Earnings Call: Q2 2015

Aug 7, 2015

Earnings release

Hello and thank you for standing by for jd.com's 2nd Quarter 2015 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'd now like to turn the meeting over to your host for today's conference, Ruiyu Li. Please go ahead. Thank you, operator, and welcome to our Q2 2015 earnings conference call. Joining me on the call today are Richard Liu, Founder, Chairman and CEO and Sidney Huang, our CFO. For today's agenda, management will discuss highlights for the Q2 2015. Following the prepared remarks, Cao Yu Shen, CEO of GDMO, join Mr. Liu and Mr. Huang for the Q and A session of the call. Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make forward looking statements. Also, this call includes discussions of certain non GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all the numbers mentioned during this conference call are in RMB. Now I would like to turn the call over to our Founder, Chairman and CEO, Richard Leung. Thank you, Ruiyi, and welcome, everyone. We are pleased to report another strong quality performance with many exciting developments in our business. During the quarter, our June 18 Anniversary Sales event saw record breaking results with consumers continuing to migrate to Jingdong as a result of our growing brand reputation and recognition of our secure customer service. I'm also pleased to update you that we rolled out new auto e commerce initiatives and expanded the range of authentic imported products on our Jingdong worldwide cross border platform. More and more, China's consumers are demanding the best service, the highest quality product and 100% authenticity. And we are focused on making sure that jd.com's reputation for excellence in this area continues to grow. At the same time, we are looking ahead and making investments in new business initiatives to build jd.comecommerceleadership for the long term. Now, I will turn the call over to Sidney and I look forward to joining the Q and A session. Thank you, Richard, and hello, everyone. I'll spend the next 10 minutes to discuss our Q2 financial highlights and the Q3 outlook. We're very pleased by our robust growth in the Q2. Our year on year GMV growth was 82%. As you know, our strategic deal was Tencent last year closed on March 10, so this quarter marks the full 1st full quarter after our 1 year anniversary of the pain center lines. This explains the seemingly slower GMV growth on an overall basis as part of the incremental GMV in Q2 last year was generated by WangGo, the B2C marketplace acquired from Tencent and the Wangou business has been discontinued in late 2014. On the other hand, our J. D. Moore's GMV growth remained robust with a year over year growth of 92% compared to 94% in the previous quarter. Our net revenue growth was 60.5% in Q2, well above our guidance due to strong performance during our 12 year anniversary sales event in June. The GMV composition was largely consistent with the prior quarter. GMV from general merchandise categories grew 97% and accounted for 48.5% of total GMV during the quarter. Apparel and shoes continued to be the fastest growing category with a year on year growth rate of nearly 150%. Other fast growing key categories included home furnishing watches and handbags, food and beverage, cosmetics and baby products. Note that the acquired Tencent marketplaces, Taipei and WangGo, were selling mostly general merchandise products. So the year on year growth rates for these categories were also affected by the full year anniversary effect as discussed earlier. GMV from our marketplace business grew 110% in Q2 and accounted for 44% of our GMV during the period. If you just look at J. D. Moore marketplace, GMV grew 156 percent year over year and 35% sequentially. Our direct sales revenues grew 58% year over year led by food and beverage, home furnishing and cosmetics, as well as mobile and home appliance categories. Services and other revenue grew 108% year on year, mainly driven by triple digit growth in commissions and the logistics service revenues. Our non GAAP gross margin improved to 12.5%, up from 11% a year ago, as a result of higher first party gross margin and higher GMV contribution from the marketplace. Starting this quarter, we began to recognize deferred revenue as a result of our resource based investments in 2 companies, which totaled RMB146 1,000,000 in the 2nd quarter. As you noted, the non GAAP gross margin figure I mentioned earlier excluded this revenue and we will exclude this revenue for all of our non GAAP measures as disclosed at the end of our earnings release. Non GAAP fulfillment expense ratio improved to 7% in Q2 compared to 7.2% in Q1. The improvement was mainly driven by better utilization of our fulfillment staff during the June 18th anniversary sales event. It was relatively consistent with the last year level, excluding the impact from the 3rd party logistics service costs. However, our fulfillment expense ratio may increase in the next few quarters as we continue to invest in our auto initiatives and our percent in Q2 compared to 3% in Q1 and 2.6% in the same quarter last year. The increase was mainly driven by higher discretionary spending such as TV advertising and offline marketing activities to raise our brand awareness during the Q2. Our non GAAP R and D expense ratio increased to 1.6% compared to 1.4% a year ago, reflecting higher investment in R and D talent for existing and new