Yixin steers away from young joint venture to stay focused on China auto market

The online car loan facilitator is pulling out of a 2-year-old tie-up as its state-owned partner seeks to take the venture into new unrelated areas

Key Takeaways:

• Yixin will sell its 49% stake in a 2-year-old joint venture to partner Qingdao Caitong, which wants to expand into areas beyond the venture’s original auto leasing services
• Yixin’s auto financing business is growing despite an unsteady Chinese car market, fueled by booming demand for electric vehicles

By Warren Yang

Reckless expansions into areas outside your core business may sometimes yield quick profits, but many times also end in disappointment. Online auto loan facilitator Yixin Group Ltd. (2858.HK) appears well aware of the perils of such missteps with its latest decision to pull out of a young joint venture that was getting steered away from its original business scope.

Just days after the Christmas holidays, Yixin said it was selling out its stake in the venture that it started with state-owned Qingdao Caitong Group just two years ago. Yixin said it will sell its 49% of the business to Qingdao Caitong for up to 280 million yuan ($39 million), according to its Dec. 27 announcement to the Hong Kong Stock Exchange.

Judging from the disclosure, Yixin’s change of heart owed to concerns that its state-owned partner wanted the venture to branch into areas beyond its original business scope of providing financial leasing services related to automobiles.

Qingdao Caitong “intends to expand its investment in a more diverse set of assets,” including those that are not part of the primary business of the joint venture, Yixin said, noting that unlike itself, Caitong is a state-owned enterprise, or SOE. As a result, the original intentions behind setting up the venture “no longer align,” it added. While such divergences of interests aren’t uncommon between joint venture partners, they also reflect a broader risk for private companies working with SOEs in China.

China’s vast web of SOEs are under big pressure to boost profits these days as the financial health of their owners, often local governments, deteriorates, in large part because of falling revenue from land sales as the real estate market slumps. Local governments are also pressuring their SOEs to take more steps to stimulate their economies, many of which are sputtering due to the property slump and three years of consumption-killing Covid-19 restrictions.

Reflecting the financial pressures such local governments are facing, ratings agency Fitch downgraded outlooks for local government funding vehicles (LGFVs) in Caitong’s hometown of Qingdao and a number of other cities to “negative” last year, citing a deterioration of the municipalities’ creditworthiness and resilience to economic shock.

Qingdao Caitong is a financial services company that was set up in 2020 by the government of the Northeastern port city, with a mission to “fully embody the development strategy of the Qingdao Municipal Communist Party Committee and municipal government, and fully implement (their) major priorities,” according to its website.

The joint venture between Tencent-backed Yixin and Qingdao Caitong earned about 183 million yuan ($26 million) in revenue in 2022, its first full year of operations, and made a net profit of 31 million yuan. Based on the size of the venture’s net assets at the end of 2022, its net profit translates to a return on the partners’ investments of about 5.8%.

That return rate isn’t bad for such a young venture, but is likely still well below the cost of capital for Qingdao Caitong. So, it’s not hard to understand why Caitong may want to expand the venture’s business into other areas, which also provides a hedge against overreliance on the auto market.

Focus on auto financing

All that said, it’s also understandable why Yixin wants to stay in its lane and focus on its own expertise in auto finance. Diversification into unfamiliar areas is always risky, with countless cases of failure. One high-profile case back in 2014 saw the now-troubled real estate giant Evergrande start selling bottled water and cooking oil, only to dispose of those businesses just two years later after racking up losses. Evergrande’s more recent bet on electric vehicles (EVs) is also meeting with a high degree of investor skepticism.

Yixin probably isn’t so keen to divert its focus right now as its core auto financing business is on an upswing. While China’s overall car market isn’t exactly booming due to recent economic uncertainty, EVs are defying the trend with strong sales growth that has made homegrown automaker BYD and U.S. giant Tesla two of the market’s biggest sellers. The EV boom is also providing a boost across the industry ecosystem for companies like Yixin.

Yixin’s total auto financing increased 30% year-on-year to 17.7 billion yuan in the third quarter of 2023 as loans for new EVs surged more than 200% to 4.2 billion yuan, according to the company’s latest quarterly business update issued early last month. Yixin’s revenue grew 16% in the first half of last year from a year earlier, with its net profit more than doubling.

Yixin is trying to expand its revenue beyond car loan facilitation, but all of its diversification moves have been related to the auto industry in some way. One such new product is a software-as-a-service (SaaS) platform for auto financing-related technology applications.

Yixin is impressive for its ability to not only survive but also thrive in auto financing even after a regulatory crackdown on online lenders that drove many similar fintech startups out of business in the years before the pandemic. It originally provided its own direct auto loans, but later transformed into the more lightly regulated role of facilitating such financing between banks and consumers after the regulatory climate shifted.

While some might commend the company for sticking to its core competency, the years of regulatory headwinds and pandemic have battered Yixin’s shares, which currently trade at a price-to-sales (P/S) ratio of just 0.6, a fraction of their 2017 IPO valuation. It’s hardly alone, however, as valuations for other Chinese online lenders are similarly depressed. Among those, P/S ratios for consumer loan facilitators FinVolution (FINV.US) and LexinFintech (LX.US) are also well below 1.

Yixin’s shares rallied a bit after the announcement, rising as much as 7%, before giving back most of those gains. Still, the brief rally could represent a vote of confidence from investors for the company’s ability to stay focused on its core business, and more upside potential could lie ahead if EV sales continue to drive up its profits.

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