Autohome Inc (ATHM) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for Autohome's second-quarter 2016 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, Vivian Xu, Autohome's IR Manager. Miss Xu, you may begin.

Thank you, operator. Hello, everyone, and welcome to Autohome's second-quarter 2016 earnings conference call. Earlier today Autohome distributed its earnings press release and you may find a copy on the Company's website at www.autohome.com.cn.

On today's call we have Mr. Yan Kang, Autohome's President; and Mr. Julian Jiun Lang Wang, Autohome's Chief Financial Officer. After the prepared remarks, Mr. Kang and Mr. Wang 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 expectations. 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 statements except as required under applicable law.

The earnings press release in this call also includes discussions of certain unaudited 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 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 President. Mr. Kang, please.

Thank you, Vivian. Good morning and good evening, everybody. Thank you for joining our second-quarter 2016 conference call.

Before we review our results, on behalf of Autohome I'd like to express our sincere gratitude to our previous executives, Mr. James Qin, Mr. Nicholas Chong for their leadership and service to Autohome. I would also like to take this opportunity to thank you, all our shareholders, for your continued support, and we look forward to working closely with you.

Now I'm very excited to join Autohome because it is a Company with very solid business fundamentals, built over the past decade by highly skilled, motivated and passionate people at all levels and the old business unit of our Company. It is undoubtedly the best known automotive media brand in China and is a clear category leader. It attracts over 22.5 million daily unique visitors. It services more than 21,000 OEM dealer clients and we're successfully matching nearly 7,000 vehicle transactions per month on average for the first half of 2016.

As our new management team takes over, we believe strongly in the Company's current growth strategy, the focus on expanding our customer audience, growing our core advertising and leads generation business, while at the same time investing in and optimizing our new transaction marketplace platform.

To ensure that we continue to take Autohome to the next level, we're conducting a full strategy review, including how to enhance our existing business model, how to improve our relationships with our OEM and dealer clients and how best to collaborate with our major shareholder, Ping An Group.

Our market, like every segment of ecommerce in China, is evolving very fast. Change brings potential risks but can also mean substantial opportunities. So we must never be complacent. We must continue to innovate and we must also take tough decisions. Some of these changes mean that we may experience a short period of uncertainty, but it will pass. So we appreciate your trust and we look forward to sharing with you our strategic plan as soon as the review process is completed.

Now despite these internal changes, we're pleased to report that we've had a great second quarter, where our revenue increased by 60% year on year to RMB1.4 billion. That exceeds the top end of our original expectation. In addition, adjusted net income attributable to Autohome grew by 22% year on year to RMB396 million. That represents an adjusted net income margin of roughly 29%.

Again, our business and our financial performance continued to beat the average performance in our industry, which really reconfirms our consistent and precise execution of our strategic priorities.

In terms of growing our consumer audience size and quality, it is also clear that consumers continue to select Autohome as a preferred choice when buying a car. As the combined number of average daily unique visitors for our mobile website and mobile applications exceeded more than 15 million as of June, that represents a 56% year-on-year increase. Our mobile advertising revenue grew 187% compared to the same period last year, accounting for roughly 29% of our media service revenue.

Now the primary reason for the traffic growth were our increased brand value and the differentiated offerings of our platforms, our ability to retain and attract automotive consumers in China, as well as the strong collaboration we've had forged with branded partners. We will continue to leverage these trends and extended resources in order to enable a more open platform, develop new and innovative content, product and services that drive the consumer audience.

We will continue to enhance our user engagement and we will empower consumers in making the optimal decision for their vehicle purchases. We will also continue to invest further into mobile technology, to reinforce and accelerate our overall traffic size and quality.

In our core advertising and lead generation business, although we continue to show very solid growth of 27% for the second quarter, it is also apparent that our growth has slowed compared to historical levels. Now that shows we have some important work to do to improve and reaccelerate our growth. We offer a powerful value proposition to our OEM and dealer clients because of our ability to reach a large and engaged base of automotive consumers.

