Hello, and thank you for standing by for JD.com's first quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there'll 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, and welcome to our first quarter 2015 earnings call. Joining me today on the call are Richard Liu, founder, chairman, and CEO, and Sidney Huang, our CFO. For today's agenda, management will discuss highlights for the first quarter 2015. Following the prepared remarks, Haoyu Shen, CEO of JD Mall, will join Mr. Liu and Mr. Huang for the questions and answer portion 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 discussion 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 figures mentioned during this conference call are in RMB.
I would like to turn the call over to our founder, chairman, and CEO, Richard Liu.
Thank you, Rui, and welcome, everyone. We are off to a strong start in 2015 as our reputation for quality and service continues to drive rapid growth. During the quarter, we enhanced JD.com's leading online shopping experience. We expanded our range of products and partnered with top international retailers as we launched JD Worldwide to give international brands a complete solution to reach Chinese consumers. We made good progress across our O2O initiatives and our internet finance business, as well as in our strategic verticals, such as auto, through our partnership with Bitauto. In addition, in March, we launched our equity crowdfunding platform, which is helping Chinese entrepreneurs develop their businesses for long-term success. This is an exciting time for JD.com. Chinese consumers increasingly demand high-quality, authentic products and truly great service.
There's a huge demand for a new generation of smart products and services that bridge the gap between on and offline. All of these areas are key to our long-term growth, our experience, reputation, and execution capability give us a powerful advantage. Again, thank you for joining us today. I will now turn over the call to Sidney.
Thank you, Richard, and hello, everyone. I'll spend the next 10 minutes to walk through our Q1 financial results and Q2 outlook. We are very encouraged by our continued robust growth in the first quarter. Our year-on-year GMV growth was 99% overall and 94% for JD Mall, excluding the effect from the marketplace business acquired from the Tencent transaction. Our net revenue year-on-year growth was 62% in Q1, above our internal expectations due to strong performance in our 1P business during the Chinese New Year holiday. The GMV composition was largely consistent with the prior quarter. GMV from general merchandise categories grew 151% and accounted for more than 49% of total GMV during the quarter. Apparel and shoes continued to be the fastest-growing category, with a year-over-year growth of 230%. Other fast-growing categories included home furnishing, watches and handbags, and auto-related products.
GMV from our marketplace business grew 185% in Q1 and accounted for 42% of our GMV during the period. More notably, if you exclude Paipai and Wanggou contribution, GMV from our B2C marketplace grew at an accelerated rate of 176% year-over-year, compared to 171% growth in Q4 last year. On a sequential basis, our overall marketplace GMV declined 1% due to seasonality, our B2C marketplace managed to buck the industry trend, with its GMV growing 3% sequentially from the seasonally strong fourth quarter. Even better, our first-party GMV had a sequential growth of 5%, driven by strong principal business during the Chinese New Year season, while third-party merchants tend to slow down or take off for the holiday. As a result, the 1P GMV contribution increased 2% sequentially to 58% of total GMV.
This seasonal mix shift highlights JD's competitive advantage of running a principal business that can ensure quality and consistency in customer experience throughout the year. Our direct sales revenue grew 59% year-over-year, led by food, beverage, baby products, and cosmetics, as well as the mobile and home appliance categories. Services and other revenue grew 139% year-over-year, mainly driven by triple-digit growth in commission, advertising, and logistics service revenues. Our non-GAAP gross margin improved to 12.2%, up from 10% a year ago, as a result of higher first-party gross margin and higher GMV contribution from the marketplace. Sequentially, gross margin came down 50 basis points, reflecting the mix shift due to seasonality. Non-GAAP fulfillment expense ratio declined slightly to 7.2% in Q1 compared to 7.3% in Q4. The decrease was mainly due to relatively lower logistics service cost, given Q4's seasonally strong marketplace activities.
