Macro headwinds accelerate Cango’s transition to car trading from auto finance

Key points to remember:

  • Cango’s revenue fell 30% in the first quarter, driven by a 74% decline in its legacy auto finance business which the company is downplaying in favor of broader auto-trading services
  • The company launched an app version of its Cango Haoche this month, expanding on last year’s rollout of a WeChat mini-app that it is positioning at the center of its new business model.

By Doug Young

Nothing like a storm of macroeconomic headwinds to propel you towards your goals.

It is a key theme in the latest results of the automobile trading company Cango inc. CANG, whose first-quarter financials mirror those of many other consumer-facing Chinese companies struggling in what is arguably one of the toughest business environments in decades. The difficulties stem from a number of factors, including a global chip shortage that is weighing on auto manufacturing and inflation that is pushing central banks to raise interest rates to levels not seen in decades.

But in China, the biggest challenge by far is the endless series of localized and city-wide lockdowns and other restrictions dating back to March to contain the highly contagious Covid 19 Omicron variant under policy.” zero Covid” of the country.

Consumer demand has plunged as many people remain confined to their homes, sometimes for weeks at a time. Many are in no mood to spend anyway, as they face uncertainty about their job prospects. At the same time, Covid restrictions have made it difficult to transport goods across the country as many highways remain closed or traffic is heavily restricted to prevent the spread of the virus from city to city.

Cango’s end result was a slump in revenue during the first quarter, with the company expecting an even bigger drop in the second quarter when China’s commercial capital of Shanghai went into total lockdown during April and May. Cango and others have spoken at length about the difficult environment they face, and most of these companies are controlling costs to try to conserve cash during such a difficult time.

At the same time, Cango and his peers are also trying to look beyond the pandemic by talking about their latest initiatives and where they stand once things return to more normal conditions.

In Cango’s case, the many macro headwinds facing the company have actually helped it accelerate its year-old transformation from an automotive financier to a provider of a wider range of motor trade services. The company is also making an aggressive push into the New Energy Vehicle (NEV) business, capturing the portion of the Chinese auto market that is doing quite well, posting triple-digit growth, despite all the economic malaise.

Investors seemed more focused on company-specific signals from Cango, with its shares falling 4% on the day of the June 9 earnings announcement, but recovering all of that over the next few trading days. Significantly, the stock is now trading roughly where it started the year – something many Chinese stocks traded in the US cannot say in the current difficult environment.

Part of the stock’s resilience may be due to a current valuation that looks decidedly low relative to its industry peers. Cango shares now trade at a price-to-book (P/B) ratio of just 0.4, compared to a ratio of 1.1 for its domestic rival Autohome ATHM and a high ratio of around 30 for the US used car trader carvana CVNA.

Driving through a storm

That said, we will then look at Cango’s latest financials, which really paint a bleak picture for the first half of the year, before taking a closer look at the company’s longer-term initiatives that are part of the previously mentioned commercial transformation. . The company’s revenue fell 30% in the first quarter to 787.7 million yuan ($117 million), from 1.12 billion yuan a year ago. He said things would get worse in the second quarter, forecasting revenue of just 250 million yuan to 300 million yuan. The midpoint of that range would represent a 71% drop from the 947 million yuan reported a year earlier.

The company’s non-GAAP adjusted net loss, which excludes the impact of stock-based compensation, actually narrowed to 113.3 million yuan for the quarter, less than half of the 254 million loss. yuan on the same basis a year earlier.

“The current round of the pandemic outbreak has been going on for more than two months, covering the first two quarters of 2022,” Cango CEO Lin Jiayuan said. “As the pandemic is slowly brought under control and production gradually resumes, we believe the impact on demand will persist in the longer term.”

One of the main reasons for the huge decline in revenue is the slump in Cango’s older car finance business, which fell 74% to 105.9 million yuan in the quarter. The sharp decline meant the auto finance business accounted for just 13% of the company’s revenue for the quarter, down from around a quarter in the prior quarter. The funding de-emphasis dates back to China’s earlier crackdown on fintech firms over risk management issues. But now, the company’s move away from that part of the business appears to be accelerating in the face of all the recent economic headwinds.

By comparison, revenue from Cango’s auto trade transactions, which the company is building under its new business model, managed to post year-over-year growth for the quarter, rising 4.9% to 599.3 million. yuan. That means part of the business accounted for about three-quarters of Cango’s revenue in the quarter, up from about two-thirds in the prior quarter.

As part of its focus on car trading services, the company this month announced the launch of its new Cango Haoche app, which sits at the center of this part of the business. The company launched a smaller version of the app last year in popular social networking platform WeChat, and said the mini-app had recorded 2.76 million cumulative transactions through the end of the month. Of March.

As part of its broader car trading business, Cango is putting the accelerator on NEVs as it attempts to move into a segment of the market that is experiencing rapid growth due to improved technology and strong government support. Of the 6,827 vehicles sold on the Cango Haoche WeChat mini-app during the quarter, 5,193 were NEVs. By comparison, the company’s NEV transactions totaled just 5,742 for the whole of last year. Cango is also trying to carve out a niche as an insurance provider for NEVs by working with some of the many smaller manufacturers in the country.

Last but not least, Cango’s management is taking a similar approach to many of its Chinese peers in curbing spending and becoming more cautious with its investments. Its operating costs remained roughly unchanged in the first quarter from a year earlier. It also shifted much of its short-term investments into cash, with the result that its cash increased to 2.1 billion yuan at the end of March from 1.4 billion yuan three months earlier.