Cango Inc.

Good morning and good evening, everyone. Welcome to Congo, Inc.' 's second quarter 2024 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. Yongyi 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. Jia Yinlin, CEO of Congo. Please go ahead, sir.

Hi, everyone. Welcome to Canggu's second quarter 2024 earnings call.

In the second quarter, the Chinese car market is weak. We are facing many challenges.

The data from the Chinese Car Industry Association shows that in June, the car sales reached 2,507,000 and 2,552,000. In the same period last year, the sales dropped 2.1% and 2.7%.

In the second quarter of 2024, the automotive market remains sluggish, presenting significant challenges for the industry. According to the China Association of Automobile Manufacturers, vehicle production and sales in June reached 2.500 million and 2.552 million units respectively. reflecting a year-on-year decline of 2.1% and 2.7% respectively. Passenger vehicle sales in June fell by 2.3% year-on-year. Although sales of new energy vehicles continue to outpace the market, their growth has not been sufficient to alter the industry's overall downward trajectory.

At the same time, we continue to carefully manage and strictly monitor the risk threshold for mobile assets and liabilities. As of June 30, the total loan amount is about 6.2 billion RMB, M1 plus is 2.93%, M3 plus is 1.57%. At the same time, we have reduced RMB 2.7 billion from the credit risk threshold of full and quick account preparation or full and guarantee responsibility.

In response to these challenges, we continue to implement strict cost control and risk management strategies, reinforcing our financial stability through disciplined expense management and cost efficiency measures. Meanwhile, we maintain meticulous oversight of current assets and liabilities, closely monitoring our risk exposure. As of June 30th, our total outstanding loan balance stood at approximately 6.2 billion RMB with M1 plus at 2.93% and M3 plus at 1.57%. Our credit risk exposure has been decreased to a low level with only 2.7 billion RMB of outstanding balance of loans where the company bears credit risks have not been provided with full debt allowance or full risk assurance liabilities.

In the background of the new car market, we are more and more clearly seeing the potential and opportunities of the second-hand car market. For this reason, we will further optimize the business process, improve service quality, and enhance customer experience. In the past season, we have been relying on the App to provide high-quality drivers, optimize the experience of car service and supply chain management, and enhance the convenience and security of one-stop delivery to improve platform competitiveness. As the new car market grows, we are increasingly recognizing the used car market's immense potential and opportunities.

As such, we have further streamlined our business processes, enhanced service quality, and strengthened the customer experience. Over the past quarter, we focused on enhancing the competitiveness of Kangaroo Car by ensuring a consistent supply of high-quality vehicles, optimizing dealer service experiences and supply chain management, and improving the convenience and security of cross-regional deliveries, which drove steady business growth. By the end of the second quarter, our Kangaroo Car app has accumulated over 130,000 page views, During the course, we facilitated the transaction of 266 vehicles and successfully auctioned 124 vehicles across our platform.

At the same time, we also actively selected and guided new partners with good reputation and rich drivers to ensure the diversity of rich drivers. To improve the efficiency of operation, we implemented a key process such as management, optimization of driver release, transaction integration, and customer service.

Meanwhile, we identified and onboarded new partners with a strong reputation and abundant vehicle inventories to ensure a diverse range of listings on Kangaroo Car. To enhance operational efficiency, we implemented rigorous management practices, refined key processes such as vehicle listing, transaction facilitation, and customer service. These efforts have increased resource utilization efficiency, and improved overall operational effectiveness.

In the second quarter, we have established strategic cooperation with multiple large second-hand car markets across the country. The information of car users in the cooperation market will be synchronized with our app in real-time to meet the needs of users for specific car users. Currently, there are more than 260,000 car users on the app. Through the integration of a wide range of car users, it effectively improves the online activity of our U-car app.

We also established strategic partnerships with numerous major used car markets nationwide in the seven quarters, enabling real-time synchronization of their vehicle listings with Kangaroo Car to better meet users' specific demands. Currently, Kangaroo Car hosts over 260,000 vehicle listings. By integrating extensive offline vehicle inventory, we have effectively enhanced user engagement on the Kangaroo Car app.

In addition, we focus on optimizing user experience by establishing member-specific communities, regularly sending member benefits and activity information, and improving user activity and loyalty. At the same time, we have developed a series of detailed operation processes and management rules to protect the rights of buyers and sellers, including clear trading rules and risk prevention mechanisms, providing comprehensive training and support, and helping sellers and sellers to improve operational efficiency.

