Ladies and gentlemen, thank you for standing by for Autohome’s Second Quarter 2017 Earnings Conference Call. [Operator Instructions] 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 you to your host, Vivian Xu, Autohome’s IR Manager. Ms. Xu, please, you may begin.

Thank you, operator. Hello, everyone and welcome to Autohome’s second quarter 2017 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 their prepared remarks, Mr. Kang and Mr. 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 risk 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 and hello everyone. Thank you for joining us today to discuss our second quarter 2017 results. Now, I am very excited to report another outstanding quarter in which our four business, including the media service and the lead generation business, revenue increased 37% year-over-year to RMB1.5 billion, that exists the highest end of our original expectations. Net income attributable to Autohome during the quarter also increased 50% year-over-year to RMB518 million, which translate into a net margin of 33%. Our second quarter results are a strong testament for the success of a series of our strategic initiatives that we have undertaken and now are starting to bear fruit. Our core media and lead generation revenue continued to deliver very strong growth of 34% and 40% year-over-year respectively. We are solidifying our dominant position in the automotive vertical across a number of dimensions. To start, we continue to consolidate our market share by enabling automakers and dealers in acquiring new users, generating higher conversion rates, and obtaining high quality automotive sales leads. And despite the increasing market pressure in this year’s China auto sector, automakers and dealers are allocating more budget to Autohome to further build their brands and acquire new customers due to our unrivaled data proposition. Secondly, we also continue to strengthen our model leadership. During the second quarter of 2017, the number of average daily unique visitors, which is UV who access our primary application, Autohome, increased by 27% year-over-year. Mobile advertisement revenue grew more than 153% compared to the same period last year, accounting for almost 50% of our media service revenue. Our investment in data and technology are beginning to bear fruits, as well. Our consumers are now able to enjoy customized content and recommendations tailored to their individual needs, while automakers are…

Thank you, Yang. Hi, everyone. As Yang has already highlighted, we are very pleased to report another strong quarter. Please note that I will reference RMB only in my discussion today. Net revenue for the second quarter increased 13% year-on-year to RMB1,562 million. Our core revenue for the second quarter was RMB1,459 million, up 37% year-on-year, which was significantly above our previous guidance of 28% year-on-year growth. Media service revenue was once again outgrew our underlying auto sector, up 34% year-on-year to RMB799 million. Despite perceived headwinds in the physical auto market, Autohome continues to be automaker’s partner of choice and continues to gain further market share from our competitors. Lead gen service revenue was up 40% year-on-year to RMB660 million. This increase was primarily driven by an increase in ARPU and a strong evidence that we continue to build trust among dealers. Online marketplace revenue was RMB103 million, of which RMB57 million was related to our inventory cleanup. In the second quarter, we sold another 647 units, which is the last bit of our previous inventory from direct sales model. Moving on to cost, cost of revenue was down 38% year-on-year to RMB287 million, mainly due to decrease in cost of goods sold related to direct vehicle sales. Our blended gross margin increased to 81.6% in the second quarter. Excluding the impact from the direct sales business, gross margins from our core business was 84.6% in second quarter versus 84.4% in the same quarter last year. Now, operating expenses, sales and marketing expense in the second quarter was RMB412 million, representing an increase of 35% year-on-year. This is primarily due to increase in offline exclusion and promotional expenses and is in line with our core revenue growth of 36.6%. Product and development expense was RMB215 million, up 55% year-on-year.…

Thank you. [Operator Instructions] And we will take our first question from Alvin Jiang with Deutsche Bank. Please go ahead.

Hi, management. Congratulations on the strong results and thanks for taking my questions. My first question is about your full year guidance, could you refresh us, what’s your full year target on the core revenue growth and the core business margin and also how is your new business investment in the year of 2017? And I have a follow-up. Thanks.

