Cango Inc. FY2020 Form 20-F Summary
Business context and reporting period
Cango Inc. is a Cayman Islands holding company operating primarily in China through subsidiaries and a consolidated variable interest entity. Its technology-enabled platform connects automobile dealers, OEMs, car buyers, financial institutions and insurance providers. The business includes automotive financing facilitation, finance leasing, automobile trading and after-market services. The filing covers the fiscal year ended December 31, 2020 and presents audited consolidated financial statements under U.S. GAAP. The filing is an annual Form 20-F; it does not provide a separately reported fourth-quarter income statement.
Key financial metrics
| Metric | FY2019 | FY2020 | Change/comment |
|---|---|---|---|
| Total revenue | RMB1,440.1 million | RMB2,052.4 million | Up 42.5% |
| Operating income | RMB323.3 million | RMB318.3 million | Down 1.5% |
| Operating margin | 22.5% | 15.5% | Down 7.0 percentage points |
| Net income | RMB404.9 million | RMB3,373.4 million | Increase primarily from Li Auto fair-value gain |
| Net income attributable to shareholders | RMB390.9 million | RMB3,369.5 million | Basic EPS was RMB1.29 versus RMB11.21 |
| Net cash from operating activities | RMB422.9 million | $(621.6) million | Shifted to cash use |
| Cash and cash equivalents | RMB2,002.3 million | RMB1,426.9 million | Down 28.7% |
| Short-term investments | RMB597.3 million | RMB4,342.4 million | Included approximately RMB3,686.5 million of Li Auto shares |
| Total assets | RMB8,736.6 million | RMB12,145.9 million | Up 39.0% |
| Total liabilities | RMB3,244.9 million | RMB3,770.7 million | Up 16.2% |
Amounts in the filing are principally in RMB; U.S. dollar translations use RMB6.5250 per US$1.00. The filing reports total cash, cash equivalents and restricted cash of RMB2,314.9 million at year-end, including RMB888.0 million of restricted cash that was generally unavailable for ordinary liquidity needs.
Revenue mix, operations and margins
- Loan facilitation and related income declined 2.4% to RMB891.8 million, representing 43.5% of revenue.
- Leasing income declined 4.7% to RMB286.1 million, or 13.9% of revenue.
- After-market services income increased 17.1% to RMB241.2 million, or 11.8% of revenue.
- Automobile trading income increased to RMB624.8 million from RMB11.4 million, representing 30.4% of revenue, following significant expansion beginning in the third quarter of 2020.
- Cost of revenue increased 103.6% to RMB1,098.1 million, primarily because vehicle costs rose to RMB619.2 million. Cost of revenue increased from 37.4% to 53.5% of revenue.
- Provision for credit losses increased from RMB56.5 million to RMB109.6 million. Risk assurance liability expense was RMB2.3 million in 2020 versus RMB34.3 million in 2019.
- Automobile trading and after-market services supported revenue growth, but the higher-cost trading mix reduced operating margin.
Financing and credit performance
- The company facilitated RMB27.7 billion of financing transactions in 2020, down from RMB28.1 billion in 2019, and facilitated 329,293 transactions versus 390,140.
- Third-party financial institutions funded 98.1% of 2020 facilitated volume, compared with 92.6% in 2019. Shanghai Chejia funded 1.9%, compared with 7.4%.
- Outstanding principal increased to RMB43.5 billion from RMB40.0 billion.
- M1+ overdue ratio increased to 0.98% from 0.85%; M3+ increased to 0.42% from 0.40%. Delinquencies peaked in mid-2020 as COVID-19 affected borrowers and subsequently improved.
- Risk assurance liabilities increased to RMB460.8 million from RMB260.0 million. The maximum potential undiscounted future payment under risk assurance obligations was RMB14.5 billion at December 31, 2020.
- Approximately 59.3% of outstanding financing transactions funded by financial institutions were subject to arrangements requiring the company or its licensed guarantee subsidiary to purchase receivables upon specified defaults; the filing identifies uncertainty over whether some arrangements could be viewed as unlicensed financing guarantee activity.
