Autohome Inc. Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by for Autohome’s Second Quarter and Interim 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. If you have any objection, 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. Hello, everyone. I'm Sterling Song. Welcome to Autohome’s second quarter and interim 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 Chief Executive Officer, Mr. Quan Long; and Chief Financial Officer, Craig Yan Zeng. After our prepared remarks, our management team will be available to answer all your questions. Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the Securities and Exchange Commission. Autohome 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 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, Sterling. Hello, everyone. This is Quan Long, Chairman and CEO of Autohome. Thank you for joining us today for our second quarter 2022 earnings conference call. We are pleased to report a strong operational performance in the second quarter of 2022. Our total revenues for the second quarter were RMB 1.73 billion and adjusted net income attributable to Autohome was RMB 472 million, with an adjusted net margin of 27.2%. The challenging macro environment and particularly, the pandemic outbreaks in multiple cities in China in Q2, have impacted the supply chain and sales in the automotive industry. Although the market began to recover in June, with passenger vehicle sales nationwide increasing by 22% year-over-year, the overall passenger vehicle sales volume fell by about 10% in the second quarter. Against the backdrop of macro headwinds, our solid overall performance clearly demonstrates our strong growth momentum. We achieved substantial sequential growth in operating results in the second quarter and continued to maintain good profitability as well as a high profit margin level, which is a testament to our ability to navigate evolving market cycles. COVID-19 resurgence affected the Chinese auto market during the quarter. Despite this, the automotive industry remains a key pillar of the national economy, with cars playing an important role in people's lives. The industry typically has a long-life cycle, and there is tremendous potential as China's automotive consumption continues to upgrade. Autohome has consistently adjusted its business model, expanded its business boundaries, and launched new products and services during the pandemic to address customer pain points and meet their demands. We have continued to empower customers, maintaining commercial contacts and earning their trust and appreciation. Supported by steady operations and solid business fundamentals, Autohome outperformed the wider market in the first half of this year. In the second half, as China's automotive market quickly recovers with the implementation of various favorable policies, Autohome will continue to enhance its performance and deliver satisfactory results to the market. I will now turn the call over to our CFO, Craig Zeng, for a closer look at our second quarter operating and financial results.

