Lentuo Releases 2014 Chairman Letter

BEIJING, Jan. 7, 2015 /PRNewswire/ --

Dear Shareholders,

As we reported last year, China's love affair with the road is just beginning. It is also fair to say that it is changing, and that those changes are quickly bringing it into line with the paradigm of well-developed markets in North America, Europe, and Asia. At Lentuo, we see ourselves as first movers, taking advantage of market evolution, whether that market is shaped by the need for cleaner skies, or by more demanding customers, or by the rapid expansion of China's car culture outside its first tier cities.

What are the major factors driving change in China's market today? Recent regulatory changes have created a level playing field, particularly for auto dealers who now have more control over costs and an increasingly stronger say in their cooperation with auto manufacturers. The single biggest factor however, is the Chinese car buyer. 10 years ago, in 2004, when the total number of new cars sold was just 2.2 million, most of the buyers - excluding the government market - were taking to their own wheels for the first time. 10 years later, with new car sales of 22 million in 2013, and likely to be close to the same number in 2014, the auto consumer is maturing. The original buyer may want a second car; the first-time buyer may look to a pre-owned car if he or she can find the quality they need.

These changes in mindset are adding up to a major opportunity in pre-owned cars. In the first 11 months of 2014, new car sales were up just 4.6 percent while used sedan sales grew by 16 percent through October 2014 and used SUV volume was up by 21 percent. In the United States, one in five cars sold are new cars while the other four are pre-owned.

Margins on pre-owned vehicles were between 10 percent and 15 percent in 2013, much higher than those from sales of new vehicles. The China Automobile Dealers Association expects that pre-owned car sales will grow from about 3 million in 2013 to 10 million cars in 2015, 20 million by 2020,and 36 million by 2023. With the national expansion of our premium car business growing rapidly, we are ideally positioned to benefit from the massive growth in China's pre-owned car market.

At Lentuo, we are basing our strategy going forward on four pillars. We are expanding beyond our base in Beijing, a natural development as new markets emerge in second and third tier cities. We are bringing our premium brand strategy to this expanded geographic footprint, with our new BMW dealership in Gaobeidian, a high-growth city south of Beijing, and other initiatives. We are laying the foundation for our pre-owned car business through strategic partnerships - both with financial partners and strong operational partners for our new Online-to-Offline business. Finally, we are building up our after-sales services, which enjoys higher margins than automobile sales and is vital for brand building in both the new car and pre-owned car business.

Strategies for a new age

Let me begin a more detailed discussion of these strategic pillars with an appropriate reference to their impact, which has already been substantial. Our financial results through the third quarter speak for themselves. Net income was up by 31.8 percent compared to the first nine months of 2013, to RMB 40.8 million ($6.6 million) on revenues of RMB 2.4 billion ($323 million), a 0.5 percent increase compared to the first nine months of 2013. While we might wish to see higher revenues, we have been focusing on boosting margin and average unit prices, both for car sales and repair and maintenance services. By these metrics, we have had a spectacular year through September 30. Average new vehicle unit prices increased by 5.7 percent to RMB 175,289 ($28,558), the average unit price for repair and maintenance services increased by 18 percent, to RMB 2,321 ($378) and gross margin for repair and maintenance services was 42.2 percent, up from 38.9 percent. Our present outlook through the end of the year maintains this trajectory.

First pillar: Building our relationship with premium brands

Lentuo's national reputation is based on its high-end, concierge-like customer service as well as its association with premium brands, including China's top-grossing foreign brand, FAW-Volkswagen Audi.  

In 2014, we have made the strengthening of our high-end brand portfolio a strategic priority, as part of our focus on increasing margin and profitability, demonstrated by the increase in average unit price in car sales through the third quarter. Our strategy to strengthen our high-end brand portfolio was based on our decades-long relationship with FAW-Volkswagen Audi and our joint venture with Itochu Corp., the parent company of the legendary Japanese dealership Yanase. Itochu's confidence in Lentuo's future resulted in a RMB 300 million investment in the joint venture giving it a 40% equity stake in Beijing Lentuo Aotong Automobile Trading Co., Ltd., which we are leveraging to expand our high-end car sales and service network nationwide.

In an effort to replicate our long-standing relationship with FAW-Volkswagen Audi, we are in discussions with a number of other high-end brands. I am very pleased to report that BMW, China's second-grossing foreign brand, granted approval in October to become an authorized BMW dealer. This will be our first BMW dealership, located in Gaobeidian, just south of Beijing in the Beijing-Tianjin-Hebei economic triangle. This new dealership actually represents two pillars of our strategy - expanding our high-end brand portfolio and expanding geographically outside Beijing. Gaobeidian is a development and reform pilot city and an ideal location to attract customers from nearby cities, with a growing population and rapid economic growth.

