Send me real-time posts from this site at my email
Motley Fool

Why Is Tencent Trying to Take Over Bitauto?

Tencent (OTC: TCEHY) and its private equity partner Hammer Capital recently offered to take Chinese car comparison website Bitauto (NYSE: BITA) private at $16 per share. Tencent already owns a 7.8% stake in the company, which went public in late 2010 at $12 per ADS.

Tencent's proposal is backed by Bitauto's other shareholders -- including its e-commerce partner (NASDAQ: JD) -- which own over 48.5% of the company. If the buyout is approved, Bitauto's shares will be delisted, and the company will become a private subsidiary of Tencent.

Image source: Getty Images.

What does Bitauto do?

Bitauto's website provides consumers with data and prices for vehicles, and connects shoppers with dealers of new and used cars. It mainly generates revenue from ads, site subscriptions, transaction services, and digital marketing solutions for automakers.

Bitauto's platform is integrated into Tencent's WeChat, the most popular mobile messaging app in China, as well as JD's online marketplace. However, Bitauto's revenue growth has still decelerated significantly over the past five years, with inconsistent earnings growth.

YOY growth












Net income*






*Non-GAAP, RMB terms. Source: Bitauto annual reports.

That slowdown occured for two main reasons. First, the company faces tough competition from its main rival Autohome (NYSE: ATHM). Second, sales of new cars in China have fallen annually for 13 straight months through August, and Fitch Solutions projects a 9% drop for the full year.

The industry's major headwinds include a weakening domestic economy, tighter emissions standards throttling sales of new vehicles, reduced government subsidies for EVs, and a speculative real estate market pulling cash away from the auto market.

As a result, analysts expect Bitauto's revenue to rise just 3% this year as its earnings dip 5%. Autohome is expected to fare better, with 13% revenue growth and 5% earnings growth.

Why does Tencent want Bitauto?

Buying out Bitauto's remaining shareholders wouldn't be a big purchase for Tencent, which ended last quarter with 122.8 billion RMB ($17.3 billion) in cash and equivalents. At $16, Bitauto trades at about ten times forward earnings with an enterprise value of $1.1 billion.

Image source: Getty Images.

Tencent's online advertising business generated 18% of its revenue last quarter, but remains exposed to tough competition and macro headwinds. Therefore, integrating Bitauto's advertising platform into its own ecosystem (on WeChat, QQ, and other platforms) could boost the unit's growth.

Tencent can also tether Bitauto's financing arm Yixin more tightly to WeChat Pay, one of the most widely used payment platforms in China, and its own fintech platform. Tencent's new "fintech and business services" segment -- which houses its higher-growth businesses like cloud and payment services -- grew its revenue 37% annually last quarter and accounted for 26% of its top line.

Buying Bitauto also complements Tencent's push into the auto market via driverless cars and its new voice-activated version of WeChat for connected cars. Taking over Bitauto's partnerships with automakers and dealers could accelerate those efforts, and it can leverage those relationships to promote cars tethered to its own ecosystem over cars linked to rival services from Baidu or Alibaba.

All those strategies pivot Tencent's core business away from video games, which accounted for 31% of its revenue last quarter but remain vulnerable to competition, censorship, and tighter regulations in China. They could also widen its moat against Baidu, Alibaba, and other ecosystem rivals.

Be greedy when others are fearful

It might seem odd for Tencent buy an auto website when the auto industry remains in a slump. However, Tencent is betting that this downturn won't last forever, and that Bitauto's growth will rebound as the industry recovers.

When that happens, Bitauto's growth could complement Tencent's other investments in connected and driverless cars, payment systems, fintech, and advertising. In short, Tencent is adhering to the classic Warren Buffett strategy of being "greedy when others are fearful," and it could pay off over the next few years.

10 stocks we like better than Tencent Holdings
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Tencent Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of June 1, 2019

Leo Sun owns shares of Baidu,, and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu,, and Tencent Holdings. The Motley Fool has a disclosure policy.


Popular posts

Welcome!!! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue