Trans-China Automotive Holdings Limited

Trans-China Automotive Holdings Limited ("Trans-China" or the "Group") is offering 85m shares comprising 82.1m Placement Shares and 2.9m Public Shares at $0.23 each. The IPO will close on 9 Nov at 12 noon and commence trading on 11 Nov at 9am. The market cap based on the IPO price will be $134.4 million.

Finally I found a company that makes their investors' IPO presentation slides available online! Kudos. Companies going for an IPO are usually advised by lawyers not to do that, so I must applaud them for doing that.

Principal Business

The Group is headquartered in Hong Kong and Shenzhen and is a leading automobile dealership group focused on the distribution of premium and ultra-premium cars for BMW, McLaren and Lotus brands.

In addition to car distribution, the Group offers after-sale services such as maintenance and repair services as well as sale of automobile parts and accessories.  The business overview is presented below.

Financial Highlights

According to the prospectus (page 57), the EPS for FY2020 assuming the service agreement has been in place was 4.29 cents. Based on the enlarged share capital of 584,323,950 shares, this translates into EPS of 3.66 Singapore cents or a historical PER of 6.3x. 

Use of Proceeds

The proceeds will be used to increase dealerships, showrooms and service centres.

What I like about the Company

• Strategic focus on the premium and ultra-premium segments - As China has become more affluent, the demand for premium cars will continue to rise as income level rises. This segment also provides higher gross margins and profitability compared to mass-market brands

• Expand to new cities and regions - The Group is well positioned to expand geographically into different cities and regions both organically and through acquisitions. The listing will help provides capital needed for expansion

• Secure dealerships for other premium and ultra-premium brands - The Group can acquire other dealerships to help expand its share and reach

• Experienced management team - The management team as shown below has many years of automobile experience

Some of my concerns

• Low margin business and renewal is dependent on the OEMs - As you can see from the chart below, the sale of automobiles is a low margin business (and that is gross profit margin). How it can increase from 0.9% in 2018 to suddenly 5% in 1Q2021 is "amazing" and how the company can become from not so profitable in 2018 to highly profitable in 2020 (see financial highlights above) is also pretty amazing to me. I haven't investigated why there was a reversal of impairment in FY2020 yet.... The after-sale services which all car owners hate is at 43%. It is easy to buy a car but tough to maintain one 😂  

• Too many bad S-Chips Experience - Singaporeans have been bitten so many times by S Chips companies that have folded. Why are they back again? Granted there are some good ones like YZJ, but that is rare rather than the norm. Singapore is usually the last resort when it comes to listing by the S-Chips, especially if they can't get listed in Hong Kong or Shanghai. I am glad the accounts are audited by PwC but will still look at it with a huge pinch of salt

• Common prosperity - Luxury cars definitely go against the ideals of common prosperity. You can't expect everyone to drive a BMW, don't you? This most used word in the last 12 months also highlights the unpredictable risk for investing in China. The government can "hit you" anytime if you run foul of their ideology

• Going net carbon zero - The pursuit for net zero means that gasoline gushing vehicles will not be "in favour". The rise of BYD, NIO and XPENG in China (in addition to TESLA) means that government policies will go towards supporting the EV sectors and cars that use petrol will be penalised. Not sure if the luxury brands will catch up with the EV startups and Trans-China may have to pivot to distributing other EV vehicles. If you look at the market cap of Telsa, it is equal to the rest of the cars combined. Why not buy the shares of Nio or Xpeng instead if you really want exposure to the EV market in China?

Listed Peers

There are two listed peers here - Eurosports Global and MeGroup. Eurosports distributes Alfa Romeo and Lamborghini and its CEO was recently investigated by CAD. (See article here) and is loss making for the year ended 31 March 2021. Me Group is marginally profitable, thinly traded and suffers from low market capitalisation.

As such, the listed peers here don't instill much confidence either. 

Mr IPO Ratings

Mr IPO credits the company for providing the presentation slides as well as offering some shares for retail participation. 

Having said that, it is not exactly a business that is exciting or going to change the world. The distributorship model is a dying model where consumers prefer to buy directly from the car manufacturers. I will give it a one chilli rating - Apply only if you like it.

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