[Company Insight] K Car, High Dividend Appeal... 81% Market Share in Used Car E-commerce

Record Q1 Sales Despite Oil Price Surge and COVID-19 Challenges
Used Car Purchase Costs Rise, Operating Profit Down 23%
Channel-Specific Purchase Strategy Enhanced... Profitability Dip Temporary
Dividend Payout Ratio 77% Last Year Following 143% in 2020

During the COVID-19 pandemic, the shortage of new cars led to a rise in used car prices, resulting in strong performance for the used car industry. Although recently used car prices have slowed due to burdens from oil prices and interest rates, there is widespread expectation that the market will become even more active as large corporations in Korea have announced their entry into the used car sales market. The used car sales market, once dismissed as a ‘lemon market’?a market where only low-quality products circulate due to opaque transaction procedures, quality, and price assessments?is now experiencing a new wave of standardization and transparency. Asia Economy analyzed the notable used car trading companies Lotte Rental and K Car.

[Asia Economy Reporter Jang Hyowon] The used car sales platform K Car is dominating the e-commerce market and is on a growth trajectory. K Car holds an 81% market share in the used car e-commerce sector. Additionally, it pays out most of its net profit as dividends, making it attractive as a dividend stock.

Dominance in Used Car E-commerce

K Car was established in 2018 when the private equity fund (PEF) Hahn & Company acquired the offline division of SK Encar. Its main businesses include the used car sector and short- and long-term car rental services. The rental car business began in February last year through the merger with Joy Rent-a-Car. As of the end of Q1 this year, the revenue composition was 97.8% from the used car business and 2.2% from the rental car business.

Despite external challenges such as soaring oil prices and the spread of COVID-19 in Q1 this year, K Car recorded its highest quarterly sales. Sales in Q1 reached 557.5 billion KRW, a 31% increase from 425.4 billion KRW in the same period last year. This growth was driven by a simultaneous rise in the average selling price and the number of used cars sold. The average retail selling price of used cars in Q1 was 16.5 million KRW, up 16.8% year-on-year.

Even with the increase in selling price, the total number of used cars sold at retail during the same period rose by 12% to 29,542 units from 26,369 units in the previous year. Notably, the number of vehicles sold through e-commerce increased by 36%, showing strong growth.

The e-commerce platform is a core growth driver for K Car. K Car is pioneering the used car e-commerce market with strategies such as 100% directly managed certified used cars, a 3-day responsibility refund policy, and nationwide 1-day delivery. It also absorbs demand linking offline and e-commerce through 47 directly managed stores nationwide. As of the end of last year, K Car’s market share in the used car e-commerce sector reached 81%. Revenue from the e-commerce segment has grown 12-fold over six years since 2016.

While sales have grown, operating profit has declined. In Q1 this year, K Car’s operating profit was 13 billion KRW, down 23.7% from 17.1 billion KRW in the same period last year. This is attributed to increased purchase costs due to rising used car prices. In fact, K Car’s cost of sales increased by 34.2% in Q1, exceeding the sales growth rate.

However, the market expects K Car’s operating profit to increase from Q2 onward. Jang Moonsoo, a researcher at Hyundai Motor Securities, said, "Due to ongoing disruptions in new car supply, the profitability of used cars is expected to improve," adding, "Expanding e-commerce to enhance operational efficiency is also a positive factor."

Choi Jongkyung, a researcher at Heungkuk Securities, explained, "They are stabilizing purchase prices by refining channel-specific purchase strategies, including marketing for the C2B (consumer-to-business) purchase platform, so the profitability decline due to cost increases in Q1 is temporary," and added, "In fact, amid intensifying competition in the used car B2C (business-to-consumer) market, it is time to focus on the competitiveness of completing the used car e-commerce platform and continuously increasing market share."

Most Earnings Paid Out as Dividends

K Car has paid out most of its net profit as dividends since 2020. In 2020, it recorded a net profit of 24.1 billion KRW but paid out 34.7 billion KRW in cash dividends. This dividend payout ratio of 143.9% meant it paid more in dividends than it earned. Last year, it paid dividends of 36.1 billion KRW, about 77.1% of net profit, and in Q1 this year, it set dividends of 9.1 billion KRW, exceeding net profit.

This high dividend payout benefits the largest shareholder, the PEF. K Car’s largest shareholder is ‘Hahn & Co Auto Service Holdings LLC,’ established by Hahn & Company, holding a 72% stake. More than two-thirds of K Car’s dividends go to Hahn & Company.

There is also a supply-demand issue. On the 10th, K Car was included in the Korea Exchange’s KOSPI 200 regular review. Index funds and exchange-traded funds (ETFs) tracking the KOSPI 200 will need to include K Car, potentially bringing in capital. However, since the 10th, short selling volume has surged, and the stock price has been declining.

Additionally, a 30 billion KRW convertible bond (CB) entered the conversion request period on the 28th of last month, but concerns about stock conversion are low. The conversion price of this CB is 40,136 KRW per share, significantly higher than the current stock price. The put option for early redemption can be exercised starting next year, so there is no immediate risk of cash outflow.