The internet auto trader benefitted nicely from a recovery in car sales in the third quarter, powered by various government incentives

Key Takeaways:

  • Autohome’s revenue increased 4.5% year-on-year in the third quarter, representing the first growth since the start of 2021
  • China’s car sales recovered strongly in the third quarter, but the momentum may not last as the effect of government sweeteners that helped to fuel the rebound start to fade

By Warren Yang

Online car trader Autohome Inc. (ATHM.US; 2518.HK) is riding a recovery in China’s car market, fueled by Beijing’s efforts to drive up demand to jumpstart the world’s second largest economy. But the brief boom for a market that has struggled recently may prove temporary as the effects of government incentives fade in a wobbly economy. If and when that happens, the brief joy ride for Autohome and its peers could hit the skids just as suddenly as it began.

The nascent rebound was evident in Autohome’s latest quarterly results released last week, which showed the company’s total net revenue grew 4.5% year-on-year to 1.8 billion yuan ($259 million) in the third quarter. While the rise may look small, it marked the company’s first year-on-year sales growth in quite a while, reflecting the industry’s recent malaise. The last time Autohome posted a year-on-year increase was a year and a half ago in the first quarter of 2021.

Despite the return to revenue growth, Autohome’s net income still shrank year-on-year as costs increased faster than income. Still, the company’s third-quarter net income beat consensus analyst estimates compiled by the Wall Street Journal by about 8%. In its earnings announcement, the company also said its board approved an extension of a program to buy back up to $200 million of its American depositary shares (ADSs).

The broadly upbeat report was music to investors’ ears on a day when Chinese stocks across the board rallied amid speculation that Beijing may ease Covid-19 restrictions soon. Autohome shares jumped 7% both in Hong Kong and New York last Friday, following the release of its earnings. The stock continued to rally in Hong Kong on Monday, though it retreated in New York.

Autohome delivered the relatively solid results as China’s automobile sales rebounded strongly in the third quarter, powering ahead by 32% in August year-on-year. That’s a pretty big jump, given that car sales increased less than 4% for all of 2021.

The third-quarter spike followed a dismal second quarter, when severe Covid restrictions saw the whole city of Shanghai locked down for the entire months of April and May. The sales jump also owed in no small part to a range of government incentives for car buyers aimed at rejuvenating the market, a critical part of the Chinese economy, after the prolonged downturn that was also the result of an earlier global semiconductor chip shortage that hindered production. Government incentives included an extension of tax exemptions for electric cars and the halving of taxes for small-engine car purchases.

Autohome’s fortunes are closely tied to the broader industry because carmakers and dealers are the main customers for its products and services. Autohome’s revenue from media services, which it provides as targeted marketing services for automakers, grew by a nice 28% in the third quarter from a year earlier. Its revenue from “leads generation” services, which enable car dealers to create their own online shops, also grew 5% year-on-year. These two segments accounted for more than 70% of the company’s third-quarter revenue.

Good times

While Autohome’s revenue returned to growth for the quarter, that came at a cost. Autohome reported its sales and marketing expenses grew by an even larger 20% year-on-year, equal to nearly half of its total net revenue. Still, the overall results are generally positive given the difficult times consumer-oriented businesses in China are facing during the country’s economic downturn.

But the good times for Autohome may not last long either. By now, a lot of consumers keen to take advantage of the government incentives have probably already done so, meaning the pool of potential new car buyers might be shrinking. As increasingly cost-conscious consumers focus on reining in their spending, expensive non-essential items like cars are naturally moving to the bottom of their shopping lists.

Car demand is already showing signs of weakening, with automobile sales growth slowing by 6 percentage points to about 26% in September. Of course, such a growth rate still isn’t bad. But it could prompt car makers to overproduce in anticipation of future demand that could ultimately be softer than many are anticipating.

Carmakers shipped 1 million vehicles to dealers in the first nine months of this year, but retail sales substantially lagged those deliveries, according to a Reuters report that citied research by China Merchants Bank International.

The large gap between shipments to dealers and actual sales means that dealers may be getting left with large unsold inventory, which would create a lot of headaches because cars are expensive to store and depreciate in value over time. Growing inventory would force carmakers to cut back on production and eventually shipments, which would hurt their revenue. In the end, lower spending by both carmakers and dealers would deal a blow to Autohome.

Autohome’s shares currently trade at a price-to-earnings (P/E) ratio of about 20 in New York and slightly less in Hong Kong. That’s more or less in line with 21 for Cango (CANG.US), another provider of auto trading services.

Such high valuations indicate investors are relatively optimistic about China’s auto industry at large. Reflecting that, shares in SAIC Motor Corp. (600104.SH), one of China’s top car makers, boast a P/E ratio of nearly 10, higher than the 7 for U.S. giant General Motors (GM.US) and South Korea’s Hyundai Motor (005380.KS).

Given the auto industry’s importance for the Chinese economy, it may be safe to bet that Beijing will continue to come up with ways to support it, which is a good thing for businesses like Autohome. But when Chinese consumers are feeling the pinch of the country’s slowing economy, any government efforts to convince them to buy cars can only have so much impact.

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