We have further enriched our user experience by establishing exclusive member communities through private traffic management, regularly providing members with benefits and event updates to boost user engagement and loyalty. We have also established a set of refined operational processes and management guidelines focused on safeguarding seller-dealer's rights. This includes implementing streamlined transaction rules and risk prevention mechanisms as well as providing comprehensive training and support, all of which are designed to help seller dealers improve their operational efficiency. Next, I would like to highlight some key advancements that CanGo has made in the area of cross-border used car transactions. Since China began allowing the export of used vehicles in 2019, export volumes have surged over tenfold, with a significant increase in the average value of exported vehicles. Supportive guidelines and favorable policies from government departments and authorities have fostered the growth of the used car export sector. We are optimistic about promising prospects in the export market for used vehicles, particularly those in the NEV segment.

自2024年3月推出以来,我们的二手车出口网站AutoCangle已经迅速展露头角, As of now, the website has attracted more than 180,000 views. The registered users are now more than 20,000. Covering 207 countries and regions around the world, Autocango has more than 850,000 high-quality second-hand vehicles SKU, providing more than 60,000 different model choices. In the second quarter, Autocango's market coverage and product service abundance have increased significantly.

Since its launch in March 2024, our international used car platform, AutoCanGo.com, has quickly gained traction among global audiences. To date, it has attracted over 180,000 visits with more than 20,000 registered users across 207 countries and regions worldwide. AutoCanGo.com hosts over 85,000 high-quality used car SKUs offering more than 60,000 different models. In the second quarter, we significantly expanded AutoCanGo.com's market coverage, as well as its range of product and services offerings. Under our traffic-first strategy, Kengo has been focusing on establishing a primary traffic gateway connecting China's used car dealers with overseas buyers. We believe that this streamlined, asset-light, and traffic-focused operational approach will enable us to control operating costs while creating sustained value across our core business lines. Our website allows overseas buyers to more conveniently and directly access China's high-quality used car inventories, and we aim to position this website as the premier gateway for exporting Chinese used cars.

In the future, Canggu will continue to深化于海外市场的融合,进一步优化AutoCangle的功能及服务,更好的服务国内外购车客户,

Moving forward, Kengo will continue to deepen our partnership with overseas markets, further refining Auto Kengo's functionality and services to better serve car users both at home and abroad. 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 second quarter 2024 earnings call. Before I started to review our financials, please note that unless otherwise stated, all number of the IMB terms and all percentage comparisons are on a year-over-year basis. Total revenue in the second quarter 2024 were $45.1 million compared with $675.4 million in the same period, 2023. Guarantee income which represented a fee income earned on a non-contingent aspect of a guarantee, was $20.9 million in the second quarter of 2024. This was presented separated from the contingent aspect of a guarantee, pursuant to the adoption of AFC 326 since January 1, 2023. Now let's move on to our cost and expenses during the quarter. Cost of revenue in the second quarter decreased 26.5 million from 615.8 million in the same period, 2023, as a percentage of total revenues. Cost of revenue in the second quarter, 2024, was 58.8% compared with 91.2% in the same period, 2023. Sales and marketing expenses in the second quarter decreased to 4 million from 12.2 million in the same period, 2023. General and administrative expenses in the second quarter were $39.2 million compared with $36.8 million in the same period, 2023. Research and development expenses in the second quarter of 2024 decreased to $1.7 million from $7.7 million in the same period, 2023. Net gain on contingent risk assurance liability in the second quarter was $10.3 million compared with a net loss of $1.6 million in the same period, 2023. Net recovery on provision for credit losses in the second quarter was $33 million compared with a net loss of $10.2 million in the same period, 2023. We recorded $47 million in income from operations in the second quarter of 2024 compared with a loss of $8.9 million in the same period, 2023. Net income in the second quarter of 2024 was $86 million. Non-GAAP adjusted net income in the second quarter of 2024 was $90.7 million. On a per share basis, basic and diluted net income per ADS in the second quarter of 2024 were $0.83 and $0.76, respectively. And non-GAAP adjusted basic and diluted net income per ADS in the same period were $0.87 and $0.8, respectively. Moving on to our balance sheet, as of June 30, 2024, the company had cash and cash equivalents of $949.5 million compared with $1.2 billion as of March 31, 2024. As of June 30, 2024, the company had short-term investment of $2.7 billion compared with $2.3 billion as of March 31, 2024. Looking ahead to the third quarter of 2024, we are now predicting our total revenue to be between $20 million and $25 million. Please note that this forecast reflects our current preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Operators, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Wei Lung Jiang with Zidic Securities. Please go ahead.

Thank you very much. I'm Jiang Weilong from City Securities. I have two questions on used car market development. So my first question is how's your strategic partnership with major used car markets help improve your market position? And what about the contribution by these partnerships to your financial performance?

