Autohome Inc. (NYSE:ATHM) Q3 2022 Earnings Conference Call November 3, 2022 8:00 AM ET

Company Participants

Sterling Song - Director, Investor Relations

Quan Long - Chairman & Chief Executive Officer

Craig Zeng - Chief Financial Officer

Conference Call Participants

Thomas Chong - Jefferies

Brian Gong - Citi

Ritchie Sun - HSBC

Operator

Ladies and gentlemen, thank you for standing by for Autohome’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time.

It is now my pleasure to introduce your host, Sterling Song, Autohome’s IR Director, Mr. Song. Please, go ahead.

Sterling Song

Thank you, operator. Hello, everyone. I'm Sterling Song and welcome to Autohome’s third quarter 2022 earnings conference call. Earlier today Autohome distributed its earnings press release and you may find a copy on the company's website at www.autohome.com.cn.

On today's call, we have Chairman and Chief Executive Officer, Mr. Quan Long; and Chief Financial Officer, Mr. Craig Zeng with us. After our prepared remarks, our management team will be available to answer all your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.

Potential risks and uncertainties include, but not are limited to those outlined in our public filings with the US Securities and Exchange Commission and Stock Exchange of Hong Kong Limited. Autohome doesn't undertake any obligation to update any forward-looking statements, except as required under applicable law.

Please also note that Autohome’s earnings press release and this conference call include discussions of certain unaudited non-GAAP financial measures. Please refer to our press release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures, and is available on Autohome's IR website. Again, as a reminder, this conference is being recorded. In addition, a live and archived webcast of this earnings conference call will also be available on Autohome's IR website.

Now, I will turn the call over to Autohome's Chairman and CEO, Mr. Long for opening remarks. Please go ahead, Mr. Long.

Quan Long

[Foreign Language] Thank you, everyone. Thank you, Sterling and hello, everyone. This is Quan Long, Chairman and CEO of Autohome. Thank you for joining us today in our third quarter 2022 earnings conference call.

We are pleased to report a strong operational performance in the third quarter, building on our vigorous recovery momentum from the first half of 2022. Our total revenue for the third quarter were RMB1.84 billion, up 4.5% year-over-year, and the media service revenue increased by 28% year-over-year.

Adjusted net income attributable to Autohome was RMB 590 million, returning to positive growth with a year-over-year increase of 1%. Adjusted net margin was 32%. Since the beginning of this year, China Central government has introduced a series of economic stimulus policies targeting the Auto industry in efforts to unleash relevant consumption potential.

Also, the abolishment of used car circulation restrictions has helped to release the bottleneck hindering growth in the used car industry, with these policy changes alongside effective measures to contain the spread of the COVID-19 pandemic. China passenger vehicle sales recovered gradually in the third quarter with a total of 5.69 million units sold or 23% year-over-year growth.

[Foreign Language]\

Despite the impact of the pandemic the auto industry remains a key pillar of the national economy also is abating services in people's lives and given automotive typically long life cycle, as well as prolonged support from the government. The auto industry is still protected tremendous growth potential as China's auto consumption level and the demand for upgrades continue to increase.

To address challenges head on Autohome relative customers listened to their demand and actively adjusted our business model to provide effective solutions to address their pinpoints. After a great business adjustment in the past few quarters, we bottomed out and achieved a late stage rebound in the third quarter. We have now returned to a driving year-over-year growth trends and are maintaining good – and we delivered solid results to the market.

[Foreign Language]

With that, I will now turn the call over to our Chief Financial Officer, Craig Zeng, for a closer look at our third quarter operating and financial results.

Craig Zeng

[Foreign Language] Thank you, Mr. Long. Hello, everyone. I’m Craig Zeng, the CFO of Autohome. First, I'd like to give you an overview of our traditional business. For the third quarter, our media service revenue reached RMB 566 million returning to positive year-over-year growth for the first time up over a year continuous adjustment. This speculate Autohome's leading position and a stable market share in the auto media vertical sector.

