Autohome Inc. Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by for Autohome’s Third 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. 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. Hello, everyone. I'm Sterling Song and welcome to Autohome’s third 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 Chief Executive Officer, Mr. Quan Long; and Chief Financial Officer, Mr. Craig Zeng with us. After our prepared remarks, our management team will be available to answer all your questions. Before we continue, 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 US Securities and Exchange Commission and Stock Exchange of Hong Kong Limited. Autohome doesn't undertake any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Autohome’s earnings press release and this conference call include discussions of certain unaudited non-GAAP financial measures. Please refer to our press release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures, and is available on Autohome's IR website. Again, 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. Now, I will turn the call over to Autohome's Chairman and CEO, Mr. Long for opening remarks. Please go ahead, Mr. Long.

Thank you, everyone. Thank you, Sterling, and hello to all. I am Quan Long, Chairman and CEO of Autohome. We appreciate you joining us today for our third quarter 2022 earnings conference call. We are pleased to report a strong operational performance in the third quarter, building on our vigorous recovery momentum from the first half of 2022. Our total revenue for the third quarter was RMB 1.84 billion, reflecting a 4.5% increase year-over-year, and media service revenue rose by 28% year-over-year. Our adjusted net income attributable to Autohome was RMB 590 million, marking a return to positive growth with a year-over-year increase of 1%. The adjusted net margin stood at 32%. Since the start of this year, the Chinese Central government has rolled out a series of economic stimulus policies focusing on the auto industry to enhance relevant consumption potential. Additionally, the removal of used car circulation restrictions has alleviated growth bottlenecks in the used car sector. With these policy changes and effective measures to contain the spread of COVID-19, passenger vehicle sales in China rebounded gradually in the third quarter, totaling 5.69 million units sold, which is a 23% growth year-over-year. Despite the pandemic's effects, the auto industry continues to be a cornerstone of the national economy and is enhancing services in people's lives. Given the traditionally long lifecycle of the automotive industry and ongoing government support, it possesses significant growth potential as demand for automobile consumption and upgrades continues to rise. To tackle challenges proactively, Autohome has listened to our customers and adapted our business model to offer effective solutions to their concerns. Following substantial business adjustments over recent quarters, we have reached a bottom and achieved a late-stage rebound in the third quarter. We are now on a clear year-over-year growth trend and are maintaining strong momentum, delivering solid results to the market. With that, I will now turn the call over to our Chief Financial Officer, Craig Zeng, for a closer look at our third-quarter operating and financial results.

