Tuhu's first day of listing was hindered by JD: How to break through and profit in the price war

After a year and a half of the IPO process, Tuhu (9690.HK), which has submitted its prospectus three times, has finally been listed on the Hong Kong Stock Exchange.

On September 26th, the automotive service platform Tuhu was listed on the main board of the Hong Kong Stock Exchange at HK$28 per share. Although the issue price was at the lower end of the price range, Tuhu still raised HK$1.081 billion, setting a record for the largest IPO project in the TMT industry on the Hong Kong stock market this year.

However, going public does not mean that Tuhu can rest easy.

On the day of its listing, Tuhu was targeted by the industry giant JD.com (JD.NASDAQ). Miao Qin, Vice President of JD Group and President of JD Retail Automotive Division, congratulated Tuhu on its listing in his personal circle of friends, but at the same time, he stated that the prices of JD.com's "shock tiger" products are 5% lower than those of its competitors. It is clear that JD.com is launching a price war against Tuhu.

When asked about this incident, Tuhu's spokesperson declined to comment and said they are focusing on their own business.

It is not difficult to understand that with the continuous growth of China's car ownership, both Alibaba and JD.com have set their sights on the expanding trillion-dollar automotive aftermarket. Connecting online and offline channels to reduce information asymmetry has always been the strength of O2O companies like Tuhu.

The competition in the "ant market" of automotive services has motivated the industry giants to grab a share. According to Zhishizixun, Tuhu, which ranks first in the industry with over 4,600 stores, only has a market share of 0.9% based on revenue.

It is not easy to achieve scale in a fragmented market. Tuhu, as the industry leader, only achieved its first profit in its 12-year history in the first half of this year.

On the one hand, automotive parts are not as easy to sell as small commodities. Due to the variety of parts, there are problems such as mismatch between supply and demand and nationwide transportation difficulties. Tuhu needs to build a logistics and warehousing system that covers the whole country, which requires continuous capital expenditure and erodes profits.

On the other hand, the price competition in the industry has led to a decline in Tuhu's revenue per user year by year. If Tuhu gets involved in a price war with JD.com again, it is uncertain whether Tuhu's hard-earned profitability in the first half of this year can be maintained. It also faces the risk of declining demand as the penetration rate of new energy vehicles increases.

On September 26th, Tuhu's stock price rose more than 5% at the close, closing at HK$29.5 per share, with a total market value of approximately HK$21.9 billion.

A Large Market Targeted by Giants

JD.com's attack on Tuhu was not without warning.

According to TradeWind01, shortly after Tuhu's hearing at the Hong Kong Stock Exchange in mid-September, JD.com immediately launched the "shock tiger" campaign.

The management of JD Retail Automotive Division publicly stated that the "shock tiger" campaign will not only continue, but will also be intensified. This is in line with Liu Qiangdong's "low-price strategy" after his return to JD.com. TradeWind01 (ID: TradeWind01) asked relevant personnel from Tuhu Car Care about their views on the low-price competition in the industry. The other party stated that the establishment of online platforms such as Tuhu Car Care in the e-commerce era has already addressed the issue of price opacity in the industry.

"Transparency does not necessarily mean cheaper. Everyone still needs to make a profit. There is no great need for the industry to engage in 'vicious price comparison'."

According to Zhoushi Consulting, with the increase in the number of private cars, the compound annual growth rate of China's automotive service market is expected to reach 10.1% from 2018 to 2022. By 2022, the market size has reached 1.24 trillion yuan, and it is expected to reach 1.93 trillion yuan by 2027.

The competition in China's automotive service market is extremely fragmented, and even the leading position is not stable.

In terms of the number of stores, as of 2022, Tuhu Car Care ranked first with 4,653 stores, while Tmall Car Care and JD Car Care ranked 3rd and 6th with approximately 2,000 and 850 stores respectively.

However, in terms of revenue, Tuhu Car Care is the leader, but its market share is only 0.9%, and the industry CR5 is only 1.6%. At this time, JD Car Care launched a price war, clearly intending to initiate a new round of reshuffling before the industry structure stabilizes.

Although Tuhu Car Care has not responded to whether it will join the price war, in fact, the average income of its single transaction user has been declining year by year, from 819 yuan in 2019 to 698 yuan in 2022.

Compared with e-commerce business, the automotive service market is much more difficult to operate and more difficult to profit from. Alibaba (Cainiao) and JD (JD Logistics), which have their own logistics systems, seem to have advantages in logistics.

A fuel vehicle has as many as 30,000 parts, of which engine parts account for 22%. The number of new energy vehicle parts is much less than that of fuel vehicles, but there are still more than 10,000. This means that the automotive service market has a wide range of SKUs, and it is impossible for a traditional IAM store to stock all of them in order to reduce inventory pressure.

Therefore, there is a problem of supply-demand mismatch for some parts nationwide, and the transportation of automotive parts is generally difficult and costly.

