Pacific Online (543.HK)             BUY (TP: HK$2.68 (from HK$2.57))

To ride with the strong auto sales growth

Pacific Online’s (PO) flagship portal PConline has reached its mature phase of growth, and we estimate revenue from this portal to grow annually at a single digit pace.  Going forward, we expect PO’s main growth driver to come from its PCauto portal, which we forecast revenue to grow at a CAGR of 31.4% for 2009-2012.  Auto sales in China have surpassed that of U.S. with 13.6m units sold in 2009, at a YoY growth of 45.5%.  We expect the strong auto sales to translate into higher ad spending from auto companies, which in turn will benefit PO.  PO is trading at an ex-share based compensation (ex-SBC) PER of 9.7x for FY10F, which we find undemanding compared to its internet-related peers.  We have adjusted our earnings accordingly, and reiterate our BUY rating for the stock with a target price (TP) of HK$2.68 based on a target FY10F ex-SBC PER of 12x.

(We initiated coverage on shares of PO in July 2009, which has since risen 19.9%.  Research coverage of PO has now been transferred to Billy Leung.)

FY10F earnings back on track. We believe 1H09 earnings growth were subdued due to advertisers’ budget constraint after the “financial crisis”, but expect FY10F growth to revert to the norm.  We estimate FY10F net profit to increase 26.3% YoY with revenue growth from PConline and PCauto at 6.0% and 49.0% YoY respectively. 

Riding the auto sales growth. Going forward, we see revenue from PCauto to be the main driver of growth.  China’s annual auto sales by units have breached the 10m mark in FY09 and we see unit sales to reach 15m by 2012.  This should result in higher ad spending from auto companies and coupled with increasing emphasis on internet advertising in China, we forecast a CAGR for PO’s net earnings at 22.3% for 2009-2012.

Undervalued internet buy. PO is currently trading at 9.7x FY10F ex-SBC PER, which is at a significant discount to its internet peers.  As a dominant player in Chinese vertical portals, along with a high yield of 6.8% for FY10F, we reiterate our BUY rating for PO with a TP of HK$2.68 based on 12x ex-SBC PER.  Our TP implies a 23.5% upside from PO’s last traded price.