Earnings Call: Q1 2020

May 15, 2020

Hello, and thank you for standing by for jd.com's 1st Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ryou Li. Thank you. Please go ahead. Before we continue, I will turn you to our safe harbor statements in the earnings press release, which applies to this Thank you, Liu. 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 likelihood of 100 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 societies throughout the COVID-nineteen crisis. In that process, we also navigated through all the operational difficulties and the disruptions resulted from the COVID-nineteen outbreak and delivered a solid set of financials for our shareholders in the Q1 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 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 387,000,000, up 25% from a year ago, the highest growth rate in 8 quarters, with 25,000,000 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 percent of our fulfilled GMV in Q1, which sets a new record. In the meantime, our mobile DAU grew 46 percent in Q1, the fastest in 9 quarters. The level of user activities on our platform notably accelerated as we earned a greater consumer mind share 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 one 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 6 quarters, driven by our newly integrated omni channel supermarket business group, growing 47% in the 1st quarter, as well as strong performance from healthcare, cosmetics and household product categories. Our omnichannel supermarket group basically combines our FMCG, fresh produce, 7 Fresh and Convenience Store Business Units, most of which were launched and developed from 0 in the past 6 years. By 2019, the revenues of this group reached over RMB115 1,000,000,000, 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 JV Health business unit also 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 Q1, 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 1 by 1 and these are just 2 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. On the other hand, 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 Q1 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. These are a few moving there are a few moving pieces in this metric, but essentially the lower fulfilled gross margin of the omni channel 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 1 to 2 years in the past 3 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 costs from the operational disruption, 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 time 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 and D and G and A expense ratios in the Q1 improved 20, 38 and 30 basis points, respectively, compared to the same quarter last year. As a result, our non GAAP operating income increased 65% to RMB3.3 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 RMB4.5 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 RMB3 1,000,000,000 compared to RMB3.3 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 Q1 was negative RMB3 1,000,000,000, partly due to our early payments or prepayments 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 RMB4.6 billion of logistics assets, which remained the most resilient real estate asset class, regardless of the COVID-nineteen situation. On the financial outlook, we expect net revenue growth in the second quarter to be between 20% 30% on a year over year basis based on the accelerating growth in the first half of Q2. And assuming the COVID-nineteen 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-nineteen. 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-nineteen outbreak, including our broad product selection in consumer stable categories and our superior logistics infrastructure. We are confident that we will 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 learning our business with a customer centric focus. I'm more confident than ever about our market position and our mid to long term growth prospects. This concludes my prepared remarks, and we can now move to the Q and 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. We have the first question from the line of Ronald Keung from Goldman Sachs. Please go ahead. Thank you. Thank you, Richard, Chile, Guangdong, Sydney, I think it's a very strong result and congratulations on the Q1 performance. And with the Q1, we've seen how JD Logistics Supply Chain and Logistics business proved to be exceptionally resilient over COVID, and we've seen that over there's over 50% revenue growth for the logistics and others revenue line in the Q1. So I'd like to hear, can management just outline some of the growth drivers and margin outlook for the logistics business in particular? And beyond fulfilling the 1st party 1P retail orders, are there any plans to fulfill more of your 3P marketplace and even Jingci orders? And what do we see as other opportunities beyond serving just within the JD Retail Group? Thank you. Okay. Thank you, Ronald. So I'll start and then maybe Donghui can add on. So the logistics business enjoyed great brand recognition amid the COVID-nineteen situation. We were widely recognized by the consumers, but also by the government, we were awarded multiple actually awards across the region. So very, very strong performance. And along with that, we absolutely attracted some new customers during the pandemic because of the resilience of our operations. But as B2B business, the impact of the brand enhancement will not come immediately. So there will be lasting effect of that positive impact. But in Q1, we did see pretty strong demand from the existing clients and also new customers outside of the JD ecosystem. And as I mentioned earlier, the performance, the productivity of our logistics team was exceptional. In fact, the cost per order reached an all time low during the Q1 because the order volume spiked unexpectedly. And our team frontline workers, as I highlighted earlier, really I used the term heroic 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 also provided all the necessary safety measures to protect our employees, who in the end really didn't get harm throughout the pandemic situation. But that additional productivity helped our overall margin in Q1 on a year over year basis. And this is a business that's built on scale. So as we continue to grow in scale, our margin will naturally trend better. And the business has been positioned to attract external customers. I didn't mention earlier, in Q1, our external revenue actually contributed more than 40% this year this quarter. So it's another milestone for the group. This is Wangzheng Hui from JD Logistics. I want to add a few things. And as Billy just mentioned, the experience actually including our staff experience is always at the core of our business. And during this very special time, the safety and health of our frontline logistics staff stay at the first priority for us to operate. And during this time, we provided over 10,000,000 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. And in addition to that, we have bought over 70,000 thermometers and over 10,000 disinfectants, etcetera, and all these are in place to ensure the operation stays at the first place. And with the epidemic situation getting better, logistics is among the first and actually in some areas is the only logistic company our JV recorders can deliver our products to door to our customers and this has fully manifested the trust we have been built among our customers, our communities and the government and this is also very helpful for us to gain more external orders and increase our revenues and services to all our clients. Thank you. 