Since automotive services must be supported by offline stores, Tuhu Car Care needs to open more stores in order to "care" for more cars. In order to match the growing demand for stores, Tuhu Car Care has invested heavily in building its own warehousing and logistics, which is also necessary to offset the large capital expenditure in the early stage with the scale effect of the terminal.

Tuhu Car Care even stated in its prospectus that it plans to cooperate more extensively with third-party logistics in the future to reduce logistics costs and improve delivery capabilities.

As of March 31, 2023, Tuhu Car Care has 39 regional distribution centers and 267 front-end distribution centers covering more than 300 cities, with a monthly delivery capacity of 2.7 million tires. Its fixed asset investment has increased from 284 million yuan in 2020 to 786 million yuan in the mid-term of 2023. From the perspective of the fundraising purpose of Tuhu Auto, it stated that it plans to timely replenish inventory to support expansion. It plans to add 43 regional distribution centers and 391 front-end distribution centers by the end of 2025.

Prior to this, in order to have sufficient funds, from 2013 to 2021, Tuhu Auto has completed 16 rounds of financing, with a total financing amount of over 9 billion yuan. Its shareholder lineup includes star capital and companies such as Tencent, Sequoia China, and Hillhouse Capital. Among them, Tencent is the largest institutional shareholder with a 19.61% stake.

Due to the large number of convertible preferred shares and the continuous increase in lease liabilities, Tuhu Auto's asset-liability ratio has always remained at a high level of around 150%. This prompted Tuhu Auto to submit documents to the Hong Kong Stock Exchange three times, finally achieving a successful listing.

Striving for profitability in expansion

Under heavy asset investment, Tuhu Auto only managed to turn losses around in the first half of this year, but whether its profitability is sustainable remains to be seen.

Due to the limited service radius of traditional IAM (Independent Aftermarket Service Provider) stores or 4S stores, Tuhu Auto has expanded its service scope by guiding users to place orders online and fulfill them offline.

However, the platform's promotion expenses are not cheap. From 2019 to 2022, its sales expense ratio has always been between 13% and 15%, higher than Alibaba and JD.com during the same period.

With high expenditure, Tuhu Auto accumulated a total loss of 11.9 billion yuan from 2020 to 2022. It only achieved a net profit of 214 million yuan in the first half of this year, mainly relying on expense reduction.

According to a research report by Cao Xu, an analyst at Shenwan Securities, Tuhu Auto's turnaround from losses is due to an increase in high-gross-margin franchise stores, a decrease in cooperative and self-operated stores, and a reduction in logistics and distribution systems.

In the first half of this year, Tuhu Auto's operating expenses decreased by 15.3% YoY to 272 million yuan, mainly due to a decrease in the number of operating personnel from 2,635 to 2,120. In addition, its research and development expenses and administrative expenses have also been reduced to varying degrees.

In 2022, there was a significant change in Tuhu Auto's store structure. The number of franchise Tuhu Factory Stores increased from 3,658 in the previous year to 4,491, while the number of cooperative stores decreased sharply from 31,624 to 20,870.

Regarding this change, a Tuhu Auto spokesperson told Xin Feng (ID: TradeWind01) that in the early stages, cooperative stores took on the offline service needs of users when the Tuhu store network was not yet sound. However, with the increase in the number of factory stores and considering long-term development, we have canceled some cooperative stores to avoid competition. In the future, the focus of development will be on factory stores.

Another major challenge that Tuhu Auto will face in the future comes from new energy vehicles, whose industry penetration rate has exceeded 30%. Due to the significantly fewer components in new energy vehicles compared to traditional fuel vehicles and higher integration levels, the daily maintenance costs are correspondingly lower. As the new energy vehicle market further expands, Tuhu Auto's automotive repair and maintenance services may face a shrinking demand. However, according to insiders from Tu Hu Car Maintenance, the current maintenance cost of plug-in hybrid vehicles is higher than that of fuel vehicles and pure electric vehicles. In the next 6-8 years, the battery of pure electric vehicles may face higher repair and replacement costs compared to fuel vehicles.

Tu Hu Car Maintenance stated in its prospectus that under regular maintenance, the lifecycle of the battery pack of new energy vehicles is about 8 years. Compared to maintenance and repair expenses, the cost of replacing the battery pack may be quite high.

The aforementioned insiders also pointed out that since most new energy vehicles have not reached the age where the battery pack needs to be replaced, there are not enough samples to evaluate the overall maintenance costs of fuel vehicles and new energy vehicles. Currently, Tu Hu Car Maintenance mainly focuses on tire services for new energy vehicles with high wear and tear, limited models, and higher prices.

However, Tu Hu Car Maintenance still needs to be prepared for the future.

So far, Tu Hu Car Maintenance has established business partnerships with Zero Run and BAIC Ji Hu, providing maintenance and car beauty services for brand owners. In October last year, Tu Hu Car Maintenance reached a strategic cooperation with Teld, a charging pile operator under Toread (300001.SZ), in talent building and charging pile maintenance service platform construction. According to the prospectus, in 2022, Tu Hu Car Maintenance completed approximately 20,000 battery and charging pile maintenance and repair orders.