Autohome Inc. (NYSE:ATHM) Q2 2024 Earnings Conference Call July 31, 2024 8:00 AM ET

Company Participants

Sterling Song – Director-Investor Relations
Tao Wu – Chief Executive Officer
Craig Yan Zeng – Chief Financial Officer

Conference Call Participants

Thomas Chong – Jefferies
Brian Gong – Citi
Ritchie Sun – HSBC
Xiaodan Zhang – CICC

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

Thank you. 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

[Foreign Language] Thank you. Sorry. Hello everyone. This is Tao Wu, CEO of Autohome. Thank you for joining our earnings conference call today. [Foreign Language] In the second quarter, Autohome’s net revenues grew steadily, user traffic increased noticeably, and our innovative business continued to make breakthroughs, driving the continuous optimization and upgrade of our entire business structure. [Foreign Language] Specifically, in the second quarter total revenues grew by 2.2% year-over-year to reach RMB1.87 billion, of which revenues from the online marketplace and others business continue to maintain double digit growth year-over-year, reaching 33.1% of total revenue.

Notably, many business lines such as data products and NEV have experienced robust growth with revenues for the quarter increasing by over 15% and nearly doubling respectively year-over-year. In addition, we have maintained a 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, allowing our adjusted net profit margin to reach 30.6%.

[Foreign Language] In our innovative business arenas, we have further expanded our new retail business reach, increasing and intensifying our penetration from high tier to low tier cities. By leveraging our established flagship Autohome Space store as the core hub, we have rapidly initiated our satellite plan. This plan utilizes our Autohome Space store as the core hub to extend our reach into neighboring low tier cities, create a network that radiates from single point to cover an entire region. This network dynamic not only accelerates the reach and depth of the sales network, but also significantly broadens the scope of our services, enabling us to access a broader market and a wider range of users.

On digitalization, we continue to drive product innovation and upgrade by leveraging the capabilities of our smart series products, which introduced a comprehensive digital business management platform for our dealership partners, encompassing everything from infrastructure setup and development, digital tools empowerment and the implementation of sophisticated operations management providing our dealership partners with an advanced and systematic digital support system, allowing them to achieve increased efficiency in their business operations. In addition, our cooperation with Ping An Group has also 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 that spans the entire lifecycle of car owners, providing users with a convenient one stop service experience.

[Foreign Language] Looking forward, we’ll remain focused on our user centric approach [indiscernible] innovation to drive development while continuously exploring new models of online to offline integration, and in the process strive to provide users with even higher quality, even more convenient and even more efficient service experience. Over this course, we will fully explore and elaborate the extensive resources and technology of Ping An Group to seek even greater synergies and identify additional opportunities in the automotive ecosystem. We believe that with our solid business foundation and diversified range of businesses, Autohome is well positioned to achieve a new phase of high-quality development.

[Foreign Language] With that, 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

[Foreign Language] Thank you everyone. Thank you, Mr. Wu. Hello everyone. This is Craig Zeng, the Chief Financial Officer of Autohome. [Foreign Language] In the second quarter, we continued to deepen our focus on enhancing our content portfolio, revitalizing the content through two categories, professional content and broader general auto-related content, establishing Autohome’s new IP matrix. [Foreign Language] For example, regarding professional evaluation, we have expanded our content to include targeted evaluations for hybrid vehicles, NEVs and ICE vehicles.

On general auto-related content, we’ve expanded our design, automotive culture, off-road vehicles and other content for unique scenarios, resulting in the creation of eight IP programs including So Fast So Test, Top 10 Horizontal Evaluation, and [indiscernible]. We are also integrating live streaming and short video formats into our content to form a more comprehensive content matrix that caters to our users’ diverse consumption preferences. To date, these eight IP programs have garnered a total exposure of 860 million views across the entire network, significantly enhancing the influence of our platform.

[Foreign Language] In addition by focusing on the new vehicle launch events prioritized by OEM, we’ve developed a set of content offerings that spans the pre-launch, during launch and post-launch stages of each new car launch. This approach begins with exclusive 3D car model speculation during the pre-launch, progressing to an in-depth introduction during launch, and then customer type evaluations post-launch, effectively prolonging the exposure times for each new car’s selling point. This not only helps the end customers efficiently promote their products, but also allows Autohome to gain influence among the end users.