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 driven by the consumption stimulus and the consumer wanted to buy mornings coming out from the COVID? Or was that the 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. So I will this is Sidney. I will give the first shot and then maybe Xu Lei can add. Yes, so 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. And as I mentioned earlier, we are now the largest omni channel supermarket in China. So we are here to benefit from the increasing demand on this category. Essentially, people will be cooking at home. And so that will increase the overall demand for fresh and supermarket sales, both online and offline. And so that has will benefit, but 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 is resuming to work, we do start to see pent up demand on the slower categories starting in March and particularly in April May. As I mentioned, we were actually seeing accelerating growth over the past 3 months. So that is in a relatively good scenario. Our strong categories will start to recover. And 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. So most people still will cook from home. So that will continue to create higher than normal demand for the supermarket product categories. So it's really depending on the development of the COVID-nineteen situation, but in either direction, our business because we are full category retailer and we have we cover all the major categories, particularly the consumer staples. So we are in a position to grow regardless. So that would be my take. And on the user side, we can see in Q1, the growth rate is very healthy and especially if we see the internal statistics of existing customers and those reactivated customers are becoming more active this quarter. And if you see by the users' recipient address, over 60% of our users are coming from the 3rd to 6 tier cities and by GMV they account for over 50% of the overall GMV now. And we will adopt a number of strategies to develop our user base in the future. And first of all, to target on our lower tier city markets and users and we call it a dual driver system driven by Jinqi platform and also by our main sites based on our more precise customer algorithm. And in terms of the income China's income landscape and online green payment, 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. And it is planned that by end of this quarter or early next quarter, we will 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. And as I introduced earlier that earlier on, we have established a new 1st tier department under JD Retail focusing on the user's growth and operation. And for this department, they focus on the optimizing of the user's algorithm and their database and assets to do more precise operations and conversion of the new users. And the result in Q1 is pretty effective. And in terms of the categories, actually on our platform, some of the categories have been benefited from the coronavirus situation and some have been infected due to supply chains, etcetera, this is lower than expectation. However, looking at the performance during the May holiday, we do see a rapid growth in the home appliances and fashion apparel segment. And we'll also give you a few words about our most important marketing activities that is 6.18 in this quarter. And due to the epidemic earlier this year, we can see that the enthusiasm epidemic earlier this year, we can see that the enthusiasm to participate into our 618 shopping festival from our branding partners, merchandings and other retailers online, offline, very high. I think it's the highest since in the past 17 years, very engaged. And we can also expect that all the major players and competitors on this market are also very active in preparing for this event. And as all of you know that 618 was created by JD 17 years ago, this is the 70s 618 event. And by nature, we will take more at center stage in this activity. And so far, we have received very positive attention from our customers and also a lot of invitation and investment from the merchants and brand makers to come in our way. If there is another major outbreak of the coronavirus again, we do think the 628 this year will be a golden opportunity for all the merchants and the brand makers to recover and offset their life in Q1. 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 because now as Mr. Xu Zhong just mentioned that we have Xingqiu. And recently, I also noticed that we have Xingdong Zhihu Ba or JD lite. And also, we do have probably over 10,000 of JD, so those stores in lower tier cities. So and also we sort of give the 1st level entry access point of WeChat to Dinhiki since late last year. So 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? And 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 Jinx instead of JD? Yes. Thank you. Let me just share some of our operations and other observations on the lower tier market. First of all, in building different shopping scenarios in places, we will not rely on any single shopping scenarios. Besides the teensy platform, which is targeted to the lower tier customers, we will also use our main sites through algorithm to play a role in expanding our shopping scenario. And just to be frank, speaking, for Q1, the Jinsea platform in February March was affected by both the spring festival and the epidemic situation. But as you can see on this earnings cost results, on Jitsi form, the percentage of our users and our GMV are all growing, the rate is also growing very healthy. So we are also adapting different measures to go down into the lower tier markets. And with the situation of the epidemic getting better, now the operation of Jinsea has come back to the normal level, the level before our spring festival. And in the meantime, we also identified several opportunities for Jinshi to