Roy Davidson, 1 February 2018

TradeMe 010218

Trade Me is the market leader in online auctions, motor classifieds and property classifieds, and is the second largest participant in online employment classifieds in New Zealand. It also has strong online businesses in accommodation, online dating, group buying and has recently launched Trade Me Insurance. TME has been at the forefront of New Zealanders’ migration online and away from traditional buying and selling through physical stores and printed classified advertising, since its establishment in 1999.

TME’s general items (auctions) business is an online marketplace where TME facilitates transactions by combining sellers (who provide inventory) with buyers, generating revenue through a mix of success fees, premium fees and other fees. TME holds a strong position in this sector. First mover advantage and strong network effect for buyers and sellers provides a significant barrier to entry to other players. The business is mature, but generates high margins and strong free cash flow for the group, which underpins its solid dividend. The business is also highly defensive, with little sensitivity to the economic cycle.

The imminent entry of Amazon into the Australian market has highlighted the competitive risks to TME’s existing business. Of primary concern is; 1) the potential negative impact on TME’s above-peer EBITDA margins, 2) slower growth trajectory for the marketplace segment, and 3) indirect impact on other segments (Jobs, Motors, Property) from reduced website traffic. While we acknowledge these risks, we note that competition is not new to TME (eBay been in Australia for 18 years), immediate pressure will be on new goods only (10% of TME revenues and notably different product mix to Amazon), and TME has a strong track record of investing appropriately to mitigate competitive impacts.

TME’s three main classified advertising businesses – Trade Me Motors, Trade Me Property and Trade Me Jobs – appear to have potential for yield (price) increases as the discount to printed advertising remains significant. However, TME’s attempt to change the pricing structure in Property to a per-listing model backfired as agents chose to remove listings for less active vendors, moving these to an industry-owned website and app instead. TME lost its market leadership of listings, though not of viewership, and eventually backed down on its price structure changes. This has mitigated the threat to the Property business, but makes yield growth harder from here. As such, TME is looking to new growth avenues and has been investing in its business.

TME has a solid set of diversified businesses with market leading positions and an established base of users that allows it to rapidly gain critical mass in new ventures. TME has many characteristics of a high quality online infrastructure company, with high operating margins and low working capital. The strong operating cash flows underpin a high return on equity and fund a reliable, growing dividend. However, we consider the share price to currently be trading at around fair value given competitive risks.

Risks to TME include: 1) economic downturn, 2) security breach, 3) increased competition.