A Chinese Growth Stock No One Is Paying Attention To

Investors in China know all the big names by now. Baidu (NASDAQ: BIDU) is the dominant search engine, Tencent (NASDAQOTH: TCEHY) seems to have its hand in everything, and JD (NASDAQ: JD) is the growing force for vertically integrated e-commerce.

On average, these three have a market cap of $215 billion, and 14 analysts covering them on a quarterly basis. Over the past three years, they have returned an average of 85%, handily beating the broader market. They also have high expectations baked in: JD and Tencent fetch multiples above 40.

The company I'm introducing to you today is under the radar: Only five analysts cover it, it has a market cap of just $2.5 billion, and it's trading for less than 19 times 2018 earnings. And yet, it has one segment growing so fast, the biggest names in China -- the very same triumvirate of Baidu, Tencent, and JD -- are betting on its success.

That company is Bitauto (NYSE: BITA), which offers the leading platform for car buying in China. While Bitauto got its start by offering advertising, creation of virtual showrooms, and marketing campaigns years ago, this founder-led company is now focused on providing the No. 1 car-buying transaction network in China.

An enormous opportunity

It may be tough for us to appreciate here in America, but the internet has still not reached over 40% of the Chinese population -- that's more than 500 million people. But that's changing quickly, and so is the size of the middle class in China.

As more citizens see their income grow and gain access to the internet, they'll become first-time car buyers. Whatever company is there to serve those needs -- and lock people into its ecosystem -- stands to reap enormous benefits.

According to this research carried out on behalf of Bitauto, the number of online auto transactions is expected to increase fivefold in just five years. At the same time, the value of those transactions will grow from $15.2 billion in 2016 to $86 billion by 2021.

That is what you call an enormous opportunity.

Lots of moving parts, but one that sticks out

There are three major divisions at Bitauto. While providing a platform for auto dealers to advertise their cars is still very important to the company's top line, it is the transactions services network that has been rapidly growing -- a 143% clip per year since 2015.

In 2014, Bitauto realized it didn't have the resources to fully capture the booming opportunity in the Chinese auto market. So it reached out to some of the biggest names in the country for funding -- including Tencent, Baidu, and JD. Bitauto took these funds and started a subsidiary -- Yixin Group Ltd. -- to provide a platform for connecting the disparate parts of the auto industry.

Right now, Yixin has a self-operated financing arm that offers loans to Chinese car buyers that provides 80% of its revenue. That introduces a fairly high level of risk: The company admits it "require[s] less documentation from applicants than that would otherwise be required by traditional banks for credit assessment and approval."

But that's changing quickly -- not because lending standards are tightening, but because Yixin's platform, and not its financing, is taking its place as the star of the show. Yixin acts as the center hub for many spokes to come together: Chinese citizens looking to buy cars, auto lenders, auto dealers, and insurance companies. Revenue from the platform -- which also includes advertising and telematics for dealers -- grew a staggering 450% during the first half of the year.

That's key, because it reduces the amount of financial risk associated with being a lender, and shifts that risk onto the parties using Yixin's platform. And because Tencent, JD, and Baidu all have stakes in Yixin -- 20.9%, 10.9%, and 3%, respectively -- customer acquisition costs can be lowered over time by partners directing traffic to the platform.

A very fair price

Yixin recently went public on the Hong Kong exchange, but Bitauto still holds a controlling 44.4% ownership in the company. Currently, Yixin has a market cap of $5.94 billion. That means Bitauto's stake is worth $2.64 billion.

And yet Bitauto -- sold on the New York Stock Exchange -- currently has a market cap of just $2.43 billion. This means that if you buy shares of Bitauto, you not only get Yixin at a discount, but you get all of Bitauto's non-Yixin businesses -- primarily advertising and marketing campaigns -- for free.

But there's more. Analysts expect Bitauto to produce $2.16 in earnings next year. The stock currently trades for just 16 times that figure.

That alone is enough to get me excited about buying more shares. Throw in the fact that the company's moat is widening, that it has the support of China's biggest names, and that it is run by a founding CEO who owns 14.7% of shares outstanding, and you have a stock that I will be adding to as soon as Motley Fool trading rules allow.

If you're looking for a special situation in China, have a long-term time horizon, and can stomach some volatility, I encourage you to consider joining me in owning a piece of the company.

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Brian Stoffel owns shares of Baidu, Bitauto Holdings, and JD.com. The Motley Fool owns shares of and recommends Baidu and JD.com. The Motley Fool has a disclosure policy.