Hello, and thank you for standing by for JD.com's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in 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'd like to turn the meeting over to your host for today's conference, Jia Dong.
Thank you. Welcome to our Second Quarter 2019 Earnings Conference Call. Joining me on the call today are Mr. Richard Liu, JD.com Group CEO, Mr. Lei Xu, CEO of JD Retail, Mr. Zhenhui Wang, CEO of JD Logistics, Sidney Huang, CFO, and Jon Liao, our Chief Strategy Officer. For today's agenda, Richard Liu will discuss highlights for the second quarter 2019, followed by Sidney Huang, our CFO. Other management will join the Q&A session. Before we continue, I refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. I would now like to turn the call over to Richard Liu.
好，谢谢。我相信一会儿估计大家会比较关心我们的利润，特别是未来的利润情况。
Thank you everyone for joining this call. I believe you will pay much attention on this quarter's call on our revenue, especially looking forward our revenue results.
首先大家看到我们最近两个季度，我们的盈利情况还是不错的。这其实最主要是两个大的因素造成。一个是我们过去几年连续布局的很多业务，现在陆续迎来了这些盈亏平衡，甚至盈利。
As you have seen that in the past quarter one and quarter two, we have achieved quite positive revenue results. These are mainly contributed to two factors. Number one is through our years of our commitment in our business plan. You have seen a lot of business have broken even and even gain some profit.
比如像京东物流，我们连续多少年投入，现在也是迎来了这个接近了盈亏平衡点。
For example, our JD Logistics, after years of efforts, we have reached our break-even point.
我们还有大量的三级品类，也是经过多少年的投入之后，现在陆续迎来了盈利。
Also we have some third tier characters, and after years of investment, we have achieved some revenue.
Profit。
Profit. Sorry, profit.
第二就是我们大概在四年前开始让京东物流大举进入这三到六线城市。所以过去几年我们的物流成本在三到六线城市其实是比较高的，因为刚开始订单密度比较小。
Secondly, for the past four years, we have invested heavily in the third to sixth tier lower cities. At the beginning, the cost of our logistics keeps relatively high.
现在随着我们物流的一线城市的投资扩张已经结束了，特别是随着我们物流的开放，大量订单进来之后，迅速平移了我们的成本，所以也导致我们履约费用一直在稳稳地下降。
Through years of investment and our increasing our fulfillment and our opening strategies, our fulfillment expense cost continue to decline.
所以我们的盈利绝对不是减少了未来的投资，更不是把一些亏损业务砍掉得到的。
The revenues we gained today is not because of a reduction.
Profit。
Sorry, the profit we gained today is not because of the reduction of our investment or our elimination of some ill-performed business.
相反，我们对未来长期的投资的决心和信心从来没有改变。我们现在依然对我们未来的增长，还有为股东的回报进行大量的业务的投资。
On the contrary, our commitment for our long-term investment never changed. We'll continue to make our apt efforts for the growth of our business and returns and benefits for our shareholders.
比如说我们会持续对新的技术，人工智能、大数据、云计算这些技术持续进行投资。同时还会进行一些新的品类的扩张，比如像生鲜，像商超等等，我们都持续地在不断地进行投资。
we will continue our investment on the technology in terms of AI, big data, cloud, and also new format of our business like the fresh groceries and all kinds of new innovative businesses.
像过去一样，因为我们坚信对于这些投资，未来一定能够为我们的股东带来持续丰富的回报。
As we have done from the past, we strongly confirm you that we will continue our efforts and bring benefits, profit for our shareholders.
当然，因为我们现在盈利的业务越来越多，所以不管新业务怎么投资，我相信我们的利润总体趋势来讲，大的趋势来讲
As we are gaining more profitability in various of our business, I believe our revenues will continue to grow in the long. Our profits in the long run will continue to grow.
Since our IPO, we have stressed that our growth will be mainly driven by our economies of scale, and our advantages in the cost, and our efficiencies, and the day has come to fulfill our promises.
In the future, we'll continue to enhance our users' experiences and also gain more potential customers from the third to sixth tier cities.
We'll continue to invest in our technologies and improve our management to reduce costs and improve profitability.
We'll continue to build up our organization's efficiencies and optimize our operations to bring more cash flows.
