Earnings Call: Q4 2018

Mar 11, 2019

Good day, and welcome to the Meituan-Dianping fourth quarter and full year 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to the Vice President of Capital Markets, Scarlett Xu. Please go ahead. Thank you, operator. Good evening and good morning, everyone. Welcome to our fourth quarter and full year 2018 earnings conference call. Joining us today are Mr. Xing Wang, Chairman and CEO, and Mr. Shaohui Chen, Senior Vice President and CFO of Meituan-Dianping. For today's call, management will first provide a review of the fourth quarter and full year 2018 results and then conduct our Q&A session. Before we start, we would like to remind you that our presentation contains forward-looking statements, which include a number of risks and uncertainties, and it may differ from the actual results in the future. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to and not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents in the IR section of our website. Now I will turn the call over to Mr. Xing Wang. Please go ahead, Xing. Thank you, Scarlett. Hello, everyone, and welcome to Meituan-Dianping's fourth quarter and full year 2018 earnings call. 2018 marks a milestone year for Meituan-Dianping. For the full year, total revenue increased to RMB 65.2 billion, up 22.3% year-over-year. Gross transaction value increased to RMB 515 billion, up 44.3% year-over-year. At the end of 2018, annual transacting user on our platform increased to 400 million, up 29.3% year-over-year. The average number of transactions per transacting user increased to 23.8 times in 2018 from 18.8 times last year. The number of active merchants increased to 5.8 million in 2018, up 32.1% year-over-year. In 2018, we continued to cement our overall market leadership. We have successfully exercised our Food + Platform strategy and enhanced the penetration on both the demand side and the supply side. Our platform is now able to satisfy more of people's daily needs than ever before. We expanded our offerings on the supply side by creating a comprehensive digitized merchant service system. More and more merchants now choose our platform to establish their online presence, access and engage a large and growing consumer base, and improve their operational efficiency. We fortified a thriving and self-reinforcing service e-commerce ecosystem in 2018. Now let me give you an overview of the performance of each of the three segments in the full year 2018. In 2018, our food delivery business sustained its robust growth as the world's largest food delivery platform. Our market leadership is evident not only in terms of delivery orders, but also in our monetization capability and delivery efficiency. In 2018, we have attained over 60% of the market share in terms of delivery orders. More importantly, our food delivery business generated more than twice the revenue of our competitors in both the third quarter and the fourth quarter of 2018, which demonstrated our competitive advantages in order quality and in operational efficiency. The GTV of our food delivery business increased by 65.3% to RMB 282 billion in 2018. The daily average number of food delivery transactions increased by 56.3% to 17.5 million in 2018. Revenue increased by 81.4% to RMB 38.1 billion in 2018. Our monetization rate increased to 13.5% in 2018 from 12.3% in 2017, and gross margin improved to 13.8% in 2018 from 8.1% in 2017. On the consumer side, we continued to acquire new users by leveraging our offline operation teams and partners and our delivery network and marketing resources, and by incentivizing user referral through social media networks. The number of annual transacting users of our food delivery service increased to 303 million in 2018. Specifically, users from third-tier cities and below contribute the majority of our total new transacting users in 2018. We also successfully increased our consumers' transaction frequency. We have been expanding our service categories to include breakfast, afternoon tea, and midnight snacks from a widening array of merchants. The delivery volume of fast food, snacks, desserts, and drinks achieved strong growth during 2018. On the merchant side, we have been helping restaurants reach new target consumers and also improving their operational efficiency. We further increased the delivery radius of our restaurant merchants. In 2018, delivery orders fulfilled from over 3 kilometers away increased to around 14% of our total orders. Our brand promotion tools and targeted marketing solutions help merchants market to their potential consumers with better accuracy, thus improving their conversion rates. In 2018, the number of annual active merchants of our food delivery business increased to 3.3 million. On the delivery service side, we optimized the algorithms of our intelligent order dispatching system to further improve our delivery efficiency. We also enhanced the training and management of our riders to guarantee the consistency of our industry-leading service quality. We further solidified our advantages in delivery efficiency as a result of our more advanced routing algorithms and higher order density. During 2018, the efficiency of our premium delivery riders increased by 10% year-over-year. Now, let's turn to the second segment, our in-store, hotel, and travel business. In 2018, we completed the integration of our in-store business group to include hotel booking and travel services and further enhanced the breadth and depth of lifestyle services offering on our platform. Revenues from our in-store, hotel, and travel business increased by 46% to RMB 15.8 billion and gross margin increased to 89% in 2018 from 88.3% in 2017. Our overall strategy is Food + Platform. The rapid development of our high-frequency food services has helped us expand our user base and increase the user stickiness of our platform, establishing the foundation for us to monetize our massive user traffic through cross-selling a wider range of consumer service categories. Traditionally, local consumer service merchants in China, mostly micro and small businesses, have very few marketing channels