Earnings Call: Q2 2019

Aug 23, 2019

Good day, and welcome to the Meituan-Dianping second quarter 2019 earnings conference call. All participants will be in a 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, today's event is being recorded. I would now like to turn the conference over to Scarlett Xu, Vice President and Head of Capital Markets. Please go ahead. Thank you, operator. Good evening and good morning, everyone. Welcome to our second quarter 2019 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 second quarter 2019 results and then conduct a 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 may differ from actual results in the future. This presentation is based on our financial accounts, which have not been audited or reviewed by our auditor. This presentation also contains 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 the disclosure document 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 second quarter 2019 earnings call. In this quarter, we continue to deliver strong business performance. Our GTV increased by 28.7% year-over-year to RMB 159.2 billion. Total revenue increased by 50.6% year-over-year to RMB 22.7 billion. For the 12 months ended June 30, 2019, annual transacting users on our platform grew by 18.4% year-over-year to 422.6 million. And annual active merchants on our platform grew by 16.2% year-over-year to 5.9 million. In addition, the annual number of transactions each transacting user made on our platform increased to 25.5 in the 12 months ended June 30, 2019 from 21.4 in the prior year period. During this quarter, our company recorded positive adjusted net profit for the first time, and our quarterly adjusted operating profit in the food delivery segment turned positive for the first time as well. While we continue to solidify our market-leading position, we have further improved the unit economics of our food delivery business and are conducting new initiatives with more discipline. We believe that our company is on the right track to achieve healthy and sustainable long-term growth. As an integrated e-commerce platform for local services in China, we have further enhanced our thriving and self-reinforcing ecosystem by increasing penetration through strong brand recognition on both the demand side and the supply side. Going forward, we will stay committed to creating value for consumers and merchants while sharing in the growth and success of our merchants in return. Now, I would like to highlight the performance of each segment in the second quarter of 2019. I will start with our food delivery segment. In the second quarter, the number of food delivery transactions increased by 34.6% year-over-year to 2.1 billion, while GTV increased by 36.5% year-over-year to RMB 93.1 billion. This quarter, we further demonstrated that we have the capability and flexibility to strengthen our market-leading position while improving the financial performance of our food delivery business at the same time. Thanks to our clear advantage in user base, merchant base, delivery network, and nationwide network effects, our market share continues to increase. Also, due to our enhanced operational efficiency and improved economies of scale, the unit economics of our food delivery business continue to improve on both a year-over-year and quarter-over-quarter basis. On the user side, we further enhanced user engagement through our food delivery membership program in this quarter. We launched our food delivery membership pilot program in the second half of 2018, and we were pleased to see that it continues to yield encouraging results. As a part of this membership program, we offer exclusive benefits to monthly membership subscribers, such as sizable discount coupons that are valid for one month. This program has helped to further enhance our platform's user stickiness. Notably, the average purchase frequency of our monthly membership subscribers was more than triple the average purchase frequency of our non-membership subscribers. Moreover, the average purchase frequency of our membership subscribers increased meaningfully during the second quarter. In June, we also launched a joint membership program with Tencent Video and sold 400,000 joint memberships in total through this partnership throughout the month. This is just the beginning of our membership program trials. In the future, we will continue to explore cooperative opportunities and collaborations with the partners in our ecosystem to further enrich membership benefits. On the merchant side, we continue to leverage our in-depth understanding of the food delivery business to develop innovative online marketing products, enhance food delivery merchants' exposure to potential consumers, and boost food delivery merchants' marketing efficiency. For example, we offer merchants display ads that help them promote their brand awareness, performance-based ads that help them enhance their exposure to consumers' search results, the marketing tools that enable them to dispense coupons customized to targeted consumers, and subscription-based services that offer them value-added services such as user review management, peer comparison, and online storefront decoration. Our continuous innovation in products and services not only help merchants to improve their marketing efficiency, but also deepen the cooperative relationship between merchants and our platform. We will continue to expand our product offerings, creating more value, and cultivate a win-win ecosystem for food delivery merchants going forward. On the delivery side, thanks to favorable weather conditions, a robust increase to order volume, and the improved management of our delivery network, we kept our delivery cost per order well under control, which has led to a significant improvement in the segment's gross margin. Although the delivery cost per order is strongly influenced by seasonality, our impressive year-over-year improvement in the quarter further highlighted that our infrastructure-enabled food delivery business model has a clear path to profitability. Thanks to our continuous investment in our food delivery network and order dispatching system over the past few years, we have not only strengthened our leading position and established competitive