That extends the reach of our clients' physical showrooms to millions of online users in China and it generates sales leads for the dealers. We must in the future be more focused on delivering the best user experience, advancing our sophisticated big data capabilities for better consumer profiling and for more customized services in order to enhance the consumer user loyalty and user yield to significantly improve our conversion rate. In addition, we also need to further improve our relationship with our OEM and dealer clients and deliver higher ROI in supporting their successes.

Now let me address our transactional marketplace. It is obvious that this business is fast-growing and evolving with enormous potential. And a transaction platform will bring us increased revenue and commission fees from our clients. We're very encouraged by the over 4,000 new vehicle transactions completed on our platform during the second quarter. This is a very strong proof that consumer demand exists and Autohome has the capability of matching consumers and supplying partners such as OEMs and dealers.

Based on the data we have so far, our review for the transaction business is focused on how to make the existing business model work better, how to improve and expand the relationships with OEM and dealer partners and how to streamline the entire purchasing process for efficiency and better effectiveness, as well as how to optimize our transaction infrastructure in order to further reduce cost, including logistic cost, inventory and management cost, etc.

We're very confident that once we optimize the matching and the clearing process between consumers and suppliers, our transaction platform will be the preferred channel for consumers in China, in a similar manner to what we have achieved with our media platform.

Now finally, before I turn the call to our CFO, I want to quickly address the used car business and other potential businesses, such as aftermarket services, etc. All of these businesses are within the scope of our strategic review as these businesses represent opportunities for the future. However, we will keep an open mind and be very prudent to review our resources for future growth and investment.

We're also well positioned to lead industry and take advantage of the many opportunities and scalabilities of the benefits of our consumers, clients and shareholders.

With that I now turn the call over to our CFO, Julian, for a closer look at our second-quarter financial results and business outlook. Julian.

Thank you, Yan. Hi, everyone. I'm really happy to be on this call. Since I joined Autohome in early August I've not had a chance to meet many of you yet, but I appreciate your interest in the Company and hope to meet with you sometime in the near future in person.

As Yan has already highlighted, we are very pleased to report another strong quarter. Please note that I will reference RMB only in the following discussions.

Net revenues for the second quarter 2016 increased 60.1% year over year to RMB1,378 million. This exceeded the high end of our initial guidance, thanks to robust growth from our core media and leads generation business, as well as the new online marketplace revenues.

In terms of revenue breakdown, media service revenues increased 20.8% year over year to RMB596 million, representing 43.3% of total revenue. This strong growth is primarily driven by an increase in average revenue per customer as automakers continue to allocate more advertising budget to Autohome.

During this quarter, leads generation revenues increased 35.8% year over year to RMB473 million, representing 34.3% of total revenue. This increase was primarily driven up by a year-over-year increase of 18.5% in average revenues per paying dealer.

Lastly, for the second quarter 2016, online marketplace revenues contributed RMB309 million, representing 22.4% of total revenue. This new business is mainly driven by direct vehicle sales, which accounted for 97% of online marketplace revenues.

Moving on to cost of revenues, which increased 238% year over year to RMB464 million and is primarily driven by the cost of goods sold of direct vehicle sales. Excluding the cost of vehicles we sold directly, the cost of revenue has only increased 31.7% year over year, resulting in a gross margin of 84.2% for the second quarter 2016. However, given the nature of online marketplace business and being in the early stage of it, the overall gross margin for the second quarter 2016 declined to 66.4%.

Now let's take a closer look at our operating expenses. Note that while we are investing into new growth opportunities, we are very cost-conscious and prudent with our overall spending. Sales and marketing expense in the second quarter was RMB306 million or 22.2% of our revenue, which is primarily due to increased marketing and headcount expenses.

Product and development expense was RMB139 million or 10.1% of revenue, relatively stable sequentially and is primarily due to increase in headcount in support of our rapid growth.

Finally, G&A expense was RMB77 million or 5.6% of revenue.

