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The company’s revenue fell 30% in the first quarter and forecast an even bigger decline in the current quarter as it took a major hit from China’s stricter COVID control measures.
There’s nothing like a storm of macroeconomic headwinds to propel you toward your goals.
This is a major theme in latest result auto trading company Congo Inc. (NYSE:CAN), whose first-quarter financials mirror those of many other consumer-facing Chinese firms struggling in one of the toughest business environments in decades. Difficulties are caused by a number of factors, including the global chip shortage that has weighed on car manufacturing, and inflation that is prompting central banks to raise interest rates to higher levels not seen in decades.
But in China, by far the biggest challenge is the country’s endless series of local and citywide lockdowns and other restrictions dating back to March to contain the highly contagious COVID 19 omicron variant under the country’s “zero COVID” policy.
Consumer demand has plummeted as many people stay at home, sometimes for weeks. Many are not in any mood to spend, as they face uncertainties about their employment prospects. Also, COVID restrictions have made it difficult to transport goods across the country as many highways remain closed or city-to-city traffic is highly restricted to prevent the spread of the virus.
The bottom line for Cango was a drop in its revenue during the first quarter, with the company forecasting an even bigger decline in the second quarter when China’s commercial capital Shanghai was completely shut for the months of April and May. Congo and others have spoken at length about the challenging environment they face, and how most of those companies are controlling costs to try and save their cash during such difficult times.
At the same time, Congo and its partners are also trying to look at the pandemic by talking about their latest initiatives and where they will stand when things return to normal.
In the case of Congo, the many macro headwinds the company is facing have actually helped accelerate its years-old transformation from a car financier to a provider of a comprehensive suite of car-trading services. The company is also moving aggressively in the new energy vehicle (NEV) business, capturing a segment of China’s car market that is actually performing quite well, with triple-digit growth despite all the economic malaise. posting.
Investors were more focused on Congo’s company-specific cues, with its shares falling 4% after results were announced on June 9, but then all but regained momentum over the next few trading days. Importantly, the stock now trades roughly where it started the year — not something many US-traded Chinese stocks can say in the current tough environment.
Part of the stock’s resilience may be due to current valuations that look decidedly lower than those of its industry peers. Congo’s stock now trades at a price-to-book (P/B) ratio of just 0.4, compared to a ratio of 1.1 for its domestic rival. autohome (ATHM; 2518.HK) and a higher ratio of around 30 for the US used car trader CARVANA (CVNA).
driving through a storm
All that said, we’ll look at Cango’s latest financials, which really paint a bleak picture for the first half of the year, before taking a closer look at the company’s long-term initiatives, which are the previously mentioned business. are part of the change. , The company’s revenue fell 30% to 787.7 million yuan ($117 million) in the first quarter, from 1.12 billion yuan in the year-ago period. It said things would get worse in the second quarter, only projecting revenue of 250 million yuan to 300 million yuan. The midpoint of that range would represent a 71% drop from the 947 million yuan reported a year earlier.
The company’s non-GAAP adjusted net loss, which excludes the impact of share-based compensation, is actually limited to 113.3 million yuan for the quarter, less than half of the 254 million yuan loss on the same basis a year ago.
“The current phase of the epidemic outbreak has lasted more than two months, spanning the first two quarters of 2022,” said Congolese CEO Lin Jiayuan. “While the pandemic is slowly coming under control and production is slowly resuming, we believe the impact on the demand side will be prolonged.”
A primary reason for the huge revenue decline was a decline in Congo’s old car financing business, which declined 74% in the quarter to 105.9 million yuan. That big drop meant the auto financing business accounted for just 13% of the company’s revenue for the quarter, up from nearly a quarter of a quarter in the previous quarter. China’s earlier crackdown on fintech companies has focused on financing because of risk-management concerns. But now the company’s move away from that part of the business seems to be accelerating in the face of all the recent economic woes.
By comparison, Congo’s car trading transaction revenue, which the company is building under its new business model, managed to register year-on-year growth for the quarter, rising 4.9% to 599.3 million yuan. That means the business share accounted for about three-quarters of Congo’s revenue during the quarter, up from about two-thirds in the previous quarter.
As part of a focus on car-trading services, the company this month launched its new Congo Haoche app, which sits at the heart of that part of the business. The company last year launched a smaller version of the app inside the hugely popular WeChat social networking platform and said the mini-app has garnered 2.76 million cumulative deals as of the end of March.
Within its broader car-trading business, Congo is putting accelerators on NEV as it tries to orient itself towards a segment of the market that is growing rapidly due to technology improvements and strong government support. Of the 6,827 vehicles sold on the Cango Haoche WeChat mini-app during the quarter, 5,193 were NEVs. In comparison, the company’s NEV transactions for the previous full year were only 5,742. Congo is trying to carve out a niche for NEV as an insurance provider by working closely with many of the country’s smaller manufacturers.
Last but certainly not least, Congo’s management is treating many of its Chinese peers alike by putting the brakes on spending and becoming more conservative with its investments. Its operating costs were almost unchanged in the first quarter from a year ago. It shifted a large portion of its short-term investments to cash, which resulted in its cash rising to 2.1 billion yuan at the end of March, up from 1.4 billion yuan three months earlier.
Editor’s Note: The summary bullets for this article were selected by Seeking Alpha editors.