According to QuestMobile, our number of average mobile DAUs reached 67.91 million in June, an increase of 8.3% from a year earlier, and scoring our leading position in the auto media vertical.

[Foreign Language] Turning to NEV, as Mr. Wu just mentioned, we initiated the satellite plan in mid-May, a strategic initiative to establish satellite stores in low tier cities adjacent to the flagship Autohome space doors. This initiative establishes a “1+N” synergistic service ecosystem where a single core Autohome Space store could support multiple satellite stores, thereby broadening 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 full coverage in these key urban areas.

Additionally, we are piloting and testing the water for the satellite store model in five cities. Through effective collaboration between core Autohome Space stores and these satellite stores, we’ve developed a comprehensive sales network, upgrading the new retail model from a single point to an upgraded, comprehensive model. We are confident that the ongoing implementation of the satellite plan will enable us to influence and serve more users in low tier cities.

[Foreign Language] In response to the national “trade-in for new” policy, we leveraged our Autohome Space stores and holographic exhibition tracks as platforms to organize the 100 cities treating for new car buying festival, providing consumers with immersive car searches, multi-brand comparative test drives, and other services. The event brings even more mainstream NAV brand models and used car exchange services to regional markets. Spanning two months, the festival featured over 100 offline auto shows and attracted more than 500,000 consumers. We are also pleased to see that revenues from NAV brands saw a continuous rise in the second quarter, nearly doubling compared to the same period last year, consistently out phasing industry growth rates.

[Foreign Language] In the digital realm, we are embracing the trend of refined operations and have introduced smart digital connections, a data product using model algorithms to improve user profiling, helping customers to more accurately identify target users assess vehicle replacement intentions, leading to increased store visit rates.

Smart Test Drive, another data product which integrates software, hardware and AI-driven quality control capabilities to address the customer pain point of information opacity in test drive scenarios. This solution provides dealership clients with digital management tools covering the entire test drive process, enhances the user test drive experience, and helps dealers establish a closed-loop, data-driven ecosystem for their offline services. During the second quarter, total data products achieved an increase in revenue year-over-year of over 15%.

[Foreign Language] In the used car segment, our vehicle condition inspection tools have seen continued momentum with the proportion of strictly verified, high-quality vehicles in our system consistently on the rise. In the first half of this year, there has been an increase of 55.4% year-over-year in the number of authenticated used car on our platform, effectively promoting the standardization for the entire used car industry.

In terms of our business model, our used car business combines Autohome Space stores for offline services with an extensive network of car owner service centers to provide after sales support. This one-stop used car service model has achieved strong results at our Chengdu pilot store. We plan to expand this model to additional cities in the second half of the year as the model continuously improves and matures.

[Foreign Language] Overall, Autohome’s core businesses remain strong and stable, while our innovative businesses steadily make constant progress, contributing to generate incremental revenue streams. This reflects the substantial strides we have made in implementing our automotive ecosystem strategy. Looking ahead, we will continue to focus on long-term development by enhancing our user experience with more diverse and richer content, professional services and more personalized and intelligent solutions.

Furthermore, we will seek out and seize opportunities for growth in new business areas, injecting new vitality into the company’s development with the aim of creating stable, long-term, positive returns for our shareholders.

[Foreign Language] Next, let me briefly walk you through the key financials for the second quarter of 2024. Please note that, as with prior course, I will reference RMB only in my discussion today unless otherwise stated.

[Foreign Language] Net revenues for the second quarter were RMB1.87 billion. Breaking it down by segment, media services revenues were RMB433 million. Leads generation services revenues were RMB820 million. And online marketplace and others revenues were RMB619 million, up 14% year-over-year.

[Foreign Language] Cost of revenues in the second quarter was RMB346 million, compared to RMB330 million in the second quarter of 2023.

Gross margin in the second quarter was 81.5% compared to 82% during the same period last year.

[Foreign Language] Turning to operating expenses, sales and marketing expenses in the second quarter was RMB753 million, compared to RMB824 million in the second quarter of 2023. Product and development expenses were RMB350 million, compared to RMB330 million in the second quarter of 2023.

