(CANG) – IPO-Bound Tuhu Searches for Profits in Aftermarket Car Services

Key takeaways:

  • Tuhu has filed for an IPO in Hong Kong, after reportedly abandoning its unique plan to lift as much as $400 million via a U.S. itemizing
  • Intense competitors within the aftermarket automobile companies business has saved the corporate firmly within the pink, because it eyes new vitality autos to show the tide

By Ken Lo

As residence to the world’s largest automobile market, China can also be fertile floor for growth of an aftermarket providing companies for the thousands and thousands of automobiles on its roads. The nation’s automotive aftermarket offering automobile upkeep, restore or detailing companies was value 1.03 trillion yuan ($162 billion) by gross merchandise quantity (GMV) in 2020 and is predicted to develop to 1.65 trillion yuan by 2025, representing a compound annual progress charge of 10% over that point, in keeping with market analysis agency China Insights Consultancy (CIC).

However the enterprise is very fragmented, making it pricey and troublesome for specialists to attain the economies of scale to not solely construct nationwide networks, but in addition the model consciousness needed to draw shoppers. As a platform with each on-line and offline operations, Tuhu Automobile Inc. is attempting place itself as a serious participant within the unbiased automotive aftermarket (IAM) by connecting upstream suppliers and downstream dealerships. That features a deal with new vitality autos which can be nonetheless a nascent section in an in any other case broadly contested sector for after-sales companies.

The corporate is attempting to promote its story to buyers in its filing for an IPO in Hong Kong late final month. It reportedly flirted with the concept of a U.S. IPO as nicely, however in the long run selected Hong Kong with plans to lift as much as $400 million.

The corporate’s income has grown steadily over the past three years, from 7.04 billion yuan to eight.75 billion yuan and eight.44 billion yuan, respectively, in 2019, 2020 and the primary three quarters of 2021, in keeping with its prospectus. By the top of final September, it had 36,592 shops in its community, 90% of which had been via tie-ups with different companions. Its self-operated and franchised shops took up 0.6% and eight.6% of the full, respectively. Such partnerships with different operators has allowed Tuhu to quickly develop its geographical footprint and improve its effectivity. Its accomplice shops have a mixed 13.9 million prospects.

Concentrate on companies

Tuhu is the most important Chinese language IAM service supplier by income and the variety of shops in its community. However what really units it aside from opponents is its sturdy deal with aftermarket companies. Based on CIC, the corporate had a month-to-month energetic person base of 10 million individuals by September 2021, giving it the biggest person group for its aftermarket companies in China.

Tuhu has secured funding from Tencent (0700.HK), whose different comparable investments embrace Yixin (2858.HK) and Cango (NYSE: CANG). In contrast to Tuhu, the opposite two derive a considerable share of their income from the automobile mortgage enterprise. Within the first half of final 12 months, Yixin derived 47.5% of its income from its mortgage enterprise. Equally, the automobile mortgage enterprise contributed 34% of Cango’s income within the first three quarters of the 12 months. By comparability, aftermarket companies are the dominant a part of Tuhu’s enterprise, with steadier progress that makes the corporate much less inclined to the ups and downs of car gross sales.

Yixin and Cango went via a tough patch final 12 months due to sluggish gross sales within the mainland Chinese language automobile market. Cango reported a non-GAAP lack of 68.23 million yuan within the first three quarters of final 12 months, reversing a 1.86 billion yuan revenue within the year-earlier interval when it recorded a big achieve on one in all its investments, in keeping with its newest outcomes. The corporate’s inventory tumbled by greater than 60% final 12 months. Yinxin’s loss narrowed to 135 million yuan within the first half of final 12 months, and the corporate’s inventory additionally misplaced 60% of its worth.

Tuhu can also be dropping huge cash. Excluding fairness compensation funds, modifications within the honest worth of convertible redeemable most well-liked inventory and losses from buybacks of convertible redeemable most well-liked inventory, it posted losses of 1.04 billion yuan, 971 million yuan and 902 million yuan in 2019, 2020 and the primary three quarters of 2021, equating to web loss ratios between 10.7% and 15%, a standard vary given its fast growth and sizable reductions for patrons.

That mentioned, the extra vital query now could be whether or not Tuhu can persuade buyers it’s a worthy recipient of their cash primarily based on its aftermarket service enterprise alone.

Extra spending on companies

Based on Tuhu’s prospectus, automobile homeowners’ spending on aftermarket companies begins to extend markedly six years after a automobile’s buy. In 2020, the typical age of autos in China was 5.6 years and is predicted to rise to 7.6 years by 2025. Nonetheless, these are each a lot decrease than the U.S. and the EU, the place the typical automobile age can be 12.2 and 12.1 years, respectively, by 2025.

Chinese language automobile homeowners’ spending on aftermarket companies can also be a lot decrease than that within the U.S. and EU, averaging $666.60 in China in comparison with $1,288.30 within the U.S. and $779.80 within the EU. With rising automobile possession in China and larger spending on aftermarket companies, the market has sturdy prospects.

Tuhu can also be setting its sights on the brand new vitality automobile enterprise. Based on knowledge from the China Affiliation of Vehicle Manufactures, new vitality automobile gross sales jumped by a whopping 1.6 instances final 12 months, at the same time as complete automobile gross sales in China solely elevated by 3.8%. Final 12 months, Tuhu introduced strategic partnerships with new vitality automobile manufacturers Leapmotor and Arcfox, which may assist it to realize extra market share within the promising new market.

The brand new vitality automobile section continues to be a comparatively small a part of China’s general automobile market. Chinese language shoppers owned simply 4.5 million new vitality autos in 2020, accounting for just one.9% of all passenger autos. The business estimates that by 2025, the proportion will enhance to 9.5%, implying appreciable enterprise alternatives for anybody who can carve out a distinct segment within the house.

Extra particulars on Tuhu’s IPO have but to be launched. To estimate its potential market worth, we will use Yixin’s and Cango’s price-to-sales (P/S) ratios for reference. Yixin has a P/S of two.06 instances and Cango 0.78 instances, yielding a median of 1.42 instances. With estimated income of round HK$13.7 billion for all of 2021 primarily based on its income figures for the primary three quarters, Tuhu’s market worth may attain HK$20 billion ($2.6 billion).

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