Autohome (NYSE: ATHM) is an interesting play on China’s EV market that comes without OEM risk. The OEMs are selling cars, but profitability is elusive, and competition is fierce, factors that will continue to influence their price action for the foreseeable future. Autohome, on the other hand, operates platforms connecting the automobile industry to consumers.
Autohome websites and apps provide advertising, lead generation, listing, transaction, and insurance services and are tied to the volume of China’s business and not any individual OEM. The salient details are that it makes money today, has a healthy and improving cash flow, and offers an attractive capital return, which makes it more of an investment and less of a trade.
China’s automobile market estimates are mixed, but expect low-to-mid-single-digit growth this year and next, led by EVs. EV sales are expected to grow by 15% to 20% over the next few years and slowly dominate the existing market. Numerous factors will influence growth, including the recent release of BYD’s (OTCMKTS: BYDDF) low-priced Seagull model. At roughly $12,000, it is half the cost of existing low-priced options.
Autohome's Growth Is Slow in 2024: Operational Quality Shines
Autohome’s growth is slow in 2024, sustaining a low-single-digit pace in Q2, but growth is present and expected to improve sequentially and next year. Revenue was driven by increasing user counts offset by sluggish demand impacted by economic headwinds. The critical details include the margin and cash flow, which have improved due to operational quality. Net income grew nearly 3% versus the almost 1% gain in revenue, driving an increase in earnings. The adjusted earnings are up nearly 1000 basis points and are expected to remain solid as the quarter's progress.
Cash flow is another critical detail. Cash flow is positive despite the company’s lean toward technology and marketing, allowing it to sustain a fortress balance sheet and initiate a buyback program. The buyback program is worth $200 million and is expected to be completed within twelve months. The allotment is worth nearly 6% of the market cap, with shares trading near $27.50, and will provide a significant tailwind for the market.
Autohome’s capital return also includes a substantial dividend. The dividend payment is worth about 6% annually to investors and is expected to be paid in two semi-annual payments through 2026. The payment is roughly 65% of quarterly earnings, a high figure offset by the clean balance sheet. The company has no long-term debt and runs a total liability-to-equity ratio of 0.2x.
Institutions Provide a Tailwind for Autohome Stock
Analyst coverage of Autohome is tepid, but institutional interest isn’t. Institutions have bought this stock on balance for three consecutive quarters and own nearly 65% of it. Major shareholders include Ping An Insurance Group, an online insurance destination in China, which holds about 45% of the stock.
The price action in Autohome stock has struggled for years but shows a clear bottom at $22. The market is moving up from that level, supported by the recent earnings report and subsequent repurchase announcement, and is likely to head higher in the near term. There is some resistance at the $27.50 level, but it will not likely last, given the size of the buyback announcement, strength of cash flow, balance sheet, growth outlook, and dividend. The next target for substantial resistance is near $32 or about 15% of upside.
