Weak China Car Market Puts Brakes On Cheche's Growth - Cheche Group (NASDAQ:CCG), Xiaomi (OTC:XIACF)

Key Takeaways:

Cheche’s net revenue rose 1% year-on-year in the first quarter, lagging growth rates for the value and number of transactions on its platform
The results indicate both insurance underwriters and Cheche are facing pricing pressure from growing competition in a sluggish auto market

By Warren Yang

China car sales that remain stuck in the slow lane are putting the brakes on revenue growth at Cheche Technology Inc. (NASDAQ:CCG). The country’s recent proliferation of green vehicles provided one of the few sparks in the Tencent-backed online auto insurance company’s latest results announced last week. But a broader sluggish car market, combined with intensifying competition, are likely to make Cheche’s road to profitability an uphill climb.

Cheche reported its net revenue increased a mere 1% year-on-year to 787 million yuan ($109 million) in the first quarter. The revenue gain was markedly slower than improvements in the company’s other performance metrics, as well as car sales growth in China during the three months, according to its second earnings report as a listed company.

The total amount of written premiums for insurance policies distributed through Cheche’s platform increased 9.2% in the first quarter from a year earlier, while the number of transactions rose more than 20%.

The discrepancy between those growth rates indicates that both insurance underwriters and Cheche itself are facing pricing pressure, most likely due to stiff competition for business in China’s sluggish car market. Cheche’s underwriter partners may be cutting their policy prices to drive up sales in the competitive space. As that happens Cheche may be feeling pressure to lower its fees to support those partners, resulting in its nearly flat revenue growth despite the big increase in transactions on its platform.

Demand for new auto insurance is closely tied to vehicle sales. And the car market in China is sputtering as a slowing economy leads to intensifying competition among not only car makers and dealers, but also providers of related services like insurance.

During the first three months of this year, overall growth in vehicle sales in China grew an underwhelming 10.6% year-on-year.

Like many other players in China’s auto ecosystem, Cheche is getting a critical boost from the country’s new electric-vehicle (NEV) boom. The company started directly partnering with NEV makers back in 2022 in hopes of selling insurance to their customers. As part of the collaborations, Cheche embeds its platform in the carmakers’ operating systems to provide vehicle owners with easy access to a full suite of insurance functions, including renewals and claim submissions, as well as auxiliary services like repairs.

NEV Partnerships

In March, Cheche signed an agreement with an affiliate of Xiaomi (OTC:XIACF) to provide an auto insurance software-as-a service (SaaS) system for the smartphone maker, which launched its first electric vehicle to much fanfare that same month. Cheche will also offer services for Xiaomi car owners in various cities across China, including Beijing and Shenzhen.

Then last month, Cheche struck a partnership with Volkswagen’s China venture to become the exclusive NEV insurance service provider for the German automaker, which has some ambitious plans to catch up with local rivals in China’s battery-powered car market.

At the end of March, Cheche had partnerships with 11 NEV companies, which yielded 370 million yuan of written premiums in the first quarter, accounting for nearly 7% of the total for the period.

“The rapid growth of the NEV market has created new opportunities for auto insurance offerings and propelled revenue growth of auto insurance providers,” Cheche said in its earnings statement. “Cheche believes that the further growth of the NEV market and the introduction of innovative NEV auto insurance solutions will further fuel the revenue contribution of its partnership with NEV manufacturers.”

Cheche may be able to facilitate more insurance transactions through its growing tie-ups with NEV manufacturers, which may help to drive up its business volume growth. But growing revenue and improving margins may be more difficult, as the company’s first-quarter results show.

Various factors can stop Cheche from increasing or simply sustaining the fees it charges its partners, which are one of its main income sources. Competition among those partners is one such factor, particularly after regulators started allowing insurers to set rates freely in 2015, making pricing a key differentiator among policies. As an insurance broker and not an actual policy underwriter, Cheche doesn’t directly get squeezed by such competition. But it comes under pressure to lower its fees as its underwriting partners get squeezed.

On the expenditure side, Cheche also pays fees to its referral partners and other third parties, wiping out most of its revenue. Because of this, its gross profit margin was just about 4.3% in the first quarter, a bad figure for any business, never mind an online service provider that is typically expected to boast much higher margins.

The company’s overall operating expenses vastly outweigh its gross profit, which means it’s deeply in the red. It reported its adjusted net loss widened to 12.2 million yuan in the first quarter from a 7.8 million yuan loss a year earlier, partly due to post-listing fees related to its recent listing.

Cheche expects its revenue to increase 6% to 12% this year. That may look modest, but it’s not so bad when considering that the China Association of Automobile Manufacturers expects domestic sales of passenger cars to increase just 3% this year. NEV sales will grow far faster than the overall market, at a projected pace of more than 20%, meaning Cheche’s ability to drive deeper into that section of the market may determine whether it can hit its revenue target.

Cheche shares slid after its latest earnings disclosure, and have now lost almost 95% of their value since the company went public last September through a backdoor listing involving a merger with special purpose acquisition company (SPAC). They now trade at a depressed price-to-sales (P/S) ratio of just 0.17. Among comparable companies, the ratio for online car loan facilitator Yixin Group Ltd. (2858.HK) is higher but still not extremely impressive at 0.6, suggesting a lack of investor enthusiasm about businesses tied to China’s auto market.

As things stand now, Cheche seems to be facing a bumpy road ahead as it seeks to win back investor interest.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.

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