Autohome Inc. Q2 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by for Autohome's Second Quarter and Interim 2023 Earnings Conference Call. At this time, all participants are in 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 morning, everyone, and welcome to Autohome's second quarter and interim 2023 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 the Chief Financial Officer, Mr. Craig Yan Zeng. After the prepared remarks, our management team will be available to answer your questions. Before we continue, 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 U.S. Securities and Exchange Commission and the 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 includes 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. 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, Sterling. Hello, everyone. This is Quan Long, Chairman and CEO of Autohome. I appreciate you joining our earnings conference call today. In the second quarter, we saw a steady recovery in our financial and operational results, with total revenues increasing by 5.8% year-over-year, marking our fourth consecutive quarter of growth. Our online marketplace and other revenues grew strongly by 20.4% compared to the same period last year, becoming the main driver of our revenue growth. Additionally, TTP and data products both achieved double-digit year-over-year revenue growth, and revenue from NEV brands continued to show strong momentum. As our revenue has scaled up, our profitability has also seen significant improvement. Adjusted net income for the second quarter was up by 20.6% year-over-year, and our adjusted net margin remained competitively high at 31.1%, an increase of 3.8 percentage points year-over-year. During the second quarter, we actively advanced our consumer strategies, making consistent progress in content optimization and business diversification while increasing our traffic through various channels. Our objective is to offer users high-quality content, practical tools, and exceptional services to enhance Autohome's brand recognition. In May, we launched our first Autohome Energy Space franchise store in Haikou, which marks the beginning of our new retail franchise model across the country. We also accelerated the implementation of AI technology in all scenarios and promoted digital upgrades and the restructuring of customer business processes, helping our partners reduce costs and boost efficiency. Our collaboration with Baidu's large language model has produced excellent results in product applications for both users and customers, providing more efficient services for both groups. Looking ahead, as technology continues to evolve, new advancements will affect every aspect of the industrial landscape. Autohome is seizing this opportunity to transform technology into productivity, develop innovative business models, and utilize technology and innovation to drive the digital transformation of the automotive sector. We are confident that, with our long-term investment in cutting-edge technology, growing brand advantages, and a comprehensive innovation incubation system, Autohome is well-positioned to capitalize on emerging opportunities, explore new ventures, and achieve diversified business growth. With that, I will now hand the call over to our CFO, Ms. Craig Zeng, for a detailed overview of our second quarter operating and financial results.

