Cango Inc.

Good morning and good evening, everyone. Welcome to Kengo Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. The call is also being broadcast live on the company's IR website. Joining us today are Mr. Jianyuan Lin, Chief Executive Officer, and Mr. Yongnyai 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 call today, as management will make forward-looking statements. With that said, I am now turning the call over to Mr. Jianyuan Lin, CEO of CanGo. Please go ahead, sir.

Hi, everyone, and welcome to CanGo's first quarter 2023 earnings call. In 2022, the automotive market was affected by many factors such as the epidemic. The whole year was in a sluggish state. 2023 is the first year of the post-epidemic era. Although the macroeconomic situation gradually warmed up, the adjustment and repair of the automotive industry in China set the foundation. But in the first quarter, in the spring, the supply and demand dropped, and in March, the price of car sales plummeted. Under the common effect of many factors, consumers' obsession with money is serious. Data from the Youth Association shows that Due to a variety of issues, notably COVID-19, the automotive industry remained slow throughout 2022. The macroeconomy began to show indications of steady recovery in 2023, the first year of the post-pandemic era.

laying a hopeful basis for a revival in China's auto sector. Despite this encouraging trend, the market remained weak in the first quarter due to constrained consumer spending caused by factors such as the spring festival holiday, the loss of national subsidies and a price war that began in March. According to China Passenger Car Association, retail sales volume of passenger vehicles declined 13.4% year-on-year in the first quarter, We predict the overall passenger vehicle market to remain volatile in 2023 owing to persistent pressure from weaker market demand.

面对宏观和市场环境的变动, 灿骨快速反应聚焦资源, 不断探索平台业务的稳健发展之路。 随着对平台服务产品及运营能力的精心打磨, 灿骨旗下的灿骨好车APP, 灿骨优车APP已全面上线运营。 This also indicates that Canggu has successfully built a complete ecosystem of new cars and second-hand cars as the core of car trade.

Canggu reacted promptly to changing macroeconomic and industrial conditions by using our resources and constantly expanding our capacity to capture long-term growth opportunities. Our Canggu Hao Che and Canggu YouCar apps are now fully operational, showcasing our capacity to successfully develop A full-service automotive transaction ecosystem centered on both new and used cars by refining our service capabilities and enhancing our operating skills.

In the end of 2022, RMB256 billion will be reduced to RMB207 billion. In the first quarter of 2023, our overall revenues were 540 million RMB, down 31% year-on-year but up 11% quarter-on-quarter.

Revenues from card trading transactions were 430 million RMB accounting for 79% of total revenues, reinforcing our position as a strong growth engine. Our company's net income for the first quarter was 78.8 million RMB primary due to an increase in gain on risk assurance liabilities under newly implemented accounting standards and a reversal of credit impairment laws due to asset quality improvements. The entire outstanding balance of financing transactions we facilitated have reduced from 25.6 billion RMB as of December 31, 2022 to 20.7 billion RMB as of March 31, 2023, with our M1 plus and M3 plus percentages falling to 2.33% and 1.29% respectively. We anticipate that the ongoing reduction in our outstanding balance of financing transactions together with our robust balance sheet will provide significant support for CanGo's healthy long-term growth prospects. 下面我将与各位分享公司主要的业务进展。 Next, I would like to provide some specifics on the significant progress we've achieved with our company. 首先是新车交易,一季度是传统的汽车销售淡季。

In addition to the multiple factors of the red-light industry, the overall market sales are strong. Although the big environment is not optimistic, our new car trading business is still stable in the first quarter due to improved operating capacity and efficiency. In the first quarter, Canggu Good Car has a total sales of 3,867 cars, which is basically the same as in the fourth quarter of 2022. As of March 31, 2023, Canggu Good Car's total number of cooperating car manufacturers

