10 Questions for Trans-China Automotive

Company Overview

Trans-China Automotive (TC Auto) specialises in the business of automobile dealerships in the premium and ultra-premium market segment in China, which includes: (i) the sale of automobiles; and (ii) the provision of after-sales services (e.g. maintenance and repair services, and sale of automobile parts and accessories). The Group carries automobile brands comprising BMW, McLaren and Genesis, and has dealerships in cities in China, namely in Foshan, Shenzhen, Guangzhou, Chongqing, Changsha and Wuhan.

1. Could you elaborate on what Trans-China Automotive (TC Auto) is about?

• We are a leading automobile dealership group with operations in China with a focus on distributing premium and ultra-premium automobiles. We carry BMW, McLaren, and Genesis-branded automobiles, and have 9 dealerships in Foshan, Shenzhen, Guangzhou, Chongqing, Changsha and Wuhan.

• In 2021, we sold more than 10,800 cars. We derive our revenue mainly from the sale of vehicles both new and preowned, and this segment contributes over 80% of our annual revenue. The balance of our revenue is from the provision of ancillary services (e.g. automobile purchase financing, insurance and car registration services) and aftersales services (e.g. maintenance & repair services, inspection of automobiles, as well as the retailing of automotive parts and accessories).

2. How would you describe the car and dealership market in China and how is it different from Singapore?

• China’s car market is the largest globally, even bigger than the US. In 2021, more than 20 million new passenger vehicles were sold in China. In order to serve such a vast market, car manufacturers distribute their cars through networks of officially-appointed dealerships. For example, BMW sold around 880,000 cars in China last year through c.600 dealerships. These dealerships are not owned by BMW, but by dealership groups such as TC Auto. This is different from a smaller car market such as Singapore, where there is usually one officially appointed dealership for any of the major automotive brands. In other words, there is competition between dealers of the same brand in China, vs. in Singapore where most car retailers have a monopoly on their representative brands.

3. What is TC Auto’s competitive edge against its peers?

• We aim to stand out by competing on the quality of our service and our dealership facilities. Customer service is part of our core values, we offer staff training and we have strict facilities management policies to ensure our customers receive a first-class experience in our stores. We systematically track our 50,000+ customers that have serviced or purchased a vehicle to tailor our marketing. For example, we have visibility over their car’s service history and when the customer may consider a trade-in. We are active with post-purchase engagements and hold events such as car owner maintenance workshops, drive tours through the country-side and co-branded events such as wine tastings.

• From a corporate perspective, our strategic focus is on large and wealthy metropolitan cities in China, with an emphasis on the Greater Bay Area in Guangdong province, where the population is affluent. In 2020, we averaged 2,516 unit sales per BMW store, almost doubling the average of 1,342 units per BMW dealership in China. We enjoy longstanding relationships with BMW and McLaren that date back to 2009 and 2014 respectively. We have received many awards and accolades over the years in recognition and as a testament of our performance.

4. TC Auto recently announced the new dealership for the Genesis brand. What are the plans to scale this brand?

• We believe that the Genesis brand will increase our overall potential market. We will be the sole Genesis dealer in Guangzhou whereas we are just 1 of 13 BMW dealers in Guangzhou. We are optimistic about the prospects of the Genesis brand given that it has been well-received in international markets. Genesis is allocating significant resources to launch this brand in China and we hope to be part of its growth journey in this market.

5. TC Auto’s bottom line has grown significantly over the years. What were some drivers for this?

• A key source of growth comes from our large and efficient dealership facilities in wealthy metropolitan areas which allows us to tap on China’s continued economic growth without having to invest in additional new dealerships. Our large-scale facilities provide capacity to serve our after-sales customers – which contribute recurring high margin revenues. The after-sales business in our BMW dealerships in Foshan, Guangzhou and Shenzhen have higher absorption ratios (i.e. after-sales gross profit to dealers’ total operating costs) than those of peers in the industry.

• China’s economic growth and rising affluence, has led to high propensity for consumption in key cities. We have benefitted from this as we operate in cities with higher rates of GDP growth compared to the rest of China, which has had a positive effect on the sales of premium and ultra-premium brands that we carry.

6. With the increasing awareness and focus on electric automobiles, is TC Auto looking to diversify its product range to include such vehicles?

