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Bitauto Holdings Limited (NYSE:BITA)

Q4 2012 Results Earnings Call

March 7, 2013 8:00 a.m. ET

Executives

William Li - Chairman and CEO

Andy Zhang - CFO

Rachel Layfield - IR

Analysts

Ravi Sarathy - Citi

[Gloria Yu] - Oppenheimer

[Jay Gargary]

Operator

Hello, and thank you for standing by for Bitauto’s fourth quarter and fiscal year 2012 earnings conference call. [Operator instructions.] I would now like to turn the meeting over to your host for today’s conference, Rachel Layfield.

Rachel Layfield

Thank you. Welcome to Bitauto’s fourth quarter and fiscal year 2012 earnings conference call. Joining us on from the company today are Mr. William Li, chairman and CEO, and Mr. Andy Zhang, CFO, Bitauto. After their prepared remarks, William and Andy will be available to answer your questions.

Before we proceed, please note that discussions today will continue forward looking statements made under the Safe Harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Forward looking statements are subject to risks and uncertainties which 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 SEC, including registration statement on form F-1. Bitauto does not undertake any obligations to update any forward looking statements, except as required under applicable law.

This call will include discussions of certain unaudited non-GAAP financial measures. Please refer to our earnings release, which was issued earlier today, for reconciliations of these unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures.

As a reminder, this conference is being recorded. In addition, a live and archived webcast of the conference will be available on our website. I will now turn the call over to William Li, chairman and CEO of Bitauto, and I will translate his remarks for you.

William Li

Hello, everyone, and thanks for joining us for our fourth quarter and fiscal year 2012 earnings conference call. I’m pleased to say that in the fourth quarter, we sustained our solid top line growth, with revenue increasing 55.8% year on year, and both revenue and net profit exceeded guidance. Our full year revenue was RMB 1.6 billion, representing year on year growth of 67.8%. In particular, full year revenue for our core Bitauto.com business grew by 81.4% year on year.

Our rapid growth benefitted from two key factors. Firstly, China’s auto market is entering a period of slow growth, and intensified market competition is encouraging automakers and dealers to increasingly invest in more effective online marketing. As the leading online marketing provider for potential car buyers, we are well-positioned to benefit from this trend.

Secondly, our continued focus on enhancing our EP platform, growing brand awareness, and [unintelligible] expanding our sales and service network has increased our brand recognition among auto buyers, automakers, and dealers.

In 2012, our key business developments have laid a solid foundation for the future development of Bitauto. Most importantly, in 2012 we successfully launched our EP platform, and at the end of August, we successfully transferred all Easypass subscribers to our EP platform. As an interactive, digital, online marketing platform for dealers, the new EP platform has received positive feedback and growing recognition from almost 10,000 dealers.

In 2012, we upgraded Bitauto.com. As part of this, we added new personalized services and adopted a more user-friendly domain name, [unintelligible].com. Through our continued efforts, our brand has received increased awareness during the last year.

Furthermore, on the first of April, we launched our revamped and rebranded used car website, taoche.com. This enhanced service model continues to improve user experience and to maintain our competitive position.

In the fourth quarter, we completed an organizational restructuring of our digital marketing solutions business, which has laid the foundations for improving operational efficiency in 2012. And in 2012, we continued to expand our sales network, which now covers 132 cities in China.

Also in the fourth quarter of 2012, AutoTrader Group, operator of the largest digital automotive marketplace in the U.S., took an approximately 21.8% stake in Bitauto. We believe that AutoTrader Group’s proven track record and experience in the [used] car market will support the development of our used car business.

Looking now at the year ahead, we are confident about Bitauto’s business developments. China’s auto market is expected to maintain slow growth. The China Association of Automobile Manufacturers estimates that China’s auto sales should achieve a year on year growth of 7% in 2013. We believe this growth will intensify market competition and that automakers and dealers marketing activities will become increasingly targeted, and our products and services are well-positioned to respond to these needs.

