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This article is written based on public information and is only for information exchange purposes. It does not constitute any investment advice

In June 2023, Pangda Automobile, once known as the "King of 4S Stores", was delisted, which is a pity.

Just one year later, Guanghui Auto, the No. 1 in China in terms of passenger car sales and No. 2 in terms of revenue, is struggling on the brink of delisting. Since June 20, the share price has closed below 1 yuan for 17 consecutive trading days. During this period, the controlling shareholder Guanghui Group and the core management team tried to stabilize the confidence of the capital market by repurchasing and increasing their holdings, but the result was counterproductive.

The delisting crisis of Guanghui Auto marks the beginning of a vigorous survival revolution in China's auto dealership industry, and also suggests that the 4S store business model will become obsolete.

01

Guanghui Roller Coaster

On March 26, 1999, Guangqi Honda opened a 4S store in Baiyun District, Guangzhou. On that day, gongs and drums were blaring and firecrackers were blasting. This was the first 4S store in the history of Chinese automobiles, and it pioneered the "four-in-one" sales and service model.

A few months later, Sun Guangxin founded Guanghui Auto in Urumqi. In the following decade, Guanghui Auto rose with the continued prosperity of China's auto industry - it accelerated its expansion in China's first- and second-tier cities through new construction, mergers and acquisitions, and joint ventures, forming a 4S dealership network covering the whole country.

On June 24, 2015, GAC Motor successfully went public through a backdoor listing with Romei Pharmaceuticals. It reached its peak right after its debut, with a market value of 84.6 billion yuan at the close of trading that day. In the following years (2015-2017), GAC Motor's performance was outstanding - revenue increased from 93.7 billion to 160.7 billion, and net profit attributable to the parent company increased from 2 billion to 3.9 billion.

Source: Wind

The hot automobile market and impressive performance have made Sun Guangxin full of confidence in the company's future prospects, and he has increased leverage to develop the luxury brand distribution business.

In 2016, Guanghui spent 10 billion yuan to acquire Baosight Auto, the world's largest BMW dealer. Soon after the acquisition, it surpassed the American AutoNation to become the world's largest auto dealer.

But what Sun Guangxin did not expect was that GAC began to decline from 2018, with revenue growth basically stagnating and profit attributable to the parent company continuing to decline, reaching only 1.6 billion yuan in 2021. During this period, Guanghui Group had an intersection with Evergrande Group, which planned to make a strategic investment of 14.5 billion yuan to become the "second largest shareholder" of the former, which once caused a sensation in the capital market.

For Sun Guangxin, 2022 may be the most difficult year. Guanghui Auto's revenue plummeted by 25 billion to 133.5 billion, and its profit suffered a huge loss of 2.7 billion. This is the first loss since the company went public, and its 11-year record of being the industry's number one has come to an abrupt end, as it was overtaken by Zhongsheng Group and ranked second.

In 2023, the epidemic has been fully lifted, and Guanghui Auto has turned losses into profits, but the profit is as thin as paper - the gross profit margin is just over 6%, and the net profit margin is less than 0.5%. In the first quarter of this year, the performance continued to deteriorate, with revenue falling by 12% and profits plummeting by nearly 90%.

With business shrinking and profitability deteriorating, the capital market naturally voted with its feet. In the first half of this year, Guanghui’s share price fell by 60%, and it was on the verge of delisting.

The start, growth, rise and fall of Guanghui Auto are a true portrayal and epitome of China's auto dealership industry. Perhaps, no industry can be "emerging" forever, and Sun Guangxin is just a grassroots hero of the times.

02

The industry has changed

As the industry leader, Guanghui Auto has a relatively strong ability to withstand blows. In fact, in the past few years, many small and medium-sized dealers or 4S stores have collapsed.

From 2020 to 2023, the number of 4S stores that withdrew from the Internet in China was 2,362, 1,400, 1,757, and 2,540, respectively. Nearly 2,000 stores closed in the first half of this year, including Guangdong Yongao Group, whose boss fled overnight and all 80 4S stores were closed.

In four and a half years, the number of 4S stores has dropped by one third compared to the peak of 30,000 in 2018.

The bloody figures reveal a cruel reality: China's auto dealership industry has changed.

In the era of fuel vehicles, foreign capital occupied an absolute dominant position and was in the same trench with domestic dealers. They shared profits and lived a very comfortable life. However, new energy vehicles began to explode in the second half of 2020. In just a few years, the automobile market has undergone earth-shaking changes.

As of April this year, the market share of Chinese independent brand cars has exceeded 60%, setting a new record again, a significant increase of more than 22% from 2020. The share of joint venture brands has dropped to 40%. Among them, Japanese brands have seen the sharpest decline, falling to 12.2%. German cars have also seen a significant decline, with only 16.6%.

Source: China Association of Automobile Manufacturers

At an investor communication meeting, Wang Chuanfu boldly predicted that in the next three to five years, the market share of Chinese joint venture brands will drop sharply from the current 40% to 10%, and the remaining 30% will be filled by Chinese brands.

You know, joint venture fuel vehicle brands are the business base of many domestic auto dealers. The market share of the former is constantly being squeezed, while the latter is inevitably creating a huge wave. The first to bear the brunt of the joint venture car's poor sales is the dealer's continued high inventory.

In June this year, the inventory warning index of Chinese auto dealers was 62.3%, up 8.3% year-on-year and 4.1% month-on-month. This means that for every new car sold by a dealer, three cars are left in the warehouse, and the pressure on the capital chain can be imagined.