business lines. Altogether, despite heavy investment in our new business initiatives, our non GAAP net margin was roughly breakeven in the Q2, which is similar to the same quarter last year. If you look at our core JD Mall business, however, both the non GAAP operating margin and the non GAAP net margin improved significantly from the prior year and were profitable during the Q2. Another highlight of our 2nd quarter performance is the cash flow and working capital. We had another record quarter with over RMB4.7 billion in free cash flow. Inventory turnover remained low at 34.5 days, while the accounts payable turnover was 42.5 days. As we mentioned before, these working capital metrics reflect our industry leading operating efficiency and significant potential for further improved cash flow. On a related note, as disclosed in our free cash flow calculation, our Internet Finance business grew significantly during the Q2. Cash outflow totaled approximately RMB5 1,000,000,000, including over 50% to suppliers and merchants due to higher transaction volume during our June promotion and the remaining to our consumers. The supplier financing grew over RMB2 1,000,000,000 during the quarter and was the largest cash outflow item in Q2. As discussed previously, supplier financing is essentially a factoring business with minimal credit risk. Our consumer financing product also grew over RMB2 1,000,000,000 during the quarter in conjunction with our June anniversary sales event. This product was initially introduced in early 2014. Over the past 18 months, we have carefully designed and improved our credit assessment model based on internal and external credit data. The 1st year metrics including delinquency trend and charge off rates have been closely monitored and continuously improving. Our merchant financing program is relatively new and is the smallest portion of our loan portfolio. Overall, our Internet Finance business is still in the investing phase with operating losses, but we are encouraged by the progress and its improving financial results. Given the increasing cash outflow, we plan to seek asset securitization and other external sources to finance this business in the second half of this year. Now let's discuss our financial outlook. We expect our Q3 net revenue growth between 49% and 54% on a year over year basis. This guidance reflects our confidence in our core business, while incorporating our conservative outlook in light of the recent Chinese stock market correction and the slowing macroeconomic conditions. As for the non GAAP bottom line, we maintain our previous guidance of between breakeven to negative 0.5 percent for the full year 2015. Lastly, we are really excited about the newly announced strategic partnership with Yonghui Super Stores. Yonghui is one of the largest supermarket chains in China with a clear leadership position in fresh product category. As part of this strategic alliance, the 2 companies will leverage each other's strength to jointly develop the online solution for consumers' day to day need for fresh and food products. In connection with the partnership, we will also invest approximately $700,000,000 for a 10% stake in Yonghui, which is subject to regulatory approval. The agreed transaction price is RMB9, which represents a 9% discount to the weighted average stock price in the past 20 days. This price is also in line with the company's 1st quarter average price of 9.38. Dollars The unaffected price before the abnormal market volatility during the Q2. As the deal was just signed this afternoon, you will see more information from Yonghui's public announcement very soon and we will give you more update on our next earnings call. With that, we can now move to the Q and In order to be fair to all callers who wish to ask a question, we will take one question at a time from each caller. Your first question comes from Eric Sheridan from UBS. Your line is open. Please go ahead. Thanks for taking the question. Sydney, I wanted to know if we could get a little bit more color on the pace or conversion of the traffic that's being delivered by Tencent now that we're up to the 1 year anniversary of the relationship? And how you see that traffic continuing to develop through the year? Thank you. Sure. I'll start and Holli may add. Yes, so the traffic has been especially on the mobile side, we have seen a lot of new users from both WeChat and QQ mobile apps. These 2 vastly popular communication social network apps have been adding a lot of new customers in Q2. It again based on our internal data, well over 20% of the new users, newly acquired customers actually came from those 2 channels. So in terms of daily active user, if we use that definition, we're seeing steady growth from Weixin and QQ as well. During our June annual campaign, we did a lot of campaigns and promotions on these two entry points as well from which we added a lot of new users. So in terms of our order very meaningful percentage right now. We can't disclose the numbers. And as Cindy just mentioned that it's giving us it's becoming a big source of new user acquisition as well. Your next question comes from the line of Alicia Yap from Barclays. Your line is open. Please go ahead. Hi. Good evening and good morning, Rich and Simeon. How are you? Thanks for taking my questions. My question is related to your overall O2O initiative and strategy. So particularly on your Yongfui and then also can you elaborate