available to them. We have become the go-to platform for local search and consumer service discovery. Based on our big data analytics, we leverage the search queries of our users to connect them with high-quality local merchants who match their preference. Therefore, we are able to help merchants reach a vast quantity of potential consumers with a low upfront cost and high conversion rates, thus offering local merchants a high ROI marketing channel. We are a unique platform that provides a comprehensive suite of transaction services and marketing tools to address merchants' different needs. Different types of service categories may have specific preferences as to which of our offerings are the most useful, depending on the nature of their businesses. For example, hotels tend to pay commissions on a room night basis. Restaurants may use both value deals and subscription-based marketing services. Other relatively low-frequency service merchants, such as beauty, wedding planning, home renovation, and vocational training, et cetera, who allocate more budget to subscription-based and CPC. Each type of merchant provide a suitable mix of our products to improve the efficiency of their user acquisition. In 2018, as we expanded into more long-tail and low-frequency categories, we saw the accelerated adoption of our subscription-based services and CPC. The penetration rates of our subscription-based ads and CPC are still at a relatively low level, allowing ample room for future growth. Our hotel booking business has always been an important category in our in-store business. In 2018, domestic room nights increased by 38.5% to 284 million room nights. High-end hotels constituted a growing portion of bookings and accounted for over 10% of the overall room nights booked on our platform during 2018. We continue to strengthen the synergy between our hotel booking and other in-store businesses. Through cross-selling reservations and value deals for restaurant dining, wedding banquet, spa, and gyms, we were able to help hotels further increase their revenue streams from non-lodging services. Now let's move to the third segment, new initiative and others. In 2018, we actively sought opportunities for new initiatives, and our revenues from the new initiatives and other segments increased by 450% to RMB 11.2 billion in 2018. Although our investment in new initiatives resulted in a greater operating loss in 2018, we believe such investment should help us augment our long-term competitiveness. To enhance our services available to merchants, we stepped up our investment in RMS, the restaurant management system, and supply chain solutions. Our RMS enables restaurants to digitize their operations and to seamlessly connect with third-party online platforms like ours. In December 2018, in addition to further upgrading our RMS Standard edition, we also launched our RMS Beverage edition. Many of the most prominent tea shop brands and fastest-growing beverage chains in China have adopted our RMS Beverage edition. Our supply chain solution, Kuailv, is also transforming the landscape of food service distribution. Merchants can access real-time prices and inventories, availability of food ingredients on our Kuailv Mall, the mobile app, and also place orders anytime, anywhere. By aggregating orders at a large scale, we are able to consolidate purchasing and distribution and create stronger operating leverage. in April 2018, we completed the acquisition of Mobike to satisfy our users' demand for high-frequency, short-distance transportation and increase our touchpoints to consumers. We started to integrate Mobike's operations into our platform. For example, we implemented organizational realignment and directed our consumers to use the Meituan app as the sole entry point to access our bike-sharing service. We have been leveraging our offline operations experience and capabilities to continuously improve the operational efficiency of the bike-sharing business and reduce its operating losses. Looking ahead into 2019, we aim to further strengthen our competitive advantages in food-related sectors, particularly our food delivery, in-store dining, and products and services utilized by restaurants. Meanwhile, we will further leverage our platform's capabilities to extend into more service categories and consumption scenarios. For our food delivery business, we aim to further fortify our leading position and market share while maintaining our competitive advantages in operating efficiency and unit economics. As the market leader, we have the flexibility to balance investment for growth and improvement in unit economics. We maintain a positive outlook. For our in-store business, we plan to further improve our monetization by expanding categories, increasing merchant penetration, and escalating the adoption of our diversified marketing solutions. We expect this segment to generate more operating cash flow to fuel the growth of the whole company. For our new initiatives, we will be more disciplined and selective as to when and where to allocate capital. In 2019, we will focus on cultivating those newly seeded initiatives into a vibrant and sustainable growth engine for the years to come. We will concentrate our resources on food-related new initiatives that can further solidify the market leading position of our core businesses. We will also seek to improve our operational efficiencies, narrow the operating losses of both our car-hailing and bike-sharing businesses, and strengthen their strategic synergies with the rest of our platform. I believe we are still at a very early stage in the digitization of the service industry. The more confidence we have for the future, the more patience we have for now. In the past few years, we have moved more and more of our consumers and merchants online. In order to serve them better, we should build a solid foundation ourselves. One of our most important goal for 2019 is to enhance our core competencies through refining our fundamental skill sets. I believe this will properly prepare us for the opportunities and challenges in the years to come. With that, I will turn the