Looking at the used car market, in recent years, car ownership has experienced rapid growth and the number of cars entering the used car market is increasing. We believe the used car market will enter a phase of strong growth in the near future, and we will continue to closely monitor the development of the used car market to ensure our products and services meet market demand.

In 2013, we will maintain focus on three core growth drivers. Firstly, we will continue to enhance the utilization of advanced products and services available on the EP platform, in addition to growing the subscriber base. We will focus on enhancing user understanding of the EP platform, and of the products and services provided by our partners.

Secondly, we will continue to enhance the user experience on bitauto.com and to grow brand recognition through proactive marketing activities. Thirdly, we will continue to invest in taoche.com. Our focus remains on increasing traffic and growing brand awareness in order to enhance both the quantity and quality of used car listings and to explore new business models.

In 2013, we will continue to focus on enhancing our current strategy, and we are confident that our strategic approach will provide a solid foundation for our long term growth.

With that, I will invite our CFO, Mr. Andy Zhang, to go through our Q4 and fiscal year financial and business results in further detail. Andy, please.

Andy Zhang

Thank, William. Hello everyone. We are very pleased with our solid fourth quarter and full year performance. Our ability to maintain healthy revenue growth demonstrates increasing demand from our automakers and dealers for Bitauto’s online marketing services as well as growing awareness of Bitauto’s brands.

A highlight of 2012 has been our ability to maintain strong growth in operating profit with a year on year increase of 171.3% in the fourth quarter and growth of 113.9% for the full year of 2012. This reflects the inherent scalability of our business, and our efforts to improve efficiencies across our business segments.

Now let me elaborate on the progress we have made in delivering on our core growth strategies. Turning first to product and services developments, as William mentioned, our EP platform has been well-received by users and is rapidly becoming a must-have online marketing platform for auto dealers.

In 2013, we will work to further enhance the range of the value-added services available on the EP platform in addition to continuing expanding our subscriber base. We are already starting to see the potential of EP to become a major revenue driver for our business. As such, from the first quarter of 2013, the EP platform business will be recognized as an individual business segment on our financial statements, and we will provide you with EP-specific financial results each quarter.

Furthermore, as you are aware, from the third quarter onwards we started to provide you with updates on the number of subscribers to our EP platform business and the number of used car dealer customers. Starting from the first quarter of 2013, we will also provide the total number of paid subscription months on our EP platform for each period.

Strong brand recognition is one of our key competitive advantages, and it is critical in driving traffic to our online marketing platforms. As such, in the fourth quarter we continued to invest in our sales network, which as of the end of 2012 covered 132 cities in China. Our strengthened network ensures that the Bitauto brands receive high visibility among auto communities in both established and increasingly important new growth regions in China.

We’re confident that the resulting better brand recognition will bring substantial long term benefits across all of our business segments. Now let me update you on the third of our core strategies, our used car business.

As we have previously stated, China’s used car market is at an early stage of development. Our focus remains on growing recognition of taoche.com and ensuring our offering responds to the needs of used car customers so we are able to capture growth as it picks up.

As William mentioned, from the first quarter onwards, we will now only charge used car dealer customers for value-added services. We are confident that this will enhance the effectiveness of customers’ marketing efforts on taoche.com and deliver positive results for our used car business in the long run.

Finally, I would like to update you on the development of our business segments and the financial measures that we will be introducing in the first quarter of 2013. Starting in the first quarter, we will introduce the EP platform business segment to our reporting. As such, in the future, we will update you on four eventual business reporting segments, namely our Bitauto.com advertising business, our EP platform business, taoche.com business, and the digital marketing solutions business.

Also starting in the first quarter, we will be expanding the range of financial measures that we provide on a quarterly basis. As part of this, in addition to revenue and the gross margin, we will now be providing you with the operating profit of each of our reporting business segments. We believe this will better reflect recent developments in each of our business segments.

Looking to our financial highlights from the first quarter of 2012, Bitauto reported revenue of RMB 354.9 million, or $57 million, for the fourth quarter of 2012, representing a 55.8% increase from the corresponding period in 2011. The increase in revenue was primarily attributable to the growth of the Bitauto.com business.

