Autohome Inc (ATHM) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by for the Autohome's third quarter 2016 earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host, Vivien Xu, Autohome's IR manager. Ms. Xu, you may begin.

Thank you, operator. Hello, everyone, and welcome to Autohome's third 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 now in our public filings with the Securities and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statement except as you required find under applicable law.

The earnings press release in this call also includes discussion 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 as 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.

Thank you, Vivien. Good morning and good evening, everyone. Before we get into the details of our operating and financial results, I would like to share with you a few exciting developments in the Autohome business over the last three months.

In our last call, I mentioned that we were in the process of reviewing our strategy to better navigate the rapid-changing market dynamics and evolving digital paradigms in China's automotive market.

On October 17, we have formally announced our new three-year strategy, which, in a short form can be described as a "4+1" strategy. Now, allow me to explain what we mean by our 4+1 strategy.

The 4 represents the four key market segments in our future consumer-centric automotive ecosystem. They are auto-media, auto-ecommerce, auto-finance and auto-lifestyle.

Now, allow me to elaborate in a bit more detail.

Media. Autohome has always been known as the most influential and professional digital auto-media in China. We provide rich and objective content for China's automotive consumers, attracting more than 25 million daily unique visitors.

Our online forum attracts more than eight million active daily users that engage on average discussions in 2,200 sub-forums. This represents over 81% in all forum traffic in China's auto market.

Our PGC business, which is a newly launched open content platform, continues to attract the best bloggers and KOLs that has now made Autohome the largest auto-PGC platform in China with 88 active contributors generating the best content for our readers.

We're continuing to lead and widening our distance from competitors in media. The media business will always be Autohome's core asset.

Auto-ecommerce. We started our transactional service 10 years ago. First, we are a dealer Yellow Page businesses to generate sales leads for auto distributers. We later on extended our transactional business a few years ago into platform ecommerce that allows OEMs and dealers to sell cars online.

We have also experimented in the last year on our self-operated ecommerce business, where we take inventories and sell directly to consumers.

At the same time, we also engage in used car ecommerce, where we help dealers to list their inventories online. In the future, we will continue to expand our business in new car ecommerce as well as used car ecommerce, and our focus will be on leveraging Autohome's unique strengths in user traffic and deep consumer data analytics to enable upgraded efficiency in the online space as compared with the old offline model by OEMs and dealers today.

Auto-finance. In my view, auto-finance is a hugely under-excavated goldmine in today's online automotive market. Research shows that by 2015 more than 35% of China's auto buyers have financing needs when buying their vehicle. That represents a CAGR of roughly 25% annually.

With Autohome's newly acquired financial capabilities and Ping An being our lead shareholder, we're uniquely positioned to best service the unmet auto-related financial needs of Chinese consumers.

Auto-lifestyle. As Chinese consumers mature, car is no longer just an expensive piece of equipment that takes people from A to B, and more and more becoming an integral part of our consumer's everyday life, or what we call auto-lifestyle.

While our ecommerce business focused mostly on satisfying consumers' need when making a purchase decision, our auto-lifestyle offerings serve our consumers' needs throughout their car ownership.

Finally, the one in our 4+1 strategy represents the engine that will transform Autohome from a content-led vertical media to an automotive eco platform based on data and technology.

In our last quarter's earning call, I told you that we are upgrading our technology and big data capability to allow customized content and commercial offerings based on consumer profiles and we are on track in our efforts along those endeavors.

In addition to setting a clear three-year strategy for Autohome, our collaboration with Ping An is also bearing fruits. In our last call, we mentioned that we have embarked on 17 joint projects with various BUs of Ping An Group to explore collaborative synergies with Autohome. Today, many of those initiatives are already showing encouraging results.

I cannot think of a better example that manifests our 4+1 strategy and the synergies with Ping An than our recent November 11 single day car buying festival, where we amalgamated the online strengths of Autohome together with Ping An's extensive offline service network in a closely synchronized campaign.

The 20-day campaign that started on October 23 and reached its pinnacle on the day of November 11, has attracted the participation of close to 100 automotive brands and more than 12,000 dealers in China.

Up until this morning, we have processed over 145,000 automotive orders, which is a 170% increase as compared with the single day campaign last year. That represents an aggregate value of more than RMB21.6 billion.

