TuHu (09690) releases 2023 financial report: First annual profit of 480 million yuan, scale effect helps gross profit margin reach a new high

On March 15th, TuHu Yanchng, China's leading online and offline integrated car service platform (09690), released a highlight-filled performance announcement for the full year of 2023. In 2023, TuHu Yanchng not only achieved a full-year profit for the first time, reversing previous losses, but also saw multiple key performance indicators reach historic highs. According to the financial report, TuHu Yanchng's revenue in 2023 reached 13.6 billion RMB, a 17.8% increase from the previous year. The core maintenance business saw strong growth, with the car maintenance, tire, and chassis parts segments increasing by 22.5% and 20.9% respectively. In terms of profitability, the company's adjusted EBITDA in 2023 was 760 million RMB, with an adjusted EBITDA profit margin of 5.6%. Adjusted net profit reached 480 million RMB, with a net profit margin of 3.5%. The gross profit margin saw a significant increase, with total gross profit reaching 3.4 billion RMB, a historic high. Through optimization of product structure and adjustments to operational strategies, TuHu Yanchng saw significant cost reduction effects in 2023. Operating costs were continuously diluted, with total operating expenses accounting for 24.4% of total revenue, a decrease of 3.2 percentage points from the previous year. By the end of 2023, the company's free cash flow reached 400 million RMB, with total cash reserves (including cash and cash equivalents, restricted cash, and financial investments) totaling 68.3 billion RMB, providing ample financial reserves for future development. With the stable expansion of the trillion-dollar track, the independent market leader in high-quality growth post-divestment It is understood that TuHu Yanchng achieved a "double growth in revenue and profit" logic in 2023. CFO Zhang Zhisong stated at the performance release conference, "With strong growth momentum and immense development potential, TuHu Yanchng has successfully transitioned from scaling to profitability, which not only validates our business model, but further solidifies our leading position in the competitive industry." Based on this, TuHu Yanchng's high-quality growth in 2023 can be summarized in two key points: the demand side of the automotive aftermarket has essential attributes and has already formed a large and stable growth market, and the company's unique competitive advantages in its business model have built strong barriers to competition, enabling the company to stand out in the competitive landscape. According to a report from Zhushi Consulting, as of 2022, China has ranked as the world's largest new car sales market for over 10 consecutive years. In 2022, China's automotive fleet reached 274 million vehicles, also making it the world's largest automotive market. However, China's passenger car ownership per thousand people is only 194 vehicles, lower than developed countries such as the United States (769 vehicles per thousand people) and EU member states (563 vehicles per thousand people), indicating significant growth potential. Zhushi Consulting predicts that China's passenger car ownership is expected to reach 374 million vehicles by 2027. As China's total passenger car ownership steadily increases, the age structure of vehicles is also changing. The average age of China's passenger cars increased from 4.9 years in 2018 to 6.2 years in 2022, and is expected to reach 8 years by 2027. Compared to new cars, older vehicles generally require more automotive services, especially maintenance and repair services, leading to the emergence of a large aftermarket market. As calculated by CITIC SEC, the overall size of China's automotive aftermarket reached 1.42 trillion RMB in 2023, and is expected to reach 1.71 trillion RMB by 2027, corresponding to a compound annual growth rate of 4.7% over the next four years. It is worth noting that TuHu Yanchng, as a leading chain maintenance brand, not only benefits from the "aging of vehicles" but also benefits from "consumption equality." As vehicles age and their "residual value" decreases, owners tend to seek lower-cost repair and maintenance services. Influenced by economic cycles, people generally seek a balance between quality assurance and reasonable prices in their consumption activities, making "consumption equality" the mainstream trend over "consumption upgrading." Compared to authorized 4S stores, independent maintenance shops in the unlicensed system have price advantages, but the independent aftermarket maintenance industry is fragmented, with long-standing pain points such as "difficult quality control" and lack of transparency in price systems. Headquartered large-scale chain aftermarket brands like TuHu Yanchng, with open and transparent pricing and a comprehensive service system, provide consumers with a choice of high-quality and affordable services. Data shows that TuHu Yanchng has 5,909 workshop stores, with 1,256 new stores added in 2023, a 27% increase compared to the previous year. According to a report from Zhushi Consulting, based on the full-year revenue scale of 2023 and the number of automotive service stores in operation as of the end of December 2023, TuHu Yanchng is the largest independent