ATHM - Autohome: It's All About Capital Allocation

2023-04-04 11:36:35 ET

Summary

• Autohome Inc. is committing to an absolute level of dividend payouts for the next few years, but its minimum dividend guidance isn't sufficiently attractive.
• Autohome has been buying back its own shares at a slower than expected pace, despite the stock's undervaluation and the company's substantial cash balance.
• Autohome seems to have set aside some of its excess capital for future investments and acquisitions, while investors might prefer that Autohome Inc. places a greater emphasis on shareholder capital return.
• In my view, Autohome hasn't done enough on the capital allocation front to warrant a substantial re-rating of its shares; a Hold rating for Autohome Inc. is fair.

Elevator Pitch

My rating for Autohome Inc. ( ATHM ) [2518:HK] shares is a Hold.

I initiated coverage of ATHM with my prior January 19, 2023 write-up for the stock, which touched on Autohome's market leadership in terms of the size of its user base, and competition from key rivals Dongchedi and Bitauto.

In this latest update, I highlight that ATHM's significant cash pile of the books is a key reason for the stock's cheap valuations, and discuss why I think that Autohome hasn't done enough to address the undervaluation issue with its current capital allocation strategy.

Valuations

Autohome is currently valued by the market at roughly 13 times consensus forward fiscal 2023 normalized P/E based on the company's consensus FY 2023 non-GAAP adjusted EPS estimate of $2.55 . But this headline P/E metric for ATHM fails to take into account the substantial cash that the company has on its balance sheet .

As disclosed in its Q4 2022 results press release , Autohome had around RMB22.08 billion or $3.20 billion of cash and short-term investments on its books as of end-2022. ATHM's ex-cash P/E is only around 3 times if one adjusts for the company's cash balance. Also, Autohome's forward EV/EBITDA multiple (a valuation metric that already takes into account ATHM's cash holdings) is also undemanding at approximately 4 times .

It is reasonable to come to the conclusion that investors have assigned a valuation discount to ATHM because of its "lazy" balance sheet as reflected in the huge amount of excess cash on its books.

In the subsequent sections of this article, I detail some of the new capital allocation initiatives that Autohome has implemented in recent times to narrow the valuation discount for its shares.

Dividends

As part of the company's earlier Q4 2022 financial results announcement in mid-February, Autohome announced a change to the company's dividend policy.

In the past, ATHM had a policy of distributing about a fifth of its annual earnings as dividends to its shareholders, which wasn't well received by investors. One factor is that Autohome's 20% dividend payout ratio isn't that high. Another factor is that paying out dividends based on a fixed payout ratio means that ATHM's dividends in absolute terms could vary significantly from year to year.

Going forward, Autohome has committed to allocating a minimum RMB500 million of excess capital to yearly dividends for the FY 2022-2026 period. This works out to be a dividend per ADS (American Depositary Share) of $0.58, which is the actual dividend that ATHM paid out for FY 2022. The new dividend policy introduced by ATHM provides the company's shareholders with greater certainty about the absolute dividends they can expect to receive every year in the medium term.

But Autohome's new dividend policy isn't good enough in my opinion. The $0.58 in dividend per ADS only translates into a modest 1.8% dividend yield based on ATHM's last traded stock price of $33.06 as of April 3, 2023. More importantly, the RMB500 million in expected annual dividends only represent 2.2% of Autohome's large cash position as of December 31, 2022.

In a nutshell, ATHM's minimum dividend as outlined in its new dividend policy isn't appealing enough, and the market would have hoped for a larger proportion of capital being allocated to dividends.

Share Repurchases

Autohome had previously initiated a $200 million share buyback program with an one year time frame in November 2021, which has been subsequently extended to November this year.

The $200 million share repurchase plan is decent, as the amount earmarked for share buybacks is equivalent to 6% of ATHM's cash balance and 5% of its market capitalization.

But ATHM's pace of share buybacks has been much slower than expected. Autohome had only completed slightly more than half ($111 million) of its share repurchase authorization in the 15 month period following the initiation of its share buyback program.

Taking into account Autohome's depressed valuations (3 times ex-cash P/E) and its significant cash position (RMB22 billion), it will be reasonable for investors to expect ATHM to be far more active in buying back its own undervalued shares.

Capital Investment

There is a risk that Autohome is prioritizing capital investment over capital return based on a review of the company management's recent comments. At its Q4 2022 earnings call on February 16, 2023, ATHM highlighted that it has "a lot of new initiatives" and "new investments," and it also noted that it is seeking "opportunities to explore M&A (Mergers and Acquisitions) deals."

It isn't necessarily a bad thing that ATHM has the intention to invest for future growth. But the market will definitely take a more favorable view of Autohome, if the company allocates more capital to buybacks and dividends. As an example, it will be easier for ATHM to enhance shareholder value to buy back its own shares at 3 times ex-cash P/E, rather than invest in new unknown acquisition targets which could be potentially more expensive.

Bottom Line

Autohome Inc. shares are rated as a Hold. ATHM's valuations are cheap, but the company needs to be more aggressive in terms of capital return to justify a positive valuation re-rating.

For further details see: