Hello. Thank you for standing by for JD.com's first quarter 2020 earnings conference call. At this time, all participants are listen-only mode. After management's prepared remarks, there will be a question- and- answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ruiyu Li. Thank you. Please go ahead.
Thanks a lot, Lena. Welcome to our first quarter 2020 earnings conference call. Joining me on the call are Mr. Richard Liu, CEO of JD.com, Mr. Lei Xu, CEO of JD Retail, and Mr. Zhenhui Wang, CEO of JD Logistics. Sidney Huang, our CFO, and Isabella, our CFO. For today's agenda, Sidney will discuss highlights in the first quarter of 2020 and other management will join the Q&A session. Before we continue, I refer you to our safe harbor statement in our earnings press release which applies to this call, as we will make forward-looking statements. This call includes the discussions of certain non-GAAP financial matters. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most direct comparable GAAP measures. Please note, unless otherwise stated, all the figures mentioned during this conference call are in RMB.
Now I would like to turn the call over to our CFO, Sidney Huang.
Thank you, Ruiyu Li. Hello, everyone. Thank you for joining us today. 2020 has been an unprecedented year for all of us. As we mentioned on our last earnings call, JD.com and its heroic 200,000-strong frontline employees have been a unique force in supporting the livelihood of hundreds of millions of consumers, helping them to adapt to a new normal under the social distancing measures and making notable contributions to productive and sustainable society throughout the COVID-19 crisis. In that process, we also navigated through all the operational difficulties and the disruptions resulted from the COVID-19 outbreak and delivered a solid set of financials for our shareholders in the first quarter of 2020.
We accomplished many impossible missions by leveraging our unparalleled supply chain and logistics capabilities that were invested over the past 15 years, as well as a strong corporate culture that cares deeply about our frontline employees, who in turn take great care of our valued customers. Our net revenues grew by 20.7% in the first quarter, ahead of our internal expectations as we ensured the supply and fulfillment of essential products to our consumers amid this tough environment. The strong top-line growth was accompanied by even stronger user engagement. Our active customers in the past 12 months reached a total of 387 million, up 25% from a year ago, the highest growth rate in eight quarters, with 25 million net additional customers on top of an already strong peak season net addition in the December quarter.
Similar to Q4 last year, over 70% of new customers in Q1 came from lower-tier cities. The lower-tier city customers contributed over 50% of our fulfilled GMV in Q1, which sets a new record. In the meantime, our mobile DAU grew 46% in Q1, the fastest in nine quarters. The level of user activities on our platform notably accelerated as we earned a greater consumer mindshare by being the only fully functioning e-commerce platform with diverse product offerings and superior logistics services immediately after the outbreak. This is further evidenced by our number 1 internal KPI, the Net Promoter Scores, which reached all-time highs across all of our core businesses.
Category-wise, revenue growth of general merchandise accelerated to 38%, the highest growth rate for the past six quarters, driven by our newly integrated omni-channel supermarket business group, growing 47% in the first quarter, as well as strong performance from healthcare, cosmetics, and household product categories. Our omni-channel supermarket group basically combines our FMCG fresh produce, 7Fresh, and convenience store business units, most of which were launched and developed from zero in the past six years. By 2019, the revenues of this group reached over CNY 115 billion, roughly 20% higher than the revenues of the largest offline supermarket chain in China, making us the largest retailer for this category in the country. If you consider the fact that most offline supermarkets also sell home products and appliances, our leadership gap will be even wider.
In addition, our JD Health business unit is also gaining consumer mindshare. With quarterly active customers for medicine categories increased by triple digits. Net revenues from JD Health increased 65% year-on-year in the first quarter, surpassing the revenues of the largest offline pharmacy in China. As I have communicated with many of you, probably every time we spoke in the past, we will secure market leadership across most of our core categories one by one, and these are just two notable examples, while a few others are hidden champions. I'm thrilled that we have achieved quite a few of these milestones before my retirement. It's just a matter of time, and the snowball will continue to grow.
