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AutoChina: Weighed down by mounting costs

2010-09-07: Strong second-quarter results can't disguise the fact that truck leasing firm AutoChina International (AUTC.NASDAQ) is still burning cash AutoChina International (AUTC.NASDAQ), a leading commercial vehicle leasing company, reported revenues of US$202 million for the second quarter, up 67% on the first three months of the year, while net income rose 75% to US$11 million. On a year-on-year basis, revenue and income increased by an astounding 220% and 188% respectively.

As of June 30, AutoChina had 14,638 vehicles out on lease, with 4,130 new leases in the second quarter compared with 2,507 in the first.

Yes, the results look impressive, but SinoSage remains fo the view that AutoChina survives on a diet of capital injections because its business model is not sustainable.

Following a capital injection of US$177 million in 2009, the company raised a total of US$242 million in the first half of 2010 – US$91 million from short-term borrowing, US$74 million in loans from affiliated firms, US$10 million in exercised warrants and US$66 from a secondary offering.

Yet AutoChina still managed to produce a negative cash flow of US$6.3 million for the first half. Where did this cash go? Big ticket items of the US$248.3 million total spend included US$6.8 million on expanding the company’s network of sales and leasing outlets, US$39 million on loan repayments, US$140 million on new vehicles and US$57.7 million in deposits for future vehicle purchases.

The pressure on AutoChina’s finances is only going to intensify as the company expands. It expects to lease 5,363-6,363 vehicles and open 82 more branches in the second half of 2010. If a truck is priced at US$40,000 on average, the total purchase cost will be around US$234 million (excluding other sales costs). With US$55.2 million in working capital at the end of June, AutoChina needs to find a further US$178 million in the next 12 months.

Luckily, the company recently announced that it has secured US$78 million in loans from three Chinese banks: US$37 million from Industrial and Commercial Bank of China (601398.SH, 1398.HK), US$29 million from China Huaxia Bank (600015.SH) and US$12 million from China CITIC Bank (601998.SH, 0998.HK).

That still leaves AutoChina US$100 million short. SinoSage believes the company will raise this through its affiliated partners and banks, a practiced habit from past quarters.

In March, AutoChina placed a secondary offering of 2 million shares at US$35 each, generating US$70 million. In August, it decided to repurchase the shares at a price below US$35. Based on the current price of US$22.79, the company stands to make a profit of US$24.4 million.

It is unclear how AutoChina plans to finance this purchase in its current circumstances. SinoSage suspects the company won’t repurchase all the shares – the secondary placement looks appears to be nothing more than an exercise designed to express management’s confidence in the business.

Smart investors should see through this charade – just as they should see through the strong earnings announcements and recognize what SinoSage has been saying all along: AutoChina is effectively on life support, spending more in six months than it makes in 26 months and relying on external funding to stay in business.

This remains a stock to avoid.