Bitauto Q2 2014: Business As Usual?

| About: Bitauto Holdings (BITA)


BITA's 2Q14 suggests that business as usual with top and bottom-line beat, and the company guiding higher Q3.

Loss of traffic from Baidu's PC Alladin is a long-term negative in which we could see erosion of operating metrics overtime.

Current multiple implies the potential contribution from the used-car business, which I suspect to have minimal impact on revenue growth in the near-term.

Bitauto's (NYSE:BITA) 2Q14 suggested that everything is business as usual with revenue of $84m (+55% y/y) and non-GAAP EPS of $0.45 handily beat consensus of $79m (+44% y/y) and EPS of $0.39 (+69% y/y). In addition, the company guided Q3 revenue between $89m-92m, a 45-51% y/y increase, which is also higher than the consensus of $87m. The stock was up 10% during the day as the market is comfortable at the sustainability of BITA's current growth profile. However, I could not ignore the negative impact from the loss of Baidu's PC Aladdin, in which BITA saw a 10% decline in PC traffic. In addition, the used car business continues to see sequential growth erosion, mostly due to competitive pressure from the local incumbents. My view is that much of BITA's multiple reflects the potential of its used car business, but the 3% y/y decline in revenue is indeed a disappointment and should be a reminder to investors that BITA's rich multiple is not justified.

Business as usual

Consolidated revenue growth of +55% y/y suggests that the online auto advertising space is still strong, thanks to the double digit increase of auto sales in China. Much of this increase was driven by (+67% y/y revenue growth) and the EP platform (+59% y/y revenue growth). Gross margin was stable across all business segments, with the most improvement coming out of, where gross margin turned positive to +14.6% vs. -58.7% a year ago. Operating leverage attributed to much of the EPS beat with OP +159% y/y on solid cost control, in which SG&A as percentage of sale declined 10%ppt y/y. In short, BITA beat on all key financial metrics that suggests business as usual.

Business not so usual

I could not help to ignore the red flags of increasing competitive pressure and the loss of user traffic, which could potentially impact revenue down the road. As the management has disclosed in the call, PC traffic declined ~10% due to the termination of the agreement with Baidu. I believe that the lost traffic was routed to Autohome (NYSE:ATHM) given that ATHM is now partnering with Baidu on the PC front. However, BITA management is positive about BITA's growth citing the positive momentum from its referral metrics, in particular from mobile. My view is that users generally prefer to browse auto vertical sites on PCs rather than mobile given the bigger screen that allow for better viewing and understanding of the product. Also it is worth considering that the agreement ended in the middle of the quarter, so we have yet to see a full-quarter impact on the traffic. Unless we are certain that mobile can offset PC traffic in the near-term, I continue to be skeptical of the positive sentiment on the stock.

Taoche a long-term potential

BITA's used car business has a valuable long-term potential but the value behind the business is unlikely to be realized in the next 10-years due to the Chinese purchasing preference of new car over second-hand car. In my view, as long as high household saving exists in China, consumers will prefer newer models, especially when new cars are becoming more affordable. That said, investors should not expect this business to become a meaningful contributor of BITA, and its recent growth decline reflects the headwind it is facing.

In conclusion, the quarter was reasonably robust on the financials but I am still cautious on the operating metrics. Reiterate my bearish view on BITA.

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