advantages on both the user side and the merchant side, but also achieved greater economies of scale and enhanced network effect through improvements to our delivery capability. We believe our last-mile delivery network is extremely valuable as it will enable us to continue growing our food delivery business and expanding our business scope. In the future, we will continue to invest in our delivery network and order dispatching system while developing other strategic initiatives to drive the long-term growth of both the industry and our ecosystem. During the quarter, the daily number of orders in our food delivery business surpassed 22.9 million. However, as we mentioned in the previous earnings call, the industry has transitioned into a stage of moderated volume growth that will be more driven by increase to purchase frequency instead of the addition of new users. We believe that the supply side is currently the main bottleneck to increase the purchase frequency of our mature user cohorts. In order to address this problem, we started to work with the restaurant to help them further diversify their offerings on their menus by exploring new delivery models to adapt to their new offerings. We firmly believe that these efforts help to make food delivery affordable to consumers from all walks of life. It enables us to further penetrate the day-to-day food consumption habits of urban Chinese consumers. It will take time for these efforts to pay off, but they are worthwhile and will ultimately help us to build a runway for the sustainable long-term growth of our food delivery business. We will continue to make investments in the food delivery sector. Now let's turn to our in-store, hotel, and travel segment, in which revenue again grew rapidly during the quarter. Our platform has become the preferred location for consumers to search for local services, as well as for merchants to make services offerings and attract new users. Notably, our increasingly diversified product offerings and promotional campaign enable merchants to reach consumers with greater marketing efficiency, and as a result, we have further improved our presence and influence among merchants. Our Must List series is a good example of this. Our launch of the Must-Eat List for top restaurants in 2017 was well received by both merchants and consumers. In the second quarter of 2019, we extended the Must List series to include the Must Shop list for top shopping malls, a Must-Visit List for top tourist destinations, a Must-Stay List for top hotels and resorts. Authorized by a credible third party, our Must Lists were built using authentic consumer feedback and aim to provide consumers with reliable travel and purchase guides. 171 shopping malls were selected for our Must Shop list, 578 tourist attractions were selected for our Must-Visit List, and 876 hotels were selected for our Must-Stay List. All of our featured selections enjoy substantial improvements in both consumer traffic and engagement. For example, in June, the shopping mall on our Must Shop list reported a year-over-year increase of around 60% in shopping traffic and 430% in shopper reviews. For recommended tourist attractions on our Must-Visit List, consumer reviews more than doubled year-over-year. For recommended hotels, the monthly room nights consumed more than doubled, while consumer reviews increased by around 75% year-over-year. Our Must List further enhanced our brand awareness and influence among both consumers and merchants across different service categories. Must Lists, which are based on authentic dynamic consumer reviews, help recommend merchants generating higher sales volumes and acquire greater brand influence, as well as guide them to improve their operations and product offerings. The success of our Must List further demonstrates our leadership as a comprehensive local search platform, helping consumers to discover and explore local life in a wide range of categories, including food, living, travel, shopping, and entertainment. It should be noted that the Must List is just one example of our many successes in product developments and business operations. Going forward, we will continue to innovate to better serve merchants and consumers through a broader range of creative product offerings. I would now turn to our third segment, new initiatives and others. During this quarter, we further narrowed our operating losses for new initiatives on both a quarter-over-quarter and year-over-year basis. Specifically, we continue to narrow the operating loss of our bike-sharing business and iterate our car-hailing business model. In fact, by June 30, we have expanded our car-hailing business to 42 cities through the new aggregated models. While we further narrow the operating losses of our new initiatives, we will continue to remain highly alert to opportunities, which correspond to our Food+ Platform strategy, explore new areas with discipline, and make investment based on our ROI assessment. For instance, in grocery retail, especially fresh food retail, there is a large total addressable market with relatively low online penetration. We see this as a great opportunity to expand into and are exploring opportunities in the grocery retail business through both our self-operated and marketplace model. Our marketplace model, Meituan 闪购 or Meituan 闪购 in Chinese, experienced strong growth from high ticket size categories such as flowers and medicines. During the quarter, for example, the GTV of both flower and medicine categories increased by more than 100% year-over-year. In addition, we started to bring traditional farm markets onto our platform in certain cities by helping them to digitize their products and inventories, as well as providing them with on-demand delivery services to better serve consumers. We launched our self-operated model known as Meituan Grocery or Meituan 买菜 in Chinese in January 2019. After making progress with this model in Beijing and Shanghai, we are also currently exploring further opportunities in Wuhan. Through our self-operated model, we set up small grocery stores in population-dense community areas and focus on providing a convenient grocery shopping experience to consumers nearby, as well as a high-frequency core SKUs for home