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TuanChe Limited - Leading Omni-Channel Automotive Marketplace

NEW YORK, NY / ACCESSWIRE / November 27, 2018 / TuanChe Limited (TC) is a leading transaction-based automotive marketing solution service provider to automobile buyers and industry sellers, founded in 2010. It is to operate as an omni-channel automotive marketplace where an online platform as a traffic driver merged with offline transaction-based auto show events to fulfill the transaction cycle across the nation in China.

Investment Thesis

Rapid expanding geographic coverage driving sustainable growth

TuanChe strategically stretched its geographic reach from 26 cities in the last quarter of 2016 to 121 cities in 2018 1H and organized 315 auto show in the first half of 2018, compared to 90 auto shows in first half of 2017, reflecting a three-and-a-half-fold increase. The company is driving further distribution penetration to tier 3 and below cities since 2017, by taking advantages of the higher growth momentum in automobile sales. According to the iResearch report, the new automobile sales volume in lower tier cities is expected to grow at a CAGR of 7.3% from 2017 to 2022, in contrast to 0.3% in tier 1 & 2 cities. In addition, by consistently organizing transaction-driven auto shows in the same cities, the company also benefits from first mover advantages, which allow the company to establish strong brand recognition and solid network relationship with industry customers. Looking ahead, the company is expected to duplicate its business model to different cities and to benefit from economic of scale, and hence to drive TuanChe's revenue growth down the road.

Effective consumer acquisition empowered by big data analytics

Diversified customer acquisition channels via online and offline plus data points accumulated over years of operational experience drive the company to detect market trends and an overview of its targeted customers' behavior, preferences, and interests. Consequently, cost-effective customer acquisition, improved event operation efficiency and value-added propositions for industry customers become the company's superior competitive advantage, evidenced by the facts of per customer acquisition cost at RMB 28.1 and an average of 4.7 sales and marketing personnel per city as of June 30, 2018.

Integrated marketing solutions complementary to virtual dealership, developing a closed-loop ecosystem

By leveraging big data analytics and the network relationships with industry customers, TuanChe has launched virtual dealership service and demand-side platform to serve automakers and dealers on distribution penetration as well as marketing efforts. Such initiatives coupled with its omni-channels business model is expected to develop a closed-loop ecosystem, which allow the company to capitalize on the increasingly viable market opportunities, including automotive financing service, aftermarket service, and automotive insurance and warranty service

I. Growth Catalysts

Rapid expanding geographic coverage through auto shows to drive near term growth

In the last quarter of 2016, TuanChe organized 26 offline auto show events in tier 1 & 2 cities. During 2017, the company has started to expand geographic coverage including tier 3 and below cities. The company arranged 90 and 214 auto shows in the first and second half of 2017, respectively, which collectively added up to a total of 304 auto shows over 75 cities. As of June 30, 2018, 315 auto shows were organized in 119 cities and the company's sales operations cover 121 cities, crossing 29 provinces. The company is expected to keep the pace with its expansion and to double the number of auto shows during 2018. In addition, the company offered 11,165 booth spaces in 2018 1H, which contributed RMB 269.18 million revenue. As a result, the company is expected to benefit from economic of scale by doubling up auto shows which leads to strong revenue growth in 2018.

The operational expansion is not only to strengthen the company's market position by penetrating into new cities, including prefecture-level and county-level cities, but also to secure a high year over year revenue growth down the road.

Exhibit 1. TuanChe's Geographic Coverage Breakdown by City Tiers


Source: TuanChe F-1 filing

Virtual Dealerships monetize by offering facilitating service to lock in mid-to-long term revenue growth

TuanChe's virtual dealership aims to act as an intermediary between automakers / dealers and secondary dealers, by providing tier 3 and below cities marketing penetration solutions for automakers / dealers and by offering end-to-end transaction chain service for secondary dealers. On automakers and dealers side, the arrangement can enlarge their distribution channels to reach tier 3 and below cities in a cost efficient way, where they don't have physical presence to accommodate customers' needs. On secondary dealers' side, the collaborations enable them to gain exposure on auto shows for free and to obtain marketing support as well as operational support such as SaaS system in forming a large scale operation. Moreover, according to iResearch report, tier 3 and below cities accounted for 45.7% of national automobile sales and new automobile sales volume of that market is expected to reach 16.1 million in 2022, a CAGR of 7.3% from 2017 to 2022. Therefore, the company is expected to get result from its transaction-driven online-merged-to-offline business model by providing one-stop shopping experience from customer acquisition to transaction fulfillment.