This is a strong testament of our joint achievement, including media advertising, offline support, financing products where you can truly see our ecosystem at work. We are very pleased of the results and the overwhelming feedback we had from satisfied consumers on their improved experience. We are very confident we're in the right path for sustained future growth in ecommerce.

Now that our future strategy is clear, we will be at full speed executing along those defined paths. But, at the same time, we must also make some adjustment including some tough measures to ensure our business structure and organization are best fitted to the strategic direction.

In our last call, many of you have expressed concerns of our holding of 10,000 Hyundai Elantra in inventory as part of our self-operated ecommerce business. This was unfortunately the historical legacy inventory we had to carry over from the previous executive team and we have to admit, it has created some challenges in our business. To rectify, we have undertaken a one-time inventory write-down in the amount of RMB34 million in the third quarter to clear the above inventory.

In the future, our new car ecommerce will focus on the online platform that optimizes the matching and the clearing process between the consumers and the OEM and dealer customers.

Given our unique strength in consumer traffic and insights, we are very confident that our transaction platform will become the undisputed leader in China, as demonstrated already in the November 11 single day campaign.

Finally, to streamline the organization in our transactional business, we have also undertaken a serious review of our headcount in the business lines that are undergoing some strategic transformation.

I want to emphasize that part of my role as President of Autohome is to recruit, retain and motivate the best talent that fits with the strategic directions we have described. And on behalf of Autohome management, I am very pleased that we have now a solid leadership team with stable personnel and we would like to thank all of Autohome's hardworking employees for contributing to our continued success.

Now, here comes the part many of you are waiting for. For the third quarter results, I am very pleased to report that revenue increased over 64% year over year to close to RMB1.5 billion. That exceeds the top end of our original expectation.

Our core media and lead generation business continued to show solid growth of 24% for the third quarter.

Adjusted net income attributable to Autohome Inc grew more than 13% year over year to RMB292 million. That represents an adjusted net income margin of 20%.

In addition, the combined number of average daily unit visitors for our mobile website and mobile applications have exceeded 18 million as of September. That is a 52% year over year increase.

Our mobile advertising revenue grew 87% compared to the same period last year, accounting for 32% of our media service revenue.

Again, this demonstrates our clear dominance, increasing branding, broad portfolio and the growth momentum within our industry to offer consumers the best way to connect to the desired information on cars.

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

Thank you, Yan. Hi, everyone. As Yan has already highlighted, we are very pleased to report another strong quarter. Note that I will reference RMB only in the following discussion.

Net revenue for the third quarter is up 64% year on year to RMB1,475 million. This surpassed the high end of our guidance.

In terms of revenue breakdown, media revenue is up 22% year on year to RMB577 million representing 39% of total revenue. This strong growth is driven by our increase of shares in automakers' marketing budget and is a proof that we are automakers' choice of partner when it comes to online media platform.

In third quarter, lead gen revenue is up 27% year on year to RMB503 million, representing 34% of total. This increase was primarily attributable to an ARPU increase of 13.5%.

Lastly, online marketplace revenue contributed RMB394 million, representing 27% of total revenue. This new business is mainly driven by direct vehicle sales, which accounted for 97% of online marketplace revenues. And as Yan said earlier, we will be de-emphasizing this direct sales model, and you should expect to see much less revenue contribution from this business going into next year.

Moving on to cost of revenue, which is up to 266% year on year to RMB585 million, the bulk of which is the cost of vehicles we sold directly. This resulted in our blended gross margin down to 60% in the third quarter, including the impact of a one-time inventory write-down of RMB34 million.

Excluding ecommerce business, however, the gross margin of our existing business reached 83.8% for the third quarter this year versus 84.4% in second quarter this year.

Now, let's take a closer look at our operating expenses. Sales and marketing expense in the third quarter was RMB384 million, up 14% year on year, much lower than our revenue growth rate of 64%, and it is also lower than our core business growth rate of 24%.

Product and development expense was RMB149 million, up 102% year on year. This represents our strong commitment to investing in technology and talent in accordance with our strategic direction.

Finally, G&A expense was RMB63 million, up 42% year on year, and representing only 4% of our revenues.

As a result, total operating expense for the third quarter this year is up 31% to RMB595 million, representing 40% of net revenues, down from 50% level last year.

Now, with lower operating expenses as percentage of revenues, we again delivered very strong profitability. Operating profit increased 3% year on year to RMB295 million. Adjusted net income attributable to Autohome Inc is up 13% year on year to RMB292 million.

