Bitauto Holdings' (BITA) CEO William Bin Li on Q3 2016 Results - Earnings Call Transcript

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About: Bitauto Holdings Limited (BITA)
by: SA Transcripts

Bitauto Holdings Limited (NYSE:BITA) Q3 2016 Earnings Conference Call November 9, 2016 7:00 AM ET

Executives

Philip Lisio - Investor Relations, Brunswick Group LLP

William Bin Li - Chairman of the Board of Directors, Chief Executive Officer

Andy Xuan Zhang - President

Cynthia He - Chief Financial Officer

Analysts

Evan Zhou - Credit Suisse

Ming Xu - UBS Investment Bank

Wayne Wang - HSBC Global Banking and Markets

Wendy Huang - Macquarie Group Limited

Thomas Chan - BOCI-Prudential Asset Management Co Ltd.

Operator

Hello, thank you for standing by for Bitauto’s Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Phil, please go ahead.

Philip Lisio

Thank you, and welcome to Bitauto’s third quarter 2016 earnings conference call. Joining us from the company today are Mr. William Li, Chairman and CEO; Mr. Andy Zhang, President; and Ms. Cynthia He, CFO of Bitauto. After their prepared remarks, William, Andy and Cynthia will be available to answer your questions.

Before we proceed, please note that discussions 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, 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 F1.

Bitauto does not undertake any obligations to update any forward-looking statement 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 those 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. I will interpret his remarks for you.

William Bin Li

[Interpreted] Hello, everyone and thank you for joining us for our third quarter 2016 earnings conference call.

We are pleased to have achieved a set of healthy results for the quarter with our overall revenue growing by 33.1% year-over-year. In particular, our transaction services revenue grew by 78.8% year-over-year with more than 90,000 revenue-generating transactions executed during the quarter.

Over the past two quarters Bitauto has focused on building a comprehensive ecosystem around automotive transaction services enabling automakers and dealers to connect with consumers, while providing consumers with the best possible experience throughout the entire automobile purchasing process.

The core of our ecosystem is automotive media and content, and extends to automotive e-commerce, auto finance and after-sales services. There are substantial synergies between these segments, with each segment serving as a growth driver for the others. Our ecosystem initiative has already begun to boost revenue growth and we are confident, it will continue to do so.

To further enhance the Bitauto ecosystem, we will continue executing on the three core strategies we have been emphasizing this year. First, we will enhance consumers purchasing experience, and increase the efficiency of our online and offline service infrastructure. Second, enabled by our big data analytics, we will strive to further increase our mobile monetization capabilities. Third, we will continue to strengthen our dealer services offering on mobile devices and social media.

I’m confident that we will strengthen our long-term competitiveness through successful execution of these core strategies. I will now invite Andy to talk about this in more detail.

Andy Xuan Zhang

Thank you, William, and hello, everyone. To add onto what William just mentioned, we are focused on creating China’s leading ecosystem in connect automotive buyers and sellers. We aim to offer buyers an easy and reliable purchasing experience, and provide sellers with marketing solutions that brings results. Within Bitauto’s ecosystem, our first interaction with the buyers through content, for which they are four points of engagement, our new car, and used car media sites, our e-commerce platform, and our financial services platform.

Each of these points, we want our users receive high-quality information and enjoy lively exchanges, as this helps to increase user stickiness, enhance marketing results and drive online transactions. Therefore producing competitive UGC, PGC and creative marketing content will always be a core focus of Bitauto.

Especially with our - of our first strategy of further enhancing our automotive transaction platform, we have successfully linked our e-commerce platform, Huimaiche with YiXin’s financial services offerings, creating a smooth purchase to finance experience for customers.

We have also complemented our online services with call centers and skilled sales consultants in more physical locations. Our O2O capability had led to significant increases in transaction volumes, and reduction in transaction times. While this has led to increased costs, we believe these investments are worthwhile, and we expect to see economies of scale in 2017 and then beyond.

Let me now talk about our second strategy of using big data analytics to increase mobile monetization. As you know, we began collaborating with our major shareholders Tencent, Baidu and JD on big data analysis following their investments in Bitauto and YiXin. Equipped by our partner’s data resources, we will soon be able to offer a new generation of highly targeted and result-driven marketing and transaction-driven solutions to the industry players, such as OEMs and dealers, and banks and financial institutions.

