ATHM - Autohome: A Mixed View

2023-10-12 09:28:11 ET

Summary

• Autohome's top line is expected to improve thanks to favorable policies for the Chinese automotive industry and growing new energy vehicle sales in China.
• However, I am unimpressed by ATHM's minimum dividend commitment and its expected profit margins.
• I stick to my existing Hold rating for Autohome, as I have a mixed view of the stock.

Elevator Pitch

Autohome Inc. ( ATHM ) [2518:HK] shares are assigned a Hold rating.

In my previous update for Autohome written on June 16, 2023, I deemed ATHM to be "cheap for good reasons." These negative factors highlighted in the mid-June write-up were the downward revision in consensus financial estimates and the below-expectations share buybacks for ATHM.

With the latest article, I share why I have a mixed opinion of Autohome stock which translates into a Hold rating. ATHM's top line performance is likely to get better, but I have a negative view of the company's expected profitability and dividends.

Mixed Read-Throughs From A Review Of Consensus Numbers

An analysis of the sell-side analysts' consensus financial forecasts indicates that ATHM's prospects are mixed.

On the positive side of things, the market consensus sees an improvement in Autohome's revenue. Specifically, ATHM's top line contraction is expected to narrow from -11.7% in FY 2022 to -0.6% for FY 2023, and the company is projected to expand its sales by +5.2% next year.

On the negative side of things, the analysts think that Autohome's profitability will be weaker and they expect muted dividend growth for the stock. As per S&P Capital IQ data, Autohome's normalized net profit margin is estimated to decrease from 31.2% for FY 2022 to 30.1% in FY 2023, before declining to 29.8% in FY 2024.

Separately, ATHM's FY 2022-2024 dividend per CAGR is forecasted to be +0.9%, based on the company's actual FY 2022 dividend of $0.58 per ADS (American Depositary Share) and the consensus FY 2024 dividend per ADS projection of $0.59 .

In the subsequent two sections of the current article, I explain why I think that the consensus numbers for Autohome are realistic.

Favorable Top Line Outlook

ATHM's top line performance for this year and next year is likely to be better as compared to the prior years, taking into account recent policy developments, monthly industry sales figures, and management disclosures.

Chinese state media The Global Times recently published a news article on October 11 mentioning that China's regulatory authorities have disclosed new measures that are expected to have a positive impact on the domestic automotive market. In this article, it is highlighted that these new initiatives proposed include "simplifying auto loan procedures, increasing the supply of financial services in the auto sector and granting more support in the new-energy vehicle sector."

The most recent monthly vehicle sales data for the Chinese market was pretty decent. Auto sales in China expanded by +9.5% YoY and +10.7% MoM (Month-on-Month) in September. It is worth noting that new energy vehicle sales in China grew much faster than the overall market with a +27.7% YoY increase in the previous month.

Autohome's management shared at the company's Q2 2023 earnings call that its sales derived from new energy vehicles jumped by a substantial +60% YoY in the recent quarter. ATHM also mentioned at its most recent quarterly earnings briefing that the proportion of new energy vehicles as a percentage of total passenger vehicles for the Chinese market was 32% as of end-1H 2023. These numbers imply that ATHM's new energy vehicle business segment is expanding rapidly and there is still huge potential for further growth considering the current industry penetration rate.

ATHM, which refers to itself as "the leading online destination for automobile consumers in China" in its media releases , is clearly a beneficiary of a faster pace of sales growth for the Chinese auto industry driven by favorable policies and rising new energy vehicle penetration.

Future Profit Margins And Dividends Could Be Disappointing

Autohome's profitability and dividends might not live up to expectations.

As noted in an earlier section of this article, ATHM's profit margins are forecasted to contract in FY 2023 and FY 2024, even though there are expectations of an improvement in the company's top line performance.

Autohome's growth in the new energy vehicles space might come at the expense of higher investments. At its Q2 2023 results briefing, ATHM indicated its intention to establish between 10 and 20 "offline experience stores" relating to new energy vehicles within the current year. As such, faster top line expansion driven by new energy vehicles could be offset by an increase in investments and expenses associated with these new brick and mortar stores.

On the other hand, investors and analysts do expect ATHM to return more of the company's excess capital to shareholders, but it is less likely that such expectations will be met.

A sell-side analyst from Jefferies ( JEF ) asked the company to provide more color on the "use of cash in the coming years" at ATHM's second quarter results call. Autohome responded to this analyst's question by stating the company's policy of distributing at least RMB500 million to shareholders in the form of dividends for the next five years.

I don't think that the minimum dividend payout of RMB500 million is sufficient in the eyes of many investors. ATHM had cash and investments amounting to RMB23.3 billion at the end of June this year, which is equivalent to 46 years of dividends based on the RMB500 million guidance. This implies that Autohome should either raise the minimum dividend payout commitment or pay out a one-time special dividend. As it stands now, the current consensus FY 2023 and FY 2024 dividends per share estimates are $0.56 and $0.59 (source: S&P Capital IQ ), respectively which are slightly above the minimum dividend payout guidance of $0.556 (RMB500 million divided by the number of ADS).

Closing Thoughts

I am encouraged by positive signs indicating that ATHM's revenue outlook is improving. On the flip side, Autohome's future profit margins and dividends are likely to be disappointing. As such, I maintain my Hold rating on Autohome.

For further details see: