Earnings Call: Q3 2016

Nov 15, 2016

Earnings release

Hello and thank you for standing by for jd.com's 3rd Quarter 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. Please go ahead. Thank you, operator, and welcome to our Q3 2016 earnings call. Joining me today on the call are Richard Liu, our CEO and Cindy Huang, our CFO, for today's agenda, Mr. Huang will discuss highlights for the Q3 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. 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 that unless otherwise stated, all the figures mentioned during this conference call are in RMB. Now I would like to turn the call over to our CFO, Sidney. Thank you, Ruiyi, and hello, everyone. We're very pleased to report another quarter of solid growth with record non GAAP operating profit. Our net revenue grew 38% in Q3 2016 as we continued to pursue profitable growth during the quarter. Our direct sales revenue grew 36% in a seasonally slow quarter, led by food and beverage, home furnishing, cosmetics and home appliance products. Our revenues from services and others increased 60% year over year, supported by higher advertising revenues. Our GMV excluding virtual items grew 47% year over year in the Q3. GMV from general merchandise categories excluding virtual items grew 61% during the quarter. Cosmetics, food and beverage, sporting goods and home furnishing were the fastest growing general merchandise categories, while apparel and footwear remained the largest with solid growth. As a percent of the total, general merchandise GMV contributed 51.3%, a record high level for JD Mall. GMV from electronics and home appliance products grew 36% during the quarter, led by the home appliance category. The non GAAP gross profit increased by 59% in the 3rd quarter, which again demonstrated healthy monetization of both our 1P and 3P businesses. Non GAAP gross margin improved to 15.5%, up from 13.4% a year ago, as a result of higher 1P gross margin and higher growth in service revenues. Non GAAP gross margin on direct sales revenue improved well above 100 basis points again on a year over year basis, driven by increased scale economies and higher volume based rebates across all key categories. Non GAAP fulfillment expense ratio was 8.2% in Q3 compared to 7.7% in the same quarter last year. The higher fulfillment expense ratio was mainly due to our investments in the consumable product category, which tends to have a lower basket size. As we mentioned in the last quarter, as part of our strategic alliance with Walmart, we further expanded our investment in the FMCG category through both JD and EHoudian platforms during the Q3, including our support to ehardian.com promotion campaigns launched in August. As a result of this collaboration, all of our major expense lines were affected and the total impact to our operating profit was a negative RMB0.3 billion during the Q3. Our non GAAP marketing expense ratio was 3.1% in Q3, largely in line with the 3% in the same quarter last year. Our non GAAP R and D and G and A expense ratios increased 27 basis points and 28 basis points respectively compared to the same quarter last year, reflecting our increased investments in R and D talent and our new business lines. The non GAAP operating margin was 0.7% in the 3rd quarter, another record high with over 100 basis point improvement over the same quarter last year. Excluding the new businesses, our core J. D. Moore operations had an operating margin of 1.1% on a non GAAP basis, with a 45 basis point improvement over the same quarter last year. This margin improvement was entirely driven by the higher gross margin, partially offset by the higher fulfillment and R and D expenses discussed earlier, as well as our support to the eHodian platform. The new businesses on the other hand incurred a non GAAP operating loss of nearly RMB0.3 billion during the quarter, mainly from JD Finance and Technology Initiatives. With improved JD Mall operating margin and reduced new business losses, we are reporting a non GAAP net income attributable to ordinary shareholders of RMB289 1,000,000 with a net margin of 0.5%. The non GAAP EBITDA for the company set another record at RMB932 1,000,000 with an EBITDA margin of 1.5%. Our free cash flow remained very strong. For the trailing 12 months ended September 30, 2016, free cash flow totaled RMB16.7 billion or US2.5 billion dollars up 200% from the previous trailing 12 months. While there is certain short term timing effect in our favor, this robust cash flow is once again a strong validation of our financial strength and solid performance. In light of the strong cash flow, we stepped up our stock repurchase activities and bought back approximately 26,000,000 ADS or 1.8 percent of our total shares outstanding as of September 30, 2016. Next, I would like to give you an update on the collaboration with Walmart and development of ehardian.com. As disclosed previously, we launched the Sam's Club flagship store as well as a Walmart global flagship store on jd.com in October. The initial results have been encouraging and both parties are working very hard to raise awareness and deliver a great user experience. Our O2O platform, Dada, which is now also a Walmart investee has launched nearly 50 stores on its app as of early November. In addition, Walmart increased its stake in jd.com during the Q3 to approximately 10% and Walmart's Asia CEO, Dirk Berg