Autohome Inc. (NYSE:ATHM) Q1 2022 Earnings Conference Call May 24, 2022 8:00 AM ET

Company Participants

Sterling Song – Investor Relations Director

Quan LONG – Chairman and the Chief Executive Officer

Craig Yan Zeng – Chief Financial Officer

Conference Call Participants

Brenda Zhao – CICC

Operator

Ladies and gentlemen, thank you for standing by for Autohome’s First 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. [Operator Instructions]

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, and this is Sterling Song. Welcome to Autohome’s first quarter 2022 earnings conference call. Earlier today Autohome [Technical Difficulty]

Operator

Sorry. Mr. Song’s line is disconnected and we will connect him again shortly.

Unidentified Company Representative

Maybe we can start from – come to our line.

Unidentified Company Representative

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 the Chief Executive Officer, Mr. Quan LONG; and the Chief Financial Officer, Mr. Craig Yan Zeng. After the prepared remarks, our management team will be available to answer your questions.

Before we begin, 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 Security and Exchange Commission. Autohome does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

The earnings press release in this call also includes discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on Autohome’s IR website. As a reminder, this conference call is being recorded. In addition, a live and archived webcast of this earnings conference call will also be available on Autohome’s IR website.

I will now turn the call over to Autohome’s Chairman and CEO, Mr. LONG, for opening remarks. Please go ahead, Mr. LONG.

Quan LONG

[Foreign Language] Thank you. Hello, everyone. This is Quan LONG, Chairman and CEO of Autohome. Thank you for joining us today for our discussion of our quarterly results.

[Foreign Language] To begin, we are delighted to announce and welcome a new member of Autohome’s senior management team, Mr. Craig Yan Zeng, who joined Autohome as our Chief Financial Officer in the beginning of May. Craig has over 20 years of experience in the capital markets and has held various senior management positions with both public and private companies, making him a rare management talent with a full set of capital market experience across Mainland China, Hong Kong and the U.S. He has in-depth expertise in financial management, finance, innovation, M&A and the risk of control as well as an excellent business philosophy and a strategic mindset. We believe that with his rich experience and outstanding leadership, Craig will be an asset to the company and help Autohome achieve its next stage of growth.

[Foreign Language] With that, I will now turn the call over to our CFO, Craig Yan Zeng, for a closer look at our first quarter operating and financial results.

Craig Yan Zeng

[Foreign Language] Since the beginning of this year, the resurgence of the COVID-19 pandemic in China has impacted most industries, including the automotive industry. Despite the challenging macro environment, Autohome reported an extraordinary first quarter with revenues totaling RMB 1.47 billion of which the contribution from new business rose to 33.7% of total revenues.

Our adjusted net income in the first quarter was RMB 438 million, with adjusted net margin of 29.7%. Our overall performance exceeded market expectations and we maintained good profitability as well as a high profit margin level.

[Foreign language] We believe our steady financial performance and strong cash flow will support Autohome as we navigate through market uncertainties and focus on long-term development with sustainable competitive advantages. Meanwhile, our healthy balance sheet and ample cash reserves allow us to continue to implement our strategy and generate sustainable returns to our shareholders with our share repurchase program and dividend policy.

[Foreign language] Moving on to an overview of our first quarter highlights, during the quarter, we strengthened our collaboration with partners throughout our ecosystem to build an online traffic alliance and explore new ways to grow traffic. According to QuestMobile, Autohome’s aggregated average DAUs grew by 7.5% year-over-year to RMB 45.21 million in March, fortifying our leading position in the auto media vertical and surpassing the total DAU of the second and third largest players in the market combined. We also continue to develop our CN user base and strengthen the diversity of our content platforms through active development of short videos and live streaming content.

Furthermore, we upgraded our NEV platform with a refreshed layout and user-friendly functionalities to cater to users’ diverse needs and behaviors, creating a more flexible and convenient user interface. These initiatives have successfully reinforced Autohome’s content ecosystem while delivering a better user experience. Furthermore, in the first quarter, our IV and used car business performed well exceeding the market growth rate. Regarding digitalization, we have effectively expanded our OEM digital product lineup at the end of last year, continuously supporting the digital transformation in Chinese auto industry as well as accelerating the progress, the process of digital upgrading of the industry.

