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Ladies and gentlemen, thank you for standing by for Autohome’s Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to introduce your host, Joyce Tang, Autohome’s IR Senior Manager. Ms. Tang, you may begin.
Thank you, operator. Hello, everyone and welcome to Autohome’s second quarter 2018 earnings conference call. Earlier today, Autohome distributed its earnings press release and you may find a copy on the company’s website at www.autohome.com.cn.
On today’s call, we have Mr. Min Lu, Autohome’s Chairman and CEO; Mr. Haifeng Shao, Autohome’s President; and Mr. Jun Zou, Autohome’s Chief Financial Officer. After the prepared remarks, Mr. Lu, Mr. Shao and Mr. Zou will be available to answer your questions.
Before we begin, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US 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 does not undertake any obligation to update any forward-looking statements except as required under the law. The earnings press release in this call also includes discussions of certain unaudited non-GAAP financial measures. The press release contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures and is available on Autohome’s IR website. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Autohome’s IR website.
I will now turn the call over to Autohome’s Chairman and CEO, Mr. Lu. Mr. Lu, please go ahead.
Thank you, Joyce. Hello, everyone. Thank you for joining us today to discuss our second quarter 2018 results. I am pleased to report another strong quarter, in which our revenue excluding direct sales, increased 36% year-over-year to RMB1.87 billion. This further solidifies that our core business and the new initiatives are gaining significant acceptance in the market and all four pillars of our business are on track with continued growth momentum.
Now, let me update some recent efforts in our core media and lead generation business. Firstly, we are able to continue expanding high quality traffic. During the second quarter of 2018, the number of average daily unique visitors who accessed our primary application Autohome increased by 54% year-over-year to reach 10.3 million according to the Quest Mobile. Also, our mobile advertising revenue grew 30% compared to the same period last year accounting for 52% of our media service revenues. Secondly, we have further broadened content with data-driven customization and intelligent recommendation. For example, currently, they are 8,000 professional contributors to our PGC platform and the overall publications, including articles and videos increased about 150% growth sequentially.
Also, as part of further upgrading the PGC ecosystem, we are expanding collaboration with all other measures, KOLs, professional experts and social media etcetera. In addition, Autohome has further diversified its content production by launching nine columns, including celebrity talk show, gourmet on the road, animated car showcase, comedian car review, cars for HER, cars and the culture, road music, industry opinion interview and test drive. Next, I will show you a chart, we continued to expand now with over 76,000 groups spanning across 351 cities, a roughly 30% increase compared to 54,000 groups in the first quarter of 2018.
Finally, the vast VR product portfolio continued to expand. Now we have AR auto shows, VR branding showrooms, [indiscernible], intelligent automobile showrooms as well as direct visual access to automakers factory design and manufacturing for users to appreciate that the entire automobile production process. We will continue to develop significant resources towards expanding contents breadth and depth in order to deliver the best user experience in the market.
Next, let me provide some updates on our new business initiatives which are on track in driving our growth target for 2018. Firstly, for auto financing business we facilitated over RMB2.9 billion loans and insurance which indicates solid demand for both consumers and dealers. Second, for data products serving automakers and dealers currently over 20 OEMs and the modern 6,000 dealers have used our data products. We will continue to develop next generation data solutions in fulfilling automakers and the dealers’ requirements in order to more precise leads generation and increased conversion rate.
Finally, as for used car e-commerce platform, our recent investment in TTP and the formation of Autohome Trusted Alliance is the big strength in accelerating online transaction and our industry leading C2B2C model, which is primarily designed to resolve the major pinpoints of the used car market, such as lack of sourcing, financing, traffic and consumer confidence. Our investment in TTP effectively enhanced C2B used car sourcing and our Autohome Trusted Alliance program with over – now with over 100 offline pre-qualified high performance used car dealers and to foster exceptional B2C purchasing experiences for our consumers. This combined the C2B2C funnel from online to offline while extend out audience reach for better targeting, insure used car sourcing, refresh fair value of the used car, establish investor based practice, reinforce industry integrity as well as increase transparency with search and validation. Another example of our effort is that the merchant loan products to select offline used car dealers resulted in accumulative credit line of RMB4.8 billion rounded to more than 1,100 dealers by the end of July.
To conclude, we are making solid progress across all four pillars of our business as we set forth in 2018 and we are on track in delivering strong top line growth with sustainable profitability. We will focus on strategic expansion of our core media and the leads generation business and continued to rollout of our new business initiatives for data and other financing in order to further strengthen the foundation of Autohome.