cooking ingredients and fruits. More grocery stores not only shorten the physical distance between consumers and products, but also effectively satisfy consumer demand for convenience and reasonably priced, high-quality grocery products. In this quarter, we further solidified our leading position as a one-stop e-commerce platform for local services in China. We are pleased with our results so far, but we are far from satisfied. We will continue to execute our Food+ Platform strategy and explore new initiatives to drive long-term growth and enhance our ecosystem. Moreover, as an enterprise that supports social responsibility, we not only strive to offer high-quality services to merchants and consumers, but also creating millions of new jobs. We are very proud of the fact that we have provided employment opportunities to around 2.7 million delivery riders and various career development programs for the new urban youth. We are only at the beginning of the journey, and we remain committed to helping people eat better and live better through technology and innovations. With that, let me turn the call over to Shaohui for financial updates. Shaohui? Apologies. This is the operator. It looks like their line has dropped. We are standing by for them to dial back in. Apologies. We have reconnected them. Let me join them in. Pardon me, you are now live. Shaohui, please go ahead. Thank you. Okay. Thank you. Hello, everyone. I will now go through our second quarter financial results. In the second quarter, our total revenue reached RMB 22.7 billion, up by 50.6% year-over-year. This growth was mainly driven by the increase in GTV and the overall monetization rate. Our GTV in the second quarter increased to RMB 159.2 billion, up by 28.7% year-over-year, as a result of our growing transacting user base and the increasing purchase frequency of our users. Our monetization rate for the second quarter reached 14.3%, up from 12.2% in the same period of 2018, and driven by the increase in the monetization rate across all of our major business segments. Our total gross profit for the second quarter increased to RMB 7.9 billion, up by 179.5% year-over-year. Gross profit margin was 35% compared to 26.4% in the previous quarter and 18.8% in the second quarter of 2018. This year-over-year increase was mainly due to the robust growth of our business scale, constant improvement to the gross margin of the food delivery business, and the consistent narrowing of losses of our new businesses. Selling and marketing expenses as a percentage of revenue further decreased to 18.3% in the second quarter of 2019 from 25.7% in the second quarter of 2018. Attributable to both our healthy operating leverage as well as optimization of our spending on branding and marketing. R&D expenses as a percentage of revenue decreased to 9% from 11% in the prior year period. G&A expenses as a percentage of revenue decreased to 4.6% from 6.5% in the prior year period as well. Our adjusted EBITDA continued to improve, reaching RMB 2.3 billion in the second quarter of 2019. More specifically, we achieved a positive adjusted net profit on a consolidated basis of RMB 1.5 billion for the quarter. Adjusted net profit as a percentage of revenue was positive 6.6%, compared to negative 21.3% in the second quarter of 2018, and negative 5.4% in the fourth quarter of 2019. The improvements of adjusted net profit and adjusted EBITDA on a year-over-year basis are attributable to both our ongoing effort in improving our core businesses' operating margin and streamlining the operation losses of our new initiatives. Furthermore, favorable seasonality also contributed to the quarter-over-quarter improvement in our overall profitability. Let's now take a look at our segment reporting. For food delivery, despite the industry transition into a more moderate growth stage, we continue to grow our food delivery transacting user base and increase user purchase frequency year-over-year in the second quarter. We also continue to increase our market share amid intense industry competition during this quarter. As a result, the number of food delivery transactions increased by 34.6% year-over-year to 2.1 billion transactions in total. Furthermore, food delivery GTV increased by 36.5% year-over-year to RMB 93.1 billion, while food delivery revenue increased by 44.2% year-over-year to RMB 12.8 billion. The profitability of our food delivery segment continued to improve during the second quarter on both a quarter-over-quarter and a year-over-year basis. More importantly, we are pleased to see that the adjusted operating profit for the food delivery segment became positive during this quarter for the first time, demonstrating our capability and flexibility to both strengthen our market position and improve our financial performance. Monetization rates for food delivery increased from 13.1% to 13.8% year-over-year. Gross profit of our food delivery business increased to RMB 2.9 billion in the second quarter, up by 102.8% year-over-year. Our gross margin expanded significantly to 22.3% from 15.8% in the prior year period, and from 14.4% in the previous quarter. As a result of our continuous efforts in product innovation, we further expanded our online marketing product to help food delivery merchants enhance their exposure to potential consumers and improve marketing efficiency. This product diversification has further accelerated the adoption of our online marketing services by food delivery merchants, and gradually improved our monetization rate for food delivery on a year-over-year basis. Gross margin and operating results for the segment are usually the highest during the second quarter of the year, attributable to their sufficient delivery capacity and the favorable weather condition across the country that help to minimize the seasonal incentives paid to delivery riders. In addition, our business scale continued to grow and the daily average order volume surpassed 22.9 million in the quarter, further improving the order density. Favorable weather conditions and economies of scale have allowed us to continue improving this delivery efficiency and minimizing the delivery cost per order, thereby improving the gross margin of our food delivery segment meaningfully on both a