Earnings Call: Q4 2018

Feb 28, 2019

And thank you for standing by for jd.com's 4th Quarter and Full Year 2018 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'll now turn the meeting over to your host for today's conference, Weiwei Li. Thank you, operator, and welcome to our Q4 and full year 2018 earnings conference call. Joining me today on the call are JD dotcom Group CEO, Richard Liu Mr. Xu Lei, CEO of JD Retail Mr. Wang Junhui, CEO of JD Logistics Sidney Huang, our CFO and John Liao, our CSO. For today's agenda, Mr. Huang will discuss highlights of the Q1 and full year 2018. Other management will join the Q and A session. Before we continue, I refer you to our safe harbor statement in the earnings press release, which apply 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 direct comparable GAAP measures. Finally, please note, otherwise stated, all the figures mentioned during this conference call are in RMB. Now I would like to turn the call to Sidney. Thank you, Lee Yu. Hello, everyone. Thank you for joining us today. We are pleased to deliver another strong quarter with solid top line and bottom line results. Our net revenue growth reached the high end of our expectation and our non GAAP net income increased by 67% from the same quarter a year ago. During the Q4 of 2018, our net revenues grew 22.4%, a solid performance on top of an exceptionally strong Q4 in 2017, despite relatively soft consumption in large ticket electronics and appliance categories. Revenues from general merchandise categories grew 38% during the quarter, driven by home goods, skincare and cosmetics categories. In addition, fulfilled marketplace GMV again grew over 40% year over year as we continued to improve marketplace operations. Net service revenues grew by 45.7% year over year, driven by JD Logistics' 3rd party revenues and advertising services. For the full year of 2018, our net revenues increased by 27.5% and our total GMV grew by 30%, as we continued to take market share and outperform the industries we participate in. Revenues from general merchandise categories grew over 42% during the year as a result of more diversified high quality product selection and our superior customer experience. Net service revenues grew over 50% and contributed nearly 10% of our total revenues in 2018, up from 8.4% in 2017 as we leveraged our retail infrastructure to expand into the business segments. Gross margin in the 4th quarter was 14.2%, compared to 13% in the Q4 2017. The margin expansion was attributable to the continued margin improvement of both JD Mall and JD Logistics. JD Mall gross margin increased over 60 basis points, mainly driven by economies of scale from the 1P business, up 38 basis points in Q3, as well as solid advertising revenue growth. JD Logistics' 3rd party business also achieved significant gross margin improvement during the quarter as it continued to grow its scale and optimize its operations. On a full year basis, non GAAP gross margin improved from 13.8% in 2017 to 14.1% in 2018, mainly driven from JD Mall gross margin expansion of 38 basis points during the year, partially offset by investments in new businesses. Fulfillment expense ratio in the 4th quarter was 6.6%, down from 7.2% in the same quarter last year, thanks to improved utilization of our logistics capacity and higher workforce productivity in the seasonally high quarter. During the Q4, our R and D expenses increased 70% from the same quarter of 2017, but were relatively flat as compared with Q3. For the full year of 2018, R and D expenses increased over 80% to RMB12.1 billion as we hired top R and D talent around the world to enhance our technology infrastructure and implement our AI driven digital strategies. With key leaders and various levels of staff now in place, we expect R and D expenses to stabilize in 2019. Our marketing expense ratio was 4.7% in the Q4 2018, up from 4.3% in the same quarter a year ago. And our 2018 full year marketing expense ratio was 4.2%, comparable to the 2017 level. Our 4th quarter and full year G and A expense ratios were 1% and 1.1%, respectively, comparable to the same periods in 2017. Coming to the bottom line, our non GAAP net margin in Q4 net income in Q4 was RMB750 1,000,000 with a net margin of 0.6%, up from 0.4% in the same quarter a year ago. The improvement was mainly supported by JD Mall's operating margin expansion of 52 basis points during the quarter and the reduced losses at JD Logistics 3rd party business. On a full year basis, non GAAP net income attributable to ordinary shareholders was RMB3.5 billion with a net margin of 0.7%, down 62 basis points from 2017, largely due to investments in new businesses. However, as we committed in our revised guidance in August last year, the operating margin for JD Mall remained intact, improving from 1.4% in 2017 to 1.6% in 2018, despite a 34 basis point increase in R and D expense ratio within JD Mall. This margin improvement demonstrates the resilience of our core margin trend, which is driven by the retail economies of scale and continuous improvement in operating efficiency. On the last August earnings call, I mentioned that we had established a property management group, not only to develop and manage our state of the art facilities, but also to monetize these assets to compensate for our earnings shortfall last year, unlock value for our shareholders, while optimizing our capital structure. I'm pleased to share with you that we have established our 1st logistics property core fund in February in partnership with GIC, the Sovereign Wealth Fund of Singapore, and have just signed a definitive agreement to transfer a portfolio of modern warehouses valued at approximately