BitAuto And Autohome Slump - Buyouts Coming?

Includes: ATHM, BITA
by: Doug Young

Bottom line: Both Autohome (NYSE:ATHM) and especially BitAuto (NYSE:BITA) look like strong candidates for buyout bids following rapid declines in both companies' stocks due to a rapid slowdown in China's car market.

We'll begin the new week with a look at two of China's leading online auto specialists, BitAuto and Autohome, whose shares have both tanked over the last three months in tandem with a rapid cooling of China's car market. The trend is similar to what's happened at online real estate service providers, whose shares have slumped for the last year due to a prolonged and much-needed correction in China's overheated property market.

China stock watchers will know that E-House (NYSE:EJ), one of the two major US-listed real estate services firms, launched a privatization bid in June, part of a broader wave that has seen dozens of Chinese firms leave New York this year due to low valuations (previous post). That leads to my next prediction, namely that BitAuto, Autohome or potentially both could soon become the latest companies to join the privatization queue.

China's auto market has been filled with twists and turns in its brief history, including the latest that shows the market rapidly running out of fuel. Sales boomed immediately after the global financial crisis of 2008 as Beijing rolled out numerous buying incentives as part of a massive stimulus package to prop up the economy during that time.

Sales continued to chug ahead after that in sync with China's booming economy, but have slowed sharply this year as the economy heads into a new phase of slower growth. A recent stock market plunge that shows no signs of easing also has hit car-buying sentiment. Amid that rapid slowdown, the nation's main automobile association said the market could post a sales decline for all of 2015 - the first such drop in 17 years (English article).

Autohome was a superstar when it listed its shares in New York in late 2013, a time when cars were considered a must-have for millions of upwardly mobile Chinese. The company sold its IPO shares at $17 apiece and saw them triple less than a year later on strong investor enthusiasm toward the sector. But lately investors have lost their taste for the stock, which has slumped by a third since a peak in May, even though it still trades at double its IPO price.

BitAuto's Skidding Shares

BitAuto's stock has been on a similar roller coaster ride, rising more than seven-fold at one point from its original IPO price of $12 in late 2010 as China's car market boomed. But the shares have lost half their value over the last two months, including an 18 percent slide in the latest trading session after the company reported a loss for the second quarter. Even so, the stock still remains 150 percent ahead of its IPO price.

All this brings us back to the issue I raised at the outset, namely the potential for a buyout bid for one or both of these stocks. Of the pair, BitAuto looks like the strongest candidate for several reasons. For starters, the company's market value is currently just $1.5 billion after the latest sell-off, less than half of Autohome's $4 billion, meaning financing for such a buyout would be easier to raise.

But perhaps more importantly, BitAuto already counts Internet heavyweights Tencent (OTCPK:TCEHY) and (NASDAQ:JD) among its investors, with the pair collectively holding nearly 30 percent of the company's stock after a purchase in January (previous post). Tencent is quite wealthy and could easily afford such a buyout using its own cash. It showed its willingness to do that just last week when it launched a buyout bid for online travel services site eLong (NASDAQ:LONG) (previous post). Accordingly, I wouldn't be surprised to see it quickly consider a similar opportunistic bid for BitAuto, especially after last week's sell-off.

Disclosure: None.