Pacific Online: Multi-bagger with 3x upside! Pacific online runs multip online portals which include auto portal (#1 in China and accounts for 74% of total rev), IT portal (#1 in IT related portal and accounts for 15% of total sales),and other smaller portals which are relatively small. Company has been growing it's auto business quickly, which now accounts for majority of sales. Revenue model is mostly advertising through it's platforms. Auto business is the key driver of it's business with revenue growing 11% CAGR in the last five years. PC online other verticals has been losing share and this has been offsetting strong growth in the auto segment. Going forward, auto business being the majority of the total sales, company would likely see more accelerated growth. Company ranks around top # 3 following Autohome / Bitauto and is an established brand in the auto online trading / info space.
Key investment points include;
1. Company engaging in new initiatives in the auto space. Company management has commented that “Following two years of investment and development, Pcauto’s “Cool Car Project” has begun to bring in business towards the latter half of 2018. Partnership with Alipay and the development of its new automotive marketing platform have resulted in increased marketing effectiveness for our clients”. “Additionally, this year saw the maturation of Pocket Auto Salesman, PCauto’s other mobile marketing management platform. By the end of December, Pocket Auto Salesman included over 12,000 dealers and more than 30,000 automotive sales specialists logged on per
day..”. Company should grow it's auto division division by at 12% YoY given these tailwinds while other segmens could stay flat. Given that auto segment has one of the highest GPM among the segments, overall blended margins should go up from 57% in FY18 to 60% in FY2022. Also, given that there are no significant incremental costs associated with growing the business, we think EBIT could grow from CNY212m in 2019 to CNY377M by 2022, posting 21% CAGR growth. This if we apply 10x EV/EBIT multiple, should translate to tripling of the stock price. Also, company pays out 9% dividend yield at current prices.
2. Company has boasted very high FCF margin and pays around 9% dividend yield (2020). Company paid out most of it's operating cash flow in the form of dividends. Company has no debt and net cash and LT investment of around HKD455M which is 23% of total market cap. Given very high FCF yield of 8%, we believe the company could build up cash towards HKD1B by 2022 which is 50% of current market cap.
4. Company chairman bought shares during Jan ~ July 2019 with prices ranging from 1.05~1.74. We think we are close to the trading range and it would be a good opportunity to accumulate from here.
5. Technicals show that the stock is over-sold.
6. Compared to Autohome / Bitauto's valuation, the company's valuation is too cheap. For instance, Autohome and Bitauto is trading at 16x and 26x EV/EBIT respectively vs. company at only 6x EV/EBIT.
