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Edited Transcript of CANG.N earnings conference call or presentation 4-Sep-19 1:00am GMT

Q2 2019 Cango Inc Earnings Call

Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Cango Inc earnings conference call or presentation Wednesday, September 4, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jiayuan Lin

Cango Inc. - Co-Founder, CEO & Director

* Yongyi Zhang

Cango Inc. - CFO & Director

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Conference Call Participants

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* Joey Xu

Morgan Stanley, Research Division - Research Associate

* Michael Li

BofA Merrill Lynch, Research Division - Research Analyst

* Tianxiao Hou

T.H. Capital, LLC - Founder, CEO & Senior Analyst

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Presentation

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Operator [1]

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Good morning, and good evening, everyone. Welcome to the Cango, Inc.'s Second Quarter 2019 Earnings Conference Call. (Operator Instructions) 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. Yengzhin Lee (sic) [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. Please note that this call is being recorded.

I would now like to turn the conference over to Mr. Jiayuan Lin, CEO of Cango. Please go ahead, sir.

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Jiayuan Lin, Cango Inc. - Co-Founder, CEO & Director [2]

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[Interpreted] Hello, everyone. Welcome to Cango's Second Quarter 2019 Earnings Call today.

During the first half of 2019, China's automotive industry continued to underwhelm due to the decelerating macroeconomic environment, accelerating China-U. S. trade disputes, decreasing demand and industrial uncertainties caused by new national emission standards. Despite introduction of some regulatory changes to stimulate car sales by the government, the Chinese auto market is still operating at historic lows and has yet to recover.

Facing external pressure, we remain committed to our growth strategy. And as a result, our business achieved steady improvement over the past several months. During Q2, we continue to focus on strengthening our core competencies in auto loan facilitation services by refining our product offers and expanding our channels. We also accelerated the development of our aftermarket services while driving our auto insurance facilitation business to a net level of growth. In addition, we further deepened our cooperation with all our core strategic partners, and our partnership with ICBC has yielded significant results. Moreover, we continue to establish new partnerships with funding partners and OEMs.

As a result of our efforts in these areas, our total revenue increased by 42.3% year-on-year to RMB 336 million in the second quarter. Our aftermarket services facilitation business, which mainly consists of insurance-related products, contributed CNY 35.9 million to our total revenue. The significant contribution from our cooperation with ICBC was the vital driver of our strong financial performance in the second quarter.

Now I will provide you with an update from the progress we achieved this quarter as well as the growth prospects of our core auto loan facilitation business, aftermarket services and strategic partner initiatives.

First, as our primary growth driver, our auto loan facilitation business continue to deliver solid results. In Q2, the total amount of financing transactions facilitated reached CNY 6.155 billion with the outstanding balance stood at -- standing at CNY 36.394 billion. On the funding side, we are currently in active negotiations for potential collaborations with multiple financial institutions, including Bank of China, China Construction Bank, China Citibank, Shanghai Pudong Bank, Zhejiang E-commerce Bank and China Merchants Bank, et cetera.

We also continue to optimize and expand our dealership network while improving our service quality. As of the end of the second quarter, our dealership network included more than 48,000 registered dealers in across 353 cities in China. We continue to lead the market as the largest auto financing service platform in the country in terms of new car dealership coverage. Notably, we continue to penetrate lower-tier markets with almost 70% of dealerships that we cover are located now in the Tier 3 or lower Tier 3. At the same time, we continue to implement our direct coverage model. By the end of second quarter, our sales team directly cover 91.6% of our dealers. The direct coverage model allows us to gain real insights into our dealer-specific needs and deeper strategic knowledge to provide dealers with solutions that best fit their demands to improve our channel stickiness.