call over to Shaohui for an update on our latest financial results. Shaohui, please. Thank you, Xing. Hello, everyone. Let me go through our financial results. For the full year of 2018, we achieved strong growth across all major business segments. Our total revenue increased 92% to RMB 65 billion. Gross profit increased to 23.6% to RMB 15.1 billion. Adjusted EBITDA loss and adjusted net loss were RMB 4.7 billion and RMB 8.5 billion respectively. in 2018, our first two business segments on a combined basis achieved positive adjusted operating profit. Now let me give you a more detailed update on our fourth quarter results. Total revenue for this quarter reached RMB 19.8 billion, up 89% year-over-year. The growth was mainly driven by the increase in GTV and overall monetization rate. The GTV in Q4 increased to RMB 138 billion, up 32.5% year-over-year, as a result of our expanding transacting user base, increasing purchase frequency, and the rapid growth of our new initiatives. Our monetization rate for the fourth quarter reached 14.3%, up from 10.1% in the same period of 2017, mostly driven by the steady increase of the monetization rate across all business segments. Total gross profit increased to RMB 4.5 billion, up 33.7% year-over-year. Turning to operating expenses. Our total selling and marketing expenses as a percentage of revenue in this quarter further decreased to 22.9% thanks to improved economy of scale, stronger brand awareness, and improved marketing tactics. R&D expenses decreased to 10% of revenue. G&A expenses was 14.4% of revenue, up from 8.7% last year. The increase is mostly attributable to the impairment provisions of our bike-sharing business due to a change in its branding strategy and overseas restructuring. Excluding these one-time charges, our G&A expenses would have decreased to 6.9% of revenue for this quarter. Our adjusted EBITDA loss and adjusted net loss in this quarter were RMB 854.6 million and RMB 1.9 billion respectively. We continue to narrow our adjusted net loss on a quarter-over-quarter basis, mainly due to the increased profit in our core categories such as in-store business and the narrow loss in our new initiatives such as car-hailing. Now let's turn to the segment reporting. Our first segment is food delivery. In the fourth quarter, the number of food delivery transactions increased to 1.8 billion, up 35.3% year-over-year. The GTV increased 40.6% to RMB 80.2 billion. Revenue increased 66.1% to RMB 11 billion. The monetization rate for food delivery increased to 13.7% from 11.6% in the same period last year. Gross profit increased to RMB 1.5 billion, up 253.8% year-over-year. Gross margin in the fourth quarter further expanded to 13.4% from 6.3% in the same period last year. In the fourth quarter, we witnessed a deceleration in the growth rate of the food delivery industry. In the past three years, the explosive growth of the industry was mainly driven by the market penetration into new cities and the addition of new transacting users and acquisition of existing restaurants. In 2018, annual transacting users of our food delivery business in our platform exceeded over 300 million, and new user growth rate has a natural slowing down. We believe the industry is transitioning into the next phase of its development cycle, defined by enhancing user engagement and expanding use cases. These objectives will require more effort from service providers and may take some time to yield results. At the same time, the average value per order of our food delivery business declined slightly quarter-over-quarter basis due to the increased contribution from users in lower tier cities. In Q4, we have slowed down our pace of monetization and increased our subsidy ratio to further enhance our user stickiness and strengthen our market leadership. We selectively increased our subsidy rate for users with higher lifetime value and in cities with higher ROI. This result in a relatively lower monetization rate on a quarter-over-quarter basis. Due to winter weather conditions, we have also made seasonal investments in incentivizing our delivery riders during Q4, which led to the sequential decline of our food delivery gross margin. Overall, we are proud of our achievements in the food delivery in the fourth quarter and in the whole year of 2018. We further grew our user base and their purchase frequency on a year-over-year basis. We maintained over 60% market share in terms of order volume, and our market share in terms of revenue reached over two-thirds of the industry, demonstrating our business quality and operating efficiency. We continue to strengthen our advantages in merchant relationship and a more advanced order dispatching system, and also more comprehensive offerings both to consumers and merchants. We have a much better profitability over our peers, which should help us drive sustainable growth for the long haul. We remain very positive on the market potential of food delivery. As the clear market leader, we will benefit from consumers' lifestyle transition, which will support the health growth of the industry for a long time to come. For our second segment, in the fourth quarter, revenue from in-store hotel and travel increased to RMB4.6 billion, up 48% year-over-year. Gross profit increased to 46.6% to RMB4 billion. Gross margin slightly decreased from 87.7% to 86.8%, mainly due to the macro headwinds, which had a negative impact on the hotel and travel business. The strong growth of this segment demonstrated our platform's capability to serve well location-based merchants. We are excited to see merchants increasing adoption of our online marketing services in this quarter. The number of active marketing merchants and average revenue per active merchant both experienced substantial growth. Online marketing revenue grew rapidly in Q4, contributing 47% of total revenue in this segment. For example, the online marketing revenue from our beauty category almost doubled year-over-year in Q4. We have also introduced diversified value-added services such as frequent user cards that not only allow users to enjoy convenient one-time discounts, but