has joined our Board as an observer to further strengthen our strategic alliance. As the 2 companies develop a closer ties, beginning November 1 this year, JD has been taking the primary responsibilities of ehardian.com's first party business. While using the previous eHodian 1P entity and its team as our purchasing agent to ensure the same merchandise selection and procurement. As a result, we have begun to recognize the first party revenue on ehardian.com since November 1, and we expect the business to contribute roughly 2% to 2.5% to our 4th quarter total revenue. As a result of this operational change, together with the promotional support in October as announced previously, we expect a total operating loss relating to ehardian.com of approximately RMB0.6 billion in the 4th quarter. We believe this investment is worthwhile as ehardian has a terrific online supermarket brand with a loyal customer base in the Eastern and Southern regions of China. Our first priority remains to preserve EHAOdian's premium product selection, competitive pricing strategy and a unique user experience. Over time, we will also use this platform to experiment some of the new innovations in FMCG categories to strengthen its differentiated market position. Now, I would like to share with you some color on the newly proposed JD Finance reorganization. As disclosed in our earnings release, the Board of Directors today approved a preliminary reorganization plan for JD Finance. Jd.com intends to dispose its remaining equity stake in JD Finance, which is approximately 68.6% on a fully diluted basis after taking into account the Series A shares and the reserved ESOP pool through a series of equity sale license and business collaboration agreements. If the plan is successful, JD would receive cash at fair market value and 40% of the pre tax profit of JD Finance in the future. There are 4 key objectives of this proposed transaction 2 for JD dotcom, the listed company and 2 for JD Finance. So for jd.com, the transaction will eliminate the downside risk associated with the finance business that some of you have been concerned about. While still keeping 40% of its upside through the various service agreements and the conversion right back into equity if permitted by the regulations. The second benefit for JD dotcom is to unlock shareholder value by taking some cash off the table and allowing our investors, mostly TMT and consumer specialists, to focus on our core business without getting distracted by the perceived riskier financial business. For JD Finance, the proposed transaction would allow its management to expand into broader areas of financial services without the constraint from its more risk averse parent company. It would also facilitate its application of certain restricted licenses in areas such as securities and mutual funds. Lastly, by restructuring JD Finance into a domestic entity, it would help its next round of financing as more domestic investors require the entity to be legally eligible in terms of corporate structure for future domestic listing. Without a domestic structure, it may become increasingly difficult to raise new capital above the previous valuation level in light of the general decline in private equity valuation in recent months. While the last two points are JD Finance related, as the 40% indirect beneficiary, jd.com would also benefit. Therefore, we believe this is a thoughtful win win solution to both our shareholders and JD Finance Business. As disclosed, Richard Liu, our Chairman and CEO, will be required to participate in this transaction to help reassure 3rd party investors and also ensure long term close partnership between the two companies. He would purchase a minority portion of the disposed shares at the same fair market value as third party investors. To further ensure alignment of interest, Richard's economic interest in JD Finance will be similar to his economic stake in jd.com. Please be aware that this proposed plan is very preliminary and there is no assurance that the transaction will be completed. The preliminary terms discussed above are also subject to change as we begin to search and negotiate with potential investors. Given Richard's participation, the transaction will require approval by the independent audit committee of the Board. Finally, let's discuss our financial outlook. We expect Q4 net revenue growth to be between 37% 42% on a year over year basis. This guidance reflects our successful November 11 promotion season as well as the expected 1P revenue contribution from ehaodian.com discussed earlier. This concludes my prepared remarks and we can now move to the Q and A session. Operator, questions please. Thank you. The question and answer session of this conference call will start in a moment. Yes. Hi. Sorry about that. We'd love to get a better sense as to, as we look forward, some of the levers that we have at our disposal to drive up margins further. Sydney, you've historically reflected on the business units working with new APIs, which are more oriented toward profitability. You also in your prepared remarks discussed improving input pricing and there's obviously theoretically at least the ability to improve pricing on the customers. As we move forward, say over the next year, which of these how would you prioritize these or other levers in improving margins further? Thank you. Sure, Alan. As we discussed