Earnings Call: Q2 2018

Aug 16, 2018

Hello and thanks for standing by for JD dotcom's 2nd Quarter 2018 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. And today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the conference turn the meeting over to your host for today's conference, Ms. Ruoyu Li. Thank you. Please go ahead. Thank you, operator, and good day, everyone. Welcome to our Q2 2018 earnings call. Joining me today on the call are Richard Liu, our CEO Cindy Huang, our CFO and John Liao, our Chief Strategy Officer. For today's agenda, Mr. Huang will discuss financial and operating highlights for the Q2, followed by brief remarks from Mr. Liao. After the prepared remarks, management will be available to answer your questions. 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 notice that unless otherwise stated, all the fingers mentioned during this conference call are in RMB. Now I would like to turn the call over to Sinek. Thank you, Wei Yu, and hello, everyone. Thank you for joining us today. Today's call, we also have our Chief Strategy Officer, John Liao, on the line. I'll discuss our financial performance first, and then John will discuss recent industry trends and the company's development strategies. We are pleased to report another quarter of solid top line growth, improving profitability for the core e commerce business and exciting developments in our smart technology initiatives. For investors to better track the progress of our business, starting this quarter, we will begin providing segment information and a more detailed revenue information on our different business lines on a semi annual basis. I believe the increased disclosure will give investors additional insights into the strength of our core business as well as our strategic initiatives. During the Q2 of 2018, our net revenues grew 31.2%. In particular, growth from net service revenues was 51% year on year, driven by strong momentum from supply chain management and advertising. In the first half of twenty eighteen, our marketplace and advertising revenues grew 37% year on year, of which commission income has been negatively impacted by the anti competitive practice in the industry, particularly in the apparel sector. On the other hand, advertising revenue continued to grow at an encouraging rate as our tech driven advertising products show improving ROI for our brand customers. Meanwhile, growth from logistics and other service revenues accelerated to 151%, mainly resulting from the robust growth from our supply chain management and technology service revenues. Investing in our 3rd party logistics service business remained a focus during the quarter. While this continued to impact the gross margin line, I'm pleased to report that loss ratio further narrowed during the Q2, and we maintained a relatively stable gross margin at the group level. Non GAAP gross margin in the 2nd quarter was 13.3% compared to 13.4% in the same quarter last year. If we look at the JD Mall, non GAAP gross margin again showed an improving trend from last year's level, reflecting steady gross margin expansion in our 1st party business and fast growth in advertising revenue. Gross margin for the direct sales business improved over 50 basis points on a year over year basis in Q2 2018 due to increased economies of scale across all key categories. During the Q2, we continued to invest heavily in R and D and technologies, which we believe will drive JD's long term growth. Our R and D expenses totaled RMB2.8 billion or 2.3 percent of total revenue, up approximately 60 basis points from the same quarter last year, mainly due to the continued investment in top R and D talent and the technology infrastructure to further enhance our capabilities in smart consumption, smart supply and small logistics. We believe these R and D investments are critical to extending our competitive strengths and transforming ourselves for the next phase of growth, driven by retail infrastructure services. Fulfilling expense ratio improved to 6.7% in the 2nd quarter, the best level in 3 years, supported by higher average ticket size in the June promotion season. Marketing expense ratio and the G and A expense ratio were 4.3% and 1.1%, respectively, comparable to the same quarter last year. As a result of our continued investments in R and D, non GAAP operating margin was 0.1% in the 2nd quarter. Excluding new businesses, the non GAAP operating margin for JD Mall was 1.1% this quarter, up from 0.8% in the same quarter last year, supported by higher gross margin, partially offset by the higher R and D spending. In the first half of twenty eighteen, non GAAP operating loss from new business increased by approximately RMB 2,000,000,000 on a year over year basis, while JD Mall further improved profitability and booked RMB 3,400,000,000 in non GAAP operating profit with a record high non GAAP operating margin of 1.6%, the highest in any 6 months period since our IPO. Our free cash flow was RMB13.1 billion during the quarter, driven by healthy operating cash flow of RMB16.4 billion, partially offset by higher CapEx in logistics real estate assets. As we mentioned previously, we are in the process of monetizing some of the logistics properties we have built in the past 2 years, which should unleash both cash flow and hidden value underlying these highly sought after real estate assets. I'm also pleased to share with you that over the past two quarters, we have built a logistics asset management company with a dedicated team of