As we expand our business and dealership network, we have prioritized risk management in our operations. Using machine learning algorithm, AI and big data technologies, we have developed a proprietary risk management system. The system is capable of implementing a comprehensive, multifaceted risk control mechanism to ensure that our auto loans can achieve solid personal performance. As of the end of second quarter, the M1+ and M3+ overdue ratios were 0.72% and 0.3%, respectively.

Secondly, we continue to expand our aftermarket services, while driving our auto insurance facilitation business to the next level. In Q2, our aftermarket services business contributed RMB 35.9 million or 10.7% to our total revenue. The auto insurance facilitation business, in particular, accident insurance and anti-theft assurance services performed very well completing 500 and -- sorry, 5,817 transactions in the quarter, up 88.2% sequentially.

Thirdly, we made further progress in our cooperation with our core strategic partners. Cango is the first auto financing service platform to complete interfacing with the bank's new system for car loans that is with ICBC. As a result, we saw a significant increase in the loan volumes made through our cooperation with ICBC's loan volume surpassing RMB 580 million in the second quarter. In addition, through our partnerships with ICBC, we have also established collaborations with 8 OEMs, These collaborations have enabled us to leverage our nationwide offline channels to launch OEM-subsidized auto financing and promotion services throughout China. We are now actively engaging with more OEMs for further collaboration.

On Didi, we facilitated over 250 car purchase transactions for licensed Didi drivers in the second quarter. We also provided Didi drivers with a complete suite of auto solutions, including car sourcing, auto financing, insurance and licensing.

Moreover, we continue to push forward strategic partnerships with OEMs, including leveraging Cango's extensive dealership network with strong penetration in lower-tier cities to expand the sales channels for OEMs, helping OEMs further diversify their product offerings in dealerships to address the needs of different consumer segments as well as retail and wholesale car sourcing. During the second quarter, we signed collaboration agreement with BAIC Group, [51's] (foreign language) and Chery Automobile. We are also currently in a process of negotiating partnerships with additional domestic and foreign OEMs.

It is also worth highlighting that we were recently certified by the Ministry of Science and Technology as a high and new technology enterprise. This is a powerful endorsement of our ongoing efforts in auto financing technology innovation. Going forward, we remain committed to advancing our auto financing services with data and technologies.

Although the auto industry is still facing challenges and macroeconomic uncertainties do exist, we are confident that as we continue to execute our growth strategies, efficiency, proactively provide high-quality services to our partners and car buyers and effectively utilize our ample cash reserves, we will further consolidate our market-leading position going forward.

With that, I will now turn the call over to our CFO, Michael Zhang, to take you through our financial performance in the second quarter.

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Yongyi Zhang, Cango Inc. - CFO & Director [3]

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Thanks, Jiayuan. Hello everyone, and welcome to our second quarter 2019 earnings call.

Before I start to review our financials for the quarter, please note that unless otherwise stated, all numbers are in RMB terms and all comparators are on a year-over-year basis.

Although car sales in China continue to plunge due to uncertainty in the macroeconomic environment and escalation of the China-U. S. trade war, we successfully run through the phase maintaining our strong growth momentum and delivering another quarter of solid financial results.

Our total revenue in the second quarter 2019 was CNY 336.3 million, representing a year-over-year increase of 42.3%, outperforming the high end of the company's guidance by 6.8%. Our aftermarket services facilitation business also continued to ramp up with our revenues going to CNY 35.9 million. Cost of revenues in the second quarter was CNY 125.8 million. As a percentage of the total revenues, cost of revenue in the second quarter increased to 37.4% from 34.4% in the prior year period.

This increase was primarily driven by a higher amount of incentives paid to employees for each financing transaction. Sales and marketing expenses in the second quarter increased to CNY 44.5 million from CNY 37 million in the prior year period mainly due to increases in travel expenses as we further expanded our operations and share-based compensation expenses. As a percentage of total revenue, sales and marketing expenses in the second quarter decreased to 13.2% from 15.7% in the prior year period.