previously, I think the key lever will continue coming from our scale economies with suppliers. If you look at our gross margin for the 1P business comparing to the top offline retailers, our gross margin remains to be extremely low with more than 10 percentage points difference on average. So this obviously partially is because of our scale has not reached number 1 in all categories, which over time will happen. And so when we continue to work towards that objective, we will receive more and more economies of scale through more vendor rebates. So I think that will be the primary source of future margin expansion. We are not in any hurry and no plan to increase prices to consumers, except for certain optimization internally. For example, promotion strategies and various other operational levers. Thank you very much. And your next question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question. Just a question on margins as well. We have seen the marketing expenses, it's kind of like doing quite well in the quarter in terms of a control. Just curious on how much of that is about seasonality and how that can be affected by our promotion into the Q4 as well as our commitments to JD Supermarket? Any color would be helpful. Thanks. Sure. So our marketing expenses, yes, there is some seasonality. You see in the past, normally Q2 and Q4 tend to have higher marketing spending in relation to the promotions. And Q1 and Q3 tend to have a lower expense ratio. But in reality, in Q3, we're also putting a lot of investments in the FMCG category through both Yihoutian and JD platforms. So this quarter, it's manageable at a fairly consistent level, I guess, slightly higher than last year's level. So as far as marketing goes, we just also mentioned before that we do spend quite a bit of money on branding, which is discretionary. And really at this point, the market is still very, very large. If you look at our user base, now nearly 200,000,000, but still have huge room to continue to expand. So branding, advertising continues to be an important investment area. But over time, obviously, there could be operating leverage on that front. Thank you. The next question comes from the line of Erica Worken of UBS. Please ask your question. Hello. Thank you. Sydney, I would like to just talk to you about the 3P mix. The contribution, it's at 45%, which is better than expectation. Does that signal the end of the anti brushing effort? And also could you just share with us what is your current thinking on what is optimal in terms of 1P and 3P mix? And just also a quick question on JD Finance. If you don't mind sharing, what is your current thinking on timing on this deal? And if you can also share some financial matrix, for example, top line matrix and profitability? That would be very helpful. Thank you. Sure. And so for 1P and 3P mix, we do see continued growth momentum from both areas. For 1P, for example, we continue to see a lot of scale economies and brands love to work with us. Also as we continue to grow our scale even in general merchandise categories, we see opportunities to develop 1P business. And 3P on the other hand is also given the anti Russian initiatives, it's actually underappreciated this year. So we actually see all else being equal, we should have a better momentum next year. And it will not only from the traditional categories such as apparel and general merchandise, but we're actually going to develop the electronics category as well for certain long tail products. So we do see both 1P and 3P continue to have a very strong momentum over time. But one as we mentioned previously, 3P will eventually going up in mix towards 50% fifty-fifty at least. So on JD Finance reorganization, we don't have a definitive timing, but we certainly wanted to move ahead as quickly as we can. It is still losing money. We'd also disclosed quite a bit of the financial metrics in the earnings release, you can see that it is trying to expand into more areas and some of those areas may be perceived as risk as risky for e commerce company. So we can discuss more separately, but you can first take a look at what we disclosed in the earnings release. Thank you very much. Sure. The next question comes from the line of Alicia Yap of Citigroup. Please ask your question. Hi, good morning, Sydney, Richard. Thanks for taking my questions. I have a question regarding your electronic categories. So with your electronic categories growing 36% in 3Q, Just wonder how should we look at these segments into 4Q? And not too sure whether you have disclosed whether the growth rate for this electronic category is during the single phase period, if you can share some of that thoughts. And then also to follow-up on the EHAO Dian, is there any revenues and GMV contribution from EHAO Dian in the 3rd quarter? And then also the RMB1 1,000,000,000 targeted expenses that you budgeted for EHAUDDIAN increase, how much of that was recognized in 3Q? Thank you. Sure. So on the electronics products, during November 11 promotion, it actually performed surprisingly well across all categories, not only say the mobile phones, even the digital products and computers performed exceptionally well. And then home appliance has been the strongest performer throughout the year. So as we continue to see above average growth rate, so we're very, very excited about this business even though we are especially the consumer