Description

This is not a dirt-cheap company but rather a proven niche leader with a very nice track record (5-year average unleveraged ROE: 44%) trading at the lowest EV multiples in years (<9x TTM EBITDA) and the highest prospective cash dividend yield (6-7%) with the next few years of earnings growth “in the bag.”

Thanks to its first-mover status (both offline and online), Union Auction (AUCT) has been the #1 independent used vehicle auction house in Thailand (13 leased auction locations and 33 leased storage sites nationwide) for three decades. AUCT specializes in auctions for foreclosed cars/motorcycles seized/sold by financial institutions (hire purchase lenders) and sold primarily to car dealers, a niche market estimated to ~200,000 vehicles in annual auction volume in most years.

Within this market, AUCT appears to have sustained 40-50% revenue market share and 50-60% pretax profit market share over the last decade (see below). Over 80% of AUCT’s bidders today are online and the remainder bid in-person. 70% of bidders (chiefly car dealers) are repeat bidders. Over the long-term, AUCT aspires to attract a) more individual/retail bidders, and b) auction a wider variety of assets.

AUCT is led today by CEO Varunyoo Sila, the energetic 39-year-old son of AUCT’s founder. The Sila family still controls 52% of total shares outstanding. Varunyoo (“Khun Sila”) himself is now a major AUCT shareholder (16%) thanks to massive block purchases he made in mid-2021 from his brother/sister, increasing his shareholding by 15 percentage points. In our view, Khun Sila has been extremely IR-friendly and responsive to questions, while AUCT’s annual report is among the most informative we have seen in Thailand, certainly among micro caps.  

Given AUCT’s market leadership, history of revenue growth (5x since 2011), high margins (>30% pretax margins), high ROE (30-40% with no borrowings), and commitment to cash dividends (95-100% annual dividend payout) we would not expect their shares to trade at attractive valuations.

Surprisingly, AUCT’s market cap has not budged much since COVID-19. Today AUCT shares are at the lowest prospective EV multiples in many years and the highest prospective cash dividend yield (high single digit). That makes little sense to us given the large backlog of business accumulated during COVID that has yet to be monetized in AUCT’s P&L but a) will be over the next few years, and b) with greater revenue per vehicle thanks to the company’s third fee price hike since 2013.  

What do we mean?

1. End of the moratorium => time to liquidate collateral (cars) that should have been seized during COVID:

The Thai government imposed a collateral foreclosure moratorium for two years during the pandemic to protect the most vulnerable borrowers: see https://asia.nikkei.com/Business/Finance/Thai-banks-give-coronavirus-hit-borrowers-one-year-moratorium and https://www.bangkokpost.com/business/2125327/bot-launches-car-loan-debt-programme. As a result, AUCT’s auction volumes were artificially flattish for the duration of COVID, but thanks to the end of the foreclosure moratorium in the summer of 2022, AUCT’s auction volumes have started to show significant growth since 3Q2022.

How significant? AUCT was quoted in the media on 6/28 highlighting the urgent need for more space to "cope" with the "spike" in new business (https://thainewsroom.com/2023/06/28/auction-company-gears-up-for-jump-in-seized-vehicles-amid-spike-in-defaults/). Given that seized car collateral legally can’t be auctioned for at least 45 days, AUCT parking lots start receiving seized cars as much as 1-2 months before they are scheduled to be sold; those parked cars that have yet to be sold because they’re still waiting out their 45 days is essentially future revenue that’s “in the bag.” In that respect, AUCT has very good revenue visibility looking out 1-2 months so if the CEO says out loud that they’re out of parking space, that’s a big bullish statement based on our prior research and a site visit late last year.

According to our research and news flow, it will take Thailand at least 2-3 years from here to liquidate – in an orderly manner that doesn’t overly depress prices to the detriment of financial institution lenders – all the cars that should have been seized due from non-performing borrowers during COVID-19. What does “orderly” volume mean? Based on our research and what has been said publicly, that should translate into at least 20% higher auction volumes per year for the next 2-3 years versus AUCT’s pre-COVID ~80k of annual sales volumes.

Don’t believe such a backlog exists? Just look at a July 17, 2023 Thanachart analyst report about JMT Network (JMT TB), the largest debt-collection company in Thailand: “In light of all-time high cash collection in 2Q23 and its largest-ever NPL backlog on hand, JMT looks on track for better earnings momentum and we estimate a three-year EPS CAGR of 22% over 2023-25F.”