quarter-over-quarter and a year-over-year basis. However, we are still prioritizing growth rather than profitability for our food delivery business. We may increase our investment during the rest of the year to drive the growth of food delivery business when we see the ROI meets our target. Now turning to our second segment, in-store, hotel and travel. Revenues in the segment increased to RMB 5.2 billion, up by 42.8% year-over-year, which was mainly due to the increases in the number of active merchants, increases in the average revenue per active merchant for our in-store dining and other local services, as well as increases in both the number and average daily rate of domestic room nights consumed on our platform. Gross profits increased by 39.7% year-over-year to RMB 4.7 billion. Gross margin slightly decreased from 90.8% to 88.8% on a year-over-year basis, mainly due to the increases in depreciation of property, plant, and equipment, bandwidth, and server fees, as well as increases in online traffic costs to support the growth of our online marketing revenue. For in-store dining services, the accelerated adoption of online marketing services by in-store dining merchants led to rapid growth in online marketing revenue. Online marketing restaurant accounts and continuous diversification of quality collections on our platform continue to drive the steady growth of transaction-based commission for our in-store dining services year-over-year. For other local services, online marketing continued to drive our robust revenue growth. In this quarter, the number of active marketing merchants in other local services grew by more than 50% year-over-year. In addition, we continue to carry out product innovations and promotional campaigns. In this quarter, we launched the 618 marketing festival to enable other local service merchants to enhance their brand exposure and acquire more online traffic. This promotional campaign has generated impressive results and helped to drive the growth of our transaction-based commissions on a year-over-year basis. For example, during the six-day promotion around June 18, our transaction users within the medical aesthetic category contributed around RMB 670 million in GTV on the platform, increasing transaction-based commissions in this category by more than 230% year-over-year during this quarter. For our hotel booking services, domestic room nights maintained a healthy growth rate of 28.9% year-over-year. In April, we launched our Hotel+X campaign to grow our high-star hotel booking business and help high-star hotels to promote their non-lodging services such as restaurant and bar, wedding and events, spa and fitness, as well as leisure and entertainment. As part of this campaign, we helped hotels to move their non-lodging services from offline to online by digitizing their product displays, bookings, transactions, and customer reviews. These efforts helped to enhance the exposure of their high-quality services to potential customers, generate a higher transaction volume from non-lodging services, and continuously improve their service quality based on customer reviews. The results of this campaign were encouraging, and more than 20 high-end hotel chains participated. Let's now turn to our third segment, new initiatives and others. In the second quarter, revenues in the segment increased to RMB 4.6 billion, up by 85.1% year-over-year. The segment recorded a gross profit of RMB 421.1 million, and gross margin turned positive in the quarter at 9.1%. The 85.8 percentage points improvement on a year-over-year basis was mainly due to both the improvement gross margin of our car-hailing services as we roll out our aggregated car-hailing model, as well as the significant margin improvement to our bike-sharing business. For bike-sharing, the operating losses narrowed significantly from last quarter, which was mainly attributable to the significant reduction in depreciation expenses as some bikes reach the end of their useful life and no longer result in any depreciation expenses, while new bikes have not all been put in place to replace them. We also continue to improve our pricing metrics and started to reasonably increase both the charge per ride and monthly subscription fee throughout several cities. For our Restaurant Management System business, our focus remains on optimizing products and increasing the coverage of high-quality merchants in order to lay a better foundation for future monetization. In this quarter, the number of high-quality merchants continued to grow from last quarter. Now moving on to our cash position. As of June 30, 2019, our cash equivalents, and short-term investments totaled RMB 58.6 billion. Overall, we further improved the operational results and cash generating capabilities of our core businesses and have been more prudent when carrying out our new initiative. However, I would like to remind our audience that our corporate philosophy prioritize long-term growth over short-term profitability, and that we will continue to make investments to drive the sustainable growth of our company. For example, we may selectively increase spending on effective marketing channels to drive the growth of our mobile app DAUs and MAUs. We may allocate more resources to expand our membership program by offering more exclusive benefits to our membership subscribers. We may also recruit more talent for new cutting-edge R&D projects. In addition, we will continue our discipline in experiments in new initiatives. Going forward, as we invest, we will continue to activate our investment strategy and adjust our capital allocation based on our latest findings and industry trends as necessary to achieve a better ROI. We believe this long-term investment will eventually bring investors optimal returns. This concludes our prepared remarks. Operator, please open up the call for questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Ronald Keung of Goldman Sachs. Please go ahead. Thank you. Thank you, Xing, Shaohui, Scarlett, and team, and congratulations on the strong results. My question will be on food delivery this time again. With unit economics now turned completely profitable, as mentioned on the call, and competition seemingly stabilizing, just want to hear, are