We expect the fulfillment expense ratio to increase in the next several quarters as we continue to invest in our O2O initiative and our logistic infrastructure in lower-tier cities, including county-level service centers as part of our rural e-commerce strategy. The non-GAAP marketing expense ratio was 3% in Q1, compared to 3.3% in Q4 and 2.6% in the same quarter last year. The sequential decrease was driven by seasonality, while the year-over-year increase was consistent with our enhanced marketing effort to raise our brand awareness this year. We expect non-GAAP marketing expense ratio to remain above 3% in 2015. Our non-GAAP R&D expense ratio also increased from 1.7% in the previous quarter to 1.8% this quarter, reflecting our R&D investment in existing and new business lines such as financial services.
Altogether, our non-GAAP net margin was negative 0.6% in the first quarter, compared to negative 0.4% in the same quarter last year. However, if you just look at our core JD Mall business, both the non-GAAP operating margin and non-GAAP net margin improved meaningfully from the prior year levels and were profitable during the quarter. In other words, the non-GAAP net loss was entirely attributable to the new business lines where JD is investing for long-term growth and profitability for the years ahead. Another important angle to gauge the health of our business is the cash flow and working capital. We had a record quarter with over RMB 2 billion in both operating cash flow and free cash flow. On the other hand, the inventory turnover remained low at 35 days, while the accounts payable turnover was only 40 days.
These working capital metrics reflect our industry-leading operating efficiency and significant potential to improve cash flow. We plan to maintain a positive operating cash flow through more active management of our working capital over the next five years. Let's discuss our financial outlook. We expect our Q2 net revenue growth between 52%-56% on a year-over-year basis. By now, we have finished four full quarters after integrating Tencent's e-commerce business in March 2014. We are very pleased that our organic growth remains robust with strong momentum. As for the non-GAAP bottom line, we maintain our previous guidance of between breakeven to negative 0.5% for the full year 2015.
While we are capable of making a profit at any time, as evidenced by our performance in the past two years, we remain convinced that it is in the best interest of our shareholders that we continue to invest opportunistically in the related new business lines, leveraging our scale and customer base to ensure sustained growth beyond the next three to five years. We are really excited about the newly announced strategic investment in Tuniu.com. In addition to what's disclosed in the joint press release, I just wanted to add that Tuniu is specialized in packaged tour business, which has a perfect fit for leveraging our middle-class customer base for cross-selling on JD's platform. Leisure travel is still an emerging trend in China, and the cultural differences and language barrier will make organized tours a preferred choice for the mass consumers looking to travel overseas.
Tuniu and JD.com, through this strategic alliance, are best positioned to take advantage of this exciting trend. With that, we are now moved to the Q&A session. Operator.
The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. If you wish to ask the question, please press star followed by the number one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the star key followed by the number two. Your first question comes from the line of Eddie Leung from Merrill Lynch. Your line is open. Please go ahead.
Good evening. Thank you for taking my questions. Just would like to get a sense on two so-called new initiatives. Could you share with us some of your strategy and plan for cross-border trade? It seems a lot of your competitors have been putting a lot of emphasis in the area. Secondly, any update about your online finance business would be great. If you can share any operating metrics, that would be wonderful. Thanks.
Right. Hey, Eddie, it's Haoyu. I'll take the cross-border business question. We formally launched JD Worldwide on April 15th. Now we have 500-600 merchants online selling. I think the number of SKUs is in hundreds of thousands. We do operate a few different models. We've rented bonded warehouses in a few cities in China, so we do direct import. We also let some merchants use our rented bonded warehouse in these cities. We also do direct shipping, mostly through third-party merchants. It's in its early days, and we think overseas shopping has a very good fit with JD's customer base and JD's association with authenticity and trust. It looks like a very promising business for us, but it's in the early days right now.
Hey, Haoyu. Sorry. Can I ask a follow-up question on that front? When you select products, how can you avoid cannibalization between the existing branded products on your platform versus those imported products?
In a lot of cases, there's not much cannibalization because of the selection. A lot of SKUs are just not available in China. In cases where there are similar SKUs, at this point, we don't look into that too much because the market is there, the consumer demand is there, we just meet our customers' demand. On your second question, Eddie, on internet finance, we see robust growth in our consumer finance business. We have gradually expanded the target customer base among, again, still a selected group of JD customers. We also, through public media, you probably saw that we have some new initiatives on equity crowdfunding and a number of other new products. Generally, they are still in fairly early stage other than the supply chain financing and also consumer financing products.
