Transforming Uxin Finds Government Support in Anhui

Key takeaways:

• Uxin’s new $388 million investment in Anhui is part of its broader plan to transform from a middleman to a direct used car seller
• One of the company’s biggest challenges going forward could be a lack of cash to execute its cost-heavy transformation plan

By Mo Yelin

Online used car seller Uxin Ltd. UXIN made a bold move last June to reinvent itself – shifting gears from its old business model of acting as middleman between used car buyers and sellers, to directly buying, then reconditioning and selling used cars.

So how are things going more than a year after the switch?

The short answer: the results are a mixed bag of both achievements and challenges. On the plus side Uxin’s effort have yielded some positive results in terms of financial performance, which were apparent in the company’s latest quarterly earnings released Sept. 24. But long-term issues remain, such as a lack of cash that could slow down further development.

The need for big cash to underwrite the transformation was on display in a major announcement made concurrently with the latest quarterly results. That separate announcement saw Uxin agree to co-invest up to 2.5 billion yuan ($388 million) with the Changfeng county government in Hefei, capital of Anhui province, to build a used car inspection and reconditioning center.

Uxin said the new center will be able to recondition 60,000 to 100,000 vehicles annually once it becomes fully operational in the next few years. “This production capacity is expected to provide Uxin with a stable and large supply of high-quality used vehicles in the coming years,” it said.

Such an announcement might be easily dismissed as just another in a long stream of tie-ups between a local government and a private Chinese company. But the deal is no small one for Anhui, which has invested heavily over the past few years in a bid to become a major heartland for China’s car industry. Some of the country’s most successful car companies are now headquartered in the province, including U.S.-listed electric-car startup and Uxin investor Nio NIO. 

Thus partnering with the Anhui government will not only provide Uxin with government funding, but will also give it access to the province’s budding car industry ecosystem, potentially paving the way for further cooperation with other industry partners.

The new plant in Anhui will complement a similar inspection and reconditioning center in Xi’an that started operating in March.

Growing Car Sales 

Concurrently released with word of the new center, Uxin’s latest earnings announcement, when coupled with its two previous quarterly reports, offers a glimpse into how the company’s transformative journey is going a year after its official launch.

Uxin started to sell used cars from its own inventory last September, whereas before that it simply acted as a middleman for other buyers and sellers. Accordingly, it makes the most sense to see how its quarterly sales have trended since last September.

Its latest report showed Uxin sold 3,011 vehicles in the three months through June, a modest figure but still up 75% from the 1,719 figure for the previous quarter that is typically a slower period due to the Chinese New Year holiday. The latest number also represented solid growth from the 2,307 sold in the last three months of last year.  

As its car sales increased, Uxin’s revenues picked up, though at a slower growth rate, indicating the company was getting less money per vehicle sold – a trend we’ll explore shortly. For the latest reporting quarter, the company recorded revenues of 277.8 million yuan ($43.1 million), up 42% from 196 million yuan for the previous quarter.

In another positive sign, Uxin’s loss from continuing operations decreased substantially from previous quarters. It recorded a 50.7 million yuan loss on that basis in the latest quarter, roughly half the 97.4 million yuan loss in the previous quarter and 162 million yuan for the last three months of last year.

Uxin’s gross margin is also now squarely in positive territory, though the latest reading of 4% was down from 4.6% in the first three months of the year. Still, both readings represented a strong improvement from negative 28% in the second quarter of last year under the old business model.

While the latest results and the Anhui plan showed Uxin is making progress in its overhaul, investors were less excited about the developments. The company’s stock lost 2.36% on Sept. 26 after the pair of announcements. They have continued to track downward since then, though they are still more than double their levels at the start of the year – a sharp contrast to most U.S.-listed Chinese stocks that are down sharply amid a recent ongoing series of regulatory crackdowns.

While Uxin’s financial performance seems generally upbeat, it may be premature to declare its transformation a success story just yet. A deeper look at its financials reveals a few flaws.

One is the company’s growing reliance on car sales to other dealers rather than consumers, which typically carry lower prices and lower margins. That at least partly explains the slower growth in revenue in the latest quarter compared with number of cars sold. Of the 3,011 cars sold in the latest reporting quarter about three-quarters went to wholesalers.

Another potential factor that could crimp the company’s transformation was its cash shortage in the first half of the year, with the company reporting just 124 million yuan in cash and cash equivalents at the end of June. That lack of cash meant Uxin was unable to procure vehicles “on a large scale,” founder Dai Kun told analysts on its latest earnings call.

The company got some relief on that front in July, when it announced that it received $100 million as part of a larger package worth $315 million from two of its investors – Nio and Joy Capital.

Still, it’s hard to say whether that sum will suffice. Dai said his company will further expand its production capacity and increase inventory in the months ahead, with a special focus on investment in inspection and reconditioning centers in new regions. Such efforts will need major new cash investment, as reflected by the huge total investment in the new Anhui center.

Uxin certainly isn’t alone as it faces such headwinds, with many of its Chinese peers experiencing similar challenges amid fierce competition that has pushed many companies into the red and forced them to consider similar overhauls of their business models to become more focused.

In that regard Uxin actually stacks up quite well against some of its major peers. Two of those, Yixin (2858.HK) and Cango CANG, the latter of which is undergoing its own transformation, currently trade at price-to-book (P/B) ratios of 0.6 and 0.5, respectively. By comparison, Uxin trades at a much higher P/B ratio of 6.4.