Autohome Inc. Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by for Autohome's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's prepared remarks. As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time. A live and archived webcast of the earnings conference call will also be available on Autohome's IR website. It is now my pleasure to introduce your host, Sterling Song, Autohome's IR Director. Mr. Song, please go ahead.

Thank you, Heidi. Thank you. Hello everyone, welcome to Autohome's third quarter 2023 earnings conference call. Earlier today, Autohome distributed its earnings press release, which can be found on the company's IR website. Joining today on the call are Chairman and CEO, Mr. Quan Long; and Chief Financial Officer, Mr. Craig Yan Zeng. Management will go through their prepared remarks, which will be followed by a Q&A session, where they 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 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 U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange. 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. A reconciliation of the non-GAAP measures for the most directly comparable GAAP measures can be found in our earnings release. 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, everyone, for joining our earnings conference call today. I am Quan Long, Chairman and CEO of Autohome. In the third quarter, our new businesses continued to propel Autohome's overall growth as we further optimized our revenue structure. This marks our fifth consecutive quarter of year-over-year growth in both revenue and profit margins while maintaining a high net profit margin. Our net revenues for the third quarter reached RMB1.91 billion. Revenues from the online marketplace and other businesses rose by 25.2% year-over-year, making up 31.4% of our total revenue. Specifically, revenue from data products showed strong growth, increasing over 30% compared to the same period last year. We made significant strides in deepening our partnerships with NEV automakers, resulting in revenues from NEV brands increasing by nearly 70% year-over-year. Additionally, our adjusted net income attributable to Autohome for the quarter rose by 2.3% year-over-year, with our adjusted net margin standing at 31.7%. During this quarter, we accelerated the development of our content ecosystem, which brings together efficient tools, content, and services to provide users with the information they seek, encourages creators to produce content and engage with the community, and fosters a cycle of growth across our platform. We are also exploring new methods to develop, integrate, and create synergies among the various business models in our ecosystem. Our newly launched Autohome Energy Space franchise stores in partnership with TTP in Chengdu and Chongqing have allowed us to further refine the retail and used car business model. Furthermore, we upgraded our digital platform's infrastructure and capabilities to enhance our data products' value and seamlessly integrate big data with advanced technologies, facilitating the digital transformation of dealers. The rapid adoption of NEVs is accelerating changes in the automotive industry, bringing forth new technologies and business models. In this evolving market, we aim to leverage the opportunities presented by NEVs and digitalization, support our partners in their business transformations, and expand our service offerings. This strategy will ultimately create a comprehensive ecosystem that covers the entire consumer cycle from research and purchase to the usage and exchange of cars, driving long-term sustainable growth. I will now hand the call over to our Chief Financial Officer, Mr. Craig Zeng, for a detailed look at our third quarter operating and financial results.