Gross profit for the fourth quarter of 2012 was RMB 249. 7 million, or $40.1 million, representing a 60.4% increase from the corresponding period in 2011. Breaking this down to each of our business segments, Bitauto.com maintained its position as our strongest revenue growth driver.

In the fourth quarter of 2012, Bitauto.com revenue was RMB 290.4 million, or $46.6 million, representing a 79.7% increase from the corresponding period in 2011. The increase were attributable to an increase in dealer subscription revenue as well as an increase in advertising revenue resulting from the Bitauto.com website’s brand recognition.

Cost of revenue for the Bitauto.com business for the fourth quarter increased 72.1% year over year. This increase was mainly due to the purchase of handheld devices, which support our digital point of sale system on behalf of our auto dealer customers, as well as an increase in person costs related to directly involved revenue generating activities, and lastly, the depreciation and amortization of equipment and intangible assets.

Revenue from the taoche.com business from the first quarter of 2012 was RMB 4.6 million, or $700,000, representing a 40.4% decrease from the corresponding period in 2011. This decrease was the result of our annual sales policy adjustments, which led to a reduction in fee-paying dealer customers. We are confident that our recent changes to taoche.com’s revenue model will deliver positive results in the long run.

In Q4 2012, our digital marketing solutions business saw improved revenue growth of 2.5% year over year to RMB 59.8 million, or $9.6 million, but with a lower gross margin as cost of revenue was up by 17.1%. As you are aware, our digital marketing solutions business provides specialized services now, some of which are promotional events that have lower gross margins.

Our operating profit in the fourth quarter of 2012 was RMB 68.4 million, or $11 million, representing a 1.3% increase from the corresponding period in 2011. The increase was primarily due to business scalability and an increase in operational efficiency.

IFRS profit in the fourth quarter of 2012 was RMB 60.6 million, or $9.7 million, an 87% increase from the corresponding period in 2011. Basic and diluted profit per ADS, each representing ordinary share in the fourth quarter of 2012, amounted to RMB 1.54, or $0.25, and RMB 1.5, or $0.24, respectively.

Turning to our balance sheet, as of December 31, 2012, the company had cash and cash equivalents of RMB 600.4 million, or $96.4 million. Cash from operating activities, cash used in investing activities such as capital expenditures, and cash used in financing activities in the fourth quarter of 2012 were RMB 113.7 million, or $18.2 million, RMB 18.9 million, or $3 million, and RMB 1.2 million, or $200,000, respectively.

Gross billings in the fourth quarter of 2012 was RMB 484.7 million, or $77.8 million, compared to RMB 363.6 million, or $58.4 million, in the corresponding period in 2011. Bills receivables representing short term notes receivables issued by financial institutions that entitle the company the receive the full face amount from the financial institutions at maturity, which generally range from 3 to 6 months from the date of issuance, was RMB 68.8 million, or $11 million, as of December 31, 2012, compared to RMB 74.5 million, or $12 million, as of December 31, 2011.

Trade receivables was RMB 472.1 million, or $75.8 million, as of December 31, 2012, compared to RMB 433.8 million, or $69.6 million, as of December 31, 2011. This increase was due to an overall increase in gross billings.

For the fiscal year 2012 results, our revenues in 2012 was RMB 1.06 billion, or $169.6 million, representing a 57.8% increase from 2011. The increasing revenue is mainly attributable to the growth of the Bitauto.com business.

Gross profit in 2012 was RMB 764.8 million, or $122.8 million, representing a 67.6% increase from 2011. Revenue from the Bitauto.com business in 2012 was RMB 840.6 million, or $134.9 million, representing an 81.4% increase from 2011. The increase was attributable to an increase in dealer subscription revenue as well as an increase in advertising revenue resulting from better brand recognition of the Bitauto.com website.

Revenue from the taoche.com business in 2012 was RMB 21.6 million, or $3.5 million, representing a 23.2% decrease from 2011. This decrease was the result of our annual sales policy adjustments, which led to a reduction in fee-paying dealer customers.