As of June 30,2018, TuanChe facilitated 27 cars through its virtual dealership, which contributed RMB 60,000 revenue. Besides transaction chain service, virtual dealership business segment implies further upside potential by offering other automotive value-added service, including automotive financing service, aftermarket service, and automotive insurance and warranty service.

Demand-side platform business opportunity envisioned by customer data analytics capabilities

The company is able to attract a large number of customers, who have strong automobile purchase intention in mind, to participate in offline auto show events, due to diversified customer acquisition channels, personal follow-up communication after each auto show and focusing on customer intelligence analysis. Therefore, owning proprietary consumer intelligence enable the company to provide precision marketing service for automakers, dealers and other automotive-related industry customers to promote brand awareness and to reach targeted potential customers following sales conversion on a cost effective way. The company launched demand-side platform in 2018 to serve its massive network of 10,000 industry customers and monetized by offering advertising, customer acquisition marketing. The new business territory in marketing efforts service has pave the way for TuanChe to equip a new revenue generating engine in the near future.

II. Competitive Advantages

Leading Online automotive platform matures into Omni-channel marketplace

TuanChe's omni-channel automotive marketplace model is proved to be prosperous in China, evidenced by not only focusing on online marketing effort but also integrating offline customer service and transaction fulfillment through auto shows. The company's success to date, in terms of both volume and GMV of new automobiles sold in 2017, is to become the third largest omni-channel automotive marketplace in China, presenting 193,000 automobile transactions through auto shows and an aggregate GMV of RMB 30 billion (US$ 4.5 billion).

According to Bain & Company report, nearly 50% of car buyers begin online but they prefer to complete the transaction in personal at the dealership, thus customers expect their preferences to carry across channel boundaries seamlessly while customers typically shift between online and offline channels at least four times. Additionally, more than 60% of customers decide on brand, model and price before visiting a dealership according to the report. Therefore, offering a one-stop end-to-end shopping experience with transparent and favorable pricing is the key feature to attract the targeted potential car buying customers accustomed to online shopping and offline transaction fulfillment service. As of June 30, 2018, there are approximately 3.4 million customers to sign up for auto shows through its online channels, and over 148,000 automobile transactions. The iReasarch report also illustrated that sales-oriented auto shows and similar offline promotion events are the most trusted channels among customers with favorable conversion efficiency.

The company's omni-channel approach to merger online customer acquisition scenario with offline transaction-based events is run to ensure that precision targeted customers is reached and to enhance customers' stickiness throughout automobile buying transaction cycle. Unlike other online automotive platforms by focusing on online marketing, TuanChe's approach stands out as being of transaction-oriented.

Diversified online-offline customer acquisitions approach to secure sustainable auto show turnout

Customized customer acquisition strategies with big-data technologies enable TuanChe to secure auto shows turnout. For online channels, the company have created mobile apps, WeChat account, WeChat mini-program, and customized webpages covering over 140 cities in China to better targeting local customers. Since 2016, over 7.6 million customers have entered their information on the platforms in aggregate and the average monthly unique visits to the online platform was 13.3 million for the first half of 2018. Besides the online platforms, the company also effectively utilized other online channels to communicate with prospective customers such as search engines, social media, newsfeed apps, and short-form video apps.