General and administrative expenses were 43.5 -- CNY 43.4 million (sic) [CNY 53.4 million] or 15.9% of total revenues in the second quarter, compared with CNY 31.4 million or 13.3% of revenue in the prior year period. This increase was mainly driven by higher share-based compensation expenses during the quarter.

Research and development expenses in the second quarter increased to CNY 12.3 million from CNY 9.5 million in the prior year period as we continue to expand our R&D efforts at investing product innovation. As a result of our strong revenue growth and the successful optimization of cost structures, our income from operations in the second quarter increased by 17.3% to CNY 84.3 million from CNY 71.8 million in the prior year period.

Our net income in the second quarter was CNY 94.6 million, increasing 46.4% from CNY 64.6 million in the prior year period. Our non-GAAP adjusted net income, which excludes the impact of share-based compensation expenses, increased by 66.7% to CNY 116.9 million in the second quarter.

On a per-share basis, our diluted net income per ADS was RMB 0.6 and our diluted non-GAAP adjusted net income per ADS was RMB 0.75 in the second quarter of 2019.

Moving on to our balance sheet. As of June 30, 2019, we had cash and cash equivalents of CNY 1,609.6 million compared with CNY 2,178 million as of March 31, 2019. The change was due to that the company invested certain amount of cash in term deposits over 3 months for better cash-on-cash return.

Looking forward to the third quarter of 2019, we expect our total revenue to be between RMB 300 million and RMB 325 million. Please note that this forecast reflects our current and preliminary view on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question today comes from [Chengze Zap] with Cango.

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Unidentified Analyst, [2]

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(foreign language) So my question is regarding the -- our partnership with ICBC. I'm wondering how you selected the products and loan yield that we facilitate with ICBC. And management also mentioned about other partnership with some new banks, how is this proceeding? As well as can the management give some guidance of -- outlook for this -- for the second half of the year regarding the car sales and our product development?

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Jiayuan Lin, Cango Inc. - Co-Founder, CEO & Director [3]

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[Interpreted] Thank you for your questions. I will answer your questions one by one. Regarding your first question, our partnership with ICBC, where we have been working with ICBC on both OEM subsidized and non-subsidized front. Right now, the CNY 1 billion loan all in -- are all based on the non-subsidized loan products. For non-subsidized products, right now, the take rate is about 5%. And as I said, the ICBC loan volumes lay above the non-subsidized loan products and right now the amount is over CNY 1 billion.

And regarding the subsidized products, we have signed agreements with 8 OEMs, and we have completed system configuration as well as product launch trainings with our OEM partners, and we are now engaging with more OEMs.

Regarding our engagement with the other banks, right now -- I mean with ICBC, we are working very proactively on non-subsidized products, we are also working on subsidized products as well. And the banks -- the other banks in the market, they have witnessed these exceptional results of our partnerships. For example, like Bank of China and the Construction Bank of China, they are -- they have expressed their strong interest and they -- these banks, they also boast very strong subsidized products, resources, especially are already offering some subsidized products for OEMs in the China market. So now -- and that's why we are now actively engaging with them and hope that with better incentives and better conditions for collaboration, we will be able to establish our partnerships with the other -- with these other banks successfully very soon.

Regarding your third question, our outlook for the second half. Well, there are a lot of negative factors impacting on the industry so far like the slowdown in the macro-economy and the trade frictions between China and U.S., decreasing consumption, switchover from the National 5 Emission Standards to National 6 Emission Standards as well as reduction of subsidies for new energy cars. All these factors now are impacting negatively on the China's auto market in the second half of 2019.

Although the government has launched some policies to stimulate car sales, we have not yet seen any turning point in the market yet, and the China's market is yet to recover. So overall speaking, we are not very optimistic about China's auto market in the second half.

Facing these challenges in the second half will continue to impact in expanding our dealership network, optimizing our service quality and efficiency and advancing our technology through innovations. As we continue to deepen our collaborations with more financial institutions and OEMs, we are confident that we will sustain our growth despite the persisting industry challenges.

