Autohome Inc. Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by for Autohome’s First Quarter 2022 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. It is now my pleasure to introduce your host, Sterling Song, Autohome’s IR Director, Mr. Song. Please go ahead.

Thank you, operator. Hello, everyone, and this is Sterling Song. Welcome to Autohome’s first quarter 2022 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 the Chief Executive Officer, Mr. Quan LONG; and the Chief Financial Officer, Mr. Craig Yan Zeng. After the prepared remarks, our management team 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 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 Security and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statements, except as required under applicable law. The earnings press release in this call also includes discussions of certain unaudited non-GAAP financial measures. 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, for opening remarks. Please go ahead, Mr. LONG.

Thank you. Hello, everyone. This is Quan LONG, Chairman and CEO of Autohome. Thank you for joining us today for our discussion of our quarterly results. To begin, we are delighted to announce and welcome a new member of Autohome’s senior management team, Mr. Craig Yan Zeng, who joined Autohome as our Chief Financial Officer at the beginning of May. Craig has over 20 years of experience in the capital markets and has held various senior management positions with both public and private companies, making him a rare management talent with a full set of capital market experience across Mainland China, Hong Kong, and the U.S. He has in-depth expertise in financial management, finance, innovation, M&A, risk control, as well as an excellent business philosophy and a strategic mindset. We believe that with his rich experience and outstanding leadership, Craig will be an asset to the company and help Autohome achieve its next stage of growth. With that, I will now turn the call over to our CFO, Craig Yan Zeng, for a closer look at our first quarter operating and financial results.

