Autostreets in the driver’s seat as China gets set for used car trading boom

The country’s leading used car trader has passed its listing hearing in Hong Kong, positioning it to complete its IPO in the coming months

Key Takeaways:

• Autostreets is reportedly aiming to raise $100 million or more in a Hong Kong IPO, seeking a rich valuation as China’s leading used-car trader
• Growth of used car sales in China is expected to accelerate in the next five years as Beijing promotes the sector and consumers become more budget conscious

By Doug Young

Autostreets Development Ltd., China’s leading provider of used car trading services, doesn’t look too exciting as an investment, at least based on its last three years of operating data contained in its Hong Kong listing application filed in February. But a closer read of the application, which passed its listing hearing at the Hong Kong Stock Exchange last week, shows a company that may be the driver’s seat for some strong growth in the next few years.

The 10-year-old company has quite a few things going for it and seems to think quite highly of itself in terms of valuation. It counts U.S. used car authority Cox Automotive, owner of the Kelley Blue Book and Autotrader.com brands, as its second largest shareholder with 11% of its stock. The company is China’s leading used car trader, with 12.6% of the market for platforms handling such trading in 2022, according to its listing document.

At the same time, the company looks set to benefit from an expected boom in used car buying in China in the years ahead, driven by two factors. One of those is recent government support for recycling. The other is China’s slowing economy, which is likely to prompt increasingly cost-conscious consumers to purchase more used cars over new ones.

Such a boom would contrast sharply with weakness in China’s used car market over the last three years due to the country’s strict Covid restrictions in 2021 and 2022, followed by more weakness in the first half of 2023 as many people became infected when restrictions were finally lifted. Used car buying suffered more than new cars during the pandemic, since buyers were often prevented from attending offline auctions where many used cars are typically sold.

Third-party data in Autostreets’ listing document said China’s used car market grew just 6.9% annually in the five years from 2019 to 2023, with 14.4 million used vehicles sold last year. But the growth rate is expected to accelerate sharply to 13.7% annually between 2023 to 2028, fueled by the factors we’ve mentioned above.

On the policy front, China’s State Council, the country’s cabinet, in March announced an “Action Plan to Promote in Large Scale Equipment Renewal and Trade-in of Consumer Goods,” which included support for used-vehicle trading. That was followed a month later by a similar plan from the Commerce Ministry, which set a target of boosting used-car trading by 45% between last year and 2028.

When such specific messaging comes from the central government, local governments often follow on with their own specific action plans. And in this case, Autostreets pointed out that major cities like Shanghai and Jinan, as well as Hunan province, have already announced their own rules to promote used vehicle trading. With that kind of government support, companies like Autostreets look well-positioned for big growth as demand jumps for their services.

High valuation

Autostreets realizes it’s in a sweet spot and appears to be hoping for a valuation that looks well beyond those for its national and global peers. The best comparison for the company is China’s own Autohome (ATHM.US; 2518.HK), which currently trades at price-to-earnings (P/E) and price-to-sales (P/S) ratios of 11 and 3, respectively.

Similar valuations for Autostreets would value the company at between $150 million and $200 million, based on its revenue and adjusted profit for 2023. Even a P/E ratio of 22, similar to that for leading U.S. used car trader Carmax (KMX.US), would only value Autostreets at about $325 million. But a report from the authoritative IFR says the company is aiming to raise about $100 million in its IPO, which suggests it is seeking a valuation of $800 million or more.

Other information in the listing document suggests that Autostreets previously explored a potential listing in the U.S. at an unspecified date, and that at that time it was valued at about the $1 billion level.

All that said, we’ll return to the company’s financials, which, as we noted at the top, certainly don’t look like reason for too much excitement. Those numbers all tell roughly the same story, namely that Autostreets experienced a sharp business slowdown in 2022 as Covid restrictions affected its business, and then began to rebound in 2023.

Its revenue fell 31% from 678 million yuan ($94 million) in 2021 to 468 million yuan in 2022, before rebounding by a much smaller 5% to 492 million yuan last year. Autostreets pointed out its growth started accelerating strongly in the second half of last year as life returned to normal after the pandemic, with its vehicle transaction volume up 21% year-on-year in the last six months of 2023.

The company derives all of its revenue from various car trading fees and services, allowing it to maintain relatively high margins while shouldering low risk. Its gross margin was relatively steady over the three-year period, falling from 62.8% in 2021 to 60.9% in 2022, before bouncing back to 63.5% in 2023.

The company is largely a B2B services provider, working mostly with professional car sellers and buyers rather than individual consumers. Growing confidence in its services among those large customers is reflected in the growing amount of revenue the company receives for each car sold, with the figure rising 27% from 1,280 yuan in 2021 to 1,636 yuan last year.

The company has been cash flow positive in each of the last three years, and posted an adjusted profit of 107 million yuan last year, up from 70 million yuan in 2022. One minor red flag is the company’s falling “transaction success rate,” which is defined as the number of used cars that successfully trade as a percentage of all vehicles put up for sale. That success rate fell from 73% in 2021 to just 46% last year, with the company blaming growing numbers of people putting up used vehicles for sale, even as buyers remained conservative.

At the end of the day, Autostreets looks like it’s quite well-positioned to profit from a coming boom in China’s used car market, even if it may be seeking an optimistically high valuation.

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