Country Garden Service – Initial Thoughts

Country Garden Service (6098.HK)

[August 24, 2019]

* Initial Thoughts *

Background

I came across this stock when reviewing post earnings release roadshow schedule. It showed up in various timeslots at different brokers’ venues. This indicates the market is interested in the stock and the company is happy to promote itself publicly.

Country Garden Service is a property management service provider and it has a related party, Country Garden (2007.HK) which is an HK-listed property developer / operator. Due to related party, there are basically two segments in Country Garden Service’s properties under management: 1st party (related party) and 3rd party. Before 1P / 3P mix becoming “balanced” in portfolio, path dependence governs the geographic cluster of properties and market segment of properties and their owners which has impact on the pricing and adoption of services offered.

Business Model

The company provides not only property management service but also property related services among daily demand and along the ownership life cycle. In addition, Country Garden Service engages in other property-related services and trajectory is to penetrate everywhere in the value network.

The business can be described as labor intensive but relatively less capital intensive. It can demonstrate economics of scale in area with high density of property under management and probably on higher geographic level. On the service side, it’s about up-sell and cross-sell to drive revenue contribution on top of basic management fee.

One of key characteristics of this business is high stickiness of customer. Generally, property owner is less likely to change property manager as the switching cost is high. The customer relationship gets deeper as time goes by. Low churn rate and cross-sell / up-sell opportunities will lead to healthy net dollar retention on property level. Long lifetime real estate and the net dollar retention will translate into impressive customer lifetime value. When you have a related party that is doing property development, you probably won’t spend a lot on customer acquisition. CLTV/CAC should be very attractive.

Company Specific before Meeting Management Team

  • I like their presentation. It seems the company has put some efforts on it.

Next Step

  • Basically, every leading property management player should be able to adopt similar business model. So why Country Garden Service? Maybe there are other more attractive targets. This needs a comp analysis.
  • What is the real customer experience? If actually reception is bad, the strong stock price development might attract short sellers with reports distributed.
  • See if I can meet the management team next week.
  • Not sure if on-site visit is needed.

* Related Posts After This *

[2019/8/26] Country Garden Service – Meeting Note 1

58.com – Initial Thoughts

58.com (WUBA.US)

[August 23, 2019]

* Initial Thoughts *

Background

I came across this stock when trying various online stock analysis tools. I listened to its 2Q2019 earnings conference call and briefly reviewed most recent company presentation. I found 58.com interesting because of its business model and new business initiatives such as 58 Town and Zhuan Zhuan (used goods marketplace) since they are to some extent related to my Pinterest analysis.

Business models

58.com and 58 Town are classifieds focusing on cities and rural areas respectively. One of the key concept for this type of platform is liquidity / density on each category / vertical. Eventually, the platform tends to concentrate on certain categories (58.com as example: jobs, real estate, used goods, automotive, and yellow pages and local services). Another concept is that certain verticals in the horizontal marketplace might be better served with dedicated products – described as unbundling / rebundling craiglist.

Unbundling

unbun

Source: The Gong Show by Andrew Parker

Rebundling

dead-unbundle

↓↓↓

rebun

Source: A CROWDED SPACE by Josh Breinlinger

What 58.com is doing

58

Current challenge and opportunity

  • Macro headwind has negative impacts on certain categories such as housing and jobs.
  • There are some progress on 58 Town and Zhaun Zhuan. 58 Town has shown trajectory similar to 58.com in early stage per management team. The go-to-market strategy of 58 Town is social graph-based and has a an official “node” on each “town”.
  • 58.com’s business models are well-understood and not very exciting. The company faces competition at different degree on each vertical / category. The entry barrier is not from technical side but from indirect network effect. Experience in execution and traffic / brand of 58.com are asset for vertical player incubation.

Next Steps

  • Some initial analysis and talk to management team next week if possible
  • Revisit Mercari (Japanese used goods C2C marketplace player)
  • Pinterest business model analysis on parallel

PDD.US – 3Q18 Results Quick Look

Projection vs Actual

Blog_PDD_3QFvA

Source of Difference

~ Operation Metrics ~

[1] Conversion rate defined as LTM Active Buyer / Avg. MAU decreased (an improvement for me) significantly by around 10 percentage points.

Conversion_3Q18

[2] Actual LTM average rate per active buyer is higher then projected

[3] Overestimation of adoption rate based on Wechat MAU

[4] Underestimation of monetization rate

~ Resulting Financial Results ~

[Revenue] Slightly overestimated by 1.9%, after factor in all top-line related operation metric estimation difference

[Gross Profit] Underestimated Gross Profit Margin by 1.5 percentage points. The absolute amount is luckily inline.

[Sales & Marketing Expense] Slightly overestimated by 1.4% which means the my LTM CAC approach and parameter estimation were both fine in 3Q18.

[General & Administrative Expense] Underestimate a lot due to noise of one-off share-based compensation in 2Q18. Now we have a clearer ratio (and hopefully more stable) to project going forward.

[Research and Development Expense] Underestimated the R&D exp ratio by 2.8%. Basically it’s at management’s discretion so if the company thinks it’s too early to provide guidance, what we can do is guessing based on historical data or other information.

[Operating Loss] Taking into above deviation, operating loss was underestimated by 33%.

[Interest income] Will start model the line item based on beginning all cash position + short-term investment

~ Implications ~

  • User engagement gauged by LTM Active Buyer / MAU is improving. The characteristic of metric indicates further decrease in metric for next few quarters before stabilization.
  • The characteristic mentioned above might show in the monetization rate as well.
  • While unit economics further deteriorated this quarter, the cash burn is very likely to be covered the cashflow PDD extracted from the marketplace (changes in net working capital). This is very favorable for platform to scale up. In addition, the marketplace finance might a major source of profit contribution in the future.

UnitEcon_3Q18