15 April 2014 Asia Pacific/China Equity Research Consumer Internet
China Internet Sector Research Analysts INITIATION
Evan Zhou 852 2101 6745 [email protected] Internet Auto: The age of sales digitisation Dick Wei 852 2101 7339 [email protected] Figure 1: Stage of "digitisation" by sectors Contribution by Marketing Sales Leads Generation Transaction Daniel Chen Performance Execution David Sun Fixed Price -based To start offering Auto performance-based solutions Real Estate Early penetration of performance- Mature solution in based leads generation online transactions Travel
Source: Credit Suisse research
■ We see that the business models of auto vertical websites are evolving from portal ads and fixed dealership platform fees to performance-based sales leads generation monetisation, following a similar evolution path in online real estate and local life services. This could potentially double their existing share of economics within the auto sales value chain. We believe China's passenger vehicle sector is at the tipping point of further digitising the sales and marketing processes. Deeper penetration into the auto sales value chain (from 2.7% to 4.5% of total sales leads generation budget by 2015E) would meaningfully expand the addressable market for leading auto vertical sites. ■ Credit Suisse China Internet auto dealership survey. Our proprietary research among 46 dealers in China highlights dealers' overall willingness to increase online spend and experiment in new performance-based lead generation solutions with auto vertical websites. Dealers have a slight preference for BITA's dealership platform over ATHM, with better data analysis and sales services to improve marketing and sell-through efficiency. ■ We initiate on BITA with OUTPERFORM and ATHM with NEUTRAL. We like BITA (OP, TP: US$46) for its strong online-to-offline capability in sales leads generation. We expect a performance-based solution to offer meaningful upside in its wallet share among dealers. Valuation is attractive compared to peers and we recommend investors to accumulate. ATHM (N, TP: US$36) is leading in portals ads and is also fast ramping up the dealership platform. While we like its organic traffic and valuable UGC resources among auto vertical websites, we believe that the current valuation fairly reflects Autohome's leadership premium and superior portal user experience, and the stock may have limited upside before a meaningful breakthrough in auto e-commerce.
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.
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15 April 2014 Focus charts and tables
Figure 2: Sizing the addressable market—auto verticals has good room of further monetisation Rmb in billions, unless otherwise stated Travel Real estate Auto 2013 2015E 2013 2015E 2013 2015E Online marketing (verticals sites only) 4.1 5.0 2.1 4.0 Total marketing budget 67.7 81.9 35.2 44.1 Online penetration (%) 6.1% 6.0% 6.0% 9.2% Online sales leads generation 2.3 4.2 0.8 2.0 Total sales leads generation budget 67.7 81.9 30.0 43.2 Online penetration (%) 3.3% 5.1% 2.7% 4.5% Online transactions value 220.5 340.0 0.0 0.0 0.0 0.0 Total offline + online transactions value 2,620.0 3,100.0 6,768.9 8,190.4 1,956.0 2,834.0 Online penetration (%) 8.4% 11.0% 0.0% 0.0% 0.0% 0.0% Source: Company data, iResearch, NBS, Credit Suisse estimates
Figure 3: China passenger vehicle sales outlook Figure 4: Auto sector value chain 47% 25,000 50% Automakers/ '000 unit OEMs 45%
Marketing 20,000 40% Sales 35% budgets, Sales 34% Target 35% budgets
15,000 30% 25% 25% Regional Sales Auto Office/Management Vertical Sites 25% 19% 10,000 20% 16% Marketing dollar 15% Sales Target 12% reimbursement 15% 8% 5,000 10% Dealers 7% 5% 0 0% Fulfillment, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e Payment after-sales services Total PV sales YoY growth Traffic, Reviews, Sales Leads Customers Contents, Sales Channels Source: China Auto Market, Credit Suisse estimates Source: China Auto Market, CEIC, Credit Suisse research
Figure 5: China Internet vertical and services comps Close Mkt cap EPS P/E P/B P/S ROE EV/EBITDA Company Ticker Ccy price (US$mn) 2013 2014E 2015E 2013 2014E 2015E 2014E 2014E 2014E 2013 2014E 2015E 58.com WUBA US USD 43.3 3,496 0.3 0.5 0.9 152.1x 86.3x 45.5x 13.8x 14.7x 16.0% 180.8x 86.7x 39.4x Autohome ATHM US USD 34.0 3,568 0.8 1.0 1.5 44.7x 32.4x 23.0x 9.4x 11.8x 20.2% 23.3x 15.5x 10.9x Bitauto BITA US USD 31.9 1,347 1.1 1.5 1.8 28.2x 21.0x 17.0x n.a 4.1x n.a n.a n.a n.a Jiayuan DATE US USD 5.9 189 0.4 0.3 0.5 15.1x 18.1x 11.5x 5.5x 2.0x 8.0% n.a n.a n.a SouFun SFUN US USD 13.5 6,866 0.7 0.8 1.1 17.9x 15.4x 12.2x 6.9x 7.2x 45.2% 19.5x 16.3x 13.4x Qunar QUNR US USD 28.9 3,284 -0.2 -0.4 -0.0 -151x -71.7x -625.0x 27.0x 14.0x -53% -61.0x -1644x 26.8x Ctrip CTRP US USD 53.8 7,056 1.5 1.1 1.7 35.2x 48.9x 31.7x 5.6x 7.7x 11.2% 39.0x 65.2x 29.7x eLong LONG US USD 15.5 536 -0.4 -0.1 0.5 -35.2x -124.0x 29.2x n.a 2.5x n.a n.a n.a n.a Sohu SOHU US USD 59.5 2,283 1.6 -1.9 -1.0 38.1x -30.7x -58.0x 3.9x 1.4x -13% 5.8x 16.1x 7.8x Average 47.3x 37.0x 24.3x 10.3x 7.3x 5.0% 53.7x 39.9x 21.4x Note: Closing price as of 14 Apr 2014. Source: Company data, Thomson-Reuters, Credit Suisse estimates
China Internet Sector 2 15 April 2014 Internet Auto: The age of sales digitisation We see that business models of auto vertical websites are evolving from portal ads and We expect auto vertical fixed dealership platform fees to performance-based sales leads generation monetisation, websites to evolve into following a similar evolution path in online real estate and local life services. This could performance-based potentially double their existing share of economics within the auto sales value chain. monetisation and double existing share of economics We believe China's passenger vehicle sector is at the tipping point of further digitising its sales and marketing processes. Deeper penetration into the auto sales value chain would meaningfully expand the addressable market for leading auto vertical websites. Sizing the addressable market: Auto sales leads generation After going through years of migrating marketing dollars from offline to online, leading auto We expect the auto sales verticals websites are poised to grab more meaningful budget, and begin to tap into sales- leads generation market to oriented budgets with performance-based solutions for dealers and automakers. We grow from Rmb800 mn to estimate that the evolution to performance-based sales leads generation will help the auto Rmb2.0 bn in the next two verticals sites to expand their revenue base in this segment from Rmb800 mn (2.7% of years total sales leads generation budget) to Rmb2.0 bn (4.5% of total) in the next two years. Credit Suisse Internet auto dealership survey We organised the first Credit Suisse China Internet auto dealership survey. Our survey Our proprietary survey results highlight dealers' overall willingness to increase online spend and experiment in shows dominant share of new performance-based lead generation solutions. BITA and ATHM have dominant share BITA/ATHM in online auto both in display and dealership platform subscription revenues. Dealers have a slight verticals preference for BITA's dealership platform over ATHM's, with better data analysis and sales services to improve marketing and sell-through efficiency. ■ Online penetration in marketing budget continues, especially in lower-tier cities. ■ BITA and ATHM have the lion’s share of the auto display ad segment. ■ BITA and ATHM garner one-third share, respectively, in their dealership platform. Online sales leads generation shows higher ROI with lower spending share. Mobile awareness among dealers is still low. ■ Performance-based sales leads generation: Dealers welcome the new online promotion model, but the current e-commerce event format needs improvement. Stock picks We initiate on BITA with OUTPERFORM and ATHM with NEUTRAL. We initiate on BITA with OUTPERFORM and ATHM We like BITA (OP, TP: US$46) for its strong online-to-offline capability in sales leads with NEUTRAL generation. We expect a performance-based solution to offer meaningful upside in its wallet share among dealers. Valuation is attractive compared to peers and we recommend investors to accumulate to capture its further growth in auto distribution digitisation. Risks: (1) external traffic reliance on partner sites to pressure margin; (2) potential new disruptive entrants in sales-leads generation. ATHM (N, TP: US$36) is leading in portals ads and is also fast ramping up its dealership platform. While we like its organic traffic and valuable UGC resources among auto vertical websites, we believe the current valuation fairly reflects Autohome's leadership premium and superior portal user experience, and the stock may have limited upside before a meaningful breakthrough in auto e-commerce. Risks: (1) potential margin downside from investment and competition; (2) low management ownership in the company.
China Internet Sector 3 15 April 2014 Table of contents
China Internet Sector 1 Focus charts and tables 2 Internet Auto: The age of sales digitisation 3 Sizing the addressable market: Auto sales leads generation 3 Credit Suisse Internet auto dealership survey 3 Stock picks 3 Sizing the addressable market: Auto sales leads generation 5 Auto sector value chain and market growth outlook 7 Credit Suisse China Internet Auto Dealership Survey 10 Executive summary 10 Methodology 11 Overall marketing budget 12 Dealership platform 15 Auto e-commerce 18 ATHM versus BITA comparison 20 Appendix I: Comparing the duo…and the rest… 21 Revenue size and growth 21 Traffic and reach 22 Margin profile 25 Mobile presence 26 Strategic investments and acquisitions 27 Ownership structure 28 Appendix II: Future markets in the next 3-5 years 30 Automobile e-commerce 30 Used car market 31 Automobile related financial products 32 Appendix III: US online auto market study 33 Autotrader 35 TrueCar 36 Autobytel 37 Autohome Inc. (ATHM.N / ATHM US) 38 Bitauto Holdings Limited (BITA.N / BITA US) 61
Acknowledgement: Credit Suisse's China Internet research team appreciates the contribution from Jun Liang, Tianwen Zhang, Xiyue Zhao and Ruihui Pang in the dealership survey section.
China Internet Sector 4 15 April 2014 Sizing the addressable market: Auto sales leads generation We believe China's passenger vehicle sector is at the tipping point of further digitising its We expect high potential of sales and marketing processes. Deeper penetration into the auto sales value chain would 'digitisation' of auto industry expand the addressable market size for leading auto vertical websites. After going through years of migrating marketing expense from offline to online, leading auto vertical websites are poised to grab more meaningful marketing budget and begin to tap into the sales budget of automakers/dealers with comprehensive performance-based solutions for them.
Figure 6: Stage of "digitisation" by sectors Sales Leads Transaction Transaction Marketing Generation Execution Fulfillment Performance Fixed Price -based To start offering Auto performance-based solutions
Real Estate Early penetration of performance- based leads generation Travel Mature solution in online transactions
Life Services Just started to charge based on performance Media Major internet monetization channels Entertainment Mature solution in online transactions Retailing Early experiment in service fulfillment Education
Source: Credit Suisse research Compared to other verticals, auto has a sizeable share of the consumption wallet but is currently one of the least monetised in terms of online spending migration. We see that the business models of auto vertical's websites are evolving from portal ads marketing and fixed dealership platform fees to performance-based sales leads generation monetisation. This could potentially double their existing share of economics within the auto sales value chain. Compared to other verticals, we see auto as a major sector with sizeable addressable market potential untapped by online players.
China Internet Sector 5 15 April 2014
We categorise the "digitisation" progress for various verticals into different stages. We categorise the 'digitisation' of online (1) Marketing: Offline goods and services providers to promote their brand and products/ verticals into four stages services on major and vertical websites. (2) Sales leads generation: Websites help generate sales leads to bring customers to goods/services providers, to facilitate the potential transactions out of interest generated from online browsing and information searching. (3) Transaction execution: Customers can complete the entire buying process online. (4) Transaction fulfillment: The actual goods/services are delivered to the customers. When an offline industry player goes online, it usually starts with marketing its brands, then over time it transitions to generate sales leads, and finally tries to complete the transactions online. Within the stage of sales leads generation, Internet companies usually start by offering a fixed-price service package (for e.g., WUBA's membership package, SouFun's listing services and BITA's EP dealer platform), and then gradually migrate into performance- based solutions to grab more wallet share and scale of economies among existing adopters. Examples in this front are WUBA's priority listing and RTB options in its listing services, and Soufun's e-commerce solutions for developers. Below we compare between travel, real estate and automobile: (1) the different levels of development of digitisation, (2) the respective addressable market size and (3) online penetration of different stage in each vertical.
Figure 7: Sizing the addressable market—auto vertical has good room of further monetisation Rmb in billions, unless otherwise stated Travel Real estate Auto 2013 2015E 2013 2015E 2013 2015E Online marketing (verticals sites only) 4.1 5.0 2.1 4.0 Total marketing budget 67.7 81.9 35.2 44.1 Online penetration (%) 6.1% 6.0% 6.0% 9.2% Online sales leads generation 2.3 4.2 0.8 2.0 Total sales leads generation budget 67.7 81.9 30.0 43.2 Online penetration (%) 3.3% 5.1% 2.7% 4.5% Online transactions value 220.5 340.0 0.0 0.0 0.0 0.0 Total offline + online transactions value 2,620.0 3,100.0 6,768.9 8,190.4 1,956.0 2,834.0 Online penetration (%) 8.4% 11.0% 0.0% 0.0% 0.0% 0.0% Source: Company data, iResearch, NBS, Credit Suisse estimates We see a similar level of online penetration in marketing services between auto and real estate, however, we did see lower online penetration in sales leads generation in auto (2.7%) compared to real estate (3.3%) by end of 2013. This is mainly because auto sector vertical's websites are still only charging fixed dealership platform fees, while in the real estate sector leading companies such as Soufun are already rolling out their performance- based e-commerce solution to developers within the property sales process. We expect this gap to close in the next two years, with online auto verticals more actively promoting their performance-based solutions to dealers and OEMs. We estimate the evolution to performance-based sales leads generation will help the auto vertical websites to expand their revenue base in this segment from Rmb800 mn (2.7% of total sales leads generation budget) to Rmb2.0 bn (4.5% of the total sales leads generation budget) in the next two years.
China Internet Sector 6 15 April 2014
Auto sector value chain and market growth outlook
Figure 8: Auto sector value chain—dealers are still key in distribution channel
Automakers/ OEMs
Marketing Sales budgets, Sales Target budgets
Regional Sales Auto Office/Management Vertical Sites
Marketing dollar Sales Target reimbursement
Dealers
Fulfillment, Payment after-sales services Traffic, Reviews, Sales Leads Customers Contents, Sales Channels
Source: Credit Suisse research Unlike other physical-good e-commerce sectors, consumers have very limited access to buy automobiles directly from manufacturers. Due to the long-standing relationship with a dealer network and the necessity of after-sales service to vehicles, automakers very seldom sell vehicles directly to consumers. Therefore, at this stage, sales leads generation efforts through media and other channels have to be in cooperation with auto dealers, rather than bypassing them.
China Internet Sector 7 15 April 2014
Figure 9: China passenger vehicle sales growth outlook 35,000 ('000 unit) 100% Phase 1 (9 year) Phase 2 (6 year): Phase 3: CAGR 36% CAGR: 7% 90% 30,000 CAGR 11% 80% 71% 25,000 59% 70% 60% 20,000 47% 41% 50% 15,000 32% 35% 40% 30% 25% 10,000 25% 23% 34% 30% 20% 19% 16% 16% 15% 20% 12% 12% 5,000 7% 8% 9% 4% 7% 5% 6% 7% 9% 10% 7% 0 0% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 PV Sales PV Sales YoY Source: China Auto Market, CEIC, Credit Suisse estimates Credit Suisse China auto analysts Bin Wang and Mark Mao expect cyclical demand uptick CS remains positive on LT in 2014/15 at 16%/15% YoY, driven by: (1) a strong replacement cycle push, (2) customer PV sales growth affordability improvement on low CPI, and (3) positive wealth-effect on higher property price.
Figure 10: Historical PV penetration trend comparison Figure 11: China PV penetration still lags global peers 700 70% Italy New Zealand 600 60% Austria Australia Canada Finland France Germany Netherlands 500 50% United Kingdom Belgium Spain Sweden Poland Greece United States Portugal Japan 400 40%
300 Belarus HungaryKorea
30% Russia Taiwan PV Penetration (%) Penetration PV
200 20% Ukraine MexicoArgentina Chile
Lebanon Brazil Units Units per '000 persons 100 Romania Turkey 10% Thailand South Africa Egypt China 0 Iran 0% 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 0 10,000 20,000 30,000 40,000 50,000 60,000 Korea Taiwan Japan China USA GDP Per Capita (USD)
Source: CEIC, Credit Suisse estimates Source: CEIC, Credit Suisse estimates Credit Suisse remains positive on the outlook for China’s PV long-term demand, and expects a ten-year CAGR of 11% in 2014-20, from 18.9 mn units in 2014 to 30 mn units in 2020. Our confidence mainly stems from: (1) the huge potential due to low penetration, (2) rising urban population as a result of emigration from rural areas, which should expand the overall car customer base, and (3) sustainable growth in customer affordability in view of the decent prospects for GDP-based disposable income and falling auto prices.
China Internet Sector 8 15 April 2014
Figure 12:Demand percentage vs global peers Figure 13: Discretionary consumption escalates in China China Global Peers Rmb Cars House 100% 30,000 9% 8% Travelling 90% 23% 23% 26% 26% 24% 80% 25,000 50% 70% 75% 60% 83% 20,000 50% 94% 95% 92% Computer 91% 15,000 40% 77% 77% 74% 74% 76% Mobilephone 30% Motorcycle 50% 10,000 Washing machine 20% Color TV 10% 25% 17% 5,000 Refrigerator 0% 6% 5% 2011 2012 2013 2014e2015e2016e India Korea USA Japan UK German - 1st Time Demand Replacement Demand 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Total SUV YoY growth Source: China Auto Market, Credit Suisse estimates Source: CEIC, Credit Suisse We expect the overall industry margin to hold well in 2014-15, as the industry capacity We expect the auto industry utilisation remains at a healthy level which should support sector margin. This should margin to hold well, thus further sustain automakers' marketing spend growth in the next two years and benefit sustaining marketing spend online vertical leaders such as ATHM and BITA. pool growth
Figure 14:Demand percentage vs global peers Auto industry gross margin vs. capacity utilization rate
100% 92% 16% 88% 84% 84% 84% 84% 90% 81% 80% 15% 71% 70% 66% 66% 13.8% 60% 53% 13.7% 14% 13.8% 13.5% 13.5% 13.3% 13.4% 50% 13.2%
40% 13%
30% 12.8% 12.7% 12.6% 20% 12%
10%
0% 11% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e Capacity utilization rate sector gross margin
Source: CEIC, China Auto Market, Credit Suisse estimates China passenger vehicle capacity expansion growth
30 Million unit 25%
25 19% 20% 18% 18% 20% 16% 20 15% 15% 15% 13% 15% 15 9% 10% 10
5% 5
- 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e Total PV Capacity YoY growth China Internet Sector 9 15 April 2014 Credit Suisse China Internet Auto Dealership Survey Executive summary We organised the first Credit Suisse China Internet Auto Dealership Survey focusing on We organised the first Credit dealers' marketing spend behaviour and their inclination on new formats of marketing and Suisse Internet Auto sales lead generation solutions. Dealership Survey, highlighting dealers' overall CS's survey results highlight dealers' overall willingness to increase online spend and willingness to increase experiment in new performance-based lead generation solutions with auto vertical sites. online spend and BITA and ATHM have dominant share both in display and dealership platform subscription experiment in new revenues. Dealers have a slight preference for BITA's dealership platform over ATHM's, performance-based lead due to better data analysis and sales services that improve marketing and sell-through generation solutions efficiency. Our key takeaways are as follows: Online penetration in marketing budget continues, especially in lower-tier-cities Dealers plan to grow their online marketing budget by 16% YoY in 2014E, while they plan to grow their total marketing budget by 8% YoY only. Tier 3 city dealers will increase their online marketing spend meaningfully by 31% YoY in 2014. Dealers spend on average ~35% of their total marketing budget online, with high-tier-city and low-tier-brand spending proportionally more online. We see a 40%/60% breakdown for display advertising/subscription platform spending in tier 1/2 cities, and 10%/90% breakdown in tier 3 cities. Among our interviewees, a subscription platform is a ‘must-buy’ item for them, while most of them find portal display advertising ‘not directly boosting sales', especially in low-tier cities. BITA and ATHM are taking the lion’s share in the auto display ad segment Overall, dealers spend ~80% of their display ad budget on BITA and ATHM, and ~20% on other sites such as Sohu Auto, PC Auto and XCar. ATHM is more popular in tier 1 cities and with high-end brands, while BITA is more popular in low tier cities and brands. Some dealers mentioned that they will consider trying out or increasing their budget on Baidu/58.com in 2014. Overall, dealers are prudent on display ad spend as they believe it is not directly linked to sales. On average, we only see 11% YoY growth for spending on display ads. Dealership platform: BITA and ATHM taking one-third of share respectively. Online sales lead generation is showing higher ROI with lower spending share. ATHM/BITA’s platform subscriptions are basically ‘must-buy items’ for dealers, while 6/15/17 dealers have also bought other platform subscriptions from Sohu Auto/PC Auto/ XCar. Of sales leads, 45% come from the Internet, while dealers only spent 35% of their budget online, showing the higher efficiency/ROI of online marketing. From these online sales leads, overall 25% of the final completed purchase transactions originated online. Within online sales leads, over 85% come from ATHM and BITA, where ATHM has a slightly higher volume than BITA (45% vs. 42%). We see a slightly higher percentage in transaction than leads for ATHM, and a slightly lower percentage for BITA. The survey shows a slightly higher sales conversion rate for ATHM compared to BITA (6% vs 5%).
China Internet Sector 10 15 April 2014
Performance-based sales lead generation: Dealers welcome new online promotion model, but current e-commerce event format is less than satisfactory Overall, dealers can accept a 13% YoY dealership platform price increase on face value. We believe dealers can actually accept a higher price growth rate than they assert, considering the importance of the online dealership platform and help from automakers' reimbursement programme. The majority of dealers are willing to apply new 'transaction-based' marketing methods and are willing to forfeit a commission of Rmb200-1,000 per car on every actual sales completed. Mid/low-end brands welcome the group-buy method, while high-end brands consider group-buy to be negative for brand image. The overall tone of the “Singles Day” event in 2013 is a mixed bag. Dealers admitted that the event can bring in new leads and transactions, but the total volume was somewhat below their expectation. Mobile awareness is still low Most dealers haven’t started considering marketing on mobile. Most of them are not impressed by BITA/ATHM's mobile apps. However, ~25% of the dealers have mentioned testing on WeChat's public account. Methodology We interviewed 46 auto dealers across different cities in China (from varying tiers) and We interviewed 46 auto among various brands. Survey formats were onsite visits and telephone interviews. The dealers across different dealership profile breakdown in terms of tier of cities/brands is as follows: cities in China
Figure 15: Dealer breakdown by tier of cities Figure 16: Dealer breakdown by tier of brands
Low High Tier 3 Tier 1 end end 33% 30% 17% 24%
Mid Tier 2 end 37% 59%
Source: Credit Suisse research Source: Credit Suisse research Our survey questionnaire includes five main topics:
■ Overall marketing budget.
■ Display advertising spend.
■ Dealership platforms' spend.
■ New sales model.
■ Others, such as the difference between BITA and ATHM from a dealer's perspective.
China Internet Sector 11 15 April 2014
Overall marketing budget Q: What is your online marketing budget as a percentage of total budget? Our survey results show that online marketing has become an indispensable part for auto Our survey shows ~35% of dealers and that they will spend on average ~35% of the marketing budget online. On the dealers' marketing budget other hand, dealers still spend 65% of their marketing budget on offline media, such as isspent online promotion activities in auto shows and traditional media such as print, radio, and outdoor. Dealers in tier 3 cities have lower online spend penetration: On average, they only spent 28% of their budget online. By tier of brands, we see high-end brand dealers spending 24% of budget online, lower than the average level. This indicates their stronger branding equity to attract buyers.