As a result, total operating expense for the second quarter increased 51.3% to RMB523 million from RBM346 million in the corresponding period last year, representing 37.9% of revenues compared to 40.1% the same quarter last year.

Now on profitability. Even with higher cost base, we still came in pretty strong. Operating profit increased 3.6% year over year to RMB391 million. Adjusted net income attributable to Autohome Inc. increased 21.8% year over year to RMB396 million. Basic and diluted earnings per share and per ADS for the second quarter were RMB3.04 and RMB2.99 respectively compared to RMB2.72 and RMB2.63 respectively in the corresponding period of 2015.

As of June 30, 2016, our balance sheet remained really, really strong, with cash and cash equivalents, restricted cash and term deposits of RMB4.6 billion. Net cash provided by operating activities in the second quarter was RMB284 million compared with RMB194 in the corresponding period last year. The strength of our balance sheet and cash position is an important competitive differentiator that leads to significant financial flexibility.

Before I move on to guidance, I would like to emphasize again that in order to execute our strategy this year we will invest in several areas, such as talent and teams in technology, as well as new businesses.

Let me now address our third-quarter 2016 outlook, which reflects our current and preliminary view on the market and the operating conditions that may be subject to changes. I would like to caution investors that, given the early stage of our online marketplace business and depending on the outcome of our final strategic review of this business, the transaction volumes and the related revenue may be somewhat volatile from quarter to quarter, although we will try our best in providing the guidance based on our present visibility.

So, right now, we expect to generate net revenue in the range of RMB1,350 million to RMB1,394 million or, in US dollar terms, between $203.1 million and $209.8 million, representing a year-over-year increase of 50.2% to 55.1%.

In summary, we see huge market opportunity and strong demand for our offering. And we are extremely focused on comprehensive strategic review and prudent execution so that we can deliver sustainable growth and maximize shareholder value.

With that, we are ready to take your questions. Operator, let's proceed to the Q&A session, please.

(Operator Instructions) We'll take our first question from Amanda Chen from Morgan Stanley.

Hi. Good evening, management. Thank you for taking my question. I have three here. The first one is regarding the third-quarter guidance. We noted that the third-quarter guidance is a little bit vague, maybe because that we are in a transition period. So from your perspective, how long will this transition period last and how will it impact the top-line and bottom-line growth? That's my first question. Thank you.

All right. Thank you, Amanda. This is Yan. The primary reasons for our adjusted forecast for Q3 is not so much of the uncertainty in our management; it's more because of our cautiousness in reviewing our new car ecommerce platform, particularly our buy-out business, where we purchase the car, we put it in inventory and we sell it to -- directly to consumers.

Now we've been trying that for a number of months. One of the key things we realized that going forward we have to make sure that our new model is adjusted so that we're very competitive in terms of inventory days and the way that we're operating our capital return for our cash, and also in the way that we manage the online/offline cost compared with traditional dealer car sales.

That is the critical success factor of our business going forward. So we wanted to really push the scrutiny of our model to make sure that we streamline all these elements before we embark on a scaled expansion. So that is why we focus more on the quality of the model rather than the scale of the model in the next few quarters going forward.

Thank you, Yan. That's very helpful. So the second one is regarding your long-term strategy for the transaction business. We are just wondering if you will continue taking inventory and also how will you integrate the Ping An Insurance with Autohome?

All right. That is a very good question. Well our overall view for our strategy going forward is that we continue to believe that ecommerce platform is a very critical part of our future business strategy. Now undoubtedly we wanted to make sure that we have the right model when we embark upon this new strategy. So we want to make sure that -- as I mentioned, we want to make sure that we'd be very efficient in our inventory days.

Now it is somewhat inevitable in such a buy-out transaction, you own inventory, but the critical success factor for us going forward is to -- we need to be more competitive, much more competitive than the traditional dealers. And we were able to do that by leveraging our strengths in our media business, by making sure we leverage our strength in consumer data and analyzing the consumer behavior based on their history in our website to make good predictions about the vehicle sales logins going forward.

