Strategy Note /
China

Cango's recent moves show its business resilience

  • Cango facilitates transactions through a technology-enabled service platform in China's automotive industry

  • The country's auto market is reviving and is set to be in a growth trajectory for quite some time

  • The company has expanded its upstream business, entering the flourishing NEV market

Niko Yang
Niko Yang

Senior Analyst

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Ivan Platonov
Ivan Platonov

Research Manager

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EqualOcean
7 September 2021
Published byEqualOcean

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The company generated CNY 558 million in net profit in Q2 2021, up 695% from a year ago.

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The relieved travel restrictions have revived trading activity in China's passenger vehicle market, the world's largest in terms of both demand and supply. Cango (CANG:NYSE), a company aimed at disrupting the auto value chain in China, has presented solid Q2 2021 results. This article will introduce Cango, its strategy and future development outlook.

Introduction

In 2010, Cango was founded by a group of veterans in China's auto financing industry with the idea of making auto transactions "simpler, easier and more pleasant." There was a certain degree of demand for such a platform in China's vast but underserved lower-tier cities' markets. Started with auto loan services, the company's scope later stretched to the vehicle sales business upstream and after-market services downstream. By the end of 2020, Cango had built a network consisting of 47,740 auto dealers, accumulatively serving more than 1.9 million car buyers. The company currently covers more than 1/3 of China's total new car dealers, and over 75% of dealers in Cango's network are located in tier 3-5 cities.

Over the past ten years, the company has established a technology-driven platform that connects various participants along the auto value chain, including dozens of large and mid-sized commercial banks, insurance firms, as well as major gasoline vehicle OEMs and high-tech new energy vehicle (NEV) OEMs.

China's auto market is back on a growth trajectory

Cango's business is rooted in the flourishing auto trading activities in China. Although the pandemic has hammered buying cars in brick-and-mortar stores, the total transactions have shown resilience. According to CPCA, the Chinese light vehicle sales hit 19 million in 2020, down 6.8% year-on-year. However, the outlook for future sales is rather encouraging: CAAM expects the market to grow by 10% in 2021. Moreover, the organization forecasts that the 2025 sales will reach 30 million, with a CAGR of 4.6% from 2021 to 2025.

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The driving force of surging future sales will be the rise of per capita ownership of cars. Based on the World Bank's data, China's car ownership was 283 units per thousand inhabitants in 2019. At the same time, China's population density was 149 people per kilometer squared, GDP per capita was USD 10,276. By comparison, Japan and South Korea are more densely populated, have higher GDP and car ownership rates per capita. Thus, China's auto market sees great potential.

Lower-tier cities are showing strong momentum in the rise of the car ownership rate. There are several catalysts. One is the policy of 'sending cars to the countryside' (汽车下乡), under which people who live in rural places receive subsidies when buying cars. Electric vehicles have been added into the list in recent years. Second, lower-tier cities in China often have no restrictions on getting vehicle plates, further stimulating car sales. Third, citizens in lower-tier cities have less debt burden on housing so that they can potentially spend more money buying cars.

Cango's next big move

Following the big trend, Cango also stepped up its efforts in the NEV market. NEV manufacturers, which usually adopt the direct operation and sales model, are actively seeking traffic in the lower-tier markets and professional traffic operation support. Cango's strong foothold in the lower-tier markets and service capabilities in auto transaction puts it in an ideal position to meet its needs. Although some in the industry argue that NEVs' direct sales won't need dealers and related service providers like Cango, we believe, however, that dealers will continue to play an important role in the new segment's development.

Inspired by Tesla, China's NEV market was initially driven mainly by direct sales. This model was soon adopted by other EV players, including NIO, Xpeng and Li Auto. Intuitively, direct sales skip dealers so that ensures better customer services and more profit to OEMs however incurs large front costs of opening new stores. Currently, all the public EV companies' valuations are very sensitive to the vehicle delivery numbers. The relationship between electric car brands and dealers is dialectical. In 2018 and 2019, some brands like NIO and Xpeng needed funds to open new stores. After raising enough funds through IPOs, NIO and Xpeng both decided to lower the number of franchised stores.

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So far, EV brands have accumulated a lot of orders, but short-term deliveries are restricted to their production capacity. As production ramps up, same-store sales will touch the ceiling, especially in lower-tier cities. By that time, these brands are likely to reconstruct the dealer network. Besides, not all NEV brands have enough capital to open...