Description

Taiwan Taxi: an asset-light Taxi Fleet with Payment Processing and Advertising Potential

Summary:

Taiwan Taxi (台灣大車隊or “55688” to locals www.taiwantaxi.com.tw) is the dominant asset-light taxi fleet operator in Taiwan with over 22,000 taxis, over 3 million active smartphone app users, over 4 million registered members, and over 6 million monthly rides (10 million monthly passengers).  The company is quietly earning much more profit from non-cash payment processing and billboard-like advertising, high-margin profit streams that don’t require additional capital investment.  We believe Taiwan Taxi could show meaningful profit growth over the next few years by A) continuing to charge a 3% transaction fee on a rapidly growing base of non-cash taxi fare payments (i.e. from Visa/Mastercard, Apple Pay, Alipay, LINE Pay, etc.), B) getting more of its taxis to carry interior/exterior advertising, and C) reducing start-up losses from a Goodyear Tire maintenance chain store business that has masked core profitability. 

Though Uber Taiwan has retreated, the threat to Taiwan Taxi from newer ride-hailing competitors (i.e. LINE Taxi) should be mitigated by the fact that there’s still a lot of market share to take from the island’s large base of uncompetitive individual taxi drivers.[1] This is especially true in the post-COVID era.[2]  

From the average taxi passenger’s perspective, there’s no incentive to choose to ride with most individual taxi drivers because they A) provide atrocious customer service (i.e. many still chew betelnuts or watch TV while driving), B) have no ability to take dispatch bookings, and C) have no ability to accept non-cash payments of any kind.  Likewise, from the average taxi-driver’s perspective, there’s no financial incentive to stay independent because government transportation data already conclusively demonstrates that individual taxi drivers earn, on average, ~20% less revenue than those who drive for dispatch fleets like Taiwan Taxi.

Taiwan Taxi’s current stock price of NT$78.00 implies a market capitalization of NT$4.2 billion, or a 2019 P/E of 15x (or 12x P/E excluding one-off losses from a non-core subsidiary) and a dividend yield of 4.7%.  Excluding a large (8,233 ping or 27,216 square meters), vacant area of land the company owns in New Taipei City worth no less than NT$417 million (according to CBRE), the P/E on 2019 after-tax earnings without one-off losses falls to about 10x.

The research for this write-up included multiple phone calls, a face-to-face meeting, as well as dozens of “secret shopper” surveys of Taiwanese taxi drivers.  Insiders have increased their shareholding in the company as recently as January 2020, and if the earlier history of a similar business in Australia (A2B, a.k.a. Cabcharge) is any guide, if there’s no catastrophic regulatory interference down the road (a big “if”) then this type of company can trade at 20-30x P/E multiples with stable/growing profits for an extended period.[3]  

We don’t know if Taiwan Taxi will ever re-rate to 20-30x, but we do believe that the current core P/E of ~10x is too cheap given the fact that tens of thousands of unsophisticated individual taxi drivers still exist and, barring any major regulatory changes, will likely continue to cede market share to larger players like Taiwan Taxi in the long-run.[4]

What is the history of Taiwan Taxi? How did the company become the industry-leader by a big margin? 

The Chairman and major shareholder of Taiwan Taxi, Mr. Lin Cun-Tian (林村田), is not the company’s founder but actually an opportunistic investor-operator who bought into the company after the first two owners failed.  Lin was raised in rural Taixi (台西), part of Yunlin County (雲林), before entering mandatory military service.[5]  After the military, Lin founded his first company (Arcoa 全虹) in 1981 at age 23 and built it into a well-known telecom equipment retailer that he later sold to Far EasTone Telecommunications in February 2005.[6]  That same year, Lin used the Arcoa disposal proceeds to acquire control of Taiwan Taxi, a money-loser with a fleet size of under 2,000 taxis but connected by a uniquely scalable GPS dispatch system copied from Singapore’s leading taxi company. [7]  From 2006 onwards, the company has been profitable every single year and revenue has increased more than ten-fold while sustaining double-digit pre-tax profit margins. 

Above: Lin Cun-Tian (林村田), the Chairman and major shareholder of Taiwan Taxi. https://www.gvm.com.tw/article/69101

Above: “小型車行及個人執業之計程車，將會逐漸被整併或淘汰” (translation: “small scale taxi companies and individual taxi drivers will gradually be acquired or eliminated”) is a market prediction that’s appeared, word for word, in in every single Taiwan Taxi annual report to shareholders from 2011-2018.  Taiwan Taxi’s success since Lin Cun-Tian took over in 2005 has been as much about taking share from uncompetitive individual drivers as it has been about beating back new entrants like Uber.

