ASX Stock Play: Australian online business models growing globally | S... https://user.stocksinvalue.com.au/reports/stock_plays/201508/asx-stock-...

StocksInValue Research | Print Date: 03rd November 2016 - 6:19pm

ASX Stock Play: Australian online business models growing globally

07th August 2015 - 11:46am

Analyst : Jonathan Wilson, Equities Analyst

Insights from: Adrian Ezquerro and Damen Kloeckner from Clime Asset Management

INTRODUCTION
Equity market themes are a useful way to identify stocks for further research. Many stocks have something in common,
for example exposure to a macroeconomic theme, a demographic trend, technological change, or shifting
policy/regulation. Our stock plays series applies thematic filters like these to identify lists of stocks set to create or
diminish - value. Price to value is still important and V/P ratios are presented for each stock.

SUMMARY:
In this note, we summarise our recent work on online businesses REA Group (ASX:REA), Carsales (ASX:CAR) and
Seek (ASX:SEK) as well as two emerging companies focused on South East Asian markets iCar Asia (ASX:ICQ), and
iProperty Group (ASX:IPP).

Online classifieds are characterised by the network effect where the portal (web+mobile) with the most listings attracts
the largest audience (and vice versa), leading to a monopoly industry structure. The degree of pricing power reflects a
portals value to agents/developers as a lead generator for sales.

In mature markets such as Australia where most of the advertising spend has migrated online the dominant player is
highly profitable. Early stage or contestable markets in developing countries are lossmaking because agents are price-
sensitive and competitors must invest heavily in technology and marketing to attract an audience.

STOCK PLAYS:

Value
Company
Stockcode To Rationale And Analysis
Name
Price

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Company
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Price

REA Group is one of the most profitable companies on the ASX due to network
effects and pricing power as Australias dominant online property classifieds portal.
Increasing listing volumes, the migration of advertising spending from print to online
and price increases have been the main revenue drivers for the group. Australia
provides ~90% of group revenues and will remain the largest region for some
years, however REAs long term outlook may also depend on the performance of its
REA.AX REA Group -5.0% international businesses, particularly in Asia and North America. REAs main
competitor domain.com.au is closing the gap on listing and subscribers with
aggressive marketing tactics. This expansion is a threat but it will not necessarily
disrupt REAs pricing power. With little room to build on REAs subscriber base,
location-based price increases and the spread of vendor paid advertising to other
areas will be important drivers of earnings growth.

CAR is one of the highest quality businesses on the ASX due to the strength of its
network effect as the clear leader in Australian online auto classifieds. The
company is however operating in an increasingly competitive market and pricing
power has begun to diminish with listing fee prices plateauing since 2011. Despite
competitive challenges, CARs commitment to innovation and user experience
CAR.AX Carsales.com -5.6% supports the sustainability of its network. With earnings momentum slowing in the
core business, future earnings growth partly depends on CARs investments,
including its vehicle finance business Stratton (50.1% ownership), the new
classifieds category Tyresales, and the portfolio of international auto classifieds
platforms, including Webmotors (leader in Brazil), Sken Car Sales (leader in South
Korea) and iCar Asia (South-East Asia, with leadership in Malaysia and Thailand).

SEK is a high quality business with profitability supported by the network effect and
pricing power it enjoys as Australias dominant online employment classifieds
portal. SEK continues to provide the most effective interface for matching hirers
and job seekers in the face of emerging competition from other providers such as
LinkedIn. SEK has bright long term prospects owing to significant international
SEK.AX Seek -0.6% growth potential. SEK has expanded in emerging markets with large populations
and low internet penetration. As internet penetration increases, the migration of
advertising from print to online should accelerate. If SEK can establish network
effects in these markets, a real possibility on current metrics, it could achieve its
objective to become the global leader in online employment.

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Value
Company
Stockcode To Rationale And Analysis
Name
Price

ICQ has established outright leadership in vehicle listings and audience volumes in
each of its markets in Malaysia, Thailand and Indonesia, crucial given the winner-
takes-all nature of competitive advantage in online classifieds. To establish this
dominant position, ICQ has been operating at a loss as the company invested
ICQ.AX iCar Asia significantly in technology and marketing. ICQ is expected to deliver losses for two
more years, so shares are likely to remain volatile until the company demonstrates
profitability. While ICQ is gaining momentum operationally and is available at
reasonable price, it is a long term investment and requires a multi-year view.

IPP operates the leading property portal in Malaysia, Hong Kong, Thailand, and
Indonesia, and the number two portal in Singapore. Cash collections continue to
rise and IPP is expected to break even for the first time at the group level this year.
Early signs are IPP could become the REA equivalent in the potentially much larger
SEA market, however its operations are still early stage and its markets are
immature. Like REA IPPs strategy has been to entrench itself with agents to
iProperty achieve leadership. One of the main differences between the markets in SEA and
IPP.AX
Group Australia, however, is developers account for ~75% of total real estate advertising
in SEA, much higher than in Australia, so strengthening relationships with
developers is a key focus. Leveraging its position as the dominant regional online
developer hub IPP recently launched a potentially high growth property
transactions business, an innovative ecommerce-style concept allowing online
sales of more vendible developer properties.

OWNERSHIP DISCLOSURES:
Our fund partner Clime Asset Management owns shares in SEK. Jonathan Wilson owns shares in SEK and IPP

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