That, I think, is a unique capability that Auto has vis-a-vis some of our competitors. And we continue to believe with that we'll be able to gradually reduce our inventory so that we are the most competitive in the marketplace going forward.

Now with the synergy with Ping An Group, for example, in our short span of less than two months we come into management, the Ping An Group has already initiated, together with Autohome, 17 projects that brings the executives of Ping An's various subsidiaries and Autohome management together to work on potential synergistic projects already. And many of those projects are work in progress, are making great progress. And we can see some of those outcomes, some benefits of that in the next quarters to come.

Thank you. And the final question is regarding your -- some initiative business as you mentioned that used car, auto finance, etc., has very bright future and a huge potential. So I'm wondering, do you have any specific strategy for these new initiatives as we know that the capital market now actually pays a lot of attention on the auto finance business? So could you please share with us your strategy? Thank you.

Sure. It is -- our belief is that in the end, in the end game, that we need to really have a complete picture of our business in most parts of the automotive ecosystem. That includes media. That includes dealer and OEM services. That includes new car ecommerce, used car, aftermarket, so on and so forth.

However, we can only take one morsel at a time. Particularly in a time of very fast-changing market environment, we need to be super focused. We need to make sure that we win one battle at a time, making sure that we excel, we deliver extreme smooth-line consumer experience. That, I think, is more critical than throwing resources all over the places.

Now recognizing that used car and aftermarket are all very big markets, with a lot of potential, with a lot of players, for us we keep a close eye on that and we have our leg in the business. We'll experiment. We'll keep a very close look. But our primary focus is making sure our media and OEM dealer business is strong -- more and more strong as we continue to build into our core, and making sure our ecommerce platform has the right and successful model and is ready for scaled expansion.

All right. Thank you. That's very helpful.

Sure.

We now take our next question from Ming Xu from UBS.

Good evening, Kang Yan and Julian. I also have two questions. The first one is regarding the lead generation business. We notice that the growth of lead generation business decelerates from 47% in Q1 to 36% in Q2. I'm just wondering, could you elaborate on the reason for the slowdown and also how should we look at the growth in Q3? That's my first question.

Okay. Thank you. That's a very good question. Now when we talk about our leader generation -- the lead generation business for the dealers, you have to bear in mind that we are already penetrating into almost all of the market. Of the 25,000 overall dealers, we cover more than 80%, close to 90% of them already. So by definition we are entering into a mature stage of our business. So that I think is the difference we look at one quarter before, where there's still some room for growth.

So we are entering into a more, how to say, stable business, stable phase of the business, where the growth will -- in the future will come more from added value, more value per customer rather than increase of customer per se. So I think it's natural to expect that to materialize.

Now, going forward, we have to say that our media and lead generation business will continue to -- I wouldn't say the word plateau because we still have a lot of potential, but then you have to put into perspective that we are already a market leader in that. And the focus of our media business and lead generation has to change more from just pure revenue growth into the quality of growth and how we leverage the big data capability and customer understanding analytics capability from the business, rather than just from revenue per se.

So one of the key initiatives we're going to do in the next 6 to 12 months is to significantly upgrade the IT infrastructure and technology base for our media business, that also includes our service for the dealers, so that we can better leverage the vast ocean of data that is generated from our website. By the way, we have the best quality of consumer data already in the market, but we want to use it in an even better way, to guide our future ecommerce, to guide the transactions of our OEM and dealership partners.

Thanks. That's very helpful. So my second question is on the media business. So the media business, I think it maintained 20 -- around 20% growth rate from Q1 to Q2. I'm just wondering how we should look at Q3 and second half. I think for -- if we look at Q3 auto -- the drivers in Q3, I think on the positive side we know that the auto sales remains very strong on the year-on-year basis. But at the same time, I think because of the sporting events, Euro Cup and Olympics, there are a lot of traffic and therefore a lot of ad budget allocated to the portals and also mobile news apps, including not only the mobile portals but also things like Jin Ri Tou Tiao. So will that be a dilution of the ad budget? And how should we look at the ad media bit revenue growth in the Q3?

