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Cango Inc. (CANG) reported 1Q22 results that were roughly inline with our expectations. Revenue guidance for 2Q22 and FY2022 was significantly below our expectations due to extended COVID shutdowns in China and lower consumer confidence.
We believe that 2022 marks a period of transition for the company as it migrates its model to one focused on auto trading. The company's strong balance sheet should help it weather the economic challenges it will face for the rest of 2022.
Business Update
Cango Inc. CANG reported first quarter 2022 results and while revenues were roughly inline with our expectations, the sales mix continues to shift toward lower margin auto trading and away from auto financing. As a result of this shift in mix and continued investments in the company's new trading platform, the company recorded a net loss of RMB136 million ($21.5 mil USD).
Guidance for 2Q22 sales was significantly below our current model – projected at RMB250-300 million versus our previous estimates of RMB1.055 billion. A number of factors have hit Cango's principal market all at once and the impact on auto transactions in the company's markets has been significant. Namely, the lingering chip shortage which has limited supply of the most in demand vehicles, COVID resurgence in Chinese cities and the subsequent restrictions that limited activity, a decline in consumer confidence in China and the general waning of enthusiasm for car purchases which has emerged in 2022.
Highlights of the Earnings Conference Call
• Cango continues to invest heavily in its trading platform as it seeks to establish itself as a dominant portal for dealers and consumers.
• It appears that the decision to de-emphasize Auto Loan Facilitation was the correct one as credit losses continue to build despite a much smaller book of business. Credit risks are being managed but renewed COVID related closures have exacerbated weakness of the credit cycle.
• Chip supply shortages that existed in 2021 re-emerged in Q1 2022 and made it more challenging for Cango to offer the most in demand vehicles. Further production shutdowns in March, April and May have created a backlog of demand that will take time to clear.
• Credit provisions rose again in Q1 as consumer financial strength has been impacted by some economic softness in pockets of the Chinese economy. It is likely that provisions will tick up further in Q2 2022 as a result of COVID related closures which severely impacted many of Cango's markets.
• Cango still has an incredibly strong balance sheet with roughly 4.0 billion RMB (over $600 million USD) of cash and short-term investments. The company continues to utilize their share repurchase program (fully diluted weighted average ADS outstanding declined 10 million in the quarter to 139 million). It is possible the shares will experience some volatility after the payment of a large special dividend next week but we believe the strength of the balance sheet offers some downside protection.
March Quarter Results & Financial Update
Cango reported revenue of RMB788 million for the March quarter which was roughly inline with our model.
Automobile Trading revenues grew roughly 5% year over year but that was below the company's initial expectations.
Loan Facilitation Income declined 74% versus the March 2021 quarter as the company continues to transition away auto financing and toward their goal of being a one-stop platform for dealers and consumers in the auto market.
Leasing Income declined 31% and will continue to be a less meaningful contributor to operations as the company de-emphasizes this business line.
Gross Margin 12.8% came in 290 bps lower than our estimate as a result of the shift in the revenue mix. Gross Margins have tumbled as the company has embarked on the transition to become an auto trading platform and away from auto financing.
Guidance for Q2 2022 was sharply below our expectations at RMB250-300 million versus our model RMB1.055 billion. This reflects the fact that auto sales in China were down 45%+ in April and at least 20% in May as a result of weaker consumer confidence and COVID related closures. We have altered our estimates for the balance of 2022 to reflect the new economic realities in China, but we will revisit our model this summer if the outlook improves. The significant reduction of revenues in our model means that we are now forecasting losses for 2022 and 2023 for the company.
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