Hello. Thank you for standing by for the JD.com's fourth quarter and full year 2016 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ruiyu Li.
Thank you, operator. Welcome to our fourth quarter and full year 2016 earnings conference call. Joining on the call today are Richard Liu, CEO of JD.com, and Sidney Huang, our CFO. For today's agenda, Mr. Huang will discuss highlights for the fourth quarter and full year 2016. Following the prepared remarks, Mr. Liu and Mr. Huang will answer your questions. 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. This call includes discussions of certain non-GAAP financial measures. Please refer to our release, which contains a reconciliation of non-GAAP measures to the most direct comparable GAAP measures. Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB. I would like to turn the call over to our CFO, Sidney.
Thank you, Ruiyu. Hello, everyone. We are delighted to report another outstanding quarter of accelerating revenue growth and a record non-GAAP net profit. Our net revenue grew 47% in Q4 2016 thanks to our highly successful shopping events in November and December holiday seasons. Our direct sales revenues grew 46% in the fourth quarter, the highest since Q4 2015, led by home furnishing, food and beverage, home appliance, and baby products. Our revenues from services and others increased 58% year-over-year, supported by higher advertising revenue as well as income from financial services, which after eliminating inter-segment revenue, surpassed 1% of our total quarterly net revenues for the first time in Q4 2016. Our GMV, excluding virtual items, grew 50% year-over-year in the fourth quarter. GMV from general merchandise categories, excluding virtual items, grew 59% during the quarter.
Food and beverage, home furnishing, cosmetics, baby products were the fastest-growing general merchandise categories with apparel and footwear remaining the largest category with solid growth momentum. As a percent of the total, general merchandise GMV contributed 52.4%, another record-high level for JD Mall. GMV from electronics and home appliance products grew 42% during the quarter, led by the home appliance category. The non-GAAP gross profit increased by 58% in the fourth quarter, further demonstrating the healthy monetization of both our 1P and 3P businesses. Non-GAAP gross margin improved to 15%, up from 14% a year ago, reflecting continued gross margin expansion in our first-party business due to increased economies of scale across all key categories. Gross margin on direct sales revenue again improved over 100 basis points on a year-over-year basis in Q4 2016.
Non-GAAP fulfillment expense ratio was 7.5% in Q4 compared to 8.2% in the same quarter last year. The lower fulfillment expense ratio was mainly due to a higher base in Q4 2015 as we started to move aggressively into the consumable product category. A second factor affecting the fulfillment expense ratio was the exceptional sequential growth in the seasonally strong fourth quarter, which drove down our average fulfillment expense per order. As a result of the stronger seasonal effect and exceptional performance in Q4, all other non-GAAP operating expense ratios also saw improvement on a year-over-year basis. This is likely a one-time event in the near term but provides a good indication for potential operating leverage in the medium to long term. The non-GAAP operating margin was 0.6% in the fourth quarter compared to a non-GAAP operating loss in the same quarter last year.
Excluding the new businesses, our core JD Mall operations had an operating margin of 0.8% on a non-GAAP basis with an improvement of over 70 basis points over the same period last year, mainly driven by the higher gross margin. Our non-GAAP net income attributable to ordinary shareholders reached a new record of RMB 566 million with a net margin of 0.7% in the fourth quarter. The non-GAAP EBITDA also set another record at RMB 1.1 billion with an EBITDA margin of 1.3%. For full year 2016, our non-GAAP net margin was 0.4% and the non-GAAP EBITDA margin was 1.1%. Our free cash flow remained strong. For the trailing 12 months ended December 31st, 2016, free cash flow totaled RMB 15.6 billion, up 121% from the previous trailing 12 months. I would like to update you the progress of the JD Finance reorganization.
As disclosed in our earnings release, we just signed the definitive agreement yesterday with a group of domestic investors after receiving approval from our independent audit committee and the board of directors for the reorganization plan. Under the agreement, JD.com will dispose its remaining 68.6% equity stake in JD Finance in exchange for RMB 14.3 billion in cash and 40% of the pre-tax profits of JD Finance after it achieves cumulative profitability in the future. We will also have the option to convert a 40% profit sharing right back into JD Finance equity when it is permitted by the applicable regulations. As part of the transaction, Richard Liu, our Chairman and CEO, will acquire a 4.3% equity stake in JD Finance and will obtain the majority voting rights in the entity through his equity stake and voting proxy with other investors and the ESOP participants.