For now, our general merchandise sales in Q1 contributed more than 40% of our product revenues for the first time and further strengthened our brand recognition and consumer perception as an everything store with increasingly broader selections. The electronics and home appliance categories also performed extraordinarily well on a relative basis, growing nearly 10% as compared to a nationwide decline of 21% in the first quarter, according to the government data. As we discussed many times in the past, our electronics and home appliance categories can always outperform because our cost structure is 50% lower than our peers, which allows us to provide the best value and best service to the consumers. Another remarkably resilient metric is our fulfilled gross margin, which stood at 8.3% in Q1, comparable to the same quarter last year.
There are a few moving pieces in this metric, but essentially, the lower fulfilled gross margin of the omnichannel supermarket business was substantially offset by the incremental gains from procurement economies of scale across all categories, particularly those with the market leadership positions. To a lesser extent, it also benefited from less subsidies used for traffic generation to cultivate consumer habit for online grocery shopping, which has probably leapfrogged for one to two years in the past three months. As a result, we are approaching the inflection point of the supermarket business ahead of our original schedule. Another positive contribution to the fulfilled gross margin was from JD Logistics, where the productivity gains from higher-than-expected orders more than offset the additional cost from the operational disruptions, higher wages, and staff protective measures. If you look around today, you can probably identify a clear pattern.
Those who treat their employees well in the normal times are the most resilient in the time of turbulence. Besides the fulfillment expenses, all other expense ratios declined due to our more disciplined spending amid uncertainties during Q1. Our marketing, R&D, and G&A expense ratios in the first quarter improved 20, 38, and 13 basis points respectively, compared to the same quarter last year. As a result, our non-GAAP operating income increased 65% to RMB 3.3 billion, and the non-GAAP operating margin was 2.2%, up 60 basis points from the same quarter last year. On a segment basis, non-GAAP operating income of JD Retail Group increased by 39% to RMB 4.5 billion in Q1, with operating margin improving to 3.2%, up 44 basis points from the same quarter last year.
While the margin improvement may surprise some, it is because we have been investing for the newer categories and never tried to optimize our margin. As I mentioned to many of you in the past, the relatively decent margin business has already been there for quite some time. In this quarter, we just narrowed the loss margin ahead of schedule for certain categories that are under the investment phase. Moving to the bottom line, our non-GAAP net income attributable to ordinary shareholders in Q1 was RMB 3 billion compared to RMB 3.3 billion in the same period last year. The decrease was primarily due to certain one-off gains in Q1 last year. Our free cash flow for the first quarter was negative RMB 3 billion, partly due to our early payments or prepayment to certain suppliers to support their operations and secure certain sought-after merchandise.
CapEx was prudent in Q1, and the spending for the development properties was for the existing project. As disclosed, we established a second core fund with GIC in Q1 to dispose another 4.6 billion CNY of logistics assets, which remain the most resilient real estate asset class regardless of the COVID-19 situation. On the financial outlook, we expect net revenue growth in the second quarter to be between 20% and 30% on a year-over-year basis based on the accelerating growth in the first half of Q2. Assuming the COVID-19 situation does not create significant unexpected disruption in the remainder of this quarter. We are not in a position to provide any full-year guidance on the bottom line due to the uncertainties of the pandemic.
However, the margin dynamics in our Q1 results may provide some basis for your own assessment on the various development scenarios of the COVID-19. In summary, we are privileged to be in a unique position to leverage on the best of our capabilities to help the society during the COVID-19 outbreak, including our broad product selection in consumer staple categories and our superior logistics infrastructure. We are confident that we'll emerge stronger on the other end with accelerated user growth, strengthened brand image, and expanded consumer mind share. All of these validate our long-term approach to running our business with a customer-centric focus. I'm more confident than ever about our market position and our mid to long-term growth process. This concludes my prepared remarks, and we can now move to the Q&A session. Operator?
Certainly. The question-and-answer session for this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. If you wish to ask your question, please press star one on your telephone and wait for your name to be announced. We have the first question from the line of Ronald Keung from Goldman Sachs. Please go ahead.
Thank you. Thank you, Richard Liu, Xu Lei, Wang Zong, Sidney Huang, Yao Yanzhong, Ruiyu Li and Ja. I think it's a very strong result, and congratulations on the first quarter performance. With the first quarter, we've seen how JD Logistics supply chain and logistics business proved to be exceptionally resilient over COVID-19, and we've seen that over there's over 50% revenue growth for the logistics and others revenue line in the first quarter. We'd like to hear, can management just outline some of the growth drivers and margin outlook for the logistics business in particular? Beyond fulfilling the first party 1P retail orders, are there any plans to fulfill more of the, your 3P marketplace and even Jingxi orders, and what do we see as other opportunities, beyond serving just within the JD Retail group? Thank you.