Okay. Thanks, Alvin. I will take this question first. You asked about the top line growth guidance. Actually, on one of our previous earnings calls, we indicated that we were looking at 25% to 30% year-on-year growth in terms of our core revenues for this year. In the last two quarters, we either maintained or beat this expectation of ours. At this point, we are now looking at a core revenue growth of 35% to 39% year-on-year for the third quarter, and also we are expecting for the whole year of 2017 to grow our core top line by 30% to 35%. And again, this excludes the GMB type of revenues for both years when you are making an apple-to-apple comparison. You also asked about the margins. Officially, we only provide top line guidance but not margin or bottom line guidance. At this point, we see tremendous opportunities to grow not only in our traditional media and lead gen business, but also in our new business, such as e-commerce and auto financing. And in order to capture those opportunities, we are prepared to invest in new initiatives, such as AR or VR showroom and online auto show campaign. All these investments are to build a solid foundation for the years to come. And fortunate enough, we are seeing a very positive trend for second half this year in terms of top line growth and market share gains. And this we believe will provide a great profit pool for us to invest smartly in new initiatives while delivering positive bottom line results. Overall speaking, our target, which is not guidance officially, but our target is to keep OpEx to grow in line with our core top line growth for the entire year. I hope that answers your question.

Thank you. This is helpful. Just let me clarify, you mean the 30% to 55% year-on-year growth is for core business lines?

That’s correct. You have to exclude the GMB type of revenues from direct sales model.

Got it. Got it. Thank you. My second question is about new business expansion. It seems you already did a lot under new business expansion, like e-commerce platform model, e-commerce and also some AR and VR technology in media service. When can we see the contribution, the meaningful contribution on revenue side of all this new business, especially the platform model e-commerce business? Thank you.

Thanks, Alvin. That’s a very good question. Now, on new initiatives, we have a combination of initiatives that strengthens our core. For example, you mentioned the AR showrooms and our technology investment, AI, etcetera. There are also initiatives that allow us to tap into the new e-commerce space. On the e-commerce space, let me say that our priorities are more in securing the moral success rather than revenue contribution or margin contribution for the rest of the year. Now, for the other sort of strengthening initiative, 45 initiatives like AR, you are already seeing the results. But even the market was under significant pressure, you see our core business in media, lead generation are continuing to growing. This is a strong testament of the variety of new services we are offering and the recognition of the value that our dealers and OEM clients are giving us. So, the reflection of those, are already embedded in the numbers you see and we have every reason to believe this is going to accelerate.

[Operator Instructions] We will take our next question from Eddie Leung from Merrill Lynch. Please go ahead.

Good evening. Thank you for taking my question. As you guys mentioned a couple of times, you guys have been investing in R&D. So just wondering if you could share any metric on how the investment has been improving, for example, the advertising, efficiency for your advertisers or are the allocation of traffic or certain user engagement metrics? Thank you.

I will try to address this question, but I don’t think we have the handy data to directly answer your question. I think the investment in R&D first of all it was reflected in the headcount we hired. The headcount was up almost 100% over the last three or four quarters. Now, you need to understand that the investment in R&D does not necessarily reflect in any operational metrics per se, but it helps us to build a much, much stronger foundation in terms of big data capability in terms of technology, speed, etcetera, etcetera. So, I don’t know if we can pick one or two metrics that directly address your question. But from our point of view, the much stronger R&D team actually gives us a lot more flexibility in terms of strategic directions as well as product development choices.

We will take our next question from Liping Zhao from CICC. Please go ahead.

Good evening, Kang and Julian. I have two questions. The first one is regarding your strong cash position. You have approximately $1 billion in cash and short-term investments sitting on your balance sheet. And could you please share what management’s thoughts to better use the cash? And the second question is regarding the non-auto ads, what’s the percentage of the revenue coming from non-auto ads? Thank you.

