Key Insights:

• Cango, a car trading platform, experienced its first quarter of revenue growth in nearly two years and reported a second consecutive quarterly profit as its new business model gained traction
• The company anticipates a slowdown in the third quarter due to the waning momentum of China’s car market rebound after the COVID-19 pandemic

By Doug Young

Cango Inc. (CANG), formerly a car financier, has undergone significant changes and is now operating as a car trading platform. In the second quarter, the company experienced a surge in revenue – its first in almost two years – thanks to the success of its new business model.

However, Cango’s latest financial report indicates potential challenges ahead. The company forecasts a major business slowdown in the third quarter, reflecting the fading momentum of China’s post-Covid rebound in the first half of the year.

The uncertain market conditions pose obstacles to Cango’s transformation. CEO Lin Jiayuan aims to strike a balance between advancing the company’s transition and avoiding risks associated with excess inventory and potential financial strains during an economic downturn.

During the second quarter earnings call, Lin stated, “Our focus in the next stage of the new car trading business will be on avoiding potential vehicle inventory risk, and we will control our transaction scales more carefully.”

Cango’s cautious approach may disappoint those expecting a rapid expansion of its new platform. The company’s U-Car app for used car trading, launched earlier this year, along with its Haoche app, launched in mid-2021, aims to attract dealerships in smaller Chinese markets. However, the company faces a start-stop sentiment from investors, as reflected in the fluctuation of its stock price.

While Cango possesses ample financial resources, with approximately 2.6 billion yuan ($359 million) in cash and short-term investments as of June, its relatively low price-to-sales (P/S) ratio of 0.8 demonstrates cautious investor sentiment compared to industry peers such as Autohome (ATHM), Uxin (UXIN), and Kaixin Auto (KXIN).

To differentiate itself in the market, Cango offers various services tailored to traders in smaller Chinese markets where resources are limited. The company expanded its platform in the second quarter, introducing a car loan program on the Haoche platform and a cross-regional delivery service. Cango also formed a team of experts to provide users with basic vehicle inspection and other services.

Revenue Growth

Cango’s revenue soared in the second quarter, driven by the success of its two major apps and the increasing adoption of supporting services. Revenue more than doubled from the year-ago quarter, reaching 675.4 million yuan. Most of the revenue came from the sale of cars through the Haoche platform, while the U-Car app facilitated a smaller number of car sales.

Car-trading transactions accounted for 83.3% of Cango’s revenue during the quarter, surpassing its car financing services that are gradually being phased out.

The company achieved a second consecutive quarterly net profit of 36.2 million yuan by controlling operating costs. However, it incurred an operating loss in the second quarter after posting an operating profit in the first quarter.

Despite the strong performance, Cango projects a more modest third quarter, with anticipated revenue of 300 million to 350 million yuan. This represents a 22% year-on-year decline at the midpoint and about half of the second quarter’s level. The company did not provide specific reasons for the expected slowdown.

The Chinese car market has also experienced fluctuations this year. Following a strong start at the beginning of the year after the easing of Covid restrictions, sales have slowed down. In fact, passenger car sales declined year-on-year in June and July, according to the China Passenger Car Association.

Lin noted that the initial sales boom may have been driven by pent-up demand and that consumer confidence remained relatively weak in the first half of the year. Despite some government efforts to stimulate the market, Lin expressed caution about the outlook for the remainder of the year.