Let's begin by discussing the new car trading transactions. The first quarter is typically considered the off-season for automobile sales and when combined with macroeconomic and industry challenges, the overall market remains subdued. Nevertheless, our new car trading transactions business demonstrated a robust performance in the first quarter, exhibiting enhanced operational capabilities and efficiency. During this period, a total of 3,867 cars were sold on CanGo HaoChe, maintaining stability compared to Q4 2022. As of March 31, 2023, the total number of dealers participating in CanGo HaoChe rose to 10,469, marking a 40.8% increase year-on-year. By the end of the first quarter, the CanGo HaoChe app had accumulated over 877,000 page views and attracted more than 78,000 unique visitors.

to increase the recognition of car dealers. With the help of car dealers, we will need more and more high-quality services to keep car dealers. Since this year, we have divided and continued to refine the products and services of the dealers, so as to accurately focus on the needs of small and medium-sized car dealers, and really help them achieve business development and profit growth. Starting in mid-February, Canggu Good Car launched a membership system, combining membership policy and car dealership division,

Our distinctive vehicle inventory advantage has significantly contributed to the success of Kangoo Hot Wheels, which has been warmly received by dealers since its inception. Leveraging our vehicle inventory, we have concentrated on our commitment to deliver a superior service to dealers through a diverse range of high-quality offerings. Since the start of this year, we have further refined our services to accurately address the challenges and unique requirements of small and medium-sized dealers, equipping them with effective support to grow their business and achieve profitability. In mid-February, Kengo Hotel introduced a new membership service. This incentive-based program merges a membership rebate policy with car dealer tiers, aiming to boost the repurchase rate of service products and foster dealer engagement.

同时,为提升线上服务效率, 4月, 灿骨好车推出了智能AI客服, 实现不间断服务, 提高车商服务效率和满意度, 持续强化系统运营能力和效率。 此外,灿骨好车的多天部模式也蓄势待发, 通过吸引汽车行业优质的第三方服务商 入住开设线上店铺, 为其横向拓展创造了可能性。 In addition to enhance our online service efficiency, we introduced an intelligent AI customer service

on Kengo Howcher in April. This 24-7 service has not only significantly improved our service quality for dealers and increased their satisfaction rates, but also boosted our operational capabilities and efficiency. Moreover, Kengo Howcher's multi-store model was specifically designed to foster horizontal expansion by attracting more high-quality third-party auto service providers to open online stores. In April, Kengo Howcher saw the launch of its first online store by third-party service provider JL Car Tuning. We anticipate the introduction of auto accessories boutique stores in the second half of 2023, empowering dealers to better serve and retain customers with a diverse range of products and services. 打通中小车商与汽车服务提供商之间的壁垒,实现全域资源共享,以数字化再造服务流程,进而实现双向资能. Moving forward, fueled by big data and digitalization, Kenco Hotel will persist in deepening its multi-store extension strategy, welcoming more upstream and downstream participants from the auto transaction value chain to join us. In doing so, we aim to fully actualize Resource sharing across industry by eliminating barriers between small and medium-sized dealers and automotive service providers and achieving bi-directional or two-way empowerment through digitalized service processes.

接下来我将介绍公司在二手车交易方面的最新进展。 1月初,灿股优车APP上线。 灿股优车APP将和去年5月推出的小程序同时运营。 APP主要面对全国的二手车商,小程序则面向二手车个体重演人员,通过分层分类的操作,把握不同行业参与者的生成需求,通过数字科技,提供更加安全,可靠,多样,高效的一站式服务. Now let's shift our focus to use cars. Building on the success of the Kangoo U-Car mini program, which was introduced in May last year, the Kangoo U-Car app was launched in early January this year.

The app operates in tandem with the mini program, providing a seamless experience. Both the app and the mini program have been specifically designed to offer comprehensive technology-driven services that are more secure, reliable, diverse, and efficient for used car dealers and individual used car owners alike. By refining these services, we have been able to better understand and cater to the unique needs of various industry players, offering a one-stop solution for all their requirements.

