Description

Overview

Autohome is the leading auto sales online portal in China. Part Autotrader, part Carvana, part Car & Driver, its lead generation represents 40% of all dealer leads and 20% of all new car sales in China. As you’d expect, this is a high ROIC business with strong network effects and high incremental margins. What might surprise you is that shares are -50% ytd and the equity currently trades at 8x cash adjusted earnings and an 8.5% FCF yield, with 33% of the market cap in cash. Revenue is growing >10% p.a. with >33% EBIT margins that convert to cash at >100%. 

Shares are -11% this week after MS downgraded and dropped its TP by 53% to $50/share.

Why so cheap? It’s easy enough to dismiss Autohome:

• May I offer you a minority stake in a controlled Chinese firm operating an online marketplace exposed to domestic consumer spending that is coming off 5 years of explosive revenue growth and high margins?

• Dealers are upset by its aggressive pricing tactics

• Plus the founder-team mostly left in 2016 and competitors are growing faster

• And the usual VIE Cayman-incorporated risks apply for a US-listed Chinese company

• Bonus: mgmt. are looking to expand into Germany, UK!

Some of these concerns are clearly valid. The VIE structure is indefensible, even if it applies to all US-listed Chinese companies. As a controlled subsidiary of Ping An (45% shareholder), Autohome’s ~$2.5bn of net cash may never be attractively allocated or returned to shareholders. Competitive threats are real, and Autohome is growing at a slower rate than (smaller and unprofitable) competitors, spooking investors who rightly see this as a winner-take-most market. Shorter term, the automotive chip shortage means new car sales may be depressed over the next few quarters.

But at $54/share the equity is more than discounting these negative concerns. Autohome is a hugely cash generative business with a reputable controlling shareholder, growing revenue and margins as it serves an under-penetrated end-market. By YE23 cash will be >50% of the market cap and the equity will be trading at 5x cash-adjusted earnings.

In Autohome you’re buying the leading consumer automotive lead generator in the world’s #2 economy and #1 car market, with decades of car ownership growth, a diverse mix of dealers/OEMs, a motivated 45% owner and growing net cash on the balance sheet. The VIE structure, competitive threats and lack of access to mgmt all warrant a material discount to global peers, but on forward estimates that are 25% below consensus and using just 10x cash-adjusted earnings (17x reported) the equity is worth $90.

Business

Autohome is a web portal generating 60m monthly active users who come for a combination of automotive news, chat forums, vehicle information and new/used car sales listings. Autohome monetizes these MAUs via traditional online advertising to OEMs (“Media Services”) and lead generation fees to dealers. In the last two years it has also built out a Data Analytics offering and expanded its presence as a used car marketplace, a hugely underpenetrated growth opportunity in China.

There are 3 reporting divisions (% of revenue):

1. 40% Leads Generation Services: dealer subscription services offering white-label online stores, as well as aggregated listings on Autohome’s own website. Also CRM software to manage prospective and existing customer relationships. Primarily new car but used car listings represent a fast growing segment.

2. 37% Media services: targeted-marketing solutions and brand promotion to OEMs

3. 23% Online marketplace and others: Autohome’s own car buying marketplace, providing facilitation services for new and used car transactions and related ancillaries (i.e. financing, insurance, servicing). Since 2017 this division has also included “data products” which purportedly leverage Autohome’s “intelligent big data analytics capabilities and massive pool of accumulated user data to provide end-to-end data driven products and solutions for automakers and dealers.” This is the fastest growing division at >20% p.a. but is likely benefiting from cannibalization as it offers turbocharged versions of the core products in the other two divisions.

Autohome has the highest lead conversion rate in China, allowing it to charge a premium vs. peers (RMB 25/lead vs. RMB 10-12 by smaller competitors). Dealers have historically grumbled, but continue to pay, confirming the high quality of Autohome’s leads. This ~$4/lead rate compares with $20-30/lead in the US, at conversion rates that are half as good.

The MAUs are almost entirely organic, another indication of Autohome’s high quality platform. Most of the COGS (11% of sales) go to content creation costs, which includes employed and contracted authors/editors/videographers. 

OEMs ad budgets have grown from 2.0% to 2.5% of vehicle sales since 2013. Ad budgets are highly correlated to sales figures, making them cyclical. Online advertising is 40% of total ad spend, up from 25% in 2014 and expected to continue growing. Go to autohome.com.cn to see what the ads look like. Over 90 OEMs including all the majors advertise with Autohome.