Thank you. Thank you for your question. By collaborating with major used car markets, we have expanded our supply channels and diversified our vehicle offerings.

In addition, these partnerships allow us to leverage their geographic coverage and market penetration, providing our customers with a broader range of choices. So our extensive offerings comprehensively address our clients' evolving needs, increasing their stickiness on our platform.

We have also improved our cost performance. This makes us more efficient in price negotiations with suppliers and customers, and we can fight for better conditions to further improve our profit space.

And as our vehicle inventory grows and market coverage expands, our transaction volume has naturally increased. This higher volume not only creates economies of scale, reducing unit costs, but also strengthens our bargaining power. This enhanced position has enabled us to negotiate more favorable terms with suppliers and customers alike, further improving our profit margins.

Thank you very much for your first question.

好,谢谢领导。然后我的第二个问题是,因为现在二手车出口也是政府大力支持的方向,所以想请问一下领导,就是在二手车的跨境交易方面,公司现在面临有哪些挑战呢?谢谢领导。 Thank you, and my second question is that the Chinese government has actually published a lot of favorable policies to support the development of used car markets.

So what about the challenges that your company faces in promoting the used car cross-border transactions? Thank you for your question. So for the challenges, first of all, the cross-border transactions usually come with relatively high logistics costs, including expenses for transportation, for insurance, and also for warehousing. And to better control these costs, we have partnered with third-party companies who have established and well-established cross-border logistics capabilities. 不同国家的关税政策和贸易变累对二手车的进出口造成影响, 我们会持续关注政策变化并制定灵活的策略以适应这些变化。 Secondly, tariff policies and trade barriers in different countries greatly impact the import and export of used vehicles. On this, we will continue to monitor policy changes and develop flexible strategies to adapt to these changes. 而且各国对二手车的法规和标准存在的差异,包括安全、排放和质量标准等, 我们会确保所交易的车辆都符合目标市场的要求。 Also, regulations and standards for used vehicles vary across countries, including safety, emissions, and quality requirements. So, to address this, we will ensure that all vehicles traded meet the standards of the target market.

In addition, used car transactions very often involve a relatively long transaction cycle,

due to their unique market characteristics, including but not limited to vehicle condition assessments, selection by buyers, multiple rounds of price negotiations, and necessary legal and financial reviews. Buyers typically need more time to look into the vehicle's maintenance history, performance, and pricing before making a purchasing decision. So naturally, this extended transaction cycle also poses a challenge for cross-border use vehicle transactions.

Thank you.

That's for your second question. Thank you very much. No more questions for me.

The next question comes from Emerson Zhu with Goldman Sachs. Please go ahead.

Thank you. I'm Emerson Zhu. I have two questions. The first question is, in terms of finance, I see that the company's revenue index has dropped. I would like to ask if there will be a continued shrinkage in the future. The second question is, I would like to ask how the management level balances the long-term development strategy and the short-term performance pressure.

Thank you. I have two questions. The first question is on finance. So I noticed that the company has decreased your revenue guidance. So will you continue to do that in the future? And the second question is, how will the management balance your long-term strategy against your short-term performance pressure?

Thank you. Regarding your first question, the company's revenue guidance has decreased. As for the old business, we are still doing strategic contraction. Currently, we have reorganized the company's resources.

OK, on your first question on guidance of revenue, we are strategically scaling back our existing business. We have reallocated the company's resources, optimized staffing, and we have also implemented effective measures to reduce operational costs in response to market changes and internal demands.

Moving forward, we will continue to evaluate business development from a strategic perspective.

while leveraging our unique business model to drive ongoing cost reduction and efficiency improvements. We are confident that these adjustments and refinements will enable us to respond more agilely to market changes and deliver greater value to our shareholders.

On your second question, well, firstly we have adopted an integrated approach to strategic planning

We have established a comprehensive strategic planning process to ensure alignment between short-term performance goals and our long-term vision. This involves maintaining continuous communication to ensure all stakeholders have a clear understanding of the company's strategy and direction. In the short term, we will focus on enhancing execution, efficiency, controlling costs, and driving revenue growth to ensure robust financial performance.

Secondly, we have broken down our goals into different phases and also made flexible adjustments.

So we have established a very clear objectives and targets for different phases that supports both short-term performance and long-term strategic implementation. At the same time, we maintain our strategic flexibility, allowing us to adapt our plans in response to market and technological changes and swiftly respond to external environmental shifts. Thank you.

And that concludes the question and answer session. Thank you once again for joining Cango's second quarter 2024 earnings conference call today. Have a great day.

Thank you all for your participation. Thank you.