Key Investment Thesis

► CAR’s price is underestimated with respect to its market position. Affected by the Luckin Coffee fraud, the stock price of CAR Inc. is at a historical low. However, the operation of CAR Inc. is independent of Luckin and it remains the largest player in the Chinese car rental market. This makes it a promising asset – and investors are beginning to take notice.

► Large OEMs have an appetite for slices of shares in robust assets, which will be a big catalyst for CAR. Such a deal could help the automobile manufacturer to struggle through the tough times. The partnership ought to boost car orders and production, as well as build networks through the travel industry. 

Key Investment Risks

► CAR’s stock price trend is driven by events, which may lead to excesses. Following BAIC’s share purchase deals, investors might push CAR Inc.’s price towards an overestimated level. Our suggestion for investors is to buy if the price is below HKD 3.4.

‘The Luckin Event’ drags the price down – and at the same time creates an opportunity to enter 

Beijing China Auto Rental Co. (CAR Inc.) is the largest car rental company in China. Its parent company UCAR, a comprehensive car service provider, now holds 29.76% shares of CAR Inc. UCAR and CAR had the same chairman, Zhengyao Lu, who was also the chairman of Luckin Coffee. Due to the infamous Luckin Coffee fraud (more details here), CAR, although operationally independent, was also greatly impacted on the capital market. 

The share price of CAR has dropped to less than HKD 3 – from HKD 4.3 on April 1. Meanwhile, as the main manipulator behind Luckin Coffee, Zhengyao was sued by international investment banks for his loan default. Under such financial pressure, UCAR is planning to sell its shares of CAR Inc., causing the price of CAR Inc. to depreciate further. Receiving this information, Automobile giants BAIC and SAIC – and international PEs such as Warburg Pincus – have shown positive signals about acquiring UCAR’s shares and taking control of CAR. 

CAR Inc. remains a stable market position in its sector. Its fleet has more than 140, 000 cars, much more than second-ranked player eHi’s 77000. With services operating in more than 300 cities, and 10 million registered customers, CAR Inc. is the best-known car rental brand in the Chinese market. 

Why is CAR targeted?

During the last 4 months the stock price of CAR Inc. (HKG.0699) has been highly event-driven. It plunged more than 50% in just one day after Luckin Coffee’s announcement of the internal audit on fabricated sales figures on April 3. There were two obvious increments at the beginning of June and July, as the result of two acquisition proposals. 

On June 1, CAR Inc. announced that it had reached an agreement (without legal effect) with BAIC Group; BAIC would acquire at most 21.26% of CAR Inc.’s total issued shares. A month later, on July 2, a new proposal came out, stating that SAIC Motor agreed to acquire at most 28.92% of CAR Inc.’s issued shares at a price of HKD 3.1, much higher than the stock price on the market. 

Compared with the agreement of BAIC, the proposal of SAIC is more detailed, though it is still not a confirmed acquisition. SAIC agreed to purchase a larger number of shares, with a higher price compared to BAIC; this is supposed to be the main reason that CAR Inc. turned to SAIC from BAIC. The latest news came on the morning of July 20 – SAIC decided to terminate the purchasing plan, causing a 15% drop in its stock price from the open price of HKD 3.16. It became more dramatic several hours later, as UCAR announced it would sell its shares to BAIC at HKD 3.1.

Top automobile manufacturers with strong capital resources are interested in the car rental business. The automobile market has been decreasing since 2018, and the gap between the number of drivers and automobiles has kept an increasing trend, indicating a growing car rental demand. Traditional manufacturers are trying to diversify their business by entering the travel industry. CAR Inc., as the top car rental company, has thus become an ideal target.

CAR Inc. has remained in a poor financial state since 2016, with a total revenue fluctuating around CNY 7 billion. The net income of 2019 contracted around 40 times compared to 2016, which was mainly due to car depreciation and the sales cost of second-hand cars (according to the firm). 

In financial statements, values of depreciation and sales costs are greatly affected by the methods the company chose to apply. Thus, these terms are most easily manipulated to affect the financial performance that is shown to the public. 

During CAR Inc.’s IPO in 2014, analysts claimed that CAR Inc. had adopted an inappropriate method to calculate the amount of depreciation. This served to pass some costs to the future and thus polish the bottom line. The deteriorating profitability shown by the financial statements is partially the result of the financial plan. Thus, CAR Inc.’s operation is believed by some PE’s to be better than what is shown to the public. 

Entry point

CAR Inc.’s value is underestimated because of the management team’s manipulation in the early years, as well as the recent Luckin Coffee fraud. It remains a good asset in the car rental industry. Automobile OEMs want to acquire CAR Inc. to enter the car rental market, while UCAR is eager to sell its shares for cash. If BAIC is able to integrate CAR Inc. into its business scope, CAR Inc.’s stock price is very likely to return to a higher level.

BAIC’s purchase today brings some temporary ease to UCAR but more turbulence to CAR Inc.’s stock price. Trading of CAR Inc.’s stock was shortly suspended from 1 pm, July 20 local time due to the announcement of BAIC’s purchasing. After the suspension, the stock price is expected to rise along with an increasing trading volume. Our suggestion is to long CAR Inc.’s stock if there is a trading opportunity at a price lower than HKD 3.4.

*This article was finished on July 18, 2020 and updated with the offer price of HKD 3.1 by BAIC on July 20, 2020.