Figure 17: Online marketing budget as a % of total (by tier Figure 18: Online marketing budget as a % of total (by tier of cities) of cities)
Tier 3 28% Low end 36%
Tier 2 40% Mid end 39%
Tier 1 39% High end 24%
Overall 35% Overall 35%
0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50%
Source: Credit Suisse research Source: Credit Suisse research Q: What is your overall/online marketing expense YoY growth in 2014E? Dealers' willingness to increase spend on online marketing is high. On average, they plan Dealers plan to grow their to grow their online marketing budget by 16% YoY in 2014E, while they plan on only an online marketing budget by 8% YoY growth in their overall marketing budget. 16% YoY in 14E, vs 8% YoY for their overall We see that most of the growth comes from tier 3 cities, as they will grow spending online marketing budget by 31% in 2014. By tier of brands, we see mid-end brands as the main growth driver with a 20% YoY growth rate.
China Internet Sector 12 15 April 2014
Figure 19: Expected marketing expense YoY% in 2014 (by Figure 20: Expected marketing expense YoY% in 2014 (by tier of cities) tier of brands) 35% 25% 31% 30% 20% 20% 25% 16% 14% 20% 15% 16% 12% 14% 13% 9% 15% 10% 8% 10% 7% 10% 8% 9% 5% 3% 5% 4%
0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end
Overall marketing expense YoY% Online marketing expense YoY% Overall marketing expense YoY% Online marketing expense YoY%
Source: Credit Suisse research Source: Credit Suisse research Q: What is your online budget % on display advertising versus dealership platform subscriptions? We see a 40%/60% breakdown for display advertising/subscription platform spending in Our survey shows that the tier 1/2 cities, and 10%/90% breakdown in tier 3 cities. Among our interviewees, the dealer subscription platform subscription platform is a ‘must-buy’ item for them, while most of them find portal display is a 'must buy' item for advertising ‘not directly boosting sales’ (especially in low-tier cities). dealers
Figure 21: Online budget breakdown (by tier of cities) Figure 22: Online budget breakdown (by tier of brands) 100% 100% 90% 90% 80% 80% 70% 57% 54% 70% 60% 65% 65% 67% 60% 60% 76% 90% 50% 50% 40% 40% 30% 30% 20% 43% 44% 20% 40% 35% 35% 33% 10% 10% 24% 10% 0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end
Brand ad Dealer subscription Brand ad Dealer subscription
Source: Credit Suisse research Source: Credit Suisse research We see an especially low percentage of budget on portal display ads for high-end cars, potentially due to the fact that most high-end brands do brand marketing via automakers, while dealers focus on sales-driven activities. Mobile marketing is still at an early stage We also asked dealers what their budget allocation to mobile marketing will be. The result shows that most of them haven’t started to consider marketing on mobile. Most of them weren't impressed by BITA/ATHM's mobile apps.
China Internet Sector 13 15 April 2014
However, ~25% of dealers have mentioned testing on WeChat's public account. Dealers hope that WeChat can develop more sophisticated functions for auto dealers to increase efficiency in marketing.
Display advertising Q: What is your online display ad budget allocation among websites? Overall, dealers will spend ~80% of their display ad budget on BITA/ATHM, and ~20% on Dealers will spend ~80% of other sites such as Sohu Auto, PC Online and XCar. BITA's share is slightly higher than their display ad budget on ATHM, in our survey. BITA and ATHM According to some of the dealers we surveyed, BITA will require them to sign an exclusive contract. As a display ad platform, ATHM is more popular in tier 1 cities and among high- end brands, while BITA is more popular in low tier cities and brands. (The sample in tier 3 cities is potentially biased as only one dealer answered this question.)
Figure 23: Online brand ad budget breakdown (by tier of Figure 24: Online brand ad budget breakdown (by tier of cities) brands) 100% 0% 100% 13% 90% 19% 18% 21% 90% 19% 17% 28% 80% 80% 70% 70% 37% 45% 60% 42% 75% 60% 42% 44% 42% 33% 50% 50% 40% 40% 30% 30% 45% 20% 39% 36% 20% 39% 39% 39% 42% 10% 25% 10% 0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end
ATHM BITA Others ATHM BITA Others
Source: Credit Suisse research Source: Credit Suisse research Some of the dealers mentioned that they will consider trying out or increasing their budget on Baidu/58.com in 2014. Q: What is your expected display ad spending YoY growth in 2014? Overall, dealers are prudent on display ad spending as they think it is not directly linked to sales. On average, we only see 11% YoY growth for spending on display ads. A We only see 11% YoY breakdown of brands shows that growth is mainly from mid-end brands, likely because growth for spending on they still need to build brand image among potential buyers. (The extra high growth rate in display ads from dealers tier 3 cities is also a potential biased result as only two dealers have answered this question.) Overall, dealers consider internet a more efficient brand ad media compared to traditional media such as newspaper/radio. However, majority brand ad budgets are from automakers.
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Figure 25: Expected brand ad expense—% YoY in 2014 Figure 26: Expected brand ad expense—% YoY in 2014 (by tier of cities) (by tier of cities) 50% 18% 44% 16% 45% 16% 40% 14% 35% 12% 11% 30% 10% 25% 20% 8% 6% 15% 11% 4% 10% 8% 4% 3% 5% 5% 2% 0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end
Source: Credit Suisse research Source: Credit Suisse research Dealers prefer those tools more related to actual sales results. Due to China's competitive market landscape, dealers will continue to invest in display ads to prevent 'lagging behind' the market. Also, dealers mainly put on display ads during the time of local auto show events to attract more eyeballs. Dealership platform Q: Which dealership platforms do you use? We come up with market breakdown as follows by counting total dealers that use a ATHM/BITA's platform specific dealership platform. ATHM/BITA’s platform subscriptions are basically ‘must-buy subscription are 'must-buy items’ for dealers, while 6/15/17 dealers have also bought other platform subscriptions items' for dealers from Sohu Auto/PC Online/XCar.
Figure 27: Dealership platform market breakdown Cheshi, 5, Xcar, 17, 4% 13% ATHM, 44, 33% Pconline, 15, 11% Sohu Auto, 6, 5%
BITA, 45, 34%
Source: Credit Suisse research
Q: What percentage of your total sales leads come from Internet?
China Internet Sector 15 15 April 2014
The survey shows that overall 45% of sales leads come from the Internet, while dealers On average 45% of dealers' only spent 35% of their budget online, showing higher efficiency of online marketing. We sales leads came from the see a higher online lead percentage in tier 1/2 cities than tier 3 cities supported by higher Internet, of which 85% come Internet penetration. from ATHM and BITA We see the largest gap in online spending/leads percentage in high-end brands, these dealers will potentially spend more on the Internet given a relatively high return rate.
Figure 28: Online leads/marketing expense as of total Figure 29: Online leads/marketing expense as of total (breakdown by tier of cities) (breakdown by tier of brands)
60% 50% 46% 53% 45% 45% 49% 45% 50% 39% 40% 45% 40% 35% 36% 39% 40% 35% 40% 35% 32% 30% 28% 24% 30% 25% 20% 20% 15%
10% 10% 5% 0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end
Online marketing expense % Online leads % Online marketing expense % Online leads %
Source: Credit Suisse research Source: Credit Suisse research Q: What is the breakdown of online leads from various auto portals? The survey shows that over 85% of sales leads come from ATHM/BITA, while ATHM has a slightly higher volume than BITA. By tier of brands, ATHM is leading in high/low end brands, while BITA is leading in mid- end brands.
Figure 30: Online leads breakdown by auto portals Figure 31: Online leads breakdown by auto portals (breakdown by tier of cities) provider (breakdown by tier of brands) 100% 100% 0% 7% 6% 5% 7% 6% 0% 1% 9% 1% 10% 90% 2% 5% 3% 0% 90% 2% 4% 4% 4% 5% 4% 2% 0% 4% 2% 4% 4% 80% 1% 0% 0% 80% 1% 0% 41% 70% 43% 70% 42% 39% 43% 42% 37% 60% 60% 44% 50% 50% 40% 40% 30% 30% 55% 48% 47% 20% 45% 44% 44% 20% 45% 41% 10% 10% 0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end ATHM BITA Sohu Auto Pconline Xcar Others ATHM BITA Sohu Auto Pconline Xcar Others
Source: Credit Suisse research Source: Credit Suisse research
China Internet Sector 16 15 April 2014
Q: What is the percentage of transactions that originated from the Internet? The survey shows that overall 25% of purchase transactions originally came from the On average 25% of Internet. The reason why it is lower than online leads percentage is because its purchase transactions transaction includes ‘walk-in’ clients, who directly come to dealer stores but are not originally came from the counted in any leads. Internet
Figure 32: Online transaction as % of total transactions Figure 33: Online transaction as % of total transactions (breakdown by tier of cities) (breakdown by tier of brands) 35% 35% 29% 30% 30% 29% 26% 25% 25% 25% 25% 25% 22% 21% 20% 20%
15% 15%
10% 10%
5% 5%
0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end
Source: Credit Suisse research Source: Credit Suisse research We see higher online transaction percentage in higher-tier cities. Also mid/low-end cars have higher online transaction percentage than high-end cars. Q: What is the breakdown of online transactions from various auto portals? The survey shows a similar breakdown regarding online leads—ATHM/BITA accounted for over 85% of total online transactions. Meanwhile, we see a slightly higher percentage in transaction than leads for ATHM, and a slightly lower percentage for BITA.
Figure 34: Online transaction breakdown by auto portals Figure 35: Online transaction breakdown by auto portals (breakdown by tier of cities) provider (breakdown by tier of brands)
100% 5% 100% 4% 0% 6% 1% 7% 6% 6% 2% 8% 0% 2% 3% 0% 2% 6% 2% 7% 90% 4% 6% 90% 4% 6% 3% 6% 8% 3% 0% 80% 2% 0% 0% 80% 2% 0% 70% 70% 43% 40% 41% 43% 40% 41% 60% 37% 60% 36% 50% 50% 40% 40% 30% 30% 50% 20% 46% 44% 46% 46% 20% 46% 44% 45% 10% 10% 0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end ATHM BITA Sohu Auto Pconline Xcar Others ATHM BITA Sohu Auto Pconline Xcar Others
Source: Credit Suisse research Source: Credit Suisse research
China Internet Sector 17 15 April 2014
Q: What is the sales conversion rate for online leads? Data shows a slightly higher sales conversion rate for ATHM than BITA. (~1% higher). ATHM has a slightly higher However, some dealers expressed a different opinion when asked about the difference sales conversion rate than between ATHM and BITA. They admitted that ATHM can generate a higher number of BITA, according to our leads than BITA. Meanwhile, the 'quality' of leads on BITA is higher as it will introduce survey potential buyers who better match the brand position of certain auto brands, thus increasing the sales conversion rate. Tier 1 cities have the highest conversion rate of 8%, compared to 3%/6% in tier 2/3 cities. Mid-end car brands have the highest conversion rate than high/low-end car brands.
Figure 36: Online leads to sales conversion rate Figure 37: Online leads to sales conversion rate (breakdown by tier of cities) (breakdown by tier of brands) 10% 8% 9% 7% 9% 7% 8% 8% 8% 6% 6% 6% 7% 6% 5% 7% 5% 6% 6% 6% 5% 5% 5% 4% 5% 5% 4% 6% 5% 5% 5% 4% 4% 4% 3% 3% 3% 3% 2% 2% 1% 1% 0% 0% Overall Tier 1 Tier 2 Tier 3 Overall High end Mid end Low end Overall ATHM BITA Overall ATHM BITA
Source: Credit Suisse research Source: Credit Suisse research Q: What is the highest level of price increase that you accept in dealership platform spending? The survey shows that overall dealers can accept 13% YoY dealership platform price increase on face value. However, BITA/ATHM have a much higher level of price increase (some dealers commented that they have increased prices by 30-40% in 2013), which is unsatisfactory for dealers. However, we believe dealers can actually accept a higher price growth rate than they assert. Firstly, the Internet has contributed to 45% of total leads for dealers, thus becoming an indispensable channel for them. Moreover, in order to boost car sales, automakers will provide subsidy or discounted prices for dealers on purchasing a dealership platform subscription. According to some dealers, actually the prices haven't increased much from dealers’ perspective (after reimbursement from automakers). Auto e-commerce Q: Have you participated in the “Singles Day (Nov 11)” online sales campaign events in 2013? The survey shows that 13 dealers participated in ATHM’s sales campaign (28%), while 19 BITA has higher coverage in dealers participated in BITA’s sales campaign (41%), showing higher coverage for BITA. 'Singles Day (Nov 11)' We see mid-end brands as the biggest fan of the auto e-commerce event, while a limited online sales campaign number of high/low end brands participated.
China Internet Sector 18 15 April 2014
Figure 38: No of dealers who participated in double Figure 39: No of dealers who participated in double eleven sales campaign (breakdown by tier of cities) eleven sales campaign (breakdown by tier of brands) 20 19 20 19 18 18 3 16 5 16 14 13 14 13 12 1 12 2 10 8 10 12 8 8 8 8 6 6 4 4 6 2 4 2 3 4 - - ATHM BITA ATHM BITA
Tier 1 Tier 2 Tier 3 High end Mid end Low end
Source: Credit Suisse research Source: Credit Suisse research Dealers welcome new online promotion model… The survey shows that the majority of dealers are willing to apply new 'transaction-based' marketing methods and are willing to spend a commision of Rmb200-1,000 per car on every actual sale completed. Mid/low-end brands welcome the group-buy method, while high-end brands consider group-buy to be negative for their brand image. …but current e-commerce event format is still less than satisfactory Overall, the tone to the “Singles Day” event in 2013 is a mixed bag. Dealers admitted that the event did bring in new leads and transactions, but the total volume ended up below their expectation. As shown in Figure 40 and Figure 41, the majority of dealers generated less than 50 leads and five actual sales during the e-commerce event.
Figure 40: No of dealers breakdown by leads generation* Figure 41: # of dealers breakdown by sales transactions* 10 12 9 10 8 2 2 7 1 8 6 2 5 6 1 4 0 1 4 2 3 6 6 2 3 2 1 3 0 0 ATHM BITA ATHM BITA
1-50 51-100 101-500 0-5 6-10 11-20
* Only counted those who disclosed actual figures of lead generation. * Only counted those who disclosed actual figures of sales generation. Source: Credit Suisse research Source: Credit Suisse research When comparing the e-commerce event arrangement of BITA and ATHM, some dealers who participated in both events commented that although BITA offered promotional services for free, it didn’t provide enough resources to support the event. Although ATHM required dealers to pay for the promotion, it provided more support than BITA, such as
China Internet Sector 19 15 April 2014 providing free gasoline cards as a gift for successful transactions. Most dealers will continue to participate in such events but hope to have better leads generation and sales conversion rate. ATHM versus BITA comparison Other than some quantitative points we mentioned above, we also summarise below some Our survey shows dealers qualitative differences between BITA and ATHM: view BITA as a better dealership platform, and (1) BITA as a better dealership platform ATHM as a better auto More dealers prefer BITA's dealership platform than ATHM’s, as it provides better data portal for users analysis tool for dealers to improve sales efficiency. Dealers also think that BITA provides better service in platform subscription than ATHM, and it has a bigger customer service team to provide tech support (such as how to increase leads and teach-in of new functions) to dealers. ATHM relatively lacks dealer support. (2) ATHM is a better auto portal for users Our survey shows that dealers view ATHM as a better auto portal for users as it provides better content, such as car model reviews and user forums. However, BITA is relatively weak in content generation. (3) More pricing information on BITA Some dealers believe that BITA has a larger pool of high quality dealer information on its platform and provides better price information than ATHM, because it has a longer operating history than ATHM. Therefore, it is more of a 'go-to' site when people want to buy cars in the near future. However, some dealers also mentioned that there are more 'secondary dealers for ATHM than BITA 二级经销商' (dealers not licensed by automakers. They provide lower pricing on the same car model than licensed dealers, but lack quality after-sales service) . Thus in some cases the price for the same car model is lower at ATHM than BITA, but it lacks quality. (4) ATHM's higher pricing on brand ads Some dealers view that although ATHM has better content, currently the pricing of its brand ad is higher than BITA. (A dealer mentioned that ATHM's brand ad price is double that of BITA).
China Internet Sector 20 15 April 2014 Appendix I: Comparing the duo…and the rest…
Figure 42: Leading China Internet auto companies (as of 2013) in Rmb thousands, unless otherwise stated Autohome Bitauto Sohu Revenue Ad revenue 894,937 73.6% 722,103 50.2% Dealer platform revenue 321,611 26.4% 489,820 34.0% Used car revenue 0 21,709 1.5% Others 0 205,700 14.3% Margins GM 79.8% 76.7% OPM 47.7% 18.8% SG&A 25.6% 50.7% R&D 6.5% 7.3% NM 39.6% 18.1% Traffic PV 151,370,000 50,174,000 23,461,000 UV 7,872,000 4,548,000 2,721,000 VV 24,277,000 7,055,000 3,796,000 Employee 1,191 2218 Ownership James Zhi Qin 2.9% Bin Li 21.9% Charles Zhang 20.1% Xiang Li 4.8% Autotrader 20.7% Orbis 16.3% Telstra Holdings Pty Ltd 65.4% FMR LLC 10.3% Delaware Management 7.2% Orchid Asia Funds 11.5% Legend 5.0% Platinum Investment 7.2% Management Source: Company data. Autohome stands out as the leading auto vertical media, with its strong user activity in forums. Bitauto leads in auto sales digitisation with strong presence in dealer platform and sales leads generation value chain. The company also differentiates itself with strategic investments into the auto service chain and has laid the foundation for future business growth. These two leading auto verticals are grabbing market share from other smaller verticals and, more importantly, from the auto channels of comprehensive portals. Except Sohu Auto, almost all auto channels of major portals still largely run a media business and are losing wallet share from automakers and dealers. Revenue size and growth Autohome's ads business benefited from its overall traffic and leading media influence, ATHM's ads business and trumps Bitauto's ad segment in size. trumps BITA's in size In the dealer platform business, Bitauto is leading with rich offline resources and years of dedication in this area. BITA's EasyPass platform (车易通) has 13,612 paid dealers in 140 cities. ATHM's “车商汇” has over 10,084 paid customers nationwide. Sohu Auto covers 125 cities with its deal platform product “车商宝”. In the used car segment, BITA is still loss-making in this area after years of investment. Autohome also has its Che168.com business but didn't disclose its financial metrics. Both are still investing in building up traffic for the sites. Monetisation at this stage is not a priority.
China Internet Sector 21 15 April 2014
Employee numbers reflected the company's investment onto offline resources and future offline services. BITA has over 2,000 employees, in which over 1,000 are sales persons located in 140 cities. ATHM has around 1,200 employees. Sohu Auto has around 800 employees, and has been growing its sales force aggressively over the past two years. Traffic and reach With comprehensive content offering and good operation on its forums, Autohome enjoys ATHM enjoys the largest the largest traffic among all automobile verticals and auto channels of portals. According to traffic among all automobile iResearch, by March 2014, Autohome ranked No.1 among all auto verticals in terms of UV verticals and PV, followed by BitAuto, XCar, and Sohu Auto Channel. Autohome is well-known for its forums, as the most active and go-to informational source for many potential vehicle buyers to pick up peers' thoughts and comments on automobiles. Forum traffic helped Autohome to gain even a larger share of PV compared to UV, as per user browsing depth is usually 2-3x of its peers. In terms of daily user spend time, Autohome was also outstanding given the large user engagement. According to iResearch, the average time users spend on Auto on a daily basis was around 900 seconds, more than double the time spent on Bitauto which ranked second. By leveraging the active user engagement, Autohome could potentially provide more meaningful scenarios and better conversion rate for online advertising business.
Figure 43: Daily UV of top 10 auto verticals/channels('000) Figure 44: Daily PV of top 10 auto vertical/channels('000)
Autohome 7872 Autohome 151,370
Bitauto 4548 Bitauto 50,174
Xcar 3807 Xcar 35,701
Sohu 2721 Sohu 23,461
Netease 2647 Netease 17,920
Tencent 2526 PCAuto 15,674
iFeng 2161 iFeng 13,271
PCAuto 1968 Tencent 13,054
Sina 1605 Sina 8,643
xgo.com.cn 1000 xgo.com.cn 2,112
0 2000 4000 6000 8000 10000 - 40,000 80,000 120,000 160,000
Source: iResearch. Source: iResearch.
China Internet Sector 22 15 April 2014
Figure 45: Daily user spend time of top 10 auto verticals/channels(in second)
Autohome 946
PCAuto 415
Bitauto 371
Xcar 318
Sina 265
Tencent 191
Sohu 188
Netease 156
iFeng 140
xgo.com.cn 72
0 100 200 300 400 500 600 700 800 900 1000
Source: iResearch. Sohu Auto Channel also benefited from strong traffic support from overall Sohu portal, which has over 100 mn monthly UV from PC and mobile. According to iResearch, Sohu Auto Channel ranked No. 1 in terms of UV and PV among all the auto channels of comprehensive portals and No. 4 overall, although, in terms of daily user spend time, it ranked slightly lower comparing to its peers.
Figure 46: Baidu Index traffic of automobile verticals/channels (as of 12 Apr 2014)
Source: Baidu Index. If we look at Baidu Index over the last three years, the brand name index traffic of ATHM outperformed its Autohome outperformed its peers always. The large volume of brand name search traffic peers in Baidu Index of Autohome implies larger organic traffic (originated from keyword search) volume and better brand recognition among its peers. On a monthly basis, the index traffic of Autohome increased 45% YoY and wasflat MoM respectively while, during the same period, index traffic of Bitauto increased 37% YoY with a decrease of 3% MoM. Despite a relatively lower traffic base compared to Autohome and Bitauto, the index traffic of XCar soared with an increase of 402% YoY and an increase of 232% MoM. In addition, the index traffic of PCAuto increased 22% YoY, although it decreased 8% MoM. With the lowest index traffic among the five portals, Sohu automobile channel's index traffic further decreased 11% YoY and 21% MoM. Organic traffic is a key to the long-term success of any Internet service. Autohome has been focusing its effort on pursuing content expertise and optimising user experience. We believe the organic traffic leadership of Autohome should lay a good foundation for the company in its future endeavours into penetration in auto transactions.
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Different from Autohome, Bitauto, which maintains strong connections with dealers, accumulates its user base by largely acquiring traffic from third parties. In 2012, Bitauto signed an agreement with Baidu to be the exclusive supplier of auto-related content for Baidu's open data platform, Aladdin. As a result, automobile queries, especially the model queries, will trigger the automobile Aladdin, and the auto-related content, including auto listings, pictures, reviews, and dealer information, provided by Bitauto and will be rendered in the Aladdin section of the search result. In August 2013, Bitauto extended its contract with Baidu Aladdin for another 11 months which will expire in July 2014. In addition, Bitauto collaborates with Qihoo to market and promote its services. The large traffic volume from third parties allows Bitauto to quickly ramp up its user base, and monetise the traffic through an extensive dealer network.
Figure 47: Automobile related queries triggering Bitauto's result on Baidu Aladdin
Source: Baidu.com User profiles for auto vertical site visitors Looking at the sheer headline numbers of overall traffic on auto vertical websites may not show the full picture of the nature of this traffic. We categorise auto vertical websites visitors into the following categories:
■ Potentials buyers: Users who may have plans to purchase a vehicle in the next 3-6 We view potential buyers as months. most valuable user group
■ Existing car owners: Those who already owned a car, but were interested in discussion, knowledge, or offline events available on the sites.
■ Automobile fans: People who are interested in any topic about automobiles and actively contribute to the discussion and commentary on auto vertical sites. These people do not have to be owners or even plan to buy vehicles soon, such as young professionals, college students or even high school students.
■ Industry practitioners: Those interested in industry news, technology advancement, new model launches and industry studies.
■ Leisure browsers: Visitors interested in browsing beautiful pictures of cars and show girls.
China Internet Sector 24 15 April 2014
In our view, the most valuable segment of users are potential buyers, as these are the most transaction-oriented and deserve the focus of more marketing dollars to increase their conversion into buyers. We also see value in existing car owners and automobile fans. These users are also valuable in viral, word-of-mouth promotions, as they usually act as experienced buyers and can give out recommendations to their friends to influence their buying decisions. Margin profile
Figure 48: Margin comparison (as of 2013) in Rmb millions, unless otherwise stated Autohome Bitauto Margins GM 79.8% 76.7% OPM 47.7% 18.8% SG&A 25.6% 50.7% R&D 6.5% 7.3% NM 39.6% 18.1% Source: Company data In terms of margin profile, Autohome enjoys higher margins in gross, operating and net ATHM enjoys higher margin lines, mainly because of the following reasons. margins than BITA
■ Higher contribution of ads segment.
