Autohome Inc (ATHM) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for Autohome's Second Quarter 2018 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, Joyce Tang, Autohome's IR Senior Manager. Ms. Tang, you may begin.

Thank you, operator. Hello everyone, and welcome to Autohome's Second Quarter 2018 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. Min Lu, Autohome's Chairman and CEO; Mr. Haifeng Shao, Autohome's President; and Mr. Jun Zou, Autohome's Chief Financial Officer. After the prepared remarks, Mr. Lu, Mr. Shao and Mr. Zou 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 provision of the U.S. 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 take any obligation to update any forward-looking statements except as required under the law. The earnings press 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 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 Chairman and CEO, Mr. Lu. Mr. Lu, please go ahead.

Thank you, Joyce. Hello, everyone. Thank you for joining us today to discuss our second quarter 2018 results. I'm pleased to report another strong quarter in which our revenue, excluding direct sales, increased 36% year-over-year to RMB 1.87 billion. This further solidifies that our core business and new initiatives are gaining significant acceptance in the market. And all 4 pillars of our business are on track with continued growth momentum.

Now let me update some recent efforts in our core media and leads generation business. Firstly, we are able to continue expanding high-quality tracking. During the second quarter of 2018, the number of average daily unique visitors who accessed our primary application, Autohome, increased by 54% year-over-year to reach 10.3 million according to the Quest Mobile. Also, our mobile advertising revenue grew 30% compared to the same period of last year, accounting for 52% of our media service revenue. Secondly, we have further broadened content with better-driven customization and tailored intelligent recommendation. For example, currently, there are 8,000 professional contributors to our PGC platform. And overall publications, including articles and videos, increased about 150% growth sequentially. Also, as the part of further upgrading the PGC ecosystem, we are expanding collaboration with all automakers, KOLs, professional experts and the social media, et cetera.

In addition, Autohome has further diversified its content production by launching 9 columns, including celebrity talk show, gourmet on the road, animated car showcase, comedian car review, cars for HER, cars and culture, road music, industry opinion interview and test drive.

Next, our CheYouQuan continues to expand now with over 76,000 groups spending across 351 cities, a roughly 30% increase compared to 54,000 groups in the first quarter of 2018. Finally, the diverse VR product portfolio continued to expand. Now we have AR auto shows, VR branding showrooms, tailored intelligent automobile showrooms as well as direct visual access to automakers' factory design and manufacturing for users to appreciate the entire automobile production process. We will continue to develop significant resources towards expanding contents' breadth and depth in order to deliver the best user experience in the market.

Next, let me provide some updates on our new business initiatives, which are on track in driving our growth target for 2018. Firstly, for auto-financing business, we facilitated over RMB 2.9 billion loans and insurance, which indicates solid demand for both consumers and the dealers. Secondly, for data product serving automakers and the dealers currently over 20 OEMs and modern 6,000 dealers have used our data products. We will continue to develop next-generation data solutions in fulfilling automakers' and dealers' requirements in order to enable more precise leads generation and increase conversion rate. Finally, as for the used car, e-commerce platform, our recent investment in TianTianPai TTP and the formation of Autohome Trusted Alliances a big step in accelerating online transaction and our industry-leading C2B2C model, which is primarily designed to resolve the major pinpoints of used car market, such as lack of sourcing, financing, traffic and consumer confidence. Our investment in TTP effectively enhanced the C2B used car sourcing and our Autohome Trusted Alliances program with over -- now with over 100 off-line prequalified, high-performance used car dealers and to foster exceptional B2C purchasing experiences for our consumers. This combined the C2B2C funnel from online to off-line while expand our audience reach for better targeting, ensure used cars sourcing, reflect fair value of the used car, establish industrial best practice, reinforce industry integrity as well as increase the transparency with search and validation.

Another example of our effort is that the merchant loan products to select off-line used car dealers resulted in accumulative credit line of RMB 4.8 billion granted to more than 1,100 dealers by the end of July.

