58.com (WUBA) A Terrific Investment Opportunity in China

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Buying one share of WUBA on a platform such as Robinhood (a $0 commission brokerage you should check out if you haven’t already) is equivalent to owning two class A ordinary shares of 58.com Inc. WUBA operates an online marketplace which enables local merchants and consumers to connect and do business. The name “58” comes from the 58 core and incubated businesses of the company. These include multi-content online classifieds, a real estate listing platform, online recruitment platform, online used good trading, a home and moving services platform, a used and new car trading platform, and many others! Recently, 58.com acquired a minority stake in a rental brokerage company 515J Holding Group.

Below is the latest financial statement per the 2017 Annual Report.

WUBA generates revenue in four primary ways: Membership, Online marketing services, E-commerce services, and Other services.

Membership: ~38% of 2017 Revenue

Subscription-based membership packages include preferential listing benefits such as daily priority listings and higher quota for daily listings, as well as access to a dedicated support team. Memberships have varied lengths depending on content category. For example, yellow pages membership are typically 12-month packages and memberships in real estate are primarily one to three month packages due to the high turnover of real estate agents. Field direct sales teams acquire the majority of paying members. Most paying members are small and medium-sized business users. Below you can see the latest reported subscription-based paying membership accounts – a key performance indicator when analyzing the growth of WUBA.

Online Marketing Services: ~60% of Revenue

The business users buy online marketing services to enhance recruitment effectiveness. Subscribing is not required to purchase online marketing services, however, subscription based members get a discount for additional marketing services.

In 2017, subscription-based paying members continue to contribute majority of the online marketing services revenues. On average, approximately 60.2% of our quarterly paying membership accounts purchased our online marketing services in 2017. – 2017 annual report

Marketing services are primarily bidding, priority listing, display advertising, and other lead-generation services. All 58 platforms offer some forms of online marketing services. Paying members use real-time bidding to get the best placement of their listings on a cost-per-click (CPC) basis. The user-friendly bidding system aids members. Minimum prices are set based on traffic and CPC metrics and listing placements can vary in duration from several hours to several weeks.

Display advertising is primarily based around real estate development platforms. Customers use this service to enhance brand recognition and attract eyes to the primary real estate projects on the market. Third-party internet companies also have links on 58.com platforms with fees based on CPC and cost-per-thousand impressions. Customer service teams stay in regular contact with customers to help promote marketing services and encouraging members to select the most suitable services to maximize their marketing effectiveness. Between 2016 and 2017, while membership revenue grew 28% marketing services grew 37%. During the same period, E-Commerce fell 56%.

E-Commerce: < 1% of Revenue

These services are real estate driven via discount coupons that home buyers use to buy a property at a discounted price. This also includes property tours, onsite promotion activities and other services relating to property purchases. Revenue is recognized when home buyers apply the discount coupon to pay for the purchase price of the designated property from the real estate developer.

Other Services: ~2 % of Revenue

Other includes off-line provided services which are primarily recruiting and selling used goods via the trading platform Zhuan Zhuan.

Analysts expect on average EPS of 2.46 in 2018 and 3.41 in 2019. At a P/E multiple of 25 that would conservatively put WUBA at a price of $85.25 which represents just shy of a 30% margin-of-safety in what we feel is a relatively conservative scenario.

photo source: Yahoo Finance 

WUBA is on a healthy trend that we expect to continue into the forseeable future. Sales are growing, cash flow is increasing (even with increased spend in R&D), operating margin performance continues to improve.

chart above author generated using Morningstar data. 

Risks

As always when investing in China, risks include how the company is structured, the regulatory environment, currency risk, and a multitude of other factors which make Chinese investment risky. Our view is that the risk of having no exposure to China is greater than the risk of having a small portion of your portfolio invested in these high growth Chinese stocks over a long time horizon. The good news for WUBA, is this is an under-followed growth stock trading with a suitable margin of safety to account for this in our view.

Thanks for reading!

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