we happy with our market share level roughly at this point? In terms of priority, will we focus more on improving, let's say, unit profits further, understanding of the seasonality as well, but all to expand our market share further? Would like to hear your thoughts. Thank you. Thank you. As we have mentioned in many occasions, we have clear advantages in consumer base, merchant base, and delivery network in terms of both scale and quality. We also have unparalleled nationwide offline operation capability and deeper insights in this industry. As a result, we were able to gain market share and improve the unit economics at the same time in the past quarter. Positive adjusted operating profit for food delivery is the result of our competitive advantage and economies of scale. However, it should be noted that the lower delivery cost per order from seasonality also contributes significantly to these results. We believe that this market is large enough to have multiple players. This is still a new industry at a very early growth stage, and capable players will benefit from this high potential market. We will continue to focus on improving our service quality, operating efficiency, and making investment for growth when we see healthy ROI. Market share gain will be a natural result. We will ensure that we always take initiatives and make innovations in food delivery business to drive the long-term industry trend. We have continuously demonstrated that the potential of this market, the path to profitability of our business model, and the power of our delivery network. However, the whole industry is still at very early stage. We plan to continue to make investment in many areas, such as supply-side operations, and further increase to our delivery capacity to drive the industry growth and solidify our long-term leading position. Overall, we will keep our ROI-oriented investment strategy and balance the pace of growth and unit improvement. In summary, neither unit economic improvement nor the market share gain are our goal. We are focused on doing the right things. Both unit economics and market share gain will be the results if we do the right things. Thank you. Our next question today comes from Eddie Leung of Bank of America. Please go ahead. Hey, good evening. Thank you for taking my question. Just a follow-up question on competition. We have got some news on your competitor doing more in the lower-tier cities. Would appreciate if you have any update on that front. Thank you. Yeah, thank you for the question. We mentioned in earlier previous call that the industry, overall, the industry has transitioned to a more modest growth stage. At the same time, you can see that during this quarter, number of transactions of our food delivery business increased more than 25% on a quarter-over-quarter basis, outpaced the industry growth. Especially we make good progress in higher-tier cities and further gain market share there, which help us further solidify revenue shares of over two-thirds in this industry. For questions regarding lower-tier cities, the growth of food delivery transaction in lower-tier cities outpaced that in higher-tier cities in our platform. The majority of the new transaction users come from there as well. Our overall market share in lower-tier cities remain very stable in this quarter, despite our competitor launch short-term promotional campaigns in certain cities to try to improve their penetration. As we emphasized, we believe our platform has clear advantage in the user base, merchant base, and in delivery services and our comprehensive services. We have also built a much stronger brand awareness in lower-tier cities. Actually, in most lower-tier cities, both Meituan and Dazhong Dianping have become one of the most popular apps for their daily lives. After this quarter, we actually become more confident in our overall leading position, including our position in lower-tier cities. We believe that the scale and service quality to both the consumers and merchants and our operating efficiency are key to our long-term market leadership. Thank you. Got it. Thank you. Our next question comes from Grace Chen of Morgan Stanley. Please go ahead. Hi, management. This is Alex dialing in on behalf of Grace. Thanks for taking the question, and congratulations on the strong results. We mentioned, in the prepared remarks, a milder food delivery industry growth outlook. Can management provide some color on how Meituan will counter the headwind and the mid- to longer-term growth outlook in the food delivery segment? Thank you. Thank you, Alex. In terms of long-term growth outlook for delivery business, urban population in China is around 850 million, and I think it's reasonable to assume each of them on average will have three meals per day. That's 2.5 billion meals in total per day. Now, two players in food delivery business only penetrate less than 2% of the urban total meals. There is still a long runway for growth. We believe with rising disposable income, increasing urbanization, and lifestyle change, the percentage of home cooking will gradually decline as consumers will value convenience and selection more and more. In recent years, the rapid rise of food delivery has accelerated this lifestyle shift, and we believe this trend will continue. Everyone needs to eat, and everyone wants to eat better. We believe that Meituan-Dianping is at the best position to capture these mega trends as we have built clear leadership on both scale, brands, operating capabilities, and technology platform. As we mentioned before on several occasions, the industry has transitioned into a stage that growth is increasingly driven more by the increase to purchase frequency than the addition to users. On our platform, the average purchase frequency of our annual transaction user was only one-fifth of the top 10% consumers. There is still purchase frequency. Supply is actually the bottleneck to the growth of purchase frequency. In the past few years, both us and our competitor focused on bringing offline restaurants online and delivering their food to our users. However, in this new stage, we should make more efforts to make their food offerings more attached to the daily dining needs of online food users. We