM ET
Jiayuan Lin – Chief Executive Officer
Michael Zhang – Chief Financial Officer
Conference Call Participants
Shelley Wang – Morgan Stanley
Good morning, and good evening, everyone. Welcome to Cango, Inc.’s Second Quarter 2020 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 a 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. Please note, this call is being recorded.
With that, I will now turn the call over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.
Hello, everyone. Welcome to Cango’s 2020 Q2 earnings call. The entire industry has been abruptly and dramatically impacted by COVID-19 since the beginning of 2020. The difficult conditions persisted through the end of the second quarter, and the recovery was lower than our previous expectations. The lower mid-range market segment as well as domestic brands were impacted more than a higher end segment and joint venture brands. Despite the unfavorable conditions, we continue to make meaningful progress in our strategic initiatives. It is worth noting that our insurance facilitation services delivered very strong performance in the second quarter.
In Q2, we booked RMB 274.1 million in revenue, exceeding the higher end of the guidance range by approximately 10%. In particular, aftermarket services revenue grew to RMB 52.5 million, accounting for 19.1% of the total. Thanks to efforts to optimize the cost structure and improve operating efficiency. The gross margin stayed at a healthy level in the second quarter. We also regained positive operating income, mainly attributable to effective cost control and improved asset quality as a result of the post loan management. Overall speaking, our net profit increased to RMB 70.2 million.
In the second quarter, we continued to build on our core auto loan facilitation business. The aftermarket service facilitation also achieved an outstanding performance, mainly fueled by the strong growth of insurance facilitation business, particularly the car insurance business that we have vigorously promoted grew significantly on a sequential basis, completing 18,000 transactions in the second quarter, more than double the previous quarter. In addition, our health insurance products continue to gain in popularity and we recorded more than 10,000 transactions in the second quarter. Insurance facilitation as a whole is no longer sideline business. Instead, it holds promising growth potential as an independent business line. Looking forward, we will continue to explore more channels and categories to meet the increasingly diverse needs of consumers. In addition, we will expand our insurance product portfolio to include those that that that have higher that transaction value.
Moving to our asset quality. In the first quarter, the COVID-19 pandemic has led to an uptick in our delinquency rate. However, in the second quarter, the overall delinquency has improved, thanks to resumption of economic activities and as well as our debt collection efforts. As of June 30, 2020, the M1+ overdue ratio has improved to 1.59% from 2% in the previous quarter. On the other hand, some of last quarter’s M1+ delinquencies have moved to the M3+ category, but it is within a reasonable range. Overall, our customer delinquency has improved considerably in the second quarter compared with the first quarter, and we remain confident in our ability to maintain the quality of our assets going forward.
Since our inception, we have emphasized the importance of risk management and regarded as the cornerstone of our business development. We strive to create value for all parties in the auto transaction value chain by strictly managing risks, to actively exploring innovative management methods and operating safe and professional one-stop auto finance services. With comprehensive controls to technology and methodologists for post loan management, Cango facilitated auto loans have been performing well over the years. We will continue to develop our strength in risk management, remain committed to supporting all industry participants as they evolve and drive innovation industry.
In July, China Auto Finance International Summit in Shanghai, Cango received the best Auto Finance Risk Management Innovation award. This summit is one of the most recognized and respected events in the auto finance industry. Cango was carefully selected from the industry, including OEMs, dealers, auto finance companies, trusts, and banks.
After vigorous reviews by a panel of access from leading financial institutions, Cango stood up from competition with our innovative risk management system and received the risk management innovation award as a recognition of outstanding performance and relentless Finance efforts in risk management.
This year marks Cango’s 10th anniversary. In the past 10 years, have grown from an auto finance company to a leading automotive transaction service platform in China, we have established partnerships with tens of thousands of auto dealers to more than 1.5 million customers. We have participated in the rapid development and transformation of China’s auto finance industry and witnessed changing consumer behavior and preferences in the past decade.
As a pioneer in the industry, we will always remain true to our vision and practice we are excited to start a new chapter, leveraging big data and innovative technologies to provide customers with safe, professional and efficient auto finance services, while contributing to the development of the entire industry.
Looking ahead, given the changing consumer behavior, swift growth of fintech, emergence of new business models, we believe China’s auto finance industry has very promising growth prospects. The government has also relaxed conditions for consumer credit applications for car purchases which have helped unleash higher demand.
Cango enjoys first mover advantages in emerging markets in the lower-tier cities, both comprehensive product and service offerings and deep partnerships with financial institutions. We are in a very strong position to gain market share and strengthen our competitive advantages. With the rapid development of mobile internet, digital services are becoming one of the new drivers for auto finance. So we are actively advancing our online business with new tools such as e-contracts and online selling.
