BITA -- Help tear my idea apart

Investment Analysis Clubs Saul’s Investing Discussions
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Greetings Saul board users,

Long time lurking, not-often poster. I’ve been doing some research on a company and was hoping, as one of the finer corners of Fooldom, that you call could put this idea through the ringer to point out the things I’m missing.

The stock: Bitauto (NYSE: BITA)

The thesis: It is building a platform for a streamlined car-buying experience that benefits from the network effect, bringing together car buyers, auto dealers, OEMs, financiers, and insurance companies.

Here’s the long-and-short:

Bitauto has three different segments (rev figures TTM, CAGR since 2015):
Advertising (48% of revs, CAGR of 10%)
Digital Marketing (11% of revs, CAGR of 38%)
Transaction Services (41% of revs, CAGR of 144%)

As you might suspect, the real thesis here is in transaction services. This is where things get a little hairy. In order to capitalize on the opportunity the company has, it reached out to lots of funders in 2014 and 2015 to create a subsidiary, Yixin – which focuses on transaction services. Just this month, Yixin was spun out of Bitauto. As far as ownership goes, these are the key details:

Bitauto still owns 44.4% of the company, and controlling voting rights.
Yixin is also backed by Tencent (20.9% ownership), JD (10.9%), and Baidu (3.0%), among others. These favorable relationships lower customer acquisition costs for Yixin, and strengthen the network effect.

Within Yixin, there are two operating segments, and it’s important to understand both of them.

Self-operating financing
At the most basic level, this is Yixin (and by proxy, Bitauto) lending out its own money for customers to make auto purchases or leases. This currently accounts for 80% of Yixin’s revenue, and is growing at 210%.

While the growth has been great, there are significant threats to take into consideration – namely that Yixin is on the hook if these loans go south. The company admit’s it’s underwriting may not be up to snuff, stating in its recent prospectus:

For most of our auto finance products, we generally require less documentation from applicants than that would otherwise be required by traditional banks for credit assessment and approval, which enables more expedited approval process. However, such lower documentation requirement may result in increasing risks through our self-operated financing business.

It’s worth noting, however, that this business is actually becoming a smaller and smaller part of Yixin’s overall operation – which I think is a good thing.

Transaction platform
This is the other arm of Yixin. It is here that the network effect really takes hold.

Even within the transaction platform, there are two sub-divisions:

Advertising and Subscription Services
Auto dealers can place ads and promotional material

This provides 12% of revenue for Yixin and has grown from 48M RMB in 2014 to 329 RMB today (CAGR of 100%)

Facilitation and Value Added Services
Connecting auto buyers with dealers, financing solutions (including those not directly associated with Yixin’s self-operating finance arm), and insurance options.
Value added services via telematics for auto dealers.

This provides 8.5% of revenue for Yixin today, BUT THIS IS THE LYNCHPIN BEHIND AN INVESTMENT.

This division only brought in 13M RMB last year, and through the first six months of 2017, it brought in 133M RMB – a tenfold increase in just six months.

This is the key because it mitigates financing risk away from Yixin, and helps strengthen the network effect. It is also growing fast enough that I believe it could represent a much larger percentage of revenue moving forward.

Beyond all these moving pieces

That’s a lot to digest. And if you have the time or interest, you can read the entire Yixin prospectus here: http://www.irasia.com/listco/hk/yixin/listingdoc/l171106.pdf…

But in terms of value, I found something else very interesting.

If my calculations are correct, Yixin is being valued on the Hong Kong exchange at $5.77B. With a 44.4% ownership stake, that means Bitauto’s share is worth $2.56B. Right now, shares of Bitauto trade with a market cap of just $2.46B. In other words, if you own shares, you get the Yixin stake for a discount, and everything else that doesn’t fall under the overlap of BITA and Yixin is absolutely free.

What I need from you!

Tear this apart. Seriously, tear it apart. I have to be missing something, because this seems like an awfully good deal. I’m not much of a trader like Saul and others (not that you’re traders, but you don’t mind getting in and out quickly), and my annual portfolio turnover is often less than 15%. Knowing that, I see autonomous electric fleets as perhaps the greatest longterm threat to BITA.

But beyond that, WHAT AM I MISSING?

Thanks in advance,
Brian

Long JD, BIDU (and very small stake in BITA)

8 Likes
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Seems interesting. But why do you think that they have taken a 25% haircut in the last week?

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Yixin just went public, and they announced earnings. Both are the types of events that could be major movers.

Having said that, there was a lot to like in Yixin’s prospectus and BITA’s earnings. Adjusted revs are expected to increase 50% next quarter, and transactions are expected to double next year.

