Autohome Inc (ATHM) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for Autohome's second-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce your host, Edith Kwan, Autohome's Investor Relations Director. Ms. Kwan, you may begin.

2015 earnings conference call. Earlier today, Autohome introduce distributed its earnings press release and you can find a copy on the Company's website at www.autohome.com.cn.

On today's call we will have Mr. James Qin, Autohome's Chief Executive Officer and Mr. Nicholas Chong, Autohome's Chief Financial Officer. After their prepared remarks, James and Nicolas will be available to answer your questions.

Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectation. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the Securities and Exchange Commission.

Autohome does not undertake any obligation to update any forward-looking statement except as required under applicable law.

This earnings press release and this call also include discussions of certain audited non-GAAP financial measures. The press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on Autohome's IR website.

As a reminder, this conference call is being recorded. In addition, a webcast of this conference call will also be available on Autohome's IR website.

I will now turn the call over to Autohome's CEO, James.

Thank you. Hello, everyone. Thank you for joining our second quarter conference call. Today we are excited to announce another set of strong quarterly results.

In the second quarter, revenue grew 70% year over year, exceeding the top end of our expectations for the seventh quarter in a row. Meanwhile, adjusted net income grew 48% and our adjusted net income margin reached 38%. We are pleased with what is a standout performance in our industry, and these solid results reaffirm that we have been making the right moves with our strategy.

During the past few quarters we have been constantly working very hard to expand our transaction platform via our strong brand recognition and influence superior content, extensive OEM support and our dealer network. As a result, our transaction platform has taken off very nicely.

Currently, given the slowdown of auto sales in the China market, we believe it is an ideal time for us to prove the worth of our transaction capability to automakers and dealers. Therefore, we have decided to further invest in second half of this year to ramp up our business. I will talk more about this and our rationale in more detail later in the call. Before that, I'd like to walk you through our progress in the second quarter.

In short, there are three key areas of strength in the quarter. First, we made a great deal of progress with our mobile offering and our mobile platform continued to gain traction. Secondly, we introduced many things to further build out our e-commerce capabilities. Third, we solidified our strategy to focus on used car transactions, and will allocate more resources in this area going forward.

Now let me provide more detail on our performance.

Autohome has been well recognized as a leading online media platform that can enhance the brand strength and bring sales for automakers. Amidst the weakened auto sales recently, our automaker revenues still grew 64% year over year in Q2. We are confident this revenue will remain reasonably strong as we enter the second half of the year.

The reason for this is that during the industry headwinds, some of the automakers would possibly be in the process of reviewing their budget to eliminate the platforms with low return on investment. However, they would also consider maintaining or even enhancing cooperation with platforms that are bringing them actual sales benefits. This is when Autohome stands out, as we have in fact been demonstrating our value to our customers with superb ROI, and thus, we continue to achieve our industry-leading growth.

In terms of traffic, during the second quarter, we continued to see great progress on the mobile front. Mobile usage is delivering strong traffic growth, and this also translates into growing revenue. Mobile advertising revenue grew 45% sequentially, and more than doubled compared to the same period last year, accounting for 13% of the automaker advertising services revenue. Also, mobile accounted for [a record high of 62%] (corrected by company after the call) of our sales leads contribution.

In June, the combined number of average daily unique visitors for our mobile site and mobile applications amounted to approximately 9.8 million, which grew 88.5% year over year. The mobile app traffic continues to grow faster than the mobile site, which indicates our early investment in mobile apps is paying off. As users are increasingly more mobile-centric in content consumption, we will continue to ramp up our investments in mobile technology and traffic in the coming quarters.

The mobile technology will continue to enhance our user experience and advertising technology, which will require larger investment in engineering headcount.

For traffic, we all know that traffic to mobile apps is very habit forming once you pay to acquire user, because of customer acquisition will eventually be down to zero, when they become a repeat user.

But, in the long run, it drives down cost and brings network effect. I want to emphasize that the investments we are making in mobile are for the long term. This, our large and strategic investments, the results will take time. But we think that we'll be forming a necessary foundation for users to adopt and embrace our mobile products.

For our region business, there was encouraging growth in our Dealer Yellow Pages business in the second quarter, which advanced 77% year over year. Dealer subscription revenue alone increased a significant 88% year over year with dealer subscription. ARPU increasing 37% year-over-year.

