The Internet auto financier’s car transactions rose 27% year-over-year in the third quarter, far outperforming the sputtering market

Key takeaways:

  • Yixin has posted solid transaction volume growth following its transformation into a car loan broker
  • New car shortage caused by tight global chip supply may pose challenges to the company

By Jony Ho

China’s GDP grew just 4.9% year-on-year in the third quarter amid a new round of Covid-19 outbreaks, with total retail sales up just 4.4% in September. The consumer spending growth was much lower than the 16.4% growth rate in the first three quarters of the year, as sentiment turned conservative, affecting sales of big-ticket items like cars.

Indeed, sales of new and used passenger cars in China dropped by about 4% in the third quarter, according to the China Association of Automobile Manufacturers and China Automobile Dealers Association. The weak showing was the result of pandemic-related closures, combined with the global shortage of car chips that has reduced new car production.

But car trading platform Yixin Group Ltd. (2858.HK) has bucked the broader downward trend by logging a significant increase in its transactions, as the company undergoes its own business transformation.

Hong Kong-listed Yixin is one of China’s top internet auto finance platforms, with Internet giant Tencent (0700.HK) as its largest shareholder. It started out as a direct provider of auto loans and vehicle leasing services, but later turned to car loan brokering between banks and buyers after Chinese regulators clamped down on the nation’s broader fintech sector.

Promising after-market business

In a third-quarter update issued last Monday, Yixin said it helped to finance about 140,000 automobile transactions for the quarter, including new and used cars, up 27% from the 110,000 transactions a year earlier. Transactions for used passenger cars grew by an even faster 52% to about 69,000 as that sector wasn’t affected by the global chip shortage and even benefitted as some consumers who couldn’t get new cars opted for used ones instead.

To expand its revenue stream, Yixin also launched an after-market business for after-sales services such as car insurance, repair and care in the second half of last year. The number of related transactions for that part of the business reached 69,000 in the third quarter, up 9% when compared with the fourth quarter of 2020. The company didn’t release data for its after-market business on a quarterly basis for the first half of the year, or for last year’s third quarter.

Investors gave an initial strong thumbs-up to the update, with Yixin’s shares rising 22% to HK$1.68 ($0.22) the day after the report’s release. But the cheers were short-lived, with many investors cashing out the next day as trading volume soared 27 times over the previous day. When the dust had settled, the stock closed at HK$1.44, representing a 5% gain from pre-announcement levels.

In many ways, Yixin’s third quarter data represented a continuation of its first half trends. In its interim report the company said its financing transactions for new and used passenger cars grew by 85% and 95%, respectively, in the first half of the year, much higher than the industry growth rate of 27% and 56%.

Revenue from Yixin’s core transaction platform business increased 63% to 810 million yuan ($127 million) in the six-month period. The newer after-market business contributed 52.71 million yuan, up 90% from the second half of last year. The company recorded a 135 million yuan loss in the first half. But on a non-IFRS basis, it posted an adjusted net profit of 71.99 million yuan, marking a significant improvement from a 870 million yuan loss a year earlier.

One of Yixin’s subsidiaries recently signed a cooperation agreement with the financial leasing unit of China Development Bank with a scale of 10 billion yuan or more, reflecting the potential Yixin sees in auto finance and leasing as it looks for new growth engines.

All that said, we should also look at Yixin’s potential weak points. The used car business in China has benefited recently from reduced value-added-tax rates. But the new car business that Yixin also relies heavily on is facing challenges that we’ve mentioned earlier.

First and foremost is the global chip shortage, which has resulted from pandemic-related work stoppages and shipping disruptions. The rampant spread of the Covid-19 Delta variant in the middle of the year exacerbated the situation, and now the shortage could once again get worse with a new wave of disruptions created by the Omicron variant.

As of August, the shortage had led to reduced production of 5.85 million vehicles worldwide, with China accounting for about 20% of the total, according to market research firm Forecast Solutions. It added that lost production will translate to an estimated annual loss of $110 billion for the industry. As a middleman dependent on supply keeping up with consumer demand, Yixin, along with many others, will inevitably be affected by the product shortage.

Underweight by Tencent

When it comes to Yixin, another element worth nothing is the changing stake in the company held by controlling shareholder Tencent. The technology giant reduced its stake in Yixin by 73.87 million shares at an average price of HK$1.52 on Nov. 5, raking in about HK$112 million as its share of the company fell from 55.1% to 53.97%.

Yinxin’s origins lie in the internet automobile trading platform Yiche Holding, which was formerly U.S.-listed. But last year Tencent privatized Yiche, which was then Yixin’s controlling shareholder. Under Hong Kong listing rules, that move forced Tencent to make an unconditional mandatory offer for Hong Kong-listed Yixin, which Tencent did at an offer price of about HK$1.91 per share.

Three months after Yiche’s privatization, Yixin stock had surged to HK$3.95. But the momentum quickly fizzled, and the company’s share price has hovered between HK$1.30 and HK$1.60, meaning Tencent has lost money on any shares it purchased for its offer price of HK$1.91.

Tencent’s fintech and business services revenue grew 38.6% year-on-year in the first three quarters of this year to 124.2 billion yuan, much of that from the Yiche buyout. The negligible contribution to the business from Yixin makes it difficult to say whether Tencent may reduce its stake in the company again in the future.

So how does Yixin look from a valuation perspective? It’s impossible to calculate price-to-earnings ratios since the company is still losing money. In terms of price-to-book ratio (P/B), the company now trades at a ratio of 0.5 times, meaning the its market cap is just half of its book value.

Dongzheng Auto Finance (2718.HK) is similarly cheap with a P/B ratio of 0.44 times after it reported a 260 million yuan loss in the first half of the year. The older and profitable Autohome (2518.HK; ATHM.US) has a P/B ratio of 1.16 times; Uxin (UXIN.US) and Cango (CANGO.US), both listed in the U.S., have P/B ratios of 6.3 times and 0.41 times, respectively.

Yixin’s low valuation compared with many of its peers may owe at least partly to its money-losing status. Only profitable companies have a truly compelling story to tell investors, meaning Yixin’s biggest task is to improve its bottom line.

In an automobile market where the sentiment is decidedly mixed these days, Yixin has delivered a fair report card after being acquired by Tencent. Now it will need to show if it can keep the momentum going heading into the traditional peak consumption season at the end of the year.

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