Tuhu Car IPO Gets Off To Slow Start Despite Star Power

Key Takeaways:

• Tuhu has been backed by five established investors including Tencent, Leapmotor and Gotion High-Tech in its public offering starting last Friday
• The company posted an adjusted profit for the first time in its latest half-year earnings but its Hong Kong shares got a lukewarm response from the public

By A. Au

How much investor interest can a company bank on if it has lost 15.3 billion yuan ($2.1 billion) in four years?

The Chinese car servicing platform Tuhu Car Inc. (9690.HK) is finding out, as it motors ahead with its IPO on the Hong Kong Stock Exchange after finally passing its listing hearing last month at the third application attempt.

The online to offline auto maintenance business has accelerated its revenues in recent years but has been grinding its wheels in deep losses, after investing heavily to expand in a fiercely competitive market.

Determined to go public, the company persevered when its first filing faltered early last year and is now approaching the IPO finishing line. Tuhu will issue about 40.62 million new shares with a price range from HK$28 to HK$31 and will be listed on Sept. 26, with four prominent investment banks as sponsors: Goldman Sachs, CICC, BofA Securities and UBS.

Aside from that star lineup, Tuhu is backed by five more cornerstone investors with solid credentials. According to the prospectus, the big names are Tencent Holdings (0700.HK), which already held a 19.7% stake in Tuhu before the IPO, Zhejiang Leapmotor Technology (9863.HK), a new-energy vehicle maker that listed on the Hong Kong Stock Exchange in September last year, Shenzhen-listed Gotion High-Tech (002074. SZ) and Shanghai Zizhu Hi-Tech Zone and Castrol Holdings. These in total account for $100 million worth of shares, or about 62% of the offering.

The admission fee is only HK$3,131.3 ($401) per lot of 100 shares, a low threshold compared with recent IPOs, but the company’s offering has not set pulses racing.

Tuhu managed to attract HK$54.59 million in margin subscriptions on the first day of the public offering last Friday, only 43% of the HK$126 million it aimed to raise in that portion, reflecting limited investor interest amid the recent market downturn. Market sources noted that Tuhu decided on Wednesday to price its shares at HK$28, at the lower end of the range, to raise HK$1.14 billion in the IPO.

The public may yet to be convinced, but on paper Tuhu has a lot of potential. At the end of September last year, China had 315 million cars on its roads with an average age of more than six years, according to data from the Ministry of Public Security. That means huge demand for repairs and maintenance behind the scenes. The research cited in Tuhu’s prospectus also found that the automotive aftermarket is expected to reach 1.8 trillion yuan by 2026, with a compound annual growth rate of 9.6%.

By the end of last year, the company had more than 4,700 Tuhu workshops and 19,000 partner outlets covering most prefecture-level cities in China, making it the country’s biggest automotive servicing network with 10.2 million active users.

Tuhu’s slogan offers to “make car care simpler”. But while it looks after car owners’ needs can the company actually support itself, or must it rely on equity financing to function?

Tuhu has three types of outlets: self-operated Tuhu workshops, franchised Tuhu workshops and third-party repair shops. The self-operated workshops almost doubled in number from 61 in 2019 to 117 at the end of March this year, but they are huge cash burners with a bigger footprint and higher costs for rent and staff. Last year, for example, this type of workshop brought in less than 5% of total revenue and made a loss, with a negative gross margin of 3.3% for the period.

The franchised workshops are the company’s main revenue driver. Under this model, Tuhu can rake in franchise fees and get a cut of profits by providing the supply chain, systems, training and other operational support. The franchise network has expanded rapidly in recent years, with the number of participants soaring from 838 in 2019 to 3,771 at the end of March this year. Franchise revenue last year reached 8.76 billion yuan, nearly 76% of the total turnover, with a gross margin of 22.4% that was the best out of all Tuhu’s workshop types. Part of the appeal for franchisees is the prospect of quickly turning a profit. According to the company, it only takes about five to six months to break even after opening a franchised workshop,.

High IPO Valuation

The picture is less bright for independent partner workshops, which mainly get orders through Tuhu’s online platform. The third-party outlets provide automobile services to customers and then agree service charges with the company. The work supplements Tuhu’s workshops and helps the company extend its reach to second- and third-tier cities. However, the low-margin businesses operate outside of Tuhu’s control, and the company is unable to guarantee service quality. The number of such partner workshops has fallen from a peak of 31,623 in 2021 to 19,624 at the end of March this year, and the revenue share dropped from 8.7% to 4.1% over the same period.

While the number of partner stores has fallen, the influx of franchisees has improved the company’s financial performance. Over the past four years, Tuhu’s revenue has kept growing, from 7.04 billion yuan in 2019 to 11.55 billion yuan last year. But rising marketing costs, especially for advertising and online traffic, and fierce competition in the industry have taken a toll on earnings. The company has posted annual net losses of between 2.14 billion and 5.85 billion yuan, mounting up to 15.3 billion yuan over the four years.

However, Tuhu’s finances look healthier if non-operating factors are excluded. The company shrank its adjusted loss by around 56% to 552 million yuan last year, and in the first half of this year the franchise model propelled the firm into the black for the first time with an adjusted profit of 214 million yuan.

After launching in 2011, the company raised a total of 9.3 billion yuan in 16 rounds of financing between 2013 and 2021 from deep-pocketed investors such as Tencent, Sequoia China, Hillhouse Capital and Qiming Venture Partners. However, after the F++ round in November 2021, the company did not tap the private equity market again, instead setting its sights on the Hong Kong Stock Exchange early last year. The move perhaps shows an eagerness to go public quickly to satisfy investors looking to cash out once the business has found the right road towards profit.

As Tuhu has not yet achieved a GAAP net profit, it can be compared with its peers using the price-to-sales (P/S) ratio. In Hong Kong and U.S. stock markets, Tencent-backed counterparts Yixin Group(2858.HK) and Cango Inc. CANG have price-to-sales (P/S) ratios of 0.82 times and 0.53 times. If priced at the midpoint of its IPO, Tuhu would command a market value of about HK$23.95 billion with a P/S ratio of 1.93 times, a significant premium over the other two. However, the lukewarm reception for its shares suggests investors have not been sold on such a high valuation.