This has never changed in the past, and it will continue in the foreseeable future. Thank you, everyone.
Okay, thank you, Richard. let me continue to give you a quick quarterly update. We're very pleased to report a solid second quarter with strong results across all key metrics. Our net revenues exceeded the upper end of our guidance, and we achieved record high operating profit in a heavily promotional season. We are also encouraged by a healthy growth of 11 million net additional customers to a total of 321 million in the past 12 months. These strong results illustrate the solid fundamentals of our online retail business model, as well as the significant progress we have made to improve our R&D capabilities, operational processes, and organizational design over the past few quarters. During the second quarter of 2019, our net revenue growth accelerated to 22.9%, despite market concerns about macroeconomic conditions and competitive dynamics.
All major categories of electronics and home appliances saw double-digit growth during the quarter, and the general merchandise categories grew by 34%, led by FMCG products. Net service revenues grew by 42% year-over-year and contributed 11.2% of our overall revenues, driven by strong momentum from third-party logistics and advertising revenues. Logistics and other service revenues grew over 98%, thanks to the team's focus on product innovation and superior service quality. Gross margin in the second quarter was 14.7%, up from 13.5% in the same quarter last year. The margin expansion was contributed by both JD Retail and our third-party logistics business. JD Retail gross margin improved by 76 basis points, driven by economies of scale from our 1P business, better economics of advertising, and certain one-time benefits of the VAT tax reform which took effect on April 1st, 2019.
This marks the 21st consecutive quarter of JD Retail's gross margin expansion on a year-over-year basis, in spite of intense competition from existing and new industry participants. It validates the resilience of our business model and the long-term margin trajectory that we have communicated since our IPO. JD Logistics also delivered a stellar quarter as its capacity utilization and staff productivity reached the normalized level during a seasonally busy quarter. The third-party logistics business saw its gross margin further improved, and as Richard mentioned, also reached past the break-even point on the non-GAAP operating income level in the second quarter. Our fulfillment efficiency was benefited as well. During the second quarter, fulfillment expense ratio was 6.1%, the lowest level in our history as the public company since the second quarter of 2014.
As Richard mentioned, our fulfillment expense ratio first began to rise in 2014 as we started to extend our logistics network into the lower tier city, creating short-term headwinds on our fulfillment expenses. In 2015, we expanded aggressively into the FMCG categories, where the average basket size was much smaller than our average order size at the time, creating further short-term headwinds on our fulfillment expense ratio. We then began expanding our capacity and service offerings in 2017 to drive scale while serving external business customers, which created an additional short-term increase in our fulfillment expense ratio. Now, five years later, when all the dust finally settled down, we emerged as a much stronger and more efficient modern logistics operator that can fulfill 6.5x more daily orders than five years ago.
The greater scale, coupled with sophisticated supply chain technologies, has brought operating leverage even as we fulfilled more and more small orders, further enhancing our structural advantage over our major retail peers and bringing more clarity to our core economic model. Our marketing expense ratio was 3.7% in the second quarter, reduced from 4.3% in the same quarter last year, mainly due to our redesigned marketing strategy and innovative marketing tools with better position and ROI. Our R&D expense ratio was 2.5%, up from 2.3% in the same quarter last year. The R&D expense amount, on the other hand, has stabilized sequentially from the last quarter as the key talent and IT infrastructure are largely in place. G&A expense ratio also improved to 0.9% in the second quarter, down from 1.1% in the same period last year.
As a result, we achieved another record in both GAAP and non-GAAP operating income in the second quarter, with the operating margins improving 2.4% and two percentage points respectively from the same quarter a year ago. The significant margin expansion was supported in sum by three key elements. One, JD Retail's gross margin expansion. Two, effective marketing programs with better ROI. three, significant improvement in JD Logistics operating efficiency, which improved both its third-party operating margin and JD Retail's fulfillment expense ratio. Our non-GAAP net income attributable to ordinary shareholders in the second quarter also set a new record at 3.6 billion RMB, with a 2.4% net margin, up from 0.4% in the same period last year. Our free cash flow improved 39% year-over-year to RMB 18.3 billion during the quarter, driven by a healthy operating profit in a seasonally strong quarter for cash flow.