At this point, we have not disclosed any metrics, but we'll probably do so over the next few quarters. Yeah. Richard wanted to add a few words about cross-border e-commerce. We're really focusing on two things this year for this business. The first one is to work with customs and bonded warehouses in different cities. Right now, we're already working with three cities, and right now, as we speak, we're working with two other cities. Hopefully by the end of the year, we'll have five cities that we can do this business through. The second thing is really on selection. We've gone to these overseas recruiting trips, so to speak. We've been to Korea, France, and Japan, and we're going to Australia soon. We're really going to those countries to recruit sellers and looking at different merchandises that will fit Chinese consumers' needs.
Again, it's early, but the numbers are looking promising and we'll continue to invest in this business. Again, it's a great fit with our brand image.
Once again, if you have more than one question, please request to join the question queue again after your first question has been addressed. Your next question comes from the line of Erica Poon Werkun from UBS. Your line is open. Please go ahead.
Thank you for the presentation. My question is on your customer add. Just wondering if you can share how many new active customers you added in Q1, and how many of those are from the Tencent, Weixin, and QQ access point? Relatedly, also wanted to understand on the Tencent relationship, wondering you can share some other metrics such as traffic data, GMV contribution, et cetera. Thank you.
We had disclosed a couple of metrics last quarter. With the November 11 Shopping Festival, we saw a huge increase from those two entry points. Sequentially, because of the seasonality and a lesser promotional quarter, you don't necessarily see the same amount of new customer adds. In terms of the contribution to new customer acquisition, the percentage last time we mentioned about roughly 20%, and in Q1, it's still fairly close to that number, even without the November 11 type of Red Dot promotion. It's still very healthy. Customer base also sequentially increased on a quarterly basis, even though Q4 was a really strong quarter. Starting this year, we will only disclose annual active customers. You can see that on a trailing 12-month basis, we did see a 90% growth in the first quarter.
Your next question comes from the line of Alicia Yap from Barclays. Your line is open. Please go ahead.
Hi. Good evening, Richard, Hao, and Sidney. Congratulations on the solid quarter, and thanks for taking my questions. I have a question regarding the JD Daojia. Can management elaborate a little bit on this initiative? I understand it is still on a testing mode and may be limited to Beijing or maybe some other city. Wanted to know how has been the traction so far, and should we expect this category to have a meaningful contribution down the road? If you could also provide the margin profile for this fresh food category. Thanks.
We formally launched our O2O business recently. As you might know, we've been testing this for over a year now, and we think we have finalized the business model. Right now, as you know, we're only in Beijing, but we're testing, as we speak, in Shanghai already. By end of Q2, hopefully we'll get to four cities, Beijing, Shanghai, Guangzhou, and Shenzhen. We're adding more provincial capitals by the end of the year. We're closely looking at the numbers every day. It's growing very fast, and it's very much liked by our customers. Yeah. Right now we're really focusing on growing customer base. We're working with supermarkets, and the take rate is very low at this point, but that's not our focus at this point. Yeah.
What we really want to do going forward is crowdsourcing logistics, and we believe this model will enable us to serve more customers. Yeah, by end of May, we'll open up a recruit, crowdsourcing delivery personnel, I guess.
Can you explain what is crowdsourcing delivery?
Oh.
These are basically freelancers, if you will, contractors, not specific JD employees, and they do delivery for orders placed on JD.
It's a delivery model of Uber.
That's right. Okay. All right, great. Thank you.
Your next question comes from the line of Mark Miller from William Blair. Your line is open. Please go ahead.
Hi. Good evening. Good morning. Could you share with us your visibility on the backlog of third-party sellers, their interest in utilizing your fulfillment capabilities? Is that a business that can be material as you progress through 2015 and the ramp-up in that, is that more constrained by your own capacity and logistics considerations, or is that a service that you need to market and build interest and show that it accelerates the volume for sellers?