To conclude, we are making solid progress across all 4 pillars of our business as we set forth in 2018, and we're on track in delivering strong top line growth with sustainable profitability. We will focus on strategic expansion of our core media in the leads generation business and continue to rollout of our new business initiatives for data and auto-financing in order to further strengthen the foundation of Autohome.

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

Thank you, Min. Hi, everyone. As Min has already highlighted, we are very excited to report another outstanding quarter. Before I start, let me briefly recap that we completed USD 100 million convertible bond investment in TTP with 8% annual coupon rate. Within the next 3 years, Autohome has the right to purchase additional convertible bonds of USD 65 million. Our strategic investment of TTP in partnership with trusted used car dealers is a key milestone in our online transaction initiative. We believe this C2B2C model will maximize Autohome's powerful platform as a win-win for all of our consumer and dealer partners.

I will continue with the quarterly reporting, and please note, I will reference RMB only in my discussion today. Net revenue for the second quarter was RMB 1,869,000,000, representing 36% year-over-year increase, excluding direct sales. This was above the high end of our original guidance. For detailed breakdown, media and leads generation revenue for the second quarter was RMB 930 million and RMB 740 million, up 25% and 28% year-over-year, respectively.

Now online marketplace and others revenue was RMB 199 million, representing an increase of 310% year-over-year, if excluding direct sales in the same period last year. So we are very pleased of the progress of these new initiatives in the second quarter.

Moving on to the cost perspective. Cost of revenue increased slightly by 3% over -- year-over-year to RMB 209 million. If excluding the cost of direct sales in Q2 of last year, cost of revenue increased by 35% year-over-year, which is in line compared to our top line growth rate.

Now for operating expense, sales and marketing expense in the second quarter of 2018 was RMB 588 million compared to RMB 412 million in the same period last year, primarily due to an increase in off-line execution and branding expenses. Product development expenses were RMB 313 million compared to RMB 215 million in the second quarter of 2017. Again, this reflects our commitment to technology advancement and hiring talent. Finally, general and administrative expenses were RMB 86 million compared to RMB 79 million in the second quarter of last year. As a result, we delivered an operating profit of RMB 748 million, a significant increase of 32% year-over-year, primarily as a result of improved operational efficiency and effective cost control.

Adjusted net income attributable to Autohome up 32% year-over-year to RMB 744 million. Non-GAAP basic and diluted earnings per share and per ADS for the second quarter were RMB 6.33 and RMB 6.23, respectively, compared to RMB 4.87 and RMB 4.8, respectively, in the corresponding quarter of last year.

As of June 30, 2018, our balance sheet remains very strong with cash, cash equivalents and short-term investments of close to RMB 7.7 billion. We generated operating cash flow of RMB 335 million in the second quarter of 2018.

And now I'll address our third quarter 2018 outlook, which reflects our current and a preliminary view on the market and operating condition that may be subject to changes. At this point, we expect to generate revenue in the range of RMB 1,850,000,000 to RMB 1,870,000,000. If we exclude impact from our direct sales business, this represents a 32.3% to 33.7% year-over-year growth.

In summary, we're very pleased with our second quarter 2018 results. Together as a team, we again achieved a revenue growth excluding buyout of 36.1% and delivered operating margin of 40%. Given the solid car business performance and continued momentum of our new business initiatives, we're confident of maximizing long-term shareholder value.

With that, we're ready to take your questions. Operator, please open the line for Q&A.

(Operator Instructions) Your first question comes from Liping Zhao from CICC.

(foreign language) I have 2 questions for the management. So first one is related to our media and leads gen business as the new car sales this year is soft. Will it impact our second half growth of the media and leads gen business? And my second question is related to our new business initiatives. As Autohome had a very strong growth in online marketplace this quarter, thanks to auto-financing data and used car business. So what's the strategic focus of the management for the coming quarters? And will these new initiatives impact our margin trend?