a little bit in terms of how this relationship and business partnership will carry out? And on top of it, I actually wanted to ask on the overall competitive landscape, given the O2O space is very crowded and there's no lack of funding. So in your opinion, given your years of experience in retail, how will this local service and your local e commerce landscape to ship out longer term, who will JD view as the potential biggest competitor? And any area that you feel you need to step up to strengthen your expertise in this local auto loan initiative? Thank you. Yes. Okay. I will start. So this is a very long question, but it's very good. I think overall O2O sector is still in a very early stage. There are many players, but not all of them are in the same particular niche. So we are for example, for jd.com, we leverage our strength in physical goods e commerce, right? So we and our existing logistics network. So we specialize and we focus on fresh products through our mobile app, Jingdong, Daojia. So as we mentioned earlier, our effort here is to connect the offline supermarkets to the consumers in the neighborhood And we will connect these consumers and provide to our delivery of the fresh products to their home. So we have it is still fairly early, but we have seen very encouraging initial results. We also started our cloud sourcing delivery network. We recruited tens of thousands of freelance delivery staff. So they are still in very early stage with a fairly low utilization rate at this point. So the Yong Hui Superstore Alliance, as I just mentioned earlier, is just part of this overall initiative. But that alliance in particular will be actually more strategic and beyond the current OTOERO initiative. So, we are on the other hand, we are not really venture into the other service oriented O2O initiative at this point. So, I think that the market is big enough and we hope we can leverage our own strength and develop a very strong position in this exciting field. Your next question comes from Cynthia Meng from Jefferies. Your line is open. Please go ahead. Good evening. Thank you, Sidney, Richard and Shandong. I have a question on the penetration into lower tier cities. Can management give us some more color on the revenue breakdown by tier of cities? And how does this compare to the prior year to last year same time? And also can you share with us your progress in deepening the penetration into lower tier cities, particularly the 500 county service center plan you mentioned previously? What is the growth in number of orders from lower tier cities last quarter? Thank you. We started our lower tier city of penetration strategy at the end of 2013. We've made a lot of progress in the past year and a half. So up to yesterday, we are with our own staff, we are covering over 2,100 districts and county and I want to remind you in China in total, there are 2,800 of those and we are covering 20,000 out of 40,000 I don't know how to say that in English, but it's a town. Town. Town maybe. Town. Town maybe. And we are covering 40,000 villages and our target by the end of this year is to cover 100,000 villages in So out of the 40 actually the exact number is 46,000 village that we're covering right now, in each village we have a representative so to speak. They do marketing, they do sales, they do after sale services for us. We've achieved leading position in 1st tier and second tier cities in the past years and we're making a lot of progress in lower tier cities. We don't disclose these numbers, but we do this is me, I'm just adding some color to what Richard said. We do track the percent of orders from lower tier cities, meaning excluding the first tier and second tier cities, we do track that number every quarter and we're seeing steady growth, meaningful growth. We believe in the near future more than half of the orders will be from the 3rd tier and lower tier cities. So, let me just add one data point. In the second quarter, for the first time, the active customers from Tier 3 to Tier 6 cities have surpassed 50%. So the next milestone will be the number of orders. Your next question comes from the line of Robert Lin from Morgan Stanley. Your line is open. Please go ahead. Hi, management. So I just want to get a little color on our outlook in terms of the 3rd party marketplace. That's a twofold question. I think obviously there's a lot of competition for brands. I think your competitor talked about strategic partnership. Can you give us a little more color on how we intend to get more of these brands strategically and what we think in the next few quarters? And in terms of seasonality, we noticed that your first party reaccelerated in terms of direct sales. Is this more of a seasonal thing because of a June promotion? How should we think about this in the second half? Thank you. We've been through competition before. As we started as an IT and digital product seller, we've seen competitors and brands not accepting us. And when we got into home appliances, we also saw some blocking strategies from some of our competitors, but we've seen through all these. We entered apparel sector about 2, 3 years ago. Right now, it's the fastest growth category, major category within JD Mall. It's the most important growth engine for JD We understand and respect decisions made by brands according to its own strategy. But we believe as long as we provide the best customer service, customer experience, eventually