After rolling out its new business model, Cango shifts into new phase

The company launched its U-Car used car trading app at the start of this year, representing the last major piece in its transformation from auto financier to car trader

Key Takeaways:

• Cango’s new and used car trading platforms have logged strong growth since their recent launches, attracting around 10,000 and 5,000 dealers, respectively, by the end of last year
• The company’s revenue fell sharply in the fourth quarter due to its transformation and market weakness, but it should return to growth in the second quarter

By Doug Young

Cango Inc.’s (CANG.US) latest quarterly results show its transformation shifting into a new phase, as it posted strong growth for the young car-trading platforms at the heart of its new business model. But its top line revenue remained squarely in contraction territory, and its bottom line stayed in the red, with no signals of relief for either of those two key metrics until later this year.

Cango is part of a group that piled into financial services when Beijing first rolled out the welcome mat for participation by private companies in the sector nearly a decade ago. But fast forward to the present, when most of those have either folded or left the space due to stiff government regulation aimed at controlling risk. Cango is one of the survivors, winding down its original business as an auto financier to become a more diversified provider of car trading services.

That road of transformation has been mostly uphill for the last two years. But the start of a new chapter was more evident in the company’s latest financial report that showed its two main platforms – one for new cars and the other for used ones – gained traction at the end of last year.

The older platform for new car trading, called Haoche, launched a mini app on the popular WeChat platform in 2021, and followed with a full app midway through last year. Its newer Cango U-Car platform for used car trading followed a similar road but about a half year behind, launching its mini app last spring before rolling out the full app at the start of this year.

Haoche kicked into high gear at the end of 2022, logging more than 360,000 page views in the fourth quarter alone – more than doubling its total page views between the app’s launch and the end of September. It added new unique visitors at a similar rate to bring its total to 57,000 by year-end, showing the platform was gaining traction among its target car buyers and dealers.

The younger U-Car platform has yet to be tested in its newer app form due to its recent launch. But the older WeChat mini app had chalked up 4,492 registered dealers by the end of last year, up roughly 50% from the 3,000 at the end of September. By comparison, Haoche had just over 10,000 registered dealers by the end of last year, growing more slowly from the 9,350 three months earlier as that platform starts to mature.

China is the world’s largest car market, surpassing the U.S. more than a decade ago after years of explosive growth. But growth rates have slowed considerably since 2018 as the market matures. Last year was especially tough for the industry, as it suffered from the double blow of Covid controls that forced many dealers to close for extended periods, combined with the older issue of component shortages that crimped car production around the beginning of the pandemic.

Cango has said it’s in a good position to outperform its rivals in such adverse market conditions, thanks to its experience dealing with more cost-conscious buyers in China’s smaller cities, as well as the used car part of its mix that is less affected by factors like component shortages.

Race against time

Having launched its two main platforms, Cango is now in a race to populate them with the kinds of services and user-friendly functions that can turn them into vibrant car-trading communities of dealers and buyers. Its recently added services include insurance, deposit guarantee, maintenance and customer lead generation services.

At the same time, the company also spent the fourth quarter building up real-world resources by setting up a national network of professional technicians and car service teams across China to help consumers inspect the cars they are buying and receive after-sales service.

“Our automotive transaction service platform covering both new and used car markets has taken shape, and excellent market feedback and increasing market demand have already validated its effectiveness,” said CEO Lin Jiayuan in remarks accompanying the results. “Three years of pandemic policies actually have created a backlog of consumer demand, and we believe this pent-up demand for car purchases will gradually be released.”

Now the company just needs to move its new business into a higher gear.

It reported its revenue fell 54% in last year’s fourth quarter to 487 million yuan ($71 million), extending a series of sharp declines throughout the year as it grappled with the challenge of undertaking a major business transformation in the middle of some of China’s strictest-ever pandemic controls. It forecast its revenue should stabilize sequentially at between 450 million and 500 million in the first quarter, though the midpoint of that range is still down about 40% year-on-year.

If it can maintain or even improve that revenue level, it should easily return to year-on-year revenue growth in the second quarter when the year-ago figures start to better reflect its current business. The company got the big majority 88.5% of its revenue from its newer car trading services in the fourth quarter, up from 67% a year earlier.

In a slightly worrisome sign, Cango’s cost of revenue has been creeping up as a percentage of total revenue, reaching 98.9% in the fourth quarter from 83.8% a year earlier. It will need to bring that figure down sharply if it hopes to find longer-term profits that have remained elusive thus far. In that regard, the company reported a fourth-quarter loss from operations of 212 million yuan, widening from a 157 million yuan operating loss a year earlier.

Investors weren’t particularly moved by the latest report, with Cango shares dropping 3% the day after the results were published. The stock has been relatively stable since mid-November, following a big sell-off around that time after the company paid out a huge dividend equal to roughly 40% of the stock price.

It currently trades at a relatively low price-to-sales (P/S) multiple of 0.6, though that’s still ahead of similarly transforming Chinese rival Uxin’s (UXIN.US) 0.37 and is light years ahead of hapless U.S. used car seller Carvana (CVNA.US) at just 0.07. But Cango is also well behind China’s leading online car trader AutoHome (ATHM.US; 2518.HK), which trades at a P/S ratio of 3.8.

At the end of the day, investors are really most interested in the long-term viability of a business like Cango’s, which will only be evident when it can sharply boost its revenues and post strong profits. It appears to have all of the pieces in place to do that, meaning all eyes will be watching to see if its sales can finally return to strong growth mode as China’s economy starts to rebound.

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