How did the company achieve this?  Lin was shrewd in observing that Taiwan’s taxi industry in 2005 was characterized by unnecessarily fragmented supply (drivers) and demand (passengers).  For decades, there have been three different taxi business models permitted in Taiwan.  The first is 個人or individually licensed/insured taxi drivers that own their own vehicles.  The second is合作社 or cooperatives of individually licensed/insured taxi drivers that each own their own vehicles.  The third is 車行 or corporate licensed/insured taxi firms that either a) acquire/own taxis to be driven by hired drivers, b) don’t acquire/own any taxis but simply manage a 車隊 or “fleet” of self-employed individual drivers connected via digital dispatch.  Unlike, say, in Hong Kong – where the number of taxi licenses has been capped since 1997, resulting in prohibitively expensive secondary market prices for each license – the financial barrier to entry for individual taxi drivers in Taiwan was only the cost of owning/leasing a car.  As a result, there’s always been a very high number (tens of thousands) of individual taxi drivers in Taiwan, many of whom drive recklessly and provide dreadful customer service.

Above: summary statistics from a bi-annual government survey of the Taiwan taxi industry (https://www.motc.gov.tw/uploaddowndoc?file=survey/201810161445520.pdf&filedisplay=201810161445520.pdf&flag=doc).  Notice 1) the wide gap observed between dispatch and non-dispatch driver monthly incomes (i.e. NT$50,951 vs. NT$40,432 before expenses and NT$28,079 vs. NT$22,004 after expenses), and 2) the high percentage of taxi drivers (49.9% as of 2017) that answered they have not yet joined a dispatch network. 

Lin realized that if Taiwan Taxi could start to consolidate supply/demand, individual taxi drivers would have to cede market share.  To build scale, Lin had to dramatically increase the number of drivers working exclusively for Taiwan Taxi’s 55688 fleet.  To attract new drivers, Lin promoted Taiwan Taxi’s GPS dispatch system and eliminated all fleet entry/exit fees for incoming/departing drivers (to this day, many taxi cooperatives and companies require hefty entry/exit fees).  To retain drivers, Lin ensured they earned above-average incomes by forcing them to focus on customer service to attract/retain new passengers.  Manners and dress codes were enforced, newer/cleaner/well-maintained cars became mandatory, exclusive corporate clients were onboarded, and the GPS dispatch service – a scalable system unlike radio dispatch which was limited in range to only 400 taxis at a time – gained popularity with its catchy 55688 phone number (now a smartphone app).

Before long, an increasing number of taxi passengers began choosing to ride in a 55688 taxi by connecting to the dispatch service.  This resulted in a “flywheel” effect: higher incomes for taxi drivers led to even more taxi drivers and even more passengers.[8]  Eventually, Taiwan Taxi’s fleet drivers came to expect lots of other competitive perks like ~50% of revenues from dispatch orders, non-cash payment-processing hardware, a higher amount of liability insurance coverage (as well as legal assistance in accidents), SAP Concur QR-code connectivity to corporate clients’ ERP systems for business expenses, car maintenance support, and a share of any vehicle exterior advertising revenue.  Likewise, Taiwan Taxi passengers came to expect unique perks like credit card-sponsored discounts and niche services like female-only drivers or handicap-equipped cars.

Above (left): Taiwan Taxi’s NT$3.5 million per passenger liability insurance policy from Fubon Insurance, far in excess of the NT$1.5 million legal requirement by taxi regulators.  Above (middle): Taiwan Taxi pioneered the ability for passengers to pay for rides using airline miles (i.e. Asiamiles) and points from other loyalty programs such as the Happy Go card from Far Eastern Group (i.e. the same conglomerate that acquired Lin’s first business, Arcoa).  Above (right): Taiwan Taxi also pioneered the ability for passengers to make specific requests such as “female-only drivers” or “no talking.”

In 2011, Lin took Taiwan Taxi public on the Taipei Exchange to cement the company’s trustworthy reputation among drivers and passengers.[9]  The listing status also provided Lin with a transparent platform to engage in merger discussions with smaller competitors that, unless they sold out to him, would have had difficulty surviving long-term.  So, in 2013 (the year Uber launched in Taiwan) three smaller taxi fleets sold their assets to Taiwan Taxi, taking the group’s fleet scale from 10,000 to 15,000 taxis.  Today, Taiwan Taxi has over 21,000 taxis under management and is the unquestionable market-leader, especially in greater Taipei where as many as 45-50% of all taxis belong to their fleet.

As any of their drivers or passengers can attest to, Taiwan Taxi is actually an innovative service provider that just happens to manage a taxi fleet at its core: R&D spending as a percentage of revenue has been at least 4% for years, and over 70 people work in the IT department.  Despite their accomplishments to date, Taiwan Taxi’s management team are still focused on improving customer experience and on expanding into adjacent opportunities – but only where they have advantages.[10] 

Above: by 2013, when Uber entered Taiwan, ~700,000 people (3% of the population) downloaded the 55688 app every month.

