Autohome Inc. Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by for Autohome's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 Sterling Song, Autohome's IR Director. Mr. Song, please go ahead.

Thank you, operator. Good evening. Hello, everyone. I'm Sterling Song. Welcome to Autohome third quarter 2021 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 Chairman and Chief Executive Officer, Mr. Quan Long; Co-President, Mr. Haifeng Shao; Chief Technology Officer, Mr. Bibo Xiang; Vice President, Mr. You Zhou, and Finance Director, Ms. Hong Jiang. After the prepared remarks, our management team will be available to answer your questions. Before we begin, please note that 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 doesn't 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. Our press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures, and is available on Autohome's IR website. As a reminder, this conference call is being recorded. In addition, a live and archived webcast of this earnings 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. Long.

Thank you for joining us today. In the third quarter of 2021, the chip shortage and rising raw material prices continued to impact the auto industry. The production cost of auto manufacturing increased by more than 10% year-over-year, and marketing-related targets were significantly reduced. Several rounds of power rationing across multiple regions in China also affected manufacturing, including automotive manufacturing, resulting in a 12% year-on-year decline in production and sales of new vehicles in the third quarter. Consequently, Autohome is facing significant challenges. Despite these difficulties, we achieved total revenues of RMB1.76 billion for the quarter, with revenue from our online marketplace and other businesses increasing by 2.5% year-over-year, accounting for 32% of total revenue. Additionally, our adjusted net income attributable to Autohome, Inc. in the third quarter was RMB583 million, with adjusted net margins of 33.1%. On November 18, 2021, Autohome's Board of Directors authorized a share repurchase program under which the company plans to repurchase up to $200 million of American Depositary Shares over the next 12 months, funded from its existing cash balance. First, let me summarize the main progress we achieved this quarter in terms of speed and traffic. According to statistics from QM, the average number of daily active users accessing via mobile websites, the primary app, and mini-apps grew to 43.87 million in September, representing a 12.3% increase year-over-year and leading the automotive media vertical. In our user composition, the proportion of active users using mobile phones priced around RMB5,000 was 37%, significantly higher than the competition or industry average, indicating the strong purchasing power of Autohome users. During the quarter, impacted by the decline in the auto market, our revenue from traditional business faced constraints, while Autohome maintained its leading position in the automotive media vertical, becoming the first choice for users to view, buy, and use cars. During the quarter, we accelerated our strategic upgrade on the team to improve our focus on new businesses. For data products, we enhanced our Intelligent New Car Launch 3.0 technology and content system, boosting the product penetration rate to 36% for the first nine months of 2021. On the dealer side, we introduced products across three major modules to offer dealers a comprehensive range of solutions. Notably, the average number of data products per dealer store increased from 3.01 to 3.55. Regarding our NEV business, revenues from NEV brands more than doubled year-over-year in the third quarter as we engaged more with NEV automakers. Particularly, among significant new-trend NEV automakers, Autohome achieved an average market share of over 50%. In the used car sector, TTP has reinforced its status as the largest online used car auction platform in China and improved its efficiency through refined operations. In the first nine months, the total number of used car dealers we served rose by 77% year-over-year, due to our comprehensive services covering leasing, data, and overall management. With that overview, I would like to provide further insights into the market environment and our business operations. In the third quarter, a persistent global chip shortage continued to heavily impact the auto industry. From July to September, vehicle sales declined each month by 7%, 12%, and 17% year-over-year, respectively. Additionally, raw material prices continued to rise. As a result of these shortages, local governments began to adopt power rationing measures to restrict high energy consumption and polluting enterprises. OEMs and auto parts manufacturers in Northeast regions and key manufacturing areas like Jiangsu and Guangdong provinces were all affected by these policies to varying degrees. Data from the National Bureau of Statistics revealed that profits in the automobile manufacturing sector fell by 46% year-over-year, leaving profit margins at only 4.9%, which is nearly a historical low. Confronted with various unfavorable conditions, automakers have extended their projected timelines for a return to normal production levels and have adjusted their marketing budgets accordingly. According to a survey by the Boston Consulting Group, budgets related to online marketing have contracted by 40% to 50% year-over-year. The market generally anticipates that the auto industry will continue to remain low in the fourth quarter. The chip supply issue may gradually improve after the third quarter of 2022, potentially leading to a recovery in the overall auto market. It is expected that the auto market may return to a relatively normal growth level in the second half of 2022. For our traditional business, despite the