What are the key drivers for car dealers’ net profit decline?

On May 16th, China Association of Automobile Circulations (CADA) released the "Top 100 List of Distributor Groups in China's Automobile Distribution Industry in 2012", with Guanghui Automobile, Guoji Automobile, and Daji Automobile and Trade relying on 72.62 billion, 62.124 billion, and 57.797 billion yuan. The total revenue was among the top three.

Net profit fell significantly

Statistics show that, on the one hand, the operating income and scale of the Chinese distributor group have further increased. There are 25 Chinese billion-dollar dealer groups, and the number of companies with operating income exceeding 50 billion has increased to four, ranking No. 1 in the Guanghui Group. Revenue reached 72.62 billion yuan, an increase of 13.3%.

On the other hand, the profitability of the Chinese distributor group has dropped significantly. “In 2012, although the gross profit margin of the Top 100 dealers increased, the net interest rate dropped drastically at only 1.2%, and a considerable number of companies outside the top 100 did not reach this level, and they were leading in the industry. The decline in the profitability of listed distributor groups is also significant.” Shen Jinjun, executive vice president and secretary-general of the China Automobile Dealers Association, used data to show his concerns.

Circulation Association statistics show that last year, the top 100 dealers group's net interest rate was only 1.2%, 2011 was 2.3%, and NADA (National Automobile Dealers Association) released data show that the United States Top 100 dealers group net rate of 2.3 %.

“If the rankings can announce net profit, half of the top 100 dealers may be losing money, and most of them are not profitable.” On the 16th, a senior dealership group that participated in the “Top 100 List” release told reporters.

In fact, it can be seen from the annual reports of the top five, listed companies, Zhongsheng, Yaxia, Zhengtong, and Baoxin listed distributor groups. In 2012, apart from the loss of the typical case huge group, Zhongsheng Group, which has always been known for its profitability in single stores. The net profit also fell by 47%.

In addition, the Lixingxing Group, which has always been running a single brand, is profitable, and is among the “hundredth” of the “hundredth”, is not as good as it was in 2012.

In fact, the surge in financial expenses was a huge challenge faced by the distributor group last year. Although the gross profit has improved, most of the profits have been eaten due to the increase in financial expenses, which has led to a substantial decline in net profit.

The data shows that in 2012, the financial expenses of the top 100 major listed companies have increased substantially, which is mainly due to the construction funds and high inventory holding funds caused by the expansion of the network.

In 2011, the ratio of financial expenses of the top five listed distributor groups to the main business was basically 1%, but in 2012, this proportion reached 3%. The huge group's 2012 financial expense growth rate was as high as 103%, and the median increase was 87.9%.

When the tide has receded, it is only known who is "naked." In 2012, the overall auto market decline, inventory and financial costs remained high, leaving most Chinese auto dealers to embark on a critical point of loss and profitability, scale and efficiency.

“In the past, as long as we had scale, we would be able to make profits. It was just a question of how much we had to earn, but the current situation is completely different. Large scale, many brands, and many outlets, but internal integration and management can not keep up, the profitability will not be good "The above-mentioned dealers further expressed.

This means that most dealer groups will gradually abandon their past oversizing of scale and shift to more in-depth intensive cultivation, especially aftermarket development.

What is the crux of the problem?

Taking the five listed companies with financial data as examples, Zhengtong Group's net profit growth in 2012 exceeded 15% year-on-year, which is one of the profitable dealer groups in the industry.

Zhengtong's good performance last year benefited from two factors: After acquiring SAIC Motors, the brand was extended to the luxury car segment, the business was positioned in mid-to-high-end and luxury brands, and profitability did not depend on a single brand; in addition, Zhengtong was The performance of auto aftermarket and derivative services such as finance, insurance and quality products is remarkable. In 2012, the contribution of the two companies to the company's profits reached 26% and 29% respectively, and the profit contribution of new car sales was 55%. However, Zhengtong's used car business still has a lot of room for growth.

However, Zhengtong’s current profit structure is not representative. From the revenue structure of the top 100 companies, vehicle sales revenue in 2012 is still the main source of operating income, accounting for 88% of the company’s revenue. The sales of the top 100 dealers in the United States in 2012 accounted for only 56%.

In addition, the used car business in China is at an early stage and has a wide gap with the United States. This is also an opportunity for development. In 2012, China’s top 100 dealership groups had a ratio of sales of new cars to used cars of 6.8:1, which means that each used car sells 6.8 new cars before it trades one used car. The US Top 100 dealers sell 1.5 new cars and they will trade a used car at a ratio of 1.5:1.

More importantly, in the U.S. market, the ratio of used car sales to new car sales is 1:0.4. In other words, there are 40 million second-hand car transactions in the United States each year, and the sales of new cars are only over 10 million vehicles. In 2012, more than 19 million new cars were sold in China, and only less than 7 million were used cars.

The crux of the matter is that the used car business with high gross profit and financial insurance contribute very little to the overall profit of the Chinese car dealership group. The resulting gross profit margin is too low, that is, the proportion of the Chinese auto market's contribution to profits is too low.

Yang Hansong, president of Baoxin Auto Group, believes that with the development trend of the entire automobile market, the gross profit of the new car will surely be flattened, and the main revenue of Baoxin will be after-sales service and extension service. "In the future, 80% to 90% of our profit sources will depend on our extended services, because the profits from the original sales will be large, and in the future it may be reversed. The profit of after-sales service may be the greatest."

“On the edge of life and death, survival is the most important thing, and changes must be deepened.” An industry source told reporters that Pang Qinghua, chairman of the giant group, personally grasped the automobile derivative business. Zhengtong and Changjiu Group planned to establish an automotive finance company. The Zhongsheng Group, which focuses on the automotive boutique business, began to attach importance to the insurance business. These are new changes in the automobile distribution industry.

"We have been actively registering fund management companies for a long time and hope that the fund management will be privately funded. We will issue such private debts externally. With equity investment, the future will be in the form of bonds to support us to obtain a better brand in this industry." Industrial Group Co., Ltd. President Li Guiping said.

“Actually, relevant departments last year introduced a policy of encouraging distributors to set up financial companies.” The relevant person told reporters that there are three advantages for the automobile dealership group to establish an auto finance company: to form an internal hematopoietic mechanism; to reduce financial costs; to expand the tripartite business , increase profit points.

At present, the Zhengtong Group's auto finance company has reported to the China Banking Regulatory Commission. If it is approved, it will be the first auto finance company established by the auto dealer group.