Date
24 September 2017
Dah Chong Hong plans to acquire more car dealerships and expand the vehicle-financing business.
Dah Chong Hong plans to acquire more car dealerships and expand the vehicle-financing business.

INTERVIEW: DCH to bank on CITIC Group for business expansion

Dah Chong Hong Holdings Ltd. (DCH, 01828.HK), a Hong Kong-based distributor of motor vehicles and food products, plans to leverage the strengths of its parent firm, China’s state-backed CITIC Group, to expand its auto business in the next five years.

The company could seek capital support from CITIC Group for initiatives such as vehicle-financing and potential acquisitions of other car dealerships, chief executive Donald Yip told the Hong Kong Economic Journal’s EJ Insight.

“Dah Chong Hong will gain capital support from the parent, as well as leverage the CITIC group network,” which includes China CITIC Bank Corp. Ltd. (00998.HK, 601998.CN), Yip said in an interview.

DCH, which is 56.7 percent owned by CITIC Group, is involved in car dealerships, auto-financing, vehicle insurance, car rentals, auto spare parts trading.

“One of our options in auto-financing business is to leverage CITIC’s support as this business requires a lot of capital,” Yip said. “However, we will use our own cash first.”

The company’s cash and bank deposits totaled HK$2.17 billion (US$278.9 million) as of end-December last year. DCH announced a business plan in February 2014, saying it aims to double its revenue and net profit in five years, with auto-financing and acquisitions of other car dealerships a key part of the strategy.

In previous years, the company reaped commission income by helping clients to line up leasing services with financial institutions. As there is increasing demand for auto-financing, DCH will take up the business with fresh vigor this year after a value-added tax reform is implemented in China.

“Today, 20 to 30 percent of car buyers seek financing for their vehicles; in big cities almost half of them are doing so. This compares with less than 10 percent three to four years ago,” Yip said, adding that DCH’s “auto-financing business will grow along with our car sales”.

“Regarding sales, we believe that demand for heavy-duty trucks will recover as… infrastructure development picks up,” the CEO said. He attributed a sales decline in China last year to weaker orders for those trucks amid a slow pace of infrastructure development in the country. Yip expects 10 percent growth in commercial and private car sales in the mainland this year.

Subsidies from the Hong Kong government will also help to boost DCH’s business. The Hong Kong government introduced an HK$11.4 billion ex-gratia payment scheme earlier to encourage the replacement of aged diesel commercial vehicles. DCH is said to hold 50 percent of the truck and bus market in Hong Kong.

To expand its business, it is also important for DCH to grow its 4S stores in the coming years. The 4S outlets provide complete services ranging from sales and service to spare parts and customer surveys. The company plans to open 10 to 15 such outlets annually.

“There are eight to ten stores under construction at the moment; the rest of the target is expected to achieved through acquisitions,” Yip said.

“There was a boom in the industry in the past few years which prompted investors to set up dealership companies. However, some of them are not well-managed or the owner is not familiar with the industry — those are our target firms,” he said.

Yip did not provide a specific figure for the planned capital expenditure, but said it will not be large.

Green cars

Both China and Hong Kong are promoting the use of green cars, fueling expectations for a boom in the segment. Yip, however, is not too optimistic.

“It is good for the two governments to encourage the use of green cars, but it is difficult to implement in Hong Kong, not to mention China, as the [support] infrastructure is not in place,” he said.

“Hong Kong is actually a good place to start with, but users are new to the technology and uncertain about how many miles they can drive with a single charge,” Yip said, adding that “the government did not do much to help.”

“There are not enough charging stations in Hong Kong. It doesn’t make any sense if there are no green car chargers in the car parks of housing estates, or if drivers cannot find a facility to charge their cars within 10 minutes driving distance if their vehicles run out of power.”

Yip urged the Hong Kong government to provide more support to green cars, and added that authorities should chart out a comprehensive plan to address issues such as charging stations.

In the mainland, most provincial governments unveiled plans this year to promote alternative energy vehicles as part of efforts to reduce air pollution. Twelve of the 31 provinces and regions have listed the new-energy vehicle industry among the top sectors for expansion this year, the China Securities Journal reported earlier this month.

Beijing, for example, will grant subsidies to encourage the use of such vehicles, while Shaanxi will host a project funded by Hyundai Motor Co. and Samsung SDI to produce electric batteries for vehicles, the report said.

Yip, however, pointed out that the green car industry in China is still in its infancy.

– Contact the reporter at [email protected]

RC

Ayishah Ma is a financial reporter on Greater China issues.

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