Okay. Thank you, Ronald. I'll start and then maybe Zhenhui Wang can add on. The logistics business enjoyed a grand, great, brand recognition amid the COVID-19 situation. We were widely recognized by the consumers but also by the government. We were awarded multiple, actually awards across the region. Very, very strong, very, very strong performance. Along with that, we absolutely attracted some new customers during the pandemic, because of the resilience of our operations. You know, as B2B business, you know, the impact of the brand enhancement will not come immediately. There will be lasting effects of that, positive impact.
In Q1, we did see pretty strong demand from the existing clients and also, you know, new customers outside of the JD ecosystem. As I mentioned earlier, you know, the performance, the productivity of our logistics team was exceptional. In fact, the cost per order reached an all-time low during the 1st quarter because the order volume spiked unexpectedly. Our team frontline workers, as I highlighted earlier, you know, really I use the term heroic, you know, because not only they were highly productive, but they are also very brave to fulfill the orders for consumers amid a lot of uncertainties.
We are, of course, also provided all the necessary safety measures to protect our employees, who in the end, really didn't get harmed throughout the pandemic situation. That additional productivity helped our overall margin in Q1 on a year-over-year basis. You know, this is a business that's built on scale. As we continue to grow in scale, our margin will naturally trend better. You know, the business has been positioned to attract external customers. I did mention earlier, in Q1, we, you know, our external revenue actually contributed more than 40% this year, at this quarter. It's another milestone for the group.
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This is Wang Zhenhui from JD Logistics. I want to add a few things.
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As Sidney just mentioned, experience, actually including our staff experience, is always at the core of our business. During this very special time, the safety and health of our frontline logistics staff stay at the first priority for us to operate. During this time, we provided over 10 million masks and 70,000 gloves and all kinds of protective gears to our logistics staff to ensure they are working in a relatively safe environment.
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In addition to that, we have bought over 70,000 thermometers and over 10,000 disinfectants, et cetera, and all different ways to ensure the operation is safe at the first place.
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With the epidemic situation getting better, JD Logistics is among the first, and actually in some areas it's the only, logistic company our JD couriers can deliver our product to doors of our customers. This has fully manifested the trust we have been built among our customers, our communities and the government. This is also very helpful for us to gain more external orders and increase our revenues and services to all our clients. Thank you.
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Thank you. We have our next question from the line of Alicia Yap from Citigroup. Please go ahead.
Hi. Good evening, management. Congratulations on the strong results and guidance. My question is, could management elaborate a bit how we should reconcile the strong guidance you provide versus the current macro situation and the consumption sentiment? How much of the outperforms are driven by the consumption stimulus, and the consumer wanted to buy more things, coming out from the COVID-19? Was that a benefit that we are seeing from the offline to online shift? How sustainable is this strong momentum into the back half of the year? Do you anticipate the demand to be more normalized? Thank you.
Okay. It's Sidney, I will give a first shot and then maybe Xu Lei can add. Yes. What we have observed is that when the pandemic situation was highly uncertain and social distancing was at the most strict time, there will be a huge spike in orders for fresh products and other daily necessities. As I mentioned earlier, we are now the largest omni-channel supermarket you know, in China. We are here to benefit from the increasing demand on this category. Essentially, people will be cooking at home. That will increase the overall demand for fresh and supermarket sales, both online and offline. That has will benefit.
You know, it will be somewhat offset by slower growth from the discretionary categories as we have seen. Now that the country is gradually opening up and everyone's resuming to work, we do start to see pent-up demand on the slower categories starting in March and particularly in April and May. As I mentioned, we're actually seeing accelerating growth over the past three months. So that is in a relatively good scenario. You know, our strong categories will start to recover. At the same time, because of the cautious measures still being undertaken by the majority of the consumers, for example, you still don't see many people in restaurants. Most people still will cook from home.