With that, I will now turn the call over to our CFO, Jun Zou for a closer look at our second quarter financial results and the business outlook.
Thank you, Min. As Min has already highlighted, we are very excited to report another outstanding quarter. Before I start, let me briefly recap that we completed $100 million convertible bond investment in TTP, with 8% annual coupon rate. Within the next 3 years, Autohome has the right to purchase additional convertible bonds of $65 million. Our strategic investment of TTP in partnership with trusted used car dealers it’s a key milestone in our online transaction initiative. We believe this C2B2C model will maximize Autohome’s powerful platform as a win-win for all of our consumer and dealer partners.
Now, I will continue the quarterly reporting and please note that I will reference RMB only in my discussion today. Net revenue for the second quarter was RMB1.869 billion, representing 36% year-over-year increase, excluding direct sales. This was above the high-end of our original guidance. For detailed breakdown, media and lead generation revenue for the second quarter was RMB930 million and RMB740 million, up 25% and 23% year-over-year respectively. Now, online marketplace and others revenue, were RMB199 million, representing an increase of 310% year-over-year, if excluding direct sales in the same period last year. So, we are very pleased of the progress of these new initiatives in the second quarter.
Moving on to cost perspective, cost of revenue increased slightly by 3% year-over-year to RMB209 million. This, excluding the cost of direct sales in Q2 of last year, cost of revenue increased by 35% year-over-year, which is in line compared to our top line growth rate. Now for operating expense, sales and marketing expense in the second quarter of 2018 was RMB588 million compared to $404 million in the same period last year primarily due to an increase in offline execution and branding expenses. Product development expenses were RMB313 million compared to RMB215 million in the second quarter of 2017. Again, this reflects our commitment to technology advancement and hiring talents.
Finally, general and administrative expenses were RMB86 million compared to RMB79 million in the second quarter of last year. As a result, we delivered operating profit of RMB748 million, a significant increase of 32% year-over-year primarily as a result of improved operational efficiency and effective cost controls. Adjusted net income attributable to Autohome Inc. was up 32% year-over-year to RMB744 million. Non-GAAP basic and diluted earnings per share and per ADS for the second quarter were RMB6.33 and RMB6.23 respectively compared to RMB4.87 and RMB4.8 respectively in the corresponding quarter of last year. As of June 30, 2018, our balance sheet remained very strong with cash, cash equivalents and short-term investments of close to RMB7.7 billion. We have generated operating cash flow of RMB335 million in the second quarter of 2018.
Let me now address our third quarter 2018 outlook, which reflects our current and preliminary view on market and operating conditions that maybe subject to changes. At this point, we expect to generate net revenue in the range of RMB1.850 billion to RMB1.870 billion. If we exclude the impact from our direct sales business, this represents a 32.3% to 33.7% year-over-year growth.
In summary, we are very pleased with our second quarter 2018 results. Together as a team, we again achieved a revenue growth, excluding buyout of 36.1% and delivered a operating margin of 40% given the solid car business performance continued momentum of our new business initiatives. We are confident of maximizing long-term shareholder value.
With that, we are ready to take your questions. Operator, please open the line for Q&A.
Thank you. [Operator Instructions] Your first question comes from Liping Zhao from CICC. Your line is now open. Please go ahead.
I have two questions for the management. The first one is related to our media and lead gen business as the new car sales this year is soft, which impact our second half growth of the media and lead gen business? And the second question is related to our new business initiatives, as Autohome has very strong growth in online marketplace this quarter, thanks to auto financing data and used car business. So what’s the strategic focus of the management for the coming quarters? And will these new initiatives impact our margin trend? Thank you.
So, let me take your question. Let’s start with the first question first. As you have said, the auto market is quite weak. We do see quiet growth if we compare with a few years back. Actually, in terms of OEMs, I think they are in three conditions. The first one, they still enjoy very good growth. The second category, the growth was quite slim or they have slightly downward shift of the growth. The third category who enjoy sharp declining. For the third category, as the business enjoys sharp declining, so that’s why they cut their budget. But for the first category and the second category, they were not capital budgets on the market, some even growth their budgets. As I said for the OEMs, there are three categories, which we do see a big divergence this year. So that’s why in terms of the budgeting on the dollars, expenditure on the marketing and advertisement, they do need to think twice and make some alternative choices. So, they will invest more on the areas which can help them to grow their sales. Because of other Chinese OEMs, the sales volume is the most important KPI, they have to pay a lot of attention to this KPI. So, for Autohome, we are trying our best to improve the following, firstly, to improve the effectiveness of the lease conversion, so that’s why we can generate more effective leads. So, we leverage on our big data capabilities and also the smart algorithm and some other high-tech tools, which we can help to generate more conversion of the leads.