In Q2, we continued to widen our coverage to 18,768 paying dealers, up 37% comparing to the corresponding period a year ago. Our dealer network is the foundation of our region business, and we have been focusing on further creating value for the installed base of dealer customers.

As mentioned in the last conference call, we have done a great deal to help improve the conversion rate for dealers. One critical enhancement is our i-Autohub platform, which is helping dealers manage sales leads more efficiently, and access extensive information about users' behavior. The user data, which we just started to provide, is being well received by our dealer customers.

This is very encouraging for us. Having built up an extensive network of dealer customers is just a preliminary stage for our lead generation business, we will continue to add headcount to fuel this fast growing business. And in particular, we are adding more remote sales consultants to serve dealers in a more cost efficient way as we continue to penetrate more geographic areas.

Our key focus is to position Autohome as an online marketplace in the automotive space in China to enhance the sales efficiency of the whole ecosystem while providing better service and price transparency for car buyers. We are currently working on establishing a marketplace where we are able to take credit from transactions and prove our ability to close the transaction loop.

Therefore, establishing this marketplace has become very important for us. Our intent is to add further legs of growth for our business by demonstrating our transaction value for the industry, and ultimately monetizing this ability in a greater way going forward. To help accomplish this, we were very busy in the second quarter launching several new transactions, products and services.

First. We upgraded and refreshed Autohome Mall. It is now a one-stop platform that offers pop stores, sales promotions, and aftermarket services, including auto financing and insurance services. We also now have online shopping assistants there to help facilitate transactions.

Second. For certain automaker customers, a new offering is the exclusive online selling of car models. The automakers have received very positive results and repeated their cooperation with us.

Third. For dealers, we're in the early stage of scaling up our performance-based products, especially the Cost Per Sales. We launched Group Buy early this year in order to take credit from the transactions that Autohome facilitated. In Q2, our Group Buy services already covered 17 cities with a stable conversion rate of above 25%.

Starting in July, we kicked off the first ever nation-wide Group Buy campaign, which covered 34 cities. We engaged with over 1,000 dealers across the country, covering more than 70% of the auto brands in the host cities. During industry down time, it really is favorable timing for our performance-based products to take off, and we will continue to invest resources in it.

Fourth. We scaled up our new shopping assistant service to enhance the shopping experience at Autohome. As you know, the Company's transitioning from a media platform into a transaction platform, and to do this, it is important to have a direct service between Autohome and our users. By giving personalized attention and providing advanced knowledge of products, market trends, and sophisticated services through the purchase process, including evaluating users' needs, making car model recommendations, and providing price transparency.

Online shopping assistants have become more trusted consultants to facilitate transactions and help with satisfying the last mile consumer needs. We view the new shopping assistant as a very important tool for our marketplace to take off. Therefore, in the second half of the year, we'll enlarge our investments, especially in the shopping assistant service team.

With all of those efforts in the first half of 2015, we were very pleased that Autohome facilitated [nearly] (corrected by company after the call) 40,000 new cars transactions, while maintaining our industry-leading margin.

Lastly, it is important to note that we are enlarging our transaction capability, not just in relation to the new car business, but also in the used car business. In the past few months, we have been doing offline trials intensively. From there we saw a lot of promising results, and thus, we feel that now is the time when we should be pulling in resources to ramp up our used car transaction services. Therefore, the used car business is also one of the key areas where we need to grow our headcount in the coming quarters.

Before I turn the call over to Nicholas, I want to briefly summarize a few things. We're singularly focused on becoming a fully transaction-centric company in both new and used cars. And we are excited about the opportunities ahead of us. We believe that our success in this area won't rely on a single business model or offering. Instead, the basket of products and services that we offer is working together to move us as quickly as possible towards the marketplace direction. And our media value and lead generation capability is certainly the fuel for our transaction -- help our transition into a transaction platform.

We are working very diligently to solidify our marketplace strategy. It is important to note that this effort will come with a need for strategic investment, and we believe the time for this is now. Our goal continues to be to sustain our leadership in our sector, as measured by user engagement and transaction volume. We believe the ultimate result will be that we maintain and further strengthen our position as the dominant player in China's automobile consumer market over the long run, and which will justify our current investments.

One last point relates to Li Xiang, our former President, who recently stepped down from that role, as announced in June. I want to thank him for all his great contributions since founding Autohome and throughout his time serving the company for more than 10 years.