Cash flow, debt and liquidity
- Operating cash flow was negative RMB621.6 million, principally reflecting increases in contract assets and other assets, including vehicle prepayments and deposits associated with automobile trading and financial institution arrangements.
- Investing cash outflow was RMB493.6 million, including RMB2.26 billion of finance-lease originations and RMB1.12 billion of short-term investment purchases, partly offset by collections and investment redemptions.
- Financing cash outflow was RMB380.8 million, reflecting RMB3.42 billion of borrowing repayments, RMB3.37 billion of new borrowings and RMB267.2 million of shareholder distributions.
- Short-term debt was RMB355.8 million. Long-term debt totaled RMB2.21 billion, including RMB1.23 billion classified as current and RMB977.8 million classified as non-current. The filing states that debt agreements did not contain material covenants.
- Management stated that anticipated operating cash flows would be sufficient for ordinary working capital and capital expenditures over the next 12 months, while noting that additional financing might be required for expansion, acquisitions, finance leases, vehicle purchases or other opportunities.
Material changes, outlook and unusual items
- COVID-19 materially reduced first-half 2020 activity: first-half revenue fell to RMB520.1 million from RMB688.0 million, and overdue ratios increased. Management reported substantial recovery beginning in the third quarter.
- The largest earnings driver was a RMB3.315 billion fair-value gain on the company’s Li Auto investment after Li Auto went public. This gain represented approximately 88% of pretax income and is market-sensitive rather than recurring operating income.
- At December 31, 2020, the company held 39,194,413 Class A ordinary shares of Li Auto. Subsequent to year-end, it sold 9,597,206 Li Auto ADSs at an average price of US$25.85 per ADS, generating approximately RMB1.62 billion, net of fees.
- Automobile trading expanded sharply, reaching 4,999 new-car transactions with total transaction value of RMB624.8 million. The strategy creates inventory, demand, obsolescence and working-capital risks.
- Management identified automobile trading as a key future growth catalyst and plans to expand dealer coverage, OEM relationships, new-energy vehicle initiatives, dealer SaaS tools, insurance and other after-market offerings.
- The company remains dependent on a limited number of financial institutions. WeBank, MYbank and Bank of Shanghai accounted for substantial portions of 2020 financing volume and financing-facilitation revenue.
- The company uses a VIE structure and relies on contractual arrangements rather than direct ownership to control Shanghai Cango and receive economic benefits. PRC authorities could challenge the structure or require business changes.
- Management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2020. The auditor was not required to provide an internal-control attestation because the company was not an accelerated or large accelerated filer.
Most important facts for investors to verify
- Reconcile the exceptional FY2020 net income with operating earnings and assess the sensitivity of results to Li Auto’s share price and future investment gains or losses.
- Review the conversion of substantial reported earnings into negative operating cash flow and monitor vehicle prepayments, contract assets, finance leases and restricted cash.
- Assess the potential loss exposure from RMB14.5 billion of maximum undiscounted risk assurance payments and the increase in risk assurance liabilities.
- Track M1+ and M3+ overdue ratios, provisions for credit losses, recoveries and collateral values as the portfolio and risk-bearing arrangements evolve.
- Evaluate whether automobile trading can produce sustainable margins after vehicle costs, inventory financing, storage, obsolescence and working-capital requirements.
- Monitor funding concentration among WeBank, MYbank, Bank of Shanghai and other financial institutions, including renewal and termination provisions.
- Review PRC regulatory risks involving financing guarantees, financing leases, insurance brokerage, data privacy, VIE contractual control and foreign investment restrictions.
- Consider liquidity available to the Cayman Islands parent separately from cash held by PRC subsidiaries and the VIE, including statutory reserve, dividend, currency-conversion and tax restrictions.
- Consider the potential U.S. tax impact of the company’s stated significant risk of PFIC classification for 2020 and future years.