2. Auction fees hiked 10% and 100% on cars & m-bikes, respectively, since 08/2022, the 3^rd hike since ‘1        

For AUCT’s bread-and-butter car auctions, AUCT has raised auction fee prices (paid by the winning bidder) THREE TIMES in the last decade: in November 2013 (from THB 7,000 to THB 8,000 per car auction), August 2020 (from THB 8,000 to THB 9,000 per car auction), and August 2022 (from THB 9,000 to THB 10,000).  For good measure, AUCT DOUBLED the auction fee charged on motorcycles in August 2022 to THB 3,000 from THB 1,500.  

We are especially impressed by the most recent August 2022 price hike because, we first started speaking with AUCT management in 2021 (shortly after the August 2020 price hike), management indicated they felt it was unlikely another price hike would occur in the near future.  Yet the following year AUCT managed to sneak through another >10% price hike and their “customers” (lending institutions with repossessed cars to liquidate) apparently had NO ISSUE with it: “for this particular price hike, we originally just wanted to raise the auction prices of motorcycles, but the customers came back and suggested we just raise the auction prices for cars, so we agreed.”

The above-mentioned volume back-log effect, plus the 10% and 100% auction prices hikes imposed by AUCT from August 2022 onwards on cars and motorcycles, respectively, should lead to significant revenue growth and, thanks to mostly fixed costs, profit growth at AUCT for at least 2023-2024.  Below is a rough attempt at penciling out what 2023 might look like.  We’ll see what happens over the rest of 2023/2024. 

Note: below estimate relies on sales volume assumptions based on historical sales volume, the record of which since 2019 onwards has been obscured by AUCT because their “customers” (financial institutions) don’t want the world to know how many cars they’re liquidating. Hence the auction sales volumes onwards below are only our best guesses based on dividing total revenue by the per car auction fee sticker price.

              Once the COVID back-log fully clears in about three years where will “normal” car auction sales volumes be?  Here’s our best guess: we know that AUCT”s that car auction sales volumes increased from 32,000 to 80,000 a year in less than a decade.  If we assume that the “normal” pre-backlog annual car volumes of 80,000 grows at 5% annually, in three years’ time the “normal” auction volume will be at ~93,000 units per year.  That 93,000 units per year will be just under the 95,000 units we expect to be sold this year in 2023… so in that scenario, there should not be a total collapse in P&L topline one the backlog clears. Who knows? AUCT may push through yet another fee price over the next three years. 

Below: 4Q2022 and 1Q2023 MD&A indicate strong growth from the extra backlog volume and increased prices.

Company History/Background:

See 2022 annual report https://market.sec.or.th/public/idisc/en/CompanyProfile/Listed/AUCT)

Union Auction Public Company Limited (“The Company”) was registered as Union Auction Company Limited on 2 August 1991 with the start-up registered capital of 3 million Baht. The Company’s business was to conduct an auction of automobiles, under the management of Mr. Thepthai Sila, its promoter and business pioneer.

In the beginning, the key business focused on the used automobiles. In 1991, the owner established a company when seeing the potential of automobile auction services business which has not yet well-known at that time in Thailand.

He studied the demand of customers and many car auction businesses in many countries, such as U.S.A., Japan, Australia, New Zealand, etc. with the objective to offer the alternative of automobile buying/ selling services and to create the ultimate satisfaction to customers, both buyers and sellers. The Company was considered the first company in Thailand conducting the automobile auction as an “Open Auction” in which the buyers showed the intention of purchase by offering the price to the public or participated bidders. The winner was the last one who offered the highest price.

The company’s current business has extended to an auction of motorcycles and other types of assets according to customer’s demand, such as land and houses, shares, furniture, electric appliances, and brand-name products to meet the needs of customers, both buyers and sellers. With the transparent auction process up to the standard and long term experiences, the Company has gained acceptance and trust from many financial institutions, private sectors and governmental sectors to serve as an intermediary to conduct an auction for all types of property.