■ Less spending in S&M.
■ Less investment in new businesses such as used cars. With decent organic traffic and brand recognition, Autohome generates more revenue from its online advertising business by monetising the low cost traffic from its portal, which also lowers its selling and marketing expenses. Compared to Autohome, due to the different areas of its strength and the nature of its focus, Bitauto spent more money on its traffic acquisition. In order to acquire more web traffic, in 2011, Bitauto reached an agreement with Baidu to display its automobile result in the Aladdin open platform for automobile related queries. In return, Bitauto pays Baidu fixed package fees for the traffic from Aladdin. A large volume of search traffic also incurs large traffic acquisition cost. In 2013, Bitauto's adjusted SG&A expenses as a percentage of total revenue was 50.7%, much higher than Autohome's 25.6%. The big difference in SG&A expenses leads to the gap in the net margin of two companies. In 2013, the adjusted net margin of Bitauto was 18.1% while the net margin of Auto recorded 39.6% given the same level of R&D expenses portion. Bitauto's investment into taoche.com started from 2006 and has cumulatively incurred more than US$100 mn of losses in the past three years. Given the early stage of the used car market in China, it is still hard for Bitauto to generate meaningful profit from used car business. As a result, the losses from the used car business further undermine Bitauto's bottom line. Autohome, on the other hand, with less exposure in the used car business, enjoys a short-term margin benefit compared to Bitauto.
China Internet Sector 25 15 April 2014
Mobile presence
Figure 49: Popular auto related mobile apps Auto info Price quote Used car Utility tool Forum Others ATHM Autohome ATHM Pricing Quote che168 Peccancy Inqury Assistant ATHM Forum (汽车之家) (汽车报价) (二手车之家) (违章查询助手) (汽车之家论坛) BITA Bitauto Bitauto Pricing Quote Taoche Auto Steward (汽车管家) Bitauto Forum Auto Show (易车) (汽车报价大全) (淘车) (汽车论坛) (车展通) Bitauto News Auto Compass Maichebao Traffic Accident Guide Auto Zhidao (汽车新闻) (选车罗盘) (卖车宝) (出险指南) (汽车知道) Bitauto Magazine Used Car Appraisal (汽车杂志) (二手车估价) Auto Brand Home (汽车品牌之家) Bitauto Auto Pictures (汽车图解) Which Car (什么车) Sohu Sohu Auto Maichebao Sohu Used Car Peccancy Inqury Defection Complaint (搜狐汽车) (买车宝) (搜狐二手车) (违章查询) (汽车投诉) Gas eStation Cheshangbao (加油 e 站) (车商宝) Netease Netease Auto Netease Auto (网易汽车) (网易汽车) PCAuto PCAuto PCAuto PCAuto Forum Auto Show Express (太平洋汽车网) (太平洋汽车网) (汽车论坛) (车展速递) PCAuto Magazine (汽车杂志) XCar Xcar Aimaiche Xcar (爱卡汽车) (爱买车) (爱卡汽车) Dasouche Souche (卖车神器) Chexun Maichetong Maichetong (买车通) (买车通) Weche Weche (微车违章查询) Beat Media Car and Driver (名车志) Source: Company data, Credit Suisse research Auto verticals are actively developing their mobile presence through a variety of mobile Auto verticals actively offerings such as mobile news portal app, price quote, used car trading, and other utility developing mobile presence tools. On the other hand, some of the comprehensive portals, such as Sohu Auto Channel, are following the mobile app matrix strategy conducted by major auto verticals to cover different phases of automobile life cycle. Some other players, such as Netease, choose to maintain their vertical apps as the major entrance, and focus on the media and utility functions. Autohome Autohome's biggest mobile app is the Autohome app which is basically a mobile news portal app similar to Sohu's. Autohome's mobile strategy remains to be very focused on media. The Autohome app inherits most of the functions from its PC version, and aims to provide a similar user experience for mobile users. The automobile forum is also migrated into a standalone app to improve the accessibility and usability on mobile devices. In addition, in order to expand its mobile product line to cover the full life cycle of automobile vertical, Autohome released other functional apps including price quote, used car trading, and other utility tools. BitAuto Similar to PC, Bitauto's mobile strategy focuses on transaction-oriented features. BitAuto promotes its pricing quote app (汽车报价大全) as its flagship mobile product, further
China Internet Sector 26 15 April 2014 highlighting its advantage in auto pricing information, and focusing on the segment of users that is closest to making purchase decisions. Besides the pricing quote app, Bitauto also invests aggressively in other mobile apps in order to build a large mobile app matrix covering all user needs in the automobile vertical. It developed brand specific apps under Auto Brand Home (汽车品牌之家) to provide tailored information and services to target customers or existing car owners. For example, potential BMW customers or existing car owners can download the app called BMW Home (宝马之家) to subscribe information updates about BMW models and promotions as well as BMW specific maintenance tips. Sohu Sohu Auto developed a comprehensive set of apps including news, price quote, violation ticket tracking, defection complaint etc. Sohu's price quote app is called '买车宝', featuring a voice bargaining function. It also released its used car trading app called '搜狐二手车' to establish a used car trading marketplace by leveraging its large user base. Sohu intends to develop user traffic for these apps through its own flagship apps, Sohu News and Sohu Video. Sohu Auto claims to have over 20 mn registered users, and mobile generated over 21% of the sales leads during the 'Nov 11' events in 2013. Sohu Auto is seeing an increasing percentage of young-generation users adopting online and mobile channels. Strategic investments and acquisitions Besides developing products and services organically, Bitauto also conducted several BITA enhanced its coverage strategic investments and acquisitions in order to diversify its business offerings. After a in auto value chain by series of strategic investments, Bitauto further broadened its business coverage in acquisition automobile vertical, and enhanced its competence in full automobile value chain.
■ In May 2011, Bitauto acquired a 49% interest in Beijing Xinchuang Interactive Advertising Company Limited ("BXIA"), a start-up company focusing on providing advertising services, for Rmb490,000.
■ In December 2011, Bitauto acquired 100% equity interest in Beijing Bitcar Interactive Information Technology Company Limited, which is the first provider of mobile Internet enabled sales tools for the automotive industry in China, with an initial payment of Rmb45 mn. After the acquisition, Bitauto integrated Bitcar's digital point-of-sale CRM solutions into its EP platform, which enables Bitauto's dealer subscribers expanding into managing face-to-face sales opportunities in their dealerships.
■ In 2Q12, Bitauto invested in minority equity interest in Car King Holding Ltd, a leading used car hypermarket based in Shanghai, in order to better understand advertising and promotional trends in the used car sector. Similarly, it invested a minority portion of equity interest in Target Net (Beijing) Technology Company, an Internet information agency in China, in the same year.
■ In November 2013, Bitauto established a joint venture, in which it owns a 40% stake, with Kelley Blue Book, the leading provider of new and used car information in the United States, and the China Automobile Dealers Association ("CADA"), a national organisation representing automobile dealers in China, to provide nation-wide vehicle valuation products to consumers, automakers, auto dealers, along with insurance, finance and other automobile-related companies. On the other hand, Autohome hasn't taken many investment or acquisition actions in the past several years. However, after the IPO, with adequate cash on its balance sheet, Autohome may start to seek for potential opportunities to expand its scope of business offerings and establish presence in new business area by strategically investing in other automobile related companies.
China Internet Sector 27 15 April 2014
In our view, there is still room for Bitauto and Autohome, as leaders in automobile vertical, to improve their business coverage and penetration. Strategic investment and acquisition are an efficient way to strengthen their competence and ramp up in new emerging business frontiers. As competition in the automobile vertical is getting tougher, consolidation may take place, and more and more strategic investments and acquisitions are foreseen in the near future. Ownership structure
Figure 50: Ownership comparison of leading Internet auto companies Autohome Bitauto Sohu Ownership James Zhi Qin 2.9% Bin Li 21.9% Charles Zhang 20.1% Xiang Li 4.8% Autotrader 20.7% Orbis 16.3% Telstra Holdings Pty Ltd 65.4% FMR LLC 10.3% Delaware Management 7.2% Orchid Asia Funds 11.5% Legend 5.0% Platinum Investment 7.2% Management Source: Company data, Credit Suisse research. Autohome management's holding in the company is quite limited. Founder Li Xiang and ATHM's management CEO Qin Zhi only own 4.8% and 2.9% respectively while the largest shareholder, Telstra, shareholding is limited possesses 65.4% of the company. In our view, this ownership structure may not align well with the incentives of management and key employees with the company's shareholders, and may impose potential risk to the company's operation. With an unstable management share structure, it is also hard for Autohome's management to conduct consistent strategies in long-term horizon. As a comparison, key management of Bitauto are controlling the company with major Key management of BITA shareholdings. As of December 2013, management and the board owned 27.1% of the are majority shareholders company, and Founder and CEO Bin Li owned 21.9%. This share structure gives management more confidence in executing business strategies, and more incentive to act for the benefit of shareholders. To some extent, the controlling position held by key management enables it to conduct sustainable strategies, and maintain a consistent direction for development.
Figure 51: Autohome's ownership structure* Shareholders # of shares % Category Xiang Li 5,066,483 4.8% Founder, President, Director James Zhi Qin 3,088,929 2.9% CEO, Director Gabriel Li 12,112,212 11.5% Director, Managing Director of Orchid Asia Subtotal of Management and Directors 20,267,624 19.2% Telstra Holdings Pty Ltd 68,788,940 65.4% Institutional Others 7,086,872 Public investors 8,993,000 Total 105,136,436 100.00% Source: Company 2013 Annual Report
China Internet Sector 28 15 April 2014
Figure 52: BITA ownership structure* Shareholders # of shares % Category Bin Li 9,519,998 21.9% Founder, CEO, Chairman Jingning Shao 250,000 0.6% President, Director Xuan Zhang 267,500 0.6% CFO Other management 1,724,625 4.0% Autotrader 9,000,000 20.7% Institutional FMR LLC 4,463,250 10.3% Institutional Legend Capital 2,176,235 5.0% Institutional Morgan Stanley 1,077,740 2.5% Institutional Other investors 16,651,023 38.4% Total 43,405,745 100.00% Source: Company data
China Internet Sector 29 15 April 2014 Appendix II: Future markets in the next 3-5 years The online automobile business is still at an early stage, which mainly focuses on online advertisement and model promotions. Many traditional offline businesses, including automobile purchase and after-sales services, could be potentially migrated to online in the future, and create great synergies with offline business in an O2O close loop. In our view, automobile e-commerce (completed transactions online), used car market, and automobile related financial products will be the major sub segments that can potentially change the online and offline automobile ecosystem in the next few years. Automobile e-commerce Despite the large transaction volume of offline automobile market in China, automobile e- Automobile e-commerce commerce hasn't been largely adopted. Some pilot automobile e-commerce actions have hasn't been largely adopted been taken by both automobile verticals and e-commerce giants in recent years: in China
Figure 53: Bitauto vs Autohome in "Singles Day Double 11" event 2013 Bitauto Autohome Total revenue (Rmb mn) 11,700 2,643 Number of automobiles sold 90,466 17,776 Deposit required for customers No Rmb 499 Discount rate 8.89 8.95 Number of OEMs 123 80 Number of models 633 n.a Number of cities 341 n.a Total investment (Rmb mn) 65 50 User reimbursement (Rmb mn) 10 15 Source: Company data, Chenyun.com
■ In February 2012, JD.com, one of the largest B2C online retailers, sold 300 Smarts in 89 minutes.
■ In August 2012, Tmall sold 398 Mercedes Benz Luxury Sports Tourers in two and a half hours.
■ In July 2013, Tmall launched a "Automobile Festival" event with ten automobile OEMs and 800 dealers on its B2C platform to promote online automobile sales. Customers first pay a deposit on Tmall for a specific model, and then visit the offline dealer shop to pay the rest at a discount price. In the end, 3,430 automobiles were sold during the 18-day event.
■ In the "Double 11" event 2013, Bitauto recorded Rmb11.7 bn revenue in automobile sales GMV while Autohome sold 17,776 units with Rmb2.7 bn in GMV. In addition, with 16 automobile OEMs and 1,730 dealers involved, Tmall recorded a total value of sales of around Rmb800 mn by selling 10,700 automobiles in 11 days. The event covered almost all the offline automobile sales geographies, including 25 provinces, 228 cities in China. Besides holding a one-time event, Tmall also established che.tmall.com (喵车惠) with 21 automobile OEMs to provide general online discount automobile sales as well as automobile group buying regularly.
■ In March 2014, Vipshop, the leading online flash sales discounted retailer, launched a flash sale trial with Honda dealers in Guangzhou to sell automobile coupons on its website. In the flash sale trial, customers first buy a coupon on Vipshop's website, and then redeem it in the offline Honda dealer shop for a discounted price. The discount ranges from Rmb8,000 to Rmb30,000 for specific models of Honda. In addition, Vipshop extends the online flash sales period from three days to 13 days in order for
China Internet Sector 30 15 April 2014
the customer to have sufficient time to visit the offline dealer shop before making the purchase. Many automobile accessories are also on sales along with the automobile flash sales. Vipshop also previewed several upcoming flash sales deals with Audi and Mercedes Benz in the near future. Although past events look inspiring, there are also a lot of issues, including a large portion of order cancellation and after-sales offline services delay. The current automobile e- commerce model is just another form of information selling, since the major transactions are still conducted offline. In order to fully leverage the power of e-commerce, many issues need to be tackled by both online and offline parties, such as the split of economics, O2O workflow integration, online payment solutions, and the post-sale service system for the online automobile market. However, from our CS proprietary survey, dealers and OEMs are fairly open-minded to these new retail formats and entry points, in order to extend their reach and expand potential buyer groups. We recommend investors keep close track of these new initiatives in the area of online automobile purchase in the next 2-3 years. Moreover, despite the importance of offline dealers in the automobile value chain, there is no effective mechanism to protect the dealer from being challenged by OEMs and e- commerce companies. On paper, direct selling automobiles from OEMs in a franchised sales area is prohibited by government regulations. However, the OEMs could bypass the regulation by some means in practice. For instance, OEMs could build their own dealer network in some areas instead of franchising the sales outright to local dealers, and effectively sell its inventories directly to customers. Some OEMs also release some customised models for online channels to avoid the conflict of interest with local offline dealers. In 2011, Geely, one of the local OEMs in China, launched two special models of Geely LC targeting online customers. Admittedly, at the current stage, customers still need to visit local dealer shops to pick up their automobile even if they purchase it online. The local dealer then recognises the sales of the automobile, and charges a channel fee from the OEMs. Used car market Besides the new car market, there is also a huge potential in the used car market. High potential in China's According to China Auto Market, replacement demand in China is just 23% of total car used car market demand, which is much lower than the number in developed countries. CS's China auto research team expects auto replacement demand to spike in 2014/15, driven by 2009/10’s 47%/34% YoY total PV sales surge, given the average new car usage time is 4.8 years. Therefore, in the long run, as the demand of used cars grows, there will be more and more used car transactions in the automobile market in China. In recent years, many Internet companies, including Bitauto, Autohome, and 58.com, started to expand their business in the used car market. Bitauto set up its used car trading website, taoche.com, in 2006. In 2013, Bitauto recorded Rmb21 mn revenue from taoche.com, despite a Rmb50.9 mn operating loss due to high operating expenses. Dasouche, a start-up company founded in 2012, adopted the O2O model in used car market by setting up an online trading platform souche.com as well as an offline chain store to provide used car appraisal, trading, and warranty services.
China Internet Sector 31 15 April 2014
Figure 54: Demand percentage vs global peers Figure 55: China used-car average age China Global Peers 2009 2010 2011 100% <1 year 4.5% 3.2% 3.3% 9% 8% 90% 23% 23% 26% 26% 24% 1-2 year 11.4% 10.3% 11.6% 80% 2-3 year 15.7% 13.1% 14.6% 50% 70% 3-4 year 14.6% 15.3% 14.0% 75% 60% 83% 4-5 year 14.1% 14.2% 14.1% 50% 94% 95% 91% 92% 5-6 year 11.6% 12.6% 12.4% 40% 77% 77% 74% 74% 76% 6-7 year 11.1% 10.0% 9.6% 30% 50% 7-8 year 6.8% 9.2% 7.3% 20% 25% 8-9 year 3.4% 5.4% 5.8% 10% 17% 0% 6% 5% 9-10 year 2.1% 2.6% 3.2% 2011 2012 2013 2014e2015e2016e India Korea USA Japan UK German >10 year 4.8% 4.1% 4.1% 1st Time Demand Replacement Demand Average age 4.6 4.8 4.8 Source: China Auto Market, Credit Suisse estimates Source: iautos.cn Currently, dealers are not very actively involved in the used car trading business in China. One major obstacle in used car trading with dealers is the high transaction tax charged by the government. According to the used car trading regulation, registered used car dealers need to pay 2% of the total transaction value as the value-added tax while, for agent and private trading, only an invoice charge of Rmb200-400 is incurred. Therefore, dealers tend to be reluctant to trade the used car in the public market due to the meaningful difference in trading cost. Some of the dealers try to evade the tax charges by conducting the deal privately with their clients. As a result, the tax barrier negatively affects the used car trading volume from dealers, both online and offline. According to China Automobile Dealers Association (CADA), a proposal report on adjusting the charge of the value-added tax in used car trading has been submitted to State Bureau of Taxation. In the report, CADA suggests the tax should be charged based on the appreciation value instead of the total transaction value of the used car, which will largely reduce the existing transaction cost for dealers. As the trading cost gets reduced in the future, dealers, the major player in new car trading, will play a more vital role in the used car trading market, which, to some extent, will potentially boost online used car trading market. Automobile related financial products Except for automobile trading, automobile-related financial products, such as automobile Online automobile players finance and insurance can also be linked to the online automobile business in order to are starting to get involved provide more comprehensive services to potential customers. in providing financial products The online automobile platform can act as a channel to bridge different parties in the car purchasing activities. It links potential customers with local dealers by exhibiting dealers' inventories on its website, and brings banks into the loop when customers purchase cars. Banks can conduct credit checking and issue loans to customers through the online platform. The online automobile platform can also package car insurance into car sales, and provide one-stop service for customers who purchase automobiles online. The potential customers then only need to consider which model to buy after conducting a comprehensive research online, the related financial related process will be taken care of by the online automobile platforms' recommendations.
China Internet Sector 32 15 April 2014 Appendix III: US online auto market study Automotive is one of the largest digital ad vertical in US in terms of total spending. US automotive industry According to eMarketer, in 2013, automotive industry spent US$5.1 bn on digital ads. This spent US$5.1 bn on digital compares with China's ~US$0.9 bn in 2012, according to iResearch. National Automobile ads Dealers Association of US (NADA) also shows that in 2012, US dealers spent 0.3% of their total sales on digital ads, which is US$165 per new car sold. According to eMarketer, automotive will become the second-biggest spender in paid online and mobile media by 2015, surpassing the financial services industry. Automotive advertiser invested ~60% of its paid digital dollars in direct-response efforts in 2013, while brand-focused campaigns will make up the remaining 40%. Search and display will still command the largest portion of digital ad spending, while the greatest growth is in the areas of mobile, video, social and local services.
Figure 56: US automobile industry digital ad spending forecast 9 25% 7.91 8 7.28 7 19.7% 6.56 20% 18.3% 5.85 6 5.11 14.5% 15% 5 4.27 12.1% 4 3.61 11.0% 10% 3 8.7%
2 5% 1 0 0% 2011 2012 2013 2014 2015 2016 2017
Automotive digital ad spending (US$Bn) YoY% % of total digital ad spending
Source: eMarketer Dealers dramatically increased Internet ad spending over past ten years According to eMarketer, Internet accounted for 26.0% of auto dealers' ad spending in 2013, increasing from 5.0% in 2002. Meanwhile, we see a rapid drop of ad spending in newspaper, declining from 46.7% in 2002 to 15.4% in 2013.
China Internet Sector 33 15 April 2014
Figure 57: US auto dealer ad spending breakdown by media 100% 8.5% 9.3% 9.7% 9.8% 90% 7.4% 9.9% 10.8% 10.8% 80% 15.7% 70% 15.9% 15.9% 15.3% 60% 20.0% 16.9% 15.4% 50% 46.7% 40% 20.1% 20.2% 22.7% 30% 20% 16.7% 26.5% 10% 24.8% 26.0% 0% 5.0% 2002 2011 2012 2013 Internet TV Newspapers Radio Direct mail Other
Source: eMarketer Mobile becoming an important digital media In October 2012, J.D. Power and Associates reported that the percentage of in-market shoppers who visited an automotive website from their smartphone increased from 17% in 2010 to 31% in 2012.
Figure 58: US car shoppers who have visited an automobile website via smartphone (%) 35% 31% 30% 24% 25% 20% 17% 15% 10% 5% 0% 2010 2011 2012
Source: eMarketer From leads generation to online transaction Previously, the majority of US online auto vertical sites, such as Autotrader, Edmunds.com Online auto transaction on and Autobytel generated revenue from brand ad and providing sales leads to auto dealers. the rise However, there are two disadvantages in this mode: (1) adequate leads to sales conversion rate and (2) opaque transaction price as all transactions need to be fulfilled offline. Both car buyers and car dealers are looking forward to a new business model. In 2005, a new automotive information website named TrueCar was founded. Instead of using the traditional monetisation mode, it provides recent real transaction price for various car types for viewers' reference. When a car buyer selects a desirable car and price, TrueCar provides a digital credential to the car buyer that enables him to purchase the car
China Internet Sector 34 15 April 2014 with the specific price from a TrueCar registered dealer. TrueCar will then charge the dealer a certain commission upon a successful deal. Such a model can both increase ROI for dealers and transparency in pricing for car buyers. Driven by the advantage of this new business model, TrueCar has become a highly successful car vertical and grown into a 'go-to' site for car buyers with 400k car sold and 2.8 mn MAU in 2013. Currently, various car verticals, such as autotrader, KBB.com and Edmunds.com all provide similar functions for car buyers. We list some of the leading car verticals in the US as below. Autotrader Autotrader operates one of the largest digital automotive marketplace and is a leading Autotrader is a leading provider of marketing and software solutions to automotive dealers in the United States. online auto vertical in US Through its AutoTrader.com (car listing website) and Kelley Blue Book (car review website), it offers consumers tools, content and information that increase their confidence in the car buying process. In its Digital Media business, Autotrader reached approximately 60% of online in-market car shoppers in the United States, based on a 2011 KS&R Vehicle Shopper Study. On AutoTrader.com, consumers could search over 3.6 mn daily unique new and used car listings (1H12 data) from its network of over 25,000 dealers. Over 21,000 of these dealers have subscribed to its services to enhance their new and used car listings on its websites. Through its Software Solutions business, it provides dealer customers with subscription- based software tools and related data analytics to help them operate their businesses with greater efficiency and profitability. In 1H12, Autotrader derived 86% revenue from its digital media service, and 13.7% revenue from its software solution service. In November 2012, Autotrader agreed to acquire a 21.8% interest in Bitauto for $58.5 mn and become a strategic investor of Bitauto. Figure 59: Autotrader revenue Figure 60: AutoTrader.com Vehicle Display Page 1200 45% 1,025.2 40% 1000 39% 35% 800 737.8 30% 629.5 563.1 25% 600 20% 17% 400 15% 15% 10% 200 5% 0 0% 2009 2010 2011 1H12
Revenue(US$Mn) YoY %
Source: Company data Source: Company data
China Internet Sector 35 15 April 2014
TrueCar TrueCar is an automotive pricing and information website for new and used car buyers TrueCar is growing fast and dealers. It is designed to provide a transparent car buying experience for auto dealers supported by its efficient and consumers. auto pricing platform TrueCar benefits consumers by providing information related to what others have paid for a make and model of car in their area and, where available, estimated prices for that make and model of car, which it refers to as upfront pricing information, from its network of TrueCar Certified Dealers. Its network of over 7,000 TrueCar Certified Dealers consists primarily of new car franchises, representing all major makes of cars, as well as independent dealers. TrueCar Certified Dealers operate in all 50 states and the District of Columbia. According to TrueCar estimation, users of its platform purchasing cars from TrueCar Certified Dealers accounted for approximately 2% of all new car sales in the United States in 2013. Since its founding in 2005, TrueCar users have purchased over 1.1 mn cars from TrueCar Certified Dealers, including nearly 400k during 2013. During 2013, TrueCar generated revenues of US$134 mn. 89% consisted of transaction revenues with the remaining 11% derived primarily from the sale of data and consulting services to the automotive and financial services industries. Transaction revenues primarily consist of fees paid to TrueCar by its network of TrueCar Certified Dealers under pay-for-performance business model where TrueCar generally earns a fee only when a TrueCar user purchases a car from them. Its MAU increased from 1.3 mn in 2011 to 2.8 mn in 2013. The total units of car sold on TrueCar.com increased from 239,000 in 2011 to 400,000 in 2013. Total franchise dealers increased from 4,916 in 2011 to 6,651 in 2013. Transaction revenue per car sold reached US$297 in 2013.