We are very pleased with the terms of the agreement. In addition to the strategic objectives I mentioned on our last earnings call, upon the transaction closing, JD.com will receive RMB 14.3 billion or $2.1 billion in cash, which will be a tremendous financial gain over the RMB 2.1 billion of capital that we have invested in JD Finance. As JD.com and JD Finance will be both under voting control of Richard after this transaction, from the accounting perspective, the deal will be accounted for as an under common control transaction with the economic gain recorded directly in the equity section of the financial statements without any impact on the P&L. Nevertheless, this is a real economic gain to our shareholders, which effectively more than offsets the total GAAP losses over the past two years.
In addition, the 40% profit sharing right does not bear any downside risk associated with the JD Finance business, but it does allow our shareholders to continue enjoying 40% of its potential upside. Therefore, from a valuation perspective, the 40% profit-sharing right is actually more valuable than a 40% straight equity interest. For many TMT and consumer-focused investors, the transaction can also remove the complexity and perceived risks associated with a financial services company so you can better evaluate the core e-commerce and the related businesses. Finally, let's discuss our financial outlook. We expect Q1 net revenue growth to be between 34% and 38% on a year-over-year basis. This guidance reflects our solid growth momentum for a seasonally slow quarter.
For the non-GAAP net income, we expect an overall non-GAAP net margin between breakeven and a +1% for the full year 2017, assuming JD Finance will be deconsolidated in the second half of this year and that the New Dada equity loss pickup is maintained at its current run rate. This guidance reflects our continued focus on the growth of our business and our commitment to gradually improving the operating margin while still maintaining sufficient flexibility to invest and compete in this highly dynamic sector. This concludes my prepared remarks, and we can now move to the Q&A session. Operator?
Thank you. The question-and-answer session of this conference call will start in a moment. 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. 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. Your first question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.
Good evening. Thank you for taking my questions, and congratulations on a very solid quarter. Just real two quick questions. The first one is about your marketing business. Could you give us an update on the progress of your marketing business about your marketplace? Are we seeing the proportion to your marketplace and 3P revenues going up from this business model? Secondly, just some clarification on some recent news about expansions into offline stores in the rural areas. Any more color would be helpful. Thank you.
Eddie, I assume you are asking about the advertising business on the other revenues. We have definitely seen our advertising business growing at a faster pace than our overall new revenue growth. However, we have also refrained from aggressively monetizing at the expense of user experience. Our growth in our advertising program with merchants and suppliers is definitely moving ahead at fast speed, but at the same time, it's quite a measured pace. For the second question on offline stores, I assume you are asking about our franchised stores that we just recently announced. It will be an extension of our rural program. It's not really for JD to set up physical stores, but we will work with local businesses to set up a franchised small stores. It's one level actually below our Jingdong Bang business model, which is at the county level.
The 10,000 stores that we mentioned is really working with villages at one level below the county level, so we can reach to broader consumers in the rural area. It's actually an asset-light business model.
Your next question comes from the line of Alicia Yap from Citigroup. Please ask your question.
Hi. Thank you. Good evening, Richard, Sidney, and Ruiyu Li. Thanks for taking my questions, and congrats on the strong results. My questions is related to your gross margins. I actually think there are some. Despite a year-over-year is an increase, but on the sequential base is actually a decline. It also seems like on the 1P margins itself, sequentially seems to be about 70 basis point decline. Is that mainly because of the FMCG categories being bigger, or is it related to the seasonal aggressive promotional discount? Related to that, how much are we targeting to spend on the sales and marketing to promote the Yihaodian and also the FMCG category? When will this category to achieve a breakeven target? Thank you.
Sure, Alicia. On the gross margin, you're right that normally in Q2 and Q4, during those major promotion events, gross margin tend to be slightly lower than the first quarter and the third quarter. That's the reason. That's why we always look at the gross margin trend on a year-over-year basis, which is more apples to apples. For the Yihaodian business, we continued to invest as part of our broader FMCG effort. We have encouragingly see that from our own business, at least the margin has been moving in the right direction, despite of the massive promotional activities that we are running during the fourth quarter, which seeing very encouraging results. The reason for that is really because of the scale economies, as I mentioned earlier.