short-term challenges in the auto market and intense competition, Autohome has focused on improving quality and customer value rather than pursuing aggressive low-price strategies. We are committed to a sustainable business model that enables us to maintain a strong market share in the auto media sector. We have advanced our strategic upgrades by enhancing our partnerships to create a comprehensive service platform for car reviewing, buying, selling, and usage, thereby building a robust ecosystem that combines technology, resources, customer interactions, and traffic to foster a healthy automobile ecosystem. Regarding content, our three-part content strategy focused on increasing users, diversifying formats, and enhancing scenarios is moving forward successfully. We have significantly raised the amount of original video and live streaming content on our platform, established collaborative projects, and introduced complementary offline activities. For instance, we co-created a new program with NetEase Cloud Music and facilitated the industry's first carnival for new energy vehicle owners. Additionally, we have broadened our content offerings with the launch of a motorcycle model library and a modified car channel, alongside the largest car-infused model library in the industry. Our initiatives to expand our content matrix and promote various offline activities are effectively increasing our user base. This year, our highlight online-offline event, the August 18 Super Auto Show, attracted over 500 million visits, more than double compared to last year. For our business initiatives, we have boosted our investment in innovative sectors and are committed to delivering results. For example, our TTP dealer products are continuously providing value-added services to dealer customers, aiding in their operational performance. Currently, three of our dealer data products have achieved a penetration rate exceeding 50%, and we have completed system-level integration with nearly ten automakers. With respect to our NEV business, we are exploring the specific needs of NEV automakers and introducing new targeted business models, while also providing solutions for rebranding and promotional channels. Since the start of the year, we have expanded our NEV partnerships with 22 brands, and our revenue from these brands more than doubled year-over-year in the third quarter. We have also accelerated our deployment in the used car industry this year by creating a platform that connects car sellers with quality used car dealers, building a leading car selling platform for Chinese users. In collaboration with Autohome, TTP has significantly improved efficiency and reduced operating costs through refined operations. We are pleased to have attracted several experienced professionals to our senior management team, including our new CTO, Mr. Bibo Xiang, who has a strong background in the Internet sector in China, including experience with major companies such as Yahoo! Search, Taobao Advertisement, and 360 Search. He will lead Autohome's technology and product development, overseeing AI, big data, and algorithm upgrades. Additionally, Mr. Zheng Wu has joined us as Vice President of our consumer-facing business, focusing on upgrading consumer products, video content, and user experience, bringing over 20 years of experience in the internet industry. Lastly, Mr. Sun Yang has joined Autohome as Vice President of our OEM business unit, with 15 years of experience in the auto industry, providing him insights into market and customer needs. With these diverse backgrounds, we are committed to executing Autohome's strategy and achieving significant breakthroughs. Overall, Autohome is prepared to maintain its leading position in mobile services and the vertical media market, with a strong balance sheet and profitability. We will strategically explore new opportunities, seek innovative business models, and develop new products. In the future, we plan to continue advancing in our core strategies, including introducing key opinion leaders to enhance live streaming content and making better use of our structured data and big data recommendations to improve user operations and experiences, while also targeting NEV owners and younger demographics to increase user engagement among those groups. For building our business with B-end clients, we have partnered with automakers to create a digital marketing highway that focuses on user digitization and virtualization with comprehensive solutions. At the same time, we have expanded the digital dealer business by optimizing our structure and empowering dealers with our digital products in all operational and management areas. Autohome's used car business will operate through the tweaking survey. We also plan to establish a gold standard certification system with TTP to develop a reliable used car ecosystem that supports sellers throughout the entire used car lifecycle and offers high-quality experiences to consumers. We firmly believe that the current challenges facing the auto industry are temporary, and the long-term growth trends of the industry remain strong. We now estimate that China's auto industry will begin to resume growth in the first half of 2022. After that, we are confident that Autohome's media services business will be well-positioned for a quick recovery, with our new business set to outperform the market. Moving forward, Autohome will continue to create synergies with partners, and with our robust business model and solid fundamentals, we will consistently promote innovation, actively unlock growth potential, and drive long-term sustainable development as we remain fully confident in the long-term prospects of China's overall auto market and the company. I'll now hand the call over to our Finance Director Ms. Hong Jiang for an in-depth review of our third-quarter financial results.

