Q1 2023 Cango Inc Earnings Call
Participants
Jiayuan Lin; Co-Founder, CEO & Director; Cango Inc.
Unidentified Company Representative
Yongyi Zhang; CFO & Director; Cango Inc.
Unidentified Analyst
Presentation
Operator
Good morning, and good evening, everyone. Welcome to Cango Inc.'s First Quarter 2023 Earnings Conference Call. (Operator Instructions) The call is also being broadcast live on the company's IR website. Joining us today are Mr. Jiayuan 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. Jiayuan Lin, CEO of Cango. Please go ahead, sir.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Hi, everyone, and welcome to Cango's First Quarter 2023 Earnings Call.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Due to a variety of issues, notably COVID-19, the automotive industry remained slow throughout 2022. The macro economy began to show indications of steady recovery in 2023, the first year of a post-pandemic era, [made on 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 the 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 into 2023, owing to persistent pressure from weaker market demand.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Cango reacted promptly to changing macroeconomic and industry conditions by using our resources and constantly expanding our capacity to capture long-term growth opportunities. Our Cango Haoche and Cango U-Car 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] In the first quarter of 2023, our overall revenue was RMB 540 million, down 31% year-on-year but up 11% quarter-on-quarter. Revenues from car trading transactions were RMB 430 million, accounting for 79% of total revenues, reinforcing our position as a strong growth engine. Our company's net income for the first quarter was RMB 78.8 million primarily due to an increase in gain on risk assurance liabilities under newly implemented accounting standards and the reversal of credit impairment loss due to asset quality improvement. The entire outstanding balance of financing transactions we facilitated have reduced from RMB 25.6 billion as of December 31, 2022, to RMB 20.7 billion as of March 31, 2023, with our M1+ and M3+ 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Next, I would like to provide some specifics on the significant progress we've achieved with our company.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Our distinctive vehicle inventory advantage has been significantly contributed to the success of Cango Haoche, which has been warmly received by dealers since its inception. Leveraging our vehicle inventory, we have concentrated on our commitment to deliver 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, Cango Haoche introduced a new membership service. This incentive-based program merges a membership rebate policy with core dealer tiers aiming to boost the repurchase rate of service products and foster dealer engagement.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] In addition to enhance our online service efficiency, we introduced an intelligent AI customer service on Cango Haoche in April. This 24/7 service has not only significantly improved our service quality for dealers and increased their satisfaction rates but also bolstered our operational capabilities and efficiency. Moreover, Cango Haoche'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, Cango Haoche saw the launch of its first online store by third-party service provider [GL 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Moving forward, fueled by big data and digitalization, Cango Haoche will persist in deepening its multi-store expansion 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 the industry by eliminating barriers between small- and medium-sized dealers and automotive service providers and achieving bidirectional or two-way empowerment through digitalized service processes.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Now let's shift our focus to used cars. Building on the success of the Cango U-Car mini program, which was introduced in May last year, the Cango 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Powered by our enhanced used car transaction services and optimized digital capabilities, Cango U-Car now provides a range of functions, including historic vehicle condition reports, vehicle appraisals, online options, online car searches, used car listings, self-operated used car inventory repurchases and [dollar] 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 21 -- I mean, in 29 provinces nationwide. The accumulated page views and total unique visitors on the Cango U-Car app and mini program reached over 513,000 and 26,000, respectively, by the end of the first quarter of 2023.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] 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 primarily challenges for used car dealers. In addition to overdue customers, Cango has potential inventory of approximately 20,000 used cars from customers whose payments ended normally each month. Powered by our enhanced capabilities in used car acquisition and transaction conversion, these potential inventory sources along with repossessed cars will further strengthen the competitive edge of Cango U-Car in terms of used car resources.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] In April this year, Cango U-Car 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 used cars for B2B auction 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 channel, enabling them to achieve better prices and faster inventory turnover.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Vehicle inspection plays an important role in improving the used car transaction experience. We have [now] 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 aftersales services for all its used cars.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Going forward, we will continue to accelerate digitalization and enhance our differentiated services in lower-tier markets. These efforts will provide the 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Next, I will turn the call over to our Chief Financial Officer, Michael Zhang, for a review of the company's financial performance.
Yongyi Zhang
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 in RMB terms and all percentage comparisons are on a year-over-year basis. Our total revenues for the first quarter was CNY 542.6 million, among which car trading transactions business delivered revenues of CNY 429.8 million, further demonstrating its solid position as our major revenue drivers.
Now let's move on to our cost and expenses during the quarter. Total operating cost and expenses in the first quarter of 2023 were CNY 490.8 million compared with CNY 976.8 million in the same period 2022. Cost of revenue in the first quarter of 2023 decreased to CNY 480.5 million from CNY 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 CNY 12.5 million from CNY 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 CNY 39.8 million from CNY 50.9 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 CNY 8.1 million from CNY 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 2022.