experienced professionals. This will be the 3rd separate business after JD Finance and JD Logistics that we built by leveraging the capabilities and infrastructure of our core JD Mall operations. The role of the logistic asset management company is to develop, monetize and operate JD's massive logistics property portfolio, both before and after the properties are sold to outside investors or co investment vehicles. As of the end of July, we already owned over 2,500,000 square meters of completed warehouse space, which could unlock 1,000,000,000 of RMB in value appreciation and a steady flow of future management income. And this portfolio is only a fraction of the pipeline we have signed all under construction. As a separate business, the logistics CapEx will be an integral part of its operations. Leveraging existing portfolio and a large pipeline, we expect the development, sales and management operations will begin generating significant cash flow and operating profit in the next 12 in the next 6 to 12 months. In addition, we also began to see operational progress in other new initiatives this year. For example, as a result of our retail as a service initiatives, we are now serving and empowering nearly 1,000,000 business customers through multiple offerings, including supply chain management, marketing solutions, logistics services and the technology support. We're also gaining traction with brands on the WeChat Store Mini Program Toolkits that we launched at the end of Q1. On average, we launched more than 80 WeChat stores each day for our brand partners during the Q2. Most of the new initiatives are yet to produce meaningful financial results, but we believe we have made good traction since doubling down on technology last year, and we remain optimistic about our future growth. This leads us to our financial outlook. We expect the Q3 2018 net revenue growth to be between 25% 30% on a year over year basis. Our Q3 guidance is affected by the relatively soft sales growth after the June promotion season through the end of July due to a few seasonal factors, including the seemingly increased seasonality this year and also an exceptional strong July for JD last year. We are pleased to see the growth rate has resumed to a normal pace since the beginning of August. I would also like to comment on our full year earnings outlook. As many of you may observe, there are several new changes in the industry and economic environment we are in, along with tremendous opportunities in front of us. We would like to reiterate our commitment to a stable and improving margin on our core e commerce business, while retaining the flexibility to invest in R and D and the new business initiatives that John will further elaborate in a minute. We also expect the monetization of our logistics properties, when realized, will compensate part or all of the additional investments in technology initiatives this year and next year. While this may create some non linearity in earnings improvement between this year and the next year, we hope the underlying earnings trends remain intact. This concludes my prepared remarks, and I now turn the call to John, who will highlight a few observations the industry and our plans on the new business. Thanks, Cindy, and thanks for all for joining us today. As many of you know, I joined JD as Chief Strategy Officer nearly 1.5 years ago. But today, I'm pleased to offer a view on the retail of the future related technology and JD's overall long term vision. Let me begin with the overall industry. We believe the e commerce industry is at the strategic inflection point. While it maintained healthy growth, we have observed changes taking place that may fundamentally reshape future development in 4 key areas. First, we are seeing a shift from centralization to decentralization. The boundary between retail and other industries has become increasingly blurry, which is why we define the future of retail as boundaryless. China is uniquely seeing an influx of retail innovation across industry boundaries. This includes the emergence of content commerce, social commerce, AI commerce, IoT commerce to name just a few. As such, the retail space will become more distributed and decentralized than ever before. 2nd, e commerce is moving away from focusing on mass traffic to position targeting. Retail is no longer just about selection, quality and pricing, but was increasingly about the shopping movement, providing the right products to the right customers in the right settings and at the right time. This fast evolution of technology in big data, AI, IoT and the host of areas enables retailers to interact with customers at more touch points and thus manage the business at a more granular level. We believe that to succeed, players need to move from an everyday store mentality to everyone store, meaning from the approach of a mass market to a market of 1. Thirdly, supply chain is increasingly more important than a pure platform model. Retail innovation and the supply chain capability enhancement are clearly the 2 most important drivers of success, both for online and offline retail. That's exactly why JD has emerged as a leader despite entering market later. It is also the reason why we retain dedicated to investing in smart supply chain solutions, which I will elaborate a bit more later on. 4, the 2B market has proven to hold great potentials. In China, there are many e commerce companies focused on 2B business innovation. Meanwhile, the ToBe Internet is still at its nascent