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China's Car Rental Market Size 23 October 2014 Asia Pacific/China Equity Research Travel & Leisure CAR Inc. (0699.HK / 0699 HK) Rating OUTPERFORM* [V] Price (21 Oct 14, HK$) 10.60 INITIATION Target price (HK$) 12.30¹ Upside/downside (%) 16.0 Mkt cap (HK$ mn) 24,990 (US$3,221 mn) Monetising strong growth in China Enterprise value (Rmb mn) 18,554 Number of shares (mn) 2,357.51 ■ Initiate coverage with OUTPERFORM rating. CAR is the largest auto Free float (%) 19.6 rental company in China, with a 31% market share. As of end-2013, CAR's 52-week price range 11.9–10.3 ADTO - 6M (US$ mn) 32.8 fleet size was four times that of eHi (the second-largest player), and greater *Stock ratings are relative to the coverage universe in each than the aggregate size of the Top 2-10 players. We expect CAR to continue analyst's or each team's respective sector. ¹Target price is for 12 months. monetising China's robust demand (a 27% CAGR over 2013-18E). [V] = Stock considered volatile (see Disclosure Appendix). ■ Asset heavy, capital intensive, and operating leverage. Fixed costs Research Analysts represent nearly 90% of CAR's total operating costs. We expect operating Kevin Yin leverage to come from: (1) rising utilisation on technology-driven yield 852 2101 7655 management (big data analysis, dynamic pricing and fleet allocation); (2) [email protected] lower unit depreciation (competitive purchasing and disposal prices); and (3) lower unit labour costs (fleet size expansion and HQ relocation to Tianjin). ■ Recent developments. (1) In October, CAR proactively offered a Rmb59 special rate (nearly 50% discount) for select economy cars in more than ten cities. CAR had planned the price cut in 1H14. The purpose was to fight competition with only a marginal impact on profitability (CAR's margin is 20 pp higher than eHi's). We assume a Rmb159 RevPAR (2H14) vs Rmb171 (1H14); (2) On 3 October, eHi filed an F-1 form with the US SEC for an IPO. The proposed maximum aggregate offering is US$100 mn (vs CAR’s gross IPO proceeds of US$538 mn). ■ Our HK$12.30 TP represents 23x 2015E P/E, 10x 2015 EV/EBITDA, 3x P/B and 0.4x PEG. This compares with a 13x trading P/E for global mature traditional auto rentals, 18.4x for China budget hotels, 21.6x for China education; 20.4x for China catering; and 31.6x for China auto O2O services. Key risks: (1) end-demand and competition; (2) operating leverage; (3) car plate restriction; (4) operation suspension; and (5) used car disposal. Share price performance Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 2,702.7 3,835.7 4,940.3 5,936.4 14 120 EBITDA (Rmb mn) 838.5 1,560.3 2,216.2 2,811.0 13 115 EBIT (Rmb mn) 118.7 822.9 1,347.0 1,799.8 12 110 Net profit (Rmb mn) -223.4 445.4 947.0 1,373.6 11 105 EPS (CS adj.) (Rmb) -0.09 0.19 0.40 0.58 10 100 Sep-14 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. — — — The price relative chart measures performance against the EPS growth (%) n.m. n.m. 112.6 45.0 MSCI CHINA F IDX which closed at 6285.33 on 21/10/14 P/E (x) -88.3 44.3 20.8 14.4 On 21/10/14 the spot exchange rate was HK$7.76/US$1 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 27.1 11.9 8.7 6.8 Performance over 1M 3M 12M P/B (x) 270.3 3.1 2.7 2.3 Absolute (%) -3.3 — — — ROE (%) -505.0 13.8 13.8 17.0 Relative (%) 2.0 — — — Net debt/equity (%) 4,070.6 Net cash Net cash Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 23 October 2014 Table of contents Focus charts and tables 4 Monetising strong growth in China 5 China's largest auto rental company 5 Operating leverage is key 5 52% recurrent earnings CAGR over 2014-16E 5 Initiate with OUTPERFORM rating 5 Short-term rentals: The fastest growing segment 14 Key drivers behind the 27% segment CAGR 15 No. 1 position with 31% market share 17 High entry barriers to sustain high margins 19 Operating leverage is key 25 90% operating cost is fixed 25 Where does the operating leverage come from? 25 Expansion along the value chain 30 Recurrent earnings to post a 52% CAGR over 2014-16E 31 Rental revenue to grow 26% CAGR over 2014-16E 32 Depreciation of rental vehicles 35 Direct operating expense 36 Operating expense ratio to decline on economy of scale and leverage 37 Operating profit to grow 48% CAGR over 2014-16E 