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On November 22, the TuanChe (TC) IPO will booty abode on Nasdaq. TuanChe is a Chinese automotive exchange that sells cars by administering “auto shows,” bringing calm sellers of new vehicles, abeyant buyers and providers of aftermarket services.

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The aggregation affairs to accession $25.5 million, with a absolute assets of $558 million. Admitting the adequately aerial price-to-sales assorted of 8x, the aggregation looks undervalued to aeon based on advanced multiples due to astounding acquirement growth.

TuanChe was founded in 2010 and was initially affianced in accouterment casework for accumulation buying. Back in 2016, this business brought the aggregation about bisected of its revenue, but already in the aboriginal bisected of 2018, TuanChe alone this business, absorption on auto shows and ablution a new action “virtual dealership.”

The company’s acquirement for the aboriginal bisected of 2018 was $40.7 million, an access of 195% compared with the aboriginal bisected of 2017. At the moment, the aggregation is unprofitable, but the net (loss) allowance bargain from -74% in 2016 to -8% in 2018, and it is actual acceptable that the breakeven point will be accomplished in 2019.Source: F-1

During the accessible offering, TuanChe affairs to accession $25.5 million, affairs 3 actor ADSs, which represent 12 actor Class A accustomed shares. The company’s allotment basic anatomy includes two types of shares: Class A and Class B. Class B shares are endemic alone by the capital actor – Wei Wen and gives 15 votes, adjoin one vote for Class A, which allows appliance sole ascendancy over the aggregation alike afterwards an IPO.

Shares will be offered in the bulk ambit of $7.5-9.5 with the appraisal of $492 to $623 million. The IPO will booty abode on November 22 on the Nasdaq. The underwriters of the IPO are Maxim Accumulation and AMTD Tiger.

The aggregation affairs to use the net gain of this alms as follows:

Source: F-1/A

Some absolute shareholders including Honor Depot Limited, BAI GmbH, and K2 Partners II L.P. bidding absorption in affairs shares of the aggregation during the IPO in the bulk of $15 million. Such a able absorption in affairs shares of the aggregation is a absolute factor, but at the aforementioned time retail investors accept alone 41% of the shares placed on the IPO (59% will be awash to the absolute shareholders). Therefore, we will best acceptable see bulk backpack aloft the accustomed ambit due to about low accumulation of shares.

The blueprint beneath shows how rapidly auto sales are growing in China. At the moment, 185 actor cars are registered in China, but at the aforementioned time, the buying bulk is rather low compared to the USA. China alone has 133 cars per 1,000 persons, while the United States has 845 cars per 1,000 persons, advertence cogent allowance for affiliated advance of China’s auto market.

According to the iResearch report, car sales aggregate of both new cars and acclimated cars in China grew rapidly at a CAGR of 8.9% from 2013 to 2017 and is accepted to added access at a CAGR of 9.8% from 2017 to 2022.

The advance of car sales in China is associated with the advance of urbanization, the advance of basement and the advance of disposable assets per capita. At the aforementioned time, in the abbreviate to boilerplate term, China’s car bazaar may apathetic bottomward due to barter wars with the United States.

Source: Tradingeconomics

TuanChe is accession itself as omni-channel exchange implying affiliated sales through online and offline. The bazaar admeasurement of the omni-channel automotive marketplace, in agreement of transaction value, is accepted to access from RMB 166.0 billion in 2017 to RMB 1,228.5 billion in 2022, apery a CAGR of 49.2%.

Source: F-1

The business archetypal of TuanChe, according to the company, is different and has no analogs. But at the aforementioned time, the aggregation alleged Bitauto (BITA) and Autohome (ATHM) the abutting competitors.

TuanChe calls itself the omni-channel automotive marketplace. The online basic of this exchange is bidding in the armpit tuanche.com and the accompanying WeChat application. Prior to the barrage of the basic dealership in June of this year, online assets acted as business solutions to allure barter to the offline platforms. The offline basic is auto shows, whose action is to amalgamate on the aforementioned belvedere a aggregation of auto dealers with buyers.

