Autohome: Focus On Vehicle Subsidies And Dividend Outlook (NYSE:ATHM)

Elevator Pitch

I rate Autohome Inc. (NYSE:ATHM) [2518:HK] stock as a Buy. My prior October 12, 2023 write-up was focused on ATHM’s mixed financial prospects.

This update touches on ATHM’s recent quarterly financial performance, the latest policy development for China’s automotive market, and the company’s dividend guidance.

Autohome is guiding for a +50% increase in dividend distributions for full-year 2024. Separately, the company’s 2024 financial performance should benefit from the introduction of new vehicle subsidies for China’s automotive market. These positive factors support an upgrade of my rating for ATHM from a Hold to a Buy.

Q1 2024 Results Were Decent

Autohome achieved positive top line and bottom line growth in the most recent quarter.

As indicated in its latest quarterly results release, ATHM’s revenue expanded by +4.9% YoY from RMB1,533.6 million in Q1 2023 to RMB1,609.1 million for Q1 2024. Autohome’s actual first quarter sales beat the consensus forecast by +1.7% as per S&P Capital IQ consensus data.

I noted in my October 2023 article that Autohome’s “new energy vehicle business segment is expanding rapidly and there is still huge potential for further growth considering the current industry penetration rate.” Indeed, it was the outperformance of ATHM’s new energy vehicle business that allowed the company to register better-than-expected top line in Q1. Autohome disclosed at its Q1 2024 earnings briefing that the revenue generated by its new energy vehicle segment rose by a substantial +49.6% on YoY terms in the most recent quarter.

On the other hand, ATHM’s normalized net profit attributable to shareholders increased by +2.2% YoY from RMB483.5 million for the first quarter of 2023 to RMB493.9 million in the latest quarter.

Autohome’s normalized net margin declined by -0.8 percentage points YoY to 30.7% in Q1 2024. This is likely attributable to marketing investments that the company made to sustain revenue growth. In specific terms, ATHM’s sales and marketing costs increased by +22.6% YoY to RMB641.3 million in the first quarter of 2024.

But the company’s first quarter net income of RMB493.9 million still beat the consensus estimate by +9.5% (source: S&P Capital IQ) and its net margin was still pretty good in absolute terms (i.e. above 30%). This suggests that ATHM’s actual profit margin contraction for the recent quarter wasn’t as bad as what the market had feared earlier.

New Vehicle Subsidies For The Chinese Automotive Market

Autohome didn’t provide any specific quantitative forward-looking guidance as part of the company’s recent Q1 2024 earnings announcement. Nevertheless, it will be reasonable to think that ATHM can perform well going forward, taking into account recent policy development.

In late April, Bloomberg reported that “China will give a one-time subsidy of as much as 10,000 yuan ($1,380) to consumers who trade in their old vehicles and buy a newer model.” This is clearly a positive development for China’s automotive sector, as the new vehicle subsidies will likely boost new car sales in the country.

In its press releases, ATHM calls itself the “leading online destination for automobile consumers in China” which is “a preferred platform for automakers and dealers to conduct their advertising campaigns.” A potential increase in transaction activity for the Chinese automotive industry will most probably have a positive impact on Autohome’s future financial performance.

At the company’s first quarter earnings call, Autohome shared its opinion that the new vehicle subsidies will “stimulate the demand on the (Chinese automotive) market”. More significantly, ATHM emphasized that it has been “utilizing big data to accurately identify people with replacement needs” and offering “other service guarantees” to “activate automobile consumption potential” associated with the latest policy development.

In other words, Autohome has been taking actions to leverage on revenue growth opportunities emerging from the new policy development, which bodes well for ATHM’s financial prospects. As per S&P Capital IQ consensus data, the sell-side analysts anticipate that ATHM’s top line and operating income can grow by +3.4% and +6.9%, respectively, for full-year FY 2024. In contrast, the company’s revenue and operating profit decreased by -1.2% and -13.0%, respectively, last year.

To sum things up, policy tailwinds are expected to have a favorable impact on ATHM’s full-year 2024 results.

Positive Dividend Outlook

ATHM highlighted the company’s intermediate term dividend distribution policy at its Q1 2024 results briefing.

Autohome’s medium-term dividend policy indicates that the company will distribute at least RMB1.5 billion in dividends each year on a semi-annual basis between fiscal 2024 and fiscal 2026. This represents a significant improvement in ATHM’s shareholder capital return approach.

The company distributed relatively lower yearly dividends amounting to RMB1.0 billion and RMB500 million for FY 2023 and FY 2022, respectively. Also, Autohome’s prior dividend payment frequency was once a year.

ATHM’s RMB1.5 billion dividend guidance translates into an enticing forward dividend yield of 6%. Autohome should be able to expand its shareholder base by attracting more income-focused dividend investors with the company’s updated dividend policy.

Variant View

Investors should focus on two main risk factors when they consider Autohome as a potential investment candidate.

One key risk is that China’s automotive market might underperform going forward, assuming that the Chinese regulatory authorities change their current favorable stance (as evidenced by new vehicle subsidies) on the sector.

The other key risk is that ATHM fails to deliver on its minimum RMB1.5 billion dividend distribution commitment, which will leave investors disappointed.

Final Thoughts

Autohome is now valued by the market at 13.2 times consensus next twelve months’ normalized P/E. In contrast, the stock’s historical 10-year mean P/E multiple is a much higher 20.4 times as per S&P Capital IQ data. My view is that ATHM is worthy of a more demanding P/E ratio closer to its historical average. The favorable policy development for the Chinese automotive industry and a positive dividend outlook are expected to be the key valuation re-rating drivers for ATHM.