all brands will come back to work with us. Lastly, as you want to say that we are working at least with over 100 brands now. So the impact from any single brand is immaterial to our overall business. Thank you. Your next question comes from the line of Tian Hou from TH Capital. Your line is open. Please go ahead. Good evening management. My question is related to JD DAOJI JD to Hong. So in terms I'd like to know the coverage of your JD to home and also how many part time delivery guys do you have and also the financial arrangement between jd dotcom and to those people? And also what is your expansion plan going forward in terms of coverage? Right now, Jingdongdaojia is in 7 cities. This is up to yesterday. We have 50,000 registered freelancers to speak. The number of orders is growing very fast and we have a sort of revenue sharing We focus on working with supermarkets especially fresh produce. It's growing very fast, but it's very small. So comparing with the overall scale of JD, it's a small business right now. I do want to answer the question asked before about the seasonality, the Q2 reacceleration of the first party business. Yes, so in June which is our annual campaign, it does tend to focus on 1st party categories, which you will see the opposite in typically in Q4. And the other reason is in Q2, the apparel tend to be small ticket items, seasonality wise and apparel is, as Richard mentioned, is a big part of our marketplace business. Your next question comes from the line of Kevin Yin from Credit Suisse. Your line is open. Please go ahead. Hi. Thank you, management. Thank you for taking my question. My question is just a follow on question on the competition. So Uniqlo, Zara and Timberland, they shut down the store on jd.com. But Shen Zhong gave us a very point that in 3C category used to similar leading brands used to block your blockyjd.com as well. So my question is what made the change for the 3C category? And this is going to this is going to help us to understand how long and what you need to do, what market share you need to gain to attract a global leading brands like the Zara, Team Blend, the Unigro to come back again? And also the can you update us on the what are the major brands are using your logistics service? Thank you. So this is never about contractually excluding your competitors. It's long term. It's never sustainable. And for the customers, it's always about customer experience. For the brands to work with the retailer, it's always about how much value you can create for them. It is probably true that the GMV number the brand can get from our platform is lower than our competitors. But it's probably also true for many of them, they make in absolute terms, they're making more money from our platform than our competitors' platform. We're not advertising based business. They don't need to spend humongous amount of money on JD to get traffic. Because of the nature of our platform, our traffic is over high quality, meaning when customers and buyers come to our site, it's very easier for the brands to them. The typical customers won't spend with their time. And on your other question on logistics services to merchants, we still offer we still deliver right now a meaningful portion of the 3rd party merchants orders. In the second quarter, it was in high 20s. The reason for the percentage went down slightly was because increasingly customers are paying by paying online instead of COD. So COD was one of the drivers for our service because it is exclusively offered by JD's delivery team. Now we are in the process of designing enhanced service offering to our merchants. So we expect to launch that in very shortly in the second half. Thank you. Your next question comes from the line of Sean Zhang from 86 Research. Your line is open. Please go ahead. Thank you, management for taking my question. Regarding I have a follow-up on the market breakdown. You have over 50% of your customer coming from lower tier cities. And can you explain to us what's the different business shopping behavior? Am I correct to assume, I think lower tier city customer will buy more 3C home appliance, so it's more 1P product instead of we are diversifying our product portfolio in Tier 1 cities, meaning Tier 1 city marketplace grow faster, a lower tier city, primarily we're selling more 1P product. Is that correct to assume that? Thank you. No, I don't think that's correct. We are able to assume so, but what we are finding is these low tier cities. And first of all, the behavior difference could be they buy sorry, in aggregate, they do purchase less from us. The ticket size tend to be smaller and the frequency tend to be slightly lower. But it's not true that they only or they tend to buy 1st party or 3C category products, they do buy other categories from us. Even as a first time user of jd.com, these buyers from 3rd tier and 4th tier cities, they do buy non 3rd tier products from us. Yes, just to add on Harry's point, so even though the ticket size and average purchase frequency is lower than Tier 1, Tier 2 cities. But we when we look at the trend over the past 4, 5 quarters, both metrics have been improving for the lower tier cities. So right now, this is really just a function of these people starting to shop on jd.com@alatertimethantier1tier2citycustomers. So over time, we do expect their shopping behavior will catch up and get much closer to the tier 1, tier 2 city customers. Thank