That will continue to create higher than normal demand for the supermarket product categories. It really depending on the development of the COVID-19 situation, but in either direction, our business, because we are full category retailer and we have, you know, we cover all the major categories, particularly the consumer staples. We are in a position to grow regardless. That would be my take.
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Xu Lei from JD Retail.
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On the user side, we can see in Q1 the growth rate is very healthy. Especially if we see the internal statistics, the existing customers and those reactivated customers are becoming more active this quarter.
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If you see by the users, recipient address, over 60% of our users are coming from the third to sixth tier cities, and by GMV they account for over 50% of the overall GMV now.
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We will adopt a number of strategies to develop our user base in the future. First of all, to target on our lower-tier city markets and users, we call it a dual driver system, driven by our Jingxi platform and also by our main sites based on our more precise customer algorithms.
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In terms of the income, China's income landscape and online retailing, the characteristics of JD users are featured, a lot of them are middle and high-end users, and a lot of them are household users.
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It is planned that by end of the this quarter or early next quarter, we'll provide specialized programs to provide more tailor-made services to our middle and high-end users, and providing them with more selected products with some paid services.
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As I introduced earlier that, earlier on, we have established a new, first tier, department under JD Retail focusing on the users growth and operation. This department, they focus on the optimizing of the users algorithm and their database and assets to do more precise operation and conversion of the new users. The result in Q1 is pretty effective.
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In terms of the categories, actually on our platform, some of the categories have been benefited from the Coronavirus situation, and some have been badly affected due to supply chains, etc. These lower than expectations. However, looking at the performance during the main holiday, we do see rapid growth in the home appliances and fashion apparel segments.
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We'll also give a few words about our most important marketing activity that is 618 in this quarter.
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Due to the epidemic earlier this year, we can see that the enthusiasm to participate into our 618 shopping festival from our brand partners, merchants, and other retailers online, offline are very high. I think it's the highest since in the past 17 years. They're very engaged.
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We can also expect that all the major players, the competitors on this market are also that very active in preparing for this event.
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As all of you know that 618 was created by JD 17 years ago. This is the 17th 618 event. By nature, we will take more a center stage in this activity. So far, we have received very positive attention from our customers and also a lot of invitation and investment from the merchants and the brand makers to, are coming our way.
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If there's another major outbreak of the coronavirus again, we do think the 618 this year will be a golden opportunity for all the merchants and the brand makers to recover and offset their loss in Q1.
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Thank you.
Thank you. We have the next question from the line of Tina Long from Credit Suisse. Please go ahead.
Hi. Thank you, management. Congratulations on the very strong results. I want to follow up on the lower tier penetration. Now as Mr. Xu, Xuzong just mentioned that we have Jingxi, and recently I also noticed that we have Jingdong Jisu Ba or JD Lite. We do have probably over 10,000 of JD Jingdong Jiadian, Jingdong Shuma. Those stores in lower tier cities. We sort of give the first level entry access point of WeChat to Jingxi since late last year.
I want to know, first of all, from each apps we just talked about and also including those offline shops, what kind of product offerings we tend to acquire those lower tier city users? Also, the contribution from the newly sort of upgraded access point. How much of our user contribution actually come from the WeChat after we sort of give access to Jingxi instead of JD? Yeah. Thank you.
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Let me just share some of our operations and other observations on the lower tier market.
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First of all, in building different shopping scenarios and places, we will not like rely on any single shopping scenarios. Besides the Jingxi platform, which is targeted to the lower tier customers, we will also use our main sites to algorithm to play a role in expanding our shopping scenarios.
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Just to be frank, speaking, for Q1, the Jingxi platform in February and March was affected by both the Spring Festival and the epidemic situation.
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As you can see on this earnings call results, on Jingxi platform, the percentage of our users and our GMV are all growing. The rate is also growing very healthy. We are also adapting different measures to go down into the lower tier markets.
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With the situation of the epidemic getting better now, the operation of Jingxi has come back to the normal level, the level before our Spring Festival. In the meantime, we also identified several opportunities for Jingxi to grow. First of all, due to the epidemic impact, actually a lot of factories who originally produced commodities for export now is looking at the domestic sales opportunities, and Jingxi can find a good way to collaborate with them to help these factories to transform their business. At the same time, Jingxi has done a lot of jobs to support the farmers, to sell their agriculture produce and to do this through live streaming and the different ways. This at the same time is also the social responsibility we are performing to help the farmers, et cetera.
