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Actionable news in WUBA: 58.COM INC,

58.com: Hidden Treasure In China's Online Classifieds Sector

Summary

Dominant position in China's online classified business.

Exceptional margin expansion potential.

Stock is cheap in a 3-year view.

58.com (NYSE:WUBA)'s share is down 30% YTD and 10% after Q2 earnings. The street is way underestimating 58's actual worth. The probability of 58 breaking out to be a profitable and dominant online multi-category classified business outweighs the risks of continued losses and losing relevance to competition. Current sentiment on the stock doesn't reflect its long-term value. Very conservatively, I see the stock having 30% upside in 1 year and 60% upside in 3 years.

It will be a solid long-term name to own in the overall context for China. Thematically, 58 will benefit from secular trends in increasing online hiring, secondary housing transactions and used goods sales, all at low penetration rates now.

Some quick points:

  • It's the 'Craigslist' of China, but with much better functionality. At 600m MAU, it is the largest online merchant by traffic, and simply dominates its space with a 80% share.
  • Significant margin expansion potentials post merger with No.2, from negative to 20-30% EBIT margin. Also long runway for user monetization growth from the current $2 Rev/user.
  • Competitors in the vertical space are not scalable enough to pose real threat to 58, although competition will persist as 58 extends further into verticals.
  • Solid and young management; there is ample optionality in new businesses.

The stock is essentially YoY flat and down 30% YTD on margin concerns post Ganji merger and now trading at 30% discount to DCF value. Just as a reference, online classifieds globally have 40%+ EBIT margins and trade at high teen EV/EBIT. I believe 58's earnings will normalize and the stock will re-rate. Also, the stock is widely held by long-only funds such as FMR/FIL, T. Rowe and Hill House.

As with any margin recovery stories, there will be bumps along the road, and there will be quarters when the company misses. But I see the long-term strategic value of the 58 assets, especially their relationship with Tencent (OTCPK:TCEHY).

What is 58.com?

  • Established in 2005, 58.com is the largest multi-category online classifieds and listing platforms in China. 58 is often consider the 'Craigslist' of China and the 'Website for the 99%', given its comprehensive information listings for real estate, jobs, goods and other daily essentials in China. It is the largest online merchant by MAU at ~600m
  • 58 has a market cap of ~US$6.8b. Tencent is a 23% shareholder in 58 and Alibaba (NYSE:BABA) has a minority stake in 58 Home, the home services platform of 58.com
  • ~40% of 58's business comes from the real estate listing (rental and sales), followed by job listing (~20%) and yellow pages (~20%). The remaining revenue is generated from other verticals such as used goods and used cars

Why is it an interesting stock?

The growth of 58 is supported by the following secular trends in China:

  • Low penetration rate (~10-15%) in digital/mobile classifieds, especially in SMEs
  • High worker turnover rates requiring constant hiring, particularly in blue collar/local services jobs
  • Second-hand home sale penetration is low and growth is strong (growing at 70%+ YoY) despite primary sales slowed down to high-single digits
  • Online used cars sales continues to be low (need to hire more to promote, but slowed down in 2015 to focus on increasing operating efficiency after Ganji acquisition)
  • Synergies in social network such as WeChat

More specifically, 58's competitive advantage lies in:

Unrivaled scale advantage

  • As a daily necessity online portal for the mass, 58's sheer scale is hard to be replicated by any current and potential competitor. After the merger with Ganji and Anjuke, 58 boosts an MAU of ~600m, the largest amongst Chinese online merchants - this is a significant amount of traffic that is the crux of 58's value proposition to its customers
  • To put things in context, WeChat has an MAU of ~800m and Weibo ~250m. 58's MAU is 6x that of each of its competitors in the vertical spaces such as SouFun (NYSE:SFUN), Autohome (NYSE:ATHM) and 51Job (NASDAQ:JOBS). 58's business could create significant synergies with vertical players (real estate, auto) and social network platforms...

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