Cango Inc.

Good morning and good evening, everyone. Welcome to Kengo Inc's third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. This call is also being broadcast live on the company's IR website. Joining us today are Mr. Jiayuan Lin, Chief Executive Officer, and Mr. Yangjie 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. As a reminder, today's conference is being recorded. With that said, I am now turning the call over to Mr. Chai-Yen Lin, CEO of Kango. Please go ahead, sir.

In the third quarter of 2023, both production and demand continue to be understrength.

Despite the introduction of economic stimulus measures, overall consumer confidence has yet to fully recover. The automotive market in China is characterized by intricate dynamics. Although the post-pandemic era in 2023 saw a resurgence in consumer demand for automobiles, it has been slow to pick up pace. As a result, major auto manufacturers have rolled out discount policies on new car purchases, leading to a sustained decrease in retail prices. In the first three quarters, the overall sales in the automotive market exhibited a modest recovery, with new energy vehicles and EVs in short and airports serving as the primary drivers of market growth.

On distribution, the profitability of car dealers has been severely impacted by pricing wars. Consequently, they have transitioned towards an on-demand vehicle purchasing to alleviate inventory accumulation and operational stress.

As per data released earlier by the China Automobile Dealers Association, 50% of auto dealers reported losses in the first half of this year, the highest level in recent years. Indeed, the impact extends beyond car dealers. All parties in the automotive financial chain, including Kangoo, have faced unprecedented pressure.

In the third quarter of 2023, the company's total revenue was 3.54 billion yuan, which is a 15.1% drop. The loss of RMB 4,909 million this quarter is greatly affected by the trade. Even so, the loss of RMB 1.30 billion, which was estimated to be the same as last year, has been reduced. This is mainly due to an increase in the overall operating efficiency of the company and a decline in financial reserves. As of September 30, 2023, the balance of the stock market has dropped further to RMB 131 billion. In Q3 2023, the company's total revenues amounted to 354 million RMB, making a year-on-year decline of 15.1%. Despite incurring a net loss of 49.09 million RMB due to goodwill impairment,

Our overall operating efficiency and reduced financial provisions helped us achieve a smaller net loss compared to 130 million RMB in the same period of last year. As of September 30, 2023, we managed to shrink the total outstanding balance of financing transactions to 13.1 billion RMB while maintaining M1 plus and M3 plus at a steady rate of 2.42% and 1.24% respectively.

Since the establishment of Canggu, it has been dependent on the needs of car dealers. In 2022, Canggu started a real-time transformation upgrade, and entered the business field of car trading with greater force. In terms of new car trading, Canggu will launch good car small programs and apps. In October of the same year, standardized service products will gradually appear. Through multi-system all-in-one platform facing the whole country, new car manufacturers provide a temporary car trading comprehensive solution as the core.

In the beginning, we have strived to gain an in-depth understanding of dealers' needs. In 2022, we initiated a significant transformation of our business by venturing to the automobile trading segment. To facilitate new car trading activities, we launched the CanGo How-To app and mini program, and gradually introduced standardized service products from October 2022. With our multi-system all-in-one platform, Kangoo offers a comprehensive one-stop solution for automotive transactions across the country. Presently, we have built a robust network of warehouses and logistics operations in nearly 100 cities across 31 provinces with over 11,000 registered new car dealers. 二手车方面,2022年5月,灿骨优车小程序退出。

In relation to used car transactions, we launched the CanGo Your Car mini program in May 2022. By the end of 2022, we introduced the CanGo Your Car app to the market.

Equipped with a range of features such as used car listings, car searches, online auctions, transaction support services, and digital services, Kangaroo Car addresses a wide array of business needs for used car dealers. To date, the total number of registered used car dealers on our platform has surpassed 7,000. 随着产物产品和服务在产业链上的不断延伸,以及与车商伙伴合作的不断深入,公司对交易业务的市场感知也越发清晰。

As we are continuing to expand our product and service offerings across the entire industry value chain and strengthen our partnerships with dealers,

we are gaining a more precise understanding of the market. The new car market in China is reaching saturation, with a significant decline in first-time new car buyers. However, we noticed an increasing trend among consumers to expand their car collection, as well as a growing demand for vehicle replacement and upgrades. Both forest and non-forest dealers are exploring used car business, while used car dealers are venturing into the sale of new cars. Traditional boundaries between car sales channels are becoming increasingly blurred.