How does Taiwan Taxi make money? Where is the future profit growth going to come from?

From 2012 to 2018, 82% of the consolidated gross profit dollars of Taiwan Taxi were produced by two streams of service income: 1) taxi fleet management fees and 2) taxi advertising.[11]  These two fee sources have been sticky, scalable, and in aggregate quite predictable.[12]  In our opinion, growth in taxi fleet fees and taxi advertising fees, along with reduced losses at a non-core Goodyear Tire maintenance subsidiary, could generate meaningful operating profit growth for the next few years.[13]

Above: the basic economics of Taiwan Taxi’s fleet circa 2017.  There was a 51/49 split between road-side pick-ups and dispatch customers, and the average fare of each ride was NT$238, producing annualized gross revenue of NT$13 billion over 54.6 million annual taxi rides (or 4.6 million monthly rides).  According to a July 2019 interview with Chairman Lin, Taiwan Taxi now generates over 6 million monthly rides (carrying 10 million monthly passengers) https://www.cheers.com.tw/article/article.action?id=5094871&page=1.

Taxi management fees can be split into three separate pools.  The largest of these fee pools, fleet membership fees (or 企業會員及加盟服務收入), is a recurring monthly fee of NT$500 to NT$1,500 paid by each yellow taxi in the 55688 fleet – revenues from this have grown 112% from 2011 to 2018, in line with the growth of Taiwan Taxi’s fleet.[14]  The second largest fee pool, dispatch booking fees (or 派遣及仲介收入), is a variable fee of NT$10 charged each time a passenger’s dispatch order comes through the 55688 smartphone app or call center – these revenues have increased 144% from 2011 to 2018 thanks to both fleet growth and more widespread adoption of dispatch bookings.  The third largest fee pool is a non-cash processing fee of 3% of the value of any non-cash taxi fare (i.e. by Apple Pay, Alipay, Visa/Mastercard, etc.) – these revenues are not clearly disclosed, but by our estimates have tripled between 2016 and 2018. 

Above: Taiwan Taxi’s non-cash payments saw a 3x increase in the first half of 2017 and has continued to grow.

Above: as of mid-2017, non-cash payments accounted for only 14% of Taiwan Taxi’s revenue, and that number was overly flattered by the fact that four percentage points of that 14% comes from corporate-settled business expense accounts (i.e. Taiwan Taxi has corporate travel expense agreements with some 20,000 small and large companies across Taiwan).  According to management, non-cash payments reached 30% in late 2019.

Above: cashless payment population statistics from Taiwan’s banking regulator https://www.wealth.com.tw/home/articles/23064

Of the above fee streams, the 3% non-cash payments fee potentially represents a big growth opportunity that can continue even if Taiwan Taxi’s fleet-size doesn’t increase much from here.  Why?  As any Taiwanese resident can attest to, most merchants accepted nothing but cash until only a few years ago.[15]  Thanks to recent government support, however, enough cashless payment platforms and participating merchants have emerged so there’s now 6 million Taiwanese (1/4 of the population) that regularly use cashless digital payments.  At Taiwan Taxi, in the last four years cashless transactions went from near-zero to now over 30% of the total.[16]  If the experience of other developed markets is any guide (i.e. from 2007 to 2016 the proportion of non-cash payments of all transactions in Australia increased from 31% to 63%) cashless transactions at Taiwan Taxi could ultimately exceed 50% in the next decade.[17] 

Taiwan Taxi’s non-cash payment processing not only provides more convenience to passengers, but also alleviates a key pain-point of its drivers: the hassle of counting/depositing cash.[18]  As a result, Taiwan Taxi charges drivers for the 3% non-cash payment processing fees.  At first, our instinct was that drivers wouldn’t accept paying 3% processing fees over the long-run, even if relatively higher surcharge rates existed in other developed taxi markets like Australia, New Zealand, and Singapore.[19]  Taiwan Taxi’s management explained to us that the 3% fee they take isn’t pure profit due to back-end processing expenses.  So, when Taiwan Taxi debits the 3% fee from 55688 drivers’ e-wallets, they apparently don’t feel ripped-off because they also receive 10% discounts on a range of other ancillary items (i.e. car maintenance consumables), and all of those discounted products can be paid for using the e-wallet.[20]  We are now of the view that, as long as Taiwan Taxi’s drivers continue to earn above-average incomes (especially in comparison to individual taxi drivers), they will continue to accept being charged a non-cash payment processing fee.

Above: Taiwan Taxi’s parent-level income statement.

