IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

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<a href="https://www.smartkarma.com/entities/27208" target="_blank" data-smartkarma-citation="entities:27208:1">Cango Inc/KY (CANG US)</a> is a leading automotive transaction service platform in China backed by Warburg Pincus (an 18.2% shareholder), Didi Chuxing (14.8% shareholder) and <a href="https://www.smartkarma.com/entities/26" target="_blank" data-smartkarma-citation="entities:26:1">Tencent Holdings Ltd (700 HK)</a> (10.7% shareholder). It has filed for an NYSE IPO to raise $300 million.Cango is joining the current frenzy of Chinese car transaction platforms which have raised capital through private rounds or IPOs. Like peers, Cango claims it’s a leader based on a chosen favourable metric which in Cango’s case is the outstanding balance of financing transactions facilitated. However, Cango financial performance is mixed as, after a strong 2017, both revenue growth and EBIT margins declined in 1Q18. The guidance calls for negative revenue growth in 2Q18 which presumably is a one-off. Overall, on a fundamental basis, we are bearish due to three recent but baffling strategic choices:<ol><li>Change in dealer coverage model when the existing model seems to work well: Cango mainly acquires car buyers through registered dealers. Cango blamed the revenue growth slowdown in 1Q18 on shifting dealers from the dealer financial managers model to the self-operated sales model. The shift was justified on the basis that it will enable a more efficient sales strategy. While this seems plausible, the average transactions per dealer through the dealer financial model was 76% higher than the self-operated model in 2017.</li><li>Chasing higher fee rates raises credit risk exposure and lowers prospective P/E rating: Cango collaborates with third-party financial institutions under the direct partnership or the co-partnership (WeBank) model. Due to a strategic shift, the co-partnership model’s share of financing transactions materially increased from 26% in 2017 to 66% in 1Q18. Cango justifies the shift due to the higher fees and the ability to efficiently work with institutions. However, the shift dramatically increases Cango’s risk as unlike the direct partnership model, it bears all the credit risk. By taking on the risk, Cango lowers its prospective P/E rating as it should be valued as a financing rather than a technology company.</li><li>Merits of the Shanghai Autohome acquisition is on shaky ground: Cango increased its shareholding in Shanghai Autohome from 25% to 50% in June 2017. It will increase its stake to 100% in 3Q18 and will grow Shanghai Autohome in part through Didi Chuxing. The merits of the acquisition are on shaky ground due to the three factors. First, Cango’s increasing ownership has coincided with a significant decline in Shanghai Autohome’s share of financing transactions. Second, Cango will bear all the credit risk related to Shanghai Autohome. Notably, Shanghai Autohome’s M3+ delinquency rate is twice that of Congo. Third, press reports indicate that Didi Chuxing has committed to purchase over a million cars from competitor Renrenche over the next three years.</li></ol>We will provide a view of valuation once the IPO price range in announced.

Cango Inc/KY (CANG US) is a leading automotive transaction service platform in China backed by Warburg Pincus (an 18.2% shareholder), Didi Chuxing (14.8% shareholder) and Tencent Holdings Ltd (700 HK) (10.7% shareholder). It has filed for an NYSE IPO to raise $300 million.Cango is joining the current frenzy of Chinese car transaction platforms which have raised capital through private rounds or IPOs. Like peers, Cango claims it’s a leader based on a chosen favourable metric which in Cango’s case is the outstanding balance of financing transactions facilitated. However, Cango financial performance is mixed as, after a strong 2017, both revenue growth and EBIT margins declined in 1Q18. The guidance calls for negative revenue growth in 2Q18 which presumably is a one-off. Overall, on a fundamental basis, we are bearish due to three recent but baffling strategic choices:Change in dealer coverage model when the existing model seems to work well: Cango mainly acquires car buyers through registered dealers. Cango blamed the revenue growth slowdown in 1Q18 on shifting dealers from the dealer financial managers model to the self-operated sales model. The shift was justified on the basis that it will enable a more efficient sales strategy. While this seems plausible, the average transactions per dealer through the dealer financial model was 76% higher than the self-operated model in 2017.Chasing higher fee rates raises credit risk exposure and lowers prospective P/E rating: Cango collaborates with third-party financial institutions under the direct partnership or the co-partnership (WeBank) model. Due to a strategic shift, the co-partnership model’s share of financing transactions materially increased from 26% in 2017 to 66% in 1Q18. Cango justifies the shift due to the higher fees and the ability to efficiently work with institutions. However, the shift dramatically increases Cango’s risk as unlike the direct partnership model, it bears all the credit risk. By taking on the risk, Cango lowers its prospective P/E rating as it should be valued as a financing rather than a technology company.Merits of the Shanghai Autohome acquisition is on shaky ground: Cango increased its shareholding in Shanghai Autohome from 25% to 50% in June 2017. It will increase its stake to 100% in 3Q18 and will grow Shanghai Autohome in part through Didi Chuxing. The merits of the acquisition are on shaky ground due to the three factors. First, Cango’s increasing ownership has coincided with a significant decline in Shanghai Autohome’s share of financing transactions. Second, Cango will bear all the credit risk related to Shanghai Autohome. Notably, Shanghai Autohome’s M3+ delinquency rate is twice that of Congo. Third, press reports indicate that Didi Chuxing has committed to purchase over a million cars from competitor Renrenche over the next three years.We will provide a view of valuation once the IPO price range in announced. 

Cango IPO Preview: Baffling Strategic Choices

China

Cango Inc. operates as a platform as a service company. The Company offers automotive transaction service platform that connects dealers, financial institutions, car buyers, and other industry participants. Cango serves clients in China.

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Cango Inc (CANG US)

Cango IPO Preview: Baffling Strategic Choices

Cango Inc/KY (CANG US) is a leading automotive transaction service platform in China backed by Warburg Pincus (an 18.2% shareholder), Didi Chuxing...

Arun George

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