you. Your next question comes from the line of Robert Peck from SunTrust. Your line is open. Please go ahead. Yes. Thank you and congratulations everybody. Sydney, I was wondering if you could give us a little more color on the Chinese stock market movements and maybe what impact that would have had during the quarter. And I know you called out as part of the guidance reflecting what you've seen so far. Is there anything else to call out in the guidance? Any other areas of weakness per se to point out? Thanks so much. Sure. Well, it's very hard to comment on the stock market itself, but we know that there are a lot of ordinary consumers who participated in the stock market. The correction does affect a lot of people. So, but there are other analysis indicating that stock market investment actually contribute a very small percentage of the overall consumer income, disposable income. So, both are valid. So, we think also on a sentiment basis, we do believe that certain large ticket item purchases could be affected. So that's why we made a relatively conservative assumption and we reflected that in our Q3 guidance. We hope as the market continue to be in its early development phase, we prepare for the worst. But right now, it seems the market has been stabilizing. Thank you. Your next question comes from the line of Fawn Jiang from Breen Capital. Your line is open. Please go ahead. Thank you for taking my question. My question is actually regarding your product mix for your 1P business. Just wonder whether you can give us a little bit color on the trend of the 1P business in terms of the product mix breakout and how has that impact your margin so far and what do we expect going forward? Yes. So right now, if you look at Q2, the year over year growth in the ranking in terms of growth rate, general merchandise grew which also grew faster than average. So the slowest growing category was IT Digital Products, which has been the case for multiple quarters. So, overall, they all grew at relatively healthy pace. Margin wise, I mentioned that the first party business as a whole, the gross margin did improve from the same quarter last year. So we do see upward trend as we continue to expand scale and enjoy more scale benefit. So Richard just added that although the growth rates are different across different categories, even for the slowest growing category IT Digital Products, we still grow at least twice as fast as the industry. In fact, we heard in some of these subcategories, the overall volume was decreased declining, but we still grew at very healthy rate. Thank you. Your next question comes from the line of Thomas Chong from Citi. Your line is open. Please go ahead. Hi, management. Thanks for taking my questions. I have two questions. The first question is about cross border e commerce. Can management give us some updates on your expectations in a few years' time? And my second question is about the trend for the marketing expenses in the second half. Will management pursue aggressive spending in O2O such as subsidies, etcetera? Thanks. First question? Cross quarter. Cross quarter, okay. Right. So we launched JD Worldwide in April and we did a few campaigns and the business also participated in our June campaign. So if we look at number of orders, it's growing steadily and we're very much looking forward to more growth in second half, especially in Q4, which tend to be a sort of high season for cross border business. And if you look at the categories, it's the baby and mother products, skincare, food supplements, these tend to be the large categories. And we continue to work with multiple cities on bonded warehouse arrangements and we do offer a few models. We can operate as a first party, meaning we can buy inventory from overseas sellers and put them in warehouses, act as a seller ourselves. We can also offer marketplace model for merchants. So, overall, it's a fast growing business and we put a good amount of resource behind it. But in absolute scale it's a small business. Yes, the second question if I understand correctly is about marketing spending on O2O initiative. There is actually quite small spending right now. The bulk of the marketing spending has been on overall JD brand building. So it's not specifically for the auto initiative. Thank you. Your next question comes from the line of Wendy Huang from Macquarie. Your line is open. Please go ahead. Thank you. I have a few quick questions. First regarding the OTOZ GMV and the revenue, how will that be recognized in your P and L? Would that be under the direct sales GMV or would it be under the other revenue in the revenue line? Secondly, can you comment on the latest draft from the government regarding the online payment regulations? How are those RMB 1,000 or RMB 5 1,000 daily transaction limit affect your business? And lastly, if you can give update outlook on the CapEx given your recent new initiatives into the lower tier cities O2O etcetera that will be very helpful. Thank you. Yes. So on the O2O, because we don't really sell those we don't possess those products. So it is essentially a marketplace model. So we would like to maximize the GMV, but not the full revenue. So we will take our own commission as part of the other revenue line. And for I guess for the payment, this is still we were still assessing this latest regulatory policy. So right now, we don't give out any comments at this point. We still because in