Valuation of Wuba's listing and online-marketing business

After the acquisition of Ganji.com, 58.com became the largest 'Craigslist' in China, well ahead of the third-place player, Baixing.com. In this article, I will value the bread and butter of 58.com, the listing and on-line marketing business segments.

1. Size
After acquisition, the revenue in FY2015 is about US$680 million (consolidation of Ganji started in 3Q15). Since 58.com has 827,000 merchant users in 2015, and comparing the 7 million merchants on Taobao, we suggest that the size of 58.com can be even bigger.
After acquisition, it is possible that 58.com would have a higher pricing power. However we should consider the alternative of merchant payers - they can always post on Baixing.com, or simply use offline advertising methods.

2. Growth
Since 2013, this business segments have enjoyed 100%+ yoy growth. On the other hand, the sales and marketing expenses are growing at 150+%. It's questionable that 58.com's growth is healthy, if they can't sustain a spread between the cost of traffic and revenues from their users.

3. Margin
The net income margin has been negative before year 2013, which is common for platform-type business - spending money until certain scale is achieved. In 2013, 58.com has a net profit margin of ~10%, which is at lower end of other online listing companies, like SouFun (NYSE: SFUN, 30~40% NI margin), Leju.com (NYSE: LEJU, ~10 NI margin) and 51job (Nasdaq: JOBS, ~30% NI margin).
Why is 58.com's margin at lower end?
We suggest that 58.com lacks the bargaining power with merchant users, if they can't provide the added value other vertical platforms have offered.

4. Asset intensity
58.com has kept negative net operating assets until they take on US$3+billion goodwill after a spree of acquisitions in 2015.


5. Business Risk
We should keep in mind that 58 Home is actually competing with merchants using their platform. For instance, real estate, moving and trucking, and home service providers are key users of its platform. However, the penetration of 58 Home can cannibalize its platform users.

6. Leverage
58.com has no debt and thus low leverage ratios.


7. Valuation

For the base case valuation, we believe  3x trailing P/S should be a reasonable valuation multiple, which leads to a valuation of US$1.8 billion.

Key follow-ups
8 million interest expenses.
Minority interests after tax.

O2O business in perspective

O2O has been one of the hottest buzzword in China since 2015. Baidu (Nasdaq: BIDU), Alibaba (NYSE: BABA) and Tencent (OTC:TCEHY) , or "BAT" as an acronym, all heavily invested in this business model. In this article, I will put O2O in perspective.

#1) Definition
Simply put, O2O or online-to-offline is the link between 'online discovery' and actual commerce in the physical world.

Groupon (NASDAQ: GRPN), OpenTable (acquired by Priceline in 2014), Uber and ClassPass are examples of O2O business.

In china, the O2O market is dominated by BAT. The current landscape is as below:

(Source: Firelood)

#2) O2O in the U.S.
The Silicon Valley is always the bellwether of Innovations. However, China sees a more dynamic O2O market. Both in the size of investments and number of firms.

One reason is the higher penetration rate of mobile payment in China.

 (Source: Innovation is Everywhere)


#3) O2O vs. 'online IT system'

The service sector has following factors:
1. Lack of scalability
Humans are different from machines, who need training and management.
It also takes considerate resources to transfer a service provider from one location to another.

2. A fine line between 'shared economy' and 'pseudo e-business'
The difference is similar to those between Uber and Shenzhou Car Rental (HKG: 2312). The former benefits from 'shared economy' and a larger scale brings profits; the latter is traditional business with an online IT system, and a large scale will amplify existing loss.

Valuation of 58 home

58 Home is the O2O segment of 58.com. Currently it has three verticals, namely home services, truck and moving, and manicure business. In this article, I will use Some of Parts method to value 58 Home.



 

Implied valuation

In 2015, 58 home raised US$300 million from Alibaba, KKR and Pingan, which implied a valuation of $1billion.

  



1. Home services
In this segment, 58 Home directly compete with 1jiajie. Founded in 2011, 1jiajie was listed on China's OTC market in 2016, with a valuation of ~US$800 million. It's worth mentioning that Tencent is a key share-holder of 1jiajie, owning 20%+ shares.
- U.S. benchmark
Home Server USA is a comparable company, although it's more focus on plumbing services. It's founded in 2002 and currently has 700 employees and US$300 million revenue

2. Trucking and moving
This segment seems to be most fragment. Mayibanjia is a notable competitor, with ~700 trucks and ~3000 employees. It's an assets heavy business.

- U.S. benchmark
U-Haul International ("U-Haul"), a subsidiary of AMERCO, can be a proxy. In additional to moving business, it's provides self-storage spaces. The total revenue of U-Haul is US$1.87billion in 2007.

3. Manicure business
Helijia is the direct competitor of 58 Home in this segment. Helijia raised US$50 million in 2015 and was valued around UD$300 million.
Manicure services are commonly provided at saloon or beauty shops. Since it takes time for service providers to travel to clients' home, efficiency may be lower.
For instance, assume each nail technicians work 8 hour a day and servers each client for 1 hour. If it takes 0.5 hour to travel to clients' home, the number of clients served will decrease from 8 to 5; if no price hikes for services provided at clients' home and assuming US$40 per service, each nail technicians suffers US$2640 (22*3*40) revenue loss per month. In China, US$2640 can rent a decent small saloon in 1-tier cities.
Put in other words, it's still uncertain this business model is sustainable and provides extra value.

- U.S. benchmark
The manicure business is quite fragmented and there has not be similar services provided at home.

Current conclusion
The O2O business is still at an early stage. It's highly likely some giants will emerge in certain verticals and consolidate the current fragmented industries. However, the fundamental premises will be:
1. A generic platform can't compete with BAT
2. If a platform is trying to transform to a vertical service provider, it will endure painful and longwinded process, running a risk of losing current users on its platform

That being said, the internet business is rapidly changing in China and a strong management team that can switch gears is essential. Michael Yao, the CEO of 58.com, seems to enjoy deep networks in the internet industry. One example is that 58.com and 58 Home received financing from both Tencent and Alibaba.

Based on current information, we suggest the valuation of 58 Home in line with the fund raising valuation of US$1 billion. 

Some other backgrounds
O2O is a highly competitive and money-burning. It has been a norm to subsidy users and service providers to try out the O2O services, which can easily escalate to 'subsidy wars'. Users' stickiness is low, and GMV is highly correlated with amount of subsidies.

58 Home targets to generate total GMV of Rmb12-15 bn in 2017

wuba data 0509

"58帮帮":173万次下载
"58速运":17万次下载
"58违章查询":1878万次下载
"58影院":1万次下载
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"好利58":1千次下载
"58车贷":258次下载
"转转":260万次下载
"58招才猫":27万次下载
"速聘•58赶集":2万次下载
"赶集生活":3475万次下载
"58速运司机端":3万次下载
"58到家":63万次下载
"58同城":6644万次下载
"58配配":8万次下载

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