Non-GAAP basic and diluted earnings per share and per ADS for the third quarter were RMB2.54 and RMB2.52, respectively, compared to RMB2.29 and RMB2.23, respectively, in the corresponding period last year.

As of end of third quarter, our balance sheet remained very strong with cash, cash equivalents, restricted cash and term deposit more than RMB5 billion and we are generating cash flow of RMB387 million in third quarter this year versus RMD296 million third quarter last year.

Before I move on to guidance, I would like to comment on a few important things. First, as Yan mentioned earlier, we will be de-emphasizing the direct sales model for our new car business. This means you should be expecting a lot lower revenues from this business line going into next year after we sell off current inventory in this and next quarter.

Secondly, as we finalize our strategic directions, we are also streamlining our team. These two factors combined, we shall be seeing a team and a cost structure leaner than before and much better tailored to our new strategy.

Let me now address our fourth quarter 2016 outlook, which reflects our current and preliminary view on the market and operating conditions that may be subject to changes. I would like to caution investors that given the business model changes we are making on our direct sales business, the related revenue may be somewhat volatile.

At this point, we expect to generate net revenue in the range of RMB2,039 million to RMB2,121 million, or in US dollar terms, between $305.8 million and $318.1 million, representing an 88.5% to 96.1% year-on-year growth.

In summary, we are very proud of what the team has collectively achieved during the transition period, and we are all very excited about what we could achieve in the quarters to come. We will continue to invest into large end content, and we have committed to serving users and customers in the way no one else could.

On that note, we are ready to take questions. Operator, please open the floor.

Thank you. We will now begin the question and answer session. (Operator Instructions). We will now take our first question from Terry Chen from HSBC.

Hello. Can you hear me well?

Hello.

Hello, can you hear me well?

Yes.

Good. This is Terry. Thanks, management, for taking my questions. I have one question on your strategy. Looking retrospectively, three months ago we are talking about fine-tuning the B2C model by lowering the inventory turnover days and enhancing the profitability. So I am just curious, what triggered such a drastic change in strategy in the last three months? And looking to the future, how would the new 4+1 strategy impact our revenue growth and margin? Thank you.

Thanks, Terry. I wouldn't say we've changed dramatically on our strategy on ecommerce. Actually what we described is pretty consistent to what we have shared with you three months ago.

Now, when I said in the ecommerce, we have to make sure that our model represents a more efficient inventory position and more efficient delivery, we really mean that we want to make sure that our ecommerce represents a better productivity compared with what the dealers and what the OEMs have already at the offline business.

Now, to achieve that, we believe the best way for us is to leverage a few core assets we have, which is our consumer traffic, which is our deep understanding of their behavior, and how do we use the big data and the results from the analytics of those data to guide our OEMs and dealers to better facilitate their offline transaction? That purpose has never changed.

What is different is now instead of taking the inventory and sell the vehicles ourselves, our position is more focused on making sure and enable our partners, which is OEMs and dealers, are more efficient. That, I think, is probably the only change.

Now, we realize that the offline operations is probably not what Autohome core assets likes. We want to make sure we only focus on areas where we can add most value. And we wanted to work in closer collaboration with our OEM dealer partners to achieve that better efficiency that we have described in the last quarter's call.

Now, with your second part of the question that I guess is the 4+1 strategy how does that impact our revenue and margins, now previously, many of you have expressed skepticism about our media and regeneration being plateaued, as they have mature business model and they have -- we have been in the leadership position for many years.

Now, our view is that there will continue to be robust growth from those businesses. That is exactly made possible by the 4+1 strategy we have described.

We are visibly upgrading our media technology platform to allow customized content and customized commercial offerings to our customers. And we are also making sure that our ad business is more integrated with our offline support. So within Autohome, we are a synchronized solution offer -- solution provider rather than discrete product providers to our customers in the future.

All of this will help to generate better value for our OEM and dealer customers, and that will in turn help us to grow our revenue even in the already mature business lines in media and lead generation.

Now, with regard to margin, we have to describe that there are a number of forces at work that will impact on margin. On the one hand, we are withdrawing from the more asset-heavy inventory-taking direct vehicle sales model, which is good news for our margin.

On the other hand, we are also investing very aggressively in technology, in new forms of business, in closer synchronization between the various BUs of Autohome as well as some external partners, including Ping An. All of those initiatives will take some efforts and investment to materialize and a lot of the results will probably be more manifested in the years to come rather than in the year that expenses are being spent.