need to work with the restaurant to optimize the supply structure on our platform. We need to upgrade the user experience of our marketplace to improve our personalized and intelligent recommendation so that more and more new suppliers can be easily found and grow on our platform. We will also invest to make our delivery network grow and evolve with better efficiency and effectiveness to address broader mass market demands. We are working on this. We do not have any major updates on this front at this moment. Before these efforts pay off, we expect the market will continue to grow modestly in terms of number of transactions. However, we remain confident on the potential of food delivery, and we continue to focus on the right things to drive long-term industry growth. I think here the key word is long-term. Thank you. Our next question comes from Alicia Yap of Citigroup. Please go ahead. Hi. Thank you. Good evening, management, and congratulations on the very strong results. Thanks for taking my questions. I have a follow-up question on the unit economics for the food delivery business. Given this strong improvement in gross margin, and I think you also mentioned will continue to invest. How should we think about, if you can elaborate a little bit, the economics for the second quarter, and then how should we think about the seasonal patterns in the third and fourth quarter? Especially on the demand and the order value as well as the rider cost, and the promotional initiative, and how should we think about that on the margin level, and also the unit economics in the second half? Thank you. Thank you. Compared to both Q2 2018 and Q1 2019, our unit economics for food delivery improved remarkably. This may be due to the decrease of delivery cost to riders, which decreased by about 6% on a year-over-year basis, and about 12% on a quarter-over-quarter basis. From a year-over-year perspective, this decrease came from economies of scale and operating efficiency improvement. On a quarter-over-quarter basis, we benefit from a favorable seasonality. In last earnings call, we explained about the different seasonality for food delivery. For this quarter, weather conditions were good across the country, and supply of delivery riders was sufficient, which gave us more flexibility to minimize incentives to delivery riders and optimize the total delivery cost. In terms of the seasonality in the second half, for order volume, Q3 is usually a good season as hot weather and the summer holiday provide more food delivery consumption scenarios. However, the delivery cost per order in Q3 will increase as we need to incentivize our delivery riders to work more efficiently under very tough weather conditions. For Q4, it is expected to be relatively softer in order volume, and the food delivery order growth rate will usually fall in Q4 as compared to Q3. Also, during the winter, the cold weather conditions, some incentives will also be needed for delivery riders. So overall speaking, Q2 is usually the best season for food delivery because the weather is not yet getting too hot and also not too cold in most of the areas. That is one of the important reasons we achieve good profitability. Therefore, we always suggest investors to focus on year-over-year comparison to better understand the progress of our food delivery business. As Xing mentioned, we firmly believe that food delivery is still at early stage of the overall industry growth. While we have achieved the big volume in the last few years, and we have seen the growth rate slowing down, we still believe food delivery will continue to contribute a bigger portion of overall urban populations' food consumption, overall meal consumption. There are lots of things that we believe we could do, and the industry will evolve to continue support the growth and to meet the demand. It is likely that we will continue to make investment in food delivery business during the rest of the year and in the following years as well when we see the ROI meets our target. We want to emphasize that again, growth rather than profitability, is our top priority for food delivery. Thank you. Our next question comes from Alex Yao of JP Morgan. Please go ahead. Hi. Good evening, management. Thank you for taking the question. Congratulations on a fantastic quarter. My question is on the margins. Now that you guys have achieved significant improvements in margin for both subsidiary and the group level, would that change your investment strategy in the coming quarters or next couple of years? How should we think about the margin trend? Thank you. Thank you, Alex. Overall, I think this is a seasonal profitability. It does not change our overall strategy in that we still focus on growing our platform and leverage technology to drive the growth of the platform. We always hold a proactive and dynamic strategic view in terms of managing our operating efficiency and making investments for the growth. In this quarter, the overall margin profile is good, thanks to a couple of reasons we mentioned before. Food delivery turning positive for the first time. We also enjoy seasonality that benefits the overall platform. We think that the more important is through this quarter and together with the performance in our last few quarters, we demonstrate to the market that it's a very unique platform for daily consumption. We have clear path for profitability, both for our food delivery business model and our overall platform. We have the clear execution capability and operating capability to improve our overall profitability when we see the overall ROI is in line with our target. Also, we are continuing seeing the solidified market position of our platform now provide us more flexibility to balance growth and profitability, when we face more uncertain macro environment and more dynamic competitive environment. For our core business, food delivery and in-store, even though they are relatively more mature and reach their market scale, we still believe there are a lot of things to be invested to drive future growth, both on consumer side and on merchant side, and also across the whole ecosystem. You also notice that we continue to invest in our R&D and in our overall marketplace capabilities to continue improve