Cango Inc.

Good morning and good evening, everyone. Welcome to the Cango, Inc.' 's fourth quarter and full year 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 Mrs. Zhaiyuan 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 harbour statement in the company's earnings release, which also applies to the conference today, as management will make forward-looking statements. With this said, I'm now turning the call over to Mr. Zhai-Wan Lin, CEO of Kango. Please go ahead, sir.

Thank you. Good morning and good evening, everyone. Welcome to CanGo's fourth quarter and full year 2020 earnings call. We are very happy to see that in the second half of the year, the overall business of the company has shown a significant rebound. In the fourth quarter, the company's total income reached 10.97 billion yuan, which is more than 46% of the direct income we gave before. Thanks to the effective cost control of the company, the operating profit continues to maintain a good growth trend, reaching 1.98 billion yuan this quarter. In 2020, the unexpected pandemic at the beginning of the year brought the industry to a standstill.

But China's economy picked up speed in the second half of the year, and the auto market recovered steadily. While there was immense pressure on the auto industry, it also accelerated its pace of transformation. With the unleashed pent-up demand from the lower-tier markets and continuous progress across our business lines, we are pleased to report that Tango's overall business rebounded significantly during the second half of this year, of the year, I mean 2020. As a result, total revenues in the fourth quarter grew to a record 1,097 million RMB, surpassing the high end of our previous guidance range by about 46%. Thanks to our effective cost control initiatives, Operating income sustained its growth momentum in the quarter and came in at 198 million RMB. Net income for the quarter was 1.6 billion RMB, primarily attributable to an investment gain of about 1.5 billion RMB in the auto.

The year 2020 marked Kengo's 10th anniversary, a significant milestone opening a new chapter of growth for the company.

Ten years ago, we founded Kengo as we saw unmet demand in the auto transaction value chain, specifically in the lower-tier markets. And this prompted us to create a one-stop platform to connect and empower all parties along the auto value chain while offering an easy and enjoyable car purchasing experience to our customers. 我们以汽车金融服务为切入点,深入布局下层市场,搭建其覆盖全国近五万家经销商的渠道网络。

After originating our business in auto financing, we have also deepened our roots in the lower-tier markets.

and today we have a network of nearly 50,000 registered dealers nationwide, making Cango a leading technology-based automotive transaction services platform in China. Building on this solid foundation, we are actively expanding to the upstream and downstream of the industry value chain, extending our reach to the car trading transactions and up-to-market services facilitation segments, pricing forward toward the goal of better serving customers and the auto industry as a whole.

Tsanghu has been promoting the development of the entire industry, making shopping simple and pleasant, and becoming the first shopping service platform chosen by consumers is our original intention. It is also the mission vision of our new 10 years of unwavering struggle. Currently, our business map covers the three areas of car transaction service, car loan promotion service, and car post-market service.

We are always looking for ways to further advance the overall development of industry and we remain dedicated to our vision and mission, which is to make car purchases easy and enjoyable and become an auto service platform of choice for consumers. As of now, Kengo has three main business lines, auto loan facilitation, car trading transactions, and aftermarket services facilitations. Through the development of a complete service ecosystem, we connect and empower dealers, OEMs, consumers, and other industry participants.

And our car trading service business has positive momentum. In the past 10 years, in our deep-down market, in the process of building a national channel network, we have deeply sensed the pain points of retailers in terms of vehicle and supply chain efficiency, and the need for new sales to be made at the main airport. Now, Canggu's channel network and ground capability has been able to create a trading service platform with deep-down car circulation. Thank you very much.

About our car trading transactions business, in the fourth quarter, this business line generated revenue of 547 million RMB, accounting for about 60% of our total revenue. It has become an important growth driver. It is worth mentioning that our car trading transaction business has positive growth margins. In the past decade, when we were actively exploring lower-tier markets, and building a nationwide dealership network, we recognize the difficulties of local dealers and the needs of OEMs looking to expand their sales network and channels. Today, with our strong foothold in the lower tier markets and service capabilities in auto transaction, we have developed a transaction service platform that effectively connects supply and demand in the lower tier markets. At the same time, new energy vehicles, in short, NEVs, have emerged as an inevitable future trend as technology leads the rapid transformation of all industries, including the auto industry. NEV manufacturers, which usually adopt the direct operational sales model, are actively seeking traffic in the lower-tier markets and professional traffic operation support. Kenco's extensive dealership network in the lower-tier markets and efficient service platform puts us in the ideal position to meet their needs. Kangoo's car trading transactions platform has improved the efficiency and convenience of the car transactions by benefiting both car buyers and car dealers and OEMs.

