Earnings Call Transcript - ATHM Q2 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by for Autohome’s Second Quarter and Interim 2024 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 this 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.

Sterling Song, IR Director

Thank you, operator. Hello everyone. I am Sterling Song and welcome to Autohome’s second quarter and interim 2024 earnings conference call. Earlier today, Autohome distributed its earnings release, which can be found on the company’s IR website at ir.autohome.com.cn. Joining me today on today’s call are Chief Executive Officer, Mr. Tao Wu; 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 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 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 Hong Kong Stock Exchange. Autohome doesn’t undertake any obligations 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 non-GAAP – unaudited non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures can be found in our earnings release. I will now turn the call over to Autohome’s CEO, Mr. Wu for opening remarks. Please go ahead, Mr. Wu.

Tao Wu, CEO

Thank you. Hello everyone. This is Tao Wu, CEO of Autohome. Thank you for joining our earnings conference call today. In the second quarter, Autohome’s net revenues grew steadily, user traffic increased noticeably, and our innovative business continued to make breakthroughs, driving the optimization and upgrade of our entire business structure. Specifically, in the second quarter, total revenues grew by 2.2% year-over-year to reach RMB1.87 billion. Revenues from the online marketplace and other businesses continued to maintain double-digit growth year-over-year, reaching 33.1% of total revenue. Notably, many business lines such as data products and new energy vehicles experienced robust growth, with revenues for the quarter increasing by over 15% and nearly doubling respectively year-over-year. In addition, we have maintained healthy profitability while driving the development of our businesses and fulfilling our commitment to provide stable shareholder returns. In the second quarter, adjusted net income attributable to Autohome was RMB572 million, resulting in an adjusted net profit margin of 30.6%. In our innovative business areas, we have expanded our new retail business, enhancing our reach from high-tier to low-tier cities. By leveraging our flagship Autohome Space store as the core hub, we have initiated our satellite plan to extend our reach into neighboring low-tier cities and create a network that radiates from a single point to cover an entire region. This network dynamic not only accelerates the sales network but also significantly broadens our service scope, enabling access to a wider market and range of users. In terms of digitalization, we are driving product innovation and upgrades by utilizing the capabilities of our smart series products, introducing a comprehensive digital business management platform for our dealership partners. This includes everything from infrastructure setup and development to digital tools empowerment and advanced operations management, providing systematic digital support for increased efficiency in their operations. Additionally, our cooperation with Ping An Group has entered a new phase. During the second quarter, we integrated various resources including car purchasing tools, content, and vehicle services to establish a comprehensive service system spanning the entire lifecycle of car owners, offering users a convenient one-stop service experience. Looking forward, we will focus on our user-centric approach and innovation to drive development while continuously exploring new models of online to offline integration, striving to provide users with a higher quality, more convenient, and efficient service experience. Throughout this process, we will explore the resources and technology of Ping An Group to seek greater synergies and identify new opportunities in the automotive ecosystem. With our solid business foundation and diversified offerings, Autohome is well-positioned for a new phase of high-quality development. I will now turn the call over to our CFO, Craig Zeng, for a closer look at our second quarter 2024 operating and financial results.