electronics we have been a market leader. And in some case we are the market leader combining both online and offline businesses. So it's it remains to be very strong. But having said that, these are more mature categories. So if you're looking if you look ahead, the growth rate will tend to be slower, but we'll make up that through other categories. That's why we're investing in apparel, investing in FMCG and clearly home appliance category gets a longer runway given our market share is still not dominant. On Yihoutiao, we did have a very small revenue contribution in Q3 for the from the marketplace business and some incremental small revenue from the fulfillment services we provide. And we did I mentioned earlier that given that we were supporting its promotional activities on yihardin.com, which is our platform. So we incurred nearly RMB0.3 billion in Q3 in relation to Yihoutian. And I also mentioned that we expect to incur RMB0.6 billion in Q4. So adding those two numbers together, it gets you to RMB0.9 billion, fairly close to the RMB1 1,000,000,000 number I mentioned on the last call. Okay. Very helpful. Thank you. Yes. So let me just add a point that I've heard investors concerned about price wars in various categories. And as I stated in the past, for the Principal 1P business, as soon as it passed a critical mass that when it turned profitable, the profit will be sustainable and will not be affected by the price war. So for example, our electronics category, we have been maintaining superior growth rate far much higher than the competition. And despite of this growth rate and the competition in decline, we have achieved the profitability, very sustainable profitability, again, also in contrast to the other industry participants who are mostly losing money. Yes. So we can assure you that in the category such as electronics where we reach the market leadership position, we'll continue to grow significantly faster than competition while sustaining a very healthy profitability. And despite of the competition, no matter the price war or else or they're incurring losses, our profit will be sustainable. And this will rotate through all other new categories, including FMCG, which we are in the investing phase at this point. So if you take FMCG category, most people worry about price war. I can tell you that we have been investing in this category for several years and the growth rate has been tremendous. However, our loss ratio has been steadily improving every year. So regardless of how fierce the price war or perceived the price war could be, it will not affect our growth and it will not affect our profitability. I think we have now 3 quarters of track record to prove that as well. Thank you. The next question comes from the line of Alex Yao of JPMorgan. Please ask your question. Hi, good evening, everyone. Thank you for taking the question. I have a quick one regarding the 4th quarter revenue guidance. It seems to me the revenue is accelerating even on excluding EHodian basis. Can you guys talk about what's driving the revenue acceleration? And then if it's a relatively lower probability category such as FMCG, would that impact the overall profitability outlook? Thank you. Sure. So, yes, I think this is mainly attributable to the enhanced seasonality pattern that I had mentioned previously. What we observed is increasingly you see consumers buying more during the promotional seasons. So Q2 and Q4, even though the same quarters last year were already strong, you continue to see stronger performance versus Q1 and Q3, even though the baseline was low, but you still have a relatively slower growth rate. So it's really, I think, mostly stronger seasonality pattern. We don't see it's not due to purely due to FMCG, which is obviously which is a market leading growth is the leader in terms of growth categories within our company. But as I mentioned earlier, during the November 11 promotions, we actually see very, very strong growth rate across all categories, including electronics and home appliance. The next question comes from the line of Jin Yoon of Mizuho Securities. Please ask your question. Hi, good evening guys. So it's a question going back to the gross margins. I think you alluded to the fact that I think rebates contributed to the gross margin upside. Can you talk about how the accounting works for rebates? First of all, do you see rebates for that particular quarter or is there like a 1 quarter lag on the rebates of what we're seeing today, what happened last quarter? Can you clarify that for us? Thanks. Sure. Yes. So the rebates will take a few forms. For some, it will be negotiated at the beginning of the year. It's based on the volume. So the higher the volume you sell, the higher the rebate, which is in contract very clearly defined. So that's one. And we do accrue on accounting basis of those rebates on a based on historical pattern on a quite conservative basis. And then another type of rebates will be promotional event driven. So you could negotiate with suppliers on rebates that are given to a particular promotion such as November 11 or anniversary sales. And there will be also other areas where if sometimes suppliers would work with us on a joint marketing campaign, so there will be also rebates associated with those marketing activities. So majority of go ahead. Yes, mostly it's driven by volume. So it has a direct connection to volume