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Another shopping scenario we have is our offline stores. We have those franchised stores of home appliances, consumer electronics, and convenience stores, et cetera. All these physical offline stores are playing a very important and positive role for us to go down to the lower tier markets.
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Besides o ur various ways to create shopping scenarios, we are also bringing our products down to the lower tier cities through our C2M products and the self-owned brands, working with different industrial belts to leverage all kinds of resources and to collaborate with the merchants and the makers, et cetera, to meet the need and tailor the need of the local market. Only while through building different shopping scenarios and making tailor-made products, with the combined efforts we can achieve the current accomplishment.
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Thank you for your question.
Thank you. We have our next question from the line of Jerry Liu from UBS. Please go ahead.
Hi. Thank you, management. My question is about margins. If we look at the first quarter, net margins were quite strong, actually reaching a level we saw throughout 2019, despite COVID-19. Earlier we talked about some of the investment areas, actually maybe improving ahead of schedule. As we look forward, do we see opportunities where we want to step up reinvestments of some of these profits into other areas? Do we want to let margin continue to rise a little bit higher? I know management has talked about this long-term target in the past, of maybe, you know, even high- single-digit margins.
Just wanna get a sense of the appetite for reinvestment or letting the margin come up a little bit. Thank you.
Yeah, sure, Jerry. This is Sidney. Yes, the plan You know, first of all, there are still a lot of uncertainties, you know, due to the COVID-19 situation. Clearly, we will act on the increasing customer base, the enhanced user engagement. We'll definitely continue to invest as we have always done, to seek the opportunity, you know, to seize the opportunities. Xu Lei mentioned earlier about June 18th festival, which will be a great opportunity for us to work with brands, work with suppliers, to really make up for the lost sales for everyone, you know, in Q1 due to the pandemic.
We will put in our share for sure, not to, not only to drive growth, but also to support the recovery of the overall, you know, from a society point of view. Clearly it's also a great opportunity for us to retain the new customers we acquired, and also to continue to build consumer behavior for multiple categories that we have gained so much in the past three months. I guess the short answer is, we will, as always, continue to reinvest. We will continue to keep an eye on the margins, as you can see what we did in Q1. You know, because it is, you know, in uncertain time, we will remain very disciplined.
On the other hand, we will never stop investing in our customers. We'll never stop investing in improving the user experience. To that end, you know, the investment will always continue.
Got it. Thank you.
Yeah.
Thank you. The next question comes from the line of Thomas Chong from Jefferies. Please go ahead.
Hi. Thanks management for taking my questions and congratulations on a very strong set of results. I have a question, it's about our supplier. We have provided a lot of support to our supplier to pass through the challenging situations. Can management comment about the environment of the suppliers in China? Are we seeing how long do you think our suppliers will be back to normal? The support measures that we provide to them, will we step up the efforts to help them pass through the situation, or do we expect they will recover in the second half? There is more relating to the free cash flow side.
Should we expect the free cash flow to turn positive in coming quarters? Thank you.
Okay. I will first give a shot. You know, just on the support to suppliers, it happened mostly in February, and maybe early, you know, in early March when the pandemic was in the most severe situation, when the whole country was locked down. You know, I think fortunately, you know, the control was quite effective. You know, by March there are, you know, there were very few new cases. Many factories and producers had already started to resume work, especially for the essential categories. You know, from our overall assessment on our suppliers, because we work with leading brands across country, most of them are back to work. Their cash flow has resumed, you know, somewhat back to normal.
Towards the later part of the quarter, there were more prepayments rather than basically to secure sought after merchandise, and to a lesser extent, just to pay payable earlier. You know, I think overall the financial health of the suppliers we work with, they are mostly mid to large suppliers and brand owners. Financially they are quite sound. Now, there may be for the small medium enterprises, there might be issues. That's why we, you know, for our Jingxi business, for example, Lei Xu mentioned that there were some slowdown, but we are also seeing the activities picking up. Overall we are cautiously optimistic.