Figure 61: TrueCar revenue Figure 62: TrueCar car pricing page 160 160% 140 141% 134.0 140% 120 120% 100 100% 100% 76.3 79.9 80 80% 68% 60 60% 38.1 40 40% 15.8 20 20% 0 5% 0% 2009 2010 2011 2012 2013
revenue(US$Mn) YoY %
Source: Company data Source: Company data
China Internet Sector 36 15 April 2014
Autobytel Founded in 1996, Autobytel is an automotive marketing services company that assists Autobytel is a traditional automotive retail dealers and automotive manufacturers market and sell new and used auto vertical in US vehicles to consumers through its programs for online lead referrals, Dealer marketing products and services, and online advertising programs and mobile products. Autobytel generates the vast majority of the leads it sells to dealers and most automakers through its own websites, Autobytel.com and Car.com, as well as through paid search advertising. Autobytel sells leads, or contact information left by online car shoppers, to about 5,200 dealers, it has sold about 5Mn leads in 2013, according to its CEO Jeff Coats. In 2013, Autobytel earned 95% revenue from leads referral fee paid by auto dealers and automakers, and 5% revenue from advertising and other services.
Figure 63: Autobytel revenue Figure 64: Autobytel car listing page 90 30% 78.4 80 24% 66.8 20% 70 63.8 17%
60 52.9 51.5 10% 50 5% 0% 40 -3% 30 -10% 20 -20% 10 -26% 0 -30% 2009 2010 2011 2012 2013
Revenue(US$Mn) YoY %
Source: Company data Source: Company data
China Internet Sector 37
15 April 2014 Asia Pacific/China Equity Research Consumer Internet
Autohome Inc.
(ATHM.N / ATHM US) Rating NEUTRAL* [V] Price (14 Apr 14, US$) 33.94 INITIATION
Target price (US$) 36.00¹ Upside/downside (%) 6.1 Mkt cap (US$ mn) 3,568 (US$ 3,568) A comprehensive auto vertical in evolution Enterprise value (Rmb mn) 18,888 Number of shares (mn) 105.14 ■ Initiating coverage with NEUTRAL rating and a target price of US$36. Free float (%) 26.8 While we like Autohome's organic traffic strength and valuable UGC 52-week price range 51.8 - 27.1 resources compared to other auto vertical portals, we believe the current ADTO - 6M (US$ mn) 3.4
*Stock ratings are relative to the coverage universe in each valuation fairly reflects its superior leadership quality and portal user analyst's or each team's respective sector. experience, and the stock may have limited upside until there's a meaningful ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). breakthrough in auto eCommerce.
Research Analysts ■ Leading player in the China auto vertical portal space. Autohome is the Evan Zhou leading player in the China auto vertical portal space in terms of overall 852 2101 6745 traffic and user engagement. It enjoys the leading position in auto vertical [email protected] online ads and is working hard to boost its dealership platform segment. On Dick Wei the advertising side, an upside from higher spend on auto advertising is 852 2101 7339 [email protected] limited for Autohome and growth should come from further ARPU increase. Contribution by On the dealership platform side, we expect the company to experience 54% Daniel Chen & David Sun CAGR over the next two years, closing the gap further with Bitauto in this segment. Autohome is also experimenting with facilitating auto eCommerce transactions by introducing sales events with attractive discounts to users. ■ Catalysts. (1) further dealership penetration in lower-tier cities; (2) further progress in eCommerce initiatives; (3) higher-than-expected China passenger vehicle market volume growth. Risks: (1) potential margin downside from higher investment and competition; (2) low management ownership in the company. ■ Expect 38% EPS CAGR over the next two years. Our target price is based on 25x 2015E P/E, on the back of our estimate of a 38% EPS CAGR over the next two years. Out TP implies 35x 2014E P/E and a PEG of 0.65x. Autohome has cash and equivalent of US$2.13 per ADS.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 1,216.5 1,869.3 2,688.3 3,388.1 60 180 EBITDA (Rmb mn) 580.5 869.1 1,253.3 1,625.9 50 EBIT (Rmb mn) 554.9 838.4 1,213.0 1,576.0 40 130 Net profit (Rmb mn) 481.8 698.0 995.5 1,282.3 30 EPS (CS adj.) (Rmb) 4.70 6.22 8.84 11.35 20 80 Dec-13 Mar-14 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 6.5 9.2 11.5 The price relative chart measures performance against the S&P EPS growth (%) 95.6 32.3 42.1 28.4 500 INDEX which closed at 1830.61 on 13/04/14 P/E (x) 44.9 33.9 23.9 18.6 On 13/04/14 the spot exchange rate was US$1./US$1 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 36.3 21.7 14.4 10.4 Performance over 1M 3M 12M P/B (x) 9.8 8.1 6.1 4.6 Absolute (%) -18.1 -6.6 — — ROE (%) 25.6 27.2 29.2 28.2 Relative (%) -17.5 -5.6 — — Net debt/equity (%) net cash net cash net cash net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
China Internet Sector 38 15 April 2014 Focus charts and tables
Figure 65: Daily UV of top auto verticals/channels ('000) Figure 66: Daily PV of top auto vertical/channels ('000)
Autohome 7872 Autohome 151,370
Bitauto 4548 Bitauto 50,174
Xcar 3807 Xcar 35,701
Sohu 2721 Sohu 23,461
Netease 2647 Netease 17,920
Tencent 2526 PCAuto 15,674
iFeng 2161 iFeng 13,271
PCAuto 1968 Tencent 13,054
xgo.com.cn 1000 xgo.com.cn 2,112
0 2000 4000 6000 8000 10000 - 40,000 80,000 120,000 160,000
Source: iResearch Source: iResearch
Figure 67: Margin comparison between Autohome and Bitauto 2011 2012 2013 Autohome Bitauto Autohome Bitauto Autohome Bitauto Gross Margin 70.6% 68.1% 76.6% 72.4% 79.8% 76.7% Adj. OPM (ex-SBC) 42.7% 13.5% 44.7% 15.8% 47.7% 18.8% SG&A (ex-SBC) 24.2% 49.1% -26.3% 51.5% 25.6% 50.7% R&D (ex-SBC) 3.7% 5.5% 5.5% 5.1% 6.5% 7.3% Adj. Net Margin (ex-SBC) 34.3% 15.8% 33.0% 14.0% 39.6% 18.1% Source: Company data
Figure 68: China Internet vertical and services comps Close Mkt cap EPS P/E ROE EV/EBITDA FCF yield (%) Company Ticker Ccy price (US$ mn) 2013 2014E 2015E 2013 2014E 2015E 2014E 2013 2014E 2015E 2013 2014E 2015E 58.com WUBA US USD 43 3,496 0.3 0.5 0.9 152.1x 86.3x 45.5x 13.8x 14.7x 16.0% 180.8x 86.7x 39.4x 43 Autohome ATHM US USD 34 3,568 0.8 1.0 1.4 44.4x 33.7x 24.0x 9.4x 11.8x 20.2% 23.3x 15.5x 10.9x 34 Bitauto BITA US USD 31 1,347 1.0 1.3 2.2 30.7x 23.3x 14.1x n.a 4.1x n.a n.a n.a n.a 31 Jiayuan DATE US USD 6 189 0.4 0.3 0.5 15.1x 18.1x 11.5x 5.5x 2.0x 8.0% n.a n.a n.a 6 SouFun SFUN US USD 13 6,866 0.7 0.8 1.1 17.9x 15.4x 12.2x 6.9x 7.2x 45.2% 19.5x 16.3x 13.4x 13 Qunar QUNR US USD 29 3,284 -0.2 -0.4 -0.0 -151x -71.7x -625x 27.0x 14.0x -53% -61.0x -1644x 26.8x 29 Ctrip CTRP US USD 54 7,056 1.5 1.1 1.7 35.2x 48.9x 31.7x 5.6x 7.7x 11.2% 39.0x 65.2x 29.7x 54 eLong LONG US USD 16 536 -0.4 -0.1 0.5 -35.2x -124x 29.2x n.a 2.5x n.a n.a n.a n.a 16 Sohu SOHU US USD 59 2,283 1.6 -1.9 -1.0 38.1x -30.7x -58.0x 3.9x 1.4x -13% 5.8x 16.1x 7.8x 59 Average 47.7x 37.6x 24.0x 10.3x 7.3x 5.0% 53.7x 39.9x 21.4x *Closing price of 14 Apr 2014; Source: Company data, Thomson-Reuters, Credit Suisse estimates
China Internet Sector 39 15 April 2014 A comprehensive auto vertical in evolution Self-owned traffic to provide long-term growth Autohome is the leading player in the China auto vertical portal space in terms of traffic and user engagement. It enjoys the leading position in online auto vertical ads and is working hard to boost its dealership platform subscription segment. Autohome experiences the largest organic traffic among all automobile verticals and auto channels of comprehensive portals. The company has been focusing on pursing content expertise and optimising user experience. We believe the organic traffic leadership of Autohome should lay a good foundation for the company further improve its expertise in auto transactions. Ads still the bread & butter with dealership platform as the growth layer On the advertising side, an upside from higher spend on auto advertising is limited for Autohome as it already has a leading position and growth has to come from further ARPU increase. We expect advertising revenue to witness a 46% CAGR to Rmb1.9 bn by 2015E. On the dealership platform side, we expect the company to achieve a 54% CAGR over the next two years, closing the gap further with Bitauto in this segment. Autohome is also experimenting with facilitating auto eCommerce transactions by introducing sales events with attractive discounts to users. Potential margin downside from future investments Autohome’s overall margin profile is the best among its peers. It might be difficult, however, for the company to further improve its overall margin, due to a stable product mix and future investments in new businesses such as dealerships and second-hand car listing platforms. We believe that there will be a potential margin downside for Autohome from future investments, especially in new business, marketing, headcount, and R&D. Valuation We initiate coverage on Autohome with a NEUTRAL rating and a target price of US$36. While we like its organic traffic strength and valuable UGC resources compared to other auto vertical portals, we believe the current valuation fairly reflects Autohome's superior leadership quality and portal user experience, and the stock may have limited upside until there's a meaningful breakthrough in auto eCommerce. Our target price is based on 25x 2015E P/E, on our estimates of a 38% EPS CAGR over the next two years. Our TP implies 35x 2014E P/E and a PEG of 0.65x. Autohome has cash and equivalent of US$2.13 per ADS. Catalysts: (1) further dealership penetration in lower-tier cities; (2) further progress in eCommerce initiatives; (3) higher-than-expected China passenger vehicle market volume growth. Risks: (1) potential margin downside from higher investment and competition; (2) low management ownership in the company.
China Internet Sector 40 15 April 2014
Autohome Inc. ATHM.N / ATHM US Price (15 Apr 14): US$33.94, Rating:: [V], Target Price: US$36.00, Analyst: Evan Zhou Target price scenario Key earnings drivers 12/13A 12/14E 12/15E 12/16E Scenario TP %Up/Dwn Assumptions Total dealer subscription 321.6 513.0 764.5 977.9 Upside 43.00 26.69 45% CAGR of 2013-16 revenue growth revenue (RMB Mn) — — — — Central Case 36.00 6.07 40% CAGR of 2013-16 revenue growth — — — — Downside 28.00 (17.50) 35% CAGR of 2013-16 revenue growth — — — —
— — — — Income statement (Rmb mn) 12/13A 12/14E 12/15E 12/16E Per share data 12/13A 12/14E 12/15E 12/16E Sales revenue 1,217 1,869 2,688 3,388 Shares (wtd avg.) (mn) 102.4 112.2 112.6 113.0 Cost of goods sold 245.7 373.0 522.8 642.6 EPS (Credit Suisse) 4.7 6.2 8.8 11.3 SG&A 311.7 481.5 700.0 864.1 DPS(Rmb) (Rmb) — — — — Other operating exp./(inc.) 78.7 145.8 212.2 255.4 BVPS (Rmb) 21.6 25.9 34.7 45.9 EBITDA 580 869 1,253 1,626 Operating CFPS (Rmb) 5.8 5.8 7.5 11.3 Depreciation & amortisation 25.5 30.7 40.3 49.9 Key ratios and 12/13A 12/14E 12/15E 12/16E EBIT 555 838 1,213 1,576 valuation Net interest expense/(inc.) — — — — Growth(%) Non-operating inc./(exp.) 13.6 10.1 10.1 10.1 Sales revenue 66.1 53.7 43.8 26.0 Associates/JV — — — — EBIT 85.9 51.1 44.7 29.9 Recurring PBT 568 849 1,223 1,586 Net profit 99 45 43 29 Exceptionals/extraordinaries — — — — EPS 95.6 32.3 42.1 28.4 Taxes 112.3 185.5 264.6 340.9 Margins (%) Profit after tax 456 663 958 1,245 EBITDA 47.7 46.5 46.6 48.0 Other after tax income — — — — EBIT 45.6 44.8 45.1 46.5 Minority interests — — — — Pre-tax profit 46.7 45.4 45.5 46.8 Preferred dividends — — — — Net profit 39.6 37.3 37.0 37.8 Reported net profit 456 663 958 1,245 Valuation metrics (x) Analyst adjustments 25.6 35.0 37.0 37.0 P/E 44.9 33.9 23.9 18.6 Net profit (Credit Suisse) 482 698 995 1,282 P/B 9.8 8.1 6.1 4.6 Cash flow (Rmb mn) 12/13A 12/14E 12/15E 12/16E Dividend yield (%) — — — — EBIT 555 838 1,213 1,576 P/CF 36.4 36.1 28.2 18.6 Net interest 13.6 10.1 10.1 10.1 EV/sales 17.3 10.1 6.7 5.0 Tax paid (112.3) (185.5) (264.6) (340.9) EV/EBITDA 36.3 21.7 14.4 10.4 Working capital (44.5) (73.6) (192.1) (49.7) EV/EBIT 37.9 22.5 14.9 10.7 Other cash & non-cash items 182.3 65.7 77.3 86.9 ROE analysis (%) Operating cash flow 594 655 844 1,283 ROE 25.6 27.2 29.2 28.2 Capex (43.7) (48.0) (48.0) (48.0) ROIC 40 192 (326) (739) Free cash flow to the firm 550 607 796 1,235 Asset turnover (x) 0.35 0.42 0.47 0.47 Disposals of fixed assets — — — — Interest burden (x) 1.02 1.01 1.01 1.01 Acquisitions — — — — Tax burden (x) 0.80 0.78 0.78 0.79 Divestments — — — — Financial leverage (x) 1.59 1.53 1.46 1.40 Associate investments — — — — Credit ratios Other investment/(outflows) (2) 1,556 — — Net debt/equity (%) (51) (113) (105) (103) Investing cash flow (46) 1,508 (48) (48) Net debt/EBITDA (x) (1.96) (3.80) (3.27) (3.28) Equity raised 632.9 0.4 0.4 0.4 Interest cover (x) — — — — Dividends paid (220.9) — — — Net borrowings 2.4 — — — Source: Company data, Thomson Reuters, Credit Suisse estimates. Other financing cash flow (245.0) — — — Financing cash flow 169.3 0.4 0.4 0.4 12MF P/E multiple Total cash flow 717 2,163 796 1,235 60 Adjustments 0.79 — — — Net change in cash 718 2,163 796 1,235 50 Balance sheet (Rmb mn) 12/13A 12/14E 12/15E 12/16E 40 Cash & cash equivalents 1,139 3,302 4,098 5,333 Current receivables 466 626 876 1,060 30 Inventories — — — — 20 Other current assets 294.9 457.2 639.5 773.8 Current assets 1,899 4,385 5,613 7,167 10
Property, plant & equip. 57.9 75.2 82.9 81.0 0 Investments — — — — Jan-14 Feb-14 Mar-14 Intangibles — — — — Other non-current assets 1,556 — — — Total assets 3,513 4,461 5,696 7,248 12MF P/B multiple Accounts payable — — — — Short-term debt — — — — 14 Current provisions — — — — 12 Other current liabilities 790 1,039 1,279 1,548 10 Current liabilities 790 1,039 1,279 1,548 Long-term debt — — — — 8 Non-current provisions — — — — 6 Other non-current liab. 510.8 510.8 510.8 510.8 4 Total liabilities 1,301 1,550 1,790 2,058 Shareholders' equity 2,212 2,911 3,907 5,189 2 Minority interests — — — — 0 Total liabilities & equity 3,513 4,461 5,696 7,248 Jan-14 Feb-14 Mar-14
Source: IBES
China Internet Sector 41 15 April 2014 Self-owned traffic to provide long- term growth Autohome started its business as one of the earliest vertical portals in China focusing on automobile-related news and information. It gradually expanded into vehicle review, pricing quotes, maintenance and dealership related information. Among the major auto-focused vertical portals, Autohome was launched the latest, in mid- 2005, after Bitauto in 2000, and PC Auto and XCar in 2002. Although a late comer compared to other auto vertical sites, Autohome quickly grew its organic traffic, with innovative website design, content production, channel categorisation and a well-operated forum. Autohome soon surpassed all its vertical portal peers in terms of traffic. With the comprehensive content offering and good operation on its forums, Autohome Autohome enjoys the largest enjoys the largest traffic among all automobile verticals and auto channels of traffic among all automobile comprehensive portals. According to iResearch, by March 2014, Autohome ranked as the verticals and auto channels No.1 among all auto verticals in terms of UV and PV, followed by BitAuto, XCar, and Sohu of comprehensive portals Auto Channel. Autohome is well-known for its forums, as the most active and go-to informational source for many potential vehicle buyers to pick up peers' thoughts and comments on automobiles. Forum traffic has helped Autohome gain an even larger share of PV compared to UV, as per user browsing duration is usually 2-3x of its peers. In terms of daily user time spent, Autohome has been outstanding given the large user engagement. According to iResearch, the average time users spend on Autohome on a daily basis is about 900 seconds, more than double compared to Bitauto which ranked second. By leveraging the active user engagement, Autohome could potentially provide more meaningful application scenarios and a satisfactory conversion rate for online advertising business.
Figure 69: Daily UV of top auto verticals/channels ('000) Figure 70: Daily PV of top auto vertical/channels ('000)
Autohome 7872 Autohome 151,370
Bitauto 4548 Bitauto 50,174
Xcar 3807 Xcar 35,701
Sohu 2721 Sohu 23,461
Netease 2647 Netease 17,920
Tencent 2526 PCAuto 15,674
iFeng 2161 iFeng 13,271
PCAuto 1968 Tencent 13,054
xgo.com.cn 1000 xgo.com.cn 2,112
0 2000 4000 6000 8000 10000 - 40,000 80,000 120,000 160,000
Source: iResearch Source: iResearch
China Internet Sector 42 15 April 2014
Figure 71: Daily user spend time of top auto verticals/channels (in seconds)
Autohome 946
PCAuto 415
Bitauto 371
Xcar 318
Tencent 191
Sohu 188
Netease 156
iFeng 140
xgo.com.cn 72
0 100 200 300 400 500 600 700 800 900 1000
Source: iResearch According to the Baidu Index, over the past three years, the brand name index traffic of The large volume of brand Autohome has outperformed its peers at all times. The large volume of brand name search name search traffic of traffic of Autohome implies larger organic traffic and better brand recognition among its Autohome implies larger peers. organic traffic and better brand recognition among its Figure 72: Baidu Index traffic of automobile verticals/channels (as of 12 April 2014) peers
Source: Baidu Index To compare, the index traffic of Autohome increased 45% YoY and was flat MoM in April 2014, while the index traffic of Bitauto increased 37% YoY and decreased 3% MoM. Despite the relatively lower traffic base compared to Autohome and Bitauto, the index traffic of XCar soared witnessing an increase of 402% YoY and 232% MoM. In addition, the index traffic of PCAuto increased 22% YoY, although it deceased 8% MoM. Sohu automobile channel's index traffic was the lowest among the five portals further decreasing 11% YoY and 21% MoM. Self-owned traffic is a key to long-term success of any Internet-focused service provider. Autohome has been focusing on pursing content expertise and optimising user experience. We believe the organic traffic leadership of Autohome should lay a good foundation for the company further improve its expertise in auto transactions.
China Internet Sector 43 15 April 2014 Advertising: Still the bread & butter According to iResearch, the first two choices for online automobile brand advertisement are portals and automobile verticals. The estimated advertising budget on portals is Rmb158 mn, accounting for 52.0% of the total budget for advertisement. The budget distributed to automobile verticals is Rmb97 mn, which accounts for 32.1% of the total budget. In total, the budget on these two major channels accounts for 84.1% of the online automobile brand advertisement budget.
Figure 73: Budget allocation for online automobile brand ads on different channels
Client software, Others, 5.7% IT related vertical, 2.2% 2.2%
Video, 5.8%
Portal, 52.0% Automobile vertical, 32.1%
Source: iResearch January 2014 Leading traffic base gives Autohome a head start in growing its online advertising business. Autohome’s ads segment is currently run in a relatively traditional way, selling banners, sponsorships, text links charged by time (CPT) and impressions (CPM).
Advertisements are embedded into each page on the website, from homepage to channel Autohome’s ads segment is pages to individual news page, with different price depending on the format of the currently run in a relatively advertisement and traffic of the page. Advertisements are displayed in a banner format traditional way, selling with flash animation in most of the pages, while, in some important hub pages such as banners, sponsorships, text homepages and channel index pages, customised advertisement formats, including links charged by time (CPT) prompted video window, news hotspot, and sidebar, are created in order to fit the content and impressions (CPM) naturally without harming the user experience.
China Internet Sector 44 15 April 2014
Figure 74: Ad inventories and price on Autohome's homepage
Source: Company data. Auto vertical advertising budget and placement fluctuates with seasonality and event Auto vertical advertising planning. The fourth quarter is typically a peak season with year-end drive for volume from budget and placement major OEMs and budget flush effects. First quarter is usually the low season due to the fluctuates with seasonality Chinese New Year and back-loaded activities such as major auto shows in 2Q. Ad and event planning. placement is also associated with new model launches and varies year to year for specific OEMs. The fluctuation of seasonal advertising is directly reflected in a vertical company's online advertisement revenue for each quarter. Autohome sells its ad inventories to OEMs and dealers mainly through agents. By 9M13, top 10 agents accounted for 47% of the company's total revenue. The biggest agent takes ~7.5% of the total revenue. Framework contacts with advertisers usually last for one year, with specific placement executed by months. On OEM advertisers, approximately 90% of over 80 OEMs in China are already ATHM's advertisers. By end-2013, ARPU per advertiser was ~Rmb9.4 mn, up 48.8% YoY. Top 5 advertisers contributed 15% of the total revenue in 2013, down from 20% in 2012. In addition, no single advertiser contributed more than 10% to the revenue in 2013.
China Internet Sector 45 15 April 2014
Ad placements from dealers also significantly rely on the overall marketing strategy from OEMs. OEMs typically have certain marketing budget reserved for supporting local marketing activities for dealers. These marketing dollars would be 'reimbursed' to dealers if a dealer achieves certain sales target. Therefore, the dealers budget their online advertisement according to the marketing strategy and support from OEMs. We see limited room for growth in terms of # of advertisers in the years to come. Growth We see limited room for will mainly come from ARPU – more wallet share from each advertiser. On the supply side, growth in terms of # of growth would come from inventory expansion, improvement in sell-through rate and price advertisers in the years to hike in future. We expect advertising revenue to witness a 46% CAGR to Rmb1.9 bn by come. Growth will mainly 2015E. come from ARPU - more wallet share from each User profiles for auto vertical sites visitors advertiser. Looking at the sheer headline number of overall traffic on auto vertical sites may not show the full picture of the nature of this traffic. We categorise visitors on auto vertical sites into the following categories:
■ Potentials buyers: Users who may have plans to purchase a vehicle in the next 3-6 months.