With the upgrade of the second-hand car trading business and the optimization of digitalization capabilities, the service of Canggu You Car is now covered with historical background check, vehicle evaluation, real-time price report, online search, vehicle release, self-driving second-hand car purchase, and logistics, financial, insurance, etc. functions. Since the end of the first quarter of 2023, nearly 6,000 second-hand car manufacturers have registered for use, covering 29 provinces and 179 cities nationwide.

Powered by our enhanced used car transaction services and optimized digital capabilities, Kangoo U-Car now provides a range of functions including historic vehicle condition reports, vehicle appraisals, online auctions, online car searches, used car listings, self-operated used car inventory repurchases, and other services such as logistics, financing, and insurance. By the end of the first quarter of 2023, our network has included nearly 6,000 registered used car dealers across 179 cities in 29 provinces nationwide. The accumulated page views and total unique visitors on the CanGo Your Car app and mini program reached over 513,000, and 26,000 respectively by the end of the first quarter of 2023.

maintaining a stable and abundant inventory as well as a transparent pricing structure are crucial for used car dealers.

Thanks to our extensive dealer network across lower tier cities and decades of industry experience, we have ample sources of high quality used cars such as trading from our auto financing customers and repossessed cars from our asset management department. These represent unique advantages for our used car transaction services and specifically address one of the primary challenges for used car dealers. In addition to overdue customers, Kengo has potential inventory of approximately 20,000 used cars from customers whose payments ended normally each month. Powered by enhanced capabilities in used car acquisition and transaction conversion, these potential inventory sources along with repossessed cars will further strengthen the competitive edge of Kengo used car in terms of used car resources.

to obtain the online auction system. At the same time, we will further optimize and upgrade our auction functions. Previously, there were only C-end drivers and stock drivers as the auction landmarks. After upgrading, all registered car dealers across the country can use the auction function to bid their own second-hand car dealers to carry out B2B auction. This is currently the first in the same category of products, which is equivalent to providing another sales channel for small and medium-sized second-hand car dealers. In April this year, Kangoo Yuko successfully obtained its online auction qualification.

With upgraded auction services in addition to auctioning individual and repossessed vehicles, all registered dealers nationwide can now list their use cards for B2B auctions through our platform. As far as we know, this capability is the first of its kind available in the market. In other words, we can now provide all small and medium-sized used car dealers with additional technology-enabled sales channels, enabling them to achieve better prices and faster inventory turnover.

In the second-hand car industry, the inspection is the key to buying and trading experiences. For this reason, we have established a self-driving inspection team, which not only improves our inspection capabilities, but can also provide special checkpoints, Vehicle inspection plays an important role in improving the used car transaction experience.

We have last established in-house technician teams to not only improve our capabilities, but also offer professional services to dealers and consumers. including vehicle condition checks, pricing, and license verifications. In April of this year, we entered into a group-level partnership with China Grand Auto to provide a suite of professional after-sales services for all its use costs.

Going forward, we will continue to accelerate digitalization and enhance our differentiated services in the OTA markets.

