In technology, the investors who get in early achieve the best returns. Getting in early allows compounding to work its magic longer. It gives investors more shares with the same amount of capital. It makes the founders and early backers of successful tech companies very wealthy. But getting in early also has risks. Companies early in their life cycle lose money. Because they are in unproven markets, young companies don’t face competition from industry giants until later. For the companies that survive the competition, some will have a difficult time converting revenues into profits.
Ehi Car Services Ltd (ADR) (NYSE:EHIC) is a company early in its life cycle. eHi Car Services is China’s number two car rental provider in terms of revenues in 2013, and has over 1,200 service locations found throughout 100 of China’s cities. The company is growing rapidly. In the first quarter, eHi Car Service’s net revenues increased 60.7% year-over-year to $47.7 million, and its fleet size increased by 81.7% year-over-year to 24,362 vehicles.
eHi Car Services is currently in the ‘show me that you can really execute’ stage, where the management has to convert growth and revenues into profits. While the company wasn’t profitable last year or in the first quarter of 2015, analysts expect it to earn $0.21 per share in 2015 and $0.70 per share in 2016. If eHi Car Services’ management executes and delivers profits while maintaining long-term revenue growth of 30-40%, it has considerable upside. Assuming a PEG of 1, 2016 EPS of $0.70 per share, and an EPS growth rate of 30-40%, eHi shares should trade around $21-28 per share by the end of 2016.
A major hedge fund believes that eHi Car Services management will execute. According to a 13D filed with the SEC, Chase Coleman‘s Tiger Global Management LLC now owns 9.4 million shares of eHi Car Services, or 21.5% of the company. Given that Tiger Global had no shares at the end of the first quarter, Tiger Global likely bought the shares during eHi Car Services’ secondary offering, in which the company raised money at $12/American depository share in a private placement of common stock in late May. Tiger Global joins several other hedge funds as major owners of Ehi Car Services Ltd (ADR) (NYSE:EHIC). Kingdon Capital Management owns 488,100 shares and Millennium Management owns 105,872 shares too.
While Tiger Global’s purchase is a big vote of confidence for eHi Car Services’ management, there is a caveat. Because Tiger Global has stakes in many tech companies, both public and private, eHi Car Services could go under and Tiger Global could still do well. All Tiger Global needs is for one of its many portfolio assets to become the next Facebook, and it will have good returns. Regular investors who don’t have the same risk tolerance as Tiger Global should not necessarily invest in the company. In the long run, Ehi Car Services Ltd (ADR) (NYSE:EHIC) will face increasing competition from car sharing apps that obviate the need to rent a car for many people. This will require continued stellar execution from eHi Car Services’ management in order to deliver value to shareholders, which can not reasonably be relied upon.
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