RMB10.9 billion to the core fund. The deal will close in several phases with the majority to be completed in 2019. And our property management group will continue to manage the assets for the current income stream and receive carried interest for future value appreciation. The estimated IRR from the transaction will be in excess of 17%, which is the annual return on these investments since we began developing these facilities from as early as 2012. If we allocate this annual return to the corresponding years, we would have earned at least RMB1.5 billion in additional profit in the year of 2018 alone. The GIC Core Fund transaction demonstrates our ability to source, develop, manage and monetize well located high quality logistics facilities. As we are developing more similar projects that are available for future disposition, We have designated CapEx related to these developments in a separate line in the cash flow free cash flow table and any future cash proceeds from these asset sales will also be disclosed in this section. So you can make better judgment on our free cash flow situation. Now let's discuss our financial outlook. In light of the relatively soft demand in certain durable goods categories, we expect 1Q 2019 net revenue growth to be between 18% 22% on a year over year basis. For the full year of 2019, we expect our non GAAP net margin to be between 0.8% and 1.2%. This margin guidance excludes the development profit from our property management business, which will add another 0.5% to 0.6% to our GAAP net margin. Lastly, one quick note on a disclosure change to the GMV data. Beginning this year, we will no longer disclose quarterly GMV, but we'll continue to disclose full year GMV, which is consistent with our major industry peer. As we discussed in the past, the GMV data currently disclosed are for industry comparison only and are not meant for financial analysis purposes. As we expand our service business, GMV is also increasingly less relevant to our revenue streams in the future. This concludes my prepared remarks, and we can now move to the Q and A session. 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 Our first question comes from the line of Ronald Keung from Goldman Sachs. Please ask your question. Hi, congratulations to the strong results. Thanks, Richard, Xu Zhong, Wang Zhong, Sidney, John and Reiyu. In light of the very strong results, but I just want to hear our thoughts into our GMV growth targets, how many categories when we think about the growth. Actually thinking about from a user base, how do we see user growth trending for 2019 and some of the strategies in driving that? And on that front, in driving traffic, could you also give us any updates on your JD Tencent agreement? Any rough timing that we would see or hear any updates from the 2 partners and aims to achieve on user growth? Thank you. Sure. So maybe I will first address the category question and then Xu Lei can discuss the user question and then we'll discuss the Tencent question. So on the categories, as we mentioned in the past, first, we are a full category retailer with the largest scale in China. We continue to believe this put us in a very unique competitive position to expand across the categories. This has demonstrated in our recent results and also results in the past years. So we do expect solid growth above the market growth across all of our key categories going forward. Now, our overall growth rate may be impacted by certain durable goods categories, but as I mentioned in the past, within these categories, we continue to significantly outperform the industry. So we are confident that growth should still be intact from a per category basis. So let me take the question of user base in 2019 from 2 aspects. The first one is about the retention of existing users. In 2018, our average revenue per user has been on the rise mainly due to 2 factors. 1 is product plus category marketing and also personalized user interface. For new customer, new user recruitment, we will do our efforts to follow in 3 aspects. The first one is supply chain. We will try to provide the right product offerings to the right tier cities. And second one is that we will explore new marketing scenarios, for example, community and campus and offline experience stores. In that way, we provide better products and service to new customers to attract new customers. And also, we will analyze our marketing expenditure structure and try to tip our resources to those more efficient and effective marketing investments. Yes. With regard to JD Tencent's relationship, both parties are fully committed to such partnerships of importance to both parties. And more details to follow. Thank Our next question comes from the line of Eddie Leung, Bank of America. Please ask your question. Good evening. Thank you for taking my questions. My question is more about the improvement in gross margin or the trend. So just could you give us some comments on the following two factors? One is, I remember you mentioned that the electronics and appliance category has been under some industry pressure and that's your previous. And historically, one driver for your gross margin is increasing negotiation power and bigger scale, so that you can get larger discounts and rebates from your suppliers, especially in the electronics appliances. So just wondering if these change, these macro change would affect the pace of the scalability and how would that affect our gross margin? And then separately, again, on gross margin, Sid, you also mentioned that JD Logistics gross margin improving. So you're just wondering if we have any broad time thing that we would expect the subsidies to the 3rd party