• China is the world’s largest new energy vehicle market, accounting for more than 50% of global sales of electric vehicles (EV). We recognize this and want to work with automobile manufacturers with the resource and capability to produce high quality electric vehicles, however, we acknowledge that ICE (internal combustion engine) cars will still remain relevant during the transition to full electrification. The rate of acceptance and adoption of EVs also varies across different regions in China, considering factors such as the infrastructure for charging, typical daily mileage driven, government subsidies, and repair costs.

• We believe that BMW and Genesis are perfect partners for this. BMW in China has introduced 4 fully-electric new vehicles (iX, i3, i4, and i7) in addition to the iX3 and the various plug-in hybrid cars we already offer. As an aside, c.8% of our unit sales in 3M2022 were EVs. Our BMW and Genesis dealerships are fully up-to-date with the latest technology and infrastructure for the maintenance and repair of EVs by fully qualified and trained technicians.

7. How has TC Auto utilized or plan to use the funds raised via its listing?

• We raised net proceeds of S$16.3 million and plan to grow by building or acquiring additional facilities and operations in the regions where we already have a presence.

• Part of the proceeds have gone into the construction of 2 projects. Our Genesis dealership in Guangzhou and a new BMW Service Centre which in a suburb adjacent to the Company’s BMW dealership in Shenzhen. We continue to look for additional growth opportunities.

8. Could you elaborate on the future direction for the Group’s business segments?

• A core component of running a strong automotive dealership business is to have a large and loyal pool of customers who return several times a year to our dealerships for regular maintenance and repair of their vehicles. This is our recurring revenue which provides us with stable and attractive margins. Where we see more opportunities within this traditional sphere of our industry is in pre-owned vehicles. This segment is starting to gain considerable traction in China in recent years, and we believe the growth in this segment represents an attractive opportunity for us.

• We are also exploring how the digital economy could enhance what we do or help us to serve our customers better. We may consider looking for opportunities to invest in mobility-related solutions that go beyond selling and repairing automobiles. Being based in China’s tech hub of Shenzhen, we believe that this is an area which may be suitable to explore.

9. Sustainability and ESG have increasingly been a key focus, how is TC Auto committed to sustainability?

• Environmental: Our Chongqing store was one of the first ‘5S’ BMW stores to open in China in 2014. The fifth ‘S’ stands for Sustainability. To be accredited by BMW with this fifth ‘S’, we need to have environmentally sustainable processes features in our facilities. These include energy-saving processes and features, using water-based solvents and paint for body-work repairs. Beyond this, we are part of a panel of dealer groups that is looking to economically introduce solar-generated electricity in dealership facilities.

• Social: We actively support training and education initiatives in the communities where we operate. Each of our BMW stores offer internships to students and recent graduates from technical schools, and we are committed to offering permanent jobs to a significant proportion of our interns. Internships include “room & board” to all interns who need it.

• Governance: We have a diversified and balanced employee and staff roster. We can do more on the board level, and just recently we have initiated the process to make our board more gender-diverse.

10. Why Should Investors Take a Closer Look at TC Auto?

• China’s population is vast, and consumer demand will strongly outperform the overall economy as the level of affluence continues to rise. Automobile ownership as measured by vehicles per capita, is still only about one quarter of that compared to other developed economies in Europe, North America, or here in Asia.

• We believe to be one of the top performing dealership groups in the Greater Bay Area of China with a portfolio of automotive brands, and a team of over 850 employees that are customer-oriented. Furthermore, we see our Group with the following merits:

• One of the top performing BMW dealerships in China with strategic presence in geographically affluent regions including the Greater Bay Area

• Robust dealership model with multiple income streams

• High earnings visibility with after-sales services generating recurring revenue at high margin

• Maintain strong business relationships with our automobile brands

• Customer-focused strategy/business model which places an emphasis on providing consistent high-quality services

• Experienced and committed key management team with strong industry experience

10 in 10 – 10 Questions in 10 Minutes with SGX-listed companies

Designed to be a short read, 10 in 10 provides insights into SGX-listed companies through a series of 10 Q&As with management. Through these Q&As, management will discuss current business objectives, key revenue drivers as well as the industry landscape. Expect to find wide-ranging topics that go beyond usual company financials.

This report contains factual commentary from the company’s management and is based on publicly announced information from the company.

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For more company information, visit tca-auto.com

Click here for TC Auto’s 2021 Financial Results.