Di四季度,我们的经纪人模式在车交易服务场景下得到了很好的应用。截至季度末,我们在全国范围内已拥有7000余位注册经纪人,并为其配置了315个支点经销商。传统经销商渠道叠加经纪人网络的不断拓展加宽加深,将极大助力我们进一步深化下层市场的车交易服务和车后市场服务。 In addition, our logistics and supply chain operations capabilities are also constantly improving. Our self-made warehouse points add up to regional company headquarters points, so that we can better solve logistics efficiency problems in the lower market, and shorten the logistics radius. At the end of the fourth quarter, we have established about 80 front-end warehouses in cooperation with multiple infrastructure service providers. The total capacity is more than 30,000 seats, covering 73 cities nationwide. It has become the most important part of our car transaction layout. Finally, as the leading and leader in the field of Chinese technological car service, Canggu has always relied on big data and technological innovation as the core driving force. We built a technological sales management system to provide salespeople with multi-level integrated guidance and services that cover the entire process of car transaction in the network, and at the same time, greatly improve our own service capabilities and efficiency.

On our car trading transactions platform, we have made solid progress in advancing our service capabilities in the past few quarters. First, in addition to our traditional dealership network, initiatives by our independent sales reps brought in private traffic flow to target more segmented customer groups and did a good job in the fourth quarter. By the end of the fourth quarter, we have had 315 sub-dealers and more than 7,000 independent sales reps across the country. The continuous expansion of our traditional dealership network plus the private traffic generated by our independent sales reps will help us deepen our car trading transactions and aftermarket services facilitation businesses in the lower-tier markets. Secondly, we have also greatly improved our logistics and supply chain capabilities. Our self-developed warehouses complement our local partners' warehouses, allowing us to solve the efficiency problem in the lower-tier markets. By the end of the fourth quarter, we have had developed approximately 80 warehouses together with several local infrastructure service providers with a total capacity of more than 30,000 parking spaces covering 73 cities across the country. This has become an important part of our strategic development to grow our car trading transactions business. Lastly, as a pioneer and leader in China's technology-based auto service field, Kenco has committed itself to big data and technological innovation as the core driving force. While we are building a technology-based dealership management system to provide multi-level integrated guidance and services for our dealers to cover the entire car transaction process, we also greatly improved our service capabilities and efficiency. 在新的一年里,我们将进一步着力提升交易服务能力,

In 2021, we will further strengthen our service capabilities, covering more car models and expanding our product offerings.

Simultaneously leveraging our technological know-how, we will continue empowering auto dealers by enhancing their transaction capabilities while promoting their branding, so as to develop an efficient and effective car transaction model suitable for the lower-tier markets.

M3 M3 M3 M3 M3 M3

在业务量增长的同时,我们保持了良好的利润率和盈利能力。 In the fourth quarter, our auto loan facilitation business rebounded strongly during the quarter. With in-depth cooperation with large financial institutions, we upgraded and launched advanced products for our target customers, resulting in improved customer service experience and customer base. In the fourth quarter, we facilitated 10.82 billion financing transactions, up 13% year-on-year. Our automotive financing facilitation revenues were 398.1 million RMB, up 51.8% from the same period of last year, recovering to pre-pandemic levels and returning back to the growth track. As of December 31, 2020, the total outstanding balance of financing transactions facilitated by the company reached 43.5 billion RMB. About asset quality, as of December 31, 2020, the M1-plus overdue ratio decreased to 0.98% from 1.111% as of September 30, 2020, and the M3-plus overdue ratio decreased to 0.42% from 0.53% as of December 30, 2020. In terms of our financial performance, our margins and profitability remain stable as business volumes grow. Finally, our aftermarket services facilitation revenues in the fourth quarter was 70.76 million RMB, strongly supporting total revenue growth. While the auto insurance premium reform in the fourth quarter put some pressure on the overall insurance industry and may potentially impact Tango's insurance business in 2021, As a response, we are actively upgrading our traditional offerings and exploring new products. Looking ahead, we will extend our cooperation with large insurance companies and introduce more diversified product offerings to meet the needs of different customer segments, while also expanding our key account sales team to drive the sustainable growth of our insurance business. In addition, backed by our insurance business, we will continuously help match the upstream and downstream businesses of the auto value chain and dig deep into aftermarket services such as auto repair and maintenance services. 渠道覆盖方面,截至四季度末, 灿骨已覆盖全国48,487家汽车经销商。 在高端品牌拓展上, 第四季度我们与一些经销商集团达成合作, 高端品牌CS经销商的数量也持续增长。