Our data covers an overwhelmingly large amount - a number of auto consumers in China and is based on individual users’ online history, making our analytics both powerful and precise. For example, in the recent marketing campaign for a joint-venture car model, we were able to achieve click through rates, sharing rates and follower increases in multiples of the industry averages.

So if you’ve been following us, you will have seen that we’ve been carrying out more marketing promotions on mobile devices and social media. The example I just gave regarding big data also applies to our growth strategy, extending our products on mobile devices and social media.

Another good news is that our efforts are well aligned with market trends, over the past year we have been encouraged by the strong momentum in the used car markets and the auto finance markets, both of which have lower penetration rates in China compared to more mature markets. For example, auto financing is used only in about 30% of our new car, new automobile purchases in China as compared to close to 80% in the U.S. market.

We’re pleased to see that the new generation of car buyers is more willing to use these financial tools, to help them to take home the cars that they desire today. We’re also starting to see more consumers upgrading their automobiles. Similar to what happened in the real estate market this is a boosting demand for used car purchases, tradings as well as related auto finance products. These are all areas in which Bitauto has a clear competitive advantage.

We believe that both the used car markets and auto finance markets will be important drivers of our future growth. Last but not the least, I would like to welcome Cynthia He, our new CFO, she joined us in September to free me up from day-to-day financial management and the capital market responsibilities, so that I can better focus on executing company’s business strategies together with William.

As you can see from our previous announcements, Cynthia has a strong background combining experience in finance, investor relations and the China’s TMT sector. She is a great addition to our leadership team.

I will now turn the call over to Cynthia to go through this quarter’s financial results in further detail.

Cynthia He

Thank you, Andy, and hello, everyone. To my old friends listening in on this call thank you very much for your support along the way through my Baidu, Brunswick and Deutsche Bank days. To those whom I’ve yet to meet, I look forward to working with you in the future. Please do not hesitate to contact me should you have questions about Bitauto.

As William and Andy have said today, we see many promising growth opportunities in our market such as in financial services and used cars. At the same time, we have tried and tested method for reaping these market opportunities supported by our integrated content to purchase to financing platforms.

I’m very excited to be joining Bitauto at this exciting time. Without further ado, let me dive into this quarter’s financials. We reported revenue of RMB1.50 billion for the third quarter of 2016, representing a 33.1% increase from the corresponding period in 2015. The increase in revenue was primarily attributable to the growth of the company’s transaction services business and digital marketing solutions business.

Let me now give you the revenue breakdown by segment. Revenue from the advertising and subscription business for the third quarter of 2016 was RMB898.3 million representing a 9.8% increase from RMB818.2 million in the corresponding period in 2015.

Revenue from the transaction services business for the third quarter of 2016 was RMB403.7 million, representing a 78.8% increase from RMB225.7 million in the corresponding period in 2015. The increase was attributable to a higher volume of transaction services. Revenue from the digital marketing solutions business for the third quarter of 2016 was RMB197.9 million representing a 138.6% increase, of RMB82.9 million in the corresponding period in 2015, which was primarily due to an increase in a number of advertising customers as well as increased spending from some customers.

Gross profit for the third quarter of 2016 was RMB958.5 million representing a 33.2% increase from the corresponding period in 2015, which is in line with revenue growth. Operating loss in the third quarter of 2016 was RMB14 million compared to an operating loss of RMB53.2 million in the year-ago period.

Non-GAAP operating profit in the third quarter of 2016 was RMB158.8 million, representing a 14.1% increase from the corresponding period in 2015.

Net loss in the third quarter of 2016 was RMB48.1 million, compared to a net loss of RMB77.7 million in the corresponding period in 2015. Basic and diluted net loss per ADS, each representing one ordinary share in the third quarter of 2016 amounted to RMB1.48 and RMB1.48, respectively.

Non-GAAP net profit in the third quarter of 2016 was RMB129.3 million, a 12.5% increase from the corresponding period in 2015. Non-GAAP basic and diluted net profit per ADS in the third quarter of 2016 amounted to RMB1.07 and RMB1.03, which translate to US$0.16 and US$0.15, respectively.

