The Motley Fool

Is iCar Asia Ltd the next Carsales.com Limited?

Carsales.com Limited (ASX: CRZ) is one of several successful Australian internet businesses trying to expand overseas. It’s of some interest, therefore, that the company owns shares in another publicly listed company, iCar Asia Ltd (ASX: ICQ). iCar Asia has essentially the same business model as Carsales, but owns websites in Malaysia, Indonesia and Thailand.

iCar Asia was founded by chairman Patrick Grove, who also founded ASX-listed companies iProperty Group Ltd (ASX: IPP) and iBuy Group Ltd (ASX: IBY). iProperty Group is a real-estate listing website that announced its maiden profit in FY 2013 and iBuy is an internet retail business, similar to Groupon in the sense that its websites offer discount deals for a variety of goods.

I’ve long had my eye on both iProperty and iCar, although I confess I was hesitant to buy shares in either. However, after Asenna Wealth founder Assad Tannous published some research on iCar Asia just over two weeks ago, I bought a small holding. While his research compared the company to Carsales.com, my purchase thesis rests mostly on the fact that iCar Asia is currently monetising its Malaysian website.

In an announcement to market in mid January, the company claimed that: “iCar Asia Limited’s Malaysian classified site, carlist.my, also commenced its dealer monetisation program during December, successfully signing close to 1,000 feature subscription contracts with customers, all of which commence on 1 January 2014.”

I think there is a case to be made that iCar is still available for a reasonable price, considering the company’s potential. Carlist.my may succeed in building the biggest car sales network in Malaysia. If it does, the network effect will provide pricing power, just as Carsales.com has pricing power here in Australia. A strong network effect requires numerous buyers and numerous sellers. Those conditions are met for car marketplaces, because almost anyone can buy a car, almost anyone can sell a car, and there are a plethora of dealers in the business.

The important question for me is whether iCar Asia’s websites will become dominant in their market, because even if only one succeeds, that would likely be enough to justify the company’s market capitalisation. At the same time, it’s worth keeping in mind that the fee charged for selling a car is limited by the value of the car itself. In this regard, car websites are at a disadvantage to real estate websites, because houses cost a lot more than cars (and as a result, real estate websites can charge a lot more).

iCar’s Malaysian website, carlist.my advertises over 43,000 cars for sale in Kuala Lumpur alone. In comparison, competitor mudah.my advertises over 23,000 cars for sale in Kuala Lumpur. However, Mudah has the slight advantage that it is a major classifieds website: so it has very high brand awareness. According to Alexa (a website information business), Mudah ranks ninth in Malaysia, whereas Carlist ranks 131. Nevertheless, I’d say iCar has a decent chance of winning that market, because it has more cars for sale. It is clear that management feels sufficiently comfortable with the lead to begin charging car dealers for listing cars on the website. If the website maintains its lead despite monetisation, then the company will be in a strong position to boost its lead by reinvesting in advertising.

While iCar looks like the favourite in Malaysia, iCar’s Indonesian website is a contender rather than the favourite. The company’s website Mobil123 ranks 477 on Alexa, against Trovit (ranked 193) and Tokobagus (ranked 12). While both those sites are general classified sites, Tokobagus advertises 207,000 cars against Mobil123’s 202,000 cars. The Indonesian market is particularly fragmented however, so there is certainly the potential for savvy acquisitions to win the market for iCar Asia, or for iCar Asia to find a buyer for its website.

iCar’s Thaicar.com may claim to be “Thailand’s No.1 Car Site,” but the Alexa rankings would imply otherwise. Competitors One2Car and Taladrod look like the main contenders to my eye. One2Car ranks 156  in Thailand and Taladrod ranks 216. Thaicar is a distant 1,235. Indeed, iCar Asia’s Thai car enthusiast website, Autospinn.com, is ranked higher at 843. There is no possible way that Thaicar’s users have the same value as Carsales’ users because Carsales has pricing power and Thaicar does not. To quote iCar CEO Damon Rielly in BRW: “It’s all about making sure we are No.1.”

Foolish takeaway

To my mind, the value of iCar Asia is mostly in its Malaysian business. While I prefer real estate website, iProperty Group as a business, I prefer iCar Asia at current prices. Shares are up over 20% in the last two weeks alone, and I am not a buyer at current prices. However, I believe this company should be on every investor’s watchlist. If iCar Asia widens its lead over competitors in Malaysia, the company is likely to easily justify its current share price. iCar Asia doesn’t have to do (anywhere near) as well as Carsales to be a good investment at current prices, it simply needs to own the dominant website in one of its markets.

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in iCar Asia, and welcomes feedback on his articles.

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