Autonavi Market Research

I am initiating coverage on AutoNavi (AMAP) with an Overweight rating and a DCF-based price target of $18. AutoNavi is a leading digital map content and navigation solution provider in China.
I am positive on AutoNavi because of its position in China's highly regulated land surveying and digital mapping industry, and its growth potential in mobile map content, navigation and location basedservices (LBS).
Business Overview
AMAP has three business segments:
1. Automotive Navigation provides digital map data for in-dash navigation system and portable navigation devices (PND)
2. Wireless and Internet LBS provides map and navigation data to mobile device makers, such as Samsung and Apple (AAPL), and websites such as Google (GOOG) and Tencent
3. Government and Enterprise Servicesprovides aerial photogrammetry, digital city modeling and LBS services to the government and corporations
Investment Highlights
In-Dash Navigation Business Will Flourish Due To High Barrier To Entry
Unlike the US and Europe, China has a highly regulated land surveying and digital mapping industry in which only 12 Chinese companies hold the land surveying license. This policy creates a high barrier toentry for foreign companies and allows domestic firms to flourish. In the long term, I believe government will maintain this barrier for national security reasons (eg. Chinese government will never allow Google to survey Chinese land data and sell it to third parties).
Among the 12 qualified Chinese companies, AMAP is the clear leader. Since 2002, the company has invested over $80 million anddigitally mapped 3.3 million kilometers of roads and 20 million point of interest (POI) in China.
Because of China's massive urbanization, new roads and cities create strong demands for accurate and comprehensive mapping and navigation services. According to iResearch, China's mapping service market is expected to grow to $420 million in 2014 from $262 million in 2012.

AMAP is the preferred mapdata provider for Audi. Other automakers such as BMW, Mercedes-Benz, VW, and Honda also use AMAP because it has the most comprehensive map database.
In China, automakers are increasingly adding in-dash navigation systems as standard equipment. According to the data from Research and Markets, 1,041 out of 3,698 car models sold in China were equipped with in-dash navigation, an increase of 6.7%from 2010. In addition, 20.4% of low-end models with RMB100-200K price tag are equipped with in-dash navigation, compared with only 12% in 2010.
The in-dash navigation market is a duopoly shared by AMAP and state-owned NavInfo.

This duopoly has been consistent over the past several years and I do not believe this will change because AMAP is used by mostly European models whereas NavInfo is usedby mostly Chinese and Japanese models. The duopoly allows both companies to collude and to make a healthy profit.
Promising Growth in Mobile
In the mobile space, AMAP provides map data and navigation, and collects revenue from pre-installed navigation solutions in mobile phones and downloadable navigation solutions and applications such as map display, route planning, point-of-interest, livetraffic service.
Wireless and internet LBS accounted for 28% of AMAP's revenue in 1Q12, compared with 11% in 2Q10.

The company's mobile monetization strategy involves collaborating with carriers and brand handset makers to sell its mobile navigation service and providing free map data service to the consumers.
AMAP collaborates with China's three major carriers China Mobile (CHL), China Unicom(CHU) and China Telecom (CHA) and its navigation service is preinstalled in all the Samsung smartphone models (including the new Samsung Galaxy S3), 80% of Motorola models, and 50% of LG models in China. The company also collaborates with HTC, Lenovo, Huawei, and ZTE. As a result, AMAP leads the mobile navigation market with 39% share.

In the map data segment, the number of AMAP's total...