stage and the recognizable market leader remained absent. By contrast, in the U. S, 2B Internet counts for 40% of market cap by some metrics. Over the past few years, we have seen start ups and venture capital shift attention towards to be market in the field of enterprise service, SaaS service and AI service. We believe that to be market will soon take off in the near future in China, which opens up an attractive opportunity for JD to extend its capability into this field. Now let me return to how we view technology. Underlying the changes I just mentioned is technological innovation, which continuously expands the possibility in retail across areas, including cost, efficiency and customer experience. Richard had made clear that there were only 3 keywords for the next decades of JD technology, technology and technology. Investing in technology will drive this company for the next decades, much like logistics, has given us a major advantage over the last decade. Our vision is to leverage technology to develop world class tech based supply chain platform capabilities, integrating both hardware and software solutions. In particular, we will focus on efforts on 3 key areas: smart consumption, smart supply and smart logistics. These three areas remain the focus of our continuing investment in R and D. Let me explain how those three areas will drive our development. Smart consumption smooth the barriers for retailers and customers across online and offline channels. The goal is to improve consumer experience at every stage, creating more engaging experience with greater customer retention and loyalty. Smart Supply improves the upstream supply chain with goal of improving the operational efficiency of REM. AI technology has been largely used on supply related application such as sales planning, dynamic pricing and inventory replenishment. As a result, we are able to improve brands' time to market, inventory control and product design. Small logistics helps get product in the hands of our consumers with better speed and lower cost. JD is still the market leaders in smart warehouse and smart transportation systems. We're also pioneering on demand warehousing, joint delivery and drivers delivery. Continuous development in these areas remain critical for us to maintain and extend our competitive advantages. Now, I would like to discuss our overarching strategy of Retail as a Service, in short, RaaS, which you might have heard us discuss about before. You'll see us covering both retail and retail infrastructure. 1st and foremost, we will continue to expand our current retail business and also focus on retail innovation. In the meantime, in the light of the future of bounded retail, JD will continue to develop and most importantly open up retail infrastructure capabilities such as smart supply chain to enable and empower more retail innovation for other countries to leverage. More specifically, we identified 3 categories of business for future growth under RAS with different growth model. Let's start with the core business. The first area where we can grow is in our flagship online retail business. We can do this both through new customer acquisition, especially in Tier 3 to Tier 5 cities, as well as expanding our relationship with existing customers by increasing the customer loyalty and spending with us. We have more than 300,000,000 high quality loyal customers, including approximately 200,000,000 who have joined us in the last 3 years. This growing customer base and expanded relationship offers tremendous room for future growth for our core business. Now let's look at our growth business. We believe we can expand our online capabilities to the categories that are under penetrated and ready for high growth rate. Internally, we call these categories 100,000,000,000 club. Those categories tend to be growing at least double the average for JD categories and they also tend to be in areas where quality is particularly important, a key strategic differentiator for JT. Some example include Fresh Group Food and Sales Tube Enterprise. Achieving the full potential of these categories will drive our long term growth in retail. Finally, we have the future business. This combination innovative retail business as well as retail infrastructure with a focus on re innovation and empowerment. In the 2C area, we will continue to place great emphasis on offline retail innovation and content commerce, social commerce and IoT commerce. In the 2B area, we will open our capabilities in advertising, store tech, supply chain and logistics and the cloud to empower brand and other retailers. Sineon has just mentioned that we have invested RMB2.8 billion in R and D last quarter with the majority investment invested in our retail infrastructure development. While the investment is significant, we have already seen some positive early results As simulation, logistics and other service revenue has increased by 150% this quarter. We have confidence that with our continuous focus, retail infrastructure can be our next core competency and product driver. In summary, JD is moving from a vertically integrated model to an open model to become a tech driven retailer and a technology based retail infrastructure service provider at the same time. There will be challenges for sure, but we believe that we have a clear vision, determination and this ability to achieve our goals. At the end of the day, delivering trust to our consumers, partners, investors, employees and broader society is something that