Battered Autohome Sees Light At The End Of The Tunnel

Key Takeaways:

• Leading Chinese online auto company Autohome says its revenue fell 24% in the third quarter, dragged down by a 50% decline in spending by car manufacturers
• The company sees global auto sector returning to more normal conditions in the second half of next year as chip shortages ease

By Doug Young

The darkest hour is upon us, but the light at the end of the tunnel is also insight.

That’s the message coming across in the latest earnings report from Autohome Inc. ATHM, China’s oldest major online car specialist, whose revenue and profit both fell sharply in the latest quarter. The culprit behind the decline is hardly unique to China and is mostly related to a global chip shortage that has put a huge damper on new car production worldwide.

At the same time, Autohome announced a $200 million share buyback to support its battered stock that has lost about two-thirds of its value this year.

The result was what looks like a relief rally for the company’s New York- and Hong Kong-listed shares, which both rose about 4% in the two trading days after the announcement. In terms of valuation the company, controlled by financial services giant Ping An Group, is in the middle of the pack among its domestic and global peers, reflecting its status as an industry veteran that’s more dependent on new than used car sales.

That’s an important distinction in the current climate, as used car specialists are generally doing quite well as they benefit from the global shortage of new cars.

Autohome currently trades at a price-to-book (P/B) ratio of 1.3, well below the 6.4 for domestic peer Uxin UXIN, which is in the midst of transforming into a used car specialist. But it outpaces the 0.6 P/B for the more similar peer Cango CANG, which has also cited the chip shortage as a factor behind its own stalling revenue growth.

U.S.-based used car sellers Carmax KMX and AutoNation AN have significantly higher P/B ratios of 4.9 and 3.3, respectively.

“In the third quarter of 2021, chip shortage and rising raw material prices continued to impact the auto industry,” Autohome CEO Long Quan said on his company’s earnings call after release of the results last Thursday. “The production cost of auto manufacture increased by more than 10% year-over-year, and the marketing related targets were significantly reduced. Several rounds of power rationing across multiple regions in China also affected manufacturing including auto manufacturers.”

Long summed up the broader outlook for his company quite succinctly: “As a result, Autohome is facing great challenges.”

During the call, he and other company officials were peppered with questions from anxious analysts seeking guidance on when the situation might ease. The collective outlook from Long and others at Autohome was that the sector’s darkest hours would be this year’s third and fourth quarters. Shortages should start to ease in next year’s second quarter and the sector could start to return to more normal conditions in the second half of next year.

If the company’s outlook is indeed correct, it’s quite possible its performance could start to improve in the next few months. That could mean the stock has bottomed out after its steady downward move this year. Its shares appear to have stabilized in the last week and are even up about 8% from a four-year low reached last week.

Lower Spending

From the bigger picture, we’ll take our usual move into the company’s specific financials, which show reduced spending all around by the core car manufacturers and dealers that are Autohome’s main revenue source. The company’s overall revenue sagged 24% year-on-year to 1.8 billion yuan ($282 million), while its net income was down 38% to 522 million.

Within the broader revenue figure, the company’s “media services” category, which mostly reflects revenue from car manufacturers, fell the most – by more than half. Following that decline, the category made up about a quarter of the total. The “leads generation” category, which accounts for 44% of Autohome’s total revenue and reflects dealer spending, was down by a milder 9%.

That would seem to indicate China’s automakers are hurting more than the country’s auto dealers.

One of the few bright spots was revenue from new energy vehicle (NEV) brands, which more than doubled year-on-year in the quarter as China aggressively promotes such cleaner technology. Autohome also noted it’s emerging as a leader in that space with more than 50% market share on average for such spending.

One other slightly bright spot comes from the company’s move to diversify into used cars, a sector that it described as highly fragmented in China. In that regard, company officials said Autohome is currently working with 50,000 used car dealers in China and is aiming to expand that figure to around 90,000.

Autohome is one of the China’s oldest online car specialists, founded in 2004 by auto enthusiast Li Xiang, now the brains behind homegrown NEV maker Li Auto LI. The company was previously controlled by Australian telecoms giant Telstra, which later sold its stake to Ping An. Most of the company’s top management comes from Ping An, which now holds about half of Autohome’s shares, according to the company’s latest report.

During the earnings call, one analyst inquired about recent rumors that Ping An might be looking to sell its stake. Company officials replied in the typical way, calling the talk simply “rumors” without actually denying it.

Apart from Ping An, Autohome looks like a relative favorite in its sector among global institutional buyers. According to its most recent annual report, its other major stakeholders include U.S. fund manager Virtus Investment Partners, with a 10% stake, and France’s Comgest, with 5%.

At the end of the day, the company is probably best viewed as a Chinese blue-chip stock in its class, both due to its long history, relatively large market cap of about $4.5 billion and its ties to Ping An. Accordingly, the stock could look attractive at current levels if you believe management’s view that the industry is currently at the height of its darkest hour and set to rebound starting next year.