■ Existing car owners: Those who already own a car, but are interested in discussion, knowledge, or offline events available on the sites.
■ Automobile fans: People who are interested in any topic about automobiles and are actively contributing to the discussion and commentaries on auto verticals sites. These people do not have to be owners or even be buying vehicles soon, such as young professionals, college students or even high school students.
■ Industry practitioners: Those interested in industry news, advancement in technology, new model launches and industry studies.
■ Leisure browsers: Visitors interested in browsing beautiful pictures of cars.
In our view, the most valuable portion of users are potential buyers, as these are the users In our view, the most who are most transaction-oriented buyers and deserve more marketing dollars to focus on valuable portion of auto and increase conversion over this group of users. We also see values in existing car vertical site users are owners and automobile fans. These users are also valuable in viral, word-of-mouth potential buyers promotions, as they usually act as experienced buyers and can give out recommendations to their friends to influence their buying decisions.
China Internet Sector 46 15 April 2014 Dealer subscriptions as the growth layer Besides being the leading automobile information portal, Autohome has been striving to provide potential buyers with dealer information over the past several years. There were 22,809 dealers registered on ATHM by 9M13, and 10,084 paid members (车商汇) by the end of 2013. Membership fees is fixed ranging from Rmb25,000-75,000 on a quarterly basis or Rmb80,000-220,000 annually, according to the membership scheme released in 1Q2014. Paid members are entitled to features such as a dedicated homepage and a hotline number, CRM system, data analysis and prioritised listing ranking.
Figure 75: Autohome dealer subscription membership scheme (1Q2014, in RMB) There is still a sizable Types Tier 1 cities Tier 2 cities Tier 3 cities Other cities potential for Autohome to Quarterly Standard 45,000 40,000 35,000 25,000 involve more dealers into its Luxury 75,000 60,000 50,000 40,000 paid dealer subscription Semiannually Standard 85,000 70,000 60,000 45,000 program given the relatively Luxury 130,000 100,000 90,000 70,000 low participation rate at the Annually Standard 150,000 120,000 110,000 80,000 current stage Luxury 220,000 180,000 160,000 120,000 Source: Company data. Pricing of the paid membership is determined by the type of membership and city tier in which the dealer is located. There are two types of paid memberships with different service packages provided by Autohome: standard and luxury. With more advanced features and services, luxury members are charged 0.5 times more than standard members in general. All the cities covered by Autohome are classified into four tiers. Dealers located in top city tiers commit higher membership fees compared to dealers in lower city tiers. On an annual basis, the membership fees ranges from Rmb80,000 for standard members in lower city tiers to Rmb220,000 for luxury members located in top city tiers. The dealer subscription services of Autohome include:
■ Integrated marketing: Through the web-based interface of Autohome's dealership information system, dealers can market their inventories by setting up online shops and providing updated model price. Autohome also helps dealers to publish their promotion and offline activities information through its platform.
■ Customer relationship management: Potential automobile customers can interact with dealer subscribers online or through toll-free numbers provided by Autohome to get more detailed information and schedule test drives. Dealers can publish their offline event through Autohome's event registration platform, and involve more potential customers into their offline activities.
■ Automotive aftersales: Aftersales activities, including automobile maintenance, car replacement, boutique accessories, and financial related business, are captured by the automotive aftersales services platform. Local dealers are connected with aftersales customers, and extend their offline aftersales business to online through the platform.
■ Data analysis: In 2012, Autohome launched its automobile consumer trend analysis service for its dealer subscribers helping them understand the condition of specific markets. By analysing large volume of marketing and user behaviour data, Autohome provides some intelligence services such as network marketing performance statistics, automotive concern index, and industry competition and comparison to its dealer subscribers.
China Internet Sector 47 15 April 2014
In terms of revenue growth, there is still a sizable potential for Autohome to involve more dealers into its paid dealer subscription program given the relatively low participation rate at the current stage. Autohome, on the other hand, could provide more value-added services to premium members, and charge higher membership fees in the future.
China Internet Sector 48 15 April 2014 Investment risks Potential margin downside from future investments Autohome’s overall margin profile is the best among its peers. It might be difficult for the There may be potential company to further improve its overall margin, due to product mix and future investments margin downside for in new businesses such as dealership services and used car listing platforms. Autohome from future investments, especially in In addition, in 2013, the total number of employees of Autohome was 1,191, much smaller new business, marketing, compared to Bitauto's headcount base. In order to further extend its business, especially headcount, and R&D the offline dealer channel and potential O2O opportunities, larger headcount and marketing expenses are expected in the future, which will also challenge the current margin level. Moreover, to keep up with the mobile trend, Autohome will also need to dedicate more resources on the development of mobile Internet platform, which may incur huge expense on R&D as well. Therefore, we believe there may be potential margin downside for Autohome from future investments, especially in new business, marketing, headcount, and R&D.
Figure 76: Margin comparison between Autohome and BitAuto 2011 2012 2013 Autohome Bitauto Autohome Bitauto Autohome Bitauto Gross Margin 70.6% 68.1% 76.6% 72.4% 79.8% 76.7% Adj. OPM (ex-SBC) 42.7% 13.5% 44.7% 15.8% 47.7% 18.8% SG&A (ex-SBC) 24.2% 49.1% -26.3% 51.5% 25.6% 50.7% R&D (ex-SBC) 3.7% 5.5% 5.5% 5.1% 6.5% 7.3% Adj. Net Margin (ex-SBC) 34.3% 15.8% 33.0% 14.0% 39.6% 18.1% Source: Company data.
A less-than-satisfactory ownership structure Autohome management's holding in the company is quite limited. Founder Li Xiang and CEO Qin Zhi only own 4.8% and 2.9%, respectively, while the largest shareholder Telstra ATHM's ownership structure possesses 65.4% of the company. may not align well the incentives of management In our view, this ownership structure may not align well the incentives of management and and key employees with the key employees with the company's shareholders, and may result in potential management company's shareholders risks hindering the company's operation. With an unstable management share structure, it might be difficult for Autohome's management to conduct consistent strategies in the long term.
Figure 77: Autohome's ownership structure Shareholders # of Shares % Category Xiang Li 5,066,483 4.8% Founder, President, Director James Zhi Qin 3,088,929 2.9% CEO, Director Gabriel Li 12,112,212 11.5% Director, Managing Director of Orchid Asia Subtotal of Management and Directors 20,267,624 19.2% Telstra Holdings Pty Ltd 68,788,940 65.4% Institutional Others 7,086,872 Public investors 8,993,000 Total 105,136,436 100.0% Source: Company 2013 Annual Report
China Internet Sector 49 15 April 2014
Traffic base subject to potential disruptive new product threats Although Autohome is still enjoying the lead in terms of overall traffic among all automobile Current format of content focused vertical sites, we see the current format of content aggregation - news articles and aggregation - news articles forums, may be subject to new, disruptive products such as social network and interest- and forums, may be subject graph based apps and services, especially in a mobile setting. to new, disruptive products user experience One of the key reasons why the content format of purchase guide, model review and forums still draw that much traffic, is because China is still at its early stage of passenger vehicle penetration. Most auto vertical viewers in China are first-time buyers, or buyers from young generation aspiring to buy their first cars. These users have strong inclination towards learning the basics of vehicles, brands and the industry as a whole, creating huge traffic in information browsing. As vehicle purchase demand shifts more into replacement demand in the coming 1-2 years, auto vertical sites will need to cater more to direct, specific information queries in pricing, dealers, availability and reviews. Brand advertising may become less effective to these growing crowd of replacement buyers as they’re more knowledgeable, mature and have already developed their inclination towards brands before they make replacement purchase decisions. If that happens, Autohome may not be able to sustain its traffic leadership, which may further jeopardise its revenue base in the future.
China Internet Sector 50 15 April 2014 Initiate with NEUTRAL and a target price of US$36 We initiate coverage on Autohome with a NEUTRAL rating and a target price of US$36. Autohome was listed in the US on 11 December 2013 with an offering price of US$17, and on the same day its shares surged 67.9% to close at US$30.07. On 11 April 2014, four months after its listing, Autohome's share price reached US$34.00, double its initial offering price. (NASDAQ decreased 0.6% during this period), driven by positive investor sentiment towards the China Internet industry and relatively conservative offer price.
Figure 78: Autohome price performance 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Dec-13 Dec-13 Jan-14 Jan-14 Feb-14 Feb-14 Mar-14 Mar-14 Apr-14
Autohome NASDAQ
Source: Company data, Credit Suisse estimates We view Autohome's future price performance to be anchored on: (1) further dealership penetration in lower-tier cities; (2) new progress in auto eCommerce initiatives; (3) higher- than-expected China passenger vehicle market volume growth. We arrive at our target price considering the following two valuation methodologies: (1) P/E Our main valuation methodology is forward P/E. Our target price of US$36 implies 35x FY2014E and 25x FY15E diluted adjusted EPS. The company had cash position (cash, cash equivalents, and short-term investments) of US$ $188.1 mn at end-4Q13. Considering Autohome's business nature and composition, we mainly look at China Internet vertical and services comps group as reference to determine our target P/E multiple. This group of companies represents major Internet vertical and services traffic owners in China and globally, and are major players in the Internet vertical and services value chain. As of 14 April 2014, this group of companies trade at ~37.6x/24.0x 14E/15E P/E.
China Internet Sector 51 15 April 2014
Figure 79: China Internet vertical and services comps Close Mkt cap EPS P/E ROE EV/EBITDA FCF yield (%) Company Ticker Ccy price (US$ mn) 2013 2014E 2015E 2013 2014E 2015E 2014E 2013 2014E 2015E 2013 2014E 2015E 58.com WUBA US USD 43 3,496 0.3 0.5 0.9 152.1x 86.3x 45.5x 13.8x 14.7x 16.0% 180.8x 86.7x 39.4x 43 Autohome ATHM US USD 34 3,568 0.8 1.0 1.4 44.4x 33.7x 24.0x 9.4x 11.8x 20.2% 23.3x 15.5x 10.9x 34 Bitauto BITA US USD 31 1,347 1.0 1.3 2.2 30.7x 23.3x 14.1x n.a 4.1x n.a n.a n.a n.a 31 Jiayuan DATE US USD 6 189 0.4 0.3 0.5 15.1x 18.1x 11.5x 5.5x 2.0x 8.0% n.a n.a n.a 6 SouFun SFUN US USD 13 6,866 0.7 0.8 1.1 17.9x 15.4x 12.2x 6.9x 7.2x 45.2% 19.5x 16.3x 13.4x 13 Qunar QUNR US USD 29 3,284 -0.2 -0.4 -0.0 -151x -71.7x -625x 27.0x 14.0x -53% -61.0x -1644x 26.8x 29 Ctrip CTRP US USD 54 7,056 1.5 1.1 1.7 35.2x 48.9x 31.7x 5.6x 7.7x 11.2% 39.0x 65.2x 29.7x 54 eLong LONG US USD 16 536 -0.4 -0.1 0.5 -35.2x -124x 29.2x n.a 2.5x n.a n.a n.a n.a 16 Sohu SOHU US USD 59 2,283 1.6 -1.9 -1.0 38.1x -30.7x -58.0x 3.9x 1.4x -13% 5.8x 16.1x 7.8x 59 Average 47.7x 37.6x 24.0x 10.3x 7.3x 5.0% 53.7x 39.9x 21.4x *Closing price of 14 Apr 2014; Source: Company data, Thomson-Reuters, Credit Suisse estimates (2) Discounted Cash Flow (DCF) We see DCF also provides a referencing point to gauge Autohome's valuation. Assuming longer-term revenue growth of 15%, long-term OPM of 40%, a WACC of 12% and a 3% terminal growth, our DCF valuation yields a target price of US$37.7 by end-2014.
Figure 80: DCF model assumptions (base-case scenario) FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E Sales growth 66.1% 52.5% 40.2% 35.0% 30.0% 28.0% 20.0% 15.0% 15.0% 15.0% 15.0% EBIT margin 45.6% 44.8% 45.6% 45.0% 45.0% 43.0% 43.0% 40.0% 40.0% 40.0% 40.0% NOPAT margin 36.3% 34.8% 35.6% 38.3% 38.3% 36.6% 36.6% 34.0% 34.0% 34.0% 34.0% Year-end net fixed assets turns 21.0 24.7 31.4 10.0 9.0 9.0 8.5 8.5 7.50 7.50 7.50 Year-end net working capital turns 38.4 13.5 7.2 10.0 10.0 10.0 10.0 10.0 10.00 10.00 10.00 Year-end net other assets turns 0.8 n.a n.a 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Cash operating taxes as a percentage of EBIT 20.3% 22.3% 21.9% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Year-end invested capital turns 0.7 8.7 5.9 1.4 1.4 1.4 1.4 1.4 1.36 1.36 1.36 Source: Company data, Credit Suisse estimates
Figure 81: DCF sensitivity analysis Terminal growth (%) 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 56.7 59.3 62.6 67.3 74.3 86.0 109.5 179.7
10.0% 48.4 49.9 51.8 54.3 57.9 63.3 72.2 90.1 11.0% 41.8 42.7 43.8 45.2 47.1 49.7 53.6 60.2
12.0% 36.6 37.1 37.7 38.4 39.4 40.7 42.5 45.2 WACC 13.0% 32.3 32.6 32.9 33.3 33.7 34.3 35.1 36.2 14.0% 28.8 28.9 29.1 29.2 29.4 29.6 29.8 30.2 15.0% 25.9 25.9 25.9 25.9 25.9 25.9 25.9 25.9 Source: Company data, Credit Suisse estimates
China Internet Sector 52 15 April 2014 Share price drivers/risks We expect Autohome's positive share price drivers and catalysts to emerge from: (1) Further dealership penetration in lower-tier cities; Our survey shows high potential in lower-tier cities, as online penetration of dealers is still low in these areas. (2) Further progress in auto eCommerce initiatives; If Autohome's auto eCommerce initiatives are better than expected, revenue/share price see a higher upside potential. (3) Higher-than-expected China passenger vehicle market volume growth. If the total auto market growth rate higher than expected, overall marketing dollars will also increase. Downside risks could emerge from: (1) Potential margin downside from investment and competition; Given severe competition between Autohome and Bitauto and other online verticals, it is likely that Autohome's margin will suffer from the negative impact. (2) Low management ownership in the company. Autohome management's holding in the company is quite limited. Founder Li Xiang and CEO Qin Zhi only own 4.8% and 2.9%, respectively, while the largest shareholder Telstra possesses 65.4% of the company. In our view, this ownership structure may not align well the incentives of management and key employees with the company's shareholders, and may result in potential management risks hindering the company's operation.
China Internet Sector 53 15 April 2014 Company profile Autohome Inc. is a leading online platform for automobile consumers in China covering the full cycle of online automobile activities. Autohome provides comprehensive, independent and interactive content to automobile buyers and owners through its two websites, autohome.com.cn, its automobile information platform, and che168.com, its used automobile trading platform. Autohome generates its revenue by providing online advertising services to automakers and dealers as well as dealer subscription services. With a large and engaged user base, Autohome has become one of the largest online automobile advertising providers in China to help automakers and dealers conduct brand promotions, new model releases and sales promotions. The dealer subscription services provided by Autohome also allow dealers market their inventory and services through its platform and extend their customer base from offline to online.
■ Advertising services The major portion of its revenue is generated by providing online advertising services to automakers and dealers, who conduct brand promotion, new model releases and sales promotions through Autohome's advertising platform. Similar to other online advertising platforms, Autohome adopts a cost per time pricing model to price its online advertising services by charging the automakers and automobile dealers on a daily basis for the advertisements placed on its websites. The vertical platform creates more meaningful and targeted advertising scenarios compared to traditional online advertising on comprehensive portals. By segmenting users into different dimensions, the advertising system of Autohome could accurately deliver the advertisements to targeted audiences. In addition, by analysing the large volume of comment and feedback information posted by consumers on its websites, Autohome can efficiently keep track of consumer sentiments and provide more reliable and timely business insights to the automakers and dealers. With large consumer exposure and comprehensive automobile information database, Autohome has become a very important medium for automakers and dealers to conduct their advertising campaigns. ■ Dealer subscription services Another business model adopted by Autohome is dealer subscription service, which allows dealers to market their inventory and services through Autohome's websites and extend their customer base from offline to online. Autohome offers basic automobile listing services free of charge to all of registered dealers, and generates its dealer subscription services revenues through the sale of various subscription service packages with additional tools and features for inventory marketing at different prices. Dealer subscribers can establish their virtual showrooms hosted on Autohome's websites and update their automobile inventories, pricing and promotion information through the dealer application interface. Potential customers can contact dealer subscribers online or through inquiry hotlines to request for more detail information or schedule test drives. The dealer subscribers, on the other hand, can keep track of all the interactions with their customers and analyse the sales traffic through Autohome's platform. ■ Database-driven content delivery engine The business model of Autohome is driven by its comprehensive content delivery engine, which conveys Autohome's proprietary content from its own database to its websites efficiently. Through its content delivery engine, Autohome provides one-stop information services to its users with all the related information and discussion of a specific car model, including new car dealer listings, professionally produced content, automobile library, user generated content, and used automobile listings. The innovative information federation model enables Autohome to quickly ramp up its user base and become one of the largest comprehensive online automobile information platforms in China.
China Internet Sector 54 15 April 2014
Competitive Landscape Bitauto Bitauto is a leading provider of Internet content and marketing services for fast-growing automotive industry in China. With major focus on providing car buyers with the most informative online products and services and delivering its auto maker and dealer customers with effective digital marketing solutions. The four business segments of Bitauto include: the bitauto.com advertising business, the EP platform business, the taoche.com business, and CIG, the digital marketing solutions business. Beside its own vertical channel, Bitauto also distributes the pricing and promotional information through its partner portal websites. Compared to Autohome, Bitauto operates a stronger dealer network, which enables it delegating the dealer resources, and dispatching the advertising requests to third-party portals. However, on the other hand, the dealer centric and advertisement dispatching model also incurs higher traffic acquisition cost and margin pressure. In addition, Bitauto also engages in used automobile trading through taoche.com and provides one-stop digital marketing solutions to automakers. Automobile channel of comprehensive portals Besides vertical automobile portals, auto channel of comprehensive portals, such as Sohu, Tencent and NetEase, also play a vital role in the online automobile segment by providing large volume of automobile related information and advertising services. The traditional comprehensive portals establish their own automobile websites as sub channels, and operate the channel together with other channels. Instead of full cycle coverage, the automobile channels typically only focus on providing automobile related content, including news, price and other automobile assessment information. By leveraging the large user base of whole portals, they monetise the web traffic by selling online advertising services to automakers and dealers. Some of the portals also establish partnership with vertical portals such as Bitauto, and charge them fees by displaying the advertisements they delegated.
Figure 82: Competitive landscape of online automobile segments
Online Advertising Services Dealer Subscription Services
Used Automobile Trading Digital Marketing Solutions
Source: Company data, Credit Suisse estimates
China Internet Sector 55 15 April 2014 Financial statement analysis Income statement
■ Revenue Autohome’s revenue mainly comes from: (1) Advertising services Revenue from advertising services accounted for 93.1%/87.6%/80.9%/73.6% of Autohome’s total revenue in 2010/11/12/13, which makes it the main revenue stream of Autohome. Autohome generates advertising revenue mainly from automakers. Currently, 80% of automakers purchase advertising service from Autohome, thus future growth will mainly come from advertising fee per automaker. Currently, Autohome monetises advertising services through the CPT (cost-per-time) model. Meanwhile, the company plans to explore other models such as CPM or other performance ad model in the future. Autohome also sells advertising services to automobile dealers. However, advertising revenue from dealers is still limited compared to revenue from automakers. In 4Q13, ad revenue from automakers/automobile dealers accounted for 53%/19% of total revenue. Dealers receive reimbursement for most of sales and marketing expenses from automakers. Future growth in this area should mainly come from higher advertising budget from automakers and Autohome’s penetration into dealers in additional geographical markets. Autohome has also been generating a small amount of revenue from automotive aftermarket services platform since 2011, while it charges commission from successful transactions. We see the YoY growth rate of advertising services revenue decreased from 69.4% in 2010 to 51.0% in 2013. (2) Dealer subscription services Revenue from dealer subscription services accounted for 6.9%/12.4%/19.1%/28.2% of Autohome’s total revenue in 2010/11/12/13. Autohome generates dealer subscription services through the sale of various subscription services packages at different prices which enables dealers to market their vehicle inventories online. Total dealer subscribers reached 10,617 in 4Q13. All of Autohome’s subscription services are sold on a quarterly or annual fixed fee basis. We have seen strong growth in revenue from dealer subscription services in the past three years with YoY growth rate of 206%/161%/130% in 2011/12/13, with the momentum mainly supported by increase in total subscribers.
China Internet Sector 56 15 April 2014
Figure 83: Revenue growth Figure 84: Revenue breakdown (4Q13) RMB Bn 1400 100% Dealer subscription 1200 28% 69% 80% 1000 81% 71% 66% 800 60% Automaker 600 40% advertising 53% 400 20% 200 Dealer 0 0% advertising 2009 2010 2011 2012 2013 19% Dealer subscription services Advertising service Total revenue YoY
Source: Company data, Credit Suisse Source: Company data, Credit Suisse
■ Gross margin Autohome’s cost of revenues consists primarily of (1) content-related costs; (2) depreciation and amortisation; (3) bandwidth and IDC costs; and (4) VAS, business tax and surcharges. We have seen a continued surge in gross margin for Autohome since 2010 –– from 66.8% in 2010 to 80.2% in 9M13. The gross margin increase has mainly been due to increasing economies of scale from rapid top-line growth.
Figure 85: Cost of revenue as a percentage of revenue Figure 86: Gross margin* 35% 82% 81% 81% 30% 80% 80% 12.5% 79% 25% 78% 12.9% 78% 78% 20% 3.2% 10.7% 76% 2.8% 15% 6.5% 8.9% 75% 4.3% 2.0% 74% 74% 10% 3.0% 1.7% 2.3% 72% 5% 11.0% 10.1% 72% 8.6% 6.9% 0% 70% 2010 2011 2012 9M13 VAT, business tax and surcharges 68% Bandwidth and IDC costs Depreciation and amortization 66% Content related costs 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Source: Company data, Credit Suisse *Non GAAP; Source: Company data, Credit Suisse
China Internet Sector 57 15 April 2014
Figure 87: Margin profile 2011 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Adj Gross margin(ex-SBC) 70.6% 73.7% 74.9% 77.5% 78.6% 80.5% 80.9% 80.9% 77.7% Adj Op Margin (ex-SBC) 42.7% 44.2% 49.1% 46.5% 39.8% 48.1% 51.7% 51.8% 40.9% Adj Net Margin (ex-SBC) 34.3% 35.6% 40.0% 36.1% 23.1% 39.8% 43.7% 42.4% 34.0% Op expense as % of Revenue* S&M (ex-SBC) 15.3% 16.7% 15.3% 15.9% 20.0% 17.6% 18.2% 16.9% 24.6% G&A (ex-SBC) 8.9% 8.3% 6.0% 8.5% 12.9% 7.3% 4.6% 5.6% 6.2% R&D(ex-SBC) 3.7% 4.5% 4.4% 6.6% 5.9% 7.4% 6.5% 6.5% 5.9% *operating expense are ex-SBC; Source: Company data, Credit Suisse
■ Sales and marketing expenses Sales and marketing expenses mainly consist of salaries and benefits and sales commissions for S&M personnel and the marketing expenses in connection with promoting brands through other online media. Its S&M expenses have accounted for 15- 25% of total revenue in the past few years, much lower than 40%-60% level for Bitauto, its major competitor, mainly due to Autohome's stronger brand image and lower reliance on third-party paid traffic. S&M expense is the main cost item in OPEX for Autohome. However, we see a mild increase in its S&M expenses as a percentage of revenue since 2011, potentially due to higher investment to compete with other auto verticals.