users, corporate users would be reduced and hence we would see potentially positive gross margin from JD Logistics. Any comment would be helpful. Thank you. Sure. So on the gross margin, I mentioned even for the electronics and home appliance categories, we remain above the industry growth. And namely, we definitely see double digit growth, for example, in Q4. And the industry, on the other hand, is in low single digit. So the growth will continue to drive scale economies. In fact, when the industry is slow, as the largest retailer, the largest most important channel, we may gain even more economies of scale when we discuss with these brands, for example, helping them to clear inventory and also order more unique customized product models. So there are various ways to improve gross margin without compromising the consumer facing price. We will remain as the most competitive price provider a customer point of view. On JD Logistics, we mentioned that in the early stage of its business, we had some early discounts to attract the major customers. But after the initial phase, the pricing has been moving back to a more normalized level. So right now, most of these clients have passed the initial discount phase. So that's why the margin gross margin for JD Logistics has been improved quite significantly. Thank you. Our next question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi. Good evening, management. Thanks for taking my questions. I have questions on these annual active customer accounts. Understand that the company actually disclosed on the quarterly active customer is experiencing year over year growth, right, for the Q3 and Q4. So just wonder if we looking at it on the quarterly active customer base on a sequential basis is what is the growth rate from 3Q to 4Q? And should we assume this kind of flattish annual trend to only normalize later in the Q3 of 2019? Thank you. Right. So yes, the Q4 quarterly customer accounts also increased sequentially, roughly 6% in Q4. So there is still upward trend in active customer base. I mentioned in the past, this is the divergence of these two data points is really because we are seeing improving quality of the new customers this year, while the customers in the previous 12 months, we did see more one time accounts. So that's why we singled out the recent two quarters just to show our customer growth is still relatively healthy. Thank you. Our next question comes from the line of John Choi from Daiwa. Please ask your question. Thank you for taking my question. Cindy, I have a question on your non GAAP guidance for 2019. So it seems like your R and D expenses are going to be flattish and assuming other we see operating expenses across the line of operating OpEx. And then hopefully with better improvement in JD Mall and also from improvement on the 3rd party logistics, shouldn't we be seeing more leverage on your margin? So can you give us a little bit more color on the margin guidance on the breakdown there? And just if I could follow-up on your it seems like your merchant account is now a bit higher in the Q4 versus Q3. Has there any can you give us an update what has changed in terms of the 3rd party merchants? Thank you. Okay. So Xu Lei will answer the merchant questions. So on the Q1, just to take R and D as an example, when I say the R and D expense will stabilize in 2019, it's stabilizing at the Q3, Q4 level. So on a year basis, if you take that run rate, you will still see year over year probably above our revenue growth. So that's one factor. Obviously, we will continue to invest in the various initiatives. We'll be on a more selective basis with more financial discipline, some balanced approach this year, but we will be in select areas where we think it's really critical to company strategy, we will continue to invest very aggressively. So at the beginning of the year, we will rather start with a relatively conservative guidance. Clearly, the margin will be better than last year. We do hope we can give you more upside over the course of the year, especially when we have better clarity on the macro trend. Thank you. Our next question comes from the line of Jin Yoon, New Street Research. Please ask your question. Hi, good evening guys. I think there is somewhere around 700 basis point delta between online sales and GMV in the quarter. Just kind of wanted to gauge what that delta will look like going forward. I understand that you won't give GMV numbers, but it would be interesting to hear kind of what the delta will look like for the upcoming year as well as is there how much material impact are you seeing from your Ping Go business or how much are you seeing contribution from that business? Thanks guys. So I think you're referring to the growth rate between the revenue and GMV, and the difference would be the marketplace GMV. I mentioned that our field marketplace GMV actually grew over 40%. So that would bridge the gap in terms of different growth rate of GMV and our PINGO Group Buy in Business and it has proved itself to be very conducive to helping us to reach to lower tier cities and markets. That's been very useful, helpful. As you know, as a main stream e commerce player, we haven't actually leveraged our competitive advantages in those lower tier markets. And through PingGo now, we are positioned to do that. And also, as you know, Weixin market has been growing very fast. And Pingul has given us the right tool to tap on that opportunity. So to seize the opportunity, we have established a social media e commerce department to help us to reach to lower tier cities and also our female customers. Thank you. Our next question comes from the line of Thomas Chong, Credit