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Edited Transcript of ATHM earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q2 2019 Autohome Inc Earnings Call

Beijing Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Autohome Inc earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anita Chen

Autohome Inc. - Head of IR

* Jun Zou

Autohome Inc. - CFO

* Min Lu

Autohome Inc. - Chairman & CEO

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Conference Call Participants

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* Chen Shen

BOCI Research Limited - Research Analyst

* Eddy Wang

Morgan Stanley, Research Division - Research Analyst

* Hillman Chan

Citigroup Inc, Research Division - Research Analyst

* Tianxiao Hou

T.H. Capital, LLC - Founder, CEO & Senior Analyst

* Xiaomeng Zhuang

BofA Merrill Lynch, Research Division - Associate

* Yuanyuan Long

Crédit Suisse AG, Research Division - Co-Head of China Internet

* Zhenyu Chen

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Thank you for standing by for Autohome's Second Quarter 2019 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 your host, Anita Chen, Autohome's IR Director. Ms. Chen, you may begin.

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Anita Chen, Autohome Inc. - Head of IR [2]

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Thank you, operator. Hello, everyone, and welcome to Autohome's Second Quarter 2019 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. Min Lu, Autohome's Chairman and CEO; Mr. Haifeng Shao, Autohome's President; and Mr. Jun Zou, Autohome's CFO. After the prepared remarks, Mr. Lu, Mr. Shao, and Mr. Zou 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 Chairman and CEO, Mr. Lu.

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Min Lu, Autohome Inc. - Chairman & CEO [3]

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Thank you, Anita. Hello, everyone and thank you for joining us today to discuss our second quarter 2019 results. I'm pleased with our quarterly results, amid a soft macro economy and considerable auto market decline.

Chinese new passenger vehicles are (inaudible) for 4 consecutive quarters and expanding to double-digit decline in July. Despite these headwinds, we still managed to deliver solid results with a total revenue increasing by 24% year-over-year to CNY 2.31 billion.

During the quarter, we strove to offer high quality content to our users while enabling our partners by leveraging our AI and big data capacity in order to gain more wallet share. Some highlights in the quarter and most recent include.

In June, the number of average DAUs, who accessed our mobile websites, primary application, and mini-apps, increased by 48% year-over-year to 37.8 million. In July, we made a major upgrade on our main app by improving user interface and reclassifying our products by functions. These upgrades and enhancements improved the overall user experience, attracting more younger demographic users. App performance experienced an encouraging trend of (inaudible).

For the second quarter, all of our content categories expanded rapidly. DAUs for each new channel, including [Travelers], [EZ], [used], and the mini-short video all of which to (inaudible) million. We are also rolling out more car use related content, such as Road Trip, aiming to attract users in addition to car buyers.

As a leading online auto ecosystem, Autohome always explores new opportunities and constantly contributes to the auto industry. On August 18, we will hold the 818 Global Super Auto Show. This show aims to initiate a (inaudible) shopping festival in the auto space. At this grand event, we are (inaudible) to deploy the integration of our distinguished online auto show and offline celebration activities.

For the online segment, we will leverage our intelligent technology to present panoramic, multidimensional shopping scenario. For the offline segment, I'd like to highlight our partnership with Hunan TV, one of China's most watched TV channels. The 818 Global Super Auto Show will be planned by Hunan TV's top production studio and make its debut in prime time August 18 as the first ever auto themed gala.

We also launched various offline activities for industry experts, car owners, auto fans, in addition to a number of auto show events across China for both new and used cars. With all of the aforementioned, we are endeavoring to help automakers and the dealers achieve success in branding and sales performance. By the end of July, more than 80 auto brands and over 2,400 dealers have signed up for participation in the event.

