SunCar Technology Group: Strong Partnerships, Good Business Model (NASDAQ:SDA)

Robert Way Introduction and Thesis If you believe that EVs are a flawed solution to a serious problem on Earth, then read on. I have an investment idea in a really solid company that went public in 2023 through a SPAC deal. Its technology helps cure some pain points for EVs. It’s called SunCar Technology Group, (NASDAQ:SDA). Their technology links car owners to aftermarket service and insurance providers via a cloud service and mobile app. It profits by solving the problem of China’s underdeveloped aftermarket for EVs and ICE cars in the largest car market in the world. Like SunCar, EV manufacturers are highly digitalized and have adopted direct-to-consumer models. This means they don’t have large dealer networks, so their aftermarket support is dependent on SunCar. Suncar is strategically positioned through its partnerships with almost all Chinese EV OEMs. It operates a business-to-business-to-consumer, B2B2C, model where Suncar sells its services in deals with OEMs and other large enterprises such as the Bank of China. It’s not surprising that SunCar’s traction among EV companies has been so strong. The type of services that will comprise the aftermarket for EVs is still being defined, but SunCar’s network of 47,000 connected service providers is a platform that should drive steady demand. Because China is at the leading edge of EV technology, and these vehicles are highly computerized, I believe technology and data on the EV aftermarket and issues specific to Chinese EV makes are good assets to own. China’s EV Aftermarket Most of the EVs on Earth are driven in China, and most of the EVs driven in China are made in China. According to the International Energy Agency, “In 2023, just under 60% of new electric car registrations were in the People’s Republic of China.” China represents just 17.4% of the global population. While growth is strong in the U.S. and Europe, data from the same source points to China being also the past leader in EV adoption. This is largely due, indirectly, to one factor: intense domestic manufacturer competition. Producers like BYD, Li, Xpeng, Nio, and several smaller names have saturated the market with vehicles and driven down prices for EVs to more affordable levels. Yes, less than $10,000 worth of yuan buys EV caliber of engineering. The specs are inexpensive and comparable with American EV models. Some rough estimates from numbers across the internet have approximately 35% of the Chinese population as drivers. Comparably, by my estimate, roughly 76% of Americans are drivers. This difference suggests a runway for growth in China. I believe the Chinese market stands to grow much more than the American market as economic conditions improve over the long run. Falling prices, due to government investment in manufacturing, should attract first time car buyers to EVs in China. This growth opportunity suggests that connecting drivers with aftermarket services will be essential to keeping these cars on the road and useful to their owners. Demand for service, repair, basic maintenance, and modifications should grow in line with the Chinese EV market. There are few, if any, competitive players in SunCar’s digitalized, aftermarket services sector when compared to the fiercely-competitive manufacturing sector in China. For me, SunCar is a company that has an attractive combination of both exposure to and protection from the manufacturers. China’s Auto eInsurance Market SunCar’s fastest growing business is actually its auto insurance segment. The company developed an innovative technology that allows consumers to get a real-time insurance quote while they are getting another SunCar service such as a tire change. If the consumer goes with the insurance deal, SunCar and the service provider split the commission on the sale. This service opens a new revenue outlet for service providers and incentivizes them to join the platform. This service has proven immensely popular and is likely to become the company’s largest business segment. The synergies between its aftermarket services and insurance segments continue to grow. China’s auto insurance market continues to further privatize and shift towards EV-specific policies, giving SunCar a large and high-growth market opportunity. This opportunity is highly synergistic with SunCar’s business in the EV aftermarket, as EVs have unique insurance needs which SunCar is meeting through its strong partnerships with the Chinese EV manufacturers. Due to the EV manufacturers’ direct-to-consumer model, those SunCar partners rely heavily on SunCar to provide high quality aftermarket services and insurance to their customers. SunCar’s cloud platform is connected to all the major auto insurers in China. It offers the best policies within minutes through a proprietary technology that puts insurance sellers into competition with one another and gives the best deal to the consumer. In the era of the smart shopper, the total cost of owning a vehicle is the main focus, so consumers are increasingly sensitive to insurance. The benefit SunCar provides to buyers in maintaining affordable yet sufficient insurance is something very useful that consumers are seeking. Insurance premiums for EVs typically run 20% higher than for ICE vehicles. Bringing these insurance premiums down to parity with ICE vehicles requires data on the burgeoning aftermarket, which SunCar is able to provide through its large network of service providers. Financials SunCar is approximately a $680 million company. It is earnings negative but Adjusted EBITDA positive, which means it is still largely in the product development phase in its lifecycle. According to seeking Alpha, unlevered free cash flow is $-32.1 million, with net income of $-17.6 million. SunCar currently has cash on hand of $52.5 million at the last report, but SunCar is raising capital, as recently covered by Jaskiran Singh, SA News Editor, so the cash runway shouldn’t be too tight given the burn rate. The major upside is that the existing products generate cash. SunCar has accounts receivable amounting to $58.9 million and has strengthened its working capital position by $23.9 million TTM. Sales are strong with 30% revenue growth in FY 2023. Major expenses include R&D and overhead. Given that the market cap is just approximately 1.9x revenue, it seems like strong growth combined with scalable costs have only been modestly rewarded by investors, as comparable tech stocks tend to earn higher multiples. I think there is plenty of room for multiple expansion if SunCar’s future financial reports don’t disappoint. Risks I believe that share prices could have a fair amount of extra risk and volatility as foreign relations between China and America play out in an election year. The good news is that SunCar’s auto aftermarket cloud service isn’t specific to EVs and can add value to the auto aftermarket experience in almost any country. Most auto owners feel they are overpaying for insurance and SunCar has a unique, innovative quote service. Many Americans only invest in American businesses because they don’t understand or agree with certain foreign government regimes or simply because the volatility measures of these instruments tend to be higher. This factor affects demand for share prices on an American exchange quite a bit. I do however expect a more educated investor to examine their bias and invest in companies that will become systematically more profitable in the future. There is also foreign currency risk. The yuan may depreciate against the dollar, causing real assets that are marketable in yuan to decrease in dollar value. I think the valuations of companies like SunCar would suffer some volatility consequently if this policy scenario occurred. However, SunCar’s business today is almost exclusively in China so the exchange rate may not be so important at this time. Conclusion SunCar is poised to thrive in the emerging China auto market. The global economy for automobiles is undergoing clear changes as well. China is emerging as a winner in engineering affordable, high performance EVs. The niche that SunCar has is making the motor vehicle service and insurance markets respectively more efficient through its access to big service provider and OEM data. This sort of solution seems at least somewhat portable to other economies, and M&A activity could very well bring a similar solution to the United States. Vehicles need to be serviced. EVs in particular need unique services. It’s likely that there is a better solution to organize EV data, and SunCar seems to be finding it. Understanding patterns in OEM-specific issues and documenting them solves several major pain points in the EV aftermarket. It lowers costs and improves the value of the car ownership experience. Appreciating that there are risks to my thesis, I reiterate my buy call on SDA.

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