January 23, 2019 - 11:02pm EST by
2019 2020
Price: 17.30 EPS 0 0
Shares Out. (in M): 72 P/E 0 0
Market Cap (in $M): 1,260 P/FCF 0 0
Net Debt (in $M): -790 EBIT 0 0
TEV (in $M): 470 TEV/EBIT 0 0

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Bitauto (BITA) is a $1.3bn market cap vertical internet content and marketing services company targeting the auto industry in China.  BITA primarily manages three business segments which caters to consumers and businesses.  The media business which is advertising and subscription based offers OEMs and dealers advertising and auto listing services while consumers find car and pricing information on new and used cars.  Transaction services offers CRM and auto-related financial services to customers (i.e. auto finance and insurance).  Digital Marketing Solutions provides OEMs with one-stop digital marketing offerings, including website creation and maintenance, online public relations, online marketing campaigns and advertising agent services

BITA’s advertising and subscription service has traditionally been BITA’s strongest segment, generating ~40% of BITA’s revenues and growing at ~15%. Platform helps auto dealers generate sales leads and manage online stores. Paying subscribers have reached 24,000, which already covers a large share of the dealers in China with 72 OEM advertising customers.  Each dealer pays a fixed amount subscription fee per year which allows dealers to set up online showrooms using pre-designed templates, manage and analyze sales leads, publish auto pricing and promotional info and virtual call centers.

The biggest contributor to revenues today is is Yixin, its transaction services segment which makes up ~50% of total revenues.  Launched as BITA’s car-financing arm in 2013, Yixin is China’s largest online auto-transaction platform, with estimated market share of ~20%.  Since its inception, Yixin has attracted over US$1.0bn of cash investment, notably from Tencent, JD and Baidu.  It recently went public in HK and trades at a $1.6bn market cap with BITA owning 47% of the company.  Yixin’s core value proposition is its online traffic, with over 50MM MAUs on its channels. Yixin differentiates itself from peers with an end-to-end, omnichannel transaction ecosystem that integrates Yixin’s online channels with its inhouse transaction service teams and auto dealer cooperative network. This allows the company to offer a comprehensive range of services to consumers, automakers, auto dealers and finance partners.  For consumers, Yixin provides a one-stop shop for their auto and financing needs. Yixin provides a wide an inventory of vehicles (~36,000 new cars and 5mn used models) and wide variety of financing combinations.  For automakers, as the identity for each of the potential car buyers is verified by Yixin on application of the auto loan/lease, Yixin is a sales channel with closed-loop data. This allows automakers to create targeting marketing campaigns aimed at improving online-to-offline conversion.  Yixin also provides a range of services, including application screening, credit assessment, repayment administration and asset (loan) management services which it charges a fee for these services.  For aftermarket service providers, such as insurance companies, Yixin provides access to a large customer base and continuous engagement throughout the transaction cycle and the duration of financing term.

Share price for BITA has gone from $50 at the end of 2017 to $17 today.  If we compare the share performance of BITA to Autohome, the other large player in advertising and subscription business (doesn’t directly compete in transaction business), Autohome is up +32% while BITA is down -35%. The timing of the drop coincides with listing of Yixin whose stock price went from 8 HKD at end of 2017 to 2 HKD today.  Market has been concerned with declining auto sales in China, increasing concern about fintech companies after tighter regulation on cash loans; and intensifying competition in auto finance.  The other concern for BITA has been that it has aggressively focused on expanding its market, via equity infusion from partners (Tencent, JD, Bidu), then levering the balance sheet and increasing SG&A in the income statement resulting in a decline in margins.  Since 2015, as BITA ramped up investments to build up the Yixin business (as stated, now contributing 50% of revenues), margins went from north of 20% to negative. As you cycle through the investment program, margins should increase and you have seen signs of that over the past 3 quarters where operating margins have steadily risen.

Despite headwind from slowing new car sales in China, the environment is positive for BITA as tight advertisement budgets will force OEMs to focus on advertising channels with high conversion rates. Mix for growth is also balanced as advertising & subscription segments will continue to grow at low double digits driven by price increases and increased penetration of OEMs/dealers while the Yixin segment will be primarily driven by volume growth as the market for consumer financing grows in China. China auto market is largest in the world with over 28mn vehicles sold and growing at low to mid –teens while penetration is still way below that of the US (173 cars per 1,000 people vs. 910 in US and 591 in Japan).  The Chinese auto finance market is also growing rapidly, with the participation of professional car rental companies, automakers, dealerships, banks etc., with the market size estimated at RMB1.2 trillion and expected to reach RMB1.6 trillion in 2023.  Auto finance penetration in China is ~40% vs. 80% in the US, 65% in India, and 70% globally.  Given the slowdown in the auto market, OEMs have had to put more focus on their customer networks, and that, in turn, has auto finance companies in China considering ways to cultivate loyalty, which is an overall positive for BITA.  In a recent interview, George Leondis, president of Dongfeng Nissan Auto Finance Co., stated that auto finance could reach 70% penetration in two to three years.  Yixin’s total transaction volumes are expected to grow at a CAGR of 80% between 2016 and 2019.

While the secular growth over the long term is attractive with BITA sitting in a seat that can capture a substantial portion of the growth, at current valuations, one doesn’t need to underwrite a high growth scenario for the investment to work.  Yixin has a current market cap of $1.6bn which results in a contribution of $750MM to BITA’s market cap given its 47% holding.  BITA’s current market cap is $1.26bn, which implies its traditional subscription/advertising business is worth $550MM resulting in the core business being valued at less than 4x P/E. 

I 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.


- Base effect of investment programs cyling through resulting in profit margin normalization

- Negative macro sentiment bottoming out

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