Auto Financer XXF Group Revs Up IPO Engine but Hits Another Speed Bump

The auto finance and leasing company has made another run at an IPO on the Hong Stock Exchange after three earlier bids stalled. But its latest effort has already hit an obstacle

Key Takeaways:

• After filing its fourth IPO application, XXF Group pulled its preliminary prospectus from the exchange’s website just a few days later
• The company will have to repay more than 50 million yuan on a loan from a Didi subsidiary by next June. The need for a cash injection may help explain its eagerness to pursue a listing

By Emily Chan

For China’s XXF Group Holdings Ltd., the road to an IPO has been littered with potholes. The provider of financed car sales and auto leasing has already stalled three times on its way to a Hong Kong listing, and a fourth attempt to start the engine has not gone smoothly.

The company’s most recent application to list on the Hong Kong Stock Exchange was filed on the last day of October. But just four days later the prospectus was removed from the new listings section of the exchange website.

As of Friday, no new version had appeared. Whether the disappearance was for technical reasons, a necessary data update or some other factor, it can be said with some certainty that the company’s IPO journey has been paved with obstacles. But still XXF perseveres in its quest to go public. What is driving this dogged desire for IPO capital?

The company was founded in 2007 by its biggest shareholder Huang Wei, who holds around 31% of shares of the company, and started out in auto rentals. Sensing a business opportunity, it shifted into selling vehicles through financed leasing, and hit the big time. The company went public on Beijing’s National Equities Exchange and Quotations (NEEQ) board in 2015, but it chose to reverse out of the market a year later due to paltry trading volumes.

The company divides its main operations into two categories, auto retail and financing, and auto-related services. In the first category, it runs its own showrooms and sells cars through direct finance leasing. This service mainly caters to individuals in second- and third-tier cities who buy non-luxury cars. For the other section of its business, XXF provides customers with so-called operational leasing of vehicles including ride-hailing or new energy cars, as well as auto-related software and other services.

Sales slowed by the pandemic

In recent years, the company’s profit performance has been dictated by the Covid pandemic. Its revenue fell 30% to 750 million yuan ($104 million) in 2020 but, as the pandemic was brought under control the following year, its new vehicle sales jumped 89% and the number of new leasing financing deals rose nearly 44%. As a result, revenue raced back up by 56% to 1.17 billion yuan and net profit surged 176% to 34.11 million yuan.

However, the pandemic resurgence in many provinces and cities in the first half of this year threw more roadblocks in the company’s path. With demand falling and the supply chain strained, the vehicles sold under its financed leasing business numbered only 3,401 in the first seven months, just 46% of last year’s total. The revenue for the period rose by a year-on-year 4.8% to 608 million yuan. Its net profit, however, shot up more than 17-fold to 47.58 million yuan after it logged 34.50 million yuan in income from changes in the fair value of redeemable common shares.

The auto retail and financing business has always been the company’s main profit engine, contributing more than 80% of total revenue and between 30% and 40% of gross margin. In the key business of financed leasing sales, it buys vehicles cost effectively in bulk and sells them to customers at a premium with low or zero down payments, with the balance paid in installments. This model puts heavy demands on the company’s capital position, with large upfront payments to buy the cars and a long time lag to recoup the costs.

As a result, Inventory is a big issue. The company’s inventory costs in the past three years were 591 million yuan, 301 million yuan and 633 million yuan, amounting to around 83%, 69% and 78% of total operational costs, highlighting the capital-intensive nature of the financed leasing business. No wonder that the prospectus put the intention of buying new vehicles at the top of a list of uses for the IPO proceeds.

But until it lays its hands on the IPO money, the company must rely on loans, income from financed leasing and sales of shares or convertible bonds to keep its operational motor ticking over. In the first seven months of the year, it borrowed 1.29 billion yuan at an average cost of 10%, higher than the 8% to 8.6% rates of the previous three years.

Loan repayment to come due

Meanwhile, the return on its lease agreements has been falling, as some of the higher yielding deals signed before 2019 run their course. The average receivable rate of return from the financed leasing business tumbled from around 28% in 2019 to 20% during the first seven months of this year. A combination of rising borrowing costs and falling returns does not bode well for the company’s finances.

Therefore, the company has been actively seeking equity financing as well as embarking on an IPO path. In 2018 it launched a vehicle leasing operation for ride-hailing service providers with Didi Global (DIDIY.US). In November of that year Didi affiliate Beijing Chesheng paid 30 million yuan for 3.41% of XXF’s shares, promising to promote its partner’s leasing business in exchange for XXF being the exclusive supplier of authorized ride-hailing vehicles for its drivers.

Moreover, Beijing Chesheng agreed to invest 60 million yuan in XXF convertible bonds with an annual coupon rate of 8% but said the next year that it would not exercise the option attached to the bonds.

The partnership with Didi as both a customer and an investor put the company on a promising track. But the agreement ended last May as a Chinese regulatory crackdown on parts of the internet and financing economy intensified. And under the deal, XXF must repay another 50.76 million yuan to Beijing Chesheng by June 30 next year after having repaid 20 million yuan last June. This will undoubtedly put more strain on the company finances. Raising IPO funds before the debt comes due might be the best available option right now.

As the Chinese government tightens controls on the online credit sector, auto finance as an industry is facing stronger policy headwinds, and the financed leasing business is bearing the brunt. This has caused some companies to change to steer away from the danger areas.

Yixin Group (2858.HK) has transitioned from being a platform for auto-finance transactions to brokering similar loans between banks and consumers, after logging a loss of 1.16 billion yuan in 2020. The company pulled out of loss territory with a net profit of 28.95 million yuan last year, before accelerating to a net profit of 124 million yuan in the first half of this year.

U.S.-listed Cango Inc. (CANG.US) is still transforming itself from a car financier to a provider of car-trading services. It fell into the red last year with a net loss of 8.5 million yuan, widening to 422 million yuan in the first half of this year.

With Cango languishing in the red, it is better to use the price-to-earnings (P/E) ratios of Yixin, at 15.8 times, and Hong Kong-listed Dongzheng Automotive Finance (2718.HK), at 29.4 times, as yardsticks for calculating XXF’s potential IPO valuation. Taking the average P/E ratio of 22.6 times and extrapolating XXF’s first-half profits of 47.58 million yuan to the full year, the auto sales and leasing company could be on course for a valuation of 2.09 billion yuan if it succeeds in navigating to a listing.

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