The dealer market is fragmented, with some 27k nationally. This has declined from a peak of 31k in 2019. The top 10 dealers account for ~10% of total vehicle sales and top 100 for <40%. In the past Autohome has been forced to publicly address dealer grumblings about the rate at which it was raising prices for both lead generation and some of its ERP-like software offerings. Mgmt have to be careful here, but ultimately this speaks to the importance and pricing power of their offering.

Most dealers (~85%) subscribe to Autohome’s lead generation and CRM products, paying ~$22k/yr on average. Gradual dealer consolidation is a long-term headwind:

Demographics

There are tremendous demographic tailwinds in China that are worth touching on. China has 180 car owners per 1,000 people. By comparison Malaysia has 433 and the USA has 838. The correlation between GDP per capita and car ownership is very strong:

In 2019 China had 21.4m new vehicle sales (vs. 17.1m in the US). The average vehicle age was 5.3yrs (vs. 12 in the US) and used car sales were just 0.5x new sales (vs. 2.4x in US). If China sells just 22m new cars/yr for the next 5 years, vehicle ownership penetration will rise from 186 to 270 per 1,000, the average vehicle age will grow to 7.2 years and total vehicles on the road will grow to 380m. This is a lowball estimate. The IMF estimates 2026 Chinese GDP per capita will be $17k, which correlates with 400 vehicles per 1,000 people.

China is already the largest automotive market globally, but its used car transactions are in early innings at just 0.5x new car sales (11.1m transactions in 2019). Unlike the US and Europe, 70% of used cars transactions in China are between individual consumers, leaving the market ripe for consolidation. Listed Uxin is addressing this space and trades at 6x forward sales despite large operating losses, reflecting investor excitement over the used car opportunity. Autohome has the opportunity to be larger than Uxin thanks to its recent purchase of TTP (next paragraph).

To capitalize on the growing used car market opportunity, during 2018-2021 Autohome gradually purchased TTP, a leading used-car marketplace. TTP is consolidated as of 1Q21 after passing 51% ownership in a purchase that implies a $600m EV. TTP’s contribution today is immaterial but it is growing at high double digit rates and mgmt repeatedly reference its growth opportunity. From a 2020 press release: “Today, used car business has become a dark horse among Autohome's new businesses and an important driving force for the company's financial growth.” TTP facilitates C2B2C transactions between consumers and dealers, offering critical authentication and financing assurances that are currently lacking in the C2C market. It’s early innings and I’m not ascribing a value to this initiative, but it has the potential to be extremely large. The growth of China’s used-car transaction market is a foregone conclusion.

Capital allocation isn’t the best. On the one hand, a dividend was introduced last year with a policy to pay out 20% of the prior year earnings. On the other hand cash continues to grow and mgmt seem keen to expand into international markets in both Asia and Europe. Autohome expanded into Germany and the UK in 2020 with a used-car portal. MAU has grown to 3.1m as of 1Q21 and the number of connected dealers and vehicles doubled qoq to 6,550/1.2m. Mgmt have been clear in saying they will not pay for lead generation and are relying on their OEM relationships and algorithms, suggesting these overseas ventures won’t burn capital even in a failure scenario. But who knows. 

Competitors

There are two notable competitors to Autohome: Bitauto and Dongchedi. Bitauto was delisted by parent Tencent in late 2020. Dongchedi is a subsidiary of ByteDance. Neither is profitable but both are extremely well capitalized. Dongchedi in particular has a dominant position in influencer-led video content (think Snapchat) in which Autohome is currently playing catch up.

A comparison to Bitauto (pre privatization) is useful. Autohome has 90% organic lead generation vs. 60% at Bitauto. Autohome sales are >90% advertising and lead generation while Bitauto revenue is only 36% ad & lead generation. Gross margins are 90% at Autohome vs. 63% at Bitauto and operating margins are 42% vs. negative.

But of course the market focuses on growth rates, and in recent quarter both Bitauto and Dongchedi have been growing faster than Autohome:

Dongchedi set an aggressive revenue target of RMB 5-6bn for 2021, vs RMB 3bn in 2020. Gross margins aren’t disclosed but will be structurally lower than Autohome’s as Dongchedi must pay for leads and pass on more of its revenues to the influencers that dominate its platform. Still, advertising dollars tend to follow eyeballs, so the higher growth rates shouldn’t be ignored.

Ping An

Ping An acquired a 52% stake in Autohome in 2016 from Telstra, and has since sold down to 45%. This is worth just 2% of Ping An’s market cap but as a consolidated subsidiary I don’t know how important Autohome’s cash might be to Ping An. Lack of access to mgmt mean there is some guesswork involved around Ping An’s ultimate strategy. See the VIC write up earlier this week on Ping An for more context.

