Key Concepts of Baoxin Auto Group and Questions (KCQ's)

After sitting down and reading through Baoxin Auto Group's Annual Report for 2013 I have developed a bit of an overview of the company and my view of some key concepts of Baoxin Auto Group as well as some questions I have so far.


WHAT DOES BAOXIN AUTO GROUP DO?

Baoxin Auto Group holds the leading position in the luxury and ultra-luxury dealership market in China (According to them.)

Their key business consists of:
- 91 Automobile Dealership Stores (Car Sales)
- After-sales service, Used Car dealerships, financing and insurance directly relating to the sales of cars in their dealership stores


WHAT ARE THE MOST IMPORTANT / CRITICAL ELEMENTS TO BAOXIN AUTO GROUP'S BUSINESS?

- The locations of their Automobile Dealership Stores are critical to their success (Ensuring that they cover popular and affluent regions - basically making sure they reach their target customer base and have them walking into their stores)

- Having strategic relationships with the Global Leading Luxury & Ultra-Luxury automobile manufacturers - basically ensuring they can have the right cars to sell to their customers.

- After-sales & retaining their customers - ensuring they bring their car back to Baoxin for servicing etc.

- Further developing the business in the area of "Pre-Owned" Vehicles as this market is in earlier stages in China compared to the rest of the world and has the potential to really "Take off."


WHAT ARE THE KEY CHALLENGES FACING BAOXIN AUTO GROUP'S ONGOING SUCCESS?

a) The new luxury car industry is, and always has been cyclical. It is highly dependent upon the stability of the macro economy.

b) The integration of the NCGA Group (recently taken over by Baoxin)

c) Volatility in the market


WHAT ARE BAOXIN AUTO GROUP DOING TO MEET THE ABOVE CHALLENGES?

Obviously, just looking at their financials, Baoxin are certainly currently successful in meeting their challenges. Their revenue is up 66% on the previous year and Gross Profit is substantially higher (From 1,583 RMB Million in 2012 to 2,920 RMB Million in 2013)

They are individually focussing on the challenges I listed in the questions above in the following ways:

a) Baoxin are heavily focussed on developing their after-sales service. This area is more resistant to change then car sales themselves due to the simple fact that there is stability and predictability in owner's requiring their cars to be serviced. Generally, in the luxury market this is a key money maker because owners of luxury vehicles have more discernment for quality and want to keep their cars in a better condition, meaning they will often always have their dealer service their vehicle. Even if sales are down, generally car servicing will continue to provide steady revenue as cars need to be serviced.

b) Baoxin have fully integrated NCGA into their business by reducing the operating, administration and financial expenses after carefully analysing and collating the cost structure and expenditure items - basically streamlining their business and ensuring that they have cleared idle assets and resources that are not required.

c) Baoxin acknowledge the volatility in the market and have continued to improve their inventory management system to ensure that the business does not over-capitalise on inventory and to ensure supply and demand is constantly monitored. They also use inventory level statistics as performance criteria to measure their employees success.


KEY QUESTIONS I HAVE SO FAR:

1) The very first thing I noticed is that Baoxin Auto Group is incorporated in the Cayman Islands. This raised a number of questions for me including:

- Does the company lack the confidence in their very own Government to have their company listed locally in China? 

- Does this negatively affect the reputation of the Company because they are trying to minimise the regulation placed upon them?

- Is the company minimising tax by registering in the Cayman Islands - is this common practice being registered offshore or is it quite normal?

- Could it be simply considered a good move for them because it is minimising cost?

2) My firm's annual report doesn't seem to mention any HSE performance. In my opinion and experience to date, it is of utmost importance for firms to be accountable for safety and environmental performance. Is this something that would normally be discussed in an Annual Report?

3) What are Baoxin doing for the wider world in terms of sustainability? Is this something normally appearing in Annual Reports (EG do they sponsor events, contribute to improving the road toll through education & training, do they have any environmental targets?)

4) What is Purchase Restrictions Policy (P9 of my AGM Para 3)?

5) What does this mean: "Regarding luxury automobile market, the major customers group of luxury automobiles has shifted from ultra-high net worth class in the past to middle and upper classes." (P.9 of Baoxin Annual Report Para 3)

6) Sometime during the past 12 months, Baoxin has taken over a company called the NCGA Group. This raises a few questions such as:

- How successful was the take-over REALLY? Does the Annual Report accurately reflect this?

- The Annual Report includes "Severances due to the take-over of NCGA Group" as a significant reason for administrative costs in 2013. Did Baoxin do a good enough job of making sure that these severances were unavoidable? Could the workers have been "re-homed" within Baoxin?

--------------------------------------------------------------------------------------------------------------------------

I will continue to further investigate these questions and discuss with others to hopefully provide some insight and also continue to develop more questions, as well as my ultimate understanding of Baoxin Auto Group and what their financial statements have to tell us.