In terms of our dealership network, by the end of the year, we have had a total of 48,487 registered dealers nationwide.

During the quarter, we started to work with some dealer groups and fully expanded 4S dealers. With more customers pursuing high-end brands, we will further our efforts in this market segment and help Kenco gain additional market share. Dedication and hard work are always recognized and rewarded. Kengo always puts customers' needs first and offers differentiated auto financing products and services. In the fourth quarter, we won numerous important industry awards. Among them, for the second year in a row, Kengo was awarded the Innovative Auto Finance Services Enterprises Award by China Automobile Dealers Association, and for the third year in a row, Kangal was awarded the Best Auto Finance Service Provider by the China Automobile Golden Engine Award.

Going into 2021, we remain committed to our customer-centric value proposition, relying on our extensive experience in auto financing services, a powerful network of nearly 50,000 dealers and rich industry resources,

We will continue to develop and provide a wide range of high-quality products and services centered around auto transactions and customer demand scenarios, and devote ourselves to making car purchases easy and enjoyable for customers. Our new journey has just begun, and I would like to conclude with the Chinese saying, where there is a will, there is a way. 接下来,有请我们的首席财务官张永毅来回顾一下公司在本季度的财务表现。 With that, I will now turn the call over to our CFO, Michael Zhang, to review our financial performance in more detail.

Thanks, Jiayuan. Hello, everyone, and welcome to our fourth quarter and four-year 2020 earnings call. Before I started to review our financials, please note that unless otherwise stated, all numbers are in IMB terms and all percentage comparisons are on a year-over-year basis. Our continuous and static progress across business fueled top-line expansion in the first quarter, with total revenues coming at $1.1 billion, once again outperforming our previous guidance range. Notably, we saw a shift in our revenue stream during the quarter, as contributions from our card trading transactions increased to approximately 50% of total revenues. This business is becoming an important revenue contributor. Revenues from automotive financing facilitation and off-market service facilitation were $398.1 million and $70.8 million respectively in the fourth quarter. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the fourth quarter of 2020 were $899 million compared to $320.8 million in the same period of 2019. The increase was mainly due to the related costs incurred by the card trading transaction business. Primary as a result of the increase in revenues from card trading transaction sales and marketing expenses, general and administrative expenses, and research and development expenses each decreased as a percentage of total revenue in the fourth quarter of 2020 compared to the same period of 2019. Cost of revenue in the fourth quarter of 2020 increased to $723.8 million from $157.2 million in the same period of 2019. As a percentage of total revenue, cost of revenue in the fourth quarter was 66% compared to 35.9% in the same period of 2019, and the change was primarily due to an increase in the amount of car trading transactions. For automotive transactions, financing facilitation, and off-market service facilitation. Cost of revenue as a percentage of relevant revenues was around 30% in the fourth quarter of 2020. Sales and marketing expenses in the fourth quarter of 2020 were $65.8 million compared to $55.2 million in the same period, 2019. As a percentage of total revenue, sales and marketing expenses in the fourth quarter of 2020 was 6% compared to 12.6% in the same period 2019. General and administrative expenses in the fourth quarter of 2020 were $90.1 million compared to $66.1 million in the same period 2019. As a percentage of total revenue, general and administrative expenses in the fourth quarter of 2020 was 8.2% compared to 15.1% in the same period, 2019. Research and development expenses in the fourth quarter of 2020 were 23 million compared to 18.6 million in the same period, 2019. As a percentage of total revenue, research and development expenses in the fourth quarter of 2020 was 2.1% compared to 4.2% in the same period, 2019. Net gain on risk assurance liability in the fourth quarter of 2020 was 18.8 million compared to a net loss of 6.5 million in the same period of 2019. Net gain on risk assurance liability was mainly due to a sequential decrease in default rate since the third quarter of 2020. We recorded income from operation of 198.4 million in the fourth quarter of 2020 compared to $117.7 million in the same period 2019. Net income in the fourth quarter of 2020 was $1,568.5 million. Non-GAAP adjusted net income in the fourth quarter of 2020 was $1,588 million. On a per share basis, diluted net income per ABS in the fourth quarter of 2020 was 10.4 and diluting non-GAAP adjusted net income per ADS in the same period was 10.53. For the full year of 2020, our total net revenues increased by 42.5% to 2.1 billion. Total operating costs and expenses were 1.7 billion. Net income was 3.4 billion and non-GAAP adjusted net income was 3.5 billion. Diluted net income per ADS and diluted non-GAAP adjusted net income per ADS was $22.17 and $22.69, respectively, in 2020. Moving on to our balance sheet, as of December 31, 2020, we had cash and cash equivalents of $1,426.9 million compared to $1,402. and $23.3 million as of September 30, 2020. As of December 31, 2020, the company had a short-term investment of $4.3 billion compared to $1.1 billion as of September 30, 2020. The increase was mainly due to the change in fair value of the company's investment in Li Auto and the company's reclassification of such investment from long-term investments to short-term investments. Looking ahead to the first quarter of 2021, we expect our total revenues to be between $1,000 million and $1,050 million. Please note that this forecast reflects 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.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Shelley Wang from Morgan Stanley. Please go ahead.