Regarding the data product offerings to the automakers, we proactively upgrade (inaudible) from analytical tools to smart marketing solutions, helping automakers not only identify the issues but also providing professional suggestions to solve problems. By the end of June, 21 OEMs have purchased our data products. In addition, we plan to further expand our Intelligent Solutions portfolio with [Shojuku] a brand new data product designed to serve OEMs R&D component and it will help them well position to capture future trades. Shojuku demonstrates our strategic move to go beyond marketing solutions and tap into the R&D value chip.

In terms of data product for dealers. By the end of second quarter, approximately 15,000 dealers have purchased our data products. In early July, we launched 2 new AI-based data products, which are designed to improve dealers' efficiency at the lower level costs. With more innovative products in our pipeline, we are building a data product matrix that serves as a comprehensive CIM system to dealers. We also see potential in overseas markets and currently are at the preliminary exploration stage.

Now please let me provide some highlights on business operations. For our lead generation business, in the second quarter total leads volume increased by 30% year-over-year. As for our used car, C2B2C platform, by the end of second quarter, we were able to (inaudible) very competitive merchant loan products to over 4,800 qualified dealers, resulting in a total cumulative credit line of CNY 6.8 billion.

Finally, for the auto financing business, within the second quarter, we facilitated close to CNY 6.2 billion in loans and in shares, representing a 108% increase year-over-year.

To summarize, Autohome has already evolved from a media vertical to an auto (inaudible) leveraging our in-depth insights in the industry compared with our advanced technology. We are confident to further unlock our value and deliver long-term growth to our shareholders.

With that, I will now turn the call over to our CFO, Jun Zou, for a closer look at our second quarter financial results and the business outlook for the third quarter.

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Jun Zou, Autohome Inc. - CFO [4]

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Thank you, Min. Hi, everyone. As Min has highlighted, we are pleased to report another solid quarter. Please note that as with prior calls, I will reference RMB only in my discussion today.

Net revenue for the second quarter was CNY 2.31 billion, slightly above the high end of our original guidance, which is 24% growth on a year-over-year basis. For a detailed breakdown. Media service revenue increased 11% year-over-year to CNY 1.28 billion. Despite a challenging physical auto market, Autohome continues to be automakers' partner of choice.

Lead generation services revenue increased 20% year-over-year to CNY 889 million, primarily driven by an increasing ARPU. Online marketplace and others revenues increased 97% year-over-year to CNY 392 million, primarily due to the increased distribution from data products and auto financing business.

Now moving onto costs. The cost of revenue increased by 26% year-over-year to CNY 264 million. Gross margin remained stable at 89% in the second quarter.

For operating expenses. Sales and marketing expenses in the second quarter were CNY 893 million compared to CNY 588 million in Q2 2018, mainly because of increased offline execution expenses to help automakers and dealers generate more leads and sales.

P&D expense were CNY 361 million compared to CNY 313 million in Q2 last year. Again, this reflects the R&D headcount increase and is proof of our commitment to technology and talent. Finally, G&A expenses were CNY 82 million compared to CNY 86 million in Q2 last year.

As a result, we delivered an operating profit of CNY 835 million for a second quarter, compared to CNY 748 million in the corresponding period of 2018.

Adjusted net income attributable to Autohome was CNY 855 million for the second quarter, compared to CNY 744 million in the corresponding period last year. Non-GAAP basic and diluted earnings per share and per EDS for the second quarter were RMB 7.22 and RMB 7.15, respectively, compared to RMB 6.33 and RMB 6.23, respectively, in the corresponding period of 2018.

As of June 30, 2019, our balance sheet remained very strong with cash, cash equivalents, and short-term investments of CNY 10.83 billion. We generated operating cash flow of CNY 372 million in the second quarter.

Let me now address our third quarter 2019 outlook, which reflects our current and preliminary view on the market operating conditions that may be subject to changes. At this point, we expect to generate net revenue in the range of RMB 2.115 billion to RMB 2.119 billion, representing a 14.4% to 16% year-over-year growth rate.