Since the beginning of this year, the resurgence of the COVID-19 pandemic in China has impacted most industries, including the automotive industry. Despite the challenging macro environment, Autohome reported an extraordinary first quarter with revenues totaling RMB 1.47 billion, of which the contribution from new business rose to 33.7% of total revenues. Our adjusted net income in the first quarter was RMB 438 million, with an adjusted net margin of 29.7%. Our overall performance exceeded market expectations, and we maintained good profitability as well as a high profit margin level. We believe our steady financial performance and strong cash flow will support Autohome as we navigate through market uncertainties and focus on long-term development with sustainable competitive advantages. Meanwhile, our healthy balance sheet and ample cash reserves allow us to continue to implement our strategy and generate sustainable returns to our shareholders with our share repurchase program and dividend policy. Moving on to an overview of our first quarter highlights, during the quarter, we strengthened our collaboration with partners throughout our ecosystem to build an online traffic alliance and explore new ways to grow traffic. According to QuestMobile, Autohome’s aggregated average DAUs grew by 7.5% year-over-year to RMB 45.21 million in March, fortifying our leading position in the auto media vertical and surpassing the total DAU of the second and third largest players in the market combined. We continue to develop our CN user base and strengthen the diversity of our content platforms through the active development of short videos and live streaming content. Furthermore, we upgraded our NEV platform with a refreshed layout and user-friendly functionalities to cater to users’ diverse needs and behaviors, creating a more flexible and convenient user interface. These initiatives have successfully reinforced Autohome’s content ecosystem while delivering a better user experience. In the first quarter, our IV and used car business performed well, exceeding the market growth rate. Regarding digitalization, we have effectively expanded our OEM digital product lineup at the end of last year, continuously supporting the digital transformation in the Chinese auto industry as well as accelerating the process of digital upgrading of the industry. Generally speaking, although the auto industry has been impacted by the pandemic, it is still one of the most important pillars in China’s economy, full of potential for future development, given the elastic demand for cars and the ongoing developments of the auto markets. We have maintained our close business relationships with most of our OEM and dealership customers, who continue to purchase popular media, leads, and digital products from us. Next, I’d like to provide more details on several aspects of our business. In terms of content development, by leveraging our big IP brands, we have steadily advanced our strategy of promoting a video-based content transformation. Furthermore, by expanding content categories and more accurately recommending content that caters to users’ preferences, we have attracted a more diverse audience. In the first quarter, Autohome launched four series of IP videos and accumulated over 100 million views in total. Additionally, to meet the demands of mid EV users, we have upgraded our NEV platforms accordingly, crafting younger product appearances, enhancing NEV content quality and diversity in reaching short video content, and adding multidimensional tools to fully satisfy NEV users’ needs for viewing, buying, and using cars. In the traditional business segment, we continue to focus on strengthening product differentiation and enhancing product and service quality for our membership product packages. We are steadily certifying the fundamental foundation of business, thereby creating more cross-selling opportunities to develop new business lines and promote new products. In 2022, over 9% of the brands renewed their contracts for our leads subscription package. Notably, the number of paying dealers subscribing to our newly launched premium vision package reached more than 12,000 during the quarter, and subscribers to the tech vision reached nearly 16,000. Together, those two high-end versions account for over 80% of total subscriptions. Moreover, the proportion of dealers who subscribe to our floating model has also significantly increased. Financially, revenue for our leads generation business in the fourth quarter increased slightly on a year-over-year basis. In response to the pandemic's resurgence, Autohome created pandemic-proof marketing plans such as online auto shows to better serve our customers and minimize the impact on our business. The data products from Autohome continued to build our platform’s big data analytic capabilities and our industry-leading technology to drive innovation and empower the digital transformation of OEM dealers and other stakeholders in the automotive industry. For dealer data products, we remain focused on improving core product quality to exceed the exclusions of our whole industry chain strategy. In the fourth quarter, we had over 18,000 dealer customers, and the average product repurchase per dealer increased from 3.01 in 2020 to 3.59 in 2021 and to 3.91 in this quarter, representing an increase of nearly 30% in the past two years. Since the launch of new data products at the end of last year, we have received wide recognition of our one-stop solution and service from OEMs. In the fourth quarter, more than 40% of our OEM clients purchased a data product subscription. As our business revenues continue to expand, our revenue streams will become more diversified despite the pandemic’s current impact. We continue to provide additional digital products and