Ladies and gentlemen, thank you for standing by for Autohome's Second Quarter and Interim 2021 Earnings Conference call. [Operator Instructions] As a reminder, the 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, Aggie Zhao, Autohome's IR Director, Mr. Zhao, you may begin.

Aggie Zhao - Investor Relations Director

Thank you. Thank you, operator. Hello, everyone, and welcome to Autohome's Second Quarter and Interim 2021 Earnings Conference Call. Earlier today, Autohome distributed its earnings press release and you may find a copy on the Company's website at www.autohome.com.cn.

On today's call, we have Chairman and Chief Executive Officer, Mr. Quan Long; Co-President, Mr. Haifeng Shao; Chief Technology Officer, Mr. Xiao Wang; Vice President, Mr. Jun Zou [Phonetic]; and Finance Director, Ms. Hong Jiang.

After the prepared remarks, Mr. Long, Mr. Shao, Mr. Wang, Mr. Zou [Phonetic], and Mr. Jiang 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 provision 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 doesn't 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 first half unaudited non-GAAP financial matters. Our press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measure and is available on Autohome's IR website.

As a reminder, this conference is being recorded. In addition a live and archived webcast of this earnings conference call will also be available on Autohome's IR website.

Now, I will turn the call over to Autohome's Chairman and CEO, Mr. Long. Mr. Long, please.

Quan Long - Chairman of the Board and Chief Executive Officer

[Foreign Speech] Thank you, everyone, and thank you for joining us today.

[Foreign Speech] We are pleased with improving metrics across our new initiatives in the second quarter along with margin expansion. Total revenues for the second quarter were RMB1.94 billion. Revenue from our Online Marketplace and Others business increased 10% year-over-year and contributed 30.7% to total revenue compared with 23.4% in the same period last year. Data Products maintained a strong growth momentum, generating a revenue increase of 47.1% year-over-year, thanks to the higher contribution from OEM Data Products.

We are excited to report that with steady operating efficiency improvements TTP broke even at operating level for the first time in June, representing a significant milestone for us. We also made further progress in our cooperation with New Energy Vehicle automakers. During the second quarter, revenues from NEV brands jumped 238% year-over-year. Adjusted net margin in second quarter continued to expand rising 2.7 percentage points year-over-year to 40.8%.

[Foreign Speech] As the impact of global chip shortage on the new passenger vehicle sales market gradually deepened in the second quarter, the production and sales of new EVs in May decreased by 2.7% and 1.7% year-over-year, respectively. This trend continued in June with production and sales declining by 13.7% and 11.1% year-over-year respectively.

In addition, automakers were further impacted by the sharp rising cost of raw material. As automakers contend which multiple unfavorable conditions, we are adopting an even more cautious approach to plan marketing budgets and our traditional business is facing great challenges.

On the other hand, China's auto market has continued evolving with mixed performance across different segments. The market has witnessed expanding trading volume for used cars and the new energy vehicles are moving into the last lane, highlighted by a secular growth trends in monthly sale. As a result, the automobile industry split widened.

[Foreign Speech] In the wake of challenges and opportunities stemming from these industry changes, we continue to improve our user experience, while implementing a radical management for the end customers to provide high value services. All these moves underpin our efforts to maintain a solid fundamental across traditional business with industry leading position.

Meanwhile, by vigorously developing new initiatives across Data Products, new energy and the used car business, we are creating our second curve of growth to promote the long-term sustainable development of our company.

[Foreign Speech] Specifically, our constant efforts in content enrichment are propelling our progress and we are pleased to see our traffic continues to lead the auto media vertical, surpassing prototype volumes of second and the third player, while maintaining a rapid year-over-year growth. According to statistics from QuestMobile in June, the number of average DAU, who accessed our mobile websites primary app and the mini apps grew to 44.1 million, representing a 16% year-over-year increase.

In addition, with the upgrade of our app, we further occupied the user experience featuring more video form live streaming and interest-based content offering. The latest version is poised to attract a younger demographic.

[Foreign Speech] With regards to our traditional business, we believe we'll remain as a leader in terms of market share in the auto media vertical and continue to focus on key customers, prioritizing customer side solutions to meet their needs. We are enhancing our service quality. We are also proactively expanding our service to the non-advertising business.

For example, we help automakers with user operations, offering OEMs direct access to their users and aggregates their own user assets. On the leads generation front, we continue to strengthen our positions by providing dealers a set of operating tools, such as live streaming and instant messaging to help improve their operations and the conversion efficiency.