So the combined forces of the investment, and also some savings in getting out of the asset-heavy, businesses will be impacting the future margins and the final results I guess we'll see when we have more detailed forecasting on those measures going forward.

Great. Just one quick follow-up. I think auto-finance is part of your 4+1 strategy. Does it mean that we are finally entering the auto-financing industry? Could you share more color on initiatives there, especially on the cooperation with Ping An? Thank you.

Yes, sure. Well, whether we do it or not, consumers are already taking financing need online and offline. So I guess a better description as to how do we leverage the capability we have acquired with Ping An's injection to better satisfy customer's need?

So to that end, I think we've made quite some significant improvements from those regards. For example, we have in auto-loan -- we have started our auto-loan business in September. And today the total amount of loan we have issued is already over RMB10 million. That's way higher than what we had before.

On our auto-insurance, in the short two months, we already grew the commission on the -- I'm sorry, not commission, the insurance volume to 2.5 -- close to RMB4 million in the last few months. That's also from almost nothing as compared to a few months ago. So a lot of those businesses are starting to take shape.

What I wanted to emphasize is that we're not taking auto-finance product for the sake of taking auto-finance product. We're doing that to make sure that all the products are being offered to our consumers at the right moments of their purchase decision in the right form of their choice.

So it's not so much that Autohome is becoming a platform vendor or a vendor of auto-finance products, but how do we use auto-finance smartly to make sure that the consumers' financing needs are being satisfied better, and the experience of auto purchase are being enhanced through that effort.

Great. Thank you, Kangzong.

You're welcome.

(Operator Instructions). We will now take our next question from Amanda Chen from Morgan Stanley. Please go ahead. Your line is open.

Hi. Good evening, management. Thank you for taking my question. My first question is regarding the Ping An again. I think Ping An has been supporting Autohome's development in every respect. We are just wondering, when shall we see any substantial outcome in terms of revenue or profit or any other operating metrics? That's my first question. Thank you.

Okay. Actually, as I mentioned in our call earlier, a lot of the efforts are already showing early signs of results. For example, I can mention that in auto-financing in insurance sales, in online/offline synchronization, for example, in the November 11's car selling festival, Ping An's only insurance business involved, life insurance business involved, Ping An's leasing business is involved, auto-financing business also involved in the campaign.

They have also collaboratively offered close to RMB120 million of red packet for our consumers to attract sales. So those success we had in our double 11 sales, which is now, by the latest count, 145,000 vehicle transactions completed, with a G&V of close to RMB21.6 billion. That is not a usual feat that you can accomplish without all the synchronization and all the support from the online/offline including Autohome and also the Ping An resources. So you can already see that being shown in the recent double 11 car festival.

That being said, a lot of the changes were taking the form of a metamorphosis. So a lot of things are going on under the water. Now we are using Ping An's help to tremendously enhance our internal capability in customizing our financial product to consumers, in making sure we offer the best loyalty program to our consumers. Ping An also by the way have the largest consumer loyalty program in China as well. We are leveraging that capability. We're also leveraging a lot of the big data capability that Ping An has to offer. Again, but at the same time we're building up our own significantly as well to make sure that we create the engine that drives the one technology and data engine that we have described in the 4+1 strategy.

Got it. Thank you. My second question is a very quick one. So regarding your lead generation business, we noticed that the monthly ARPU seems to decelerate in Q3 again. Any reason behind it and also how should we see the growth trend in 2017 and also what is the advertised revenue trend in 2017 as well? Thank you.

Hi Amanda. This is Julian. If you look at the lead generation business, we are still looking at a price up regularly on an annual basis. So if you look at the lead generation business revenue growth in third quarter, it may not be as high as we had expected. However, going forward we do see a very, very healthy growth outlook in this business.

So in summary, I think the core operations that we have been operating, including lead gen and the media business, we are looking at somewhere around 25% to 30% year-on-year growth going forward.

Got it. Thank you. Thank you, Kangzong, Julian and Vivien.

We will now take our next question from Ming Xu from UBS. Please go ahead. Your line is open.