[Foreign language] Generally speaking, although the auto industry has been impacted by the pandemic, it is still one of the most important pillars in China’s economy and a full of potential for future development, given that the elastic demand for cars and the ongoing developments of the auto markets. We have maintained our close business relationships with most of our OEM and the dealership customers, who continue to purchase popular media, leads and digital products from us.

[Foreign language] Next, I’d like to provide more details on several aspects of our business. In terms of content development, by leveraging our big IP brands, we have steadily advanced our strategy of promoting a video-based content transformation. Furthermore, by expanding content categories and the more accurate recommending content that caters to users’ preference, we have attracted a more diverse audience. In the first quarter, Autohome launched four series of IP videos and accumulated over 100 million views in total.

In addition, two mid EV users growing demand, we have upgraded our NEV platforms accordingly, crafting younger products appearance, enhancing NEV content quality and diversity in reaching short video content and adding multidimensional tools to fully satisfy NEV users’ needs for viewing, buying and using cars.

[Foreign Language] In the traditional business segment, we continue to focus on strengthening product differentiation and enhancing product and service quality for our membership product packages. While also steadily certifying the fundamental foundation of the business, thereby creating a more future or cross-selling opportunities to develop new business lines and promote new products. In 2022, over 9% of the brands renewed their contracts for our leads subscription package. Notably, the number of paying dealers subscription to our newly launched premium vision package reached more than 12,000 during the quarter and subscribers to the tech vision reached nearly 16 – 6,000.

Together, those two high-end versions account for over 80% of total subscriptions. Moreover, the proportion of dealers who subscribe to our floating model has also significantly increased. Financially, revenue for our leads generation business in the fourth quarter increased slightly on a year-over-year basis. In response to the pandemic resurges, Autohome actually created pandemic-proof marketing plans such as online auto shows to better serve our customers and minimize the impact to our business.

[Foreign Language] And the data products from Autohome continued to build our platform’s big data analytic capabilities, and our industry-leading technology to drive innovation and empower the digital transformation of OEM dealers and other stakeholders of the automotive industry. For dealer data products, we remain focused on improving core product quality to exceed the exclusion of our whole industry chain strategy.

In the fourth quarter, we had over 18,000 dealer customers and average product repurchase per dealer increased from 3.01 in 2020 to 3.59 in 2021 and to 3.91 in this quarter, representing an increase of nearly 30% in the past two years. Since the launch of new data products at the end of last year, we have received a wild recognition of OEMs to our one-stop solution and service.

In the fourth quarter, more than 40% of our OEM clients purchased a data product subscription. As our business revenues continue to expand, our revenue streams will become more diversified despite the pandemic’s current impact. We continue to provide additional digital products and actively accelerate the digital transformation and upgrading of China’s automobile industry. We expect that digital products will contribute an increasing amount of revenue to the company going forward.

[Foreign Language] Regarding our NEV business, we focus on integration of a brand and sales to building a full chain closed-loop marketing cycle through our NEV commerce services while also generating diversified revenue streams. In the fourth quarter, we maintained our cooperation with the most domestic mainstream NEV brands and the revenue generated by our annual business surged 156.1% year-over-year, exceeding the overall NEV market sales growth rate in several consecutive quarters.

In addition, given the rapid growth of NEV sales, we continue to tap into new opportunities in the NEV sector, especially with respect to the new retail sales model to reach more customers and products and the services that meet specific demand. We expect that NEV retail model will begin to contribute revenue to Autohome this year.

[Foreign Language]

In the used car area, Autohome services upstream corporates with Tiantian Paiche as midstream and joined hands with Ping An Finance and Insurance group in the downstream to form a complete closed-loop used car knowledge, creating the most comprehensive used car transaction system in China and present.

Autohome is largest automobile contribution platform and vertical media platform in China with the highest traffic volume and the number of users in this industry. Tiantian Paiche large online used car auction platform in China and Ping An Insurance Group is the largest financial insurance group in China, both in a large number for high quality automotive customers, each of these three companies leads its respective few. And in combination, we create in fact that’s much greater than the sum of its parts. Together, we form a ecological chain covering the upstream, midstream and the downstream of the industry and building an entry barrier, a huge advantage of our competitors don’t have.

