US Stock IPO Preview | Aochuang Holdings: Industry "Price War" in Full Swing, New Energy Vehicle 4S Stores Struggling to Hide Performance Decline

In the process of China's automotive market transitioning to new energy vehicles, automotive dealers are also actively moving towards new energy. Looking at the overall situation of the Chinese automotive dealer industry, in 2023, the industry opened 3,458 new stores, with 50% of them being new energy vehicles. With the new industry trend, it is expected that new players will emerge and potentially outperform, with Aochuang Holdings possibly being one of them.

On September 6, Chinese electric vehicle retailer Aochuang Holdings submitted an initial public offering (IPO) application to the U.S. Securities and Exchange Commission (SEC), planning to raise up to $6 million. The company plans to issue 1.3 million shares at a price of $4 to $6 per share, raising $6 million. Based on the midpoint of the proposed price range, Aochuang Holdings' market value will reach $176 million.

Revenue Decline and Expanded Losses

According to the prospectus, Aochuang Holdings was founded in 2013 and is a passenger electric vehicle (EV) retailer and comprehensive automotive service provider from Hainan. Hainan Province is the first province in China to propose a timetable to "ban the sale of fuel vehicles" by 2030. Leveraging favorable policies for electric vehicle promotion by the local government, Aochuang Holdings strategically focuses on the sales and services of electric vehicles rather than internal combustion engine vehicles (ICEVs).

As of March 31, 2024, Aochuang Holdings operates four dealerships, selling a variety of popular domestic electric vehicles including Geely, Ora, Chery, GAC, Aito, Leapmotor, and Jetour. Aochuang Holdings has also started selling some international brands of electric vehicles, including Smart, Volkswagen, Volvo, and Kia.

According to the Hainan Provincial Department of Commerce, in 2022, the company's subsidiary Hainan Aochuang Qiangsheng Automobile Sales Service Co., Ltd. ranked among the top twenty automobile dealers in Hainan Province, and its subsidiary Hainan Welon Automobile Management Co., Ltd. was awarded the top ten automobile dealers in Hainan Province's automobile circulation industry (passenger cars) for 2022 by the Hainan Automobile Circulation Association. With the popularization of new energy vehicles in Hainan, the company plans to build battery swapping stations in Sanya City and plans to deploy new energy vehicle charging piles across the entire island.

In terms of performance, in the past fiscal years of 2022, 2023, and the first half of 2024 (fiscal year ending on September 30 each year) (hereinafter referred to as the "reporting period"), Aochuang Holdings' revenues were $76.9489 million, $68.1336 million, and $33.1897 million respectively, with corresponding net profits of $0.9496 million, -$0.0078 million, and -$0.3994 million. In summary, during the reporting period, Aochuang Holdings' revenue declined while losses gradually expanded.

Looking at the revenue sources, automotive sales revenue during the period was $72.571 million, $64.805 million, and $31.242 million, accounting for 94.3%, 95.1%, and 94.1% of total revenue respectively; automotive parts, repair, and maintenance service revenue were $2.435 million, $1.977 million, and $1.122 million, accounting for 3.2%, 2.9%, and 3.4% of total revenue respectively Financial services revenue was 584,000 yuan, 556,000 yuan, and 430,000 yuan respectively, accounting for less than 1% of total revenue in each period.

In general, the decline in company performance is not unrelated to the downturn in car sales business. During the reporting period, the company's new car sales were 4,659 units, 3,661 units, and 1,358 units respectively, showing a significant decline. Aochuang Holdings stated that in 2023, there was an oversupply of electric vehicles in the market, putting tremendous downward pressure on the company's electric vehicle retail prices. Additionally, some competitors significantly reduced prices on their models to compete for market share, resulting in a loss of market share for the company.