The gross margin has seen meaningful improvement, and at the same time, we are also optimizing on our fulfillment infrastructure and also on the order economics driven by, for example, minimum order size required for free delivery. We have been beginning to see a very meaningful improvement in both growth and order economics for the consumer product category.
Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question.
Hi, good morning. Sorry, good morning and good evening, everyone. Thank you for taking the question, and congrats on a solid quarter. Two quick ones. One is regarding the strong top-line growth momentum, particularly for Q1, which is usually a seasonal weak quarter for you guys. Can you talk about what's driving the revenue momentum there? Secondly, just want to clarify that your 2017 net margin guidance is between 0%-1% that include the Dada loss pickup, which is about CNY 1.4 billion this quarter. Assuming annualized CNY 6 billion loss, you still expect to be profitable this year?
On the first quarter revenue guidance, you do see the seasonal slowdown in growth rate. I guess you are comparing our growth rate to perhaps other industry players. From our perspective, we always strive to grow much faster than the industry average. The current growth rate, in our mind is, we hope it will be even stronger. To us, this is only a very comfortable base, and with our internal effort, we can outperform. For the 2017 net margin guidance, I don't know how you get to the CNY 1.5 billion New Dada loss. As I mentioned in the past, you should assume about CNY 100 million monthly run rate in loss pickup from New Dada. That would be the run rate I'm referring to.
Please be advised, in order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. Your next question comes from the line of Mr. Alan Hellawell from Deutsche Bank. Please ask your question.
Great. Thank you very much. Just quickly, now that we've moved through a near calendar year of anti-brushing and a decline in the sale of virtual items, given that it's now rearview mirror, I was wondering if you could quantify how much of a tailwind this translates in 2017 for us. Also, would just love a little more color around the free cash flow turning negative, increase in inventory days in the fourth quarter, and what we might take on board as it relates to 2017. Thank you.
Sure, Alan. For our GMV growth in 2017, by the second quarter, basically we'll lap the enhanced anti-brushing efforts that we announced last year. All else being equal, you will see a more normalized growth rate. I can't promise you for an acceleration, but at least by that time it will be more apples to apples. We continue to work very hard to improve the quality of the products we list through our marketplace. That ongoing effort, we hope, will pay off, and both our customers and the quality merchants will benefit. On the free cash flow, as I mentioned actually on my previous earnings call, that there was some seasonal timing effect in Q3. By Q4, we effectively reversed that timing difference.
Again for cash flow, because you could easily make some impact at quarter end, any single quarter cash flow would not reflect your ongoing cash flow momentum. That's why we always like to use the trailing 12 months as a better metric to measure free cash flow.
Your next question comes from the line of Chi Tsang of HSBC. Please ask your question.
Hi. Good evening. Thank you very much for taking my question, congrats on the nice set of results. I was just wondering if you can give us an update on sort of how Yihaodian is going, both from a sort of a 1P and a 3P perspective. Thank you.
Right. As we mentioned the last quarter, actually beginning November 1st, we took over the first party business while still utilizing the Yihaodian entity and its team to run the procurement for us. The business has been very healthy. We see healthy growth on a year-over-year basis. It also contributed roughly CNY 1.8 billion in the fourth quarter during those two months. It's a very healthy business, we look to further innovate utilizing this separate e-commerce platform. By the time the plan is finalized, we will announce to the market. We will have a new positioning for Yihaodian to better serve the local communities. In terms of category focus, it will continue to be focused on the FMCG and food and beverage categories.
Once again, participants are requested to ask one question at a time. The next question comes from the line of Jin Yoon of Mizuho Securities. Please ask your question.
Hi, good evening. On that $2.1 billion that you're going to receive, is that going to come in stages, or should we expect that one lump sum payment? And second of all, with that, is there a spending horizon for that cash that you're going to see? Any CapEx cycles that we may see going forward? Thanks.