Thank you, everyone. I'm Craig Zeng, CFO of Autohome. In the second quarter, we continued to develop our content ecosystem and business innovations to capitalize on the major industry trends of NEV and artificial intelligence. We enhanced our NEV themed content and activities to improve our offerings while also introducing new business models and technologies to meet the evolving needs of our users and customers. In mid-June, we hosted the Future City NEV Technology Festival, a major event following the Super Auto Show in August. We incorporated 3D Visio onsite test drives and launched a music festival to create a thrilling experience for owners and young users. At this event, we introduced China’s first mobile exhibition truck with a large-scale holographic display, providing consumers in lower-tier cities with comprehensive information on NEVs and enabling brands to expand their reach in line with government support for NEV consumption in rural areas. The event received positive feedback, achieving total exposure of over $2 billion across the network. Additionally, earlier this month, we initiated the NEV content creator acceleration plan to align our content with NEV market development and user needs. This plan aims to give creators more exposure and monetization opportunities, encouraging them to utilize Autohome accounts for producing NEV content and diversifying our content portfolio. As we enhance our platform’s premium content, we are also speeding up the development of a new media ecosystem by creating tailored content for various platforms, promoting Autohome’s brand and driving traffic. According to QuestMobile, our mobile daily active users increased by 31.7% year-over-year, reaching 62.71 million, showcasing our continued leadership in automotive media. On the business side, new business ventures led Autohome’s overall growth in the second quarter. Specifically, our NEV business saw a revenue increase of 60% year-over-year. The successful launch of our Autohome Energy Space franchise store in Haikou highlights the recognition of our innovative retail model, which provides a comprehensive service for car selection and purchases. This benefits consumers looking for their ideal cars and offers automakers a cost-effective solution for NEV sales. Energy Space is gaining popularity, and over 40 mainstream vehicle models are now supported by 3D holographic modeling. More automakers and franchisees are showing interest in this model, and we expect the expansion of Energy Space franchise stores in various cities in the latter half of the year. In terms of digitalization, we utilized the GPT model to create two decision-making assistance products. Our car selection assistant helps users find their ideal car by aggregating information from the Autohome platform based on their preferences and budget. Operation Butler is a digital assistant for dealer management that integrates operational data, generates analysis, and offers suggestions to guide dealers in managing their operations. Moreover, over 21,000 dealers used our data products in the second quarter, with significant growth in key metrics like the average number of products adopted and revenue per dealer store. Moving forward, we will focus on enhancing our data products' quality and usefulness by utilizing large language models and knowledge graphs. In our used car business, our dealers, including TTP, experienced accelerated revenue growth in the second quarter, with TTP maintaining its profitability. Our platform accounted for about 24.7% of all used car transactions in China, showing a year-over-year growth of 2.1 percentage points. We have integrated our used car operations with new car retail stores, facilitating a smoother process for new car buyers to sell their old vehicles. We're also offering additional services like used car testing to strengthen connections with consumers and create new business opportunities. Overall, Autohome’s core business remained stable while experiencing strong growth in our new ventures, significantly advancing new products and models, thereby reinforcing our leadership in key areas. Looking ahead, we will continue to focus on the key industry trends of NEV and artificial intelligence, consistently innovating to deliver enhanced products and services for our users and customers, while also generating long-term value for our shareholders. Now, let me provide an overview of our financial results for the second quarter of 2023. Please note that I will refer to RMB throughout my discussion today. Net revenues for the second quarter were RMB1.83 billion, representing a 5.8% increase year-over-year. For a breakdown, media services revenue totaled RMB532 million, lead generation services revenue was RMB760 million, and revenue from our online marketplace and other services reached RMB541 million, reflecting a year-over-year increase of 20.4%, driven by higher contributions from TTP and data products. Regarding costs, the cost of revenues in the second quarter stood at RMB330 million, up from RMB279 million in Q2 2022, primarily due to increased operational costs. Our gross margin was 82%, slightly down from 83.9% in Q2 2022. In terms of operating expenses, our sales and marketing expenses were RMB824 million, compared to RMB739 million in Q2 2022, with the increase attributed to higher market and promotional spending. Product development expenses were RMB313 million, down from RMB362 million in Q2 2022, mainly due to reduced personnel costs. General and administrative expenses decreased to RMB91 million from RMB127 million last year, reflecting lower expected credit losses. Overall, we reported operating profits of RMB342 million in the second quarter compared to RMB301 million in the same period last year. Adjusted net income attributable to Autohome, Inc. was RMB569 million, marking a 20.6% increase year-over-year from RMB472 million. Non-GAAP basic and diluted earnings per share were RMB1.15 and RMB1.16 respectively, up from RMB0.94 in the same period last year. Non-GAAP earnings per ADS were RMB4.62 and RMB4.61 respectively, compared to RMB3.77 for both in the prior year. As of June 30, 2023, our balance sheet remained robust, with cash and short-term investments totaling RMB23.34 billion, and we generated net operating cash flow of RMB522 million in the second quarter of 2023. Our Board of Directors has authorized a share repurchase program allowing for the buyback of up to US$200 million of Autohome ADS. As of July 21, 2023, we have repurchased around 4.7 million ADS for approximately US$141 million. With that, we are ready to take your questions. Please open the line for the Q&A session. Thank you.

Thank you. Our first question comes from Xiaodan Zhang from CICC. Please go ahead, Xiaodan.

Thank you to the management for addressing my questions and congratulations on the strong results. First, what is your outlook for the domestic auto market in the second half of 2023? Additionally, could you provide an update on the new retail model for NEV and the upcoming expansion plans? Thank you.

