Abstract: according to the number and amount of automobile retail transactions in 2016, Yixin Group is the largest Internet automobile retail trading platform in China. According to market forecasts, the company's adjusted net profit will grow by 500% in 2017 and more than 80% in 2018, mainly due to the company's focus on China's fast-growing used car market. BITA.US, the parent company of Yixin Group, now has a price-to-earnings ratio of 22.5 times 2018 and a price-earnings growth rate of 0.65 times. Assuming that the company can achieve a price-to-earnings growth rate of 0.5-0.65 times earnings after listing (based on 2018 earnings), the company's 2018 price-to-earnings ratio is expected to reach 43.5-56.5 times, which means that the share price will have 20-57% room to rise above the upper limit of the price range (HK $7.7).
Company background: Yixin Group, founded in 2014, is a subsidiary of Yi car. In terms of the number and value of auto retail transactions in 2016, the company is the largest Internet auto retail trading platform in China, with a market share of more than 18%. In 2016, the company facilitated more than 190,000 retail car transactions, involving a total value of more than 18 billion yuan. After listing, Yi che, Tencent (0700.HK), JD.com and Baidu, Inc. hold 43.9%, 20.9%, 10.9% and 3.02% interests in the company, respectively.
Key information about IPO: (I) IPO price: HK $6.6-HK $7.7; (ii) number of new shares issued: 878.7 million new shares (14% of the enlarged share capital); (iii) size of capital raised: assuming pricing at the upper limit of the offer price range, the total amount raised is HK $6.77 billion; (iv) Hong Kong IPO date: November 6-9; (v) listing date: November 16; (vi) co-sponsors: Citigroup and Credit Suisse.
China's used car market is growing rapidly from a low base. The volume of automobile retail transactions in China increased from 2.2 trillion yuan in 2012 to 3.8 trillion yuan in 2016, with an average annual compound growth rate of 14.9 percent. According to the Frost Sullivan report, this value is expected to increase from 3.8 trillion yuan in 2016 to 5.2 trillion yuan in 2021, with an average annual compound growth rate of 6.5 per cent. The retail transaction volume of used cars in China increased from 191.4 billion yuan in 2012 to 509.6 billion yuan in 2016, with an average annual compound growth rate of 27.7 percent.
In 2016, used car retail transactions in China accounted for only 24.6% of the total car retail transactions, far lower than the proportion in the United States (68.2%). As a result, the retail transaction volume of used cars is expected to reach 14.6 million (32 per cent of the total) by 2021, with an average annual compound growth rate of 13.5 per cent.
Benefit from the market's attention to the second-hand car market. In 2014, the company only provided advertising and membership services, with a low revenue base. However, the company has rapidly developed its own financing business, providing financing services to consumers through financial leasing products, and focusing on the fast-growing used car market. The division's revenue soared from 65 million yuan in 2015 to 1.2 billion yuan in the first half of 17 years. With the rapid growth of proprietary financing business, the company has established a trading platform business (online and offline), which includes (I) transaction facilitation services, in which the company mainly charges service fees to consumers or car dealers who complete transactions through our platform, (b) loan facilitation services, in which the company mainly collects service fees from consumers who borrow money or banks that issue car loans to consumers, and (c) value-added services. Most of this revenue comes from the sale of car networking systems to car dealers. The business income of the trading platform increased significantly from 58 million yuan in the first half of 16 to 321 million yuan in the first half of 17 years.
It is still a small business in the whole market. In terms of the number and value of auto retail transactions in 2016, Yixin Group is the largest Internet auto retail trading platform in China, with a market share of more than 18%. However, due to the small size of the online market, the company accounted for only 0.6% and 0.5% of China's overall auto retail market volume and volume in 2016. This means that Yixin still has a lot of room to gain market share from the offline market.
The development of China's auto finance market is still very low. In 2016, the penetration rate of auto consumer financing in China was only 30.5%, far lower than the 82.0% in the United States. According to the Frost Sullivan report, the permeability is expected to reach 58.4% by 2021. This means that the growth prospects of Yixin's proprietary financing business are still very positive in the next few years.
Competitive advantage: because the company is the largest Internet automobile retail trading platform in China, the company has a larger customer database than its peers. The company's data analysis team of more than 380 data experts jointly developed advanced proprietary algorithms as a key basis for the company's business, thereby improving sales and marketing performance, speeding up the transaction process and improving transaction success rates, as well as improving credit risk management. As of June 30, 2017, the overdue rates over 30 days, 90 days and 180 days were only 0.89%, 0.51% and 0.23%, respectively. With the financial support of Tencent, JD.com, Baidu, Inc. and other shareholders, Yixin's total accounts receivable increased from 2.86 billion yuan at the end of 2015 to 19.6 billion yuan in the first half of 17 years.
Profits are distorted by non-cash items. According to the company's statement, the company recorded a huge loss of 6.1 billion yuan in the first half of 17 years, which involved the fair value loss of convertible redeemable preferred shares. Excluding the project and non-cash expenses, the adjusted net profit was 261 million yuan, an increase of 684% over the same period last year. At the same time, the average rate of return on net financial leases receivable rose from 7.3% in 2015 to 13% in the first half of 17 years. The average cost ratio of interest-bearing liabilities in the first half of 17 was 5.5 per cent, up from 4.3 per cent in 2016.
Valuation: according to the market forecasts quoted in the report, assuming the company is priced at the upper limit of the IPO price range (HK $7.7), the company's price-to-earnings ratios for 2017, 2018 and 2019 are 67.5, 36.1 and 19.5 times, respectively. At present, the price-to-earnings ratio of its parent company is 30.3 times, 22.5 times and 15.5 times. We believe that the low valuation of the parent company is reasonable because (I) the parent company's business (excluding Yixin) is mainly concentrated in the new car market, which is growing at a slower rate than the used car market, and (ii) there is a discount in the holding company. Based on the 2018 price-to-earnings ratio, the parent company's price-earnings growth rate is 0.65 times. If we conservatively assume that Yixin's price-to-earnings growth rate is 0.5-0.65 times, the price-to-earnings ratio for 2018 is expected to reach 43.5-56.5 times, with a potential upside of 20-57%.
Risks: (1) the industry is relatively new and the company has a short track record (the company was established in 2014); (2) due to its short operating history, the reliability of asset quality data is uncertain; (3) have the opportunity to face competition from other enterprises (Ping an, Merrill Financial (also invested by JD.com), Youxin, etc.); (4) interest rate risk, or lead to pressure on its net interest margin. (5) the rapid development of the industry may bring regulatory risks; (6) the company carries out new business or faces implementation risks.