On our own free cash flow, we do expect it gradually return to normal. On the other hand, you know, in just stay alert about potential, you know, future W shape, for example, scenarios. Cash flow will remain to be a focus for us as well. Free cash flow, you know, should be a function of our overall bottom line, you know, we do expect free cash flow to perform better than our net profit as we did last year.
Thank you, Lei Xu, for the detailed answer, and congratulations again.
Thank you.
Thank you. The next question comes from the line of Eddie Leung from Bank of America. Please go ahead.
Hey. Good evening, guys. Congratulations on a good quarter amid a difficult time for everyone. I have a bigger picture question. Given the strategy and aggressive tactics of some of our competitors, do you see a risk to the industry's long-term margins? If not, why not? Thanks.
Yeah. You know, I think we have, as I mentioned in my earlier remarks, we have been as aggressive as we could in our own right. We have been investing heavily in all of the categories. You know, we always strive to provide the best value on top of the best service. You know, that's why I mentioned also earlier in response to Jerry's question that we will clearly also step up our own investments, given the strong, relatively strong performance, and investing back, basically giving back to our consumers as we always do.
When we do that, we also work with brands, and, you know, in a joint effort in those promotional activities and on top of our everyday low price. You know, the fundamental driver for our margin, I can't speak for others, the fundamental driver for our business is from the economies of scale. Because as we continue to grow, we can gain more and more procurement benefits. You know, some are as straightforward as rebates, volume-based rebates. Others could be in the form of.
Customized models and private label products. A lot of those tools will become available once you are the largest retailer in a category. We will not be affected by others in the industry, you know, which is a trend you have been seeing over the past few years. You know, because every year, if you recall, every year there's the reason to believe the competition is stronger. Every year there's the reason the competition become more fierce. But we continue to perform pretty well and, you know, with growth now accelerating and margin expanding.
Thank you very much.
Thank you. We have our next question from the line of Gregory Zhao from Barclays. Please go ahead.
Hi, management. Thanks for taking my question, and congratulations to the strong quarter. A really quick one. We know large majority of the products are produced by the local manufacturers, but you still have a portion of the products are imported from the overseas market. As the pan-pandemic is still ongoing in the rest of the world, how shall we think about the impact to your imports and the cross-border business? Thank you.
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For JD, our very fundamental and the highly well-known category is our electronics and PC segment.
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For this home appliances category, the supply chain was not so heavily affected by this COVID-19, but the flat driver is more from the demand side because these products won't be delivered and installed at door.
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For the mobile phone category, The sales will not be heavily impacted, affected in the later quarters as well. Major impact on this category is the 5G new products released, which were planned to be launched in the first quarter, has now been postponed to be launched in this quarter. You will see more new products of the 5G phone released in April and May.
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For this IT category, this will have a more impact from the global supply chains, especially you can see from some storage pieces, the supplies and the prices are going up. However, thanks to our market share online, offline on the Chinese market, we will strengthen our collaborations with our brand partners globally and to secure our leading position and against all the odds of the coronavirus.
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For some categories, which many of them are from overseas, we need to import. The mom and baby products, cosmetics, all of these, their impact in the first in the second quarter is not very big. There is uncertainty on the third quarter, and this will mainly depend on the epidemic situation in the manufacturer regions.
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Thank you.
Thank you. We have our next question from the line of Eddy Wang from Morgan Stanley. Please go ahead.
Thank you, management, for taking my question, and congratulations on the great results. I have a question regarding the pricing and marketplace revenue. We understand that in the first quarter, because of the COVID-19, you have a negative impact on this part of the revenue in terms of revenue growth. Have you witnessed, you know, there's a strong, you know, recovery, especially in terms of the pricing revenue from the third-party merchants in the second quarter so far. Thank you.
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This is Xu Lei.
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We received the result in 2019 in the advertising market. It only achieved a single-digit growth, but the internet advertising has taken a bigger share.
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In this Q1, the overall Chinese market advertising revenues is a negative growth. For those brand advertising is also a negative growth.
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What makes our JD advertising business different, first of all, our advertising, our services is highly integrated with the branding, advertising and the sales, because we are very close to the customer's shopping decision. Secondly, among all our advertisers, there's a lot of them are from SMEs. However, if you see the absolute values, there's a very heavy investment from the large and medium-sized companies.