Talking about the numbers of leads and also the lease conversion rate, Autohome enjoyed the highest in the industry. So, I firmly believe that if the OEM, have to force to shrink the budget, they would not start from us, they would not shrink our budget. Now, secondly, we also try to expand on the content site. If you look at our content in the past, we focused a lot on the C side, which are product oriented, which is auto. Now, we migrate into some of the B side content. For example, we expanded into the B side we would cover the industry news, the OEMs, history, culture, high-tech techniques and also the characters of the leaders. So provide a more B content, we have also embedded the branding communications into our content. As you know in the past, our advertisement income or revenue are more from the product, which are the autos, the cars. The OEMs doesn’t think we are doing branding for them. After we embedded more coverage of the branding and also the industry history and the OEMs history and the culture into the content, we believe the OEMs whether you invest more marketing dollars on the branding on us.
So in conclusion, we do see the divergence of the OEMs, so we do see some of the OEMs are tightening their budgeting expenditure. However, because we generate the most number of leads as well as the highest and the most efficient leads conversion rate in industry, we believe that we would become even stronger in such scenario and we would benefit out of such divergence. Now, let me answer your second question. Talking about auto finance, which is one of our new and very focused business. We just get started in this business. We have answered the investors questions before regarding this question and we said this business would take off if we have come up with closed loop transaction business. If we grow that closed loop transaction business and this auto finance business would continue to grow. Just last week, we announced that we established the Autohome alliance for established trusted alliance.
Currently, there are more than 100 dealers in the Autohome Trusted Alliance and in the future we are going to expand into thousands of Autohome Trusted Alliance dealers. So, if we establish this closed loop transaction, we would continue to grow this business. Talking about the new car sales, we are also trying to put more efforts in some of the new ways to do this out and we are calling to see good results in the latter half of this year. So in summary, in terms of auto finance we are just getting started with a more closed loop transaction business grows and we believe that this business would also continue to grow. Thank you very much.
Thank you. Your next question comes from Eddy Wang from Morgan Stanley. Your line is now open. Please go ahead.
My first question is about the used car business, so basically, we have seen that the company has already established the C2B2C model, the used car transaction business and has the capability to close the transaction loop. So, my question is compared with the other used car platforms actually in China, no sooner than sensitivity model and sooner than adjusted adopted PGC model, what’s our advantage and what’s our long-term target about the used car business in the longer term? And my second question is that we have been announced actually around RMB1 billion to further improve and invest in the TTP platform and the related content such as the short video. So, basically, what’s our – have we seen any signs of increased interest in our progress upon OEM, dealers and customers just part of the content and new content? Thank you.
Okay. Let me answer you first question, which is about the used car business. Now talking about our investment on the C2B side, we invested in the TTP platform. Now, on the B2C side, we work with the selectors and good quality dealers we formed at the Authome Trusted Alliance. For the car buyers, I think the used car buyers have the biggest concerns over the quality of the car and they easily get frauded. So that’s why we come up with Autohome Trusted Alliance, which is like a promise of the authenticity of the source of the car as well as the good condition of the car. If the buyers identified any untold problem of the car within 5 days, they can get easily refunded. It’s just like omni-paced system that buyers put the money with the platform if they identify any problem within 5 days, they can get refund from the platform. While this business is just getting started, this is quite new business and next year we would continue to grow this business and hopefully there will be thousands of good dealers, especially on the top quadrant of the dealers would join us. Our business model is very clear, especially we have the C2B and B2C which is a closed loop transaction model.
Now, the second business is the leads purchase, because we generated a lot of leads. And those leads, some of them can be digested by the trusted alliance dealers and some would be taken by the secondary or Tier 2 dealers, so this is our leads business. And the third business is the ad business, the advertisement. So we can say that we have very clear business model for our used car business. We are the platform to enjoy our field privileges and advantages over other platforms. Firstly, good traffic, I mean good leads. For example in the used car business on our platform in our APP there are about 2 million DAUs, daily active users. Very strong, we are going to refer to the used car business click, on the first page of our APP and we believe the DAU would grow very quickly.