As of September 30, 2016, the company had cash and cash equivalents, time deposit and restricted cash of [RMB2.25 billion] [ph]. Cash used in operating activities, in investing activities and cash from financing activities in the third quarter of 2016 were RMB3.39 billion and RMB3.13 billion and RMB6 billion, respectively.

Bills receivables, representing short-term notes receivable issued by financial institutions that entitled the company to receive the full face amount at maturity, which generally range from three to six months from the date of issuance, was RMB135.9 million as of September 30, 2016, compared to RMB147.7 million as of December 31, 2015.

Trade receivables was RMB2.43 billion as of September 30, 2016, compared to RMB1.9 billion as of December 31, 2015. This increase was in line with revenue growth.

As of September 30, 2016, the company’s transaction services business had cash and cash equivalents and restricted cash of RMB3.2 billion, finance leasing receivables of RMB8.53 billion and interest-bearing borrowings of RMB5.71 billion.

The number of employees was 6,261 as of September 30, 2016, including employees of the entities in which Bitauto acquired and holds controlling interests. This represented a 31.9% increase from September 30, 2015, primarily due to higher headcount in customer support service teams supporting Bitauto’s transaction services business, including automobile transactions and automobile finance.

With that, I will turn to guidance for the fourth quarter of 2016.

Bitauto currently expects to generate revenue in the range of RMB1.58 billion to RMB1.63 billion in the fourth quarter of 2016.

May I remind you that, 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 may be subject to change.

Thank you for joining us today. We concluded our prepared remarks and we’re now ready for your questions. Operator, please turn the session over to questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session of this conference call will start in a moment. [Operator Instructions] Thank you. Your first question comes from the line of Evan Zhou of Credit Suisse. Please ask your question.

Evan Zhou

Hi, good evening, William, Andy; and congratulations, Cynthia, for the new role. My question is regarding the new business mix within our auto finance and transaction business, which is probably more related to our used car, because I’ve noticed that there have been like, relatively speaking, increasing amount of offerings of used cars with partnering [ph] with the YiXin or other financial institutions packages on our platform. So I was wondering like how is that business ramping up, and is that part of our strategy to accept the used car markets compared to what the others has been doing on the market using different transactions or traffic referral models. So if you can elaborate a bit on that, it will be very helpful. Thank you.

Andy Xuan Zhang

Thanks for your question, Evan. I will answer this particular question regarding used car. First of all, BIT actually has started our used car business since the year of 2006, which is the year I joined the firm. We’ve actually explored various different options, not only being - providing information/services to the used car interested consumers, as well as been able to explore various different revenue capabilities and sources for the - within the used car sector for the last almost 10 years now.

So far I think we are - in terms of exploring the ways that the used car and used car consumers are being serviced through BITA, we are capable currently of delivering not only the listings of inventories coming from thousands of different dealerships/consumers, but also we are capable of helping these consumers in the offline level to help them to actually lock in and to purchase these particular inventories on the offline level.

While we’re doing that, similarly to that what we have been doing with the new car business is we continue to adding on additional services during this entire process. So the current revenue stream that - so far this particular operation has been executing pretty smoothly to the point where that I’m capable of telling you that we’re generating revenues in the used car business in the following areas.

One is the listing and advertising revenues that’s coming from either dealers or the OEMs. Two is the actual action of helping the consumers to make these purchases on the offline level in terms of on the transaction services side. As well as any additional services that we overlap, which includes what you have mentioned relating to any financial products that we actually sell on our financial platform, overlapping that with these transactions that takes place online and offline.

So, well, we have these three main streams of revenue that’s coming into our used car business.

Currently, we do expect our overall used car revenue to account for between the number of RMB400 million to about RMB0.5 billion for the entire year of 2016. This number actually will go up to between RMB1 billion to RMB1.5 billion in the year of 2017. This year the transactions that resulted these revenues, we’re foreseeing a number somewhere around near a 100,000 in terms of revenue generating transactions in the used car sector.

In the forward-looking year 2017, we’re looking at that number to be at least doubled. So in other words, that going forward from the next earnings release and onwards, we will also put in a segmentation of revenues that are being generated from new cars versus used car, so that consumers as well as capital markets will have a clearer view as to how we generate revenues from each of these different sectors, and how are these revenue streams will be growing in the future.