Net gain on contingent risk assurance liabilities in the first quarter of 2023 was CNY 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 CNY 48.6 million. The recovery was primarily due to the positive impact from the collections of financial receivables.
We recorded income from operations of CNY 51.8 million in the same -- in the first quarter of 2023 compared with a loss of CNY 189.1 million in the same period 2022. Net income in the first quarter of 2023 was CNY 78.8 million. Non-GAAP adjusted net income in the first quarter of 2023 was CNY 92.8 million. On a per share basis, basic and diluted net income per ADS in the first quarter 2023 was CNY 0.58 and CNY 0.56, respectively. And non-GAAP adjusted basic and diluted net income per ADS in the same period was CNY 0.69 and CNY 0.66, respectively.
Moving on to our balance sheet. As of March 31, 2023, we had cash and cash equivalents of CNY 696.6 million compared with CNY 378.9 million as of December 31, 2022. As of March 1 -- March 31, 2023, the company had a short-term investment of CNY 2 billion compared with CNY 1.9 billion as of December 31, 2022. Looking ahead to the second quarter of 2023, we are now predicting our total revenues to be between CNY 600 million and CNY 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. Operator, we are now ready to take questions.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from [Stanley Wang] from Morgan Stanley.
Unidentified Analyst
(foreign language)
Unidentified Company Representative
[Interpreted] I have 2 questions. The first question is that beginning this year, many OEMs suggested their strategies. What do you think of structural opportunities for NEVs, new energy vehicles, and also internal combustion engine vehicles, in short ICEVs? My second question is that the overdue ratios of Cango's financing facilitation business dropped. Is this a sign of reduced credit risk in the market and gradual economic recovery?
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] 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 VI-b emission standards and industry-wide price competition further constrained consumer spending.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Although NEV sales soared in Q4 2022, NEV penetration exceeded 30%. The CPCA forecasts NEV penetration may reach 36% nationwide in 2023. At the recent Shanghai auto show, over 100 of the more than 150 new models launched were NEVs.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] In addition, government campaigns encouraging rural NEV purchases and expanding charging stations there indicate lower-tier markets over huge opportunity and potential for NEV sales growing trend.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] For ICEVs, the announcement in May that some ICEVs received a grace period under the China VI-b emission standards mitigated some of the sales pressure for automakers.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] As of the end of first quarter, the total outstanding balance of financing transactions we facilitated RMB 20.7 billion with our M1+ and M3+ 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 nonperforming assets, leading to a decrease in value of numerator and denominator for calculation where the loans were prepaid.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] By the end of March, our existing customers had already been paying -- made payments for around 2 years with an average of 14 months remaining on their prepayment contracts. This led to our lower overdue ratios from this customer cohort.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] 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.
Operator
Your next question comes from (inaudible) from Goldman Sachs.
Unidentified Analyst
(foreign language)
Unidentified Company Representative
[Interpreted] I have 2 questions as well. The first question is that the price war that began in March weighed on the whole industry. Could you please provide some color around where the market is heading and your next move for vehicle inventory? And the second question is that in addition to car trading transactions business, could you shed some light on the development of your other value-added services?
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Thank you for your questions. On your first question, China's automotive industry growth began moderating in 2019. With the pandemic impact, recovery had 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 RMB 362 billion, down 15.1% quarter-over-quarter. Collected vehicle purchase tax was RMB 21.3 billion, 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Despite improvement 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 amidst weak consumer demand. The inappropriate intervention by nonmarket participants exacerbated the situation. The price war disrupted market order and impacted the used car market as well. Lower prices ultimately hindered rather than help the situation.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Early this year, we reduced inventory in anticipation of China's VI-b 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 dealer experience as well as improved operational efficiency.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] 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 as well as to improve the dealer experience. And we believe that these will more effectively support small- and medium-sized dealers across lower-tier markets.
Operator
Your next question comes from (inaudible) from CITIC Securities.
Unidentified Analyst
(foreign language)
Unidentified Company Representative
[Interpreted] I'm from CITIC Securities. I have 2 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 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 market. 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 color on your plans for your used car business? And what are your thoughts on the used car market?
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Thank you for your 2 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 household disposable income was 17% to 18% below national average and rural household disposable income was 40% net of urban levels.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] According to CADA data, [51%] of dealers reported declining transactions and 36.5% reported flat transactions and only 12.5% reported increased transactions.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Well, based on our first-line -- frontline experience, in lower-tier markets, many dealers closed 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] On your second question on used car market, well, the recent 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 market. The new car price war 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 [lower] rate than in previous years.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] 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 impact, 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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] And at Cango, we launched Cango U-Car app in Q1, and this app offered -- 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. Cango U-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.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] And in April, Cango U-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 used cars for B2B auctions. Thank you.
Operator
We have no further questions at this time. I'll hand the call back to management for closing remarks.
Jiayuan Lin
(foreign language)
Unidentified Company Representative
[Interpreted] Thank you all for your participation. That closes today's earnings call.
Operator
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. .
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