Being forced into a corner, Porsche dealers this year even united to "force" the manufacturer to demand favorable policy support to support the normal operation of their business.

As sales of joint venture car brands continue to suffer from a backlog, they are naturally forced to try to stabilize their business base by slashing prices.

In 2023, Dongfeng Citroen shocked the automotive industry with its 120,000 yuan table-top price. Today, the Camry is already 120,000 yuan, the Tiguan L will soon be 150,000 yuan, and the Sylphy is on sale for a limited time at 99,800 yuan... It was shocking at the time, but now it's commonplace.

In addition to second- and third-tier brands, price wars have already begun among luxury brands. In terms of fuel vehicles, the Mercedes-Benz C-Class has dropped to 200,000 yuan (a price reduction of 130,000 yuan), and the Mercedes-Benz GLC has dropped to 300,000 yuan (a price reduction of 127,000 yuan). The BMW 3 Series has dropped below 250,000 yuan, and the starting price of the Audi A4L has dropped below 200,000 yuan.

In terms of new energy vehicles, the price of Mercedes-Benz EQE, EQE SUV, and EQB all dropped by more than 170,000 yuan, especially the EQB, which dropped by 50%. Looking at BMW, the official guide price of i3 is 353,900 yuan, but the dealer's selling price is only 209,800 yuan, a drop of more than 40%. In some local markets, the bare car price of i3 has dropped to 170,000 yuan.

The joint venture manufacturers continue to engage in price wars, which is a double whammy for dealers. Manufacturers continue to lower the factory guide price, and dealers are forced to engage in "price-for-volume". This is also one of the important factors that nearly 50% of dealers will suffer losses in 2023.

The penetration rate of new energy vehicles in China continues to rise, exceeding 50% this year. Logically speaking, this will also be a transformation opportunity for traditional dealers. But in fact, this is not entirely the case.

First, it is difficult for traditional dealers to turn around and invest huge amounts of money in a short period of time to establish a sales network related to new energy vehicles. Secondly, with Tesla's launch of the direct sales model in China, domestic new forces, such as Xiaopeng, Weilai, Ideal, and Huawei Zhixing, have increased their direct sales stores and bypassed dealers to directly connect with end consumers.

With three major factors at play - the collapse of the joint venture car market, the endless price war, and the direct sales model of new car companies, car dealers are having a hard time.

03

The dusk of 4S shop

China's auto dealership industry has a history of 25 years since 1999. How did the dealers make money during this period?

Generally speaking, dealers will purchase cars at the original price as recommended by the vehicle manufacturer, and then sell them to end consumers at the original price, ultimately completing the car manufacturer's sales target and receiving profit points returned by the car manufacturer at the end of the year.

When the market is hot, dealers can not only get rebates, but also increase the price of cars. On the contrary, if the terminal reduces the price appropriately, the rebates can be used to offset the loss of price reduction and realize profits.

Today, things are different. The more dealers sell, the more they may lose. First, even if they follow the big price cuts, they may still find it difficult to achieve sales targets and receive profit rebates. Second, even if they receive rebates, they may not be able to make up for the losses from the price cuts.

In addition to selling new cars, dealers can also make money through after-sales services, such as repair services, parts sales, vehicle beauty, etc., and the gross profit margin is generally higher. For example, in 2022, the most difficult year for Guanghui Auto, the gross profit of after-sales and other businesses accounted for 94%.

In fact, this part of the income will also be affected and impacted by the new car price war. This is because car maintenance and other services are closely related to the value of the car itself. For example, a major maintenance of a 300,000 yuan car costs 3,000 yuan. If the new car has been reduced to 200,000 yuan, the maintenance fee will naturally be reduced a lot.

In fact, the root cause of the difficult times for car dealers is the rapid rise of Chinese domestic car brands, which have achieved "overtaking on the curve" over foreign brands.

What is even more cruel is that the concentration of China's automobile industry will increase significantly. Yu Chengdong once predicted that in the future, the number of major players in China's automobile market may be less than or equal to 5, which can be counted on one hand. At that time, large automobile enterprise groups will almost certainly extend the upstream and downstream industrial chains, and the direct sales model for downstream sales channels will be the general trend. This will also greatly reshuffle the current distribution market structure.

In fact, the distribution models of various industries, including automobiles, are undergoing some profound changes to a greater or lesser extent in the current era.

In 2023, China's online retail sales have exceeded 15 trillion yuan, an increase of 11%, accounting for 27.6% of total social retail consumption, setting a new record. Online retail is mainly carried out through e-commerce platforms, which has replaced the redundant distribution model of offline retail, and the trend is becoming more and more obvious.

In offline retail, many industries are also cutting down on traditional distribution chains. For example, snack food, the snack mass-market model that focuses on cost-effectiveness has risen rapidly in recent years, reshaping the entire food and leisure industry market structure. The rapid rise is due to the fact that mass-market snack food merchants have reformed the retail channels, bypassing distributors to purchase directly from manufacturers, and purchasing at lower prices to benefit consumers, in order to achieve the goal of small profits but quick turnover.

For many years, distribution was a business model that relied on information asymmetry and asymmetric supply and demand to earn the difference. But now, both online and offline are going to be de-distribution, and the essence of this is that various asymmetries are gradually being eliminated in the era of fast-growing mobile Internet.

The general trend of the world is vast and unstoppable. Those who follow it will prosper, and those who go against it will perish. For ordinary investors, those who know the current situation should be heroes.

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