And that's all from me. Thank you.

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Operator [4]

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The next question comes from Joey Xu with Morgan Stanley.

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Joey Xu, Morgan Stanley, Research Division - Research Associate [5]

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(foreign language) And I'll briefly translate my question. And as currently the covered dealer group has already slowed down, going forward, what's the management plan on the operating efficiency improvement front? And such as increase the dealer coverage efficiency of the salesperson or increase the number of credit applications per dealer?

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Jiayuan Lin, Cango Inc. - Co-Founder, CEO & Director [6]

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[Interpreted] To answer your question, yes, as you described, the -- we are facing a lot of challenges in the external environment and what we can do right now, of course, is to improve our internal capabilities. So how do we do that? You probably know that last month, we already launched the 3 -- the new sales management system, what we call the Sales Management System 3.0. And with this new sales management system that we will be able to improve the productivity of our salespeople, and that's the first point. And the second point, we are now working very closely with ICBC and other major banks in China to further penetrate our coverage of dealers across different regions. In other words, we are working on improving the density of our dealership coverage. And we believe that with higher density, we will also be able to improve the operating efficiency.

And thirdly, we are also focusing a lot of our efforts right now on aftermarket services part. And with that, I think, we were also at the end improve both the productivity and also operating efficiency very successfully. Thank you.

Also, there is one more point I would like to add that is, right now, we are implementing a small-scale pilot program in the lower-tier cities. That is we are providing supply chain financing solutions for the non-ForEx dealerships in the lower-tier cities, that is cities in the third tier and even lower. Because you know that 70% of our dealers, they actually are located in the lower-tier cities that is the third tier and low -- and even fourth tier and lower-tier cites.

And for non-ForEx dealers in these lower tier cities, they have strong demand for car sourcing and also for funding services. So Cango have the strong competitive advantage in all these areas, so that's why we are trying to leverage these advantages to meet the non-Forex dealers' demand for car sourcing and funding. Right now, the pilot program is still on a small scale, but we are confident that as the pilot program expands, we will be able to further expand our dealership network successfully, and also will -- restructure program will help improve the dealers stickiness with Cango. And with that, we are confident that our business will further grow very strongly. That's all from me. Thank you.

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Operator [7]

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The next question comes from Michael Li with Bank of America Merrill Lynch.

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Michael Li, BofA Merrill Lynch, Research Division - Research Analyst [8]

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(foreign language) Okay. I'll repeat my question in English. So this is Michael Li calling from Bank of America Merrill Lynch. So I may have missed this, the early part of the statement of the management. So my question is, in the first half, the overall auto market in China was quite weak, but we still see quite strong growth of Cango's revenue in first half, even except for the part of aftermarket service growth, the major business growth was quite strong. So could management explain what Cango did right in first half to outperform the car market in China?

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Jiayuan Lin, Cango Inc. - Co-Founder, CEO & Director [9]

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[Interpreted] Thank you for -- Michael for your question. I will answer your questions -- your question, and actually I think the reason for our strong growth in the first -- in Q2, in the first half, actually, there are several risk contributors or drivers. The first one is from the product side. Cango has in fact is happy to optimize our product portfolio. And for example, since Q4 last year, we have increased our business with Bank of Shanghai. And Bank of Shanghai as a funding partner in fact offers much lower cost of funding for Cango and they -- so that means we have a better or more -- we are in a more advantageous position in our partnership with Bank of Shanghai than with other funding partners. And that's why we are more competitive now than our industry peers in terms of cost funding in this regard.

And also from the product side, there is another piece of information that Mr. Lin, our CEO, touched upon earlier. That is in June, our non-subsidized products with ICBC increased strongly in volume. So that's why, on the product side, we have strong advantages.

