In a new report, Morgan Stanley analyst Ben Lin updated the firm’s projections for 58.com Inc (ADR) WUBA based on the most recent economic numbers out of China. Despite scaling back many of its financial estimates, the firm upgraded the Chinese online classified market company from Underweight to Overweight based on its long-term growth potential.
Significant Forecast Reduction
Much of the reduction in Morgan Stanley’s earnings expectations for the next two years comes as a result of the company’s acquisition of a 43 percent stake in rival Ganja earlier this year. Morgan Stanley is now calling for a pro-forma core business loss of $190 million in fiscal 2015 and new business investment of $250 million through 2016.
The firm is still predicting staggering growth numbers from 58.com, including 55 percent compound annual revenue growth over the next three years and net margins of 15–20 percent. In addition, Lin predicts that the business will return to profitability within a year.
DCF Analysis
58.com’s stock has taken a major nosedive as the Chinese equity market has crashed. The stock was recently trading about 50 percent off its all-time highs.
According to Lin’s analysis, the stock is now trading at 5x fiscal 2015 price/sales and 33x FISCAL 2017 price/earnings. While these numbers may seem relatively high, he believes that the extremely strong growth outlook leaves plenty of room for upside.
Outlook
Overall, Lin sees the company’s recent acquisitions as a positive and believes that they have added to its dominant market share in several categories. “We view 58.com as well positioned to capture the significant growth potential in China’s online classified market, given low SME online ad penetration,” Lin explained.
In addition to the Overweight rating, Morgan Stanley raised its price target for 58.com from $37.30 to $65.00.
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