Thank you, Mr. Long. Hello, everyone. I’m Craig Zeng, the CFO of Autohome. First, I'd like to provide an overview of our traditional business. For the third quarter, our media service revenue reached RMB 566 million, marking a return to positive year-over-year growth for the first time after over a year of adjustments. This confirms Autohome's leading position in the auto media sector. Our strong performance is mainly due to two factors. First, we adapted to changes and actively pursued innovation to enhance our traditional services. For instance, to mitigate the pandemic's impact, we implemented advanced technologies in our car searching tools and organized online auto shows to connect customers with potential buyers more efficiently, increasing traffic to Autohome’s platform. In the first nine months of the year, we hosted 305 online auto shows, reaching over 500 million people nationwide, providing users with a simple and secure way to search and select cars anytime and anywhere. This normalization of online auto shows has significantly improved user engagement and enhanced their experience, helping our partners navigate a challenging business environment. Our online auto shows have received positive feedback from both users and OEM customers, leading to a notable increase in our media business. Second, we focused our resources on strengthening our competitive advantages and enhancing our industry presence. For example, Autohome launched the 818 Super Auto Show, the most influential auto media event globally, which we have organized for four consecutive years. This year, we invested more resources into the show and collaborated with China Central Television (CCTV) to promote OEM brands and products more effectively, accelerating digital transformation within the auto industry. The 818 Super Auto Show generated over 16.4 billion exposures across the entire network and attracted more than 1 billion short video views, reflecting the significant influence of Autohome in the auto media sector. The increased media exposure, combined with our ongoing advancements in content creation and efforts to enhance our core capabilities, has led to the establishment of a strong and reliable video-based content ecosystem. Our commitment to content innovation included signing a contract for the industry's first hyper-realistic video, which has received over 100 million views across the network, indicating strong consumer interest. Moreover, in the first three quarters of 2022, our original IP series, including travel journals, garnered over 236 million views on the Autohome platform and over 372 million on the entire network, highlighting our growing influence. Looking ahead, Autohome will introduce more macro features, virtual assets, and engaging elements to enhance the quality of our video-based content ecosystem, encouraging greater participation and deeper engagement among young users. Our initiatives to strengthen user-generated content significantly enhance our capability to deliver stable, long-term traffic growth. According to QuestMobile, Autohome's aggregated average daily active users increased by 7.4% year-over-year in September, reaching 49.66 million users. Additionally, our mobile average daily active user count exceeded 12.3 million, positioning us strongly in the industry. Now, let's discuss our Eastern region business, where revenue showed a positive growth trend in the third quarter, increasing over 5% year-over-year, surpassing the growth rates from the first two quarters of 2022. Furthermore, the quarter-over-quarter growth rate exceeded 7% in new customers acquired, reaching over 13,000 dealers. More than 7,000 dealers purchased the tax with a total exceeding 20,000 dealers who bought premium versions of our subscription packages, reflecting an increase of over 1,200 dealer clients or 6.5% growth from the second quarter. The steady rise in revenue and customer numbers underscores our commitment to empowering client businesses. Looking ahead, we will continue to grow our product pipeline and increase R&D to fully meet our customers' needs with upgraded products and services. Turning to our new initiatives, we are executing our development plan and accelerating our secondary growth curve while focusing on our NEV business, which is crucial for the future. Our new car business, which has significant growth potential, along with our digital product offerings, allows us to empower our customers effectively, achieving substantial progress. First, regarding NEV. In response to the evolving NEV market structure and rising penetration rates, Autohome has adapted actively by pioneering a unique multi-brand retail model with energy space, providing 3D holographic displays and test-driving services across various NEV manufacturers and models in China. This space offers a one-stop solution for selecting, test-driving, and purchasing vehicles, streamlining the traditionally time-consuming car buying process. The space has helped us maintain a competitive edge and has attracted interest from other NEV automakers who now view Autohome differently. In September, we launched our first offline store in Shanghai, drawing significant attention from industry stakeholders. In the future, Autohome's energy space will expand in top-tier cities and gradually into lower-tier cities, covering more NEV brands and models. By creating an ecosystem that benefits all parties, Autohome will drive the rapidly growing Chinese NEV industry forward. Notably, during the quarter, we formed a strategic partnership with the Beijing Institute of Technology Information Company. Moving forward, both parties will explore various collaborations in NEV data applications, equipping Autohome with valuable data sources to develop more digital products and services to enhance NEV sales and marketing effectiveness, broadening our growth prospects in the NEV sector. In Q3, revenue generated from NEV brands grew significantly, increasing by 140.7% year-over-year, once again