In summary, we are happy with our second quarter 2019 results. Each of our business lines achieved decent growth, coupled with our strong balance sheet. We are well positioned to capture the future growth opportunities, drive long-term sustainable growth, and maximize value for shareholders.

With that, we are ready to take your questions. Operator, please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Eddy Wang at Morgan Stanley.

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Eddy Wang, Morgan Stanley, Research Division - Research Analyst [2]

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(foreign language) My question is that with the Global Super Auto Show last week and I believe such event could help to maintain and further improve our long-term relationship and partnership with OEMs and dealers. So my question is that how management expects such event could help our media business in the short-term, say, like, in the second half of this year.

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Min Lu, Autohome Inc. - Chairman & CEO [3]

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(foreign language) Okay. I'd like to address this question, Eddy. Actually, 818 Auto Show has been initiated since last year and for the first half of this year, we have been preparing for this event. (foreign language) Actually, this auto show will include 9 different categories of activities. The largest activities are co-organized together with China trade promotion agency, which is the Auto Association and there's the China Trade Promotion Agency.

(foreign language) The second biggest activity is the collaboration with Hunan TV, which will be a gala night performance hosted on August 18, which will have a lot of superstars to join us. (foreign language) The third activity was co-organized with China Auto Industrial Association on August 19, which will be participated by 1,000 people, which is a workshop.

(foreign language) The fourth activity is that we're going to organize offline car exhibition in almost 130 cities in China so that we can help the dealers to sell cars. (foreign language) And there will be other activities, which I won't go into details. For example, the Sand Festival or the Car Model Competition, et cetera.

(foreign language) Actually, this is a big portfolio of different activities. The major purpose is to rejuvenate this industry. (foreign language) The second purpose is to expand the influence of Autohome among the consumers. (foreign language) And in terms of the financial revenue generated by this activity, I'd like to say that we're not going to actually make money from this kind of auto show. The major purpose are what I mentioned before.

(foreign language) Generally speaking, we're not going to suffer losses by organizing this auto show but our major objective is to contribute to the entire auto industry in China, and also pave the way for future development of auto home. (foreign language) This is the very first time we've organized such a large-scale virtual auto show. (foreign language) And through this first time experience, we also want to expand this auto show to the global level for the second time next year.

(foreign language) That is why we also have the English website for this auto show this time so that people can watch the online auto show. (foreign language) That's all for me, Eddy.

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Operator [4]

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And your next question is from Miranda Zhuang at Merrill Lynch.

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Xiaomeng Zhuang, BofA Merrill Lynch, Research Division - Associate [5]

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(foreign language) So we have seen that in the past, Autohome has invested in TTP Car, which is a C2B used car company, and recently, the company has been cooperating with [USEAM], which is a B2C used car company and also [Chuhowdo], which is a C2C used car company. And also, we know that the company this year is expanding the CPA's model for the used car industry. So just I would like to understand the company's latest thinking about your strategy in the used car industry.

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Min Lu, Autohome Inc. - Chairman & CEO [6]

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(foreign language) Okay. I'd like to take this question. Firstly, we are quite bullish about the future used car business in China. (foreign language) That is why we have been exploring this business over the past few years and now, strategically it becomes more clearer. (foreign language) So since the second half of last year, we have opened the entrance for the used car business. We hope that we can expand the traffic for the used car.

(foreign language) So far, our daily DAU for the used car is about 3 million. (foreign language) So actually, I instructed my team to keep the target of 4 million by the end of the year. (foreign language) So this is the first part of our strategy, which is to take a very strong hold of the traffic entrants of the used car business.

(foreign language) The second part of this strategy is that due to the increase of the traffic, the volume of the leads will also increase. (foreign language) Actually, the merchants we are cooperating with are having very high quality but the number of the total merchants are not very big. Let's say almost 30,000.