also enable our merchants to attract and retain repeat customers. In the fourth quarter, the max hotel room nights consumed on our platform increased to 74.4 million, up 26% year-over-year. We maintain our competitive advantages in areas including user acquisition cost, operational cost, and cross-selling non-lodging services. Let's move to the third segment, new initiatives and others. In the fourth quarter, revenue increased significantly to RMB4.2 billion, up 462% year-over-year. Our new initiatives and other businesses recorded a gross loss of RMB979 million in the fourth quarter. Gross loss as a percentage of revenue continued to narrow to negative 23.3%, an improvement of 14.1 points in gross margin on a quarter-over-quarter basis. Mainly as a result of us limiting subsidies in the car-hailing business, as well as increasing revenue contribution from our services for merchants. Our overall strategy and new initiative is to focus on food-related services while optimizing our operations in other new initiatives. We believe that the long-term leadership of our food delivery business is contingent upon a healthy ecosystem and continued innovation. Both our restaurant management system and the supply chain business have achieved rapid revenue growth in the fourth quarter. Our restaurant management system service continued to increase its penetration among our merchant base. At the same time, we are refining our strategy with a focus to improve the quality of our merchant base and increase the coverage on high-value merchants for our RMS business. This will help improve the overall efficiency of our merchants and at the same time strengthen our leadership in these high-quality merchants. For Mobike, we have added the channel in our Meituan app to convert users to use the Meituan app with the goal of directing more offline traffic to our integrated platform. To further narrow the operating loss, Mobike's international business is undergoing restructuring, which will result in the closure of most international markets. As these commercial decisions were made before the year-end of 2018, we recorded CNY 1.3 billion of impairment provision of intangible assets result from the change of branding of our bike-sharing services, as well as CNY 358 million of impairment provision for Mobike's overseas restructuring in the fourth quarter. These losses are one-off and non-cash in nature, and excluded from our adjusted net loss. These strategic adjustments can enhance the synergies among our business units and better utilize company resources and management's attention. As Xing Wang mentioned, we will maintain a disciplined philosophy towards our new initiatives investment in 2019. We will carefully allocate our resources with a focus on building and further strengthening our long-term competitive advantage in the food value chain. Now, moving on to our cash position. As of December 31st, 2018, our cash equivalents, and short-term investments total around CNY 58.9 billion. Net cash used in operating activities was CNY 9.2 billion for the year ended December 31st, 2018, mainly consisting of the adjusted EBITDA loss and the changes in working capital. This concludes our prepared remarks. Operator, please open up for the call for questions. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Ronald Keung of Goldman Sachs. Please go ahead. Thank you. Thank you, Xing and Shaohui Chen. My question is on food delivery. I have two questions. Firstly, it is on the industry growth. We have seen the order growth slow to around 35% in the fourth quarter. I just want to hear how you see growth in 2019 and in the longer run, and the key catalysts for that driver of ongoing food delivery growth in the long term. Second will be on competition, particularly with your peer Ele.me. With your peer talking about expanding into lower-tier cities where we are stronger in, how are we responding to that and how do we see the 60% market share that you just mentioned? Is that also our target for the next few years, and how will we defend that? Thank you. Okay, thank you. I will pick up the first question. In 2018, we have seen the growth rate of food delivery decelerated quarter by quarter. We expect the industry will continue the modest growth rates in 2019. Our food delivery business is transitioning from short-term explosive growth stage to long-term, relatively slower, but more sustainable growth stage. The high growth during the past three years was largely driven by the launch of new cities and the acquisition of users and existing restaurants. While we continue increasing the overall penetration rate, the future growth will be driven more by purchase frequency, consumption scenarios, and new suppliers. That is going to be a very long runway and can support our long-term growth. While everyone needs to eat and everyone wants to eat better, we believe Meituan-Dianping is in the best position to capture this new growth trend as we have built our scale, our brand, and service quality to meet those needs. Right now, food delivery total users are less than half the total smartphone users in China. So a lot of room for growth. Currently, only 40% of our annual transacting user for food delivery are active on a monthly basis, and their average purchase frequency was only one quarter of our top 10% consumers. That means high potential for frequency growth. There are a lot of things we can do to drive the new growth. We will optimize our personalization and intelligent recommendation to stimulate repeat purchases. We expect the purchase frequency of our new users to catch up with those more mature cohorts. We continue to upgrade our marketplace system so that more and more new suppliers can be more easily found, and they can grow on our platform. Delivery system will continue to evolve and reduce per delivery cost to address broader mass market demands. Yeah, I'll ask Shaohui to answer the other question. Hi, Ronald. I will take the question on competition. First, thank you for the question. Competition has always been the topic that we face, and starting from early, Meituan-Dianping has been facing very