US stock market preview | Aucma Holdings: Industry "price war" in full swing, new energy car 4S stores struggling to hide performance decline

In the process of the comprehensive transition to new energy vehicles in the Chinese automotive market, car dealers are also actively moving towards new energy vehicles. Looking at the overall situation of the Chinese automotive dealer industry, 3458 new stores were opened in the industry in 2023, with 50% of them being new energy vehicles. With the new industry trend, it is expected that new players will emerge and potentially seize opportunities, with Orchid Holdings possibly being one of them. On September 6, Chinese electric vehicle retailer Orchid Holdings submitted an initial public offering (IPO) application to the U.S. Securities and Exchange Commission (SEC), planning to raise up to $6 million. The company plans to issue 1.3 million shares of stock at a price of $4 to $6 per share, raising $6 million. At the midpoint of the proposed price range, Orchid Holdings' market value will reach $176 million. Revenue decrease Loss expansion The prospectus shows that Orchid Holdings was established in 2013 and is a passenger electric vehicle (EV) retailer and comprehensive automotive service supplier from Hainan. Hainan Province was the first province in China to propose a timetable to "ban the sale of fuel vehicles" by 2030. With favorable policies from the local government to promote electric vehicles, Orchid Holdings strategically focuses on the sales and services of electric vehicles rather than internal combustion engine vehicles (ICEVs). As of March 31, 2024, Orchid Holdings operated four dealerships, selling a variety of popular domestic electric vehicles including Geely, Ora, Chery, GAC, Wenjie, Zero Run, and Jetour. Orchid Holdings has also recently started selling some international brand electric vehicles, including Smart, Volkswagen, Volvo, and Kia. According to the Hainan Province Commerce Department, in 2022, Orchid Strong Victories Automotive Sales Service Co., Ltd., a subsidiary of the company, was ranked among the top twenty car dealers in Hainan Province. Its subsidiary, Hainan Blue Sky Automotive Management Co., Ltd., was awarded the 2022 Hainan Province Automobile Distribution Industry (Passenger Car) Top Ten Distributors by the Hainan Automobile Circulation Association. As electric vehicles become more popular in Hainan, the company plans to build battery swapping stations in Sanya and expand its new energy vehicle charging pile business across the island. In terms of performance, in the past fiscal years 2022, 2023, and the first half of 2024 (with the fiscal year ending on September 30 each year) (referred to as the "reporting period"), Orchid Holdings' revenues were $76.9489 million, $68.1336 million, and $33.1897 million, respectively. Net profits were $0.9496 million, -$0.0078 million, and -$0.3994 million, respectively. In summary, Orchid Holdings' revenue declined while losses gradually expanded during the reporting period. In terms of revenue sources, car sales revenue during the period were $72.571 million, $64.805 million, and $31.242 million, accounting for 94.3%, 95.1%, and 94.1% of total revenue, respectively; automotive parts, repair, and maintenance services revenue were $2.435 million, $1.977 million, and $1.122 million, accounting for 3.2%, 2.9%, and 3.4% of total revenue, respectively; financial services revenue were $0.584 million, $0.556 million, and $0.430 million, accounting for less than 1% of total revenue for each period. In summary, the decline in company performance is related to the downturn in car sales business. During the reporting period, new car sales were 4,659 units, 3,661 units, and 1,358 units, showing a significant decline. Orchid Holdings stated that in 2023, there was an oversupply of electric vehicles in the market, leading to significant downward pressure on the company's electric vehicle retail prices. Additionally, some competitors drastically lowered their prices to compete for market share, resulting in a loss of market share for the company. Price reductions led to a decline in Orchid Holdings' profitability, with gross profit margins of 9%, 7%, and 5% during the reporting period. Additionally, the company's liquidity also raised concerns. Operating cash flow was negative at -$0.916 million, -$0.974 million, and -0.662 million during the reporting period, and cash balances at the end of each period fluctuated. Industry price wars are intensifying Automakers offer olive branches to dealership models From what is understood, the domestic car market in China has been caught up in fierce price wars, leading to a dire situation for car dealers. According to the latest report released by the China Automobile Dealers Association on the survival of car dealers in the first half of 2024, the proportion of dealerships facing losses reached 50.8%, which was significantly larger compared to the same period last year. The average gross profit per store experienced a significant decrease year-on-year, especially in new car business, with an average loss of 1.78 million yuan per store and a decline in new car profit contribution to -26.5%. Under the shadow of the industry, Orchid Holdings naturally faced challenges as well. Fortunately, automakers have stepped up their support for dealership models in the face of industry challenges. For example, in June, BYD Company Limited and its brands Tang Shi and Fang Cheng Bao announced the launch of the first batch of dealership partnerships open to the public. This means that besides the top brand, BYD Company Limited is adopting a dealership+direct sales channel model. In May, Chang'an Avita opted for a full transition from direct sales to dealership model, and the company also tried to ensure that dealers absorb all direct sales staff. New energy car companies are also not sitting back. After the launch of its sub-brand Le Dao, NIO announced its channel plan, which differs from the direct sales model of the main NIO brand. Le Dao plans to introduce dealers and establish separate stores, and has even reached out to some leading dealer groups in China. Additionally, companies like Xiaopeng, Zero Run, Jike, and Zhiji are constantly adjusting the balance between direct sales stores and dealerships, accelerating the layout of dealership networks. For example, Xiaopeng's "Jupiter Plan" aims to gradually replace the direct sales model with a dealership model; Jike is increasing the proportion of authorized dealership stores and collaborating with some dealers under Geely's Lynk & Co brand. It can be seen that the "olive branches" extended by the automakers are like a lifeline for the struggling 4S stores. For Orchid Holdings, this is undoubtedly a positive development. After allThe Chinese electric vehicle market is currently in the stage of accelerated penetration, and dealers' market share is expected to continue to grow with the increased efforts of car manufacturers.According to the China Association of Automobile Manufacturers (CAAM), in 2015, the total sales of automobiles in China were 24.6 million units, with a total sales of electric vehicles at 331,100 units. The penetration rate was only 1.35%. By 2022 and 2023, the penetration rate of electric vehicles in China is expected to reach 25.64% and 31.56% respectively. According to the data from the China Passenger Car Association (CPCA), in the first half of 2024, the cumulative sales of electric vehicles increased by 37.2% compared to the previous year. According to the data published by China Automobile Dealers Association, as of the end of 2023, there were 33,779 4S dealerships in China, with an annual growth rate of 0.6%. Domestic brands have shown significant growth of over 60%. Among the new dealerships opened by Chinese people, domestic brands such as Changan, BYD Company Limited, Chery, Aion, and Xiaopeng continue to expand their networks. NAMMI, HYPTEC, Chery iCAR, and BYD Company Limited's Fangchengbao have also achieved growth through the 4S dealership network. With this listing, Ochun Holdings plans to use the funds to expand its new energy vehicle-related businesses, including building battery swapping stations and charging pile networks, in order to seize the growth dividend of new energy vehicle dealers. In conclusion, under the industry price war, Ochun Holdings is facing a decline in revenue and an expansion of losses. However, as car companies layout dealership models and domestic brand dealerships significantly grow, jointly expanding the market for new energy vehicle dealers, Ochun Holdings is attempting to expand its related businesses through listing financing to enjoy the market growth dividend.