[Foreign Language]

As I mentioned a moment ago, also produced the passenger vertical sales dropped slightly year-over-year market wide in the first quarter due to COVID-19. Autohome’s used car business unit together with Tiantian Paiche outperformed the market and achieved 5% year-over-year growth in terms of revenues.

At the same time, we continue to deepen businesses synergies with Tiantian Paiche during the quarter to enhance and grow our used car business. Through our matching and auction capability, we’re now evolving [indiscernible] about 20% of all used passenger vehicle trades in China, an increase of about 4% points compared with last quarter.

Going forward, we will continue to invest substantial resources in development to ensure successful market launch of a new data product for used cars, and combine our car condition and car comprise data products with our certified used car program to become China’s largest online real used car data and transactions platform.

[Foreign Language]

In conclusion, we will continue to fortify our traditional business foundation while actively investing in new business avenues as we move forward. Also the COVID-19 residues in the first half of 2022 has posted tremendous challenge to China’s auto industry and the broader Chinese economy. Autohome actually adjust our operation model to adopt to the new economic environment.

We believe as the industry recovers in the second half of the year, Autohome’s business quickly rebound with it. We will leverage our core competencies to explore large markets and the more sustainable portfolio margins to obtain a greater longer-term benefits supported by our train network, in fact, excellent innovation and capabilities and experience. Visionary management team, we believe that Autohome will continue to lead the development of China’s auto industry and create lasting value of the entire industry in the long run.

[Foreign Language]

Next, let me walk you through the key financials for the first quarter of 2022. Please note that as with prior calls, I will reference RMB only in my discussion today, unless otherwise stated.

[Foreign Language]

Net revenues for the first quarter were RMB1.47 billion due to decrease compared with the corresponding period of 2021 was primarily attributed to the impact of the ongoing chip shortage as well as the COVID-19 pandemic in certain cities in China in Q1 since the year. For a detailed breakdown, media services revenue came in at RMB267 million. Leads generation service revenues were RMB708 million and online marketplace and other revenues were RMB496 million.

[Foreign Language]

Moving on to cost. Cost of revenues was RMB255 million and gross margin was 83%.

[Foreign Language]

Financial operating expenses, sales and marketing expenses in the fourth quarter were RMB592 million. The decline compared with the corresponding period of last year was primarily due to the decrease in promotional spending. Product and development expenses were RMB355 million, an increase compared with corresponding period of last year, primarily attributed to higher investment research and development activities for digital products. Finally, general and administrative expenses were RMB137 million.

[Foreign Language]

Overall, with the other operating profit of RMB241 million and adjusted net income attributed to Autohome Inc. was RMB438 million.

[Foreign Language]

Non-GAAP basic and diluted earnings per share were RMB0.87 and RMB0.87 respectively, non-GAAP basic and diluted earnings per ADS were RMB3.7 and RMB3.7, respectively.

[Foreign Language]

As of March 31, 2022, our balance sheet remained very strong with cash and cash equivalents and short-term investments of RMB20.27 billion. We generated operating cash flow of RMB496 million for the first quarter of 2022.

[Foreign Language]

On November 18, 2021, our Board of Directors authorized a share repurchase program and which we repurchased up to $200 million of Autohome’s ADS for a period not to exceed 12 months thereafter. As of May 2020, we have repurchased approximately 1.57 million ADS for total cost of approximately RMB443.9 million.

[Foreign Language]

With that, we are ready to take your questions.

Question-and-Answer Session

Operator

Thank you, management. [Operator Instructions] Our first one is from Brenda Zhao at CICC. Please go ahead.

Brenda Zhao

[Foreign Language]

Good evening, management. Thanks for taking my questions. I have three here. First one is about the industry. Could management give some color on the supply chain pressure of auto companies? And to what extent the current chip supply can meet market demand compared with the pre-pandemic period. And what’s management’s expectation of the new car sales market in the second half of this year?

And my second question is about the data product. So what’s our R&D strategy in data products? And the third question is about the used car market. What are management’s view on the used car market and please give some color on the operation results of TTP. Thanks.

Craig Yan Zeng

[Foreign Language]

Thank you very much for the question. Let me echo with a question by quoting some of the data to you about the big market. Actually, if you look at the whole market, if we look at the already published data, you can see that in January and February, the market is still doing okay. However, getting into March, it has got into net growth.

