Cash Infusion And Superstore Growth Potential To Catalyze This Stock

The company said it closed a deal first announced last September to sell new stock to shared ride operator Dida for $7.5 million

Key Takeaways:

• Uxin has received $7.5 million in funding from Dida, following a similar $27 million cash infusion from longtime investor Nio last month
• The company reported strong growth for its two used car superstores in the third quarter, and announced plans to add new stores in the cities of Wuhan and Zhengzhou

China's car market is hardly a place for risk averse investors these days, with a slowing economy and overcapacity driving many brands and dealers into the red. But one potential bright spot could be the used car segment, which is showing signs of benefiting as buyers who previously would only consider new products opt for used cars instead.

That factor is helping to juice up sales for Uxin Ltd. (UXIN.US), which is developing a used car superstore model similar to that used by U.S. giant Carmax (KMX.US). The only problem is that time is working against Uxin, which is perpetually running low on cash as it races to build out its superstore network to the point where it can operate profitably.

Uxin just received a small lifeline in that regard this week with the closing of a new cash infusion from Dida (2559.HK), one of China's smaller shared ride operators. The funding isn't huge, with Dida agreeing to provide $7.5 million by subscribing to new Uxin shares. But that amount, equal to around 55 million yuan, is nearly double the meager 29 million yuan in cash Uxin had in its coffers at the end of last September.

Uxin also said last month that it had closed another deal announced a year earlier to receive a fresh $28 million, also via a sale of new shares, from longtime investor Nio (NIO.US; 9866.HK), one of China's top new energy vehicle (NEV) startups. Nio has been one of Uxin's oldest supporters, and its latest investment should bring its stake in the company to around 70%, according to our calculations. By comparison, Dida's latest investment gave it 2.5% of Uxin.

Uxin seems quite adept at getting money from this kind of strategic partner. In addition to these two private investors, the company has also received major cash infusions from state-owned partners in the cities of Xi'an and Hefei, where it operates its two used car superstores. Last year it also announced plans to open its third and fourth stores in the cities of Wuhan and Zhengzhou, the former in collaboration with the city government and the latter with the city's airport authority.

Such collaborations look smart, as these stakeholders have a strong interest in seeing Uxin succeed, and thus could easily provide new cash infusions if needed. For the big state-owned entities, in particular, providing Uxin with another 50 million yuan would probably be quite easy.

At the same time, all these stakeholders are bringing Uxin valuable resources. Dida could position Uxin as a preferred supplier of used cars to its thousands of drivers. Nio could also provide Uxin with its used NEVs, as such vehicles start to age and enter the second-hand market. And the government entities that are major stakeholders in each of Uxin's superstores can refer their thousands of employees to buy the company's cars, and also purchase such cars for their own fleets.

Rising stock

Uxin's growing momentum seems to have finally caught the attention of investors, with the company's stock nearly doubling over the last year. That means Dida has gotten quite a good deal, since its subscription price of $1.46 per American depositary share (ADS) is less than half of Uxin's latest closing price of $3.15.

If Uxin ultimately becomes profitable, we suspect that Nio could try to take the company private, since it already owns such a huge stake in the company. It could also sell down its stake to try and recoup some of its investment. But that's a story for another day.

The big picture for Uxin is that it could benefit as Chinese car buyers opt for more value-oriented choices amid recent economic uncertainty. At the same time, China has rolled out measures to try and boost the country's used car market, and more recently has given the industry an extra jolt with various programs aimed at stimulating domestic consumption.

China's used car market grew just 6.9% annually in the five years from 2019 to 2023, with 14.4 million used vehicles sold last year, according to third-party market data in the IPO prospectus for Autostreets (2443.HK), another provider of used car services that listed in Hong Kong last year. But the annual growth rate is expected to accelerate to 13.7% between 2023 to 2028, fueled by the confluence of recent favorable factors.

Uxin has yet to report any results for last year's fourth quarter. But its third-quarter results looked relatively encouraging. Its transaction volume jumped 81% year-on-year to 7,046 vehicles during the quarter, from 3,884 vehicles a year earlier. Most of its sales are to retail buyers, with retail transactions rising 162% to 6,005 units from 2,287 a year earlier. It forecast retail transactions would continue to grow by about 150% year-on-year in the fourth quarter, though it has yet to release any final figures.

Despite those triple-digit retail unit transaction gains, however, the company's retail transaction revenue grew by a far slower 79% year-on-year in the third quarter to 444 million yuan ($61 million) from 249 million yuan a year earlier. That discrepancy indicates average prices per vehicle are coming down sharply due to excess supply and weak demand in the broader car market.

Despite that, Uxin has been steadily improving its gross margin as it gains scale and experience. The figure rose to 7.0% in last year's third quarter, up from 6.2% a year earlier, helped by cost controls that saw marketing, administrative and R&D costs all fall during the period. The company's adjusted loss before interest, taxes, depreciation and amortization (EBITDA) dropped to 9.2 million yuan from 45.9 million yuan a year earlier. It previously said it believes the figure on that basis could become positive in the fourth quarter.

"Our superstore model has proven to be successful, showcasing strong competitiveness and significant growth potential," said founder and chairman Dai Kun in the third-quarter results. That means Uxin's days of constantly looking for new cash could soon be over. But we should also note that the stock looks just slightly pricey after the recent runup, trading at a price-to-sales (P/S) ratio of 1.5, quite a bit higher than the 0.48 for Carmax, which uses a similar business model.