Cango(CANG) - 2020 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section presents Cango Inc.'s selected financial data and outlines key business, operational, and ADS-related risk factors Selected Financial Data This section presents Cango Inc.'s selected consolidated financial data, highlighting revenue growth, significant net income increase from investment gains, and asset expansion Selected Consolidated Statements of Comprehensive Income Data (2018-2020) | Indicator | 2018 (RMB, in thousands) | 2019 (RMB, in thousands) | 2020 (RMB, in thousands) | | :--- | :--- | :--- | :--- | | Total revenues | 1,091,414 | 1,440,069 | 2,052,432 | | Income from operations | 276,720 | 323,296 | 318,297 | | Fair value change of equity investment | — | 41,582 | 3,315,476 | | Net income | 306,924 | 404,859 | 3,373,420 | | Net income attributable to Cango Inc.'s shareholders | 302,692 | 390,914 | 3,369,518 | | Diluted Earnings per ADS | 2.16 | 2.58 | 22.18 | Selected Consolidated Balance Sheet Data (as of Dec 31) | Indicator | 2018 (RMB, in thousands) | 2019 (RMB, in thousands) | 2020 (RMB, in thousands) | | :--- | :--- | :--- | :--- | | Total assets | 7,301,140 | 8,736,574 | 12,145,933 | | Total liabilities | 2,045,773 | 3,244,914 | 3,770,723 | | Total shareholders' equity | 5,255,367 | 5,491,660 | 8,375,209 | Reconciliation of Net Income to Adjusted Net Income (Non-GAAP) | Indicator | 2018 (RMB, in thousands) | 2019 (RMB, in thousands) | 2020 (RMB, in thousands) | | :--- | :--- | :--- | :--- | | Net income | 306,924 | 404,859 | 3,373,420 | | Add: ESOP Expenses | 33,411 | 82,266 | 78,755 | | Adjusted net income | 340,335 | 487,125 | 3,452,175 | Risk Factors The company faces various risks related to its business operations, corporate structure, evolving regulatory landscape in China, and potential adverse consequences for ADS holders - The company operates in an emerging and fast-growing market with a limited operating history, making future performance difficult to predict, with key challenges including maintaining relationships with dealers and financial institutions, managing credit risk, and adapting to regulatory changes[29][31] - The COVID-19 pandemic adversely affected operations in the first half of 2020, causing a decrease in revenue and an increase in delinquency rates, though business recovered in the second half, future impacts remain uncertain[33] - The company relies on a limited number of financial institutions, with WeBank, MYbank, and Bank of Shanghai being key partners, and in 2020, collaborations with these three institutions accounted for 32.6%, 51.5%, and 4.0% of automotive financing facilitation revenues, respectively, where any disruption could materially impact the business[46] - There is a significant risk that the company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. investors[286][287] - The company's auditor is not inspected by the Public Company Accounting Oversight Board (PCAOB), and the Holding Foreign Companies Accountable Act (HFCA Act) could lead to the delisting of the company's securities from U.S. exchanges if the PCAOB is unable to inspect the auditor for three consecutive years[238][241] ITEM 4. INFORMATION ON THE COMPANY This section details the company's history, technology-enabled automotive transaction service platform business model, and its organizational structure, including the VIE arrangement History and Development of the Company This section outlines Cango Inc.'s development from its 2010 founding, including its IPO, strategic acquisitions, and key equity investments - The company was founded in August 2010 through Shanghai Cango, initially focusing on automotive financing solutions[293] - Completed its initial public offering on the New York Stock Exchange on July 26, 2018, under the symbol "CANG"[298] - Acquired Shanghai Chejia at the end of September 2018, making it a wholly-owned consolidated subsidiary, and in 2019, acquired Fushun Insurance Brokerage Co., Ltd. to enhance its after-market services[296] - Made a series of equity investments in Li Auto (formerly Chehejia) in 2018 and 2019, holding 39,194,413 Class A ordinary shares of Li Auto as of December 31, 2020[297] Business Overview Cango operates a technology-enabled automotive transaction service platform offering trading, financing facilitation, and after-market services, leveraging a vast dealer network and financial institution partnerships - The company's platform offers three core services: pre-sale automobile trading solutions, during-sale automotive financing facilitation, and post-sale after-market services