[Foreign Speech] Amid a fast developing NEV market, we established a dedicated New Energy Business department to explore market opportunities. Through business model innovation, we are finding solutions to address industry's pain points in branding, distribution channel and the user operation, helping NEV automakers with these emerging and growing opportunities.

In the first half of this year, we cooperated with 20 NEV brands resulting in a 238% year-over-year jump in revenues from NEV brand across our platform during the second quarter, far exceeding the growth rate of the NEV industry.

[Foreign Speech] Now turning to the used car front, we believe 2021 is going to be a crucial year for Autohome and the TTP, as we are committed to deepening our cooperation for further success. With the acquisition of TTP, Autohome's used car business has formed a C2B2C end-to-end business covering the full used car lifecycle from selling to purchasing a used car, which enhances our ability to serve users and customer.

And TTP, supported by Autohome has improved its operation and the transaction efficiency. In June, TTP broke even at the operating level for the first time, a significant milestone for us that demonstrates great synergies between Autohome and TTP. We are also looking for other opportunities that could lead to synergistic development and expansion of our auto ecosystem.

[Foreign Speech] Moving onto our Data Products, our consistent efforts in product optimization and the effectiveness improvements have been gaining momentum among customers. In the second quarter, a total of 19 automakers utilized our Data Products and the total number of programs for Intelligent New Car Launch and Intelligent Marketing Solutions was more than 30. As for Data Products for dealers, we remain focused on product upgrades and the enhanced product value offering a full spectrum of services from user acquisition, transaction to maintenance.

[Foreign Speech] In conclusion, we are fully committed to maintaining our leading position in terms of traffic and market share in the auto media vertical, while exploring fresh pathway in new business areas. We have achieved meaningful progress in data, used car and NEV business and our strong balance sheet and profitability allow us to make investments in this key area. We plan to announce our strategic upgrade plan in detail at the upcoming Investor Day on September 15 to give more market share opportunities and ensure our long-term growth.

[Foreign Speech] China is the world's largest new car market and the largest NEV market. China's used car market is also one of the fastest growing major markets in the world. However, in contrast to developed countries China's car ownership per 1,000 people and the used to new car sales ratio still have huge growth potential.

Going forward, we believe the auto industry will gradually recover from the temporary difficulties we are facing at the moment and the long-term growth trend remains unchanged.

Looking ahead, with our strategy upgrade and our cooperation with Ping An in terms of internal resources, traffic and technology, we'll unleash room for further growth go beyond ourselves and bring more value to users and customers.

[Foreign Speech] With that, I will now turn the call over to our Finance Director, Ms. Hong Jiang for a closer look at our second quarter financial results.

Hong Jiang - Finance Director

Thank you, Quan Long. Now let me walk you through the key financials for the second quarter. Please note that as with prior calls I will reference RMB only in my discussion today unless otherwise stated. Net revenue for the second quarter were RMB1.94 billion. For a detailed breakdown, Media Service revenue came in at RMB600 million, Lead Generation Service revenue were RMB744 million, and the Online Marketplace and Others revenue increased by 10% year-over-year to RMB594 million, primarily driven by the consolidation of TTP and the increased contribution from Data Products.

Moving on to cost; cost of revenues was RMB262 million compared to RMB265 million in the second quarter of 2020. Gross margin was 86.5% in the second quarter compared to 88.5% in the same period last year. Turning to operating expenses; sales and marketing expenses in the second quarter were RMB552 million, compared to RMB872 million a year ago. The decrease was primarily due to a decrease in promotional spending.

Product and development expenses was RMB335 million compared to RMB326 million in the second quarter of 2020. Finally, G&A expenses were RMB177 million compared to RMB82 million in the Q2 2020. So, the increase was primarily attributable to the consolidation of TTP and a better provision related to a surge in advertising customers.

Overall, we delivered operating profit of RMB673 million for the second quarter compared with RMB871 million in the corresponding period of 2020. Adjusted net income attributable to Autohome, Inc. was RMB790 million for the second quarter compared to RMB881 million in the corresponding period of 2020.

Non-GAAP basic and diluted earnings per share for the second quarter were RMB1.57 and RMB1.56 respectively, compared to RMB1.85 and RMB1.84 in the corresponding period of 2020. Non-GAAP basic and diluted earnings per ADS for the second quarter was RMB6.27 and the RMB6.26 respectively, compared to RMB7.39 and RMB7.36 in the corresponding period of 2020.