Yes. Well over the longer term, similar to what I described to the lead generation business, our media business is also entering into a more mature stage. But at the same time it's also having very solid fundamentals. So we do not see any reason why we would not be able to maintain the same tempo of growth going forward. That's for the medium to the longer term.

In the short term, there may be some disruptions from various hot topics, including Olympics and so on, so forth, that may create some fluctuations. But fundamentally we do not believe the structural business of our media business has changed. So we continue to anticipate a healthy and steady growth of our mainstream media business.

Now you -- very interesting you mentioned the example of Jin Ri Tou Tiao, which is one of the directions that we will continue to migrate our media business into, because we are, at this point of time, a more content-driven and more editor recommendation-based media, where we excel at our editors' objective and so authoritative comments about automotive, which attract a lot of respect and interest from automotive buyers.

Now, going forward, that is continued going to be core. But as you've probably also seen in the news that we're continuing to expand our content sources from a more OGC -- so more of original-generated content to more professionally generated content by experts outside of Autohome, as well as UGC, user-generated content. That will be a major directional addition to what we have in the past. That will continue to enrich the quality and the quantity of our content that will allow us to make more customized recommendations to our readers, based on their own behavior and then characteristics.

So with that, I think those will be the key growth drivers to drive our media business going forward. In turn, that quality of media content will result in better commercial realization for our advertisement clients.

Thanks. That's very helpful. Just a quick follow-up on this second question. You mentioned the transformation in your media business model, which I guess what you are referring to is the Shuo Ke business. But to my understanding, the Shuo Ke, the contributor on the Shuo Ke platform is actually quite -- the group of contributors are basically very similar to the group of competitors on your -- or group of contributors on your competitor's platform. And also the group of -- this same group of people also contribute to maybe Jin Ri Tou Tiao and some other aggregator sources.

So how do you -- what's your competitive strategy in this? How do you try to secure an exclusive content and how to ensure that the contributors can have a better readership on your platform?

Yes, well, I think that's a very important question. I think one of our key differentiators in the past is original content. Now we believe in the future the battle will be both on the originality of the content as well as the quantity of content, particularly when we go into more of a Qian Ren Qian Mian, a smart recommendation of content based on our reader behavior and characteristics. So we have to really drive on both wheels.

So we're not saying that the Shuo Ke business is going to dilute the originality of our editor's business, but it's going to be a complementary pillar to what we're going to have.

Now as what you're referring to, how does that compare with some of the other players in market? I think it will have to come to user experience. If the content may be the same or similar, but it's the way that you link the content to the relatedness of the consumer's likes and dislike, and how do you weave that into a streamlined experience based on your understanding, deep understanding of consumers' behavior and their own characteristics. I think that really is the key why some are more successful than the others. At same time we continue to differentiate from our original content, which is -- continues to be our core going forward.

Thanks, Kang Yan. So my third question and last question is on the marketplace business. You sold around 9,000 to 10,000 cars in first half. I'm just wondering, could you give us a breakdown between the direct sales model and the commission model?

And also I understand that you're conducting a review on the business, but is there -- is it possible to give a rough guidance for the volume in the second half to help us to model the revenue growth? Thank you.

Sure. Of the roughly 10,000 vehicles that we sold, the buy-out model and the commission model is roughly 50/50 split in terms of the volume. But of course, as you can understand, the revenue contributor primarily coming from the buy-out deals model as the commission represents a relatively much insignificant part of the revenue.

Now going forward, as I said, and also Vivian -- also as Julian mentioned, we may see some volatility in second half of volume, because we're really examining the model. We wanted to put the first priority on the quality of the model rather than the how many cars we sell. We can sell cars no problem. But we want to make sure that we have the model right.

Now our current estimate for the whole year, vehicle marketplace, is now something -- somewhere between 20,000 to 25,000 overall. But again (multiple speakers).

