Trans-China Automotive Holdings (TCA), an automobile dealership group with operations in China, has launched its initial public offering (IPO) on the Catalist board of the Singapore Exchange (SGX) on Nov 1.
Headquartered in Hong Kong and Shenzhen, TCA was incorporated in 2015 and is in the business of distributing premium and ultra-premium automobiles under the BMW, McLaren and Lotus brands. The company’s dealerships are located in some of China’s key cities, namely, Foshan, Shenzhen, Guangzhou, Chongqing, Changsha and Wuhan. Its two main business segments are the sale of automobiles and the provision of aftersales services.
The company also sells pre-owned automobiles that come mainly from customer trade-ins, auction companies and other suppliers of used cars, and are not limited to the brands it carries. As an ancillary business, TCA provides automobile agency services to its customers, which include referrals for automobile financing, and referrals for insurance and car registration agency services where the group receives referral fees.
TCA provides after-sales services including repairs and scheduled servicing, maintenance and inspection of automobiles. The group also retails automobile parts and accessories and merchandise that feature the brands it carries.
In its latest FY2020 ended December, TCA recorded an 11.8% y-o-y increase in revenue to RMB4.2 billion ($880 million), with the sales of automobiles segment contributing 87.9% of total revenue, while the remaining 12.1% was contributed by its provision of after-sales segment.
In tandem with the higher revenue, gross profit rose 10.8% y-o-y to RMB316.1 million, while net profit expanded more than four times to RMB109.9 million in FY2020. This was thanks to the higher profit margin from its after-sales segment, which contributed 66% of the total gross profit, while the sales of automobiles segment only contributed 34%, due to its lower profit margin.
“Our after-sales segment is a very high margin business. This is also our recurring revenue, with an average of about 2.2 people coming into our dealership per year,” explains Francis Tjia, founder, executive director, executive chairman and CEO of TCA.
“Having a large contribution from our recurring revenue from the aftersales segment provides a really solid cushion in terms of profitability for the business,” says Tjia, adding that this helps to power the company through lean times when sales of new cars are low. For FY2020, most of its dealerships in China managed to completely cover its operating costs with only profits from its aftersales business.
For instance, the company’s Foshan dealership recorded a 172% service absorption ratio in FY2020. This ratio calculates its profit over its overall costs of running a dealership. In this case, 172% of its cost in its Foshan dealership has been covered by profits from after-sales. Hence, if there were no profit from the sale of new cars, this outlet would still be profitable.
TCA managed to carry this positive growth momentum to 1QFY2021, with revenue almost doubling y-o-y during the first quarter to RMB1.3 billion, while gross profit increased by 92.8% y-o-y to RMB113.0 million, thanks to higher gross profit margins from sales of automobiles. Net profit for 1QFY2021 surged 1,514% y-o-y to RMB46.8 million.
“Our performance in FY2020 and even in 1QFY2021 attests to the resilience of our business and given the robust conditions in our markets and industry, we are optimistic that we can continue this growth trajectory with the implementation and execution of our business strategies,” says Tjia. Prior to founding TCA, Tjia co-founded another car dealership Summit Motors (China) back in 1994, distributing first Toyota cars, then BMW cars. He sold off his stake in Summit in 2006.
Driving to the next phase
With resilient earnings and a yearning to expand the breadth and depth of its business, TCA is going public.
“We believe that this is the right time for TCA to embark on its next chapter of growth. Over the years, our group has amassed extensive industry experience and expertise and has built a strong reputation among our business partners BMW and McLaren, who trust us to uphold their brand values and sales performance, and also among our customers, who rely on us to take care of their long-term automotive needs,” says Tjia.
“These factors, together with our team of experienced and dedicated employees, give us the confidence to move forward with the expansion of our operations. The funds raised through this IPO will enable us to fulfil our business strategies and future plans,” he adds.
With this IPO, TCA will become the first automobile dealership group with operations in China to list on SGX. Other automobile dealership groups listed on SGX include Singapore-based EuroSports Global, Malaysia-based MeGroup and Jardine Cycle & Carriage, with presence across the region.
Given TCA’s strong focus on China, Tjia was asked why TCA chooses to list in Singapore. “The car dealership business is a very popular investment for many years [in mainland China and Hong Kong]. In fact, I believe that there are about nine listed car dealership groups [on the Hong Kong stock exchange] that have an identical business model to what we do,” he says.