Suisse. Please ask the question. Hi. Thanks management for taking my questions and congratulations on a strong set of results. I have two questions. My first question is about the marketplace business, in particular the apparel category. How should we think about the trend as we head into this year? And my second question is about our 7 Fresh strategy. Can management give us some color about how many 7 Fresh stores will be opened this year? And will we pursue the 1P or 3P model going forward? Thanks. For apparel business, we have 3 clients for 2019. The first one is that we will step up our efforts to recruit high quality brands and the merchants to provide a wider choice or product offerings to our customers. Second one is that we will build smart operating capabilities. We will integrate our 1P business with our 3P business based upon our supply chain capabilities. For example, we consolidate the warehouses and stores of our merchants with our warehouses and distribution capabilities to improve the overall efficiency. Our first plan is to show the intensity with the existing customers to get more value out of the existing customer base. And also, we'll do more Hinkou group buying business with apparel category because this category is very suitable to group buying this business model. And also, if you look at the composition or the structure of our merchants in 2019, thanks to the product improvement and also system improvement of our ecosystem, the structure, the composition of merchants has increased its soundness or wholesomeness. It's quite going in a healthy direction. So we expect to see this trend to continue in 2019. So on 7 Fresh, it's still relatively young business that we started early 2018. Currently, we have 12 stores. We're still in experimental phase exploring various omnichannel strategies and tactics to prove the model. Honestly, we don't think anyone has proved this model in the market today. So we will take a more managed pace in the expansion of this business this year. Thank you. Our next question comes from the line of Elati Chanel and Renaissance. Please ask the question. Thank you and congratulations on strong results. Sydney, I wonder if you can provide us more colors for your margin outlook with the property fund impact. I'm talking about on an ongoing basis, not the one time impact. So going forward in 2019 and onwards, how should we think about the, for example, fulfillment as a percentage of revenue? And also your management fee that contribution to the revenue, so revenue and margin impact. And then quickly on the PingGo Businesses, I wonder if Shizong can provide us a long term outlook. In terms of user and the GMV contribution, where do you think Pingou can help contribute to your bigger picture? Thank you. Sure. So on the property management business, we're still in the process of closing those transactions. So only after the closing, we'll start earning the management fee. With our larger scale, we don't think the management fee will have any material impact on our bottom line at least this year. But as we continue to monetize the other assets on the portfolio, it could become more meaningful. There shouldn't be much of impact on our fulfillment expense. After all, with our large warehouse network, only about at the end of the year, roughly 2,500,000 square meters of warehouses were self built, and now we are monetizing them. So this is a fraction, roughly about 20 plus percent of our overall warehouse space. So the current monetization plan does not will not have much of significant impact on the fulfillment expense. Let me add something about group buy investment. As I already pointed out, group buying PINGO actually is very helpful for us to tap on to the lower tier cities and female client base through emerging tools or channels like Weixin. And also, it helps us to actually to activate the bottom tier merchants on our original platform because of the specific characteristics of group buying customers. For the buying business model. When we started a specialized team to deal with this project, we will provide not just existing products, but also products that actually shifted from Thank you. Our next question comes from the line of Jerry Liu, UBS. Please ask your question. Hi, thank you. Yes, my question is just on the broader macro environment. In the Q4 and so far this quarter, have we seen any improvement in the macro environment, especially as we think about consumer sentiment around big ticket purchases, such as home appliances and smartphones? And secondarily, just following up on the margin questions earlier, What's the assumption around the competitive landscape, around the competitive intensity over 111 in the 4th quarter? Thank you. Yes. So we I think if you look at our growth rate and also across the durable goods versus the general merchandise categories, the latter has not been much impacted, but the electronics appliance categories were impacted. So we do see still see double digit growth and at this point, it's tough to tell, but we are cautiously optimistic for the second half of this year when the government various incentive policies begin to take effect. So we are cautiously optimistic on the macro for the second half. Thank you. Our next question comes from Natalie Wu, CICC. Please ask your question. Hi. This is Natalie from CICC. Thanks for taking my question. Firstly, just a little bit follow-up on Ella's question. For your like 3 5,000,000 active customer accounts, how many of them are originated from Pindu model? And what's the current user conversion ratio from Weixin channel team you have you have recently announced an internal restructure in your annual meeting, I