(foreign language) So let me take your question, let's start with the first question. (foreign language). As you have said, this year the auto market is quite weak. We do see quite growth if we compare with a few years back. (foreign language) Actually in terms of OEMs, I think there are 3 conditions. The first one, they are still enjoy very good growth. (foreign language) The second category, the growth was quite slim or they have slightly downward shift of the growth. (foreign language) The third category who enjoyed sharp declining. (foreign language) For the third category, the business enjoys sharp declining, so that's why they cut the budget. (foreign language) But for the first category and the second category, they will not cut in the budgets on the market. (foreign language) Some even grow their budget. (foreign language) The third, for the OEMs, there are 3 categories, which we do see a big divergence this year. (foreign language) So that's why in terms of the budgeting on the dollars expenditure on the marketing and advertisement, they do need to think twice and make some alternative choices. (foreign language) So they would invest more on the areas, which can help them to grow their sales. (foreign language) Because for the Chinese OEMs, the sales volume is the most important KPI. They have to pay a lot of attention to these KPI. (foreign language) So for Autohome, we are trying our best to improve the following: firstly, to improve the effectiveness of the leads conversion, so that's why we can generate more effective leads. (foreign language) So we leverage our Big Data capabilities and also the smart algorithm and some other high-tech tools, which we can help to generate more conversion of the leads. (foreign language) Talking about the numbers of leads and also the leads conversion rates, Autohome enjoys the highest in the industry. (foreign language) So I firmly believe that if the OEM have to force to shrink the budget, they would not start from us, they would not shrink our budget. (foreign language) Now secondly, we also try to expand on the content side. If you look at our content, in the past, we focused a lot on the C-side, which are product-oriented. (foreign language) which is auto. (foreign language) Now we migrate into some of the B-side content. (foreign language) For example, we expanded into the -- to B-side, we would cover the industry news, the OEMs, history, culture, high-tech, techniques and also the characters of the leaders. (foreign language) To provide more to B content, we can also embed the branding communications into our content. (foreign language) As you know, in the past, all advertisement income or revenue are more from the product, which are the autos, the cars. (foreign language) The OEMs doesn't think we are doing branding for them. (foreign language) After we embedded more coverage of the branding and also the industry history and OEMs' history and the culture intel of the content, we believe the OEMs would invest more marketing dollars on the branding on us. (foreign language) So in conclusion, we do see the divergence of the OEMs, so we do see some of the OEMs are tightening their budgeting expenditure. However, because we generate the most number of leads as well as the highest and the most efficient leads conversion rate in industry, we believe that we would become even stronger in such scenario and we would benefit out of such divergence. (foreign language) Now let me answer your second question. Talking about auto-finance, which is one of our new and very focused business. (foreign language) We just get started in this business. (foreign language) We have answered the investors' questions before regarding this question and we said this business would take off if we have come up with closed loop transaction business, if we grow, that's closed loop transaction business and this auto-finance business would continue to grow. (foreign language) Just last week, we announced that we established the Autohome Alliance for established -- Trusted Alliance. (foreign language) Currently, there are more than 100 dealers in the Autohome Trusted Alliance and in the future, we are going to expand into thousands of thousands of Trusted Autohome Trusted Alliance dealers, so if we establish this closed loop transaction, we would continue to grow this business. (foreign language) To hear about the new car sales, we are also trying to put more efforts in some of the new ways to do the sales, and we are going to see good results in the latter half of this year. (foreign language) So in summary, in terms of auto-finance, we're just getting started with more closed loop transaction business growth, and we believe that this business would also continue to grow.

Your next question comes from Eddy Wang from Morgan Stanley.

