Souche plans big sale of used-auto loans in 2017

16 May 2017

China’s auto financing explosion is creating alternative fundraising possibilities for a company such as Souche.com, China’s leading SaaS provider in the used-auto sector.

Yao Junhong, founder and CEO of Souche, said the company plans to issue RMB 10 billion ($1.5 billion U.S.) in asset-backed securities (ABS) in 2017. Souche has already issued about RMB 330 million in ABS in 2017, via an agreement with Tebon Securities. 

Used-auto loans extended to consumers are packaged (or bundled) together in ABS, which are then sold on the so-called secondary capital market. The sale unlocks money tied up in the auto loans, which the issuer (Souche) can use to extend more loans.

Tangeche.com, Souche’s vehicle financing business, which targets young consumers with low down-payments and extended payback periods on vehicles, is set to make fast inroads. Launched earlier this year, Tangeche.com is a joint venture with Ant Financial, Alibaba’s fintech division.

Ant Financial led the November 2016 series C investment round in Souche, investing $100 million U.S.. Last month, Souche completed a $180 million U.S. series D financing round, led by Warburg Pincus (which we reported on here). Following this, Souche announced that RMB 300 million has been earmarked for the promotion of the Tangeche brand.

China’s used-auto financing sector is currently set for a meteoric explosion in revenue, and auto financing initiatives, such as Tangeche, Bitauto’s (NYSE: BITA) Yixin Capital and Daikuan.com, are leveraging themselves to the hilt in search of the big payoff.

Last month, Daikuan issued ABS valued at RMB 2 billion – its sixth such issuance in the past 28 months (which we reported on here). Yixin Capital has already issued more than RMB 10 billion in ABS in partnership with Zhongtai Securities Ltd.

In China, asset-backed securities (ABS) are principally used by foreign auto manufacturers, who remain the largest extenders of auto finance in China. Last year, in total $88 billion U.S. worth of securities backed by used-auto loans were issued new – just shy of the $90 billion U.S. issued in the U.S. in the same period. 

“In China, auto-loan ABS performed well in 2016. The cumulative default rate and cumulative net losses of auto loan receivables have been low to date,” said Standard & Poor’s in a recent report on the subject (South China Morning Post).

Nonetheless, in the U.S. last year losses on auto ABS climbed to over 8 percent – 27 percent higher than a year earlier. Personal credit scores have limited penetration in China, and sites like Tangeche.com, which target the young and cash-strapped, may be facing future delinquency issues.

China’s asset-backed securities market has been booming, rising to RMB 1.6 trillion from RMB 60.2 billion in 2013. Chinese companies doubled their ABS issuances in 2016, viewing them as an alternative, and often faster, means of raising financing than traditional equity issuances. (A comparable system is China’s OTC equity market, the NEEQ, which as we have reported, has been used extensively by Baixing.com to raise funds.)  

The auto-finance penetration rate reached 35 percent in China in 2016 – a jump from the 20 percent last recorded in 2014. In the U.S. and Germany, the rates are 81 percent and 64 percent respectively.

(One can only hope China’s financial regulators have the issuance of securities backed by used-auto loans on their radar screens. The numbers and their growth boggle the mind. Not long ago (in 2008), the ABS of U.S. banks (so-called junk bonds, backed by home loans) almost pulled the global banking system down. And securities backed by used-auto loans sound inherently far more dangerous than securities backed by home loans – editor.)

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Tom Marling

Tom is a PhD candidate in Chinese History at Hong Kong Baptist University, and former PR consultant in Mainland China. He joined the AIM Group in 2016 as a writer/analyst.