outperforming overall industry sales growth. Next, let’s address the used car market. With favorable changes in government policies this year, China remains the world's fastest-growing and most promising used car market. To seize this opportunity, we are consolidating resources across TPG, Tianbo, and Autohome to gain a competitive edge and advance the development of our one-stop used car transaction platform. Our trading product targets users looking to trade in their used cars for new ones, effectively aiding OEMs' marketing efforts to reach potential new car buyers. We have established collaborations with 22 brands and have received positive feedback. Our efforts have resulted in a standardized process for searching, buying, and leasing vehicles, executing the industry's first seamless processing of test-driving services to provide a smooth user experience. Additionally, we are rapidly advancing with our 35 new car systems, increasing the number of new cars on our platform, creating more operational efficiency and transaction opportunities for both new car dealers and buyers. Moving forward, Autohome will expedite the implementation of business innovations to develop a comprehensive tactical system that enhances our competitive advantage and contributes to overall industry growth. We have also deepened our partnerships with DCP in the third quarter through our matching and auction services. Our platform accounted for around 21% of all used car transactions in China during the third quarter, marking a 3 percentage point growth year-over-year. Market conditions are expected to continue improving moving forward. Lastly, regarding data products, they maintained a healthy growth trend in Q3, with revenue increasing by 7% year-over-year, while our client base grew by 5% quarter-over-quarter and 6% year-over-year, surpassing 9,800. Throughout the first nine months of 2022, the average number of data products adopted by clients and the average revenue per dealer increased by approximately 31% and 20% year-over-year, respectively. Additionally, we have capitalized on opportunities presented by the digital transformation of the auto industry as part of our ongoing efforts to enhance our product offerings. Currently, Autohome collaborates deeply with 48 mainstream automakers, which will continue to drive and accelerate our secondary growth curve. In summary, despite the uncertain macroeconomic environment, we are pleased to have achieved remarkable results across all three of our business segments, reflecting a recovery momentum since the first half of 2022. As one of the leaders in China's auto industry, Autohome has adhered to two main strategies over the past year. First, we actively promote our ecosystem approach, consolidating resources with Ping An Group to develop a comprehensive platform that offers extensive services to auto users. At the same time, we are heavily invested in the industry's future and committed to leading innovation by continuously evaluating our innovative business segments, built on our solid foundation and strong financial performance. Autohome aims to fuel digital transformation within the industry, creating lasting value for all stakeholders through exceptional performance that navigates market cycles. Next, I will provide a summary of the key financials for the third quarter of 2022. Please note that I will reference RMB in my discussion unless noted otherwise. Net revenues for the third quarter were RMB 1.84 billion, up 4.5% year-over-year. For a detailed breakdown, media services revenue was RMB 556 million, a 28% year-over-year increase. Generation services revenue rose by 5.3% year-over-year to RMB 809 million, while online marketplace and other revenue reached RMB 478 million. Moving on to costs, the cost of revenue for the third quarter was RMB 331 million compared to RMB 281 million in Q3 last year. The increase was mainly due to our ongoing investment in content. The gross margin for the third quarter was 82.1%, down from 84.1% in Q3 2021. Regarding operating expenses, sales and marketing expenses in the third quarter were RMB 863 million, compared to RMB 712 million in Q3 2021. This increase was primarily due to heightened marketing and promotional spending. Product and development expenses were RMB 387 million compared to RMB 364 million in Q3 2021, driven mainly by higher investments in research and development for digital products. Finally, general and administrative expenses totaled RMB 136 million, compared to RMB 111 million in Q3 2021. Overall, we reported an operating profit of RMB 192 million in the third quarter compared to RMB 365 million in the same period in 2021. Adjusted net income attributable to Autohome was RMB 590 million in the third quarter, compared to RMB 583 million in the corresponding period in 2021. Non-GAAP basic and diluted earnings per share for the third quarter were both RMB 1.18, up from RMB 1.15 in the same period last year. Non-GAAP basic and diluted earnings per ADS in the third quarter were RMB 4.73 and RMB 4.72, respectively, compared to RMB 4.61 for both in the same period last year. As of September 30, 2022, our balance sheet remains strong with cash, cash equivalents, and short-term investments totaling RMB 2.34 billion. We generated net operating cash flow of RMB 541 million in the third 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 over a 12-month period. As of October 31, 2022, we had repurchased approximately 3.61 million ADS for a total cost of around US$106 million. On November 3, 2022, our Board of Directors approved an extension of the share repurchase program for another sales plan, which will be detailed in a filing on November 17, 2023. Autohome's stable long-term operations, strong cash flow, ample cash reserves, and active stock repurchase program show our commitment to enhancing the company's potential and effectively communicating our expectations to investors. We will continue to manage our market value proactively. Thank you.

