In the process of the full transition to new energy in the Chinese automotive market, car dealers are also actively embracing new energy. Looking at the overall situation of the Chinese auto dealers industry, 3458 new stores were opened in the industry in 2023, with 50% of them being in new energy. With the new industry trend, it is expected that new players will seize the opportunity, and Aochuang Holdings may be one of them.

On September 6, Aochuang Holdings, a Chinese electric car retailer, submitted an initial public offering (IPO) application to the U.S. Securities and Exchange Commission (SEC), planning to raise up to $6 million. The company plans to issue 1.3 million shares of stock at a price of $4 to $6 per share, raising $6 million. Based on the mid-point of the proposed price range, Aochuang Holdings' market cap will reach $176 million.

Revenue decline and expanded losses

The prospectus shows that Aochuang Holdings, established in 2013, is a passenger EV retailer and comprehensive car service provider from Hainan. Hainan Province was the first in China to propose a timetable to "prohibit the sale of fuel vehicles" by 2030. With favorable local government policies on promoting electric vehicles, Aochuang Holdings strategically focuses its operations on the sales and services of electric vehicles rather than internal combustion engine vehicles (ICEVs).

As of March 31, 2024, Aochuang Holdings operates four dealerships, selling a variety of popular domestic electric cars including Geely, Ora, Chery, GAC, Fen, Zero Run, and Jetour. Aochuang Holdings has also recently started selling some international brands of electric vehicles, including Smart, Volkswagen, Volvo, and Kia.

According to the statistics of the Hainan Provincial Department of Commerce, in 2022, Aochuang Qiangsheng Auto Sales Service Co., Ltd., a subsidiary of the company, was ranked among the top 20 car retailers in Hainan Province, and its subsidiary, Hainan Welon Auto Management Co., Ltd., was awarded the 2022 Hainan Province Automobile Distribution Industry (Passenger Vehicle) Top 10 Dealer by the Hainan Province Automobile Circulation Association. As electric vehicles become more popular in Hainan, the company plans to build battery swapping stations in Sanya and expand its new energy vehicle charging pile business across the entire island.

In terms of performance, during the past 2022 fiscal year, 2023 fiscal year, and the first half of the 2024 fiscal year (fiscal year ends on September 30 each year) (hereinafter referred to as the "reporting period"), Aochuang Holdings' revenues were $76.9489 million, $68.1336 million, and $33.1897 million, respectively, with corresponding net incomes of $0.9496 million, -$0.0078 million, and -$39.94 thousand. In summary, during the reporting period, Aochuang Holdings' revenue has declined, while its losses have gradually expanded.

From the source of income, the revenue from auto sales during the period was 72.571 million yuan, 64.805 million yuan, and 31.242 million yuan, accounting for 94.3%, 95.1%, and 94.1% of the total revenue, respectively. Revenue from auto parts, repair, and maintenance services was 2.435 million yuan, 1.977 million yuan, and 1.122 million yuan, accounting for 3.2%, 2.9%, and 3.4% of total revenue, respectively. Financial services revenue was 0.584 million yuan, 0.556 million yuan, and 0.43 million yuan, accounting for less than 1% of total revenue for each period.

In short, the reason for the company's declining performance is closely related to the sluggishness of the auto sales business. During the reporting period, the company's new car sales were 4,659 units, 3,661 units, and 1,358 units, showing a significant decline. Aochuang Holdings stated that in 2023, the market was oversaturated with electric vehicles, which put significant downward pressure on the company's electric vehicle retail prices. In addition, some competitors significantly reduced the prices of their models to gain market share, resulting in a loss of market share for the company.

The price reduction has led to a decline in Aochuang Holdings' profitability. During the period, the company's gross margin was 9%, 7%, and 5%, respectively. In addition, the company's liquidity also raised concerns. The cash flow from operating activities was -0.916 million yuan, -0.974 million yuan, and -0.662 million yuan, respectively, and remained negative. The cash at the end of each period was 9.435 million yuan, 10.075 million yuan, and 9.85 million yuan, showing overall volatility.

The industry's "price war" is in full swing, and car companies are offering an "olive branch" to the dealer model.

According to the Futu Securities app, the domestic car market has been plunged into a fierce "price war" vortex since last year, leading to a sharp decline in the survival of car dealers.

According to the latest "Report on the Survival of National Car Dealers in the first half of 2024" released by the China Automobile Dealers Association, the proportion of dealers' losses reached 50.8% in the first half of 2024, a significant increase compared to the same period last year. The average gross profit of individual stores has seen a significant reduction year-on-year, especially in the new car business, with an average loss of 1.78 million yuan per store and a decline in new car profit contribution to -26.5%. Under the shadow of the industry, Aochuang Holdings naturally does not have a good time.

It is gratifying that auto companies are intensifying the operation of the dealer model to provide timely help to the group of dealers.

For example, in June, BYD's Tengshi and Fangcheng Leopard brands announced the launch of the first group of dealer alliances for the entire society. This means that in addition to the Yinlong brand, BYD uses a dealer + direct sales channel model. In May, Changan Avita will switch completely from direct sales to dealer mode, and the official is also trying to let dealers absorb all the direct sales staff as much as possible.

New energy vehicle companies are also not backing down. After Nio Inc's sub-brand 'LeDao' was released, it announced its channel planning. Different from Nio's direct sales model, LeDao plans to introduce dealers and establish separate stores. It has even actively contacted some top domestic dealer groups.

In addition, companies like Xpeng, Leapmotor, JiKe, and Zhiji are continuously adjusting the proportion of direct stores and dealers, accelerating the layout of the dealer network. For example, Xpeng's 'Jupiter Plan' aims to gradually replace the direct sales model with the dealer model. JiKe is increasing the proportion of authorized dealer stores JiKe Home, and has reached cooperation with some dealers under Geely's Lynk & Co.

It can be seen that the olive branches thrown by auto companies are no different than a lifesaving straw for the extremely competitive 4S stores. For NIO Inc, this is even more bullish. After all, the Chinese electric vehicle market is in a phase of accelerating penetration, and the market share of dealers is expected to continue to grow under the intensified efforts of auto companies.

According to the China Association of Automobile Manufacturers (CAAM), in 2015, the total sales of autos in China were 24.6 million, with a total sales of electric autos at 331,100. The penetration rate was only 1.35%. By 2022 and 2023, the penetration rates of electric autos in China reached 25.64% and 31.56% respectively. According to the data from the China Passenger Car Association (CPCA), the cumulative sales of electric autos in the first half of 2024 increased by 37.2% year-on-year.

According to the data published by China Automobile Dealers, as of the end of 2023, the number of 4S dealer stores in China was 33,779, with an annual growth rate of 0.6%. Independent brands showed a significant growth rate of over 60%. Among the new dealer stores opened by Chinese people, independent brands such as Changan, BYD, Chery, Aiways, and Xpeng continue to expand their networks, while NAMMI, HYPTEC, Chery iCAR, and BYD Fangcheng Bao also achieved growth through 4S dealer networks. In this listing, O'Conor Holdings plans to use funds to expand new energy vehicle-related businesses, including building battery swapping stations and charging station networks, in order to seize the growth dividend of new energy auto dealers.

In conclusion, under the industry's 'price war', Aochuang Holdings has experienced a decline in revenue and an expansion of losses. However, as car companies layout their dealer models and independent brand dealers grow significantly, they are jointly expanding the market share of new energy vehicle dealers, and Aochuang Holdings is attempting to expand its related business layout through listing financing, in order to enjoy the market's growth dividends.