            Billboard-like advertising revenue – both inside and outside taxi cabs – represents another source of potential profit growth for Taiwan Taxi.  According to management, the company has historically underperformed on its advertising potential and today only half of all 55688 taxis carry any ads.  In addition to increased utilization, there is also scope for smarter advertisements that link with the 3 million active 55688 smartphone apps and their user profiles.  For example, if a passenger orders a car to the airport, travel insurance deals could appear on either the app screen, the interior touch-panel device, or both.  This “precision advertising” vision is a work-in-progress today, but given how many high-income leisure/business passengers sit in Taiwan Taxi’s cabs each month (10 million) and how many Taiwanese consumer-facing companies we have met that complain Facebook/Google advertising is too expensive, it does seem like there is a niche to be filled. 

Because all taxicabs are already owned by the 55688 fleet drivers, there’s a) almost no upfront investment cost to put up what amounts to roving billboards and b) almost no revenue sharing with drivers aside from a NT$500 monthly payment on exterior ads.[21]   By our estimate, at the parent-level the gross profit margin on advertising revenue after paying drivers their NT$500 monthly share is as high as 95%, which means that advertising already generates just over 40% of the company’s total gross profit. 

Above: Taiwan Taxi’s MID (mobile internet device) interior advertising stats circa June 2013.

What about competition from aggressive ride-hailing companies like Uber?

In Singapore, the leading incumbent taxi companies, Comfort Delgro and Trans-Cab, both suffered significant declines in taxi revenue/profit due to the proliferation of “ride-hailing” apps (chiefly Uber/Grab) from 2013 to 2019. 

Taiwan, however, is an example of where Uber’s aggressive driver/passenger subsidies failed to disrupt, or even slow down, the incumbent taxi operator.  Why?  The answer is not simply because Taiwanese lawmakers, fed up with Uber’s pattern of non-compliance, regulated away Uber’s prior business model.[22]  It’s also because Taiwan Taxi (or “55688” to locals) already perfected a profitable, asset-light digital car dispatch business model with superior service standards and customer loyalty long before Uber arrived in 2013.[23] 

The numbers to date show that the “network effect” of Taiwan Taxi’s ~22,000 drivers (~24% island-wide market share, ~40-50% northern Taiwan market share) and ~3 million active smartphone app users kept new entrants at bay.  Taiwan Taxi’s revenues, taxis under management, R&D spending, and core earnings power all increased during the 5-6 years that Uber was most active in Taiwan.  In fact, during the fourth quarter of 2019 (when Uber’s regulatory fate was finally sealed) many of Uber’s Taiwan drivers switched allegiances to drive for Taiwan Taxi’s deluxe “diversified taxi” service.[24]   

More recently, LINE launched their own Taiwan ride-hailing service, LINE Taxi, in October 2019 to compete directly with Taiwan Taxi. [25]  Since LINE chat counts 21 million active users in Taiwan out of a total population of 23 million, their entry into taxi hailing made for splashy headlines and even caused some weakness in Taiwan Taxi’s stock price.  Based on our own surveys with actual taxi drivers since then, however, it does not seem like LINE has achieved a big enough scale of repeat taxi passengers to ensure their taxi drivers can earn more money than if they were to drive for Taiwan Taxi.[26]  Likewise, it is hard to see how serious LINE is in exploiting their scale as a near-ubiquitous app in Taiwan to compete in a narrower business like taxi-hailing.  The reason why is LINE still offer enormous convenience to Taiwan Taxi’s existing customers by allowing them to a) pay for rides using LINE Pay (which is still accepted in all 55688 cabs) and b) book dispatch taxi rides by simply chatting with a LINE chatroom bot.[27]

Above: LINE is a friend and competitor to Taiwan Taxi.  Not only is LINE Pay accepted in all Taiwan Taxi vehicles, but Taiwan Taxi users can use the affiliated “55899” call-sign to hail taxis via LINE chatbots.  When LINE Taxi launched in October 2019, the chatbot taxi hailing function was advertised in several news outlets as a unique selling point.  That both LINE Pay and the LINE chatbots are available to a rival taxi company like Taiwan Taxi suggests that maybe LINE is not willing to sacrifice the average app user’s convenience in return for boosting their ride-hailing market share.

Above: how ubiquitous is 55688 in Taiwan?  On the afternoon of January 30^th, 2020 not a single Uber (above left) or LINE Taxi (above middle) vehicle could be found roaming the streets of Taitung looking for customers.  Only Taiwan Taxi (above right) vehicles were available and open for business.  Granted, Taitung only has a population of 100,000, but it is a popular surfer town that attracted over 8 million tourists in 2019 (https://www.cna.com.tw/news/aloc/202001150117.aspx).

Catalyst

Take further market share from individual taxi drivers that have no way to compete long-term. COVID-19 has likely convinced many more individual taxi drivers to stop trying to compete and just join Taiwan Taxi as a fleet driver instead.