April 12, 2016 6:07 a.m. ET
Hong Kong-listed CAR, China’s largest car-rental firm, had a promising start as the nation’s largest pure-play auto-rental firm when it initially sold its shares in 2014. But quickly, management has shifted focus to its ride-hailing affiliate, UCAR, leaving investors feeling like the vehicle they rented is missing some key features.
The main issue is a shifting of resources from CAR to UCAR, which is privately held and is both CAR’s largest shareholder and its largest customer. UCAR rents CAR’s vehicles for its drivers. Last month, CAR founder Charles Lu sold his stake in CAR to UCAR. In exchange, Mr. Lu became UCAR’s controlling shareholder.
This week brought news that Mr. Lu, who served as CAR’s chief executive, will leave that role, though he will remain chairman and become a nonexecutive director. Muddying the waters, he will begin serving as UCAR’s CEO instead. CAR’s chief operating officer, who has been with the company since its founding, is also following Mr. Lu. Meanwhile, messy cross shareholdings mean UCAR holds a 29% stake in CAR, while CAR maintains a roughly 10% stake in UCAR. It’s enough for lost investors to throw the map out of the window.
CAR management says Mr. Lu still indirectly owns CAR through his holding in UCAR, and that there is no difference between a direct and indirect stake. Plus, UCAR’s significant shareholding in CAR now solidifies the two as related parties, a previously ambiguous link. CAR will be forced to disclose details of its rentals to UCAR.
European Pressphoto Agency
More disclosure is good, but it doesn’t change the perception that CAR might suddenly be Mr. Lu’s less favorite child. CAR’s minority shareholders will be right to wonder if the founders now prefer to focus on UCAR. The ride-hailing entity, incorporated in December 2014, filed Tuesday for an initial offering of shares in an over-the-counter market in mainland China, according to a person familiar with the matter.
This urgency to have a public funding platform for UCAR less than two years after CAR itself went public in Hong Kong drives home the suggestion that UCAR is where the founders predict high growth.
CAR could argue that it, too, is exposed to UCAR’s growth. Yet investing in a supplier is different from investing in the main service provider. What if UCAR demands changes in the terms under which it rents vehicles from CAR? CAR has internal committees and an independent adviser to set and review these terms, though these may not be enough to reassure investors.
In that light, CAR is actually too exposed to UCAR. Though CAR’s rental revenue grew 53% in 2015, without UCAR, it would have fallen. UCAR contributed around half of CAR’s earnings before interest, tax, depreciation and amortization, estimates GMT Research. In the shuffle over the past month, Hertz, an early investor in CAR, sold most of its stake.
CAR has to ensure that UCAR doesn’t abuse its connection and that CAR finds other sources of growth. Or else it will find that its shareholders are ready to leave, too.
Write to Abheek Bhattacharya at [email protected]