Craig Yan Zeng, CFO

Thank you, everyone. Thank you, Mr. Wu. Hello everyone. This is Craig Zeng, the Chief Financial Officer of Autohome. In the second quarter, we continued to focus on enhancing our content portfolio by revitalizing it through two categories: professional content and broader general auto-related content, establishing Autohome’s new IP matrix. For instance, we have expanded our professional evaluations to include targeted assessments for hybrid vehicles, new energy vehicles, and internal combustion engine vehicles. In general auto-related content, we've broadened our range to include design, automotive culture, off-road vehicles, and other unique scenarios, resulting in the creation of eight IP programs such as So Fast So Test and Top 10 Horizontal Evaluation. We are also integrating live streaming and short video formats into our offerings to create a more comprehensive content matrix tailored to our users’ diverse consumption preferences. To date, these eight IP programs have amassed a total exposure of 860 million views across the entire network, significantly boosting our platform's influence. Additionally, by concentrating on new vehicle launch events prioritized by original equipment manufacturers, we’ve developed a set of offerings that cover the pre-launch, launch, and post-launch phases for each new car. This strategy starts with exclusive 3D model previews during the pre-launch, moves to detailed introductions during launch, and follows up with customer evaluations afterward, extending the exposure for each new car's selling points. This approach not only assists customers in promoting their products effectively but also increases Autohome's influence among end users. According to QuestMobile, our average mobile daily active users reached 67.91 million in June, reflecting an 8.3% increase year-over-year, solidifying our leading position in the auto media sector. Turning to new energy vehicles, as Mr. Wu just mentioned, we launched the satellite plan in mid-May, a strategic initiative to set up satellite stores in lower-tier cities adjacent to our flagship Autohome Space stores. This plan creates a “1+N” synergistic service ecosystem where one core Autohome Space store supports multiple satellite locations, expanding our service reach to more regional markets. To date, we have established Autohome Space stores in 28 cities, including first-tier and super first-tier cities across China, achieving complete coverage in these key urban areas. Additionally, we are piloting the satellite store model in five cities. Through effective collaboration between core stores and satellite stores, we’ve developed a robust sales network, upgrading our retail model from a single point to a comprehensive one. We are confident that implementing our satellite plan will help us serve more users in lower-tier cities. In response to the national “trade-in for new” policy, we utilized our Autohome Space stores and holographic exhibition tracks to host a trading festival for new car purchases in 100 cities, offering immersive car experiences, multi-brand test drives, and other services. The event highlighted mainstream new energy vehicle brands and used car exchange services in regional markets. Over two months, the festival included more than 100 offline auto shows and attracted over 500,000 consumers. We also noted that revenues from new energy vehicle brands increased significantly in the second quarter, nearly doubling from the same period last year, consistently outpacing industry growth rates. In the digital area, we are adopting refined operational trends and have launched smart digital connections, a data product employing algorithms to enhance user profiling, aiding customers in accurately identifying target users and assessing vehicle replacement intentions, which leads to increased store visit rates. Our Smart Test Drive product combines software, hardware, and AI for quality control to tackle information opacity in test drive scenarios. This solution equips dealerships with comprehensive digital management tools for the entire test drive process, improving user experience and helping dealers create a data-driven ecosystem for their offline services. In the second quarter, revenue from total data products increased by over 15% year-over-year. In the used car segment, our vehicle condition inspection tools have continued to gain traction, with the percentage of strictly verified, high-quality vehicles in our system steadily rising. The first half of this year saw a 55.4% year-over-year increase in the number of authenticated used cars on our platform, effectively advancing standardization in the used car industry. Our used car business model integrates Autohome Space stores for offline services with a broad network of car owner service centers for aftersales support. This one-stop used car service model has shown strong performance at our Chengdu pilot store, and we plan to expand it to other cities in the second half of the year as the model matures. Overall, Autohome’s core businesses remain robust and stable, while our innovative ventures are steadily progressing and contributing to generating new revenue streams. This showcases the significant strides we have made in executing our automotive ecosystem strategy. Looking ahead, we will maintain our focus on long-term growth by improving user experience with a wider array of diverse content, professional services, and more personalized intelligent solutions. Furthermore, we will pursue new opportunities for growth in emerging business areas, energizing the company’s development to create stable, long-term positive returns for our shareholders. Next, let me briefly go over the key financials for the second quarter of 2024. Please note that I will refer to RMB only in my discussion today unless stated otherwise. Net revenues for the second quarter were RMB1.87 billion. Breaking it down by segment, media services revenues were RMB433 million, lead generation services revenues were RMB820 million, and online marketplace and other revenues totaled RMB619 million, marking a 14% increase year-over-year. The cost of revenues for the second quarter was RMB346 million, compared to RMB330 million in the second quarter of 2023. Gross margin for the second quarter stood at 81.5%, down from 82% during the same period last year. In terms of operating expenses, sales and marketing costs in the second quarter were RMB753 million, compared to RMB824 million in the second quarter of 2023. Product and development expenses were RMB350 million, an increase from RMB330 million a year earlier. General and administrative expenses hit RMB180 million, versus RMB91 million during the same period last year. Overall, we achieved an operating profit of RMB412 million in the second quarter, compared to RMB342 million for the same period in 2023. Adjusted net income attributable to Autohome was RMB572 million in the second quarter, compared to RMB569 million from the same period in 2023. On a non-GAAP basis, basic and diluted earnings per share in the second quarter were RMB1.18 billion, up from RMB1.16 billion and RMB1.15 in the same period of 2023. Non-GAAP basic and diluted earnings per ADS for the second quarter were RMB4.72 and RMB4.71 respectively, compared to RMB4.62 and RMB4.61 in the corresponding period of 2023. As of June 30, 2024, our balance sheet remains strong with cash, cash equivalents, and short-term investments amounting to RMB23.47 billion. We generated net operating cash flow of RMB452 million in the second quarter of 2024. The above is our financial summary. With that, we are ready to open the Q&A session.

Sterling Song, IR Director

Operator, please open the line for Q&A session, please.