Sure. The CNY 14.3 billion. Oh, yeah, you mean $2.1 billion. Yes, we will receive that in a lump sum payment upon closing. We should expect to receive that in the middle of 2017. We have not Have any specific use of the proceeds. But as part of our ongoing investment, there will be CapEx requirement this year. I did mention last time that CapEx for 2016 was artificially low. Some of the projects were delayed due to the local land readiness. You will see higher CapEx in 2017, but it will be covered by our operating cash flow in any event. The additional cash proceeds we got from this transaction, obviously we can also use it for strategic investments in our ecosystem and other general corporate purposes that we deemed appropriate.
Your next question comes from the line of Ronald Keung of Goldman Sachs. Please ask your question.
Thank you for taking my questions, and thank you, Sidney. Just a question on the supermarket initiatives. Do you have any further cooperations or strategic plans with Walmart and Yonghui, mainly across supply chain sourcing and O2O this year? Thank you.
Sure. We have developed a very healthy relationship with those two strategic partners. In particular, our New Dada entity is forming a closer partnership with those two companies. We disclosed that the number of stores that are linked to our New Dada platform. In particular, increasingly, we have established separate picking centers in those stores so that when a customer places an order, the items can be very quickly packaged and delivered. For JD program, the current commitment is delivering within 2 hours. If you look at the actual in most of the stores, the delivery time is actually narrowing down to about one hour. The customer service level has been continuously improving with the closer partnership with those two supermarket partners. There are also other potential collaborations, which is yet to be announced.
Your next question comes from the line of Ming Zhao of 86Research. Please ask your question. Your line is now open. Ming Zhao from 86Research. Please ask your question.
Yes. My question is, the JD Finance is a spun off from the company. JD is generating a lot of cash. For a lot of retail companies, the free cash flow is plenty, and they use that to do investment and generate returns. If JD Finance is spun off, what can JD do to generate returns from those cash flows you generate? What's a business model for that free cash flow generation? Thank you.
Right. That's interesting question. In fact, even before we spin off JD Finance, we had committed to the market that JD Finance, starting 2016, would be self-funded. We actually didn't use JD.com's free cash flow to fund JD Finance. We disclosed in the cash flow section of our earnings release, the total cash inflow and cash outflow for JD Finance business. You can see that inflow actually was higher than the outflow during the year. That has been our philosophy that the finance business should be independently run. JD.com has not either subsidized or deployed our capital to support the business beyond the initial investment. I actually mentioned about CNY 2.1 billion. That was the capital that we invested. On top of that, we did have a line of credit to JD Finance that's capped at around CNY 10 billion.
That line of credit is still available but, as you can see in last year, that line of credit did not move up. That's basically our separation of risks between JD.com and JD Finance. As far as the free cash flow, we do have actually many investment opportunities for the e-commerce ecosystem. We've been very active in discussing strategic partnership with many of the potential partners in either retail or on the product side. We expect more of those investment opportunities to come up.
Once again, participants are requested to ask one question at a time. Your next question comes from the line of Evan Zhou of Credit Suisse. Please ask your question.
Hi. Good evening, Sidney. Thank you for taking my questions. Congrats on a very strong quarter. Questions regarding our FMCG category growth. I think a couple days ago, we announced that we have roughly CNY 100 billion of GMV in the broadly defined FMCG category for this year. Is there a number that we can reference our expectation in for this year? In terms of the contribution from the loss or in terms of the margin drag from the FMCG segment or JD Supermarket, could you provide some color to quantify that for this year? Thank you.
Sure. Yeah. I believe the CNY 100 billion is a three-year target. Oh, for this year. Okay. Yeah. This is obviously announced by our business unit. It should be a number that's pretty comfortably achievable. On the margin profile, as I mentioned earlier, we do see a trend of improving operating margin or narrowing operating loss for that business, which is driven by both expanding gross margin due to the economies of scale and also improving order economics through higher ticket size and more efficient fulfillment. It is definitely improving, but at the same time, this remains the last major category that's money-losing. We do believe because the characteristics of this unique category, it is worthwhile for us to continue to invest in this category, at least in the next few years. There will be obviously profitability potential for this business.
Again, both from further improvement in the gross margin and also on the order economics.
The next question comes from the line of Natalie Wu from CICC. Please ask your question.