any new regulations, there will be a lot of interpretation. This probably has some technicalities here, but what Richard said has negligible impact on JV because we the kind of online payment we tend to focus on are not regulated. Not part of the restriction. Yes, the restriction is more on payment out of accounts. So we have been we have not been in that part of the business. So in other words, if you deposit certain money in the payment account in advance And so that part of the business may be restricted now. And we have been connecting the consumers through basically using their bank cards to provide the payment solution. So it's quite different. So the government's objective seems to be limiting the 3rd party payment providers' ability to manage the money in its accounts, rather they would rather have the money deposited in the bank's accounts. Thank you. Your next question comes from Preeti Hu from China Everbright. Your line is open. Please go ahead. Hi. Good evening or good morning management. This is Purdy Ho from China Everbright overseas TMT team. So I have a question regarding the competitive landscape. So as we can see the your competitors the differentiation between JD and your competitors is position about how would you position yourself going forward? Would it be more on the logistics side or would it be more on product differentiation? And I would also like to know about the pipeline breakdown either in GMV or in revenue? Thanks. I think our offering is actually quite differentiated from our key competitor. We operate our 1st party business, which is still contributing more than half of our GMV and bulk of our revenue. 1st party means we process the merchandise first before selling to the consumers. So we have a lot more control over the quality and authenticity of these products. And we also can accumulate procurement power over time when we purchase more and more larger quantity from these suppliers. And so just on the product quality assurance aspect, we have been very much differentiated and consumers recognize that as through various third party surveys. Logistics has also been a key differentiator from our competitors. You can see that our 211 program now covering more counties and districts every quarter. Our 2nd day delivery, together with our 2nd day delivery, we cover well over 80% of all of our orders. So the speed of delivery and also the personal touch of our in house delivery staff has been a huge differentiator from a pure marketplace operator. Thank you. Your next question comes from the line of Mark Miller from William Blair. Your line is open. Please go ahead. Hi, good day everyone. Could you provide some color on the what we would calculate as the take rate for marketplace and other. And I know last quarter there was some concern around that and there are some differences between gross and net GMV, but the metric looks better this period. And so if you could elaborate on the drivers of that, so take rate within 3rd party sales as well as advertising and other components that are relevant? Thank you. Right. So on the GMV versus net GMV, the gap between the two metrics are closing now for Q2 in a row. So that is a very positive trend. So there are a number of moving pieces in between. For example, the return rates, which we have set consistently in low single digit. And then the remaining was really just incompleted orders. We saw higher incompleted orders on mobile. We think it may be part of the mobile behavior. And but the trend has been improving, but it's offsetting by increasing proportion of the orders from mobile, right? So overall, we see very positive trend that will close the gap. So on the commission, it would somewhat reflect that because the take rates on the marketplace will just attract the net GMV. And advertising is also growing very nicely. It as I mentioned on last quarter's earnings call, we are yet to monetize on mobile. And we right now, the most of the advertising revenue came from PC. And as everyone knows that PC traffic is decelerating in growth, although we are still growing. But on mobile, we're still testing and taking very careful step before monetizing on mobile. So just add a few words to what Sune said. So the majority of our take rate is from commission, not from the ads. So the migration of orders from marketplace orders from PC to mobile has not impacted our overall take rate that much. Even though we are not selling much ads on mobile yet, but we are working on it because there is needs from brands to put advertising on mobile and we are doing some experiments and so far we're seeing promising results. So going forward, we will monetize mobile traffic with that more so than now anyway. Thank you. Your next question comes from the line of John Choi from Daiwa Capital Markets. Your line is open. Please go ahead. Good evening. Thanks for taking my question. I just have a question on the JD Daojia, especially on the user experience side given that your in house delivery is pretty much well regarded to the user experience. I'm wondering how you guys are going to control on a lot of these part time delivery people when you have tens of 1,000 and wouldn't that have a negative impact to user experience? And a follow-up on this, I remember, Cindy, you mentioned that the fulfillment costs might go up from the 7% level from this quarter. So can you give us a bit more color and the reason why and what's magnitude? Thank