Autohome Inc. (ATHM) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by for Autohome's Second Quarter 2016 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’s now my pleasure to introduce your host Vivian Xu, Autohome's IR Manager. Ms Xu, you may begin.

Thank you, operator. Hello everyone and welcome to Autohome's second quarter 2016 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 Mr. Yan Kang, Autohome's President and Mr. Julian Jiun Lang Wang, Autohome's Chief Financial Officer. After the prepared remarks, Mr. Kang and Wang 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 Securities 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. The 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 is being recorded. In addition, a webcast of this conference call will also be available on Autohome's IR website. I will now turn the call over to Autohome's President, Mr. Kang, please.

Thank you, Vivian. Good morning and good evening everybody. Thank you for joining our second quarter 2016 conference call. Before we review our results, on behalf of Autohome, I would like to express our sincere gratitude to our previous executive Mr. James Qin, Mr. Nicholas Chong for their leadership and service to Autohome. I would also like to take this opportunity to thank you all our shareholders for your continued support and we look forward to working closely with you. Now, I am very excited to join Autohome because it is a company with very solid business fundamentals driven over past decades by highly skilled, motivated and passionate people at all levels and all business units of our company. It is undoubtedly the best known automotive media brand in China and is a clear category leader. It attracts over 22.5 million daily unique visitors. It services more than 21,000 OEM dealer clients, and we are successfully matching nearly 7,000 vehicle transactions per month on average for the first half of 2016. As our new management team takes over, we believe strongly in the company's growth strategy that focus on expanding our customer audience, growing our core advertising and leads generation business, while at the same time, investing in and optimizing the new transaction marketplace platform. To ensure that we continue to take Autohome to the next level, we're conducting a full strategy review, including how we enhance our existing business model, how we improve our relationships with our OEM and dealer clients, and how best to collaborate with our major shareholder, Ping An Group. Our market, like every segment of e-commerce in China, is evolving very fast. Change brings potential risks, but can also mean substantial opportunities, so we must never be complacent. We must continue to innovate, and we must also take tough decisions. Some of these changes mean that we may experience a short period of uncertainty, but it will pass. So, we appreciate your trust and we look forward to sharing with you our strategic plan as soon as the review process is completed. Now despite these internal changes, we're pleased to report that we have had a great second quarter, where our revenue increased by 60% year-on-year to RMB1.4 billion. That exceeds -- that exceed the top end of our original expectation. In addition, adjusted net income attributable to Autohome grew by 22% year-on-year to RMB396 million. That represents an adjusted net income margin of roughly 29%. Again, our business and our financial performance continue to beat the average performance in our industry, which really reconfirms our consistent and precise execution of our strategic priorities. In terms of growing our customer audience size and quality, it is also clear that consumers continue to select Autohome as the preferred choice when buying a car, as the combined number of average daily unique visitors for our mobile website and mobile applications exceeded more than 15 million as of June. That represents a 56% year-on-year increase. Our mobile advertising revenue grew 187% compared to the same period last year, accounted for roughly 29% of our media service revenue. Now the primary reason for the traffic growth were our increased brand value and the differentiated offerings of our platforms. Our ability to retain and attract automotive consumers in China, as well as the strong collaboration we have had forced with branded partners. We will continue to leverage these brands and extended resources in order to enable a more open platform, develop new and innovative content, product and services that drive the consumer audience. We will continue to enhance our user engagement, and we will empower consumers in making the optimal decision for their vehicle purchases. We also continue to invest further into mobile technology to reinforce and accelerate our overall traffic size and quality. In our core advertising and leads generation business, although we continue to show very solid growth of 26 -- 27% for the second quarter, it is also apparent that our growth has slowed compared to historical levels. Now that shows we have some important work to do to improve and reaccelerate our growth. We offer a powerful value proposition to our OEM and dealer client because of our ability to reach a large and engaged base of automotive consumers. To that extent, the reach of our clients' physical showrooms to millions of online users in China and it generate sales leads for dealers. We must in the future be more focused on delivering the best user experience, advancing our sophisticated big data capabilities for better consumer providing and for more customized services in order to enhance the consumer user loyalty and user yield to significantly improve our commercial rate. In addition, we also need to further improve our relationship with OEM and dealer clients and deliver higher ROI in supporting to their successes. Now, let me address our transactional marketplace. It is obvious that this business is fast-growing and evolving with enormous potential. And the transaction platform will bring us increased revenue and commission fees from our clients. We're very encouraged by the over 4,000 new vehicle transactions completed on our platform during the second quarter. This is a very strong proof that consumer demand exists, and Autohome has the capability of matching consumers and supplying partners such as OEMs and dealers. Based on the data we have so far, our review for the transaction business is focused on how to make the existing business model work better, how to improve and expand the relationships with OEM and dealer partners, and how to streamline the entire purchasing process for efficiency and better effectiveness, as well as how to optimize our transaction infrastructure in order to further reduce cost, including logistic costs, inventory and managing costs, et cetera. We're very confident that once we optimize the matching and the clearing process between consumers and suppliers, our transaction platform will be the preferred channel for consumers in China, in a similar manner to what we have achieved with our media platform. Now finally, before I turn the call to our CFO, I want to quickly address the used car business and other potential businesses such as aftermarket services, et cetera. All of these businesses are within the scope of our strategic review as these businesses represent opportunities for the future. However, we will keep a note in mind and be very prudent to review our resources for future growth and investment. We're also well positioned to lead industry and take advantage of the many opportunities and scalabilities of the benefits of our consumers, clients and shareholders. With that, I’ll now turn the call over to our CFO, Julian, for a closer look at our second quarter financial results and business outlooks. Julian?

