Autohome deflated by plunging ad sales, car price wars

The car-trading services provider reported a fourth consecutive quarter of revenue decline in the second quarter, as its gross margin plunged more than 10 percentage points

Key Takeaways:

• Autohome’s revenue fell about 6% in the second quarter, as Chinese car manufacturers and dealers slashed their advertising budgets amid a bloody price war
• The company launched an international edition of its core car-trading platform in June, aiming to tap China’s growing prowess as the world’s top auto exporter

By Doug Young

China’s overheated car market is leading Autohome Inc. (ATHM.US; 2518.HK) to look outside for relief, as the country’s largest car-trading services provider tries to jumpstart its growth that began stalling in the second half of last year. Autohome revealed it launched an international version of its website in June, as it reported a fourth consecutive quarter of contracting revenues for the latest three-month period through June.

The company’s advertising services took the biggest hit during the quarter, plunging 36% year-on-year in revenue terms, as carmakers and dealers that are Autohome’s biggest customers slashed their marketing budgets amid a bloody price war that has dragged on for more than a year. Company executives noted the government has taken steps this year to try to ease the price war, optimistically predicting the situation could improve in the second half of the year.

Autohome’s online marketplace was also a small bright spot as the only one of its three main business segments to report revenue growth in the latest quarter. That growth, combined with an 11% slump for the company’s leads generation services, allowed the former to overtake the latter to become Autohome’s biggest breadwinner for the quarter.

Truth be told, Autohome looks like one of the few bets in China’s struggling auto market that still holds some promise right now. That’s largely because the company is quite adamant in sticking to an asset-light business model, meaning it never shoulders any inventory risk and related exposure to the huge recent volatility in China’s car market.

Instead, the company relies mostly on fees for its various services, which are largely based on transactions as well as advertising. On the transactions side, Autohome should be doing relatively well, as new car sales in China actually rose more than 10% in the first half of this year, with about 15.6 million vehicles produced and sold, according to the China Association of Automobile Manufacturers (CAAM).

CAAM doesn’t publish average selling prices for cars, but it’s probably quite safe to say that prices were down a bit in the first half of the year due to the price wars. As that happened, auto manufacturers’ profits dropped 12% in the first five months of the year, according to data from the National Bureau of Statistics. Falling prices probably hit Autohome by lowering the average commission it received for each car sold. And as the company pointed out, the plunging profits also caused many automakers to sharply cut their advertising spending.

Investors were relatively sanguine in response to the latest report, with Autohome’s shares rising 0.26% in New York on Thursday after its publication. The stock is up 3.5% this year, which doesn’t seem too exciting on the surface. But that’s notably stronger than the 17% decline for SAIC Motor (600104.SH), the Chinese joint venture partner of GM and Volkswagen; and the 7.3% decline for Hong Kong-listed shares of GAC (2238.HK; 601238.SH), the joint venture partner of Toyota and Honda.

Despite its wobbly position, Autohome’s stock still trades at a relatively strong forward price-to-earnings (P/E) ratio of 15, similar to the 16 for U.S. peer CarGurus (CARG.US). That may explain why the analyst community is quite cautious on Autohome at the moment, with nine of the 13 polled by Yahoo Finance rating the company a “hold.”

Overseas drive

Next, we’ll take a deeper dive into the nuts-and-bolts under Autohome’s hood, starting with the new export drive that didn’t seem to excite investors too much. CEO Yang Song said Autohome’s recently launched international site features over 1,900 vehicle models from 52 Chinese automobile brands seeking to expand in the global market.

Autohome is hoping to ride a recent wave that has seen Chinese carmakers rev up their overseas sales, pushing the country past Japan to become the world’s biggest exporter. The movement is being driven partly by huge overcapacity within the Chinese car manufacturing sector, the result of a huge buildup over the last two decades.

“So far, we cover six countries and regions, including China, Hong Kong, Thailand, Saudi Arabia, the United Kingdom, Australia and Brazil,” said Yang on the company’s earnings call. “I think that this kind of overseas business deployment will also become the new growth curve for our business.”

Back at home, Autohome’s business continued to stumble with a fourth consecutive quarter of contraction in the three months to June. The figure fell 5.9% year-on-year to 1.76 billion yuan ($245 million) in the second quarter from 1.87 billion yuan a year earlier. Within that figure, media services tumbled by more than a third to 279 million yuan, making up just 16% of the revenue total. Revenue from leads generation fell 11% to 733 million, while online marketplace revenue rose 21% to 746 million yuan.

In a worrisome trend, the company noted its gross margin dropped by more than 10 percentage points to 71.4% in the second quarter compared with 81.5% a year earlier. Autohome executives blamed the erosion on “higher transaction costs associated with the company’s innovative business in lower-tier cities,” and weren’t more specific. But investors will almost certainly be watching that metric in the next few quarters to make sure it stabilizes.

The company partly offset the lower gross margin with a 14% drop in its operating expenses. A sizable portion of that may have come from layoffs, as Autohome reported having 4,360 employees at the end of June, down 14% from 5,078 a year earlier. But on the bottom line, the company still reported its profit fell 22% to 399 million yuan from 510 million yuan a year earlier.

As to the future, Autohome tried to sound a positive note about an end to the price wars in the second half of the year that could improve its advertising and leads generation businesses. But price wars are really just a symptom of China’s underlying economic weakness right now, which is dampening consumer sentiment. While such wars may entice some consumers with lower prices, stabilization of China’s economy and a return to stronger consumption-led growth will be necessary to put the domestic car market back on a sounder footing.

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