These efforts will provide a foundation for CanGo's sustainable growth. We remain committed to standardizing our offerings and deepening our penetration across the automotive value chain, powered by big data and technological innovation. We will continue strengthening our competitive advantages across the supply chain, covering car transactions, aftermarket services, and building a closed-loop ecosystem. With these initiatives, CanGo is well positioned for resilience as we strengthen our place in China's automotive industry evolution powered by digital technology. 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 2023 earnings call. Before I started to review our financials, Please note that unless otherwise stated, all numbers are IMB terms and all percentage comparisons are on a year-over-year basis. Our total revenues for the first quarter was $542.6 million, among which high-trading transaction business delivered revenues of $429.8 million, further demonstrating its solid position as our major revenue drivers. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the first quarter of 2023 were $490.8 million compared with $976.8 million in the same period, 2022. Cost of revenue in the first quarter of 2023 decreased to $480.5 million from $687 million in the same period, 2022. As a percentage of total revenues, cost of revenue in the first quarter of 2023 was 88.6% compared with 87.2% in the same period, 2022. Sales and marketing expenses in the first quarter of 2023 decreased to $12.5 million from $53.8 million in the same period, 2022. As a percentage of total revenues, sales and marketing expenses in the first quarter of 2023 was 2.3% compared with 6.8% in the same period, 2022. General and administrative expenses in the first quarter of 2023 decreased to $39.8 million from $15.9 million in the same period, 2022. As a percentage of total revenues, general and administrative expenses in the first quarter of 2023 was 7.3% compared with 6.5% in the same period, 2022. Research and development expenses in the first quarter of 2023 decreased to $8.1 million from $14.5 million in the same period of 2022. As a percentage of total revenues, research and development expenses in the first quarter of 2023 was 1.5% compared with 1.8% in the same period of 2022. Net gain on contingent risk assurance liabilities in the first quarter of 2023 was $1.6 million. The gain was recognized due to the release of obligations from the contingent aspect of the risk assurance liabilities. Net recovery on provision for credit losses in the first quarter of 2023 was $48.6 million. The recovery was primarily due to the positive impact from the collections of financial receivables. We recorded income from operations of 51.8 million in the first quarter of 2023, compared with a loss of 189.1 million in the same period, 2022. Net income in the first quarter of 2023 was 78.8 million. Non-GAAP adjusted net income in the first quarter of 2023 was 92.8 million. On a per share basis, basic and diluted net income per ADS in the first quarter of 2023 was 0.58 and 0.56, respectively. And non-GAAP adjusted basic and diluted net income per ADS in the same period was 0.69 and 0.66, respectively. Moving on to our balance sheet, as of March 31, 2023, we had cash and cash equivalent of $696 point six million compared with 378.9 million as of december 31st 2022 as of march the first march 31st 2023 the company had a short-term investment of 2 billion compared with 1.9 billion as of december 31st 2022 looking ahead to the second quarter 2023 we are now predicting our total revenues to be between 600 million and 650 million. Please note that this forecast reflects our current and preliminary view on market and operational conditions, which are subject to change. This concludes our prepared remarks. Operators, 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. The first question comes from Stanley Wang from Mobile Stanley. Please go ahead.

Hi, I'm Stanley from Mobile Stanley. I'd like to ask two questions. We see that all major car companies have made some strategic adjustments since the beginning of the year. I would like to ask the management level about the potential of new energy and diesel car structural opportunities. The second is about the financial business of the company's savings. We see that the expected rate of the first quarter has dropped. Does it reflect the risk of credit in the market is decreasing and the economy is gradually improving? Thank you.

Good morning. I have two questions. The first question is that beginning this year, many OEMs suggested their strategies. What do you think of the structural opportunities for AEVs, new energy vehicles, and also internal combustion engine vehicles, in short, ICEVs? My second question is that, say, overdue ratios of CanGo's financing facilitation business dropped. Is this a sign of reduced credit risk in the market and gradual economic recovery? Thank you.

Thank you for your questions. About the first question,

The automotive industry was sluggish in the first quarter. According to China Passenger Car Association, retail sales of passenger vehicles decreased 13.4% year-on-year, and consumer demand began slowing since late 2022 as incentives ended. The impact of China's 6B emission standards and industry-wide price competition further constrained consumer spending.

Although NEV sales sold in Q4 2022, NEV penetration exceeded 30%. The CPCA forecast

NEV penetration may reach 36% nationwide in 2023, and the recent Shanghai Auto Show, over 100 of the more than 150 new models launched were NEVs. In addition, government campaigns encouraging rural NEV purchases and expanding charging stations there indicate lower-tier markets offer huge opportunity and potential for NEV sales, a growing trend.

另外,蓝油车方面,五月出台的关于国六B延期的政策一定程度缓解了主机厂和车商的销售压力。 For ICEVs,

The announcement in May that some ICEVs received a grace period under the China 6B emission standards mitigated some of the sales pressure for automakers.

