ANALYSIS: Cango Pursues Expansion Despite China's Auto Market Challenges

Car dealer online marketplace and service provider Cango continues to expand its business in many directions and will be well-positioned to benefit from an upturn in the Chinese auto buying market.

Donovan Jones
    Jul 20, 2019 5:00 AM  PT
ANALYSIS: Cango Pursues Expansion Despite China's Auto Market Challenges
resource from: (Source: ir.cangoonline.com)   
(Source: ir.cangoonline.com)

Short Take

Cango Inc. (NYSE: CANG) reported financial results for its Q1 2019 quarter in late May.

The firm provides car dealers with an online portal that connects them to customers and partners to facilitate buying and selling of new and used cars.

Since its IPO, CANG has experienced a difficult car-buying environment in China. When a more positive market returns, I expect the firm to be well-positioned to take advantage of the upturn.

Company

Shanghai, China,-based Cango was founded in 2010 to develop an online new vehicle purchase system for car dealers.

Management is headed by co-founder, director and CEO Jiayuan Lin.

The company's business is composed of three primary services, as the chart below indicates:

  • Automotive Transactions

  • Automotive Financing

  • After-Market Service

(Source: Cango)

Cango facilitates new and, to a lesser extent, used car buying and selling. It also connects financial institutions with buyers so they can afford to purchase a new car - it provides connections to auto maintenance after the sale.

With regard to its financial services, the firm provides access to third-party financial institutions that bear credit risk and it will also bear credit risk through Shanghai Autohome which provides lease financing.

Customer Acquisition

Cango targets its software to car dealers. The dealer network is central to acquiring more customers. Cango also uses online automotive advertising platforms to attract a larger user base.

The firm is focusing its efforts on providing service to tier 2 and tier 3 cities where there are a large number of auto dealers, which it divides into new and used car dealers as well as "2S" and "4S." 2S are dealers that provide "Sales" and "Service," while 4S dealers also provide "Spare parts" and "Survey," which refers to obtaining customer survey data.

Its in-house sales team is responsible for expanding and managing its dealer network.

As of Dec. 31, 2017, Cango counted 37,667 registered dealers, 11 third-party financial institutions and had facilitated transactions for 734,336 new car buyers.

According to a recent Oliver Wyman report, Cango's platform serves the largest number of new car dealers, at 27,054.

Market and Competition

According to a 2017 market research report by ReportLinker, the new cars via an online marketplace market is forecast to accelerate for the five-year period 2016 - 2021. The Chinese additional cars sector generated revenues of $417 billion in 2016, representing a CAGR of 10.70% between 2012 and 2016.

The main factors driving expected market growth are tax cuts on the sales of small engine vehicles and the loosening of regulations that banned pickups from circulating in main cities.

Major competitive vendors that sell new or used cars via an online marketplace include:

  • Yixin Group

  • Uxin Group (Nasdaq: Uxin)

  • Gauzi.com

  • RenRenChe

  • Tiantian Paiche

  • Souche.com

Notably, Uxin Group is focused on the consumer used car market with its online platform, whereas Cango is more focused on new car dealers.

Recent Performance

Since its IPO in July 2018, topline revenue by quarter has been uneven, although Q1 2019 saw a significant sequential increase:

(Source: Seeking Alpha)

Gross profit by quarter has fluctuated, though rising from a five-quarter low in Q2 2018:

(Source: Seeking Alpha)

Operating income by quarter has generally worsened since the IPO, rising only in the most recent reported period:

(Source: Seeking Alpha)

Earnings per share (diluted) have generally trended downward since Q2 2018:

(Source: Seeking Alpha)

In the past 12 months, CANG's stock price has dropped 42.5 percent, as the chart below indicates:

(Source: Sentieo)

Earnings surprises in the three quarters since the firm has had public coverage have been negative on two occasions and positive only once:

(Source: Seeking Alpha)

Commentary

In its most recent earnings conference call, management highlighted the challenging results in 2018 for the automotive market in China, experiencing its first decline in the past two decades.

Against this difficult backdrop, however, the firm continues to execute its plan to expand its service offerings to car dealers and grow its dealer network.

For example, CANG acquired an insurance brokerage firm and plans to set up brokerages in various regions within the PRC.

Additionally, it introduced accident insurance for auto payments and anti-theft insurance.

Perhaps the most promising partnership is its connection with ridesharing firm Didi Chuxing. In Q1 2019, it completed 190 car purchases for drivers in 8 cities and expanded its service to 41 cities. It provides a suite of services to drivers on the Didi network.

So, while the firm's financial results have been uneven and affected by the macro environment in China, I'm impressed by management's execution and focus on improving various aspects of its business.

When the Chinese car industry resumes growth, I expect Cango to be well-positioned to take advantage of that growth.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)


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