ATHM - Autohome: Cheap For Good Reasons

2023-06-16 05:32:25 ET

Summary

• Autohome gave up some of its initial post-Q1 2023 results and share price gains in the last month.
• Recent data suggest that ATHM's near-term financial performance could be weak, while Autohome only spent a relatively small amount of money on share repurchases in the past few months.
• I keep my Hold rating for Autohome, as I believe that there are relevant factors contributing to ATHM's undervaluation.

Elevator Pitch

I have a Hold investment rating assigned to Autohome Inc. ( ATHM ) [2518:HK] stock. My earlier article for ATHM published on April 4, 2023 was focused on the company's capital allocation approach.

My current write-up highlights that Autohome's shares are cheap for good reasons relating to the company's financial prospects and capital return strategy. Therefore, I have chosen to retain a Neutral view of ATHM.

Post-Q1 Results Stock Price Outperformance Wasn't Sustained

Autohome previously announced its Q1 2023 results on May 11, 2023 before trading hours.

ATHM's actual first quarter top line of $221 million and normalized EPS of $0.56 came in +1.5% and +7.6% above the market's consensus financial forecasts, respectively. At its Q1 2023 earnings call , Autohome mentioned that "revenues from TPP (used car auction platform) and data products returned to their growth track (post-COVID recovery and normalization) and the revenue contribution from new energy (vehicle or NEV) brands continue to rise." These were the key drivers of ATHM's better-than-expected Q1 2023 financial performance.

Initially, investors were encouraged by Autohome's above-expectations financial results for the first quarter of 2023. ATHM's shares went up by +6.6%, +3.2%, and +5.8% on the 11th, 12th and 15th of May, respectively. This means that Autohome's stock price rose by +16.3% on a cumulative basis in the three trading days after the company reported its first quarter results.

But ATHM's last traded share price of $31.34 as of June 15, 2023 was -4.2% lower than its May 15, 2023 closing stock price of $32.70. In the subsequent sections, I explain why Autohome's positive share price momentum following its Q1 earnings release couldn't be sustained in the past month.

FY 2023 Financial Outlook

The prospects for Autohome for the rest of 2023 aren't great, notwithstanding the company's Q1 revenue and earnings beat.

In the past three months, 14 of the 17 sell-side analysts covering ATHM's stock reduced their respective FY 2023 top line projections for the company. In addition, eight of the analysts with Autohome in their coverage universe lowered their current year earnings estimates for ATHM. Specifically, the market's current consensus financial forecasts imply that Autohome's normalized net profit will decrease by -4.2% YoY to $303 million for full-year FY 2023 as per S&P Capital IQ data.

The sell-side is justified in having a bearish view of ATHM's financial outlook. The most recent passenger vehicle data for the Mainland Chinese market was disappointing. The number of passenger vehicles sold in Mainland China contracted by -25% MoM (Month-on-Month) to 425,000 units for the June 1-11 time period. Also, China's retail sales growth moderated from +18.4% in April 2023 to +12.7% in May 2023, which was -90 basis points below the consensus growth expectation of +13.6%.

ATHM's outlook for the remainder of this year isn't that favorable, taking into account the analysts' consensus numbers and recent data.

Shareholder Capital Return

At the company's first quarter results briefing last month, Autohome was asked by one of the attendees "how we spend our cash, as well as the future plan." In response, ATHM emphasized that it "will continue to consider about increasing our return to the shareholders."

It isn't a surprise that analysts and investors are concerned about how Autohome manages its cash and its strategy relating to capital return.

ATHM's cash and investments as of March 31, 2023 was RMB22.71 billion or $3.18 billion, and this represented about 82% of the company's market capitalization. But Autohome hasn't been as active in returning capital to its shareholders as one would have expected.

Between February 10 and May 5 of this year, ATHM only allocated $8 million (0.2% of its market capitalization) to share buybacks based on the company's disclosures in the prior earnings calls. During this period, Autohome was valued by the market in the 1.4-5.8 times (source: S&P Capital IQ ) consensus forward next twelve months' EV/EBITDA multiple range. It is reasonable to assume that ATHM had the opportunity to buy back its own shares at EV/EBITDA ratios in the low-to-mid single digit range for the past couple of months.

Autohome's cash balance increased by approximately +2.9% QoQ between the end of 2022 and March 31, 2023, and the company didn't do any significant share buybacks for the February 10-May 5 time frame. In summary, ATHM continues to have a "lazy balance sheet" with lots of "idle cash", and it is hard to expect a sustained share price increase for Autohome unless the company addresses issues associated with shareholder capital return.

Concluding Thoughts

ATHM currently trades at 2.8 times consensus forward next twelve months' EV/EBITDA as per S&P Capital IQ data. Considering that Autohome hasn't been aggressively buying back its own shares and the company's outlook is weakening, it is reasonable that Autohome's shares are cheap. As such, I think that ATHM warrants a Hold rating.

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