Cango Inc.

Good morning and good evening, everyone. Welcome to Kengo Inc.' 's second 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. Jiaoyuan 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 and 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. Jian Lin, CEO of Kengo. Mr. Lin, the floor is yours, sir.

Good morning and good evening, everyone. Welcome to Cango's 2021 Q2 Earnings Call. 2021 Cango's 2021 Q2 Earnings Call 2021 Cango's 2021 Q2 Earnings Call 2021

In the first half of 2021, China's auto market, still recovering from the impact of the COVID-19 pandemic, faced renewed pressure due to the persistent global chip shortage.

In the wake of this shortage, OEMs have had to slow down production and dealers have slashed promotions, leading to a significant decline in car production and sales. The volatility in the automotive market stemming from uneven chip supplies is unlikely to ease in the short term and is widely expected to linger in the second half of 2021. Meanwhile, price increases in other key components and raw materials have further intensified cost pressure on OEMs and fueled uncertainty in their production plans. The chip shortage crisis will undoubtedly slow the recovery of the auto industry. Despite this, Kengo's overall business remained stable in the second quarter. Total revenues came in at 947 million RMB. Thanks to investment gains from the altar, we realized a net income of 558 million RMB.

I would like to talk about the car transaction service business first. As the core business block of our car transaction service platform, the car transaction service business has a total income of 5.23 billion RMB in the second quarter. which accounts for nearly 55.2% of the total revenue, and is gradually becoming an important engine for the future development of Zhicheng Group. As a traffic center, the car salesman is a key part of the car traffic value chain, and is also an important starting point for our car transaction service. Through the integration of car members, financial insurance, and other car sales services, we can support better rich car dealers, and thus increase the efficiency of the entire industry. For consumers, this also means that the purchase process is simpler and quicker,

Now I'd like to talk about our car trading transactions business. As the business at the core of our car transaction service platform, revenues from car trading transactions reached 523 million RMB in the second quarter, accounting for about 55.2% of the total revenues, signaling its gradual evolution into an important growth driver for our growth. Car dealers are not only just a key link in the auto transaction value chain, but also an important focus of our car trading transaction services. By integrating car sourcing, financing, insurance, and dollar market aftermarket services, Kengo empowers dealers and improves efficiency of the industry as a whole. For consumers, purchasing cars will be much simpler and faster with more diversified and reliable supporting services as well as enhanced user experience. 今年五月底,

Canggu launched a B2B service platform, Canggu Good Car, which is a B2B service platform. Canggu Good Car's comprehensive information and trading, logistics, financial, insurance, and other capabilities directly go down to the market. The pain points in the business process. Canggu has been in the financial and insurance sector for more than 10 years. It has built a network of channels that cover the national low-end market. Connect more than 47,000 physical dealerships. At the end of May 2021, we launched Kangoo Hao Che, a B2B service platform for dealers. Kangoo Hao Che integrates information with transactions, logistics, financing, and insurance,

to directly address the unmet needs of car dealers in the lower-tier markets. Thanks to more than 10 years of commitment, Kengo has built up strong expertise in car financing and insurance services and a nationwide dealership network that covers over 40,000 dealers. Kengo how to is a natural extension into the automotive transaction field. We aim to offer diversified and comprehensive products to further strengthen the bond between Kengo and our dealers, as well as to empower our dealers.

At the same time, the basic ability of the vehicle trading service platform continues to increase. First of all, in the customer service sector, as our important guide tool, the economic model continues to expand in the second quarter in a specific direction. Currently, it has more than 13,500 registered agents and has equipped 581 branch stores for it, further building its own private flow. It is worth mentioning that in this quarter, we will launch a new upgrade of the Canggu Car Life Service, which will provide consumers with service that covers the purchase, use, and maintenance of cars. Through Canggu Car Life and Canggu Car Life, Canggu will be able to serve B-end merchants and C-end car owners. In addition, in the construction of supply chain operation capabilities, as of the end of the second quarter, we have established a total of 110 pre-employment centers with basic facilities.

In addition, we continue to develop the capabilities of our car transaction services platform. In terms of customer acquisition and services, in line with our long-term plans, in the second quarter, we expanded our team of independent sales reps. An important method to generate sales leads to more than 13,000 sales reps. Our sub-dealers grew to 581 as of June 30, 2021. further increasing our private traffic. Notably, we updated the web app of Kangoo Che Shen Huo on WeChat in the second quarter, offering a one-stop service that covers car purchases, car usage, and car maintenance. With Kangoo Hao Che and Kangoo Che Shen Huo, we empower car dealers and serve car buyers. On supply chain operations, by the end of the second quarter, we have co-developed a total of 110 warehouses together with infrastructure service providers, covering 86 cities nationwide, further enhancing our warehouse capacity.

