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 original plan to raise up to $400 million through a U.S. listing
• Intense competition in the aftermarket car services industry has kept the company firmly in the red, as it eyes new energy vehicles to turn the tide

By Ken Lo

As home to the world’s largest car market, China is also fertile ground for development of an aftermarket offering services for the millions of cars on its roads. The nation’s automotive aftermarket providing vehicle maintenance, repair or detailing services was worth 1.03 trillion yuan ($162 billion) by gross merchandise volume (GMV) in 2020 and is expected to grow to 1.65 trillion yuan by 2025, representing a compound annual growth rate of 10% over that time, according to market research firm China Insights Consultancy (CIC).

But the business is highly fragmented, making it costly and difficult for specialists to achieve the economies of scale to not only build nationwide networks, but also the brand awareness necessary to attract consumers. As a platform with both online and offline operations, Tuhu Car Inc. is trying position itself as a major player in the independent automotive aftermarket (IAM) by connecting upstream suppliers and downstream dealerships. That includes a focus on new energy vehicles that are still a nascent segment in an otherwise widely contested sector for after-sales services.

The company is trying to sell its story to investors in its filing for an IPO in Hong Kong late last month. It reportedly flirted with the idea of a U.S. IPO as well, but in the end decided on Hong Kong with plans to raise up to $400 million.

The company’s revenue has grown steadily over the last three years, from 7.04 billion yuan to 8.75 billion yuan and 8.44 billion yuan, respectively, in 2019, 2020 and the first three quarters of 2021, according to its prospectus. By the end of last September, it had 36,592 stores in its network, 90% of which were through tie-ups with other partners. Its self-operated and franchised stores took up 0.6% and 8.6% of the total, respectively. Such partnerships with other operators has allowed Tuhu to rapidly expand its geographical footprint and enhance its efficiency. Its partner stores have a combined 13.9 million customers.

Focus on services

Tuhu is the biggest Chinese IAM service provider by revenue and the number of stores in its network. But what truly sets it apart from competitors is its strong focus on aftermarket services. According to CIC, the company had a monthly active user base of 10 million people by September 2021, giving it the largest user community for its aftermarket services in China.

Tuhu has secured investment from Tencent (0700.HK), whose other similar investments include Yixin (2858.HK) and Cango CANG. Unlike Tuhu, the other two derive a substantial share of their revenue from the vehicle loan business. In the first half of last year, Yixin derived 47.5% of its revenue from its loan business. Similarly, the car loan business contributed 34% of Cango’s revenue in the first three quarters of the year. By comparison, aftermarket services are the dominant part of Tuhu’s business, with steadier growth that makes the company less susceptible to the ups and downs of vehicle sales.

Yixin and Cango went through a rough patch last year because of sluggish sales in the mainland Chinese car market. Cango reported a non-GAAP loss of 68.23 million yuan in the first three quarters of last year, reversing a 1.86 billion yuan profit in the year-earlier period when it recorded a large gain on one of its investments, according to its latest results. The company’s stock tumbled by more than 60% last year. Yinxin’s loss narrowed to 135 million yuan in the first half of last year, and the company’s stock also lost 60% of its value.

Tuhu is also losing big money. Excluding equity compensation payments, changes in the fair value of convertible redeemable preferred stock and losses from buybacks of convertible redeemable preferred stock, it posted losses of 1.04 billion yuan, 971 million yuan and 902 million yuan in 2019, 2020 and the first three quarters of 2021, equating to net loss ratios between 10.7% and 15%, a normal range given its rapid expansion and sizable discounts for customers.

That said, the more important question now is whether Tuhu can convince investors it is a worthy recipient of their money based on its aftermarket service business alone.

More spending on services

According to Tuhu’s prospectus, car owners’ spending on aftermarket services starts to increase markedly six years after a vehicle’s purchase. In 2020, the average age of vehicles in China was 5.6 years and is expected to rise to 7.6 years by 2025. Still, those are both much lower than the U.S. and the EU, where the average vehicle age will be 12.2 and 12.1 years, respectively, by 2025.

Chinese car owners’ spending on aftermarket services is also much lower than that in the U.S. and EU, averaging $666.60 in China compared to $1,288.30 in the U.S. and $779.80 in the EU. With growing car ownership in China and greater spending on aftermarket services, the market has strong prospects.

Tuhu is also setting its sights on the new energy vehicle business. According to data from the China Association of Automobile Manufactures, new energy vehicle sales jumped by a whopping 1.6 times last year, even as total vehicle sales in China only increased by 3.8%. Last year, Tuhu announced strategic partnerships with new energy car brands Leapmotor and Arcfox, which could help it to gain more market share in the promising new market.

The new energy vehicle segment is still a relatively small part of China’s overall vehicle market. Chinese consumers owned just 4.5 million new energy vehicles in 2020, accounting for only 1.9% of all passenger vehicles. The industry estimates that by 2025, the percentage will increase to 9.5%, implying considerable business opportunities for anyone who can carve out a niche in the space.

More details on Tuhu’s IPO have yet to be released. To estimate its potential market value, we can use Yixin’s and Cango’s price-to-sales (P/S) ratios for reference. Yixin has a P/S of 2.06 times and Cango 0.78 times, yielding an average of 1.42 times. With estimated revenue of around HK$13.7 billion for all of 2021 based on its revenue figures for the first three quarters, Tuhu’s market value could reach HK$20 billion ($2.6 billion).