Our excellent performance is mainly attributable to two factors. First, we embrace changes and proactively pursue innovation to upgrade our traditional visits. For example, to all time the pandemic impact will fly via and other advanced technologies to our car searching tools and help online auto shows for customers to reach potential buyers more effectively, which also generated additional traffic for Autohome’s platform.

In the first nine months of the year, we have helped 305 online auto shows covering over 500 million people nation-wide and offering user a simple secured searching the choosing cars anytime and anywhere. Normalizing online auto shows has effectively ordered user production, improve their experience and help partners to navigate the top business environment. Our online auto shows have received high grades from both users and our OEM customers, resulting in great improvement in our media business.

Second, we concentrated our sources on fortifying our competitive advantages and enhancing our industry presence. For example, Autohome initiated the 818 Super Auto Show, the world's most positive IT in the auto media sector and has helped the auto show annually for four consecutive year.

This year, we not only devoted more resources to the show but also collaborated with China Central Television CCTV media platform to more effectively promote OEM brands and products accelerating the pace of digital transformation across the auto industry. This year's 818 Super Auto Show generated over 16.4 billion exposure other across the entire network and over 1 billion short video view, identifying the unprecedented level of Autohome brand influence in the auto media vertical industry.

The increased media exposure, those having hand with our continued advancement in content creation as well as our ongoing efforts to build our core IT through which we have constructed a useful and firm video-based content ecosystem. For instance, our pursuit of content innovation, we signed a contract for the industry's first hyper realistic [indiscernible] the video has garnered over 100 million views across the entire network and for the view generated indeed responses among our users.

Additionally, in the first three quarters of 2022, our core original IP series, including the travel journal among others are accumulating over 236 million views on Autohome platform and over 372 million on entire network, demonstrating our growing influence. So in the future, Autohome will introduce additional macro features, virtual assets and other interesting arrangements to our portfolio to further upgrade the quality of our video-based content ecosystem, encouraging greater participation and stricter engagement is set among young users.

This series of efforts to strengthen our user metal content bolsters our ability to deliver long-term steady traffic growth according to QuestMobile, Autohome aggregated average daily active users achieved a big consecutive demand of accelerating growth in September showing by 7.4% year-over-year to RMB 49.66 million. Furthermore, our mobile average daily active user [ph] was over 12.3 million greatly seeing the industry level and affording our industry-leading position.

[Foreign Language]

Now, let's move ahead our Eastern region business, where revenue accelerated growth trends in the third quarter with year-over-year growth of over 5%, surpassing growth rate for the first two quarters of 2022.

Moreover, the quarter-over-quarter growth rate was over 7% in terms of the number of our customers in the third quarter over 13,000 dealers such our premium region and over 7,000 dealer purchased the tax [ph] a combined total of over 20,000 dealers purchasing the high-end versions of our subscription packages.

This represents an increase of over 1,200 dealer clients or 6.5% growth compared to the second quarter. The steady increase in both revenue and the number of customers once again illustrates our ability to keep empower our client business.

Moving forward, building on our excellent product capability, we'll continue to expand our product pipeline and increased R&D into [indiscernible] to holistically fulfill our customers' needs with upgraded products and services.

[Foreign Language]

Turning to our new initiative, we continue to execute our development plan and accelerate the realization of our second growth curve while we look at our NEV business representing the direction of the future, our new car business with the fast growth potential of our digital product business empowering our customers we have made significant progress and achieved substantial advancements.

[Foreign Language]

First, let's look at NEV, shifting the continuous evolution of the NEV market structure and the increase in NEV penetration rates. Autohome adapted proactively and elapsed the market transformation by pioneering a unique multi brand retail model energy space, offering 3D holographic versus [indiscernible], followed by test driving services across a broad support of China's new NEV brands makers and the model. And this base provides a one-stop story for selecting, test driving and purchasing cars which is completely support the traditional time-consuming car purchasing experience and stop uses [indiscernible]. And this space has not only helped us stay ahead of the market also to keep attention from other NEV automakers to look at Autohome in a whole new life.