I guess I will take the first question first. In terms of the cash, the use of cash, like we said before, with very strong cash generating capability, we are seriously considering to return some cash back to shareholders. At this point, we are inclined to having our board discuss and approve a plan towards the end of the year and distributing part of the cash flow we generate this year. We have not finalized our proposal to the board yet in terms of how much to distribute our yield, but the board members we have spoken to so far are all supportive of the direction. And if we do, we are planning to keep it a long-term practice given that our asset-light growth strategy does not require much capital to further grow our leadership in the market. Hopefully, we will have something tangible to share in the next three months.

Now, I will take your question on the non-auto ads. And a short answer is that you can almost neglect the non-auto ad, because it doesn’t really take significant percentage of our revenue, which is on purpose, because our efforts in non-auto engagement, the purpose is really to further enrich the experience that our consumers have with our ecosystem making sure that we increase the stickiness. And revenue generation particularly in ads was not a primary purpose. So, while we have expanded significantly in various type of peripheral engagement with our consumers, some in non-auto initiatives, advertisement revenue remained very, very small, almost negligible.

Okay, thank you.

We will take our next question from Chi Tsang from HSBC. Please go ahead.

Hi, thank you management for taking my question. I am Wayne Wang speaking on behalf of Chi. So, I have a first question regarding to the margin channel. So, we have seen that gross margin expanded a lot in this quarter, Q-o-Q and Y-o-Y. So, I guess it may partly explained by the lower revenue contribution from low margin business, which is online market placement, but have we also seen margin expanding in core business as well? So if so, any reason for that? And maybe second question is about the increase in the accounts receivable. It seems that this quarter, by end of this quarter, the account receivable increased almost 30% Q-o-Q, any particular reason on that? Thank you very much.

Okay. I will take both questions. On the margin side, I think excluding the impact from the direct sales model, which as you referred to as the marketplace revenues, the core revenue margins actually stayed stable. And going forward, we do expect the margin trend to stay stable for the next two quarters. As for the account receivables, yes, for the second quarter, we do see a little bit of AR overdue. But more than half of the overdue ARs, has been collected in July and we are expecting to collect the rest before the end of August. So at this point, we are not really worried about the AR collection issues, because those ARs are with the large accounts that we have been working with for the last 10, 8 years. So in order for us to really worry about this issue, you need to foresee a collapse of China economy per se. So at this point, we don’t think that’s the case. So, we are not worried at all.

Now, maybe allow me to add and extend on some of my views in those two questions. On the first question of margin, now, what you see on the number is the continued improvement in our margin, but fundamentally, this reflects a structural change in the health of our business. We have grown our revenue by a big margin, but we have put our cost in check. We have taken a number of very prudent initiatives to make sure all our dollars are invested in avenues with maximum return. Now, we have also streamlined our HR structure. Now, the HR structure today you see is much more geared towards technology and heavy reaching media content. It’s dramatically different from the structure last year where you see a lot of overheads in investment in sort of non-core initiatives. So, we have tightened our cost structure. We are much more leaner. We are much more agile in our overall cost and also organization structure. And there is a heavy investment in proportion in technology and mobile and also artificial intelligence and AR and etcetera. Now, on the accounts receivable, you have to compare with us with other medias which by far we are still the best practice. And you have to know that we keep our collections strictly to 6 months after delivery of the service, which is so far, as we know the best in the industry by practice. Now, we also at the same time have a large pile of cash in our accounts. So, there is a balance actually of where is the maximum value, how much of credit rules we apply to the agencies that help us to pay as the middleman between us and also the OEM players. So, we actually need to balance how much of a leeway we give them in terms of capital cost, borrowing money to pay us, at the same time making sure that the credit risk is in check. And so far, we have very strong belief in the strong creditworthiness of our key long-term partners, which we are starting to test to give them a little bit more credit lines.

And we will take our next question from Thomas Chong from BOCI. Please go ahead.

