The explosive market debut of Chinese car retail site Autohome (ATHM) revealed plenty about ongoing Wall Street support for the world’s second-biggest economy. But for U.S. investors hungry for access to that economy, it’s also a great sign that bigger opportunities are lining up on the horizon.
ATHM surged from an offering price of $17 on a wave of buying that few of the more vocal China bears could have predicted. Bracketing the company’s fundamental merits for the moment, the investment thesis here is painfully simple: even after years of China being touted as the hottest story on the planet, high-quality exposure to that story has been too scarce to satisfy demand.
Over the last three years, the number of Chinese stocks available on the Nasdaq and NYSE has stagnated at a little over a hundred names. Many are left over from the days when U.S. exchanges took a more relaxed approach to the documentation they required from overseas issuers and today these tickers are effectively the equivalent of orphaned penny stocks trading at extremely low volumes and minuscule real market capitalization.
Others have left the market entirely under clouds of scandal. J.P. Morgan (JPM) numbers show only a handful of Chinese stocks coming to the U.S. market since late 2011, not nearly enough to replace the dozens that terminated their listings to accommodate mergers or failures.
As the supply of pure-play Chinese equity shrank, demand for ways to trade the country’s still-vibrant consumer sector continued to build. If anything, too many of the Chinese stocks available to U.S. investors have been geared to the country’s export economy – oil, infrastructure, manufacturing – leaving at best two dozen pure consumer names and proxies in the mix.
ATHM is not only a new consumer play but the only way global investors can trade China’s record-breaking auto sales boom. Chinese households now buy 2 million cars a month and this company has become the default source of pricing information and reviews for a stunning 44% of them, making its audience roughly the size of the entire active U.S. auto-buying population.
As the Chinese car market matures at a growth rate of 14% a year, ATHM clearly has a first mover advantage. Whether it can keep its momentum and its current position in the hearts of U.S. investors remains to be seen – I am not quite convinced that any growth rate can justify a $2 billion market cap for a stock that only earned $53 million last year – but right now the world is clearly this company’s oyster.
More importantly, this IPO shows us that the idea of the “red chip stock” still has plenty of currency on Wall Street and that the market will embrace new supply instead of slamming the doors.
This is crucial as we all dig for higher-quality names outside the now-familiar telecoms, dot-coms and airlines where we so very often come up empty-handed. And with the Alibaba Group — the e-commerce king of Asia – edging toward going public next year, the supply/demand calculations will probably change again soon.
Alibaba may just swamp markets on both sides of the Pacific Ocean in what could become a $150 billion wake. But if global capital can absorb those shares, it could create a more welcoming environment for smaller debuts like ATHM.