Soochow Securities released a research report stating that it is optimistic about Tu Huo (09690)'s further highlighting of its model advantages and further improving profitability while expanding its terminal network. It is expected that the net profit after adjustment in 2024-2026 will be 736/1228/1777 million yuan respectively. Referring to the valuation of head enterprises in the American auto service market, the company is given a 2025 20 times PE and a target price of 33 Hong Kong dollars, and a "buy" rating is given for the first time.

Introduction: In 2023, Tu Huo became the first stock in the "independent aftermarket service market for automobiles" to go public and achieved annual profitability for the first time, verifying its business model. As the average car age in China reaches the inflection point, the automotive service market will enter a new development stage, and the business models and competitive landscape of head players may take a different path from that of overseas counterparts. This article attempts to answer: 1) Characteristics and space of domestic demand; 2) The prospect of IAM, where are the advantages of the O2O model; 3) There have been countless losers in the O2O model, what has Tu Huo done right and how does it view its subsequent expansion and profit space?

Automotive service demand reaches the inflection point and reaches 2 trillion yuan in 2027. The scale of China's automotive service market is still growing continuously, with an estimated 1931.9 billion yuan expected to be reached in 2027 according to Zhao Shi Consultancy, with a CAGR of 9% from 2023 to 2027. 1) Car ownership: It is expected to benefit from the increase in per capita income, especially as there is still room for growth in the sinking market. If compared with Japan, we expect that the number of cars owned in 2027 will reach 319 million, with a CAGR of 4.2% from 2023-2027. 2) Per capita car consumption: The average age of cars in China has reached the maintenance inflection point, and income per capita has driven growth with increasing ages. Zhongshi Consulting predicts that the annual average service expenditure per vehicle will increase to 5,168 yuan by 2027, with a CAGR of 2.7% from 2023-2027. 3) Compared with traditional automobiles, the replacement cycle of new energy vehicles is shorter, and the total amount and structure of service expenditures per vehicle have changed, but the short-term impact on the market is limited, and structural opportunities are of long-term concern.

Supply-side changes: Internet-based models promote value redistribution. 1) Old pattern: The market is highly fragmented (the revenue market share of the head is 2%, and CR5 is less than 6%), and 4S stores account for 54% of the GMV share with only 4% of the stores, but they are not the most efficient, with accessory prices and service fees being 30% and 80% higher than IAM stores, respectively. 2) New changes: As more automobile warranties expire and automobile ages increase, consumer demand for IAM (independent after-sales) is expected to increase. The consulting team of Zhao Shi predicts that the GMV of IAM will increase to 1.1 trillion yuan by 2027, and the market share will increase to 58%. The chain rate of IAM is insufficient (only 4.8% of IAM stores are chain stores, and the income market share of CR5 is 3%), mainly due to the characteristics of the automobile industry that make it difficult to establish product scale effects and increase the difficulty of industry chain integration. We are more optimistic about O2O platforms that have the advantage of aggregating demand and simultaneously integrating the entire industrial chain for market share.

Tu Huo Auto: an effective expansion model, entering a period of profit release. Automotive service O2O is essentially a slow business, and platforms need to achieve effective expansion: most stores can achieve sustained profitability; repurchase rates and ARPU are more important than MPU; long-term high gross margin product/service category revenue ratios can be improved. Tu Huo is an example of effective expansion. 1) While leading in the number of stores, the profitability of franchisees is superior to the industry average, and profitability is sustainable: Tu Huo achieves service standardization through the whole process digital transformation and instant fulfillment system, improves user experience, deepens user trust, and improves repurchase rates. Tu Huo's user repurchase rate, old customer revenue contribution, and direct in-store order revenue contribution are steadily increasing. In regional expansion, Tu Huo has a deep understanding of the offline chain business model, the density is greater than the speed, and the average number of stores per workshop in all first-line and new first-line cities exceeds 100. There is an average of one Tu Huo workshop per 3 square kilometers in Shanghai, Shenzhen, Dongguan, and other places. Higher city density helps the company establish regional flywheel effects and continue to seize market share. Our neutral view is that there is room for the opening of 10,000 stores for subsequent heavy investment in the sinking market, which is an increase of 81% compared with 2023. 2) Profit direction: the company achieved the first net profit in 2023, with a gross profit margin of 25%. Compared with the average of TOP4 in the American IAM (an average of 46%), there is still great room for improvement. We are optimistic about three aspects driving the company's gross margin to continue to increase: economies of scale; the ratio of high gross margin SKU revenue increases; the ratio of special supply and own-brand revenue increases. In the short term, the impact of Internet giants' entry or acceleration of industry clearance may be limited to Tu Huo's market share and profits.

Profit forecast and investment rating: We are optimistic about the further highlighting of the advantages of Tu Huo's model and the further improvement of profitability while expanding its terminal network. We expect the company's net profit after adjustment will be 736/1228/1777 million yuan respectively in 2024-2026. Referring to the valuation of head enterprises in the American automobile service market, the company is given a 2025 20 times PE and a target price of 33 HKD, and a "buy" rating is given for the first time.