We will keep this pitch short and simple. BITA, a ~$2.7bn EV Chinese internet company, is trading at a discount to its 43.5%? stake in recently IPO’d Yixin (2585 HK) plus net cash on its balance sheet, effectively creating its core business "for free". Alternatively, BITA (on a consolidated basis) trades at a mere 14x 2019 EPS for 25%+ aggregate EPS growth, or a ~30% multiple discount to its closest peer, ATHM. Either way, this valuation discrepancy, which is a result of a technical dislocation (below), will not persist.
WHAT IS THE TECHNICAL DISLOCATION?
On 11/16/2017, BITA IPO'd Yixin - its online auto credit platform, in the H-share market. Since this came on the heels of a frothy period in Chinese IPOs (China Literature rose by 150% in its debut just a week earlier), fast money investors piled into BITA as a way of "playing Yixin" ahead of the actual event. Unfortunately, Yixin IPO did not fare as well as planned, creating a wave of reflexive selling which took BITA's share price from the low $50s to high $20s in 3 swift weeks. Both Yixin and BITA have recently stabilized and a wave of upcoming catalysts (below) will insure that the fair value is restored.
WHAT ARE BITA AND YIXIN?
BITA is a midcap company that provides internet advertising services for the automotive industry in China. There are two major players in this space in China: Bitauto and Autohome. In late 2016 and early 2017, amid concerns about China’s auto sector slowing down, Bitauto’s growth slowed. The growth slowdown was exacerbated by a subpar management team who failed to take action to alleviate the macro situation. Meanwhile, Autohome continued to grow its top line by 20%+. New management was installed at Bitauto last year which undertook several measures on the heels of which BITA’s top line reaccelerated back to ~19%. The company has since exceeded expectations in back-to-back quarters. Checks with advertising agencies in China confirm the rebound in Bitauto’s execution and point to continued increases in budget allocations to the Bitauto platform.
Yixin is the auto financing and value added services platform founded by BITA. In August 2016, BITA announced a deal that brought new investors including Baidu, Tencent and JD into Yixin. The new strategic investors provided Yixin with $550mm in capital and Bitauto's share was effectively 47% post this transaction. Yixin has been growing earnings by over 100% and is an attractive strategic asset in its own right. Yixin can collect data on millions of cars on the road due to lease terms in the country. Baidu et al. want access to the data as it can be used for various things like location-based services, autonomous driving etc. Furthermore auto credit is vastly underpenetrated in China, which explains the rapid growth being experienced by Yixin. Finally, Yixin’s business is transforming from a pure auto financing business to an internet value added services platform for cars in China.
WHAT IS THE RISK/REWARD?
BITA’s stake in Yixin, currently trading at ~7.1 HKD/sh, is worth ~$32.33/BITA share. We believe Yixin itself is undervalued at this time, but set that aside for the moment. The value of Bitauto’s unrestricted cash stands at $6.64 per share. That means that, at $35/share, BITA core business, which is still growing topline ~20%, is essentially being created for free. At 12x core EPS plus Yixin stake plus net unrestricted cash per share, you get a $50.75 stock or +45% from current levels. This would correspond to 20x multiple of consolidated '19 consensus EPS which would put it on par with peer ATHM, while showing a faster consolidated earnings clip than ATHM and giving no credit for value creation ahead at Yixin.
Risk price is to 15x '18 street EPS or $29.75/share or -15% from current price, which is where the stock settled recently on the back of the post-Yixin selloff.
MAIN RISKS TO THE STOCK?
- Macro weakness in China, especially in autos
- Stories/headline risk around credit tightening of all sorts, including in autos, even though Yixin has almost entirely transitioned its model away from balance sheet risk
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
- Abatement of technical selling and reversal of momentum
- Strong Q4 2017 earnings and Q1 2018 guidance
- Analyst Initiations on Yixin (management, including CEO Andy Zhang is excellent in meetings and conferences, and they have been quiet ever since IPO- at some point they go on the road and tell the Yixin story)
- The announcement that Tencent and JD would back Vipshop and pay a 55% premium for its shares shows of how quickly a story can change in China midcap internet, and this is a strategic asset for Tencent and JD