iCar Asia (ASX:ICQ): Our latest online classifieds play

PM Capital

Online automotive advertising portals, Autohome – featured in a Livewire piece in February 2017 – are a part of a broader investment thematic at PM Capital which has focused on online classified advertising businesses across the Asia region. With Autohome more than doubling since then we wrote about it, Livewire asked for our current view on the stock and if there were any others in the same thematic that we like.

What started out as a single idea in 2009 – Malaysian employment classifieds portal Jobstreet – has morphed into eight different investments across the jobs, real estate, travel and automotive categories. At its peak, this investment theme accounted for approximately one quarter of the portfolio in our two Asian strategies.

Despite the long-term structural growth opportunity underpinning these businesses, we have always maintained a disciplined and pragmatic approach of exiting any position which reaches our target price to then look for a better place to redeploy that capital. An example of this has been our investments in Autohome and now, iCar Asia.

Autohome: Our investment thesis has mostly played out

As a clear market leader in the Chinese automotive classified category, we had long admired Autohome’s business but it was the decision by company management to enter the capital-intensive direct automotive sales business along with concerns around economic growth in China which drove a material decline in its share price and what prompted us to revisit the company in more detail.

The economics of the direct sales business – essentially a glorified online car dealership – were inferior to that of the asset-light lead generation and media businesses on which Autohome had historically focused. Investors accordingly lowered margin and returns expectations materially. With investors preoccupied with the company’s new business initiative we believed the significant value of the lead generation and media businesses as well as substantial net cash position on the balance sheet – in excess of 20% of the market capitalisation – were being heavily discounted.

We remained confident that these capital-light businesses would continue to generate significant free cash flow overtime and engaged management to reconsider the direct sales business so that capital would not be deployed into inferior business areas.

We took an initial position in Autohome during the first quarter of 2016 when the stock was trading below $25 and added to it as the year progressed. The position reached a maximum of 7% in our Asian Companies Fund. At the time of our initial purchase, Autohome’s share price had fallen 60% from its 2015 peak and was being valued below 15x forward earnings despite 20%+ year-over-year revenue growth in its core lead generation and media businesses.

After this, two key catalysts emerged resulting in a significant share price rerating. In June 2016 Ping An Group took control of the business from Telstra and appointed a new management team, who after a strategic review, decided to exited the direct sales business. With the primary margin pressure now effectively removed, the market raised earnings expectations. Management also raised the prospects of capital management initiatives aimed at addressing the significant accretion of excess capital on the balance sheet, positively surprising investors.

With a large part of our investment thesis having played out, and a dramatic reversal in investor sentiment taking place, we exited our position in August 2017 after more than doubling our investment.

iCar Asia: Our latest online classifieds play

The most recent iteration of our online classified thematic is the ASX-listed iCar Asia which also operates in the automotive category but is focused on Malaysia, Thailand and Indonesia.

Given our investments in the online classified category we have followed iCar since its IPO in 2012. However, while we liked the underlying business model and could see the positive structural dynamic driving the business longer term, we had concerns around elements of the company’s corporate strategy, most notably monetisation, as well as the markets implied valuation so were willing to wait patiently for these to be addressed.

Buying at a time of pessimism

The opportunity to invest arose in 2016 with a series of negative events which saw the share price fall from around $1 to 25c. A rebasing of earnings expectations after the arrival of new CEO, Hamish Stone, acted as the primary catalysts for the decline.

Hamish’s decision to reinvest more heavily into the business to strengthen its market leadership came at a time when short-term macroeconomic conditions were negatively impacting operations in Malaysia and Thailand. As a result, investors factored in further capital raisings, the first of which came in September 2016.

Compounding the market's pessimism, the perceived lack of commitment to the business from its second-largest shareholder Carsales who did not participate in the September capital raising, removed the ‘takeover premium’ in the stock.

Strategic direction to breakeven

Over the past two years, we have had several discussions with Hamish Stone which has given us confidence in the company’s strategic direction under his leadership, particularly the clearer direction on the path to breakeven. Reinvestment initiatives back into the business have proved successful with a strengthening of iCar’s competitive position.

In November last year iCar announced a further A$10 million rights issue, which we participated in. On top of our pro rata allocation, we also took part of the shortfall in demand from other investors and in doing so we became a substantial shareholder in the company.

The recent capital raising strengthens the company’s balance sheet, ensuring management has adequate scope and flexibility to continue investing in the recent initiatives it outlined to the market, in particular, new car and ancillary services.

Contirbuted by Kevin Bertoli, Portfolio Manager, PM Capital Asian Companies Fund, PM Capital Asian Opportunities Fund (LIC).


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