In light of the changing market trends and demands, we have made some adjustments to our strategy.

Our goal is to offer a comprehensive end-to-end service for both new and used car dealers across the country. To achieve this, we have integrated our offerings on the Kangoo how-to platform into the Kangoo Your Car platform. This integration and upgrade will allow us to focus our resources on Kangoo Your Car and significantly enhance operational efficiency. Moving forward, we aim to develop a multi-store model and expand our ecosystem beyond self-operated stores. This will include vehicle sources, insurance services, and more by welcoming more third-party stores to our platform. As of now, some regional logistics companies and car generation service providers have already joined our community. Their feedback is highly valuable, as it allows us to continually refine our offerings and improve our supply chain services, ultimately enabling downstream dealers to better serve end customers.

In the third quarter of 2023, in terms of new car deals, we sold 2,399 cars in total. We sold 27 cars in total. We designed 18 brands and 23 car series. In the first three quarters of this year, we sold 12,138 cars in total, of which 3,151 were Hanxing Energy cars. In terms of second-hand car deals, in the third quarter, we sold nearly 300 units on the platform, which increased by two times. We sold more than 600 units in total, which increased by 20%.

During the third quarter of 2023, we sold 2,399 new cars, including 27 vehicle models across 18 auto brands and 23 car series. In the first nine months of 2023, we sold a total of 12,138 cars, including 3,151 new energy vehicles. In terms of used car, the auction transaction volume on the Tango U-Car platform reached nearly 300 in the third quarter of 2023, doubling quarter over quarter. We also facilitate over 600 transactions, marking a 20% increase quarter over quarter.

As we continue to improve our online services and supply chain management,

While fostering greater synergies across online and offline operations, we are building a self-reinforcing closed-loop ecosystem. In addition to strategic and service upgrades, we remain committed to accelerating our digitalization and leveraging advanced technologies to empower business. With a focus on big data and technological innovation, we are fully dedicated to standardizing our services and optimizing our processes. Our ultimate goal is to achieve heightened productivity and operational excellence, in turn enabling our partners to achieve increased efficiency. In September, our innovative digital product, AI Asset Guard, won the 2023 CDI Product Digital Innovation Award. This recognition is a testament to the digital innovations that we have implemented across our business operations.

In the future, using large-scale data and digital technologies, we will be able to In the future, we will leverage the power of big data and digital technologies to more accurately classify our dealer partners

and launch value-adding products and services tailored to their specific needs. Additionally, we will actively explore new areas to seek growth opportunities, including the potential expansion into used car markets abroad. By continuously refining our business operations, elevating profitability, and strengthening our core competitive edges, we are confident that we can secure the sustained momentum required to navigate the ever-evolving business environment. Next, I will hand over to Michael Zhang, our CFO, for a review of the company's financial performance.

