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Investor Does Fundamental Analysis on Autohome (ATHM) - Stock Analysis For Beginners

17 Sep 2021

Transcript

00:30 About Autohome

Hey guys, I’m Alex. Welcome to Behind The Stock where I dissect company information and annual report to discover and identify investment opportunities for you. We upload new episodes every Friday! Make sure to subscribe and turn on the notification bell!

Today, let’s talk about Autohome, the leading online destination for automobile consumers in China!

As always, this video is not a buy/sell recommendation. Remember to always do your research and due diligence.

Back to Autohome, the company provides professionally produced and user-generated content, a comprehensive automobile library, and extensive automobile listing information to consumers.

As a transaction-centric company, they also have “Autohome Mall” which is a full-service online transaction platform. Its function is to facilitate transactions for automakers and dealers. Autohome also offers sales leads, data analysis, and marketing services to help automakers and dealers to improve their efficiency and transactions.

Besides that, through their website and mobile apps, Autohome also provides other value-added services. This includes auto financing, auto insurance, used car transactions, and aftermarket services.

Basically, they cover the entire car purchase and ownership cycle. Autohome’s mission is to enhance the car-buying and ownership experience for auto consumers in China.

They have created a community with 42.1 million daily active users! That’s the highest among all car online service platforms in 2020.

As of June 2021, the company has more than 6,000 employees. But what especially caught my attention is their experienced management team.

The CEO, Long Quan (龙泉), has held a series of leadership roles within Ping An Insurance before joining Autohome. He also has extensive experience in business management at leading internet companies. He was the assistant general manager of Lufax, senior director of Ant Group, both times in charge of insurance business, then a director, general manager and CEO of Cathay Insurance Company.

Other than that, the co-president, Shao Haifeng (邵海峰) and the CTO, Wang Xiao (王晓), are both very experienced as well.

Autohome went public on NYSE in December 2013 and recently completed their secondary listing on Hong Kong Stock Exchange this March.

02:54 Autohome Business Overview

Going back to the business, Autohome’s revenue is separated into 3 segments. Media services, leads generation services, online marketplace and others.

In terms of the media services segment, they provide automakers with targeted-marketing solutions for brand promotion, new model release and sales promotion. Autohome's large and engaged user base provides a wide reach for automakers.

As for the leads generation services, it enables their dealer subscribers to create their own online stores. They can list pricing, promotional information, provide dealer contact information, place advertisements and others. The leads generation services also include used car listing services, where interested buyers can contact the relevant sellers.

Lastly, it’s the online marketplace and others. As Autohome continues to strengthen their media and leads generation services, they’re also further developing their online marketplace and other businesses. It includes facilitation services for new and used car transactions, auto financing business, data products which leverage on intelligent big data analytics and their massive pool of accumulated user data, and others.

In terms of revenue breakdown, media services segment contributes to almost 40% of total net revenue. Lead generation services around 37% and online marketplace and others about 23%. As we can see over the years, Autohome has been gradually reducing their reliance on revenue from media services.

04:07 Autohome Growth

Now let’s talk about their growth!

First is the large market for Autohome to expand. Their business and results of operations are hugely influenced by China’s overall economic conditions AND the general trends in the automotive industry.

The economic growth in China has contributed to an increase in household disposable income and improved the availability of financing for automobile purchases. So, the better the economy is, the more the people are buying cars, the better it is for Autohome.

As for the trends in the industry, in 2019, new-energy vehicles made up 5% of all new car sales in China. The ratio is expected to increase until 50%. Of the new-energy vehicles, more than 95% are to be EVs which is electric vehicles.

There are plans to further boost new-energy vehicles as China is the world's biggest carbon emitter. The goals are to raise the ratio of hybrids to 75% of all gasoline cars by 2030 and to 100% by 2035, and to stop manufacturing and selling conventional gasoline vehicles. So, this will have an impact on Autohome as well.

The other growth factor for Autohome is their expanding sales force. Autohome has an in-house team of sales representatives that sell their services to automakers and dealers.

As of end December 2020, they had 1,500 sales and marketing representatives operating their physical sales office network across 70 cities in China. The sales team only goes where there is enough customer base.

In cities where they do not yet have a customer base, they provide sales coverage by telephone. In the past years, Autohome has successfully expanded their market presence in the first- and second-tier cities in China. They plan to continue expanding their sales and marketing efforts into third- and fourth-tier cities to further capture the opportunities for automobile sales growth in those markets.