Exhibit 2. Monthly unique visits to online platform Exhibit 3. Customers signed up for offline event

Source: TuanChe F-1 filing

In addition, offline channels also amplified the customer acquisition power by collaborating with traditional print media, television, radio, and billboards in the streets and subway stations, especially in tier 3 and below cities marketing efforts. On top of online and offline channels, word-of-mouth referral by customers also help the company promote auto show events. The growing automobile customer base especially in tier-3 and below cities has created a very high entry barrier for TuanChe's competitors, while allowed TuanChe to sustain competitive advantages.

Strong operational efficiency driven by customer data analytics capability

Due to the business nature of transaction-driven auto shows, TuanChe is well positioned to obtain comprehensive customers intelligence when customer signed up and walked in for auto shows, comprising contact information, preferred automobile brand and model, other automotive-related service needs and etc... Moreover, the company endeavored to construct customer intelligence database by converting offline traffic into online data, incentivizing attendees to submit questionnaires, and cooperating with call centers to conduct follow-up survey. Thus, by leveraging the big data analytics to procure customer insights, TuanChe is able to refine auto show planning, to maximize sales conversion rate during its offline event, and to achieve low customers acquisition cost at RMB 28.1 per customer attending the auto shows as well as an average of 4.7 sales and marketing personnel per in the six months ended June 30, 2018.

Enhanced value proposition secured by data analytics capability

Years of operational experience and big data accumulated since the year of providing group-purchase facilitation service equipped TuanChe for optimizing customer acquisition strategies, efficient offline auto show arrangement, and establishing network of over 10,000 industry customers to date. The availability of customers intelligence enable the company, through data-driven insight, to provide operational supports for automakers, franchised dealerships, and secondary dealers, including sales and marketing strategies, inventory management, and precision customer acquisitions. By materializing the value-added service to its industry customers, the company has initiated two platforms, virtual dealership and demand-side platform, to solidify a self-reinforcing network whereby industry customers can utilize TuanChe's data analytics to bring in precision potential customers and to optimize inventory sourcing. The data analytics capability also strengthens the company's operation efficiency.

III. Company Overview

Introduction

TuanChe Limited was founded in 2010 and is headquartered in Beijing, China. The company commenced automobile group-purchase facilitation business in 2010 and operated as a vertically integrated online-to-offline automobile facilitator. Through its online platforms and offline negotiating event with 4S dealers in China, TuanChe provides its customers with a favorable bargaining power to obtain an automobile deal and hence, brings a group of potential customer for 4S dealers to boost their sales volumes in a short period of time.

Though prospective customers have already decided on brand and model while participating in a group-purchase event, the company find that customer's brand loyalty have been decreasing and customers anticipate to have a many-to-many consumption environment to include multiple brands in one scenario. Such customers' behavior changes led the company to expand the group-facilitation service to auto show service in the last quarter of 2016, by leveraging its operational capabilities and the network of dealerships the company built through organizing offline events. Past experiences enable the company to launch virtual dealership business in the second quarter of 2018 by offering operating and marketing consulting service for car makers / dealers, targeting lower tier cities.

Business Segments

i) Integrated Marketing Solution

To offer the company's customers a smooth automobile transaction process and industry customers a scenario-based transaction opportunity, TuanChe provides a scalable omni-channel automotive marketplace approach to automotive marketing and distribution, by attracting potential car buyers through online platform to attending offline auto show events. The online traffic platform, http://www.TuanChe.com, originated as the transaction-driven customer acquisition approach enables the company to effectively approach targeting customers, followed by the offline transaction-facilitating auto show to fulfill transactions. Based on the record of volume and GMV of new automobiles sold in 2017, the company's omni-channel marketplace ranks third place in China, according to the iResearch report. The total GMV of automobile transactions facilitated through auto show reached around RMB 30 billion (US$ 4.5 billion) in 2017 and around RMB 21.4 billion (US$ 3.2 billion) in the first half of 2018. As of June 30, 2018, the company has accumulatively organized 645 auto shows across 119 cities in China, while facilitated an average of 549 automobile sales transactions per auto show. The chart below demonstrates how the value proposition of the integrated marketing solution to align customers' needs with dealers' objectives.