With that, I will now turn the call over to our CFO, Nicholas, for a closer look at our second quarter results and our outlook.

Thank you, James. Hello, everyone. As James has already highlighted, we are very pleased to report solid financial results for the second quarter.

Net revenues came in ahead of our initial guidance and net income advanced remarkably as well. Further, we maintained a very healthy level of cash, proving that we are able to effectively manage our business and balance sheet for the benefit of the overall business. I am extremely proud of our ability to deliver sustained strong performance quarter after quarter.

Now let me go over the key drivers of the second quarter performance in greater detail. Note that I will reference RMB only in this discussion, but you can find the equivalent US dollar numbers in our press release issued earlier today.

To start, our top line performance was very strong. Net revenues for the second quarter increased 69.9% to RMB861m from RMB506.8m in the corresponding period in 2014.

Breaking this down further, we again exhibited across the board strength in various revenue components of note. During the quarter, the Dealer Yellow Page business, which includes our dealer advertising and dealer subscriptions services, grew 76.7% year over year.

Separately, dealer advertising services revenue significantly increased by 59.8m -- by 59.8% to RMB144.8m from RMB90.6m in the corresponding period of 2014.

Meanwhile, dealer subscription revenues increased 87.6% to RMB263.7m from RMB140.6m in the corresponding period in 2014, with balanced growth from both volume and ARPU.

The strong performance was mainly driven by the increase in the number of paying dealers, which was a result of deeper penetration into existing markets, as well as an increase in the share of wallet from the paying dealers. As noted in the press release, we sold dealer subscription services to 18,768 dealers in the second quarter compared with 13,693 dealers in the corresponding period in 2014.

Also, ARPU was up 36.9%, which is of course very encouraging.

Turning to automaker advertising services, revenue increased 64.2% to RMB452.5m from RMB275.6m in the corresponding period in 2014. This strong growth is solid proof of the high recognition of our brand among automakers and why, due to that strength, we are quite resilient during the slowdown of the auto sales.

Gross profit for the second quarter increased by 75.1% to RMB723.7m from RMB413.3m in the corresponding period in 2014. We continue to gain leverage from revenue increases and efficiency from economies of scale in our operations.

Turning to the cost side of the business, as I've mentioned in the past, while we are certainly re-investing heavily in the future business, we are at the same time very cost efficient and prudent with our spending on the existing business.

Operating expenses for the second quarter increased 116.1% to RMB345.7m from RMB160m in the corresponding period in 2014. As a percentage of net revenues, operating expenses increased to 40.1% from 31.6% in the corresponding period in 2014.

We have been continuously reinvesting in key strategic areas such as sales and marketing, including the Baidu Aladdin investment, as well as in other mobile traffic acquisition efforts, product development and general administrative needs. This is all required for growing the business. Even with this increase in expenses during the quarter, we are still delivering industry-leading profitability levels. It's a strong testament and demonstrates our precise execution.

Operating profit for the second quarter increased 49.2% to RMB378m from RMB253.3m in the corresponding period in 2014.

Net income for the second quarter increased 47.8% to RMB304.9m from RMB206.3m in the corresponding period in 2014.

Basic and diluted earnings per share and per ADS for the second quarter were RMB -- $2.32 and $2.63 respectively compared to RMB1.96 and RMB1.83 respectively in the corresponding period of 2014.

Adjusted net income for the second quarter increased 47.9% to RMB324.8m from RMB219.6m in the corresponding period in 2014.

Non-GAAP basic and diluted EPS for the second quarter were RMB2.89 and RMB2.80 respectively compared to RMB2.08 and RMB1.95 respectively in the corresponding period of 2014.

Turning to the balance sheet and cash flow information, this is also an area of key strength and sustained positive performance. As of June 30, 2015, we had cash and cash equivalents and term deposits of RMB3.21b. Net cash provided by operating activities in the second quarter was RMB194.8m compared to RMB163m in the same period last year.

Let me now address our near-term outlook for the quarter ahead. For the third quarter of 2015, we currently expect to generate net revenue in the range of RMB850m, or $137.1m, to RMB884m, or equivalent of $142.6m, representing a 55.9% to 62.2% year over year increase.

It's also worth reiterating what James mentioned in his remarks. During the second half of this year, we will be making important investments. We need to continue to invest to grow the platform and solidify our leadership. The majority will still come through sales and marketing line, in particular in the areas related to our mobile products and scaling our transaction capability in both new and used cars with higher investment in headcounts.