To sum it up, we’re looking for this sizeable revenue stream as well as this quantity of volume, revenue generating volume, that we deal with on a daily basis should put us right on top of all the used car businesses or Internet businesses in China.

And forward-looking wise, I think in 2017 we should be - on the revenue-wise side I do not foresee anyone on the sizeable - revenue-size-wise I do not foresee anyone to exceed us, given that we’re looking at about between RMB1 billion to RMB1.5 billion revenue for 2017, that’s generated from auto deal, used car sector on the BITA.

So hopefully that answers your question.

Evan Zhou

Thanks, Andy. Can I have a follow-up on that, because based on the number you just told me - and I think it’s roughly for this year on a per-transaction basis for used car. We’re going to have roughly RMB4,000 to RMB5,000 per-transaction for used car. If that’s the ballpark, then can we have more color, say, how on the unit basis this RMB4,000, RMB5,000 per-transaction for used car, what’s the kind of the mix of the three stream of revenue you just mentioned?

Andy Xuan Zhang

Yes. I think it’s about 20% to 30% relating to listing, advertising and the transaction services, approximately 70% is leverage related. So moving forward, this particular contribution will be fairly similar. If you look at over the players in this particular industry, I think everyone else is pretty much following-suit in that. We are confident, we’ll probably lead the trend moving forward.

Evan Zhou

Got it, so next year this per-unit revenue will probably go to roughly, if my number is correct, like RMB6,000 to RMB7,000 per car. And that incremental increase would be more coming from the finance product or…?

Andy Xuan Zhang

Well, the ASP increase will be - yes, the ASP increase will be mainly driven or derived from additional overlapping of different services on the - in single vehicle transaction basis. So again similar to the new car services that the more activities or the more services that you provide on the single transaction you wind up having higher ASP generate from that particular transaction.

It is our full intention to make sure that the vehicle transactions will receive more than just one simple service in the future in terms of these new and the used car transaction within BITA’s reach. Thank you.

Evan Zhou

Got it. Thanks, Andy.

Operator

The next question comes from the line of Ming Xu of UBS. Please ask you question.

Ming Xu

Good evening, William, Andy and Cynthia. So I have a question on the sales event, so we are - as we are heading into the Double 11 event, we know that the - we are approaching a new or try new business models for the transaction services in the recent two quarters. So I just want to know what’s the company’s preparation or the current status for the upcoming Double 11, whether we have any target and also if we look at the revenue contribution to different - to various business lines, so what should we look for the contribution for the advertising, dealer service and also transaction services? Thanks.

Andy Xuan Zhang

Okay. I guess, I am the one taking that question. Well, first of all, I think there are two parts to the Double 11 in the auto industry. One part is that on the marketing side of it, there are demands coming from OEMs that leveraging this particular event during this specific timeframe to promote their products online on the more of a promotional basis.

The second part is regarding the actual transactions that shall take place during the period. In terms of the first part of the - that relates to this particular event on an annual basis, OEMs has already been putting these budget within their existing, our original fourth quarter marketing budget. So it’s unlike when we first started this particular event few years back where it’s a brand new thing during that year, so while we were able to - everybody was able to get additional budget allocations for those.

Right now, since this particular event has already become a routine event. So therefore it’s becoming part of their routine budget as well. So other words that no one in this industry is really getting too much of additional thing out of this, but more of a routine activities during this specific timeframe.

The second part of this Double 11s, some of the so-called e-commerce firms are using that to promote their strength in terms of selling products online to consumers. However, to us I think, you’ve actually heard William or myself indicating that in the third quarter alone we’ve carried out over 90,000 revenue generating transactions in that quarter alone.

So the 300,000 transaction for the entire year are still well intact for my target. We’re almost half the way through this on third - fourth quarter. I think I’m very confident to tell you that we shall reach this target at the end of the year. So therefore, to me transaction services or, slash, you may categorize as e-commerce, to me it’s a daily routine process. We do that with all my different divisions in the transaction services group on a daily basis. And therefore, we’re capable of generating this number of transactions each year and thus translates into the revenue streams that we are looking at this year.