Thank you, Mr. Long. Hello everyone, I'm Craig Zeng, the CFO of Autohome. In the third quarter, we focused on systematically developing tools and content, widening the platform and broadening our profile across the industry. With interest in NEVs growing, we tested nearly 100 popular models to provide users with comprehensive, easy to understand and professional analysis and information. To date, more than 2.6 million users have used our testing tools to assist in their car buying decision-making. In addition, we promoted Autohome's August 18th Super Auto Festival across our multiple platforms in collaboration with CCTV finance channel and other broadcast and social media platforms. Total exposure exceeded 14.5 billion impressions, which further strengthens our profile in the industry. At the same time, we launched the next development phase for our service system, which combines online content with offline experiences to further increase our mind-share among users. At the Chengdu Auto Show, we showcased our purchase assistance service for the first time, which offers consumers a hands-on purchasing experience where they can view and evaluate various car models accompanied by our highly experienced editors. We also launched our shopping guide program to encourage content creators to produce and promote content that facilitates the decision-making process for consumers and boosts overall car consumption through our platform. According to QuestMobile, mobile DAU in September increased 39.3% year-over-year to 69.01 million, underscoring our ability to steadily strengthen our leadership position in the automotive media vertical. Following the launch of our first brick-and-mortar NEV experience store last September, we further refined this business model by integrating our used car business. In addition to providing a one-stop service for NEVs from multiple brands that span from car selection to purchase services, these stores now offer consumers the option to trade in their cars and apply the proceeds towards the purchase of a new one. This will create additional opportunities for car sales and take advantage of TTP's vehicle disposal capacity. The Autohome Energy Space Chengdu store, which opened this past August, has become particularly popular among young consumers with its innovative marketing activities and automotive culture offerings, including a car museum. In addition, the Chongqing store, which officially opened two weeks ago, is our first location to feature a dedicated used car selection within the store. This provides consumers with a one-stop experience, allowing them to sell their old cars and then purchase a NEV or used car at the same time. This innovative service model capitalizes on the synergies between our new and used car businesses and offers consumers a complete field of additional services including vehicle inspection, purchase, and replacement. Our new retail business is currently developing rapidly with the construction of new retail stores in certain cities already underway. Over the next two years, we plan to increase the penetration of Autohome Energy Space franchise stores across the country, allowing Autohome to turn its online advantages into offline business across a broad range of markets. TTP will also leverage the Autohome Energy Space network to accelerate its operations nationwide. On the digital front, we upgraded our technology and information channel to improve communication and user profiling, strengthening the efficiency and accuracy of customer outreach. We broadened the application of AI in our smart products to generate further labor savings, improve content quality, and provide more value to dealer customers. In the first nine months of the year, key metrics such as the average number of data products adopted by each dealer store and average revenue from data products per dealer store both increased by double digits compared to the same period last year. We are rapidly expanding our digital product portfolio across a range of application scenarios to support dealers as they shift from human-driven to digital-driven operations, ultimately improving operational efficiency and lowering prices for customers. Turning to our used car business, in addition to our ongoing cooperation with new retail stores, we launched a one-stop vehicle price inquiry product during the quarter based on used car auction and new car transaction data. This platform provides used car dealers with real vehicle transaction prices as well as valuation tools supported by large language module capabilities. Dealers can now accurately evaluate each vehicle by querying transaction prices for new and used vehicles across different regions, brands, and models. In addition, we are boosting the transaction conversion rate by increasing customer satisfaction. In the third quarter, Autohome's matching and auction services platform accounted for about 24.4% of all used car transactions in China, a year-over-year increase of approximately 3 percentage points. In summary, we delivered steady revenue and profit growth during the quarter while continuing to optimize our revenue structure. Our new retail business is gaining growth momentum as synergies among our diverse business lines begin to take hold, which will greatly strengthen overall growth prospects going forward. Looking ahead, we will continue to advance our ecosystem approach by creating new business models that connect the online and offline channels to help automakers transform and adapt to NEV trends. We are confident that our diversified business will drive Autohome growth to the next level. Next, let me walk you through the key financials for the third quarter of 2023. Please know that as with prior calls I'll reference RMB only in my discussion today unless otherwise stated. Net revenues for the third quarter were RMB1.91 billion, up 3.4% year-over-year. Breaking it down by segment, media services revenues were RMB477 million, lead generation services revenues were RMB830 million and online marketplace and other revenues were RMB599 million, up 25.2% year-over-year, driven primarily by increasing revenue contribution from data products. Moving on to costs. The cost of revenues in the third quarter was RMB374 million compared to RMB331 million in the third quarter of 2022. The increase was primarily attributable to content and operational costs. Gross margin in the third quarter was 80.4% compared to 82.1% in Q3 2022. Turning to operating expenses. Sales and marketing expenses in the third quarter were RMB935 million compared to RMB863 million in Q3 2022. The increase was primarily due to an increase in marketing and promotional expenditures. Products and development expenses were RMB355 million compared to RMB387 million in Q3 2022. The decrease was primarily attributable to a decline in personnel-related expenses. Finally, general and administrative expenses were RMB141 million compared to RMB136 million in Q3 2022. Overall, we delivered an operating profit of RMB166 million in the third quarter compared to RMB192 million in the corresponding period of 2022. Adjusted net income attributable to Autohome, Inc was RMB604 million in the third quarter, compared to RMB590 million in the corresponding period of 2022, representing an increase of 2.3% year-over-year. Non-GAAP basic and diluted earnings per share in the third quarter were RMB1.23 respectively, compared to RMB1.18 respectively in the corresponding period of 2022. Non-GAAP basic and diluted earnings per ADS in the third quarter were RMB4.93 and RMB4.92 respectively, compared to RMB4.73 and RMB4.72 respectively in the corresponding period of 2022. As of September 30, 2023, our balance sheet remained very strong with cash, cash equivalents and short-term investments amounting to RMB23.43 billion. We generated net operating cash flow of RMB425 million in the third quarter of 2023. On November 18, 2021, our Board of Directors authorized a share repurchase program under which we were permitted to repurchase up to $200 million of Autohome's ADS for a period not to exceed 12 months thereafter. On November 3, 2022, our Board of Directors authorized an extension of the share repurchase program for another 12 months expiring on November 17, 2023. As of October 27, 2023, we have repurchased approximately $6.25 million ADS for a total cost of approximately $187 million. With that, we are ready to take your questions. Operator, please.

