Facing winter at home, Cango looks overseas

The auto-trading platform operator unveiled a new service for overseas dealers aiming to import used Chinese cars

Key Takeaways:

• Cango has launched a new app, AutoCango, to facilitate the export of used Chinese cars to dealers in developing markets
• The company’s revenue plunged 73% in last year’s fourth quarter, but it remains relatively well regarded by investors due to its conservative stance in China’s difficult car market

By Doug Young

If you can’t stand the heat in China’s intensely competitive car market, then you get out of the kitchen.

Of course that’s a slight exaggeration, but it’s not too far from the latest approach by Cango Inc. (CANG.US), a former auto financier now trying to become a leading provider of auto trading services in the world’s largest car market. Following a major pivot in its domestic strategy late last year in response to intense competition, Cango disclosed yet another major new turn in its roadmap in its fourth quarter results released on Monday.

That turn will see Cango try to position itself as a leading facilitator of used Chinese car sales to developing markets. Such a move may sound radical, but it dovetails with a recent boom in Chinese new car exports that has seen the country challenge Japan for the spot as the world’s top auto exporter.

The Chinese companies are looking overseas after building up huge capacity that fed the country’s huge demand for cars as its economy boomed over the last two decades. But with that economy now braking, intense competition at home has driven many companies to look overseas for new markets. Cango is facing similar problems as the many Chinese auto dealers that are its main revenue source are now losing money.

“2023 was a challenging year … In the automobile sector, intense competition hastened the survival of the fittest, transforming the industry landscape,” said Cango CEO Lin Jiayuan. “We see significant potential in China’s burgeoning used car export market, unlike the fierce competition within the domestic market. China, as the world’s largest auto manufacturer and consumer, possesses a vast pool of used cars, a gold mine for exporters.”

Lin’s unveiling of the export initiative comes just months after Cango made another major shift by merging its two recently launched platforms for new and used car trading into a single platform called U-Car. It called the shift strategic, saying it reflected an increasingly blurring line between new and used car dealers.

Amid all those shifts, investors still seem surprisingly attracted to Cango. Its stock rose 2% after its latest quarterly results announcement. The shares are up around 50% so far this year, giving the company a price-to-sales (P/S) ratio of 0.72. Leading domestic rival Autohome (ATHM.US; 2518.HK) trades at a higher 3.24, but Uxin (UXIN.US) is far lower at just 0.04. And even U.S. used car giant CarMax (KMX.US) is lower at 0.48.

The big attraction for investors appears to be Cango’s deep financial reserves, which are actually growing as it remains cash flow positive thanks to its conservative stance. The company had 3.3 billion yuan ($459 million) in cash and short-term investments at the end of last year, up from 3.1 billion yuan just three months earlier. By comparison, Uxin had just 64 million yuan in cash at the end of last June.

Looking overseas

Lin revealed that Cango took its first step to tap global markets with its launch earlier this month of AutoCango, which offers information and related services on used Chinese cars to dealers in emerging markets. He said the service already has information on more than 75,000 cars, and is adding another 500 to 1,000 each week.

“China has a well-developed logistics network, ensuring efficient and secure delivery of used cars to international buyers,” he said. The service’s newness means it has yet to facilitate any exports of used Chinese cars. But investors will almost certainly be looking for updates in the company’s next quarterly report in around three months’ time.

China exported more than 5 million cars last year, threatening Japan’s longtime position as the world’s largest exporter. Two of the country’s biggest export destinations were Russia and Mexico, which look like the kinds of developing markets that could also hold potential for the new AutoCango service.

Cango launched the overseas drive as its current domestic business is going nowhere fast. Its revenue plunged 73% to 130.2 million yuan in last year’s fourth quarter, which was in line with its forecast given three months earlier. Car trading accounted for the single largest revenue source, down 88% to 53.2 million yuan from 431.1 million yuan a year earlier.

Significantly, its cost of revenue fell to 85.1% of total revenue in the latest quarter from 98.9% a year earlier, CFO Zhang Yongyi said on Cango’s earnings call, marking an important improvement as it tries to return to sustained profitability.

While its revenue was down sharply, so were most of its costs, including a 77% decline in sales and marketing expenses and a 31% drop in general and administrative expenses. As a result, its operating loss narrowed sharply to 28.9 million yuan from 211.6 million yuan a year earlier, while its net loss fell to 103.8 million yuan from 558.9 million yuan.

The company said its revenue would continue to drop sharply in the current quarter. It forecast revenue of just 50 million yuan to 100 million yuan for this year’s first quarter, which would represent an 86% decline at the midpoint from 542.6 million yuan a year earlier.

As uncertainty loomed large in its home China market, Cango also made another recent adjustment by lowering its focus on directly selling cars, which carries high inventory risk, to the lower-risk business of providing intermediary and other services for car traders.

It said its U-Car app is slowly building up an ecosystem of such traders, and that 38 dealers had set up stores offering new and used cars in the fourth quarter. The app provided service to 3,499 small online car dealers and facilitated 530 used car transactions during the quarter.

At the end of the day, Cango looks a lot like a company preparing for a long and potentially cold winter, at least in its home market, which is undergoing a painful correction with too much capacity after years of explosive growth. In such circumstances, the company is taking care to lower its own risks and maintain a comfortable cash cushion to see it through the difficult times. It’s also planting some seeds that could allow it to thrive when things improve, including its latest foray into car exporting.

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