So overall, I think I’m expecting the transaction-driven revenues to also somewhat of reaching the realm of RMB1 billion area. In the 2017 and onwards, I’m also fairly bullish on the revenue growth in that particular sector as well to look for the number to at least double. So the bottom line is that we’re taking this seriously in terms of - we’re spending capital, we’re spending time, we’re building up offline headcounts to really facilitate - we’re building up the overall infrastructure to facilitate all of the transactions we have specified, or in particular, majority Double 11.

But to me, I think we don’t sell cars just during Double 11. We sell cars all year around. We don’t only extend loans on behalf of banks and the financial institutions during Double 11. We do that on the 365 basis. So I guess my point of view is - has always been consistent throughout even the first year we started this whole Double 11 campaign is that this is a time that it’s best for some of the product creators, product producers to promote their products.

But on the transaction side this is not something too much of special from what we do on the daily basis. Hope that answers your question. Thank you.

Ming Xu

Sure. I also have a quick follow-up. So you just mentioned that the change in OEMs’ budgeting from a kind of a special event to their normal marketing budget. So I just want to check, when we look at our revenue in Q2, so we notice that actually the - while the transaction service revenue was particularly from the - traditional advertising and dealer service revenue is a bit weak.

So I just want to know if related to this changing OEMs’ budgeting behavior, whether that have any impacting our accounting rules or accounting treatment or the way we book our revenue, so that causes especially strong transaction revenue. Thanks.

Andy Xuan Zhang

No, definitely not. I think let’s not get confused in terms of the budget allocation, because on the transaction service within the entire transaction services sector, we seldomly generate revenue from the OEMs. We normally generate revenues from the consumers or the dealers or any other parties within such industries, such as banks and the financial institutions, or the aftermarket service providers.

What I was trying to say in the my first part of the answer to your question was that, when we first launched this Double 11 campaign a few years back, OEM wasn’t really ready for that, so they had to come up with additional budget just to make that ends meet. But since this Double 11 campaign have become a [very good] [ph] activity, therefore they’ve already built up into their - built this part of budget into their routine fourth quarter budget.

So in other words, that’s the main difference between the first year we’ve undertaken this and now. So that was my sort of a clear intention to express to you. So let’s not get confused with advertising dollar and also in general transaction services dollar. They are completely two different areas of revenue streams coming from different parties in general.

Ming Xu

Okay, thanks. Thanks, Andy.

Andy Xuan Zhang

Thank you.

Operator

Thank you. Your next question comes from the line of Terry Chen of HSBC. Please ask your question.

Wayne Wang

Hi, management. I am Wayne Wang from HSBC. I am asking this question on behalf of Terry Chen. My question is about YiXin Capital, so can you share more color on the latest development including like GMV revenue and margin? And in the next coming 12 months, what do think would be the size and margin associated with this business? Thank you.

Andy Xuan Zhang

Well, first of all, I think, we made an announcement in the middle of the third quarter relating to YiXin’s second financing of US$550 million. That puts YiXin’s registered capital to close to US$1 billion. However, again when we build up YiXin, we are looking to build up a very strong online financial services platform within this particular industry. I think so far we are fairly successful on achieving that.

We’ve received thousands, if not, tens of thousands of applications per day through online. And our offline team is working very hard to deliver services upon these requests as well as requests received offline.

In terms of what we can offer to the consumers for YiXin Capital and YiXin’s financial platform is that along with our own capital, we also help different - I’ll say, somewhere between 10 to 20 different banks and financial institutions, to extend loans and the leases to our consumers to fulfill their demands on leveraged buy on the vehicle.

So far I think in the year of 2016, we’re probably looking at number to be the overall loan originated through the platform or loan leases originated through the platform to be in the range of RMB12 billion to RMB14 billion. That number can be growing pretty fast in 2017.

So hopefully we still continue to be able to plough through. I think the primary focus of YiXin’s financial platform is, in terms of auto sector is, we are targeting more in the used car sector versus the new car. And we want to make sure that in the used car sector, we will be also undoubtedly the number one platform in that sector. And so far I think we are fairly successfully in achieving that. Our intention is to continue to maintain this leadership position and lead the trend in this particular industry.