grow. First of all, due to the epidemic impact, actually a lot of our factories who originally produced commodities for export now is looking at the domestic sales opportunities and Jinxi can find a good way to collaborate with them to help these factories to transform their business. And at the same time, Jinseng has done a lot of jobs to support the farmers to sell their agriculture produce and through live streaming and different ways, this at the same time is also the social responsibility we are performing to help the farmers, etcetera. And another shopping scenario we have is our offline stores. We have those franchise stores of home appliances, consumer electronics and convenience stores, etcetera. And all these physical offline stores are playing a very important and positive role for us to go down to the lower tier market. And besides our 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 and working with different industrial styles to leverage all kinds of resources and to collaborate with the merchants and the makers, etcetera, to meet the need and tailor the need of the local market. Only through building different shopping scenarios and making tailor made products with the combined efforts we can achieve the current accomplishments. Thank you for your questions. 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 Q1, margins were net margins were quite strong, actually reaching a level we saw throughout 2019 despite COVID. And earlier, we talked about some of the investment areas actually maybe improving ahead of schedule. So as we look forward, do we see opportunities where we want to step up reinvestments of some of these profits into other areas? Or do we want to let margins continue to rise a little bit higher? I know management has talked about this long term target in the past of maybe even high single digit margins. So just want to get a sense of the appetite for reinvestment or letting the margin come up a little bit? Thank you. Yes, sure, Jerry. This is Sidney. Yes, the plan first of all, there are still a lot of uncertainties due to the COVID-nineteen situation. But clearly, we will act on increasing customer base, the enhanced user engagement, we'll definitely continue to invest as we have always done to seek the opportunity to seize the opportunities. Shirei mentioned earlier about June 18 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 in Q1 due to the pandemic. So we will put in our share for sure not only to drive growth, but also to support the recovery of the overall 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 3 months. So 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, because it is in uncertain time we will remain very, very disciplined. But on the other hand, we will never stop investing in our customers. We will never stop investing in improving the user experience and to that end the investment will always continue. Got it. Thank you. Thank you. The next question comes from the line of Thomas Chang 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 for suppliers in China? Are we seeing how long do you think our suppliers will be back to normal? And the support measures that we provide to them, will we set up the efforts to help them pass through the situation or do we expect they will recover in the second half? So that 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 Just on the support to suppliers, it happened mostly in February and maybe early March when the pandemic was in the most severe situation when the whole country was locked down. But I think fortunately, the control was quite effective. So by March, there are there were very few new cases. So many factories and producers had already started resume work, especially for the essential categories. So from our overall assessment on our supplies, because we work with leading brands across country, So most of them are back to work. Their cash flow has resumed somewhat back to normal. So towards the later part of the quarter, there were more prepayments rather than basically to secure sought after merchandise to a lesser extent just to pay payable earlier. So 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. There may be for the small medium enterprises there might be issues. So that's why we for our Jinxi business, for example, Xu Lei mentioned that there were some slowdown, but we are also seeing the activities picking up. So overall, we are cautiously optimistic. Now on our own free cash flow, we do expect it gradually return to normal. But on the other hand, just stay alert about potential future W shape for example scenarios then so cash flow will remain to be a focus for us as well. Free cash flow should be a function of our overall bottom line, but we do expect free cash flow to perform better than our net profit as we did last year. Thank you, Citi, for the detailed answer and congratulations again. Thank you. Thank you. Your 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, so do you see a risk to the Yes. 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. We always strive to provide the best value on top of the best service. So 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. And when we do that, we also work with brands and in a joint effort in those promotional activities and on top of our everyday low price. So the fundamental driver for our margin, I can't speak for others, the fundamental driver for our business is from economies of scale, because as we continue to grow, we can gain more and more procurement benefits. Some are as straightforward as rebates, volume based rebates, others could be in the form of customized models and private label products. So a lot of those tools will become available once you are the largest retailer in the category. So we will not be affected by others in the industry, which is the trend you have been seeing over the past few years. Because every year, if you recall, every year there's a reason to believe the competition is stronger. Every year there's a reason the competition become more fierce. So but we continue to perform pretty well and 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 a strong quarter. So a really quick one. So we know large majority of the products are produced by the local manufacturers. So but you still have a portion of the products are imported from the overseas market. So as the pandemic is still ongoing, right, in the rest of the world, how shall we think about the impact to your imports and the cross border business? Thank you. For JD, our very fundamental and the highly well known categories is our electronics and PC segment. And for this home and appliances category, the supply chain was not heavily affected by this coronavirus, but flat