There's not so much backlog in terms of merchants waiting to use our services. As we mentioned in previous calls, we do handle about 30% of the merchants' parcels already in terms of last-mile delivery. I think what we will focus on going forward is convince more and more of them to use our warehouses. Our warehouse space has been a constraint capacity-wise, but not so much anymore. At this point, we're really focusing on selling into these merchants to use our warehouses. It takes more convincing for them to use our warehouses than just to use our last-mile delivery services. We've made some progress. As you might know, we've started working with Uniqlo recently, the Japanese fast retail business. They're using not only our last-mile delivery but also our warehouses. It will take some time.
Great. If I could ask one other question. The take rate on third-party sales continues to migrate down, at least that computed percentage. Can you just share with us the dynamics, in terms of how we think about that contribution? Thanks.
The take rate is stable, but it does vary by category, so some fluctuation from quarter to quarter might be due to the mix shift.
For example, in the fourth quarter, during November 11 Festival, there will be more apparel sales, which has higher take rate. Comparatively speaking, Q1, there will be more buying for food and beverage and other kind of New Year season gifts. The take rate will be a little bit different from the mix.
Your next question comes from the line of Ella Ji from Oppenheimer. Your line is open. Please go ahead.
Good evening. Congratulations on solid quarter. I first have a quick follow-up relating to your worldwide business. Your logistics and delivery services has been one of your key differentiations. Could you also talk about your services for the worldwide segment? Meaning, if you now added one more step, which is custom clearance, do you still think your logistics and the deliveries are better than other competitors on the market? So far, what is the average delivery time for the orders made on the worldwide? Then, the next question is relating to your partnership with Tuniu. I just want to clarify that if Tuniu is going to be your sole operator on JD Travel. If that's right, I understand that Tuniu is mostly an outbound online travel agency.
Is it fair to say that your travel channel is going to be focused on outbound travel only? Thank you.
For the cross-border business, for the high velocity, high-frequency SKUs, our goal is to stock them in bonded warehouses in China, and so far, the custom clearance time is very fast. We will do direct shipping for the long-tail SKUs considering the inventory risk. Naturally, the custom experience will not be as good as the SKUs that go through the bonded warehouses. Depending on the categories different and countries, it takes anywhere between four to 15 days to arrive.
On the Tuniu question, we only give Tuniu exclusive right to operate the packaged tour and some related leisure travel channels.
We do allow Tuniu to be a preferred partner on air and hotel booking services, but that is not exclusive. We will still maintain our own travel channel, but we will give Tuniu exclusive access to several sub-channels within the travel category.
Thank you.
Your next question comes from the line of Cynthia Meng from Jefferies. Your line is open. Please go ahead.
Thank you. Good evening, management, for giving us the chance, and congratulations from [quarter]. I have a question on the mobile GMV contribution. Can management give us more color on the average ticket size per order on mobile compared to PC? Related to the marketplace strategy, can you give us some more color on, for the long term, how management thinks about the third-party marketplace GMV contribution would be for the whole company? Where is JD's competitive differentiation in the third-party marketplace compared to other players in the market? Thank you.
Okay, I will take the first question. The first question, I guess, was about the GMV contribution from mobile. We don't disclose that number, right?
Yeah.
We will disclose the % of orders.
Right. You're talking about ticket size.
Yeah.
Ticket size has been actually on both PC and mobile fairly consistent over the last several quarters. For Q1, in particular, we actually saw some increase in average order size. We think partly because now everyone's on the suspension for the lottery tickets, which has a low ticket size. I think excluding that effect, it should be fairly consistent, mobile generally will have a lower ticket size than the PC average order value.
I think we mentioned in the release that in Q1, mobile accounted for 32% of our orders. As far as GMV, that percentage will be lower, not very low, we don't disclose that number. On your question about third-party marketplace growth. Q1, if you look at these numbers sequentially, Q1 versus Q4 is a big quarter for marketplace. If you compare first-party versus marketplace, the growth was similar from Q4 to Q1. Going forward, we think marketplace growth will continue to outpace the growth of first-party business, we don't have a set goal. I think Richard mentioned before that it's very possible in the next few years that the majority of our GMV will be from marketplace sellers.