In terms of margin question, I think, right now, because this platform is still very young. And it’s not my customary way of expressing the margin profiles over a call like this. But I think when we actually have discussions with the model building, I think we will - I think I’ve communicated with Terry before in terms of the margin profiles of YiXin Capital, different products and the services that we render.

So therefore we can find the time to - when we start working on 2017 models we will be able to express that to you very specifically. Hopefully, that answers all your questions.

Wayne Wang

All right. Thank you. Thank you very much.

Operator

The next question comes from the line of Ms. Wendy Huang of Macquarie. Please ask your question.

Wendy Huang

Thank you. I have two quick questions. First, you mentioned that this year you are on track to exceed the 300,000 revenue-generating transactions target. So what do you have in mind for the next year in terms of the revenue-generating transactions and also in particular I think you also mentioned earlier you expect used car volume to also double, so how should we see the breakdown between the used car versus the new car?

Second question is about the YiXin, so the registered capital reached US$1 billion, with this what kind of the loan amount or how fast do you expect the loan side speed up in 2017 or how many times you can leverage up on that US$1 billion. And also with the fast progress of the YiXin, what kind of measures that you are taking to control the bad debt? And also what kind of the default ratio you are seeing within the current transactions? Thank you.

Andy Xuan Zhang

Well, coming to your first question, service and transaction numbers, volume, we’re looking at 300,000 this year. My guess is that if everything goes right, we’re looking at a 0.5 million around that for 2017. Split between new and used, we’re looking at about, what, 200,000 probably, little bit more than 200,000 for the used car and the remainder are the new cars.

So it’s more of a 40-60 split that I’m seeing. Regarding YiXin Capital, I think please keep in mind we’re a financial platform. So in terms of my registered capital that’s something that is enabling me to negotiate with the banks in terms of helping them to extend underwriting loans to the consumers, not necessarily my focus is on how to leverage these registered capital to extend loans to the consumers on my own.

So therefore, I think the focus of the YiXin Capital and YiXin financial platforms has always been, try to create values for the product providers and link their products with consumers. And so consumers receive the most suitable financial product, while they’re looking to buy, purchase a vehicle.

I think there are three major key components of why the banks are willing to work with my financial platform. I think one is that, obviously, we’re capable of generating online interests from consumers while they are looking for purchasing vehicles. Two, is that our status of - the shareholder status plus the amount of registered capital that we have given enough assurance to the banks that works with me in terms of - on a more of a status or more of a - works with their comfort zone so to speak.

But most importantly is our capability of managing the assets that we actually help them to underwrite. Managing the assets meaning that on a either bad debt or reserve standpoint is that we do divide our risk control or risk profile of a consumer record into three different staffs, so three different stages, one is the pre-underwriting, one is during the underwriting, and one is the post underwriting.

The reason that YiXin Capital is having this whole shareholder structure as it is right now is because we would like to use as much data as possible to put that into my risk management system, where that not only that we have most amount of the car-related data and the car consumer related data, car pricing related data, car valuation related data, car residual value related data, et cetera, et cetera, within my risk management profile system.

But also we can work with all of my partners, which I mean my shareholders: Baidu, Tencent and the JD; on exchanging all these data in terms of creating different models that further enhances my capability on the risk controlling - on the risk control system. I think that covers pre-underwrite and during underwriting.

Lastly, I think, we do have a large team of risk management team within YiXin that also helps all the banks to manage their assets after loans being extended and the cars being purchased, in terms of maintaining, monitoring, repossessing [ph] and liquidating all of those assets, in case there are any defaults that happens.

So it’s a very thorough system that combines data from everyone; that combines the online and offline capability; that combines our capability of assessing, evaluating the asset, plus assessing evaluating the person; and combining our capability of quick, of timely liquidation, because of the networks that we’re in, that they were currently working with over 25,000 dealerships in China; so all of which contributes to those entire process to make sure that we have the lowest default/bad-debt or reserve ratio in the entire industry.

So this so far is the - is something that we have been able to achieve to me in the first stage, but also I think we’ll like that capability continue to grow as we grow larger in terms of - as a platform. So that’s the plan and the current situation with YiXin’s financial platform. Thank you.

Operator

The next question comes from the line of Thomas Chan of BOCI. Please ask your question.

