This article first appeared in Digital Edge, The Edge Malaysia Weekly on November 13, 2023 - November 19, 2023

Carro, the parent company of online used car platform myTukar, is well on track for a public listing, potentially next year. Permodalan Nasional Bhd (PNB), one of the largest fund management companies in Malaysia, is one of its investors.

On the group level, Carro reported positive Ebitda (earnings before interest, tax, depreciation and amortisation) for the third time last year and is expected to do even better this year, says Ernest Chew, its chief financial officer. “We are one of the very few Southeast Asian start-ups that are Ebitda positive.”

More impressive is the fact that Carro generated a net profit in the recent quarter after deducting interest, tax expenses, depreciation and amortisation. “In the recent quarter, we achieved positive adjusted net profit. We have not made a final decision yet on where the company will be listed, but it will likely be in the US.

“I think that will be a refreshing IPO (initial public offering) story as we are probably the only profitable Southeast Asian unicorn tech start-up,” says Chew.

Its encouraging financial results in recent quarters have accelerated Carro’s expansion plan. Other than its core markets in Malaysia, Singapore, Indonesia and Thailand, it is looking to reinvest its earnings to explore one or two other markets in Asia.

For comparison, its closest competitor Carsome announced that it achieved “operational profitability” in the first quarter of this year (1Q2023), as its revenue had increased 250% last year. The firm aims to achieve its first group-wide profit or break-even this year.

In an interview with international news agency Reuters in September, Carsome CEO Eric Cheng announced that the company is ready for an IPO, though a timeline has not been fixed. Carsome is an investee company of sovereign wealth fund Khazanah Nasional Bhd.

Carro and Carsome are often compared side by side by investors for obvious reasons. Both entities operate in the used car industry and have attained unicorn status with a market valuation of above US$1 billion.

They are also each backed by a large government-linked investment company locally and view Malaysia as one of their core markets.

Nevertheless, Chew says Carro stands out among its peers if one looks under the hood. The numbers tell a different story, he asserts, adding that Carro has built a sustainable business model. “Of course, people think of Carro or myTukar as just another place to buy [used] cars. But our business model is more than that.”

Carro and its competitors are similar in that they source used cars from consumers and sell them to used car dealers. They would also cherry-pick some good quality vehicles and refurbish them to sell them back to consumers with better profits.

Moreover, they offer consumers hire purchase loans for used cars and connect them with insurers to renew their motor insurance each year. After-sales service, which includes warranty, repairs and maintenance of the used cars, is another important pillar for these companies.

However, Chew says Carro has built a “better ecosystem” as compared to its competitors. Based on the firm’s most recent quarterly financial results, nearly 60% of its gross profit is derived from ancillary services, which include financing, mobility (such as subscriptions and corporate leasing), insurance and after-sales service. Meanwhile, about 90% of its revenue comes from its online used car marketplace where second-hand vehicles are traded with individuals and car dealers.

“We understand that we cannot build just a pure marketplace business. A pure marketplace business, where we spend so much to acquire customers just to see them return to us only every four or five years [to buy another used car], is likely a loss-making business.

“The idea is to cross-sell, upsell and keep selling [various services to our users] throughout their vehicle ownership and usership journey.

“We don’t need to tell our customers that they need these services, like insurance and after-sales service. Our job is to convince them that our platform is the better one by making it super simple, transparent and hassle-free,” Chew explains.

The financing business is a main part of Carro’s ancillary services, says Chew. On the group level, the firm has a loan book of more than US$350 million (RM1.7 billion). In Malaysia, its loan book is over RM500 million, he continues.

The non-performing loan or NPL rate of the group’s overall financing business has stood at less than 0.5% since 2016, he adds. Its NPL in Malaysia is less than 2%.

According to Carro’s latest quarterly financial results, its financing business contributes just over 20% to the group’s gross profit, says Chew.

Just like any other hire purchase loan out there, Carro’s loan tenure is typically seven to nine years, while the rates it charges the borrowers range from over 4% to 10% per annum, depending on their credit profile and the type of used cars they buy.

