CaoCao approaches IPO finish line with nod from China’s securities regulator

A Hong Kong listing by the Geely-backed ride hailing app was approved last week by the CSRC, a year after the company first filed for the IPO

Key Takeaways:

• CaoCao’s year-old effort to list in Hong Kong could be nearing completion, after receiving a green light from China’s securities regulator
• The company’s revenue grew 25% in the first half of last year, outpacing its rivals, as it entered 32 new cities, boosting its footprint by more than 60%

By Doug Young

Auto giant Geely is developing a reputation as a company that’s often late to the race in the newest driving technologies and services, but then quickly makes up for lost time with its deeper resources and better execution. That could well be the case again with CaoCao Inc., Geely’s answer to Uber (UBER.US), whose stalled IPO could finally be nearing completion.

CaoCao first filed to list in Hong Kong a year ago, but never made it to market and renewed its application last October. The Chinese securities regulator finally gave the listing a green light last Friday, clearing one of the last major regulatory hurdles. Now, CaoCao must pass its listing hearing with the Hong Kong Stock Exchange, which could happen in the next month or two, and would clear the way for it to finally become a public company.

It would join an increasingly crowded field of listed Chinese rivals, including the smaller Dida (2559.HK) and Chenqi (9680.HK). Many believe industry giant DiDi Global is also likely to list in Hong Kong in the not-too-distant future, becoming a publicly traded company again after its brief New York listing in 2021 ended due to failure to undergo a necessary data security review.

Mid-sized Chinese investment banks Huatai International, ABC International and GF Securities (Hong Kong) are underwriting the deal, which indicates it should be relatively large. Bloomberg previously reported the listing could raise several hundred million dollars.

CaoCao is a relative newcomer to China’s crowded ride hailing space, founded a decade ago in 2015. The company is 84% owned by Geely founder Li Shufu, which is one of its biggest competitive advantages. Geely is one of China’s most successful private automakers, with a current stable of publicly listed assets running the range from its own Geely (0175.HK) brand, to Sweden’s Volvo (VOLCAR.US), electric vehicle maker Zeekr (ZKR.US), sportscar maker Lotus (LOT.US) and smart car technology maker ECARX (ECX.US).

The company distinguishes itself from rivals through increasing use of its own customized cars, which are produced by companies from the Geely family and it sells and leases to its drivers. Such a model is similar to that used by taxis, and differs from many of its rivals that simply let drivers use their own cars.

“We leverage an expanding network of battery swap stations and auto servicing shops operated by Geely Group, which empowers our drivers with significant cost advantages, enhancing their net income,” CaoCao said in the most recent edition of its listing document filed last October. “Our purpose-built vehicles also optimize economics and driving experience for drivers.”

The purpose-built vehicle strategy is relatively new for CaoCao, dating back to just 2022. But since then it has aggressively built up that part of the business. Such vehicles accounted for about a fifth of its gross transaction value (GTV) in 2023, and the figure rose further to 26.4% in the first half of last year. CaoCao said the ratio is expected to rise further, with an ultimate goal of providing all of its drivers with purpose-built vehicles.

Aggregator apps

CaoCao’s other distinctive feature is its growing use of aggregation apps that offer service from many different ride hailing services. Such apps are increasingly common in China, lowering barriers of entry for smaller companies that have less resources to develop their own apps. But it has also resulted in many smaller players entering the market, ramping up the competition. Use of aggregation apps also lowers marketing costs, since most such platforms are operated by well-known names like mapping company AutoNavi and takeout dining giant Meituan.

CaoCao started out relying on its own app, but has rapidly been shifting its business onto the aggregator apps since first using them not long after its founding. Since then, the proportion of its ride-hailing orders fulfilled through aggregator apps has risen from 3.5% in 2018 to 30% in 2023. The company said it expects the ratio to keep growing to reach about half of its orders by 2028.

It pointed out the use of aggregation apps has significantly lowered its user acquisition costs, dropping them to 18.1% of its GTV in 2023 from 23.6% in 2021.

With its basic business formula in place, CaoCao has recently embarked on an aggressive expansion. It entered 32 new cities in the first half of last year alone, expanding its footprint by more than 60% to 83 cities served by last June. That helped it to record 25% revenue growth in the first half of last year, as the figure climbed to 6.16 billion yuan ($844 million) from 4.94 billion yuan a year earlier. By comparison, DiDi reported far slower 7.5% revenue growth for all last year, while Chenqi’s revenue rose 14% and Dida’s revenue actually fell 3.4%.

But the rapid growth also drove up CaoCao’s marketing expenses to 8.4% of revenue in the first half of last year from 7.1% in 2021. It offset that partly by lowering its general and administrative and R&D spending as percentage of revenue over that time.

Such efforts helped the company to record its first-ever gross profit in 2023, and the figure more than doubled to 429 million yuan in the first half of last year from 165 million yuan in the year-ago period. That lifted its gross margin to 7.0% from 5.8% over that period, and the figure looks likely to keep improving as it consolidates its position as the market’s second-largest player behind only DiDi. Here, however, we should also note that CaoCao has quite a bit of catching up to do, since its listing document says the industry’s top player, presumably DiDi, controlled about 75% of the market in 2023, while its own share stood at just 4.8%.

In terms of valuation, multiples are all over the map for other companies from this field. Premier names like Uber and Grab (GRAB.US) currently trade at price-to-sales (P/S) ratios of 3.7 and 5.9, respectively, while Chenqi and Dida are much lower at just 0.79 for the former and 1.25 for the latter. We expect CaoCao should be able to find a valuation closer to the premier end of that spectrum, perhaps with a P/S ratio of around 3, which would value it at a very respectable 40 billion yuan.

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