38 Costs related to suspended fleet 39 Recurrent earnings (ex-suspended fleet) to grow 52% CAGR over 2014-16E 40 Share-based compensation 41 Tax rate 42 Working capital management 42 Capex plan 42 Free cash flow and net gearing 43 ROE, ROIC and ROA 43 Use of IPO proceeds 43 Sensitivity analysis 43 Initiate with OUTPERFORM rating 51 HK$12.3 TP represents 23x 2015 P/E, 10x 2015 EV/EBITDA, 3x P/B and 0.4x PEG 51 Our benchmarks 51 Compared to China budget hotels 52 Compared to Hertz 54 DCF valuation 57 Investment risks 58 Direct and indirect competition 58 Capital-intensive business model 59 High operating leverage 59 Restrictions on car purchases in certain cities 60 Customer violations of traffic rules 60 Disposal price of used cars 61 Other industry and business risks 62 Appendix 1: Business model 63 Products and service 63 Extensive network cross China 65 Customer base 68 Customer service 69 Brand 70 Direct marketing 70 Fleet management and operation 70 Staffing 73 CAR Inc. (0699.HK / 0699 HK) 2 23 October 2014 Growth strategies 74 Strengths 74 Appendix 2: China's car rental market overview 76 Low penetration implies large potential upside in China 76 China's car rental market size 76 A highly fragmented market 78 Appendix 3: China's short-term car rental market 79 China's short-term car rental market size growth 79 Driving forces of China’s short-term car rental market 80 Competitive landscape in China's short-term car rental market 82 Appendix 4: China long-term car rental and leasing market 84 Growth drivers: China's long-term car rental market 84 Growth drivers of China's leasing market 85 Competitive landscape in China's long-term car rental market 85 Appendix 5: China's used car market 86 Appendix 6: Company history 88 Key milestones of CAR 88 Appendix 7: Senior management & board members 89 Profile of senior management 89 Profile of board members 90 Appendix 8: Holding structure 91 Relationship with Hertz 92 Relationships with Warburg Pincus 93 Appendix 9: Comparison with eHi 94 Appendix 10: Local peer comparison 98 Appendix 11: Global peer comparison 99 The author of this report wishes to acknowledge the contributions made by Michael Shen, an employee of Evalueserve Research Hong Kong Ltd, a third-party provider to Credit Suisse of research support services. CAR Inc. (0699.HK / 0699 HK) 3 23 October 2014 Focus charts and tables Figure 1: CAR had a 31% market share in short-term self- Figure 2: 90% of operating costs is fixed (2013) drive by revenue in 2013 Others CAR Fuel 10% 31.2% 5% Car Repair depreciation 44% CAR 8% - 31% market share - 4x of No.2 player Store Others - Exceeds sum of next expense 55.6% 9 players 8% eHi 8.2% Insurance Reocar 10% Labour Avis Topone 1.9% 15% 1.2% 1.9% Source: Roland Berger Source: Company data Figure 3: Depreciation ratio catching up with global peers Figure 4: Breakeven analysis (on one-car basis) Rmb per car per day 40.0% (Dep/rental) (Utilization ratel) 80.0% 180 165 33.3% 34.4% 35 35.0% 31.9% 31.3% 78.0% 75.0% 160 30.0% 26.7% 71.0% 24.7% 70.0% 140 23.8% 52 Breakeven 25.0% 66.8% 22.0% 21.0% RevPac: 120 120 20.0% 65.0% 100 15.0% 13.0% 60.0% 61.7% 61.7% 5 10.0% 60.5% 80 15 59.0% 57.9% 57.9% 55.0% 14 5.0% 56.7% 60 8 0.0% 50.0% 40 37 CAR CAR CAR CAR CAR CAR CAR Avis Hertz Localiza 2011 2012 1Q13 2013 1H14 2013 1H14 2013 2013 2013 20 Adj. Adj. 0 Depreciation as % of rental income Utilization rate RevPac Depreciation DOE Selling G&A Internet Breakeven Tax Net costs expense expense RevPac expense income Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates Figure 5: Peer comparison—ROIC vs EBITDA growth Figure 6: Dynamic pricing on big data analysis system 2014 ROIC 70.0% 60.0% New Oriental Bitauto 50.0% Big Data Analysis Tech - driven In search of • Consumer operation excellence 40.0% TripAdvisor (1) behaviour analysis Autohome • Mobile/O2O interface • Superior O2O (1) • Demand & trend • Yield management experience 30.0% Priceline prediction (dynamic pricing) • Pricing power Cafe de Coral Tsui Wah (c15% rate premium) Expedia Gourmet • Inventory • Efficient fleet 20.0% (1) management deployment • Cost leadership Localiza Future Bright Master Home Inns • CRM & loyalty (c25% discount) Ajisen • c50% rate difference 10.0% CAR Inc.
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