With the China Automobile Dealers Association (referred to as: the Dealers Association) officially submitting an "Urgent Report on the Current Funding Dilemma and Closure Risk Facing Auto Dealers" to relevant government departments, the survival crisis of traditional dealers is once again brought to the forefront.

The report shows that according to the Dealers Association's "Market Pulse" monitoring data, from January to August this year, the "price war" has resulted in an overall retail loss of 138 billion yuan in the new car market, significantly impacting the healthy development of the industry.

In fact, this year, due to the unbearable burden of the "price war", many dealers have found themselves deep in trouble. In September alone, news broke of two auto dealers either unable to register new cars or having their dealership agreements terminated by the brand. The plight of these two dealers is not an isolated incident, but a reflection of the current reality faced by the entire auto dealer industry.

While the Dealers Association is calling for the introduction of phased financial relief measures, institutions also expect sales performance in the traditionally strong seasons of September and October to exceed expectations. Positive news resonates, and auto dealers surge. On September 24, Zhongsheng Holding (00881) and Meidong Auto (01268) surged by 9.85% and 17.68% respectively.

According to the Securities Times app, the difficult situation faced by auto dealers is a tangible manifestation of the pains of their transformation period. And at this critical juncture of life and death, leading auto dealers are beginning to explore ways to break free.

The "darkest moment" for domestic auto dealers

The 'golden age' of car dealers lying down to make money in the face of the terminal consumer market is no longer in existence, and the industry as a whole is under tremendous survival pressure.

The 'Report' believes that currently, the two main issues facing the car dealers industry are: first, the dual pressure of weak consumption and high manufacturer wholesale volume keeps dealer inventory at a high level. To reduce financial pressure and financing costs, dealers are forced to sell at low prices to survive. Second, the 'price war' has led to serious mismatch between purchases and sales, the more cars dealers sell, the more loss they incur. At the same time, dealers face the pressure of difficult financing maturity and fulfillment, resulting in the risk of operational cash flow disruption and fund chain rupture. Currently, the existing working capital of dealers has been compressed to the limit.

According to the Association's 'Market Pulse' monitoring data, as of August this year, the highest mismatch data of dealers' purchases and sales has reached -22.8%, further expanding by 10.7 percentage points compared to the same period last year. According to relevant data analysis by the Association's experts, in August, the overall discount rate of the new car market was 17.4%. From January to August this year, the 'price war' has resulted in a cumulative retail loss of 138 billion yuan for the new car market, significantly impacting the industry's healthy development.

The results of 'quantity over price' are also not ideal. In the first half of this year, only close to 30% of dealers exceeded their half-year sales targets, with over 80% of those who exceeded the target being more than 50%. Dealers with target completion rates below 70% still make up one-third. Luxury/import brands have a higher target completion rate, with over 40% of dealers completing half-year targets; joint venture brands have the lowest completion rate (only 20.8%), with over 40% of dealers having a completion rate below 70%; the proportion for independent brands is 23.1%.

Even the leading companies are finding it hard to escape under the shadow of the industry. Of the 8 car dealer groups listed on the Hong Kong stock market, only Zhongsheng Hldg and Harmony Auto (03836) saw an increase in new car sales, while the remaining 6 car dealer groups experienced sales declines ranging from 4% to 17%, with Meidong Auto having the largest decline.

More crucially, behind the 'quantity over price' strategy is the continual squeeze on profit margins. While dealer losses expanded in the first half of this year, the profit margins also narrowed.

Based on the first-half financial reports of Zhongsheng Hldg, Harmony Auto, Grand Baoxin, Yongda Auto, etc., the net income margins for the first half of 2024 for all companies have decreased and their profitability has declined. Among them, Zhongsheng Hldg's net income decreased by 50.3% year-on-year, Yongda Auto's net income decreased by 76.1% year-on-year, and car dealers like Sunfonda GP and Grand Baoxin are still 'struggling' in losses.

(Unit: 10,000 yuan)

In addition, public data shows that in the first half of this year, nearly 2,000 4S stores nationwide closed or went offline, almost reaching the total number of closures for the entire previous year. Domestic car dealers are going through a 'darkest moment.'

Front-end operations are facing obstacles, and the capital market is also beginning to react. Last year, the first domestic IPO car dealer, Pangda Group, began the road to delisting. It should be noted that its peak revenue once exceeded 70 billion, with partnerships with nearly a hundred car brands and over 1,400 4S store locations. In addition, on August 28th, the once high-flying automotive dealer giant, China Grand AutomotiveServices Group, officially delisted. In the 9 years since its IPO, China Grand Automotive's market cap plummeted from hundreds of billions straight down, eventually triggering a face value delisting.