facilitation[299][304] Key Operational Metrics (2020) | Metric | Value | | :--- | :--- | | Registered Dealers | 48,487 | | Active Dealers (Q4 2020) | 19,667 | | Financing Transactions Facilitated | 329,293 | | Total Amount of Financing | RMB 27.7 billion | | Automobile Trading Transactions | 4,999 cars | | Automobile Trading Value | RMB 624.8 million | - The company collaborates with 12 third-party financial institutions, and in 2020, 98.1% of financing was funded by these institutions, with the remaining 1.9% funded by the company's subsidiary, Shanghai Chejia[309][327] - A strategic partnership with Didi Chuxing provides access to its large driver base for services like vehicle sourcing, financing, and insurance, with Cango serving 509 licensed Didi Chuxing drivers in 2020[373] Organizational Structure Cango Inc. operates in the PRC primarily through a Variable Interest Entity (VIE) structure to comply with foreign investment restrictions, maintaining control via contractual arrangements - The company uses a VIE structure to conduct its operations in China, mainly through Shanghai Cango, to comply with PRC restrictions on foreign ownership in certain business areas like VATS[486] - Control over the VIE is established through a series of contractual arrangements, including Equity Interest Pledge Agreements, Powers of Attorney, an Exclusive Business Cooperation Agreement, and an Exclusive Option Agreement[486][489] - As a result of these arrangements, Cango Inc. is the primary beneficiary of Shanghai Cango, allowing it to consolidate the VIE's financial results into its own financial statements under U.S. GAAP[487] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides management's discussion and analysis of the company's financial condition and operating results, including revenue, costs, liquidity, and capital resources Operating Results This section details the company's operating performance, highlighting significant revenue growth, a surge in net income driven by investment gains, and changes in credit performance metrics Comparison of Results of Operations (2019 vs. 2020) | Indicator (RMB, in millions) | 2019 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | 1,440.1 | 2,052.4 | +42.5% | | Automobile trading income | 11.4 | 624.8 | +5375.9% | | After-market services income | 206.0 | 241.2 | +17.1% | | Total operating cost and expenses | 1,116.8 | 1,734.1 | +55.3% | | Fair value change of equity investment | 41.6 | 3,315.5 | +7870.0% | | Net income | 404.9 | 3,373.4 | +733.1% | - The significant increase in 2020 net income was primarily driven by a RMB 3,315.5 million gain from the fair value change of the company's equity investment in Li Auto, which went public in July 2020[608] Credit Performance Metrics (as of Dec 31) | Ratio | 2019 | 2020 | | :--- | :--- | :--- | | M1+ overdue ratio | 0.85% | 0.98% | | M3+ overdue ratio | 0.40% | 0.42% | Liquidity and Capital Resources This section discusses the company's liquidity sources, including cash balances, operating cash flows, and various debt financing activities like credit facilities and asset-backed securities Summary of Cash Flows (RMB, in millions) | Cash Flow Activity | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from/(used in) operating activities | 184.8 | 422.9 | (621.6) | | Net cash used in investing activities | (1,638.6) | (1,198.4) | (493.6) | | Net cash from/(used in) financing activities | 4,091.1 | 730.5 | (380.8) | - As of December 31, 2020, the company had cash and cash equivalents of RMB 1,426.9 million and restricted cash of RMB 888.0 million[618][619] - The company utilizes debt financing, including credit agreements with banks like Bank of Shanghai and CITIC Bank, and has issued Asset-Backed Notes (ABNs) and Asset-Backed Securities (ABSs) to raise capital[620][621][623][624] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, compensation practices, board structure, and employee breakdown, including share ownership of key personnel Compensation This section outlines the aggregate cash compensation for directors and executive officers, details the Share Incentive Plan, and mentions employment agreement clauses - In 2020, aggregate cash compensation for directors and executive officers was approximately RMB 26.5 million (US$4.1 million)[667] - The company adopted the Share Incentive Plan 2018, initially reserving 27,845,526 ordinary shares for grants, and as of December 31, 2020, 18,510,727 options remained outstanding after grants in May 2018, February 2019, and October 2020[674][680] - Share-based compensation expenses recognized in 2020 amounted to RMB 78.8 