Now that the one-time impact of the marketplace settlement change has phased out for four quarters, our free cash flow for the trailing 12 months has returned to a solid RMB 7.4 billion. Let's turn to our third quarter outlook. In light of the accelerated growth momentum in the second quarter and July, we expect net revenue to grow between 20% and 24% on a year-over-year basis. We remain optimistic about the Chinese consumer market and JD.com's competitive market position, despite uncertainties with the macro environment. Finally, I would like to comment on our full-year earnings outlook. Our non-GAAP net income attributable to ordinary shareholders in the first half of 2019 was the RMB 6.8 billion , with a 2.5% net margin.
In addition to economies of scale from JD Retail business and a rapid improvement in logistics operating efficiency, we also benefited from the newly enacted VAT tax reform, as well as a couple of other items under other income, which totaled RMB 1.8 billion during the first half, that may be non-recurring in nature. We intend to reinvest these extra gains back into the business in the second half to drive our lower tier cities strategy. Therefore, we are revising up our 2019 full year non-GAAP net income guidance to be between RMB 8 billion and RMB 9.6 billion , which reflect our second half investment strategy and our anticipation for continued macroeconomic uncertainties. The new margin guidance is above the historical peak level in 2017, and we believe our reinvestment strategy in the second half will help drive sustained growth and continuously rising profitability into 2020.
Overall, we are proud of the first half results, which speak for the success of the series of strategic and organizational changes we have implemented over the past several quarters. We hope you share our confidence in our unique supply chain capabilities and deep competitive moat around our scale and technology-driven business model. This concludes my prepared remarks, and we can now move to the Q&A session. Thank you.
The question and answer session of 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. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Ronald Keung from Goldman Sachs. Please ask your question.
Thank you. Thank you, Richard, Xu Lei, Wang Dong, Sidney, John, and Jia. Congratulations on the strong beat and growth acceleration, even in this rising bigger revenue base. My question will be more on the investments and also your long-term margin commitments. Given that, as Sidney, you've said, the full year guidances has been lifted, and the implied second half margin will be roughly between, calculated implied, will be 0.3%-0.9%. What do we see as the major investments in the second half? Particularly, Richard mentioned about fresh AI, cloud, big data. Just want to see what are the key moving parts that we expect would be spending higher in the second half, leading to this more conservative sequential margin outlook into the second half.
Given the full year commitment around 1.4%- 1.7% net margin, how are we seeing the longer-term normalized margin potential of the business, particularly given the very strong first half? If we see the net margins of Walmart are between 3%- 4%, do we see this moving up to these sort of trends in the next two, three years or normalized margin potential of the business? Thank you.
Sure, Ronald. Let me try to answer this. Well, first, I mentioned earlier that the first half, we had a couple of one-off items that we intend to invest roughly RMB 1.8 billion on these. That would have an impact, which will be invested mostly in the lower tier city initiatives. Not only on the new WeChat platform, but also on logistics that we actually intend to further penetrate down into those lower tier city areas to enhance customer experience. The intention is to position ourselves for stronger growth or sustained growth, well into next year and the years beyond. Our margin commitment has been quite clear that we want to improve our margins consecutively on a year-over-year basis.
as Richard also mentioned earlier, we are in a much better position to generate these steadily improving profit, because some of our major investment areas have now bearing fruit and are turning profitable. the logistics and fulfillment expense ratio example that I highlighted was just one of them, where we actually went through a series of investment phases. Some of them are really overlapping on top of each other. for quite a few years, you couldn't tell whether we are ever going to have operating leverage, or we just simply continue to increase the expense ratio. by this quarter, it's a good illustration that the fulfillment expense ratio actually went back to a historical low level since our IPO. clearly, we still have room to further improve because JD Logistics is still in an investment phase.
That's why it's just broke even with a slight profit. Obviously, going forward, as it completes its investment cycle, the business should be much more profitable. Which will, in turn, also drive further operating leverage on the JD Retail side. just coming back to your question on long-term profitability, we maintain our position that over the long term, our first-party retail business should generate 1%- 2% point higher net margin than the best run offline retailers. layering on top of that, we'll have our marketplace business, which generate a much higher accounting margin. combining the two, we should be generating somewhere in high single digits in combined net margin for the business. that, as also mentioned by Richard earlier, that we have always committed to a long-term margin trend that will ultimately reach that level.
