Cango(CANG) - 2019 Q4 - Annual Report

PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS This section is not applicable as per the report - This item is not applicable[16] ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE This section is not applicable as per the report - This item is not applicable[16] ITEM 3. KEY INFORMATION This section presents selected historical financial data, discusses key risk factors, and provides information on capitalization and use of proceeds Selected Financial Data The company's total revenues grew to RMB 1.44 billion in 2019, with net income attributable to ordinary shareholders reaching RMB 390.9 million Selected Consolidated Statements of Comprehensive Income Data (2017-2019) | Indicator | 2017 (RMB) | 2018 (RMB) | 2019 (RMB) | 2019 (US$) | | :--- | :--- | :--- | :--- | :--- | | Total revenues | 1,052,204 | 1,091,414 | 1,440,069 | 206,853 | | Income from operations | 470,020 | 276,720 | 323,296 | 46,439 | | Net income | 349,057 | 306,924 | 404,859 | 58,154 | | Net income attributable to Cango Inc.'s ordinary shareholders | 341,010 | 302,692 | 390,914 | 56,151 | | Basic Earnings per ADS | N/A | 2.17 | 2.59 | 0.37 | Selected Consolidated Balance Sheet Data (As of Dec 31) | Indicator | 2018 (RMB) | 2019 (RMB) | 2019 (US$) | | :--- | :--- | :--- | :--- | | Total assets | 7,301,140 | 8,736,574 | 1,254,930 | | Total liabilities | 2,045,773 | 3,244,914 | 466,103 | | Total shareholders' equity | 5,255,367 | 5,491,660 | 788,828 | Reconciliation of Net Income to Adjusted Net Income (Non-GAAP) | Indicator | 2017 (RMB) | 2018 (RMB) | 2019 (RMB) | 2019 (US$) | | :--- | :--- | :--- | :--- | :--- | | Net income | 349,057 | 306,924 | 404,859 | 58,154 | | Add: ESOP Expenses | — | 33,411 | 82,266 | 11,817 | | Adjusted net income | 349,057 | 340,335 | 487,125 | 69,971 | Risk Factors This section details significant risks including intense competition, reliance on financial institutions, regulatory changes, VIE structure uncertainties, and NYSE listing non-compliance - The company has a limited operating history in China's emerging automotive finance market, making historical performance not necessarily indicative of future results[30][31][32] - The COVID-19 outbreak is expected to have a material adverse impact on business and financial condition for 2020 due to decreased auto purchases and potential rises in delinquency rates[38][40] - The company relies on a limited number of financial institutions, with Jincheng Bank and WeBank representing 22.6% and 16.4% of total revenues in 2019 respectively[52][53] - Contractual arrangements with its VIE (Shanghai Cango) may not be as effective as direct ownership and could be subject to scrutiny by PRC authorities[214][224] - The company received a NYSE non-compliance notification on October 24, 2019, related to stockholder count, with potential delisting if compliance is not regained[295][296][298] - There is a significant risk that the company was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for 2019, potentially resulting in adverse tax consequences for U.S. investors[334][335] ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Cango Inc., detailing its history, business model, organizational structure, and facilities History and Development of the Company Cango, founded in 2010, has expanded its automotive financing and dealer network, serving over 1.38 million car buyers and completing its NYSE IPO in 2018 - The company was founded in 2010 and has cumulatively served 1,383,833 car buyers through its platform as of December 31, 2019[342] - Cango Inc. was incorporated in the Cayman Islands in October 2017 and established a VIE structure with Shanghai Cango to conduct its business in China[343] - The company completed its initial public offering on the New York Stock Exchange under the symbol "CANG" on July 26, 2018[346] Business Overview Cango operates an automotive transaction service platform in China, connecting 49,238 dealers and 13 financial institutions, facilitating RMB 28.1 billion in financing in 2019 - The company's platform connects 49,238 registered dealers, 13 third-party financial institutions, and 59 other industry participants[347] - Core services include automotive financing facilitation, automotive transaction facilitation, and after-market service facilitation[348] Financing Transactions Facilitated in 2019 | Metric | Value | | :--- | :--- | | Number of car purchases financed | 390,140 | | Total amount of financing transactions | RMB 28.1 billion (US$4.0 billion) | - The company has strategic partnerships with ICBC for expanding into tier-one and tier-two cities and with Didi Chuxing to provide solutions for its driver fleet[371][372] Organizational Structure Cango Inc. operates in the PRC through a Variable Interest Entity (VIE), Shanghai Cango, controlled via contractual arrangements