Hence, Tjia explains that if TCA were to list in Hong Kong, on top of having to offer its IPO at a discount, it would have to face an additional challenge of convincing investors to switch out of their existing exposure to the other listed dealership stocks. Through Tjia’s checks in the Singapore market, he believes that Singapore lacks the exposure to dealerships in China and investors are receptive to this.
“I think there is an appetite in Singapore for this sort of company — China-based consumer story, growth-oriented, significant in size and with solid profitability. These are all the things that, we feel, allow us to stand out in the Singapore market; and we do not have to fight against eight or nine other dealership groups that are already listed, like what we would find in Hong Kong,” says Tjia.
TCA’s IPO, priced at 23 cents each, translates to a historical P/E of six times, based on its earnings per share of 3.8 cents for FY2020. TCA plans to offer a total of 85 million shares, raising net proceeds of around $16.3 million. It consists of a placement tranche of 82.1 million shares and a public offer of 2.9 million shares. The new shares will increase the company’s share base by 14.55% to 584.3 million, and give it a market capitalisation of around $134.4 million.
The IPO will close at 12 noon on Nov 9, and the listing and trading of TCA’s shares is expected to commence on a ready basis at 9am on Nov 11. TCA will be the fifth IPO on SGX this year. RHT Capital is the issue manager and full sponsor for this IPO, while UOB Kay Hian is the underwriter and placement agent.
TCA plans to use funds raised to expand the breadth and depth of its business. “We are confident of the prospects and outlook for our business. The PRC continues to experience rapid economic growth and rising affluence is driving a high propensity for consumption in key cities and this has led to robust demand for premium and ultra-premium automobile brands such as BMW and McLaren,” says Tjia, who will hold the dominant stake of 75.6% following the IPO.
Road to a sustainable future
Going forward, TCA will maintain its focus on the premium and ultra-premium car brands and is not intending to expand into the mass-market segment.
According to Frost & Sullivan, the premium and ultra-premium car segments in China are showing resilience, growing at 9.1% in 2020 despite the Covid-19 pandemic, compared to an 11.1% decline in the overall market. In 2019, the penetration rate for premium and ultra-premium automobiles in China came up to only an average of 19.6 per 1,000 people.
The way Tjia sees it, wealth in China is growing, and the upperclass as well as upper-middle class households are growing. Hence, he believes that there is much growth potential in the China market for the brands that the group carries.
Even as trends such as electrification booms within the market, Tjia is not fazed.
BMW may only have two fully electric vehicles (EVs) now in the China market. But he explains that 20 new EVs from BMW will be coming into China over the next five years. On top of that, all of TCA’s BMW dealerships are equipped to welcome EVs with charging stations installed, while its after-service segment is certified to inspect, maintain and repair BMW EVs.
Meanwhile, for ultra-premium brands such as Lotus and McLaren, Tjia explains that these cars target a whole different market and the demand is likely to not falter despite the EV boom.
“I would not call the McLaren and Lotus ‘transportation cars’. These are more ‘lifestyle cars’. We see burgeoning demand from the high-net-worth individuals to acquire these cars to give them certain prestige and enjoyment from driving them,” he says.
While it may take some time for the ultra-premium brand to introduce an EV into the market, many have already pushed out hybrid models in a bid to meet some of the new energy vehicle requirements.
On the outlook, TCA expects revenues from new automobile sales to increase, due to an anticipated increase in demand for premium and ultra-premium automobiles in conjunction with the release of new BMW models in China and for revenues for after-sales services to increase in tandem.
Currently, the group owns two plots of land in Chongqing. One of them is already occupied by its BMW dealership, while the other remains vacant. The group intends to launch a dealership on the vacant land with another OEM (original equipment manufacturer) brand that has a focus on EVs.
Although TCA does not have a formal dividend policy, Tjia says: “In my personal view, if the company has strong cash flow, which I expect it to, and if it has more than sufficient cash to meet all of its operating capex plans for the year, I certainly, as a key member of the management team, will be recommending the dividend to the board of directors. And then of course, it is up to the board to make the final decision.”
Photo: Trans-China Automotive