Carro’s financing business in Malaysia is operated by GFS Technology Sdn Bhd under the brand name Genie Financial Services.

According to a report from CTOS, GFS Technology generated revenue of RM3.58 million in its financial year ended Dec 31, 2022 (FY2022). Its profit after tax stood at RM975,532, which translated into a profit margin of 27.25%.

In FY2021, the company did not generate any revenue and was sitting on a loss of RM77,485.

GFS Technology has total assets of RM114.4 million against total liabilities of RM503,381.

“Some of our competitors in Malaysia have close to double-digit NPLs. If you look at the financial report of one of our competitors, their financing business has been loss-making and they are no longer lending,” says Chew.

The key to its profitable financing business is the company’s ability to source funding at an attractive rate from banks before lending it to used car buyers. “This is where a lot of companies struggle. Because their P&L (profit and loss statement), balance sheet and cash flow don’t look good. Not only are they deeply unprofitable and cash flow negative, some of our competitors have raised funds using large amounts of convertible notes, which are inherently debt. And this can ‘destroy’ their balance sheet,” says Chew.

“It is crucial for players like us to secure bank borrowings at a low rate to make any financing business profitable. Taking on venture debt (loans offered by non-bank lenders) where the funding rate is near or above 10% per annum is a recipe for disaster,” he adds.

For Carro, Chew says the firm secures debt financing from regional and global banks at an effective interest rate of 4% to 6% per annum for up to nine years. This translates into a simple interest rate of about 2.15% to 3.3% per annum during the corresponding period.

The myriad of used car data possessed by Carro is another important factor that has contributed to the profitability of its financing business. It allows the firm to price used cars accurately and lend money to borrowers by using the cars as collateral, he points out.

“For instance, we can plot out the residual value (the estimated value of a vehicle after it is sold) of popular models manufactured across different years. We know how fast they can depreciate, or how the residual values of local, Japanese or continental cars would depreciate,” Chew explains.

This is possible thanks to Carro’s online marketplace business. More than 300 cars are auctioned in each online session and four sessions are conducted in a day, seven days a week. That means more than 30,000 used cars are auctioned in a month, providing the firm with a large pool of data and giving it insights into the residual value of various used cars.

Coupled with its data-driven risk assessment approach, Carro is able to finance borrowers with profiles that banks typically do not lend to. They can be fresh graduates looking for a car to travel to work or cash-rich business owners who do not have regular incomes.

A typical example would be a hawker who needs to replace his old van to continue running his business. He has sufficient cash but does not have a solid financial track record with traditional banks.

“This guy would say, ‘Hey, I want to replace my old van; it is breaking down. I don’t have regular income, but I have regular customers who pay me with cash.’ He can show us his books (business record) and that’s pretty much it. The banks generally struggle with these types of customers,” says Chew.

As Carro can value used cars accurately, it can more easily attach “undiscovered credit” to borrowers, he continues. The firm can fall back on the collateral if defaults were to happen and sell it off quickly at an estimated price.

“Undiscovered credit means a person with no credit history. In Malaysia, about 55% to 60% of our borrowers are people we call ‘CCRIS-kosong’. But our database tells us that they can be good borrowers if we finance them properly and know what we are doing,” he adds. CCRIS stands for the Central Credit Reference Information System.

A significant portion of Carro’s income also comes from its mobility business, which involves financing and leasing used cars to large corporations, especially in Indonesia, says Chew.

“We have a bunch of high-quality corporations, mostly in Indonesia, that want to provide vehicles to their senior executives or for business operations. But they don’t want to own the vehicles and [deal with] the hassle of dealing with drivers.

“So, what we do is that we finance those cars and lease the cars to them for at least a year, or on a multiyear contract. And we also get them the drivers,” he says.

Leveraging its online platform to cross-sell insurance policies is another profit and revenue stream for Carro. The attachment rate, which means the percentage of people who buy used cars and an insurance policy from the firm, is close to 100%, Chew reveals.