(foreign language) So my first question is about the used car business. So basically, we have seen that the company has already established the C2B2C model, the used car transaction business and has a capability to close the transaction loop. So my question is compared with the other used car platform actually in China, some of them adopted C2C model and some of them just adopted a B2C model, what's our advantage? And what's our long-term targets about the used car business in the longer term? And my second question is that we have announced that we invest RMB 1 billion to further improve and invest in the TTP platform, (foreign language) and the related accountant such as the short video. So basically, what's our -- have we seen any signs of the increased interest forecast on OEMs, dealers and customers despite of the content and new content?

(foreign language) Let me answer your first question, which is about the used car business. (foreign language) Talking about our investment on the C2B side, we invested in the TTP platform. (foreign language) On the B2C side, we work with the selected and good-quality dealers. We formed Autohome Trusted Alliance. (foreign language) For the car buyers, I think the second -- the used car buyers have the biggest concerns over the quality of the car and they are easily get frauded. (foreign language) So that's why we come up with Autohome Trusted Alliance, which is like a promise of the authenticity of the source of the car as well as the good condition of the car. If the buyers identified any untold problem of the car within 5 days, they can get easily refunded. It's just like Alipay system. The buyers put with the money with the platform. If they identify any problem within 5 days, they can get refund from the platform. (foreign language) Well this business is just getting started. This is a quite new business and next year, we would continue to grow this business, and hopefully, there will be thousands of good dealers, especially on the top quadrant of the dealers will join us. (foreign language) Our business model is very clear. Firstly, we have the C2B and B2C, which is a closed loop transaction model. (foreign language) Now the second business is the leads purchase, because we generated a lot of leads and aversely, some of them can be digested by the Trusted Alliance dealers and some would be taken by the secondary or Tier 2 dealers. So this is our leads business. (foreign language) And the third business is the ads business, the advertisement. (foreign language) So we can say that we have very clear business model for our used car business. (foreign language) We and the platform do enjoy a few privileges and advantages over other platforms. (foreign language) Firstly, good traffic and good leads. (foreign language) For example, in the used car business on our platform in our APP, there are about 2 million DAUs, daily active users. (foreign language) Very soon, we're going to further the used car business click on the first page of our APP, and we believe, the DAU would grow very quickly. (foreign language) Now talking about leads, we generate about 70,000 leads per day. We have C1 lead, which are the source of the cars, which is about 19,000. And we have the C2, which are the buyers' leads. The buyers' leads daily is about 50,000. Add them together, it's about 70,000 per day. (foreign language) We believe the number of leads would continue to grow this year. (foreign language) So for those leads, we do not need to make any purchase, because the platform, the APP itself, would generate such leads. (foreign language) There's no need for our marketing dollars on these as well. We do not need to invest heavily on advertisement. (foreign language) Secondly, we have the support from Ping An Finance. (foreign language) We have all kinds of collaborations with Ping An Finance, including the dealers' loans, the consumer loans, auto loans and also the insurance. So I would like to skip the details of this part. (foreign language) The third piece of our business is Big Data. (foreign language) Based on the Big Data platform, we can track the users' footprints. We would understand very deeply of our users and then we can provide very good and precise suggestions to our users. (foreign language) We also have the feedback system of the used car dealers, every day the users would provide comments and they would rate the dealers. (foreign language) We also generate a lot of other data. So I would like to skip the details. Overall speaking, we are trying to establish a trustworthy these used car transaction platform in China. (foreign language) By establishing such a trusted alliance and platform, we are trying to provide transparent and standardized user experience while purchasing the used car. (foreign language) We firmly believe that with more and more development of the used car market as well as our business, we would become a very important and a leading player in the used car business in China. (foreign language) Now that is the answer for the first question. Now I want to echo on your second question. (foreign language) As we said, we announced, we're going to invest RMB 1 billion into the content. (foreign language) As you know, our content grow very rapidly on this media platform. Every day, we have 6 million DAUs. (foreign language) So next step, we're going to launch 9 IPs, and we would have deep collaboration with a lot of OEMs in terms of launching the IP. (foreign language) To further incentivize growth content providers, we would have the profit sharing plans for all the content providers. (foreign language) So the investment of RMB 1 billion just refer to the profit sharing with our content providers. (foreign language) So we hope this can be an extra business for us, which is not existing business, but new business. (foreign language) We also have a service platform, which is called SaaS. (foreign language) The content providers can leverage on our Big Data platform and easily create the content. (foreign language) They can leverage on our AR car model and a VR showroom, to generate good content. (foreign language) And this is exclusive from us, they cannot having such resources from other platforms. (foreign language) On the latter half of this year, we're also growing to launch the AGC, which is AR-generated content, which is a tool provided to the content contributors. (foreign language) which can help them to enhance the efficiency in generating comments. (foreign language) We are quite ambitious in this content providing -- generating ecosystem. We want to attract more very genius and smart content providers on our platforms. (foreign language) We're also doing the short video clips content generating on our platform, some are big, some are small. (foreign language) As I said, the consumption of auto is different from the fast consumption products. (foreign language) Usually, the buyers would spend more time in selection before they make the purchase. (foreign language) So usually, in people's daily life, nobody would watch a short video and they would have imposed by. (foreign language) In reality, they would read more content and listen to the friends' comments and feedbacks and they can -- they would make a lot of comparison between different brands. (foreign language) So this is exactly what we can provide in Autohome. (foreign language) So I think the short detail clips, you mentioned, is only part of the buyers' selection cycle and which is not very important in the whole selection process.

