EV dealer AoChuang charges up Nasdaq IPO

The company has quadrupled the size of its listing plan to comply with new Nasdaq rules requiring a minimum of $25 million in fundraising

Key Takeaways:

• AoChuang Holdings has sharply boosted the size of its listing plan, aiming to raise about $30 million through a Nasdaq IPO
• The EV dealership operator has solid financials, but the aggressive valuation it’s seeking could quickly pressure its shares if it completes the listing

By Doug Young

An electric vehicle (EV) dealership operator is one of the first major Chinese applicants for a U.S. IPO in the Year of the Horse, looking to raise up to $36 million. But AoChuang Holdings Inc.’s plan could face some major headwinds, most notably because it’s seeking quite a rich valuation in a climate where such Chinese companies are coming under growing regulatory scrutiny.

Many of the Chinese companies seeking Nasdaq IPOs these days have sought similarly aggressive valuations, with the result that shares of most to complete their listings plunged within months or even days after their trading debuts. The Nasdaq stepped in last year with strict new rules to stem the flow of such listings that often left less sophisticated investors with big losses.

AoChuang is aware of those changes, which is why its latest filing last week saw it supersize its fundraising target to as much as $36 million from a previous $9 million in its first IPO filing in September 2024. The new Nasdaq rules will require all Chinese companies to raise a minimum of $25 million. They also require those companies to maintain a minimum float of $15 million, and a drop of the float below $5 million would trigger an accelerated share suspension and delisting process.

AoChuang plans to sell 6 million shares for $4 to $6 apiece, which would raise $30 million at the midpoint. That means a stock price drop of more than half post-listing would quickly drop the company’s float below the $15 million minimum threshold set by the Nasdaq. That could make the company’s listing quite short-lived, if it makes it to market.

The bigger picture behind all of this is that listings by major Chinese companies in the U.S. have come to a virtual halt due to uncertainties on both sides of the Pacific. From the U.S. side, many companies worry about repeated threats of forced de-listings by U.S. politicians, and an increasingly hostile attitude in general towards Chinese companies on Wall Street. From the Chinese side, Beijing worries that listings by Chinese companies in New York could make their sensitive user data and other information accessible to the U.S. government.

That’s left mostly smaller names like AoChuang as the only Chinese companies still seeking U.S. listings. Their IPO underwriters are usually small names as well, and AoChuang’s is one such minor player, D. Boral Capital, formerly known as E.F. Hutton.

All that said, AoChuang actually looks like a relatively interesting company that might be worth a look from investors if it wasn’t pricing its stock so aggressively. The company operates four new energy vehicle (NEV) dealerships on South China’s Hainan Island, which is known for its preferential government policies designed to build up its tourism industry. More recently Beijing is also trying to build up Hainan as a major trade hub, which could also work to AoChuang’s advantage.

Aggressive pricing

AoChuang’s proposed price range would give it a market value of about $200 million and a price-to-sales ratio (P/S) of 2.8, based on the company’s sales for its fiscal year through last September. While that kind of ratio would look normal for a moderately growing tech company, it’s quite high for the relatively mature auto dealership sector.

By comparison, top U.S. operators Penske (PAG.US) and AutoNation (AN.US) trade at ratios of about 0.35. Chinese dealership operator MeiDong (1268.HK) trades even lower at a miniscule 0.09, reflecting the difficult situation for many auto dealerships in China due to huge oversupply and weak consumer demand in the nation’s car market.

That huge valuation gap shows why AoChuang’s shares could come under immediate pressure if the company completes its listing. China’s securities regulator is aware of what’s happening, and has also stepped up its scrutiny of these smaller companies. A check of the latest offshore IPO applicants on the China Securities Regulatory Commission’s (CSRC) website shows that AoChuang’s name is on the list, but has yet to get the necessary approval.

Having covered the many hurdles AoChuang faces, we’ll take a closer look at its actual business, which, as we previously noted, looks relatively healthy. The company opened its first dealership in 2016, and currently offers NEV models from many of the nation’s top domestic brands, including Geely, Chery, GAC, AITO and Leapmotor. It says it also recently started selling models from foreign brands, including Volkswagen, Volvo and Kia.

The company’s revenue rose 34% to $71.6 million for its fiscal year through last September from $53.6 million in the previous year. Its unit car sales rose by a higher 56% in the latest year to 4,767 from 3,048 a year earlier, far outpacing the 28% growth for unit EV sales in China last year.

AoChuang’s average vehicle sold for about $13,400 in the latest 12-month period, down from $16,300 a year earlier, reflecting a price war resulting from huge oversupply in the sector. But while many dealers have fallen deeply into the red, AoChuang seems to be maintaining and even improving its profit margins. Its gross margin for car sales has held steady at about 4% over the last two years, and its overall gross margin actually rose to 8% from 7% over that time as the proportion of revenue from higher-margin after-sales services and spare parts increased.

Those generally improving trends helped AoChuang record its first positive net income from operations in the year to last September, and to pare its net loss to $122,000 in the latest 12-month period from a $1.05 million loss a year earlier. That means the company could quite possibly become profitable in its current fiscal year, and could use its sizable cash reserves of $23 million plus any IPO proceeds to expand its operations.

The bottom line is that AoChuang’s IPO plan has quite a few moving parts. Its financials look relatively strong, and its lack of legacy gas-powered car dealership operations could position it well as NEVs come to rapidly dominate the Chinese car market. But China’s overall car market also looks quite weak right now. And, most importantly, the aggressive valuation the company is pursuing is almost certain to attract strong scrutiny from both the Nasdaq, as well as U.S. and Chinese securities regulators.

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