think. And in the meanwhile, you've also mentioned that for your business unit leaders, they shouldn't put too much emphasis on GMV as GMV is not a leading indicator, but a result. So just wondering if there's any new change introduced to your original KPI mechanism. Thank you. Yes. So I guess we the WeChat channel continues to be a very, very important new customer acquisition channel. Overall, we still see over a quarter of our new customers coming from the WeChat channel, We don't track how much of that from PingGo and subsequent conversion. So I think but overall, it is definitely a very important new customer acquisition channel. I'll let Xu Lei to answer the second question. Waiting market is very important for us to increase our user base. However, we still have our centralized app channels, which are equally important for acquiring new customers. And we are stepping up our efforts to come up with new Weixin products to acquire even more customers. However, I'm not in position to say weixin channel is the single most important channel for our customer acquisition. Actually, it's a lot of This is Richard Liu. I would rather talk more about our strategy on 2019 because the organization system is really very complicated to display in a very short time. In 2009, we have we will focus on 3 most important things. The first is our lower tier cities. I think some of you will know we have focused on the lower tier cities for several years. From last year, the good news is I think it was the 1st year from the lower tier cities over the Tier 1, Tier 2 cities already. And this year, we will take more products to the lower tier cities to attract more customers. Secondly is our I would say, digitalization. We will drive our whole group to the traditional management system to based on the our big data and digitalization to improve our management system efficiency to help our partners to keep growing our platform. And the last line, we will open more and more new business model to the offline business. Today, we have a Dungflash, we have home appliance, we have JD's 3 to 3 home, we have a new channel department. And from this year, we will have more new offline business model. On the first step, we will keep testing until this model is improved. We will copy as quickly as possible. Thank you. Thank you. Our next question comes from the line of Alex Yao, JPMorgan. Please ask your question. Hi, good evening, management. Thank you for taking my question and congrats on a strong quarter. I have a follow-up question on your previous commentary around user acquisition strategy into the lower tier cities. I think you guys have been doing this for quite a few years. What will you be doing differently this year versus the previous few years? Apparently, there's a new product launch such as the PingGo, but is there anything incremental you need to do to be more efficiently tapping to the lower tier or lower end consumer demand? For example, is there a change in supply chain merchandising strategy such that you will build relationship with the low end or even super low end supply chain in China? Or is there incremental requirement for you to invest more in lower tier city logistic infrastructure? Any color would be helpful. Thank you. Yes. As Julie already mentioned, I think one what you mentioned going to lower tier city, the lower priced supply chain products is actually one of our initiatives this year. Logistics, on the other hand, we are already in these lower tier cities. We already have a full coverage network. So there is not much extra to be done, but more on the supply chain side, more on the product side. And also the various onlineoffline omnichannel strategies will also help the lower tier city expansion. Thank you. Our next question comes from the line of Richard Kramer from Arete Research. Please ask your question. Thanks very much. If I just have one question, I'd like to ask the outlook for free cash flow for 2019. Is this something that's expected to again be sharply negative? And at what point and excluding the real estate transaction will JD turn to being a sustainably cash flow free cash flow generating business? Thank you. Sure. Yes. So at this time, if you note on cash flow section, I actually separate out the CapEx for development projects available for sale. So those will be turned into cash as we monetize those products. So it is the disposition will be part of the contra CapEx account because those were the cash outflow we have already absorbed. If you look at the disclosure, if you subtract this CapEx for development projects available for sale, you will already see a very different cash flow picture even for 20 18. In 2018, we had a one time event as we communicated early in 2018. So we do have confidence that cash flow in 2019 will be improved. And from both operating side, because of operating margin will improve, and also from CapEx side that now that we have also completed a major CapEx year for our technology infrastructure in 2018. So we will have less other CapEx. We will have better margin operating cash flow and we will have the development available for sale lines separated, which will see cash inflow this year. So on the combination of all the 3, we should see better cash flow this year. Thank you. Our next question comes from the line of Wendy Huang, Macquarie. Please ask your question. Thank you. I assume that most of the comments you made earlier was more on the electronic side, but not on the home appliance side. Given the government subsidy policy recently came out on the home appliance side in certain cities, how do you see that actually has driven the home appliance consumption and how actually JD