Our next question comes from Miranda Zhuang from Merrill Lynch.

(foreign language) So I have two quick questions. The first one is to follow-up with the company's plan to invest RMB 1 billion to empower the PGC content creators. So can you elaborate more on the details, for example, like what kind of KOLs are you targeting? Are you touching those top tiers or like the mid tier KOLs? And then are those collaborations exclusive? And then how will you expect this investment to impact the top line and bottom line for the next few quarters? And then my second question is about the Big Data business. So in this quarter, you previously mentioned that there are about 6,000 dealers that paid for the Big Data product and last quarter the number is around 5,300. So on a Q-o-Q basis, it seems that the increase is not that much. Can you elaborate on the reasons behind?

(foreign language) Now to answer your first question, the PGC question, the RMB 1 billion is not from our own pocket. It is the new marketing dollars paid by the OEMs. That's why this is about RMB 1 billion investment. (foreign language) Talking about the KOLs, some of them can be top tiers, some of them can be second or middle tiers, it depends. (foreign language) The plan itself, it should be exclusive. (foreign language) But as we said before, we are still open. We are not forcing the KOLs to exclusively only work with us. Actually, we are open attitude. (foreign language) And hopefully, more and more KOLs, they can leverage our Big Data and the technical tools to help them to be more productive and more effective and efficient in content generation. So we hope we can attract very good KOLs. (foreign language) As you know, our platform is auto or rented traffic platform, so that's why the KOLs, if they publish the content on our APP, there will be numerous readers. (foreign language) We help them to generate more traffic and help them to attract more fans. (foreign language)