And the second reason is that in the first half indeed, the car market -- the auto market in China underperformed and was not -- auto sales were not very high. However, in this state -- in this cycle, we are also experiencing both peaks and troughs. For example in Q1, that is in about January, we saw a small-sized rebound in the auto market, that is the auto service picked up for some brief period of time. I think the reason was mainly because of the lacking -- because some consumptions that should have taken place in late 2018 now were postponed to January and Q1 now for 2019. So this lagging effect has led to this rebound in the car market. And Cango has successfully taken advantage of this rebound.

In addition, we have earlier invested strongly to improve our dealership network management. That is we are now focusing more on direct coverage rather than SP. So this is another reason that we can take advantage of this opportunity to achieve better-than-market performance.

And in addition, in June this year, we noticed another rebound in the market. I think this rebound was triggered by the switch from National Emission Standard 5 to National Emission Standard 6. And because of this switchover, a lot of OEMs started promotional programs for their National 5-based car products. And so that's why there was this strong -- brief period of strong sales in the market again. And again, Cango was able to catch this opportunity and improved our business.

And the third reason is that -- well, since March 2018, Cango has made a lot of efforts to better manage our channel. For example, we have changed our channel management model but have also invested a lot to improve the dealership stickiness with Cango. And so despite the lower sales as a whole in the car market, we are able to improve our market share in -- expand that through our dealership -- in our dealership network. For example, our single dealer or single store penetration rate has successfully improved, thereby improving our market share. So all these reasons are constant drivers of our strong growth in the first half of this year. In addition, there is also this contribution from our aftermarket service as well.

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Michael Li, BofA Merrill Lynch, Research Division - Research Analyst [10]

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(foreign language)

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Yongyi Zhang, Cango Inc. - CFO & Director [11]

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(foreign language)

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Michael Li, BofA Merrill Lynch, Research Division - Research Analyst [12]

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(foreign language)

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Yongyi Zhang, Cango Inc. - CFO & Director [13]

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(foreign language)

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Michael Li, BofA Merrill Lynch, Research Division - Research Analyst [14]

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[Interpreted] The follow-up question is about the -- just now you described the -- your partnership with the Bank of Shanghai and you talked about lower cost of funding and it is a major contributor to your revenue growth in the first half. And because Cango's business model is acting as a facilitator, so the bank provides the funding for the customers, and of course, the bank pays take rate to Cango. So lower cost of funding, does it mean that the take rate received by Cango from the banks will increase? In addition, we expect that the interbank interest rate to go down in the second half. Actually, it has gone down in the past few periods. So what is your outlook for the second half in terms of the cost funding? Well, the cost of funding, will it continue to go down? And will that, in turn, lead to higher take rate for Cango?

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Jiayuan Lin, Cango Inc. - Co-Founder, CEO & Director [15]

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[Interpreted] So the answer is as follows. First of all, indeed as you have described, the funding cost has gone -- I mean, lower funding cost means that higher take rate for Cango. And the second point we like to make is that actually lower cost of funding is -- brings another benefit that is to the customers. The APR or offer to customers go down with the lower funding cost, and that improves the Cango's competitiveness on the product side as well as on the channel side.

So overall speaking, first of all, higher take rate that means higher revenue for Cango. And second, the lower cost of funding means we are more competitive on the channel side as well. That's why we have seen growth on both on the price side and also on the volume side for Cango.

And the second point I'd like to make is that indeed, we expect the overall market cost of funding to go down in the second half and regarding our partnership with ICBC and the Bank of Shanghai, yes, indeed, the -- as the market cost of funding is going down, of course, our cost of funding with these partners will go down as well.

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Michael Li, BofA Merrill Lynch, Research Division - Research Analyst [16]

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(foreign language)

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Yongyi Zhang, Cango Inc. - CFO & Director [17]

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(foreign language)

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Operator [18]

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The next question comes from Tian Hou with T.H. Capital.

