Xi Xiang Feng's surface revenue continues to grow, but as it accelerates the expansion of low-margin automotive direct retail business to supplement the higher-margin automotive retail and financing business, profit pressure is increasingly intensifying.
<h4>Key Points:</h4>
<ul>
<li>Xi Xiang Feng's revenue grew by 27.2% last year, but gross profit only increased by 9.3%, with the growth rate being about one-third of revenue, reflecting pressure on profit margins.</li>
<li>The company is accelerating the development of automotive direct retail business to drive revenue growth, but compared to its core automotive retail and financing business, this business has significantly lower gross margins.</li>
</ul>
Liang Wuren
As the Chinese automotive market rapidly cools, XXF Group Holdings Limited (2473.HK), which specializes in car rentals, seems to show unexpectedly robust performance in its annual results. However, a closer look at the data reveals that while the company maintains revenue growth, it is facing increasingly severe profit pressure.
Last Friday, Xi Xiang Feng announced its 2025 results, reporting a revenue growth of 27.2% to 1.86 billion yuan (USD 270 million), which appears quite strong and far exceeds the growth rate of automobile sales in China. However, the company's gross profit only increased by 9.3%, about one-third of the revenue growth rate.
On the other hand, although net profit grew by 15.3%, excluding stock-based compensation expenses, the increase was only 3.5%. The significant gap between Xi Xiang Feng's revenue and gross profit growth rates can only indicate one thing: profit margins are significantly narrowing.
The industry's own difficulties, intertwined with the macroeconomic environment, are generally squeezing the profitability of Chinese automotive companies. From an industry perspective, in the face of weak demand and severe overcapacity, car manufacturers eager to stimulate sales are launching a wave of long-term loan subsidies with low or even zero interest rates, forcing independent automotive dealers and rental companies like Xi Xiang Feng to lower their own conditions to maintain competitiveness.
As it becomes increasingly difficult to maintain market position, Xi Xiang Feng, which traditionally focused on renting non-luxury cars to customers in lower-tier cities, is shifting towards automotive direct retail. Last year, the company's revenue from automotive direct retail business, which also includes rapidly growing export business, surged more than fourfold to 411 million yuan.
This significant increase caused the revenue from this business to rise from 5.4% of total revenue in 2024 to about 22%. The cars sold by Xi Xiang Feng include new cars purchased directly from Chinese automakers as well as rental vehicles returned after the lease period.
However, this shift is further dragging down Xi Xiang Feng's profits, as the gross margin of the automotive direct retail business is only 4.4%, compared to the gross margin of 33% from its core automotive retail and financing business, which is a stark contrast. As the automotive sales business expands, Xi Xiang Feng's overall gross margin for 2025 has declined by more than 4 percentage points to 25.7%.
Given that Xi Xiang Feng's gross margin was still 30% in the first half of last year, the profit pressure seems to have significantly intensified in the second half. Meanwhile, the company's revenue in the second half increased further compared to the first half; this likely reflects the entire industry entering a price war by the end of the year, causing industry profit margins to drop to a historical low of 1.8% in December, less than half of the approximately 4% level a year ago
This year's situation does not seem likely to improve. Last year, China's automobile sales grew by 6.7%, a significant portion of which came from heavy discounts to clear inventory and consumers rushing to buy cars during the policy incentive period. However, in the first two months of this year, domestic automobile sales have already dropped by 8.8%.
In the current weak industry environment, XXF is increasingly focusing on automobile sales, which brings another tricky issue for the company. Continuous price cuts by car manufacturers will lower the value of XXF's own inventory vehicles, which may force the company to further reduce prices to attract buyers, even leading to some vehicles being sold at a loss.
<h4>Betting on Exports</h4>
As challenges in the Chinese market intensify, the company seems to be betting on exports to capitalize on the increasing popularity of Chinese automobiles overseas. Last year, its export business revenue surged approximately 5.7 times to 276 million yuan, accounting for more than two-thirds of total automobile sales revenue. XXF stated that sales growth in Central Asia and the Middle East was particularly significant. To further strengthen its presence in these markets, the company established a new subsidiary in Uzbekistan in May last year and set up another subsidiary in Kazakhstan in December.
This expansion strategy of XXF is clearly eroding its profitability, and returns may only materialize if the automobile sales business can rapidly scale up, which itself carries significant uncertainty. In contrast, its direct competitor Yixin (2858.HK) focuses on enhancing profit margins through technology-driven products such as Software as a Service (SaaS). As a result, Yixin's gross profit growth last year far exceeded its 17% revenue growth, driving a 48% increase in net profit, while adjusted profits, excluding stock-based compensation, also grew by about one-third.
XXF is also trying to leverage technology to improve efficiency, aiming to double its number of &#34;digital employees&#34; to 200 by the end of 2025 compared to the previous year. Additionally, the company established a subsidiary focused on smart mobility services at the end of last year and formed partnerships with automated delivery companies. These new businesses may have the potential to become significant revenue sources in the future, but they are still in the early stages, and their prospects remain uncertain.
As expected, since XXF announced its latest performance last week, its stock price has dropped nearly 10%. Nevertheless, its stock price is still higher than when it was listed in 2023, with a current price-to-earnings ratio close to 50 times, far exceeding Yixin's 12 times. However, this gap largely stems from XXF's low profit base; if the company fails to curb the decline in profit margins, its stock price still has room to fall.
XXF's shift towards automobile sales and exports to maintain growth in the challenging Chinese automobile market is indeed commendable. However, the simultaneous decline in profit margins is more concerning; this transformation only makes sense if the business can rapidly achieve scale. Other new businesses also face similar situations; although they have higher gross margins, they are still in the early stages. If neither of these aspects can achieve breakthroughs, XXF may become another example of trading profit for growth in a highly competitive market

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Under the backdrop of a slowdown in the Chinese automotive market, XXF Holdings Limited reported a revenue growth of 27.2% to CNY 1.86 billion last year, but its gross profit only increased by 9.3%, indicating intensified profit pressure. The company is accelerating the development of its low-margin direct automotive retail business to drive revenue growth; however, the gross margin of this business is significantly lower than that of its core automotive retail and financing operations. As market competition intensifies, XXF's profit margins are narrowing

Pressure in the automotive market intensifies as XXF sacrifices profits for growth