Thomas Chan

Hi, William, Andy, and Cynthia; thanks for taking my questions. I have two questions. The first question is about the auto industry outlook. Can management share your view about the trend for next year given the uncertainties in macro?

And my second question is about the advertising and subscription revenue. In this quarter it is about close to 10%. How should we think about the outlook for advertising and subscription in 2017? Thanks.

Philip Lisio

I think William will take that question, so allow us to briefly translate. Thank you.

William Bin Li

[Foreign Language]

Cynthia He

Please allow me to translate William’s response. In 2016, we saw auto sales growth exceeding most people’s expectations. Our information shows that in the first nine months of 2016, the growth is over 15% year-over-year. We believe this is caused by a number of factors: Number one, the demand for cars in the lower tier cities for example, the fourth to fifth tier cities is still there, that hasn’t been met before. And also the policy, the beneficiary referable [ph] policy to smaller cars at 1.6 liter has helped to increase sales.

But on top of that, we also believe, an encouraging sector is that people are more and more using financial tools to help them purchase the cars that may not be able to otherwise afford today.

We are seeing increase in financial penetration used - financial tools penetration used in auto purchase. It’s still at low percentage, which is about 30%, below compared to in matured markets. However, it is - the growth has been very fast, if you look at about one-year ago, this penetration rate is only about 20% something. This also explains why our financial business segment has been enjoying very healthy growth.

So if we look a little bit further into the long-term, we believe that there are two growth drivers still in place: number one is genuine demand from lower tier cities for auto consumption; number two, the boost from using financial tools for people to own desirable cars sooner than they can otherwise afford.

However, having said that, the China’s auto consumption ownership is already enjoying a very large base. So we believe the growth rate will not be as high as in previous years, but high-single-digit growth should still be a reasonable assumption for us to take.

Okay. So that answers the first question about auto industry outlook. And, Thomas, your second question is about how to look at our advertising and subscription revenue in 2017. Our view is that - let’s answer this question in a rather long form. First of all, we do - we believe that similar to auto sales, the advertising or subscription business in the - for the whole industry. It’s also at a - also pretty - has a pretty large base and it has enjoyed very fast growth for many, many years.

Going forward, we are expecting slower growth in terms - because our base is larger, because our penetration into the dealers, into the OEMs for automobiles has already very high. And budget allocations from the dealer customers, from the OEM customers are also at a saturated point. Of course there are more budgets that will go into mobile and social marketing, and we are doing our best to capture that part of the opportunity.

Andy Xuan Zhang

Just to add on the comments for the outlook, I guess, two things that we continue to mention quarter-over-quarter in last, I think, a year or year-and-a-half, which was that one of the major concerns coming from us. Why BITA should commence its trials in the transaction services area is out of a concern that we’re a vertical media.

And we are already occupying on average from OEM perspective almost RMB30 million per client basis out of this [or near] [ph] 70 clients that we service. I am not sure how much further that can grow as an independent vertical platform in China within particularly - within this industry.

Secondly, obviously, dealers are very - strive for car sales. They are even more encouraged for result-driven activities than the OEMs. Unless we started providing the additional services which they can see results by the way, otherwise they would not likely to continue to largely increase on the general memberships.

So our way of justifying this is by entering into result-driven transaction services, which I had expressed before that we are capable of generating additional revenues from the dealers on top of the existing membership base or membership fees that we charge them.

So in other words that - we are taking a different approach compared to a lot of different firms in the industry, that membership within the - with the dealers has become a fairly steady and basic or entry-level relationship with BITA - within BITA and the dealers, but there are tons of additional other things, services that we can provide for dealers or on behalf the dealers through my service team, through my frontend, which is my apps and the websites. So this is our way of addressing that or justifying the growth of that particular area.

So, again, I’m saying this not being bearish, but we are generating more than RMB3 billion just in the combined basis for 2016, on both the advertising revenue plus the memberships. So I guess this part of the revenue shall be fairly steady in the future years.

We’re definitely banking heavily on the transaction services and their growth which we already see a very, very clear sign of in the future. So hopefully this answers the question completely. Thank you.

Thomas Chan

Thanks.

Operator

We are now approaching the end of the conference call. I will now turn the call over to Bitauto CFO, Cynthia He, for closing remarks.

Cynthia He

All right, so 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. Good bye, everyone.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.