Exhibit 4. TuanChe's Business Model

Source: TuanChe F-1 filling

ii) Virtual Dealership

In June 2018, TuanChe launched its virtual dealership business, which was formed to create a bridge between automakers / franchised dealerships and secondary dealers in tier 3 and below cities, where automakers and franchised dealerships lack sufficient distribution channel and secondary dealers are having troubles to secure automobile inventory sourcing as well as sales volumes. The virtual dealerships intend to build a comprehensive network, targeting underserved market in tier 3 and below cities, by leveraging automobile inventory from automakers and franchised dealerships and localized distribution channel of secondary dealers. Through the virtual dealership, the company successfully facilitated 27 automobile transactions in June 2018, with a GMV of over RMB 2.5 million (US$ 0.4 million).

Exhibit 5. TuanChe's Virtual Dealership Model

Source: TuanChe F-1 filling

iii) Demand-side Platform

Based on its effective customer acquisition technique and big-data analytics capability, TuanChe launched a targeted online advertising and marketing solution for automakers, auto dealers and automotive service providers in 2018. The demand-side platform serves as a gateway to attracting precise targeted customers, to enhancing brand awareness and to maximizing automakers and auto dealers' customer conversation rate, empowered by the company's network of online and offline media outlets and proprietary data analytical models.

Intellectual Property

As of June 30, 2018, the company had registered 100 domain names related to its business, including the company's tuanche.com Website in China. The company also held 1 artwork copyright, 18 registered software copyrights, and 83 trademarks in China, including it "TuanChe" trademarks.

IV. Automobile Market Industry Analysis

Rapid and massive automobile market driven by lower tier cities market growth

Exhibit 6. New Passenger Car Sales, China, 2013-2022E (in millions)

Source: iResearch Report and TuanChe filing

China's automobile market has seen a rapid growth of new car sales over the past 5 years, with market sales increasing to 24.7 million units in 2017 from 17.9 million units in 2013 at a CAGR of 8.4%. Driven by the increasing urbanization rate and the increasing disposable income per capita, the sales volume is expected to reach 29.7 million units in 2022 at a CAGR of 3.8% during 2017 to 2022, according to the iResearch report. Though China's automobile market is expected to experience slower growth, the growth momentum varies between tier 1&2 cities and tier 3 & below cities. Tier 3 & below cities market is the key driver of the new automobile sales volume, expected to reach 16.1 million in 2022 at a CAGR of 7.3% from 2017 to 2022, compared with only 0.3% in tier 1 & 2 cities. Increasing affluence and improving infrastructure are driving the demand for automobiles in lower tier cities. In addition, the car ownership rate is only 96 cars per 1,000 persons in tier 3 & below cities, significantly lower than that of 220 in tier1 & 2 cities, leaving ample room for growth in the lower tier cities. By capitalizing on opportunities presented by the market trend, TuanChe intends to organically expand its geographical coverage from 121 cities to all cities across the nation, while being on the lookout for opportunities to grow inorganically.

Exhibit 7. New Automobile Sales Volume in Tier-1 & 2 vs Lower Tier Cities, China, 2013-2022 (in millions)

Source: iResearch Report and TuanChe filing

The ecosystem of China's Automobile Distribution Channel empowered the omni-channel automotive marketplace

The network of automotive distribution in China is fragmented and dispersed, due to wide geographic coverage of the China market. Automakers' franchised dealers were dominated in tier 1 or tier 2 cities, where there are, on average, approximately 123 franchised dealers per city, in contrast to 79 franchised dealers per tier 3 or below city, according to iResearch report. The major auto distributor in tier 3 and below cities are many local secondary dealers, as they contribute to over 50% of total automobile sales. As the market growth has shifted to tier 3 and below cities, the undergone rapid growth opportunity prompts automakers to expand franchised dealerships but cost considerations become main obstacles to penetrating into tier 3 and below cities. Moreover, secondary dealers also face challenges to enhance their scales of operation due to lack of marketing resource, customers' trust and automakers' support. Such hurdles provide a huge market potential for companies with online merged with offline platform to fill the gap. An omni-channel automotive marketplace delivers solutions for both parties by extending marketing reach to tier 3 and below cities without heavy cost burden and enhancing customer acquisition efficiency. On consumer side, almost 50% of car buyers begin online but they tend to fulfill car buying transaction offline, according to Bain & Company's report. As a result, the market size of the omni-channel automotive marketplace, in terms of transaction value, reached RMB 166 billion in 2017 and is expected to grow rapidly at a CAGR of 49.2% from 2017 to 2022, to reach RMB 1,228.5 billion, according to iResearch report.