In September, we unveiled our first offline store in Shanghai, attracting great attention across the industry. In the future, Autohome energy space will increase its presence in top-tier cities and that hands into lower tier cities, covering more NEV brands and the model by building ecosystem that benefits all parties Autohome will continue to continue the fast-growing and prosperer Chinese NEV industry.

Notably, during the quarter, we signed a top strategic partners with the Beijing Institute of Technology information company. Going forward, the two parties we opened up index corporation in various areas such as NEV data applications. This cooperation will empower Autohome with valuable data sources to develop more digital products and services supporting NEV sales and the marketing improve [indiscernible] for use NEV and broaden our NEV business growth prospect.

Before, in Q3, revenue generated from NEV brands continue to grow ligated and is increased by 140.7% year-over-year, once again outperforming the industry sales growth overall.

[Foreign Language]

Next, the used car market. With this year positive changes in governmental policies, China undoubtedly the world's profit growing and high potential user market -- to make the most of this opportunity, we continue to consolidate resources across TPG, Tianbo and Autohome to gain a competitive ads and propel development of our one-stop use car transaction platform, -- for into sellers, our treating do product, which targets users looking to fit in their used cars and purchase new ones has toward attractive for OEM sheathing way to reach potential new car buyers.

We have already established collaboration with 22 brands and received positive feedback. For Itabir, we provide a standardized on subsidiary for searching, buying and leasing car, realizing the industry's first acception of one of a processing test driving services and delivering a smooth and main user experience.

In addition, we continue to make progress with our 35 new car systems and have rapidly increased the number 35 new cars sort on our platform. creating more ease and transaction opportunities for both new car dealers and buyers. Going forward, Autohome will accelerate implementation of business innovation to establish a full new tactical system covering upstream, midstream and downstream players, augmenting our competitive advantage while contributing to overall industry development.

We continue to deepen these units with DCP in the third quarter through our matching and auction services, our platform accounted for around 21% of all used car transactions in China in the third quarter with 3 percentage points year-over-year growth and weak tax operating conditions will continue to improve going forward.

Lastly, on the data product front, data products continued their healthy growth trend in the third quarter with revenue 7% year-over-year, the number of clients up by 5% quarter-over-quarter and 6% year-over-year to over 9,800 a -- during the first 9 months of 2022, the average number of data products adopted by the [indiscernible] and the average revenue per dilator increased roughly by 31% and 20% year-over-year respective. On top of that, we successfully capitalized on opportunities brought by the auto industry digital transformation as part of our continued efforts to upgrade our product. Presently, Autohome has established in-depth collaboration with 48 mainstream automakers, which will continue to support and accelerate Autohome's second growth curve.

[Foreign Language] To summarize, despite uncertain microeconomic environment, we are pleased to have achieved extraordinary results in all three of our business segments, expanding our recovery momentum since the first half of 2022.

As one of the leaders in China's auto industry, Autohome has focused on two main strategies over the past year. First, we are actively advancing our ecosystem approach, consolidating resources with Ping An Group to build a one-stop featuring Autohome platform that provides comprehensive services for auto users.

In meantime, we are deeply invested in the industry's future and committed to leading industry-wide innovation by continuously calculating our innovative business segment backed by our strong business foundation and perilous financial performance. Autohome will foster digital transformation in the industry creating lasting value for all our stakeholders with outstanding performance that navigates market cycles.

[Foreign Language] Next, let me walk you through the key financials for the third quarter 2022. Please note that as with prior call, I'll reference RMB only in my discussion today, unless otherwise stated.

[Foreign Language] Net revenues for the third quarter were RMB 1.84 billion, up 4.5% year-over-year. For detailed breakdown, media services revenue came in at RMB 556 million, an increase of 28% year-over-year. This generation services revenue increased 5.3% year-over-year to RMB 809 million and online marketplace and others revenue was RMB 478 million.

[Foreign Language] Moving on to Costs. Cost of revenue in the third quarter was RMB 331 million compared to RMB 281 million in Q3 last year. The increase was primarily attributable to our continued investment in content. Gross margin in the third quarter was 82.1% compared to 84.1% in Q3, 2021.

