Zacks Small Cap Research – SDA: INITIATION of fast growing cloud-based provider of digital enterprise auto services and auto eInsurance services in China. – Technologist

By Thomas Kerr, CFA

NASDAQ:SDA

READ THE FULL SDA RESEARCH REPORT

SunCar Technology Group (NASDAQ:SDA) is a leading cloud-based provider of digital enterprise auto services and auto eInsurance products in China. The company has a leading position in both of these segments and with complementary synergies between them, they offer one-stop, fully digital, on-demand automotive service systems to help large enterprise clients build up their customer base and serve their end customers. The company operates in a unique position in which it is believed to be the only company in China providing this type of comprehensive technology services.

Founded in 2007, the company has developed extensive experience in understanding and serving the expanding needs of China’s automobile owners. With the increasing prevalence of the mobile internet in China, the company introduced online apps for its insurance and auto business in 2014 and 2015. The company has built comprehensive digital systems for both the auto service and auto eInsurance business segments which is centered on a multi-tenant, cloud-based platform which empowers its enterprise clients and service providers to optimally access and manage the types of services and insurance they need.

For the auto eInsurance business, SunCar primarily facilitates the sale of auto eInsurance products underwritten by major insurance companies in China. The company receives commission income from these insurance companies, typically a percentage of the premium paid by the end insurance purchasers. SunCar implements, automates and streamlines the insurance purchasing process on its proprietary, fully online digital apps, which integrate full spectrum products from leading insurers in China. The company sells insurance policies through a network of over 64,000 external sales partners. These sales partners include an offline auto network with frequent exposure to car owners, an online marketplace with large user traffic, and emerging EV manufacturers and service providers. As of December 31, 2023, the company has branch headquarters in 32 cities in 20 provinces of China. The company has also established collaborative relationships with 85 insurance companies including the top 10 insurance companies in the country with a combined market share of over 90%.

The company operates its auto services business by offering customized service solutions to its enterprise clients, who are typically major banks, insurance companies, or telecommunication companies. These organizations typically have end customers demanding automotive services. These enterprise clients purchase service solutions from SunCar for the members of their reward programs or customer loyalty programs.

The auto service solutions cover over 300 types of services such as car wash, oil change, tire repair, car beautification, road assistance, flight pickup, designated driving, or VIP lounge. They are provided in collaboration with third-party auto service providers. As of December 31, 2023, the company has established a service network of over 47,000 third-party brick-and-mortar auto service providers, leasing and roadside assistance companies which covers over 350 cities (out of a total of approximately 690), and all 33 provinces of China. With this extensive service network, the company serves over 1,400 enterprise clients.

SunCar has built up these businesses as an advanced technology-driven provider of online services. The company has secured 150 registered copyrights of computer software. Its proprietary technology solution is centered on a multi-tenant platform and advanced cloud infrastructure. On the auto services side, the digital platform provides API docking, front-end plug-in and module integration for enterprise clients, as well as efficient, user friendly management and operations tools for service providers.

On the auto eInsurance side, the existing platform empowers insurance company clients to manage all aspects of their business including customer orders, products, commissions, and other reports. For insurance purchasers by consumers, the online insurance interface provides data-driven, AI-empowered real time quotation, pricing, underwriting and payment. The AI-empowered hybrid cloud infrastructure provides secure storage and computation to support the demands by both insurance companies as well as end customers.

SunCar has recently begun making its core technologies into a new business line. With growing demands to efficiently manage their businesses, the company’s auto service providers are now paying for online tools to streamline their business workflows, manage their customer relationships and automate orders processing. As the technology becomes more advanced, the company is working on developing a SaaS model product offering and plan to gradually turn the automotive service providers into technology customers.

The cross-utilizations and interconnections between the auto service and auto eInsurance business lines enable positive feedback loops between them. As the company is developing a nationwide automotive service provider network, these service providers become sales partners of the auto eInsurance business. Conversely, when engaging with insurance companies to sell their insurance products, we also obtain them as clients of the auto service solutions. We believe this synergistic business development will boost sales channels as well as expand the client network in both business segments.

As both core businesses are closely connected to the automotive industry, the company has also captured the recent trends of electric and smart vehicles. SunCar is now working with 20 mainstream EV and smart car panel players which embeds the auto service solutions into their online applications and panels as well as providing various insurance products to EV owners.

The company generated revenues of $363.7 million in 2023, an increase from $282.4 million in 2022. The company currently has cash and short-term investments totaling $44.6 million as of 6/30/24 and working capital of $50.8 million. The current market capitalization is approximately $989 million.

Valuation

SunCar Technology Group has the potential to deliver strong double-digit revenue growth and positive earnings over the next 10 years as the company expands and gains market share in its eInsurance and auto service offerings. We believe the company can generate average annual revenue growth in the 15%-20% range over the next 5 years and improve margins to industry averages over time.

Our primary valuation tool utilizes a Discounted Cash Flow process. Under the scenario described above, our DCF based valuation target is approximately $20.00 per share. Our target price may be conservative as it utilizes a high discount rate of 15.0% due to the unpredictability of earnings, higher prevailing interest rates, and uncertainty surrounding revenue growth rates.

Our total revenue estimate is $455.3 million for 2024 and $570.7 million for 2025. The eInsurance segment is expected to be the company’s fastest growing business line. Our 2024 full year adjusted EPS estimate is $0.11, and for 2025, our EPS estimate is $0.53.

SunCar operates in a unique space in China and there are no competitors with the exact breadth of services and offerings that the company has. However, a competitive set of InsurTech, B2B marketplaces, and vertical software companies provide comps on an EV/Sales basis that show SDA stock to be undervalued on a relative basis.

The competitive set trades at an average EV/Sales ratio of approximately 8.4x (5.5x for B2B marketplaces, 7.5x for InsurTech, and 12.3x for vertical software). With SunCar’s EV/Sales ratio at approximately 2.6x based on 2023 revenues and 2.2x based on 2024 revenue estimates, SDA stock appears to be substantially undervalued on a relative basis. Using the B2B sector EV/Sales ratio of 5.5x, the relative value for SDA stock would be in the $22.00-$26.00 range.

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