benefits from that and also how sustainable this trend could be? And also to follow-up on the cash flow questions, the previous answer, so shall we expect free cash flow to turn positive definitely in 2019, given the 3 factors you just mentioned? Thank you. That they aim to encourage and motivate or stimulate the development of home appliance market. And we've been deeply involved in that. And I think it will take time to take effect and also it will take time for us to preserve the ultimate result of those policies. As you know, for home appliances category, JD has been enjoying very high reputation. And also in terms of our online market, JD enjoys a notably competitive advantage of our peers. So that's where we'll position us in a very favorable position. Also, this year, in 2019, we will open our 1D or direct sale capabilities to our partners and help them achieve our improved guest And that way, together, we can do the market even better. And also, we will increase the percentage of customized products offerings this year. That will help us to tap deeper into the lower city customers and also help us to improve our profitability. Also, we will penetrate deeper into our countries and towns. We'll open up more experienced stores and we will work more closely with the local players to get more engagement points with our customers. So on the free cash flow, we don't give guidance on free cash flow, but clearly that will be our objective. Internally, we'll be working very hard towards achieving positive cash flow. Thank you. Our next question comes from the line of Grace Chen, Morgan Stanley. Please ask your question. Hello. Yes. Thank you for taking my questions. My question is about Q4 numbers. The Q4 sales were at high end of the guidance. I'm wondering which areas performed better that led to the upside in the 4Q sales. And for the gross margin in the 4th quarter as well, it came in better than the expectation. So I believe the substantial improvements in the loss of JD Logistics was should be one of the key reasons. So if you could just share with us some more details about JD Logistics, for example, what's the gross margin status now? And what's your target for gross margin and operating margin in 2019 and maybe in the mid to long term? Any more color will be very helpful. Thank you. Right. So the Q4 growth I mentioned was actually pretty well balanced other than the couple of categories that we singled out, but they were still growing at double digits. So pretty healthy growth across all the categories. Now margin expansion was also partly due to the previous Q4 was at somewhat of a lower margin base given due to different promotional strategies. So it is obviously, we're very, very pleased with the performance. On the logistics side, it was also a very major positive contributor given the high volume and better utilization of the facilities. So it is a seasonally high quarter for us normally in Q4 in terms of utilization, but from year to year, there may be different emphasis. So that would be we gave the full year guidance for this year already. We will see steadily increasing gross margin for JD Mall and also improving margin from JD Logistics. Thank you. Our next question comes from the line of Tian Hou, TH Capital. Please ask your question. Thanks so much for taking my question. The question is related to the new customers. So what you guys mentioned, most of new customers and it comes from the lower tier cities and or some of that driven by the VTS. So I wonder, when we increase more lower tier city management than the customers, will that impact the GMV per order? That's number 1. Number 2, on an annual basis, each active or unique customer, what is the ASP on an annual basis? And also, how many times they purchase? So that's all the questions. Thank you. For PINGO customers, it's true that the initial stage actually, their particular price or the customer price is on the low side compared to our other customers. We'll pay a lot of attention to how to retain them and how much they spend afterwards. We'll sell cross categories to them. So after all those efforts, actually, we see a quite optimistic picture with the Pingel customer spend. Let me share with you the ARPU figure with the overall JD Mall, average revenue per user. Actually, last year, in terms of the time customers take to go from, say, middle stickiness customer to a high stickiness customer, actually, it's short term. That means that it takes less time for us to turn our customers into loyal customers. In the future, we will make even more intensive efforts to turn new customers into the first time customers and then to second to third party customers. Thank you. Our next question comes from the line of Xiaolong Nomura. Please ask your question. Hi. Good evening, management. Thanks for taking my question. I have just one question. Your fulfillment expense slowed down quite meaningfully. Year over year growth slowed down quite meaningfully in Q4. So I just wonder what was the driver? And heading into this year, will you see continued leverage on fulfillment expense? Thank you. Let me take this question. As you know, 4th quarter is our peak season and we've improved substantially our storage capacity and also warehouse utilization. That's why we have quite a satisfactory sales force performance rate. We think actually looking forward Thank you. We are now watching the NFT conference call. I will now turn the call over to JD.comrui Li for closing remarks. Thank you for joining us today. Please feel free to contact us if you have any further questions. Looking forward to talking with you in the future. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.