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December Quarter Financial & Operational Results
Cango Inc. (NYSE:CANG) reported 4Q21 results that were inline to our expectations. Revenue guidance for 1Q22 is short of expectations and caused by several items including macro, credit cycle & chip shortage.
We believe that the March quarter will be the lowest revenue quarter of this year and the only sales decline quarter. Auto Trading business should resume high growth starting in the June quarter.
We continue to forecast positive net profits & EPS for 2022. The company sold its equity interest in Li Auto (LI), which we estimate could have generated approximately $220 million of gross proceeds.
Cango Inc. reported December quarter results inline with our expectations. Revenues declined -4%, but came in slightly better than guidance. Gross Margin 16.2% contracted in half from the year-ago period due to the mix shift to lower-margin Car Trading and away from higher-margin Loan Facilitation.
Automobile Trading revenues grew 29%, which was nice to see. Loan Facilitation Income declined -37% and worse than expected as the company was more focused on the credit cycle risk potential and some slowdown in macro. Positive Net Income was entirely from the gain in value of its Li Auto stake of ADSs, which the company no longer owns and has completely sold out of.
Guidance for 1Q22 revenues (March quarter) was disappointing and below expectations. The management team attributed this mostly to Loan Facilitation, which the company has pulled back on and is pro-actively not chasing additional business because of credit cycle concern in some cities.
While we are surprised at the magnitude of the shortfall for 1Q sales guidance, we grasp that Cango is trying to alleviate the credit cycle initial downturn and is being pro-actively cautious for Loan Facilitation.
We reduced our 2022 revenue forecasts by 14% to 19% sales growth because of the company's less emphasis on Loan Facilitation and the prolonged negative impact from the chip shortage on deliveries of new vehicles in China. Most of our sales reduction occurs in the March 2022 quarter (1Q22), which is the only quarter during 2022 for which we forecast a year-over-year sales decline.
We now forecast 19% sales growth for 2022 & 30% growth for 2023.
Highlights of the Conference Call
• Deepening of its technology platform is underway with a one-stop shop offering now. More foreign brands have been added to its dealership network and the company is leveraging its WeChat and other technologies.
• Loan Facilitation business is being de-emphasized as the credit cycle softens in some lower tier citifies in China. The management team noticed early signs of possible credit risk and has decided to pro-actively not chase business there during a softer cycle. Instead, they will await an improvement turn in the credit cycle to grow Loan Facilitation. This is the #1 reason for the company's low sales guidance for 1Q.
• Electric vehicles and plug-in hybrids are a good volume growth driver, especially after passing the chip shortage issue this upcoming summer.
• Auto Trading has ample runway to grow after the March quarter. Only 6,000 dealers of its 46,000 dealers network were penetrated with it recently. Penetration could reach 15,000 in December 2023.
• Loyalty of dealers is a focus for the company with additional training and support for dealers. Dealers also appreciate the warehousing, logistics and last-mile delivery services by Cango.
• Credit provisions rose in December quarter to reflect the credit cycle in some lower tier cities where minor slowdown has occurred. The management team believes that its M1 & M3 ratios should remain flat in the coming quarters.
• Cango no longer owns Li Auto ADSs (ticker LI on Nasdaq & 2015.HK on Hong Kong Stock Exchange). They sold some in 4Q21 and the remaining ADSs in 1Q22. We estimate they received approximately $220 million USD worth of proceeds to improve its net debt position and fund internal or external investing.
Valuation
We value Cango Inc. using a peer comparables valuation methodology based on both EV/Sales & P/E multiples of the peer group applied to our 2022 forecasts.
We reach $6.50 valuation price per ADS (American Depository Shares) by taking a blended average of the peer group average of 2.2x EV/Sales 2022 & 13.0x P/E 2022 to our forecasts.
Many peers have higher operating margins and different enough segments revenue mix.
Our peer comp table includes some China-based stocks, which we believe already factors in a discount for regulatory and geopolitical risks in China. Instead of using only EV/Sales, which would generate a higher price target, we deemed that P/E is also needed to be factored in to reflect the lower gross margin profile of Cango versus some peers.
Trading at 0.5x EV/Sales 2022, but expensive on P/E due to lower gross margin from Auto Trading.
We no longer consider the stake of Li Auto (NASDAQ:LI) ADSs because Cango sold it.
Please see the Risks section of our full report.
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