■ General and administrative expenses/ Product development expenses Autohome's G&A expenses mainly consist of management and administrative personal expenses. The company also incurred a significant amount of third-party professional services fees as it engaged auditors and legal counsel in 2011-13. We see a downtrend in G&A as a percentage of total revenue in 2013. We also see a mild increase in R&D expenses as percentage of total revenue since 2011. Balance sheet Cash As of the end of 4Q13, Autohome had cash and cash equivalents of Rmb1,138.6 mn, compared to Rmb420.6 mn in 4Q12. Cash flow statement
Figure 88: Cash flow profile RMB Mn 2010 2011 2012 9M13 Operating cash flow 156.4 146.1 279.5 271.3 Investing cash flow -66.5 -12.7 -27.7 -35.5 Financing cash flow 0 -94 -44.9 -219.3 Net increase in cash and cash equivalent 89.9 39.4 206.9 16.9 Source: Company data. Operating activities Autohome generated positive operating cash flow of Rmb156.4 mn/Rmb146.1 mn/Rmb279.5 mn/Rmb271.3 mn in 10/11/12/9M13, due to its rapid top line growth and strict control on cost items. Investing activities Autohome generated negative investing cash flow of Rmb66.5 mn/Rmb12.7 mn/Rmb27.7 mn/Rmb35.5 mn in 10/11/12/9M13, mainly due to purchase of property and equipment and held-to-maturity instruments.
China Internet Sector 58 15 April 2014
Financing activities Autohome generated negative financing cash flow of Rmb66.5 mn/Rmb12.7 mn/Rmb27.7 mn/ Rmb35.5 mn in 10/11/12/9M13, mainly due to special dividend paid to all shareholders.
Figure 89: ATHM's ownership structure* Shareholders # of Shares % Category Xiang Li 5,066,483 4.90% Founder, President, Director James Zhi Qin 3,088,929 3.00% CEO, Director Gabriel Li 12,112,212 11.70% Director, Managing Director of Orchid Asia Subtotal of Management and Directors 20,267,624 19.50% Telstra Holdings Pty Ltd 68,788,940 66.20% Institutional Others 7,086,872 Public investors 7,820,000 Total 103,963,436 100.00% *assuming no exercise of over allotment; Source: Company IPO Prospectus
China Internet Sector 59
Sector China Internet Figure 90: Autohome income statement 2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016E (Rmb in Mn, year-end Dec) 1Q 2Q 3Q 4Q 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE Total Revenue 204.4 295.0 331.2 386.0 336.0 462.8 499.0 571.5 505.0 668.7 715.2 799.4 689.4 845.3 886.1 967.2 252.9 433.2 732.5 1,216.5 1,869.3 2,688.3 3,388.1 Advertising services 148.8 227.9 241.3 277.0 243.7 346.1 356.5 410.0 360.8 494.3 504.1 564.6 479.9 614.3 626.6 689.3 235.4 379.7 592.6 894.9 1,356.3 1,923.8 2,410.1 Dealer subscription services 55.6 67.1 90.0 109.0 92.3 116.7 142.5 161.6 144.2 174.5 211.0 234.8 209.5 231.0 259.5 277.9 17.5 53.5 139.9 321.6 513.0 764.5 977.9 COGS -39.9 -56.2 -63.4 -86.2 -64.5 -87.9 -94.8 -125.7 -94.9 -123.7 -132.3 -171.9 -126.2 -153.8 -159.5 -203.1 -83.9 -127.3 -171.7 -245.7 -373.0 -522.8 -642.6 Gross Profit 164.4 238.8 267.8 299.8 271.5 374.9 404.2 445.8 410.0 545.0 582.9 627.5 563.3 691.5 726.6 764.1 169.0 305.9 560.8 970.8 1,496.4 2,165.4 2,745.4
Operating Expense -72.4 -92.9 -100.3 -150.3 -122.7 -154.3 -166.2 -214.8 -179.7 -221.0 -236.9 -314.9 -242.0 -266.0 -282.4 -379.0 -72.9 -133.8 -262.4 -415.9 -658.0 -952.5 -1,169.4 Sales & Marketing -36.0 -53.7 -56.1 -95.1 -60.5 -87.9 -87.3 -137.2 -90.9 -125.7 -128.7 -199.8 -124.1 -152.2 -150.6 -241.8 -48.7 -66.4 -125.6 -240.9 -372.9 -545.2 -668.7 General & Admin -14.9 -13.6 -18.5 -23.8 -23.5 -20.8 -29.9 -34.3 -34.3 -29.4 -41.5 -49.6 -46.9 -37.2 -51.4 -60.0 -18.0 -38.5 -67.4 -70.8 -108.6 -154.8 -195.4 Research & Development -15.2 -19.1 -21.5 -22.9 -30.2 -37.0 -39.9 -34.3 -45.4 -56.8 -57.2 -56.0 -62.0 -67.6 -70.9 -67.7 -6.2 -15.9 -40.2 -78.7 -141.5 -215.5 -268.3 Share-based comp expenses -6.4 -6.5 -4.2 -8.5 -8.5 -8.5 -9.0 -9.0 -9.0 -9.0 -9.5 -9.5 -9.0 -9.0 -9.5 -9.5 0.0 -13.0 -29.1 -25.6 -35.0 -37.0 -37.0 EBIT 92.0 145.9 167.5 149.5 148.7 220.6 238.0 231.0 230.4 324.0 345.9 312.7 321.2 425.5 444.2 385.1 96.2 172.1 298.5 554.9 838.4 1,213.0 1,576.0 Adj. EBIT (ex-share-based exp.) 98.4 152.4 171.7 158.0 157.2 229.1 247.0 240.0 239.4 333.0 355.4 322.2 330.2 434.5 453.7 394.6 96.2 185.1 327.6 580.5 873.4 1,250.0 1,613.0 Adj. EBITDA 104.2 158.3 177.6 165.9 164.0 236.5 255.0 248.6 248.5 342.8 365.8 333.1 341.8 446.7 466.5 408.0 109.0 197.2 341.9 606.1 904.1 1,290.3 1,662.9 Interest Income, net 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.0 0.0 Other Income, net 2.7 6.2 2.2 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 0.1 1.7 5.2 13.6 10.1 10.1 10.1 Pre Tax Profit 94.7 152.0 169.7 152.0 151.3 223.1 240.5 233.6 232.9 326.6 348.5 315.2 323.8 428.0 446.7 387.6 96.3 173.8 303.9 568.5 848.5 1,223.1 1,586.2 Tax (Expense) / Credit -19.7 -29.8 -33.5 -29.4 -33.6 -48.6 -52.4 -50.9 -50.8 -70.5 -75.2 -68.2 -69.9 -91.8 -95.8 -83.4 -15.9 -38.3 -91.0 -112.3 -185.5 -264.6 -340.9 Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 75.0 122.2 136.2 122.7 117.7 174.5 188.1 182.6 182.1 256.1 273.3 247.0 253.9 336.2 350.9 304.2 80.4 135.4 212.9 456.2 663.0 958.5 1,245.3 Adj. Net Profit (ex-share-based exp.) 81.4 128.8 140.4 131.2 126.2 183.0 197.1 191.6 191.1 265.1 282.8 256.5 262.9 345.2 360.4 313.7 80.4 148.4 242.0 481.8 698.0 995.5 1,282.3 Diluted EPS (RMB) 0.74 1.21 1.34 1.16 1.05 1.56 1.68 1.63 1.62 2.28 2.43 2.19 2.25 2.98 3.10 2.69 0.80 1.35 2.12 4.45 5.91 8.51 11.02 Adj. Diluted EPS (RMB, ex-share-based exp.)0.80 1.27 1.39 1.24 1.13 1.63 1.76 1.71 1.70 2.36 2.51 2.27 2.33 3.06 3.19 2.77 0.80 1.48 2.40 4.70 6.22 8.84 11.35 Margins (%) Gross Margin 80.5 80.9 80.9 77.7 80.8 81.0 81.0 78.0 81.2 81.5 81.5 78.5 81.7 81.8 82.0 79.0 66.8 70.6 76.6 79.8 80.0 80.6 81.0 Adj. Operating Margin (ex-share-based exp.)48.1 51.7 51.8 40.9 46.8 49.5 49.5 42.0 47.4 49.8 49.7 40.3 47.9 51.4 51.2 40.8 38.0 42.7 44.7 47.7 46.7 46.5 47.6 Adj. EBITDA Margin 51.0 53.7 53.6 43.0 48.8 51.1 51.1 43.5 49.2 51.3 51.2 41.7 49.6 52.8 52.6 42.2 43.1 45.5 46.7 49.8 48.4 48.0 49.1 Net Margin 36.7 41.4 41.1 31.8 35.0 37.7 37.7 32.0 36.1 38.3 38.2 30.9 36.8 39.8 39.6 31.5 31.8 31.3 29.1 37.5 35.5 35.7 36.8 Adj. Net Margin (ex-share-based exp.) 39.8 43.7 42.4 34.0 37.6 39.5 39.5 33.5 37.8 39.6 39.5 32.1 38.1 40.8 40.7 32.4 31.8 34.3 33.0 39.6 37.3 37.0 37.8 Sequential Growth (%) Revenue -7.8 44.3 12.3 16.5 -13.0 37.7 7.8 14.5 -11.6 32.4 6.9 11.8 -13.8 22.6 4.8 9.2 71.3 69.1 66.1 53.7 43.8 26.0 Gross Profit -5.6 45.2 12.2 11.9 -9.4 38.1 7.8 10.3 -8.0 32.9 6.9 7.7 -10.2 22.8 5.1 5.2 80.9 83.4 73.1 54.1 44.7 26.8 EBIT 14.6 58.6 14.8 -10.8 -0.5 48.3 7.9 -2.9 -0.3 40.7 6.8 -9.6 2.7 32.4 4.4 -13.3 79.0 73.4 85.9 51.1 44.7 29.9 Net Profit 73.2 63.0 11.4 -9.9 -4.0 48.2 7.8 -2.9 -0.3 40.6 6.7 -9.6 2.8 32.4 4.4 -13.3 68.4 57.2 114.3 45.3 44.6 29.9 Adj. Net Profit 58.6 58.3 9.0 -6.5 -3.8 45.0 7.7 -2.8 -0.3 38.7 6.7 -9.3 2.5 31.3 4.4 -12.9 84.5 63.1 99.1 44.9 42.6 28.8 Diluted EPS 72.0 63.0 11.4 -13.8 -9.4 48.1 7.7 -3.0 -0.4 40.5 6.6 -9.7 2.7 32.3 4.3 -13.4 56.5 110.4 32.7 44.1 29.5 Adj. Diluted EPS 57.5 58.3 9.0 -10.5 -9.1 44.8 7.6 -2.9 -0.4 38.6 6.6 -9.4 2.4 31.2 4.3 -13.0 62.3 95.4 32.3 42.1 28.4
Source: Company data, Credit Suisse estimates 2014 15 April
60
15 April 2014 Asia Pacific/China Equity Research Consumer Internet
Bitauto Holdings Limited
(BITA.N / BITA US) Rating OUTPERFORM* [V] Price (15 Apr 14, US$) 31.04 INITIATION
Target price (US$) 46.00¹ Upside/downside (%) 48.2 Mkt cap (US$ mn) 1,347 (US$ 1,347) Leader in auto distribution digitalisation Enterprise value (Rmb mn) 7,134 Number of shares (mn) 43.41 ■ Initiate with OUTPERFORM and a TP of US$46 (48% potential upside). Free float (%) 41.7 We see BITA as the leader in the China auto sector's distribution digitisation 52-week price range 44.7 - 10.0 ADTO - 6M (US$ mn) 5.0 in the next two to three years. Our proprietary research survey among over
*Stock ratings are relative to the coverage universe in each 46 dealers in China highlights BITA's effectiveness in sales leads generation analyst's or each team's respective sector. ¹Target price is for 12 months. and its offline service resources enable further value-chain penetration. Its [V] = Stock considered volatile (see Disclosure Appendix). valuation is attractive compared to peers' and we recommend investors to
Research Analysts accumulate to capture its further growth in auto sales digitisation. Evan Zhou ■ BITA enjoys the leadership position in the China auto dealer platform 852 2101 6745 [email protected] and sales leads generation. We expect the company to achieve a 56% Dick Wei CAGR in the EP platform in the next two years, by gaining a wallet share of 852 2101 7339 dealers and, to a lesser extent, further penetration into more dealers. BITA’s [email protected] various investments in China’s used-car and aftersales market laid a solid Contributed by foundation for its leadership in forming China’s largest used-car platform to Daniel Chen address the auto purchase behaviour shift in the years to come. We haven't David Sun factored in much value for used-car platform, taoche.com, and other investments, as free options for future upside. ■ Catalysts: (1) A further wallet share increase in the dealer platform and sales leads generation; (2) the take-off of China's used-car market; and (3) higher-than-expected China passenger vehicle market growth. Risks: (1) External traffic reliance on partner sites to put pressure on margins; and (2) new disruptive entrants in auto sales leads generation. ■ Valuation. Our US$46 target price is based on 20x FY15E P/E, on the back of a 49% EPS CAGR in the next two years. TP implies 32x FY14E P/E and PEG of 0.4x. The company has cash and equivalents of US$4.22 per ADS.
Share price performance Financial and valuation metrics
Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (Rmb mn) 1,439.3 1,985.0 2,692.3 3,527.5 60 800 EBITDA (Rmb mn) 269.9 453.3 728.2 1,083.0 40 600 400 EBIT (Rmb mn) 250.9 433.8 708.2 1,063.0 20 200 Net profit (Rmb mn) 260.6 388.2 608.9 899.8 0 0 EPS (CS adj.) (Rmb) 6.21 8.73 13.69 20.23 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 10.0 11.4 — The price relative chart measures performance against the S&P EPS growth (%) 69.1 40.5 56.8 47.8 500 INDEX which closed at 1830.61 on 14/04/14 P/E (x) 31.1 22.1 14.1 9.5 On 14/04/14 the spot exchange rate was US$1./US$1 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 26.9 15.7 9.0 5.4 Performance Over 1M 3M 12M P/B (x) 5.5 4.6 3.5 2.5 Absolute (%) -17.1 -11.8 207.3 — ROE (%) 21.2 23.2 28.1 30.8
Relative (%) -16.6 -10.8 189.4 —
Net debt/equity (%) Net cash Net cash Net cash Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates.
China Internet Sector 61 15 April 2014 Focus tables and charts
Figure 91: Performance-based solution to lift growth of EP platform in the next 2-3 years Rmb mn, unless otherwise stated 1,000.0 BITA launched in Performance-based solution launch to 2000 drive further EP platform growth EP platform 500.0 monetization begins
0.0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14E 3Q14E 1Q15E 3Q15E BitAuto.com Advertising EP Platform Taoche.com Digital Marketing Solution
Source: Company data, Credit Suisse estimates
Figure 92: Comparison of different sales leads generation models Subscription P4P P4T Time period Annually Event-based On-going Discount offer from dealers No No Yes Additional promotion service No Yes Yes Sales leads guarantee No Yes No Transaction guarantee No No Partial Charge to customers No No Deposit Charge to dealers Annual fee One-time fee Transaction-based fee Dealer participation Large Medium Small Contribution to ARPU Large Medium Small Source: Company data, Credit Suisse research
Figure 93: BITA SOTP valuation (as valuation reference point) FY15E revenue Normalised FY15E net Multiple Bear-case Multiple Bull-case (US$ mn) NM income (x) Value (x) Value BitAuto.com Ads 201.6 40% 80.6 8 645.0 12 967.5 EP Platform 203.4 25% 50.9 15 762.9 25 1,271.4 Taoche.com 4.0 40% 1.6 20 31.8 30 47.7 Digital Marketing Solution 35.9 30% 10.8 10 107.6 20 215.2 Net cash 183.0 183.0 Total Equity Value 1,730.3 2,684.8 Value per ADS 41.9 64.9 Mid-point 53.4 Source: Company data, Credit Suisse estimates
Figure 94: China Internet vertical and services comps Close Mkt cap EPS P/E ROE EV/EBITDA FCF yield (%) Company Ticker Ccy price (US$ mn) 2013 2014E 2015E 2013 2014E 2015E 2014E 2013 2014E 2015E 2013 2014E 2015E 58.com WUBA US USD 43 3,496 0.3 0.5 0.9 152.1x 86.3x 45.5x 13.8x 14.7x 16.0% 180.8x 86.7x 39.4x 43 Autohome ATHM US USD 34 3,568 0.8 1.0 1.4 44.4x 33.7x 24.0x 9.4x 11.8x 20.2% 23.3x 15.5x 10.9x 34 Bitauto BITA US USD 31 1,347 1.0 1.3 2.2 30.7x 23.3x 14.1x n.a 4.1x n.a n.a n.a n.a 31 Jiayuan DATE US USD 6 189 0.4 0.3 0.5 15.1x 18.1x 11.5x 5.5x 2.0x 8.0% n.a n.a n.a 6 SouFun SFUN US USD 13 6,866 0.7 0.8 1.1 17.9x 15.4x 12.2x 6.9x 7.2x 45.2% 19.5x 16.3x 13.4x 13 Qunar QUNR US USD 29 3,284 -0.2 -0.4 -0.0 -151x -71.7x -625x 27.0x 14.0x -53% -61.0x -1644x 26.8x 29 Ctrip CTRP US USD 54 7,056 1.5 1.1 1.7 35.2x 48.9x 31.7x 5.6x 7.7x 11.2% 39.0x 65.2x 29.7x 54 eLong LONG US USD 16 536 -0.4 -0.1 0.5 -35.2x -124x 29.2x n.a 2.5x n.a n.a n.a n.a 16 Sohu SOHU US USD 59 2,283 1.6 -1.9 -1.0 38.1x -30.7x -58.0x 3.9x 1.4x -13% 5.8x 16.1x 7.8x 59 Average 47.7x 37.6x 24.0x 10.3x 7.3x 5.0% 53.7x 39.9x 21.4x *Closing price of 14 Apr 2014; Source: Company data, Thomson-Reuters, Credit Suisse estimates
China Internet Sector 62 15 April 2014 Leader in auto distribution digitisation Leader in auto distribution digitisation We see BITA as the leader in the China auto sector's distribution digitisation in the next Our proprietary research two to three years. Our proprietary research survey among over 46 dealers in China survey highlights BITA's highlights BITA's effectiveness in sales leads generation and offline service resources to effectiveness in sales leads enable further value-chain penetration. BITA enjoys the leading position in the China auto generation and offline dealer platform and sales leads generation. Compared to Autohome, BitAuto has an service resources to enable extensive offline sales and services network and deeper relationships among dealers. further value-chain penetration Its valuation is attractive compared to peers' and we recommend investors to accumulate to capture its further growth in auto sales digitisation. New monetisation model to emerge, with new business initiatives as free options Starting from 2Q14, besides the fixed dealer subscription fee scheme, Bitauto will explore We expect BITA to achieve and incorporate more performance-based monetisation models into its EP platform a 56% CAGR in the EP business to increase sales leads and conversion, and as a result, increase the average platform in the next two spend per dealer customer on the platform. years, by gaining a wallet share of dealers We expect BITA to achieve a 56% CAGR in the EP platform in the next two years, by gaining a wallet share of dealers and, to a lesser extent, further penetration into more dealers. BITA’s various investments in China’s used-car and aftersales market laid a solid foundation for its leadership in forming China’s largest used-car platform to address the auto purchase behaviour shift in the years to come. We haven't factored in much value in used-car platform, taoche.com, and investments, as free options for future upside. External traffic reliance may put pressure on margins We see a potential risk of increasing competition for some of Bitauto's high-value external Potential risk of increasing traffic. We believe traffic from Baidu Aladdin is of higher value to BITA, as this is competition for some of transaction-minded traffic seeking for quotes, dealers or model-specific vehicle information. Bitauto's high-value external Users behind these traffic are more likely to make vehicle purchases in the near term, thus traffic and change of pricing could be converted into more valuable sales leads to BITA. scheme from Baidu If competitors aggressively bid for external traffic, especially for Baidu Aladdin in the coming years, or Baidu meaningfully changes its pricing scheme, BITA may continue to need investing into acquiring Baidu traffic, albeit likely at a higher cost. Initiate with OUTPERFORM with a TP of US$46
Our target price is based on 20x FY15E P/E, on the back of a 49% EPS CAGR in the next Its valuation is attractive and two years. TP implies 32x FY14E P/E and PEG of 0.4x. The company has cash and we recommend investors to equivalent of US$4.22 per ADS. accumulate to capture its further growth in auto sales We also use SOTP as a valuation reference point. We value (1) Bitauto.com at US$806 digitisation mn, (2) EP platform at US$1,017 mn, (3) Taoche.com at US$40 mn, and (4) CIG at US$161 mn. This gives us a SOTP valuation of US$2,208 mn, corresponding to US$53 per ADS, ~15% higher than our conservative P/E-based target price of US$46.
China Internet Sector 63 15 April 2014
Bitauto Holdings Limited BITA.N / BITA US Price (15 Apr 14): US$31.04, Rating:: OUTPERFORM [V], Target Price: US$46.00, Analyst: Evan Zhou Target price scenario Key earnings drivers 12/13A 12/14E 12/15E 12/16E Scenario TP %Up/Dwn Assumptions Total EP platform revenue 490 766 1,231 1,867 Upside 55.00 77.19 40% CAGR for revenue growth from 13-16E (RMB Mn) — — — — Central Case 46.00 48.20 32% CAGR for revenue growth from 13-16E — — — — Downside 35.00 12.76 27% CAGR for revenue growth from 13-16E — — — —
— — — — Income statement (Rmb mn) 12/13A 12/14E 12/15E 12/16E Per share data 12/13A 12/14E 12/15E 12/16E Sales revenue 1,439 1,985 2,692 3,528 Shares (wtd avg.) (mn) 42.0 44.5 44.5 44.5 Cost of goods sold 335.2 401.6 507.9 636.3 EPS (Credit Suisse) 6.2 8.7 13.7 20.2 SG&A 729 991 1,282 1,576 DPS(Rmb) (Rmb) — — — — Other operating exp./(inc.) 104.7 138.8 174.5 232.7 BVPS (Rmb) 35.2 41.9 55.6 75.8 EBITDA 270 453 728 1,083 Operating CFPS (Rmb) 8.0 4.5 13.6 17.4 Depreciation & amortisation 19.1 19.5 20.0 20.0 Key ratios and valuation 12/13A 12/14E 12/15E 12/16E EBIT 251 434 708 1,063 Growth(%) Net interest expense/(inc.) (5.4) (14.8) (19.5) (27.2) Sales revenue 36.2 37.9 35.6 31.0 Non-operating inc./(exp.) 7.3 10.6 10.6 10.6 EBIT 63.3 72.9 63.2 50.1 Associates/JV — — — — Net profit 75.6 49.0 56.8 47.8 Recurring PBT 263 459 738 1,101 EPS 69.1 40.5 56.8 47.8 Exceptionals/extraordinaries — — — — Margins (%) Taxes 22.3 91.1 152.2 225.0 EBITDA 18.8 22.8 27.0 30.7 Profit after tax 241.2 368.2 586.1 875.8 EBIT 17.4 21.9 26.3 30.1 Other after tax income — — — — Pre-tax profit 18.3 23.1 27.4 31.2 Minority interests — — — — Net profit 18.1 19.6 22.6 25.5 Preferred dividends — — — — Valuation metrics (x) Reported net profit 241.2 368.2 586.1 875.8 P/E 31.1 22.1 14.1 9.5 Analyst adjustments 19.4 20.0 22.8 24.0 P/B 5.49 4.61 3.47 2.55 Net profit (Credit Suisse) 260.6 388.2 608.9 899.8 Dividend yield (%) — — — — Cash flow (Rmb mn) 12/13A 12/14E 12/15E 12/16E P/CF 24.0 43.2 14.2 11.1 EBIT 251 434 708 1,063 EV/sales 5.05 3.59 2.45 1.66 Net interest 12.6 25.5 30.1 37.8 EV/EBITDA 26.9 15.7 9.0 5.4 Tax paid (22.3) (91.1) (152.2) (225.0) EV/EBIT 29.0 16.4 9.3 5.5 Working capital 57.4 (209.1) (22.5) (145.3) ROE analysis (%) Other cash & non-cash items 38.4 39.5 42.8 44.0 ROE 21.2 23.2 28.1 30.8 Operating cash flow 337.0 198.7 606.4 774.6 ROIC 61 71 87 109 Capex (31.9) (60.0) (60.0) (60.0) Asset turnover (x) 0.68 0.79 0.82 0.79 Free cash flow to the firm 305.1 138.7 546.4 714.6 Interest burden (x) 1.05 1.06 1.04 1.04 Disposals of fixed assets — — — — Tax burden (x) 0.92 0.80 0.79 0.80 Acquisitions — — — — Financial leverage (x) 1.44 1.36 1.33 1.32 Divestments — — — — Credit ratios Associate investments — — — — Net debt/equity (%) (75.1) (66.9) (72.5) (74.4) Other investment/(outflows) — — — — Net debt/EBITDA (x) (4.10) (2.75) (2.46) (2.32) Investing cash flow (31.9) (60.0) (60.0) (60.0) Interest cover (x) (46.8) (29.2) (36.3) (39.1) Equity raised 468.7 0.4 0.4 0.4 Source: Company data, Thomson Reuters, Credit Suisse estimates. Dividends paid — — — — Net borrowings — — — — 12MF P/E multiple Other financing cash flow (266.4) — — — 35 Financing cash flow 202.2 0.4 0.4 0.4 30 Total cash flow 507.4 139.1 546.8 714.9 Adjustments — — — — 25 Net change in cash 507.4 139.1 546.8 714.9 20
Balance sheet (Rmb mn) 12/13A 12/14E 12/15E 12/16E 15 Cash & cash equivalents 1,108 1,247 1,794 2,509 Current receivables 726 871 1,009 1,347 10 Inventories — — — — 5 Other current assets 79.6 155.9 196.9 262.9 0 Current assets 1,913 2,274 2,999 4,118 Jan-11 Sep-11 May-12 Jan-13 Sep-13 Property, plant & equip. 213.8 254.3 294.3 334.3 Investments — — — — Intangibles — — — — 12MF P/B multiple Other non-current assets — — — — Total assets 2,127 2,528 3,294 4,453 3.5 Accounts payable 232.5 217.1 257.0 328.8 3.0 Short-term debt — — — — 2.5 Current provisions — — — — Other current liabilities 413.6 441.7 557.9 744.9 2.0 Current liabilities 646 659 815 1,074 1.5 Long-term debt — — — — 1.0 Non-current provisions — — — — Other non-current liab. 5.0 5.0 5.0 5.0 0.5 Total liabilities 651 664 820 1,079 0.0 Shareholders' equity 1,476 1,864 2,474 3,374 Jan-11 Sep-11 May-12 Jan-13 Sep-13 Minority interests — — — — Source: IBES Total liabilities & equity 2,127 2,528 3,294 4,453
China Internet Sector 64 15 April 2014 Leader in auto distribution digitisation
We see BITA as the leader in the China auto sector's distribution digitisation in the next BITA enjoys the leadership two to three years. Our proprietary research survey among over 46 dealers in China position in the China auto highlights BITA's effectiveness in sales leads generation and offline service resources to dealer platform and sales enable further value-chain penetration. BITA enjoys the leadership position in the China leads generation auto dealer platform and sales leads generation. Compared to Autohome, BitAuto has an extensive offline sales and services network and deeper relationships with dealers. BitAuto started off its business focusing on providing CRM and marketing solutions to auto dealers and OEMs in 2000. It later expanded services by offering a comprehensive auto site, bitauto.com, and a leading second-hand car service site, taoche.com. At the early stage of launching bitauto.com, due to a lack of traffic volume, BitAuto decided to collaborate with leading portals such as Sohu, Tencent and NetEase as a supplier of auto-related data and pricing information. The internet element of the company used to be less significant before 2009, when Bitauto.com's traffic base was still relatively small. Over the past three to five years, Bitauto has put more emphasis on promoting BitAuto.com brand and traffic acquisition.