Thank you. Our first question comes from Thomas Chong from Jefferies. Please go ahead, Thomas.

Thank you to management for addressing my questions. My first question is about the developments in the auto industry for Q3 and what the outlook for Q4 2023 looks like. My second question pertains to the used car market. How is it evolving, along with the overall market landscape, including TTP, and what strategies should we consider for next year? Thank you.

Thank you for your questions. The first question relates to the industry, which I will address, while our CFO, Craig Zeng, will respond to your second question about the new car business. First and foremost, the auto industry plays a vital role in our national economy and has garnered significant interest regarding policies and trends. I believe that this year's targets for our industry have already been achieved. In Q3, we saw a notable recovery in profitability among car manufacturers, which bodes well for Autohome. According to the CTCA, passenger vehicle sales in China experienced a year-over-year decline of 4.5% in Q1 and 9.8% in Q2, but in Q3, we registered a growth of 23.7%. The National Statistics Bureau reported that automobile manufacturing revenue rose by 6.7% in the first nine months of this year, with profits surpassing RMB 370 billion and only a slight year-on-year drop of 1.9%. The decline in margins compared to January to August has also narrowed by 5.4 percentage points. This indicates that sales of passenger vehicles are recovering from a downturn, and we believe we may be approaching a turning point. In Q3, we noticed optimistic monthly sales and production figures that contributed to stabilization and recovery in the industry. We expect follow-up policies to become more specific and consolidated, creating a stronger foundation for economic recovery. As a result, we maintain a cautiously optimistic outlook for Q4 regarding automotive industry developments. The automotive sector is highly valued by both the country and the government, which has introduced favorable policies to stabilize and boost major consumer markets, especially in this sector. The state council has implemented comprehensive measures on new car restrictions, and in September, the Ministry of Finance and the State Administration of Taxation launched a policy to stimulate auto purchases, encouraging growth in the NEV sector. We anticipate significant upgrades in auto consumption going forward. Since the start of this year, recurrent COVID-19 outbreaks in multiple regions of China have posed challenges and uncertainties affecting macroeconomic growth and, to some extent, our mobile market's growth. However, we believe that measures are being taken to encourage end consumption as the year ends, leading to greater discounts from OEMs. This trend could stimulate demand and create a positive feedback loop for our industry. On the other hand, we also observe rapid growth in the EV market, supported by favorable policies, improved supply chains, and rising fuel prices. As of September, the domestic retail penetration rate for NEVs was 31.8%, an increase of 11 percentage points from the previous year's figure of 21.1%. In the first nine months of this year, the NEV domestic retail penetration rate stood at 26%. Additionally, the 2021-2035 NEV industry development plan has set a target of 20% penetration by 2025, which now seems achievable three years ahead of schedule. According to the China Association of Automobile Manufacturers, Q4 is projected to stabilize in manufacturing and sales due to policies aimed at supporting the economy, with positive growth expectations for the overall auto market this year. Continued favorable policies will be essential for sustained growth across all sectors. Regarding your second question about our data products and the used car market, we are observing a positive trend in our digital dealer business, achieving double-digit revenue growth in both revenue and dealership numbers. Feedback on our products has been encouraging; we are leveraging our strengths while addressing weaknesses. In terms of our digital products for OEMs, we have established partnerships with over 50% of mainstream brands in the Chinese market, specifically 48 brands. However, we have noted a slight decline in client appointments, though overall collaboration remains strong. For digital products related to new energy, we recently signed an exclusive strategic cooperation agreement with Beijing Kemoshijie Technology, which we believe presents significant collaborative opportunities in both new and used car digital products. Discussing the used car market, China is recognized as the fastest-growing used car market. In our business landscape involving Autohome, TTP, and Ping An, we cover all aspects from upstream to downstream, providing unique competitive advantages. Our certified used car platform is focused on addressing sector challenges. We are transitioning from a lead-generating service to a value-added digital life service, moving beyond traditional monetization methods. Overall, we are very confident in our used car market and will continue to enhance our asset service model to develop an integrated transaction services platform in the automotive sector. Thank you.