(foreign language) However, with the increasing of the volume of the leads, actually, we think that the number of the merchants are not enough. (foreign language) That's why I said that in the second half of the year and also on the Hong Kong Boat Show, we want to make used car an open platform, which includes a B2C -- a C2B and a C2C.

(foreign language) For example, we have been cooperating with [Yoshi] and (inaudible) to expand our platform cooperation and we're also expanding to some regional platforms in our cooperation strategies.

(foreign language) In that case, we can fully digest all the leads we generated. (foreign language) At the same time, we can also better satisfy the demand of the consumers. (foreign language) For example, our cooperation with [Yushi]. We have a program called (inaudible), which is the procurement of the used car all over China. Because regionally, the used cars are mainly traded locally. So this is a new type of service delivered to the consumers. By cooperating with Yushi , we can actually promote more trades of the used cars nationwide.

(foreign language) So I just mentioned about the increase of traffic and leads. The third thing is that we are also developing the integrity alliance, which is the closed loop transaction. (foreign language) So actually, this year, we have revised the rules of the game. We're going to expand this kind of cooperation because during the pilot period of last year, we encountered some problems.

(foreign language) And now actually, Tiantian Paiche, TTP cars have been cooperating with us in this. (foreign language) You also mentioned TTP Cars, so I'd like to mention our strategic cooperation with them. (foreign language) We do have close cooperation with TTP. (foreign language) Every 2 weeks, we will organize a PMO Conference, which I personally attend. (foreign language) There are 3 aspects in this kind of cooperation. There's a C2B business, mainly the auction of the cars and the (inaudible) of the cars.

(foreign language) At the same time, it will also generate leads of the new cars. (foreign language) And this is very accurately. (foreign language) And secondly, B2B cooperation. (foreign language) And together with TTP and some (inaudible) stores and the dealers, we're doing the trading business of the used cars and help the dealers to auction their used cars.

(foreign language) And the third cooperation is the B2C cooperation, including the integrity alliance and mission just announced. And also, we will put the TTP authorized cost on our apps so that you make the consumers assured about the quality. (foreign language) So actually, these are some simple philosophies for our used car business and I think the essence is to intensify the development of our user products. And recently, we're also iterating our user products. And after that, we're going to strengthen our traffic development for the used cars.

(foreign language) And actually, last year, our used car department for the very first time turning losses into profits. (foreign language) And this year, we have entered the guidance of our used car development business, we can accelerate the used car business next year. (foreign language) Thank you. That's my answer for the used car business.

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Operator [7]

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(Operator Instructions) The next question is from Frank Chen at Macquarie.

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Zhenyu Chen, Macquarie Research - Analyst [8]

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(foreign language) I'll translate myself. I have a quick question on the cash. On the balance sheet, you got RMB 10 billion cash and short-term investment and I wonder what your plan with your cash? Any plan for the potential dividend or M&A in the future?

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Min Lu, Autohome Inc. - Chairman & CEO [9]

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(foreign language) Okay. I will answer the questions simply. Yes, indeed, we have abundant cash on our balance sheet. (foreign language) Firstly, we're going to intensify our investment. (foreign language) There are 2 parts, internally and externally. (foreign language) Externally, I also mentioned before we are looking at the possibility on the auction market, including United States, Europe, and Southeast Asian countries. (foreign language) And the final decisions are yet to be made.

(foreign language) Internally, we have several new projects going on. The 818 Auto Show is one of them. Altogether, there are 6 or 7 new projects going on. (foreign language) When this project developed to a certain extent, actually, Chinese market, there will be opportunities for investment. (foreign language) Yes, of course, and this project themselves also need R&D input.

(foreign language) And secondly, you also mentioned about dividends. Actually, we are still steady about the plan of dividend. If there is any news, we will disclose to the market. (foreign language) That's all from me. Thank you.

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Operator [10]

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Your next question is from Hillman Chan at Citigroup.