In the second half, we will implement the following four strategic priorities. Firstly, we will continue to develop the aftermarket services as one of the primary revenue growth drivers. Secondly, for the core auto loan facilitation business, we will continue our efforts to expand into the higher end segment with innovative product offerings. We have built a dedicated team to develop this segment. It is worth noting that during the second quarter, we served all Tesla stores in Shanghai, and we will further explore the untapped growth potential in this market segment.
Thirdly, we will continue to build up the auto transaction facilitation business. In the second quarter, we have assembled a special team focusing on these areas, and we expect to see stronger development in the coming quarters. Finally, we will further improve our operating efficiency and optimize our cost structure.
While we expand into mid to high end markets, we believe there is also a big opportunity for us to further improve the efficiency of our lower-tier dealer network. By the end of the second quarter, the number of registered dealers have reduced to 44,500, as we continue to optimize our network efficiency by terminating relationships with dealers that were not up to our standards in terms of operating risk and traffic generation capabilities.
[Foreign Language] We will plus forward, as we have done for the past decade, with our eyes set on the long-term and plans to achieve more milestones along the way.
With that, I will now turn the call over to our CFO, Michael Zhang, to review our financial performance in the second quarter.
Thanks, Jiayuan. Hello, everyone, and welcome to our second quarter 2020 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.
Amidst COVID-19 pandemic, we generated RMB 274.1 million in the total revenue in the second quarter of 2020, outperforming the high end of our previous guidance by approximately 10%. In addition, our aftermarket service facilitation business continued to serve as an important growth driver, generating RMB 52.5 million in revenues for the second quarter and accounting for approximately 19% of total revenue.
Now let’s move on to our cost and expenses during the quarter. Total operating costs and expenses in the second quarter of 2020 were RMB 207.4 million compared to RMB 252 million in the same period of last year. This was in line with the decrease in company sales volume.
Cost revenue in the second quarter of 2020 decreased by 18.3% to RMB 102.8 million from RMB 125.8 million in the same period last year. As a percentage of total revenue, cost of revenue in the second quarter of 2020 was 37.5% compared to 37.4% in the same period 2019.
Sales and marketing expenses in the second quarter of 2020 was RMB 42.4 million compared to RMB 44.5 million in the same period last year. As a percentage of total revenue, sales and marketing expenses in the second quarter of 2020 increased to 15.5% from 13.2% in the same period last year.
General and administrative expenses in the second quarter of 2020 were RMB 66 million compared to RMB 53.4 million in the same period 2019. As a percentage of total revenue, general and administrative expenses in the second quarter of 2020 increased to 24.1% from 15.9% in the same period last year.
Research and development expenses in the second quarter of 2020 were RMB 12.9 million compared to RMB 12.2 million in the same period last year. As a percentage of total revenue, research and development expenses in the second quarter of 2020 increased to 4.7% from 3.6% in the same period 2019.
Net gain on risk assurance liability in the second quarter of 2020 were RMB 42.9 million compared with a net loss of RMB 76.9 million in the first quarter of 2020. Net gain on risk assurance liability was mainly due to a decrease in the delinquent loan balance and default rate.
We recorded income from operations of RMB 66.7 million in the second quarter of 2020 compared with RMB 84.3 million in the same period last year. Net income in the second quarter of 2020 was RMB 70.2 million. Non-GAAP adjusted net income in the second quarter of 2020 was RMB 92.3 million. On a per share basis, our diluted net income per ADS, in the second quarter of 2020 was RMB 0.47 and our diluted non-GAAP adjusted net income per ADS in the same period was RMB 0.61.
Moving on to our balance sheet, as of June 30, 2020, we have cash and cash equivalents of RMB 2 billion compared to RMB 2.7 billion as of March 31, 2020, mainly due to the dividend paid in May and the repayment of debt. Looking ahead to the third quarter of 2020, we expect our total revenue to be between RMB 300 million and RMB 313 million. Please note that this forecast reflects our current and preliminary view on the market and operational conditions which are made in considerations on uncertainties in the market caused by COVID-19 outbreak and are, therefore, subject to change.
This concludes our prepared remarks. Operator, we are now ready to take questions.
[Operator Instructions] Our first question will come from Shelley from Shelley Wang with Morgan Stanley.
So I have three questions. I am from Morgan Stanley. The first one is about the Q3 performance. Well, actually, we are seeing the China’s auto market turn for the better in — starting from now, and we are also seeing strong growth in sales for some Chinese brands such as [indiscernible]. So my question is that how will this trend help with our business in Q3? And second question is about overdue ratio. We do see that the overdue ratio for the second quarter improved; however, it still remained at a level higher than that of last year, so if overdue ratio continue to improve, will generate more gains for risk assurance liabilities. And the third question is about the longer-term growth strategy. Right now, we have covered 45,000. So, what about your growth expectation in two or three years’ time? How many dealers do you expect to cover? And what are the new growth drivers for the longer term; are you going to cover more stores? Are you going to work with more auto brands? And also, I mean, what is the longer term growth strategy for the business?