and it also has a direct connection to the various promotional activities. But it's all recognized most of it in the same quarter then? Yes. It's based on accrual basis, right? So it's not cash basis. Yes. So it will there's a very mature, very established methodology to accrue those rebates, which is very standard in the retail industry. Got it. Thank you. Yes. So I can tell you give you another way to observe and make a judgment call on our category of profitability. If we have a dominant market position such as computer category, you can be assured that we will have very healthy profit margin for that business. So for mobile phone, another example is we are also the market leader in China. And for home appliance, we are likely to surpass Gourmet this year and will also be on an equal relatively equal footing with Suning this year. And there's we're confident that we can surpass Suning in next year. Yes. Another category is books. So this year, our run rate is now on par with dangdang.com, the market leader. And based on the current growth rate and the momentum, we expect our books category will also become number 1 in China next year. So for the FMCG categories, because the offline retailers tend to sell a broader selection including apparel and electronic products. So it may appear that we are much smaller, but if you only look at the FMCG categories alone, we believe our FMCG business could be also one of the largest next year, if not the largest. Yes. The other categories like home furnishing products, automobile products, we continue to take market share and also is growing tremendously. Our strategy has been that for any category that we are not a market leader yet, growth will be our top priority. But once we achieve market leadership position, we should have we should generate profitability on a sustainable basis. And despite of the profit sustainable profit orientation I mentioned earlier, we are confident that we can continue to outperform the competition from a growth perspective. For apparel, we are building a team to operate this category on the 1st party basis and we'll push ahead next year, especially on the more standardized portion of this category. Yes. So in the earlier years, the contribution could be very small for the 1P business, but we are confident that it will be a very promising business with great growth and profitability prospects. As long as we can ensure the best customer experience, we can win in all categories. The next question comes from the line of Wendy Huang of Macquarie. Please ask your question. Thank you. My first question is to follow-up on your comments about different categories. So given the market positioning that JD is having at the FMCG and home furnishing, can you give us an update on the gross margin of these two categories? And also you mentioned that rebates may help the home appliance business. So how is the latest margin on that category as well? And also you touched about the apparel category. You mentioned that you're going to build your own merchandise team. But in my understanding, the SKU of the apparel category is actually massive. And most of the other e commerce platform choose to do it via the marketplace model. So right now the most accessible merchandise team in the apparel space is probably VIP shop. So my question is, what kind of the confidence do you have to tap into the apparel market by this kind of model? And also, with this kind of model, does that mean you may actually consider to collaborate with VIP shops? That's my first question. Second question Yes. So first, let me reiterate that for all categories, we'll pursue both marketplace and 1st party models, including, for example, electronics, we are also expanding in the marketplace business. So by operating a 1st party apparel business, clearly, it does not preclude us from continue to work with all apparel marketplace merchants and brands. And in fact, we will work even closer with these 3rd party marketplace participants. So despite of the relatively large sized color sort of long tail nature of the apparel business, we found a model to operate this business. Yes, but it will take time for us to accumulate experience. So at this point, we're mostly focusing on the male apparel segment, which has basically generally more standardized. Yes. And if you look at both online and offline, look at successful retailers, there's ample evidence that the 1P model for apparel is clearly a workable model. And on your earlier question, we don't disclose gross margin for each category. But again, coming back to the slide I showed you before, just on a blended basis, our gross margin is still significantly lower than the top 5 or any top offline retailers. So this is actually the perfect evidence that despite of a significant lower gross margin versus offline peers, we can still we can still be profitable. That validates how effective our business model is. If your profitability is coming from higher gross margin than your industry peer, then the model is not sustainable. So one example, if you look at electronics industry, just by looking at the cost structure of the offline competition, you can know that it's very difficult for these competitors to reverse the current trend. Thank you. So my second question is on your cooperation with social networking platform like Tencent and also the media platform like Toitiao. So how has been