Despite Asian online classifieds operator iCar Asia’s recent share price declines and poor financials, key operating metrics are actually very encouraging and the stock is interesting to the aggressive investor.
ICQ has established outright leadership in vehicle listings and audience volumes (unique monthly visitors) in each of its markets (Malaysia, Thailand and Indonesia) -- crucial given the winner-takes-all nature of competitive advantage (due to the ‘network effect’) in online classifieds. In immature markets competitors must invest heavily in technology and marketing in the race to achieve listings leadership and grow their audience so ICQ’s losses were expected if not necessary.
Like major shareholder Carsales, which owns 18.7 per cent, ICQ’s strategy is to entrench itself with dealers to cement its dominance. Approximately one third of cars sold in Malaysia and Thailand are through dealers and about half in Indonesia.
Dealer listings make up the vast majority of ICQ’s inventory. In Australia, dealers use CAR’s Autogate inventory management system, which supports their operations. One of the most encouraging developments over the last year is the adoption by dealers of ICQ’s Response Management System (RMS), which is key to ICQ’s ability to monetise its network.
The revenue model evolves as trust in the digital sales interface strengthens and online usage increases. Initially, to grow volumes and attract an audience online, dealers and private sellers aren’t charged listing fees. Once a certain level of consumer engagement is achieved dealer subscription and fixed listing fees can be charged, as well as fees for various ‘depth products’ that enhance the prominence of listings. Once leads are critical to the sales process, the portal can move to a ‘cost per lead’ revenue model to extract maximum value.
RMS is likely to be an essential tool for dealers to remain competitive, as is the case with Autogate. It provides a range of functions to assist with the sales process including smartphone vehicle listings uploads to ICQ’s portals, online usage data and leads (sales enquiries) generation and management.
Positively ICQ’s competitors in Malaysia and Indonesia are horizontals focused on consumer-to-consumer vehicle sales, while in Thailand ICQ has around a 90 per cent share, so take-up of RMS across ICQ’s markets has been swift and unimpeded by competition.
In its 2Q 2015 update, ICQ reported record monthly audiences and leads of over 7.7 million unique car buyers and 650,000 individual car buyers who sent leads across its network during June. More than 6,300 logged into the RMS system with a record 3,300 dealers now paying to advertise.
Carlist.my in Malaysia is ICQ's most developed business, reflected in a more advanced stage of monetisation. In Thailand, ICQ's position has strengthened after last November's acquisition of market leader one2car.com. Recent efforts have focused on integrating one2car with the existing business thaicar.com. In both markets ICQ currently has a subscription and depth product revenue model.
The Indonesian business Mobile123.com is the clear market leader in terms of listings, audience and leads, however, ICQ is monetising at a slower pace as it continues to increase dealer penetration and engagement outside greater Jakarta.
A positive from the capital raising announcement on July 1 was management's specific guidance of achieving break-even in 4Q 2017. The $15m proceeds will be used to develop mobile and app technologies to improve the user experience and drive greater leads and audience share. These technologies will also enable a 'cost per lead' revenue model to be implemented in the future.
ICQ estimates online auto advertising spend for new cars in Malaysia, Thailand and Indonesia will increase from $71m (4.1 per cent of total) in 2014 to $395m (14.9 per cent of total) in 2020. Its lower estimate of used car market value in 2020 is $4.8bn, up from $3.6bn in 2014.
ICQ is difficult to value because the timing and extent of price increases in uncertain. Although management is confident of reaching break-even in a little over two years, and has a good track record of delivery, risks are heightened for a company losing money. If, for example, there is an unexpected or prolonged negative response to price increases break-even could be delayed and ICQ may have to raise equity again. Another risk is a major international player entering the market forcing ICQ to increase marketing and delaying price increases. In short, ICQ is positioned very well and is establishing a similar incentive structure with dealers as CAR created in Australia, but the return profile remains uncertain.
Using ICQ’s lower assumptions for share of new car ad spend and used car market income of 5 per cent and 1 per cent respectively (CAR has 18.7 per cent share of new car ad spend and around 11 per cent of used car market income), 2020 revenues would be around $70m. Assuming a net profit margin of 25 per cent (Carsales achieves 40 per cent) ICQ’s estimates translate to a FY20 return on equity (NROE in the table below) of about 40 per cent. Applying the same 81 per cent payout ratio we use for Carsales (conservative considering the immaturity of ICQ’s markets in 2020), and required return of 16 per cent, which is appropriately high for now because the business model is unproven in Asia and the actual timing of breakeven is uncertain, we derive a FY20 valuation of around $0.93. Our FY15 valuation is around $0.66.
Figure 3. ICQ FY20 valuation matrix Source: StocksInValue
If profitability is proven in the time ICQ forecasts, required returns would be lowered and profitability adjusted higher. So to invest in ICQ it is necessary to see a time when a lower required return, like 12 or 14 per cent, is justified. In these cases the stock could be worth as much as $1.40 using a return on equity of 40 per cent or $1.94 if profitability increases.