In this season, we will continue to improve the ability of the insurance and sales team, and newly opened more than 500 gas and oil stores and micro-sales stores. In terms of system construction, we and the insurance company will build a system to connect the online product warehouse. In the future, we will further integrate service-related products. The KA team continues to advance the progress of the previous quarter and continues to promote cooperation negotiations with many new energy manufacturers. Four points of work are expected to gradually land in the third quarter.

In Q2, revenues from aftermarket services facilitation were 51.9 million RMB, making a sizable contribution to the company's total revenues. Focusing on car insurance business and starting from the demand side, we recommended high-quality insurance purchase channels to car owners, covering a wide range of insurance products, including car insurance, non-car insurance, and health insurance. We continue to develop our direct sales teams, and established partnerships with more than 500 auto trade and maintenance operators. In the meantime, we continue to integrate our systems with those of insurance companies and launch the WeChat mini program for product library. Going forward, we will further integrate more aftermarket services. Additionally, our K18 continued partnership negotiations with several new energy vehicle makers. Pilots are expected to roll out in the third quarter.

In the second quarter, the company completed the new car loan amount of RMB 77.9 billion, which is 57.5% higher than the previous year. The revenue of the car rental business is RMB 3.03 billion, which is 111% higher than the previous year, which is 1.44 billion yuan.

Finally, automotive financing facilitation, our main business line, also grew steadily in the second quarter. We facilitated new financing transactions for cars amounting to 7.79 billion RMB, up 57.5% year-on-year. Our automotive financing facilitation revenues were $300 million, 3 million RMB up 111% from 144 million RMB in the same period of last year. As of June 30, 2021, total outstanding balance of financing transactions facilitated by the company amounted to 48.64 billion RMB.

Now turning to asset quality, as of June 30, 2021,

Due to changes in our stock product mix, the M1 plus and M3 plus overview ratio rose slightly to 1.35% and 0.69% respectively. Going forward, we plan to continue strengthening our risk management system and improve our risk identification and control capabilities. We remain confident in our overall asset quality. 渠道方面,截至二季度末,

In terms of dealership networks,

We had 47,740 registered dealers as of June 30th, 2021. Our channel mix and customer base have been further improved. Notably, despite the impact of the global chip shortage, our share in the high-end market segment has risen. As of June 30th, 2021, we have covered more than 9,300 forest dealers, including about 500 luxury brand dealers, such as major Germany dealers, major German luxury brands including BMW, Mercedes, and Audi, and also Lexus.

The development of new energy vehicles is an important measure to achieve the target of carbon reduction in the transportation sector. We have always been very optimistic about the new energy vehicle industry. By using Canggu's business model and the high-quality integration of new energy vehicles, we will help new energy manufacturers to be online and achieve the last mile of its operating model. Currently, Canggu is not only an ideal service partner for vehicles nationwide, As NEVs are becoming more popular, the penetration rate of NEVs in China is expected to further increase.

Meanwhile, in an effort to address the global climate change crisis, China has officially announced its carbon emission peaking and neutrality goals for 2030 and 2060, respectively. The development of NEVs is a key to achieving emission reduction targets in the transport sector. We have always believed in the future of NEVs, and our business model is highly consistent with that of NEV manufacturers. We are committed to supporting NEV makers to realize the last mile of their direct sale model by leveraging our extensive dealership network in the lower-tier markets. At present, Kingo is Li Auto's nationwide service partner and also covers all of Tesla's stores in Shanghai. We also work with Xiaopeng, GAC, New Energy, and other NEP manufacturers on transactions, financing insurance, and delivery services, and so on. Looking ahead, we saw the global chip supply shortage in the auto industry and impact from domestic financial regulatory changes to continue in the second half of 2021, which may create challenges for our business. But we will continue to execute our strategies and uphold our commitment to facilitating easy, and enjoyable car purchase experiences. We remain dedicated to our goal of building an auto service platform of choice for consumers.

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。 Next, I will turn over to our CFO Michael Zhang to review our financial performance in more details.