For the full year?

For the full year. For the full year.

Okay.

With the caveat that there may be quarter-to-quarter volatility, depending on the result of our review of our new car sales model.

Got it. Very helpful. Thanks Kang Yan.

All right. You're welcome.

(Operator Instructions) We'll now take our next question from Nora Zhang from Merrill Lynch.

Good evening, management. Thank you for taking my questions. I have three questions. My first question is about your headcount expansion. We've added 600 staff in the first half 2016. As you just mentioned, we have 17 projects with Ping An and will work out new strategies in auto finance and used car. So I wonder what's our plan on headcount expansion this year and how many headcount are we looking at till year end?

In terms of headcount, we did increase quite a bit mostly in the transaction-related business unit. Going forward we may or may not increase headcount further. It all depends on the strategic review, which is going on as we speak. So we don't have a definite answer to your question in terms of the headcount we will have by the end of the year, but it all depends on the kind of initiatives we will be taking in second half this year.

In terms of the 17 project teams that you just referred to, I don't think that directly links to the headcount plan we have. Basically it's just to explore the synergistic initiatives between Ping An Group and Autohome. So you probably should not take that into account when we talk about the headcount.

Sure. That's very helpful. So my second question is about sales and marketing expense. We notice that the sales and marketing expense has been down quarter over quarter. Could you help us understand the reason behind and provide some color regarding the sales and marketing expense in the third and fourth quarter?

Let me address that question a little bit. The sales and marketing expense, probably it's a little bit below the original expectation, partially because part of the sales and marketing expenses actually went into the other part of the P&L because of the headcount allocation in different departments. So I think the way you look at our P&L, you should be looking at the overall operating expenses rather than the specific category.

Sure. Sorry, Julian, I still have another question. So we notice that in the -- in our balance sheet we -- our prepaid expenses increased to RMB1 billion. I think this may be related to our inventory-taking business. So does it mean that we will take about RMB1 billion in the second half 2016?

Well this is Yan again. Let me try to address that business -- that question. Yes, well the RMB1 billion inventory was regarded -- was a result of a decision of the management team to take in roughly 10,000 vehicles from Hyundai, the Elantra, in the second quarter. Now we're reviewing the effect of that decision. That of course was made based on a number of various factors to boost our ecommerce sales platform. This is also the reason why we have said a bit earlier we're reviewing our business model for the ecommerce platform, particularly for the buyout.

We wanted to make sure, in the future, our inventory becomes efficient, that we do not necessarily take excessive inventories for the ecommerce business. So we do not anticipate our inventory to further go up. Actually we're ready to anticipate our inventory will go down as we more aggressively streamline our operation, making sure that our capital structure and also our business model is competitive compared with the regular offline transactions as dealers and OEMs engage.

Got you. Thanks a lot, Yan and Julian.

You're welcome.

That's all my questions.

(Operator Instructions) We'll now take our next question from Alvin Jiang from Deutsche Bank.

Hi, management. Thank you for taking my questions. I have a quick question, is on your opinion about the competition landscape. We notice some of our peer companies actually doing aggressively on the buy-outs, ecommerce business and also the aftermarket business. So in your mind, how to balance our expansion into this more aggressive business model and between this expansion and our bottom line and the internal reviewing jobs? Thank you.

Okay. Very good question. Well the economics of those new businesses, the new car ecommerce and also aftermarket second car market, is very different from our existing core business, which is in media and lead generation. Now earlier, what I mentioned, we believe in the long run those are definitely the right direction to go. As we further expand into the automotive ecosystem, those are all related and linked all-in-one services to our consumers. But we have to take one step at a time.

Particularly, for example, in our ecommerce, we wanted to -- well, that's maybe a little bit different philosophy that we have with some of our competitors. We wanted to make sure we leverage to the fullest extent the core strengths in our media capability, with the big data, big consumer deep understanding, with customized offerings, with ability to predict the sales volume, with ability to manage down the inventory at a significantly reduced level to traditional offline businesses so that our model is fundamentally competitive and superior than what you see offline with the dealers and OEMs.

