• Tue
  • Sep 30, 2014
  • Updated: 6:55pm
BusinessChina Business
CAR INDUSTRY

Zhongsheng a tale of life in the fast lane

Car dealer goes from strength to strength in 16 years, with the lucrative after-sales sector picking up slack when profit margins fall

PUBLISHED : Monday, 20 August, 2012, 12:00am
UPDATED : Monday, 20 August, 2012, 5:36am

It looked like an ordinary car dealership found anywhere on the mainland, with long glass windows showcasing the latest car models and a handful of neatly dressed agents waiting with their sales pitches.

But when that outlet - the mainland's first authorised Toyota dealership - opened in the port city of Dalian 16 years ago, it marked the birth of Zhongsheng group, now the biggest Hong Kong-listed car dealer by market value. The company aspires to double its annual turnover and become the mainland's biggest dealer by 2015. Besides Toyotas, Zhongsheng sells other brands, including Mercedes-Benz and Audi.

"When the outlet, then known as the 3S shop, opened in 1996 there was not much concept of private car ownership in China. All vehicles were owned by corporates and the government," chairman Huang Yi told the South China Morning Post. "But I opened it anyway as both Toyota and I believed it was only a matter of time before China would develop a retail market for individual auto buyers."

He was right.

In 2009, less than a decade after retail car sales became commonplace in China, the country over took the United States as the world's largest car market. In the five years to 2011, new car sales grew an average of 24 per cent a year. While growth has slowed, global carmakers believe China will remain the most prominent growth story for many years to come.

"Before 2000, all foreign brands were imported by wholesalers. Few people could afford a car due to their low consumption power and the hefty duty imposed on imported vehicles, which represented 150 per cent of the vehicle's price," Huang said.

His wholesale car business, a trading company that required only an office, a secretary and a few clerks, was profitable. But his first Toyota retail outlet, which cost US$2 million to set up, suffered losses for the first two years. Just when things started to get on track, a trade war erupted between Japan and China, stopping imports of Japanese cars.

"For more than half a year I didn't get to import one single car," Huang said. "Luckily Toyota was very helpful and they delayed payment for the cars I had bought from them."

At that time, Huang relied solely on after-sales service for survival. That experience, together with training sessions provided by Toyota's head office, made him realise that being a car dealer was not just about selling cars.

"If you only care about sales," he said, "you've lost your chance to capture" a new business stream when car sales slow.

Life was pretty much a straight road for Zhongsheng after the trade war. Toyota's "domestication" in 2002 when it started making its own cars in China helped push Zhongsheng into the fast lane.

By 2007, the company had expanded to 20 outlets. It was listed on the Hong Kong stock exchange in 2010.

Although Zhongsheng derived 90 per cent of its revenue from new car sales last year, after-sales service is where the earnings growth lies. At the end of last year, the profits from sales and service were almost evenly split.

Ahead of the company's announcement of its interim results today, Morgan Stanley wrote in a research report that said it expected Zhongsheng's net profit to fall 37 per cent to 332 million yuan (HK$406 million) due to lower profit margins on new car sales. But it said that without strong growth in after-sales service and commission gains from services such as vehicle insurance, the decline would have been sharper.

Huang said new car sales jumped by a double-digit figure during the first five months but a price war between Audi, BMW and Mercedes had squeezed profit margins. Several other financial institutions echoed Morgan Stanley's view and slashed their target price and earnings per share for the year by between 35 and 48 per cent. But of 18 firms that track Zhongsheng's performance, 11 still recommend buying the stock.

These supporters believe Zhongsheng will see higher sales next year when the mainland's luxury car sector goes up a gear. Some analysts say the pressures on China's car industry -such as high inventories, squeezed profit margins and escalating costs - already are reflected in Zhongsheng's stock price, which closed at HK$9.21 on Friday, below its IPO price of HK$10.

Like its rivals, Zhongsheng has quickly expanded over the past two years in a bid to secure its position in an increasingly competitive market.

Two years ago, the Ministry of Commerce said Beijing wanted to consolidate the highly fragmented dealership market. The goal is for two or three dealers, each with annual turnover exceeding 100 billion yuan by a target date of 2015, to emerge to represent the major brands. There would also be 20 to 30 smaller dealers with sales of about 10 billion yuan each.

Zhongsheng, which had turnover of 49 billion yuan last year, said it aimed to be one of the top three.

Reaching an annual turnover of 100 billion yuan "is absolutely possible", Huang said.

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