Exhibit 8. Omni-channel Automotive Transaction Market Size, China, 2015-2022E

Source: iResearch Report and TuanChe filing

V. Growth Analysis and Earnings Review

Rapid revenue growth from expanding auto show geographical coverage

TuanChe shifted its operation to organized auto show from group-purchase facilitation service in 2017. The company not only expanded the auto show geographical coverage from tier 1 & 2 cities to lower tier, but also increased the frequency of auto show in the targeted cities. The successful transaction-driven auto show business model boosted the company's revenue growth doubled. In 2017, TuanChe's revenues from auto show increased by 419% to RMB 264 million from 2016 of RMB 51 million, driven by an increase in the number of auto show organized. Such increase drove the company's revenues growth by 139% to RMB 281 million in 2017 from RMB 117 million in 2016. In 2018 1H, the company also reported another robust revenue growth by 193.8% to RMB 269 million, compared with the same period of 2017. Revenue from the group-purchase facilitation decreased to RMB 17 million (-74.8 % y/y) in 2017, followed by decrease to nil in 2018 1H due to changing operational strategy.

The burgeoning revenue growth was mainly attributed to the unrelenting expansion of auto show geographical coverage across the county and the new business segments including virtual dealership as well as demand-side platform started to make contribution, which collectively are expected to further increase the revenue and improve operating performance in 2018 and beyond.

Exhibit 9. Revenues Breakdown by Segment (In RMB Thousands)

Source: TuanChe F-1 filing

Robust gross profit growth with high gross margin

The company's gross profit increased by 95.7% YoY to RMB 195 million in 2017 and by 207.6% to RMB 269 million in 2018 1H over the same period of 2017, however its gross margin declined by 15.4% to 69.5% in 2017 and bounced back to 72.5% in 2018 1H, mainly due to higher costs associated with auto shows arrangements leading to lower margin in the beginning. The company reported a net loss of RMB 87 million and RMB 91 million in 2016 and 2017, respectively, reflective of significant selling and marketing expenses incurred from promoting auto shows during the year. As the company is devoted to expand the geographic coverage and simultaneously scaling up the number of auto shows, the company is able to reducing set-up costs and spreading selling and marketing expense across auto shows organized through greater of economy of scale. In addition, given standardizing event planning and operating procedures, the company showed an increasing operational efficiency since 2017, evidenced by the decreasing total operating expense ratio from 95.0% of 2017 to 76.9% of 2018 1H. Nevertheless, the company's Non-GAAP net income, adjusted by share-based compensation expenses, realized a net profit of RMB 3.3 million in 2018 1H. As the company usually organizes more auto shows during last quarter of each year due to the consumption behavior of Chinese automobile consumers, the company is expected to experience higher revenue growth in the second half of 2018.

Exhibit 10. Gross Profit, Gross Margin (%), and Net Income (In RMB Thousands)

Source: TuanChe F-1 filing

VI. Risk

Geographic expansion risk

Market conditions and Business operations may be significantly different by region in China could make replicating the company's experience difficult. If the expansion efforts could not meet the expectation, it may adversely affect the performance of the company.

Regulatory risk

The regulation in China related to security administration of large-scale mass activities and temporary urban road occupation perhaps change, adversely affecting the company's ability to obtain the necessary permits for each offline events in the future. Moreover, government authorities may unexpectedly suspend the company's scheduled offline events due to a variety of reasons beyond the company's control. Collectively, such regulation changes and abrupt suspensions might adversely affect the development and performance of the company in the future.

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SOURCE: TuanChe Limited