Hi Kangzong, Julian and Vivien. Congratulations on the strong results. So I just have two questions. The first is a follow-up question on the inventory write-down. So you mentioned that you booked RMB30 million inventory write-down in Q3. I just want to confirm the have you -- so firstly have you sold all the inventory? Secondly, will there be any sales in Q4. And thirdly, will there be further write-down in Q4 regarding these Hyundai cars? That's my first question.

Okay. The RMB34 million inventory write-down figure we booked for third quarter this year, that was on the inventory value side but the transaction is -- will be booked in fourth quarter. That means we will be selling most of the inventory of Hyundai Elantra model in fourth quarter.

But by the end of third quarter, because we already have a contract on hand which is going to be executed in fourth quarter, our auditor believes it's only prudent to take down the value of our inventory in third quarter to better reflect the intrinsic value of our balance sheet in third quarter, and that's why we took a hit in the third quarter.

Most of the sales will be executed in fourth quarter and we are -- at this point we are not expecting further inventory write-down in fourth quarter. We are in the process of securing the sales contract for the Hyundai Elantra model in the next two weeks.

Okay, thank you. So my second question is on the implication around the margin and the revenue side of the advertising business. So Kangzong you just mentioned -- discussed a lot about the 4+1 initiatives, so I just want to be more specifically on the advertising business.

So given the more personalized customized output content offering, and also the more diverse ad offerings as well as the sales media platform you are operating, so what's the expectation of all these on your -- both on your revenue and margin -- revenue growth and margin of the advertising business in 2017? Thanks.

On the revenue side, there are a number of engines that will drive -- continue to drive our media growth in 2017. One is of course our traditional ad business for OEM. That will continue to grow and exceed as we take share from our competitors, but that will be fortified and accelerated by our technology support.

For example, with more intelligent consumer slicing and consumer profiling, we will be able to increase our mobile advertising inventory by a significant percent next year. Now that will represent a better revenue opportunity with OEM customers, with more targeted and more precise targeting of audience and also better value. So that's one.

Now the second growth will come from our getting into non-car advertising sales. Now, previously all or revenue advertising is coming from automotive OEMs. But remember we represent a vertical that attracts over 22 million active users every day. Those 22 million active users are high quality middle class consumers in China and they have needs more than buying a car.

So to that end, we are also starting our non-automotive advertising business. However, those will be close adjacencies to our auto business. So for example, we're not going to sell house online, but we're going to get into an online location or outdoor businesses and so on and so forth, so that are complementary to our automotive theme. So that again is going to be an additional stream of revenue that will be new to us in the next year.

Now thirdly, we are also being much more open in our media platform, in that with our strengths and deeper understanding of automotive customers, we are going to form alliances and partnerships with other media that complements our media resources that can equally serve the needs of our automotive OEMs.

So in the, what we call the advertising alliance scheme, we're also going to have additional revenue. But that's going to be a new model for ourselves, so we're still prudent as to putting a number behind it, but that's going to be an additional source of our revenue going forward.

So in a nutshell, we are rather confident that those new engines are going to continue to drive the growth of our media business.

Now, on the other hand, I also wanted to emphasize, that the core of our media business growth is coming from our traffic growth, which is in some way a result of our enhanced and enriched content. From that aspect, we are also making some very big improvement.

For example, we are going to significantly increase our PGC platform to accommodate more talent in the market, to allow them to finding their home in the Autohome eco-system to make sure their good content are being commercialized in the best way, and also being offered to a wide group of audience. So those will be win-win collaborations we are going to forge in content sharing and content contribution with a much bigger group of external content providers and we'll continue to do that.

So we are going to increase our stickiness and sort of content, richness of content. We are going to continue to drive traffic. We are going to form alliances with other complementary media platforms. We are going to continue deepening our commercialization business through better customized, more targeted advertisement to our OEM customers.

So with all those efforts we believe that the growth target that Julian described, 20% to 30%, even for our mature media business is quite achievable next year.

We will now take our next question from Nora Zhang from Merrill Lynch. Please go ahead. Your line is open.

Good evening management. Thank you for taking my questions. I have a question regarding the auto insurance business. Could you help us understand how big is the addressable market for Autohome and what kind of competitive advantages we have comparing to offline channels and other online insurance distributors?

Now first we have to say we are not an online insurance distributor. That is not who we are. And a purpose for us is not to sell anyone's insurance product through Autohome. The purpose is more to integrate products that our consumer demands and weave that seamlessly into the consumer's auto buy in experience. That is the most important thing that we are aiming at.