He adds that many Carro users also renew their motor insurance policies through the firm. As it knows when those policies will be due, the firm can prompt or nudge its users to renew their policies before they expire. “We prompt you and make it super simple for you to renew your motor insurance online. You can also click and compare the quotes from six insurers and choose your preferred one.”

Mitsui Sumitomo Insurance Group (MSIG) and ZA Tech, an insurance technology company headquartered in Singapore, are investors and partners of Carro. The latter provides Carro with its digital insurance technology platform which connects the firm to six other insurers online.

According to Crunchbase, a business information provider, other notable investors in Carro include Softbank Vision Fund and Temasek Holdings. Locally, they include Sime Darby and DRB-Hicom, which also trades used cars with myTukar.

Unbeknownst to some, Carro has been operating used car workshops for over five years, says Chew. It has six workshops in Singapore and five in Malaysia. It has another two reconditioning centres locally. “Generally, we have workshops and reconditioning centres across the region, which forms another vital part of the company’s revenue stream. More workshops and reconditioning centres will be launched moving forward.”

Chew says a key difference between Carro and its competitors is that the company does not burn money to fuel its growth and expansion, adding that it spends investors’ money prudently and emphasises sustainability.

He gives the example of how myTukar set up its retail experience and service centre in Puchong South. The centre was built by Hap Seng Star Sdn Bhd to showcase and sell Mercedes-Benz vehicles. After Hap Seng Star vacated the building, myTukar leased it from the landlord under a 10-year contract.

“Hap Seng Star left. They built it to the Mercedes-Benz standard. And we just walked in and took over. That was during the Covid-19 time and we did some interior [changes]. But literally, the place was already done up for us. We didn’t spend much money. We got it at a very good rate,” he says.

Carro’s investment decisions are made based on prudence and sustainability. For every sen it spends, it wants to know the return on investment that it would get, says Chew.

It was also due to such a philosophy that Carro acquired a minority stake in Driven Communications Sdn Bhd, the company behind automotive news portal paultan.org (paultan) and auto classifieds site oto.my. The news was announced in June.

The decision was made because Carro and myTukar can get a lot more market exposure and sales by investing in paultan than by spending money on billboards and expensive brand ambassadors, says Chew.

“Paultan has about seven million unique visitors per month. Investing in them is far more efficient than putting up billboards on the highways. People will go to paultan for research to buy and sell cars, or when they want to find out something about cars. Their intent is very clear. Every part of the website touches our ecosystem,” he continues.

However, that does not mean that Carro’s management would exert its influence on the content of paultan. Chew says the entire senior management team of the news portal has remained and will continue to do so — that was part of the investment deal.

None of Carro’s directors sit on the board of Driven Communications, says Chew. “I’ve not even stepped into their office since we invested in them. I absolutely don’t want to interfere with their editorial independence. That’s very clear. We asked paultan’s people to charge us an arm’s-length rate and not offer us things for free.

“But we can create synergies with seven million unique visitors flooding into their websites each month. Chances are these visitors are going to buy or sell a car with us or engage us for services.

“They (paultan) are already a well-loved brand in Malaysia. We want to strengthen and help them grow within our ecosystem. We want to help them grow regionally too,” he adds.

Carro also made the decision to invest in Driven Communications because its online used car listings and advertisements were blocked by websites that had been acquired by its competitor, which, to Chew, is not in line with the anti-monopoly practice encouraged by the government.

“We came into this unusual competition phenomenon. Whenever our competitor bought some of these [online automotive] companies, we would get blocked. We respect healthy and fair competition, which is good for everyone. So, with paultan, we also said they don’t need to block our competitors’ listings,” he says.

With prudence and its focus on sustainability, Carro has over US$300 million in free cash and undrawn bank lines, plus “plenty of financing receivables, fleet, inventory and public investments”, according to Chew.

“The company has total assets of nearly US$1 billion. Its unsecured leverage ratio, which is unsecured debt divided by equity, is 0.05 times,” he says.

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