Thank you, Mr. Long. Now, I’d like to provide an overview of our second quarter highlights. During this period, we enhanced our private entities by expanding our online test align, reaching more users in diverse scenarios to boost traffic growth. According to QuestMobile, Autohome’s average daily users rose by 8.1% year-over-year, reaching 47.63 million in June. In terms of user composition, 37% of our high-value users, whose spending exceeds RMB 5000, outnumbered our competitors, highlighting our user traffic's value. We also diversified our content ecosystem and implemented our video-based strategy, launching regular cloud auto shows and a new EV car model database to broaden our product offerings, enhancing customer experience with a wider price range. In response to the resurgence of the pandemic, we supported over 300 national and local online auto shows, reaching over 70 million people across China. Additionally, we initiated our safety to store campaign, a new promotional model allowing users to safely review and purchase parts during the pandemic, which also aided dealers and clients in boosting sales and improving user experience. Looking ahead to the full year, our digital products have gradually penetrated the market since their launch, now covering over half of all mainstream automakers in China. We achieved double-digit year-over-year growth across all of our dealer digital products. Our energy business also continued to grow, with revenue increases outpacing the market average. The synergies between Autohome and Ping Group are on track, as we leverage our unique advantages to enhance services for Autohome’s users. Moving on to content development, we have advanced our strategy of promoting video-based content transformation by leveraging our big IP brand. For example, we modified the content of our show Super PAC to include motorcycle reveals, allowing us to expand our IP content beyond just passenger vehicles. In the first half of this year, our original IP series garnered over 148 million views on Autohome's platform and more than 207 million across the entire network. We also introduced our NEV car model database in June, and we'll continue enhancing our NEV platform, significantly improving access for users through improved content categories and data on NEV specifics. Autohome prioritizes brand development and is committed to long-term brand building and upgrades. This year, in response to user needs for car search, purchase, and maintenance, as well as the general automobile market conditions, we appointed Eileen Gu, the 2022 Beijing Winter Olympic champion, as our brand ambassador. Her digital presence will be integrated into our online auto shows and user interactions using advanced technologies like VR. She embodies the younger generation, and we believe her involvement will help Autohome attract a greater number of younger and female users. Regarding our traditional business segment, we quickly adapted our operational model to address pandemic-related challenges, assisting our clients in overcoming difficulties. Following the cancellation of local offline auto shows and events, we initiated regular online auto shows and safety to store services, allowing users to explore and select cars conveniently, while enabling automakers to deliver localized promotional messages via our platform. Additionally, we provided ride vouchers to assist customers in reaching physical stores, addressing last-mile challenges in the car buying process. Our lead generation products offer dealers various tools to connect with prospective customers. In the second quarter, over 12,000 clients purchased our premium version, and more than 6,000 opted for our tech version, indicating sustained demand, particularly for high-end versions. On the data products front, we are enhancing our core competitiveness through innovation and pushing forward with our data and technology-driven approach. Our expanded product line now includes digital products and VR car search tools, enabling dealers to operate effectively and safely during the pandemic. In the second quarter, revenue from dealers' digital products soared over 40% year-over-year, reaching more than 18,000 clients. During the first half of 2022, average purchases and revenue per store surged by 32% and 20% year-over-year, respectively. Our intelligence solutions are tailored to meet the core demands of automakers, assisting traditional auto companies in their digital transformation. Since launching our first digital and technology product in late 2021, we have continuously enhanced our offerings, collaborating with over 30 automakers, marking significant progress in our expansion beyond the vertical media industry. We anticipate continued growth in our digital business, generating future revenue and supporting our growth trajectory. For our NEV business, we are dedicated to providing comprehensive branding solutions for automakers, organizing activities for car owners that reflect each brand's identity to promote their unique car lifestyle. By bridging online and offline operations, we help automakers convey their messages, foster user interaction, and diversify our income streams. In the second quarter, revenue from NEV brands significantly increased year-over-year, outpacing the overall market growth rate. Additionally, as NEV penetration rises, we have accelerated our development in this area by resuming construction of new sales model stores as the pandemic subsides. We plan to launch these stores in Beijing and Shanghai in the third quarter, exploring an innovative auto sales model utilizing a high-tech physical store setup. We aim to enhance exposure for new NEV automakers through our unique sales channels, expecting this initiative to generate revenue for the company in 2022. On the used car front, we enhanced our used service ecosystem by integrating resources from Autohome, TTP, and the Ping An Group, creating a one-stop cloud platform for used car services that connects users and clients while offering value-added and digital services alongside lead generation. With support from diverse content and Ping An's offline channels, we aim to scale the platform to include more sellers. Our synergy with TTP is deepening through consolidation and auction services. In the second quarter, our platform accounted for around 23% of China's used car trading volume, marking a three-point increase quarter-over-quarter and a six-point increase year-over-year. We also made significant progress in establishing our certified used car system, which now operates in 47 cities. We expect our certified car sources to keep growing steadily. Recent policy changes by the State Council of China, which removed restrictions on the relocation of small-sized, non-upgrading used cars meeting national emission standards and revised certain management regulations, are set to stimulate used car sales, promoting smoother circulation in the market. This series of new policies will support the used car market's development in China by fostering more trading activities, positively impacting consumption. In summary, we are pleased with our progress across all business segments during this challenging quarter. Since June, as the pandemic eases and the government introduces economic stimulus measures aimed at boosting the economy and auto sales, we have seen a significant release of pent-up demand. We expect these developments to positively influence the auto market and support its recovery. Passenger vehicle sales rose by over 22% year-over-year in June, with many key sales indicators showing signs of recovery. Despite factory suspensions in April and May, demand surged in June, leading to increased trading volume. The automotive sector remains a critical pillar of China's economy and is recovering consistently. With Autohome’s solid business foundation and strong financial performance, we are actively pursuing new development opportunities across various sectors. We believe Autohome will continue to drive the evolution of China's auto industry, achieving sustainable long-term growth while delivering lasting value for all stakeholders. Now, let’s review the key financials for the second quarter of 2022. Please note that, as in previous calls, I will reference RMB only during my discussion unless noted otherwise. Net revenues for the second quarter were RMB 1.73 billion. In detail, media services revenue was RMB 531 million, generation services revenue totaled RMB 753 million, and revenues from online marketplace and others reached RMB 450 million. The cost of revenue in the second quarter was RMB 279 million compared to RMB 262 million in Q2 2021, driven largely by ongoing content investments. The gross margin for the second quarter was 83.9%, down from 86.5% in Q2 2021. Operating expenses included sales and marketing costs of RMB 739 million, up from RMB 562 million in Q2 2021, mainly due to increased marketing expenditures. Product and development expenses were RMB 362 million compared to RMB 335 million in Q2 2021, reflecting higher investments in R&D for digital products. General and administrative expenses were RMB 127 million, reduced from RMB 177 million in Q2 2021, primarily due to lower expected credit losses. Overall, we achieved an operating profit of RMB 301 million in the second quarter, a decline from RMB 673 million in the same period last year. Adjusted net income attributable to Autohome Inc. was RMB 472 million, down from RMB 795 million in the corresponding quarter in 2021. On a Non-GAAP basis, diluted earnings per share in the second quarter were RMB 0.94, compared to RMB 1.58 and RMB 1.57 in the same period of the previous year. Non-GAAP basic and diluted earnings per ADS for this quarter were both RMB 3.77, versus RMB 6.31 and RMB 6.30, respectively, from the corresponding period of 2021. As of June 30, 2022, our balance sheet is robust, with cash, cash equivalents, and short-term investments totaling RMB 20.94 billion. We generated net operating cash flow of RMB 488 million in the second quarter of 2022. On November 18, 2021, our Board of Directors approved a share repurchase program allowing us to buy back up to US$200 million of Autohome ADS within a 12-month period. As of July 31, 2022, we have repurchased approximately 1.88 million ADS for a cost of around US$54.2 million. With that, we are ready to take your questions. Operator, please open the line for the Q&A session.

