The Chinese auto market represents an enormous opportunity for investors: The value of auto-related transactions in the country is expected to grow from $23 billion last year to $89 billion by 2021.
An opportunity like that is bound to attract competition, which is why it's important for any company you invest in to have a defensible moat. Bitauto (NYSE:BITA), which offers online platforms for car-sellers in China as well as transaction services to make the car-buying process smoother, is spending a lot of money today in the hopes of building that moat and capturing this huge opportunity.
Financial results released by the company on Wednesday show that, while the company is still very popular in the auto industry -- demonstrated by its strong sales growth -- it is also spending hand over fist to secure that long-term advantage.
Bitauto earnings: The raw numbers
Before we dive into the details of Bitatuo's quarter, it's important to review the headline figures. It's also important to note that because of an accounting change, some of the results might not appear -- on the surface -- to match what the company posted during the first quarter of 2017.
|Metric||Q1 2018||Q1 2017||Growth|
|Revenue||2.17 billion RMB||1.43 billion RMB||52%|
|EPS||0.88 RMB||1.09 RMB||(19%)|
At first blush, this appears like a mixed bag: everyone loves strong growth. But if that growth doesn't lead to sustainable profitability, it doesn't mean much.
For the time being, however, investors shouldn't be too worried. Selling and Administrative costs outpaced sales growth, jumping 64%. This was due to increases in marketing spend (to grab market share), credit loss provisions (which mean that the company is making more loans), and an increase in headcount. These are important investments, as they are upfront costs related to building a moat around the company.
The company's new and used-car websites already benefit from the network effect, with each additional car buyer who visits the site adding incentive for car dealers themselves to sign on. But with the advent of transaction services -- primarily offered through Bitauto's subsidiary Yixin, which it owns over 40% of -- the company is building an even more powerful network effect. Yixin's platform is becoming the platform that connects auto buyers, auto dealers, financiers, and insurance agents. As more people join Yixin, more are incentivized to join.
Because it plays such a large role in Bitauto's future, management released preliminary results for Yixin as well. The company:
- Processed over 110,000 transaction in the first quarter, and
- Brought in $196 million in revenue.
Because it was recently spun out, it's difficult to put that growth in perspective, but consider that during the entire 2016 fiscal year, Yixin:
- Processed a total of 260,000 transactions, or an average of 65,000 per quarter, and
- Brought in $233 million in revenue -- or an average of about $58 million per quarter.
While this is far from an apples-to-apple comparison, it does a solid job of highlighting the type of growth that Yixin has experienced.
What else happened during the quarter?
There were lots of moving pieces for Bitauto investors to digest. We'll start with the company's three main divisions, and give the results in dollars to offer context.
|Division||Q1 2018||Q1 2017||Growth|
|Transaction Services||$187 million||$93 million||101%|
|Advertising & Subscription||$126 million||$108 million||16%|
|Digital Marketing||$34 million||$26 million||28%|
Unsurprisingly, transaction services is the most important piece of the puzzle.
The company also announced a major strategic partnership with Yusheng, a company that helps finance and process used auto purchases. Speaking on the development, CEO Andy Zhang said:
We believe that Yixin's cooperation with and investment in Yusheng, together with support from strategic investors such as Tencent and JD.com, will enable Yusheng to increase its competitiveness more quickly and be better positioned to benefit from the growth potential of China's used automobile market. At the same time, Yusheng will give Yixin preferred cooperation rights for used car financing, which will strengthen Yixin's core competency in financed auto transactions business.
In other words, Yixin -- and de facto Bitauto -- is growing its sticky car buying ecosystem in China by adding an important used-car dealer into the process. And because major players like Tencent, JD, and Baidu, Yusheng will have access to capital to help scale at a much faster rate.
Bitauto also announced Yixin's 30, 60, and 90-days past due ratios -- an important measure of the quality of loans Yixin is making -- were 1.45%, 0.93%, and 0.39%, respectively. Compared to the end of 2017, the 30-day ratio improved slightly, while the 60 and 90-day ratios expanded. This will be an important metric to watch moving forward so that investors know they aren't exposed to major downside losses from Yixin's financing arm.
Management announced that it expects revenue to come in at a mid-point of $398 million. If it can hit this target, it would represent growth of 25%. After today's earnings release, Bitauto's market cap is roughly $2.15 billion, and it trades for 48 times trailing non-GAAP earnings. It's 44.4% stake in Yixin alone is worth $1.6 billion -- though this figure could grow when trading opens in Hong Kong.