BitAuto has launched EasyPass platform (车易通), the first major web-based CRM platform EasyPass Platform has laid for auto dealers in China. This laid the foundation for Bitauto's growth and focus for the years the foundation for Bitauto's to come. The EP platform provides industry-specific, in-depth solutions in marketing and growth and focus for the CRM for auto dealers. With early presence in the dealership platform business, Bitauto has years to come also established an extensive offline sales and services network in China. The web-based integrated digital marketing and CRM system, EP platform, enables dealers to efficiently market their inventories online by providing comprehensive online marketing and customer relationship management services. Although at a cost, the wider reach of the EP platform for potential sales leads and better function and services helped Bitauto achieve stronger pricing power for its EP platform subscription services. Typically the EP platform charges at least 10-20% higher than those of peers. In 2013, the number of paid subscribers on the EP platform was 13,612 versus 10,617 paid dealers of Autohome. Bitauto's EP platform collaborated with over 600 websites for the dealer inquiry traffic, including Baidu, Tencent and NetEase. Bitauto pays fixed fee to partner sites in return for the traffic on price quotes and dealer inquiries. As a comparison, Autohome aggregates sales leads only from its own site, autohome.com.cn. In effect, BitAuto leverages partner site traffic to compensate for the scale of its own traffic base and achieves a wider reach, albeit with a different level of traffic acquisition cost. According to the company, BITA generated ~30 mn sales leads in 2013. Approximately 5- 6% of these leads could be converted into transactions. The company expects to generate 45 mn leads in 2014 and improve the conversion rate to 8-10% over longer run.
China Internet Sector 65 15 April 2014 New monetisation model to emerge Starting from 2Q14, besides the fixed dealer subscription fee scheme, Bitauto will explore We expect the company to and incorporate more performance-based monetisation models into its EP platform achieve a 56% CAGR in the business to increase sales leads and conversion, and as a result, increase the average EP platform in the next two spend per dealer customer on the EP platform. years, by gaining a wallet share of dealers We expect the company to achieve a 56% CAGR in the EP platform in the next two years, by gaining a wallet share of dealers and, to a lesser extent, further penetration into more dealers.
Figure 95: Performance-based solution to lift growth of the EP Platform in the next 2-3 years Rmb mn, unless otherwise stated 900.0 Performance-based solution 800.0 BITA launched in launch to drive further EP 2000 700.0 platform growth 600.0 500.0 EP platform monetization begins 400.0 300.0 200.0 100.0 0.0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14E 3Q14E 1Q15E 3Q15E BitAuto.com Advertising EP Platform Taoche.com Digital Marketing Solution
Source: Company data, Credit Suisse estimates According to the company, potential newly planned performance-based solutions include "Pay for performance (P4P)" and "Pay for transaction (P4T)".
■ Pay for performance (P4P). Different from its existing fixed dealer subscription fee New performance-based scheme, the pay for performance model will charge the dealer a package price by solutions "Pay for guaranteeing a certain amount of sales leads to be generated for a specific period of performance (P4P)" and time. The dealers, located in top Tier 1-2 cities, may submit requests for the EP "Pay for transaction (P4T)" platform for purchasing the value-added 'pay for performance' package in their may potentially boost ARPU promotion events one or two times a year at their discretion in order to increase sales per dealer for Rmb10,000- leads in that period of time. 20,000 annually Performance means BitAuto will promote the inventories of those dealers who joined this programme, and guarantee a certain amount of potential customers visiting their offline dealer shops during a specific period of time. However, since the dealers in this programme are not required to provide any price discounts to customers, there is no guarantee that the sales leads will be converted into transactions. By adopting the 'pay for performance' model, the company expects to increase the average spend per dealer customer on the EP platform by Rmb10,000-15,000 annually.
■ Pay for transaction (P4T). Another performance-based model is pay for transaction, which allows BitAuto to charge dealers additional fees based on the transaction proceeds through the EP platform. In the 'pay for transaction' business model, BitAuto will undertake promotions on dealers' inventories by requiring dealers to provide additional discounts on those promoted models. Potential customers need to pay a certain amount of deposit to BitAuto for a specific model in advance, and then visit the
China Internet Sector 66 15 April 2014
offline dealer shop to pay the rest at a discount. In the end, BitAuto will transfer the deposit to the dealers and charge them a fixed fee on a per transaction basis. In addition, BitAuto can reimburse a certain portion of the fixed transaction fees to customers to provide more incentives for potential customers to purchase automobile under this programme. Different from the P4P model, the 'pay for transaction' model partially guarantees the sales leads to be converted into transactions by requiring potential customer paying a deposit in advance. Those customers, who pay the deposit, are more likely to be the ones with a strong willingness to purchase the model in the short term. Deposit as a pre-load charge filters out the sales leads with a less transaction value, and as a result, increases the conversion rate and improves the efficiency of dealers' marketing. BitAuto could potentially increase the average spend per dealer customer by providing the 'pay for transaction' services to its dealer subscribers.
Figure 96: Comparison of different sales leads generation models Subscription P4P P4T Time period Annually Event-based On-going Discount offer from dealers No No Yes Additional promotion service No Yes Yes Sales leads guarantee No Yes No Transaction guarantee No No Partial Charge to customers No No Deposit Charge to dealers Annual fee One-time fee Transaction-based fee Dealer participation Large Medium Small Contribution to ARPU Large Medium Small Source: Company data, Credit Suisse research Strategic investments and acquisitions Besides developing products and services organically, BitAuto has made several strategic BITA’s various investments investments and acquisitions to diversify its business offerings. After a series of strategic in the used-car and investments, BitAuto has further broadened its business coverage in the automobile aftersales market laid a solid vertical, and enhanced its competence in the full automobile value chain. foundation for its leadership in forming China’s largest ■ In May 2011, Bitauto acquired a 49% interest in Beijing Xinchuang Interactive used-car platform to Advertising Company Limited ("BXIA"), a start-up company focusing on providing address the auto purchase advertising services, for Rmb490,000. behaviour shift in the years ■ In December 2011, Bitauto acquired a 100% equity interest in Beijing Bitcar Interactive to come Information Technology Company Limited, which is the first provider of mobile Internet-enabled sales tools for the automotive industry in China, with an initial payment of Rmb45 mn. After the acquisition, BitAuto integrated BitCar's digital point- of-sale CRM solutions into its EP platform, which enables BitAuto's customers expand into managing face-to-face sales opportunities in their dealerships.
■ In 2Q12, Bitauto invested in a minority equity interest in Car King Holding Ltd, a leading used-car hypermarket based in Shanghai, to better understand advertising and promotional trends in the used-car sector. Similarly, it invested a minority portion of equity interest in Target Net (Beijing) Technology Company, an Internet information agency in China, in the same year.
■ In November 2013, BitAuto established a joint venture, in which it owns a 40% stake, with Kelley Blue Book, the leading provider of new and used-car information in the US, and the China Automobile Dealers Association ("CADA"), a national organisation representing automobile dealers in China, to provide nation-wide vehicle valuation products to consumers, automakers, auto dealers, along with insurance, finance and other automobile-related companies.
China Internet Sector 67 15 April 2014
Used-car market We see huge potential in the China's used-car market. According to China Auto Market, replacement demand in China is just 23% of total car demand, which is much lower than the number in developed countries. CS's China auto research team expects auto replacement demand to spike in 2014-15, driven by 47%/34% YoY total PV sales surge in 2009/2010, given the average new car usage time is 4.8 years. Therefore, in the long run, as demand of used car grows, there will be more and more used-car transactions in the automobile market in China. BitAuto set up its used-car trading website, taoche.com, in 2006. In 2013, BitAuto recorded a Rmb21 mn revenue from taoche.com, despite a Rmb50.9 mn operating loss due to high operating expenses. Dasouche, a start-up company founded in 2012, adopted the O2O model in the used-car market by setting up an online trading platform, souche.com, as well as an offline chain store to provide used-car appraisal, trading and warranty services.
Figure 97: Demand percentage vs global peers Figure 98: China used-car average age China Global Peers 2009 2010 2011 100% <1 year 4.5% 3.2% 3.3% 9% 8% 90% 23% 23% 26% 26% 24% 1-2 year 11.4% 10.3% 11.6% 80% 2-3 year 15.7% 13.1% 14.6% 50% 70% 3-4 year 14.6% 15.3% 14.0% 75% 60% 83% 4-5 year 14.1% 14.2% 14.1% 50% 94% 95% 91% 92% 5-6 year 11.6% 12.6% 12.4% 40% 77% 77% 74% 74% 76% 6-7 year 11.1% 10.0% 9.6% 30% 50% 7-8 year 6.8% 9.2% 7.3% 20% 25% 8-9 year 3.4% 5.4% 5.8% 10% 17% 0% 6% 5% 9-10 year 2.1% 2.6% 3.2% 2011 2012 2013 2014e2015e2016e India Korea USA Japan UK German >10 year 4.8% 4.1% 4.1% 1st Time Demand Replacement Demand Average age 4.6 4.8 4.8 Source: China Auto Market, Credit Suisse estimates Source: iautos.cn Currently, dealers are not very actively involved in the used-car trading business in China. One major obstacle in the used-car trading with dealers is the high transaction tax charged by the government. According to the used-car trading regulation, registered used-car dealer needs to pay 2% of the total transaction value as the value-added tax while for agent and private trading, only an invoice charge of Rmb200-400 is incurred. Therefore, dealers tend to be reluctant to trade the used car in the public market due to the substantial difference in trading cost. Some of the dealers try to evade the tax charges by conducting the deal privately with their clients. As a result, the tax barrier negatively affects the used-car trading volume from dealers both online and offline. According to the China Automobile Dealers Association (CADA), a proposal on adjusting the charge of the value-added tax in used-car trading has been submitted to the State Bureau of Taxation. In the report, the CADA has suggested the tax should be charged based on the appreciation value instead of the total transaction value of the used car, which will largely reduce the existing transaction cost for dealers. As the trading cost gets reduced in the future, dealers, the major player in new car trading, will play a more vital role in the used-car trading market, which, to some extent, will potentially boost the online used-car trading market.
China Internet Sector 68 15 April 2014 External traffic reliance on partner sites may put pressure on margins BITA's self-owned traffic percentage is relatively low compared to Autohome's, mainly Potential risk of increasing because its portal Bitauto.com's organic traffic is of lower scale. competition for some of Bitauto's high-value external According to the company, Bitauto's traffic breakdown is as follows, as of 3Q13. traffic and change of pricing Figure 99: Bitauto traffic breakdown scheme from Baidu
Source: Company data We see a potential risk of increasing competition for some of Bitauto's high-value external traffic. BITA entered into an exclusive deal with Baidu Aladdin in mid-2011 on Baidu auto- related key words. BITA spent approximately Rmb100-150 mn p.a on traffic acquisition from Baidu. The overall package price increase from Baidu was mild in the previous years, as there was no strong competitor to bid for this packaged traffic in the auto vertical on Baidu. In 2012, Bitauto signed an agreement with Baidu to be the exclusive supplier of auto- related content for Baidu's open data platform, Aladdin. As a result, automobile queries, especially the model queries, triggered the Aladdin of auto vertical, and the auto-related content, including auto listings, pictures, reviews, and dealer information, provided by BitAuto are rendered in the Aladdin section of the search result. In August 2013, Bitauto extended its contract with Baidu Aladdin for another 11 months which will expire in July 2014. In addition, BitAuto has collaborated with Qihoo to market and promote its services. The large traffic volume from third parties allows BitAuto quickly ramp up its user base, and monetise the traffic through an extensive dealer network.
China Internet Sector 69 15 April 2014
Figure 100: Automobile related queries triggering Bitauto's result on Baidu Aladdin
Source: Baidu.com BITA also acquires traffic from over 600 partner sites who get paid for traffic acquisition. We believe traffic from Baidu Aladdin is of higher value to BITA, as this is transaction- minded traffic seeking for quotes, dealers or model-specific vehicle information. Users behind this traffic are more likely to make vehicle purchases in the near term, thus could be converted into more valuable sales leads to BITA. If competitors aggressively bid for external traffic, especially for Baidu Aladdin in the coming years, BITA may continue to need investing into acquiring Baidu traffic, albeit likely at a higher cost. Another variable is that Baidu is rolling out its Zhixin scheme for specific verticals in a progressive manner, such as finance, education and health care. Auto has not been migrated to Zhixin yet, but may be planned in the future. In that case, the pricing structure of the overall package as well as the effectiveness of the new format may be subject to changes. To mitigate this risk, BITA has been actively developing its own organic traffic base by investing in content production team and acquiring domain names such as yiche.com and taoche.com. In terms of overall percentage, BITA's reliance on Baidu traffic has been decreasing. At 3Q13, ~10-15% of BITA's overall traffic came from Baidu's paid traffic. New entrants in sales lead generation
Starting from mid-2013, many physical-goods B2C retail companies have been planning or We recommend investors to exploring the possibilities of selling automobiles on their own websites. keep a close watch on these new initiatives in the area of In July 2013, Tmall launched an 'Automobile Festival' event with ten automobile OEMs online automobile purchase and 800 dealers on its B2C platform, Tmall, to promote online automobile sales. in the next 2-3 years Customers first deposit a certain amount on Tmall for a specific model, and then visit the offline dealer shop to pay the rest at a discount price. In the end, 3,430 automobiles were sold during the 18-day event. In the 'Double 11' event in 2013, with 16 automobile OEMs and 1,730 dealers involved, Tmall recorded a total sales value of ~Rmb800 mn by selling 10,700 automobiles in 11 days. The event covered almost all the offline automobile sales geographies, including 25 provinces and 228 cities in China. Besides holding a one-time
China Internet Sector 70 15 April 2014 event, Tmall established che.tmall.com (喵车惠) with 21 automobile OEMs for general online discount automobile sales as well as automobile group buying regularly.
Figure 101: Tmall automobile sales
Source: Tmall.com In March 2014, Vipshop, the leading online flash sales discount retailer, launched a flash sale trial with Honda dealers in Guangzhou to sell automobile coupons on its website. In the flash sale trial, customers first bought a coupon on Vipshop's website, and then redeemed it in the offline Honda dealer shop for a discount. The discount ranged from Rmb8,000 to Rmb30,000 for a specific model of Honda. In addition, Vipshop extended the online flash sales period from three days to 13 days in order for customer to have sufficient time to visit the offline dealer shop before making the purchase. Many automobile accessories were also on sale along with automobile flash sales. Vipshop also previewed several upcoming flash sales deals with Audi and Mercedes Benz. Vipshop sees this campaign more of a marketing effort to offer something different to clients, rather than a product category it is seriously entering.
China Internet Sector 71 15 April 2014
Figure 102: Vipshop automobile sales
Source: Vip.com Overall, we do not see a major threat from these new entrants yet to emerge, as most vehicle buyers have not fostered the habit of seeking car information and shopping automobile on general e-commerce sites. User profile also does not match that well for verticals like Vipshop to generate a reasonable conversion out of its own user base. However, from our interviews, dealers and OEMs are fairly open-minded to these new retail formats and entry points, to extend their reach and expand potential buyer groups. We recommend investors to keep a close watch on these new initiatives in the area of online automobile purchase in the next two to three years.
China Internet Sector 72 15 April 2014 Initiate with OUTPERFORM and a target price of US$46 We initiate coverage on Bitauto with an OUTPERFORM rating and a target price of US$46. Bitauto was listed in the US on 17 November 2010 with an offer price of US$12; on the debut day its share price increased 3.75% to US$12.45. After declining in the first two years, Bitauto's share price has started picking up from 2013 along with the China internet sector boom. On 9 April 2014, Bitauto's share price reached US$35.79, rallying 198% from the initial offer price. NASDAQ rose 71% during the same period, driven by positive investor sentiment towards the China internet sector and decent vertical internet monetisation upside.
Figure 103: BitAuto share price performance 4
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Bitauto NASDAQ
Source: Company data, Credit Suisse research We believe Bitauto's future price performance will be driven by: (1) further enhanced penetration and monetisation from Bitauto.com and EP platform business; (2) further improvement in the operation of taoche.com and digital marketing solutions business; (3) successful monetisation in performance-based solutions and (4) overall investor sentiment towards the China Internet sector. We arrive at our target price considering the following three valuation methodologies: (1) P/E Our main valuation methodology is forward P/E. Our target price of US$46 implies 32x FY14E and 20x FY15E diluted adjusted EPS. The company has a cash position (cash, cash equivalents, and short-term investments) of US$183.0 mn in 4Q13. Considering BitAuto's business nature and composition, we mainly look at the internet vertical and services comps, which are mainly vertical websites in various industries, such as real estate, recruitment and travel. As of 14 April 2014, this group of companies trade at ~37.6x/24.0x 14E/15E P/E
China Internet Sector 73 15 April 2014
Figure 104: China Internet vertical and services comps Close Mkt cap EPS P/E ROE EV/EBITDA FCF yield (%) Company Ticker Ccy price (US$ mn) 2013 2014E 2015E 2013 2014E 2015E 2014E 2013 2014E 2015E 2013 2014E 2015E 58.com WUBA US USD 43 3,496 0.3 0.5 0.9 152.1x 86.3x 45.5x 13.8x 14.7x 16.0% 180.8x 86.7x 39.4x 43 Autohome ATHM US USD 34 3,568 0.8 1.0 1.4 44.4x 33.7x 24.0x 9.4x 11.8x 20.2% 23.3x 15.5x 10.9x 34 Bitauto BITA US USD 31 1,347 1.0 1.3 2.2 30.7x 23.3x 14.1x n.a 4.1x n.a n.a n.a n.a 31 Jiayuan DATE US USD 6 189 0.4 0.3 0.5 15.1x 18.1x 11.5x 5.5x 2.0x 8.0% n.a n.a n.a 6 SouFun SFUN US USD 13 6,866 0.7 0.8 1.1 17.9x 15.4x 12.2x 6.9x 7.2x 45.2% 19.5x 16.3x 13.4x 13 Qunar QUNR US USD 29 3,284 -0.2 -0.4 -0.0 -151x -71.7x -625x 27.0x 14.0x -53% -61.0x -1644x 26.8x 29 Ctrip CTRP US USD 54 7,056 1.5 1.1 1.7 35.2x 48.9x 31.7x 5.6x 7.7x 11.2% 39.0x 65.2x 29.7x 54 eLong LONG US USD 16 536 -0.4 -0.1 0.5 -35.2x -124x 29.2x n.a 2.5x n.a n.a n.a n.a 16 Sohu SOHU US USD 59 2,283 1.6 -1.9 -1.0 38.1x -30.7x -58.0x 3.9x 1.4x -13% 5.8x 16.1x 7.8x 59 Average 47.7x 37.6x 24.0x 10.3x 7.3x 5.0% 53.7x 39.9x 21.4x *Closing price of 14 Apr 2014; Source: Company data, Thomson-Reuters, Credit Suisse estimates (2) Discounted cash flow (DCF) We see DCF also provides a reference point to gauge BitAuto's valuation. Assuming longer-term revenue growth of 15%, long-term OPM of 33.0%, a WACC of 12% and 3% terminal growth, our DCF valuation yields a target price of US$63.0 by end-14. Our TP of US$46 is at a 27% discount to the DCF price.
Figure 105: DCF model assumptions (base-case scenario) FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E Sales growth 36.2% 37.9% 35.6% 31.0% 25.0% 22.0% 18.0% 15.0% 15.0% 15.0% 15.0% EBIT margin 17.4% 21.9% 26.3% 30.1% 32.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% NOPAT margin 15.9% 17.2% 20.6% 23.7% 24.0% 24.8% 24.8% 24.8% 24.8% 24.8% 24.8% Year-end net fixed assets turns 6.7 7.8 9.1 10.6 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Year-end net working capital turns 6.2 4.2 5.1 5.0 3.0 3.0 3.0 3.0 3.00 3.0 3.0 Year-end net other assets turns 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cash operating taxes as a percentage of EBIT 8.9% 21.3% 21.9% 21.4% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Year-end invested capital turns 3.2 2.7 3.3 3.4 1.8 1.8 1.8 1.8 1.84 1.84 1.84 Source: Company data, Credit Suisse estimates
Figure 106: DCF sensitivity analysis Terminal growth (%) 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 97.4 101.8 107.5 115.6 127.6 147.8 188.0 308.8
10.0% 82.3 84.8 88.1 92.4 98.5 107.7 122.9 153.3
11.0% 70.5 72.0 73.8 76.2 79.4 83.8 90.4 101.5
12.0% 61.1 61.9 63.0 64.2 65.8 68.0 71.0 75.5 WACC 13.0% 53.5 54.0 54.5 55.1 55.8 56.8 58.1 60.0 14.0% 47.3 47.5 47.7 47.9 48.2 48.5 49.0 49.6 15.0% 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 Source: Company data, Credit Suisse estimates (3) Sum of the parts (SOTP) Since there are four business segments in BitAuto, SOTP provides another way of valuation to measure the fair value of the company. The following shows how we value each business segment:
■ Bitauto.com (~45% of revenue): 2015E revenue of US$201.6 mn, mainly from selling advertising to automakers and dealers. We assume a normalised net margin of 40% with 10x P/E to arrive at a valuation of US$806.2 mn.