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Hillman Chan, Citigroup Inc, Research Division - Research Analyst [11]

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(foreign language) So my first question is about the second half outlook for the auto retail industry as well as the online OEM advertisement. And my second question is about the margin impact from our offline events, including August 18, and also the event for the 130 cities.

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Min Lu, Autohome Inc. - Chairman & CEO [12]

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(foreign language) Okay, the first question. The OEM advertising investment in the second half of the year. (foreign language) You may notice that we have lowered our guidance in Q3. This is a precautious move. (foreign language) Because the market in July is not that good. (foreign language) The situation also differs among the OEMs. Some still have the positive growth but quite a few suffer from losses.

(foreign language) So actually, we heard that the budget of the OEMs are going in parallel with their sales volume. (foreign language) If they suffer from negative growth, they will be very precautious about releasing budget. (foreign language) And this is (inaudible) circumstances. And today, I also see a Moody's forecast, which said that at the end of this year, the auto industry in China will suffer from negative 6.5% of growth.

(foreign language) If this forecast come true, actually, the auto market in the second half of the year is quite good. (foreign language) Since the first half is negative 14%, so if the whole year forecast is negative 6.5%, it means that the auto market will go up in the second half.

(foreign language) So according to the statistics from Autohome, actually, the advertising investment from the top 15 OEMs still remains positive. (foreign language) Among the top 15, only 3 have the negative growth. All the rest have the positive growth. (foreign language) But things are still not very clear because the auto market is still not very good on August. We have to look to September.

(foreign language) That is why we make show effort on 818 Auto Show. (foreign language) We hope that actually 818 will become a turning point, up turning point for the entire auto industry.

(foreign language) The second question is about the margins for 818. (foreign language) I already mentioned that we will not organize this event at a loss. (foreign language) And secondly, we also have our budget management system. So this is also within our budget. (foreign language) And I also mentioned before, actually, most important thing is that this auto show will influence our auto market, and in future, it will generate big value. (foreign language) That's my answer. Thank you.

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Operator [13]

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The next question will be Tian Hou at T.H. Capital.

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Tianxiao Hou, T.H. Capital, LLC - Founder, CEO & Senior Analyst [14]

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(foreign language) So Mr. Lu just mentioned you hope through all these activities you can actually become a turning point for China auto industry from current quite bearish to probably, possibly better situation. What is the logic behind that hope? And just the question really behind that is what's the major reason for the current market weakness? Is that because people do not know those automakers? Or because consumer doesn't have enough willingness to buy auto cars? So what is the main reason? What is exactly the current situation is in your mind?

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Min Lu, Autohome Inc. - Chairman & CEO [15]

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(foreign language) Actually, the auto market is far from being saturated. (foreign language) Actually, the auto ownership per 1,000 person in China is still really low. (foreign language) And recently, actually, I heard from the Deputy Director General (inaudible) from the National Information Center. He mentioned that actually in the future, the ceiling of new car sales in China is CNY 40 million per year.

(foreign language) And we see that the negative growth that we're suffering this year is also the first time ever over the past (inaudible) years. (foreign language) Because the previous years are too good and this is the very first time, we have such a big drop that the (inaudible) are quite special.

(foreign language) Someone compared China to Japan in 1970s. Actually, Japanese automaker industry also experienced a lot of twist and turns. (foreign language) So if we look at the situation in the long run, we may reach the same consensus, which is the negative growth we're suffering now is only a setback in the longer history. So in the future, we're still bullish about the auto market.

(foreign language) As I also mentioned in the previous conference call, this year we're suffering from worse negative growth comparing with last year. I think this is related to the macroeconomic situation. (foreign language) In closing, the trade war initiated by President Trump. (foreign language) And in order to promote environmental protection in China, actually, they jumped from National 5 to National 6 standard is too fast.

(foreign language) So we see that actually in June of this year, the National 5 standard vehicles are all sold out. (foreign language) Actually now, the National 6 standards are already put into place. That is why actually the sales in July has dropped. (foreign language) And we also see the fading out of the subsidy policy for new energy vehicles. (foreign language) As a result, the consumers would like to wait and see.