Operator, Operator

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

Thomas Chong, Analyst

Thank you to management for addressing my question. Recently, we've noticed that some luxury car brands have stepped back from the price competition. What do you think are the reasons for this? Additionally, the government introduced new policies a few days ago. How will these positively affect us and the entire industry? Thank you.

Tao Wu, CEO

Okay, thank you for your question. Since last year, we've noted that competition in the auto market has intensified, leading to aggressive price wars among automakers vying for market share. The length and intensity of these price cuts have surpassed expectations, lasting over 500 days now. As a result, BBA and other luxury brands have chosen to withdraw from this price war after more than a year of participation. From an OEM's perspective, we've observed that the price-for-volume strategy has not curbed declining sales. For instance, a car originally priced at RMB300,000 is now sold for RMB200,000 after a price cut of RMB100,000, yet Mercedes-Benz and BMW sales in China have continued to drop in the first half of this year compared to last year. Additionally, ongoing price cuts negatively affect the brand image of luxury automakers and harm their profitability. From the perspective of dealers, they are also feeling significant operational pressure due to the prolonged price war. Specifically, there's high inventory pressure, with the Chinese dealers' Inventory Alert Index at 62.3% in June, and luxury and imported brands being even higher at 66.4%. BBA dealers, in particular, are facing substantial losses, with more than 80% unable to meet their sales targets in the first half of the year. If they continue with the price-for-volume approach, many BBA dealers may struggle to survive. BMW Brilliance's CEO mentioned that the company will maintain close discussions with partners to find viable business models to ensure their sustainability. Consequently, due to declining sales volumes and various pressures—such as profitability and dealer challenges—BBA opted to pull out of the price war. Following this decision, automakers have taken varying approaches; some have continued the fight, while others have also withdrawn, leading most to adopt a wait-and-see stance. In the short term, we believe the price war cannot be completely resolved, and ongoing price adjustments could continue to affect automakers' sales volumes, keeping market competition quite fierce. Regarding policy updates, on July 25, the NDRC and Ministry of Finance released a document aimed at enhancing support for equipment replacement and the trading of new consumer products. This move intends to encourage trade-ins and boost automobile sales. Under the new policy, purchasing NEV passenger vehicles offers a subsidy of RMB20,000, while buyers of ICE cars with engines of 2.0 liters or below can receive RMB15,000—subsidies that have doubled compared to the previous policy. Mister Choi Dongshu, the secretary general of the DA, noted that the recent expansion and doubling of the car rapid replacement subsidy is very positive for the entire auto market. It is anticipated to generate about 2 million car purchases this year and will stimulate hundreds of billions in related consumption. For Autohome, the increase in NEV replacements will benefit our NEV business, and with the launch of offline franchising stores, we will better meet customer demands for car selection and purchases. We expect revenue from the NEV brand to increase rapidly soon. In the short term, it's evident that over a year of challenges in this industry has hurt automaker profitability and caused several issues. We too have felt the impact of these industrial headwinds. Nevertheless, in the long term, we believe that as the price war eases and the government continues to introduce supportive policies for auto market consumption, there is strong potential for long-term growth in the auto market, and we remain optimistic about the sustainable development of the auto industry in China.

Operator, Operator

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

Brian Gong, Analyst

Thanks management for taking my question. I have two inquiries. First, regarding the used car markets and the recent price reductions by OEMs, what is the current situation in the used car market? Have you noticed any marginal improvement? Second, concerning dealers, have there been many dealer closures recently or do you anticipate significant closures in the future? Thank you.

Tao Wu, CEO

Thank you for your question. When examining the used car market, it's clear that the consistent decline in new car prices is putting significant pressure on it. In June, used car sales dropped by 1 percentage point compared to the previous year. Many potential buyers are opting for new cars, and existing car owners are hesitant to sell due to price volatility. As we near the middle of the year, the significant fluctuations in new car prices are affecting used car sales rates. The used car UCMI index also fell to 41.2% in June, down 2.4 percentage points from last year, which indicates that the used car market is struggling amidst tough competition and market pressures.

