Bitauto: Positioning To Capitalize On The Pre-Owned Segment

| About: Bitauto Holdings (BITA)


Bitauto's recent JV with LAS and Yongda reflects the company's commitment to enter the fast-growing used car segment.

The JV with LAS will focus on northern China, while the JV with Yongda will focus on eastern China.

Dealers are the ultimate winner of this deal, while the benefits to Bitauto remain to be seen. Reiterating my cautious view on the stock.

Bitauto (NYSE:BITA) announced that it has formed a joint venture with Yongda Group (3669 HK) and UXIN to ramp up its used car website, This is the second major announcement since last Friday, when Lentuo (NYSE:LAS) announced that it has formed a JV with BITA and UXIN to focus on the high-end pre-owned market, with Beijing as a starting point for a nationwide expansion. The JV with Yongda, a Shanghainese incumbent dealer, allows BITA to capture the used car market in eastern China by leveraging Yongda's >40 luxury and >30 mid/high-end dealerships. The two JVs are encouraging signs in that they reflect management's commitment to ramp up on its used car platform after consecutive quarters of sluggish sales growth, but I am cautious on the shares, as it is still too early to tell whether this strategy will succeed.

JV with Lentuo to focus on northern China

BITA, LAS and UXIN formed a JV to integrate each other's resources to build the largest O2O platform that exclusively focus on high-end pre-owned cars. LAS will own 60% of the JV, while BITA and UXIN will own 20% each. The goal is to combine BITA's online database, nationwide user base and big data analytics with UXIN's expertise on online auction and Lentuo's offline dealership network into a single platform, so that it could take advantage of China's fast-growing used car market. The JV will initially focus on the Beijing market before expanding nationwide.

Under the agreement, BITA will be responsible for building an online portal dedicated to used cars that are available for sale for the JV. BITA will then direct its online sales lead for the high-end used cars to the JV portal. I suspect that will play a role here in that some of the sales leads for high-end used cars will be routed to the JV site.

After 45 days of unsuccessful listing, the model will then be directed to UXIN's auction system, where it is sold to the highest bidder, thereby facilitating a timely disposal of inventory. Once the transaction is finalized, Lentuo will provide the shipping and handling, as well as the certification, refurbishing and inspection. Additionally, Lentuo will look to offer after-sales services, vehicle financing, auto leasing and insurance to the buyers.

JV with Yongda to focus on eastern China

Yongda is one of top ten largest car dealerships in China in terms of sales. The company is based in Shanghai, and has been aggressive in network expansion via both organic growth and M&A. Currently, Yongda focuses on the luxury and high-end segment, including brands such as Porche, JLR, BMW, Audi and Inifiniti. In addition, there is also a portfolio of mid-end brands, such as Buick, Toyota and VW. With the majority of its dealership network centered in Shanghai and neighboring provinces such as Jiangsu and Zhejiang, Yongda is well-known for its one-stop shop services. In addition, the company is one of the earlier pioneers of auto-leasing services for the used car market. While the specific terms of the JV was not disclosed, I suspect that it is similar to that with LAS, in which Yongda commands 60%, while BITA and UXIN each commands 20%.

My view of the two JVs is that the dealers are the ultimate winners in that they can leverage BITA's large database and analytics to better cater to its customers, while BITA may see incremental commissions paid by LAS and Yongda. Moreover, I suspect that not all models from LAS and Yongda will be available for the pre-owned JV. For example, Yongda only specializes in one pre-owned brand with BMW, and there is a risk if BMW demand in China begins to soften. I remain cautious on BITA's shares due to rich valuation and competitive pressure from Autohome (NYSE:ATHM).

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