eHi Car Services is the largest chauffeured services car company in China, and second largest rental business in terms of fleet size. At the end of 2014, they operated more than 18000 vehicles in rental segment (70% of revenue) and 1300 vehicles in car services (30% of revenue) for a total of more than 19 000 (9800 in 2012). Fleet utilization stood at 71.8%, up from 70.5% in 2013. Number of covered cities also increased from 48 to 99. Ehi Car also operates a peer to peer sharing service similar to Zipcar.
Car rental in China is booming
Everyone knows that Chinese car industry has seen unprecedented growth in the last decade, car ownership increased significantly, although as of 2013 it was 101 cars per 1000 people, which is very low compared to USA's 800 cars per 1000 people. China has a big pollution problem, and the government already limits car ownership in certain big cities, not to mention scarce parking. Revenue in car rental market is rising much faster, from 9 billion yuan in 2008 to 34 billion yuan ($5.6 billion) in 2013 —and it is expected to reach 65 billion yuan by 2018 according to Roland Berger Strategy Consultants.
China has more than 13 000 car-rental firms, however the whole industry had a combined fleet size of only 369,000 vehicles in 2013, about 0.4% of the country’s passenger vehicles outstanding. Compare this to 1.6% in the U.S. and 2.5% in Japan.
Competition
The industry has two major players, CAR Inc (Owned partially by Hertz Global) and eHi Car. Enterprise Holdings, largest car rental company in USA has acquired a 20% stake in EHIC, marking it's entry in China. CAR is a bigger company by any metric and also holds larger market share (7% according to Frost Sullivan), while EHIC stood at 2.1% in 2013. However, EHIC is growing revenes at a faster rate 50% vs. 30%. Both companies are investing heavily to expanding their fleets and number of cities, hence their earnings and cash flow are depressed (although CAR achieved profitability in 2014, with a 12% profit margin). Let's look at EHIC financial statements:
Car rental in China is booming
Everyone knows that Chinese car industry has seen unprecedented growth in the last decade, car ownership increased significantly, although as of 2013 it was 101 cars per 1000 people, which is very low compared to USA's 800 cars per 1000 people. China has a big pollution problem, and the government already limits car ownership in certain big cities, not to mention scarce parking. Revenue in car rental market is rising much faster, from 9 billion yuan in 2008 to 34 billion yuan ($5.6 billion) in 2013 —and it is expected to reach 65 billion yuan by 2018 according to Roland Berger Strategy Consultants.
China has more than 13 000 car-rental firms, however the whole industry had a combined fleet size of only 369,000 vehicles in 2013, about 0.4% of the country’s passenger vehicles outstanding. Compare this to 1.6% in the U.S. and 2.5% in Japan.
Competition
The industry has two major players, CAR Inc (Owned partially by Hertz Global) and eHi Car. Enterprise Holdings, largest car rental company in USA has acquired a 20% stake in EHIC, marking it's entry in China. CAR is a bigger company by any metric and also holds larger market share (7% according to Frost Sullivan), while EHIC stood at 2.1% in 2013. However, EHIC is growing revenes at a faster rate 50% vs. 30%. Both companies are investing heavily to expanding their fleets and number of cities, hence their earnings and cash flow are depressed (although CAR achieved profitability in 2014, with a 12% profit margin). Let's look at EHIC financial statements:
Revenue growth is accelerating (50% vs. 26% in 2013), margins are improving, one warning sign is that receivables grew faster than revenues (89% vs. 50%). In the latest quarter, the company held more than 150 million USD in cash, which should cover a major part of their expansion plans. Long-term debt stands at 115 million, but EHIC generated 7 million in operating cash flow last quarter, so they should be able to repay it over time. The company is growing mainly by adding buying more cars and adding cities, but also thanks to an increasing average daily rental rate - 176 RMB from 163 RMB in 2013 (6% growth).
EHIC and Didi Kuaidi, China's Uber
The interesting thing about EHIC stock is, that in April 2014 they purchased 4.7 million preferred shares in Travice Inc. for $25 million, representing 8.4% of then outstanding capital. Travice operates Kuaidi Taxi application, which merged with Didi app, forming the largest car sharing application to fight Uber in China. The new company has a market share of 99%, significantly slowing down Uber, which entered late into Mainland China. Recent funding deals increased value of Didi Kuaidi to $8.75 billion, with Farallon Capital Management, Coatue Capital, Tiger Global and Alibaba (BABA) among investors.
EHIC still carries the original investment at a value of $25 million on their balance sheet, although their stake in the combined Didi Kuaidi entity is certainly diluted, even 1% would give them a value $87.5 million, or 11% of current market cap ($800 million). Value of this holding is expected to grow in the future, once they cement their dominant position and start monetizing the car sharing app.
Summary
EHIC is a fast growing company in an infant industry. I expect it to grow significantly, and achieve profitability in next 3 years. It might seem expensive at P/S of 5, but with possible profit margins around 10% (CAR Inc had 12% last year), accelerating growth and interest in Didi Kuaidi, EHIC stock offers a lot of potential. Their competitive advantage lies in the chauffeured services market, where the Chinese government selected them as their preferred transportation provider. Also, they signed a deal with Ctrip.com (CTRP), where they provide pickup and transport from airports to corporate clients and individuals. CTRP also invested $100 million into EHIC.
Before it went public, there were allegations that the company misrepresented it's statements and conducted fraud. These were not yet confirmed, as I couldn't find any hard evidence, also short float is quite low (8%). I think the stock offers big upside at current prices, with some risks which are worth taking. I am going long today (5% initial position), with a stop loss like always. Tiger Global and SRS just announced a private placement to invest in EHIC stock, we will see what it does today but I will definitely buy this company.
Good luck in investing!
EHIC and Didi Kuaidi, China's Uber
The interesting thing about EHIC stock is, that in April 2014 they purchased 4.7 million preferred shares in Travice Inc. for $25 million, representing 8.4% of then outstanding capital. Travice operates Kuaidi Taxi application, which merged with Didi app, forming the largest car sharing application to fight Uber in China. The new company has a market share of 99%, significantly slowing down Uber, which entered late into Mainland China. Recent funding deals increased value of Didi Kuaidi to $8.75 billion, with Farallon Capital Management, Coatue Capital, Tiger Global and Alibaba (BABA) among investors.
EHIC still carries the original investment at a value of $25 million on their balance sheet, although their stake in the combined Didi Kuaidi entity is certainly diluted, even 1% would give them a value $87.5 million, or 11% of current market cap ($800 million). Value of this holding is expected to grow in the future, once they cement their dominant position and start monetizing the car sharing app.
Summary
EHIC is a fast growing company in an infant industry. I expect it to grow significantly, and achieve profitability in next 3 years. It might seem expensive at P/S of 5, but with possible profit margins around 10% (CAR Inc had 12% last year), accelerating growth and interest in Didi Kuaidi, EHIC stock offers a lot of potential. Their competitive advantage lies in the chauffeured services market, where the Chinese government selected them as their preferred transportation provider. Also, they signed a deal with Ctrip.com (CTRP), where they provide pickup and transport from airports to corporate clients and individuals. CTRP also invested $100 million into EHIC.
Before it went public, there were allegations that the company misrepresented it's statements and conducted fraud. These were not yet confirmed, as I couldn't find any hard evidence, also short float is quite low (8%). I think the stock offers big upside at current prices, with some risks which are worth taking. I am going long today (5% initial position), with a stop loss like always. Tiger Global and SRS just announced a private placement to invest in EHIC stock, we will see what it does today but I will definitely buy this company.
Good luck in investing!
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