fierce competition. Our track record has proved that we are able to compete and compete effectively. We have been able to enter this market later than most peers, but achieved clear market leadership after a few years' efforts. Our track record in 2018 continued, and we have been able to maintain above 60% market share by the year-end of 2018. Our market share continued to grow in recent months. More importantly, we maintain a revenue market share of over two-thirds of the industry. We believe we have built a competitive advantage across different tier cities. In top-tier cities, where the competition is relatively more intense right now, our advantages on high-quality merchant relationship and better and more stable delivery experience address the pain points of the high-quality users in higher-tier cities. We can retain those high-quality users without irrational spending. In most of the lower-tier cities, we have clear market leadership and a much stronger brand. We have been entering those markets much earlier than most peers and have been growing at a fast pace. We believe our operating history and the clear advantage in consumer base, merchant base, and delivery network will help us strengthen our leadership in lower-tier cities. On the other hand, our overall strategy is not focused on competition, but to continue to enhance the user experience and the merchant experience. We believe the industry is still at the very early stage of its online penetration rate, and we will focus on making investments in areas that can help merchants move online faster and to further penetrate into users that have not yet used our services, and to also further grow the purchase frequency of our existing user base. We still maintain a positive view on the industry and also very confident on our long-term competitive advantages. Thank you. Thank you, Xing and Shaohui Chen. Thank you. The next question comes from Grace Chen of Morgan Stanley. Please go ahead. Thank you. Thank you very much for taking my question. My question is about the in-store business. Meituan has another great quarter in the in-store business, and the take rate has been increasing nicely. At the same time, we are also seeing more competition. So it would be great if the management can share your view about the competitive landscape, especially after Koubei and Ele.me's integration. Any changes in the outlook of the take rate in the segment? And a follow-up is for the advertisement revenue in the in-store business. Can the management elaborate more on the size of the addressable market and your key competitive edges in the in-store business? Thank you. Okay, thank you. So that's a huge market. There are over 10 million local service merchants in China, and most of them are small independent stores. So I would say this is a trillion-market opportunity. It is still in a very early stage of its online penetration because there are so many of them, and most of them are so small, and they have a very low digitization skills. While traditionally, these independent stores have very limited means for marketing. To place ads on online search engines or social media platforms, they need to compete with larger business in verticals like real estate or FMCG, who can afford to bid much, much higher prices for the limited ad space. As a result, the marketing budget of these small local merchants has not been fully utilized. Meituan Dianping has built a platform by offering merchants online marketing tools with a low upfront cost and visible results. We help small merchants reach out to new consumers at a very compelling ROI, and this product is unleashing the potential of their previously unmet marketing needs. Different types of merchants might have specific preferences as to which of our offerings are most useful depending on the nature of their businesses. In the past, our in-store products focused more on value deals, and our revenue was heavily reliant on commissions. But in the past 2 years, we have further diversified our product offerings and focused more on helping merchants attract the consumer with better exposure and content. Currently, only 20% of our active merchants are using the CPC product, the cost per click, and only 30% of them are using our subscription-based services. There's still a lot of room for growth, which can further increase the ARPU. We believe that with further expansion into more lifestyle service categories and more merchants who adopt our CPC and subscription-based services. In addition, with stronger network effects, more merchants will recognize our platform's value for online marketing and shift more budget offline to online. Thank you. A quick answer to your question on competition. We believe the in-store business model is very strong in that it has strong first mover advantage and a strong network effect. By the end of 2018, we have accumulated close to 6 billion user-generating reviews on over 14 million POIs. The more information on our platform, the more users will come, and the more reviews they will leave on our platform. The interplay between users and merchants continue to solidify our competitive advantages. Currently in this market, both Meituan and Dianping have maintained clear market leading position for the in-store business and have become the household brands for both consumers and merchants. We are not very concerned on the competition. Rather, we have been continuing making investment on innovations, to help our users and merchants match each other more efficiently and to continue upgrade our content and infrastructures. We are very positive on their growth outlook and monetization potential for the in-store business. Thank you. Thank you. Thank you so much. The next question comes from Eddie Leung of Bank of America. Please go ahead. Good evening. I have a question on the competitive landscape. Could you comment in three areas? Because we have seen quite some news from your competitors seemingly making progress in these three areas. Number one is user acquisition. Number two is supply chain management. And number three, it seems like your competitor also talking