Via online business online marketing online business opportunities WUBA: Craigslist On Steroids

Via online business online marketing online business opportunities

Via online business online marketing online business opportunitiesOverview

58.cominc (NYSE:WUBA) started in China in 2005 with an online classifieds platform that is similar to Craigslist. Since then, WUBA has become one of the most valuable Chinese internet unicorns as it grew exponentially through expansion into other businesses across various verticals.

We believe that WUBA provides an interesting opportunity for investors looking to gain exposure to Chinese internet consumers and a two-sided online services market like the one Craigslist is doing. WUBA looks a lot like Craigslist on steroids. Compared to Craigslist, WUBA has been able to monetize its core marketplace platform much more effectively through multiple business models. For instance, two revenue streams WUBA has that Craigslist does not are its subscription-based membership services where those business users who enroll can unlock special features such as priority listings or increased quotas for listings per day. As stated by its20-F:

Our subscription-based membership is a basic service package consisting mainly of merchant certification, display of an online storefront on our platforms, preferential listing benefits such as daily priority listings and a higher limit for daily listings, and access to our dedicated customer service support team and online account management system.

Besides, WUBA now also makes billions through its Google-like performance online marketing platform, which includes real-time bidding and display ads.

Via online business online marketing online business opportunitiesFinancials

WUBA’s fundamentals have been very solid. Five-year revenue CAGR is 60%, with YoY revenue growth of 26.43%. In FY 2018, it recorded a revenue of almost $2 billion while also expanding its net profit margin to 2.2% from 1.93% in the previous year.

(Source:58.cominc Q2 earnings call slide.)

While its paid-membership subscription model was the key driver to overall revenue, WUBA has made almost twice as much money from selling ads and priority listings on its platform since 2014. More than 60% of its revenue today has come from its OMS (Online Marketing Services) business segment. Furthermore, in Q2 it achieved a new record high on quarterly OMS revenue with RMB 2.7 billion or equivalent to $376 million.

(Source: stockrow. WUBA’s profitability and shares outstanding)

WUBA’s profitability is also healthy. Gross margin has dropped from 94% to 89.96% over the last five years, though the decrease in the last two years has remained much flatter. The slight decrease in gross margin most likely happened due to an increased cost of sales, which was driven by increases in non-cash expenses, such as stock-based compensations. Looking at its20-F, the stock-based compensation component of its cost of revenue has increased by almost 14 times as of FY 2018 compared to two years prior. As a fast-growing company looking to attract and retain the best people in the competitive China technology industry, we think the level of increase is quite justifiable.

Via online business online marketing online business opportunitiesHow Craigslist would end up through a more diverse monetization strategy

Before we dive deeper into WUBA’s business strategy, we believe the comparison to Craigslist would be quite relevant. Craigslist, which started in the US in 1995, is in the same core business as WUBA but is better known outside China. As shown, Craigslist traffic has been driven primarily by its traction in the U.S., India, and Canada. As a private company, there is also not much information about its financials as of today. From public sources, we learned thatits estimated annual revenue was $690 million in FY 2016, while its valuation was $3 billion as of FY 2017.

(Source: Alexa.Top 3 visitors of Craigslistby country and source of traffic)

While Craigslist has operations inat least 70 countries, including in China, its growth strategy is relatively more optimized for US growth. At the same time, due to theChinese Government’s initiativeto block top US sites such as Google or Facebook domestically, Craigslist would potentially struggle if it had tried to enter the Chinese market.

Looking at what Craigslist has done over the last 10 years, we feel that WUBA might see the opportunity in the classified ads market in China. WUBA is also by far a more ambitious and visionary venture than Craigslist, having grown its revenue by more than 8 times within only 4 years after its IPO. From a financial perspective, we also learned that WUBA already surpassed Craigslist’s revenue by over 1.5 times in 2016.

We saw that WUBA also took a proven classified ads concept and used it as an entry point to expand into other businesses. As of today, WUBA has been monetizing organically mostly through its performance ads platform and premium subscription, and inorganically through various types of strategic buyouts of HR and Real Estate listing platforms. As per its20-F, we learned that it has also launched an accelerator program which incubates startup companies in automotive, logistics, and hyperlocal businesses for rural areas in China.

Via online business online marketing online business opportunitiesValuation and Risk

As of September 2019, WUBA trades at approximately $54 per share with a market cap of $8 billion. Looking at its growth potential and valuation metrics, we believe that WUBA is attractively priced.

(Source: seeking alpha. WUBA’srelative valuationandgrowthmetrics vs its peers)

In terms of growth outlook, its revenue, EBITDA, or EBIT growth metrics are relatively much higher than the sector median. With a $7.79 billion market cap, WUBA is one of the largest companies among its comparable peers which include YY (YY), Autohome (ATHM), or Sina (SINA) that still offers an interesting double-digit top-line growth rate. To us, this means an opportunity for investors to get exposure to the Chinese market with relatively lower risk. Furthermore, with FWD P/E of 15.19 and FWD EV/Sales of 3.2, WUBA is also attractively priced. While its FWD P/E is lower than the sector median, its relatively more premium FWD EV/Sales compared to the sector median of 2.21 instead indicates that there is a consensus that the company has interesting upside potential. At the moment, we believe that the premium on the EV/Sales may be driven by WUBA’s activities in both its current fast-growing internet business and venture incubation program. In that sense, WUBA is signaling that it is well-positioned to tap into both long-term and very long-term opportunities.

On the risk front, one particular risk we believe WUBA needs to be careful about is concentration risk. As opposed to Craigslist’s situation in the US, WUBA is dealing with a more concentrated market in China. Though China has a relatively mature technology ecosystem, it is stillconsidered as a developing country to some extent. With the developing landscape, there are only a few major cities in China that drive most of the online activities. Anypotential shockin any of these cities could potentially impact WUBA’s revenue in a big way. We found this risk factor to be highlighted as well in WUBA’s 20-F:

We typically generate more revenues from big cities than from smaller ones. In particular, we derive a significant portion of our revenues from five of China’s major cities: Beijing, Shanghai, Shenzhen, Guangzhou, and Chengdu. Even though revenues from five major cities as a percentage of the total revenues have been decreasing, we expect these five cities to continue to be important sources of revenues in all of our content categories.

Via online business online marketing online business opportunitiesTakeaway

Drawing a comparison to Craigslist in the U.S., WUBA is relatively a more ambitious classified ads company by far. In a sense, WUBA seems to be Craigslist on steroids. We have learned that it took WUBA only a decade to surpass what Craigslist has done in two in terms of revenue. Being led by a strong management team, WUBA has also been executing its diverse monetization strategy such as subscription, performance-based online marketing, and eCommerce very well. In the last two years, despite growing over 25% YoY, WUBA has been profitable. Taking all these factors into account, WUBA is an interesting investment opportunity for those looking to get exposure to the Chinese consumer and B2B markets.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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