to comply with foreign ownership restrictions - The company operates in the PRC through a VIE structure to comply with foreign ownership restrictions, with Shanghai Cango as the consolidated VIE[516] - Control over the VIE is maintained through a series of contractual arrangements, enabling the company to consolidate its financial statements and receive economic benefits[517][518] - PRC legal counsel has opined that the ownership structure and contractual arrangements are valid, but substantial uncertainties remain regarding PRC law interpretation[519][520] Facilities The company's headquarters are in Shanghai, leasing approximately 7,328 square meters of office space, along with regional offices and warehouses across China - The company's headquarters are in Shanghai, and it leases all its office and warehouse facilities across China[530] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial condition and results, highlighting revenue growth, net income increase, liquidity, and capital resources Operating Results In 2019, total revenues grew 31.9% to RMB 1.44 billion, driven by leasing and after-market services, with net income rising to RMB 404.9 million Key Financial Results Comparison (2018 vs 2019) | Metric | 2018 (RMB Million) | 2019 (RMB Million) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | 1,091.4 | 1,440.1 | +31.9% | | Net Income | 306.9 | 404.9 | +31.9% | - The revenue growth in 2019 was mainly driven by a RMB 241.0 million increase in leasing income and a RMB 105.9 million increase in after-market services income[630] Credit Performance Metrics (As of Dec 31) | Ratio | 2018 | 2019 | | :--- | :--- | :--- | | M1+ Overdue Ratio | 0.74% | 0.85% | | M3+ Overdue Ratio | 0.37% | 0.40% | Liquidity and Capital Resources The company's liquidity is supported by RMB 2.00 billion in cash and equivalents, RMB 1.84 billion in restricted cash, and RMB 422.9 million in operating cash flow, alongside increased borrowings Cash and Debt Position (As of Dec 31, 2019) | Item | Amount (RMB Million) | Amount (US$ Million) | | :--- | :--- | :--- | | Cash and cash equivalents | 2,002.3 | 287.6 | | Restricted cash | 1,844.7 | 265.0 | | Short-term debts | 1,439.7 | 206.8 | | Long-term debts | 1,165.1 | 167.4 | Summary of Cash Flows (2019) | Cash Flow Item | Amount (RMB Million) | Amount (US$ Million) | | :--- | :--- | :--- | | Net cash provided by operating activities | 422.9 | 60.7 | | Net cash used in investing activities | (1,198.4) | (172.1) | | Net cash provided by financing activities | 730.5 | 104.9 | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, compensation, board structure, and employee base, noting co-founders' significant voting control - The company is led by co-founder and Chairman Xiaojun Zhang and co-founder, director, and CEO Jiayuan Lin[683][684][685] - In 2019, aggregate cash compensation paid to directors and executive officers was approximately RMB 21.6 million (US$3.1 million)[697] - As of December 31, 2019, the company had 3,189 employees, with 72.3% in sales and marketing roles[728] - As of March 31, 2020, co-founders collectively exercised 87.2% of the aggregate voting power, making the company a "controlled company" under NYSE rules[199][739] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section outlines major shareholders and describes transactions with related parties, including Jincheng Bank, Didi Chuxing, and the VIE structure - Jincheng Bank was considered a related party until September 2017 due to co-founder Mr. Xiaojun Zhang's directorship, with the company providing automotive financing facilitation services[742][743] - The company has a strategic business cooperation agreement with shareholder Didi Chuxing to provide vehicle sourcing, financing, and insurance facilitation to Didi's drivers and users[754][755] - The company operates through a VIE structure, which involves contractual arrangements with the VIE (Shanghai Cango) and its shareholders, who are also related parties[749] ITEM 8. FINANCIAL INFORMATION This section confirms the consolidated financial statements are appended and details the company's dividend policy, including special cash dividends approved in 2019 and 2020 - The company's board approved special cash dividends of US$0.125 per ordinary share (US$0.25 per ADS) on April 22, 2020, following a similar dividend in 2019[760] - The company's ability to pay dividends depends on distributions from its PRC subsidiaries, subject to PRC laws requiring allocation to statutory reserves[762] ITEM 9. THE OFFER AND LISTING This section details the listing of the company's American Depositary Shares (ADSs) on the New York Stock Exchange (NYSE) under the ticker symbol "CANG" since July 26, 2018 - The company's ADSs are listed on the New York Stock Exchange under the symbol "CANG" since July 26, 2018, with each ADS representing two Class A