Cango Inc.

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. Jiayin 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 am now turning the call over to Mr. Jiayin Lin, CEO of Kangoo. Please go ahead, sir.

Hi, everyone. Welcome to Kangoo's first quarter 2022 earnings call. This year, the international situation has become more complex, and the domestic market environment is getting worse. Especially since March, the spread of the Omicron epidemic has brought great pressure on the economic operation. It has brought different levels of impact to the social levels, including individuals and enterprises. Our automotive industry has not lost its shadow yet, and is facing the interruption of the industrial and supply chains caused by the outbreak of the epidemic. At the supply end, The global situation brought about 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 spread across the nation since March, with lockdowns in certain regions bringing great pressure and impact on society as a whole, including individuals and businesses alike. The automotive industry is still in the shadow of a chip shortage and facing the disruption of industrial production and supply chain caused by the COVID-19 resurgence. On the supply side, auto companies in Shanghai and Jilin have stopped manufacturing on 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.

In general, the overall market environment since the beginning of this year is more severe than our previous predictions. In the face of policy trends and economic downturns that have led to a decline in user credit level and repayment capabilities, we made strategic adjustments early last year to actively collect the scale of traditional car financial business, strengthen wind control measures, and increase the recovery rate of expected assets, and control risks. At the same time, we established a new strategic goal,

In the beginning of the year, the overall market environment has been tougher than we had anticipated, facing decline in consumers' 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 in 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 card trading transaction business at its core and monetizing through multiple channels, including financing and insurance.

In the first quarter of 2022, the company achieved a total revenue of RMB 7.9 billion, exceeding the expected line given before. Among them, the revenue of car transaction service business, RMB 6.0 billion, accounted for a total revenue of more than 76%, becoming the main engine of the company's performance. Car loan-based business and car post-market The revenue of the service industry is 1.1 billion yuan and RMB 25.78 million yuan respectively. In the first quarter, the company nearly lost RMB 1.4 billion yuan, mainly due to the increase in credit. In this quarter, the data of M1 plus and M3 plus are 1.76% and 0.80% respectively. The M1 education and business quarter continues to slow down, which is consistent with the economic and market overall trend. 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 transactions business were about 599 million RMB, 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 140 million RMB, mainly due to increased provision for credit losses. As of March 31, 2022, the M1 Plus and M3 Plus 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 decrease of M1 Plus was consistent with the overall trend of the economy and the market. In the meantime, the gross margin of our card trading transactions business is on the low side and present, while our investment in early-stage infrastructure development for our platform is relatively high, which to some extent drags down the bottom line.

下面我将分平台业务和传统非平台业务与各位分享一季度主要的业务进展。 Next, I would like to share some information on the progress of both platform business and traditional non-platform business. 平台业务方面经过过去几个季度的铺垫, Car transaction service platform has been removed. Platform performance and operation capabilities continue to improve in this quarter. As a small program to serve high-efficiency and integrated self-driving drivers, third-party drivers, transaction, integration, storage, logistics, and other services as the main traffic intersection of the platform, it has accumulated a good reputation in the car industry in less than a year. The total traffic volume has exceeded 2.76 million. Our initiatives and efforts in the past few quarters are bearing fruit. 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 Hao Che, efficiently combines various services covering proprietary card sources, third-party card sources, transaction facilitation, warehousing and logistic services, etc. Since its launch, CanGo Hao Che has established a positive reputation among dealers. The cumulative number of The use for Kangoo Hao Che has exceeded 2.76 million. As of the end of first quarter, Kangoo Hao Che has engaged with 7,435 dealers in 31 provinces and 306 cities. There are 33 proprietary vehicle models on Kangoo Hao Che, including 9 car brands and the 13 car series. As of the end of first quarter, Kangoo Hao Che has engaged with 7,435 dealers in 31 provinces

This quarter, the number of car dealers on the platform has increased by more than 50%. Among them, the main growth comes from the top line of 4S retailers, which accounts for two-thirds of the new top line of retailers this quarter. At the same time, it is good to combine online operation and offline export. In the first quarter, the daily activity rate of platform users has increased significantly. The activity rate of car dealers this quarter has increased by 9%.

