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ANALYSIS: Autohome Continues Solid Growth Despite Auto Sales Slowdown

Donovan Jones 2019-09-07 06:00 AM

Short Take

Autohome Inc. (NYSE: ATHM) has recently reported financial results for its second calendar quarter of 2019.

The firm provides a comprehensive online information resource and marketplace for car buyers and sellers to learn and transact for direct vehicle purchases.

ATHM has produced growth and earnings during a time of contracting auto sales in a changing economic environment within the domestic Chinese market.

Company

Beijing-based Autohome was founded in 2005 as an online information resource, social network, and direct vehicle sales marketplace between automobile dealers and consumers.

Autohome’s chairman and chief executive is Min Lu and chief financial officer is Jun Zou.

An important part of the firm’s value proposition is that it provides a major source of lead-generation services to car dealers. It has generated over 110 million leads through the end of calendar year 2018.

The company went public in 2013 and raised $132.9 million at a price of $17 per share.

Market & Competition

According to a market research report by ReportLinker, the new cars via an online marketplace market is forecast to accelerate for the five year period 2016 - 2021. 

The Chinese automotive sales sector generated revenues of $417 billion in 2016, representing a CAGR of 10.70 percent between 2012 and 2016.

The main factors driving expected market growth are tax cuts on the sales of small engine vehicles and the loosening of regulations that banned pickups from circulating in main cities.

Major competitive vendors that sell new or used cars via an online marketplace include:

  • Cango (NYSE: CANG)

  • Yixin Group (HKEX: 2858)

  • Uxin Group (Nasdaq: UXIN)

  • Gauzi.com

  • RenRenChe

  • Tiantian Paiche

  • Souche.com

Recent Performance

ATHM’s topline revenue by quarter has been uneven but trended upward, as shown below:

(Source: Seeking Alpha)

Gross profit by quarter has similarly reported uneven results, with a significant drop in Q1 2019 but a rebound for Q2 2019:

(Source: Seeking Alpha)

Operating income by quarter has varied, with Q4 2018 marking a high point over the past five quarters:

(Source: Seeking Alpha)

Earnings per share (diluted) have fluctuated accordingly:

(Source: Seeking Alpha)

In the past 12 months, ATHM’s stock price has risen 17.1 percent vs. the overall U.S. market increase of 1.6 percent, as the chart below indicates:

(Source: Simply Wall Street)

Commentary

In its most recent earnings call, management highlighted a number of marketing-oriented initiatives, including virtual events to help dealers sell more cars, such as virtual auto show exhibitions in over 130 cities across China.

With the deleveraging initiatives directed by government and regulatory authorities combined with a drop in consumer sentiment owing in part to U.S. China trade tensions, the Chinese auto sector is currently in a period of contraction for the first time in many years.

Also, more recently, the regulators have been looking into a potential timetable for banning new internal combustion engine cars in favor of electric cars, likely adding to more uncertainty in the industry.

As to its financial results, management said it is ‘happy’ with its second quarter results, as guided net revenue in the range of 14.4 to 16 percent year-over-year growth rate.

Since its quarterly results report, the stock has traded up approximately 20 percent.

Notably, by comparison, recent market entrant Cango, which is a direct competitor of Autohome, has produced a lower growth rate and the stock has performed poorly since its IPO in July 2018 where it priced at $11 and is now trading at around $5.30 per share.

A comparison of the major valuation metrics for the two firms is shown here:

Metric

Autohome (ATHM)

Cango (CANG)

EV / Revenue

8.67

3.98

EV / EBITDA

21.83

17.55

Earnings Per Share

$3.30

$0.11

Revenue Growth Rate

23.50%

20.41%

Autohome is the clear favorite in terms of earnings per share while retaining a healthy trailing growth rate, perhaps justifying its higher enterprise value metrics.

The Chinese automobile sales market will likely continue to remain in a challenged position for some time, as the government authorities continue their efforts to reign in the shadow/alternative banking industry which had provided so many funding sources and liquidity for the capital intensive automobile purchase market.

What we’re seeing is an apparent shake out of the marketplace industry and Autohome appears to be performing better than others in crossing this industry recession.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)