James Fletcher of APG Asset Management presented his in-depth investment thesis on Autohome (NYSE: ATHM) at Best Ideas 2018.
Autohome is a business with a strong network effect, where the market underestimates pricing power, with improved corporate governance, strong cash generation, and an undervalued stock relative to history and global peers. The company is China’s leading online automotive portal, with 25+ million unique users per day and 28,000+ serviced dealers. Autohome is comparable to Autotrader.com in the UK, Cars.com or Autotrader.com in the U.S., and Carsales.com in Australia.
James’ investment thesis is based on four pillars:
(i) The company benefits from a network effect. It dominates the market with 80+% traffic share (based on unique users and time spent on websites), with most of the content in the form of user-generated content, forums, and reviews. A platform business is all about traffic and stickiness; Autohome dominates the market and continues to gain share, making the network effect more powerful.
(ii) The market may be underestimating the company’s pricing power. Autohome has been increasing APRU 25-40% per year to dealers and OEMs fairly easily in past years, recently at Rmb 46,000 per year, i.e., ~$10 per lead, much lower than global peers. Dealers are dependent on Autohome, and in James’ channel checks with Chinese car dealers, the ROIC of using Autohome’s platform is as high as 10x, as Autohome accounts for 30-40% of car leads but only 9% of marketing spend.
(iii) After a rocky eighteen months of changes in management and controlling shareholders, Ping An has taken control and seems to be refocusing the business on the core media platform business as well as looking for synergies in the auto financing business.
(iv) Autohome is an asset-light, cash-generative business. CFROI is 32%, the FCF yield is 4+%. The company has room for growth, with minimal investment required.
Peers in other countries trade at 7-15x EV to sales. Autohome traded as high as 17x but has recently been quoted at 6x EV to sales. The company has $1+ billion in cash on the balance sheet, equating to 10+% of market cap.
About the instructor:
James Fletcher is a portfolio manager with over 12 years of equity research experience. He is currently Director of small and midcap EM equities at APG Asset Management. James earned a B.S. in Finance from Brigham Young University, where he graduated summa cum laude and with University Honors. He is a CFA charterholder.
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