Hi, thank you for taking my questions. This is Xin on behalf of Thomas. Two questions. First one is how do you see the trend of OEM aspect shifting to online verticals from the social platforms, with the portion of the incremental budget to online channels? The second question is could you please introduce more details on customized accounts and recommendation on your platform and how that the customization changed your users’ behavior? Thank you.

Can you repeat your first question again? I am not sure, we are not sure we hear you clearly.

Yes. So about the trends OEM aspects you are shifting to online verticals and the social platforms, so [indiscernible]

Say it again, I think can you repeat your question again, just that – what you just said, the trend of?

About the advertising budget shifting to online verticals and online social platforms.

Online vertical and say it again?

Social platforms.

Social platforms, okay. I hear you, but why do you believe the trend of OEMs shifting budget to verticals as social platforms?

Yes, right, the revenue to social platforms experiencing hyper growth.

Okay, you are right. Okay. Regarding what it is, okay. The customers and OEMs will always shift their revenue to where their results can be maximized. That’s always true, okay. So, we believe – it doesn’t matter whether it’s online verticals, whether it’s social media, if those who can maximize the return of the customer’s investment that will continue to capture their revenue. So in a way, Autohome is doing exactly that. We are increasingly leveraging our strength of data to make sure we give guided investment of their media spending, so that their returns can be maximized. And this is why even during time of pressure, as you can see the market is experiencing a little bit of ups and downs, there are ever growing commitment from key OEM client to the service that Autohome gives. If you notice in some of their latest media news, you will see that we have forged very strong strategic alliance with a number of leading OEM brands and this is a testament of how strongly they believe in us and our cooperation with them is expanding from just media advertisement to more strategic alignment in data sharing in sort of a transaction maximization, even in how we help R&D and customer journey, customer experience enhancement is also for us. So our belief is we don’t bet on sectors. We don’t bet on where it’s growing, where it’s not growing. We always make sure that our value being delivered to customers is continuing to grow. So I think that is my reaction to your first question. And your second question is regarding to – can you remind us again?

About the customized accounting recommendation on your platform to [indiscernible], so how does it change users?

Yes. Now, we started this almost a year ago when the new management team just sort of started our journey at Autohome. We started this what we call 180 days of overhaul of our technology platform to offer the challenge and the sort of a customized recommendation. But I want to say this is the continuous journey. We are continuing to improve in every aspect in ways we can engage our consumers better. Starting from our last year initiative in overhauling our technology platform in big data technology, in adding to our R&D capability, to our most recent initiative in accurating our accountant labels and consumer behavioral labels to match all the FSOs and continuous journeys to the FSOs to also the content and also advertising placement that we have. So this is something that we will continue to drive in the rest of the year and also to next year. And we are seeing significant improvement. I remember just now, there was a gentleman asking whether there are metrics that we can measure to some degree. I want to say that, in terms of effectiveness of content recommendation, at least our metric shows more than 100% improvement over the last 9 months in terms of how effective – how consumers are welcoming the recommendations they receive as reflected by more than 100% increase in the CTR, click-through rate of the content.

And we will take our next question from Binbin Ding with JPMorgan. Please go ahead.

Hey, good evening management. Thanks for taking my question and congrats on the strong results. So, my first question is on the online marketplace business. I noticed that, in the second quarter, your online marketplace revenue, excluding the direct sales, seems to be pretty strong. And I think previously you have seen that product busy during the testing period and didn’t actually have too much expectation on it. So, I am wondering if the view has changed and if management not already formed any granular plan to grow that product business? And second question on margin side, I think management – okay, maybe you can just go ahead of your first question, and I can follow-up again.