So because of the pandemic, especially in April, for example, let me quote you with a number, which according to the Passenger Car Association, the retail sales volume had dropped by 35.5% for the passenger car. Actually, according to another data which is released by the China Auto Association, the whole selling volume had dropped by 43.4%. Actually getting into May, situations get even worse. For the first half of May, if you look at the Passenger Car Association’s number, the car sales volume dropped by 21%.

It’s only half a month sales volume. It already dropped by 21% comparing with the same period of last year. So actually, in the short-term, we do see the pandemic actually still have some negative impact on the market, and there are a lot of uncertainties tied to the pandemic. Thank you.

[Foreign Language]

After we talked about the sales in the market, now let’s shift to the supply side. If you look at the supply chain of the Chinese auto market, actually starting from 2022 April, we do see the supply chain experienced a lot of challenges, especially due to the lockdown policies for some of the cities, a lot of companies have to sustain, actually have to stop functioning. And also, there are big challenges on the logistics side. And actually, it already affected the supply chain a lot, especially on the supply side, the supplying capabilities have significantly dropped.

Let me take Shanghai as an example. Shanghai has been under lockdown for quite some while. Now Shanghai’s Municipal Government is trying to proactively reopen and restore some of the auto market, especially the production side.

Well, actually, now let me talk about the demand side. We already said that on the supply side, the government is trying to proactively push the restorement and the reopening of some of the plants. However, on the demand side, although a lot of consumption has been already curbed by the pandemic. However, we do see the negative impact is getting you know the marginal effect is getting slimmer and the slimmer.

I personally think, in the future, I feel quite confident about the Chinese auto market. However, we all have to notice that because of the overall economy is still quite weak the consumers’ overall confidence level is still limited. So that’s why auto consumption is quite expensive and the large commodities is kind of quite expensive consumption goods. So if the customer’s confidence level has not been fully restored, I believe that would impact the demand side.

I also want to quote what the China Auto Association’s Secretary General, Mr. Cui Dongshu, had recently made a comment. He said that ever since February of 2022 due to the shortage of the chip supply in the market and appreciation of the raw materials as well as the large commodities price, over 20 OEMs had already announced that they’re going to readjust the pricing on the new renewable vehicles, the NEV.

And actually, after the price readjustment we do see that on the demand side, the consumers had significantly reduced the number of newer consumers. So that’s why a lot of consumers believe the price may further drop. So they postponed the purchasing demand. So in this way, from the perspective of consumer as well as the investors, we do see that the enthusiasm for investment and consumption has been significantly weaker.

Well, actually, we do see that auto has quite expensive consumption goods. It is strongly related to people’s consumption confidence level. If the confidence level is low and people are getting more and more cautious and prudent in purchasing the car, we believe the auto market in the future would encounter the code market and the downward chip [ph] market. If there is no significant supporting policy released by the government, I believe that this year may not be easy to reach the annual target designed at the beginning of the year.

So the growth target is not that easy to achieve. However, having said that, we are still very happy to see this actually the silver lining. For example, on May 24 morning, the State Council had hold a meeting to discuss how would the central government further support the economy. They announced a lot of measures to stabilize and boost of economy.

For example, in some of the cities, the restrictive purchasing policy has been eased and the people are getting more freely to purchase vehicles. And also, the tax cut for the vehicles purchasing, the total amount has reached to 60 billion. So the 60 billion consumption tax has been cut, which would boost the consumption market for the auto.

[Foreign Language] Well, actually, luckily, we do see that a lot of local government as well as central government starts to introduce more and more stimulus policies toward the auto market. And we believe that with the more and more supporting policy getting released, I believe the market may turn around, we would pay close attention to the market move and then making our strategies accordingly. Now, let me comment on the chip supply. Currently, if you look at the chip supply in the auto market, it’s still the supply is very tight.

It cannot fully meet with the demand of the OEMs. And it’s not easy to restore at the level before the pandemic. So I believe it will take a while for the chip supply to get back to the normal rate before pandemic. So I hope that the chip supply, especially the tight situation will be eased gradually in the future and that would help the market to get to the normal track.

[Foreign Language] Well, thank you very much. In terms of the data product, actually, if you look at the OEM reach to the whole auto market, until the end the core KPI, which is the sales volume, we do see that the marketing and the sales chain is very long. There’s no single company which can cover such low value and business chain. Actually, we are the companies who are trying to cover the whole marketing and sales chain by providing the customized product.