Hi. Good evening, Sidney. Thanks for taking my question and congratulations on a very solid quarter. My question is regarding on actually the average order size seems to be stabilized in fourth quarter. Also, the fulfillment cost per order stops rising as well. Just wondering, is it merely due to a seasonality phenomenon, or shall we expect the trend to carry on in this year?
Right. They're actually both. Normally in the fourth quarter, you do see somewhat higher average order size because of the promotional events. Also, for certain category, as I mentioned about FMCG, some of the new policies will actually guide consumers to increase the ticket size gradually. That trend will continue, we hope. On the other hand, because the low ticket size categories like FMCG and apparel and home furnishing are growing faster than the electronics and home appliance categories. On a blended basis, you may not see average ticket size improving every quarter. There's two forces in getting to a blended average.
Hello, everyone. This is Richard speaking. I will try my best to speak English. If you cannot, maybe Ray will help you offline later translate my Suzhou English to you all. I know a lot of investors care about our FMCG category. Also, a lot of competitors gave a lot of rumors on the market. They said, "Look at me, I made so much money. If I only reduce a little bit of my margin and I take Jingdong to be a price war, he would never, ever been profitable. He will die sooner or later." It's definitely wrong. I can give you two points. First one is, in most of our suppliers, we have a margin protection item. It says Jingdong will remain the lowest price.
If any competitor reduce their price, we have our right to reduce our price on same time, on the same level. The supplier will give us the same gross margin. We're not lose any money. To be honest, sometimes it does impact our gross margin a little bit because on the same time, we are not only reducing our price, we also give a huge coupon. We give a lot of coupons to our customers It's our money, but not a significant impact, just only a little bit. Second, actually, price war is very good for our company. I can give you two examples. First one is about books. In 2009, we got into a price war with Dangdang in books category. After six years later, I can tell you last year, the books category has been profitable by quarterly.
In 2012, we also launched a price war with Suning about the larger home appliance. In one day, we lost huge money because at that time, we have no margin protection item at that time. It's our money. One day, we lost hundreds, millions, and I'm sure every investor cried on that night. Five years later, we are absolutely number one largest distributor in China, both online and offline. It has been profitable for some years. Today, we're also in a price war on FMCG category. Always the price war is the best news to us. I will recommend my shareholder, anytime when you heard some price war with JD, you should open a luxury brand of champagne and cheers for that, because it means sooner or later, we will be number one, and it will be profitable.
It can make a lot of money for our shareholders. Let's make it simple. No war, no win, no profit, and no worry. Thank you.
Your next question comes from the line of Wendy Huang of Macquarie. Please ask your question.
Thank you. You mentioned that if you want to convert the profit sharing 40% to the equity ownership, there are some regulatory approval you need to go through. Can you give some detail on what kind of the government approval that you need to obtain in order to achieve that? Also, you mentioned that you will get a profit share only after the company actually achieved the accumulated profit. What is the accumulated loss as of now? Thank you.
Sure. If we keep in mind that the spin-off, in the first place, is down to facilitate JD Finance to, one, to apply for certain licenses. For example, the securities license that will require strict domestic shareholder base. Second, the domestic shareholding structure will facilitate a future domestic listing. For those two areas, as of now, the regulation will not permit us to convert the 40% profit sharing right back into equity. However, in the future, should the regulations change in those two areas, for example, clearly we would have the option to convert back into equity. On your second question, we have not disclosed our cumulative losses. We will, however, disclose more segment information in our annual report, where you will see at least the operating losses for our new business lines, which will give you a fairly good idea on the JD Finance profile.
It is a private company, we are not disclosing the exact loss amounts at this point.
Your next question comes from the line of John Choi of Daiwa. Please ask your question.
Good evening and good morning, thanks for taking my question, and congratulations on a great set of results. I have a couple questions here. Sidney, I was wondering if you could clarify or give more color on the strategic area investments that you mentioned. As you said, given that JD Finance is now being officially spun off, you said you're going to invest in return products, et cetera. I was wondering what kind of areas and how big, kind of investments that you guys are thinking of and how we should think of it in longer term. The second question is in your fulfillment area. If you look at the fulfillment, we've seen nice operating leverage. But as you can see recently, a lot of the third-party logistics providers have been coming to the market with IPO, and we've heard a lot of aggressive investment plans from them.