our user experience. For our new initiative, we have been focused on optimize the operation in last two quarters and to narrow our loss, and also to prioritize our resources across different new businesses. One of the major reasons for this quarter's improvement is the decreased depreciation of our bike-sharing business and scale back our subsidy for our car-hailing business. We continue to be very excited for our new initiatives because they present unmet needs in the overall e-commerce for services space. It is likely that we will increase our investment in one or two or more new initiatives when we see a good ROI. We stick to our mission to help people eat better and live better. We will try our best to provide consumer more convenient local services and also provide our merchants more comprehensive marketing operation tools. We will remain very alert to industry trends and new opportunities, and we will make investment where we need. Thank you. Our next question today comes from Kenneth Fong of Credit Suisse. Please go ahead. Good evening, management. Congrats on the very strong set of results, and thanks for taking my question. I have a question mainly on the in-store business part. Over the past few quarters, we continue to see very healthy growth for the in-store business segment, up consistently 40% year-over-year over the past few quarter. Could you please share more details on the potential growth potential for the dining and other local service business in term of the penetration rate right now, the active merchant growth in the future, as well as the average order value size growth? Also, in addition to the dining and beauty segment, what are the other potential service categories that we see as a big potential driver going forward in the future? Thank you. Thank you, Kenny. I believe we have built quite a unique online platform business for our offline merchants. This business model has a very high entry barrier. Excluding hotel booking, our in-store business have only penetrated less than 2 million annual active merchants. We will continue to grow our active merchant base as we deepen penetrations in existing categories and expand into new service categories. Especially, we will improve sales efficiency and seek for more opportunities to cover those regional merchants in lower tier cities. We will also expand the coverage and optimize the efficiency of our direct sales team for service categories that have high growth potential. In terms of transaction-based product, our average order value, AOV, increased more than 10% in this year on a year-over-year basis. We will continue to develop more transaction-based products and enhance our operation capability to meet the ever-changing needs from consumers and merchants. We will have ample room to increase the number of active merchants paying for our advertising products. In addition, our pool of our active merchants are also expected to be further expanded, driven by the diversification of advertising products. Revenue from more developed service categories such as beauty, leisure, and entertainment, continue to deliver healthy year-over-year revenue growth. The newly developed categories such as medical aesthetics, education, parent and child, home decoration, et cetera, are expected to be the next growth drivers for our in-store business. For example, due to the rapid industry growth, the ads revenue from our medical aesthetics category continued to grow more than 170% year-over-year in last quarter. We also expect parent and child services category to grow rapidly, and children-related activities are one of the fastest growing service categories in China. Especially parent and child and other less developed service categories have a huge room to increase direct sales geographical coverage. Overall, we are still at early stage to cover more and more local servicing categories and merchants. Thank you. Thank you. Our next question today comes from David Dai of Bernstein. Please go ahead. Thank you very much, management. Congratulations on a fantastic set of results. I just have a question on your advertising business. We have seen continuous pressure from macro on other advertising platforms, online advertising platforms. Do you also face a headwind, and do you have any unique advantages to counter it? Thank you. As we mentioned before, consumer staples such as food consumption generally remain resilient against macro headwinds. We believe that our food-related services have a high frequency and relatively low ticket size nature, and therefore, are less impacted by short-term macro slowdown. In terms of our advertising revenue, traditional online advertising platforms have a meaningful portion of key account customers from verticals like FMCG, auto, real estate, and other consumer sectors with large ticket size, and they typically focus on targeting consumers in high-tier cities. Macro softness will negatively affect these platforms as consumption on these categories will decrease remarkably. Our advertising revenue continued to have healthy growth in the last several quarters, despite weak macro condition, mainly due to our focus on food and other local services. Consumptions of these lifestyle services continue to rise. In addition, we have a lot of small local merchants on our platform who have not fully utilized their marketing budget yet due to the high bidding price on other platforms. Therefore, as we offer compelling ROI at affordable cost and large consumer base with a strong search intention, we will be able to unleash the potential of their previously unmet marketing needs. We are still at the early stage of ramping up our ads business and have a big potential to further penetrate into new merchants from both existing and new categories. In online marketing space, there are several things that differentiate us. We have leading location-based algorithms, which lead to better search results. We leverage the local search queries and our leading location-based algorithms to connect consumers with merchants, and providing users more customized search results and merchants have ROI over their marketing spending. For consumers, we are the only platform with billions of authentic user-generated reviews for millions of local