Craig Yan Zeng, CFO

If you look at the market, we can observe several characteristics of the used car market. Firstly, prices are still low. In June, the average price for used cars was around RMB64,400, marking the lowest level this year. This aligns with our expectations due to new car prices. Secondly, cross-regional trading is very active, showing a lot of vigor in the overall market, which is quite unique in China. Therefore, creating an integrated, trustworthy, and transparent industrial environment is crucial. Despite facing some short-term challenges, we believe that the scale, policy environment, market structure, and consumer demand in the used car market will remain stable in the long term, and we anticipate sound growth for the market. From Autohome's perspective, we are concentrating on our capacity building. For instance, we've enhanced our focus on vehicle conditions and statuses within our product offerings. In the first half of this year, the number of authenticated high-quality vehicles on our platform grew by 50% year over year. We want consumers to feel confident when purchasing used cars through Autohome, aiming to reactivate the used car market. Regarding traditional internal combustion engine dealers, it's evident that closures are happening. Observing the volume in the ICE sector and announcements from listed companies shows that closing traditional dealers is becoming unavoidable, with nearly 5,000 stores shut down in the first half of this year. However, this is not a straightforward adjustment; despite these closures, overall auto sales volume has not notably decreased, indicating an industry restructuring. We are witnessing the rise of new energy vehicles and increased penetration into lower-tier cities, prompting both OEMs and dealers to adapt and transform according to these trends. From our viewpoint, we are actively supporting our clients to face these challenges. As previously mentioned, in our new retail initiatives, we have introduced the satellite plan to aid our dealers and OEM partners. Through our new retail model, we help dealers with various services related to car usage, acquisition, and extensions. At Autohome, we recognize both opportunities and challenges ahead.

Sterling Song, IR Director

Okay operator, the next one please.

Operator, Operator

Thank you. Our next question comes from the line of Ritchie Sun from HSBC. Please ask your question Richie.

Ritchie Sun, Analyst

Thank you management for taking my questions. I have two. First, regarding competition, we have noticed that many Internet platforms are beginning to develop lead generation businesses and are using large language models to enhance efficiency and conversions. What plans does management have to tackle these challenges? Second, considering the cash balance is quite adequate and profits are stable, what is management's view on potential special dividends or increasing the dividend payout ratio? Would management also contemplate initiating a large-scale buyback program? Thank you.

Tao Wu, CEO

For your first question regarding other entrants into the lead generation businesses, this is not something new and has been happening for quite some time. We see this as a long-term challenge because we cannot dominate this sector. Before we entered this area over 10 years ago, other search platforms and various media were already engaged in this business. We still face significant competition. Our specialty lies in professionalism within the verticals, covering the entire lifecycle of car selection, purchase, use, and replacement. To tackle these competitive challenges, we have three solutions. First, we have introduced many short-form videos, live streaming activities, and other new formats to enhance our content ecosystem. At the same time, we have developed unique intellectual properties to distinguish ourselves from competitors. Second, we continuously optimize our website and app interface design to improve user convenience. Third, we collaborate with various media platforms to develop a traffic matrix that enables mutually beneficial outcomes in the face of competition. The second question is about dividend payout. Let me first review our dividend payout history. Over the past two years, we have consistently provided returns to our shareholders. From 2019 to 2021, we distributed 20% of our net margin to shareholders as dividends. In 2022, we revised our dividend payout policy with a fixed amount of RMB500 million, which represented 28% of our net margin that year. In December 2023, we maintained a dividend payout policy of approximately RMB1 billion, increasing our payout ratio to 50% of our net margin. Therefore, I believe that over the next three years, from 2024 to 2026, the annual dividend payout amount will be no less than RMB1.5 billion.

Operator, Operator

We distributed 20% of our net margin to shareholders as dividends. In 2022, we updated our dividend payout policy to a fixed amount of RMB500 million, which represented 28% of our net margin for that year. In December 2023, we maintained a dividend payout policy of approximately RMB1 billion, increasing our payout ratio to 50% of our net margin. Therefore, I believe that in the next three years, from 2024 to 2026, the annual dividend payout amount will be at least RMB1.5 billion.

Sterling Song, IR Director

Operator, the next question please.

Operator, Operator

Thank you. Our next question comes from the line of Xiaodan Zhang from CICC. Please ask your question.

Xiaodan Zhang, Analyst

Thank you to management for addressing my questions. I would like to inquire about your new retail model for NEVs. Autohome introduced the satellite plan in the second quarter. How should we view your expansion plans moving forward? Thank you.

Tao Wu, CEO

Thank you for your question. Since we opened our first offline store in September 2022, we have established our Space stores in 28 cities across China, including the southeast, southwest, and northern regions. Our satellite store model is now present in five cities as part of a new trial. Moving forward, we will continue to explore similar initiatives from different perspectives. The pace of our store openings aligns with what we communicated earlier this year, as the satellite store is a novel concept aimed at reaching more low-tier cities to enhance the reach and coverage of our Space stores.

Sterling Song, IR Director

Okay, operator, that’s the end of the Q&A session.

Operator, Operator

Thank you. I’ll now turn the conference back to management for closing comments.

Tao Wu, CEO

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

Operator, Operator

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.