Now, talking about leads, we generate about 70,000 leads per day. We have C1 lead which are the source of the cars, which is about 19,000 and we have the C2 which have the buyers leads. The buyers leads daily is about 50,000, add them together it’s about 70,000 per day. We believe the number of leads would continue to grow this year. So for those leads we do not need to make any purchase, because the platform, the APP itself would generate such leads. There is no need for our marketing dollars on these as well we do not need to invest heavily on advertisement. Certainly we have the support from Ping An Finance. We have all kinds of collaboration with Ping An Finance including the dealers loans, consumer loans, auto loans and also the insurance, so I would like to skip the details of this part.
Now the third piece of our business is big data. Based on the big data platform, we can track the users’ footprints, we would understand very deeply of our users and then we can provide very good and precise suggestions to our users. We also have the feedback system of the used car dealers. Every day the users would provide comments and they would rate the dealers. We also generated a lot of other data, so I would like to skip the details, over speaking we are trying to establish a trust towards these used cars transaction platform in China. By establishing such a trusted alliance and platform we are trying to provide the transparent and standardized user experience when purchasing the used car. With that we believe that with more and more development of the used car market as well as our business we would become a very important and leading player in the used car business in China. Now, that is the answer for the first question. Now, I want to echo on the second question. As we said we announced we are going to invest RMB1 billion into the content. As you know, our content grow very rapidly on this media platform. Everyday, we have 6 million DAUs.
So next step, we are going to launch nine IPs and we would have deep collaboration with a lot of OEMs in terms of launching the IP. To better incentivize growth content providers, we would have the profit platform and sharing plan for all the content providers. So the investment of RMB1 billion just refers to profit sharing with our content providers. So we hope this can be an extra business for us which is not existing business, but new business. We also have established the platform which is called SaaS. The content providers can leverage on our big data platform and easily create their content. They collaborate on our AR car model and a VR showroom to generate good content. And this is exclusive from us they cannot having such resources for other platforms. On the latter half of this year we are also going to launch the AGC which is AR generated content which is the tool provided to the content contributors, which can help them to enhance their efficiency in generating content. We are quite ambitious in this content providing and generating ecosystem. We want to attract more very genius and smart content providers on our platform.
We are also doing the short video clips content generating on our platform, some are big some are small. And the third, the consumption of auto is different from the fast consumption products. Usually, the buyers would spend more time in selection before they make the purchase. So usually in people’s daily lives, nobody want to watch a short video and they will have imposed by. In reality, they would read more content and listen to their friends, comments and feedbacks and they would make a lot of comparison between different brands. So, this is exactly what we can provide in Autohome. So I think the short video clips you mentioned in only part of the buyers’ selection cycle and which is not very effective – well, important in the whole selection process. Okay, that’s all. Thank you very much.
Thank you. Our next question comes from Miranda Zhuang from Merrill Lynch. Your line is now open. Please go ahead.
Let me translate my question. So, I have two quick questions. The first one is to follow-up with the company’s plan to invest RMB1 billion to empower the PGC content creators. So, can you elaborate more on that details, for example, like what kind of KOLs are you targeting, are you touching those top tiers or that could meet tier KOLs? And then are those collaborations exclusive and then how we will expect this investment to impact the top line and bottom line for the next few quarters? And then my second question is about the big data business. So, in this quarter, you previously mentioned that they are about 6,000 dealers that paid for the big data products and last quarter number is around 5,300. So, on a Q-on-Q basis, it seems that the increase is not that much. Can you elaborate on the reasons behind? Thank you.
Yes. To answer your first question, the PGC question, the RMB1 billion is not from our own pocket, it is the new marketing dollars paid by the OEMs, that’s why this is what about RMB1 billion investment. Talking about the KOLs, some of them can be top tier, some of them can be second or middle tier, it depends. The plan itself it should be exclusive. But as we said before, we are still open. We are not forcing the KOLs to exclusively work with us. Actually, we are open in that still. And hopefully, more and more KOLs, they can leverage our big data and the technical tools to help them to be more productive and more effective and efficient in content generation. So we hope we can attract very good KOLs. As you know, our platform is auto oriented traffic platform. So, that’s why the KOLs if they published the content on our APV, there will be numerous leaders. We help them to generate more traffic and help them to attract more sense.
[Technical Difficulty]
Ladies and gentlemen, can we stay on the line? We are currently experiencing technical issues. We will be back momentarily. Once again, kindly stay on the line, ladies and gentlemen, we are currently experiencing some technical issues, we will be back momentarily. Thank you for your patience. Thank you all for your patience. Our speaker is back. Speakers, please continue.