sets us apart from our competitors. With that, we will take your questions. Thank you. Our first question comes from the line of Edward Young of Merrill Lynch. Please ask your question. Good evening. Thank you for taking my questions. I have a question on perhaps the environment that Cindy you mentioned it perhaps starting in the Q3. Could you elaborate a little bit more on some of the macro factors and seasonal factors we have seen that might affect the future growth of our business? And then related to that, would that affect our near term margin profile given the timing of the investment in various new initiatives? Thank you. Sure. Eddie, I think you were asking about Q3 sales guidance. As I mentioned, July, actually after our June 18 promotions in the last 10 days of June, we started to observe somewhat of a softness in our sales growth. But we have seen a recovery in August, basically back to the normal pace. We internally analyzed we believe there are mainly seasonality factors, partly for this year, we may have seen a stronger than before seasonality post promotion and 2 is that we did have a very strong July last year in JD. So I think it's a combination of these factors. And obviously, there's also some particular category was affected by the overall market environment. But in any event, we starting August, we have seen pretty well recovery across all categories. So we are still quite optimistic looking ahead. You asked about our view on the macro. I think we are still cautiously optimistic given that in China the overall consumption growth, consumer income and also consumption as a percent of GDP are all pointing to a continuous consumption growth for many years to come. So we are still quite bullish in terms of our growth outlook. Thank you. Our next question is from the line of Alicia Yap of Citigroup. Please ask your question. Hi. Good evening, management. Thanks for taking my questions. I have a couple of questions, if I may. Could you actually maybe perhaps elaborate and share with us any update on the closer collaborations with Google so far since the strategic investment in June? And if the in the event if Google has interest to launch the Google Shopping Action Program in China, will JD be the strategic partner to work with them? And then housekeeping question, Sidney, given all these initiatives, I wasn't quite sure. Are we still retaining the full year net margin guidance of 1% to 2%? Thank you. Okay. We're taking those Google questions. Now, of course, JD and Google are very much complementary in terms of a lot of skill set. The strategic partnerships between Google and JD were very much mutual beneficial for both companies. And of course, in the United States, JD, of course, we're working closely with the Google Shopping action to say gateway for JD to be for JD products to be listed on Google Shopping platform. And of course, on behalf of domestically, we have 170,000 high quality merchants. So JD, I mean, the Google Shopping action will be a very important gateway for those high quality merchants as well. So clearly, of course, we have greater ambition in working closely with Google in many ways. Now with this kind of collaboration, I think there will be much more initiatives coming along the way. So we'll see how this will unfold as time goes by. And on your second question on the earnings guidance, I mentioned that we'll remain committed to the JD Mall core margin being stable. And but we are investing more in other initiatives, as I mentioned. To compensate for that, we actually accelerated our monetization plan for logistics properties and which, when realized, should be more than compensating or at least compensating the shortfall due to the additional investments. But as I mentioned earlier, the timing of the monetization is relatively we don't necessarily can guarantee it will be completed by the end of this year. So that will create some non linearity in earnings trend from this year and the next year. So that I don't know if that will answer. Thank you. Our next question is from the line of Alex Yao of JPMorgan. Please ask your question. Hi, good evening management. Thank you for taking my question. Cindy, can you elaborate a little bit more on the JD Logistics Asset Management business? How does it work? How do they generate revenue, free cash flow? What is the long term vision for this initiative? And I think you kind of mentioned in the prepared remarks that the financial contribution from this part of the initiative will increase into the second half this year in terms of revenue and the free cash flow. Can you maybe elaborate on the magnitude of these contribution? Also follow-up on Alicia's question, what exactly does it mean the earning or the margin trend will be long linear towards the rest of the year? Does it mean the margin could be more volatile than the historical pattern? Thank you. Yes, sure. So we actually mentioned in the past few quarters that the reason we were investing in logistics assets is because that JD is in a very unique position to acquire the land resources by working with the government and obviously we're creating jobs for the local economies. So as a result of that effort, we have now built over 2.5 1,000,000 square meters of our own logistic properties, but we actually have a lot more than that in the pipeline. And when we have that portfolio, we are in a very good position to monetize these properties by several ways. One is to sell it to outside investors. They are already investors