Macro Headwinds Accelerate Cango's Drive to Car Trading from Auto Finance

Key Takeaways:

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

By Doug Young

There's nothing like a storm of macroeconomic headwinds to power you towards your goals.

That's a key theme in the latest results from auto trading company Cango Inc. NYSE:CANG, whose first-quarter financials mirror those of many other consumer-facing Chinese firms that are struggling in what's arguably one of the most difficult business environments in decades. The difficulties owe to a number of factors, including a global chip shortage that is weighing on car manufacturing, and inflation that is promoting central banks to raise interest rates to highs not seen in decades.

But in China, the biggest challenge by far is the country's unending series of localized and citywide lockdowns and other restrictions dating back to March to contain the highly contagious Covid 19 Omicron variant under the country's "zero Covid" policy.

Consumer demand has plunged as many people remain confined at home, sometimes for weeks at a time. Many aren't in much of a spending mood anyhow, as they face uncertainties about their employment prospects. At the same time, Covid restrictions have made it difficult to transport goods around the country as many highways remain shut or traffic is heavily restricted to prevent the spread of the virus from city to city.

The bottom line for Cango was a plunge in its revenue during the first quarter, with the company forecasting an even bigger decline in the second quarter when China's commercial capital of Shanghai was under complete lockdown for the months of April and May. Cango and others have talked at length about the challenging environment they face, and most of those companies are controlling costs to try and conserve their cash during such a difficult time.

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

In Cango's case, the numerous macro headwinds the company is facing have actually helped it accelerate its year-old transformation from a car financier to a provider of a broader suite of car-trading services. The company is also making an aggressive push into new energy vehicle (NEV) trading, seizing on the one part of China's car market that is actually doing quite well, posting triple-digit growth, despite all the economic malaise.

Investors seemed more focused on Cango's company-specific signals, with its shares falling 4% the day the results were announced on June 9, but then gaining all of that back in the next few trading days. Significantly, the stock now trades roughly where it began the year - not something many U.S.-traded Chinese stocks can say in the current difficult environment.

Part of the stock's resilience may owe to a current valuation that looks decidedly low compared with its industry peers. Cango's stock now trades at a price-to-book (P/B) ratio of just 0.4, compared with a ratio of 1.1 for domestic rival Autohome NYSE:ATHM and a lofty ratio of about 30 for U.S. used car trader Carvana NYSE:CVNA.

Driving through a storm

All that said, we'll look next at Cango's latest financials, which really do 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 business transformation. The company's revenue fell 30% in the first quarter to 787.7 million yuan ($117 million) from 1.12 billion yuan in the year-ago period. It 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% decline from the 947 million yuan it reported a year earlier.

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

"The current round of the pandemic outbreak has lasted for more than two months, spanning the first two quarters of 2022," said Cango CEO Lin Jiayuan. "While the pandemic is slowly coming under control and production is gradually resuming, we believe the impact on the demand side will persist longer-term."

A primary reason for the huge revenue decline was a plunge in Cango's older car financing business, which dropped by 74% to 105.9 million yuan in the quarter. That big decline meant the auto financing business accounted for just 13% of the company's revenue for the quarter, down from about a quarter in the previous quarter. The de-emphasis on financing dates back to China's earlier crackdown on fintech companies due to risk-management concerns. But now the company's drive away from that part of the business seems to be accelerating in the face of all the recent economic headwinds.

By comparison, Cango's car trading transaction revenue, which the company is building up under its new business model, managed to post year-on-year growth for the quarter, rising 4.9% to 599.3 million yuan. That means that part of the business accounted for about three-quarters of Cango's revenue during the quarter, up from about two-thirds in the previous quarter.

As part of the focus on car-trading services, the company trumpeted the launch of its new Cango Haoche app this month that lies at the center of that part of the business. The company launched a smaller version of the app last year inside the hugely popular WeChat social networking platform, and said that mini-app had logged 2.76 million cumulative deals through the end of March.

Within its broader car-trading business, Cango is putting the accelerator on NEVs as it tries to orient itself towards a segment of the market that is growing rapidly due to improving 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 all of last year. Cango is also trying to carve out a niche as an insurance provider for NEVs by working together with some of the country's many smaller manufacturers.

Last but certainly not least, Cango's management is taking a similar tack to many of its Chinese peers by pumping the brakes on spending and becoming more conservative with its investments. Its operating costs were roughly unchanged in the first quarter from a year earlier. It also moved a big chunk of its short-term investments into cash, with the result that its cash rose to 2.1 billion yuan at the end of March from 1.4 billion yuan three months earlier.