Great. Thank you. Our next question comes from Brian Gong from Citi. Please ask your question, Brian.

I will translate myself. Thanks to management for taking my question. Can management share their perspective on auto advertising budgets and the market outlook for the fourth quarter this year and next year? Additionally, for our lease product, can you provide insights on where we will continue to introduce more premium offerings? Thank you.

Generally speaking, we still hold a favorable attitude and are cautiously optimistic. Our estimation is based on the new car market. However, regarding advertising budgets for new model launches, the impact of the COVID-19 pandemic led to serious disruptions in many auto shows or exhibitions this year, preventing them from occurring as scheduled. This shift has prompted the emergence of new formats for auto showcases, such as virtual events and metaverse integrations. Overall, OEM advertising budgets remain closely tied to sales performance, which supports our cautious optimism for Q4 and next year. We have been committed to providing diverse services to our dealers, and we will continue developing new features aimed at reducing costs and boosting efficiency. That concludes my response to your question, Brian.

Thank you. Our next question comes from Ritchie Sun from HSBC. Please ask your question, Ritchie.

Thank you to management for taking my questions. First, we noticed that you have signed collaborations with NetEase Music as well as Huawei. Can you elaborate on the rationale and opportunities behind these partnerships? Additionally, what other collaboration opportunities have arisen with other Internet companies? Secondly, in terms of cost-cutting or efficiency initiatives, what additional measures can we implement given the top macro environment? Thank you.

Thank you for your question, Ritchie. The first question relates to our collaboration with NetEase Music. This initiative aims to enhance user engagement through an integrated driving and music experience, targeting car owners who subscribe. We launched a campaign called car owners' music season, along with a variety of engaging activities. This collaboration promotes better driving experiences with music and opens new opportunities for content consumption during driving. Additionally, we are collaborating with other partners to diversify our product offerings and attract traffic through various online and offline interactive activities. We are actively exploring business development in multiple settings to build alliances and establish a new traffic system. Furthermore, we have partnered with companies like Focus Media Information Technology, showing that Autohome seeks partnerships not only with Internet companies but also with traditional enterprises to create an integrated ecosystem across shopping, purchases, and auto applications. Your second question about cost efficiency includes both internal and external initiatives. Internally, we have implemented measures focused on performance evaluation and technical management. For example, our content generation has improved efficiency through technological enhancements that enable automated video generation from our inventory. There are many similar initiatives, and if you would like, please feel free to reach out for more details. Regarding external measures for cost efficiency, we aim to facilitate ecosystem growth. Currently, our customer acquisition strategy focuses on shopping and car purchases, and we intend to extend this chain into car usage, thereby improving our ecosystem and enhancing cost efficiency. Are there any further questions?

Thank you. Our next question comes from Brenda Zhao from CICC. Please ask your question.

So my first question pertains to the data product. With expectations of ongoing COVID resurgences weighing on OEMs' budgets, how should we evaluate demand from OEMs and dealers entering Q4 and 2023? Additionally, are there any recent plans for new product launches? My second question concerns our cash utilization. Given our robust cash position, are there any plans to increase our dividend payout ratio or initiate share buybacks? Thank you.

Thank you for your question. Regarding our data products, I previously provided insights, so to summarize, we will continue launching new data products for our customers. For OEMs, our focus will be on assisting with marketing and product launches, while for dealers, we will enhance cost efficiency initiatives and market analysis capabilities. On the topic of our cash flow, we will maintain our buyback plans while ensuring consistent dividends to our shareholders. We are committed to delivering returns in ways that align with their best interests. Okay. That's the end of the Q&A session. Thank you, everyone. We appreciate your participation in today's earnings conference call, and we look forward to updating you on our next quarter's conference call in a few months. In the meantime, please feel free to contact us if you have any further questions. Thank you, operator. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.