So everything we do is for the purpose of better satisfying our customer experience and consumer satisfaction. For auto insurance there is no exception.

So I wanted to say that the way that you will see us to integrate the insurance is not so that we have a tab that sells auto insurance, buy here, but rather you see that we integrated that insurance buy-in in our consumer journey, when they buy our vehicle, when they deal with the dealer.

Also we're not selling insurance for the sales purpose alone. We are actually also collaborating with our distributors to sell insurance. In many of the cases, we would give the margin and the commissions of the insurance sales to the distributors in order to make sure that they got a best benefit from offering that to the consumer. So again, I wouldn't describe it as a channel but we will use insurance increasingly as a value add service that we're going to provide to the consumer.

Understood. Thank you Kangzong. That's very helpful.

Sure.

Our next question comes from Alex Yao from JP Morgan. Please go ahead. Your line is open.

Hi. Good evening everyone. Thank you for taking my questions. Two questions. One is how do we model the incremental elements that you guys will introduce to the business model, i.e. as you guys emphasized the direct sell ecommerce business, the rest of the traditional media plus advertising business, should it go back to 20%, 30% of the growth rate and maybe low 80 type of the gross margin profile.

Then as you guys are adding the auto finance and the auto lifestyle etc. elements to the business and enhancing the technology, so how should we see think about the model structure in 2017?

Then the second quick question is on the cost of product development side. This item increased pretty quickly this quarter, a lot faster than the top line revenue growth. Can you help us understand is it one of the impacts or it's reflective of you guys ambition to enhance the R&D capability and we should expect similar strong growth rates into the coming quarters? Thank you.

Well I'll probably take your first question. Then on the second question maybe you need to repeat a little bit because I'm not sure we got your second question. But let me try to address your first question first on the modelling part. Unfortunately, I'm not a modelling expert but what I can describe to you is how do we envisage the business going forward so that you can probably factor that into -- when you construct your model.

Now, I think in the future the Autohome business is going to be composed with a number of discrete parts. One is our media business and the auto-eco platform. The media business basically is the formation and the foundation of our eco platform. So I would say media and the auto-finance -- well media -- no, I'm sorry, media and auto-lifestyle are probably more part of this -- this is the platform business, so it's core business.

I say that it is core is because this is very fundamental in terms it attracts the consumers who come to our website or mobile app for that matter to enjoy the content, to enjoy their lifestyle. This is more a traffic generator and at the same time also generates advertising revenue. Some accessory of revenue in the forms of some consumer-related revenues, for example, some sales of probably outdoor activities, some sales of non-automotive advertising products in our eco system. That's one business.

The second group of businesses is more a transaction business which is our new car ecommerce, which is our used car ecommerce, and at some point it's going to be also our outdoor market ecommerce as well. Those will be separate ecommerce businesses that you can probably find equivalent of our new car sales in the form of the automotive Tmall. That will be something, the closest analogy I can think of.

Our new car ecommerce is probably going to be -- and in some way already the largest ecommerce transaction platform online and it's going to be like a Tmall. Our used car business very similarly is going to be a market place where used car dealers find their transactions and close their deals with consumers online, similarly to our aftermarket business.

For those businesses, I guess the valuation will be the more trickier, other than just your PE model or sort of DCF model which you probably can -- I am sure you have better ways to evaluate those businesses as you do with some of the equivalent or similar businesses.

For the core business, I think you can take a look at our revenue and our growth projection as well as our cost structure. Those are probably ways that you can look at our core business. So those will be two separate groups of evaluation approaches that you can take. Does that answer your first question?

Yes, sure. The second question is about the product development expense, which increased more than 100% this quarter, much faster than the top line growth. Just wondering what is the reason this line item is growing so fast. Is it a one-off or is it consistent to trends that we are going to see very strong R&D in the product development cost increase into the foreseeable future?

On your second question, I think you have already had the answer yourself. In the last quarter, or actually most of the time in 2016, we have invested heavily in the team and technology and that resulted in a product development cost up by about 100%. But with that line item you probably should view it as an investment rather than as expense because by building up a strong larger platform and a strong team, that actually forms a good platform for us to move -- to grow into year 2017 and beyond.

So going forward, you should not expect a similar growth rate in that line item going into next year because most of the investment we have already made in this year. But that did build up a higher cost base going into next year.

Is it mainly the headcount expansion that drives that growth under this line item?