There will be immaterial revenue from marketplace this year. We will continue to invest in the marketplace as we see a large opportunity for e-commerce to take off.

Based on our track record, we are confident that our investment strategy is creating long-term value for the Company.

Again, I must mention that these comments on our outlook reflect our current and preliminary view on the market and operating conditions, which is subject to change.

With that, James and I are ready to take your questions. Operator, please open the line for Q & A. Thank you.

(Operator Instructions) Ming Xu, UBS.

Thank you. Thank you, James and Nicolas. Congratulations for the strong quarter. So, basically, I have two questions. Sorry, three questions.

First one is could you -- you mentioned a lot of investments to be made in the second half. I know it's for the long-term benefit, but could you maybe quantify the monetary impact?

And the second one is I notice a very strong pickup -- very strong growth in dealer ARPU in the second quarter. So I just -- how this is achieved, and what further upside can we expect in the second half?

And thirdly, on your sales and marketing window, notice that you have terminated the contract with Baidu Aladdin. So I just want to confirm on that. Will this happen in the later half -- in later this year or we will not sign up to other things for the rest of the year? Thanks.

Okay, Xu Ming, this is Nicolas. So I will answer your questions on the margin first. I think for the whole year we are still talking about above 30%. That is no change from what we have been communicating.

If you look at the first half, we achieved 35.2% net margin. That's a demonstration of how strong we managed the existing business, and that's including not only existing business but also the marketplace.

As you can see, we highlighted that we have done more than 40,000 transactions in the first half. But we will continue to invest in the second half.

The investment comes in a few areas. One is the new investment and remaining focus on headcount are perceived to be more transaction-centric traffic acquisition, especially on mobile, and apps promotion and branding. So I think -- yes, that's the question on the -- to address your question on the margin.

The second one. I think the second question is on -- relating to dealer ARPU. We -- it's the same reason as what we registered in Q1. It's basically coming from two areas. One is that the price increase that we implemented since January last year. So this year we get the full impact of that, so that's one of the reasons.

The other reason is that the premium package right now is about high 30s, mid to high 30%. I mean it's picking up about 30% plus of the total number of dealers.

Okay. I'll take a crack on the third question, which is Aladdin. I think we're still in the process of having discussion with Baidu about the strategic investment or strategic cooperation between Baidu. So that is an ongoing discussion.

But having said that, we are doing strong in both PC and mobile traffic. As of June 2015, mobile traffic grew 88.5% year over year. And now PC traffic remains over 8m DAUs with industry-leading traffic. So we have very strong organic traffic in all channels. It will not make or break our Company because of any traffic source. And, currently, we evaluate all traffic acquisition channels and based on the ROI. If spending money to drive traffic is considered appropriate, we'll definitely go ahead and do so. If it is not, then it is not.

Sure. Thanks.

Vivian Hao, Deutsche Bank.

Hi, James, Nicholas. Thank you for taking my questions. I have two questions. First, my first question is, there seems to be a sharp moderation in our dealer app segment growth on a year over year basis. What is the key reason behind? And also, given the less optimal macro trending in auto industry, how is the visibility of our core advertising business in second half?

My second question is regarding your headcount expansion that you mentioned in the prepared remarks. What is the expected headcount increase in second half? Can we get a sense of the incremental spending, social marketing and potential impact to all markets? Thank you.

I will try to answer your first question, which is about dealer advertising and what is the outlook. So we are very cautiously optimistic about overall market and our business, despite the current industry headwinds. Given that, we are still very relatively small in the share of wallet, which we now see what you rightly have ahead of us.

In the first half of 2015, dealer advertising revenue grew 78% year over year. This business is very solid and with high growth. Given our high ROI brought to our customers, we'll focus more on further creating value to the automobile ecosystem with better services, such as what we are doing with the auto group buy with dealers for more than 100 cities across China.

And we are in a short run, to cope with changes in the market, sometimes we are changing the forms of advertising services. For example, we are moving into more transaction-based revenue and campaign-based revenue than pure advertising as it is most directly to help our customers to reach out to buyers.

And despite the current industry headwind, it is preferable for our performance-based product to take off where we take credit based on transactions. Eventually, I think it will be beneficial to us to grab more share of wallet as we can get better recognition from the dealers. Because nowadays, as you can see, some of the -- in some of the carmakers, they start to shift the variable marketing cost as a direct price reduction at end sales level.