The one big hit was the fact that they had LOTS of options grants to Yixin which made it so there was a steep GAAP unprofitability.

Brian

Long Bita

1 Like
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Brian,

Unfortunately, I have nothing to offer at the moment in order to tear your idea apart. Quite the contrary :smiley: You convinced me to buy BITA! Lol!

Keep up the good work!

Dominic

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"building a platform for a streamlined car-buying experience that benefits from the network effect’

The first rule is that 99% of the companies that claim they have a network effect, don’t :slight_smile:

A strategy writer that I follow put it really well recently. It’s not a network effect if more customers make the margins a little better. That’s economies of scale. It is a network effect if more customers make it so that the competitors are irrelevant.

Now facilitating financial transactions (particularly lending and insurance) is usually a very profitable business. I would look at how much marketing they have to do to get those customers, and what (if anything) would stop competitors from taking those customers. The total market size would also be relevant.

Aside from that, there is the whole China thing. I don’t directly own any Chinese stocks and haven’t really looked into the legal risks.

When I talked to some people there a few months ago I got the impression that a lot of the higher-priced sales (like real estate) are probably being driven by a historic debt bubble because there is very little actual capacity to pay back the loans. But with central planning that doesn’t mean things will change any time soon. I just can’t tell how much further they might be able to push back the outcome, or how much more the bubble might grow.

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Tear this apart. Seriously, tear it apart.

Wouldn’t dream of it.

However :slight_smile: I would like to tell you a story.

The last car I purchased* was last summer when I decided to buy my wife a new Subaru SUV. I called ahead and talked to a sales manager of a firm 60 miles away that was recommended by a relative with a terrific experience buying from them. He assured me that I could get a price on a new vehicle with the options we wanted and a price for our trade-in, sign papers if agree upon everything, and be done in 2 hours.

Okay, you laugh, but you don’t know how important this was to me. My wife and I used to trade our cars every 2 years, meaning every year one of us was trading in our car or truck for a new one. This started taking so much time when I had employees to babysit, er, manage, that I started buying by phone, fax and email only. Win-win, right?

Back to the Subaru dealer. First, we went in on a weekend. We argued first over the trade-in value. I’d already looked up Kelly blue book and the other online “appraiser” (can’t remember the firm, I’m old and feeble) so I knew what it was worth and there was no question of the great condition it was in. Turned out, the salesman was doing something wrong - wrong year, or model, or ??? never did hear - so we politely thanked them and left.

They called Monday a.m. “We found the problem resulting in the disagreement ($2k) so we’re all set.” They apologized for the error and would we be willing to come back in and start over and now be done in an hour or less? Against my better judgement we did but I had an appointment in the same city and had to leave, so my wife was left to handle the final details. To shorten this by 4 chapters, they bullied and nagged my wife about add-on “services” so hard she was in tears when I called her to check on progress. We ended up leasing instead of buying (not our choice) and buying an extended warranty ($1600, not our choice). “Why in hell would we need an extended warranty on a brand new car?!” I screamed. “They pushed and pushed and pushed until I had enough” my wife (who never backs down and never misses a sale, a coupon, a good deal–ever) said.

To save another 3 chapters …

Never.
Ever.
Again.

People are tired of the way they’re treated by so many car dealerships. And it’s only a stupid car. Plus, when I bought my Corvette - a Corvette, mind you, $60k +, I drove out in under 45 minutes because they knew my intolerance for “extras” and “time wasters.”

Would I ever invest? Well, without reading and studying the company a lot more … Never. Ever. Again.

I may be in the minority here with my feelings about car buying, but I can’t imagine that many others don’t feel somewhat the same way. And maybe these guys are happy, fun-loving salesmen, interested only in their customers’s satisfaction.

But, reading upstream, uh-oh … As you might suspect, the real thesis here is in transaction services.

Nope.
Never.
…(you know the rest by now.)

Dan

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Dan,

Thanks for the story. That does not sound like fun. And reminds me why I’m happy we’ve had the same car for most of our parenting lives.

Brian

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thecompounder-

A strategy writer that I follow put it really well recently. It’s not a network effect if more customers make the margins a little better. That’s economies of scale. It is a network effect if more customers make it so that the competitors are irrelevant.

What a great line. Who, may I ask, is that writer? I need to start following her/him.

I think the popularity of the app for consumers is the real lynchpin that could “make the competitors irrelevant.” As far as that goes, MAUs were 51 million last quarter, but I couldn’t find any data on previous quarters to see how that stacks up.

Brian
Long BITA

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Ben Thompson

1 Like