As of June 30, 2021, our balance sheet remained very strong with cash, cash equivalents and the short-term investments of RMB18.43 billion. We generated operating cash flow of RMB581 million in the second quarter of 2021.

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

Question & Answers

Operator

[Operator Instructions] [Foreign Speech] First, we have Thomas Chong from Jefferies. Your question please.

Aggie Zhao - Investor Relations Director

Thomas, please go ahead. Hello, Thomas? Operator, there is no one to ask.

Thomas Chong - Jefferies - Analyst

Sorry, can you hear?

Operator

Next we have - Hi, Thomas.

Thomas Chong - Jefferies - Analyst

I'm sorry about that. The connection was - had some problem. The question is about the auto industry outlook, can management share about the trend going forward? Thank you. [Foreign Speech]

Aggie Zhao - Investor Relations Director

[Foreign Speech] We'll ask Chairman and CEO, Mr. Long to answer your question.

Quan Long - Chairman of the Board and Chief Executive Officer

[Foreign Speech] Well, thank you for the questions. Actually, if you look at the first half of the year and then we make some judgements over the future outlook. So first of all, Q1, the data was really good in the auto market. Q2, we do see the data drop sharply and after we communicated with the industry experts, we found out that the lack of enough supply of chips as well as the raw material increasing of the cost; that impacts the auto market.

I don't think this situation will be eradicated in a short period of time. Maybe in Q4, the conditions may be more eased. So we believe that for the whole year, in terms of the auto sales, we would experience positive growth. However, the positive growth would be quite, not so robust, it may be single-digit growth, so definitely it will be less than 10%.

Aggie Zhao - Investor Relations Director

Okay. Thank you for Mr. Long's answer. Operator, we can go ahead.

Operator

Next we have Ritchie from HSBC. Your question please.

Ritchie Sun - HSBC - Analyst

[Foreign Speech] Let me translate this myself. So I have two questions. So first one is, can management comment how will this regulatory environment affect the competitive landscape going forward and what are the costs and opportunities that we foresee from this new environment? And second question is, what is the outlook for used car industry and how is the competitive landscape and what are the areas that we can still improve on and do we see any M&A opportunities in this space? Thank you.

Aggie Zhao - Investor Relations Director

Thank you for your question. Here we have our President, Mr. Shao, to answer your question. Mr. Shao, please.

Haifeng Shao - Co-President

[Foreign Speech] Well, thank you. I would like to take your second question, which is about the used to car business. Just as Mr. Long have said, we believe that the room for the used to car market is very promising.

[Foreign Speech] Actually, there are three features of the used car business in China as a status quo. The first characteristic is, it is more or less a chaos-ed market and a segmented market. Secondly, the market lack of enough trust and transparency. And thirdly, we lack of enough financial support.

[Foreign Speech] So we believe that the business model which is C2B and B2B, they both have potential to be profitable. However, for the B2C business, it may suffer loss sometimes, so it's may be on the edge of the profitability.

[Foreign Speech] So for Autohome, we do have a few strategies in used car business. The first one is light asset model. We would stick to light assets.

[Foreign Speech] And secondly, we do have the long-term strategy on this market. As you know, the whole used car market in China is developing very fast and there has been a lot of changes in this market. We have to be persistent and we have to carry on until the tipping point occur in this market. Until that time, we should be prepared in terms of we have enough capital, we have enough capacity and we have good experience and good branding. So in this way, we would get prepared for this market to further grow.

[Foreign Speech] And lastly, I want to comment on TTP. We already have chemistry with TTP. As you know, we have a lot of resources and also we embedded the internet technologies and know-hows with TTP and together with Ping An, we empowered TTP.

So, actually in mid-June, there is something historical happened, which is we achieved breakeven in mid-June. So this is a very successful experience, which we believe we can copy that to some other areas, for example, new business investment opportunities out there.

Aggie Zhao - Investor Relations Director

Okay. That is all for your question. Operator, we can go ahead.

Operator

Thank you. Next we have Eddy from Morgan Stanley. Your question please.

Eddy Wang - Morgan Stanley - Analyst

[Foreign Speech]

Aggie Zhao - Investor Relations Director

Yes we can. Please go ahead.

Eddy Wang - Morgan Stanley - Analyst

[Foreign Speech] I have two questions. First is about the competition. So, the first level of the question is that, can you comment on the competitor landscape within the auto vertical between us versus the other, the vertical players in the first half of this year? And a second level of this question is that, can you comment or give us some color about how the dynamic between the auto vertical versus other new channels in terms of their getting budget for all these OEMs and dealers?

