It's been a tough time for Chinese stocks. Fears of a trade war with the U.S. and concerns about slowing economic growth have combined to send Chinese stocks into a bear market as the Shanghai Composite is down 24% since a peak in January. That compares to essentially flat growth for the S&P 500 during that time.
That's been a disappointment for investors in high-profile Chinese stocks like Alibaba and Tencent, which are down 28% and 39%, respectively. However, it's also opened up opportunities in other corners of the market, and one such stock that deserves closer attention is recent IPO Uxin Limited (NASDAQ:UXIN).
What is Uxin?
Founded in 2011, Uxin is the largest used-car e-commerce platform based on both the number of transactions and gross merchandise volume (GMV). Both individual sellers and dealers sell on Uxin's platform, and its business operates through two components: Uxin Used Car and Uxin Auction.
Uxin Used Car is focused on individual consumers, providing them with services like financing, title transfer, and delivery, among others, while Uxin Auction caters to business buyers with services such as vehicle sourcing and turnover optimization.
Chinese stocks often have an American analogue. Alibaba and JD.com are compared to Amazon. Baidu is seen as the Google of China, and Baozun is often called China's Shopify. Similarly, Uxin bears a close resemblance to CarMax (NYSE:KMX), which generated $730 in net income in the last four quarters, illuminating the opportunity for Uxin, as China is the world's largest car market and the stock has a market cap of just $1.7 billion.
In a country where consumers are often concerned about fraud and counterfeiting, Uxin puts its cars through a 300-point inspection system, understanding that trust between buyers and sellers is key for the platform to be successful. The company also has industry-leading warranty coverage that includes repairs at service centers in 300 cities across China and 100% compensation for claims made within one year or 20,000 km.
Like a number of other Chinese companies, Uxin's growth numbers look mouthwatering to investors. In 2017, its revenue jumped 136.7% to $298.6 million, but that pace slowed to 79.6% in its most recent quarter to $100.6 million. However, triple-digit revenue growth can only be expected for so long, so investors should expect to see that revenue growth moderate.
Uxin has also continued to take share from competitors, as it now has 41% of the B2C market and 42% of the B2B market, up from 32% and 40%, respectively, in 2016. The number of active dealers on the platform, which may be the biggest driver of revenue growth, was up 29% last year to 83,700, and used-car transactions increased 67.9% to 634,317.
On the bottom line, the company is still operating at a loss, but considering how young the company is and how fast it's growing, it's understandable that Uxin would still be losing money. Its bottom-line loss has expanded in recent quarters, at an adjusted loss per share of $0.23 in its most recent quarter, but margins are improving, which shows that the company is making progress toward profitability. Uxin spends the vast majority of its revenue on sales and marketing, a sign of the market opportunity it sees, so it should move toward profitability as sales and marketing spending growth moderates.
Foolish investors know that blockbuster growth and a large market opportunity aren't enough on their own. A successful stock needs a competitive advantage or an economic moat, and luckily, Uxin already has one built in. The company's transactional model is based on network effects. As the leader in online used-car transactions, Uxin has the most buyers and sellers of any platform, therefore a new buyer or seller will be most likely to choose Uxin over competitors since Uxin offers the most selection for buyers and sellers. In turn, by attracting more buyers and sellers, the platform only becomes more attractive for future buyers and sellers. It's the same model that has helped make Facebook so successful.
The power of network effects may explain in part why the company is spending so aggressively on sales and marketing -- because it needs to get new customers while the market is ripe in order to cement its leadership and block out competition. According to the numbers, those efforts seem to be paying off, as not only has the company's market share increased, but brand recognition has reached 68%, according to Ipsos, as 68% of consumers named "Uxin" in a survey about used cars.
Uxin shares are down more than a third from its IPO in June when it debuted at $9, as the sell-off in Chinese stocks has weighed on the used-car dealer. However, that only makes Uxin a more appealing buy, as it trades at a very reasonable price-to-sales ratio of 4.4, which seems cheap considering its growth. Uxin may not be right for risk-averse investors, but if the saber rattling over trade cools down and the company keeps up its blistering top-line growth, the stock could skyrocket over the coming years.