But we believe this is only a temporary phenomenon because China is a very important market for all automakers. And we have high confidence that our new products will capture further business growth as the level of vehicle ownership in China is still relatively low compared with the rest of the world. So, in short, we believe the outlook is still promising, and we are cautiously optimistic about the outlook.

I think I'll touch on the headcount. I think we will continue to invest in headcount in the following areas, like for example, our dealer business continued to show good momentum. We are increasing -- we continue to increase the number of paying dealers, and we believe we will cross the 20,000 month of paying -- I mean, 20,000 paying dealers by the end of this year. So we continue to invest on the dealer sales headcount.

And we also see goods, promising sign in the used car business and also in the transaction business. So we'll continue to invest headcount on the two areas as well.

And then likewise, we invest in the technical team to continue to support the business expansion. That's on the income.

As far as sales and marketing, as you can see, the major area is really behind the, for example, the traffic acquisition particularly on mobile. And also this year we have also increased some of the branding spending in the second half of the year because of the November 11 event which we host ever year, and also this year we are celebrating our tenth anniversary. So this is overall branding exercise.

If you look at the percentage of revenue, it's really, if you look at Q1, our sales and marketing as a percentage of revenue was 35%. In Q2, because of the growth in the revenue, sales and marketing as a percentage of revenue has dropped to 28.4%. So in the second half we'll be somewhere around 30%-plus or so. But, overall, we will come in with 30% margin for the whole year, non-GAAP net margin for the whole year.

Thank you. Very helpful.

Amanda Chen, Morgan Stanley.

Hi James and Nicholas. Thank you for taking my questions. My first question is regarding your new business. Could you please share some updates on your new business, especially the call center consultants (spoken in Mandarin) and C2C used car transaction business? Any operational metrics will be appreciated. Thank you.

Okay, so our shopping assistant service provides a sophisticated service throughout the purchase process. Essentially right now we are mainly in the business in Beijing, but we start to expand to other cities because we think this is a value-added service which directly links the consumers to the dealers. So we are going to keep pushing ahead on that one. So that's on the (spoken in Mandarin).

Sorry what was your second question? Your other question about the new business?

It's a C2C used car transaction business.

Oh, the C2C used car transaction business. Initially, we launched that business in Guangzhou. Now we start to expand to other cities and this is still in the very early stage. Probably there's not much we can talk about. But we think it's a promising business because it can leverage our large consumer base which in the process of buying cars in some of the cities with limited plate, it can help us drive up the used cars. So that was the reason we think a C2C business is really helpful.

Based on the lifestyles of our users and our traffic scale, we believe that we have a lot of absolute advantages over used car transaction business.

Okay. Thank you. And the second question is regarding your investment plan you mentioned in your webcast release. Could you give us more color say on how much you're going to spend, if possible? And besides the investment in branding, mobile and headcount increase, any other areas you are going to increase investment? And also how long the investment cycle will be and how it will impact margin. I think someone already asked this, but could you give us more specific numbers? Thank you.

I think, as I shared just now, I think we believe that, during the first half we came in at 35.2% non-GAAP net margin. I think for the whole year we still are holding to the 30%-plus non-GAAP net margin. But in the second half, I think given the momentum in the first half, some promising signs on the used car business, the transaction business, we will invest into that business in terms of headcount and mobile. That's what I shared just now.

I think probably I'll add some more light on this area. So outside of the traditional investment in R&D and product development, inevitably, when we venture into the transaction business, both in the new car and the used car business, we're in the process of building a marketplace both for new car and used car business. And when we start to do more transaction-related business we inevitably need a lot more headcount than create a consumer value.

So in terms of the new area, probably it will be new car transaction business, used car transaction business. And on both the new car platform and the used car platform, our used car marketplace, because now we cover more geographics than in the past so we need more headcount to keep the penetration healthy.

Yes, penetration and also to provide better services to serve the customers and the users.

Okay. Thank you. And the third question is regarding the macro environment. We all know that this year the auto sales market is not very good. But I think it's maybe a moment for us to gain market share because OEMs are willing to shift budget to some media with higher ROI. But if the soft market continues in 2016 how it will impact our growth after 2016. Thank you.

