By Kevin Cook
There are many ways to play the growth of China's middle class and BitAuto Holdings (NYSE:BITA) 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 bitauto.com and ucar.cn websites provide consumers new and used automobile pricing information, specifications, reviews and consumer feedback.
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 bitauto.com and taoche.com websites 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: bitauto.com business, ucar.cn business and digital marketing solutions business. Bitauto.com business provides subscription services to new automobile dealers and advertising services to dealers and automakers on the bitauto.com website.
Bitauto's ucar.cn business provides listing and advertising services to used automobile dealers on ucar.cn 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.
In 2010 through 2012, BITA grew revenues at average annual pace of 57%. And while 2013 looks to be slowing down quite a bit to 38%, that's still taking the company from 2012's topline of $170 million to an estimated $234 million this year. And 2014 full year estimates are for 29% revenue growth to top the $300 million mark.
After a strong 3rd-quarter report, Oppenheimer analysts raised estimates for the this quarter and next year citing "BITA’s ad sales continued to benefit from robust auto sales growth in China and marketing dollar shifts from offline to online by auto OEMs and dealers."
Encouraged by gross margin expansion of approximately 122bps year-over-year to 74.4% on a mix shift to higher margin bitauto.com and EP businesses, the analysts raised Q4 EPS estimates to 34-cents from $0.31 and full year 2014 EPS estimates to $1.18 from $1.10.
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 (NASDAQ:BIDU), Qihoo 360 (NYSE:QIHU), which specializes in Internet security, search, and mobile apps, and SouFun (NYSE:SFUN) which he calls the "Zillow (NASDAQ:Z) of China."
On November 7, the day of their last quarterly report, BitAuto also 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. While the forward P/E looks pricey at 33X, dips below 30X look worth accumulating for this key player in the Chinese automarket.