Thank you, again. Hi everyone. I'm really happy to be here on this call. Since I joined Autohome in early August, I have not had a chance to meet many of you yet, but I appreciate your interest in the company and hope to meet with you sometime in the near future in person. As Yan has already highlighted, we are very pleased to report another strong quarter. Please note that I will reference RMB only in the following discussions. Net revenues for the second quarter 2016 increased 60.1% year-over-year to RMB1,378 million. This exceeded the high end of our initial guidance, thanks to robust growth from our core media and leads generation business as well as the new online marketplace revenues. In terms of revenue breakdown, media service revenues increased 20.8% year-over-year to RMB596 million, representing 43.3% of total revenue. This strong growth is primarily driven by an increase in average revenue per customer as automakers continue to allocate more advertising budget to Autohome. During this quarter, leads generation revenues increased 35.8% year-over-year to RMB473 million, representing 34.3% of total revenue. This increase was primarily driven by a year-over-year increase of 18.5% in average revenues per paying dealer. Lastly, for the second quarter 2016, our online marketplace revenues contributed RMB309 million, representing 22.4% of total revenue. This new business is mainly driven by direct vehicle sales, which accounted for 97% of online marketplace revenues. Moving on to cost of revenues, which increased 238% year-over-year to RMB464 million and is primarily driven by the cost of goods sold of direct vehicle sales. Excluding the cost of vehicles we sold directly, the cost of revenue has only increased 31.7% year-over-year, resulting in a gross margin of 84.2% for the second quarter 2016. However, given the nature of our online marketplace and being in the early stage of it, the overall gross margin for the second quarter 2016 declined to 66.4%. Now let's take a closer look at our operating expenses. Note that while we are investing into new growth opportunities, we are very cost conscious and prudent with our overspending. Sales and marketing expense in the second quarter was RMB306 million or 22.2% of our revenue, which is primarily due to increased marketing and headcount expenses. Product and development expense was RMB139 million or 10.1% of revenue, relatively stable sequentially and is primarily due to increase in headcount in support of our rapid growth. Finally, G&A expense was RMB77 million, or 5.6% of revenue. As a result, total operating expense for the second quarter increased 51.3% to RMB523 million from RMB346 million in the corresponding period last year, representing 37.9% of revenues compared to 40.1% the same quarter last year. Now on profitability. Even with higher cost base, we still came in pretty strong. Operating profit increased 3.6% year-over-year to RMB391 million. Adjusted net income attributable to Autohome Inc. increased 21.8% year-over-year to RMB396 million. Basic and diluted earnings per share and per ADS for the second quarter were RMB3.04 and RMB2.99, respectively, compared to RMB2.72 and RMB2.63, respectively, in the corresponding period of 2016. As of June 30, 2016, our balance sheet remains really, really strong, with cash and cash equivalents, restricted cash and term deposit of RMB4.6 billion. Net cash provided by operating activities in the second quarter was RMB284 million compared with RMB194 million in the corresponding period last year. The strength of our balance sheet and cash position is an important competitive differentiator that leads to significant financial flexibility. Before I move onto guidance, I would like to emphasize again that in order to execute our strategy this year, we will invest in several areas, such as talent and teams in technology as well as new businesses. Let me now address our third quarter 2016 outlook, which will reflect our current and preliminary view on the market and operating conditions that may be subject to changes. I would like to caution investors that, given the early stage of our online marketplace business and depending on the outcome of our final strategic review of this business, the transaction volumes and the related revenue may be somewhat volatile from quarter-to-quarter, although we will try our best in providing the guidance based on our current visibility. So right now, we expect to generate net revenue in the range of RMB1,350 million to RMB1,394 million, or in U.S. dollar terms between $203.1 million and $209.8 million, representing a year-over-year increase of 50.2% to 55.1%. In summary, we see huge market opportunity and strong demand for our operations and we are extremely focused on comprehensive strategic review and prudent execution so that we can deliver sustainable growth and maximize shareholder value. With that, we are ready to take your questions. Operator, let's proceed to the Q&A session, please.

