Cango Inc. 2021 Form 20-F Summary
Business context and reporting period
Cango Inc. is a Cayman Islands holding company whose operations are conducted primarily in China through Shanghai Cango, a consolidated variable interest entity, and its subsidiaries. The company operates a technology-enabled automotive transaction platform spanning automobile trading, automotive financing facilitation and after-market services. The filing covers the fiscal year ended December 31, 2021; it is an annual Form 20-F rather than a standalone fourth-quarter filing.
- 45,930 registered dealers across 344 cities and all province-level regions at year-end.
- 318,772 financing transactions facilitated in 2021, totaling RMB30.1 billion.
- 23,166 B2B and B2C vehicle transactions in 2021, with transaction value of RMB2.23 billion.
- Financing was funded 96.4% by third-party financial institutions and 3.6% by Shanghai Chejia.
Financial performance and key metrics
| RMB millions, except percentages | 2020 | 2021 | Change |
|---|---|---|---|
| Revenue | 2,052.4 | 3,921.7 | +91.1% |
| Operating cost and expenses | 1,734.1 | 3,945.0 | +127.5% |
| Income from operations | 318.3 | (23.2) | Turned negative |
| Net income attributable to Cango shareholders | 3,369.5 | (8.5) | Turned to loss |
| Net margin | 164.2% | (0.2%) | Declined materially |
| Operating cash flow | (621.6) | (404.4) | Improved, remained negative |
Revenue growth was driven primarily by the expansion of automobile trading and higher financing facilitation activity. Automobile trading revenue increased to RMB2.23 billion, or 56.8% of revenue, from RMB624.8 million in 2020. Loan facilitation and related income increased to RMB1.23 billion, while leasing and after-market services income declined.
Cost of revenue rose to RMB2.96 billion, or 75.4% of revenue, from 53.5% in 2020, principally because of vehicle costs and dealer commissions. The company recorded a RMB197.8 million net loss on risk assurance liabilities and RMB203.4 million of provision for credit losses. The 2020 net income included a RMB3.35 billion gain on equity securities, primarily related to Li Auto; 2021 instead included a RMB13.0 million loss.
- Cash and cash equivalents: RMB1.43 billion at December 31, 2021, broadly unchanged from RMB1.43 billion at year-end 2020.
- Cash, cash equivalents, restricted cash and short-term investments: RMB5.21 billion.
- Restricted cash: RMB1.18 billion, largely unavailable for general liquidity needs.
- Short-term debt: RMB579.8 million; long-term debt: RMB1.42 billion, including RMB938.0 million current portion.
- Risk assurance liabilities: RMB699.0 million, compared with RMB460.8 million in 2020.
- Maximum potential undiscounted future payment under risk assurance obligations: RMB31.34 billion.
- Short-term investments: RMB2.60 billion, including RMB464.7 million of Li Auto shares.
- Adjusted net income, excluding share-based compensation, was RMB79.1 million, versus RMB3.45 billion in 2020; this is a non-GAAP measure.
Material changes versus the prior comparable period
- Revenue more than doubled, but operating expenses grew faster, resulting in an operating loss and a consolidated net loss.
- Automobile trading became the dominant revenue source, materially changing the company’s revenue mix and cost structure.
- Financing volume increased from RMB27.7 billion to RMB30.1 billion, but transaction count declined from 329,293 to 318,772.
- Credit performance deteriorated: M1+ overdue ratio increased from 0.98% to 1.62%, and M3+ increased from 0.42% to 0.86% at year-end.
- Risk assurance liabilities and credit-loss provisions increased substantially, reflecting higher defaults and macroeconomic pressure.
- Operating cash flow remained negative, while investing cash flow became strongly positive because of investment maturities and redemptions; financing cash flow was negative due to debt repayments, share repurchases and shareholder distributions.
- The company repurchased 11.53 million ADSs from March 2021 through March 2022 at an average price of $6.20 per ADS. Treasury shares totaled RMB485.3 million at year-end.
Guidance, outlook, commentary and risks
Management did not provide a quantified full-year 2022 outlook. It stated that COVID-19 outbreaks and related lockdowns beginning in March 2022 were expected to cause a significant year-over-year revenue decline in the second quarter of 2022, higher delinquency rates and increased net losses on risk assurance liabilities.
- The business remains exposed to borrower defaults, collateral-value declines, collection difficulties and the accuracy of credit models.
- Funding is concentrated: WeBank, MYbank and Bank of Shanghai accounted for approximately 16.4%, 41.4% and 31.7%, respectively, of 2021 facilitated financing volume.
- Approximately 78.7% of outstanding financing volume was subject to arrangements under which the company or its affiliates may bear credit risk, including obligations to purchase receivables after specified defaults.
- Regulatory uncertainty affects financing guarantees, online financial intermediation, insurance brokerage, cybersecurity, data privacy, VIE arrangements and overseas listings.
- The company relies on contractual arrangements rather than equity ownership to control its Chinese operating VIE. Loss of control or deconsolidation could materially impair the business and ADS value.
- The PCAOB reported that it could not fully inspect accounting firms headquartered in mainland China or Hong Kong, including the company’s auditor. The company warned of potential HFCA-related trading restrictions or delisting.
- The company received a prior NYSE continued-listing deficiency notice but reported that it regained compliance; continued compliance remains a risk.
- The company believes it was at significant risk of being classified as a passive foreign investment company for U.S. tax purposes in 2021.
- Management concluded internal control over financial reporting was effective, but the company was exempt from an auditor attestation because it remains an emerging growth company.
Most important facts for investors to verify
- Reconcile the annual filing’s financial statements with any separate fourth-quarter earnings release; the filing does not provide a complete standalone Q4 income statement.
- Assess whether automobile trading revenue growth can generate acceptable margins after vehicle costs, commissions and working-capital requirements.
- Monitor M1+ and M3+ overdue ratios, risk assurance liabilities, credit-loss provisions and the RMB31.34 billion maximum potential risk-assurance exposure.
- Verify the availability of cash held at the VIE and the restrictions on transferring PRC cash to the Cayman Islands parent.
- Review debt maturities, pledged assets, restricted cash and the difference between balance-sheet debt and contractual payment obligations.
- Evaluate customer and funding concentration, particularly exposure to MYbank, Bank of Shanghai and WeBank.
- Confirm the status of PCAOB inspection access, HFCA identification and NYSE listing compliance.
- Review the effect of the VIE structure, PRC regulatory changes and data-security requirements on continued operations.
- Note that the filing reports fourth-quarter active dealers as 29.6% in one section and 28.7% in another; this inconsistency should be reconciled.