Auction house Sothebys (NYSE:BID) has gained on main competitor Christie’s over the last year and looks set to turn its real estate holdings and financial services into additional sources of revenue, but Citi analysts Oliver Chen and Nancy Hilliker are still neutral on the stock over concerns about the nature of the auction business and Sotheby’s ability to deliver in emerging markets.

Sothebys

Sothebys’ functions

Sothebys (NYSE:BID) is the world’s second largest auctioneer after Christie’s, handling $4.3 billion in auctions in 2010 (with no other company seriously rivaling the pair), and the only one that is publicly listed. In addition to auctioning off art and other high value collectibles, Sotheby’s brokers sales and offers financial services that are mostly meant to aid its auction services.

Sothebys v Christies

Sothebys’ neutral ratings

“We believe Sothebys (NYSE:BID) is a trusted auction model with premier brand equity but valuation, a strong correlation to market performance, and emerging competitive factors keep us on the sidelines at a Neutral rating,” write Chen and Hilliker.

They like Sothebys (NYSE:BID) low-risk business model and the potential for growth as emerging nation, especially China, become interested in alternative investments in art. The company also has lowered its fixed costs and debt level since 2009, but it is bound to a market with volatile supply and demand that isn’t easy to control.

Growth opportunity in China

In China, possibly Sothebys (NYSE:BID) biggest growth opportunity, Chen and Hilliker worry about execution risk. Aside from the three local competitors that have put pressure on Sotheby’s, Christie’s has more freedom to do business there. “We believe BID has significant opportunity in China, but has not yet established a firm relationship with the Chinese government which would allow them to sell at the level of competitor Christie’s which donated ~$80mm in valuable property to China,” they write.

Of course, Sothebys (NYSE:BID) could surprise to the upside. Aside from building their position in China, it could benefit from “increasing utilization of Art as an alternative asset class and safe haven [and] greater-than-expected supply of goods for sale due to higher-than-expected levels of death, divorce, debt, or discretion needs of clients.” The two analysts set a price target of $45 with 20x EPS.