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Tianxiao Hou, T.H. Capital, LLC - Founder, CEO & Senior Analyst [19]

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(foreign language) So the recent trade war came with increased tariffs on importing components from China -- from U.S. So how this is going to impact dealers? And how this is going to impact you, that's the number one question. Number two, recently, we see China's financial system a lot of liquidity issues. So in your future developments, how can you make sure you're not -- work together with some problems at local regional bank, your second question. Third question, recently, we saw some higher delinquency rate from consumer borrowing and lending. And I wonder, in your cooperation with the state bank, do you actually -- what's the term you are enter into with them for those delinquent loans?

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Jiayuan Lin, Cango Inc. - Co-Founder, CEO & Director [20]

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[Interpreted] Okay. I will take your questions. Thank you for your questions. The first question about the impact of China-U. S. trade frictions and the higher tariffs imposed on auto -- imported auto parts from U.S. and its impact on us. Right now, we haven't seen the impact yet while we do expect to see impacts. But so far, we have not yet seen the real impact, not yet. The reason I think is mostly because many -- most of our customers, they are buyers of domestically produced cars and most of our customers, they are located in the lower-tier cities. So I think that it takes time for such an impact to transfer to such a customer segment and to such a market segment. So far, we have not seen the substantial impact yet.

Also, slowdown in China's economy, that's have an impact on the market. For example, while Cango indeed has outperformed the market as a whole, however, we have not seen the growth rate especially in terms of sales as high as we expected to be despite the heavy investment we have made in improving our sales productivity and improving our channel. So the growth rate is not as high as we have expected it to be.

In addition, to control risk, we have rejected a lot of applications from our customers. So rejection rate from Cango actually has increased. This also shows the impact of the economic slowdown on our business and in Cango in order to better control risk, we have rejected more customers than our -- many of our peers.

And regarding our partnership with the smaller banks, our partners are all major banks. In China, we have no small banks partners.

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Tianxiao Hou, T.H. Capital, LLC - Founder, CEO & Senior Analyst [21]

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(foreign language)

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Yongyi Zhang, Cango Inc. - CFO & Director [22]

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[Interpreted] I'd like to add some things to the answers. Well first of all, in regarding our funding partners, first of all, as Mr. Lin described, we are working with the major banks only so far. So in terms of size, they -- we only work with the big banks. In addition, we are diversifying our funding sources. That is we are now working with the different types -- different funding partners. So in regarding funding, we are very safe.

And about your question on offer due rates, and this has also something to do with our business model. For our loan facilitation services, there are 2 types of loan facilitation services: One with -- one is -- the first one is Cango takes the credit risk, and the second one is that Cango does not take little credit risk. With this cost, we have started our collaboration with ICBC and Shanghai Bank not for long, that is we are still at the beginning of our partnership, Cango decides to take on the guarantee responsibility that is we take on the credit risk. In other words, if the loans are overdue, Cango has to buy back the loans.

And as I said, well, some -- for some of these loans collaborations with the banks, Cango takes the buyback obligation that is Cango takes the credit risk. But in turn, Cango gets higher take rates from the banks for such products in order to compensate for the credit risk that we have take on. And such a model, as I described, is just for the beginning of our partnerships. And we -- our strategy is that, well -- as we show our funding partners, our strong personal performance, then we will be able to renegotiate with our funding partners on these terms, especially when we review our performance after a certain period of collaboration. So our plan is that in the future, then Cango will focus more on products that -- products on which we do not take any credit risk. Thank you.

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Operator [23]

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This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

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Yongyi Zhang, Cango Inc. - CFO & Director [24]

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(foreign language)

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Jiayuan Lin, Cango Inc. - Co-Founder, CEO & Director [25]

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[Interpreted] If you have no more questions, then that closes for -- that closes today's earnings call. Thank you very much.

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Yongyi Zhang, Cango Inc. - CFO & Director [26]

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Thank you, everyone.

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Operator [27]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]