Is JD required to further step up investment in order to compete or maintain its competitive advantage versus these players? Should we be thinking about additional CapEx related to this? Thank you.
Sure. For investment, we always maintained that all of our investments will be strategic. We're very focused to invest only in the ecosystem around our e-commerce business, and also on the new technologies. As we also mentioned in our earnings release, that Richard actually laid out our next 12 years strategic plan to invest further into the technologies, in particular, in artificial intelligence, and big data, for example. Some of the investments will potentially be invested in these technology areas. They will all be very much related to our core business. On your second question, we addressed this before, that our logistics network is actually quite different from , which is purely a delivery company. For us, it's an integrated warehousing network and last mile delivery, which is very unique for the e-commerce model.
In fact, the speed of delivery is determined by the warehouse network, not by the last mile itself. Also the quality is very different. Because JD's delivery men, for those of you who live in China, you will know that because of our training and our corporate culture, JD delivery men are essentially a customer representative. They are very committed to be very thoughtful, and provide service beyond just simple delivery. It's a very different model in terms of both the speed determined by the warehousing network and the personal touch by our well-trained delivery staff. Which we believe will remain very differentiated with the third-party network utilizing the delivery companies.
The next question comes from the line of Ella Ji of China Renaissance. Please ask your question.
Thank you. For your current customer base, I wonder if you can share a breakdown between the male and the female. For the new customers that you added, I wonder what are the categories that are attracting these new customers coming to you for the first time? Also, just regarding your advertising, I understand that you won't go aggressive in terms of adding more ad inventories. Can you talk about what's your efforts in the advertising targeting? For example, to improve the click-through rate, et cetera, can you just share us with some updates on that? Thank you.
Sure. For the male-female customer base, we've run some analysis internally because we don't require customers to identify their gender when they register, so we could only get a proxy. Definitely the female customers have been increasing in proportion. Based on different analysis, they are at least very close. We believe the male customers are still slightly higher in our overall customer base. This is actually one of the key areas of new customer acquisition that this year, is one of our key strategic focus is to attract female customers through both our existing FMCG efforts and also our enhanced apparel category effort. One of the initiatives, in fact, is to break out the apparel business from our existing apparel and home business unit.
We'll form a separate apparel business group led by a new leader, and we will implement a number of measures to enhance the platform to attract the new female users. Your second question is actually related, right? For example, the FMCG category is one of those we believe can attract many new customers, specifically female customers. Obviously, the existing promotional activities, our superior service level, our channel penetration into the lower tier cities, all of these efforts will help attract new customers to our platform. On your last question, I think it is actually somewhat related to our effort to invest in technologies and artificial intelligence. We have been investing in this area to better target our customers and also provide more personalized recommendations Our products to our consumers. Honestly, we are still far away from reaching a satisfactory stage for this area.
On the other hand, it is actually a great opportunity if we can improve in customer targeting and advertising effectiveness, for example, and also just organic traffic utilization. We actually can see a much better conversion rate, for example, down the road. It is one area for our further improvement.
The next question comes from the line of Jialong Shi of Nomura. Please ask your question.
Hi. Good evening, Richard, Sidney, Ray, and Dong Jiang. Thanks for taking my questions. I just wonder, how do you think of your relationship with Walmart? We know Walmart has kept buying your shares from open market in the past few months. I just wonder if Walmart tries to seek a board directorship in the future, will you object to this move, or you would welcome Walmart to become your new board director? How much operating loss you booked from FMCG category into Q4, and how much you expect to invest in FMCG this year? Thank you.
Sure. On the Walmart ownership, where we actually disclosed the last quarter, on the last earnings call that Walmart had reached a 10% stake in JD.com and has a board observer seat. In fact, there's no further development from a share perspective. However, at the same time, the two companies have developed closer ties during the past quarter. Our Sam's Club flagship store on JD.com has seen very encouraging results during the quarter. We are also collaborating on other new initiatives, which are yet to be announced. I mentioned about the Dada collaboration. In a very short period of time, several dozens of Walmart stores have been connected through the Dada program to our JD Daojia program. Many exciting initiatives are being discussed and implemented.
Your next question comes from the line of Eric Wen from Blue Lotus. Please ask your question.