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As we said, because we can help them to leverage on our Big Data and the technical tools, they can generate more effective content and attract more fans and they would have more traffic. This would enhance our close relationships with all those content generators. (foreign language) So in this way, we can achieve the win-win situation together with the content providers. (foreign language) So to answer your question whether this would affect our performance. The answer is very positive. It will be positively affecting our performance. (foreign language) And also depends on whether we can make the good progress of this program. (foreign language) Now talking about the Big Data business. (foreign language) There are 2 pieces of our Big Data business, 1 is to OEMs and other is to dealers. (foreign language) Now talking about the dealers, as we said, we have a very rapid growth first quarter, so that's why in Q2, the growth decelerated. (foreign language) Firstly, we have provided more choices of our products. We have a good -- better product portfolio for the dealers to choose from. And some of dealers had made the first purchase, then the second, then the third, there are multiple buyers. (foreign language) Secondly, we are truly helping the dealers to make effective utilization of the tools they purchase from us. (foreign language) Let me give you one example. We have a product, which is called (foreign language) the smart online set, DCC -- intelligent DCC. (foreign language) For example, the intelligent DCC tool, some of the dealers, they are very experienced in using this tool, but some are still new to it. (foreign language) So some of the users, they have to look at the big screen, they also use their cellphone, they are still not used to it. (foreign language) So we are helping them to projecting their cellphone content into the big screen. In this way, they have the unified user interface and they will be more used to such content. (foreign language) After they -- helping them to use it more smartly and use more effectively, we can see the results. (foreign language) The Big Data business as well as the auto-finance business, they are all new to us. (foreign language) I think these 2 business are very promising business. They would be very prosperous in the future. (foreign language) I just visited the BMW headquarter in Germany and talked with the SVP from BMW, Germany. (foreign language) He think very highly of our product and he said, we are the only service provider in the world. There is no other competitor who can provide the same product as us. (foreign language) So along the way of further developing this business, we are very confident we can help the OEMs as well as the dealers to enhance the conversion rate and also they can get more PCC, the intelligent driven sales. (foreign language) As we said, the ultra marketing China is getting more divergence recently. And we do see more precise tools as well as marketing and sales tools would be very helpful for the OEMs. Our Big Data services as well as other services would be very helpful for the dealers and OEMs as well.

Also after Mr. Lu's comment, Miranda, the 5,300 number that you mentioned was actually by the earning state of last quarter, which is May the 8. So it's not by end of first quarter. And also we did mention that by this quarter we have more than 6,000 dealer subscribers. We didn't mention how many more thousand -- how many hundred more than 6,000. Actually, it's quite a few hundred more than 6,000. Anyway, so thanks for your question.

Your next question comes from (inaudible) from Crédit Suisse.

(foreign language) My first question is regarding the unauthorized dealer strategy. So we have -- already have a high penetration into the authorized dealers. I want to know how many of the unauthorized dealers are covered by Autohome right now? And what kind of service are we providing to them? And what is their current spending level? My second question is regarding the sales and marketing spending this quarter. I assume this is just a little bit higher quarter-over-quarter and year-over-year. So how much of that is related to our branding efforts in lower tier cities and what's the trend for the second half of 2018?

(foreign language) Now talking about the unauthorized dealer strategy, we have been trying this business for 2 years. (foreign language) We have tried to readjust our business. (foreign language) This is kind of exploration in this business. (foreign language) You're asking how many was covered by Autohome. The answer is about 700 to 800, but the number doesn't matter too much. (foreign language) Because the core question is, how can we better transfer the online sales leads into true sales? These are the weakest in this whole cycle. (foreign language) And recently, we have revised our model. (foreign language) I can tell you for the later half of the year, we already covered 20 provinces across China. (foreign language) End of this year, we are going to cover maybe 30 provinces or even more. (foreign language) And in the future, we want to have at least 1 in each of the city or even in 1 county (foreign language) After we revised our model, we need only 1 in each of the small city. (foreign language) Although, we are still in like exploration process, but we are very confident, we already found the new direction. And in the later half of the year, we are going to get into each of the small cities. (foreign language) We do see that the auto sales in the lower tier cities, from Tier 1 to Tier 5 cities, they're growing. (foreign language) Tier 3 to 5. (foreign language) So that's why we have placed advertisement with CCTV targeting at the lower tier cities. (foreign language) We do see it's quite effective. (foreign language) And our ambassador, Mr. Fan Zhendong, the ping pong world champion, he had many games this year and this is very effective commercial for us. (foreign language) As for how many app downloads are triggered by the CCTV commercial, it's not easy to make the statistics. (foreign language) But we do see the traffic of visiting our app are growing very rapidly.

Thank you. I will now turn the conference back to the management for closing remarks. Please go ahead.

Thank you very much for joining us today. We 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 further questions or comments. Thank you.

Thank you.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for your participation. You may all now disconnect.