Thank you, Mr. Long. Now, let me take you through the key financials for the third quarter. Please note that, as with prior calls, I will reference RMB only in my discussion today unless otherwise stated. Net revenue for the third quarter was RMB1.76 billion, with media services revenue scaling at RMB434 million. Leads generation services revenue was RMB768 million, and the online marketplace and other revenue increased by 2.5% year-over-year to RMB561 million, primarily driven by the consolidation of TTP. Moving on to costs, the cost of revenues was RMB281 million compared to RMB260 million in the third quarter of 2020. Gross margin was 84.1% in the third quarter compared to 89.2% in the same period last year. Turning to operating expenses, sales and marketing expenses in the third quarter were RMB712 million compared to RMB979 million a year ago. The decrease was primarily due to a reduction in promotional spending and continuous product control. Product development expenses were RMB364 million compared to RMB349 million in the third quarter of 2020. Finally, G&A expenses were RMB111 million compared to RMB140 million in the third quarter of 2020. Overall, we delivered operating profit of RMB365 million in the third quarter compared to RMB744 million in the corresponding period of 2020. Adjusted net income attributable to Autohome, Inc. was RMB583 million in the third quarter compared to RMB902 million in the corresponding period of 2020. Non-GAAP basic and diluted earnings per share for the third quarter were RMB1.15 and RMB1.15, respectively, compared to RMB1.89 and RMB1.88 in the corresponding period of 2020. Non-GAAP basic and diluted earnings for ADS for the third quarter were RMB4.61 and RMB4.61, respectively, compared to RMB7.55 and RMB7.52 in the corresponding period of last year. As of September 30, 2021, our balance sheet remained very strong, with cash, cash equivalents and short-term investments of RMB19.18 billion. We generated operating cash flow of RMB567 million in the third quarter of 2021. With that, we are ready to take your questions.

Thank you. The first question is from Thomas Chong at Jefferies. Please go ahead.

I will translate myself. My question is about the competitive landscape in each business segment. Thank you.

Thank you for the question. According to the statistics from QuestMobile, the number of daily active users accessing our mobile websites, primary app, and mini-apps grew to 43.87 million in September, which represents a 12.3% increase year-over-year. Notably, 37% of those users are utilizing mobile phones priced around RMB5,000. In comparison, our major competitors only have 20% of their active users in that price range, while the industry average is just 15%. This shows that our users tend to be more high-end and have stronger purchasing power. Although some may point to our competitors having parent companies like Tencent and ByteDance, our parent company, Ping An Group, is highly capable. For instance, Ping An Group has 640 million internet users and 210 million financial service users, including 60 million auto insurance users and 30 million credit card users who are also car owners of Ping An Bank. By leveraging Ping An Group's substantial customer base, we can further grow Autohome's business. We have also expanded into the EV and renewable energy sectors, as well as into live streaming and broadcasting. We are offering various products, including motorcycle car model libraries and services in live streaming and broadcasting, to attract more users, particularly younger ones. Now, let me turn to the next question. Thank you.