Thank you. [Operator Instructions] We'll take our first question from Amanda Chen from Morgan Stanley.

Hi, good evening, management. Thank you for taking my questions. I have three here. The first one is regarding the third quarter guidance. We noted that the third quarter guidance is a little bit weak. Maybe because that we are in a transition periot. So from your perspective, how long will this transition period last? And how will it impact the top line and bottom line growth? That's my first question. Thank you.

All right. Thank you, Amanda. This is Yan. The primary reasons for our adjusted forecast for Q3 is not so much the uncertainty in our management. It is more because of our cautiousness and reviewing our new car ecommerce platform, particularly our buyout business, where we purchase a car to put it in inventory and we sell it directly to consumers. Now we've been trying that for a number of months. One of the key thing we realized that going forward, we have to make sure that our new model is adjusted so that we're very competitive in terms of inventory days and the way that we operate in our capital return for our cash, but also in the way that we manage the online/offline costs compared with traditional dealer car cartels. That is the critical success factor of our business going forward. So we wanted to really put the scrutiny of our model to make sure that we streamline all these elements before we embark on a scaled expansion. So that is why we focus more on the quality of the model rather than the scale of the model in the next few quarters going forward.

Thank you, Yan. That's very helpful. So the second one is regarding your long-term strategy for the transaction business. We're just wondering if you will continue taking inventories and also how will you integrate Ping An Group’s resources with Autohome.

Okay. All right, that is a very good question. Well, our overview for our strategy going forward is that we continue to believe that e-commerce platform is a very critical part of our future business strategy. Now undoubtedly, we wanted to make sure that we have the right model when we embark upon this new strategy. So, as I mentioned, we want to make sure that we be very efficient in our inventory days. Now it is somewhat inevitable in such a buyout transaction you own inventory, but the critical success factor for us going forward is we need to be more competitive, much more competitive than the tradition leaders. We were able to do that by leveraging our strengths in our media business, by making sure we leverage our strengths in consumer data, in analyzing the consumer behavior based on their history in our website to make good predictions about the vehicle sales volumes going forward. That I think is a unique capability that Autohome has vis-à-vis some of our competitors. We continue to believe with that we'll be able to gradually reduce our inventory so that we are the most competitive in the marketplace going forward. Now with the synergies with Ping An Group, for example, in our short span of less than two months we’ve come into management, the Ping An Group has already initiated, together with Autohome, 17 projects. That brings the objectives of Ping An, various subsidiaries and Autohome management together to work on potential synergistic products already. And many of those projects are work-in-progress and are making great progress. We can see some of those outcomes and benefits of that in the next quarters to come.