Currently, car dealer companies that have not yet delisted, including zhengtongauto, sunfonda gp, harmony auto, cent unit hldg (01959), have been trading below 0.5 Hong Kong dollars for several consecutive days, indicating the attitude of the capital markets.

Accelerating transformation to seek vitality

It is not difficult to see that at the current stage, the plight of the traditional dealer system, or 4S dealerships, is indeed closely related to the 'price war' throughout the year. However, the deeper reason lies in the rapid rise of electric vehicles, with the introduction of direct sales models, making traditional automotive 4S dealerships seem 'less needed.'

It should be pointed out that the painful period of industry transformation is inevitable, but it is in every change, under new market selection mechanisms, that the industry's appearance can be ultimately rejuvenated.

According to the Zhitong Finance APP, car dealers have started to take targeted measures, such as strengthening after-sales services, adding used cars and new energy vehicle businesses, or expanding overseas operations. Even though some dealers are struggling to withstand the operational pressure disappearing in the wave of transformation, there are still players who rely on transformation and remain in the game.

In the first half of 2024, Zhongsheng Hldg, Yongda Auto, Zhengtong Auto, and Cent Unit Hldg maintained growth momentum in terms of after-sales services, reaching 10.96 billion yuan, 4.65 billion yuan, 1.7 billion yuan, and 0.11 billion yuan respectively, with year-on-year growth rates of 13.8%, 0.2%, 19.2%, and 15.1%.

Especially for Zhongsheng Hldg, all profits come from after-sales services. In terms of gross profit, Zhongsheng Hldg's total gross profit reached 4.93 billion yuan in the first half of the year. Although the gross profit from new car sales saw a severe decline, reaching -1.99 billion yuan, the gross profit from after-sales services surged to 5 billion yuan, a significant increase of 12.7%, fully covering the group's total gross profit in scale.

After-sales services have always been a high-profit business for dealer groups. As track players continue to deepen their layout, this business will gradually improve the overall profit for them.

(Unit: 10,000 yuan)

In terms of used cars and new energy vehicles, only five car dealer groups disclosed their used car trading volumes in the first half of the year. Among them, Zhongsheng Hldg, as the leader, saw a 53.9% year-on-year growth in used car trading volume. Meanwhile, Yongda Auto's total used car trading volume (dealer + brokerage) was 35,236 units, a decrease of 14.2% compared to the previous year, with 17,025 units in dealer sales, down 14.5% year-on-year. Additionally, facing the trend of new energy vehicles, dealers have generally increased their efforts in brand layout, with over 30% of dealers believing that the penetration rate of new energy vehicles will exceed 50% for the whole year.

It is undeniable that as the development of new energy brands requires a broader market coverage, faster response mechanisms, and more diversified sales strategies, the role of channel agents becomes prominent, and the attribute of 'existence means reasonable' for dealers gradually emerges.

On the other hand, since 2021, China's automotive export market has shown super strong growth. According to export data from the General Administration of Customs, in 2023, China's car exports reached 5.221 million units (3.317 million units in the same period of 2022), with an export growth rate of 57.4%. It is currently the world's largest car exporter, with huge potential for the future.

As independent brands expand their overseas markets, car dealers have also followed the pace of car companies in embarking on overseas journeys. The first to seize the opportunity is Harmony Auto. In November 2023, the first Aion Auto showroom jointly opened by GAC Aion and Harmony Auto in Bangkok, Thailand. On January 9th this year, Thailand's largest Aion new energy car experience center, Harmony Aion Center, was opened. Harmony Auto aims to establish at least 10 Aion sales outlets in Thailand, striving to become the largest Aion agent in Thailand. It is foreseeable that when GAC Aion's factory in Thailand goes into production, Harmony Auto will become its most important partner.

However, going global places high demands on resources and local market understanding for overseas customers, posing a major challenge for car dealers. Currently, car companies often choose to cooperate with local overseas dealers. For example, Xiaopeng has strategic cooperation agreements with top European dealers, EmilFrey NV Group from the Netherlands and Bilia Group from Sweden, to establish a 'direct + authorized' retail model. Therefore, the overseas expansion of domestic car dealers may be a breakthrough, but this path is still not without obstacles.

In summary, under the escalating 'price war', domestic dealers are experiencing a 'crisis' moment where operational and profit capabilities are declining. In this context, how dealers innovate becomes a crucial weapon for their breakthrough. For example, Zhongsheng Holdings has shifted its profit focus to aftersales services, and Harmony Auto has also intensified its efforts in the overseas market. The road is tough and long, but we still believe that dealers who rely on their own efforts will stay in the game during this elimination round.