For example, from the leads generation to the store visits, to boost transaction, to the real transaction, to the customer satisfaction rate enhancement, we are building our data product to cover all the value chain. Actually 2022, what we have done is to consolidate our data as well as upgrading our technologies. By consolidating Ping An’s data and a lot of data sources together, we are trying to create a big and multidimensional profile of the data, and we are trying to create a data barrier for our competitors.

After we create such a data barrier, then we can come up with a more sophisticated and more upgraded data product. For example, we provide three key part of our data product. One is we call it CRM Plus, and it covers the CRM chain. Secondly, it is a more active management model. And thirdly, it is a module-based and a very flexible system.

[Foreign Language]

Now, thank you for the used car business. We are quite optimistic about the used car business, and we expect that this year, there will be 90 million cars being transacted in the used car market. The growth rate can be 8% year-on-year, and we also see a lot of supporting policies get released.

For example, in January 21, actually the reforming and the Development and Reforming Committee released a document, which is trying to boost to the green consumption concept. And they significantly pointed out the used car business need to be boosted and they encourage the building of more dealers for the used car business and trying to enlarge the circulation of the used car and the boost the liquidity of the used-car market.

And secondly, on March the 5th, we do see that the government designed a further policy to boost the used car, the white goods consumption, and they also designed some detailed policies. For example, in large the parking lot establishments and build more charging post, et cetera. In this way, the government released the more and more policies trying to boost the used car business.

[Foreign Language]

Well, we said we used to be quite optimistic about the used to car market. But the real situation is more complicated than what we have believed. For example, there are pros and accounts in this market. On the Pro side, because of the cheap supply shortage, that curbed a lot of launching of the cost in the new car market. A lot of the dealers and OEMs that don’t have enough cars to sell, if you want to purchase a new car, you have to wait for a while for even a few months to get the car. So a lot of the buyers that shifted to the used car market to buy the used car which boosted the market, which is the Pro. However, on the con side, because used-car are not standardized products.

It is not standardized. So you have to look at the car, test to drive the car offline. Due to the COVID-19 pandemic policies, especially the quarantine policies, that curbed a lot of off-line store visits to purchase the used car. So in this way, we do see that in Q1, the overall used car market had slightly dropped.

However, we encountered positive growth, but the average market, the whole market had dropped. In Q2, we believe the market may continue to be weak. Let’s put the hope on the second half of the year. If the pandemic policies can be – the COVID can be better controlled than we did the second half of the year, there will be more opportunities on the used car market. Thank you.

Operator

Thank you. Our next question is from Maddie Lee [ph] at Jefferies. Please go ahead.

Unidentified Analyst

Thank you, management for taking my question. I have three questions. So the first one is about management providing color on the monthly business momentum and the impact of the Beijing Auto Show in second quarter under the pandemic outbreak and our expectation on the auto industry outlook in the second half? The second question is about the competitive landscape in online auto vertical. And the third, the last question is on the media and the leads generation outlook in the second half this year.

[Foreign Language]

Quan LONG

[Foreign language]

Well, thank you for the question. Now talking about the Beijing Auto Show. Yes, the time has been postponed and the timing is still uncertain of when it will be held. Actually, 40% of the new car launching has already been postponed.

So that’s why it already impacted the new car market a lot. If the COVID pandemic can be better controlled, hopefully, for the second half of the year, if we do see less quarantine cities, then we believe that starting from third quarter, we will see some pickup in the auto market. Thank you.

[Foreign language]

Now talking about the competition. Actually, on the 2B side, we continue to be the number one player in the market. Our market share is more than 50%, which is 52%. And actually, for the rest of the two competitors, they are quite close.

If you look at the market share breakdown between the top three players, I believe it was five to three to two. And secondly, for the second half of the year, in terms of how the media and leads business would evolve, actually it depends on the pandemic. And also for the media business, the advertisement and marketing expenditures do get negative impacted. For the leads business, if the COVID-19 pandemic can be better controlled, I believe that starting from third quarter, the leads business would starting to perform better. Thank you.

Operator

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

Quan LONG

[Foreign language]

Thank you, everyone. Thank you very much 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’ time. In the meantime, please feel free to contact us if you have any further questions or comments. Thank you, everyone. Bye.