Cheetah Net Supply Chain Service Inc. (NASDAQ:CTNT) is a North Carolina-based company that operates in two key business segments: parallel-import vehicle dealership and logistics and warehousing services. The company has faced significant headwinds in its core parallel-import vehicle business, leading it to undergo a strategic shift towards becoming a more diversified international trade service provider.

Business Overview

Cheetah Net's parallel-import vehicle dealership business involves purchasing automobiles, primarily luxury brands such as Mercedes, Lexus, Range Rover, RAM, and Toyota, from authorized dealers in the U.S. market and reselling them to customers, including both U.S. and China-based parallel-import car dealers. The company derives profits primarily from the price difference between its buying and selling prices for these parallel-import vehicles. Its expertise lies in identifying the types of parallel-import vehicles that are in high demand and procuring them in a timely manner.

In the logistics and warehousing segment, the company's subsidiary, Edward, operates as a licensed Non-Vessel Operating Common Carrier (NVOCC). It provides freight forwarding services, including shipment consolidation and carrier selection, as well as warehousing services encompassing fulfillment, storage, and inventory management. This segment supports both the company's internal operations and external client logistical needs.

Challenging Market Conditions in Parallel-Import Vehicle Segment

Beginning in the second half of 2023, the market for new luxury vehicles in China has been negatively impacted by weak economic conditions and a shift in consumer demand towards electric vehicles, mainly those produced domestically by Chinese manufacturers. Luxury import brand dealers have responded to these threats by discounting the sale price of their vehicles, which has significantly challenged Cheetah Net's ability to generate a profit from the sale of parallel-import vehicles.

Consistent with the company's strategy to focus only on profitable parallel-import vehicle transactions, its unit sales during the first quarter of 2024 fell to 13 vehicles, an 84.1% decrease from the first quarter of 2023 and a 73.5% decrease from unit sales in the fourth quarter of 2023. This resulted in $1.4 million in vehicle revenues and the recognition of a net loss of $0.6 million during the first quarter of 2024. These adverse market conditions are continuing into the second quarter of 2024, and the company does not anticipate a significant sales rebound during the second quarter.

Strategic Shift Towards Diversification

In response to the significant downturn in its core parallel-import vehicle business, Cheetah Net is undergoing a strategic shift from being primarily a parallel-import vehicle trader to becoming a more diversified international trade service provider and facilitator. An important first step in this shift was the acquisition of Edward in February 2024.

The acquisition of Edward diversified Cheetah Net's business model and enhanced its capabilities to respond more effectively to evolving market demands. By integrating Edward's logistics and warehousing services into its operations, the company aims to mitigate the adverse impact of declining vehicle sales and facilitate its entry into other service areas, adapting to current market dynamics.

Additionally, Cheetah Net is actively implementing cost reduction measures and maintaining a very low level of inventory to mitigate financial risks. These efforts are complemented by using its cash flow to enhance its logistics and warehouse capabilities and cover overhead costs.

Financials

For the full year 2023, Cheetah Net reported annual revenue of $38,315,974, annual net income of $133,870, annual operating cash flow of $5,610,225, and annual free cash flow of $5,610,225.

In the first quarter of 2024, the company reported revenue of $1,507,785, a net loss of $608,930, operating cash flow of $1,695,717, and free cash flow of $1,695,717. The significant decline in revenue and profitability was primarily due to the challenges faced in the parallel-import vehicle segment, as discussed earlier.

Liquidity

As of March 31, 2024, Cheetah Net reported cash of $903,204 and working capital of $6.3 million. The company has been able to improve its liquidity and reduce interest expenses by using its revolving lines of credit and proceeds from its August 2023 initial public offering (IPO), which raised net proceeds of approximately $3.7 million.

Cheetah Net is working to further improve its liquidity and capital sources primarily by generating cash from operations, debt financing, and, if needed, financial support from its principal stockholder. The company believes that the measures it has taken, including the acquisition of Edward and cost reduction initiatives, will provide sufficient liquidity to meet its future liquidity and capital requirements for at least the next 12 months.

Risks and Challenges

Cheetah Net's operations are subject to various risks and uncertainties, including changes in consumer demand in the Chinese market towards fuel-efficient and electric vehicles, the impact of PRC government policies on the purchase and ownership of automobiles, adverse changes in political relations between the PRC and the U.S., and the ongoing global economic and geopolitical challenges.

The company's business, financial condition, and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics, and other catastrophic incidents, which could significantly disrupt its operations.

Outlook

Due to the ongoing challenges in the parallel-import vehicle market, Cheetah Net does not anticipate a significant sales rebound in the second quarter of 2024. The company remains focused on its strategic shift towards diversification, leveraging the integration of Edward's logistics and warehousing services to mitigate the adverse impact of declining vehicle sales and explore new service areas.

While the market conditions for the parallel-import vehicle sector remain challenging and unpredictable, Cheetah Net's long-term ambition is to transcend these immediate hurdles and evolve into an integrated provider of international trade services for small- and medium-sized traders. By shifting its focus from being solely a trader to become a provider of more comprehensive services, the company is laying the groundwork for its transformation into a diversified business model that can adapt to changing market dynamics and serve a broader range of trading needs.

Conclusion

Cheetah Net Supply Chain Service Inc. is navigating a challenging period in its core parallel-import vehicle business, marked by declining sales and profitability. In response, the company has undertaken a strategic shift towards diversification, with the acquisition of Edward serving as a key step in this transformation. By integrating logistics and warehousing services into its operations, Cheetah Net aims to mitigate the adverse impact of the current market conditions and position itself as a more comprehensive participant in the global trade ecosystem. While the near-term outlook remains uncertain, the company's long-term vision of becoming a diversified international trade service provider holds promise in adapting to the evolving market dynamics.