Turning to operating expenses. Sales and marketing expenses in the third quarter was RMB 863 million compared to RMB 712 million in Q3, 2021. The increase was primarily attributable to the escalation of marketing and promotional spending. Product and development expenses were RMB 387 million compared to RMB 364 million in Q3 2021.

The increase was primarily attributable to greater investments in research and development activities for digital products. Finally, general and administrative expenses were RMB 136 million compared to RMB 111 million in Q3, 2021.

Overall, we delivered operating profit of RMB 192 million in the third quarter compared to RMB 365 million in the corresponding period of 2021. Adjusted net income attributable to Autohome Inc. was RMB 590 million in the third quarter, compared to RMB 583 million in the corresponding period of 2021.

Non-GAAP basic and diluted earnings per share in the third quarter were both RMB 1.18 compared to both RMB 1.15 in the corresponding period of 2021. Non-GAAP basic and diluted earnings per ADS in the third quarter were RMB 4.73 and RMB 4.72 respectively, compared to RMB 4.61 for both in the transforming period of 2021.

As of September 30, 2022, our balance sheet remains very strong with cash, cash equivalents and short-term investments of RMB 2.34 billion. We generated net operating cash flow of RMB 541 million in the third quarter of 2022

On November 18, 2021, our Board of Directors authorized a share repurchase program under which we may, reflected up to US$200 million of Autohome ADS for a period not to exceed 12 months thereafter. As of October 31st, 2022, we have repurchased approximately 3.61 million ADS for a total cost of approximately US$106 million. On November 3rd, 2022, our Board of Directors authorized an extension of the share repurchase program for another sale plan is filing on November 17th, 2023.

Autohome stable long-term operations, healthy cash flow and ample cash reserves as well as our active stock repurchase program demonstrates our intention to improve the company's potential Chapter efficiency and reset our long-standing expectation to our investors' interest we will maintain our efforts to proactively manage market value. You can go to the outstanding on cases.

[Foreign Language]

With that, we are ready to answer your questions, Operator?

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 questions. My first question is about the auto industry Q3 development as well as, how we should think about Q4 2023 outlook? And my second question is about the used car market.

How does sets are developing so far as well as the market landscape, including TTP as well as how we should think about next year's strategies? Thank you.

Quan Long

[Foreign Language] Thank you for your questions. The first question is related to the industry, and I will answer that. Your second question is related to the new car business, our CFO, Craig Zeng will answer you. So first of all, the auto industry is the vertical industry for our national economy, and we have been receiving attention from all parties, certain policies and development.

[Foreign Language] First of all, I believe that the target at the moment of this year for our industry has already passed. Q3 made a significant recovery of the profitability of car manufacturers to set update for Autohome according to the CTCA this year, China passenger vehicle sales Q1 year-on-year decrease of 4.5%, and Q2 year-on-year decrease of 9.8% and Q3 year-on-year growth of 23.7%, according to National Statistics Bureau in the first nine months of this year that automobile manufacturing revenue has a synchronized growth of 6.7% and profit over RMB370 billion year-on-year decrease of 1.9% and the decreased margin compared to January to August has narrowed by 5.4 percentage points. We could see that the passenger vehicle sales is out of the bottom period and the turning point might have already -- might have been arrived -- might have provided.

In Q3, the monthly sales and the production are both very optimistic leading the industry for a stabilization and recovery, and we see the follow-up policies getting more and more specific and consolidated. And since September, we see the implementation of a series of necessary details. So that effectively improved the effective management strong foundation for economic recovery. So we believe that the automobile industry is having a more and more positive environment for our development.

Secondly, we benefit from the policies that encourage automobile reduction, and we also see remediation regarding the problem of the supply chain, as well as the shortage. Therefore, we are cautiously optimistic about the expectations for Q4 automobile industry development.

Mobile industry is highly valued by the country and the government. And this year has witnessed a series of favorable policies from all levels of [indiscernible] to specifically stabilize and boost the major consumptions like automobile enables the state council, each moment -- the [indiscernible] we moved comprehensively from the situation restriction for new cost and in September, the Ministry of Finance, retaxation Administration NIIT jointly launched the policy to exams and it is from auto purchase as to encourage the NEE industry growth. So we see a huge potential for the upgrading in auto consumption in [indiscernible].