So probably I will only -- I can't talk about the macro trend in the auto industry because it's difficult for me to predict China's macro economy. Just like I think it's difficult to predict China's Asia market performance. But given the strong O2O trend across all industries we still see online advertising is quite insulated from the macro headwinds as we continue to win over the offline channels.

And also, as we continue to see, we're gaining market share as our performance is increasingly being recognized by being a leader in the industry. So, as you can see, our OEM advertising still grew more than 60% in the first half of this year and we foresee that growth will still be reasonably strong into the second half.

And we always believe by bringing higher ROI and better conversion rate than other channels to our customers and we're going to win in the end.

So, again, we tend to think the current trend of China's auto market is only a temporary phenomenon because of the low penetration of vehicle ownership in China and the Chinese government has started to pour a lot of money into building the infrastructures like the road, all those kinds of things, it will help Chinese consumers in the end to buy more cars.

Piyush Mubayi, Goldman Sachs.

Thank you. Congratulations on a good set of numbers James and Nicholas. I have three questions. First is in the business that you talked about where you talked about 40,000 units in the first half, could you give us a sense of whether that was dominated by new cars or was it new and used and, if so, what was the mix there?

The second question is more general. If you could talk about the mobile monetization on the OEM advertising business, and I think you gave us a number last quarter, 13% or 14%. Where are we on that?

And the third, and this is really a broader question but wanted to understand from you what you thought is necessary to succeed in the used car market. Thank you.

So Piyush, thanks for the question. I think the first one, the 40,000, is basically the, it's referring to the new car business only.

And we mainly sold that through our feature sales and the flash sales.

Thank you. And was there a particular brand?

No. I think it's -- well this one we have is across multiple brands and multiple car models, so it's not overly concentrated in a few brands. It's well-represented.

Thank you.

The second question is about the mobile advertising revenue. So mobile revenue increased 45% quarter over quarter and more than doubled year over year. So right now the mobile advertising accounts for 13% of the automaker advertising service revenue. So that is the mobile advertising.

I think going forward we'll enhance our performance-based advertising on the mobile platform. So right now that percentage is still very small. We're basically only sending the opening screen banners. I think by adding more performance-based advertising we should be able to achieve more penetration on the mobile advertising side.

Your third question was what is the winning factor for used car business. Well, that's very complicated. I think there are a couple of things. The first one, I think inevitably if you have a closer relationship and trust from the China's consumer side, who has the best trust or best brand name could be one of the winners in the used car business. So that's definitely number one.

But secondly, I think that because the used car business right now is very fragmented and the consumer value is very limited at this point, so it's really I think by who can build value among the whole purchasing process and add some more services or even like extended warranty or services with those can win in the market.

And I think we understand the roadmap. But we need to execute and make sure we will be the winner in the used car business in the long run.

Okay. And may I ask another question, not related directly. But, you talked about 9.8m DAUs. I wonder why we look at DAUs and if you could give us the MAU number too.

So we do have MAUs. The MAUs is 10m. So in our 2015 June our mobile MAUs altogether, so that is the mobile browser plus mobile apps, together is close to 10m.

Thank you very much.

Nora Zhang, Merrill Lynch.

Sorry, sorry, that was wrong. This is 100m, not 10m sorry. The monthly unique visitors for mobile apps and mobile browser is 99 -- 100m. So it's not 10m. It's 100m. Our DAU is just about 10m. So it's about 10 times our DAUs. Sorry for that.

Nora Zhang, Merrill Lynch.

Hi. Good evening management. Thank you for taking my question. Just now you mentioned that Autohome made big progress in group buy business. Can you give us more color on the monetization and the revenue model of the group buy business? And how is the margin of this business comparing to the consumption transaction business model. Thank you.

So right now our group buy business is initiated from our dealer consultant sales force. And the monetization -- I think the key for our current group buy business is rather to help the dealers to sell more cars and make more profit because the first -- probably the second quarter for them was pretty bad. And, at this point, we do not have a clear target on our monetization or take rate on the group buy business. Rather that we want to build out our market share and the number of transactions facilitated through us. And I think that will probably help our dealer advertising business and the dealer subscription business somewhat. But to answer your question, in short, we do not have a target for that.

I think to build on James question, I think in the first - - we have done three sessions over the three weekends in July and we have generated more than 10,000 transactions from that.

And then, as James said, I think the primary focus right now is to first demonstrate our value to the dealers by having a very high growth rate. I think that is the first thing for us that we're trying to do and then we will work on the monetization going forward.

