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In a recently developed market like China where everything is new, car services veteran Autohome Inc. (NYSE:ATHM, 2518.HK) is playing the contrarian with a big new bet on used car trading. Such a bet may have once raised eyebrows, in a land where new homes, new cars and new gadgets were in strong demand for years from a growing middle class happy to spend its newfound wealth on the latest and greatest items.
But as China’s economy slows after three decades of breakneck growth, many are considering the once unthinkable option of buying used items like cars, smartphones and existing homes rather than new ones. To accommodate that shifting demand, specialists like Autohome are springing up to act as middlemen for such trading, providing a professional level of reassurance for buyers who may be wary of ending up with duds.
Autohome is one of China’s oldest car services companies, and shot to fame 10 years ago with its listing on the New York Stock Exchange. Its shares once traded as much as nearly seven times their IPO price as China zoomed past the U.S. to become the world’s largest auto market. Despite the market slowing in the last three years, they’re still more than 60% ahead of their IPO price.
And with a price-to-sales (P/S) ratio of 3.4 times, the company still trades at a premium to domestic peers like Cango (CANG) and Kaixin (KXIN), which both have ratios of less than 0.5, and U.S. giant Carvana (CVNA) with a ratio of 0.8.
The big premium owes in no small part to Autohome’s profitability, with the company reporting a profit every year since its listing 10 years ago. But its growth has slowed considerably in recent years as China’s new car market starts to mature. Overall car sales in the market rose just 3% year-on-year in the first 10 months of this year.
But the picture is quite different for used cars. Autohome expects its revenue from used car trading services to rise by the end of this year, even as analysts polled by Yahoo Finance expect the company’s overall revenue for 2023 to be roughly the same as 2022.
“This year we have made preparations in this part of the business,” Autohome CFO Zeng Yan, who also uses the English name Craig, told Bamboo Works in an interview, referring to Autohome’s upcoming big push into used car trading.
The company estimates that new car sales in China will total about 22 million this year, while used cars are expected to reach about 80% of that level with between 17 million and 18 million units sold. By comparison, used car sales typically far outnumber new cars in more developed markets, with the former often outselling the latter by two to three times.
As China’s market matures, Autohome expects the ratio to soon approach 50-50, providing a big business opportunity to partner with the nation’s more than 300,000 used car dealers – roughly 10 times the number of new car dealers.
Used car dealer memberships
While used car dealerships are far more numerous than new car ones, Zeng pointed out that the former earn far less than the latter due to their smaller sizes. Still, Autohome sees big potential for signing up those dealers for membership services on its platform.
Autohome currently gets about 30% of its total revenue, which analysts expect to reach about $1 billion this year, from membership fees paid by the more than 22,000 new car dealers that use its platform. The company recently began marketing a new category of memberships for used car dealers, and will start signing up members next year.
“In the next three to five years, we plan to have 40% to 50% of the country’s 300,000 used car dealers signed with us,” said Autohome senior vice president Yang Song. He noted that membership prices will be much lower for used car dealers, around 10% the price for new car dealers. But he said the company hopes that used car dealer memberships can ultimately contribute a similar level of revenue to what new car dealer memberships now bring in.
The other piece of Autohome’s used car drive is TTP, a used car auction platform established in 2015. TTP is 51% owned by Autohome, and operates a network of stores in 30 Chinese cities. It passed a major milestone this year when it became profitable for the first time, as it generated about $100 million in revenue, up about 15% from 2022. Unlike auto dealers that own their cars, TTP makes its money purely from commissions and therefore avoids any inventory risk – an important factor amid all the recent uncertainty in China’s auto market.
Autohome is planning a major expansion for the service by opening new outlets inside its new chain of experience-oriented “Autohome Space” centers. That chain uses a franchise model, and launched last year by providing services like holograms that allow customers to see cars in 3D, as well as test driving services for new and used cars.
The company opened three such Autohome Spaces within the first year of launching its maiden store in Shanghai. It has sharply accelerated new openings for the chain in the last three months with the addition of 17 more since October. “We needed to make sure such a business model is workable,” said Zeng. “In the fourth quarter we dramatically accelerated the expansion.”
He added the original Autohome Space in Shanghai now sells more than 400 cars each month, and the existing 20 stores are selling about 3,000 cars combined per month. Some 34 car brands are currently working with Autohome on the project, which is expected to generate about 100 million yuan in sales this year. Of that total, 30% will go to Autohome as owner of the brand, while the remaining 70% goes to franchisees.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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