China Is Buying Cars and Going Online – Two Tailwinds for One Promising Company

China is buying cars again...

Early on in the year, it looked like the Chinese auto market – which is the largest in the world – was in trouble. Car sales fell 42% in the first three months of the year as China's economy shut down to prevent the spread of COVID-19.

But over the past several months, sales have bounced back strongly.

In the third quarter, Chinese auto sales rose 7.9%, marking their first quarterly growth in more than two years. And the growth has continued into recent months, with October and November posting 12.5% and 12.6% year-over-year increases, respectively.

This year, China is expected to buy 25 million cars, according to Fu Bingfeng, executive vice chairman of the China Association of Automobile Manufacturers. While that would be a slight decline from last year, it's remarkable considering the impact of COVID-19 in the early part of 2020.

And the strong auto market should continue, especially if China's government has anything to say about it. Earlier this year, the government cut the value-added tax on used cars by three-fourths – down to just 0.5% – to encourage consumers to get behind the wheel. This cut will last until the end of 2023.

So the Chinese auto market has tailwinds to continue its growth. And today's company is a great way to play this trend...

Autohome (NYSE: ATHM) is a $12 billion online car-buying platform for China.

You might be familiar with Autohome's American equivalent, CarGurus (CARG). It's the most widely used source of online information for new and used cars.

You can use CarGurus.com to learn just about anything about any car model in the market. It also has information about used cars (and how to get in touch with their sellers).

Well, Autohome – with information on more than 46,800 different model configurations – is CarGurus.com on steroids.

That's because Autohome doesn't just provide all the information on new and used cars available on the market... It connects 92 different automakers and 27,100 nationwide dealers with potential buyers.

That's a ridiculous number of businesses using the company's online platform.

Autohome breaks its business out into three divisions:

The first is Media Services. This is the advertising part of Autohome's business. With so many eyes on its platform, automakers and dealers are happy to pay for advertising on the site. This segment makes up a little more than 40% of Autohome's total revenue.

The next part of Autohome's business is Leads Generation Services. This segment sells subscriptions to its network of dealers. That allows it to generate leads based on Autohome's vast database. Lead Generation also accounts for about 40% of Autohome's sales.

The last part of Autohome's business is its Online Marketplace, making up the remaining 20% of its revenue. This allows Autohome to become the virtual middleman between buyers and sellers. And it generates an additional stream of revenues through transaction fees. On the platform, buyers can bid for automobiles through an auction process.

But that's not all this business does... The Online Marketplace division also offers a range of other car-related financial services. Indeed, buyers on its platform can buy car insurance and even finance their car purchases.

In short, Autohome has turned itself into a one-stop shop for car buyers looking for any kind of car, new or used. And by doing it online, it's perfect for the Chinese market.

Last year, 26% of retail sales in China were made online through a computer or a smartphone. By comparison, U.S. consumers make just 16% of their total purchases online.

This number has likely only moved higher thanks to the pandemic. Earlier this year, Chinese e-commerce giant Alibaba (BABA) said the pandemic has further accelerated the "digitization" of the Chinese economy.

So Autohome finds itself at the intersection of two powerful trends: a rebound in auto sales and an increasingly digital world. This should continue to pull more and more consumers onto its platform, driving higher advertising revenue, lead generation, and transaction fees. And that will push Autohome shares higher.

Sometimes investing is simple.