Thanks, management, for taking my questions. I'm asking on behalf of Eric Wen. Please allow me to ask in Chinese first, then I will translate into English. I'd like to ask two questions. First, compared to Alibaba's new retail, how much GMV do our new channel business unit wish to achieve in 2017? Second, what's the difference between Alibaba's LST, and our new channel business unit? Thank you.
Yeah, sure. First of all, I don't think that the two models are comparable. In fact, we believe we have explored the so-called new retail model far ahead of our competition. In fact, the O2O model, the JD Home model was an online-to-offline initiative that leveraged the offline strength with the online customer reach. We have seen very encouraging results in our JD Home business, and especially after the merger into the New Dada. The average ticket size, the service level to our customers have seen significant improvement over the past six, seven months. From our perspective, we do see tremendous opportunities in an integrated model between online and offline. For the Xin Tong Lu, it's actually a completely separate business that's aiming to support the mom-and-pop shops in the cities and also rural areas.
It's actually a quite different model that we are still in a fairly early development stage. Given that JD.com has these highly sophisticated supply chain capabilities and also our own last mile delivery network, we believe our model is superior to any competition.
The next question comes from the line of Mr. Thomas Chong from BOCI. Please ask your question.
Hi. Thanks, management for taking my question. I have a quick question about the synergies with Tencent. Can management provide some color about the % of new customers for Mobile QQ and Weixin? Thanks.
Right. Yeah, the collaboration has been very fruitful. If you look at the number of new customers attracted in the fourth quarter, it remained above 25%. It is a very solid new customer acquisition channel. We also, in addition to those two channels and the new customer acquisitions, we also have a number of other collaborations, including Jing Teng plan, which is a joint marketing and advertising program working with key brands that we mentioned in the past. We also have seen very encouraging results out of that program.
Your next question comes from the line of Yan Hu of Barclays. Please ask your question.
Hi, Sidney, Richard, and Rui. Good evening. The question is related to your gross margin. As you are expanding in your FMCG business and apparel business, the ticket value compared with the home appliances and 3C can be smaller. The size, each ticket, each delivery, the economics can be worse than before. How do you manage the gross margin growth going forward?
Right. First of all, the gross margin is actually less affected by the ticket size itself, but the operating margin will. For gross margin, as Richard actually mentioned earlier that on the customer side, we will always maintain everyday low price plus very aggressive promotions and coupons. The gross margin will purely coming from our enhanced scale economies. For example, for FMCG, we are today, we are actually not the largest FMCG retailer yet in China. As we continue to grow in scale, it is fairly natural to see more and more scale economies through better purchasing price and more volume-based rebates. That will continue to drive expanding gross margin without compromising our everyday low price and the promotions. I think your question is more on the operating side. There are ways for sure to enhance the order economics.
One simple example is through, as I mentioned earlier, requiring higher ticket size for free delivery, for example, right? There are other methodologies to encourage customer to buy more through certain promotional initiatives. Over time, the order economics will be improved through higher ticket size. You are right that it will probably never get to the electronics and home appliance categories. On the other hand, both apparel and consumer products do tend to carry higher gross margin than the electronics category.
The next question comes from the line of Rodney Hull of SunTrust. Please ask your question.
Yes, good evening. Thank you for taking my question. I wondered if you could discuss the logistics monetization as you move forward on starting to monetize some of your logistics network for your 3P providers. If you could provide any update, sort of the traction there to date and maybe what we should think about for the coming year in 2017. Thank you.
We are actually aggressively expanding our service to our merchants. In the fourth quarter, for example, the number of merchants adopting our service has increased quite meaningfully. In terms of number of orders that were served by our warehouse network, it started moving into high single digit, which is a quite meaningful improvement. We have mentioned in the past that warehouse and delivery, the integrated service involving both will differentiate the customer experience because of the speed and also the personal touch of the JD delivery staff. For many smaller merchants, it is not necessarily an easy decision. It will be a natural progression that increasingly starting from more sizable merchants and then to mid-sized merchants. We are seeing definitely very encouraging trend in our key merchants adopting the service.
We are now approaching the end of the conference call. I will now turn the call over to JD.com's Ruiyu Li for closing remarks.
Thanks, operator. Once again, thank you for joining us today. Please feel free to contact 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.