service merchants. For merchants, as we are focusing on local services, when users open our app, they have a clear intention embedded in search queries. We generate higher click-through rates and conversion rates for ads. Advanced location data service technology platform with unrivaled leadership in user base, merchant base, and high-quality user-generated content give us a unique advantage for online advertising. Thank you. Our next question today comes from Jerry Liu of UBS. Please go ahead. Hi. Thanks, guys. I wanted to ask about travel, in particular the performance of the hotel business. In the prepared remarks, we talked about the new Hotel+X program, cross-selling to the high-end hotels. It sounds like we're putting some more resources into this area and talking more about it now. I just want to get a sense of do we believe that we can continue to gain share of hotels? Can we get an update on what's the long-term strategy here? Thank you. Yeah, sure. We are very satisfied for the hotel business in our platform. Besides the continued strong growth, we also see our ADR, per room night, experience a steady year-over-year growth. The high-end hotel also contribute a higher percentage of total domestic room nights in Q2 on a year-by-year basis. We also continue to enhance the cross-sale capability. This is a very differentiated capability we have from traditional OTA, and we think this provides strong foundation for us to further our business in gaining market share in the overall online hotel booking business. Right now, about 90% of new transaction users for our hotel booking business are already existing users of our food delivery or instant dining business. So we have a much better cost structure and operating leverage compared to OTAs. We have also seen very good progress to move into high-end hotels with the natural growth of the disposable income of our younger generation consumers. In addition, we continue to help hotels, especially mid to high-end hotels, further expand and increase their revenue streams in non-lodging services. I think this is very well-received by these hotels and become very important new revenue drivers. Our performance further demonstrate very efficient ROI of our hotel business, and we think it's a good timing for us to further increase our investments in hotel space. We plan to increase overall investment in hotel space during the rest of the year. In the mid to long term, we think this business has very good potential for sustainable growth and for very good margin profile. But at current timing, we prioritize long-term growth rather than profitability in the hotel business. You should expect to see we allocate more resources in the hotel business, particularly the domestic hotel room night growth, and including both the lower tier cities and mid to high-end tier cities. Hotel booking business has clear strategic value to us and is also a very good example to demonstrate our platform advantage. We will continue to invest and grow this business. Thank you. Thanks. Our next question today comes from Natalie Wu of CICC. Please go ahead. Hi. Good evening, management. Thanks for taking my question and congratulations on very solid result. You mentioned before that you will keep prioritizing resources across different lines of new initiatives. Can you share more details on the current priority of your investment in the second half of this year, and what kind of the scale should we anticipate respectively? Also, can you share with us the process of your To B new initiatives? More particularly, we'd love to hear management's thoughts on the largest challenges you've encountered when you are promoting your RMS currently. Thank you. Thank you, Natalie. Yes, we have a lot of new initiatives, a lot of stuff in that segment. For our RMS, the Restaurant Management System and food distribution service, in the first half, we mainly focused on improving our merchant base and product offerings, service quality, operating capabilities and team structure. Because you need to have the right team in place to build a business, it takes time. Especially the percentage of high-quality merchants with annual sales above certain thresholds increased steadily in the first half. Because there are millions of merchants out there, you need to do the STP and the segmentation and the targeting and positioning. Now we want to target the higher quality merchants. This should lay a better foundation for future monetization of these To B businesses. Both RMS and food distribution service have clear strategic value to our platform and are important parts of food service value chain. They could help our merchants improve operating efficiency and customer satisfaction and reduce management hassles. We will continue our investment in these To B services in the second half, and we will continue to improve operating efficiency and iterate our business model based on latest industry trends and our learnings from practice. In addition to that, we will also actively explore additional opportunities in other To C services, such as grocery retail, which has a huge total addressable market, low online penetration. Currently, online grocery retail industry is still at a very early stage with a few industry players exploring different types of businesses. All kinds of people are trying all kind of ways and those big operations and very well-funded startups. But no one knows what really works, so we are all trying. There are a lot of attempts, but none of these business models are yet proven to be successful. At this time, we do not rush to scale up. Our objective is to test, to verify and iterate our grocery retail business model. Only after we are confident we have the right model, we will invest heavily to scale up. Once again, I want to emphasize that we will be more disciplined when allocating capital for our new initiatives. We will prudently evaluate the ROI for long-term perspective. Again, here the keyword is long-term. Thank you. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Scarlett Xu for any closing remarks. Okay. Thank you everyone for joining our call. We look forward to speaking with you next quarter. Thanks a lot. Thank you. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.