Got it. Thank you. And the final question is regarding some initiative business, as you mentioned that used car, auto finance, et cetera, has very bright future and a huge potential. So I'm wondering, do you have any specific strategy for these new initiatives as we know that the capital market now actually pay a lot of attention on the auto finance business. So could you please share with us your strategy? Thank you.

Sure. Our belief is that in the end, in the endgame, that we need to really have a complete picture of our business in most part of the automotive acquisition. That includes media, that includes dealer and OEM services, that includes new car e-commerce, used car, aftermarket so on, so forth. However, we can take one morsel at a time, particularly in a time of very fast-changing marketing environment, we need to be super focused. We need to make sure that we win one battle at a time, making sure that we excel, we deliver extreme smooth line consumer experience. That, I think, is more critical than throwing resources all over the places. Now recognizing that used car and aftermarket are all very big market with a lot of potential, with a lot of players, for us, we keep a close eye on that and we have our leg in the business. We'll experiment. We'll keep a very close look, but our primary focus is making sure our media and OEM dealer business is strong, more and more strong as we continue to build into our core and making sure our e-commerce platform has the right and successful model and is ready for scaled expansion.

All right. Thank you. That’s very helpful.

Sure.

We'll now take our next question from Ming Xu from UBS.

Good evening, Yag and Julian. So I also have three questions. The first one is regarding the lead generation business. So I noticed that the growth of lead generation business decelerated from 47% in Q1 to 36% in Q2. I'm just wondering, could you elaborate on the reason for the slowdown? And also, how should we look at the growth in Q3? So that's my first question.

Okay. Thank you. That's a very good question. Now when we talk about our leader generation -- the leads generation business for the dealers, you have to bear in mind that we are already penetrating into almost all of the market. Of the 25,000 overall dealers, we cover more than 80, close to 90% of them already. So, by definition, we are entering into a mature stage of our business. So that, I think, is the difference we you look at one quarter before, where there's still some room for growth. So, we entering into a more, say, stable business, stable phase of the business, where the growth will -- in the future will come more from added value, more value per customer rather than increase of customer, per se. So, I think it's natural to expect that can materialize. Now, going forward, we have to say that our media and leads generation business will continue to -- I wouldn't say the word plateau because we do have a lot of potential. But then, you have to put into perspective that we already a market leader in that. And the focus of our media business and leads generation has to change more from just pure revenue growth into quality of growth, and how we leverage the big data capability and customer understanding analytics capability from the business rather than just from revenue, per se. So, one of the key initiatives we're going to do in the next six to 12 is to significantly upgrade the IT infrastructure and technology base for our media business, that also includes our service for the dealers, so that we can better leverage the vast ocean of data that is generated from our website. By the way, we have the best quality of consumer data already in the market. We want to use it in an even better way to guide our future e-commerce, to guide the transaction of our OEM and dealership partners.

That's very helpful. So, my second question on the media business. So, the media business, I think it maintained 20 -- around 20% of growth rate from Q1 to Q2. So, I am just wondering, how should we look at Q3 and second half? I think for -- if you look at Q3, although -- the drivers in Q3, I think on the positive side, we know that the auto sales remains very strong on the year-on-year basis, but at the same time, I think, because of the sporting events, you have an Olympics, there are a lot of traffic and therefore, lot of ad budget allocated to the portals and also mobile news apps, including not only the mobile portals, but also things like Jinri Toutiao. So, will that be a dilution of ad purchase and how should we look at ad media business revenue growth in the Q3?