Thanks, Jiayuan. Hello, everyone, and welcome to our third quarter 2023 earnings call. Before I started to review our financials, please note that unless otherwise stated, all numbers are in IMB terms. Our percentage comparisons are on a year-over-year basis. Our total revenues for the third quarter were $353.6 million. Among them, revenues from the card trading transaction business were $263.8 million, or 74.6% of total revenues. Now let's move on to our costs and expenses during the quarter. Total operating costs and expenses in the third quarter of 2023 were $441.4 million, compared with $608.8 million in the same period, 2022. Cost of revenue in the third quarter of 2023 was $304.6 million compared with $388.7 million in the same period, 2022. As a percentage of total revenues, cost of revenue in the third quarter of 2023 was 86.1% compared with 93.3% in the same period, 2022. Sales and marketing expenses in the third quarter of 2023 decreased to $9.9 million from $17.9 million in the same period, 2022. As a percentage of total revenues, sales and marketing expenses in the third quarter of 2023 were 2.8% compared with 4.3% in the same period, 2022. General and administrative expenses in the third quarter of 2023 decreased to $34.7 million from 57.8 million in the same period, 2022. As a percentage of total revenues, general and administrative expenses in the third quarter of 2023 were 9.8% compared with 13.9% in the same period, 2022. Research and development expenses in the third quarter of 2023 decreased to 7 million from 10.2 million in the same period, 2022. As a percentage of total revenues, Research and development expenses in the third quarter of 2023 were 2%, compared with 2.4% in the same period of 2022. Net loss on contingent risk assurance liability in the third quarter of 2023 was $3.5 million. Net recovery on provisions for credit losses in the third quarter of 2023 was $66.9 million. The recovery was primarily due to the positive impact from the collections of financing receivables. Impairment loss from Goodwill in the third quarter of 2023 was $148.7 million. The provision for Goodwill impairment is based on the profit forecast associated with historical trend and the prevailing current conditions of market downturn. We recorded a loss from operations of 87.8 million in the same period of 2023 compared with 192.3 million in the same period of 2022. Net loss in the third quarter of 2023 was 49.1 million. Non-GAAP adjusted net loss in the third quarter of 2023 was 41.2 million. On a per share basis, basic and diluted net loss per ADS in the third quarter of 2023 were both 0.45 respectively and a non-GAAP adjusted basic and diluted net loss per ADS in the same period were both 0.38 respectively. Moving on to our balance sheet, as of September 30, 2023, we had cash and cash equivalents of $665.6 million compared with $589.4 million as of June 30, 2023. As of September 30, 2023, the company had a short-term investment of $2.43 billion, compared with $2.06 billion as of June 30, 2023. Looking ahead to the fourth quarter of 2023, we are now predicting our total revenues to be between $100 million and $150 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. Operators, we are now ready to take questions.

Thank you. If you would like to ask a question, please press star then 1 on your telephone keypad. If your question has been addressed and you would like to withdraw your question, please press star then 2. Once again, that's star then 1 if you have a question. And today's first question comes from Pingyu Wu with CITIC Securities. Please go ahead.

Hello, Manager Teng. Thank you for the opportunity to ask this question. I would like to ask two questions. The first one is to ask Manager Teng about his view on the 4th quarter and the car market next year. Will the price war of the entire market continue? The second question is to ask the company. In fact, the share price of shareholders has always been high. Let me translate my question. My first question is about how do we think about the auto market for the fourth quarter 2023 and what about next year? And will the price war between the OEMs will continue? My second question is about What's our dividend plan for this year? Thank you.

For the next year's automotive market, we think there are mainly the following two aspects. First, new energy vehicles will continue to develop first. According to the data of the City Council, by the end of September, the penetration rate of new energy vehicles into the market reached 36.9%. The central and local governments continue to introduce more targeted and effective measures to promote consumption. We expect that the popularity rate of new energy vehicles next year will continue to rise. The second-hand car market is also expanding. Thank you very much for your questions. To answer your first question on our outlook for the auto market for next quarter and next year. In the third quarter, we saw a slowdown in passenger vehicles retail sales volume growth.

And sales for the fourth quarter were boosted by the National Day holiday and the Singles Day shopping festival. As the market is approaching year-end with strong sales promotions, we expect a strong discount to continue, driving a quarter or over-quarter increase in sales volumes. And for our outlook for next year, well, I would like to share my thoughts from two perspectives. First, we think new energy vehicles will continue to outperform, according to the CPCA, that is China Passenger Car Association's data, as of the end of September, NEV's market penetration rate has already reached 36.9% and their growth momentum is expected to continue throughout next year, driven largely by more targeted and effective incentive policies from national and regional governments. Secondly, on the used car market, we expect it to continue to grow. For the first nine months of this year, used cars' total sales volume exceeded 13 million, with GMB gross market value close to about 860 billion RMB. This is a trillion-dollar market, and we expect China's used car market still has great growth potential.

