CANG: A challenging environment for the business as its model evolves in 2022. Revenue was roughly in line with expectations in the second quarter. Adjust our price target to reflect lower revenue and margins.

By Brian Lantier, CFA

NYSE: CANG

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Cango CANG released its second quarter 2022 results last night and, as expected, the April and May COVID-related shutdowns had a significant impact on the business. The revenue mix continues to shift towards the auto trading business, which is currently a very low margin business and, coupled with additional investment in new business initiatives, resulted in a significant loss of RMB 286 million over the past year. quarter (42.7 million USD).

During the company's conference call, management indicated that despite new government tax incentives designed to stimulate consumer automotive demand, third-quarter 2022 revenue is expected to be between 350 and 400 million RMB (51 to 58 million US dollars). This represents another significant shortfall from our previous estimate of 749 RMB. While supply chain issues are slowly easing and some consumer demand has returned following stimulus efforts, management noted that the return to previous levels of demand has been more slower than expected.

Highlights from the earnings conference call

• Cango continues to face the challenge of a major shift in strategy and business model amid a significant slowdown in automotive demand in China in 2022. There are signs that demand consumer spending has picked up in the past two months following new stimulus initiatives from the Chinese government to boost purchases of new vehicles, but it is unclear whether these trends will remain intact throughout the year.

• The company's exit from the lending facilitation market was very evident in the June quarter, as revenue from this segment fell from RMB 303.3 million in June 2021 to only RMB 14.6 million in the current quarter. Although the company noted that its outstanding balances increased to 2.2% in the June quarter, this is mainly due to the fact that the total volume of business is smaller and this will be a less meaningful data point. in the future.

• The company's "Cango Haoche" platform recorded total sales of 2,291 vehicles during the quarter, of which more than 50% were New Energy Vehicles (NEVs). ). Increasing convenience for consumers and resellers with this platform is likely key to Cango's future success, as many future ancillary business lines (insurance, financing) will be offered to resellers and consumers through the Haoche platform. .

• With the proceeds the company received from the sale of Li Auto shares, Cango still declared RMB 3,397 million in cash and short-term investments ( $507 million) as of 6/30/22. Based on the current number of shares, this means that the company holds more than $3.50 per ADS, which exceeds the current share price by more than 30%. The company's 2021 stock buyback program expired in August 2021, but the board authorized an additional $50 million stock buyback program in April 2022 and we believe the company has the full remaining capacity under this authorization.

June 2022 quarter results

Cango reported revenue of RMB 289.2 million in the second quarter ending June 30, 2022, approximately 11% lower than our forecast, but in line with reported guidance previously 250 to 300 million RMB. Sequentially, revenue decreased by RMB 499 million or 63% and RMB 658 million or 69% year-on-year, due to the previously discussed economic challenges and the company's shift to auto trade.

Gross margin declined sharply due to the sharp increase in auto trading revenue as a percentage of sales. The total gross margin of only 5.7% was lower than expected. We believe the competitive landscape may have contributed to lower gross margins and we will need to monitor this trend for the remainder of 2022 and 2023.

For the third consecutive quarter, the company was well below our model for Q3 2022. The company now expects Q3 revenue of RMB 350-400 million. At the midpoint of that range, that would represent 30% sequential growth, which would be good news for investors, but the profitability of that revenue will be significant. We believe that business h...