In my debut article, I decided to turn my attention to an IPO that might have snuck under the radar during the monster IPO week with juggernauts such as GM and BAH going public as well. While it did receive a brief shout out on "Mad Money" (with Cramer giving it his "Buy" approval), that seems to be it as far as media coverage goes and the bloggers and analysts seem to be quiet as well. In my mind, Bitauto Holdings seems like a very intriguing company, one that poses an extremely high upside to any investor willing to take a risk on an Chinese internet company that has posted a net loss of 122 million in the first nine months of 2010. This is mostly due to the uggs coupons change of value in it convertible bond, which has less to do with the business itself than it is a technical issue from converting some of it bonds into a fixed number of shares. That may stand to be a red flag for some, but where there is risk and doubt, there is also tremendous opportunity, and after scouring over the company's 100+ page SEC filing upon its public offering, I found a lot that I liked about the company.



First and foremost, lets see what BITA does. Accounting for 62.8% of their revenue, it is an automobile website that through subscriptions with new automobile dealers, enables users to browse, research, and view lists of prices and promotional information ugg australia outlet on new cars. Dealers pay for this subscription service in order to have their listings, promotions, and sales posted to a large number of viewers in hopes of attracting business. How large is this number of viewers? How about 76.4 million unique viewers, which may not seem impressive until you consider that number is 90% more than their closest competitor.



Their second largest source of revenue comes from their Digital Marketing Solutions service, which according to their press release, "provides automakers with onestop digital marketing solutions, including website creation and maintenance, online public relations, online marketing campaigns and advertising agent services." This is an exceptional service provided by the company, one that accounts for exactly 1/3 of their latest revenue reports. According to iResearch, only 7.4% of China total automobile advertising was designated to online advertising in 2009. This was a significant growth from the mere 3.3% spent in 2005, but still far from the expected 10.9% in 2013, according to the same research study. This of course is a huge attribute, one that will be most likely prosper from the future balancing of new and used cars being bought and sold in China, one that highly favors new cars in today market. Bin Li, the founder of the company has more than 10 years in the Chinese Internet industry, while also currently serving as the vicechairman of the China Automobile Dealers Association. This connection to a huge network of automobile dealers proves to be an essential competitive advantage for the company over it other competitors. Such a strong bond between an association of car dealers to a website that specifically relies on the business of those dealers is a big deal. As vicechairman of the CADA, Mr. Bin has a direct channel to not only market his company, but also communicate with his potential customers on how exactly the internet industry (aka bitauto/ucar) can help them grow their business.



The president of the company, Mr. Jingning Shao has quite an impressive resume himself. His last gig before making the move to bitauto was general manager of business operations for Sina, a Chinese online media company that has rewarded shareholders with a 140% return since it IPO in 2005. Specifically, during his implementation of GM of Business Operations for Sina in 2007, the company posted significant gains, along the lines of 57% in his first year on the job.



The CFO of the company, Mr. Xuan Zhang, has over 10 years experience in accounting and finance, holding previous jobs with Ernst Young and PricewaterhouseCoopers LLP. This proves significant in my eyes, because as many of us know, the accounting principles used by many Chinese companies has led to numerous downfalls. An example of one of these accounting errors is that of Duoyuan Global Water and Duoyuan Printing, both of whom shared the same accounting department, and both suffering serious losses to the stock (69% and 59% YTD) after news of shaky accounting was announced. Now Mr. Zhang previous jobs do not guarantee anything, but with experience of being employed by multiple bigfour firms, we can at least expect that the CFO knows the consequences of what happens when a firm has poor accounting practices.



The Growth



Research indicates that as a percent of total car sales in China, new cars account for 80.7% while used cars only account for 19.3%. We can expect that over time, China percentage will most likely correct itself to fall in line closer to Japan or the United States.



New/Used Automobile Sales as Percent of Total Sales



As stated in the report, used automobile market in China is still at an early stage of development, but is expected to grow quickly at a CAGR of 31.9% to reach 10.0 million units in 2013, according to CADA, driven by an overall increase of automobiles in the market and shorter average automobile holding periods, among other factors. Not exactly the 90% that bitauto boasts, but still am impressive lead that the company expects to build on, as they have increased their spending on R each of the last three years.



We can also not look past the fact that there are A LOT of cars to be produced and bought in China in the near future, and the chart below expresses just how few automobiles exists in China when compared to the population.



Combine the growth in general car sales with the growth of Internet, and BITA seems to be prospering from more than one catalyst in China. Internet usage in China is expected to grow from 480 million in 2010 to 664 million in 2013 for a CAGR of 14.7%. We have seen how much Baidu has prospered from being the clear and cut leader of Chinese Internet search, and from what the numbers tell, BITA is solidifying itself as an industry leader in online automobile anything in China. As many of you know, the formula of (Industry Leader) +(High Growth Industry) x (Emerging Market)=$$$ to be made, and BIDU is the perfect example of that. All the pieces seem to be in place for BITA to make a nice run in the next year or so (pending no major market downfall), and I for one am positioning myself for a nice into the profits.



I think that the conversion in bonds is a good indicator that the bond holders see more reward in holding equity. This is an upside for the company since now it has to worry less about meeting certain obligations and can pay out more in dividends and use some to plow back into the company. The downside is that they take on some extraordinary losses now. Even then I don't believe the result of conversion effects their cash flows so this really only impacted the net income because of accounting rules and not due to relevant economic factors. Seeing the expanding population in China and other parts of Asia, the company has a lot of room to grow and explore new segments. I'm surprised this IPO didn't get enough coverage. How did you find out about it?Steven Ferreira



Steve,Great insight and feedback. I found the stock on a list of IPO's for November, and it seemed to have a more high risk/high reward quality than GM, which I am not the biggest fan of. I had some spare time in the midst of traveling, and decided to read BITA's 100page SEC filing. After I was done, I decided that I found enough information that deemed it not only worthy of some investment on my part, but also worth writing an article about, especially due to the low amount of coverage it has received. Thanks for the interest!Ben