Thank you.
Your next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please ask your question.
Good evening. Thank you for taking my question. Just a follow-up question on lower tier city investment and expansion. Could you elaborate on how you will compete in the lower tier cities, including how to position JD Pingou versus your more traditional JD mortgages, as well as versus your key competitors? Which are you using a different strategy, especially from sourcing from the manufacturers? Thanks.
我是徐雷，我来回答这个问题。关于在低线城市的话，之前的几份财报里面跟大家分享过，我们首先是要找到适合低线城市的相应的货品。确实在早期的时候，我们的平台的商品更多的是符合一二线为主的大城市的消费者。那么随着今年我们在低线城市的关注，我们会在相应的货品上面会做一些突破，例如说会有跟品牌商一起开发一些BOM成本的商品。比如说在中国国内有很多产业带，那么产业带的工厂他们也非常地需要通过京东这个平台能够将商品售卖出去。包括我们还会跟品牌商一起做一些包销和独家产品，这些都是通过商品的丰富性去满足消费者的需要。
Xu Lei of JD Retail. Regarding the lower tier city questions. As I have shared in our past financial report, the first question we need to address in this matter is to find the most fit products for our lower tier city customers. Admittedly, in the past years on JD platform, we offer more selections of products that better fit our first and second tier city customers. Since this year, we have step up efforts to select products that fit better to the lower tier cities. We are working with our brand partners to build up the supplies of our products. For example, the POM, the more cost-effective products, and also work with the industrial factory producers to produce the most specific products to sell to our lower tier cities.
At the same time, we also diversify our businesses on the exclusive sales and exclusive products and more customized products. These are all the efforts we want to diversify our offerings to our different segments of our customers.
第二点，除了上半年我们做的一些工作以外，我们今年下半年应该在10月1号前后，我们会将升级跟腾讯合作的微信一级入口的资源，将微信一级入口，全新打造一个专门针对微信生态，尤其是女性和低线市场的一个新的模式。这种方式将会采用低扣点的方式，吸引更多的商家和更丰富的商品，去满足低线城市消费者的需求。
Secondly, build on the efforts we have done in the first half of the year, we will launch an upgraded WeChat first year access point around the October 1st period of time. This is the efforts we're going to diversify and enrich our WeChat ecosystem and provide a new model that attracts lower tier cities, especially the female users and low-income users. We're going to also carry out the policies with some low take rates to attract the best products and the sellers to fit the need of the lower tier customers.
第三点，您刚才提到的京东原有的自营模式，我们认为也是我们面向低线市场的一个重要的手段和能力。我们会跟京东物流一起合作，为我们的商家提供综合的这种解决方案。我们在保证用户体验的同时，去能够获得他们对京东的认可。同时我们也会利用好我们的开放平台的模式，让更多的商家通过这种模式能够接触到我们低线的消费者。
Thirdly, we will also leverage our advantages of our 1P platform. We think this is our best abilities and our approaches to touch our lower tier city customers. Together with our abilities and our logistics, we are able to provide an all-around solution plan to our merchants. At the same time, we keep the premier users experience. We believe we're gonna win our merchants' trust. At the same time, we're gonna also use our opening strategies and open platform to provide the best support to our merchants to go together with us down to the lower tier cities.
在这里我想再分享几个相应的一些数据。第一个是我们目前来自于低线，就是三到六线的用户的增速是高于一二线城市的。
Also, I'm gonna share a few data with you. According to our statistics so far, the new users growth on our platform from the lower tier city, that is the third to sixth tier cities, the growth rate is much higher than the first and second tier cities.
第二个是我们现在的新用户当中，有将近七成是来自于低线城市的。
Secondly, the number of overall new users coming from the lower tier city has taken up 70% of our old user base.
第三个是按照我们的收货地址去看的话，整体用户里面超过一半是来自于低线城市的。
If you filter it by the recipient's address, about 50% of the users are coming from the lower tier cities now.
最后一句话就是，我们实际上低线用户的表现应该比外部看到的会更好。当然我们内部觉得我们还会有更好的表现。
Lastly, the performance of lower tier city customers are really exciting, and internally, we believe they can do better in the future.
谢谢。
Thank you.