Since the beginning of this year, we have seen a recurrence of the COVID-19 pandemic in multiple locations in China, which brought some challenges and uncertainties, fully macroeconomic growth and to some extent, gross engine impact for our on-mobile market in China. And the consumers are confident as well as their actions of part has been impacted by the periodical and ethnical measures. So in a short-term perspective, there is -- to some extent, one in the market, we are increasing the fees at the end of this year and the OEM or MVC enterprises, they try to give greater discounts to the sales. So I think that it is likely to boost the end consumption need and to initiate an upward cycle of our industry.

On the other hand, from the perspective of the sales structure of the auto market and EV has been growing rapidly, because of a very upward market, due to the favorable policy, due to the improvement of the supply side as well as the higher gas prices in September, the NEV domestic retail penetration base which is 31.8% compared year-on-year growth compared to last of September. The penetration rate was 21.1%, and you could see there is an increase of 11 percentage points.

In the first nine months this year, the NEV domestic retail penetration rate is 26% and in 2021 to 2035 NEV industry development plan it mentioned that the goal of 2025 NEV penetration rate is 20%. Now, we could see that the goal could be achieved three years in advance.

[Foreign Language]

According to the explanation by CAAM or China Association of Automobile Manufacturers, Q4 manufacturing and sales of automobile will continue to be stabilized under the process influence of policies that aim to stabilize the economy and reception and is also estimates that the overall auto market this year would achieve the stable growth project – and of course, the auto market still means favorable policies, and we hope that, the related policies could continue in the next year, so as this contributes to a stable growth of other sectors.

[Foreign Language]

So the second question, I see that you are quite interested in our data products as well as the second cars -- used cars business. Well, about our digital products, since the beginning of this year, we aim for a constant positive trend in our digital dealers business in terms of -- so we have a double-digit growth in terms of revenue a point of quantity, the dealer revenue -- or the first store revenue as well as the project -- collaborated projects amounts have sold, and so just proves our efficacy of our capability as well as our products.

[Foreign Language] And about the digital product for OEM, we have already established a collaboration partnership with over 50% of the mainstream also brands in Chinese market, specifically 48 brands. However, there is a very slight contraction because of the decrease of clients -- of the client’s appointment but we see an increasing set of our collaboration.

[Foreign Language] And taking our digital products in terms of new energy, recently, we signed an exclusive strategic cooperation agreement with Beijing Kemoshijie Technology [indiscernible] Technology Company Limited, which further diverse our dimension of the data product. And in future, there will be interoperation between the two parties. We believe there is huge potential in terms of the digital product for new cars, as well as used cars, which is an area that we are advantageous and good at.

[Foreign Language] And talking about used car, first perspective is the quality perspective. The used cars in China, is the fastest growing used car market.

[Foreign Language] And talking about the business landscape on Autohome TTP as well as Ping An, cover the upstream and middle-stream and downstream of the used cars development, which is our unique advantages in competition of which is lacking by other counterparts in factor

[Foreign Language] In terms of business pattern, our certified used car platform is committed to stop the pain points in the sector. And we are upgrading from a lead-generating service to value-added and digital life to service and is growing beyond our solo monetization passion

[Foreign Language] Generally speaking, we are very confident in a second we used the contractor, and we will keep maintaining our life asset service model and to build a platform of integrated trading service in car.

[Foreign Language] So above all, our answers to your questions, Thomas.

Operator

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

Brian Gong

[Foreign Language] I will translate myself. Thanks management for taking my question. Can management share your view on auto as budget and as market ahead in the fourth quarter this year and next year? And also for our lease product to [indiscernible], where we continue to roll out more premium working ahead? Thank you.

