Car dealership sector facing survival crisis: Bitter fruits of trading price for volume, transformation exploration still needs scrutiny.

With the official submission of the "Urgent Report on the Current Financial Difficulties and Closure Risks Faced by Automobile Dealers" by the China Automobile Circulation Association (hereinafter referred to as the Circulation Association) to relevant government departments, the survival crisis of traditional dealers has once again come to the forefront. The report shows that according to monitoring data from the "Market Pulse" of the Circulation Association, from January to August this year, the "price war" has caused a cumulative loss of 138 billion yuan in the overall retail market for new cars, significantly impacting the healthy development of the industry. In fact, since the beginning of this year, there have been many dealers who have been unable to cope with the pressures caused by the "price war" and have found themselves in financial difficulties. In September alone, there were reports of two automobile dealers who either could not register new cars or had their dealer agreements terminated by the brand. The situation of these two dealers is not isolated incidents but rather a reflection of the current reality faced by the entire automobile dealer industry. The Circulation Association has called for the introduction of phased financial relief policies, while institutions also predict that sales performance in the peak sales season of September and October will exceed expectations. The positive news resonated, and automobile dealers surged in response. On September 24, ZHONGSHENG HLDG (00881) and MEIDONG AUTO (01268) surged by 9.85% and 17.68% respectively. In the face of the crisis, even the leading companies are finding it difficult to escape. Among the 8 automobile dealer groups listed on the Hong Kong stock market, only ZHONGSHENG HLDG and HARMONY AUTO (03836) achieved an increase in new car sales, while the other 6 dealer groups experienced sales declines ranging from 4% to 17%, with MEIDONG AUTO experiencing the largest decline. Behind the "price war," the shrinking profit margins are increasingly putting pressure on the profitability of dealers. In the first half of this year, as dealers faced losses while profits narrowed, the pressure on staying afloat increased. Public data shows that in the first half of this year, nearly 2000 4S stores nationwide closed or exited the market, approaching the total number of closures for the entire previous year. The domestic automobile dealer industry is going through its "darkest moment." As the front-end operations face challenges, the capital market is also reacting. Last year, the first IPO-listed automobile dealer in China, Pang Da Group, started the path to delisting. In its peak, the company's revenue exceeded 70 billion, with nearly a hundred cooperated car brands and over 1400 4S stores. Additionally, on August 28, the once leading automotive dealer giant, China Grand Automotive Services Group, officially delisted. In the 9 years since going public, the market value of China Grand Automotive Services Group plummeted from hundreds of billions to triggering a face-delisting. The remaining automobile dealer companies yet to be delisted, including ZHENGTONGAUTO, SUNFONDA GP, HARMONY AUTO, and CENT UNIT HLDG (01959) have been trading below 0.5 Hong Kong dollars for several consecutive days, reflecting the attitude of the capital market. Accelerating the transition to seek new vitality It is clear to see that the current predicament of the traditional dealer system, or 4S stores, is indeed closely related to the ongoing "price war" throughout the year. However, the deeper reason lies in the rapid rise of new energy vehicles and the introduction of the direct sales model, which makes traditional 4S stores seem "no longer needed." It must be pointed out that the period of industry transformation is inevitable, but it is in each transformation, in the face of new market screening mechanisms, that the industry can ultimately rejuvenate. According to reports, automobile dealers have already begun taking targeted measures, such as strengthening after-sales services or adding.The second-hand car and new energy vehicle businesses, or expanding into overseas markets, even though some dealers are unable to withstand the pressures of operation and disappear in the wave of transformation, there are still players who have successfully adapted and remained in the game.In terms of after-sales service, in the first half of 2024, ZHONGSHENG HLDG, YONGDA AUTO, ZHENGTONGAUTO, and CENT UNIT HLDG maintained growth momentum, with sales of 10.96 billion yuan, 4.65 billion yuan, 1.70 billion yuan, and 0.11 billion yuan respectively, representing year-on-year growth rates of 13.8%, 0.2%, 19.2%, and 15.1%. Especially for ZHONGSHENG HLDG, profits rely entirely on after-sales service. In terms of gross profit, ZHONGSHENG HLDG's total gross profit in the first half of the year reached 4.93 billion yuan, with a severe decline in gross profit from new car sales, which was -1.99 billion yuan. However, the gross profit from after-sales services reached 5 billion yuan, a significant increase of 12.7% year-on-year, completely covering the total gross profit of the group in terms of volume. The after-sales sector has always been a high-gross-profit business for dealer groups. With racing players continuously deepening their layout, this business will gradually improve the overall profit of the dealers. As for the used car and new energy car sectors, only 5 automotive dealer groups disclosed the volume of used car transactions in the first half of the year. Among them, ZHONGSHENG HLDG, as a leading player, saw a 53.9% year-on-year increase in used car transaction volume. On the other hand, YONGDA AUTO's overall used car transaction volume (sales + brokerage) was 35,236 units, a 14.2% year-on-year decrease, with the sales volume of 17,025 units, a 14.5% year-on-year decrease. In addition, facing the trend of new energy, dealers have generally increased their layout efforts for new energy car brands this year, with more than 30% of dealers believing that the penetration rate of new energy cars for the whole year will exceed 50%. Undeniably, when the development of new energy brands requires broader market coverage, faster response mechanisms, and more diversified sales strategies, the role of channel agents will become prominent, and the attribute of dealers' "existence is rational" will gradually show. On the other hand, since 2021, the Chinese auto export market has shown strong growth. According to export data from the General Administration of Customs, 5.221 million vehicles were exported from China in 23 years (compared to 3.317 million vehicles in 22 years), with an export growth rate of 57.4%. China is now the world's largest auto exporting country, with enormous potential for the future. As domestic brands expand their presence in overseas markets, automotive dealers are also closely following the footsteps of auto manufacturers to embark on their overseas journey. The first to step into this path was HARMONY AUTO. In November 2023, the first AIN Auto showroom jointly established by GAC AIN and HARMONY AUTO opened in Bangkok, Thailand. On January 9th this year, the largest AIN new energy car experience center in Thailand, Harmonised AIN Chiang Mai Experience Center, opened. HARMONY AUTO aims to establish at least 10 AIN sales points in Thailand and aims to become the largest AIN dealer in Thailand. It can be foreseen that after GAC AIN's Thai factory starts production, HARMONY AUTO will become its most important partner. However, going overseas requires high demands on overseas customer resources, understanding of the local market, etc., which poses a major challenge for automotive dealers. Currently, auto manufacturers tend to cooperate with local dealers overseas. For example, Xiaopeng has strategic cooperation agreements with top European dealers Emil Frey NV and Bilia Group in the Netherlands and Sweden, respectively, to implement a "direct + authorized" retail model. Therefore, the overseas journey of domestic automotive dealers may be a breakthrough, but this road is still full of challenges. In conclusion, under the escalating "price war," domestic dealers are facing a challenging situation where their operational and profitability capabilities are declining. In this context, how dealers seek change becomes an important weapon for their breakthrough. For example, ZHONGSHENG HLDG has shifted its profit focus to after-sales business, and HARMONY AUTO is also expanding its presence in overseas markets. The road ahead is long and arduous, but we still believe that dealers who rely on their own efforts will remain at the table in this elimination game.