Earnings Call: Q1 2015

May 8, 2015

Earnings release

Hello and thank you for standing by for jd's.com's 1st 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 would now like to turn the meeting over to your host for today's conference, Ruiyu Li. Thank you, operator, and welcome to our Q1 2015 earnings call. Joining me today on the call are Richard Liu, Founder, Chairman and CEO and Cindy Huang, our CFO. For today's agenda, management will discuss highlights for the Q1 2015. Following the prepared remarks, Hao Yu Xian, CEO of GDMO 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, Ruiz, 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 Junong'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 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 a truly great service. And there's a huge demand for new generation of smart products and services that bridge the gap between on and off line. All of these areas are key to our long term growth and 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 Q1. 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 percent of total GMV during the quarter. Apparel and shoes continued to be the fastest growing category with a year over year growth of 2 30%. 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 the pipeline and Wango 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, but our B2C marketplace managed to buck the industry trend with its GMV growing 3% sequentially from the seasonally strong 4th 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 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 costs 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 percent 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 and D expense ratio also increased from 1.7% in the previous quarter to 1.8% this quarter, reflecting our R and D investment in existing and new business lines such as financial services. Altogether, our non GAAP net margin was negative 0.6% in the Q1 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 RMB2 1,000,000,000 in both operating cash flow and free cash flow. On the other hand, 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 5 years. Now let's discuss our financial outlook. We expect our Q2 net revenue growth between 52% and 56% on a year over year basis. By now, we have finished 4 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 2 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 3 to 5 years. Lastly, we are really excited about the newly announced strategic investment in tunio.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 move to the Q and A session. Operator? The question and answer 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 2 so called like new initiatives. Could you share with us some of your strategy and planned for cross border trade? It seems a lot of your competitors have been putting a lot of emphasis in the area. And then secondly, any update from about your online finance business would be great. If you can share any operating metrics that would be wonderful. Thanks. Hi, Eddie, it's Thao Yu. I'll take the cross border business question. We formally launched JD Worldwide April 15. Now we have 500 to 600 merchants online selling, I think the number of SKUs is in 100 of 1000. And we do operate a few different models. We have we've rented bonded warehouses in a few cities in China. So we do direct import. We also let some merchants use our rented upon a warehouse in these cities. We also do direct shipping, mostly through 3rd party merchants. So 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. So we have it looks like a very promising business for us, but it's in early days right now. Hey, how are you? Sorry. Can I ask a follow-up question on that front? When you select products, how can you avoid like cannibalization between the existing like branded products on your platform versus those like imported products? In a lot of cases, there's not much cannibalization because of the selection. Too much because the market is there, the consumer demand is there. Too much because the market is there, the consumer demand is there. So we just meet our customers' demand. And 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. And we also through public media, you probably saw that we had some new initiatives on equity crowdfunding and a number of other new products. But generally, they are still in fairly early stage other than the supply chain financing and also consumer financing products. So we at this point we have not disclosed any metrics, but we'll probably do so over the next few quarters. That's okay. Yes, Rich, I wanted to add a few words about cross border e commerce. So we're really focusing on 2 things this year for this business. The first one is to work with customs and when I bought a warehouse in different cities. Right now, we're already working with 3 cities and we're right now as we speak, we're working with 2 other cities. So hopefully by the end of the year, we'll have 5 cities that we can do this business through. And 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, really going to those cities those countries to recruit sellers and looking at different promising and we will continue to invest in this business. And it's again, it's a very great it's a great fit with our brand image. Your next question comes from the line of Erika Poon Werkhun from UBS. Your line is open. Please go ahead. Thank you. Thank you for the presentation. My question is on your customer add. Just wondering if you can share how many new customer active customer you added in Q1? And how many of those are from the Tencent, Weixin and QQ access point? And relatedly also wanted to understand on the Tencent relationship, wondering if you can share some other metrics such as traffic data, GMV contribution, etcetera? Thank you. So 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. So sequentially, because of the seasonality and a less promotional quarter. So you don't necessarily see the same amount of new customer adds. But in terms of the contribution to new customer acquisition, the percentage was still close. Last time we mentioned the November the November 11 type of red dot promotion. So it's still very, very healthy. So customer base also sequentially increased on a quarterly basis even though Q4 was a really strong quarter. But starting this year, we will only disclose annual customer annual active customers. So you can see that on a trailing 12 month basis, we did see a 90% growth this year in the 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 Yu and Cindy. Congratulations on a solid quarter and thanks for taking my questions. I have a question regarding the JD Daojia. So can management elaborate a little bit on these initiatives? So I understand it is still on a testing mode and maybe limited to Beijing or maybe some other city. So wanted to know how has been the traction so far? Should we expect this category to have a meaningful contribution down the road? And if you could also provide the margin profile for this fresh So we formally launched our O2O business recently. We've been as you might know, we've been testing this for over a year now. And we think we have fixed we finalized the model. Right now, as you know, we're only in Beijing, but we're testing as we speak in Shanghai already. So by end of Q2, hopefully we'll get to 4 cities Beijing, Shanghai, Guangzhou and Shenzhen and we're adding more provincial capitals by the end of the year. So we're looking closely looking at the numbers every day. It's growing very fast and it's very much liked by our customers. 