The aggregation earns on auto shows primarily due to commissions for sellers and aftermarket, banking and allowance casework providers. In 2017, the aggregation captivated a absolute of 304 auto shows, admitting in the aboriginal bisected of 2018, the cardinal of auto shows has already exceeded 315.

TuanChe allows sellers to get added customers, and buyers a advanced automotive ambit at an affordable bulk (the aggregation seeks to abate prices by an boilerplate of 7.3% of the retail price, which attracts buyers).

Source: F-1

In June 2018, TuanChe launched a basic dealership and has already fabricated its aboriginal sales through a new service. Beneath is a account anecdotic the assignment of basic dealership. The action of the new account is mainly aimed at consumers in Tier-3 cities, breadth accessory dealers are operationally bound due to abate abundance area, bound car selections, and abridgement of acceptance amid consumers, which opens up opportunities for TuanChe.

Source: F-1

The company’s acquirement is growing at a amazing pace. Acquirement for the aboriginal bisected of 2018 was $40.7 million, about as abundant as for the absolute 2017.

Revenue advance dynamics:

TuanChe has a huge befalling to abide this accelerated acquirement advance by accoutrement added Tier-3 cities and by the development of basic dealership segment.

Source: F-1

The accelerated advance of the business calibration allows the aggregation to abate the allotment of SG&A costs to revenue.

SG&A dynamics (to revenue):

The abridgement of operating costs accustomed the aggregation to access an operating accident abutting to zero. By Non-GAAP standards, the aggregation in the aboriginal bisected of the year showed a net accumulation of $500 thousand.

Continued acquirement advance and bigger margins will actual acceptable acquiesce the aggregation to access GAAP breakeven as aboriginal as 2019.

Source: F-1

At the end of the aboriginal bisected of 2018, the company’s banknote position was $23 million, which is about 2 times the anniversary banknote address from operating activities. In addition, the aggregation aloft an advance of $52.3 actor in the third division of 2018.

In backward September, TuanChe aloft its aftermost advance annular of $52.3 million. Based on the cardinal of shares accustomed by investors, the bulk per allotment was $9.7.

During the IPO, the aggregation affairs to accession addition $25.5 actor at a mean bulk of $8.5 per share. It should be acclaimed that due to the not absolutely optimal altitude in the banking markets, the aggregation has alert bargain the bulk of IPO.

After a acknowledged IPO, TuanChe bazaar assets will be in the ambit of $492-623 million. At mean price, we get a balloon price-to-sales arrangement of 8x. Forecasting acquirement advance in the abutting 12 months by 150%, we get a advanced P/S arrangement of hardly added than 3x.

One of the company’s competitors, Autohome, has a advanced P/S arrangement of 7.8x, admitting a decidedly slower acquirement advance rate. Autohome abundantly surpasses TuanChe in gross and net margins, but at the aforementioned time, such a aberration in appraisal does not attending absolutely reasonable. Also, for example, we can booty for allegory the Chinese aggregation Uxin (UXIN), which captivated an IPO this year. With a net allowance of -140%, and acquirement advance ante of 60-70%, the aggregation is additionally admired at about 3x advanced revenue, which makes TuanChe about bargain at the antecedent bulk range.

Despite the contempo able abatement in the US markets, contempo IPOs of Chinese auto-related companies including Niu (NIU) and NIO (NIO) are in the blooming zone.

TuanChe operates in a actual fast-growing bazaar with a absolutely different and accurate business archetypal that allows the aggregation to abound at a amazing clip and dynamically advance margins acknowledgment to its operations scale.

The contempo advance annular at a bulk of $9.7 per allotment suggests that any bulk in the antecedent ambit from $7.5 to $9.5 looks absolutely attractive.

Disclosure: I/we accept no positions in any stocks mentioned, and no affairs to admit any positions aural the abutting 72 hours.

I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I accept no business accord with any aggregation whose banal is mentioned in this article.

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