关于第二个问题,一季度倡股的债贷余额为207亿元, M1加为2.33%, M3加为1.29%, 预期率环比有所下降, 这主要是由于我们加大了不良资产的催收力度, As of the end of first quarter, the total outstanding balance of financing transactions we facilitated were 20.7 billion RMB with our M1 plus and M3 plus ratios down to 2.33% and 1.29% respectively.

and our overdue ratios decreasing quarter over quarter. Overdue ratios dropped mainly because we strengthened our collection efforts of non-performing assets, leading to a decreasing value of numerator and denominator for calculation where the loans were prepaid. 所以这部分的客户疫区率相对以前会比较低。 By the end of March, our existing customers had already been paying payments for around two years, with an average of 14 months remaining on their repayment contracts. This led to our lower overdue ratios from these customer cohorts. While our outstanding balance of financing transactions continues to decrease, our risk exposures have been shrinking. The credit cycle and risk exposure of the entire market remain unclear. Therefore, we will remain cautious and prudent.

Thank you.

That's all for your questions from my side.

Thank you. Your next question comes from Emerson Zoo from Goldman Sachs. Please go ahead.

Thank you, everyone. I'm Emerson from Goldman Sachs. I have two questions. First of all, the price of the vehicle started in March. In fact, it has caused a relatively large impact on the entire car market. I would like to know more about Guan Lixun's prediction of the company's future and what kind of plans will be made in terms of drivers. Then the second question is, in addition to the business of car trading, what is the current progress of other additional service industries? Please let Guan Lixun introduce it. Thank you.

Thank you. I have two questions as well. The first question is that the price fall that began in March weighed on the whole industry. Could you please provide some colors around where the market is heading and your next moves for vehicle inventory? And the second question is that in addition to car trading transactions business, could you shed some light on the developments of your other value-adding services?

Since 2018, the Chinese car market has continued to grow at a low rate and under the impact of the epidemic. It is still struggling to recover from the imbalance and instability. In the first half of this year, the car market did not open the door as expected by the industry. According to the National Bureau of Statistics and the Ministry of Finance, in April, the consumer goods sales of cars were 3621 yuan, down by 15.1%. Thank you for your questions. On your first question, China's automotive industry growth began moderating in 2019.

With the pandemic's impact, recovery has been unstable and sluggish. The highly anticipated rebound has yet to materialize in the first half of 2023. According to the National Bureau of Statistics and Ministry of Finance, in April, retail sales of automotive consumer goods were R362 billion, down 15.1% quarter of a quarter. Collected vehicle purchase tax was R21.3 billion, billion RMB down 9.7% quarter over quarter. And China Automobile Dealers Association data show that from January to April, the retail passenger vehicle sales was about 5.895 million down 1.3% year-on-year. In summary, the auto market still faces considerable downward pressure with little evidence of recovery so far.

In addition, the supply and demand of cars are improving, but the recovery of demand is clearly insufficient compared to the improvement of supply. Under this background, the sale of cars, the sale of cars, the sale of cars, the sale of cars, the sale of cars, the sale of cars, 不仅严重扰乱了市场秩序, 其副作用还进一步传导至二手车领域, 带来的效果适得其反。 Despite improvements in supply and demand, recovery on the demand side was too moderate for the new supply.

Against this backdrop and coupled with the withdrawal of subsidies, Wuhan started a price war as production capacity resumed amid weak consumer demand. The inappropriate intervention by non-market participants The price war disrupted market order and impacted the used car market as well. Lower prices ultimately hindered rather than helped the situation. 年初我们基于对国六B政策因素的预判大幅降低了库存, 因此这次车市动荡并未给公司带来亏损。 下半年我们也会以低库存的状态运营, 聚焦于深化现有服务产品的功能。 Early this year, we reduced inventory in anticipation of China's 6B emission standards. This proved a very wise decision safeguarding us from auto market disruptions and losses. In the second half, we will maintain a low inventory level, enhance service and product functions, further refine our business management and upgrade the data experience as well as improve operational efficiency.