Yes, because I think from our point of view probably it's not wise to increase our monetization when our customers are having a difficult time.

Yes, understood. So just now you talked about 25% conversion rate. Can you explain that? How did you calculate the conversion rates?

For group buying business, because every single transaction goes through us so we just use the number of transactions divided by the number of sales we generate. So that's 25% give or take.

Okay. Understood. Thank you.

Gregory Zhao, Barclays.

Hello Mr. Nathan Snyder, your line is open, please go ahead.

Thanks. Just two questions for James and Nicholas. In terms of the ecommerce transaction business, obviously near term we have some financial headwinds just in terms of building out the business, more costs associated with it. But if you look out longer term and you think about that margin profile, would you agree that the margin profile will probably be lower than the pure play advertising business? And then in terms of different ecommerce models, can you talk about longer term your thought process in terms of what that margin profile might be?

Currently we do not take inventory. We view our ecommerce model as also a marketplace. So from that point of view, we don't think that margin is going to go down. And because if you, when you do ecommerce not only you can earn the commission based on the transactions, but you can also add on some value-added services such as car financing and car insurance. But currently, because our transaction volumes on the auto ecommerce is still relatively small, it's difficult for us to predict the end result of the financing and the insurance.

Currently we're trying to gain more attraction from the Chinese automakers, especially the Chinese brands with their SUV products because in this year, even with the slow growth or no growth of China's new car market, the SUV sector still grew about 40% year over year. So that's why we concentrate our effort on growing that sector.

Yes, okay. That makes sense. Then a follow-up. In terms of the China Grand Auto as well as the Ping An joint ventures or cooperation that we've been working on, when do you expect those to ramp-up in terms of the timeline and how much revenue or profitability would be expected in the next six to 18 months?

I think right now it's still at the early stage. I think we can't give -- I think what is important is for the two parties to work together and then we can -- that is the most important thing. Let me share with you some of the things that we're working with Ping An and then Grand Auto.

Ping An is like -- we think that Internet financing is a rising industry and has accelerated a transition of financial institutions and prompted them to launch online portals for financing applications. Autohome will help Ping An to develop their Internet player strategy, especially in the mobile Internet space to increase the Ping An marketing efficiency.

On the other hand, Ping An will provide customized insurance products and financing products to users and potential car buyers of Autohome.

And work on this will also continue to explore the potential to further leverage each other's broad user base for cooperation in the future because both Ping An and ourselves have a very strong user base.

As for the partnership with China Grand Auto, we are able to -- China Grand Auto is an existing customer of Autohome. With this new partnership we're able to obtain greater share of wallet from them. And also, we'll be able to provide marketing support to China Grand Auto's financing products and ecommerce platform and also support them with big data services.

So these are a few initial things that we are working on and we will continue to explore and expand into a wider range of other areas in the future.

Okay. Thank you.

Thanks.

Gregory Zhao, Barclays.

Hi James and Nicholas and Edith, sorry I dropped off the line. So congratulations on the strong quarter. I have three questions.

The first one, I think recently we organized some offline campaigns around 100 cities and we see some very good traction there to drive the auto sales. So can we share some color about the revenue contribution from the events and what's the margin of the business? This is my first question.

Okay, I'll take a crack at that. So, so far we have already completed about 10,000 cars sold for the last, I think basically --

Three weekends.

Three weekends. And there will be another I think three or four. There's another couple of weekends, two weekends. So the total will be eight campaigns -- eight weekends. We think we can, based on the rate, we should be able to achieve more than 20,000 vehicles sold throughout those campaigns. So currently we do not have a revenue target for that business because, as I mentioned previously, right now is a difficult time for our customers. We need to help them achieve sales.

Got it. And my second question is also about the offline sales. I think as there is some online/offline players like [Shalimar], like [Ventura]. Do you think we will see any competition of such kind of offline direct sales models? And do you think in the future maybe we will adopt a similar business model to directly offer some offline group buy services to our users?

I have another question.

I think probably I will not comment on some of the other business models. I think for the group buying business, I think it's akin to differentiate Autohome's business with some other business models. So you need to think about that what is consumer value and what is the customer value for a group buying business.