Quan Long

[Foreign Language] Generally speaking, we still hold a favorable attitude, and we are partially cautiously optimistic. Our estimation is based on the new car market, however, the -- talking about the advertising budget for new models of part. This year, the auto shows or auto exhibition also from the impact of the COVID-19 pandemic almost all of them, almost none of them were held according to schedule or according to the schedule time or scale. However, that has led to new forms of -- also shows, for example, virtually and for example, integrating with metaverse. So generally speaking, the advertising budget of OEM is still linked to the sales that is why our additives for Q4 as well as for next year is cautiously optimistic.

[Foreign Language] We have been providing a more diverse service to our dealers. For example, [Indiscernible] is very popular among our dealers. So we will continue to provide new features to help our dealers to cut costs and boost the efficiency.

[Foreign Language] So that is the answer for your question, Brian.

Operator

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

Ritchie Sun

[Foreign Language] Thank you management for taking my questions. First of all, is we noticed that you have signed some collaboration with NetEase Music as well as Huawei. Can you elaborate on the rationale and also opportunities behind this? And what are the other collaboration opportunities that we've seen with other Internet companies.

Secondly, in terms of cost cuts or efficiency initiatives, what are the other rooms for us to do more given the top macro environment? Thank you.

Quan Long

[Foreign Language] Thank you for your question, Ritchie. First question is about our collaboration with NetEase Music, this is a new initiative that we make in the scenario of subscribing a car user scenario. We try to attract active users and to acquire new users and we collaborate with NetEase Music to launch a campaign called car owners music season and we launched some iterative activities. This provides better experiences of driving and music, and I think it gives us more room for imagination of how the content consumption could be integrated with the driving scenario. We also collaborate with the [indiscernible], and we need this cyber formats to bring diversity to our common products, and we also try to use – user and bring traffic by this online and offline, which is a virtual important interaction activity. And besides, we also collaborate with [indiscernible] and we try to explore business development based on different scenarios and try to build an alliance and a new system for traffic.

But as I said, we also have some other collaborations, for example, the Focus Media Information Technology [ph] and Information Technology Company Limited, of which were mentioned a moment earlier, so Autohome in the future will have more collaborations with not only Internet enterprises, but also traditional enterprises to build an ecosystem for example, also shopping also purchased as well as auto application.

And your second question is about our cost efficiency it consist of internal and external initiatives internally speaking, there are some pipes to the small measures. For example, in terms of -- in the report, we have been doing and very well continuing to do -- to take measures such as the performance evaluation and another measure is technical managers.

I'll give you an example of how we boost our cost efficiency by technical managers, for example, in our content generation, we use our technological measures to boost the efficiency of content generation in terms of our inventory of our models and we could even automatically generate explanations in video format. There are more places like this if you are interested, you can feel free to reach out to me for more. Talking about the external measures of cost efficiency initiative, we try to facilitate the building of our ecological system.

For example, currently, our customer acquisition stayed focused on a shopping and car purchase. And in the future, we don't extend this chain to car driving, so in this way, we could further improve our ecosystem and we could see first our cost efficiency initiative. So are there any further questions?

Operator

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

Unidentified Analyst

So my first question is regarding the data product. As we could expect the COVID resurgence may continue to weigh on our OEMs budget, how should we think of the OEM and dealers demand entering into Q4 and 2023? Also, are there any recent plans for new product launch? And my second question is about our cash usage. Since we have sufficient cash balance, do we have any plans to raise our dividend payout ratio or set up our share buybacks? Thank you.

Quan Long

[Foreign Language] Thank you for your question. The first question regarding the data product, actually, I have already talked about it earlier and I will just recap it briefly. So we will continue to launch new data products for our customers. For OEMs, we will help them mainly with their marketing and launching of product. And for dealers, we will help them mainly with cost efficiency initiatives as well as market analysis.

And talking about our cash flow, we will continue our buyback plan and we have been paying dividends in a stable manner. And we will, of course, pay returns to our shareholders in a manner that is best compatible with their best interests.

End of Q&A

Quan Long

Okay. That's the end of the Q&A session. Thank you, everyone. Thank you for joining us today in the earnings conference call, appreciate your support, and we look forward to updating you on our next quarter's conference call in a few months time. So in the meantime, please feel free to contact us, if you have any [Foreign Language] to everyone. Thank you, operator. Thank you.

Operator

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