Second pillar: Building brand visibility beyond Beijing

Although Beijing remains our operational hub, vehicle sales outside Beijing continued to grow at a faster pace, increasing 33.5 percent to RMB 430 million during the first nine months of 2014. With nine of our 12 dealerships located in Beijing, we are actively developing locations beyond the city to increase our brand visibility and recognition geographically. We currently have dealerships in Jiangsu, Zhejiang and Guangdong provinces and are exploring opportunities in other traditionally underserved markets in southwest China such as Yunnan, Guizhou and Sichuan provinces as well as wealthy cities in southeastern coastal areas. The BMW dealership in Gaobeidian represents the kind of opportunities we are seeking as it straddles two of our strategic pillars. In addition to being located outside Beijing, the 14,000 square meter facility also diversifies our high-end brand portfolio.

Third pillar: Certified pre-owned car business

In August, we signed a joint venture with Bitauto Holdings Limited and Youxinpai (Beijing) Information Technology, to build China's largest O2O platform exclusively focused on high-end pre-owned cars. Bitauto, one of China's foremost providers of Internet content and marketing services for China's automotive industry will build a dedicated portal listing pre-owned cars available for sale by the joint venture, linked to its huge data base of online sales and purchase leads. Youxinpai, a leading professional auto auction service provider, will provide its expertise in online auctions. Lentuo will contribute its state of the art offline resources in the pre-owned car business, including its physical facilities and experienced technicians and certification professionals.

Many of you will be aware that fragmentation and lack of credibility have been among the key weaknesses of the pre-owned car business in China. In April, we launched our own certification program based on a complete technical inspection and analysis of every pre-owned car offered for sale. We guarantee that they have no significant frame or internal damage, are in excellent working order and meet or exceed generally accepted standards for a particular make or model.

These cars, labeled Lentuo Certified Quality Cars, will be sold through our O2O platform initially from our pre-owned flagship store in Beijing, but moving beyond Beijing as we expand the geographic footprint of our pre-owned car dealership network. Our emphasis on quality and certification has made it possible to attract a significant financial partner, China Orient Tiantong Capital Management, a subsidiary of China Orient Asset Management Corp., a major state-owned financial asset management company. The strategic partnership with China Orient will help Lentuo provide adequate funding to our pre-owned car customers.

How can we make the pre-owned car business even more robust and sustainable? Beyond our in-house achievements, we are looking to join hands across company lines to work on a new pre-owned quality certification standard for all of China. This effort has been spearheaded by the Xing Certified Pre-Owned Car Alliance of the China Automobile Dealers Association (CADA). Lentuo, which joined the Xing Alliance in June 2014, is so far the only publicly listed company to do so. The Xing Alliance will oversee the nationwide rollout of CADA's pre-owned car technical inspection and analysis procedures.

Cars that successfully pass the tests in the Lentuo system will receive the Xing Alliance Certification in addition to the Lentuo Certified Quality Car Certification. The Xing Alliance represents a critical step in moving towards a unified and highly fungible market for pre-owned cars in China, where customers can feel confident in pre-owned car dealers and their products if that is what they choose to buy.

Fourth pillar: High-margin after-sales services

Our fourth pillar is very much a reflection of our increasing tilt toward premium cars. In the first nine months of 2014, we serviced 144,850 vehicles, essentially the same number as in the same period of 2013. Our revenues, however, increased by 17 percent to RMB 336.2 million ($54.8 million) from RMB 287.3 million in 2013, with the average unit price for repair and maintenance services increasing by 18.1 percent, to RMB 2,321 ($378).

Looking ahead

While our full-year results are still a few months away from release, I can tell you that I am confident we will sustain the momentum of the first three quarters through the end of the year. Last May, when we announced a share purchase plan for senior management, I described it as a sign of confidence in our long-term prospects. I am even more confident today. We made the right choices in moving our business model towards an emphasis on margins as much as market share. We hope that you, our shareholders, will share our confidence, and thank you for your loyalty and the trust you have placed in us.

Hetong Guo
Founder and Chairman, Lentuo International

IR Contact:

Lentuo Investor Relations
Telephone +86-10-8735-8388
Email: [email protected]

Christensen
Mr. Christian Arnell
Telephone +86-10-5900-1548 in Beijing
Email: [email protected]

Ms. Linda Bergkamp
Phone: +1-480-614-3004 (U.S.A.)
Email: [email protected]

SOURCE Lentuo International Inc.