Well, over a longer term, similar to what I described to the lead generation business, our media business is also entering into a more mature phase. So, -- but at the same time, it's also having very solid fundamentals. We do not see reason why we would not be able to maintain the same tempo of growth going forward. That's for sort of medium to the longer term. In the short term, there may be distractions from various topics [ph] including Olympics and so on, so forth, that may create some fluctuations. But fundamentally, we do not believe the structure of our media business have changed. So we have continued to anticipate a healthy and steady growth of our mainstream media business. Now you -- very interesting, you mentioned the example of Jinri Toutiao, which is one of the directions that we will continue to migrate our media business into because we are, at this point in time, a more content driven, a more editor recommendation based media, where we excel at our editors' objectives and some authoritative comments about automotive, which attracts a lot of respect and interest from automotive buyers. Now, going forward, that has continued going to be our core. But as you probably also see in the news that we're continuing to expand our content sources from a more OGC, more of original generated content to more professionally generated content by experts outside of Autohome as well as UGC, user generated content. That will be a major directional addition to what we have in the past, that we will continue to enrich the quality and the quantity of our content. That will allow us to make more customized recommendations to our readers based on their own behavior and then characteristics. So, with that, I think those will be the key growth drivers to drive our media business going forward. In turn, that quality of media content will result in better commercial realization for our advertisement front.

That's very helpful. Just a quick follow-up on this second question. So you mentioned the transformation in your media business model, which I guess, what you are referring to is a short curve business. But to my understanding, the short curve -- the contributor on the short curve platform is actually quite -- the group of contributors are basically very similar to the group of competitors on your -- group of contributors on your competitors' platform, and also the group -- this same group of people also can contribute to maybe Jinri Toutiao and some other aggregator sources. So how do you -- what's your competitive strategy in this? How do you try to secure an exclusive content and how to ensure that the contributors can have better readership on your platform?

Yeah, well, I think that's a very important question. I think one of our key differentiator in the past is our original content. Now, we believe in the future the battle will be both on the -- sort of originality of the content, as well as the quantity of content, particularly, when we go into more of a -- sort of a smart recommendation of content based on sort of our reader behavior and characteristics. So we have to really drive on both wheels. So we're not saying that the short curve business is going to dilute the originality of our editors' business, but it's going to be a complementary filler to what we're going to have. Now as what you were referring to, how does that compare with some of the other players in the market? I think it will have to come from user experience. The content may be the same or similar, but it's the way that you link a content to the sort of relatedness of the consumers' likes and dislikes, how do you weave that into a streamlined experience based on your understanding -- deep understanding, of consumers behavior and their own characteristic. I think that really is the key why some are more successful than the others. At the same time, we continue to differentiate from our original content, which is continuing to be our core going forward.

Thanks. So, my third question and last question is just on the marketplace business. So you have sold around 9,000 to 10,000 cars in first half. Just wondering, could you give us a breakdown between the direct sales model and the commission model? And also, I understand that you are conducting a review on the business, but is there -- is it possible to give a rough guidance for the volume in the second half to help us to model the revenue growth?

Sure. Sure. Off the roughly 10,000 vehicles that we sold, the buyout model and the commission model is a roughly 50-50 split in terms of the volume. But, of course, as you understand, the revenue contributor primarily coming from the buyout build model. The commission represents a relatively much insignificant part of the revenue. Now, going forward, as I said -- as also Vivian also -- or as Julian mentioned, we may see some volatility in the second half of volume, because we're really examining the model. We wanted to put the first priority on the quality of the model rather than how much -- how many cars we sell. We can sell cars, no problem, but we want to make sure that we have the model right. Now our current estimate for the full year vehicle marketplace is now something -- somewhere between 20,000 to 25,000 overall. But, again...

For the full year?

For full year. For the full year.

Okay.