about software solutions. Could you comment more on how we differentiate in these three areas? Separately, just a quick question on your transportation pieces. Could you talk a little bit about the P&L outlook for 2019 and any synergy you have seen with your other businesses? Thank you. Thank you, Eddie. Let's talk about RMS first. I think here, what's more important is not differentiation. It's about innovation and distribution of the product. By accelerating the SaaS adoption in restaurant software, our RMS business could help merchant and digitize the whole operation in order to improve their operating efficiency and customer satisfaction. Also, they can reduce cost and achieve scalability. But what's more important, this will significantly increase the online penetration of the restaurant business. In the past, if they are still using the last generation RMS, they cannot connect smoothly to the online platform like ours. Now, once they in-store our RMS, they can have seamless integration with our online platform. Also, the target customers of our supply chain solutions, in general, are small and midsize independent restaurants. They are previously underserved by a food service distributor because in China, we don't have something like Sysco or US Foods. By digitizing the restaurant procurement, we can further help merchants improve operating efficiency and reduce management hassles. In both of the RMS and the supply chain management, both of these two businesses have increased their penetration in our active restaurant merchant in 2018. For the competitive advantage on RMS, we have advantage in innovation and also we have a wider distribution. Because we have the strongest offline sales team, and also on the product side, our RMS product team work closely with the product team of our two C services, both Meituan app and also the Dianping app for the content and reviews. When they design and upgrade functionalities of our RMS, they can ensure the RMS functionality can integrate very well with our online platform. That's very unique. Also, we could better design industry-specific versions, which will also accelerate our penetration in some very important verticals. For example, we launched an RMS beverage edition, and our merchants include most of the top brands in this very rapidly developing vertical. Secondly, we have an advantage in merchant relationships, leveraging our operational expertise and historical know-how about the restaurant industry. Our large on-the-ground sales team can maintain daily dialogues with the merchants and accelerating the merchant adoption of the product. Also, at the end of the day, because we have the largest offline team, they can- Not only sell, they can also service the merchants. Because the merchants are going to need people to help them solve a problem when they run into problem. So we are there to help them. We have the largest offline presence, and we have the most efficient offline team. I think that's a very important advantage. I will take the questions on your question about the P&L impact from our new initiatives. As you can see in 2018, it's an important year for us to exploring new business along our value chain. We have been making investments in both the food-related sectors and also new initiatives across our overall life service area. We believe this investment is important for our long-term competitive advantage. But at the same time, we plan to focus on food-related new initiatives in 2019. Particularly, as you mentioned, restaurant management system is one of the areas that we believe is critical to build our competitive advantage and also to help the overall ecosystem move online faster. So we will continue to make investments into areas like restaurant management system. But at the same time, we will be more selectively in making investments into other non-food related sectors. We believe the loss from our new initiative in 2019 should be able to narrow down. As you can see from our last few quarters trend, we are able to narrow on quarter-over-quarter basis, because we continue to optimize the operation for new initiatives and focus our resources on selective areas. Thank you. Thank you. The next question comes from Alex Yao of J.P. Morgan. Please go ahead. Hi. Thank you, management for taking my questions. I have a couple of questions on competition. First of all, can you talk about the latest incentive or subsidy level versus Ele.me? How would management manage the balance between cash burn and the market share loss if the competition with Ele.me become even fiercer? More importantly, what are the subsidy spending selection criteria across market share profitability, et cetera? Second question is regarding Alibaba's 88VIP membership, which has been integrated with the Ele.me services to boost user adoption of Ele.me for delivery and the user retention. How would you guys think about such integrated membership solution? Any update on launching your own membership? Thank you. Thank you. For the question on subsidy ratio, we have selectively increased the subsidy rate in Q4 to retain some high lifetime value consumers and also to strengthen our relationship on key merchants and key accounts. We have been successfully maintain our market leadership while our subsidy rate is less than half our competitor. We expect our advantage on subsidy efficiency, as well as our leading position in the market share will continue in 2019. We have been compete with different players for a long time, and we believe we have the best efficiency in the industry in terms of balancing the spending on users or merchants or delivery riders, but also balance the healthy growth of our business. Instead of using any single criteria, we focus more on the strategy that can help them maintain or further increase our long-term advantages and also our monetization potential. We take an ROI-oriented approach in our subsidy spending, allocating most of our budget to users or cities that have the best ROI. Because we have the largest coverage and also the clear leadership in most tier cities, we have the flexibility in allocate our resources