Cango: Recovery still in progress for Cango in Global Auto StormBamboo Works

Key points to remember:

1、 Cango reported that its revenue fell in the third quarter compared to the second, but expected the figure to return to sequential growth in the fourth quarter

2、The company appears undervalued compared to its domestic peers as it diversifies beyond its former auto finance business into the auto trade

Spots of light in a sea of ​​darkness.

That might better describe the broader scorecard view of online auto services company Cango Inc. (CANG.US), whose latest earnings report looks decidedly pessimistic but offers some signs of optimism for the future. company undergoing transformation.

Those signs include a resumption of official support from Beijing for auto finance, one of the company’s two core businesses alongside its new auto trade business. Cango also expects a return to revenue growth in the coming year, reversing a cycle that has seen the figure decline throughout this year.

Cango and most of its peers have been caught up in a downturn in the global auto industry, whose sales have stumbled due to a shortage of the many high-tech microchips that are a key part of auto manufacturing. Frequent major lockdowns in China due to the country’s zero-Covid policy have also weighed on consumer sentiment, further dampening demand in the world’s biggest auto market.

Reflecting the bigger picture, new car sales in China fell 9.4% in October year-on-year, marking the sixth consecutive month of decline. Cango’s larger and more established competitor, Autohome (ATHM.US; 2518.HK), previously reported similarly tough conditions, which sent its revenue and profit down 24% and 38%, respectively. in the third trimester.

Cango was similar, although its revenue actually rose 84% year-on-year in the third quarter to 800.6 million yuan ($126 million), beating the company’s previous forecast of 700 million. yuan to 750 million yuan. But the big jump is due to the virtual absence of its new car trading services in the last year quarter, an area Cango just entered last year in a diversification move that now represents more than half of the company’s revenue.

So a quarter-over-quarter comparison is probably best to see how this company is doing. In this regard, the latest revenue was down 15% from the second quarter, as the shortage of chips and new cars led to lower sales in the automotive industry. In one of the small bright spots we mentioned above, the company expects revenue to finally turn the page and start to rebound in the current quarter to reach between 950 million yuan and 1 billion yuan.

This lack of optimism did not spur investors, whose pessimism sparked a 10% drop in Cango shares the day after the November 22 earnings announcement. The sell-off has continued since then, with shares now down around 25% after the announcement and trading near an all-time low since the company listed in New York in 2018.

Analysts are a bit more optimistic, presumably anticipating when the global chip shortage may start to ease, which many predict in the second half of next year. The three analysts polled by Yahoo Finance were evenly split, with one calling the company a “strong buy,” one a “buy” and another a “hold.” Their average price target of $4.80 represents about a 50% premium to Cango’s last stock price.

Undervalued

Cango is one of many web-based companies seeking consumers in China’s vast but equally competitive automotive market. Among other publicly listed companies, it competes with the much larger Autohome, as well as other names like auto finance specialist Yixin (2858.HK) and used car specialist Uxin (UXIN.US). With the exception of Autohome, most of its peers are losing money and almost all have higher valuations.

On a price-to-sales (P/S) basis, Cango now trades at a ratio of just 0.77, a figure that seems quite low considering its strong revenue growth as it adds services to car exchange to its product line. Uxin is the most popular domestic player with a P/S of 7.2, perhaps due to its recent addition of several high-profile investors and its own transformation story which should lead to rapid growth similar to that of Cango.

Autohome is also trading at a significantly higher P/S of 3.2, and Yixin is trading at 2.3.

A deeper dive into Cango’s financials shows that its new auto-trading revenue has plateaued after exploding early on in the venture. That figure totaled 429 million yuan in the third quarter, still accounting for more than half of the company’s revenue, but down from 522 million yuan in the previous quarter.

Its former auto finance business looked slightly better, up 15.8% year-on-year to 266.5 million yuan. But that activity was also down quarter over quarter, again due to general industry malaise.

“Given the dual effect of the epidemic and the economic slowdown, consumer demand is very weak, especially in lower-level markets. And the automotive market is showing a weak supply and demand trend. “, CEO Lin Jiayuan said of the company’s earnings. to call. “Looking ahead, we expect the upheaval related to the shortage of automotive chips in the automotive market to persist for some time.”

Beijing is also clearly concerned about the slump and the impact it could have on China’s economy. This concern underlies one of the few positives highlighted by Cango, which is that the country’s state-owned banks, which largely take their cues from the government, have taken a renewed interest in auto loans. Cango acts as an intermediary between these banks and consumers for the bulk of its auto finance business.

“In fact, we have observed that there is a change in the preference of banks with regard to the assets they hold, and now (this preference) is moving away from real estate assets, and banks are increasingly turning more towards auto loans,” Lin said.

So if ever consumer sentiment improves, money to fund their purchases will be ready and waiting. Cango’s network of nearly 48,000 resellers and brand partners also looks set to spring into action when things improve, with Cango’s new WeChat mini-app showing signs of gaining momentum by signing up 5,700 partners. since its launch in May. The company is still refining this app and plans to start publishing more metrics like users and gross merchandise value in the first half of next year.

But for now, at least, the result doesn’t look too exciting. Cango posted a loss of 416.5 million yuan in the third quarter, although almost all of that loss appears to be tied to a sharp decline in the company’s holdings in electric car maker Li Auto (LI.US).

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