And I am pretty sure that the operator will cut your second question. But in any case, now let me elaborate on our concept of e-commerce platform. There are actually three distinct components to it. One is our – what we call the dealer cloud platform. The second is actually our real online direct sales e-commerce platform. The third is our secondhand car e-commerce platform. Now, what you mentioned, the online direct sales platform is actually something that we’re still testing. That hasn’t been formally launched. What has been formally launched is what we call the online dealer open platform, and the second car platform. The online dealer platforms are not independent e-commerce initiative itself. They are a supplement. They are a support and an enabling platform to our lead generation business in a way to help us to strengthen the relationships that we have with 23,000 dealer subscribers to make sure that we help them to better market online, to make sure that we connect our online technology and data analytics to their offline piece in a seamless manner, to make sure consumer experience is maximized to the most, to make sure all the sort of financial products, all the sort of marketing technologies can be leveraged to ensure better results. So that is one part. Now, the second part is our secondhand car e-commerce platform. Now, we have quite ambitious target in that. If you go to the dealers that we have launched in the past few months, you will see some of the expectation that our management of secondhand car view have outlined. And that you will see some significant contribution for the remainder of the year, but so far I think I will defer to the official announcement of the second car dealer platform. You can actually search on the web and news and you will see some of the numbers that we have shown there.

And we will take our next question from Robert Cowell with 86Research. Please go ahead.

Hi, management. Thanks for taking the questions. I’d like to ask I guess you gave a metric that CTR is up more than 100%, but I guess I would like to kind of dig in a little bit more on the mobile ad business. What are these new products, like customized feed, targeted ads, improved content? What kind of impact is that having on our mobile ad revenue? And then also, how are we thinking about video on the mobile platform? Thank you.

I heard your question is about how does CTR improvement have impact on our revenue, right, on the advertisement side? And the second question is – and the second part of the question is?

Second one is more broadly speaking, how do you view video on the mobile device and is that an important part of your mobile strategy?

Okay. Now, as you have already seen that our mobile revenue have grown dramatically and that the number is more than 100% and is now 50% of our over ad revenue. Last year it was only 20% or something, 20% to 30%. So, there is a significant increase in our mobile revenue as a result of the customizing effectiveness. Of course, there are variety of different product that I don’t want to delve into details. Now, the second question that you have is video. Now, our view is not only video. Our view is a full blown engagement by managements with consumers, including from the original text and picture to video, to online streaming, to AR and VR. And also if you go to our ad, if you shake the ad, you have what we call general window of intelligent Q&A, very much like the AI robots that help you to answer questions. We believe those are ways, one of the many ways we continue to enrich avenues to engage with user consumers, not only video. So, we are expanding continuously the ways along the interest of consumers and that is not limited to video. And we have seen a lot of improvement in terms of how consumers view us. For example, in the AR Auto Show like in the number we just shared with you, it’s 10 times of the Shanghai Auto Show, more than 10 million visitors. Now, along the 10 million visitors, just think about the magnitude of that. You actually can do a lot of data mining from it, who has viewed what vehicle, what color, what kind of option they have tested, how many vehicles they have viewed, what brand, which brand of your competitor they have also viewed, what features they have compared, whether they need financing or not, where they are located. And you actually can have a heat map of consumers’ location, who are interested in a certain car brand. And we will present it to OEM. They are jumping from their seats, because it’s, oh, this is exactly what I want, because I want to see where our consumers are. I want to see where I need to invest more in building our dealer network. I want us to see invest – where I need to put more advertisement to jumpstart our revenue. I want to also make sure where, vis-à-vis our competitor we should be differentiating ourselves. So, all of these are not just traffic data itself. It’s data. It’s intelligence. It’s values we can give to our OEM dealer friends in no ways that they have been able to before, so all of these with an accelerating and expanding effect in what we can offer to our business partners as well as to our customers.

That concludes today’s question-and-answer session. I will turn the conference back to management for closing remarks.

Okay. Thank you very much for you all joining us today. We really appreciate your support. This is my fourth earning call today, so thank you very much. And we have really enjoyed working with all of you. And we believe our business will continue to unfold itself in a much stronger platform that we have just presented to you. Now, in the meantime, please also feel free to get in touch with us if you have further questions or comments. Thank you very much.

This concludes today’s presentation. We thank you for your participation. You may now disconnect.