On your second question about the dividend payment,

Well, since our IPO, Kengo has distributed cash dividends totaling nearly 500 million USD. Meanwhile, since April 2021, the company has been actively rewarding our investors and improving stock value in various ways, including share repurchase programs. Looking ahead, Kengo will remain prudent regarding financial management and continue to enhance capital allocation efficiency. We will prioritize investments in areas with high ROI and value, creating long-term shareholder value.

Thank you.

Thank you.

That's all from me.

Thank you. And our next question comes from Emerson Zhou with Goldman Sachs. Please go ahead.

Thank you, Guanlin Sun. I'm from Emerson in Kaohsiung. Thank you very much for giving me this opportunity to ask two questions. The first question is

Has the Adidas operational environment improved in the lower-tier markets after the pandemic restrictions have been lifted? And the second question is, what is the rationale behind the merge of the CanGo HowTo platform and the CanGo YouCar platform? Could you elaborate on that?

Okay, thank you. Regarding the lower-tier market, the main customer service of CanGo has been concentrated in the three or four-tier market. So we have felt a lot of changes in the low-tier market in the past two years. The data from the Youth Council shows that in 2022, 40% of domestic retailers have closed down. Currently, more than half of the car sales stores are in a loss state. On average, about 11 car sales stores are closed every day. Small and medium-sized e-commerce stores are more difficult to keep up, and they are gathering in groups to collect heat, or to transform into second-hand trading cars, or to conduct live broadcasts, sell cars, and watch cars, and so on. At the same time, there is also a difference in the consumption needs in each region. The performance of the southern market Thank you for your questions. On your first question on the lower-tier market, well, Kenco's customers are primarily based in third-tier and fourth-tier cities, so we have deeply felt the changes in the lower-tier markets over the past two years.

According to CPCA's data, 40% of dealers in China shut down their businesses in 2022. More than half of dealers are now operating at a loss, and on average, about 11 foreign stores close down every day. Small and medium auto dealers are having an even greater difficulty staying afloat. They have either merged with others to survive or switched to used car transactions. Some are also trying new sales channels, such as live streaming e-commerce. At the same time, consumer demand differs from region to region. NEB sales volume is higher in southern markets compared to the north, for example, and NEB's penetration rate is also higher in cities with more charging stations. Furthermore, A0 cars and below as well as luxury cars are selling better than other classes. 考虑合并产股好车和产股优车两个平台主要是基于近两年业务端的市场感知。

我们发现整个中国新车市场已趋于饱和 从C端消费者角度看 新车首次购车客户减少 而新车增购和二手车置换的需求增加 从B端车商角度看 CS店和气贸店都基于消费者需求的变化 开始自己组建二手车渠道 新车和二手车店铺销售界限变模糊了 因此我们进行双平台融合 Our decision to integrate Kangoo Hot Wheels offerings into the Kangoo U-Car platform is primarily based on our deep market insights gained over the past two years.

we noticed that China's new car market is near saturation. On consumption, there is a noticeable decline in first-time new car buyers, while there is an upward trend in consumers looking for additional cars and rising demand for vehicle replacement and upgrades. On the distribution side, both forest dealers and used car dealers have begun establishing their own used car sales channels in response to changing consumer needs. This is a blurred area now because the boundary between the traditional new car and used car sales channels are becoming increasingly integrated. So that's why we are integrating the two platforms, Tango Haozhou and Tango Youcar platform, so that customers can now purchase new cars while trading in their used cars on the same platform. This integration we believe will not only greatly improve our operational efficiency but also will enable us to better serve our car dealers. I think that's all from my side.

Thank you. And ladies and gentlemen, there are no further questions, so I'd like to turn it back to management for closing remarks.

好,谢谢大家的关注和支持。今天的电话会到此结束。谢谢。 Thank you all for joining us.

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.