A couple of items from China's booming auto market are shining a spotlight on the sector's big potential and also the looming risk of a government-led slowdown in a bid to control the nation's worsening air quality. In the former category, online information provider Autohome has just made its first public filing for a New York IPO, becoming the latest in a sudden burst of tech firms to raise money outside China. The second news bit looks a bit more ominous, with media reporting the city of Beijing is sharply cutting its quota for new car sales in a bid to improve local air quality. That could be the first sign of a looming slowdown for national auto sales if other cities follow suit, which could easily happen.
Let's start with a look at Autohome, whose news comes just days after spectacular trading debuts for 2 newly listed Chinese tech firms in New York, online classified ads site 58.com (NYSE: WUBA) and online travel agent Qunar (Nasdaq: QUNR). According to the latest reports, Autohome plans to raise up to $120 million through an offering on the New York Stock Exchange. (English article; Chinese article) Goldman Sachs and Deutsche Bank are underwriting the deal, which could be a good sign since that pair were also the lead banks for Qunar's highly successful IPO.
The reports say Autohome posted $109 million in revenue for the first 9 months of the year, up 63 percent from the same period of 2012. The company has also been profitable for at least the last 2 years, with net income doubling in the first 9 months of this year to $54.6 million. Autohome counts leading Australian telco Telstra (Sydney: TLS) as its largest shareholder, owning just over 70 percent of the company. Media had previously reported in August that Telstra was in talks to purchase Autohome's parent (previous post).
This particular offering looks quite attractive to me for a number of reasons. Perhaps most importantly, Autohome is already not only profitable, but actually quite profitable. Some quick math will show that its profit already equals more than half of its revenue, and the ratio is likely to improve for the next few years as it boosts its scale. Equally important, the company looks like a leader in its space, which should see rapid growth in the next few years as Chinese consumers look for information in their quest to make more informed decisions about buying cars.
From Autohome, let's look a little further down the road to the implications of the latest policy from Beijing. According to media reports, the Beijing city government will slash its new car sales quota by nearly 40 percent next year in a bid to control worsening air quality in the nation's capital (English article). People who live in China will know that local governments use this kind of registration quota to control the number of cars on their local roads.
Historically, most quotas have been quite relaxed as the central government encouraged car sales to boost economic growth. But lately the bigger focus has been on improving China's worsening air quality, which has become a major concern for citizens around the country. This latest move indicates the Beijing city government is willing to sacrifice some economic growth to clean up the city's air.
China watchers will also know that many such pilot programs often begin in Beijing and then expand to other markets, meaning we could easily see cities throughout China adopt similar measures in the year ahead. If that happens, which seems likely, we could see a sharp slowdown in the nation's car sales next year, with the industry potentially posting little or no growth as new quota clampdowns take effect.
Bottom line: Autohome's IPO should receive strong interest due to its market leading position and big growth prospects, even as China's broader car sector could be set for a big slowdown.