谢谢。
Your next question comes from the line of Alicia Yap from Citigroup. Please ask your question.
Hi. Thank you. Good evening, management. Congratulations on the strong result. Thanks for taking my questions. I have some follow-up questions on Sidney, when you mentioned about this one-off profit, this RMB 1.8 billion that you plan to reinvest into the second half. Can you maybe clarify a bit to us in terms of in the first half, how much of it, the one-off, is recognized in the first quarter versus the second quarter? Then how much of this RMB 1.8 billion it is more than one time in nature that is not recurring? For the second half, when you try to spend this reinvestment amount, how should we think about the 3Q versus the 4Q level? Like which quarter will be more heavily weighted?
With that, as we go into the next year as JD commitment to continue to improve margins on a year-over-year basis, how should we think about the first half margin in 2020 versus the second half? Thank you.
Sure, Alicia. For the RMB 1.8 billion, you could roughly divide them equally into the first two quarters. Roughly RMB 0.9 each. For the second half, we are already implementing some of the reinvestment strategies. Also, as Ronald was quick earlier in back calculating the ratio, I think in terms of guidance, it's very hard to just back calculating into exact amount because we still have to anticipate how the competitive environment will be, how the macro environment will be, and also provide enough flexibility for the business leaders to react and jump onto good opportunities to put capital to work. Obviously we will have to build in some room for all of these factors. If you want to do a rough allocation, then I would think Q3 should somewhat better than Q4.
As one is that we will introduce the new WeChat platform somewhat towards the end of Q3, and also Q4 will have our Double 11 promotion season. again, this is very preliminary guidance for the second half, and we do hope that we will give you more clarity as we move into the fourth quarter.
Your next question comes from the line of Tina Long from Credit Suisse. Please ask your question.
Sure. Thank you. Hi. Good evening, management. Thank you for taking my questions, and congratulations on the good results. I have a question more on the logistics side. In your segment reporting that we have new business that the operating loss was about CNY 2 billion in the second quarter. I want to have a little bit more details on the loss breakdown by logistics, by technology, and also probably overseas investment. In the meantime, still on the logistics side, because Sidney just mentioned that in second quarter, we have achieved GP margin breakeven for logistics. I want to know for the full year outlook and also probably will we have a further improvement like operating margin breakeven in 2020? Also how are we gonna achieve that? Thank you.
Okay. Let me take the first question and then Zhenhui can maybe address the second one. The first one on segment reporting, it's a half-year data. The number you saw is for the first half. The largest operating loss from the new businesses now is in the technology initiatives. Followed by logistics, which still had meaningful non-GAAP losses in Q1, but improving. Q2 was roughly around breakeven, and then followed by the overseas business. Overall, you have seen the loss ratio has come down significantly from the first half of 2018. Then also note that the revenue for new businesses has grown quite tremendously over the first half as well. We are seeing significantly narrowing loss ratio on these new businesses.
Wang of JD Logistics. On your second question, as you show on this financial report, our external delivery orders non-GAAP net revenue has broken even, and this year we'll continue to optimize our operations and especially to continue plan our lower tier city markets and improve our users experience in the first to third tier cities. We will make our efforts to ensure this year's profitability will be greater than last year.
Your next question comes from the line of Thomas Chong from Jefferies. Please ask your question.
Hi. Thanks management for taking my questions. I have a question about our user growth trend. How should we anticipate the user growth in the next couple of quarters or in the coming years as we penetrate into lower tier cities? Should we expect a re-acceleration in the user growth? Thank you.
Xu Lei of JD Retail. As I shared in the last quarter, the growth of users are mainly split into two parts. One is the new users growth, which will be our emphasis to work on in the following time. At the same time, we also pay attention to the repeated frequencies of the buying activities of our existing users. You can see for the first half of the year, we have seen an increase of our new user acquisition. At the same time, the existing users are becoming more and more active, and their overall ARPU value continues to go up. Secondly, since earlier January this year, in the JD group and also JD Retail, we have emphasized our efforts on the user's experience and making NPS and et cetera indicators as important performance indicator.
