Description
As everyone knows, online classifieds are a great business model. These businesses have strong network effects and naturally evolve to a winner takes all industry structure, are asset light, and benefit from strong growth given the continued shift to online from physical. M&A is often very value accretive (unlike in most sectors) because it allows for a dominant player to emerge and given online is often only a portion of the overall market, M&A can often occur in the space without triggering anti-trust regulations and lead to natural monopolies forming over time.
Unsurprisingly, online classified stocks have been huge outperformers. Rightmove in the UK has been a 10 bagger over the past 10 years and is now at 21.5x EV/EBITDA and 27x P/E. REA Group in Australia has been an eleven bagger over the past 10 years and is at 25.5x EV/EBITDA and 41x PE today.
We believe there exists an overlooked opportunity in this sector in Taiwan – AddCN (5287 TT). Instead of paying 30x+ P/E, AddCN is trading at 17x our estimate of 2018 P/E and is growing at the similar 10-15% rate of Rightmove and REA.
Founded in 2007, the company began as a pure-play internet platform selling virtual gaming items (e.g., if you want to trade an item for another which you need to advance in the game, this was a platform that enabled those types of transactions between gamers). In the subsequent years, the company ventured into real estate classifieds in 2007 which has now become the flagship enterprise and automobile classifieds in 2009 which is now a major growth driver. The company was listed on the Taiwan Stock Exchange in 2014 and remains one of the very few listed platform internet companies in Taiwan. Over the past 8 years, the company delivered a 4x EBIT increase, completely organically and with minimal capEx.
As of today, we believe ~60% of AddCN’s EBIT is in their real estate classified platform which along with the auto classifieds site is the part of the business we are most excited about. A key aspect of this business is the dominance the platform has in the rental segment (80-90% market share). This is leading the site to take market share in the for sale homes category as the rental platform gives the for sale platform a big traffic boost. The below has more detail on each segment. Note the job search site (12% of EBIT) we view as a competitive market and not a great business, the other ~90% of EBIT comes from either dominant platforms or platforms well on their way to becoming the dominant player in their category.
We think about the return formula of the company as a 20% annual total stock return + multiple rerating optionality:
- + 10% EPS growth or higher, mainly driven by the real estate and the auto classifieds segment as we will detail
- + 6-7% dividend yield (asset light, FCF not needed to fund EPS growth, AddCN historically has had a 90%+ payout ratio)
- + 2-3% positive carry of hedging (one gets paid to hedge TWD)
20% type USD returns while we wait for a multiple-rerating is not bad for a business of this quality and is the core of our thesis. We think there is another 20-30% to be made based on our SOTP math but this is less important than making 20% a year for what we think could be many years. The below segment by segment build shows how we get to 10%+ EPS CAGR over the next 4-5 years.
1. Real Estate Classified to deliver 15%+ CAGR in revenue growth over the next 4-5 years.
- Key driver of step-up in growth is the new home advertisement initiative.
- Currently, AddCN’s Asian peers make 30-50% of their topline from new building advertisements, and AddCN is targeting low-end of such level in 4-5 years.
- Capturing 15-20% of digital share would give AddCN 400-500 mm TWD of additional revenue vs. <50 mm TWD in FY17.
- Upside if Taiwan home sales improve, note the business’s ability to grow despite weak home sales in 2013-2016 before improving in 2017 and in 2018 YTD.
2. Automobile Classified to deliver ~25% CAGR in revenue growth over the next 4-5 years.
- While this segment is growing well already, we think introducing new car ads will be a meaningful push. Currently 0% of it is captured by AddCN whereby this marketing spend is ~50% of its Asian peers’ revenue. Large automobile companies like Nissan and Ford are already approaching AddCN to capture on the web traffic. The company believes it can capture ~10% of the marketing spend over the course of 4-5 years and effectively double the business vs. today.
- Small impact to model if new automobile initiative does not work as auto is estimated to be only 8% of consolidated EBIT.
3. Job Search and Virtual Item platform to remain flattish over the next few years
- We expect the virtual items exchange platform and the job search platform to remain stable over the next few year. These platforms should require minimal marketing spend and will act as cash cows to grow the real estate and automobile classified business, as well as incubating other platform businesses within ADDCN.
- Job search platform is a competitive, saturated industry.
- Gaming business will grow from growth in overall industry but faces pressure from shift to mobile games, we model flat revenue as these two factors largely offset
The estimates above point to a 10%+ CAGR in EPS over the next 4-5 years, with natural walk-up in the mix of real estate + automobile classified which will help re-rating.
The below is our SOTP analysis, implying an 80 cent dollar, or 25% upside on valuation alone.
Valuation benchmarking vs. peers suggest AddCN is noticeably undervalued for its growth profile and mix of businesses.
There are a couple of free options you get as well.
Option One: Taiwan 2nd hand home sales volume at 25 year low and 2016-17 bottomed out and now growing 10%. This could be a strong boost for 591 (the real estate platform) if there is a strong recovery in volumes.
Option Two: Continuous Experimentation For New Platforms
- AddCN has a continuous history of innovation/experimentation and has built dominant platform businesses across multiple sectors with minimal dilution and massive EPS compounding for shareholders.
- The company spends ~ 10% of op ex a year on moonshots similar to the Google philosophy although of course on a much smaller scale. We think this culture is the hallmark of the company and is the right approach to long-term compounding and value creation.
- If over the past 10 years management built three large scale platforms, we think at least one new platform over our 3-5 year investment horizon is reasonable. This would be upside to our numbers as we already are fully incorporating the expenses from these growth investments but not any of the potential revenue or profits.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Make ~ 10% in USD in cash returns a year and 20% total returns