Thanks, Xia Yuan. Hello, everyone, and welcome to our second quarter 2021 earnings call. Before I started to review our financials, please note that unless otherwise stated, all numbers are in IMV terms and all percentage comparisons are on the year-over-year basis. Our second quarter financial performance was in line with our expectations. Total revenues came in at $946.7 million. more than tripling from a year ago. Revenue from card trading transactions were 522.5 million, continuing to serve as an important revenue contributor. Revenue from automotive financing facilitation and off-market services facilitation was 303.3 million and 51.9 million, respectively. While uncertainties stemming from global chip supply chain disruption are ongoing, we remain committed to improving our operating efficiency while continually investing in business to deliver more value to our dealers, partners, and users. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the second quarter of 2021 were $933.5 million compared to $207.4 million in the same period of 2020. This was mainly due to the related costs incurred by car trading transaction business. Primary as a result of the increase in revenue from 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 second quarter of 2021 compared to the same period of 2020. Cost of revenue in the second quarter 2021 increased to $697.8 million from $102.8 million in the same period 2020. As a percentage of total revenue, cost of revenue in the second quarter of 2021 was 73.7% compared to 37.5% in the same period 2020, and the change was primarily due to an increase in the amount of card trading transactions. For automotive financing facilitation of market services facilitation, cost of revenue as a percentage of relevant revenues was around 41.6% in the second quarter of 2021. Sales and marketing expenses in the second quarter of 2021 were 60.9 million compared to 42.4 million in the same period 2020. As a percentage of total revenue, sales and marketing expenses in the second quarter of 2021 was 6.4% compared to 15.5% in the same period 2020. General and administrative expenses in the second quarter of 2021 were $64.7 million compared to $66 million in the same period 2020. As a percentage of total revenue, general and administrative expenses in the second quarter of 2021 was 6.8% compared to 24.1% in the same period 2020. Research and development expenses in the second quarter 2021 were 15.6 million compared to 12.9 million in the same period 2020. As a percentage of total revenues, research and development expenses in the second quarter 2021 was 1.7% compared to 4.7% in the same period 2020. Net loss on risk assurance liability in the second quarter of 2021 was $35.9 million compared to a net gain of $42.9 million in the same period, 2020. Net loss on risk assurance liability in the second quarter of 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 $13.2 million in the second quarter of 2021 compared to $66.7 million in the same period of 2020. Due to the fair value change of the company investments in Li Auto, net income in the second quarter of 2021 was $557.7 million. Non-GAAP adjusted net income in the second quarter of 2021 was $578.3 million. On a per share basis, diluting net income per ADS in the second quarter of 2021 was 3.75, and diluting non-GAAP adjusting net income per ADS in the same period was 3.89. Moving on to our balance sheet, as of June 30, 2021, we had cash and cash equivalents of $1.5 billion compared to $1.6 billion as of March 31, 2021. As of June 30, 2021, 2021, the company had short-term investments of $3.1 billion compared to $2.6 billion as of March 31, 2021. Looking ahead to the third quarter of 2021, we expect our total revenue to be between $700 million and $750 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.

Thank you, sir. We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your test phone. If there is any speakerphone, please make an answer before pressing the keys. If an entertainment question has been addressed and you would like to withdraw your question, please press star, then 2. Again, there's a star, then one, to ask a question. At this time, we will pause momentarily to assume our roster. And the first question we have will come from Shelley Wang of Morgan Stanley. Please go ahead.

Hello, I'm Shelley from Morgan Stanley. I have three questions I would like to ask. One is about the guidance of our three systems, namely, 7 to 7.5 billion of revenue guidance, how much will our car trade business account for? And how much of this is due to the impact of car shortcomings, that is, the impact of shortcomings. The second thing I would like to ask is the interest rate of our car trade. This is the same. If the driver is nervous, have we seen an increase in the interest rate? The third thing is about Hi, I'm Shadi from Mogadishu. I have three questions. The first question is,

is about your guidance for revenue in Q3, $700 to $750 million. How much of that is from card trading transaction business? And could you comment on the impact of a chip shortage on these numbers? And the second question is about the gross margin for card trading transactions. Did gross margin increase due to the chip supply shortage? And the third question is about some metrics of provision. That is, in Q1 and Q3, I noticed these metrics of risk-assurance liabilities and also provisions. So could you comment on the trends of these two metrics in the future?

I will ask Michael Zhang, our CFO, to address your questions.

