Cango Inc. 2018 Form 20-F Summary
Business context and reporting period
Cango Inc. is a Cayman Islands holding company operating primarily in China through a consolidated variable interest entity and its subsidiaries. The company provides automotive financing facilitation, automotive transaction facilitation and after-market services. The filing is an annual report for the fiscal year ended December 31, 2018, prepared under U.S. GAAP. The source does not provide a separate standalone Q4 income statement; fourth-quarter operating metrics are included where disclosed.
Cango completed its initial public offering in July 2018 and acquired the remaining 50% of Shanghai Autohome in September 2018, making the financing-lease business a wholly owned consolidated subsidiary.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | RMB1,091.4 million | RMB1,052.2 million | Up 3.7% |
| Loan facilitation income | RMB916.3 million | RMB1,019.1 million | Down 10.1% |
| Leasing income | RMB59.1 million | None | New after Shanghai Autohome consolidation |
| Other revenue | RMB106.6 million | RMB7.0 million | Up substantially |
| Operating expenses | RMB814.7 million | RMB582.2 million | Up 39.9% |
| Income from operations | RMB276.7 million | RMB470.0 million | Down 41.1% |
| Operating margin | 25.4% | 44.7% | Down 19.3 percentage points |
| Net income | RMB306.9 million | RMB349.1 million | Down 12.1% |
| Net margin | 28.1% | 33.2% | Down 5.1 percentage points |
| Net income attributable to Cango shareholders | RMB302.7 million | RMB341.0 million | Down 11.2% |
| Adjusted net income | RMB340.3 million | RMB349.1 million | Down 2.5% |
| Net cash from operating activities | RMB184.8 million | RMB589.3 million | Down 68.6% |
| Financing transactions facilitated | 356,576; RMB21.7 billion | 434,881; RMB26.6 billion | Down 18.0% by number and 18.3% by amount |
Balance sheet, debt and liquidity
- Cash and cash equivalents were RMB2.913 billion, compared with RMB803.3 million at December 31, 2017.
- Restricted cash was RMB967.5 million, including deposits supporting risk-assurance arrangements and collateral for borrowings; this cash was not generally available for operating liquidity.
- Total assets increased to RMB7.301 billion from RMB1.997 billion, principally reflecting the IPO and shareholder capital contributions, the Shanghai Autohome acquisition and increased finance-lease receivables.
- Finance lease receivables totaled RMB2.406 billion net, including RMB1.124 billion current and RMB1.282 billion non-current.
- Short-term debt was RMB660.0 million. Current maturities of long-term debt were RMB467.2 million, and non-current long-term debt was RMB472.8 million. Aggregate reported debt was therefore approximately RMB1.600 billion.
- Operating cash flow was positive but materially below net income and prior-year operating cash flow. Investing cash outflow was RMB1.639 billion, while financing cash inflow was RMB4.091 billion, primarily from shareholder contributions, the IPO and borrowings.
- Management stated that anticipated operating cash flows were expected to fund ordinary working-capital needs and capital expenditures for the following 12 months, but additional financing could be required for expansion, acquisitions, finance leases or adverse business conditions.
Material changes versus the prior comparable period
- Revenue growth slowed sharply from 142.3% in 2017 to 3.7% in 2018, while net income declined.
- Loan facilitation revenue declined because of lower transaction volumes, the transition to a more directly operated dealer-coverage model and weaker automotive-market conditions. The company’s sales team expanded from 1,691 to 2,469 employees, increasing training costs and sales compensation.
- Cost of revenue rose to 39.4% of revenue from 36.7%, mainly because of higher dealer commissions. Sales and marketing rose to 15.3% of revenue from 10.8%; general and administrative expense rose to 13.8% from 9.6%; and research and development rose to 4.3% from 1.8%.
- Provision for credit losses increased to RMB20.0 million from RMB0.2 million, reflecting growth in purchased financing receivables and the Shanghai Autohome acquisition.
- Shanghai Autohome contributed leasing income from the end of September 2018 and increased finance-lease receivables and credit exposure.
- The company’s dealer network grew from 34,634 to 46,565 registered dealers, but active dealers declined to 39.2% of the year-end network in the fourth quarter of 2018. Cango terminated 3,099 dealer relationships in the fourth quarter.
- The M3+ overdue ratio for outstanding facilitated financing transactions increased modestly to 0.37% from 0.34% at year-end 2017. The M1+ overdue ratio was 0.74% at year-end 2018 versus 0.86% at year-end 2017.
Guidance, outlook, commentary, risks and unusual items
- The filing provides no formal numerical revenue, earnings or transaction-volume guidance. Management’s stated priorities included expanding the dealer network, increasing automation and technology investment, broadening financing leases, developing insurance and other after-market services, and pursuing cooperation with ICBC, Didi Chuxing and OEMs.
- Cango entered a strategic cooperation agreement with ICBC in July 2018. The parties aimed over three years to work with 40 to 50 major OEMs and reach 10,000 to 15,000 4S dealers across more than 500 cities, but the filing cautions that the expected benefits are not assured.
- Cango bears credit exposure on certain transactions, including financing transactions subject to receivable-purchase obligations and finance leases funded by Shanghai Autohome. Risk-assurance liabilities were RMB173.2 million, while the maximum potential undiscounted future payment under the related obligations was RMB14.341 billion.
- Revenue concentration remained material: approximately 60.2% of 2018 revenue came from the top two financial institutions. Collaboration with WeBank and Jincheng Bank represented significant transaction and revenue exposure.
- The company identified one material weakness in internal control over financial reporting involving insufficient personnel with appropriate U.S. GAAP, SEC and reporting experience. Management stated that disclosure controls were not effective at December 31, 2018 and began remediation efforts.
- The company operates through a PRC VIE structure and has an unlimited financial-support undertaking to the VIE. Changes in PRC regulation, including rules affecting foreign investment, financing guarantees, online finance and VIE arrangements, could materially affect operations.
- The company disclosed a prior 2016 administrative penalty in Hunan involving dealer commissions, consisting of surrendered alleged illegal income of RMB58,499 and a RMB100,000 fine. It also disclosed uncertainty regarding future interpretation and enforcement of PRC anti-bribery and unfair-competition rules.
- Share-based compensation was RMB33.4 million in 2018, with RMB112.5 million of unrecognized expense remaining at year-end. The filing also identifies a significant risk that Cango was a passive foreign investment company for U.S. tax purposes in 2018 and may be one in future years.
- After year-end, the company agreed to acquire an insurance-brokerage business for RMB66.1 million and committed RMB200 million for a less-than-2% investment in Chehejia. The board also approved a special dividend of US$0.125 per ordinary share, or US$0.25 per ADS, totaling approximately RMB260.2 million.
Most important facts for an investor to verify
- Whether the dealer-coverage transition improves transaction volumes and operating margins after 2018, particularly relative to the substantially higher sales and marketing cost base.
- The sustainability and quality of Shanghai Autohome’s finance-lease portfolio, including delinquency trends, allowance adequacy, recoveries and collateral values.
- The scale and enforceability of the RMB14.341 billion maximum risk-assurance obligation and the adequacy of the RMB173.2 million recorded liability.
- Dependence on a limited number of funding institutions, especially WeBank, Jincheng Bank and other major counterparties.
- Availability of unrestricted cash after excluding RMB967.5 million of restricted cash and considering debt maturities and planned dividends.
- Progress in remediating the material weakness in financial reporting controls and whether additional weaknesses are identified.
- Regulatory developments affecting the PRC VIE structure, financing-guarantee exposure, online finance activities, data privacy and foreign investment restrictions.
- Whether the reported annual results are representative of ongoing operations, given the Shanghai Autohome acquisition, IPO financing, unusual investment gains and the absence of a separate quarterly income statement in the filing.