Why Latin America is the Hotspot for this Billion Dollar Company

Why Latin America is the Hotspot for this Billion Dollar Company

Last week, my girlfriend decided to sell her car.

Now I’m not a ‘car guy’, but when I look at that car I don’t see a vehicle. I see the trip we made to Lorne on the Australia Day weekend. Or the fun we had driving too Mt. Hotham to catch the last bit of snow.

Yet, we made up our minds. The car is going.

With used car dealerships offering us less than half of what the car’s worth, we opted to sell it ourselves online.

If you’ve ever sold a car online before, you’ll know how easy it is. You upload some pictures and basic information, and then wait. It only took two days for buyers to contact us.

It’s a typical process that thousands of Australians do every year. And it’s quickly becoming the preferred method for buying and selling used cars.

In Accenture’s 2015 Automotive Survey, a majority of consumers disliked dealerships. In fact, 75% of the 10,000 people surveyed said that ‘if given the opportunity, they would consider making their entire car-buying process online, including financing, price negotiation, back office paper work and delivery.

It’s a preference that’s made the auto-classified businesses extremely profitable.

What to do when growth slows down?

Australia’s biggest auto-classifieds business is Carsales.com.au Ltd [ASX:CAR]. In FY16, they generated $344 million in revenues. Around 31.77% trickled down to net profit after tax. That’s huge considering the industry average is only 5.84%, according to Reuters.

How do they make money?

From online advertising, data & research, and finance related services. Online advertising made up the majority of sales (69%) in FY16.

Putting your car on Carsales’ website isn’t free. That is unless you sell your car for under $5,000. Carsales charges $65 dollars for a standard ad, and $135 for a premium ad. They even get ad revenue from automotive manufacturers trying to capture the online buyers.

But sales growth has been sporadic over the past five years. From 2012–16, growth ranged from as high as 32% to as low as 9.5%. In 2015–16 the company saw its biggest dip in revenue growth, down 22%, to 10.3%.

Net profit growth has also steadily declined over the same period. From 2012–16 profit growth has trended down from 22.81% to 5.81%.

This slowdown in growth doesn’t sit well with management…or shareholders. Carsales intends to remain the dominant auto-classified business. And this ambition has made them look to other markets outside of Australia.

Biggest isn’t always the best

China’s automotive market is massive. It became the biggest in the world in 2009, and has remained so ever since.

But China isn’t the market Carsales have their eye on. Instead they are venturing into Latin America (LA). Their reason is simple; that’s where future growth will be.

In 2013, HIS Markit believed that LA was a growing hot bed for automotive sales.

The South American automobile market will grow significantly by 2025…IHS Automotive forecasts that nearly 2.3 million additional vehicles will be sold in South America by 2025, equal to the output of 10 modern assembly plants. Most of the growth will occur in Brazil, followed by Argentina and Colombia.

Two years later, the growth HIS was talking about didn’t show up. The overall LA automotive market declined, excluding Mexico. But in 2016, the story flipped.

Countries like Chile, Brazil and Mexico all posted great domestic sales growth for the year, growing sales by 6.1%, 9.8% and 19.9% respectively year-on-year.

Carsales believes LA is the place to be in the next couple of years — and they’ve invested heavily in the region.

In March, 2016, Carsales bought an 83% stake in Chileautos, Chile’s largest online automotive advertisements website. And the buying hasn’t stopped there. Carsales wants to become the dominate player in the region. And it’s lead them to buy yet another LA auto business to strengthen their market presence.

Driving deeper into the Latin American market

On 31 January, 2017, Carsales bought DeMotores for $6.7 million. DeMotores runs auto-classifieds websites in Argentina, Colombia and Chile. Carsales said in an announcement:

The inclusion of DeMotores with Carsales’ existing investment in Brazil, Mexico and Chile makes us the number one online automotive classifieds network operating across the Latin American region.

This investment further capitalises on our work rolling out a Spanish language version of our world-class technology in Mexico and Chile and helps us continue to benefit from economies of scale in Latin America.

The company said Argentina is of particular interest. The country is continuing its positive transition under new president, Mauricio Macri. The country also recently increased auto sales by over 10% in 2016.

Carsales’ CEO, Greg Roebuck called Argentina ‘one of the most attractive markets in the region’. We’ll have to wait and see if the investment will be a success. The LA market has grown throughout last year. But the region’s track record is sporadic, much like Carsales’ own revenue growth.

Competitor Latam Autos Ltd [ASX:LAA] knows how hard the LA market can be. They jumped into the LA auto-classified market in 2013.

You need a lot of patience and drive to have a good crack at it,’ LAA’s CFO Gareth Bannan said. ‘Lots of gringos go from zero to zero in a year to 18 months.

It’s been almost a year since Carsales first ventured into Latin America. They increased international revenues by more than 50% in FY16. Newly acquired DeMotores will likely add to this figure.

The biggest factor likely to affect Carsales’ growth in the coming years is the prosperity of Latin America. Will the region prosper in the foreseeable future? Carsales’ hopes for stronger growth might depend on it.

Regards,

Härje Ronngard,
Contributing Editor, Money Morning

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Harje Ronngard

Harje Ronngard

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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