In the first quarter, we continue 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 forward dealers, which accounted for more than two-thirds of the newly registered dealers within a 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, and quarterly delay activity increased by 9% from the previous quarter. With the expansion of our dealer coverage, we have also expanded our offline warehouse in our logistics network further. As of the end of this quarter, a total of 103 warehouses 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 Kangoo Haoxue increased by 120% and 227% respectively from the previous quarter.

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 their locations, sizes, historical transaction preferences, etc. These analysis then guided our activities such as brand cooperation, cash flows in 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.

In addition to the above shared platform operation situation progress, in the first quarter, we also continue to invest in resources to build platform self-driving products, mainly with self-driving drivers and financial insurance and other supply chain services, as well as non-self-driving products, mainly including combination services such as third-party driver release, patrol, logistics, etc. In terms of self-driving products, in the first quarter, a total sales of 6827 cars, Among them, there are 5,193 new energy vehicles. Helping small and medium-sized new energy brands to enter the lower market is also one of the key development points for our car trading business in the future. In terms of non-driving products, the platform activity of the first quarter has increased significantly. The number of third-party car members and patrols has increased by 624% and 22% respectively.

In addition to the progress of the platform operations I've just mentioned, in the first quarter, we also continue to invest in building the platform's proprietary products and services, including proprietary vehicle sources, supporting financial and insurance supply chain services, as well as third-party products and services, such as third-party vehicle source listing, car search, logistics, and dollar 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 and EV brands to penetrate into the lower-tier markets is one of the priorities of our car trading transactions business going forward. In terms of third-party products and services, the platform's activity increased significantly in the first 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. At the same time, during the transition process to an auto transaction services platform, the 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 pivoting around auto transactions. 具体来说,结合战略崭新和当下的市场情况,

we took the initiative to tighten the pure financial business. This also reflects the business data of each section. In the first quarter of 2022, the revenue of the car financial business section was 1.1 billion yuan, and it continued to shrink. At the same time, with the transformation, we carried out a process transformation of the traditional car financial business at the business end, making it more efficient to coincide with the transaction. At the car business end, we promoted the car business through the platform, and released the stored car. In the end of the first quarter, there were a total of 44,771 car financial cooperation dealers, of which 8687 are 4S dealers.

我们也正逐步推动这部分车商向我们的产股好车平台迁徙。 Specifically, in combination with the strategic transformation and current market conditions, we have reduced our financing facilitation business size. Meanwhile, re-engineering 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 106 million RMB. 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 foreign 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 forest dealers. We have also been gradually promoting the migration of these dealers to our cargo culture platform. 同样,我们在车后市场板块也做了业务流程梳理。

to drive the transaction and promote insurance and transaction finance closer together to provide better service to the car dealers. In the first quarter, the car insurance came out in the same amount, but in fact, after the car insurance fee was changed, this part of the business space was greatly compressed. The main opportunities we currently see are in the field of new energy vehicles, so in the past few quarters, we have been focusing on exploring the opportunity to cooperate with new energy brands in the field of insurance. The current system, which has been completed and is in harmony with the ideal, is also in progress with the development of new energy brands such as Weima, Nezha, Shalong, Jidu, and other new energy brands. At the same time, we have opened a repair network of repair and transaction events in Guizhou and Shaanxi, and we hope to use this to try to broaden the network of post-market service. At the same time, we entrust these network points to provide downstream market delivery and social service to new energy manufacturers. Similarly, in the aftermarket services sector, we have also restructured the business process.

