Cango shifts gears with merger of platforms, focus on inventory risk control

The company said it will combine its new and used car services into a single platform, as a growing number of dealers engage in both businesses

Key Takeaways:

• Cango will merge its new and used car platforms onto a single service, in a major tweak to its new business model as a car-trading services provider
• The company forecast its fourth-quarter revenue would drop sharply as it becomes more conservative in the current market where half of dealers are losing money

By Doug Young

Just when it looked set to cruise with its new business model, Cango Inc. (CANG.US) has announced an abrupt shift of gears with its latest third-quarter results. The car trader will merge its recently launched new and used trading car platforms into a single entity, a move that it says reflects recent trends in China’s auto market.

At the same time, Cango also announced it will scale back one of its other recent major initiatives to focus on direct car trading. Instead, it will also encourage other traders to set up shops on its platform. That shift looks aimed at easing Cango’s risk of building up too much inventory as China’s car market becomes increasingly saturated and plagued by price wars after years of big growth.

With so many uncertainties in the background, Cango slipped back into revenue contraction in the third quarter after reporting its first growth in nearly two years during the previous quarter, according to its latest results released on Monday. It forecast even bigger revenue contraction in the fourth quarter, which has typically been a slow period for the company.

Despite putting on the brakes, Cango’s relatively conservative approach helped to keep it cash flow positive during the latest quarter, giving it more than 3 billion yuan ($421 million) in reserves that it can start to spend more aggressively when the market shows signs of improvement.

CEO Lin Jiayuan pointed out that previously released data from the China Automobile Dealers Association shows that 50% of Chinese auto dealers lost money in the first half of this year, the highest level in recent years. Their losses came on the back of a bloody price war as dealers struggle to attract buyers in the sluggish market.

“Car dealers’ profitability has been badly affected by pricing wars, and they have shifted toward purchasing vehicles on-demand to ease inventory buildup and operational pressure,” he said on the company’s earnings call. “In fact, not only car dealers have been impacted – everyone along the automotive value chain has experienced unprecedented pressure, including Cango.”

China’s car market has been moving in fits and starts this year, trying to regain its earlier momentum from years of breakneck growth that propelled it past the U.S. to become the world’s largest marketplace. After a relatively strong start to the year with China’s end of Covid restrictions, the market quickly lost momentum in the middle of 2023 as consumers reined in their spending over worries about the slowing economy.

Growth returned to positive territory in August and September, though sales from the year-ago period were already quite weak due to China’s strict pandemic controls at the time. And as Cango’s Lin pointed out, much of the third-quarter sales growth for the broader car market was undermined by the fact that many dealers were selling at a loss to clear out inventory.

Lin previous flagged inventory buildup in the slowing market as a risk that Cango is trying to minimize. At the same time, he noted that many dealers have also been buying less cars recently to lower similar risk. Those factors combined to yield a 24% year-on-year decline in Cango’s car-trading transactions to 264 million yuan in the third quarter. The weakness pulled down the company’s overall revenue by 15% year-on-year to 354 million yuan, slightly beating its guidance given out three months earlier.

Under construction

Cango has spent most of the past two years overhauling itself as it moves away from its original business as a car financing specialist and into the more lightly regulated area of car trading services. Reflecting that, the outstanding balance from its older car financing business dropped sharply to just 13 billion yuan at the end of September, down by nearly 60% from a year earlier.

The company’s move into car-trading services is focused on China’s smaller cities where dealers are typically smaller and have less resources than their big-city peers. It rolled out two platforms, Haoche for new cars and U-Car for used cars, over the last year and a half as part of that change, offering both car-trading as well as supporting services like insurance. But in a sudden shift, the company has decided to combine the two into a single marketplace.

“New car dealers are starting to engage in used car retail, while used car dealers are now attempting to sell new cars as well,” said Lin. “As such, we have decided to merge Cango Haoche’s services into our Cango U-car platform to cater to the rapidly disappearing boundary between new car and used car sales channels.”

As part of its shift, Cango will also move from its previous focus on directly buying and selling cars to a “multi-store” approach that encourages more third parties to set up stores on its platform. That move looks at least partly aimed at reducing the inventory risk for Cango that we previously mentioned. The company also announced it is studying the possibility of expanding into overseas markets.

As it makes those adjustments, Cango forecast its revenue would drop to between 100 million yuan and 150 million yuan in the fourth quarter, which would represent a steep 74% decline from the 487 million yuan it reported a year earlier at the midpoint.

Shareholders took the shift largely in stride, with Cango’s shares rising 0.9% on Tuesday after the results came out. Their relative lack of concern could owe to the fact that Cango is still cash flow positive thanks to its conservative approach. It reported a 49.1 million yuan net loss for the quarter, reversing profits in the two previous periods. But the loss was largely due to a non-cash goodwill impairment.

Its cautious approach allowed Cango to build up its financial reserves, which totaled 666 million yuan in cash and 2.43 billion yuan in short-term investments at the end up September, both up by more than 10% from three months earlier.

Cango’s shares currently trade at a price-to-sales (P/S) ratio of 0.51, which is well behind the 3.34 for much larger rival Autohome (ATHM.US; 2518.HK) but ahead of the 0.18 and 0.40 for more similar-sized peers Uxin (UXIN.US) and Kaixin Auto (KXIN.US), respectively.

At the end of the day, Cango’s conservative approach may have earned it a premium to its similar-sized peers. But if it wants to chase the likes of Autohome, it will need to show it can effectively use its sizable cash resources to quickly build up its new business once the Chinese auto market finally starts to improve.

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