General and administrative expenses were RMB180 million, compared to RMB91 million during the same period last year.

[Foreign Language]

Overall, we delivered an operating profit of RMB412 million in the second quarter this year, compared to RMB342 million for the same period of 2023. Adjusted net income attributable to Autohome was RMB572 million in the second quarter, compared to RMB569 million in the corresponding period of 2023.

[Foreign Language]

Non-GAAP, basic and diluted earnings per share in the second quarter were RMB1.18 billion, up from RMB1.16 billion and RMB1.15, respectively, in the conspiring period of 2023. Non-GAAP basic and diluted earnings per ADS in the second quarter were RMB4.72 and RMB4.71 respectively, compared to RMB4.62 and RMB4.61, respectively, in the corresponding period of 2023.

[Foreign Language]

As of June 30, 2024, our balance sheet remains quite strong with cash, cash equivalent and short term investment of RMB23.47 billion. We generated net operating cash flow of RMB452 million in the second quarter of 2024.

[Foreign Language]

The above is our financial summary. With that, we are ready to open up the Q&A session.

Sterling Song

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Thomas Chong from Jefferies. Please ask your question, Thomas.

Thomas Chong

[Foreign Language]

Thanks management for taking my question. So recently we saw some luxury car brands exited the price war. So what do you think the reasons behind? And also government launched some policy a couple of days ago. So how it will positively impact us and the whole industry? Thanks.

Tao Wu

[Foreign Language]

Okay, thank you for raising this question. Since last year we said that the auto market competition becomes even more fierce with very severe rat racing and all kinds of automakers start to wait the price war and in order to gain more shares from the market. You can see that the duration of this round of price wardens intensity of the price cuts as well as the depth to this impact goes beyond everybody’s expectation.

Since the beginning of last year to now, the price war has already lasted for more than 500 days. So for BBA [ph] as well as the other luxury brands, they decided to withdraw from the price war after participating for more than one year. We think there might be the following reason.

[Foreign Language]

So first of all, from the OEM perspective, we have observed that price for volume strategy doesn’t slow down the decline of the sales. You can see there’s one example. They originally priced 300,000 cars, now only sold at RMB200,000 with a price cut of RMB100,000. Even like that, in first half of this year, Mercedes-Benz and BMW here in China sales continue to decline versus the similar period last year. However, at the same time, the price cut also imposes negative impacts on the brand image of those luxury brands. Besides, we can see continuous price will also harm the profitability of the automakers.

[Foreign Language]

And secondly, from the dealers perspective, those dealers are also under big operation pressure because of the continuous price war. There are two aspects of it. The first thing is a pretty high inventory pressure. According to the statistics of Chinese Association of Automobile Manufacturers in June, you can see that the Chinese dealers Inventory Alert Index was 62.3%, which is already above the threshold PMI and five brands, luxury and imported brands, their inventory early alert index was 66.4%, and for those mainstream joint venture brands, 60.8%. And the Chinese domestic brand 61.5%. We can see that the luxury brands are under the biggest pressure, much higher than the other two categories.

[Foreign Language]

And the second side is actually BBA dealers already start to suffer from big losses. You can see, according to the statistics, in the first half of this year, more than 80% of dealers cannot complete their sales goals and tops. If they continue to go for the price for volume strategy, quite a few BBA dealers, they cannot survive anymore in this circumstances. BMW Brilliance, CEO said that BMW will continue to keep the close contact and discussion with upstream and downstream partners, so as to explore the commercially viable model and to ensure other partners can make enough money so as to live for the future.

[Foreign Language]

As a result, with the decline of the sales volume, with all kinds of pressures, such as profitability, brand value as well as dealership, BBA decided to withdraw from the price war. So after BBA decided to withdraw from the price war, we see that different automakers, they don’t act in a consistent manner. Some choose to follow and the others choose to withdraw from the price well. However, most of the automakers still adopt a good and see attitude. We think that in short term, the press wall cannot be totally ended. And with price cut as well as or sales performance the price adjustment as well as withdrawal from the price war may imposes pressure on the sales volume of the automakers. As a result, we can see that market competition is due pretty fierce.