For the first half of the year, we have seen the NPS value grow significantly. This is the major approach for us to ensure JD's reputation and the brand image in the industry and continue to win our customers' hearts. Since early this year, we came up with the concept of quality growth. We want to make sure that no matter if they're new customers or existing customers, they will have sustainable interactions with us. We are reluctant to use some short-term measures and subsidies to drive short-term customer shopping behavior. We don't think it's sustainable and will be a good investment for the long term.
最后一点，我想再补充一个我们观察到的信息。确实很多低线的消费者，刚开始的购物是对一些客单价相对较低的商品，开始成为一个电商或者叫网购的用户。但是随着他们对网购的熟悉和了解以后，我们明显能够看到，无论是在我们自身的平台，还是通过行业的数据，能够看到他们在线上的购买，最终还是倾向于高品质的商品。相信这个是我们平台还是坚持的一些我们的能力和一些价值。
just one more observation I want to add on. We do realize the customers from the lower tier cities, their first engagement with e-commerce may start with some very small ticket size, but in the longer run, as they get more accustomed to the online shopping behaviors, they will have a stronger pursuit for higher quality products. This has been shown in the data on our platform and also some external data. we strongly believe that this is the value JD will stick to and create for our potential customers in the long run.
谢谢。
Thank you.
Thank you. Your next question comes from the line of Grace Chen from Morgan Stanley. Please ask your question.
Hello. Hi. Thank you for taking my call. Congratulations on the strong results. My question is about the online advertising business growth potential. This business has obviously been growing very fast and has been one of the key drivers of JD's margin expansion. I wonder whether you can help us elaborate a bit more on the details about the online advertising business, such as the ROI's pricing customization. Especially, how do you compare yourself with other e-commerce peers in terms of the growth potential in the online advertising business? Thank you.
你好，我是徐雷，我来回答这个问题。第一点，可以看到我们上半年的广告收入的增长，主要是基于我们在AI和大数据这些广告技术方面投入的不断的改善。今年我们的重点是结合我们二季度的首页的改版，去持续地优化我们的算法。同时上半年我们可以看到我们的商家广告渗透率在不断地提升，单一商家的广告的UP值也在提升。而且目前我们也不会再考虑额外地增加广告流量池，尽管新版首页的改版以后给了我们充裕的广告流量池的可能性。但是我们认为现在还是先通过技术去平衡我们的广告和零售业务。
Xu Lei of JD Retail. For the first half of the year, our advertising revenue is mainly driven by our improved technology, namely the AI and big data. In Q2, we have revamped our main app and continued to optimize our algorithm. The rate of merchants who are using our advertising system continued to grow, and their ARPU value also grows. At this stage, we don't plan to increase our advertising inventory because we believe that though the revamp of the main site gave us this possibility, but we'd rather keep a balanced relationship between our advertising revenue growth and our user experience and retail operations.
第二点，我们可以看到，今年上半年整个中国广告市场本身遇到跟经济相关比较大的增长的压力。但因为我们是一个零售平台，我们的广告产品是服务于我们的供应商和商家的。同时，我们也可以直接转化为销售。所以说我们的广告效果是可衡量，也可以优化的。在目前整体的情况下，反而我们认为我们会得到整个市场更好的青睐。从目前的广告主的数量和质量来看，也验证了这个看法。
we do realize that because of the overall macro environment, China's advertising market is under great pressure. for JD as a retail platform, we are aiming to provide our advertising products to serve our advertisers and merchants. we do have the competitiveness and advantage to give back some direct benefits and ROI and conversion rates, which give us an upper hand in this difficult time. this has been reflected in the number of new advertisers and the feedback from our merchants.
好，谢谢。
Thank you.
Your next question comes from the line of Alex Yao from JP Morgan. Please ask your question.
Thank you, management, for taking my question. A follow-up question on the reinvestment and into the second half. After the reinvestment and the potential impact on the bottom line, which of the segment will face more pressure into the second half? Is there a retail business, the logistics, or the new technology part? Also, will that affect our CapEx to reaccelerate into the second half? Thank you.
Yes. The overall investments, they're more in the operating OpEx or gross profit as we give back to consumers through promotions and also as we launch the new platform as a new marketplace. We would not charge much of a take rate. It will take some time for the advertising to catch up. These will be the main investment areas. Also mentioned on the logistics side, it's also through penetrating down to more lower-tier cities so that we can improve the user experience and create the unique logistics experience for our new lower-tier city customers. We do not see a major increase in CapEx, but we mentioned in the past that CapEx has been broken into two categories. One is for the properties built for sale, and one is for the other regular CapEx.
