China’s largest provider of vehicle monitoring services for dealerships and their lenders gets support from its parent and benefits from business with sister companies

Key Takeaways:

  • Changjiu Holdings, a subsidiary of Changjiu Group, has been expanding its revenues in recent years but profits have been volatile, falling nearly 27% in the first half of this year despite higher turnover
  • Aside from vehicle monitoring, the firm manages dealership operations on behalf of 75 clients but only one of them is unrelated to its parent company

 

By Fai Pui

In China, vehicle tracking services help to keep the wheels of the car market turning.

Here’s how it works. Many Chinese consumers buy their cars at dealerships, which often depend on loans from banks and finance companies to pay for their automotive stock. The lenders treat the cars as collateral and are keen to avoid the risk of the assets being damaged or stolen. The solution is to pay a third-party company to monitor the pledged vehicles.

Changjiu Holdings Ltd., China’s largest provider of such services in the automobile distribution sector, passed a listing hearing last Friday at its second attempt and is now heading for an IPO on the Hong Kong Stock Exchange.

The company first applied in May this year under the name “Changjiu Digital Technology Ltd”, but the bid lapsed when the prospectus expired. The company dropped the tech label and renamed itself Changjiu Holdings before refiling in November, mindful perhaps that investors have been wary of the tech sector after a stock price plunge in recent years.

The name “Changjiu” may ring a bell for some readers. Another firm in the same family, Beijing Changjiu Logistics Corp. (603569.SH), listed its shares in Shanghai in 2016. When the stock surged 2.5 times, the couple who founded the parent company, Changjiu Group, were propelled onto the “Hurun China Rich List” after their fortune soared by 18 billion yuan ($2.54 billion).

But seven years on it would be hard for Bo Shijiu and Li Guiping to recreate that success, given concern about the weak overall market as well as the performance of Changjiu Holdings itself.

The company’s revenue has grown steadily from 431 million yuan in 2020 to 548 million yuan in 2022, while income in the first half of this year rose 19.6% to 309 million yuan, according to figures supplied in the prospectus. But profits have been erratic, despite the expanding revenue. The company made a net 114 million yuan in 2020, but profits fell 26.6% to just 83.73 million yuan the following year, before rising again last year to 95.91 million. Profit in the first half of this year amounted to just 35.29 million, nearly 27% less than the year-earlier period.

The reason for the rollercoaster lies partly in the company’s heavy investment to boost revenue, which pushed general and administrative expenses from 42.58 million yuan in 2020 to 76.98 million yuan last year, a rise of 80% over the period. The costs jumped nearly 89% to 63.4 million yuan in the first half of this year alone, equivalent to around 82% of the full-year expenses in 2022. In its prospectus the company cited a business expansion and related staffing needs as the cost driver.

However, investors are more worried about the actual scope for market expansion despite the heavy spending. Monitoring of pledged vehicles remains a niche and concentrated market in China. Changjiu Holdings provided vehicle tracking services to about 200 branches of 18 commercial banks, 27 auto finance companies and 11,152 auto dealers as of June 30 this year.

In revenue terms, the company controlled 47.9% of China’s market for the monitoring of pledged vehicles last year, according to data from China Insights Consultancy. But that means the entire market was only worth around 1.14 billion yuan based on the company’s revenues of about 548 million yuan last year. And the top five providers already serve just over 90% of the market, leaving limited room for expansion.

Another way to grab market share is to offer competitive prices. Changjiu Holdings levied an average service fee for its vehicle monitoring business of 3,564 yuan per month in 2020 but by the end of June this year the price had fallen to 3,206 yuan, a 10% drop over the period.

Meanwhile, the customer base is also increasingly concentrated. The company’s top five customers have accounted for a growing proportion of overall sales, rising from 33.3% in 2020 to 56.2% at the end of June this year. Meanwhile another group firm, auto distribution services provider Changjiu Industry, was the source of 16% of total revenue in the first half, becoming the company’s second-biggest customer.

Concentration side effects

The dense customer base makes it hard for Changjiu Holdings to raise prices, dragging on growth in its core business. That’s why the company has been exploring new avenues to diversify its income streams.

Last year Changjiu Holdings started to offer operations management services for small and medium-sized dealerships that lack specialized knowledge or personnel. However, only one of the 75 dealerships it had served by the end of June this year had no ties to the Changjiu Group.

Looking more closely at the finances, the company’s revenue from dealership management services jumped 1.4 times to 30.36 million yuan in the first half of this year. The average fee per dealer was 404,900 yuan based on 75 clients, but the revenue from the only independent third-party customer was just 83,000 yuan. Clearly the parent company is trying to nurture the growth of its subsidiary.

However, Changjiu Holdings is also trying to wean itself off parental support, noting in the prospectus it had entered into 144 non-binding letters of intent with independent car dealers.

Shares in its sister company Changjiu Logistics had a good run this year, with the price rising around 51% despite market weakness in mainland China and Hong Kong. Therefore, market watchers are also expecting Changjiu Holdings to buck the gloomy trend and launch successfully on the Hong Kong exchange. However, Changjiu Holdings has no listed peers in the car monitoring business to serve as valuation reference points. In the absence of comparatives, the company and its sponsors will need to work hard to sell the proposition to investors, and they may need to bide their time.

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