Company’s revenue takes major Covid hit as it launches a new Haoche app at the center of its ongoing transformation from car financier to car-trading platform operator

Key Takeaways:

  • Cango’s revenue fell 69% in the second quarter due to disruptions from China’s strict Covid controls, but it forecast the figure would start to rebound in the current quarter
  • Company added two important pieces to its emerging car-trading business model with the rollout of its Haoche app and launch of a used car trading platform 

By Doug Young

Talk about hitting a major speed bump.

Car trading platform Cango Inc.’s (CANG.US) business took a big hit in the second quarter, as China’s car market ground to a near standstill and the company’s headquarters in Shanghai was shuttered along with thousands of other businesses for much of the period. But Cango remained comfortable enough to start putting its cash back into short-term investments, as it continued to roll out some of the final pieces in its transformation to a provider of car-trading services from its older business model as a car financier.

Its progress in that transformation was speckled through the company’s second-quarter financial report, though a huge drop in its quarterly car transactions and revenue dominated the announcement. The smaller but strategically significant developments were also focal points on its earnings call, whose participants included analysts from Morgan Stanley and Goldman Sachs, showing the company can still attract attention from some of the big-name banks.

Like many Chinese companies being pounded by fallout from the country’s strict Covid control measures, Cango also forecast that things were already starting to improve in the current quarter as cities across China began to ease some of their restrictions. Still, the potential for more big disruptions always remains a possibility, as evidenced by new citywide lockdowns this week in the southern boomtown of Shenzhen and in Chengdu, capital of Sichuan province.

China’s overall auto market suffered one of its worst quarters in recent memory in the three months through June, with sales down a whopping 48% in April and another 13% in May amid all the Covid controls, including a complete lockdown of Shanghai in April and May. But the market began to pick up in June and July, with car sales posting around 30% year-on-year growth for both months, according to industry data.

Cango’s comeback wasn’t quite that strong, though its numbers do show its business bottomed out in the second quarter and has started trending back upwards. Its second-quarter revenue tumbled 69% to 289.2 million yuan ($41.7 million) from 946.7 million yuan a year earlier, according to its latest quarterly report released on Monday last week.

The company conducted 2,291 car-trading transactions over its platform during the quarter, down from 6,827 on its Haoche miniapp in the previous quarter. New energy vehicles (NEVs), a major focus for its car-trading services, accounted for 1,329 units during the quarter, about 58% of total transactions.

The weak numbers bled through to Cango’s bottom line, with the company reporting a non-GAAP adjusted net loss, which excludes certain items like employee stock incentives, of 189.6 million yuan, widening from a 113.3 million yuan loss in the previous quarter.

Cango forecast its revenue would bounce back to between 350 million yuan and 400 million yuan in the current quarter, which would represent about 30% growth from the second-quarter low but is still down about 50% from the year-ago level. At least part of the drop owes to the changing business model we’ve already mentioned, which puts far more emphasis on a broader range of car trading services aimed at mid-sized to smaller auto dealers in smaller cities.

By comparison, Cango was previously a traditional car financier. That part of the business has been shrinking steadily, and accounted for less than 10% of the company’s business in the second quarter – down sharply from 13% in the previous quarter and 25% in the final quarter of 2021.

New investments

While the company clearly burned through some cash in the last quarter, it also managed to put around 250 million yuan of its remaining cash into new short-term investments. As a result, its total cash fell to 1.28 billion yuan at the end of June from 2.14 billion three months earlier. Such behavior seems to show the company is relatively confident about where it’s going and isn’t worried about a cash crunch in the near-term.

Amid all the background noise from the broader economic turmoil, Cango managed to roll out the centerpiece of its new car-trading strategy during the latest quarter with the June launch of its Haoche app, following the launch of its Haoche miniapp on the popular WeChat instant messaging platform last year. It also made some major moves into used cars during the quarter in anticipation of strong growth ahead for that market.

“As NEVs and used cars enter a new development stage of fast and large-scale growth and benefit from policy initiatives designed to stimulate market activities, we will make ongoing investments in these two areas to elevate our platform capabilities and realize our goal of building a tech-enabled car trading platform,” said CEO Lin Jiayuan on the company’s earnings call.

Company officials said that only two weeks after the Haoche app’s June launch, more than 1,000 dealers had migrated to the app or registered new accounts there. That brought the number of dealers in the broader Haoche ecosystem, which also includes WeChat miniapp users, to 8,237 dealers in 305 cities by the end of June.

Company officials added the Haoche app will launch an insurance service interface in the current quarter. Meantime, they also highlighted encouraging results that have seen daily user activity on the Haoche platform rising by nearly 50% on a quarter-to-quarter basis, and dealer activity rising by an even stronger 70% on the same basis, reflecting growing user “stickiness.”

At the same time, the company launched a used car platform early in the second quarter, and by the end of June had already signed up 1,500 registered users. It pointed out China’s used car market could be headed for rapid growth soon, following the recent removal of cross-city transfer restrictions on used cars that should pave the way for a western-style national marketplace.

“Based on the results so far, we believe the used car platform actually will be more active than the new car platform,” said CFO Zhang Yongyi on the call.

Despite the encouraging report on Haoche’s development, investors seemed to want more immediate good news than Cango had to offer. The company’s stock fell 10% the day after the results announcement, and is now down about 31% this year. Those declines have left it with a relatively weak price-to-sales (P/S) ratio of 0.78, trailing similar-sized rival Uxin (UXIN.US) at 1.33 times and the far larger and older Autohome (ATHM.US) at 4.45 times.

At the end of the day, Cango seems to have an interesting story to tell and is assembling an ecosystem that could quickly accelerate if and when China’s car market ever rebounds. Now it just needs to prove that system works by starting to ramp up the numbers to significant levels, and also by returning to a growth track. Returning to sustainable profitability would also help.

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