What happened
Shares of Chinese automobile website Autohome (ATHM 1.21%) surged 17.6% in December, according to data from S&P Global Market Intelligence. Autohome's shares had a challenging year and a challenging November, following a disappointing outlook given in its third-quarter earnings release. The China auto market has been in a recession this year, and is projected to be down 8%-9% in 2019.
However, in December, a U.S.-China "phase one" trade deal reignited hopes for a rebound in the Chinese economy, and therefore its auto market, causing Autohome shares to bounce back from their November swoon.
Image source: Getty Images.
So what
Autohome plummeted in November when management said it would not be raising subscription prices for its dealership customers next year in light of the market headwinds. It also projected just 3.1% to 6.5% growth next quarter, a big deceleration from the 14.9% growth posted in the third quarter, with even the high end of that range below analyst expectations.
Yet on Dec. 13, the U.S. and China agreed to a "phase one" trade deal, which is set to be signed sometime in January. As a result of the preliminary deal, the U.S. agreed to postpone tariffs that were set to kick in on Dec. 15, and cut the tariffs that were imposed on Sept. 1 by half.
The preliminary deal lit a fire under most stocks that are sensitive to Chinese economic growth. That goes double for companies whose businesses encompass big-ticket items such as cars.
Now what
The trade deal may have quelled some investor fears over next year's growth and refocused investors on positives going on at the company. For instance, Autohome still believes it can grow next year despite not raising subscription rates, as it has incubated several new products in the past few years, such as customer-to-customer used-car transactions, a growing auto finance business, and other big data-driven initiatives. The company also recently obtained an OTA (online travel agency) license in China, which could get the company into hotel bookings. Finally, its board decided to initiate a dividend to be paid this year, based on 20% of net income.
Going forward, investors should monitor China's economic health paired with these new initiatives. At just 25 times trailing earnings, Autohome looks relatively inexpensive for a growing internet platform in the midst of a downcycle.