Only in that we believe scale expansion is minimal. So you probably see the different approach. We wanted to make -- well, it's not about money. It's not about willingness to reinvest. Actually, with Ping An's investment, we actually have even stronger capital backing than any of our competitors to go. But we don't want to throw money in the water. We wanted to make sure that we have the right model. And that's why the model is based on the unique capability and advantages of our media business. That is not available to any of our competitors.

Now with regard to second car and aftermarket, for example, aftermarket is a place where a lot of people are still burning money to find a model. We probably don't want to be the first ones to throw money in the water. We again wanted to make sure that we win one battle at a time. We want to make sure that, again, we leverage the core strengths of our media capability, our deep understanding of the consumers when we enter that model.

So we have the business. We have our after-sale business. We have our second-car business. But the reason we do that is that we wanted to use that to be -- continue to be vigilant and aware of all the changes and will continue to explore how to make our model unique before scale expansion. And in the next two quarters, clearly our focus is more on the new car ecommerce rather than aftermarket.

Okay. Got it. Thank you. This is very helpful.

We'll now take our next question from Robert Cowell from 86Research.

Hi, Kang Yan and Julian. Thanks for taking my question. I wanted to ask a little bit more about the transaction business. So in the long term, what kind of gross margin do we think this business can do?

And then you also mention you think it has -- your transaction business is a better solution than the one currently provided by offline dealers. How do we manage that relationship with the offline dealers? And also what makes us better in the long run?

Right. Well, as we all know that in the world of investment that margin is not only -- is not the only measure of return. It's the margin plus how fast you turn on capital, right? That's how Dell becomes successful, how Walmart becomes successful and many other low-margin industry leaders become successful.

Now similarly to that, in automotive sale business we believe you have to pull the same -- the two levers at the same time, so how you employ your capital, how do you -- how fast you turn on inventory, how we become efficient in logistics, in immense anticipation, in forecasts, so on, so forth. Those are really the area where Autohome have a cutting edge, have a unique competitive advantage over anyone else in the market. And we wanted to fully exploit that.

So our focus is really on that. Of course, with a more efficient online process and offline business, we will improve somewhat the gross margin. But we believe the lever is bigger in the other leg, which is the capital efficiency. And by the way, with Ping An's injection of capabilities, we are now even more confident. Autohome is positioned in a very unique place, where we will be the absolute leader in making sure we deploy the best capital efficiency in that manner.

Thanks. And then also just about managing the relationship with the offline dealers, because they're an important customer as well.

Yes. So, now, it's interesting because the same logic will apply to the dealers. Even if they do not improve on their car margin position, if they are having access to a better capital utilization rate, they will improve as well. So what we're doing in the ecommerce platform is an experiment, if you will, for us to -- making sure we have the magic recipe.

Once we have that, we have every incentive to use it to enable our dealer partners and OEM partners to make them as competitive as possible as well, because we believe the future change of the car distribution market is not going to be done by Autohome alone. We need to do that with everybody and everyone in the market. And we'll be the one to enable them to make that change. So I think that actually, for us, represents opportunity.

And just as a final note to that, one of the 17 initiatives that we're initially working on is exactly to enable our dealer fronts to be more efficient in deploying their capital, so it is really a win-win. Now, of course, as you rightly point out, we need to very carefully balance the two legs to make sure that we remain frenemies, sort of friends and enemies at the same time, making sure that we put those steps in an advanced model, but at the same time we use the learning to benefit the whole ecosystem, particularly our partners fronts.

Thank you very much.

Thank you. As there are no further questions at this time, I would like to turn the conference back to management for closing comments. Mr. Kang, please go ahead.

Thank you very much for all joining us today. We really appreciate your support and we look forward to updating you on our next quarter's conference call in a few months' time. So in the meantime, please feel free to get in touch with us if you have any further questions and comments.

Thank you very much. Goodnight and good morning.