Thank you. We will take our first question. Your first question comes from Kenny Wang from CICC. Please go ahead. Your line is open.

Thank you to management for addressing my questions. I have two questions today. First, could you share your thoughts on the market outlook for the upcoming quarters? Do you anticipate ongoing price competition among OEMs? Secondly, could you provide an update on the progress of the new retail model for NEVs? In particular, please share the key operating metrics from pioneer cities like Shanghai or Chengdu. Thank you.

Okay. I will take the first two questions. In the third quarter, the economy continued to recover. The National Bureau of Statistics reported that our GDP grew by 4.9% year-on-year, which was higher than market expectations. According to CPCA data, passenger vehicle retail sales were approximately 1.8% in Q3, down from 21.4% in Q2, indicating a significant slowdown in growth. This slowdown is attributed to a high base from the previous year, coupled with consumers being cautious about spending. Consequently, the auto industry faces challenges. In the first nine months of 2023, the overall profit margin for the Chinese auto industry stood at 4.9%, which is lower than the overall profit margin of 5.7% for industrial companies. Even though internal combustion engine vehicles are profitable, their market share is declining. Meanwhile, new energy vehicles have seen rapid growth, but most are still operating at a loss, leading to a restructuring in the sector. Central and local governments are actively working to stabilize auto production through various policies and incentives to stimulate consumption. For instance, there are measures to optimize car purchase restrictions to encourage trading in old cars for new ones and to develop the used car market, as well as to enhance NEV infrastructure. We believe these favorable policies will lead to a significant recovery in auto consumption. Looking at the auto market outlook for this year, we see two main trends. First, NEVs will remain a key focus, with CPCA data showing a NEV passenger vehicle market penetration of 36.9% by the end of September. Government actions to promote NEV consumption are expected to continue, and we anticipate that NEV penetration will rise next year. Second, the used car market is poised for further growth. We've observed a rapid increase in used car transactions in China, with trading volumes reaching 13.49 million units and a trading value of RMB859.8 billion in the first nine months of 2023, confirming its status as a trillion-level market. As NEVs develop, more consumers will find opportunities to purchase used cars at lower prices, and new policies for used cars will also foster growth in the dealership sector. I see great potential for the used car market in China. In conclusion, the Chinese auto sector is expected to maintain a stable and upward trajectory in the medium and long term, and we are optimistic about the long-term development and potential of this market. Autohome will continue to expand our NEV and used car business to seize new opportunities and support our growth with a diversified ecosystem.

So for the second question, the first thing we should focus on is the number of stores we have opened. Currently, we have officially launched our stores in Shanghai, Haikou, Chengdu, and Chongqing. By the end of the year, we plan to establish another 20 new shops. This metric is crucial for us—the number of stores. Although we have not shared specific figures for key cities, the pace at which we are opening stores, along with the positive feedback from consumers, is promising. I believe this trend will continue to gain popularity in the future. We invite everyone to visit our stores in various cities. Over the next one to two years, based on our progress in different locations and partnerships, we will keep expanding the number of our stores. We are establishing locations in Tier 1, Tier 2, and Tier 3 cities, as well as in Tier 4 and Tier 5 cities, where we observe strong energy and potential. Our goal is to cover an additional 50 cities next year, aiming for a total of 100 cities in China by the end of 2025. We anticipate that as the penetration of NEV increases, our new retail business will keep making significant contributions.

Thank you. We will take our next question. Please stand by. Your next question comes from the line of Ritchie Sun from HSBC. Please go ahead. Your line is open.

I will translate these questions myself. Good evening, management. Thank you for the opportunity to ask questions. I have two. Firstly, after the previous question regarding used cars, can management provide more details about the expected growth outlook for the used car market next year? What are your expectations for revenue and margins in this business? Secondly, various internet platforms are leveraging AI and large language models to enhance ad monetization, content production, and lead-filtering efficiency. What is Autohome's strategy in this regard, and in media services, lead generation, and data products, do we see potential for further efficiency improvements? Thank you.