关于第二个问题,我们公司除了车交易业务收入,目前我们的服务化产品主要是为提升经销商体验为主。 我们希望这样的服务化产品能更好地赋能经销商,吸引更多的中小车商入驻我们的平台,带来更多的流量。 On your second question, in addition to revenues from car sales,

Our services and products mainly aim to enhance the dealer experience. We hope these services will empower dealers, attract more small and medium-sized dealers to our platform, and generate more traffic. Going forward, we will leverage big data and technological innovations to refine our products, to refresh our service portfolio, and offer more accessible and diversified functions so as to improve the dealer experience. And we believe that this will more effectively support small and medium-sized dealers across lower-tier markets.

Thank you.

Thank you. Your next question comes from a new word from CITIC Security. Please go ahead.

Thank you, Guan Xicheng. I'm from Wuxing, China. I also have two questions. The first question is about the recent car market. Because in March and April, the performance of the car market was not very good. In May, we learned that during May 1st and the whole month of May, uh uh Thank you for your question.

Thank you. I'm from City Securities. I have two questions. The first question is that, yes, indeed, in March and April, the car market has not been performing very well. However, in May, based on data, we have seen some pickups in both the traffic to the stores as well as the car purchases. So what about in the lower-tier markets? Have you observed any similar demand recovery in the lower-tier markets? And that's my first question. And the second question is about the used car markets. Well, based on what I have heard, I understand that the company mainly provides services and customers for used car purchases. Do I understand that in the right way? And also, what about, could you give us more colors on your plans for your used car business and what are your thoughts on the used car market? Thank you.

thank you for your two questions let me take on the first question first

Overall economic indicators and total financing show little improvement in April and May. So recovery in lower-tier markets have just begun. Public data show that Tier 3 and Tier 4 city households' disposable income was 17% to 18% below national average, and rural households' disposable income was 40% less of urban levels.

According to CADA data, 51% of dealers reported declining transactions and 36.5% reported flat transactions and only 12.5%

reported increased transactions.

而且从我们业务一线段来看, 下层市场的车商关店退出很多, 销量也不及预期, 前端销售同时, 反馈购车客户仍以持币观望居多。 Based on our frontline experience, in lower-tier markets, many dealers close the stores while remaining dealers saw much lower sales volumes than expected.

Our sales team interacting with the clients noted that consumers mostly postponed car purchases. On your second question on used car market, well, the reason new car price war pushed the prices to all-time lows, causing rare but substantial depreciation in used car values. It has also impacted the used car markets. The new car price wall has led to a 5% drop in average used car prices in March, and also 1.56 million used car trades nationwide in March, up 7.4% quarter-over-quarter, a slower rate than in previous years.

总体来看,目前二手车处在一个快速扩张的时期, 一是国家重视度提升, 商务部出台了相应的鼓励二手车发展的一系列P1, All in all, the used car market is rapidly expanding due to favorable government policies encouraging used car businesses and also growth in the new car market increasing the supply of used cars.

Despite COVID-19's negative impacts, the used car market saw steady growth overall. We believe the used car market will maintain sustainable long-term growth due to government policy support and also increasing supply of used cars as the new car market expands.

从公司层面,一季度我们二手车APP 产股优车上线 目前服务涵盖历史车况查定 车辆评估 限时报价 在线巡车 车员发布 And I can go.

we launched CanGo U-Car app in Q1. And this app has been offering vehicle condition reports, evaluations, online auctions, car searches, listings, inventory purchases, and also logistics and financing and insurance services. By the end of Q1, our dealer network included nearly 6,000 used car dealers in 179 cities across 29 provinces. Kangaroo Car saw monthly active users above 35%, transactions doubling monthly from January, and also 513,000 accumulated page views and 26,000 total unique visitors.

And in April, Kangaroo Car obtained online auction qualifications, and we also upgraded the auction services. Now, this upgrade allows

individuals and repossessed vehicles to be auctioned, and the all registered dealers nationwide to list the use cards for B2B auctions. 谢谢。 Thank you.

Thank you. We have no further questions at this time. I'll hand the call back to management for closing remarks. 那我们今天就电话会议结束。

Thank you all for your participation. That closes today's earnings call.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.