The second question is about the tax. So, as we noted that some of the platform - internet platform company, they are not yet approved in terms of the lower tax rates 10% of the key software, the company tax rate, just wonder if we have any - this kind of problem as well? Yeah. Thank you.

Quan Long - Chairman of the Board and Chief Executive Officer

[Foreign Speech] Thank you very much. I would like to take your first question, which is about competition. As you know, for any industry, it always have competition. We welcome our competitors, because we believe competition would boost the whole industry to further develop and this would be a good opportunity for us to learn from each other. And if we actually boosted the collaboration and competition, we believe that we would push forward our technical know-hows and we can build a more high-end levels for this whole market.

[Foreign Speech] Well, as you know, I have just issued my report, which has said, our constant efforts in content enrichment are propelling our progress and we are pleased to see our traffic continues to lead the whole auto media vertical, surpassing the total traffic volume of the second and the third players, while maintaining the rapid year-over-year growth.

So in this way, our DAU new numbers also reached to a historical high, which is 44.1 million. So in this way, we actually achieved great success in getting a lot of traffic and we're definitely in a leading position.

[Foreign Speech] Now, talking about the regulation, as you know Autohome is a listed company. I mean, we are fully compliant with the regulations and the laws and policies.

As you know, for the first half of the year, we did see the regulation and compliance gets tightened. However, in terms of data security as well as the personal privacy protection, we have never received any notice or any warnings from the regulators in China, which means we are fully compatible with the laws and regulations in terms of data protection, security protection and privacy protection.

We're not only being fully compliant with laws and regulations, we also take one step ahead, which is the regulation plus one, which means we are even in a tighter position in terms of the fully compliance with the laws and regulations.

Hong Jiang - Finance Director

[Foreign Speech] Now I want to answer your second question, which is about the tax policies. As you know, the regulation has been tightened for the key software corporations to receive the favorable tax policies. Actually for Autohome, we are fully compatible with the laws and regulations and we are eligible for applying for such favorable tax policies. We would continuously keep a close eye on this policy and we would understand the policy in their full rights and we would continue to apply for the tax - favorable tax policies.

Aggie Zhao - Investor Relations Director

Operator, we can go ahead.

Operator

Thank you. Next we have Brian from Citigroup. Your question please. Hi, Brian, please go ahead.

Brian Gong - Citi - Analyst

Hi, management [Foreign Speech].

Aggie Zhao - Investor Relations Director

[Foreign Speech]

Brian Gong - Citi - Analyst

[Foreign Speech]

Aggie Zhao - Investor Relations Director

Okay. [Foreign Speech] Next we'll ask President Mr. Shao to answer your question.

Haifeng Shao - Co-President

[Foreign Speech] Now, thank you for the questions. In terms of the automakers budget on advertising, we believe that in Q3, the shortage of the supply of chips do affected the capacity of the automakers. And also it affected the sales. And in Q4, we believe this would - the situation would be more eased. However, for the next half of the year, we can see the automakers advertising budgets always go with its sales volume and it also goes with their annual profit target. So if the sales volume is under pressure [Phonetic] and the profits target is under pressure, we believe their advertising budget would be under double pressure.

[Foreign Speech] Now, the second question is about the dealers numbers. Actually, we have some statistics till the end of June, we call them the auto dealers, which is already on the internet, actually on our network. Actually last year, this number was 23,800 and that was last year. This year - this end of June, the number is 25,600, so slightly up.

[Foreign Speech] My last comment on this question is, the coverage rate. The penetration rate or coverage rate for Autohome for the auto dealers was very good. So in this way, especially the paying members, we have a flat paying members for the dealers as over last year.

Aggie Zhao - Investor Relations Director

Thank you for your question. We can go ahead.

Operator

Thank you. Next, we have Leo from DB. Your question please.

Leo Chiang - Deutsche Bank - Analyst

[Foreign Speech] So, I will translate myself. So the first question is, we see that sales and marketing expense in second quarter declined quite a bit, so - while our competitors still acquire users aggressively. So I want to ask, like what is our user growth strategy in the future? My second question is regarding Data Products. So we see our Data Products still grow robustly and what is the outlook for second half and what is the new product in the pipeline?

Aggie Zhao - Investor Relations Director

Okay. Thank you for your question. We have, our Vice President Jun Zou [Phonetic] answer your question first and then our President Mr. Shao, will answer your question. Mr. Zou, please.