If your group buying business is by squeezing the dealers, let them having lower transaction price, at the same time also paying you about RMB1,000 per vehicle and it's all same city sales, I think basically there's not an apparent customer value over there. However Autohome's (spoken in Mandarin), or our group buying services is not by trying to squeeze the dealer too often to give a rock bottom price. We want to make sure the dealer is going to profitable of selling more vehicles. So I think we need to differentiate the customer value from there.

However, I think we always need to balance the customer value and the consumer value. We need to think about what type offline to -- online to offline business you really create a value to consumer, whether or not because you have a fixed inventory or you have a better shopping experience, those kinds of things, I think that will set up apart from peers.

Anne Shih, Brean Capital.

Hi James, Nicholas. Thanks for taking my questions. I guess I just have two. I understand the investments required for the second half of the year are going to be a long-term growth driver here. But just thinking about how moving into a transaction-based platform with greater headcount and increased services will impact your margin profile potentially for the longer term, so could you just share any color or visibility into 2016? Should we think about the 30% level as the new normalized level or anticipate any maybe improvements into 2016 here. That's my first question.

Regarding the, I think because the margin percentage obviously will be a function of the revenue, I think right now, I think what we can't sort of be too long -- I think it's very difficult for us to predict our 2016 margin because we operate in a fast-changing industry which is the Internet. In some of the sectors they burn $100m per month. In other sectors they burn $100m per quarter. I think you guys all cover those industries so you know what I'm talking about.

But having said that, I think Autohome always wants to maintain a healthy profit margin because I think a business can generate a profit is a sustainable business model. We don't believe in a subsidized revenue model which will not bring repeated consumer purchase or consumer behavior change.

That's very helpful. Thank you. Then my second question is a follow-up on an earlier question on dealer advertising. Just specifically, I saw the revenue growth figures grow from the second quarter from the first quarter. I'm just wondering what the trajectory would be for the second half, especially given the weakness on the macro side. Thank you.

I think we said a couple of times about the second quarter revenue. In terms of both OEM advertising and the dealer business, we maintain cautiously optimistic about our revenue growth for mainly two reasons.

The first one is that we believe in the long run China's auto new car sector, or new car industry is still going to grow for a couple of reasons I mentioned previously.

Secondly, we believe with the transaction value Autohome has been building, and we're going to become a most efficient way for China's automakers and auto dealers to facilitate their sales.

And for those above two reasons we maintain our cautiously optimistic about our future.

Robert Cowell, 86 Research.

Hey James and Nicholas. Congrats on the strong results. I just have one quick question here about the joint venture with HappiGO. Do you have any update on their progress of this initiative or further visibility on the timeframe for the launch of the showroom? Thanks.

Yes. So on HappiGO I think right now it's off to a good start. I think we plan to have the full service, our full mobile sales mall open by the fourth quarter. It should be in time for the national holidays and for November 11. So, the services that we're going to offer will include vehicle display, test drives, sales of auto and auto accessories and auto delivery and also provide license plate registration for the buyer. So it's a very good one-stop auto service that we provide to the users.

So net I think the project is well on track. I think we will be opening the service, the exhibition hall in the fourth quarter.

Good new. Thank you.

I think it would be helpful, Nicholas, maybe in the fourth quarter we organize a reverse roadshow for --

Yes, that's right. That's the plan. So the first stage of our business with HappiGO, actually the Chinese name is pretty good, it's called (spoken in Mandarin). We were able to leverage Hunan, which is the brand name. The first stage is that we open a 7,000 square meter showroom with different areas to promote an urban usage of sedans and also the countryside usage of SUVs we currently have. I think that is the first major step for us to get into the offline service business so we can understand the pros and cons of running a business. And with Hunan's help, with HappiGO's help we think we can do well in that area.

And also leveraging our strength on the online services strength that we have. So I think that will be something to look forward too.

Thank you both.

Okay, that concludes our question and answer session. I would like to hand the floor back to our management team for any closing or additional remarks.

Thanks everybody for joining us today. We appreciate your support and we look forward to updating you on our third quarter 2015 conference call in a few months' time. In the meantime please feel free to get in touch with us if you have further questions or comments. And hopefully you'll get on our applications, or Autohome website to check out our transactional services. And also I can broadcast again our telephone number which is 400 (spoken in Mandarin) -- sorry 400 800 7777. Any worries, we can help you find buy cars. Sorry I've just taken up airtime. All right. Thank you everyone.

Thank you everyone.

That does conclude our conference for today. Thank you for participating. You may all disconnect.