Revenue from the digital marketing solutions business in 2012 was RMB 194.7 million, or $31.3 million, representing a 9.1% increase from 2011, which reflects an increase in spending on advertising and events by our customers.

Operating profit in fiscal year 2012 was RMB 153.6 million, or $24.7 million, representing a 113.9% increase from 2011. The increase was primarily due to business scalability and an increase in operational efficiency.

IFRS profit in fiscal year 2012 was RMB 135.2 million, or $21.7 million, a 55.1% increase from 2011. Basic and diluted earnings per ADS, each representing one ordinary share, in fiscal year 2012, amounted to RMB 3.4, or $0.55, and RMB 3.33, or $0.53, respectively.

Turning to our balance sheet, cash from operating activities, cash used in investing activities such as capital expenditures, and cash used in financing activities in 2012, were RMB 128.2 million, or $20.6 million, RMB 83.3 million, or $13.4 million, and RMB 48.8 million, or $7.8 million, respectively.

Days sales outstanding were approximately 114 days in fiscal year 2012, compared to approximately 111 days in fiscal year 2011.

With that, I will turn to guidance for the first quarter of 2013. Bitauto currently expects to generate revenue in the range of RMB 235 million, or $37.7 million, to RMB 245 million, or $39.3 million, in the first quarter of fiscal year 2013, representing a 32% to 37.7% year over year increase.

Bitauto currently expects non-GAAP diluted earnings per ADS, each representing one ordinary share, to be approximately RMB 46 cents, or $0.07, to RMB 51 cents, or $0.08 in the first quarter of 2013.

This forecast takes into consideration seasonality factors in Bitauto’s business and excludes any impact of foreign currency fluctuation. It reflects management’s current and preliminary view, which is subject to change.

Thank you for listening. We are now ready for your questions. Operator?

Question-and-Answer Session

Operator

Thank you sir. [Operator instructions.] Your first question comes from Ravi Sarathy from Citi. Please ask the question.

Ravi Sarathy - Citi

I’ve got two questions, if I may. The first one is just wanted to get a quick update on the number of used car dealers and the number of new car dealers that you have signed up for the subscription business. And what do you think the penetration is of total new car dealers on the new car side?

And my second question is more strategic. I’d love to get any color you might have, now that you’ve got the EP platform, and the old Easypass becomes effectively one app on that platform, wanted to hear any thoughts you might have on your ability to layer in further apps going forward over the medium and long term.

Andy Zhang

I think I’ll answer the first quarter and have William answer the second question. First of all, I think that at the end of last year, we have about 9,900 EP subscribers to the platform. All of them are new car dealerships, and as of the end of last year, we also have over 3,084 used car customers overall. So that’s the number.

In terms of penetration [rights] for new car dealerships, there were, from a third-party report, we understand there are approximately 16,000 new car franchise dealerships in China, and we have approximately 10,000 out of the 16,000, so that’s the penetration at the end of last year.

And the second question I’ll pass on to William and have him answer that.

William Li

The first step we took after converting all the Easypass subscribers to the new EP platform is by offering them an independent module, by using search keywords. And this is an exclusive agreement between us and [Bai Du] to resell their keywords into the dealership in the sector for the year 2013. And we will continue to work with other partners, such as [Tensen] and NetEase, and other mobile app network providers on creating and providing more of these individual modules from the partnerships of third party to the dealer subscribers.

Ravi Sarathy - Citi

One quick follow up if I may, if I was a dealer, and looking at your range of products and services and description packages, a new car dealer 12 months ago, and looking at that same range today, what would I see in terms of different options and different price points?

William Li

From a year ago, before we converted Easypass into the EP platform, most of the dealership subscribers are actually seeing Easypass as a product that is created solely from Bitauto.com’s website. As of today, obviously these dealer subscribers to the EP platform will actually have more choices in terms of other than Easypass.