Jun Zou - Vice President

[Foreign Speech] Thank you. Let me decompose your questions. The first one is about the sales expenditure declining in Q2 versus our competitors, they are spending more in acquiring new customers. So actually if you look at our customer and the traffic strategy, on the 2C and 2B side, we are Number one in terms of the market share and also the traffic.

According to QuestMobile, on the mobile side, our traffic is more than the total sum of number two and the number three players. If we add up the PC side of traffic, we definitely can see even more - actually growth [Phonetic] traffic advantages. So we are in the leading position in terms of the traffic and the market share in the vertical media industry.

[Foreign Speech] In the future, how can we expand our user base, we did have a few strategies. Firstly is, go more granular level with car sinks down into lower-tier cities. If you look at the incremental new members, actually, we used to have 50% from the Tier 3 cities. Now, this number has climbed to 70%.

[Foreign Speech] Second is, we are attracting more younger users. For example, the age at or below 35 years old, they're accounting for a higher portion out of the total users.

[Foreign Speech] In the future, we actually want to say our sales expenditure are always dynamically changing. We would be re-adjusting dynamically based on the status quo of the customers, competitors in the market. We launched the 11.0 new version, which would be more video based, more younger generation targeted, and a more diversified. We will deploy a lot of new efforts, say for example, live streaming videos as well as lot of new scenarios.

Aggie Zhao - Investor Relations Director

[Foreign Speech]

Haifeng Shao - Co-President

[Foreign Speech] Now, Mr. Shao is going to address your second question, which is about the Data Products. We are very glad that you have noticed that we do achieve good growth on our new Data Product business. In Q2, the growth is about 47%.

[Foreign Speech] Our long-term strategy for the Data Product is, we would further enhance the total weight of the Data Product in our total revenue. And leveraging on the high growth of the Data Products, we are going to achieve a higher growth on our revenue.

[Foreign Speech] So, to better understand our scenario, we would warmly invite you to attend our September 15's New Strategy Conference. On this New Strategy releasing conference, we are going to elaborate on the Data Product strategy and targets.

[Foreign Speech] Actually, we also had a lot of new moves. For example, from the beginning of the year to today, we always have been upgrading our Data Product and optimized our Data Product. So example of this year for the dealers Data Products, we launched 11 modules. I mean in June - in September, we are going to release the new version, which is the 2.0 version of the Intelligent New Car Launch module.

Aggie Zhao - Investor Relations Director

That is all the answers. Operator, let's move on to the next question.

Operator

We will now be taking one last question from Ashley from Credit Suisse. Your question please.

Ashley Xu - Credit Suisse - Analyst

[Foreign Speech] I just wanted to check about our initiatives starting this April that we require users to verify through message when they leave their contacts. So just want to check the background and impact from this initiative. And if we look forward, how would this impact the pricing in our next negotiation round with the dealers? Thank you.

Aggie Zhao - Investor Relations Director

Thank you, Ashley. Our President, Shao, will answer your question.

Haifeng Shao - Co-President

[Foreign Speech] Thank you very much for your questions. Actually, ever since April, we launched the Blue Sky plan, which we want to be a role model in the industry to implementing the [Indecipherable] protection law and the data protection law of China.

[Foreign Speech] And then secondly, in terms of the quality of the leads we generated, we claim to be the best in the industry and we are proud to say we are the best.

[Foreign Speech] Actually, after implementing this April's Blue Sky plan, if you look at the number of the leads, it jumped [Phonetic] by 10%.

[Foreign Speech] Actually, if you look at leads quality, the leads quality have improved. And followed by our initiative, in June, some of our peers - they have gradually introduced similar plans carrying different names.

[Foreign Speech] And then, we shift our focus into optimizing of the product and try to enhance the user experience. And till August, we do see that our Lead Generation numbers have already recovered to the period of time before we carry out the Blue Sky plan.

[Foreign Speech] So what I want to say is, the Blue Sky plan would never be a barrier for our dealers and automakers to continue to renew their contract with us. On contrary, it would lay a solid foundation for them to recognize, we are the market leaders and the quality of our leads has been greatly improved. So in this way, this plan is quite positive.

Aggie Zhao - Investor Relations Director

That's all for the answers. Operator, time is running out. So let's move on to the last part. Thank you.

Operator

Due to the time constraint this will be the last question we take on this call. I will now turn the conference back to the management for closing comments.

Quan Long - Chairman of the Board and Chief Executive Officer

[Foreign Speech] Thank you. Thank you everyone 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 any further questions. Thank you everyone. Bye-bye.

Operator

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Q2 2021

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