for this type of assets in China because and actually globally, because the logistic assets have been appreciating quite steadily and with steady rental increase. So it has been a very, very attractive asset class for many very long term investors globally and domestically. So there are already investors to purchase these assets, which will help us realize the hidden value appreciation that has not been realized currently on our financial statements. And after the transaction, we would also continue to serve as the management company for those assets. For that, we as I mentioned, we established a separate operations, which will continue to develop those warehouse facilities and they will also monetize in the sales transaction and also manage those properties afterwards. So there will be management income after we monetize those products. I mentioned that will happen in the next 6 to 12 months. So it may not have a very near term impact on our financials in the second half. And that is why I said that nonlinearity, meaning that part of that essentially the monetization could happen by next year. So then it will impact our overall bottom line forecast for this year. Thank you. The next question is from Ronald Keung of Goldman Sachs. Please ask your question. Thank you. Thank you, Richard, Sydney, Jen, Chen Wen and Ruiyu. I guess I'll ask the similar question as last quarter, but just want to hear any updates on your apparel. Particularly, we see a lot of new initiatives for JD Mall within the marketplace from just encouraging merchants to sell more targeted sales and with commissions and advertising bundled together. Just want to hear how apparel growth has it resumed back to at least positive growth in the Q2? And how we're looking on our strategy for apparel in the second half of this year as we lapse the 1 year of exclusive partnership we've seen at our competitor? Thank you. Sure. Yes. First, we have not passed the 1 year anniversary of that impact competitive practice by our competitors last year, which started in August. And so as a result, during the Q2, unfortunately, our fashion category is still under the shadow of this unfortunate inter competitive practice, which essentially uses its traffic control to force apparel merchants to stay off our platform, in fact, also other platforms. So this practice does affect our fashion business line, but also have a ripple effect on our overall profitability. But we have been working very hard through other categories to better serve our customer base or enhancing our merchant products and services. So we remain optimistic about beginning the momentum in this category in the next few quarters. Thank you. Next question is from Jerry Liu of UBS. Please ask your question. Thank you. My question is about JD Mall. I understand when we look outside of that, there are some maybe milestones, right, such as the logistics asset management milestones that may or may not fall in this year and that complicates the net margins a little bit. But if we just focus on JD Mall, how do we see the margins trending in the second half of the year versus last year versus the first half of this year? Thank you. Yes. So as we when we look at the Q2, gross margin did expand on the 1st party business over 50 basis points actually, so quite meaningful improvement. And also we continue to see robust growth in our advertising revenues. So these are the main drivers for our profitability for the JD Mall business and which we believe will remain stable margin and potentially higher margin for the remainder of the year. Thank you. Next in line to ask a question is from Song Chong of Credit Suisse. Please ask your question. Hi. Thanks management for taking my questions. I have a few questions. The first question is about our 2B initiatives. Can management give us some KPI that we may have over the next couple of years? And my second question is about 7 Fresh. Can management comments about how is the status so far? And my third question is also about the net margin question. Is there any color that the 1% to 2% net margin guidance that we still keep it as is? Thank you. Yes. I think we have now if you look at our service revenue, vast majority of that is from To Be Business segments. And but these are today majority of that is still coming from our platform business. And we have one recent example is that we have been putting a lot of investment in 3rd party logistics services or supply chain management services. And we've seen great traction in that business line. Going forward, the investment we have made in technologies will also produce what we believe very solid revenue going forward. And there are also areas that we can invest in the supply chain capability leveraging supply chain capabilities we have. On the 7 Fresh, we have a couple of stores that are we have been observing the results of those stores, which actually has shown very, very encouraging results. Overall, our sales per square meters have seen at least 3 to 4 times the traditional offline supermarkets. So we're very encouraging. We're very encouraged by the initial results and we are in the process of opening up another 20 to 30 stores in the next few months. Thank you. Next is Ms. Huandi Wang of Macquarie. Please ask your question. Thank you. My question is mainly about your logistic. So you mentioned about the appreciation value of your logistic asset. So can you give us some color regarding the self owned warehouses versus the food based warehouses among the 5 21 warehouses