58.com Leads China's Hot Online Classifieds Market

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Investors are feeling a little more comfortable about Chinese listings in the U.S. than they were a couple of years ago, when accounting scandals at some firms rocked the whole stock boat from China.

Take Beijing-based58.com ( WUBA ) . Its U.S.-listed shares, which popped in Friday trading, are up 84% from the Oct. 31 offering price of $17.

Founded in 2005 and known as the Craigslist of China, 58.com is the top online classified advertising player in China, providing a market for consumers and small and medium-sized businesses.

Products and services offered on its site include housing, jobs, used goods, autos, home care, travel and business services, among others.

But it hasn't been entirely smooth sailing for Chinese stocks.NQ Mobile ( NQ ), a Chinese security software developer, lost about half of its value on Oct. 24 when research firm Muddy Waters alleged "massive fraud," and several other Chinese stocks traded in the U.S. saw their shares stumble as well. Many of the others dragged down by NQ have since recovered.

China's New Issues

The average total stock appreciation of the eight Chinese companies that have listed in the U.S. this year was 61% as of Thursday's close, says Stephanie Chang, research analyst at Renaissance Capital.

Investors "remain selective," she says. For example, she says, online retailerLightInTheBox ( LITB ) is off its June offering price due to "company specific" issues -- shares were down about 15% from the IPO in Friday trading. The company's Q2 revenue as well as sales guidance for Q3 were well below Street expectations.

"We think (58.com) has tremendous growth potential given the nascent nature of China's online classifieds market, which is expected to grow at a 53% compounded average growth rate through 2017," Chang said by email.

China's online classifieds market currently accounts for 15% of total classified advertising, according to iResearch.

58.com has seen "massive growth" over the past two years, she said, "and unlike many high-growth tech companies, it is profitable."

It became profitable in the second quarter of this year. Net income in the third quarter -- its first as a publicly traded company in the U.S. -- totaled $9.3 million, compared with a net loss of $5.9 million a year earlier. In terms of per-share American depositary receipts, it earned 10 cents vs. a 40-cent loss.

As much a jump as that was, earnings came in 2 cents below analysts' consensus, which caused the stock to fall 10% the day results were released on Nov. 27. Shares had risen to as high as 38.70 on Nov. 22. Shares have moved up recently, but the stock is still 21% off that high.

Pacific Crest Securities analyst Cheng Cheng blames the slight earnings miss for the stock's rocky performance since then. But he thinks the company still has lots of room to grow.

He figures it's only tapped about 10% of its potential membership opportunity, for one thing. And he says it'll likely grow into new verticals and field new ad products.

The company's total revenue in Q3 increased 77.6% from the earlier year to $41.6 million. Management expects Q4 revenue of $41 million-$43 million, for a year-over-year gain of 65.9% to 74%.

Money From Members

Nearly 60% of Q3 revenue came from membership fees from a portion of merchants selling on its platform. These merchants pay monthly, quarterly or yearly fees to have their listings placed above free listings, Cheng says. "It's kind of a pseudo advertising revenue stream," he said in a phone interview.

Membership revenue jumped almost 80% from the year ago period, driven by a gain in the number of paying merchant members, which increased 73% to 353,000.

The other 40% of revenue was from online advertising. That included search-engine revenue sharing from partners such asBaidu ( BIDU ), real-time bidding and other marketing services such as priority listings and service agreements with third-party Internet companies. All depend on traffic and page views.

Revenue from online marketing jumped 112.4% from the year-ago period, due largely to the launch of the real-time bidding service in Q1.

China's local services market "is at the dawn of online budget migration," wrote Credit Suisse analysts Dick Wei and Evan Zhou in a recent initiation report on 58.com. They said 58.com is "riding at the top" of the online local services market. Further growth could come from new product categories and geographic expansion, they said.

One of the biggest positives for 58.com, Cheng of Pacific Crest says, is that 58.com's online business model is "very mobile ready," so users' transition to mobile devices won't be a problem. Another positive is that its location-specific products and services will become even more valuable in China's growing online classifieds' market.

"58 has been taking share from competitors," he said.

Of the top five online providers of classified ads in China last year, 58.com had the largest share at 38%, up from 23% in 2010, according to iResearch. Real estate and home-services portalSouFun Holdings ( SFUN ) was next with 27% share.

But the "space is competitive," Cheng said. One big concern is that some of the largest Internet companies in China, such as Tencent Holdings, Baidu and Alibaba, will offer more "overlapping services," especially on mobile devices. "People are watching how it will play out," he said.

Chang of Renaissance Capital agreed that the online classifieds market in China is "highly competitive and constantly evolving."

"(58.com) carries high execution risks as a relatively young company," she said.

But the Credit Suisse analysts wrote that 58.com has a big advantage as the leader in the Internet's fast-growing local services market in China. Plus it has a "strong brand name" and "good execution track record."

"We believe the local services market is a winner-take-all market -- with the leader gathering most of the market information," they said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BIDU , LITB , NQ , SFUN , WUBA

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