[Foreign Language]

In terms of the policy update, since July 25, NDRC and Ministry of Finance has printed out the document called [indiscernible] intensifying the support on large scale equipment replacement and consumer products trading for new. So as to encourage trade in to promote the consumption of the automobiles, and also at the same time the designated garnet refugee subsidy standards has been greatly improved and now for the purchase of the NEV passenger vehicles, we can get a subsidy of RMB20,000 yuan and the purchase of 2.0 liters and below ice cars can get a subsidy of RMB15,000 yuan. So versus the previous policy, now carpet can get a doubling subsidy.

Tao Wu

[Foreign Language]

[Indiscernible] Mister Choi Dongshu, secretary general of the DA also said that this round of car rapid and replacement subsidy expansion and doubling is a very favorable news for the entire auto market. It is expected to drive around 2 million car consumptions of this year. Sorry, 2 million cars repeat this year and also in favor of driving more than hundreds of billion of replacement related consumption. And for Autohome, you can see that with the increase of the NEV replacement, it will be favorable for our NEV business and with the opening of the offline franchising stores, we will better satisfy the customer’s needs on car selection and car purchase. And for Autohome, we can see that the revenue coming from the NEV brand will also quickly rise in the near future.

[Foreign Language] In short term, you can see that more than one year of [indiscernible] in this industry really compromised the profitability of the automakers and also triggered a series of issues and were also affected by this industrial headwind. However, in the long run, with the mitigation of the price war and with government keeps launching favorable policies to support the auto market consumption, we strongly believe that the auto market still equipped with long term growth potential and we are also bullish about the long term sound development of the auto industry in China.

Operator

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

Brian Gong

[Foreign Language] Thanks management for taking my question. I have two questions. First question is regarding the used car markets given recently using price lowered by OEMs. What’s the latest situation for used car markets? Have you observed any improvement – marginal improvement for used car market? And the second question is about dealers. Have we seen a lot of closure of those dealers recently or do you expect any large scale closure in the future? Thank you.

Tao Wu

[Foreign Language] Okay. Thank you for raising this question. If you look at the used car market because the new car price has been keeping the client, as a result it impulses a lot of pressure on the used car market. In June you can see that the used car sales dropped by 1 percentage point year on year. So anytime a lot of used care potential buyers have to purchase the new car and the car holders because of their price and volatility, they wouldn’t like to sell their cars. So here you can see that we are already approaching the half year, so for the half year volume Champaign resulted in very big volatility after new car transaction price. As a result, the sales rate [ph] for used cars is already intensifying. And in June, you can see that used care UCMI index is also define it to 41.2%, a drop of 2.4 percentage points year-on-year. And also highlighting that the used car market is not performing pretty well with a lot of big competition as well as the pressure of the entire market.

Craig Yan Zeng

[Foreign Language] So if you look at the market we can observe the following characteristics of the used car market. The first thing is that the price remains low. And in June you can see that the used car average price remains at about RMB64,400 yen, which is the low point within this year. And I think that this is within our expectation because of the new car price. And the second thing is that the cross regional trading is very active and the entire market is do have a lot of bigger and vitality. This is pretty unique in the Chinese market. As a result, to construct integral and trustworthy and transparent industrial environment is very important.

[Foreign Language] Even though there are some challenges in short term before the used car market that in the long-run we think that the scale, the policy environment, market structure as well as the consumer demand of the used car market doesn’t fundamentally change. And I think that’s when the car consumption, market expansion as well as the rising recognition of the consumers for the used car in the longer future. We think that used car market is still got a lot of potential and expected to grow in a sound manner.

And you can see from autofocus perspective, we’re also very much focusing our own capacity building. For example, we intensify our products in terms of the car conditions and car statures in quarry products in the first half of this year I already mentioned our platform the authenticated high quality vehicles number increased by 50% year-on-year. We hope that with the entrance of Autohome into this market, the consumers can actually purchase the used car in the reassured manner and the used car market can become very active again.

[Foreign Language] The second question is about whether there is closure of the stores for the traditional ICE builders. And I think that if you look at the ICE field volume as well as any of the announcements of the listed company, I think that the closure of the traditional ID dealers is inevitable. If you look at the first half of this year, there are almost 5,000 stores are shut down.

