Monday, April 14, 2014

Investing in China Automobile Earnings Growth

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There are many ways to play the growth of China's middle class and BitAuto Holdings (BITA - Trend Report) may offer a combination of two of the best: cars and the Internet.

BitAuto provides Internet content and marketing services for the automotive industry in China. Its and websites provide consumers new and used automobile pricing information, specifications, reviews and consumer feedback.

I last wrote about BitAuto as the Bull of the Day in late November when it was trading just below $35. In the subsequent four months, it built a base at $27 and reached an all-time high above $46 in early March. I thought it was a good time to revisit the name as it just became a Zacks #1 Rank again on a big boost in the earnings outlook.

New Name, Experienced Player

Since China overtook the US as the world's largest automobile market in 2010, Chinese companies have of course been scrambling to capitalize on the boom. While you may have never heard of BitAuto and you may be skeptical about "another Chinese Internet company," their roots in the auto industry go back more than a decade.

BitAuto was originally an advertising agency focusing on the automobile sector before they expanded into an integrated online vertical/portal model. They operate their websites as vehicles for dealers, automotive advertisers and consumers to converge.

According to analysts at Oppenheimer, "With China's emerging auto sector coupled with strong secular tailwinds of increasing Internet ad spend, rising domestic consumption, Internet penetration growth, and greater reliance by consumers on the Internet for car information, BITA is positioned to maintain its leading position in the automotive online advertising and agency business."

The BitAuto Model

The company operates in three segments: business, business and digital marketing solutions business. The business provides subscription services to new automobile dealers and advertising services to dealers and automakers on the their websites.

BitAuto's business provides listing and advertising services to used automobile dealers on website. And their business services division provides automakers with digital marketing solutions, including website creation and maintenance, online public relations, online marketing campaigns and advertising agent services.

High-Speed Growth

In 2010 through 2012, BITA grew revenues at average annual pace of 57%. While that early-stage growth pace is slowing, the numbers are still impressive. In early March, BITA reported standout Q4 2013 results with the following highlights.

Revenue was $79.9 million, a 36.3% increase from the corresponding period in 2012. Revenue in fiscal year 2013 was $237.8 million, a 36.2% increase from 2012.

Operating profit was $17.2 million, a 52.2% increase from the corresponding period in 2012. Operating profit in fiscal year 2013 was $41.4 million, a 63.3% increase from 2012.

The company also guided to 1Q14 sales $53.9-55.5M, suggesting continued 36-40% year-over-year revenue growth. In reaction, Oppenheimer analysts noted.

"BITA continues to focus on providing more value-added services for auto dealers via its CRM system. According to mgmt, the EP platform generated over 11M sales leads for dealers in 4Q and 30M in 2013. The mobile business also started to gain momentum, accounting for over 40% of the sales leads in December."

And these views, combined with strong forward guidance from the company, also prompted the analysts to bump their EPS projections for this year by 30%.

"We’re raising our 2014 sales and GAAP estimates from $301M/$1.18 to $327M/$1.54, and increasing our target to $45 from $30."

Innovation and Partnership

The Chinese have made it clear they like to build their own dominant companies in key industries, like the Internet for instance. For this reason, hedge fund manager John Burbank of Passport Capital has major investments in Baidu (BIDU - Trend Report), Qihoo 360 (QIHU - Trend Report), which specializes in Internet security, search, and mobile apps, and SouFun (SFUN - Trend Report) which he calls the "Zillow of China."

In November, BitAuto announced a joint venture with Kelley Blue Book and the China Automobile Dealers Association (CADA) to provide data on the Chinese used car market. But not only did BITA pick a great US partner, they are also launching these services in mobile applications to meet the country's increasingly high-tech consumer demand.

"Bitauto is delighted to cooperate with Kelley Blue Book and CADA to bring innovative vehicle valuations to China's used car market," said Mr. William Bin Li, chairman and chief executive officer of Bitauto in the company press release. "We see increasingly strong demand for vehicle valuation products particularly in China's used car market which is currently under-served and is now entering a period of rapid development.

"We believe that consumers will greatly benefit from the joint venture's products and services which will offer quick and easy access to the most market-reflective vehicle valuations, helping them make informed decisions on their vehicle transactions. We are confident that these will become the starting point for consumers and dealers seeking used vehicle pricing information."

Mr. Li added, "Our combined experience, technology and brand will drive the development of this joint venture and allow us to deliver trusted values to China's used car market. We believe this joint venture will further solidify Bitauto's leading position in China's online used car market."

The new Web and mobile-based products will be the direct access point for China's most comprehensive and up-to-date car valuation information and is expected to serve as a central hub for the development of China's new and used car industries.

If you are looking for a high-growth play on the Chinese consumer, BitAuto may be a good option. When I last wrote about BITA in November, the forward P/E was pricey at 33X on a $35 stock. Now that shares are back to $32 and the EPS estimates are higher, you're looking at paying under 25X for high double-digit earnings growth.

At that price, I think the stock is definitely worth looking at to own a piece of the key player in the biggest auto market in the world.

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