the traffic conversion or sales conversion in the past quarter? Thank you. Yes. I think we have mentioned that our partnership with Tencent has been very, very productive. The 2 channels both Weicham, Mobile QQ have continued to provide a tremendous traffic. The conversion ratio has been improving. We don't disclose exact conversion ratio, but it is they are definitely improving. Toitao is a new partnership. It's more on the digital marketing collaboration basically utilizing their technology and our marketing technology to better to improve the advertising efficiency. And so it's still in the early stage, but results have been quite encouraging. Yes. So we do expect similar collaborations as the Total collaboration with more other partners down the road. Yes. This is really from a project we call internally called a Kepler, a project Kepler that we started 2 years ago. And we are really seeing more and more projects coming out of that project. Your next question comes from the line of Robert Peck of SunTrust. Please ask your question. Yes. Thank you. Just two quick ones. First on logistics, given the robust growth in GMV and category expansion, could you talk to us a little bit more about the capital intensity for the business for logistics going forward 2017 beyond? And then Sydney, just on procedurally, some of the steps here for the JD Finance spin, can you tell us just some of the milestones we should be looking for? We noticed I know you mentioned the audit approval. Is there a shareholder vote, regulatory approval? How do we think about the various checklists of things we should be looking for? Thank you. Yes, sure. So on logistics, most of the on operating expense side, it will still grow with the scale. On CapEx, there is some delay in terms of building out some of the larger warehouses really because of the readiness of the land. So when I mentioned earlier about certain timing difference for our cash flow purpose, CapEx was one factor. So we do expect so this year, the CapEx was below our original budget. And we do expect you should also model in a much higher CapEx next year. We don't have the exact number, but you should consider that some of the CapEx was moved from this year to next year. But again, this should be clearly within our cash flow our operating cash flow, okay? So free cash flow will remain to be strong and clearly positive. For process on JD Finance reorganization, the next step is to go out and talk to investors. And once we get enough investor interest, then we will prepare a plan for the independent audit committee to approve, which will then in turn submit for Board approval. There is no shareholder approval, neither any regulatory approval. The next question comes from the line of Chi Chang of HSBC. Please ask your question. I just wanted to sort of get your sense on some of the growth drivers for 2017 in terms of both sort of 1P and 3P GMV, maybe sort of framing out some of the different categories or different sort of initiatives that will be driving your top line? And also sort of framing versus sort of direct sales versus services and advertising because advertising has been growing very rapidly? Thanks. Yes. So I think we are still in the process of doing our 2017 budget. We don't at this point, as we mentioned earlier, we should continue to see clearly above industry growth rate across all categories, whether it's a profitable category or it's a growth stage category. There will be difference obviously more mature categories may see slower growth, but for each and every category we should grow significantly faster than other industry peer in that category. So we will report to you in more details next quarter when we guide our 2017 growth rate. For 1P3P, I mentioned earlier, we continue to see growth from both really both models, because for each and every category, we wanted to have healthy 1P business, but also have a very healthy marketplace ecosystem. So we have clearly demonstrated it is achievable. Yes. So I wanted to reiterate this maybe I wouldn't respond to so many questions maybe in the future, but I wanted to reiterate that our strategy has been very consistent for all these years that we will continue to grow both 1P and 3P. And even within 3P business, we will work with the brands, work with specialty stores and work with distributors. We work with all of these various forms of third party merchants to ensure the success of the platform. The next question comes from the line of Shanshang of 86 Research. Please ask your question. Thank you for taking my question and congratulations on a solid quarter. Just want to shift gear a little bit to the user growth. You have very rapid user growth, 57% in the quarter. Just want to get your sense on how you balance the user growth potential with, for example, you talk about customer experience. What do you think about customer experience? Is it user engagement? Or is it helping user to make fast, very efficient shopping decision? So maybe just share your thought on that in light with our competitor increasing like every user time spent. Another small question will be, we're seeing a lot of domestic courier such as DTO, SF going public. So with more capital raised from the market, we are seeing these guys are improving, upgrading their logistics system. So how do we think our competitive edge in the logistic area? Thank you. Yes. So on the user experience, for