actively accelerate the digital transformation and upgrading of China’s automobile industry. We expect that digital products will contribute an increasing amount of revenue to the company going forward. Regarding our NEV business, we focus on integrating brand and sales to build a full chain closed-loop marketing cycle through our NEV commerce services while also generating diversified revenue streams. In the fourth quarter, we maintained our cooperation with the most domestic mainstream NEV brands, and the revenue generated by our annual business surged 156.1% year-over-year, exceeding the overall NEV market sales growth rate for several consecutive quarters. In addition, given the rapid growth of NEV sales, we continue to tap into new opportunities in the NEV sector, especially with respect to the new retail sales model to reach more customers and provide products and services that meet specific demand. We expect that the NEV retail model will begin to contribute revenue to Autohome this year. In the used car area, Autohome services upstream corporates with Tiantian Paiche as midstream and joined hands with Ping An Finance and Insurance group downstream to form a complete closed-loop used car knowledge, creating the most comprehensive used car transaction system in China. Autohome is the largest automobile contribution platform and vertical media platform in China with the highest traffic volume and the number of users in this industry. Tiantian Paiche is the largest online used car auction platform in China, and Ping An Insurance Group is the largest financial insurance group in China, both highly rated for quality automotive customers; each of these three companies leads its respective field. Together, we create a synergy that is much greater than the sum of its parts. We form an ecological chain covering the upstream, midstream, and downstream of the industry, building an entry barrier, a huge advantage that our competitors do not have. As I mentioned a moment ago, Autohome’s used car business unit, together with Tiantian Paiche, outperformed the market and achieved 5% year-over-year growth in terms of revenues. At the same time, we continue to deepen business synergies with Tiantian Paiche during the quarter to enhance and grow our used car business. Through our matching and auction capability, we’re now involved in about 20% of all used passenger vehicle trades in China, an increase of about 4 percentage points compared with last quarter. Going forward, we will continue to invest substantial resources in development to ensure the successful market launch of new data products for used cars and combine our car condition and car comprise data products with our certified used car program to become China’s largest online real used car data and transaction platform. In conclusion, we will continue to fortify our traditional business foundation while actively investing in new business avenues as we move forward. The COVID-19 resurgence in the first half of 2022 has posed tremendous challenges to China’s auto industry and the broader Chinese economy. Autohome has adjusted our operational model to adapt to the new economic environment. We believe as the industry recovers in the second half of the year, Autohome’s business will quickly rebound with it. We will leverage our core competencies to explore large markets and facilitate more sustainable portfolio margins to obtain greater long-term benefits supported by our trained workforce, excellent innovation capabilities, and experience. With our visionary management team, we believe that Autohome will continue to lead the development of China’s auto industry and create lasting value for the entire industry in the long run. Next, let me walk you through the key financials for the first quarter of 2022. Please note that as with prior calls, I will reference RMB only in my discussion today. Net revenues for the first quarter were RMB 1.47 billion, which is a decrease compared to the corresponding period of 2021, primarily attributed to the impact of the ongoing chip shortage as well as the COVID-19 pandemic in certain cities in China in Q1 this year. For a detailed breakdown, media services revenue came in at RMB 267 million. Leads generation service revenues were RMB 708 million, and online marketplace and other revenues were RMB 496 million. Moving on to costs. The cost of revenues was RMB 255 million, and gross margin was 83%. Financial operating expenses, sales, and marketing expenses in the fourth quarter were RMB 592 million. The decline compared to the corresponding period of last year was primarily due to the decrease in promotional spending. Product and development expenses were RMB 355 million, an increase compared to the corresponding period of last year, primarily attributed to higher investment in research and development activities for digital products. Finally, general and administrative expenses were RMB 137 million. Overall, with the other operating profit of RMB 241 million, and adjusted net income attributed to Autohome Inc. was RMB 438 million. Non-GAAP basic and diluted earnings per share were RMB 0.87 and RMB 0.87, respectively; non-GAAP basic and diluted earnings per ADS were RMB 3.7 and RMB 3.7, respectively. As of March 31, 2022, our balance sheet remained very strong with cash and cash equivalents and short-term investments of RMB 20.27 billion. We generated operating cash flow of RMB 496 million for the first quarter of 2022. On November 18, 2021, our Board of Directors authorized a share repurchase program under which we repurchased up to $200 million of Autohome’s ADS for a period not to exceed 12 months thereafter. As of May 2022, we have repurchased approximately 1.57 million ADS for a total cost of approximately RMB 443.9 million. With that, we are ready to take your questions.