Thank you for your question, Sherry. Let me answer the first question. In the guidance of the third quarter, the revenue of the entire source car transaction is expected to be about 55%, which means that its ratio is equal to the basic level of the second quarter. The absolute number is expected to be about 400 million. The second question is about the influence of guidance on the entire car transaction. We understand that there are two aspects to this. The first is supply side. The supply side is mainly affected by the chip. This will have a more significant impact on our entire car transaction, because from the situation of the third quarter, the impact on the entire business volume of our entire car transaction should be a very important factor. I think this is one aspect. At the same time, due to the shortage of car members in the supply chain, from the entire supply chain of the driver to the second-tier network of the lower-level market. In this process, the impact on the entire supply chain and the lower-level market should be greater. In the first half of the year, there was mainly a storage and virtualization support, so the total amount of business should be relatively It's in a good state. But if it enters the third quarter, we can see that the entire car market will be more affected. So we say this is the impact of the supply side. In addition, from the demand side, because we are also paying attention to the overall demand of the entire car market, after entering the second quarter, from the demand side of the entire new car, it is still relatively weak. Thank you, Shelley, for your questions. Let me take your first question first. Well, about our...

revenue guidance for Q3. In terms of a contribution from card trading transactions to our Q3 revenue, we expect it to be at about 55%, so basically in line with the development in Q2. In terms of absolute number for revenue guidance, we expect the card trading transactions contribute about $400 million to the total revenue. And the second part of your first question, that is the factors impacting on our guidance for card trading transactions. Well, I would like to answer this question from two perspectives. Firstly, on the supply side, actually the chip supply shortage does have a big impact on our card trading transactions. And in Q3, we saw the shortage of card supply to have quite a big impact. Also, we expect the car supply shortage to gradually cascade down from the forest stores in Tier 1, Tier 2 cities to non-forest stores in the lower tier cities. So, in fact, we expect a bigger impact on the lower tier markets. In the first half, thanks to, you know, historic stock of cars, we still enjoyed business growth in the first half. However, in Q3, we expect the car supply shortage to continue and the impact will be more significant than in the first half of this year. And secondly, on the demand side, well, actually in Q2, in the lower tier cities, the demand for new cars have been quite weak. So this had quite a big impact on our small dealers' partners as well as on our car financing transactions.

its horsepower is relatively low, because this is due to the pricing factor of the entire OEM. In itself, the space given to the middle end of the price range is relatively small, because it is a commercial model. For some models that are not so commercial, its horsepower will be higher. So this may be the same as a chip, factors, we understand that the impact may not be particularly significant. This is the first point. The second point is based on ourselves, because from the point of view of the entire car transaction, this is our new strategic business, so in the process of starting, we will buy more from the point of view of risk control and operating efficiency, and we will buy more and sell more cars to ensure that we in a relatively short period of time. At the same time, in order to stimulate the transaction capability of the entire coin end, we also gave the small coin a more attractive free space. So, in fact, So in general, our strategy is to give our coins enough attraction to stimulate their trading ability. And to answer your second question on the growth margin of car trading transaction business, well, actually the main factor impacting on the growth margin is the car models.

That is, for popular car models, usually the gross margin for us is lower because OEMs, when they price these popular car models, they usually don't give a lot of room for negotiation. And for unpopular car models, however, the gross margins could be higher. So in terms of the factors impacting the gross margin of our car transaction businesses, really it's not about the chip shortage. It's, in fact, more about the car models. And the second point I'd like to make is that on Kengo's side, well, car trading transaction business is a new strategic business line for us, and it is still developing. So in order to encourage the development of this new business, And in order to better control risks and improve operational efficiency, we focus on the popular car models so that in the short term we could drive up the sales and also the growth of this business line. In addition, we are offering the smaller dealers attractive gross margins in order to help them drive up sales on their side as well. So in terms of gross margin as a whole, for us, when we consider pricing, we maintain a stable and robust pricing strategy with two purposes, as I described. That is to, first of all, ensure that the current stock of cars will quickly be sold off, and the second is to ensure that the small dealers have attractive enough gross margin to stimulate their business growth. So overall speaking, the gross margin of a car trading transaction business line is steady.

您问的这个第三个问题是关于整个的一个我们的risk assurance, 就是我们的一个货币和我们的一个坏账的一个集体的这么一个问题。 这一块的话呢,主要的一个点是因为我们在去年的 In this process, we also pay attention to the performance of the behind-the-scenes expectations of the whole asset of Fenghong. In fact, it has produced a relatively negative impact. In the fourth quarter of last year, we found that after this state appeared, we have made corresponding strategic adjustments in the first quarter of this year. However, at present, because it is a gradual manifestation of a residual asset, we expect it to continue to the third quarter of this year. We expect it to And your third question about risk assurance liabilities as well as the provisions.