driver is more from the demand side because these products won't be delivered and they installed at store. And for the mobile phone category, its development will not be the sales will not be heavily affected in the later quarters as well. And some major impact on this category is the 5 gs new products release, which were planned to be launched in the Q1, has now been postponed to be launched in this quarter. So you will see more new products of the 5 gs phones released in April May. And for this IT category, this will be have a more impact from the global supply chain, 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. And for some categories, which may help them from overseas going to import, for the mom and baby products, cosmetics, all of these, their impact in the first in the second quarter is not very big, but there is uncertainty on the Q3. And this will be mainly dependent on the epidemic situation in the manufacturer region. Thank you. Thank you. We have our next question from the line of Eddie Huang from Morgan Stanley. Please go ahead. Thank you, management, for taking my question and congratulations on the great results. So I have question regarding the advertising and the marketplace revenue. So we understand that in the Q1 because of the COVID-nineteen, you have an active impact on the part of the revenue in terms of revenue growth. So have you witnessed this strong recovery, especially in terms of the pricing revenue from the 3rd party merchants in the Q2 so far? Thank you. We received results in 2019 in the advertising market. It only achieved a single digit growth, but the Internet advertising has taken a bigger share. And in this Q1, the overall Chinese market advertising revenue is a negative growth and for the those brands advertising is also a negative growth. And what makes our JD advertising business different? And first of all, well, our advertising services is highly integrated with the branding advertising and the sales, because we are very close our there's a lot of that are from SMEs. However, you can see the absolute value, there's a lot of there's a very heavy investment from the large and medium sized companies. And thanks to all these factors, we have seen ROI for our advertisers and then the merchants are actually growing up and this in turn has given them much higher ad value. And during this epidemic special period of time, it has become a very important place for those medium and big sized enterprises, especially those brands partners' favorite place to place their advertisement. And with the call book session getting better, we have seen that the SMEs are being more active on the advertising transactions. And the difference is actually SMEs, they have even higher requirement on their ROI and among all the Chinese e commerce platforms and JD is doing a great job in providing the ROIs. And relatively speaking, I believe for some e commerce platform that is not delivering a good ROI results will be will have a very big pressure this year. So overall, we are satisfied with the performance of our advertising business performance for Q1. Thank you. Thank you. We have our next question from the line of James Lee from Can you give us an update on the state of deregulation for online pharmacy here? And help us understand a little bit how you're working with the government and hospitals to drive the adoption here? And also maybe during your experience of COVID-nineteen, 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. I would like to give you a brief introduction on our gaming health development. Because of the epidemic outbreak, it gives us opportunity for a fast growth of our JD Health. And 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 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, etcetera. So they have really done a lot of great job. And besides the normal business of providing medicines and drugs, we have also done a lot to provide the health services. We have experienced an explosive growth on online medical consultation and also we are the 1st telemedicine platform to provide the coronavirus the nucleic acid testing services, which is very new this for a lot of workers who are waiting for coming back to work. And in terms of our customers, for those young customers and telemedicine is not a very easy thing to get used to. And for this COVID situation, it's very helpful for us to be known and used by the senior people over 50, 60 years old. And 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. We're obviously seeing those hospitals and pharmacies and all these related players, they are also actively embracing the Internet. And the value proposition of JD Health is to leverage our core capacities on supply chain and to provide our health services with our technology to provide a whole life users services to our customers. And for the next step, we will continue to strengthen our supply chain on the medicines and drugs and improve our diabetes on health services. Thank you. And 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. Yes. So if you look at when we look into this space, if you look at the offline pharmacy financials, what's interesting is that the sector has roughly 40% gross margin, but with very high expense ratio of over 30%. And here we actually saw a very similar pattern as our electronics home appliance business where I mentioned earlier that our expense ratio is 50%, five-zero percent lower than the leading offline players. And here for healthcare, our expense ratio was also significantly lower, probably 10 percentage point advantage versus the offline pharmacies. So this also gives us the ability to provide the best value and best service to our consumers. So that is why our pharmacy business has been quietly growing tremendously over the past few years. And it leverages our as Shirei mentioned, we have the existing customer base, we have the consumer recognition of JD as a trusted platform, which is quite essential for healthcare services. So that trust element, the fulfillment reliability, the speed and our value proposition, meaning we can provide lowest price. All that combined is a great, great combination and because of our cost structure driven by our technology, our cost structure is lower, so we can also have a decent margin for this business. So this is where we are already and we are seeing, as I mentioned, tremendous growth with this fundamental economics basically underlying our business model here. Thanks so much. Thank you. We are now approaching the end of the conference call. I will now turn the call over to jd.com's Ria Li for closing remarks. Thank you for your presentation in today's conference. This concludes the presentation. You may now disconnect. Goodbye.