Thank you for the question. My name is Quan Long. I would like to take your question. Firstly, let me summarize the current state of the market. Starting from the second quarter, the auto market began to recover as anticipated. We believe the outlook for the second half of the year is quite promising. This is largely due to last year's low base resulting from the COVID-19 impact, and the price wars we saw in Q1. As the price war eased in Q2, consumers started to spend rather than hold onto cash, contributing to our positive outlook for the auto market in the latter half of the year. The introduction of the National 6B transitional policy has also helped stabilize prices. Recently, the central government has launched several stimulus and favorable policies to invigorate the market, which will assist in its gradual recovery. We see structural opportunities in the market, particularly in two areas: NEVs and the used car market. Regarding NEVs, this segment will remain a significant focus. According to the latest data from the China Passenger Car Association, the NEV penetration rate reached 32.4% by the end of June, supported by initiatives from the government to boost consumption, marketing efforts from various NEV manufacturers, and the introduction of new car models. We anticipate continued improvement in NEV sales volume and a rising penetration rate throughout this year. Additionally, recent policies such as the Automobiles to Countryside campaign and the fourth extension of the NEV purchase tax exemption will significantly boost NEV consumption. Turning to the used car market, we believe it will be a crucial driver for the Chinese auto market. Recent data shows growth in used car transaction volume both year-on-year and month-on-month. The launch of an independent registration system for used cars will likely create substantial business growth potential for several car dealer groups. The development of NEVs and more affordable options will also stimulate growth in the NEV used car segment. After this week’s meeting of the Political Bureau of the Chinese Communist Party, it’s clear that the central government is prioritizing the stimulation of domestic consumption to enhance its role in economic growth while also improving public revenues and household income to drive demand. They will implement domestic consumption strategies alongside supply-side reforms to particularly boost auto and electronics consumption as well as demand for larger furniture and home appliances. Therefore, we are confident in the long-term and stable growth of the Chinese auto market. Consumer demand will gradually be unleashed, and advancements in technology and innovation will create new opportunities for both the NEV and used car sectors. In summary, I foresee a long-term cycle filled with growth potential for the NEV market.

My name is Zeng Yan. I would like to address the second question. Since September 2022, we launched the Autohome Energy Space offline store in Shanghai, marking our first major effort in advancing our retail channel and NEV innovation. The store's operations have been promising, and we have received positive feedback from consumers, customers, and dealers regarding this business model. In June this year, we opened our first franchise store in Haikou City. Our new retail business model includes a variety of pilot projects such as holographic modeling, test drive reports, lead services, purchasing orders, and offline activities. For instance, holographic modeling is already in place with over 40 mainstream OEMs. Given the unique characteristics and market sizes of different cities, we plan to expand these franchising stores across the country soon. Our goal is to create a comprehensive solution for NEV consumers and to assist OEMs in effectively connecting with consumers and enhancing their channels. We are currently engaged in negotiations with several franchisees and partners to explore more opportunities. By the end of 2023, we aim to open 10 to 20 offline stores, particularly in middle and lower-tier cities. I will keep you informed about our latest developments. Thank you.

Thank you. Our next question comes from the line of Ritchie Sun from HSBC. Please go ahead, Ritchie.

I'll translate it myself. Thank you management for taking my questions. I noticed that we have a very strong DAU growth. Can you please explain the drivers behind that and how we should interpret the consumption power of these users and modern taxation potential? Thank you.

Thank you for the question. In terms of user growth, we have achieved significant increases due to several factors. Firstly, Autohome launched high-quality, professional, and engaging content to attract users. We also conducted a thorough study of user behavior, enabling us to create targeted content that satisfies diverse user demands. For instance, in June, we hosted the Future City NEV Technology Festival focused on NEV car orders through collaboration, creating a unique experience for NEV users and consumers. Additionally, we plan to introduce the first mobile exhibition truck with a large-scale holographic display, allowing many users from lower-tier cities to explore various NEV brands. Soon, we will partner with CCTV to host the 5th 818 Auto Show, which will be a significant campaign and a well-known property developed by Autohome in the NEV sector. With our enriched content, we aim to assist OEMs and brands in gaining visibility, attracting more users, and providing outstanding experiences. Moreover, we have created an improved ecosystem in new media and generated differentiated and innovative content. For example, we have implemented a content matrix that attracts more traffic. In Q2, we noticed that new media significantly boosted overall traffic. Regarding content, while our focus has traditionally been on auto-related consumption, we have expanded into broader automotive lifestyles and services, striving to build a car ecosystem around car ownership. This year, we launched features in our Autohome app that include carwash services and special fuel pricing for users, which has greatly supported our user growth. With NEVs becoming prominent, we believe they will drive transaction volume in the auto market. For this customer segment, we have initiated several new efforts based on the content needs of NEV users. For example, as NEVs evolve, many customers have varying purchasing requirements; unlike traditional combustion car users, NEV users tend to prioritize battery life, mileage, and advanced technology features. Thus, Autohome has partnered with Beijing BITNEI Corp. to gather real-time user data on battery life endurance, providing various performance indicators for our users. Additionally, for NEVs, we have implemented an intelligent driving assessment system, launching real-time testing and assessment data for users' consideration. We have introduced models showcasing core functions, interactive features, and real-time data, which has attracted considerable interest among NEV users.

Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead, Thomas.

Thank you, management, for taking my questions. I have two inquiries. The first concerns the used car market and TTP's strategies. The second question is about our cash usage; could management provide details on our cash utilization in the upcoming years? Thank you.

Well, thank you for the question. Talking about the used cars, in the second quarter of this year, we have seen that the domestic used car sales volume grew by 21.3%. According to the China Auto Association's estimation, the yield from the used car market is expected to grow by 25%. This indicates significant potential for growth within the used car market. As we just mentioned, TTP's revenue along with other used car models within Autohome experienced accelerated growth in the second quarter, outpacing the average industry growth. Moreover, TTP achieved profitability in August 2022, and its profitability has significantly improved in the first half of this year. We believe that Autohome's used car business will maintain good profitability in 2023. Regarding our business model, we have integrated the used car and new retail operations. Our retail stores assist car users, particularly new car buyers, in managing their used cars, streamlining the trading process while addressing transparency issues related to used car transactions. We are also consolidating resources with Ping An Group, TTP, Beijing BITNEI Corp., and our NEV offline experience stores. By leveraging these resources, we aim to create greater business synergy. In summary, we will continue to develop a comprehensive one-stop solution ecosystem for used cars, emphasizing our combined approach for buying and selling cars coupled with a SaaS model. We are positioned to capitalize on the opportunities within the used car market and accelerate the growth of this segment, solidifying our industry leadership. Now, let me answer your second question. We have ample cash reserves within the firm, and we implemented a dividend payout plan designed by the Board of Directors in 2022. Compared to the dividend payouts of 2021, the payout ratio for 2022 has risen by 8 percentage points. The Board has approved that starting from 2022 and over the next five years, we will distribute dividends totaling at least RMB500 million annually. We prioritize our shareholders' interests and are committed to returning value sustainably. We are also exploring additional strategies to enhance shareholder returns. Regarding our share buyback, we continue with the US$200 million repurchase plan and have executed approximately US$140 million of share repurchases. Moving forward, we will assess other investment opportunities to further strengthen shareholder returns. Thank you.

Thank you. Our next question comes from the line of Brian Gong from Citi. Please go ahead, Brian.

Thank you to management for addressing my question and congratulations on the solid results. I would like to ask about our data products. How many data products do we currently have for dealers, and what is the penetration rate for each product among them? Additionally, on the OEM side, when do we anticipate a recovery in the amount for data products? Thank you.

Thank you for the question. Regarding our dealer business, in the second quarter, we had over 20,000 paying dealers utilizing more than 10 mature products to support them, including the smart marketplace, smart intelligent hall, smart quality inspection, intelligent assistance, and smart cloud telemarketing and services. These products encompass the entire process for dealers before and after sales. Our aim is to help dealers access comprehensive operating information and improve their conversion rates overall. We have received positive feedback from dealers and achieved high penetration rates for many of our products. Additionally, our product average revenue per user has also seen enhancements. Moreover, utilizing the GPT model, we introduced new decision-assistance tools like the Car Selection Assistant and Operation Butler models which aid dealers in improving their decision-making and operational efficiency. Now, discussing the OEMs, post-COVID, we helped them execute various online campaigns to substitute traditional exhibitions for new models. Their demand has evolved, and we are adjusting our service model accordingly to better align with their needs.

Thank you. We have now reached the end of the question-and-answer session. Thank you for all your questions. I'll now 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 on our next quarter conference call in a few months. In the meantime, please feel free to contact us if you have any further questions or comments. Thank you very much, and goodbye.

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