[Foreign Language] But this is not a one way thing or adjustment. If you look at the overall auto sales volume, actually there’s no big decline. So this is actually the restructuring of this industry. We see the emergence of the NEV as well as the bigger penetration into the lower tier cities. So I think that in this circumstances, no matter what OEMs or the dealers, they have to adapt and have to transform according to this trend.

[Foreign Language]

Thus from all of them perspective, we’re also actively empower our clients to cope with this kind of challenges. As I mentioned before, in our new retail businesses, we also launched the satellite plan just to enable our dealers as well as our OEM partners. And for dealers, we also actually help them in the car use services, acquisition as well as extension. So for Autohome it’s those opportunities as well as challenges.

Sterling Song

Okay operator, the next one please.

Operator

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

Ritchie Sun

[Foreign Language]

Thank you management for taking my questions. I have two. First of all, in terms of competition, we have observed that a lot of Internet platforms started to develop the lead generation businesses as well as using large language model to improve the efficiency and conversions. So what does management will do, what will measurement do to address these challenges?

Second of all, in terms of the cash balance, it is very adequate and profit is also quite stable. Our management, what does management feel on the potential special dividends or even lifting the dividend payout ratio? And would management consider launching a big scale by that program? Thank you.

Tao Wu

[Foreign Language]

So for your first question which is actually about the other entrance into the lead generation businesses, actually this is not something new and it already happened for quite a long time and for Autohome, we think that this is a long term challenge for us because we cannot monopolize this business.

[Foreign Language]

Before Autohome enter into this area actually there are already some search platforms as well as pan-media engaging in this business. And after we enter into this area for more than 10 years, we still face quite serious competition. And for Autohome, we think that our specialty is about professionalism in the verticals and we actually cover the whole lifecycle including car selection, car purchase, car use as well as car replacement.

[Foreign Language]

And in terms of the content measures to these challenges, we have three solutions. First is in terms of the content innovation. In recent years Autohome have introduced a lots of short form videos and live streaming as well as the other new formats says to enrich our ecosystem of the content. While at the same time we also built a lot of inclusive and unique IPs that have our IP ecosystem to differentiate from our competitors.

And the second is in terms of the user experience enhancement, we keep optimizing our website as well as app interface design just to offer more convenience to our users. And third one is in terms of the cooperation channel expansion. We have been cooperating with a lot of pan-media platforms so as to build the traffic matrix and so as to deliver win-win against the competition.

[Foreign Language]

So the second question is about dividend payout. Let me first review our dividend payout history. Over the past two years we have been keep enhancing the return to our shareholders. From 2019 to 2021 we actually distributed 20% of our net margin to the shareholders as a dividend. And in the year 2022 we also updated our dividend payout policy with a fixed amount of RMB500 million, which is equivalent to 28% of our net margin of the same year.

And in December 2023 we keep an end of dividend payout policy and over now about RMB1 billion dividend payout decisions, which is enhanced our dividend payout ratio to 50% of our net margin. So I think that in the next three years, from 2024 to 2026, the annual dividend payout amount will be no less than RMB1.5 billion. [Technical Difficulty]

Operator

[Operator Instructions]

Sterling Song

Operator the next question please.

Operator

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

Xiaodan Zhang

[Foreign Language]

So thanks management for taking my questions. And my question is regarding your new retail model for NEVs. At Autohome launched the so called satellite plan in the second quarter. So how should we think of your expansion plan going onwards? Thank you.

Tao Wu

[Foreign Language]

Okay. Thank you for raising this question. I think that since the launch of the first offline store in September 2022, now we are already actually our Space store already take roots in 28 cities in China and covering southeast and southwest as well as north part of China. And so far you can see that our satellite store model already covers five cities including [indiscernible]. And this is actually a new trial. And in the future we’re going to have a similar trial from the different angles.

And the store opening pace is quite consistent with our communication at the beginning of the year because the satellite store is pretty new model and the major purpose is to cover more low tier cities so that our Space stores can have a better reach out and coverage.

Sterling Song

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

Operator

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

Tao Wu

[Foreign Language] Thank you everyone. Thank you very much for joining us today. We appreciate your support to the company and look forward to updating you on next quarter’s earnings conference call in a few months’ time. And in the meantime, please feel free to contact us or email us if you have any further questions or other comments. Thank you very much. Bye-bye.

Operator

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