Shares of Autohome Inc. (ATHM), a Chinese online automobile information provider, jumped 5% in Friday’s trade after a news website reported that Morgan Stanley (MS) has picked up a 5.3% stake in the company.
The surge in share price yielded a solid one-year return of 39.9% and 20.2% year-to-date.
The possible reason behind Morgan Stanley’s investment could be Autohome’s increasing revenues and solid balance sheet. The fact that the company operates in the fastest growing automobile market, China, and is growing its exposure in the online automobile information market could also have supported the decision.
Not only was it the first country to surpass the 20 million unit domestic auto sales benchmark in 2013, but auto sales in China also increased 8.2% year over year to 13.3 million units in the first seven months of 2014, per the China Association of Automobile Manufacturers (CAAM).
Autohome operates through two websites — autohome.com.cn and che168.com — and generates revenues from advertising and dealer subscription services.
In Autohome’s last-reported quarter, it added a significant number of auto dealers which almost doubled from the year-ago period. The websites also generated heavy traffic. All these factors helped Autohome to report strong revenues (71.8% year-over-year increase) in the quarter. Moreover, the company has a debt-free balance sheet. Autohome has also forged a partnership with Chinese search engine Baidu (BIDU) to increase its visibility in auto-related searches.
It is worth noting that Tiger Global Management also recently increased its stake in the company to 18.5%.
Although we believe that the company’s strong financials and exposure in the Chinese automobile market is commendable, the competition from other online providers such as PC Auto.com and Bitauto Holdings (BITA) could moderate its growth prospects.
Currently, Autohome has a Zacks Rank #3 (Hold).
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