Easypass still remains to be one of the modules available to dealer subscribers on the EP platform, but on top of that, we also will have [Tensen] individually, we also will have other products created from the mobile ad network partnerships, and so on and so forth. So each of those are individually priced.

So historically, they were buying a bundled package and that was the only choice that the dealership has with the Easypass. Now, they have the option to purchase bundled packages from Easypass at the same time. They also have the freedom to choose other individual partnered modules that are available on the platform.

And also, we have further enhanced and strengthened our analytics module and also our ECRM module to enable the dealerships to be better following the results of their marketing distributions across the platform and eventually to the website we’re partnering with.

Andy Zhang

To answer the second part of your question, in terms of pricing, we have been shifted from a bundled package selling model to a bundled package plus [unintelligible] model in 2013, and overall, we have been able to increase the price for the bundles north of 30%. And obviously, the more understanding from these dealerships with the additional individual modules that’s offered on the platform and the more revenue contribution we will have from these individual subscribers.

So therefore, one of the most important works for the year is to encourage and help train dealerships to start adapting to this new model and to buy more and more individual modules, other than the bundled packages that we currently offer on the EP platform.

Operator

Your next question comes from Andy Yeung from Oppenheimer. Please ask the question.

[Gloria Yu] - Oppenheimer

Hi, this is Gloria Yu asking questions on behalf of Andy Yeung. My first question is about your first quarter guidance. Could you share some color on your guidance in terms of the revenue growth by each business segment?

Andy Zhang

Historically, we have been giving guidance on the corporate level, and we intend to maintain that way going forward. Obviously, as you look at the history of the company’s growth, especially on a top line basis, you understand our Bitauto.com business, which includes two parts, the Bitauto.com advertising business as well as the EP platform. Those have been the core growth drivers for the corporation in the past two or three years, and it will remain to be the core driver for the year of 2013 as well as first quarter.

You also realize, looking at the history of the company, that our digital marketing solutions business, eventually agency business, has been growing quite consistently at around 10% for the past many years and quarters. So in other words, if you look at them collectively, you will see that our Bitauto.com business will be actually growing far exceeding the overall corporation growth, because of the [CIG’s] stable growth that was played in the mix.

[Gloria Yu] - Oppenheimer

Another question is about SG&A expense. We noticed that the expense as a percentage of revenue decreased year over year and quarter over quarter in the fourth quarter. Just wanted to know, do you see a similar pattern in the first quarter, in the coming quarter?

Andy Zhang

Margin expansion has always been part of our concern, and always plays into our strategies, at the same time, while we expand our revenue growth. What we’re looking at going forward is also we will see continued gross margin and operating margin expansion in the year 2013. Not necessarily on a quarterly basis, but on an annual basis, that’s what we are forecasting.

Operator

[Operator instructions.] Your next question comes from [Jay Gargary]. Please ask the question.

[Jay Gargary]

Yes, I was wanting to see if you could elaborate a little bit more on the revised approach with the used car website?

William Li

We remain positive regarding the used car market, and unfortunately we still believe that at this point, we are still at the early stage of this particular market. In terms of key strategies in the used car business, first of all we would like to continue to ensure that we are still leading as the primary online used car marketplace in China, for taoche.com. To further explain that, we will keep maintaining number one in the traffic, as well as valid listed inventories on taoche.com.

Because we realize the importance of a valid inventory listing, and the number and quality of these listings on our site, we have been undergoing several strategies to further enhance our leadership in that particular area, which will be executed in the current year to help increase brand awareness as well as the validity of the inventories that we currently carry.

From a pure revenue model perspective, we definitely are also contemplating a different model than what we used to have, and we’re planning on offering a few value-added services on taoche.com for our dealership clients. And hopefully that will encourage the dealerships to continue to list more and more inventories on the site, at the same time generating revenues from value-added products and services that we have to offer taoche.com

Operator

[Operator instructions.] Ladies and gentlemen, we are now approaching the end of the conference call. I will now turn the call over to Bitauto’s CFO, Andy Zhang, for closing remarks.

Andy Zhang

Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to talking with you in the coming months.

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