The overall market size for the categories dominated by marketplace is much larger than the standardized products usually handled by a direct model. You also asked a question of what's our differentiator versus some other platforms. I think we've talked about this many times before. For the merchants, we have higher-income customers, and for the merchants, we offer logistics services for them. Both of these can be very strong differentiators in the market.
Your next question comes from the line of Alex Yao from J.P. Morgan. Your line is open. Please go ahead.
Hi, good evening, everyone, and thank you for taking my question. I just want to ask about the category expansion strategy for both of your 1P and 3P business. Now that you have investment in Tuniu, and obviously you are pushing forward for the travel categories. Any updates on a 2-3 years view will be helpful. Thank you.
We are a full category online retailer. We already covered all the essential categories. The strategic alliance with Tuniu and also with Bitauto last quarter was really to expand our capabilities in more specialized verticals, where vertical expertise was very important. This has not changed our vertical expansion strategy. We are in these verticals. It is really just a matter of execution in each and every of these categories. I mentioned a few categories in my prepared remarks on which ones are growing faster. I can tell you that just for our marketplace business Vast majority of those categories are growing at a triple digit. We are making very good progress across all categories.
Your next question comes from the line of Gene Munster from Piper Jaffray. Your line is open. Please go ahead.
Hey, Ed and Mike, congratulations. In the past, you've talked about JD growing at or better than overall e-commerce growth rates. The question is twofold. First is, do you still feel long-term that will be the case? Second is, now that you've had some time to think about and digest Alibaba's strategy post-IPO, has anything changed in how they're approaching the market that may be impacting how you feel about your ability to grow at or above e-commerce growth rates longer term? Thank you.
Right. We have been growing significantly faster than the industry and also our largest competitor. In particular, over the past several quarters, we have seen in a number of areas accelerating growth. The track record just provides strong evidence that our unique model is working. Our focus on customer experience, focus on quality and service, is definitely giving us a competitive edge versus our competitors in the industry. Yeah, we do not believe there's anything changed from our strategy point of view. The only rule in e-commerce business is whoever can provide the best customer experience always wins.
Your next question comes from the line of Robert Lin from Morgan Stanley. Your line is open. Please go ahead.
Hi, management. Congratulations on the results. I have two questions here. I noticed that you guys have tested the personalization of the homepage, essentially. Some of the articles I've read is that the initial feedback has been positive. Can you just comment on why your initiative is different than other marketplaces like Taobao? The initial conversion rate, as well as the potential full-blown rollout, too, of the timing of the rollout for this year. Second question is your third-party margin. There is a substantial decrease. I know notice that, Sidney, you said it's a mix issue. Are there any other factors that is contributing to that decline, meaning your warehousing services or your logistics services that's dragging down besides just a mix shift? Can you provide that color? Thank you.
I'll take the homepage question. We did revamp our homepage in the first quarter after a lot of testing, and we added more personalization components in our homepage. I think we are not doing enough yet. This is just a start. I think as we grow our customer base, as we grow the number of orders every day, we get more data about our customers. As they purchase or visit our site more frequently, we get more data about them. We'll keep improving personalization. Recently, we've made a few very good hires, technology hires on this front. You should expect to see more in that respect from us, but nothing in particular to add.
On your second question, for sequential gross margin change, there are really three key elements. The first is commission. I mentioned about mix shift because Q4 is a stronger quarter for apparel, which happened to have the highest commission rate. The second element is advertising. It also coincides with high promotional quarters. Q2 and Q4 will see higher advertising revenue as a % of total revenue. That also has impact on sequential decline in Q1. The third element is the logistics services. Because the marketplace activities slowed down in Q1 because of Chinese New Year, so the outsourced third-party logistics services also were impacted. All three actually had seasonal effect, basically. That's why you should look at on a year-over-year basis, which we do see improvement across all three elements.
Your next question comes from Ida Yu from CICC. Your line is open. Please go ahead.
