This local monopoly player is making major moves offshore

Sustainable competitive advantages are key when seeking quality listed companies, with “sticky” customers and so-called network effects a couple of the most highly prized intangible attributes in this regard. We believe the following company possesses these traits – and more.

Carsales.com Limited (ASX: CAR) is a leading digital automotive and non-automotive marketplace. Its key services span the areas of online advertising and data, research and services. In the first of these, the company's online advertising offering spans classifieds and display advertising. 

Within data, research and services, CAR provides:

• Software as a service (SAAS)
• Research and reporting
  
• Valuations and appraisals
  
• Website development and hosting
  
• Photography services.
  

Domestically, Carsales.com is an incredibly strong business that dominates its market, for both consumers and dealers. Protecting this strong market position is the network effect coupled with their ability to constantly innovate via improving existing products or creating new ones.

Like all excellent businesses, Carsales aims to provide value to all stakeholders. Our research indicates the company is certainly doing this for the consumer, the car dealers and auto manufacturers.

To give you an understanding of Carsales’ domestic scale:

• It provides products to over 6,000 dealers
• More than 5 million consumers visit the company’s websites every month

From an international perspective, Carsales.com has operations in South Korea, Latin America and the United States.

• Trust Encar in South Korea. It is the market leader in automotive advertising. It is growing strongly through both the dealer, consumer and OEM (original equipment manufacturer) channels. They receive 23m monthly visits and have an inventory of stock for sale of 152k
• Webmotors in Brazil. Again, the number one provider to the auto market, however low overall penetration into what is a very large market leaves a long runway for growth. They receive 28m monthly visits and have inventory of 407k
• Chileautos in Chile and Soloautos in Mexico are smaller businesses, particularly Mexico which would be considered to be in an early stage of development.
• Trader Interactive in the United States. This is a reasonably new acquisition, however they held an equity interest prior to launching the full acquisition. It is a slightly different market for them in that the focus is on RVs, powersports, trucks and equipment industries. Even though it has a very strong market position, It is fair to say that their offering, and the market in which they operate, currently lacks sophistication. We believe that Carsales.com will add a lot of value over the years ahead. In terms of scale, Trader Interactive currently receives 14m monthly visits and has an inventory of 763,000.

Impact of the current economic environment

The current economic environment is having both positively and negatively affecting CAR’s business. On the positive side, as interest rate rises start to bite and the economy slows, it is likely that car dealers will need to increase their advertising with Carsales to shift stock. There are also signs that the supply chain disruptions caused by the pandemic may be starting to ease. This is expected to boost the turnover of used stock, which is a large part of CAR’s business.

On the negative side, an increase in supply of used car stock could lower used car prices and this would reduce the commission received on sales. On balance, we believe CAR is adeptly navigating these positive and negative impacts.

Management

We are backing management to continue their history of excellent operational execution. This is particularly relevant for the integration of Trader Interactive where it will take several years to integrate and move to a similar dynamic pricing model that CAR use in their existing markets.

CAR's share price

The selloff in more growth-orientated companies over the past 12 months provided us with an entry point into CAR that we were comfortable with, given its dominant market position and forward-looking growth prospects.

We are positive about the long-term outlook for CAR as the company continues to develop products, strengthen its network effect, and provide value to customers.

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