Thank you, management. Our first question is from Robin Leung at Daiwa. Please go ahead.

Hi. Thank you to the management for addressing my question and congratulations on the strong results. Could management provide insights on the auto market trends for the second half of this year? Additionally, how do the effects of government stimulus policies and the chipset supply situation influence auto suppliers' decisions regarding their marketing budgets? Thank you.

Let me address your question. I am Long Quan, the president of Autohome. Your question has two parts: the auto market and the chip supply. Starting in March, Shanghai and Changchun faced severe lockdowns, which impacted these key car manufacturing cities. This led to a 35% drop in car retail data in April and a 16.9% decline in May. Consequently, the retail market for passenger cars saw a significant decline in the second quarter. The auto sector is a critical component of China's consumption market, accounting for about 10% of total retail consumption. As a response, the government introduced various stimulus policies starting in April to revitalize the auto market, including significant consumption-boosting policies and tax cuts for car purchases. In July, further aggressive policies were announced to promote market consumption. By June, market consumption had increased by 22.6%, and in July, it rose by 17%, indicating a turnaround in the retail auto market. We are very optimistic about the remaining months of this year, expecting strong market performance. The China Auto Association forecasts that total car sales in China will reach 27 million units in 2022, up 3% from the previous year, with passenger car sales expected to hit 23 million, a 7% increase. Sales of new energy vehicles are projected to reach 5.5 million units, reflecting a 56% growth. We believe the market has significant potential and a bright future. Now, regarding the chip supply, the Passenger Car Association of China warned in January that about 1 million cars would experience a chip shortage, which has affected some brands like Toyota. However, compared to the second half of 2021, the situation for domestic manufacturers is improving, and we do not expect a widespread lack of chip supply. The Ministry of Industry and Information Technology has assured that they will monitor the industry closely to ensure a smooth supply chain for chips and raw materials. As we move into the second half of the year, we anticipate new cars will gradually be launched in the market, accompanied by key auto shows and events, providing opportunities for manufacturers to showcase new models. We do not expect chip supply to be a bottleneck moving forward. Thank you.

Thank you. It’s very helpful. Thanks.

Our next question is Liping Zhao, CICC.

Thanks for taking my questions. I have two questions here. First, could you please provide more details on the growth momentum of the data products in the second half of this year? And second, with the increase in offline computing in the second half, such as your overstatement accessible, how should we expect the sales and marketing expenses in the third and fourth quarters of this year? Thank you.

Thank you for the question. Regarding the first question about data products, it's correct that in Q1 there were delays in new car launches and some events were canceled, which impacted our data product revenue, particularly the new smart car launches. We believe that if the COVID pandemic is better controlled in Q2, the OEMs will accelerate their new car model launches. Therefore, we expect data product revenue to grow in the second half of the year. As for the second question on sales and marketing expenditure, we have the 818 August 18 auto show coming up, along with online auto shows and online stores. We anticipate that our advertising and media revenue will become positive in Q3. It's clear that for Q3, the revenue from media and advertising will turn positive, but we will need to consider other factors for Q4.

Next question is Ritchie Sun, HSBC.

Thank you to management for answering my questions. I have two inquiries. Firstly, I've noticed that video accounts on Weibo and Bilibili are attracting more automotive ad budgets than previously. How do you assess the competition from these alternative platforms, and what is our strategy to address this? Secondly, can you update us on the progress in our investments in traffic and content, particularly in short video and live streaming?

Thank you for the question. Yes, it's true that platforms like Weibo, Bilibili, TikTok, and Douyin are attracting more car advertising business. This trend is quite normal as media becomes more diversified, bringing in unexpected levels of car advertising. However, I'd like to point out a few key points. First, Autohome remains a key player in the vertical auto industry media sector. Second, our operations extend beyond just vertical media; we've also initiated a variety of business activities, including digital products and lead generation. This diversification means our revenue streams are not limited to media alone. Unlike Rose Media, which focuses more on entertainment content, we've made significant investments in our own content, such as special effects and core intellectual property. Our four major original IPs have generated around 200 million views, and we lead in many content areas, including 3D modeling. Additionally, we offer practical tools for car purchasing, such as a comprehensive car model database, which distinguishes us from entertainment-focused platforms. We have also formed traffic alliances with several partners, excluding TikTok, Douyin, and Tencent. Through collaboration with these traffic providers, we aim to maintain our leading position by offering professional content and effective tools for car buyers. Notably, our user base grew by 8.1% over the last year, as indicated by the recent QuestMobile data. Thank you. Next question, please.