Hi, thank you for taking my question and congratulations for the great quarter. I have one question here. As we noticed that online direct sales GMV maintained very strong growth momentum, and its portion also increased to 58% in Q1 from the previous quarter. As Sidney Huang mentioned, that it was due to the seasonality. I'm also wondering what is the trend going forward, and will the company devote more resources to develop direct sales business for better quality control? Can you also share with us what are the categories that lead this strong growth in the direct sales? Thanks.
Right. As I mentioned, Q1 was really mainly driven by seasonality, because third-party merchants tend to take off during the holidays. It's more of seasonality than company strategy. We will continue to focus on both direct sales and marketplace businesses, as Richard Liu mentioned earlier, because of the underlying market is larger for the long-tail products. We do expect marketplace will continue to outgrow the principal business in the foreseeable future. Q1 was more of a seasonality issue rather than a company's strategic shift. What's the second part of the question? Okay.
Your next question comes from Sean Zhang from 86Research. Your line is open. Please go ahead.
Hi, good evening, Richard Liu, Sidney Huang, Haoyu Shen, Ruiyu Li. Congratulations on a strong quarter. My understanding is JD is still in a very rapid growth stage. I think the biggest driver for me is user growth and market penetration. 90% user growth year-over-year, is that a surprise to management as well? Going forward, what do you see the trend will be? I also see that your order growth actually fell behind the user growth and also what will be the trend for order growth going forward? Thank you.
The 90% customer growth is fairly consistent. It actually slowed down a bit from previous quarters on a year-over-year basis as we continue to become with larger size. The order number is actually consistent with my earlier comment on average ticket size. We suspect probably the reasons for lottery tickets, even though the left GMV contribution was very small, but the ticket size was also really, really small. That's why it actually impacts the number of orders. Other than that, there's really nothing unusual, other than we hope that the average order size is improving when customers buying more products in each order.
Your next question comes from the line of Thomas Chong from Citi. Your line is open. Please go ahead.
Hi, thanks for taking my questions. I have two questions. The first question is about the number of third-party merchants in your 3P business. It seems that it is quite stable at about 60,000. Can management provide us some color about your expectations in the upcoming quarters? Secondly, for fulfillment, can management share some color about the fulfillment as a % of revenue that comes from your warehousing and delivery services provided to third-party partners? Thanks.
Yeah. On the merchants, for the current quarter, it's fairly consistent as we continue to closely monitor the quality of our merchant base. We are also increasing the annual service fees for each merchant. Really in an effort to continue to focus on the larger and the more established merchant base. Longer term, we do see that number to increase. I think our target is somewhere around 100,000 merchants that would be probably optimal. As far as fulfillment as % of revenue for a third party, it's very difficult to separate, because the same delivery staff will deliver for both 1P and 3P parcels. It's impossible actually to separate them. That's why we have no longer Even the gross margin is a kind of a non-GAAP measure.
It's somewhere, if you just take a look at revenue and assume expense is same as the revenue, because we're running at a break even at this point. It's roughly 1% to slightly higher, depending on the quarter.
I'll just add to what Sidney just said about the number of merchants. We always have quite high criteria when it comes to recruiting merchants to our platform. We do offer a pretty good selection at this point already. We're not looking to grow this marketplace into a very crowded marketplace. We do want to offer selection, but at the same time, to make sure that every merchant can make reasonable money on our platform. Going forward, we're definitely going to add more to our platform, but in a very measured way.
Your next question comes from Eric Wen from Blue Lotus. Your line is open. Please go ahead.
Hi. Good evening. Thanks very much for taking my questions, Sidney and Haoyu. My question is regarding your operating cash flow. Looks like our operating cash flow has more than doubled during the quarter, and you generated about RMB 2.1 billion worth of positive change in working capital in this quarter. Now, I understand that coming off an inventory build-up in Q4, we always have a positive cash flow in Q1. Can I get your comment on how scalable this cash flow effect is in the future Q1s, and if there's any one-time effect in this quarter's result? Thanks.
