Tuesday, January 17, 2012

SourcingLink.net Inc.

The focus of this report is SourcingLink.net Inc. It is a little known holding company headquartered in Orange County, California and publicly trading under the symbol SNET.

Some recent filings and news releases made us pay attention to this company, which until recent years was just a shell. What really caught the eye was its subsidiary, Alliance Auto Group (AAG).




WHAT DOES SNET/AAG OFFER?

AAG is a car sharing company which targets the high-end, luxury car-share markets. Due to the rapid pace of growth in the car-share industry coupled with the niche that only a few serve, AAG is poised to be at the forefront of industry. In fact, in recent press releases, the parent company has stated their intent to make the niche of high-end car-sharing their own.

While a sound business plan is essential for a successful business, it has to be aided by favorable market conditions. For a really successful business, it has to be in the right market at the right time. Based upon our research and understanding of the car-sharing market, we believe SourcingLink.net Inc., is in just the perfect market at the right time. The "Sharing Economy" as many label it, is growing by leaps and bounds and it is no longer a novel idea. However, there are only a few players in the market and the rapid growth is making it nearly impossible for the current players to satisfy the needs of the ever-expanding consumer-base. It is the perfect opportunity for new companies that are built around the idea of "Sharing Economy" and since it is a fairly new market, embracing and understanding the idea is ultimately going to be more important than experience alone, something that we will cover in more detail later. 


Membership Benefits

AAG's car sharing service offers the following benefits:

  • A cost saving alternative to car ownership.
  • Access to a varied fleet of luxury vehicles.
  • Locations include luxury hotels, private jet terminals and other partner locations.
  • An efficient, responsible and sustainable lifestyle without compromising on luxury and comfort.
  • Private jet service for members.
  • Different membership plans tailored to suit everyone's needs.
  • Freedom and flexibility beyond other alternatives such as taxis, public transportation and traditional car rental.



Differentiating Factors

  • AAG's fleet consists of vehicles owned by the company as well as vehicles placed for sharing by other participating members. This gives AAG a lot of flexibility unlike the competition where companies tend to pick one or the the other approach.
  • Unlike some of the competing companies, AAG plans on installing kiosks at luxury hotels, private jet terminals among others to add to the convenience. Members will not have to meet the owner in person and go through a lengthy and time consuming process. 
  • AAG is constantly building partnerships nationwide and expanding its network. This should help the company become a major player in the national and eventually global car-sharing market.
  • No other car sharing company offers Private Jet service to its members. This also proves that this company is really focusing on the high-end of the market.


What is in it for investors?

There is plenty to suggest that SNET/AAG could be an excellent investment opportunity. However, what really settles it is the fact that the company has been working on the business side of things, laying the foundations of a fast-paced and successful business. But so far it has not focused on marketing the company and bringing awareness to its products and services. As we know, the best time to invest in a business is when it is under valued and under the radar of other investors. Because of the recent press releases, we are under the impression that the company is trying to get more awareness and it is only a matter of time before market takes notice. It seems to be at the cusp of a big change in direction as regards to its marketing policies.


According to the recent filings, the Outstanding Share count is less than 70M shares. Considering that the company already has a fleet of luxury vehicles, is profitable and earning revenue from membership fees, it is clearly very under-valued. Even a PPS of 20c would translate to a market cap of only $14M which is a very small piece of an enormous pie, expected to be worth $6 billion in 2016.  One important point that should not be missed is, AAG is focusing on the very lucrative higher end of the market.


THE "SHARING ECONOMY"


The name Steve Case should ring a bell. He was the founder of America Online. He stepped down as chairman of AOL Time Warner in 2003. One year later, his firm, Revolution, had acquired ExclusiveResorts, a vacation-home sharing company that now owns over $1 billion in mansions around the world. Three years later, it helped create what we know as ZipCar, now the world's largest car-sharing company. The same year, it invested in a new company started by four former employees called LivingSocial, an online social commerce company with more than 45 million global members.

At first glance one might see three random ideas, but upon a closer look it is easier to see a pattern there. All three companies primarily promote:

1. Power in numbers
2. Access over ownership
3. Cutting the waste
4. Efficiency

These ideals form the backbone of a new "Web Economy" or what many call "The Sharing Economy".

It is pertinent to note that a typical summer home costs $100,000 a year for 17 days. Exclusive Resorts eliminates that waste by giving families access to homes they never have to buy. The typical car costs $20,000 dollars and sits in a garage or parking spot for 20 hours a day. Zipcar gives drivers access to cars they don't have to own. Every day, 30 percent of all food in the U.S., equal to $50 billion of inventory, sits idle in restaurants. LivingSocial gives merchants a way to coordinate deals to drive customers to underutilized inventory. 

It all adds up to more economic activity with a lot less waste.

By spending less money on owning homes, cars and clothes, we could get back to focusing on new projects. More family savings would find their way to banks and investment firms. That capital would flow into exciting entrepreneurial projects looking to answer more big problems. Young start-ups waiting to change the world with their new ideas would benefit from the capital that flows from all this new investment. It certainly brings wasteful spending down and improves efficiency a great deal, something that is necessary in current economic environment.


