Key Takeaways:
- Autohome’s adjusted net income tumbled 40% during the first quarter, less than the 50% drop expected by the market. Relieved investors sent the share price soaring 19% over three trading days
- The company’s business is expected to pick up in the second half of the year as auto production normalizes, policy support kicks in and market demand rallies
By Lau Ming
For the Chinese car industry, this year has been the toughest of times. Another wave of Covid in March, coupled with chip supply problems, put the brakes on an automotive business recovery and sent sales of new vehicles screeching to a halt.
And yet investors have cheered the latest quarterly results from leading vehicle trading platform Autohome Inc. (NYSE:ATHM), even though the numbers show the company has suffered alongside other players in China’s car industry.
Why has the market shrugged off the profit setback and kept faith with Autohome?
Autohome, a veteran of China’s auto trading scene, reported its revenues fell 20% during the first quarter to 1.47 billion yuan ($219 million). Its non-GAAP adjusted net income dropped just over 40% to 440 million yuan from the same period a year earlier, a decline of almost 7% from the prior quarter.
China’s auto industry got off to a strong start at the beginning of the year. But the Covid outbreak in March hit both supply and demand, sending sales of passenger cars sharply into reverse. Shanghai, China’s biggest city, reported its worst month in vehicle sales since 1949 and no new cars were sold in April at all, according to the city’s auto trade association.
In the run-up to the quarterly results, Autohome’s U.S.-listed stock fell for three straight days. The price sagged a further 5% on the day of the release before recovering to close nearly 1% higher than the opening price. Over the next three trading days it rallied 19%.
The company’s earnings turned out to be less gloomy than investors had feared, as Autohome outperformed expectations for a 23% fall in revenue and 50% fall in profit. With their eyes on the way ahead, investors decided the company’s fortunes could take a turn for the better later in the year.
Glimmers of light in the gloom
Looking more closely at the financials, used-car services were a bright spot in an otherwise dull market.
Revenues from Autohome’s lead generation services, which help buyers find their ideal second-hand car and interact with sellers, increased 1.5% to 708 million yuan. With demand for used cars still strong, this part of its business has not been severely affected by factory closures.
But the company’s income stream from automaker advertising was badly hit. Revenues from its media services dropped nearly 56% to 267 million yuan, as advertising needs shrank in the face of sluggish consumer demand.
But the company was not alone in its troubles. The financial reports of many leading tech companies tell a similar story.
Take the case of tech titan Tencent (0700.HK). Its Internet-related revenue plummeted 18% in the first quarter despite steady demand for fast consumer goods and a successful merger with search engine business Sogou. Online marketing services revenue at Baidu (NASDAQ:BIDU) also fell 4% during the quarter.
Autohome has made an aggressive push to provide varied video and livestreaming content to lure more users to its online ecosystem. The company had 45.21 million daily active users of its online portals and platforms in March, 7.5% higher than a year earlier, according to data from the research institute QuestMobile. This far exceeds the combined user numbers of the companies ranked second and third behind Autohome in market share.
The company has also been actively cultivating its online marketplace and other services, the third of its business segments, where revenue fell by 8% in the first quarter to 496 million yuan.
With its extensive user database and big-data analysis tools, the company benefits from being able to provide end-to-end data products and services to automakers and distributors.
This year it launched a smart decision-making product that could be a new growth engine for the company. The product offers distributors industry intelligence and customer insights, as well as pricing the latest vehicles and managing online operations.
Still, investors are keeping a wary eye on Autohome’s expenditure. Despite the falling revenues, it could not cut back on operational expenses as it aims to keep attracting users and stay competitive, which explains why its net profit fell by more than its revenue.
Its first-quarter sales and marketing expenses fell 13% to 590 million yuan, but increased investment in digital products pushed up R&D spending by 16% to 360 million yuan. Finding effective cost controls will be a big challenge for the company as revenues take time to come back up.
Moving forward, the performance of the company’s media and leads generation services will largely depend on the recovery of the auto market. Auto factories started producing again in May and a government stimulus package for the industry is taking effect. Once supply starts satisfying pent-up demand, the company could be on track for a rebound in media service revenue, as automakers embark on aggressive marketing campaigns. All this could drive Autohome to a better set of earnings numbers in the second half of the year.
Lower valuation than peers
In the United States, the biggest used-car distributors such as Carmax (NYSE:KMX) and Carvana (NYSE:CVNA) rake in annual revenue of more than $10 billion, while in China the market is less concentrated and individual players have relatively smaller market share. As the No.1 player, Autohome has scope to expand its business and market share by acquiring other companies down the road.
After the results, analysts at CICC maintained their revenue projections for the company but revised down forecasts for its non-GAAP net income this year by 3% to 1.71 billion yuan, which would be a drop of 34% from the year earlier. But CICC expects profits to rebound next year, with a projected rise of 19% to 2.58 billion yuan. The investment bank has also kept its “neutral” rating for the company and a target price of $35 given a likely market recovery later this year.
In terms of valuations, industry rival Cango (NYSE:CANG), which started out in vehicle finance and expanded into trading and after-sales services, earned a non-GAAP net income of 79 million yuan last year and a market valuation of 2.7 billion yuan, with a price-to-earnings (P/E) ratio of 34 times. Yixin (2858.HK), an online vehicle finance and trading platform, posted 29 million yuan in net profit last year with a P/E ratio of 150 times. And the U.S. used-car distributor Carmax, with a similar portfolio to Autohome, traded at 14 times earnings.
By comparison, Autohome’s P/E ratio of 12 times indicates it is still valued below its peers. So, despite their positive response to the latest earnings, investors may still be cautious about the company’s chances of accelerating out of the industry downturn and finding a route to bigger profits.