Next question is Brian Gong, Citigroup.

I'd like to translate myself. Management shared the last revenue share for TTP units in the second quarter, and with government stimulus policy, what's our expectation for TTP in the second half of this year? Thank you.

Thank you for the question. Regarding used cars, the forecast made in January 2022 estimated the transaction yield around used cars at 90 million units, indicating an 8% growth rate. However, the lockdowns in Shanghai significantly impacted used car transactions starting in the second quarter, leading to a negative growth in actual transaction volume during that time. Since June, with improved COVID-19 management, we are witnessing a gradual recovery in the used car market. Currently, the transaction volume and total revenue from used cars represent a small fraction of our overall revenue. We believe the used car business will continue to grow in the second half of the year, with an anticipated growth rate of 23%, particularly in this latter half. The National State Council has also issued policies aimed at boosting the circulation of the used car market in China. Each vendor typically engages in only a part of the value chain; however, by leveraging Autohome, TTP, and Ping An together, we can consolidate resources and offer a comprehensive solution for car users and buyers. This approach will enhance our ability to provide value-added and digital services for the used car segment. We expect that with the implementation of supportive WFOE policies and the collaboration of the three players, next year the used car business will constitute a larger share of our total revenue.

Okay. Thank you.

Next question is Thomas Chong. Please go ahead.

I'll translate my questions. First, congratulations on the really strong set of results. For new energy vehicles, we are seeing very fast revenue growth during the second quarter. May I ask about the competitive landscape at the moment? And in the next couple of years, how should we think about the revenue contribution from this segment in the future? Thank you.

Well, thank you for the question. Regarding competition, Autohome remains a market leader. We are not just focused on the media business; our overall trend shows that media providers are increasingly diversifying. Consequently, Autohome has already broadened our revenue streams beyond media and advertising. We have ventured into lead generation, digitized products, the auto ecosystem, and car lifestyle products. This approach aims to reshape the entire industry value chain and digitize it. Our CRM Plus business model encompasses lead generation, click management, first store management, and a CRM system. While some competitors excel in specific areas, our combined strengths ensure that we hold a strong market-leading position. Now, regarding the new energy vehicle market, we are consistently in a strong position, and NEVs have become a significant force in the automotive sector. However, NEV sales represent a new marketing and sales model that differs from traditional methods. We are preparing to transition to a more appropriate sales model for NEVs, which we refer to as a new retail sales model. We are implementing virtual reality technology, or hybrid virtual reality technology, to enhance car sales for NEV manufacturers. In the third quarter, we plan to launch several experience stores, and we invite you to visit these stores to see for yourself. Thank you.

Our last question is Steven Tsai, Morgan Stanley.

Thank you to the management for addressing my questions. I would like to ask about the media service segment. This segment experienced approximately 100% growth despite some city lockdowns and supply chain challenges. Could you explain the key factors contributing to this growth? What strategies did you implement that were different from those in media entertainment and other vertical platforms? Additionally, as we look toward the second half of the year, how should we anticipate the trajectory of media service revenue growth? You mentioned that passenger vehicle sales are expected to hit a four-year high. Is there any fundamental reason why the revenue might not return to the highs we experienced in 2019 and 2020? Thank you.

Thank you for your question. The major drivers include some seasonal factors in Q1, particularly the Spring Festival, which is the largest festival in China, as well as the impact of the COVID pandemic. These factors contributed to a delay in media expenditure. However, after Q2, as Shanghai and Jilin began to lift their city lockdowns and reopen, we saw an improvement in media expenditure. Looking ahead, while we aim to achieve results similar to those of 2019 and 2020, it's important to note that the current landscape is quite different. We are now offering more comprehensive and combined services rather than just a single service. The services provided to OEMs and dealers have been enhanced to be more comprehensive. Therefore, we may adjust some of our accounting practices in our financial reports to better reflect this shift in our business model, which has expanded to include services in new energy vehicles, car lifestyle, OEMs, and the used car market.

Operator, this is the end of the Q&A. Please go ahead.

Thank you. This is the end of the Q&A session. So I'll turn the conference back to the management for closing remarks.

Thank you everyone for joining us today for the earnings conference call. We appreciate your support and we look forward to updating you on our next quarter 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 very much and good-bye.