million (US$12.1 million)[680] Employees This section provides a breakdown of the company's total employees by functional area as of year-end 2020, highlighting the sales and marketing concentration Employee Breakdown by Function (as of Dec 31, 2020) | Function | Number of Employees | % of Total | | :--- | :--- | :--- | | Sales and marketing | 2,053 | 68.2% | | Operations | 364 | 12.1% | | Risk management | 233 | 7.7% | | General administration | 215 | 7.2% | | Research and development | 144 | 4.8% | | Total | 3,009 | 100.0% | Share Ownership This section details the company's concentrated voting power, primarily held by co-founders through super-voting shares, and lists other principal shareholders - Co-founders Mr. Xiaojun Zhang and Mr. Jiayuan Lin collectively exercise 87.6% of the aggregate voting power as of March 31, 2021, due to their ownership of super-voting Class B shares[709] - Each Class A ordinary share is entitled to one vote, while each Class B ordinary share is entitled to 20 votes[704] - Other principal shareholders (owning over 5%) include WP Fintech (18.3%), Tencent Mobility Limited (10.8%), Didi Chuxing (9.7%), and Taikang Offshore Entities (5.6%)[704] ITEM 8. FINANCIAL INFORMATION This section presents the company's consolidated financial statements and outlines its dividend policy, including past special cash dividends and future payment considerations - The company's board approved special cash dividends in three consecutive years Special Cash Dividend History | Approval Date | Dividend per Share (Ordinary) | Dividend per ADS | Aggregate Amount | | :--- | :--- | :--- | :--- | | April 22, 2019 | US$0.125 | US$0.25 | Approx. US$37.9M | | April 22, 2020 | US$0.125 | US$0.25 | Approx. US$37.9M | | March 11, 2021 | US$0.50 | US$1.00 | Approx. US$151.4M | - Future dividend payments are not guaranteed and will depend on the company's earnings, financial condition, and other factors, with distributions also constrained by PRC laws requiring statutory reserves to be set aside by its PRC subsidiaries[723][724] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily foreign exchange and interest rate fluctuations, and assesses the impact of inflation on operations - Foreign Exchange Risk: All revenues are denominated in RMB, and fluctuations in the RMB against the U.S. dollar can affect translated financial results, with the company recording a foreign exchange loss of RMB 8.8 million in 2020[766] - Interest Rate Risk: The company has not been materially exposed to interest rate risk and has not used derivative instruments to manage this exposure, however, future changes in market interest rates could pose a risk[771] - Inflation Risk: Inflation in China has not materially affected results of operations, with the consumer price index increasing by 2.5% in 2020[772][645] PART III ITEM 18. FINANCIAL STATEMENTS This section presents the full audited consolidated financial statements of Cango Inc. for 2018-2020, prepared under U.S. GAAP, including the auditor's report and detailed notes Notes to the Consolidated Financial Statements These notes provide detailed explanations of the company's significant accounting policies, including VIE consolidation, revenue recognition, share-based compensation, and fair value measurements - VIE Structure: The company operates in the PRC through a VIE, Shanghai Cango, due to foreign ownership restrictions, and is considered the primary beneficiary, consolidating the VIE's financial results[843][848] - Revenue Recognition: The company adopted ASC 606 on January 1, 2019, with revenue derived from loan facilitation, finance leases, after-market services, and automobile trading, and revenue from loan facilitation and post-origination services is allocated and recognized accordingly[875][878] - Risk Assurance Liabilities: For certain financing arrangements, the company provides risk assurance to financial institutions, with this liability having two components: a non-contingent aspect accounted for under ASC 460 and a contingent loss aspect under ASC 450, totaling RMB 460.8 million as of December 31, 2020[915][1007] - Share-Based Compensation: The company uses the binomial tree option pricing model to value stock options granted under its 2018 ESOP, with total share-based compensation expense amounting to RMB 78.8 million in 2020[1054][1055] - Investment in Li Auto: The investment in Li Auto was reclassified to short-term investments in 2020 following its IPO, and as of December 31, 2020, the fair value of this investment was RMB 3.69 billion, resulting in a significant unrealized gain[972][973]