Centering on car transactions, we are looking to promote a closer integration of car transaction financing insurance so as to provide more integrated supply chain solutions for dealers. In the first quarter, the number of auto insurance orders, they 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 greatly compressed. And the main opportunities we see are present 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. are present. The system integration with D-Auto and Hi-Fi have been completed, and the negotiations with more NEFE brands such as Welmeister, Netta, Saloon, and PixelJ 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. This initiative has expanded our offline presence in the aftermarket services sector and enhanced our capability in providing delivery and after-sales 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. 本轮疫情已持续两月有余。

The epidemic prevention and control measures have a greater impact on the second quarter economy. The global economy is uncertain, and the international supply chain has continued to crash. In the near future, the economy will still face greater downward pressure. For the car market, the major regional epidemic outbreak has brought a huge loss to the car industry chain temporarily banned. In April, the car sales dropped by 47.6%, The current round of the pandemic has lasted for more than two months. The prevention 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 the economy to face greater downward pressure in the coming quarters. For the automotive market, losses caused by the pandemic outbreak in key areas are huge, with the year-on-year decline in total vehicle sales as high as 47.6% in April. Though 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 and production is gradually resuming, the impact on consumption and consumer confidence is longer-term, and it will take time to recover.

and the decline is equivalent to the decline of the overall test. For the whole year of 2022, we have been very cautious. In the face of a more complex external environment, we will continue to strengthen business risk management and control in the field. On the other hand, we will continue to establish and build platforms. The development of our independent car transaction service app Carrefour is coming to an end and is about to be launched. We hope that there will be more progress in the second quarter of the conference.

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. We will update you on its progress in our second quarter earnings call.

下面时间交给我们的CFO张永毅, 与各位分享我们一季度的财务表现。

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

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 IMB terms and all percentage comparisons are on the year-over-year basis. Entering 2022, economic Upheaver, 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 transaction division, which delivered revenues of $599.3 million, played an essential role in our transformation to a platform model. In addition, revenues from our automotive financing facilitation and off-market service facilitation business were $105.9 million and $25.8 million respectively. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the first quarter of 2022 were $976.8 million compared with $964.2 million in the same period, 2021. Cost of revenue in the first quarter of 2022 decreased to $687 million from $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 card trading transactions sharing of total revenues. Card trading transactions normally present a higher cost revenue ratio, thus pushing up the overall ratios. For automotive financing facilitation and off-market 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 $53.8 million compared with $57.8 million in the same period, 2021. As a percentage of total revenue, sales and marketing expenses 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 $50.9 million compared with $61.4 million in the same period, 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 $14.5 million compared with $13.6 million in the same period, 2021. As a percentage 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 of 2022 was $98.9 million compared with $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 loss from operations of $189.1 million in the first quarter of 2022 compared with income of $159.5 million in the same period 2021. Net loss in the first quarter of 2022 was $136.2 million. Non-GAAP adjusted net loss in the first quarter of 2022 was $113.3 million. On a per share basis, diluted net loss per ADX in the first quarter of 2022 was $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 31st, 2022, we had a cash and cash equivalent of 2.1 billion compared with 1.4 billion as of December 31st, 2021. As of March 31st, 2022, The company had a short-term investment of $1.9 billion compared with $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 shutdown and sales plunging, and we, along with our dealers, are facing a much more difficult operating environment. Thus, we are now predicting our total revenue to be between $250 million and $300 million. Please note that these forecasts 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.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you were using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Shelly Wang with Morgan Stanley. Please go ahead.

Hello, everyone. I'm Shelly. I have three questions for you. The first one is about the policy of reducing the purchase tax recently. I'd like to know what you think about the demand and supply side. One is the demand side. Do you think that the business of car transactions and bags in the second half of the year And then the second question is, I want to ask about the first quarter Because I see that the truck business has decreased. And I would like to ask, is this decrease a temporary phenomenon or is it a long-term, maybe a directional strategic adjustment? And the third question is also about strategy. If we look at it a little bit longer, for example, three years, five years, for us, which business will be the focus of our future development?

