On August 30th, Cango (CANG.US) released its Q2 2024 financial results. The company's total revenue for Q2 was 45.1 million yuan, a year-on-year decrease of 93%; net income was 86.02 million yuan, an increase of 137.5% year-on-year.

Clearly, this profitability without revenue growth did not satisfy investors. After the results were announced, the stock price of Cango (CANG.US) fell for three consecutive days (August 30th, September 3rd, and September 4th), reaching a low of $1.59 per share, with a cumulative decline of 9.91% and a cumulative trading volume of 0.07023 million shares. As of the close on September 4th, Cango was trading at $1.6 per share, with a total market value of $0.167 billion.

Why is there profitability without revenue growth?

According to the information from the Zhitong Finance APP, after voluntarily 'de-financializing', Cango has been committed to transforming its business into an automotive trading services platform, making automotive trading its core business. However, the Q2 financial report results have dealt a significant blow to Cango's envisioned transformation.

During the period, apart from revenue growth in the after-sales service business, Cango's business scale has declined across the board. In particular, revenue from the largest automotive trading business plummeted 99.7% year-on-year to 1.469 million yuan. During the same period, revenue from the loan assistance business, guarantee income, and leasing income were 1.67 million yuan, 20.907 million yuan, and 3.342 million yuan, respectively, with year-on-year declines of 88.0%, 62.6%, and 79.9%.

While the operating income of Cango Group has significantly decreased, its operational spread has not improved. In the first half of this year, Cango achieved an operational spread (revenue - cost) of 53.9179 million yuan, a year-on-year decrease of 55.7%.

In the case of a comprehensive defeat in business and a simultaneous decrease in operational spread, how did Cango achieve a substantial increase in profit?

According to the financial report, benefiting from adjustments such as Q2Net loss (gain) on contingent risk assurance liabilities and Provision (net recovery on provision) for credit losses, Cango's "income" increased by 10.257 million yuan and 62.99 million yuan respectively compared to the same period last year, leading to a significant improvement in Cango's total operations and costs from 0.684 billion yuan in Q2 2023 to -1.895 million yuan, and ultimately contributing to the company's net profit of 86.02 million yuan.

More importantly, Cango's phenomenon of increasing profits without increasing revenue has already appeared in the first half of 2023. At that time, Cango explained that "this is mainly due to the dilution of income caused by the new accounting standards and the reversal of credit losses resulting from the improvement in asset quality." "Since this year, Cango has adopted the modified retrospective transition method, and the contingent risk assurance liabilities have increased by 0.3024 billion yuan in the first half of 2023."

Similarly, Cango's remarkable performance in net profit is also inseparable from its impressive financial techniques.

In addition, the net recovery amount of Cango's current credit loss provision of 62.99 million yuan may be mainly due to the receipt of accounts receivable financing.

In fact, Cango's gross margin in business has declined significantly. From 2019 to the first half of 2024, the company's gross margin has decreased from 62.55% in 2019 to 49% in the first half of 2024.

In addition to the decline in gross margin, rbob gasoline's auto loan facilitation business has seen a continuous increase in overdue rates. As of June 30, 2024, rbob gasoline group's outstanding balance of existing auto loan business was 6.2 billion yuan, with M1+ overdue rate and M3+ non-performing rate at 2.93% and 1.57% respectively, both hitting new highs since 2019.

In addition, rbob gasoline's book funds have also been sharply depleted. As of June 30, 2024, rbob gasoline held a total of 0.9495 billion yuan in cash and cash equivalents, compared to 3.288 billion yuan as of December 31, 2023, with the company's cash flow decreasing by approximately 2.3385 billion yuan within six months.

In short, the increase in net income that is detached from business growth is like a tree without roots and water without a source. Despite the "good-looking" net income, the sharp decline in revenue, gross margin, and cash flow are all exposing the predicament in which rbob gasoline finds itself.

Is the narrowing of the business volume entry a key point in the breakthrough in the used car market?

In fact, rbob gasoline's sluggish performance is closely related to the pressured state of the Chinese auto market. Data from the China Association of Automobile Manufacturers shows that in June, auto production and sales completed 2.507 million and 2.552 million vehicles respectively, lower than expected, down by 2.1% and 2.7% year-on-year, with passenger vehicle sales in June dropping by 2.3%.

With declining production and sales, consumer sentiment has also been shrouded in pessimism. Against this backdrop, rbob gasoline's performance as a Chinese auto trading service platform naturally falters.

In order to navigate the industry cycle, rbob gasoline chooses to seize the growth opportunity in the used car market, enhance the core competitiveness of 'rbob gasoline Youche', sustainably supply high-quality vehicles, optimize dealer service experience and supply chain management, and enhance the convenience and safety of cross-regional deliveries.

However, can the used car market really become the breakthrough key point for rbob gasoline?

According to Zhitong Finance APP, the used car market seems to have entered an unprecedented downturn. In the past decade, the number of registered companies in the used car brokerage industry in China has continued to grow steadily, surpassing the milestone of 1.5 million in 2022. However, after entering 2024, this growth momentum has slowed significantly, with a 17.7% year-on-year decrease in the number of registrations in the first half of the year, reaching only 0.8 million.

In addition, according to the latest data, in May 2024, the used car trading market in China experienced a significant cooling down, with the trading volume sharply reduced to 1.5846 million vehicles. At the same time, the average selling price of used cars also suffered a setback, falling by about 4.2%. The entire market atmosphere reveals a sense of chill.

This trend is closely related to the intense price war in the new car market, especially in the field of new energy and gasoline vehicles, which has continued to intensify, affecting the value system of used cars as well.

In this regard, the cold used car market seems to have a hard time nurturing the growth opportunities that Cango needs.

What's worse, the automotive trading service track where Cango is located also seems to be under considerable pressure.

In terms of business model, Cango is based on auto loan assist services, connecting major financial institutions and car dealers nationwide, providing them with professional, efficient, and convenient auto financial services, with direct sales services as the main focus.

Since 2023, the competition in China's passenger vehicle finance market has become increasingly fierce. In addition to traditional large banks, auto finance companies, and some professional leasing companies, there are also various types of financial and service institutions such as regional banks, finance leasing companies, and financial companies joining the race.

Looking at the market competition pattern in 2023, commercial banks, benefiting from their relatively low cost of funds, leading financial technology level, and continuous transformation and improvement in retail finance in recent years, have become the main players in auto finance, significantly squeezing the market space of auto finance companies and leasing companies. In 2023, commercial banks' overall market share in auto finance can reach 46%, a significant increase compared to 2022.

Automotive financial services are precisely the business flow entry point for Cango. Once this entry becomes narrower, it will be difficult to improve the contraction of Cango's automotive trading and leasing businesses.

In conclusion, the dilemma of Cango's business collapse cannot be solved solely by the antidote of profit growth under new financial standards.