CAR SHARING MARKET

This section of the report will focus on the car sharing market and prove that it is the right time to be in this market.

Let's go back to Steve Case and hear from him how he stumbled upon the idea of car-sharing. Two years after leaving AOL Time Warner, Case noticed something on the street. It was called a Flexcar. "I thought, huh, what's a Flexcar?" A few weeks later, he noticed something else. Something called a Zipcar. "I thought, huh, what's a Zipcar?" After a little snooping online, Case got his first taste of the car-sharing economy. It was small. But it was promising.

So Case called the CEOs of Flexcar and Zipcar to talk about their companies. "I said, 'Hey I'm Steve Case, you're doing something interesting, and maybe I'd like to work with you.'" That year, Case and Revolution bought control of Flexcar. He brought in a new CEO. He assembled an all-star board headlined by Lee Iacocca, the former CEO of Chrysler and presidential candidate, and Joe Vittoria, the former CEO of both Hertz and Avis. Then he merged both car-sharing companies and held on to about 30 percent of the new entity. They called it Zipcar. Zipcar is a publicly traded company today (NASDAQ: ZIP), operating in 14 major metro areas and more than 230 college campuses. Sharing cars is so standard in crowded U.S. metros today that it is hard to imagine how foreign the concept seemed to other investors just six years ago. "We decided it would be a mainstream phenomenon. Now it's a multi-billion industry," Case said. 
According to recent studies by the Urban Land Institute, transportation in major metropolitan areas represents a significant cost burden. In regional studies performed in the Greater Boston, Washington, D.C. and San Francisco Bay areas, transportation costs represent between 17% and 20% of household income, which translates to $11,927 to $13,375 in average annual transportation costs. According to Frost & Sullivan, depending on total distance driven, a car sharing program can save up to 70% of the total transit costs for its members.



MARKET FORECAST

 
Estimates of the car sharing market opportunity vary based on a variety of factors. According to Frost & Sullivan, revenue from car sharing programs in North America will increase to $3.3 billion in 2016, up from $253 million in 2009. They also expect revenue from car sharing programs in Europe to increase to €2.6 billion in 2016, up from €220 million in 2009.
According to the same report, the number of drivers using car-sharing networks increased 117 percent between 2007 and 2009 in North America. Within five years, the firm expects to see 4.4 million people in North America and 5.5 million people in Europe signing up for car sharing services.


COMPETITION

ZipCar

When the market leader ZipCar announced its IPO in June 2010, they had 400,000 members, also known as "Zipsters". By the end of third quarter of 2011, the number had risen to 650,000, a 63% increase. 

ZipCar's revenue was $13.7 million in 2005. It grew to almost 10-times as much by 2009 reaching $131.2 million.

ZipCar's Full year 2011 revenue is expected to be in the range of $241 million to $243 million. This is an estimated increase of another 85% in just two years. ZipCar became profitable in the third quarter of 2011, much sooner than expected, it has to be noted. 


HiGear

The meteoric rise of HiGear in a very short period of time epitomizes not only the potential for growth in the car sharing industry, but also the need for a high-end alternative to the likes of ZipCar and RelayRides to satisfy the demands of the upscale clientele. HiGear, a peer-to-peer car sharing startup that focuses on luxury and sports cars, announced in October 2011, only two months after their launch, that they had raised $1.3 million in a seed round from a group of venture and angel investors. Investors include Battery Ventures, BV Capital, and 500 Startups, and angels like Craig Sherman, a Zipcar angel investor and Kevin Chou, CEO of Kabam. The company provides comprehensive liability and collision insurance to the members, and also performs screenings, driver checks and sometimes credit checks.



Other Competition

The explosive growth potential of the car sharing market as forecast by several market analysts is forcing traditional car rental businesses to act as well and several of them have launched separately branded car sharing operations. 

Connect by Hertz reports having more than 650 car sharing vehicles in select geographic areas such as New York, London and Paris. 

Enterprise has announced its WeCar brand, principally at universities and on some corporate campuses. 

UHaul has launched UCarShare in Portland, Oregon. 

However, since these companies are only trying to take advantage of their existing businesses and they are not designed and built around the idea of car sharing, many believe, they will face a lot of difficulty adapting to a member based service from a transaction based service.

Facing the development of car sharing, some OEMs also have chosen to join the game. Daimler, launched its own car sharing subsidiary, Car2Go, in Europe and North America. Car2Go will provide 200 Smart Cars for 13,000 employees of the city of Austin, Texas, to use. According to Frost & Sullivan: "...this event opened a new era for the automotive industry and could accelerate the development of car sharing".



CONCLUSION

To summarize, based upon our research and understanding of the industry, we believe SNET/AAG is making giant leaps and will be a force to reckon with. The company is clearly targeting the highly lucrative and exclusive niche of luxury car sharing, at the same time catering to the needs of the general car-sharing market as well. The differentiating factors and the fact that it is not known to the investing public, make us deduce that SNET presents an excellent long-term investment opportunity and investors should keep an eye on this company's progress.






Sources:



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We have purchased shares in the open market and plan on buying more shares on the open market. This should not be taken as a recommendation to buy.
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