I have three questions. The first question is about the impact on demand and supply from the government policy to half the cost of 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 what do you expect the impact to be, I mean, the extent of the impact to be? And on the supply side, we actually continue to expect a chip shortage in the second half of this year. 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 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 the next three to five years?

Okay, thank you, Shirley. Let me answer your three questions. The first question, in the current situation, gasoline car, new car supply can face shortcomings. Thank you, Sherry, for your three questions. I will answer them one by one.

About the supply of petrol cars, right now there is still a supply shortage of traditional petrol cars, and we don't expect the problem to be mitigated in the shorter term. Well, what are the problems exactly? I think there is a mismatch of supply and demand. And for a lot of the inventory car models, I mean, it's still difficult to sell in the market. And for those popular car models, on the other hand, we cannot find enough supply. So to address this issue, on our side, we will continue to work on the sourcing of new energy vehicles and also address the problems of non-infantry vehicles and try to find more sources for used cars. 关于第二个和第三个问题,传统汽车代的住代业务我们将进行收缩,这是战略性的调整。

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. 所以我们的车贷业务表现会经过快速下降,然后逐步恢复,然后再持续增长的这样一个状态。 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 it reaches the plateau, then the growth will stabilize. And then after that, it will continue to grow steadily.

Thank you. That's all for me.

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

Hi, everyone. My name is Sophia. I have three questions related to business. They are mainly related to two aspects. The first one is about the company's car transaction. Congratulations to the company. In Q1 this year, the income was exceeded. But I would like to ask, in terms of the business model of car trading, I don't know, we understand that many players who are doing this business, in fact, some people are already starting to do the B2B2C model. So I don't know if the company is planning to expand the B2B2C business model in the future. If so, I would like to ask, in terms of the specific B2B platform, does it include all types of, for example, car shops or institutions? The second question and the third question, I mainly want to ask about the business of the company's housing loan. Because in the past, the housing loan in the business scale is still relatively large. But in the last financial report disclosure, the company should have mentioned that the next step would be to reduce the size of the entire housing loan to avoid such a risk. In fact, I want to ask about the whole Q1. I don't know if the performance of the new rental loan from the company has improved. And overall, is the trend of the company's rental interest rate a decline overall? And the third question is also related to the rental loan. If the company continues to plan to reduce the scale of the rental loan business, Thank you. I'm Sophia from Goldman Sachs.

I have 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. Okay, so on card trading transactions, many players in this area actually 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, so what kind of organizations will be included in the B side? What types of dealers, for example, do you plan to include into this model? And the second and third questions are on the car loan or car financing facilitation business. 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. What about the performance? What about the overdue ratio performance of the new loans in Q1? Is it showing signs of improvement? What about the overall overdue ratio trend in Q1? Do you see any slowdown in these overdue ratios? And the third question is, 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?

Thank you, Sophia, for your question. So your first question, actually, the B2C model will be our endpoint as we transform our platforms. Actually, over the

past decades, 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. 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, our parties could include the auto OEMs, banks, insurance companies, mid and small size 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 as well as our partners.

Okay. On your second question, on the new loans in Q1, 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 loans. So technically, the quality of the loans should be much better than before. However, it is 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. At the same time, we are working on collections. As a result, we have seen a slight improvement in our M1 plus ratio over the past few months. Sorry, we have seen an improvement In the M3 ratio, thanks to our collection efforts, however, the M1 plus ratio has gone up slightly. It's largely because of the pandemic.

um um It will lower our overall profit level in the near future. But on the other hand, from the logic of the overall business, when the transaction size continues to expand, the financial insurance extension business transformation related to the transaction will cause our future profit level to rise, causing our overall profit level to show a trajectory of first decline, then continuous recovery and rise.

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 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, 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 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 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 and after-market services business, then we expect our profits 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.

That's all from me.

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

Thank you all for attention and for your participation.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.