Hello, everyone. I'm Shelley from Morgan Stanley. First of all, congratulations to another very strong I have three questions here. The first is about our new car trading business. I would like to ask you about the outlook of our 2021 car trading business. For example, we expect to have tens of thousands of cars. In this business model, compared to the salesperson asking the main airport to take the car directly, our car trading service is to provide additional value to the salesperson. And then the second one is also to ask about our new business, which is the agent-manager model. The main thing is how to do financial control in this part, because they are not our employees. For example, to verify those, for example, everyone's loan ability, and then the loan, is it really used to buy? In these aspects, how do we do financial control? First of all,

Congratulations to the management on yet another year of a strong performance. I'm Shirley Wang from Morgan Stanley. And so I have three questions. The first question is on the car trading transactions business line. What is your outlook for the business in 2021? For example, how many cars do you expect to complete facilitation in 2021? And also, you know, some dealers, they may be able to get cars directly from the OEMs. So what kind of value do you generate with your card trading transaction service to the dealers. My second question is about the independent sales rep model. How do you manage risks for this model? For example, how do you verify the ability to repay the loans by the customers, and how do you make sure that the loans are indeed used to buy cards? And my third question is more on the macroeconomy. So do you see the credit supply tightening in the new year? And how will that, I mean, based on your observation, how will that impact the demand for auto loans? Do you already see, you know, less demand for auto loans because of a tightening credit supply?

Thank you, Shirley. Let me answer your three questions. The first question is about car transactions. In 2021, we expect to have 40,000 to 50,000 units this year. Our goal is to have a positive cash flow and a positive profit margin. We are facing non-authorized dealers in the lower market. Generally speaking, they do not directly acquire members from the main airport. In the past, their members came from traders or large CS stores. Therefore, This is their pain point. The value of our warehouse is to acquire vehicles from the main plant through a single-seater. At the same time, we provide配套 supply chain service to avoid more interruption in the process of acquiring vehicles. This not only improves the efficiency of all parties, but also reduces the cost of sales. OK, Shirley, I will answer your three questions. First of all, about the outlook for our car trading transaction in 2021. So we expect that in 2021, for the whole year, we will facilitate