Besides that, there’s also the strategic acquisition of TTP Car. Back in Oct 2020, Autohome announced a 168 million US dollar investment into TTP Car, which is a leading auction platform for used cars in China. It will add significant synergetic value to Autohome's used car business.

By working closely with TTP, Autohome will integrate itself into upstream supply of used cars. They can leverage the transaction business to further develop their auto finance operations, build a comprehensive ecosystem for used car transactions, and become China's largest used car platform.

In Autohome’s recent Q2 earnings, they announced that TTP has already break even at the operating level for the first time in June 2021.

In terms of Alex Meter, I rate Autohome’s growth as exciting.

06:39 Autohome Moat

Moving on to their competitive advantage, I would say it’s network effect. Autohome is at the top in terms of branding and market share in China.

They are also the leading online destination for automobile consumers in China. The more automakers and dealers engage Autohome, the more it will attract customers due to larger selections. As they get more users, then more automakers and dealers will want to use Autohome’s services as well because that’s where the potential customers are.

In order to stay on top, Autohome has to make sure their technology and infrastructure are top notch. So, Autohome follows a user-centric strategy for their system architecture. They have developed a robust and scalable technology platform driven by AI, big data and cloud technologies. It’s also flexible to support their rapid growth.

They’re also able to rapidly gather user intelligence by analyzing large amounts of data from many sources throughout their content production system. They can then monitor and analyze user behaviours and preferences through their browsing record on Autohome’s platforms. Those insights can be used to personalize user interfaces, facilitate interactions among users and many more.

They also provide automobile consumers trend analysis services for their automaker and dealer customers that help them analyze the data.

Not only that, by leveraging AR- and VR-related technologies like virtual showroom and auto show, they’re able to provide an innovative and superior experience. This has enhanced their user loyalty as well.

In terms of Alex Meter, I rate Autohome’s competitive advantage as strong

08:13 Autohome Risks

Now let’s look into their risks.

First is the regulatory risks.

Autohome is dependent on China’s automotive industry for their revenue and future growth. In a sense, there can be many uncertainties, which includes government regulations and policies.

A global trade war could also increase the cost of imported automobiles, which could negatively impact the demand for automobiles and impact their business. There are various other policies that would impact the business, like emission standard, adjustment of purchase tax, and more.

China’s motor insurance is also undergoing a reform. This could result in additional restrictions on Autohome’s business operations and/or create more intensive competition in the industry.

Besides that, there’s technology risks as well.

Their ability to provide users with a high-quality online experience depends on the continuing operation and scalability of Autohome's network infrastructure and IT systems.

Their systems are potentially vulnerable to damage or interruption as a result of natural disasters, power loss, telecommunications failures, technical error, computer viruses, hacking or similar events.

Autohome relies on content delivery networks, data centers and other network facilities provided by third parties. Any disruption to these network facilities may result in service interruptions, decreases in connection speed, permanent loss of user data and uploaded content.

Lastly, Autohome also faces competition.

In terms of China’s automotive vertical, there are several other websites and mobile apps that Autohome has to compete with. They are namely BitAuto, Dongchedi, Xcar and PCauto.

In terms of Alex Meter, I rate Autohome’s risks as medium risk

09:56 Autohome Financial

Now, let's take a look in the financials of the business. The revenue and profit is growing over the years. Of course, it’s the growth is impacted on Q2 LTM which is due to the COVID situation. However, they do have strong gross profit margin, net profit margin and return on equity. And, they have no debt while generating strong operating and free cash flow

In terms of Alex Meter, I rate Autohome’s financials as strong.

10:20 Like & Dislikes of Autohome

Here’s what I like and dislike about Autohome.

What I like is that they’re a high margin business. They’re showing profitability strength, which is good!

Another thing I like is the promising growth tailwind. Chinese government has been pushing and promoting new energy and hybrids car. It’s a long-term plan for the next few decades so meaning more people will be buying cars.

As for what I dislike, their business is heavily reliant on automobile industry which is very much affected by the overall economy. While automobile industry is growing historically and projected to grow strongly in the future, the journey can be cyclical. For example, on top of Covid, the shortage of chips also impacted the automobile industry. These external factors will affect Autohome’s customers, like automakers and dealers. So they might spend less on media and leads generation services.

Besides that, there’s lack of exclusive business relationship between Autohome and their customers. Meaning, automakers and dealers are free to choose different channels and platform to sell their inventories if they have the ads budget. They aren’t able to lock those customers on Autohome. When competition intensifies, this will affect Autohome.

So, after watching my analysis, would you add Autohome into your watchlist?

Comment down below what do you like or dislike about Autohome.

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Till then, I’m Alex and goodbye!