The price reduction led to a decline in Aochuang Holdings' profitability, with gross profit margins of 9%, 7%, and 5% respectively during the period. Additionally, the company's liquidity also raised concerns. The company's operating cash flows were -916,000 yuan, -974,000 yuan, and -662,000 yuan respectively during the reporting period, remaining negative; and the cash balances at the end of each period were 9.435 million yuan, 10.075 million yuan, and 9.850 million yuan respectively, showing overall volatility.

Intense "price wars" in the industry as car companies offer olive branches to distribution models

According to the Intelligent Finance and Economics App, the domestic car market has been caught in a fierce "price war" vortex since last year, leading to a sharp decline in the survival of car dealers.

The latest "Report on the Survival Status of National Automobile Dealers in the First Half of 2024" released by the China Automobile Circulation Association shows that in the first half of 2024, the proportion of dealerships operating at a loss reached 50.8%, a significant increase compared to the same period last year. The average gross profit total per single store has seen a significant reduction year-on-year, especially in new car business, with the average single store loss amounting to 1.78 million yuan and the contribution of new car profits declining to -26.5%. Under the shadow of the industry, Aochuang Holdings naturally faced difficult times as well.

It is gratifying that car companies are stepping up their efforts to support the dealer community.

For example, in June, BYD's Tang and Song Pro brands announced the launch of the first batch of dealer partnerships to the entire society. This means that in addition to the brand, BYD adopts a dealer + direct sales channel model. In May, Changan Auchan will completely switch from a direct sales model to a dealer model, and the official also tries to ensure that dealers absorb all direct sales employees.

New energy car companies are also not backing down. After NIO's sub-brand "LeDao" was launched, it announced its channel plan. Different from NIO's direct sales model, LeDao plans to introduce dealers and establish independent stores, and has even actively contacted some leading dealer groups in China.

In addition, companies like XPeng, Leapmotor, ZEEKR, IM Motors, etc., are continuously adjusting the proportion between direct sales stores and dealers, accelerating the layout of dealer networks. For example, XPeng's "Jupiter Plan" aims to gradually replace the direct sales model with a dealer model; ZEEKR is increasing the proportion of authorized dealer stores ZEEKR Home and has reached cooperation with some dealers under Geely's Lynk & Co It can be seen that the "olive branches" thrown by car companies are like a life-saving straw for the highly competitive 4S dealerships. For Aochuang Holdings, it is even more of a positive development. After all, the Chinese electric vehicle market is in the stage of accelerated penetration, and the market share of dealers is expected to continue to grow under the increased efforts of car companies.

According to the China Association of Automobile Manufacturers (CAAM), in 2015, the total sales of automobiles in China were 24.6 million units, with a total sales of electric vehicles of 331,100 units. The penetration rate was only 1.35%. By 2022 and 2023, the penetration rates of electric vehicles in China are expected to reach 25.64% and 31.56% respectively. According to data from the China Passenger Car Association (CPCA), in the first half of 2024, the cumulative sales of electric vehicles increased by 37.2% year-on-year.

Based on data released by the China Automobile Dealers Association, as of the end of 2023, the number of 4S dealerships in China was 33,779, with an annual growth rate of 0.6%. Independent brands have shown significant growth of over 60%. Among the new dealerships opened by Chinese people, independent brands such as Changan, BYD, Chery, Aiways, and XPeng continue to expand their networks, while NAMMI, HYPTEC, Chery iCAR, and BYD Fangchengbao have also achieved growth through the 4S dealership network. With this listing, Aochuang Holdings plans to use the funds to expand its new energy vehicle-related business, including the construction of battery swapping stations and charging pile networks, in order to seize the growth dividend of new energy vehicle dealers.

In summary, under the industry's "price war", Aochuang Holdings is facing a decline in revenue and an expansion of losses. However, as car companies layout dealership models and independent brand dealerships show significant growth, jointly expanding the market share of new energy vehicle dealers, Aochuang Holdings is attempting to expand its related business layout through listing financing to enjoy the market growth dividend