45,000 to 50,000 car trading transactions. And about the second part of your first question, that is what kind of value do we offer to the dealers? Well, we mainly target the non-authorized dealers in the lower tier cities. So for these types of dealers, they don't really have very solid supply of cars from the OEMs. because they used to get their cars mostly from the car traders and large forest stores. So for them, they have quite a lot of challenges in ensuring the supply of their cars. For example, the supply of cars is not very steady and reliable, and sometimes it's difficult for them to authenticate the source of cars, and their prices are not very competitive in the market, and the whole supply chain is inefficient. So Targeting these difficulties, we offer various values to the lower tier city non-authorized dealers because we centralize the sourcing of cars from OEMs and we also provide supplementary and complementary supply chain services to these dealers. And our services are able to help the dealers to streamline the whole process of car sourcing. And this actually not only helps, the dealers, but also is very valuable to different parties in the supply chain. It reduces the cost of operation for the dealers and also improves their ability to complete deals as well as their profitability. So in the future, we will continue to improve our logistics service capabilities so as to better empower the dealer partners. 第二個問題關於經紀人模式下的風險控制。

When our economic model is engaged in the service of post-market and car trading, our economic model mainly focuses on traffic operation. There are no risks in this regard. As for the car financial business that the economy is engaged in, we monitor the status of each economy member. Its process is from recommendation to review, then to actual visit, and then to the full line of the report. And then all the financial members of the individual economy are provided or matched by the company to ensure the authenticity of the transaction. Currently, the wind control standards and conditions under the economy model are based on our 2S business, that is, our car financial business in the lower market. In the current period of time, the behind-the-scenes quality under the economy model is close to the average level.

On your second question, risk control for the independent sales rep model, well, for the aftermarket services business line and card trading transaction business line, well, our independent sales reps, they are mostly helping the company to generate and operate traffic, so there is not much risk exposure to the company on these two business lines. And then about auto loan transaction business line, we are strictly managing and monitoring the qualification as well as the eligibility of each and every sales rep. And we look into the recommendation and we also review their authorization levels as well as how they conduct in-person visits. So we have a very strict authorization level set up for all these independent sales reps. we control the supply of cars to the independent sales reps in terms of the auto loan facilitation business. So because we have strict control over the source of the cars, we are able to ensure the authenticity of the transactions. And thirdly, we are also adopting more stringent risk control measures on these independent sales reps than for our lower tier city auto loan facilitation business. And so far, if you look at the loan service management, in fact, the quality of the loan service management is close to the average level of the company. 第三个问题,对于那个宏观性信贷政策对我们业务的影响,

This problem, from a policy point of view, is to expand online consumption, stabilize and increase public consumption such as cars. It was written in the 2020 State Council Government Work Report. So from the policy point of view, it is a good thing for our business. And from the current stage, the modern tightening has not directly affected us. The tightness of the car will have a more direct impact on our basic business.

I thought your third question, the macro credit policies impact on our business. Well, if you look at the central government policies, for example, the 2021 State Council Work Report, it has been clearly proposed that measures will be taken to drive consumption in the rural areas of China and in the counties and smaller cities of China as well as to increase the supply of cars, as well as to increase the demand for cars steadily. So definitely, the macro policies are in favor of companies like CanGo. And also, so far, based on observation, the tightening of credit supply has not really directly impacted on our business. the performance of the core market as a whole is a more direct factor on impacting on our fundamental business. So that's all for me. Thank you.

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

Thank you. I'm Derek Su from Goldman Sachs. Congratulations for your strong performance in the fourth quarter. My question is about your partnership with the founding partners,

So what is your outlook for tick rate, and what is your outlook for interest rate, the cost of funding, et cetera? So I will invite Michael Zhang, our CFO, to answer this question.

Derek, thank you. First of all, thank you for your question. From our current situation, from our entire strategy, we have been constantly expanding our funding cooperation. At the same time, we will include more large-scale and better financial resources. So from our current status, we can clearly see that the overall price from the capital end has maintained a steady trend. In this respect, we can better create a competitive product at the customer end. Thank you.

Thank you, Derek, for your question. Well, our strategy has always been to expanding the range of funding partners we have. We want to work with more and larger and higher quality funding partners. So we have been working very hard to keep the cost of our funding steady and even decreased. And with this, then we will be able to offer more competitive products to our customers, thereby helping our customer acquisition strategy. So we have been able to keep our take rate steady and stable. I mean, you probably understand the take rate is the fee paid by the bank to us. So for the future, we believe we'll be able to keep our cost of funding steady and also our take rate steady as well. Thank you.

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

Thank you for joining us on this earnings call. Thank you all for your participational support.