I would like to share my outlook over the next 24 months regarding market competition. Now, let's look at our traditional business first. We believe that the traditional business is transforming from a quantitative-based approach to a qualitative-based approach, which means the driver will shift from quantity to quality. The OEMs and dealers will pay more attention to the quality of the data. In this regard, Autohome is absolutely number one in the vertical auto media industry. Now, from an advertisement product perspective, we believe that advertisements will shift from traditional exposure types to more interactive and immersive formats. We anticipate that future leads will have a more direct connection to customers. Now, let's look at the new business. We have three major components: the data business, NEV, and used cars. In the data business, it is evident that the digital transformation of OEMs and dealers is accelerating. We are early adopters in the vertical media industry of the auto sector compared to our competitors. Our foundation is strong, and we have a larger volume of data since we started accumulating it in 2016. Additionally, we have excelled in data classification and integrated our data into our models, enhancing their validity and relevance, which makes our models smarter. This allows us to achieve better results and effectiveness in the data business compared to our competitors. Now, let's discuss the NEV business. We already hold over 50% of the market share in the NEV sector. Looking ahead to the next two years, we believe the biggest challenge for OEMs will be maximizing and enhancing their sales through a direct sales model. For vertical media players, not transforming their business and service model will present significant obstacles. Fortunately, we are already in a leading position, having facilitated transactions and sales in the NEV market. Therefore, we can assist OEMs in achieving greater success under the direct retail model. Now, regarding the used car business, it is a large market in China; however, it's highly segmented, with no dominant player because of the presence of many small players. In terms of the B2B and C2B sides, a lack of trust is the primary challenge. In this market segment, our main competitor is 58.com. However, we are more successful in promoting transactions since we have effectively boosted our transactions, and in terms of trading and the auction process, we are more advanced compared to 58.com. In the used car sector, utilizing Ping An Group's extensive resources is one of our key advantages, enabling us to optimize our supply of used cars. By controlling the source of used cars, we can quickly achieve a leading position over the second player in the market through the B2B model. We are already a leader in this space, collaborating with more than 50,000 used car dealers, and we aim to increase this number to over 90,000. This approach will allow us to enhance our supply of used cars and drive transactions, ensuring we maintain our leadership in the used car auction market.

Our next question will be from Brenda Zhao at CICC. Please go ahead.

Sorry to interrupt, Ms. Brenda. It seems like you have a really bad signal. Can you please readjust and ask your question again? Sorry, everyone. Participant Brenda is having some technical issues at the moment. Maybe we'll have her back later. Now, let's move on with the next question from HSBC, Ritchie Sun. Please go ahead.

I’ll translate the question myself. Recently, there were some news reports discussing Ping An possibly selling its stake in Autohome. Can management address that? How do we perceive Ping An's role in Autohome's strategy, and what has been the importance of that involvement so far? Thank you.

Actually, my comment is that a rumor is just a rumor, and there is no sound evidence. Internally, we haven't heard anything similar to what you quoted. As a matter of fact, Autohome's shares are currently undervalued. In terms of Ping An Group and Autohome, we have frequent and routine discussions regarding Autohome's business. Just this morning, we held an internal meeting confirming that Autohome remains a core part of the auto ecosystem within Ping An Group, and it will continue to be so in the future. Therefore, Ping An Group attaches great importance to supporting Autohome's development. Thank you.

Thank you. And your next question will be from Brenda Zhao at CICC. Please go ahead.

Thanks, management for taking my question. I have two questions. First, could management share its view on the fourth quarter and next year's market outlook, particularly regarding when core business revenue growth is expected to recover? My second question is about the customer-end strategy. What is the company's strategy for emerging business models, such as live streaming? Thank you.

To answer your question, first, regarding the short supply of chips in the auto business, we believe that the situation will ease in the second quarter. For the latter half of next year, the overall market is likely to improve. This year, the third and fourth quarters for new car sales might be considered the darkest hours. We expect the situation to improve in the first quarter and anticipate that new car sales will rise, potentially growing by 4% to 5%, which aligns with growth rates from 2019. Now, regarding the live streaming business, we need to differentiate between our live broadcasting and the live selling of vehicles. In terms of live streaming and vehicle sales, there are many discussions around this; however, actual sales remain low since auto sales involve complex transactions that cannot be completed entirely online. We expect live streaming to become more interactive in the future. Tomorrow, we will host a seven-hour live streaming campaign at the Guangzhou Auto Show, which is quite an innovative activity. We welcome you to join us for tomorrow's live streaming. Thank you, Liping. We can move to the closing part now.

Thank you. There are no further questions at this time. I'd like to turn the conference back to management for closing comments.

Thank you everyone for joining us today. We appreciate your support and look forward to updating you at our next quarterly conference call in a few months. In the meantime, please feel free to reach out if you have any further questions or comments. Thank you and goodbye.