Okay. Firstly, I will address the question about the used car market. The used car market is a very important segment in the entire auto sector and always receives high attention from the government. Recently, the government has continuously released a series of incentives to promote consumption in the used car market. According to the data from the Auto Dealers Association, in the first three quarters of this year, our used car market trading volume hit almost RMB13.5 million, growing by 12.6% year-over-year. Also, according to the forecast of the Auto Dealers Association, this year our national used car trading volume is expected to hit a historical high. We expect that next year the used car market will continue to keep pace with this year's positive trend and continue to be very active and embrace a new stage of high-quality development. In terms of revenue, while the new car price cuts and promotional campaigns are creating challenges for the used car market, our used car business has shown strong resilience. In the first three quarters, our overall used car business, including TTP, maintained good growth momentum, and TTP remains profitable. Next year, with more new retail shops operating in different cities, I believe that TTP will leverage these locations to expand its business across China. We are very confident that the overall used car business revenue will continue to grow. For the second question, from the application side, we continue to apply AI and large language model-related technologies and seek more business cooperation opportunities to improve our product competitiveness and customer satisfaction. Earlier this year, we entered into a strategic partnership with Baidu's Ernie Bot, and we will leverage the capability of Baidu's Smart Cloud connected with the Ernie bot. Based on our own data and technology strengths, we aim to achieve a comprehensive convergence of intelligent dialog technology with auto digital services. This serves as the first application scenario of AI large language model technologies in the auto sector in China. In terms of product updates, earlier this year we launched our AI-based intelligent tool, Smart Selection, to facilitate and empower dealers to quickly segment their clients and reach out to high net worth individuals as soon as possible, thereby enhancing service quality. Based on the GPT model, we are also assisting users and clients in selecting cars and helping dealers perform operational analysis. Another example is our AI smart writing tool, which is one of the features in our intelligent assistant. It can empower dealers to produce high-quality content efficiently. We hope that by relying on this type of large language model product, we can continue to enable dealers to cut costs, improve efficiency, and enhance their overall operational capabilities.

Thank you. We will take our next question. Your next question comes from the line of Thomas Chong from Jefferies. Please go ahead, your line is open.

Thank you to management for taking my questions. My first question is about the budget spent by OEMs in the second half of this year and into 2024. My second question is regarding the overall used car market and the strategies involved. Thank you.

Okay, I will first address the question about the budget plan for the OEM in the second half and next year. In the latter half of this year, especially since Q4, we have observed that OEMs are eager to allocate more of their budget towards encouraging transactions from users. This includes efforts like lead generation, advertising investments, or direct consumer subsidies. Looking towards next year, as Mr. Long noted, we anticipate that investments will remain cautiously optimistic. Given the pressure on OEMs' profit margins, they are expected to focus more on the effectiveness of their budget allocations, prioritizing support for dealers and direct consumer subsidies. Consequently, they will likely approach advertising investments with more caution and aim to diversify their spending with a focus on effectiveness. Moving forward, we see opportunities in two key areas: enhancing the digital application of AI and prioritizing NEVs. By leveraging our strengths, we intend to attract more customers and secure their budgets and investments. Regarding the used car market, I previously mentioned that the price reductions of new vehicles and the impact of COVID-19 have placed pressure on the used car market. However, I believe that in the coming years, the price cuts for new cars will reach a limit, allowing for anticipated double-digit growth in the used car market. TTP is already turning a profit, indicating that it has moved beyond merely surviving and is now in a phase of expansion and development. We will continue to utilize resources from the group and our partners to support TTP's growth. Additionally, we believe that our three-in-one service model will significantly enhance TTP's development and promote rapid growth.

Thank you. We will take our final question. Your final question comes from the line of Brian Gong from Citi. Please go ahead. Your line is open.

When will we begin the contract renewal process with dealers for lead generation, and what are our expectations for this renewal? Is there still an opportunity to increase our prices? Additionally, with the growing share of new auto sales from new energy vehicles, how does management view the future number of dealers from traditional OEMs? Will we see a gradual decline in their numbers? Thank you.

Thank you, Brian, for your question. Yes, we have already started the contract renewals with our dealers. However, we will not pursue price increases as a strategy for profit growth, as that has never been our approach. There may be cases where we charge more for enhanced services, including additional digital products, but we don’t intend to use price hikes as a primary method for increasing profits. This year, we understand that dealers are facing challenges, so we will refrain from raising prices. Our goal is to empower dealers by offering more digital products that help reduce costs and boost efficiency. In summary, we have not relied on price increases for profit maximization previously, and we do not plan to do so in the future. Regarding your question about the number of dealers, in Q3 we saw a nearly 9% drop in sales from ICE car dealers. Traditional dealers are being affected by declining ICE vehicle sales, but NEV sales are increasing, reaching 37% in Q3, indicating rapid progress for NEV brands. Some traditional dealers are also transitioning to NEV dealers. With our new retail business model, we aim to support NEV dealers in expanding their market presence. The market is quite dynamic, and I believe that the number of dealers is not the main concern; rather, it’s about how we adapt to these changes to better position dealers for success. By providing digital products and supporting the new retail model, I am confident we will perform well moving forward.

Operator?

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

Thank you, everyone, 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. In the meantime, please feel free to contact us if you have any further questions. Thank you and goodbye.

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