I should probably add that may be quarter-to-quarter volatility depending on the results of our review of our new car sales model.

Got it. Very helpful. Thanks.

All right. You are welcome.

[Operator Instructions] We'll now take our next question from Nora Zhang from Merrill Lynch.

Good evening, management. Thank you for taking our questions. I have three questions. My first question is about your headcount expansion. We have added 600 staff in the first half 2016. As you just mentioned, we have 17 projects with Ping An and we'll work out new strategies in auto finance and used car. So, I wonder what's our plan on headcount expansion this year, and how many headcount are we looking at until year-end?

In terms of headcount, we did increase quite a bit, mostly in the transaction related business units. Going forward, we may or may not increase headcount further. It all depends on the strategic review, which is going on as we speak. So, we don't have a definite answer to your question in terms of the headcount. We will have by the end of the year, but it all depends on the kind of initiatives we will be taking in second half this year. In terms of the 17 project themes that you just referred to, I don't think that directly links to the headcount plan we have. Basically, it's just to explore the synergistic initiatives between Ping An Group and Autohome. So, you probably should not take that into account when we talk about headcount.

Sure. Actually, it is very helpful. So, my second question is about sales and marketing expense. We noticed that the sales and marketing expense has been down quarter-over-quarter. Could you help us understand the reason behind and provide some color regarding the sales and marketing expense in the third and fourth quarter?

We will now take our next question...

Let me address that question a little bit. Now, the sales and marketing expense, partly -- it's a little bit below the original expectation partially because part of the sales and marketing expenses actually went into the other part of the P&L, because of the headcount allocation in different departments. So, the -- I think the way you look at our P&L, you should be looking at the overall operating expenses rather than the specific category.

Sure. Sorry, Julian, I still have another question. So, we noticed that in our balance sheet, where our operating [ph] expense has increased to RMB1 billion. I think this may be related to our inventory taking business. So, does it mean that we will take about RMB1 billion inventory in the second half 2016?

Well, this is Yan again. Let me try to answer that business -- that question. Yes, well, the RMB1 billion inventory was regarded -- was the result of a decision of the management team to take in roughly 10,000 vehicles from Hyundai, Elantra, in the second quarter. Now, we're reviewing the effect of that decision. That, of course, was made based on a number of various factors to boost our e-commerce on our sales platform. This is also the reason why, we've said it earlier, we're reviewing our business model for the e-commerce platform, particularly for the buyout. We wanted to make sure, in the future, our inventory become efficient. Now, we do not necessarily take excessive inventories for the e-commerce business. So, we do not anticipate our inventory to further go up. Actually, we -- we're ready to anticipate our inventory will go down as we more aggressively streamline operation, making sure that our capital structure and also our business model is competitive compared with the regular offline transactions as dealers and OEMs engage.

That's it, and thanks a lot Yan and Julian.

You are welcome.

That's all my questions.

[Operator Instructions] We'll now take our next question from Alvin Jiang from Deutsche Bank.

Hi, management. Thank you for taking my question. I have a quick question. It is on your opinion about the competition landscape. We noticed some of your peer companies actually doing aggressively on the buyout e-commerce business and also the aftermarket business. So, in your mind, how do you balance our expansion into this more aggressive business model and -- between this expansion in our bottom line and the internal review results? Thank you.

