Next stop for Geely-backed CaoCao: a Hong Kong IPO

The ride-sharing company has built partnerships with third-party platforms to mount a concerted challenge to the market leader, but the strategy carries risks  

Key Takeaways:

  • CaoCao Inc.’s revenues have grown for the last three years but the company has yet to turn a profit, posting a loss of 1.98 billion yuan last year and landing nearly 967 million yuan in the red on an adjusted basis 
  • The company gets around 70% of its orders from third-party platforms after scaling back reliance on its own channels 

By Ken Lo

One of China’s top three ride-hailing services, CaoCao Inc., has set a course for the Hong Kong stock market.

The company is aiming to deliver the sector’s most significant IPO since passenger transport pioneer DiDi Global(DIDIY.US) went public in the United States in 2021, only to delist from the New York market less than a year later.

With car maker Geely as a strategic partner, Suzhou-based CaoCao has cultivated links with third-party platforms and mapping apps to boost orders and motor its way into the upper ranks of China’s ride-hailing market.

The company, which applied for a Hong Kong listing in April, was set up in 2015 and offers online ride-hailing services across 51 Chinese cities. While its competitors mostly use privately owned vehicles, CaoCao has been developing customized cars for ride sharing. By the end of 2023, it had amassed China’s largest such fleet with about 31,000 purpose-built vehicles operating in 24 cities.

The company’s majority owner, Li Shufu, holds an 83.87% stake through motor manufacturers Geely Holding Group and Zhejiang Jidi. 

Shifting into higher gear

CaoCao has consistently placed third in the industry rankings by gross transaction volume (GTV) over the past three years, according to data in its preliminary prospectus, although its market share is dwarfed by the dominant provider, DiDi, and the saturating ride-hailing market poses growth risks.

According to a Frost & Sullivan study, the company’s 2023 GTV accelerated 37.5% to about 12.21 billion yuan ($1.73 billion) from a year earlier, with a market share of 4.78%. Customized vehicle services contributed about 2.46 billion yuan, surging from 5.3% of the GTV total in 2022 to 20.1% in 2023. By contrast, last year DiDi achieved a whopping GTV of 192.4 billion yuan, with a commanding 75.4% grip on the market.

As for earnings, CaoCao’s revenues have traced a steadily rising path. The company reported 7.15 billion yuan in revenues for 2021, increasing to 7.63 billion yuan a year later and 10.67 billion yuan in 2023. But the firm still landed in the red after deducting pay and subsidies for drivers, depreciation charges and vehicle servicing costs. The company logged annual losses of 3.01 billion, 2.01 billion and 1.98 billion yuan over the three years. On a non-IFRS adjusted basis, losses narrowed from 2.96 billion yuan in 2021 to 1.65 billion yuan the following year and shrank further to nearly 967 million yuan in 2023. CaoCao’s gross margin increased from a negative 24.4% in 2021 to a positive 5.8% last year.

The company blamed its meager 6.68% revenue growth in 2022 on pandemic-related controls. A 39.8% revenue jump in 2023 was attributed to a rapid sectoral recovery after Covid, the new strategy to draw business via third-party sites and a move to boost loyalty by expanding the specialized fleet.

DiDi, which is rumored to be considering its own Hong Kong listing, enjoyed a near monopoly of China’s ride-hailing business before a regulator-driven restructuring in 2021. Since then, order traffic has become less centralized, channeled through various mapping and navigation apps, platforms or local amenity sites. The proportion of online orders originating from aggregation platforms increased from 3.5% in 2018 to 30% in 2023, according to Frost &Sullivan.

CaoCao originally spent heavily to gain a foothold in the market but has since fostered collaborative relationships with many third parties such as AutoNavi, DiDi, Meituan, and Tencent to boost traffic.

Over the past three years, CaoCao has moved to a position in which most of its orders come through third-party channels. The GTV from aggregation platforms was 3.9 billion yuan in 2021, or 43.8% of the total. The following year the amount rose to 4.4 billion yuan, a 49.9% share. Last year the third-party GTV reached 8.9 billion yuan, representing 73.2% of the total transaction volume. Total user acquisition costs as a percentage of total GTV fell to 18.1% from 23.6% in 2021.

The strategic alliances allowed the company to acquire traffic at a lower cost, with reduced spending on promotion, advertising and subsidies for user referrals. However, this model has its downsides. Commissions paid to third-party aggregators have more than doubled, rising from 277 million yuan in 2021 to 667 million yuan in 2023. The relevant proportion of sales and marketing costs has jumped from 54.7% to 79.7%.

Nearing saturation point

CaoCao’s close ties with Geely Auto (0175.HK) allow it to steer the automotive design process, tailoring vehicles to the needs of passengers and drivers. This has involved features to make vehicles more robust and easier to maintain, as well as innovative battery-swap systems and smart cockpits. Drivers can also benefit from Geely’s expanding network of battery-swap stations and auto repair shops, helping to contain running costs.

CaoCao has launched two customized vehicles, Maple 80V and CaoCao 60, with an estimated total cost of ownership (TCO) of 0.53 yuan and 0.47 yuan per kilometer respectively, the Frost & Sullivan report said. Those costs are 32% and40% less than the average among equivalent battery-powered vehicles, the study said.

However, the ride-hailing market is peaking out after reaching a value of 282 billion yuan last year. In a slowing economy the user base has stabilized over the past two years, while the number of drivers has continued to grow. Last year, several cities warned of market saturation and a potential industry downturn. Some cities also slapped a freeze on new ride-hailing permits and transport certificates. 

Moreover, aggregation platforms have added another link in the chain of transactions, ultimately eroding the earnings of ride-hailing drivers. China’s transport authorities issued new guidelines in April calling on platforms to pay drivers fair wages and to curb commission rates or membership fee caps. Most platforms duly reduced their fees, potentially affecting profit margins. The collaborations that provided fuel for CaoCao‘s revenue growth could thus turn into a drag on its finances.

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