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Thanks to all these factors, we have seen ROI for our advertisers and the merchants are actually growing up. This in turn has given them a much higher ad value. During this epidemic special period of time, JD has become a very important place for those medium and big size enterprises, especially those brand partners, favorite place to place their advertisements.
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With the COVID situation getting better, we have seen that the SMEs are being more active on the advertising transactions. The difference is actually the SMEs, they have even higher requirements on their ROI. Among all the Chinese e-commerce platforms and JD is doing a great job in providing the ROIs. Relatively speaking, I believe for some e-commerce platforms that is not delivering a good ROI result will be, will have a very big pressure this year.
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Overall, we are satisfied with the performance of our advertising business performance for Q1. Thank you.
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Thank you. We have our next question from the line of James Lee from Mizuho. Please go ahead.
Great. Thanks for taking my question. Can you give us an update on the state of the regulation for online pharmacy here? Help us understand a little bit how you're working with the government and hospitals to drive the adoption here. Also maybe, you know, during your experience of COVID-19, what gives you the confidence that the user behavior that you're seeing will remain, and how are you uniquely positioned to take advantage of this category? Thanks.
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Xu Lei, I would like to give you a brief introduction on our JD Health development.
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Because of the epidemic outbreak, it gives us opportunity for faster growth of our JD Health.
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This is such a young team and a young business, and they have contributed a lot for the society to fight against the coronavirus. We have been providing and to ensuring the supplies of all kinds of medical materials and to provide free online telemedicine consultations and do the live streaming to spread knowledge about the virus, et cetera. They have really done a lot of great job.
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Besides the normal business of providing medicines and drugs, we have also done a lot to provide the health services. We have experienced a explosive growth on the online medical consultations. Also, we are the first telemedicine platform to provide the coronavirus the nucleic acid testing services, which is very needed for a lot of workers who are waiting for coming back to work.
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In terms of our customers, for those young customers in the telemedicine, it's not a very easy thing to get used to. For this COVID-19 situation, it's very helpful for us to be known and used by those senior people over 50, 60 years old.
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On the government policy side, we have seen the opening of the online payment of the medical insurance, and this will greatly promote the development of telemedicine and online health services.
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We've also seen those hospitals and the pharmacies and all these related players, they are also actively embracing the internet.
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The value proposition of JD Health is to leverage our core capacities on supply chains and to provide our health services with the other technologies to provide a whole life users services to our customers.
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For the next step, we'll continue to strengthen our supply chains on the medicines and drugs and improve our abilities on health services.
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Thank you.
If I could ask a follow-up question maybe to Sidney about the long-term margins of the online pharmacy business. How should we think about that relative to your other categories? Thanks.
Sure. Yeah. If you look at, you know, when we looked into this space, if you look at, you know, the offline pharmacy financials, what's interesting is that, you know, the sector has roughly 40% gross margin, but with very high expense ratio of over 30%. Here, we actually saw a very similar pattern as our electronics home appliance business, where I mentioned earlier that our expense ratio is 50% lower than the leading offline players. Here, for healthcare, our expense ratio was also significantly lower, probably 10 percentage point advantage versus the offline pharmacies. This also give us the ability to provide the best value and best service to our consumers.
That is why our pharmacy business has been quietly growing tremendously over the past few years. It leverages our You know, as Xu Lei mentioned, we have the existing customer base. We have the consumer recognition, you know, of JD as a trusted platform, which is quite essential for healthcare services. That trust element, the fulfillment, reliability, the speed, and our value proposition, meaning, you know, we can provide lowest price, you know, all that combined is a great combination. Because of our cost structure, driven by our technology, you know, our cost structure is lower, so we can also have a decent margin for this business. This is where we are already.
We're seeing, as I mentioned, tremendous growth, you know, with this fundamental economics basically underlying our business model here.
Thanks so much.
Sure.
Thank you. We are now approaching the end of the conference call. I will now turn the call over to JD.com's Ruiyu Li for closing remarks.
Thank you, operators. Thank you for joining us today. Please feel free to contact us if you have any further questions. We are looking forward to talking with you in the coming months. Thank you.
Thank you for your presentation in today's conference. This concludes the presentation. You may now disconnect. Goodbye.