Well that's a combination of a lot of things, headcount, service, bandwidth, a lot of things.

Technology investment.

Thank you very much.

Our next question comes from Thomas Chong from Bank of China. Please go ahead. Your line is open.

Hi. Thanks management for taking my questions. I have two questions. The first one is can management provide some color about the number of vehicles sold in 2016 and how we should expect it in 2017?

My second question is more about the financials. Can management provide the breakdown for the SBC under R&D, SG&A, etc.? Thanks.

For our ecommerce platform, for those what we call platform sales as well as direct sales, all together we sold roughly, which number, 25,000 vehicles. That excludes, by the way, our double 11 number that I have just described. So excluding double 11, we are selling roughly 25,000 vehicles for Q3. And cumulatively for 2016, the number will be something close to 50,000, of which 20% are for direct sales and the rest for platform sales.

Again, this is excluding our number for double 11, which has now come in at already 145,000 altogether. So adding those two is quite an impressive number. That's for the ecommerce platform sales.

Another part of your question was about the composition of the expense line items, right?

Yes.

Okay, I would actually suggest that you take a look at the earnings release we've put out on the web today. In that document, we actually have a very detailed breakdown of many things. One thing I would like to point out is the share-based compensation expenses related to the departing senior management, which happened in the third quarter.

We booked the share based compensation expenses under a different line item including cost of revenues, sales and marketing expense, as well as product development. In the year earnings release document you will see all the details.

Thanks. May I just have a quick follow-up about the number of vehicles that we target for 2017, thanks?

What we have described is that the number of vehicles for direct sales will be significantly reduced for next year. Now we achieved a dramatic increase, almost over 170% in our double 11 for this year from last year. Now we anticipate the growth of ecommerce platform to be very strong but we don't have a specific number to share at this point of time.

Now I think going forward, when we have a better view of our next year's forecast, we'll probably give you a more accurate number. At this point, I would just say that is going to be very robust growth as you have already witnessed from the last few months. Next year I think is going to be a significantly increased number from this year.

Thanks.

We will now take our next question from Tian Hou from TH Capital. Please go ahead. Your line is open.

Yes, Kangzong and Julian, my question is really related to your market place. So I see you change from listing advertising to transaction business. So I wonder what's the relationship between you and the OEM who are selling cars on their own or car dealers on their own? What's the relationship going to be going forward?

The relationship is going to be quite simple. They are our customers and they will continue to be our customers, and we will be their enabler and service provider to make sure that they navigate the market as smoothly as possible. So we're going to use our consumer traffic, we're going to use more targeted transaction guidance to help them to sell better cars whether offline or online.

So in some ways, our platform ecommerce is going to be an extension of our advertising business and also lead generation business as it currently is. All the purpose is to make sure that we become a full service provider, use our technology to make sure they are more efficient. They are better improving their business model that are suited for the competition going forward.

So is that possible for the dealers and OEMs to shift their media budget to a much more online market place?

No. The media business in a way serves a different purpose from the ecommerce platform. The media is for awareness building, is for consumer education, is for conversion, is for loyalty breeding. So that's why you see that when a consumers buys a car, before they buy a car they spend roughly three months in our website learning about various types of vehicles of their likes and dislikes and they compare comments from their peers. They look for advice from our professionals.

So the use of the media will continue to exist in those functions. Our OEMs, particularly some of the leading OEMs, are well aware of that. They're well aware of that in leveraging our media business to achieve those goals, branding goals, and education and sort of asset building. So that will continue to be the case.

Now what will be somewhat tricky will be some of the more transaction business including our lead generation business, including our ecommerce. This will in time, in our view, probably integrate and convert. So at one time, we're offering the dealers leads to their offline sites in our lead generation business. At the same time we're also offering opportunities for them to opening online shops that are better at taking advantage of our online traffic.

I think those serve different needs. That the lead generation is more eminent, is more for the current states of business that is a very important part of themselves. The ecommerce platform will be representing the future and we think both will be needed for our dealer friends and OEMs, the customers, in helping them to navigate the evermore competitive automotive market.

That's very helpful. Thank you. That's all my questions.

That will conclude today's question and answer session. I'll now turn the call back to management for closing remarks.

Okay. Thank you very much for joining us all 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. In the meantime, please feel free to get in touch with us if you have any further questions or comments. Thank you very much.

That will conclude today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.