you. All these freelancers are not our full time employees. So naturally, we were concerned about the customer experience quality at the beginning. But now we are concerned because we realize, we recognize that vast majority of these freelancers are actually from the same community they want to serve. So they do have a reputation they need to protect. So we've accumulated a lot of experience over time at JD Mall in managing delivery staff and we believe a lot of these expertise can be leveraged in this crowdsourcing model as well. So on the fulfillment expenses, because think about the these delivery cost does not generate revenue. If anything, it's a very small take rate. So just on a pure percentage basis, it will move higher. On the other hand, at the beginning of the business, we may decide to subsidize to certain extent to this business. So my comment was really incorporating all this potential cost in the second half. But there is no clear at this point, because it's in a very early stage, it's very, very difficult to quantify. So I just wanted to make a very conservative assessment. Thank you. Your next question comes from the line of Robert Lin from Morgan Stanley. Your line is open. Please go ahead. Hi, management. I just want a follow-up question on your Internet Finance business. We've heard from the order this morning that there could be potential more cooperation among JD as well as Tencent. When I think about your this is a fairly asset heavy business. Is there a consideration to spin out this business as a separate entity to do a lot of supplier financing, insurance, etcetera? Can we provide some color on how we think about Finesse Business going forward? So, basically as I mentioned earlier about Internet Finance Business, we are seeking external sources of funding. We're both doing this through securitization, but also we may look for external financing for this business. Until further announcement, we will at this point. And just quickly on I remember this earlier question on paipei.com. So, paipei is going through internal restructuring. We are redesigning its business. So, just a heads up that it will impact year over year GMV growth going forward. But as always, I've been disclosing GMV growth for J. D. Moore on a standalone basis. So the PiePipe business restructuring will potentially impact the overall GMV growth. But as again, we will also disclose the core JD Mall growth as well. Right. So Richard just added because Piepare has a zero commission, so whatever the business restructuring plan is, there will be very limited impact on the revenue. Thank you. Your next question comes from the line of Eric Wen from Blue Lotus. Your line is open. Please go ahead. Hi. Thanks very much for taking my question and congratulations on a great quarter. I have a short question regarding the collaboration with the supermarket. As we know the supermarket business has a low percentage of fresh produce, which actually do not make money and all the profit come from the remaining business, which are really not fresh produce. When you collaborate with the HyperMarts, how do you structure the economic benefit, so that there will be profit coming to your end and going forward? That's my question. Yes. So let me okay. So we yes, Yonghui actually is, as I mentioned, the best fresh product operator among all Chinese supermarkets. The percentage of fresh product sales of total sales at Yongfui is actually much higher than other supermarket chains. From its mid year financial report, you will see that fresh actually contributed about 43% of the total sales. And because we have been very much focused on improving and strengthening its supply chain for fresh products. It probably has the best procurement cost among all players on fresh products. So we actually from our understanding, it's fresh product is profitable. Gross margin is very healthy. Now, I think on a strategic collaboration front, obviously, we will work out a model that will provide benefits to both companies. For example, they now have over 3 50 stores, but obviously that will never be able to cover the entire country. So by having the partnership in areas where their physical stores do not cover, but we can jointly provide an onlineoffline model to provide this service because they already have the sourcing and the products and the warehouses and we have delivery network. So there will be a lot of areas for potential collaboration in this area. Although very small right now will in the future will contribute a lot of GMV and revenue to the company and profitability as well. But more importantly, it will make Jingdong a high frequency destination for customers, increase the stickiness of our customers and we believe this is its most important value to As As successful as JD Mall is, our typical customer probably use us a handful of times every month in the quarter. But what we find in the app is our customers use our app a few times a day. Sorry. Open our apps a few times a day anyway. If down the road if one day we have an app installed on customer cell phones which they use a few times every day, there's a lot of cross selling opportunities. We are now approaching the end of the conference call. I will now turn the call over to JD dotcom's Ryu Li for closing remarks. Thank you, operator. Once again, thank you for your continued support and we look forward to talk 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.