Cango Inc. Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 20-F, not a standalone quarterly filing; quarterly operating data is disclosed in parts of the report. Financial statements are prepared under U.S. GAAP. Cango operates primarily in China through subsidiaries and a consolidated variable interest entity.
Business context
Cango is a China-based automotive transaction service platform connecting dealers, financial institutions, car buyers and other industry participants. Its principal activities are automotive financing facilitation, financing leases, automotive transaction facilitation and after-market services, including insurance facilitation and anti-theft services.
- 49,238 registered dealers across 347 cities and all province-level administrative regions as of December 31, 2019.
- 13 third-party financial institutions and 59 other industry participants connected to the platform.
- 390,140 financing transactions facilitated in 2019, totaling RMB28.1 billion.
- Third-party financial institutions funded 92.6% of 2019 facilitated financing volume; Shanghai Chejia funded the remaining 7.4% through financing leases.
2019 financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | RMB1,440.1 million | RMB1,091.4 million | +31.9% |
| Loan facilitation and related income | RMB913.8 million | RMB916.3 million | -0.3% |
| Leasing income | RMB300.1 million | RMB59.1 million | +407.6% |
| After-market services income | RMB206.0 million | RMB100.1 million | +105.9% |
| Total operating costs and expenses | RMB1,116.8 million | RMB814.7 million | +37.1% |
| Income from operations | RMB323.3 million | RMB276.7 million | +16.8% |
| Net income | RMB404.9 million | RMB306.9 million | +31.9% |
| Net income attributable to Cango shareholders | RMB390.9 million | RMB302.7 million | +29.2% |
| Operating margin | 22.5% | 25.4% | Down 2.9 percentage points |
| Net margin | 28.1% | 28.1% | Flat |
| Adjusted net income | RMB487.1 million | RMB340.3 million | +43.1% |
| Net cash from operating activities | RMB422.9 million | RMB184.8 million | +128.8% |
U.S. dollar figures in the filing use an exchange rate of RMB6.9618 per US$1.00. Reported 2019 revenue was US$206.9 million, net income was US$58.2 million and operating cash flow was US$60.7 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were RMB2.002 billion at year-end, down from RMB2.913 billion.
- Restricted cash totaled RMB1.845 billion, including deposits supporting risk-assurance arrangements and collateral for borrowings; management states this cash is not generally available for operating liquidity.
- Short-term debt was RMB1.440 billion; current portion of long-term debt was RMB863.4 million; non-current long-term debt was RMB301.7 million.
- Total liabilities increased to RMB3.245 billion from RMB2.046 billion, while total shareholders’ equity increased to RMB5.492 billion from RMB5.255 billion.
- Net cash from investing activities was negative RMB1.198 billion, principally reflecting investment purchases and origination of finance lease receivables. Net cash from financing activities was RMB730.5 million.
- Management stated that expected operating cash flows should be sufficient for ordinary working capital and capital expenditures for the next 12 months, while noting potential future financing needs.
Material changes versus the prior comparable period
- Revenue growth was driven mainly by the larger financing-lease business following the Shanghai Chejia acquisition and by increased cross-selling of after-market services. Loan facilitation revenue was broadly flat.
- Financing transactions facilitated rose to RMB28.1 billion from RMB21.7 billion, and transaction count increased to 390,140 from 356,576.
- Cost of revenue increased, but its ratio to revenue improved to 37.4% from 39.4%. General and administrative expense rose to 16.4% of revenue from 13.8%, primarily because of higher share-based compensation.
- Provision for credit losses increased to RMB56.5 million from RMB20.0 million, and the company recorded a RMB34.3 million net loss on risk-assurance liabilities versus a small gain in 2018.
- M1+ overdue ratio increased to 0.85% from 0.74%; M3+ overdue ratio increased to 0.40% from 0.37%.
- Restricted cash and debt increased substantially, reflecting expansion of financing leases, risk-assurance deposits and collateralized funding.
- Cango adopted ASC 606 using the modified retrospective method. The filing states that 2019 revenue was RMB37.7 million lower than it would have been under the prior revenue standard, and net income was RMB28.6 million lower.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quantitative revenue or earnings guidance.
- Management expects growth from expanding the dealer network, financing leases, insurance and other after-market services, OEM partnerships, technology automation and cooperation with financial institutions and Didi Chuxing.
- COVID-19 was identified as a material subsequent risk. Financing transactions facilitated in January and February 2020 were 39,138, compared with 71,765 in the same period of 2019. Management expected lower auto purchases, higher unemployment and increased delinquencies to adversely affect 2020 results, but could not estimate the magnitude.
- Risk-assurance liabilities were RMB260.0 million at year-end. The maximum potential undiscounted future payment under related obligations was RMB17.806 billion, although the recorded liability was substantially lower.
- The company bears credit risk on certain financing arrangements and on Shanghai Chejia’s finance leases. It also has obligations to purchase certain delinquent financing receivables.
- Shanghai Cango may be viewed by PRC regulators as conducting financing-guarantee activities without the required license. The company also faces evolving rules concerning data privacy, online finance, insurance brokerage, foreign investment and its VIE structure.
- Repossession activities were suspended beginning in the fourth quarter of 2019 due to regulatory requirements.
- The NYSE notified Cango in October 2019 that it did not meet certain continued-listing stockholder standards. The company submitted and the NYSE accepted a compliance plan, but continued listing was not assured.
- The company repurchased 431,556 ADSs for approximately US$3.0 million at an average price of US$6.95 per ADS.
- Share-based compensation expense was RMB82.3 million in 2019, with RMB112.8 million of unrecognized expense remaining at year-end.
- The company approved a special dividend of US$0.125 per ordinary share, or US$0.25 per ADS, in April 2020. The filing states that Cango generally intends to retain future earnings for business growth.
- Management concluded that internal control over financial reporting was effective as of December 31, 2019, but the independent auditor did not provide an internal-control attestation because Cango was exempt as an emerging growth company and non-large accelerated filer.
Most important facts for investors to verify
- Whether COVID-19 caused sustained declines in transaction volume, revenue, cash flow or credit performance after year-end.
- The exposure, funding concentration and renewal status of arrangements with Jincheng Bank, WeBank and other financial institutions.
- The potential cash impact of the RMB17.806 billion maximum risk-assurance obligation and the adequacy of the RMB260.0 million recorded liability.
- Trends in M1+ and M3+ overdue ratios, finance-lease losses, repossession recoveries and provision for credit losses.
- Availability of unrestricted liquidity after excluding RMB1.845 billion of restricted cash, and the maturity profile of short-term debt.
- Regulatory treatment of the VIE structure, financing-guarantee obligations, repossession practices, insurance brokerage activities and personal-information handling.
- Progress toward regaining compliance with NYSE continued-listing standards.
- The effect of ASC 606, share-based compensation, investment gains and other non-operating items on underlying earnings quality.