AddCN Technology 5287
March 22, 2021 - 1:05pm EST by
punchcardtrader
2021 2022
Price: 252.00 EPS 15 16.5
Shares Out. (in M): 43 P/E 16.8 15
Market Cap (in $M): 367 P/FCF 15 14
Net Debt (in $M): -20 EBIT 0 0
TEV ($): 347 TEV/EBIT 0 0

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Description

AddCN is a very high-quality business operating online classified platforms in Taiwan. It is currently trading on 17x P/E with a ~5% dividend yield. Net cash balance sheet.

 

For the past 2 years, AddCN has derated from 20+ P/E down to 17+ P/E as the business growth stagnates due to sub-par performance from 1) job recruitment business unit and 2) loss-making eCommerce businesses

 

Nonetheless, its core property business (591) continues to deliver 10% annual top-line growth while new business lines are entering the monetisation stage. From this point on, I believe it can grow earnings between 5-10% in the next 5 years.

 

For more details, please refer to briarwood988's previous post on AddCN.

 

Business Overview

AddCN operates dominant marketplace businesses and hence have a very high net margin of 40% and enjoy excellent free cash conversion (more than 100%). With little need for capex and a tax on retained earnings in Taiwan, mgmt team pays out the majority (90-100%) of net income as dividends.

 

AddCN owns the dominant online property platform (similar to REA in Australia and Rightmove in the UK). It makes up 62% of revenue and over 80% of group EBIT. This business is the crown jewel. This business is currently growing at 10%.

 

AddCN operates a C2C marketplace for in-game items and the platform charges a commission fee based on the purchase price. This business is driven by PC game and hence as the gaming market moves to mobile; this business has stagnated. So this is a cash cow but not growing. It makes up 23% of revenue and ~15% of group EBIT.

 

AddCN's used car and job recruitment platform collectively make up 15% of total revenue and ~ 5% of total EBIT. These two businesses are not in a dominant position and hence very sub-par profitability.

 

However the company's job recruitment business unit has been particularly active in developing new business lines which are now entering the monetisation stage. According to my research, the job recruitment team is extremely motivated and continue to incubate new business ideas.

 

Investment thesis

 

1. Core property portal business (called 591) continue to deliver 10% top-line growth which is primarily driven by volume and to a less degree by pricing. There are three sub businesses within 591. For the last 2 years, 591 has been growing its new home property business (10% of 591) and will continue to drive growth going forward. 591's rental business is a truly excellent business as in Taiwan, the rental business is driven by the private landlords rather than the agents which gave 591 an incredibly dominant position. 591's secondary home business is also growing nicely as more property agents chose to advertise on 591's platform. Unlike peers in the UK and Australia, 591 has been very restrained in terms of exercising pricing power because its management team wants to prioritise volume over price growth. This is very healthy in my view and hence give me conviction in the sustainability of 10% revenue growth for a long period of time

 

2. For the past two years, AddCN sold off its loss-making eCommerce businesses in recognition that they are better at service verticals rather than dealing with physical goods.

 

3. In the past 2 years, AddCN's job recruitment business has shrunk to a sufficiently small size that it won't matter to the business performance going forward

 

4. AddCN's various new business ventures, such as a marketplace for wedding vendors (hotels and photographers) and consumers and a freelance job platform, are finally entering the monetisation stage which not only will help with top-line growth but also profitability

 

5. Excellent corporate governance - I think the company strikes a good balance between investing in organic start-ups within the business while also closing things down if it doesn’t work. Unlike many other cash flow generative businesses in Asia, this company is dedicated to paying out a healthy dividend

 

Valuation

17x p/e for a high-quality business with great cash flow generative capability and 5-10% earnings growth for the next 5 year. Net cash balance sheet.

 

Risk

Taiwan macro

Disruptive business models such as Opendoor in Taiwan

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Earnings growth

 

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