On the first category, if we do see good opportunities, for example, in tier 1 cities, we will clearly take the opportunity. On that part, it's less predictable, but overall, CapEx should be under control.
Your next question comes from the line of Natalie Wu from CICC. Please ask your question.
Hi. Thanks for taking my question, and congratulations on a very solid quarter. My question is regarding the JD Retail GP margin. It has a very robust of 76 basis points improvement in the second quarter. Just wondering if we exclude the contribution from the VAT tax reform, what will the number be? If we try to break it down, how much of the improvement comes from the 1P business, and how much from the contribution of the marketplace and advertising business? Looking forward, which one will be the larger driver for the GP margin improvement of JD Retail in the future? Thank you.
Okay, sure. the VAT tax rebate is actually not very easy to separate out, even though when the tax was enacted at the beginning of April, the existing inventory will have some benefit, and then also the new purchases. the issue is many suppliers and brands will also adjust their pricing strategy. Many of them actually demand a lower official price. it's actually hard to quantify exactly how much is the one time of benefit. we clearly recognize there's a meaningful element in Q2, especially from the existing inventory side. because it's not a very clear-cut benefit, it's a result of a lot of interaction and discussions between the retailer and also the brand and also our promotion strategy. even without this one-off benefit, internally we've analyzed that our 1P business should still have margin improvement in Q2.
Over the longer term, we mentioned that both 1P business growth margin and advertising should contribute quite significantly to our future margin expansion. If you looked at the margin analysis we did, especially the one that comparing our operating expense ratio with the top offline retailers and also the gross margin with the same large retailers, you will see our gross margin was substantially lower, roughly 10 percentage points more lower than the offline players. There is plenty of room for margin expansion as we continue to increase our scale and realize better and better purchasing price, and also more customized product offerings. We are actually seeing improving mix in terms of customized products from our leading suppliers. These will all help on both offering our customers the lowest price, everyday low price, but at the same time continue to improve our margin.
Your next question comes from the line of Jerry Liu from UBS. Please ask your question.
Hi, thank you very much. Two questions from me. I think the first is on electronics and home appliances. In the first half of this year, we saw a re-acceleration in the growth rate there. Just wanted to see if there are any specific drivers that help that, and also whether the VAT or income tax cuts, anything like that helped. Second, just on Pingou. Could we talk a little bit about the strategy to make that an independent unit? Thanks.
Okay. I'll take the first one, and maybe Xu Lei will take the second one. On electronics, we mentioned actually the macro headwind started in the second half of last year, so we already saw some slowdown. The current growth rate in our mind is actually rather normal. We have always maintained that as a market leader, we should be able to continue to grow well way above the industry average as we continue to take the benefit from the outsized consumer mindshare and also our superior customer experience. Yeah. On the other hand, the VAT tax does also help in terms of providing better value to our customers.
Let me add a few more things on the category of electronic home appliances. We have realized a few factors that will contribute to the growth of these categories, such as the real estate market is recovering, especially in the third to fourth tier cities, and there are also some regional reasons as well as the government's policies for the subsidies. These are all conducive for this category's growth. Second, in terms of the products, before on our platform, we have more mid-range priced products that are more suitable for the tier 1 and tier 2 consumers. In this year, we continue to enrich and diversify our products, in terms of the high-end and also the low-end product to cater to the different needs of our customers.
For example, during our 618 Shopping Festival, we have collaborated with a number of high-end brands, and we found the sales result is very good. Thirdly, since last year, we have also exploring some offline business models, either our 1P platform or our strategic collaborations, and all these various forms of offline collaborations are also conducive for this category's growth. Lastly, in this category, by leveraging our 1P platform abilities, we are gradually opening up our abilities, data, and services with our brand merchants. We're going to continue to strengthen the collaboration with the brands and improve our supply chains. These will be the direction we'll continue to improve to drive the growth of this category. Thank you.
We are now approaching the end of the conference call. I will now turn the call over to JD.com's Jia Dong for closing remarks.
Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support, and we look forward to talking with you in the coming months.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.