■ EP platform (~46% of revenue): BitAuto generates revenue in this segment by providing automobile dealer subscription and other performance-based sales leads
China Internet Sector 74 15 April 2014
generation services on its EP platform. We estimate 2015E revenue contribution from EP platform will be ~US$203.4 mn. By assigning a normalised net margin of 25% and using 20x P/E, we value the EP platform business at US$1,017.2 mn.
■ Taoche.com (~1% of revenue): Mainly provides advertising services to auto dealers and automakers and listing services to used automobile dealers. We conservatively put US$40 mn valuation on this part of Bitauto's business.
■ CIG (~8% of revenue): Bitauto earns revenue by providing digital marketing solutions and advertising agent service and project-based fees. We estimate the revenue from CIG will be US$35.9 mn. Assuming a normalised net margin of 30%, we use 15x P/E to arrive at a valuation of US$161.4 mn.
■ Cash: By 4Q13, Bitauto had a net cash position of US$183.0 mn.
Figure 107: BITA SOTP valuation (as valuation reference point) 15E Revenue Normalized 15E Net Multiple Bear-case Multiple Bull-case (US$mn) NM Income (x) Value (x) Value BitAuto.com Ads 201.6 40% 80.6 8 645.0 12 967.5 EP Platform 203.4 25% 50.9 15 762.9 25 1,271.4 Taoche.com 4.0 40% 1.6 20 31.8 30 47.7 Digital Marketing Solution 35.9 30% 10.8 10 107.6 20 215.2 Net cash 183.0 183.0 Total Equity Value 1,730.3 2,684.8 Value per ADS 41.9 64.9 Mid-point 53.4 Source: Company data, Credit Suisse estimates In summary, the above calculation gives us an SOTP valuation of US$2,207.5 mn, corresponding to US$53.4 per ADS, ~15%+ higher than our conservative P/E-based TP of US$46. Share price drivers/risks We see that Bitauto's positive share price drivers and catalysts are from: (1) a further wallet share increase in sales leads generation; (2) the take-off of China's second-hand car market; and (3) higher-than-expected China passenger vehicle market volume growth. Downside risks may emerge from: (1) Slower-than-expected online advertising and dealer subscription business growth: If BITA's display ad revenue is lower than expected due to macro headwinds or slower online penetration of automakers/auto dealers, or if its e-commerce initiatives are marching slower than expected, there will be a negative effect to its share price. (2) External traffic reliance on partner sites creating pressure on margins: Since BITA has higher reliance on external traffic than ATHM, if the pricing of partner site traffic keeps rising, there will be a potential downside risk to BITA's margins. (3) Potential new disruptive entrants in sales leads generation: Although BITA/ATHM are currently leading players in the online auto vertical, if a new disruptive player enters the market with a more advanced sales leads generation model, there will be a downside risk to BITA's share price.
China Internet Sector 75 15 April 2014 Company profile Founded in 2000, Bitauto Holdings Limited is a leading provider of Internet content and marketing services for the fast-growing automotive industry in China. With a major focus on providing car buyers with the most informative online products and services and delivering its automaker and dealer customers with effective digital marketing solutions, the four business segments of Bitauto include: the bitauto.com advertising business, the EP platform, taoche.com, and the digital marketing solutions business.
Figure 108: Bitauto business segments
Source: Company data
■ Bitauto.com advertising. Bitauto.com advertising provides automakers and dealers a variety of services through its online platform, which contains a full package of automobile information, including up-to-date new automobile price and promotional information, specifications, reviews and consumer feedback. Besides its own vertical channel, Bitauto.com distributes the pricing and promotional information through its partner portal websites. Revenues are generated by selling automobile advertising to automakers and deals as well as by providing subscription services to dealers of new automobiles in China to support their automobile marketing. ■ EP platform. The EP platform, which was developed based on its previous EasyPass platform in 2012, offers automobile deals in China with web-based digital marketing and CRM applications. The dealer subscribers can create their own marketing information, such as showrooms, list price and promotional information, dealer contraction information and customer relationship information, through its integrated platform. ■ Taoche.com. Taoche.com helps the potential used automobile buyers to efficiently navigate through a large used automobile database to select vehicles that match their needs. Bitauto monetises its used automobile information platform by providing listing services to dealers of used automobiles in China. In addition, Taoche.com shares the same automobile adverting business model with Bitauto.com by displaying advertisements from automakers and dealers in different formats, including text-based, banner, video and rich media advertisements. ■ CIG, digital marketing solutions. CIG, a one-stop digital marketing solutions provider, offers integrated advertising solutions to automakers with its in-depth knowledge of the China automobile industry. Major business areas covered by CIG include: online advertising, website creation and maintenance, online public relations, and online marketing campaigns. It also involves in the formation of clients’ branding and advertising strategies to provide comprehensive services in automobile digital marketing.
China Internet Sector 76 15 April 2014
Competitive landscape Autohome Autohome Inc. is a leading online platform for automobile consumers in China covering the full cycle of online automobile activities. Autohome provides comprehensive, independent and interactive content to automobile buyers and owners through its two websites, autohome.com.cn, its automobile information platform, and che168.com, its used automobile trading platform. Autohome generates its revenue by providing online advertising services to automakers and dealers as well as dealer subscription services. With a large and engaged user base, Autohome has become one of the largest online automobile advertising providers in China to help automakers and dealers conduct brand promotions, new model releases and sales promotions. The dealer subscription services provided by Autohome also allow dealers market their inventory and services through its platform and extend their customer base from offline to online. Different from Bitauto, Autohome maintains an organic user base in terms of user engagement, which leads to a relatively low traffic acquisition cost. Automobile channel of comprehensive portals Besides vertical automobile portals, auto channel of comprehensive portals, such as Sohu, Tencent and NetEase, also play a vital role in the online automobile segment by providing large volume of automobile related information and advertising services. The traditional comprehensive portals establish their own automobile websites as sub channels, and operate the channel together with other channels. Instead of full cycle coverage, the automobile channels typically only focus on providing automobile related content, including news, price and other automobile assessment information. By leveraging the large user base of whole portals, they monetise the web traffic by selling online advertising services to automakers and dealers. Some of the portals also establish partnership with vertical portals like Bitauto, and charge them fees by displaying the advertisements they delegated.
Figure 109: Competitive landscape of the online automobile segment
Online Advertising Services Dealer Subscription Services
Used Automobile Trading Digital Marketing Solutions
Source: Credit Suisse research
China Internet Sector 77 15 April 2014 Financial statement analysis Income statement
■ Revenue Bitauto's revenue mainly comes from: (1) Bitauto.com advertising Revenue from Bitauto.com advertising accounted for 63.6%/69.2%/45.6%/50.2% of Bitauto's total revenue in 2010/2011/2012/2013 (it included EP platform revenue in 2010/2011), which makes it the largest revenue stream of Bitauto. Bitauto generates revenue on its Bitauto.com by providing advertising service to automakers and auto dealers, while automakers contributed to the majority (about two-thirds) of advertising revenue. Bitauto.com advertising revenue grew 49.7% YoY in 2013. (2) EP platform Previously recognised under Bitauto.com advertising service, the EP platform business has been shown as a separate segment since 1Q13 earnings release. In 2013, the EP platform accounted for 34.0% of total revenue, which makes it the second largest revenue stream for Bitauto. It grew 36.8% YoY in 2013, which makes it the second fastest growing sector behind Bitauto advertising. Bitauto generates revenue in this segment by providing automobile dealer subscription services on its EP platform (previously known as EasyPass platform). It generates revenue by charging EP platform subscription fee to subscribers. (3) Taoche.com Revenue from Taoche.com (Bitauto's second-hand car portal) accounted for 4.2%/4.2%/2.0%/1.5% of Bitauto's total revenue in 2010/2011/2012/2013, which is only a minor revenue contributor for Bitauto. Bitauto generates revenue from Taoche.com by providing advertising services to auto dealers and automakers and providing listing services to used automobile dealer. (4) Digital marketing solution Revenue from digital marketing solution accounted for 32.3%/26.6%/18.4%/14.3% of Bitauto's total revenue in 2010/2011/2012/2013. Bitauto earns revenue by providing digital marketing solution (website creation and maintenance, online marketing campaign) and advertising agent service and project-based fees. Bitauto's advertising agent revenues are derived from fees received for assisting customers in placing advertisements on media vendor websites and performance-based rebates from the media vendors, equal to a percentage of the purchase price for qualifying advertising. We see downtrend in both its revenue contribution and YoY growth rate.
China Internet Sector 78 15 April 2014
Figure 110: Revenue growth* Figure 111: Revenue breakdown (2013)
RMB M 2,000 70% Digital marketin 60% 56.2% 57.8% Taoche.c g solution 1,500 50% om 14.3% 46.2% 1.5% 40% 36.2% Bitauto.c 1,000 om 30% EP advertisin 20% platform g 500 50.2% 10% 34.0% 0 0% 2009 2010 2011 2012 2013 Bitauto.com advertising EP platform Taoche.com Digital marketing solution Total revenue YoY
*Bitauto disclose both advertising and EP platform revenue in Source: Company data, Credit Suisse Research advertising segment in 09-11; Source: Company data, Credit Suisse Research
■ Gross margin We saw a continued pull-up of gross margin for Bitauto since 2010, rising from 68% in 2010 to 77% in 2013. The gross margin increase was mainly due to (1) a higher revenue mix of high gross-margin businesses such as advertising and EP platform; and (2) higher gross margin for advertising and EP platform. Its Taoche business remains a loss-making one due to its lacklustre revenue growth.
Figure 112: Bitauto segment gross margin 100% 0% 90% -10% 80% -20% 70% -30% 60% -40% 50% -50% 40% -60% 30% 20% -70% 10% -80% 0% -90% 2010 2011 2012 2013 Bitauto.com advertising(LHS) EP platform(LHS) Digital marketing solution(LHS) Overall(LHS)
Taoche.com(RHS) Source: Company data
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Figure 113: Margin profile* 90% 25% 80% 70% 20% 60% 15% 50% 40% 10% 30% 20% 5% 10% 0% 0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Gross margin(LHS) Adj S&M expense as of rev(LHS) Adj Op Margin(RHS) Adj Net Margin(RHS) Adj R&D expense as of rev(RHS)
Adj items are ex share based compensation. Source: Company data Balance sheet Cash As of the end of 4Q13, Bitauto had cash and cash equivalent of Rmb1.11 bn compared with Rmb600 mn in 4Q12. Cash flow statement
Figure 114: Cash flow profile Rmb mn 2010 2011 2012 2013 Operating cash flow 14.5 (86.7) 128.4 337.0 Investing cash flow (18.0) (71.5) (83.3) (31.9) Financing cash flow 656.3 (39.1) (49.0) 202.2 Net increase in cash and cash equivalent 652.5 (201.8) (1.0) 507.4 Source: Company data, Credit Suisse estimates Operating activities Bitauto recorded operating cash flows of Rmb14.5 mn/-Rmb86.7 mn/Rmb128.4 mn/Rmb337.0 mn in 2010/2011/2012/2013; 2011 negative operating cash flow was due to an increase in trade receivable of Rmb211.3 mn. Investing activities Bitauto recorded investing cash flows of -Rmb18.0 mn/-Rmb71.5 mn/-Rmb83.3 mn in 2010/2011/2012/2013, mainly reflecting spending on the acquisition of a subsidiary and the purchase of PP&E. Financing activities Bitauto recorded financing cash flows of Rmb656.3 mn/-Rmb39.1 mn/-Rmb49.0 mn/Rmb507.3 mn in 2010/2011/2012/2013; negative cash flow was due to the share repurchase programme, while positive cash flow due to the proceeds from IPO and follow0on financing in 2010/2013.
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Figure 115: BITA ownership structure* Shareholders # of shares % Category Bin Li 9,519,998 21.9% Founder, CEO, Chairman Jingning Shao 250,000 0.6% President, Director Xuan Zhang 267,500 0.6% CFO Other management 1,724,625 4.0% Autotrader 9,000,000 20.7% Institutional FMR LLC 4,463,250 10.3% Institutional Legend Capital 2,176,235 5.0% Institutional Morgan Stanley 1,077,740 2.5% Institutional Other investors 16,651,023 38.4% Total 43,405,745 100.00% Source: Company data
China Internet Sector 81
Sector China Internet Figure 116: Bitauto income statement
2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016E (Rmb in Mn, year-end Dec) 1Q 2Q 3Q 4Q 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE Total Revenue 239.5 338.0 378.2 483.6 327.4 467.4 527.7 662.5 490.0 644.2 721.1 836.9 638.0 835.5 936.8 1,117.3 458.1 670.0 1,056.9 1,439.3 1,985.0 2,692.3 3,527.5 BitAuto.com Advertising 109.6 176.5 182.4 253.6 152.3 231.5 253.4 342.8 232.9 304.6 314.4 368.0 260.5 351.7 375.4 442.3 291.1 304.5 482.4 722.1 980.0 1,220.0 1,429.9 EP Platform 92.8 105.5 133.5 158.1 133.5 176.6 211.6 244.4 211.2 279.1 343.8 397.1 333.6 425.8 501.3 606.6 0.0 158.8 358.2 489.8 766.2 1,231.3 1,867.3
Taoche.com 3.0 5.9 4.8 8.0 3.2 6.4 6.0 6.2 4.5 6.6 6.3 6.6 4.8 7.1 6.8 7.1 19.0 28.1 21.6 21.7 21.8 24.0 25.9 Digital Marketing Solution 34.1 50.2 57.5 63.9 38.4 52.9 56.6 69.1 41.5 53.9 56.6 65.1 39.0 50.8 53.3 61.3 148.0 178.5 194.7 205.7 217.0 217.0 204.4 COGS -54.5 -82.8 -96.8 -101.1 -66.7 -99.1 -119.3 -116.5 -91.2 -123.4 -155.3 -138.0 -113.1 -151.6 -195.2 -176.5 -148.7 -213.8 -292.2 -335.2 -401.6 -507.9 -636.3 Gross Profit 185.0 255.2 281.4 382.5 260.7 368.3 408.5 546.0 398.8 520.8 565.8 698.9 524.9 683.9 741.6 940.8 309.4 456.2 764.8 1,104.1 1,583.4 2,184.4 2,891.2 Operating Expense -165.3 -204.4 -205.1 -278.4 -222.0 -277.5 -300.5 -349.5 -315.4 -360.0 -385.0 -415.8 -402.8 -440.4 -465.0 -520.0 -241.8 -384.4 -611.2 -853.3 -1,149.6 -1,476.2 -1,828.2 Sales & Administration -142.9 -179.0 -172.4 -235.1 -191.5 -243.0 -258.6 -298.1 -274.4 -315.7 -331.7 -359.9 -350.9 -384.3 -393.4 -446.9 -204.5 -329.0 -544.1 -729.5 -991.3 -1,281.7 -1,575.6 Research & Development -18.9 -22.2 -27.4 -36.0 -25.5 -29.4 -36.9 -46.4 -35.3 -38.7 -47.6 -50.2 -45.9 -50.1 -65.6 -67.0 -29.8 -36.6 -53.8 -104.4 -138.3 -171.7 -228.7 Share-based comp expenses -3.5 -3.2 -5.3 -7.3 -5.0 -5.0 -5.0 -5.0 -5.7 -5.7 -5.7 -5.7 -6.0 -6.0 -6.0 -6.0 -7.5 -18.7 -13.3 -19.4 -20.0 -22.8 -24.0 EBIT 19.7 50.8 76.3 104.1 38.7 90.8 107.9 196.5 83.4 160.8 180.8 283.2 122.1 243.5 276.6 420.9 67.6 71.8 153.6 250.9 433.8 708.2 1,063.0 Adj. EBIT (ex-SBC) 23.2 54.0 81.6 111.4 43.7 95.8 112.9 201.5 89.1 166.5 186.5 288.9 128.1 249.5 282.6 426.9 75.1 90.5 166.9 270.2 453.8 731.0 1,087.0 Adj. EBITDA 28.0 58.9 86.5 115.9 48.2 100.8 117.9 206.5 94.1 171.5 191.5 293.9 133.1 254.5 287.6 431.9 82.7 101.2 186.3 289.3 473.3 751.0 1,107.0 Interest Income, net 2.2 2.2 1.9 -0.9 4.0 3.5 3.4 4.0 4.5 4.6 4.5 5.8 6.5 6.3 6.3 8.0 -0.4 2.7 2.0 5.4 14.8 19.5 27.2 Other Income, net -0.4 5.1 0.4 2.2 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 -1,276.0 22.4 -1.5 7.3 10.6 10.6 10.6 Pre Tax Profit 21.4 58.0 78.6 105.4 45.3 96.9 114.0 203.1 90.6 168.1 188.0 291.6 131.2 252.5 285.6 431.6 -1,208.8 96.9 154.1 263.5 459.3 738.3 1,100.8 Tax (Expense) / Credit -1.7 -2.2 -6.3 -12.0 -9.6 -19.4 -22.6 -39.5 -19.3 -34.8 -38.7 -59.5 -27.4 -51.7 -58.3 -87.5 -13.2 -9.8 -18.9 -22.3 -91.1 -152.2 -225.0 Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 19.7 55.8 72.3 93.4 35.8 77.6 91.4 163.5 71.3 133.4 149.3 232.1 103.8 200.8 227.2 344.0 -1,222.0 87.2 135.2 241.2 368.2 586.1 875.8 Adj. Net Profit (ex-SBC) 23.2 59.1 77.7 100.7 40.8 82.6 96.4 168.5 77.0 139.1 155.0 237.8 109.8 206.8 233.2 350.0 -1,214.5 105.9 148.4 260.6 388.2 608.9 899.8 Diluted EPS (Rmb) 0.48 1.35 1.74 2.18 0.80 1.74 2.05 3.68 1.60 3.00 3.36 5.22 2.33 4.51 5.11 7.73 2.03 3.34 5.75 8.28 13.17 19.69 Adj. Diluted EPS (Rmb, ex-SBC) 0.56 1.43 1.86 2.35 0.92 1.86 2.17 3.79 1.73 3.13 3.48 5.35 2.47 4.65 5.24 7.87 2.47 3.67 6.21 8.73 13.69 20.23 Margins (%) Gross Margin 77.2 75.5 74.4 79.1 79.6 78.8 77.4 82.4 81.4 80.8 78.5 83.5 82.3 81.9 79.2 84.2 67.5 68.1 72.4 76.7 79.8 81.1 82.0 Adj. Operating Margin (ex-SBC) 9.7 16.0 21.6 23.0 13.3 20.5 21.4 30.4 18.2 25.8 25.9 34.5 20.1 29.9 30.2 38.2 16.4 13.5 15.8 18.8 22.9 27.2 30.8 Adj. EBITDA Margin 11.7 17.4 22.9 24.0 14.7 21.6 22.3 31.2 19.2 26.6 26.6 35.1 20.9 30.5 30.7 38.7 18.1 15.1 17.6 20.1 23.8 27.9 31.4 Net Margin 8.2 16.5 19.1 19.3 10.9 16.6 17.3 24.7 14.6 20.7 20.7 27.7 16.3 24.0 24.3 30.8 -266.7 13.0 12.8 16.8 18.6 21.8 24.8 Adj. Net Margin (ex-SBC) 9.7 17.5 20.5 20.8 12.5 17.7 18.3 25.4 15.7 21.6 21.5 28.4 17.2 24.7 24.9 31.3 -265.1 15.8 14.0 18.1 19.6 22.6 25.5 Sequential Growth (%) Revenue -32.5 41.1 11.9 27.9 -32.3 42.8 12.9 25.5 -26.0 31.5 11.9 16.1 -23.8 31.0 12.1 19.3 46.2 57.8 36.2 37.9 35.6 31.0 Gross Profit -25.9 38.0 10.3 35.9 -31.8 41.3 10.9 33.7 -27.0 30.6 8.6 23.5 -24.9 30.3 8.4 26.9 47.4 67.6 44.4 43.4 38.0 32.4 EBIT -71.2 157.9 50.2 36.4 -62.9 134.8 18.9 82.0 -57.6 92.8 12.4 56.6 -56.9 99.4 13.6 52.2 6.2 113.9 63.3 72.9 63.2 50.1 Net Profit -67.5 183.1 29.6 29.1 -61.7 116.8 17.8 79.0 -56.4 87.0 11.9 55.5 -55.3 93.4 13.2 51.4 n.m. 55.0 78.5 52.7 59.2 49.4 Adj. Net Profit -64.4 154.6 31.5 29.7 -59.5 102.5 16.8 74.9 -54.3 80.5 11.5 53.5 -53.8 88.3 12.8 50.1 n.m. 40.2 75.6 49.0 56.8 47.8 Source: Company data, Credit Suisse estimates
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Companies Mentioned (Price as of 14-Apr-2014) 58.com Inc. (WUBA.N, $42.93) Autobytel (ABTL.OQ, $12.19) Autohome Inc. (ATHM.N, $33.94, NEUTRAL[V], TP $36.0) Baidu Inc (BIDU.OQ, $153.755) Bitauto Holdings Limited (BITA.N, $31.04, OUTPERFORM[V], TP $46.0) Ctrip.com International (CTRP.OQ, $54.37) Jiayuan (DATE.OQ, $6.04) NetEase.com (NTES.OQ, $69.15) Phoenix (FENG.N, $10.0) Qihoo 360 Technology Co. Ltd. (QIHU.N, $87.73) Qunar (QUNR.OQ, $28.75) Sohu.com (SOHU.OQ, $59.47) SouFun (SFUN.N, $12.94) Telstra Corporation (TLS.AX, A$5.05) Tencent Holdings (0700.HK, HK$526.0) Vipshop Holdings Limited (VIPS.N, $135.29) eLong (LONG.OQ, $15.5)
Disclosure Appendix
Important Global Disclosures Evan Zhou and Dick Wei, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Bitauto Holdings Limited (BITA.N)
BITA.N Closing Price Target Price Date (US$) (US$) Rating 24-Feb-14 34.97 R * Asterisk signifies initiation or assumption of coverage.
REST RICT ED
3-Year Price and Rating History for Vipshop Holdings Limited (VIPS.N)
VIPS.N Closing Price Target Price Date (US$) (US$) Rating 26-Sep-13 57.97 60.00 N * 13-Nov-13 86.99 75.00 16-Jan-14 103.81 80.00 05-Mar-14 171.48 145.00 08-Apr-14 142.64 178.00 O * Asterisk signifies initiation or assumption of coverage.
NEUTRAL OUTPERFORM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
China Internet Sector 83 15 April 2014
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An ana lyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (53% banking clients) Neutral/Hold* 41% (50% banking clients) Underperform/Sell* 14% (46% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Price Target: (12 months) for Autohome Inc. (ATHM.N)
Method: Our main valuation methodology for Autohome is forward P/E (price-to-earnings). Our target price of US$36 implies 35x FY14E and 25x FY15E diluted adjusted EPS (earnings per share). The company has cash position (cash, cash equivalents, and short-term investments) of US$ $188.1 mn in 4Q13.
Risk: Autohome's upside risks to our US$36 target price are from: (1) faster-than-expected user growth and online advertising business expansion; (2) faster-than-expected paying dealer subscriber growth; (3) lower-than-expected traffic acquisition cost and (4) faster-than- expected mobile monetisation. Downside risks could come from: (1) slower-than-expected user growth of user growth; (2) slowdown in online advertisement business growth; (3) slower-than-expected paying dealer subscriber growth and (4) potential severe competition in online automobile vertical.
Price Target: (12 months) for Bitauto Holdings Limited (BITA.N) Method: Our target price of US$46 for Bitauto Holdings is based on 20x 2015E P/E, on the back of 52% EPS CAGR in the next two years. The target price implies 32x 2014E P/E and a PEG of 0.4x. The company has a cash and equivalent of US$4.22 per ADS.
China Internet Sector 84 15 April 2014
Risk: Downside risks to our target price of US$46 for Bitauto Holdings may emerge from: (1) slower-than-expected online advertising and dealer subscription business growth; (2) slow improvement of operating efficiency in other business lines; (3) potential severe competition in online automobile vertical and (4) margin pressure due to competition and higher traffic acquisition cost.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (BITA.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (BITA.N) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (BITA.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (BITA.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BITA.N) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (ATHM.N, BITA.N, VIPS.N). Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ATHM.N, BITA.N, VIPS.N) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (ATHM.N, BITA.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ...... Evan Zhou ; Dick Wei
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China Internet Sector 85 15 April 2014
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IT0315 China Internet Sector 86