depending how we believe it's important. For example, sometimes in some new areas, in order to reach the order density which will help on the delivery efficiency, we may allocate more resources in acquiring new users or push for their purchase frequency of existing users. By segmenting users and cities across different layers and doing selective subsidy with different strategy, we can maintain our leadership and still maintain our efficiency. Also, we have seen a new trend in this industry. As the industry become bigger and the consumers become more and more familiar with different platforms, they are generally less price-sensitive compared to before. The service quality, including the merchant selection, the delivery stability, become more important than just the price subsidy. We have the confidence to maintain our advantages in subsidy efficiency and to maintain our market share. On our membership program, currently, we have a monthly membership program for our food delivery business. Its primary focus is to enhance the purchase frequency and especially further enhance the user stickiness of our registered newer cohorts, and to convert those newer cohorts to high-frequency users. We are closely monitor this program based on our ROI-oriented approach. We believe the membership program is a complex system that can potentially help strengthen the stickiness of consumers. But in order to build, to design a sustainable economic working membership program that requires a deep understanding of the industry and comprehensive offerings from your platform, we are still in the process of designing across categories, a platform-wide membership program, and we'll launch to the market when we feel it's ready. Thank you. The next question comes from Ella Ji of China Renaissance. Please go ahead. Thank you. I also have two questions. The first question is relating to the commission rate in your food delivery business. Can management provide some clarification in terms of, was there an increase in the commission rate as reported by some medias? How has your competitors' take rate been trending, and how has your strategy been changed? Also longer term, where do you see the take rate that you can achieve in the long term, and what are your key assumptions? The second question is relating to your hotel booking strategy in 2019 for both low-end and high-end hotels. It appears that your competitor has made some good progress in both segments. Could you talk about your market share and your strategy in both low and high-end segments respectively? Thank you. Okay, thank you. I will take the first question on take rate. As you can see in our result, we have decided to slow down the pace of the monetization rate increase in Q4. Compared to Q3, the monetization rate for food delivery has slightly decreased. So different from what you say, we have not been aggressively improving monetization rate. We focus on continue to grow the volume of our business and also to encourage more merchants to come to our platform. We are not in a position to increasing this take rate. Compared to overseas players, we believe the monetization rate on our platform for food delivery is still much lower and much healthier, and it is one of the many reasons that the food delivery business in our platform can grow at much scale than peers in overseas markets. We think the monetization rate potential depends on how much value we create for our merchants and users and for the whole ecosystem. In the past few years, our main objective is to move most consumers and merchants online and help our merchants build online presence, so these restaurants can accept online orders and enjoy our delivery services, which began to build a more and more incremental business, and increase the overall operating efficiency for those restaurants. The increase of our monetization rate in the past few years demonstrate the value we have created for those merchants. Today, we feel there are still so many things that we can do to help our merchants grow better, including improving our current infrastructure such as delivery and the online cross-selling capability to drive more traffic. Including the further merchant-side services such as restaurant management systems and other supply chain services. We believe these additional services will further strengthen our relationship with these merchants, and the monetization rate improvement will be a natural result of those efforts. We are not concerned and not in the rush pace to increase the monetization rate, but rather we are focused to continue to build our platform and our infrastructure to serve those merchants better. Okay, I will answer the question on hotel booking. Our hotel booking business had a very healthy growth in 2018 for both lower end and high-end hotels. We continue to maintain our leading position in terms of domestic room nights. I think we have the largest domestic room nights. Coming back to our Food + Platform strategy, our hotel business is just one of the categories that help us monetize our traffic from food. In 2018, over 90% new consumers for our hotel booking business are either existing users of food delivery or existing in-store dining users. In 2019, we will try to maintain the healthy growth rate for domestic room night while balancing the monetization. We are already profitable in this business. In retrospect, we started our hotel business in the lower star segment and lower tier cities, given most of the hotel booking users were converted from food-related businesses. They are younger generation who have mostly leisure travel demands. As these younger users grow in age, they also grow in income and grow in spending power, their hotel booking demands naturally move up to high-end hotels. In addition, more and more business travelers in higher tier cities are also high-frequency users for our food services, which bring us more opportunities for cross-selling hotel booking services. I think that is the rationale behind our expansion into the highest end hotels. To move up to the high-end hotels, we will not aggressively subsidize users to compete with