What does seem clear is that Ping An is a sophisticated investor who in recent years has made moves to realize value for its subsidiaries via primary and secondary listings. In March of this year Autohome had a secondary listing in Hong Kong. That alone isn’t unusual as lots of US-listed Chinese firms did the same thing out of geopolitical concern. What is strange is that (a) Ping An sold a bit into the listing and (b) fresh equity was raised. Perhaps both moves were necessary to achieve sufficient liquidity, but it’s an unanswered red flag that a company with excessive net cash elected to raise fresh equity without obvious explanation.

Both Ping An and Autohome talk about the cross-selling opportunities, which today account for <5% of Autohome’s revenue. The goal is to sell Ping An insurance and financing products to consumers at the time of purchase on Autohome’s platform. Management reference a RMB 50bn TAM against current annualized sales of just RMB 0.5bn that is growing at double digit rates. I have no insight into the ultimate opportunity here, but do note that online insurance sales are not yet permitted by Chinese regulators, but are currently being tested in 4 cities.

Finally on Ping An it’s important to note that Autohome leadership are Ping An executives. The current CEO, Quan Long,  started in January 2021 and is a Ping An veteran since 1998. He ran Lufax, an online financial services firm 42% owned by Ping An that IPO’d in October 2020. On paper he seems strong but I have no real insight into management quality and note that the CFO recently announced his departure.

Valuation

On an earnings multiple Autohome has never been cheaper. This doesn't account for the growing cash pile.

Against 2022 estimates the company today trades at 2.3x EV/Sales, 6.6x EV/EBITDA, and 11x reported EPS. When adjusting for the cash on the b/s the earnings multiple becomes 6.0x. I expect operating income to grow at a 7.5% CAGR 2020-2024 and my projections are 25% below consensus. On a 3-year view my exit valuation of $91 assumes 3.5x revenue, 12x NOPAT and 10x cash adj. earnings, with a 6% FCF yield for a business that will have 50% of its market cap in cash. These exit multiples are far below international peers and Autohome’s own history. Should the firm ever trade closer to similar winner-take-most high ROCE peers the equity is worth well in excess of $150/share.

If Autohome were a US or European company, it would trade >30x earnings. The lack of access to mgmt, VIE shareholding structure and fluid competitive landscape all clearly warrant a discount, but at <10x cash-adjusted earnings these risks seem baked in. Plus the business has a listed controlling shareholder with aligned incentives and deep industry connections. China represents the strongest demographic tailwind globally for car ownership, and Autohome has a large cash cushion (unlike many international peers).

No peer is perfect but here are some global comps:

For a downside scenario, assume the unlikely: flat revenue and margin for 3 years. In 2024 Autohome would earn RMB 9.5bn in sales, 3.5bn in EBITDA and 3.5bn in FCF (~$550m). Net cash will grow from RMB 15bn to 27bn, which is $4.2bn or $33/share. At a 10% FCF yield shares would be worth $43 and net cash would be 75% of the market cap. This outcome, -20% from today’s prices, seems extremely unlikely. Revenue will almost certainly grow, even if slower than competitors, and cash will not build indefinitely or be 75% of the market cap.

Risks

First the obvious risk: the VIE. As with all Variable Interest Entity arrangements, foreign shareholders have a precarious claim to actual equity ownership. Below is Autohome’s corporate structure. The only important bits of this chart are the three dotted lines leading to the boxed-entities. They represent the “contracted arrangements” with which all foreign owners of any VIE claim their stake. The risks around VIEs have been front-and-center in the news lately and I have nothing intelligent to add. Now feels like an attractive moment to take this risk. If the PRC chose to pull the rug out from existing VIE arrangements I think we’ll all have bigger things to worry about than our portfolios.

Beyond the VIE there is a short list of relevant risks:

1. Competitive threats - as discussed, well-financed competitors growing faster

2. Ping An’s motivations - unclear

3. Consolidation of the Chinese dealer market - headwind to pricing power

4. Short-term weakness in new car sales - immaterial against LT growth of Chinese car ownership

Autohome probably is never a core holding given some of these risks, but at today’s valuation the risk/reward profile seems extremely compelling. Of course I say this as a generalist with limited Chinese insight. Curious what others with more relevant experience may think.

Catalyst

• Increase in shareholder returns (dividend or repurchase)

• Normalization of long-term trend in new car purchases in China

• New disclosures around TTP (used car sales)

• Base-case: Continued hsd revenue growth leading to a growing cash pile that forces a re-rating as the market realizes Autohome remains the incumbent despite the faster growth of unprofitable peers (which are more entertainment platforms than transaction platforms anyway).