ordinary shares[763][765] ITEM 10. ADDITIONAL INFORMATION This section covers supplementary information including corporate documents, exchange controls, and taxation, highlighting the significant risk of being classified as a Passive Foreign Investment Company (PFIC) - The company is an exempted company in the Cayman Islands and is not subject to income, gains, or withholding taxes there[770] - There is a risk that PRC tax authorities could deem the company a PRC resident enterprise, subjecting it to a 25% enterprise income tax on worldwide income and potential withholding taxes for non-PRC shareholders[771] - The company believes there is a significant risk it was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for 2019, potentially resulting in adverse tax consequences for U.S. Holders[785][790] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily foreign exchange risk due to RMB-denominated revenues and USD functional currency, with limited interest rate risk - The company's primary market risk is foreign exchange risk, as all revenues are denominated in RMB, impacting reported financial results due to RMB/USD fluctuations[813][816] - The company has not been materially exposed to interest rate risk but notes that future changes could impact its interest-earning assets and borrowings[818] ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section describes the company's American Depositary Shares (ADSs), for which Citibank, N.A. serves as the depositary bank, detailing associated fees and listing information - Citibank, N.A. is the depositary bank for the company's ADSs[821] Selected Depositary Fees for ADS Holders | Service | Fee | | :--- | :--- | | Issuance of ADSs | Up to U.S. 5¢ per ADS | | Cancellation of ADSs | Up to U.S. 5¢ per ADS | | Distribution of cash dividends | Up to U.S. 5¢ per ADS held | PART II ITEM 15. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the annual report[830] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019[831] - The annual report does not include an attestation report from the registered public accounting firm regarding internal control over financial reporting due to the company's exemption as a non-accelerated filer[832] ITEM 16. [RESERVED] This section covers corporate governance and compliance, including principal accountant fees, share repurchases, and foreign private issuer exemptions from NYSE rules Principal Accountant Fees and Services Ernst & Young Hua Ming LLP was paid US$919 thousand for audit services in fiscal year 2019 Accountant Fees (in thousands of US dollars) | Fee Category | 2018 | 2019 | | :--- | :--- | :--- | | Audit Fees | $2,624 | $919 | | Tax Fees | — | — | | All Other Fees | — | — | | Total | $2,624 | $919 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers The company repurchased 431,556 ADSs for approximately US$3.0 million under its US$10 million share repurchase program, with US$7.0 million remaining as of March 31, 2020 - The company announced a US$10 million share repurchase program on June 5, 2019[841] Share Repurchase Activity (June 5, 2019 to March 31, 2020) | Metric | Value | | :--- | :--- | | Total ADSs Purchased | 431,556 | | Average Price Paid per ADS | US$6.95 | | Total Cost | ~US$3.0 million | | Remaining Authorization | US$7.0 million | Corporate Governance As a foreign private issuer, the company follows home country (Cayman Islands) corporate governance practices, exempting it from certain NYSE listing standards - The company, as a foreign private issuer, follows home country (Cayman Islands) practices for certain corporate governance matters, exempting it from some NYSE listing standards[843] - Key differences from NYSE standards include not having compensation or nominating committees composed entirely of independent directors[844] PART III ITEM 18. FINANCIAL STATEMENTS This section contains the company's audited consolidated financial statements for 2017-2019, prepared under U.S. GAAP, with an unqualified opinion from Ernst & Young Hua Ming LLP - The report includes audited consolidated financial statements for the years ended December 31, 2017, 2018, and 2019, prepared in accordance with U.S. GAAP[848][858] - The independent auditor, Ernst & Young Hua Ming LLP, issued an unqualified opinion on the financial statements[858][863] - The company adopted new accounting standards for revenue recognition (ASC 606) and certain equity securities in 2019[859] ITEM 19. EXHIBITS This section lists all exhibits filed as part of the annual report, including corporate documents, VIE agreements, and Sarbanes-Oxley Act certifications - Lists key corporate documents filed as exhibits, including the Memorandum and Articles of Association, Deposit Agreement, and various contractual arrangements governing the VIE structure[849][850] - Includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[852]