58.Com: Great Number And Even Better Company – 58.com Inc. (NYSE:WUBA)


Investment thesis

Since the recent dip at the beginning of 2017, shares of Chinese internet technology company 58.com Inc. (WUBA) have experienced an extraordinary rally. With respect to the company’s outstanding financials and desired publicly-traded business traits, I believe the rally has just started and the company’s shares have a long way to run.

Company profile

58.com Inc. is a diversified Chinese internet holding company operating several online platforms for consumer users to browse, search, post information, connect, and communicate. Besides the original 58 website, serving people to exchange various items (sort of Chinese version of Craiglist.com), the company’s other core businesses include operations of Anjuke real estate platform or a 58 similar-like platform called Ganji. The company generates revenues primarily from membership fees, online marketing, and e-commerce services.

Chinese online market still underserved

Even though it might sound unbelievable to many daily internet users, China still belongs to one of the most populous countries with a relatively limited access to the internet. According to a recent study by China internet watch, there were approximately 772 million internet users in China by the end of 2017. In relative terms, this represents an internet penetration rate of roughly 55.8 percent. To put this into context, the United States has almost 90 percent of its population connected to the internet which represents a considerable opportunity for all Chinese internet & technology businesses.



Source: www.chinainternetwatch.com

Founder as a CEO

According to conclusions of several academic studies, companies with their founder in the role of the CEO or other considerable influence on the business tend to substantially outperform their lacking-founder-as-a-CEO peers. Two years ago, global management consulting company Bain & Co. analyzed a few hundred founder-led companies and identified three elements that set the companies apart – a business insurgency, a front-line obsession, and an owner’s mindset. The founder and CEO of 58.com is Mr. Michael Jinbo Yao who currently has a direct beneficial ownership of 10.5 percent of the total outstanding shares. Going forward, this is clearly a desired trait that has a potential to get reflected in the share price and positively impact all the company’s shareholders.

Valuation

Under one of the most widely used valuation techniques in finance – the discounted cash flow analysis – blended perpetuity growth and EBITDA multiple method – 58.com’s shares currently seem to be unprecedentedly undervalued. Under the perpetuity growth method, fair value of the stock comes at US$242, assuming 30 percent annual revenue growth over the next five years, steady EBIT margin of 18 percent, and terminal growth rate in perpetuity of 2 percent. Under the EBITDA multiple approach, the intrinsic value per share value of the company stands at roughly US$617 if we assume that the appropriate exit EV/EBITDA multiple in five years’ time is around 25x.



Under a different valuation approach, giving a better picture of the company’s long-run intrinsic value most probable evolution, a technique commonly-called Peter Lynch earnings line, 58.com’s shares look also remarkably attractive. Using the Fast Graphs forecasting calculator with a default 14 percent operating earnings growth rate assumption, the company’s intrinsic value by the end of December FY2023 is estimated to reach US$340, which implies approximately 35 percent total annualized rate of return upside potential.



Source: www.fastgraphs.com

Key Risks

  • If the company fails to anticipate evolving user needs and user preferences, it might not be able to grow and retain its user base.
  • If the company fails to effectively manage its growth and expansion, the company operations might be adversely affected.
  • Any damage to the company’s reputation and brands or failure to enhance its recognition may result in negative business consequences.
  • Variety of marketing efforts and incurred costs might turn out to be ineffective.
  • The company’s revenue is heavily concentrated in China’s major cities – Beijing, Shanghai, Hangzhou, and Guangzhou – which poses a non-negligible market risk.
  • The company’s real estate business is susceptible to fluctuations in China’s real estate industry which might negatively impact the company’s financial results.
  • If the company fails to keep up with the technological developments, it might become difficult to meet its revenue growth expectations and the financial results of its operations may be adversely affected.
  • If search engines algorithms are modified or the company’s search result page rankings decline for other reasons, the company’s financial results might be adversely affected.
  • The business is substantially dependent on the continuing efforts of its executives, employees, and if the company loses any of its qualified personnel, its operations might be severely disrupted.
  • The company’s operations are significantly reliant on the performance of internet infrastructure and telecommunications in China.
  • The company may not be able to prevent others from unauthorized use of our intellectual property, which could harm its business and competitive position.
  • The company might become a subject to intellectual property infringement claims or other litigations which may adversely affect its business.
  • The company is subject to various risks stemming from its regulatory environments.

The bottom line

To sum up, 58.com is an exceptional internet & technology company, both from the industry outlook perspective as well as the company’s financial and corporate governance perspective. Even though not indicative of future performance, the company’s shares look extremely attractive under both commonly-used discounted cash flow methods. Estimating the company’s long-term value using a popular price-earnings correlation technique derived from the renowned Peter Lynch’s earnings line, 58.com’s shares currently seem incredibly underrated. Although the company’s revenue has slowed down substantially in recent years, based on the company’s overall business momentum, I believe 58.com best days are certainly yet to come.

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Disclaimer: Please note that this article has an informative purpose, expresses its author’s opinion, and do not constitute investment recommendation or advice. The author does not know individual investors’ circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WUBA over 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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