automotive service platform in China, leading in store number, growth rate, and revenue in the independent aftermarket third-party sector. This means that TuHu Yanchng, as an independent aftermarket market leader with internet genes, continues to enhance its ability to address the industry's pain points of being "large and chaotic," leading to a strengthening positive feedback loop. Flywheel effect strengthening positively, high certainty of future growth TuHu Yanchng CEO Chen Min stated at the performance release conference, "In 2023, TuHu Yanchng delivered satisfactory results, thanks to keen market insights and precise grasp. TuHu Yanchng will continue to maintain its spirit of innovation and market acumen, continuously introduce new products and services that meet user needs, and enhance user experience and satisfaction." TuHu Yanchng's "spirit of innovation and market acumen," in addition to pioneering the innovative service model of Wuxi Online Offline Communication Information Technology Co., Ltd., resolving industry pain points and greatly improving user experience, the company also actively adapts to market trends in the automotive sector to provide new products and services. For example, in new business areas, TuHu is exploring fast repairs, collision repairs, in addition to mature businesses such as tires, maintenance, and car washes, and offers more service categories through store upgrades and technician training. At the same time, TuHu is actively expanding its new energy vehicle maintenance business, having launched six new energy vehicle repair projects including battery maintenance, charging pile maintenance, and beauty care. As a result, TuHu Yanchng has become the preferred choice for more users. Data shows that TuHu Yanchng's registered user base has exceeded 1150 million.In 2023, the total number of transaction users reached 19.3 million, setting a new record high.On one hand, more traffic can attract more franchisees to join, thereby bringing in more stores. As the number of stores increases, Tuhu Maintenance's offline fulfillment capabilities strengthen, leading to an improvement in user experience and bringing in more traffic. On the other hand, the increase in sales resulting from more traffic also enhances the company's bargaining power in upstream procurement, strengthening price advantages and attracting potential customers, thus bringing in more traffic. With the continued effect of the flywheel, Tuhu Maintenance has successfully implemented its business model, creating an automotive service ecosystem that includes car owners, suppliers, service outlets, and other participants. This has made the company's leading advantage in the industry more apparent, establishing a competitive barrier that is difficult to replicate. According to CITIC SEC research report, the difficulty in replicating Tuhu Maintenance's business model mainly lies in the company's self-supply of products and unified logistics distribution, giving the company the ability to "strongly control" the stores. In terms of products, over 90% of the products sold by franchise stores are provided by Tuhu, while this proportion is only about 40% for other e-commerce platforms in the industry. In terms of the stores, Tuhu maintenance requirements on the size and location of workshop stores are standardized, and the equipment inside the store is specified by Tuhu Maintenance. In terms of personnel, the company also provides online training and real-time guidance to ensure service quality. Furthermore, Tuhu Maintenance has established a complete and efficient supply chain system. By the end of 2023, its national regional distribution centers (RDC) and front-end distribution centers (FDC) can replenish high-frequency SKUs within 0.5-1 hour; the Auto Parts Dragon platform gathers numerous suppliers to meet longer-tail and more diverse needs. The more standardized system of Tuhu Maintenance brings stronger control capabilities over personnel, products, and stores, effectively enhancing user experience, increasing user traffic, and becoming a key element in the "flywheel". By replicating its own business model, Tuhu Maintenance can efficiently cover a broader market. It is understood that Tuhu Maintenance is accelerating its layout in the sinking market, with new stores focusing on the sinking market. 70% of the new stores added in 2023 are located in second-tier and below cities, covering 221 counties and county-level cities, gradually forming economies of scale. In addition, Tuhu Maintenance has also announced a franchise discount policy for 2024, planning to reduce the operating pressure of new workshop stores in the initial period through management fee reduction, franchise fee waiver, and refunds, in order to achieve faster market coverage in target cities. With a long-term perspective, under a clear development logic and innovative business model, Tuhu Maintenance has formed unique competitive barriers and core competencies, generating a strong "siphon effect" in the automotive aftermarket. The company's first annual report after going public reflects its relentless pursuit of strengthening sustainable development capabilities, indicating that Tuhu Maintenance's intrinsic value will continue to increase, maintaining the strong business law over a longer time horizon.