China's Boche Files For Hong Kong IPO To Fund Expansion

China's biggest auction platform for salvaged vehicles has filed for an IPO to to pay for its plans, but is there room for growth in this niche market?

Key Takeaways:

• The company drove into the black in 2024 with a net profit of 1.53 million yuan for the first nine months of the year 
• But revenue growth slowed to a paltry 3.3%, held back by a fall in active members and repeat business 

China reports more than 250,000 traffic accidents a year, generating a huge scrap heap of wrecked cars. But some vehicles or their salvaged parts can be sold on, offering a commercial opportunity in automotive recycling.

A market leader in vehicle salvage, Boche Holding Limited (Cayman), has just filed for an IPO on the Hong Kong Stock Exchange, looking to welcome investors on board its business model as China rolls out policies to promote the used car market and other repurposing efforts.

In the past, China's scrappage and salvage business lacked standard practices and pricing. As such, it was hard to match sellers with buyers of parts or repairable vehicles. But since starting out in 2014, Boche Holdings has built an online auction platform that connects parties seeking to dispose of vehicles, primarily insurance companies, rental agencies and auto finance firms, with purchasers such as repair workshops and vehicle dismantlers. Boche says its platform has made the process quicker, more efficient and transparent.

The proceeds from the IPO, which is sponsored by CITIC Securities and Fosun International Capital, would be spent on expanding the business and setting up regional centers to increase handling capacity, as rates of car ownership in China are projected to keep rising.

Aside from salvage, the company deals in used cars and offers a range of services including valuation, vehicle transport, refurbishment and claims processing. In the first three quarters of last year, it derived 54% of its operating revenue from auctions of salvaged vehicles and other services, while the share from vehicle dealing rose to around 23%.

Decelerating growth

The prospectus said Boche was the only Chinese provider covering the entire auction process for salvaged cars, quoting market research firm China Insights Industry Consulting (CIC). The auto services firm handled transactions for 108,000 salvaged vehicles in 2023, making it the industry leader in volume terms with a market share of around 31%.

The company has raised capital in five financing rounds so far, earning a valuation of around 3.17 billion yuan ($440 million) after securing 100 million yuan worth of funds in 2022, with the likes of Fosun International and Ping An among its shareholders. 

Its revenues came in at 390 million yuan in 2022 and 520 million yuan the following year, while annual net losses over the same periods amounted to 180 million yuan and 120 million yuan.

Turnover rose 3.3% to 400 million yuan in the first three quarters of 2024, edging the firm into the black with a net profit of 1.53 million yuan compared with a loss of 39.43 million yuan in the year-earlier period.

The company has blamed its red ink stains on declines in the fair value of  financial instruments issued to investors. The impairment losses were 170 million yuan in 2022, 150 million yuan in 2023 and 40.29 million yuan in the first three quarters of last year. But gross margins have been robust, at 44.4%, 49.9% and 47.3% over the same timeframe.

However, key metrics such as the size of its user base and the rate of repeat business dropped last year. Active platform users fell 10.6% to 77,000 in the first three quarters of 2024, while the repurchase rate, defined as the percentage of buyers making at least two purchases in the period, slipped from 71.9% to 70.7%. Deal volume on the platform suffered as a result, sending revenue growth plummeting from 33.6% in 2023 to just 3.3% in the first three quarters of 2024. 

Scale constraints

The slowdown might be a reflection of the limited market size. China boasts the world's biggest auto market with ownership of more than 330 million vehicles, but only 345,000 salvaged vehicles were auctioned in 2023. Despite controlling almost a third of the market, the company only handled around 100,000 salvage deals. The United States has lower ownership rates at around 290 million vehicles but its retrieval business is vastly bigger than China's, with sales of more than 7 million salvaged vehicles.

A price war in the Chinese auto industry, with cheaper new models rolling off production lines, could weigh on demand for used or wrecked cars and vehicle parts. 

But looking at it another way, the salvage supply could increase if repair costs exceed the residual value of the cheaper models, making it more likely that insurance companies will write off badly damaged vehicles. Even so, the volume of salvaged vehicles is expected to reach just 807,000 by 2028, still ranking as a niche market.

Competitors may also start to gain on the market leader, as other platforms such as Guazi, Renrenche and Autohome gain traction with users. The insurance companies and other vehicle consignors might even set up their own auction platforms.

The modest size of the market is holding back those rivalries for now, as the salvage segment generates just a fraction of the 20 million annual transactions for used cars. But as the salvage volume rises, more entrants could be lured in, challenging the dominance of the current market leader.

Boche is in pole position right now and could press home its advantage with its IPO cash as China ramps up policies to promote the second-hand car industry, but potential rivals may not be far behind.