any retailer, it's really about product quality, about product selection and its product service. I think these are really the core elements of user experience. So our focus has been on these three areas, making sure that quality is solid, Customers don't have to worry about counterfeits. They can also return the products they don't like. This is about service, the speed of delivery. These are also about service selection that we continue to expand into more and more category with more and more product selections. I think we focus on yes, and price. So we focus on this core retail experience. I don't think we care too much about what competition is doing. I think in the end it's really about each business has its own core elements and you should ask consumers what they care most. On the yes, sorry, no. So every time you ask 2 questions, I got lost track on the second one. So the I think that listed for the 3rd party logistic companies should be healthy for the industry. As you know, it's been fiercely competitive in terms of pricing and also our quality has been pretty subpar, substandard with a lot of these 3rd party companies because they adopt franchise model. But with these companies becoming listed companies, there will be better oversight whether from type investors point of view from a lot of government regulation point of view. So we do believe hopefully the quality will improve, but at the same time the pricing environment will improve. So over in the end consumers will be willing to pay for that service. So right now because of the price competition and low quality, there's actually artificially low pricing environment for logistics services. Yes. So regarding the a very easy and convenient shopping experience. And in this respect, jd.com is clearly the best choice where consumers can come and find the products very quickly and also get delivered very quickly. For this segment of customers, what we care about is the frequency of their shopping on jd.com or the frequency of the coming browsing the products. So one of the initiative for example is we launched this JD Daojia platform to engage consumers with daily necessities, so people come to shop on a daily basis. So yes, there will be another type of customers who wanted to spend more time on a platform, whether it's to going through various selections, browsing and more like window shopping and finding surprises. So with these type of customers, we are also designing new interface including video streaming and direct broadcasting as to allow these consumers to find their own shopping experience on jd.com. Yes. So but if you look at these models back in 1, 2 decades, you see a lot of these products have its own life cycle and life span. So one example, Toucai, I don't know what for those of you who know in Chinese, it was very hot, very popular for a while, but it got after a while and it's no longer a very popular destination. So there are similar phenomenons in the U. S. I'm sure that you also experienced in your own country where this kind of new forms kind of come and go. And so the direct broadcasting model, for example, we believe it could be something popular in the short term, but it's not necessarily something it's not necessarily the main forms of retail business down the road. So we should come back to the fundamentals and look for what customers really want from in terms of shopping experience. The fundamentals should never change. Our next question comes from the line of John Choi of Daiwa. Please ask your question. Thanks for taking my questions. Just quickly on the JD Finance. I think you guys mentioned that more JD Finance allow management to expand into more broader areas. So in the longer term, what is management thinking about how this business is going to evolve just from the current consumer and the supply financing? And lastly, just quickly on the data and equity investees, seems to be a bit less than what we expected. Can you give any comments on this part? Thank you. Sure. Yes. So for JD Finance, again, this may be a very mature business for in Western countries, but in China, this is still a very emerging industry. So there are a lot of opportunities, a lot of areas that could be interesting. One example we mentioned in earnings release is because we have been doing asset backed securities to raise its own funding, we became expert. And so they actually started a practice to advise other companies securitizing their portfolio. So examples like this in the West, any bank could do it, but in China, there are a lot of these emerging opportunities. So you have to be you have to stay innovative and you want to take risks whenever you think it's warranted. But with a big e commerce parent company, we are actually very risk averse. So sometimes we may impose restrictions on those new business models. And on data, this remember that there's a 1 quarter lag in terms of picking up equity losses. So we are picking up only 2 months of losses occurred in Q2. So next quarter you should expect a higher loss from data. We are now approaching the end of the conference call. I will now turn the call over to JD.com's Rui Lee for closing remarks. Thank you, operator. Once again, thank you for joining us today. Please feel free to contact us if you have any further questions. Thank you for your continued support and looking 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.