Site visit video of complete truck auction at AUCT headquarters (yellow screen = offline bidder, green screen = online bidder, starting bid = THB 240k, winning bid = THB 342k):

https://www.dropbox.com/s/5g3uwbsdg5dlama/IMG_9860.MOV?dl=0

Site visit video of live auction with a glimpse of small section of the massive HQ parking lot:

https://www.dropbox.com/s/cpmls3vtprzv64q/IMG_9859.MOV?dl=0

Site visit video of live motorcycle auction at AUCT HQ:

https://www.dropbox.com/s/ul0hkylu8xlymnh/IMG_9864.MOV?dl=0

Site visit video of AUCT’s smartphone bidding user interface:

https://www.dropbox.com/s/r35xfoiejbn1k5k/IMG_9863.mov.MOV?dl=0

Peer comps:

It’s not easy to find publicly traded relevant comps for AUCT, but we think their current 8.7x TTM EV/EBITDA with 6.7% indicated dividend yield (4.6% trailing yield) compares favorably versus nearly any Asian-listed comp from the perspective of a) historical track record (sustained high margins + ROE, no cash hoarding or distraction investments), and b) prospective total return (i.e., high single digit % cash yield PLUS “in-the-bag” growth for the foreseeable future easily comes out to double-digit total returns):

• JMT Network (JMT TB): 23x TTM EV/EBITDA with 3.0% indicated dividend yield (leading debt-collection company in Thailand, also benefiting from COVID-related backlog of NPLs)
• Art Emperor (6650 TT): 13x TTM EV/EBITDA with 2.9% indicated dividend yield (Taiwanese art auction firm competing admirably against Sotheby’s/Christies)
• Auctnet (3964 JP): 3.4x TTM EV/EBITDA with 2.8% indicated dividend yield (car auction-related, but hoarding cash irrationally as far as we can see)
• Apple Int’l (2788 JP): 4.6x TTM EV/EBITDA with 1.5% indicated dividend yield (42% shareholder of direct competitor Apple Auction Thailand, but core business is inventory-heavy traditional 2^nd hand car dealing)

Below: AUCT’s revenue and pre-tax profit market share versus direct competitors we identified. Financial data on unlisted peers is publicly available on a pay-per-view basis with the Ministry of Commerce and local credit bureaus. Note that Motto Auction numbers disappeared after getting acquired by Carro (https://carro.sg/).

Below: CEO Varunyoo Sila’s significant insider share purchase in 2021, making him tied for #1 shareholder. While his purchase was from family and not on the open market, this was the first time he officially had this much skin in the game (i.e. US$25 million of personal shareholdings as of today).

Other miscellenous facts (not comprehensive):

• Thailand’s annual new car sales are about 0.8-1 million cars. The used car market is even bigger, so there are at least 2-3 million transactions per year, but according to AUCT there’s no official records on the second hand transactions.
• Any fluctuations in AUCT’s growth over time has been mostly the result of one-off government policies
  • For example, there were two years in a row of decline in 2016/2017 – this was the result of a “first car” government policy that pulled forward demand to the prior years.
• Gross transaction values
  • in 2020 the THB 864 million of auction fees were earned on a transaction value “greater than THB 10 billion but less than THB 30 billion” (AUCT won’t confirm the exact amounts) on an average selling price per car of roughly THB 250,000.
• Independent auction houses have taken market share over time from the in-house auction arms of lending institutions and car dealers that also act as auction houses. Why?
  • 1) Economies of scale: AUCT liquidates cars for everyone, so they can be more efficient on costs because of their higher volumes
  • 2) Lack of conflicts of interest: a car dealer that also has an in-house auction arm is not independent from the perspective of a lending institution that seeks to liquidate collateral at the best price.
• AUCT’s numerous storage locations and auction venues are a key advantage:
  • when car collateral is enforced around the country, debt collectors try to send the cars to the nearest parking lot and AUCT simply as the most locations.
• Due to high import duties, there is minimal threat of foreign import cars.
• Sell-side concentration: #1 seller is 40-50% of sales volume and the top five account for 80-90% of volume. In this industry, there’s not many institutions that make car loans, so the big five lenders are a massive percentage of auction volume for virtually all auction houses nationwide.
• Buy-side concentration: top 10 bidders are no more than 10-20% of transaction volume.
• Revenue can grow from an improved “auction success rate”
  • For example, if AUCT puts 500 cars up for auction, a 50% success rate means 250 were actually sold. AUCT’s historical auction success rate has hovered at 50-60%, but for 2021 it was higher (68%) because car prices increased due to extra COVID demand for 2nd hand cars (i.e. the volume of cars for sale decreased, so there was more bidding per car).
  • For the “success rate” of auctions, it depends on the prices that lending institutions set too – if sellers set prices too high then the auction success rate will be low, and vice versa.

Catalyst

Growth of revenue, profit, and cash dividends thanks to a) monetizing the COVID backlog, b) auctioning a wider variety of assets besides vehicles, and c) further auction fee price hikes.