Shares of the owner of an operating system used by more than half of China’s used car dealers lost nearly half their value in their first trading day on the Nasdaq

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Key Takeaways:

  • DSC raised about $50 million in its Nasdaq IPO this week, making it one of the largest new listings by a Chinese company on Wall Street in more than a year
  • The company’s stock fell 47% on its first trading day, as investors balked at its aggressive pricing and stalling growth in China’s sputtering car market

Just when the U.S. market for Chinese IPOs looked dead, along comes a relatively large listing with quite the A-list of players. We’re talking about DSC Holdings Ltd. (NASDAQ:DSC), owner of China’s leading operating system (OS) for used car dealers, which made its Nasdaq trading debut on Thursday, just a month after making its first public filing for the IPO.

DSC raised a tidy $50 million in the listing, which isn’t huge compared with the many mega-listings we’ve seen in Hong Kong lately. Still, it’s the largest we’ve seen by a Chinese company on Wall Street for more than a year. But reflecting the many issues dogging such listings, DSC’s stock lost nearly half of its value on its first trading day, closing at $9.06 after selling 3 million American depositary shares (ADS) for $17 each.

This kind of early sell-off has become all too common for new Chinese listings on Wall Street, leading many – including Washington politicians and the securities regulator – to suspect behind-the-scenes manipulation. Both the U.S. Securities and Exchange Commission and the U.S. House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party have taken steps to tackle the problem, which has sharply reduced the number of new listing applications, especially by smaller companies.

Truth be told, DSC’s new listing doesn’t appear to fall into the category of stock manipulation, despite its big first-day decline, due to its A-list of actors with quite respectable backgrounds. The deal was underwritten by leading Chinese investment bank CICC and Deutsche Bank, also a very respectable Western brand. By comparison, most of the other Chinese listings we’ve seen lately have been underwritten by small boutique brokerages.

DSC is also backed by some very respectable investors, led by Ant Group, owner of the Alipay payments service and the financial affiliate of e-commerce giant Alibaba. Ant Group owned 8.8% of DSC’s stock after the listing, and had indicated it was willing to buy about $30 million worth of IPO shares, or about 60% of the offering. DSC’s other major pre-IPO investors included Primavera, 5Y Capital and Cygnus Equity, all also respectable names.

Finally, there’s the company’s founder, Yao Junhong, who has strong credentials in the auto market from his former role as co-founder and COO of Car Inc., one of China’s leading car rental agencies, before he set up his company in 2012.

Unlike many of the other recent Chinese applicants for Wall Street IPOs, DSC is also quite large and has access to large amounts of data that necessitated a data security review by China’s cybersecurity regulator. In its most recent prospectus, DSC specified that it underwent and passed such a review, and the company also received required clearance for the listing from the China Securities Regulatory Commission (CSRC) in late April.

So, why exactly did DSC’s stock tank in its trading debut, and does its listing mean the U.S. market for major Chinese IPOs may still have some life left?

Tough car market

We’ll tackle the tanking stock issue first, which appears related to an aggressive valuation for the stock, and also to weak prospects for the company’s core business in China’s sputtering car market. The company is still losing money, which is never that encouraging for a 14-year-old enterprise that says its core DaFengChe operating system is "embedded in the daily operations" of more than half of China’s used car dealers.

Even after the big first-day drop, the stock still trades at a price-to-sales (P/S) ratio of 4.5, based on its 2025 sales. That’s nearly double the 2.5 for Autohome (ATHM.US; 2518.HK), which is seven years older than DSC and is profitable, and also derives most of its money from transaction-based fees related to new and used car trading.

Then there’s the issue of DSC’s financials, which don’t exactly inspire confidence. That’s not really the company’s fault, and more the result of its reliance on a Chinese car market that has suddenly slammed on the brakes after zooming for most of the first two decades of the 21st century. As the market has skidded, including double-digit declines for new car sales this year, many of the new and used car dealers that are DSC’s biggest customers have begun losing money and are sharply reining in their spending.

The company’s revenue rose slightly in the first quarter of this year to 146.6 million yuan ($21.6 million) from 142.7 million yuan a year earlier, which isn’t bad considering the sorry state of the market. But it’s hardly the kind of high growth that gets investors excited. The company offers its DaFengChe OS to used auto dealers for free, and makes most of its money by charging fees for marketing services, as well as referral services for things like car inspections and certification.

While its revenue rose slightly, the company’s number of monetized dealers and brokers, as well as its active users, both fell year-on-year in the first quarter. Its average revenue per user (ARPU) rose to 3,399 yuan in this year’s first quarter from 2,872 yuan a year earlier. But the low amount of both figures shows car dealers and brokers are hardly spending heavily on DSC’s services.

As the industry suffers, DSC’s gross margin dropped to 36.8% in the first quarter from 40.5% a year earlier. On the bottom line, its 29.2 million yuan loss in the latest quarter narrowed from a 39.6 million yuan loss a year earlier. But as we’ve already noted, a 14-year-old company with such strong credentials really shouldn’t be losing money at this stage.

That brings us back to the second question we raised earlier, namely, whether DSC’s listing could auger a revival of major Chinese listings on Wall Street. In our view, the answer is a definite "maybe." This listing shows that Beijing is still willing to green-light major new listings by Chinese companies on Wall Street, especially from more mature sectors like cars.

But the bigger obstacle could be China’s economy, which underpinned strong U.S. investor appetite for China stocks when things were booming. But with that same economy now running low on fuel, U.S. investors will be far more selective on any new "made in China" stocks – especially ones priced as aggressively as DSC’s.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.