(foreign language) So we hope that through the 818 Auto Show, the voice of this industry can be maximized. It can be spread out so as to rejuvenate this industry and to consolidate the confidence of the consumers. (foreign language) Generally speaking, I think the Chinese auto market is very huge and enjoys great potential. Despite the current difficulties, we can actually join hands to [tide] over these difficulties. (foreign language) That's all for my answer. Thank you.

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Operator [16]

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The next question is Jamie Shen from Bank of China.

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Chen Shen, BOCI Research Limited - Research Analyst [17]

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(foreign language) I'll quickly translate my question. Just wonder if we continue to witness soft auto sales figures, will Autohome continue to increase the sales and marketing expenses related to offline promotional (inaudible) to support OEM and dealers?

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Min Lu, Autohome Inc. - Chairman & CEO [18]

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(foreign language) Autohome has been developing very fast over the past few years. (foreign language) And our market always remains high. (foreign language) And when there is a negative growth in the Chinese auto market, we cannot just purely pursue margin. (foreign language) So what we have to pursue is the biggest profit rather than the biggest profitability.

(foreign language) In that way, we can actually contribute the long-term return for the investors and shareholders. (foreign language) At the same time, we've also got a mission to contribute to the entire industry. (foreign language) In particular, in difficult times. (foreign language) That is why we will engage in some lower margin businesses. (foreign language) Generally speaking, we hope that the auto market can be rejuvenated again and renew this positive growth pathway. (foreign language) So that's all for my answer. Thank you.

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Operator [19]

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The next question is from Tina Long at Credit Suisse.

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Yuanyuan Long, Crédit Suisse AG, Research Division - Co-Head of China Internet [20]

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(foreign language) So my question is actually regarding the ARPU increase, which actually remains (inaudible) for the weak generation (inaudible). So I want to know whether it comes from the price hikes year-on-year, from a year-on-year base, or actually is because of dealers choosing more value-add service. And how much of the chance that the price can continue to be hiked next year given the current situation? And second small question is about the other income and also where it comes from in second quarter.

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Min Lu, Autohome Inc. - Chairman & CEO [21]

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(foreign language) So I will answer the first question. Talking about the leads, actually, since last year and the beginning of last year, we already have agreement on the price of the leads as a package. (foreign language) And about the price increase and the end of last year and the beginning of last year, our quotes increased by 20 times -- 20%.

(foreign language) At the same time, we also add our science and technology department income to that, but this is data product and not the leads. (foreign language) I also mention that, actually, our price increased by 20 times [sic] [20%]. However, at the same time, our leads increased by 30%.

(foreign language) You also note that at the very beginning of this year, some actually dealers challenged about our price increase. (foreign language) So we are now steady about the price plan for the leads of next year. (foreign language) Our team also discussed with some OEMs. (foreign language) And also with some dealers. (foreign language) And actually, the dealers and the OEMs, we also can agree on this topic.

(foreign language) And now we developed a new plan and we will communicate with them and we already learned a lesson from last time, which means that we will communicate first and then do it. (foreign language) And actually, we will actually maintain the volume and also enjoy some floating. (foreign language) We will also disclose this information after the communication.

(foreign language) Now it's yet to be finalized because we're still communicating with them. (foreign language)

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Jun Zou, Autohome Inc. - CFO [22]

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In this quarter, in other income increased by 65% compared to that of last year. And the main reason is that after careful planning, we are able to enjoy more government tax refund and rebate. And so basically, yes, that's the reason. Thank you.

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Operator [23]

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

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Min Lu, Autohome Inc. - Chairman & CEO [24]

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Thank you very much for joining us today. We appreciate your support and we look forward to updating you on our next quarter's conference call in a few months' time. In the meantime, please feel free to get in touch with us if you have further questions or comments. Thank you.