Okay. Very good question. Well, the economics of those new businesses, the new car e-commerce and also aftermarket, second car market, is very different from our existing core business, which is in media and lead generation. Now earlier, when I mentioned, we believe in the long run, those are -- that is the right direction to go as we further expand into the automotive ecosystem. Those are all related and linked OEM services to our consumers, while we have to take one step at a time. Particularly, for example, in our e-commerce, we wanted to -- well, that -- maybe a little bit different philosophy than we had with some of our competitors, we wanted to make sure we leveraged to the fullest extent the core strength in our media capability with the big data, the consumer, deep understanding with customized offerings, with ability to predict the sales volume, with ability to manage down inventory at a significantly reduced level to traditional offline businesses, so that our model is fundamentally competitive and superior than what you see offline with the dealers and OEMs. Only given that we believe a scale expansion is meaningful. So, you already see the different approach. We wanted to make sure it's not about money. It's not about willingness to invest. Actually, with Ping An's investment, we actually have even stronger capital backing than any of our competitors to go. But we don't want to storm anybody in the world. We wanted to make sure that we have the right model. As outlined our right model is based on the unique capability and advantages of our media business that is not available to any of our competitors. Now, with regard to second car and aftermarket, for example, aftermarket is a place where a lot of people are still burning money to find a model. We probably don't want to be the first one to throw money in the water. We, again, wanted to make sure that we'll win one battle at a time. We are going to make sure that again we leverage the core strength of our media capability, our deep understanding of the consumers when we enter that model. So we have the business. We have our after sales business. We have our second car business. But the reason we do that is that we wanted to use that to be -- continued to be vigilant and aware of all the changes and we will continue to explore how to make our model unique before scaled expansion. And in the next two quarters, clearly our focus is more on the new car e-commerce rather than aftermarket.

Okay. Got it. Thank you. This is very helpful.

We'll now take our next question from Robert Cowell from 86Research.

Hey, [indiscernible] and thanks for taking for question. I wanted to ask a little bit more about the transaction business. So, in the long term, what kind of gross margin do we think this business can do? And then, you also mentioned you think it has -- your transaction business is a better solution than the one currently provided by offline dealers. How do we manage that relationship with the offline dealers? And also what makes it better in the long run?

Right. Right. Well, as we all know, that in the world of investments, that margin is not only -- is not the only measure of return. It's the margin plus how fast you return on capital, right? That's how Dell become successful, how Walmart become successful and maybe other low margin industry leaders become successful. Now similarly to that, in automotive sell business, we believe you have to pull the sane -- the two levers at the same time. So, how you employ your capital, how do you -- how fast you turn your inventory, how become efficient in logistics, in demand anticipation, in forecast, so on, so forth. Those are really the area where Autohome have a cutting edge, have a unique competitive advantage over anyone else in the market and we wanted to fully exploit that. So, our focus is really on that. Of course, with a more efficient online process -- we're now funding this -- we will improve somewhat the gross margin. But we believe the lever is bigger in the other leg, which is the capital efficiency. And by the way, with Ping An's injection of capabilities, we are now even more confident Autohome is positioned in a very unique place, where we'll be the absolute leader in making sure we deploy the best capital efficiency in that manner.

Thanks. And then also, just about managing the relationship with the offline dealers, because they are an important customer as well.

Yes. So -- now it's interesting because the same logic will apply to the dealers. Even if they do not improve on their car margin provision, if they are having access to a better capital utilization rate, they will improve as well. So, what we're doing in e-commerce platform is an experiment, if you will, for us to making sure we have the magic recipe. And once we have that, we have every incentive to use it to enable our dealer partners and OEM partners to make them as competitive as possible as well, because we believe that future change of the car distribution market is not going to be done by Autohome alone. We need to do that with everybody and everyone in the market, and we'll be the one to enable them to make that change. So, I think that actually for us represents opportunity. And just as a final to that, one of the 17 initiatives that we're initiating with Ping An is exactly to enable our dealer clients to be more efficient in deploying their capital. So, it is really a win-win. Now, of course, as you rightly point out, we need to very carefully balance the two legs to make sure that we remain friendly -- sort of friends and enemies at the same time, making sure that we put those step in advanced model, but at same time, we use the learning to benefit the whole ecosystem, particularly our partner Ping An.

Thank you very much.

Thank you. As there are no further questions at this time, I would like to turn the conference back to management for closing comments. Mr. Kang, please go ahead.

Thank you very much for all who joined us today. We really 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 get in touch with us if you have any further questions and comments. Thank you very much. Good night and good morning.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.