you are operating right now or maybe a split between the 12,000,000 square meter size, that's fine as well? And also can you give us some color on the number? Okay. The space that we own is roughly it's over 2,500,000 square meters out of the 12,000,000 warehouse space we have. So just for those self owned facilities, we can see, in fact, billions of RMB in unrealized appreciation. And there are also multiple times of that space in the pipeline. So we do see great potential in this business as a standalone separate operations. Thank you. Next is Jin Yoon of New Street Research. Please ask your question. Hi, guys. Just a couple of questions on the advertising front. I understand that the advertising seasonality is a little bit more positive in the second half of the year with 11.11 and so forth. But just wanted to see kind of how you're looking at that business, if you could share with us some metrics behind that, including the number of advertisers, ad loads or anything that you could share with us, that'd be great. And second of all, on the legit? Yes. So on advertising, we mentioned I think that today or in really in the past couple of years, our strategy has been using technology and artificial intelligence to provide a better position and better ROI for our brands. So we have seen very, very good results of that effort. And this is what's driving our advertising revenue growth as far as ad loads. And we have not been very aggressive. We have not been very aggressive in increasing ad load at all. If anything, we are under monetizing in this area. But for JD, we want to maintain the right balance between monetization and customer experience. So we will continue to adopt that approach, use more of a technology driven approach to enhance our advertising revenue. Thank you. Our next question is from John Choi of Daiwa. Please ask your question. Thank you. I just want to ask a more of a broader question regarding the overall industry. So right now, we are obviously seeing a very intense competition here. So how does the management think about the long term growth outlook we're seeing? There has been some first half was very good, particularly in the Q1 and starting from later part of Q2, we're seeing some sort of slowdown. So how should we think about the growth? And just on that, I mean, are you seeing any new retail having a negative impact to our core business? Thank you. You. I think John has elaborated quite a bit on our growth strategy that we are still we still have a very long growth trajectory for our core e commerce business and we are also investing in some of the underpenetrated categories that will produce RMB100 1,000,000,000 revenue potential. And we also have a 3rd growth curve that's focusing on the 2B business and also some of the innovation and empowerment driven businesses. So internally, we have very clear strategies and we have various task forces to drive these initiatives. And we hope as we continue to grow the core business, you will start to see other streams of revenue being generated through these efforts. Thank you. Our next question is from Binnie Wang of HSBC. Please ask your question. Hi. Thank you management for taking my question. My question is on the margin trend. If at least that you have shared with us in terms of the gross margin improvement, some of the key drivers here. Can you elaborate a little bit on the expansion in core business gross margins, which category have you been seeing more improvement here? And also you mentioned about in terms of the ads, robust growth in ads and that also helps to drive our overall margins. Can you elaborate the past year or more in terms of the advertiser that you have been seeing? Are those coming from the luxury brands or are those coming from the big brands that you have been launching? And as you mentioned in your recent success development, what type of advertisers are we seeing mostly in which category? Thank you so much. Yes, sure. So as far as gross margin drivers, we do see gross margin expansion in all categories in the second quarter. Those are driven by our scale economies as we purchase more from the brands we get natural rebates for gross margin expansion. So not only on the electronics and the home appliance categories, which we continue to see margin enhancement, but also on FMCG, for example, we are also gaining more and more scale economies with the brands. So that's essentially the driver both on gross margin and also on our ability to provide competitive pricing to our customers, which we expect will continue to drive our business for many years to come. As far as consumer for the brand advertising, it's the usual aspect, obviously, the consumer goods brands and actually brands across all industries have been working closely with us. Obviously, the plans that we work the categories were the strongest will provide more advertising spending with us. Thank you. Our next question is from the line of Natalie Wu of CICC. Just curious what's your view on the industry competitive landscape change, especially as the rising of some social e commerce platforms. Did you see any kind of impact in terms of shopping frequency for your certain category? Thank you. Yes. As I mentioned in my statement, we have seen an influx of new innovators in the landscaping. Now, however, JD is a quality Internet platform. Now with those emerging social commerce platforms, I think they provide tremendous opportunity to educate new customers. So in other words, we do see this as a