Key takeaways:

1、Cango reported its revenue fell in the third quarter from the second, but forecast the figure would return to sequential growth in the fourth quarter

2、Company looks undervalued compared with domestic peers as it diversifies beyond its older car finance business into auto trading

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Spots of light in a sea of darkness.

That could best describe the broader view from the dashboard of online car services company Cango Inc.(CANG.US), whose latest earnings report looks decidedly downbeat but does offer a few signs of optimism for the transforming company.

Those signs include a pickup in official support from Beijing for auto financing, one of the company’s two core businesses alongside its newer auto trading business. Cango is also predicting a return to revenue growth in the coming year, reversing a cycle that has seen the figure drop throughout this year.

Cango and most of its peers have gotten caught up in a downturn for the global auto industry, whose sales have stumbled due to a shortage of the many high-tech microchips that are a key component in auto manufacturing. Frequent major lockdowns in China due to the country’s zero-Covid policy have also taken a toll on consumer sentiment, further dampening demand in the world’s largest auto market.

Reflecting the bigger situation, new car sales in China fell 9.4% in October year-on-year, marking the sixth straight month of declines. Cango’s larger and more established rival Autohome (ATHM.US; 2518.HK) previously reportedsimilarly tough conditions, which caused its revenue and profit to sag 24% and 38%, respectively, in the third quarter.

Cango was similar, though its revenue actually grew 84% year-on-year in the third quarter to 800.6 million yuan ($126 million), beating previous company guidance for 700 million yuan to 750 million yuan. But the big jump owed to the near-absence of its newer car trading services in the year-ago quarter, an area that Cango just entered last year in a diversification move that now accounts for more than half of the company’s revenue.

Thus a quarter-on-quarter comparison is probably better to see how this company is trending. In that regard, the latest revenue represented a 15% decline from the second quarter as the chip and new car shortages led to declining auto industry sales. In one of the small bright spots that we mentioned above, the company forecast that revenue will finally turn a corner start to rebound in the current quarter to reach between 950 million yuan and 1 billion yuan.

That bit of optimism didn’t energize investors, whose pessimism sparked a 10% decline in Cango’s shares the day after the results announcement on Nov. 22. The selloff has continued since then, with the shares now down about 25% post-announcement and trading near an all-time low since the company’s 2018 New York listing.

Analysts are a bit more optimistic, presumably looking ahead to when the global chip shortage may start to ease, which many are predicting will come in the second half of next year. The three analysts polled by Yahoo Finance were evenly split, with one rating the company as a “strong buy,” one a “buy” and the other a “hold.” Their average price target of $4.80 represents about a 50% premium over Cango’s latest share price.

Undervalued

Cango is one of a number of online-focused companies chasing consumers in China’s vast but also competitive car market. Among other listed companies, it competes with the likes of the much larger Autohome, along with other names like car financing specialist Yixin (2858.HK) and used car specialist Uxin (UXIN.US). With the exception of Autohome, most of its peers are losing money, and nearly all have higher valuations.

On a price-to-sales (P/S) basis, Cango now trades at a ratio of just 0.77, a figure that looks quite low when one considers its high revenue growth as it adds car-trading services to its product mix. Uxin is the most richly valued of the domestic players with a P/S of 7.2, perhaps owing to its recent addition of several high-profile investors and its own transformation story that should lead to similar fast growth like Cango’s.

Autohome also trades at a substantially higher P/S of 3.2, and Yixin trades at a 2.3.

A deeper dive into Cango’s financials shows its newer auto trading revenue has plateaued after exploding in the early stages of entering that business. That figure totaled 429 million yuan in the third quarter, still accounting for more than half of the company’s revenue but down from 522 million yuan in the previous quarter.

Its older auto financing business looked slightly better, up 15.8% year-on-year to 266.5 million yuan. But that business was down quarter-on-quarter as well, again due to the broader industry malaise.

“Given the dual effects of the epidemic and the economic downturn, consumer demand is very weak, especially in lower-tier markets. And the auto market shows a pattern of weakness in both supply and demand,” said CEO Lin Jiayuan on the company’s earnings call. “Looking ahead, we expect the chip shortage-related upheaval in the auto market to linger for some time.”

Beijing is also clearly worried about the slump and impact it could have on China’s economy. That concern underlies one of the few bright spots Cango pointed to, namely that the country’s state-run banks, which take many of their cues from the government, have taken a new interest in car loans. Cango acts as an intermediary between those banks and consumers for the bulk of its car financing business.

“Actually, we have observed that there is a shift in the preference of banks in which asset targets that they hold, and now (that preference) is turning from the property assets, and banks are looking more and more into the automotive car loans,” Lin said.

So, if consumer sentiment ever improves, the money to fund their buying will be ready and waiting. Cango’s network of nearly 48,000 dealer and brand partners also looks ready to spring into action when things improve, with Cango’s new WeChat miniapp showing some signs of gaining traction by signing on 5,700 partners since its launch in May. The company is still honing that app, and plans to start releasing more metrics for it such as users and gross merchandise value in the first half of next year.  

But for now, at least, the bottom line doesn’t look too exciting. Cango posted a 416.5 million yuan loss in the third-quarter, though nearly all of that appears related to a big drop in the company’s holdings in electric car maker Li Auto (LI.US).