other OTAs. In addition, we can also provide our users value deals for reservation services for restaurant dining, gyms, and other entertainment facilities when they come to our platform for hotel booking. This brings hotels, and especially those mid to high-end hotels, cross-selling opportunities in increased non-lodging services revenue. They will certainly welcome this opportunity for cross-selling and for additional revenue streams. For lower-end hotels, we have a very clear advantage in both cost structure and operational efficiency. Even in those high-end hotels where their average daily rate is lower, we are already quite profitable in OP level. Because we enjoy much lower user acquisition costs through cross-selling, especially from cross-selling from food services. Our younger users tend to solve their problems using the app. While saving us money on OPEX, we do not have to run those big call centers. Of course, we have call centers, but only for solving problems, not for taking orders. We can leverage our 30,000 on-the-ground sales team to sign up with individual lower-end hotels across the whole country. It is very important to remember that we operate our hotel booking business just as one category of our whole in-store business and our overall strategy, and focus more on increasing the profitability of the business segment instead of paying excessive attention to the competition. We do not have to focus on the competition here because we have the largest user platform, and those users have natural need for hotel booking. We have the very good infrastructure for connecting with the hotels. We are already profitable here, and we are already the largest in terms of room nights. I think that we are going to continue to do well in this business. Thank you. Due to time constraints, the last question will come from Benny Wong of HSBC. Please go ahead. Hi, good evening, Wang Xing and Shaohui. Thank you for taking my question. Two quick question here. One is on the profitability of the food delivery. Can you comment on how you see the profitability can be improved in view of the competition and also the macro headwinds? In order to achieve better margins, which factor do you think is more effective, via operating efficiency improving or the more effective use of subsidies as you mentioned in your opening remark? Also is your view on the unit economics, where they can achieve in the longer run, is it still remain unchanged? One final quick follow-up question is just on the percentage of the non-food orders and how it has been able to help us to lower down the rider cost in view of our competitor has been heavily investing into last mile capabilities. Thank you so much. Thank you for the questions. The short answer, we remain unchanged on the unit economics outlook that we can achieve in the long run for food delivery. We are still very confident on the unit economics potential, and we feel this is a great business model. On path to profitability. Actually, if you read the results in the last several quarters, you can see that we have been able to enhance our monetization rate for food delivery, at the same time, lower the delivery cost to order and to further improve the unit economics. This demonstrate the economy of scale and also our operating efficiency. We feel as the clear market leader in this space, we have the flexibility to balance the growth, the market competition, and also profitability. As we mentioned before, we believe the industry stage has changed from purely using subsidy to grow consumers to a stage that require a comprehensive and better services to retain consumers, especially those high-quality consumers, and to grow your business with them. Also, efficient delivery network is required for merchants to be able to continue to working closely with you. Within this industry transition, benefit most to player like us, platform that is able to manage well the efficiency and the service quality. Actually, we have been continue improve our financial results for food delivery in different tier cities. We have been already profit-making in some relatively lower cities. Also in 2018, our marketplace model for food delivery has also become profit-making and continue to improve the operating leverage. We believe we have demonstrated a clear path to profitability of this business. However, as I said, when we get into the new stage, the competitive advantage lies in platform that can serve the high-quality consumers and merchants better than your peers. That is why we continue to make investments to areas, to cities, to consumers, or merchants that we believe can return good ROIs and can help us continue improve our order density and efficiency. We think we are able to continue to make investment to grow our platform, but at the same time, continue to improve our unit economics. A quick answer to the non-food delivery. We continue to carefully monitor the non-food delivery orders on our platform. Right now, it accounts less than 5% of the total on-demand delivery orders, so still much, much smaller compared to food delivery, and do not include it in our food delivery orders. Because we believe they are complete different unit economics because the merchants are very different, have different gross margin, and we are continue making innovations in order to find the right ways to working with those low-gross margin local retailers. In the long run, we believe this delivery network can be very helpful to help drive the online penetration of those non-food delivery categories. But in the near term, our top priority is to focus on optimize the business model rather than the scale of the non-food delivery. Thank you. Okay. Thank you. That is very helpful. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Scarlett Xu for any closing remarks. Thank you, operator. We are now closing the call. If you would like to see our press release and other financial information, please visit the IR section of our website. The replay of the webcast will be available shortly. Thank you, everyone. The conference has now- Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.