Right. There is a little one-time effect. As you recall that in Q4, we mentioned a few reason for a negative operating cash flow. One of the reason was we had some prepayments to stock up for the Chinese New Year holiday season. That obviously in Q1 will be reversed. I think even longer term, on a sustainable basis, there is very good potential to sustain a positive operating cash flow. I did mention in my earlier remarks about our working capital. Our accounts payable days outstanding was only 40 days this quarter, which is probably the lowest in the industry. At some point, this payable cycle will gradually increase, which will certainly add a lot of cash flow to our business. We haven't really pulled the trigger, but the trend should be moving up in the next three to five years.
If you look at the payable situations at other offline retailers of similar size, they tend to have much longer payable days, sometimes around 100 days. We only have about 40 days, this shows our strong support to our suppliers. Having said that, it also indicates that we have a lot of potential to further improve our cash situation. We're not going to increase our payable days abruptly, but I think over the next few years, we do have potential to increase that by some days every year.
Your next question comes from the line of Tian Hou from T.H. Capital. Your line is open. Please go ahead.
Hi, Richard, Sidney, and Haoyu. A question related to your expansion. In the Tier 1 cities, like what we live in Beijing, we saw JD deliver everywhere, from morning to the night, very active. As company's expansion strategy, you're going to lower-tier cities, that will relate to the lower-tier cities' warehousing, deliverings, and labors. I wonder, what's the fulfillment cost is going to look like comparing in the Tier 1, Tier 2 city merchants or purchase? That's the number one question. The second one is really related to your overseas direct Haitao program. Haitao is such a big new thing, new trend. However, it's very complicated. It is a product sourcing from all over the world. How do you resolve this very complex product sourcing issue? That's two questions.
Yeah. On the first one, as you know, since last year, we started expanding into the lower-tier cities by really building up delivery stations in 3rd to 6th-tier cities. There will be inefficiency at the beginning, but as the order density improves throughout the year, we do see improvement on efficiency. Select the areas with very good population density. If you look at the latest coverage, we now cover about 1,961 counties and districts out of 2,800 nationwide. These are still highly populated areas. We do see good potential to have highly efficient last-mile operations in those areas. In terms of the delivery service, we do not target Also, in those more and more areas, we don't target same-day delivery. For example, our objective is to have as many of these areas covered by next-day delivery services.
We're seeing great improvement over the past 12 months.
Yeah. I'll add to what Sidney Huang said about fulfillment into lower-tier cities. Over the past years, we've been through this process many times, right? We were only in the 1st-tier cities in the early years. When we go to 2nd-tier cities, we always had 6 months or 1 year, when it's very uneconomical when we do deliveries ourselves. Having people in JD uniform on the ground and delivering parcels to our customers is the most powerful marketing tool for us. Very quickly, we see orders going up, order density going up, and the cost per order will take care of itself. Now we're going to 4th-tier, 5th-tier cities, and 6th-tier cities, and we're very confident that as our order density goes up, we will benefit tremendously. Your second question about Haitao, yes, it is a very complicated business.
A lot of SKUs. There are a few things we're doing, as Richard Liu mentioned earlier. One thing we do is we go to these different countries. We work with the government. We do these conferences to try to recruit sellers onto our platform. We also work with different models. We work directly with brands. We work with distributors a lot at this point as well, and also we are talking to retailers, multi-brand retailers in different countries as well. We're trying a few different approaches. For the brands that really meet Chinese consumers' needs, right now, we are probably working with distributors into importing to China. Over time, we want to work directly with the brands to get their authorization to become their authorized reseller in China, doing it through a first-party model.
Your next question comes from the line of John Choi from Daiwa. Your line is open. Please go ahead.
Management, thanks for taking my question. I have a very brief question on your flash sales initiatives. Could management share any progress and more color to share with us? Any idea on the contribution to the GMV? Thank you.
It's part of I would say about half of the business, or maybe even more than half, is apparel and shoes. We don't disclose the exact numbers, if we look at the Q1 numbers, it's still growing very fast, sequentially and also year-over-year. A significant portion of that business now uses our warehouses and delivery. If you look at overall, it's still a small number. They're growing fast.
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.
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, we are looking forward to talking with you in the future.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.