Thank you, Shelley, for your questions. I will take your first question and then our CFO will answer the next two questions. Okay. About two questions on the impact of the growth of Chinese brands sales of our business. Well, we see that the recovery trend is similar to what we have observed in the second quarter.
And actually, compared with the first and second tier cities, there is no significant improvement in demand in the lower-tier city yet, and actually Cango is the strongest in those lower-tier markets. So, — and also for the growth in sales of these Chinese brands, actually they are mainly attributable to the sales in stores. So, there is some support to our business, but limited indeed.
I’d like to add some point to the first question. Well, yes, we also observed the recovery in sales for Chinese brands such as [Indiscernible] and we also are seeing positive contribution by this recovery to our business growth in the second quarter. Actually, by the end of the second quarter, we already saw this positive impact.
However, as we said earlier, Cango focused mostly on the lower-tier markets and in this lower-tier markets and I think it will take — it will still take some time for the demand to recover. In particular, we need to see a stronger rebound in the purchasing power of the consumers.
So, yes, indeed, we expect to see positive contribution to our business growth in Q3 and in the longer term from the recovery of the Chinese auto brands and other brands as well, but indeed, for the real impact on our business to happen, we still need to see the better purchasing power in lower-tier cities.
And about second question, that is the overdue ratio improvement and its impact on gains in the risk assurance liabilities item. Well, in the second quarter, thanks to our post loan management, in particular, our debt production efforts, we have seen an improvement in our overdue ratio.
Actually, the — I mean, some overdue ratios, in particular and one ratio has dropped significantly over the second quarter. And this is mainly attributable, as I said earlier, to our post management effort. And that’s why in the second quarter, we have recognized about RMB 40 million gain in – in the changes in – of the fair value the risk assurance liability.
And starting from early Q3 we are seeing continuing improvement in this post management metrics and if this trend continues we actually do see an opportunity to recognize more gains in the risk assurance liability. And in Q1 when the pandemic was at its peak, Cango, in fact, aggressively made more provisions for the — for our assets. And that’s why — and that’s why you are seeing higher provisions in our Q3 on our books.
But thanks to resumption of economic activities and also thanks to our post management effort we are seeing better asset quality in the second quarter and throughout the early Q3. So with these trends going on, we expect to see lower provisions in the future, and we could reverse some of the revisions that we made earlier and recognize them as gains in our risk assurance liabilities.
About your third question on our future growth strategy, let me, first of all, talk about the channel side. Well, we will continue to explore opportunities to increase our dealer partners in the next few years. Well, first of all, we will continue to optimize our relationship with the renowned foreign stores in the lower tier cities. And as you heard earlier, we are now gradually terminating partnerships with those dealers who do not meet our standards on service level and also in traffic generation capabilities. And these are all efforts by us to improve the operating efficiency in the lower tier city network.
And on the other hand, we are also working on building relationships with foreign stores of the higher end brands, and we have established a dedicated team to develop this market segment. And so we are actively exploring this new channel, and we are investing heavily to expand our relationships with the foreign stores.
So overall speaking, in the next three years, we expect the number of dealers who work with us to increase to about 60,000, 45,00 of which will be the foreign stores in the lower-tier cities and about 15,000 of which will be foreign stores of the higher end brands.
In addition, we will further improve our product and service offerings with our dealers in order to improve the productivity as well as traffic generation activities of our dealers, because we should not just look at the number of dealers who we are working with. It’s also very important for us to improve the per store activity and also per store productivity, because these metrics will have a direct bearing on our business growth. So these are some of the priorities we are going to work on in the near future.
And thirdly, well, the core business of Cango has been the auto loan facilitation business. At the same time, we are investing heavily to grow our aftermarket business. Actually, as you can see from our results, the contribution from this business to our revenue has increased quite significantly.
And also in the aftermarket business line, the insurance facilitation business has performed outstandingly. And you can see that the contribution by this insurance facilitation business, where our revenue has grown significantly. So we expect that actually — we expect this insurance facilitation business to grow into core and an independent business line of Cango in the future.
In addition, we have also set up a dedicated team to grow our auto transaction facilitation business. So, thanks to our efforts and investment, we expect the auto transaction facilitation business to make positive contribution to our business, as well as to our revenue growth in the third quarter and in the following quarters. Thank you.
[Operator Instructions] We have no further questions at this time. I will hand the call back to management for closing remarks.
End of Q&A
Thank you all for your participation. That concludes today’s earnings call.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.