Sorry that we dropped the line. As we said, because we can help them to leverage our big data and technical tools, they can generate more effective content and attract more sense and they will have more traffic. This would enhance our closer relationship with content generators. So in this way, we can achieve the win-win situation together with content providers. So to answer your question, whether this will affect our performance, the answer is very positive. It will be positively affecting our performance. And also depends on whether we can make the good progress of this program. Now, talking about big data business, there are two pieces of our big data business, one is to OEM, another is to dealers. Now, talking about the dealers, as we said, we have a very rapid growth first quarter, so that’s why, in Q2, the growth decelerated. But we are doing two things. Firstly, we have provided more choices of our products. We have a better product portfolio for the dealers to choose from and some of dealers had made the first questions than the second, than the third, they are multiple buyers.
Secondly, we are truly helping the dealers to make effective utilization of the tools, the purchase from us. Let me give you one example. We have a product which is called the smart online sales. So therefore the intelligent DCC tool, some of the dealers, they are very experienced in using this tool, but it’s still muted. Well, some of the users, they have look at the big screen, they also used several, they are still not used to it. So we are helping them to projecting their sales on content into the big screen. In this way, they have the unified user interface and they will be more used to such content. After helping them to use it more smartly and it’s more effectively we can see the results. The big data business as well as the Auto Finance business, they are all new to us. I think these two business are very promising business. They would be very prosperous in the future. I just visited the BMW headquarter in Germany and talked with SVP from BMW Germany. He thinks very highly of our product and he said we are the only service provider in the world. There is no other competitor who can provide the same product as us. So, along the way of further developing this business, we are very confident – we can help the OEMs as well as the dealers to enhance the conversion rate and also they can get to more DCC, the intelligent driven sales. As we said, the auto market in China is getting more divergence recently and we do see more precise tools as well as marketing and sales tools would be very helpful for the OEMs. Our big data services as well as other services would be very helpful for the dealers and OEMs as well. Thank you very much.
I will also add to Mr. Lu’s comment, Miranda, the 5,300 number that you mentioned was actually by the earnings date of last quarter, which is May 8. So it’s not by end of first quarter. And also we did mention that this quarter we have more than 6,000 dealer subscribers. We didn’t mention how many more hundred more than 6,000, actually it’s quite a few hundred more than 6,000, but anyway so thanks for your question.
Thank you. Thank you very much.
Thank you. Your next question comes from [indiscernible] from Credit Suisse. Your line is now open. Please go ahead.
So I will quickly translate my question. My first question is regarding the unauthorized dealer strategy, so we have already have a high penetration into the authorized dealers, but I want to know how many of the unauthorized dealers are covered by Autohome right now and what kind of service are we providing to them, I know at least they are covering spending levels? My second question is regarding the sales and marketing spending this quarter, it’s just a little bit higher quarter-over-quarter and year-over-year, so how much of that is related to our branding efforts in lower tier cities and what’s the trend for the second half of 2018? Thank you.
Now, talking about the authorized dealers’ strategy, we have been trying this business for 2 years. We have tried to readjust our business. This is kind of exploration in this business. You are asking how many was covered by Autohome, the answer is about 700 to 800, but the number doesn’t matter too much. Because the core question is how can we better transfer the online sales leads into true sales? These are the weakest in this whole cycle. And recently, we have revised our model. I can tell you for the later half of the year, we already covered 20 provinces across China. End of this year, we are going to cover maybe 30 provinces or even more. And in the future, we want to have at least 1 in each of the city or even in one country. After we revised our model, we need only 1 in each of the smart city. Although we are still in the conversion process, but we are very confident we already found the new direction and in the later half of the year, we are going to get into each of the smart cities. We do see that the auto sales in the lower tier cities from Tier 1 to Tier 5 cities, they are growing. So that’s why we have placed advertisement with CCTV targeting at the lower tier cities. We do see it’s quite effective. And our investor Mr. [indiscernible] world champion, he had many games this year and this is very effective commercial for us. As for how many app downloads are triggered by the CCTV commercial, it’s not easy to make this a good fit. But we do see the traffic of visiting our app, we are growing very rapidly. Okay, that’s all. Thank you very much.
Thank you. I will now turn the conference back to the management for closing remarks. Please go ahead.
Thank you very much for joining us today. We appreciate your support and we look forward to updating you on our next quarter’s conference call in a few months’ time. In the meantime, please feel free to get in touch with us, if you have further questions or comments. Thank you.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.