Well, what I would like to emphasize is that actually in Q4 last year, in order to facilitate innovation of our business models, we changed and upgraded our procedures and processes for some of our products as well as the user experience. But such measures and such strategies did have a negative impact on the overdue ratios of our assets. But however, since then, actually since Q1 this year, we have also made strategic adjustments. So we expect the negative impact on the current, on the stock assets to continue into Q3 this year. However, by the end of Q3, we expect the overdue ratios to improve.

Thank you.

Thank you for your questions. Thank you. Thank you very much. Thank you.

The next question will come from David Penn of Goldman Sachs.

Can you hear me?

Yes.

First of all, congratulations to Goldman Sachs, which is a relatively challenging second quarter in the entire industry. In terms of some of the main strategies, I have two questions. The first is a more specific question. I see that our second quarter is the same as in the housing business. In fact, there is a relatively large, basically more than half of such a growth, which is income. Then in the post-market side, it seems to be the same as last year. Basically, it is a balance. I want to know more about some of the reasons here. Is it our insurance related business or other? Do you have any recent trends or companies? Then the second question is about the new energy car. The management team just made a more specific sharing, including us with Li Xiang, with Xiaopeng, with Tesla, etc. in some of the latest advances. I want to know more about the specific services we provide for him, and how these services correspond to our financial performance, including income, in our transactions, housing and logistics, and these different blocks below. Thank you.

First of all, congratulations to the management on your strong performance and also strong progress in Q2 despite the challenges in the overall market. So I have two questions, three questions mainly. The first question is about the development the business performance of the auto loan facilitation business and also the aftermarket business. Well, in the second half, I mean, in Q2, I noticed that the revenue from the auto loan facilitation business almost doubled, and the revenue from the aftermarket services remained flat. So could you give us more colors on the reasons? for such a performance and also to share with us your outlook for future trends and also the factors that will impact on the revenue performance in the future. And second question is about NE fees. In your presentation, you talked about your partnerships with the auto, Tesla, and also Shelton and other NE fee makers. So could you share with us more information on the type of services that you offer to these and EV makers, and also how do these partnerships on these services contribute to your financial performance, for example, to revenue growth? And could you share with us, you know, the specific impact on your car trading business line and auto loan facilitation business line, as well as the aftermarket service business line, respectively? And also, the third question is about your outlook for Q3. And the second half, I don't know.

所以我们这方面的保险的业务的增长 没有预期的那么快 所以这是回答你第一个问题 然后跟理想能源新合作 我们主要是在 一个是我们所有的金融系统 是嵌入理想的销售APP的 所以它的客户在线上下订的同时 都能直接跟我们的金融产品 Thank you.

Okay, so I will take your first two questions. The first question about the insurance, that is the aftermarket services business line. Well, because of the free liberalization reform in the China market, the business models of insurance companies saw big changes over the past... I mean, the business models of insurance companies have seen big changes. So... For us, how to meet the new challenges and how to better partner with insurance companies and adapt to the new business models, these have been the issues for us to address. So that's why our insurance business hasn't been growing as we expect it to be. And the second question, our partnership with NEV makers, including DeAuto. Well, for DeAuto specifically, for our car financing transaction business, our system of this business is, in fact, directly incorporated into the sales app of Lee Auto. So, for example, when the customer of Lee Auto makes an order offline, the information is directly fed into our system, and then we can provide the necessary services to the Lee Auto customer service. And the same principle applies to the car insurance business, For example, we help liaison and connect with the local car insurance companies, and then we feed the information into the auto insurance business system, and then the customer service employees of the auto then will see the information on their sales app. So we offer one-stop service. car insurance services as well.

In the cooperation with Xiaopeng, the ideal cooperation mode is slightly different. Our cooperation with Xiaopeng is similar to collecting orders from our system to purchase Xiaopeng from the customer, and then collecting them to purchase from Xiaopeng. And then in this process, we provide all the financial services and insurance services that we can provide.

However, our partnership model with Xiaopeng is different from that with Li Auto. With Xiaopeng, well, first of all, on our side, we collect customer orders and relevant information in our system, and then we bulk purchase the cars from Xiaopeng. So in the process, we also provide, you know, financing products as well as insurance products to the customers.

I'm done, David.

I think that's all from my side.

Thank you.

Thank you.

Again, as a reminder, if you'd like to ask a question, please press star, then 1 on a touch-tone phone. Again, that is star, then 1 to ask a question. Again, we will just pause momentarily to assemble our roster. Again, I just starved in one to ask a question. Okay, we have no further questions at this time. I will hand the conference call back over to management for any closing remarks.

Okay.

Thank you, everybody. That closes today's earnings call.

And we thank you, ma'am, and to the rest of the management team for your time also today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you, everyone. Take care and have a great day.