Thank you, management. Our first question is from Brenda Zhao at CICC. Please go ahead.

Good evening, management. Thanks for taking my questions. I have three here. First one is about the industry. Could management give some color on the supply chain pressure of auto companies? And to what extent can the current chip supply meet market demand compared with the pre-pandemic period? And what’s management’s expectation of the new car sales market in the second half of this year? My second question is about the data product. So what’s our R&D strategy in data products? And the third question is about the used car market. What are management’s views on the used car market and please give some color on the operational results of TTP. Thanks.

Thank you very much for the question. Let me echo your inquiries by quoting some data regarding the market. Actually, if you look at the whole market, the already published data shows that in January and February, the market was still doing okay. However, as we entered March, growth turned negative. For example, according to the Passenger Car Association, the retail sales volume had dropped by 35.5% for passenger cars. According to another dataset released by the China Auto Association, the wholesaling volume had dropped by 43.4%. In May, the situation worsened; for the first half of the month, car sales volume dropped by 21%. As for the short-term outlook, we do see the pandemic continuing to have a negative impact on the market, and there are many uncertainties linked to the pandemic. Thank you. Now shifting to the supply side. The supply chain of the Chinese auto market has experienced significant challenges since April 2022 due to lockdown policies in some cities, causing many companies to halt operations and creating logistics issues. This has significantly affected the supply chain, leading to a marked drop in supplying capabilities. For example, Shanghai has been under lockdown for some time, but the municipal government is now trying to proactively reopen and restore production. On the demand side, while consumption has been curtailed by the pandemic, we see the marginal impact reducing. I personally have confidence in the Chinese auto market's future. However, consumer confidence remains low due to the overall economy being weak. That’s why spending in the auto market, which is an expensive commodity, is showing signs of caution. Therefore, if consumer confidence is not restored, demands may remain weak. Additionally, over 20 OEMs have announced plans to readjust pricing for new renewable vehicles, which has decreased purchasing demand as consumers anticipate further price drops. Being cautious and prudent about purchasing vehicles may lead the auto market to face challenges in reaching the growth targets set at the start of the year. However, there is a silver lining. For example, on May 24, the State Council had a meeting to discuss further economic support, announcing measures to stabilize the economy. In various cities, restrictive purchasing policies have been eased, allowing people to buy vehicles more freely. Moreover, a total tax cut of 60 billion RMB for vehicle purchases has been designed to boost the consumption market for the auto sector. Fortunately, we see that local and central governments are introducing increasingly more stimulus policies for the auto market. We believe that, with more such policies, the market may begin to turn around, and we will monitor market movements closely, adjusting our strategies as needed. Regarding the chip supply, it's important to note that the supply remains tight and does not fully meet OEM demand, and returning to pre-pandemic levels will take time. I hope that the situation will gradually ease in the future, allowing the market to normalize. In terms of data product development, we aim to cover the entire marketing and sales chain by providing customized products. From lead generation to store visits, transaction boosting, and enhancing customer satisfaction rates, we are building our data products to cover all value chains. In 2022, our focus is on consolidating data and upgrading our technologies to create a multidimensional profile that encompasses numerous data sources, effectively establishing a competitive barrier. This barrier will allow us to create more sophisticated and upgraded data products. We provide three key parts of our data product: CRM Plus, which covers the CRM chain, a more active management model, and a module-based, flexible system. Now, regarding the used car business, we are optimistic, expecting 90 million cars to be transacted in the used car market this year, with an anticipated growth rate of 8% year-on-year. There are many supportive policies being rolled out. For instance, the Reform and Development Committee initiated a document to stimulate green consumption, with a particular focus on boosting the used car sector by enhancing dealer support and widening circulation to improve market liquidity. In the long term, the government is pushing policies to promote the used car market. We are optimistic about the used car sector, but the reality is more complex than anticipated. On the plus side, due to the chip supply shortage in the new car market, many consumers have shifted to used cars, providing a market boost. However, on the downside, the lack of standardization in used cars means consumers must inspect vehicles in person, but COVID-19 policies have hindered offline visits. So, while our used car unit has performed positively, the overall market has slightly dropped. We hope for better circumstances in Q2 and greater opportunities in the second half of the year as the pandemic policies are better managed.

Thank you. Our next question is from Maddie Lee at Jefferies. Please go ahead.

Thank you, management for taking my question. I have three questions. The first is about monthly business momentum and the impact of the Beijing Auto Show in the second quarter given the pandemic outbreak, as well as our expectations on the auto industry outlook for the second half. The second question relates to the competitive landscape in the online auto vertical. And the third question pertains to media and leads generation outlook for the second half this year.

Thank you for the question. Regarding the Beijing Auto Show, the event has been postponed, and the timing remains uncertain. Approximately 40% of new car launches have been postponed, significantly impacting the new car market. If COVID is better controlled, we expect to see a pickup in the auto market beginning in the third quarter. Now discussing competition, we remain the number one player in the market with a market share exceeding 50%, specifically at 52%. Our closest competitors are within the range of a market share of 5% to 3% to 2%. Concerning the media and leads business for the second half of the year, much will depend on how the pandemic is managed. Media business advertisement and marketing expenditures have faced negative impacts. Conversely, the leads business could improve if the pandemic situation stabilizes; hence, we anticipate a better performance starting from the third quarter.

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

Thank you, everyone. Thank you very much for joining us today. We appreciate your support and look forward to updating you on our next quarter’s conference call in a few months’ time. In the meantime, please feel free to contact us if you have any further questions or comments. Thank you, everyone. Bye.