Reconditioned ZhengTong drives down new road after massive overhaul

Caught up in price wars and a resulting sea of red ink, the former car dealership highflyer is entering a new phase after being taken over by a rival and disposing of some assets

Key Takeaways:

• ZhengTong sold industrial land in Shenzhen to an enterprise linked to its new owner, following an earlier merger with its new owner’s car dealership business
• The car dealership operator has piled up cumulative losses of more than 15.1 billion yuan over the last five years as China’s car market suffers from an ongoing price war

By Lee Shih Ta

Shifts within China’s car sector over the last two years have led to a familiar cycle for most dealers. Constant slashing of new vehicle prices, combined with a new norm of nonstop brand promotions, have squeezed the traditional 4S dealership model to a breaking point.

In such an environment, dealers burdened with higher debt have faced even greater pressure, leaving many fighting simply to survive another day. Those stresses wreaked havoc on China ZhengTong Auto Services Holdings Ltd. (1728.HK), forcing it into a takeover by a state-owned rival and a series of asset divestitures just to keep its engine running.

In the latest of those steps, the company last week announced the disposal of its Shenzhenshi Huianqi project, owner of an industrial land parcel still under development, for about 803 million yuan ($115 million). ZhengTong will use proceeds from the sale to repay bank loans and supplement its general working capital.

The deal is a bit of a family affair, since the buyer is an affiliate of the state-owned Xiamen ITG Holding Group, which is ZhengTong’s current controlling shareholder. The transaction constitutes the latest step in a systematic deleveraging that also includes Xiamen ITG’s assumption of the steering wheel at ZhengTong.

The ongoing takeover took shape early last year when ITG, via its Xinda Motors subsidiary, acquired approximately 66% of ZhengTong’s enlarged share capital through a share placement. Following an additional share consolidation finalized in June, its holdings in ZhengTong rose to more than 90%, causing the company’s public float to fall below the Hong Kong Stock Exchange’s minimum threshold. After that happened, ZhengTong’s stock was suspended last July, and trading has yet to resume.

State capital reshuffle

With the takeover complete, ITG began to consolidate its various automotive assets into ZhengTong. Last month, ZhengTong acquired the entire dealership and export operations of Xiamen Xindeco ITG Automobile Group from ITG’s Xiamen Xindeco Ltd. unit for about 793 million yuan. That operation included nearly 50 4S dealerships whose brands encompass BMW, Audi, Lexus and Hongqi, as well as new energy vehicle (NEV) brands such as Tesla, IM Motors, and HIMA.

ZhengTong’s relationship with ITG goes back as far as 2020, when the former agreed to sell 29.9% of itself to the latter at a 30% premium when China’s car market was still humming. That deal closed in August 2021. In November 2022, ITG pledged to regulators to resolve competitive auto dealership conflicts between ZhengTong and its own Xiamen Xindeco within five years. With the latest deal, bringing ZhengTong’s and Xindeco’s car dealerships together under one roof, that commitment is close to being fulfilled.

The road to the present was hardly foreseen by ZhengTong. Following its 1999 establishment in Shanghai, the company rapidly scaled up by acquiring rights to luxury car brands. It listed on the Hong Kong Stock Exchange in 2010, becoming one of China’s first publicly traded auto dealership groups. Over the next decade, ZhengTong expanded primarily via acquisitions, extending its business across mainstream luxury brands as it briefly became one of the nation’s leading auto dealers.

Sea of red ink

ZhengTong’s core business model centers on traditional 4S dealership operations, with revenue heavily dependent on new vehicle sales. Higher-margin businesses such as after-sales services and used cars provide only a limited contribution. Intensifying new vehicle price wars and moves by many automakers into direct sales in China’s sputtering and oversupplied car market have ultimately put the squeeze on many dealers. Even when their sales volumes remain relatively high, narrowing gaps between wholesale and selling prices are rapidly eroding dealers’ margins. ZhengTong was a case in point, reporting its gross margin stood at just 3.3% in the first half of last year.

The company has racked up more than 15.1 billion yuan in losses over the last five years, more than half of that in 2020 due to the pandemic, followed by the onset of the auto sector’s ongoing price war. The red ink continued in the first half of last year with a 990 million yuan loss — showing the hemorrhaging isn’t about to stop anytime soon. Meantime, the company’s revenues have been falling steadily from 25 billion yuan in 2022 to 21 billion yuan in 2024, and on track to drop further still after registering about 8.89 billion yuan in the first half of last year, down nearly 10% year-on-year.

From an operational perspective, ZhengTong has effectively been consolidated with its former major rival. The latest land sale last week effectively transfers a non-core, capital-intensive asset to ITG for absorption by one of the state-run group’s other units. The listed ZhengTong gains some cash to reduce its debt pressure, and secures time to continue overhauling its core business.

The acquisition of 50 dealerships for 793 million yuan from ITG’s Xindeco includes several leading NEV brands, aligning with ZhengTong’s accelerated shift toward electrification. Concurrently, ZhengTong has acquired ITG Auto (Thailand) for approximately 22.13 million yuan. That entity has yet to start major operations, but the move provides ZhengTong with an initial platform for overseas expansion, with the ability to engage in future developments like vehicle exports, transshipments, and related cross-border businesses.

The steady series of transactions equate to an asset reshuffle within the Xiamen ITG family following its takeover of ZhengTong, equating to a needed consolidation driven by China’s automotive price war. With the consolidation of its automotive operations under ZhengTong now complete, ITG can focus on its other businesses. Meanwhile, ZhengTong has been reborn under new ownership, positioned to zip back into China’s automotive race.

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