consumption upgrading, Rosalind downgrading as many of you have pointed out. So, what I mean by upgrading is they provide new social commerce provide customers with the choice, meaning in the past they have no choice. Now they have a choice. Now of course, from no choice to have a choice. And then JD, on the other hand, from choice to have a better choice. So in this case, I think the customer education will provide the foundation for the future in terms of JD's growth. So I think it is so in other words, there will be new customers moving to the We We also have our own team purchase product called PingGo on our WeChat interest point. And interestingly, we are also seeing a lot of demand from both our merchants and from our customers on this team purchase product that we offer. So just give you a couple of data points. In the second quarter, the percent of merchants that participated in our PINGO program, up from 16% in Q1 to 40% in Q2. So very active participation on the high quality SKUs participating in our PINGO program. And if you look at the purchase orders for our 3P platform, the PingGo transaction volume is now over 10% already. Thank you. Our next question is from Grace Chen of Morgan Stanley. Please ask your question. Yes. Thank you for taking my question. I have two questions. The first question is about the overall consumer demand in the market. There have been some talks about demand slowdown. So would you share with us your observation of the consumer demand and if possible by segment such as home appliance, 3C, apparel, FMCG? And my second question is a follow-up of the margin guidance, specifically on JD Mall margin. We talked about J. D. Mo margin to be stable. So does that mean we are expecting to see a flattish J. D. Mo operating margin year over year? If you can add a bit more color in terms of JDMO margin trend that would be great. Thank you. Yes. So on the consumption trend, as I mentioned, other than the somewhat softer July sales, which we believe is more due to seasonality, we actually don't see much of impact at this point starting August. The growth is still quite solid. And I think we are given that the consumer income growth continued to be faster than GDP growth, employment level continues to be very high in China and also the consumption a percent of GDP is still quite low. So I think given all those dynamics, we do feel still quite optimistic about the consumption trend. On the JD Mall margin, as I mentioned, it should be remain stable with some upside throughout this year. Again, it's driven by our economies of scale in the first party business and also driven by our advertising growth. Thank you. Our next question is from Tian Hou of TH Capital. Please ask your question. Hi, Sydney and management. I have two JD Mall and Logistics. And now we know the JD Mall margin is going to be stable with some upside. So I wonder, investment side, on the logistics, how much you expect to have a margin drag? So that's on the logistics side. And also how much revenue contribution should we expect from logistics? So that's the number one question. Number 2. Yes, sure. So on the logistics margin, we are pleased to see margin the loss ratio has been narrowing in the Q2, but this year is an investing year for JD Logistics. So we do expect some losses in the remainder of this year, and we do hope the loss margin will continue to narrow. The growth rate is well over 150%. We did separate the logistic and other services in a separate line in our half year supplemental information section. So we wanted to provide some color on this new business along with a few other new business lines. So very, very strong growth rate, very good customer adoption, corporate customer adoption of our service. So very good revenue growth, but we'll continue to sustain some short term losses. Thank you. Our last question is from the line of Xiaoyuan Wang of 86 Research. Please ask your question. So we noticed in Q2, the JD Logistics launched a flash delivery initiative. So can you offer more color on this new delivery model? For example, what kind of category are you focusing on? And do you expect to expand this kind of shop more fast delivery to consumers to expand in geography expansion and also the category expansion? And currently, what kind of percentage of GMV or orders is from this model? I think my second question would be, we know your Yes. So on fresh delivery, we have been always stayed in the innovation forefront for logistics services. So this is just one of the recent examples that we established a new product, really providing customers with 1 hour delivery in selected cities. So it is another really higher service level delivery product that we offer. But even before that, we as we mentioned, for over 90% of all of our first party orders, we deliver either within same day or next day across the country. Our own delivery and warehouse network will cover well over 2,800 counties and districts. Essentially, 99.9% of the country is covered by our differentiated logistics services. So we will introduce more and more of differentiated products at different tiers of the cities providing differentiated services to our customers. Thank you. We are now approaching the end of the conference call. I'll now turn the call over to JD Kang's Ruiyu Li for closing remarks. Thank you, operator, and thank you, everyone, for joining us on the call. Please feel free to contact with us if you have any further questions. 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.