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. What we really want to do going forward is crowdsourcing logistics and we believe this model will enable us to serve more customers. By end of May, we will open up a recruit, I think, crowdsourcing delivery personnel, I guess. Can you explain what is crowdsourcing delivery? Yes, these are basic freelancers, if you will, contractors, not JD specific JD employees and they do delivery for orders based on JD Daojang. Yes. So 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 3rd party sellers, their interest in utilizing your fulfillment capabilities? And then 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. So our warehouse space has been a constraint capacity wise, but not so much anymore. So at this point, we're really focusing on selling into these merchants to use our warehouses. But it's more it takes more convincing for them to use our warehouses than just to use our last mile delivery services. But we've made some progress. As you might know, we've started working with Uniqlo recently, the Japanese fast retail business and they're using our not only last mile delivery but also our warehouses, but it will take some time. Great. And 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. Right. Because for example, in the Q4 during November 11 festival, there will be more apparel sales, which has higher take rate. And comparatively speaking Q1, there will be more buying for food and beverage and other kind of New Year season gifts. So 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 and congratulations on solid quarter. I first have a quick follow-up relating to your worldwide business. So 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 we've added one more step, which is custom clearance. Do you still think you can your logistics and the deliveries are better than other competitors on the market? And so far, what is the average delivery time for the orders made on the worldwide? And then the next question is relating to your partnership with Tuniu. So I just want to clarify that if Tuniu is going to be your sole operator on JD Travel. And if that's right, I understand that Tuniu is mostly an outbound online travel agency. So 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, we our goal is to stop them in bonded warehouses in China. And so far, the We'll do direct shipping for long tail SKUs considering the inventory risk, then naturally the customer experience will not be as good as SKUs that go through the bonded warehouses. Depending on the categories different and countries it takes anywhere between 4 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's not exclusive. So 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 Xinjiang Meng from Jefferies. Your line is open. Please go ahead. Thank you. Good evening management for giving us the chance and congratulations for a strong quarter. I have a question on the mobile GMV contribution. Can And related to that, And related to that actually related to the marketplace strategy, Can you give us some more color on for the long term how management thinks about the 3rd party marketplace GMV contribution would be for the whole company? And where is JD's competitive differentiation in the 3rd party marketplace compared to other players in the market? Thank you. Okay. So I'll take the first question. The first question I guess was about the GMV contribution from mobile. We don't disclose that number, right? Yes. We disclose the percent of orders. Right. So you're talking about ticket size. So ticket size has been actually on both PC and mobile and fairly consistent over the last several quarters. For Q1 in particular, we actually saw some increase in average order size. We think partly because we can now everyone is on the suspension for the lottery tickets, which has low ticket size. But I think excluding that effect, it should be fairly consistent. But 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 42% of our orders. So as far as GMV, it's up percent, it will be lower, but not very low. But we don't disclose that number. And on your question about 3rd party marketplace growth, Q1, if you look at these numbers sequentially, Q1 versus Q4, the Q4 is a big quarter for marketplace. So if you compare 1st party versus marketplace, the growth was similar from Q4 to Q1. But going forward, we think marketplace will continue the growth will continue to outpace of 1st party business, but we don't have a set goal. But 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 talked about this many times before. It's for the merchants, we have higher income customers and for the merchants we offer logistics services for them. So these both of these can be very strong differentiators in the market. Your next question comes from the line of Alex Yao from JPMorgan. Your line is open. Please go ahead. Hi, good evening everyone and thank you for taking my question. Just want to ask about the category expansion strategy for both of your 1P and 3P business. Now that you have the investment in Tuniu and obviously you are pushing forward for the travel categories. Any updates on 2 to 3 years view will be helpful. Thank you. Yes. So we are now in we are a full category online retailer, right? So 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. So 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, which ones are growing faster. But I can tell you that just for our marketplace business, vast majority of those categories are growing at a triple digit. So 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, I'll add my congratulations. In the past you've talked about JD growing at or better than overall e commerce growth rates. And the question is twofold. First is, do you still feel long term that that will be the case? And 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. And in particular, over the past several quarters, we have seen in a number of areas accelerating growth. So 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. Yes, 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 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 and some of the articles I read is that the initial feedback has been positive. Can you just comment on why your initiative is different than other marketplaces like Taobao and like the initial conversion loan rollout to all of blown rollout too of the timing of the rollout for this year? 2nd question is your 3rd party margin. There is a substantial decrease. Now I know there's as 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 the mix shift? Can you provide that color? Thank you. So I'll take the homepage question. We did revamp our homepage in the Q1 after a lot of testing and we added more personalization components in our homepage. But I think we are not doing enough yet. I mean, this is just a start. I think as we grow our customer base, as we grow number of orders every day, we get more data about our customers as they purchase or visit our sites more frequently we get more data about them. So we'll keep improving. And recently we've made a few very good hires, technology hires on this front. So you should expect to see more in that respect from us, but nothing in particular to add. So on your second question for sequential gross margin change, there are really 3 key elements, right? The first is commission and I mentioned about mix shift because apparel was Q4 was a stronger quarter for apparel which happened to have the highest commission rate. And the second element is advertising. It also coincides with high promotional quarters. So Q2 and Q4 will see higher advertising revenue as a percent of total revenue. So that also has impact on sequential decline in Q1. And then 3rd element is the logistics services. And because the marketplace activity slowed down in Q1 because Chinese New Year, so the outsourced third party logistics services also were impacted. So all three actually had seasonal effect basically. And 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. And my 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. And as Cindy mentioned that it was due to the seasonality. So 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? And also can you also share with us what are the categories that lead this strong growth in the direct sales? Thanks. Right. So as I mentioned Q1 was really mainly driven by seasonality, because third party merchants tend to take off during the holidays, right? So it's more of seasonality than company strategy. We will continue to focus on both direct sales and marketplace businesses. As Richard and how you mentioned earlier, because of the underlying market is larger for the long tail products. So we do expect marketplace will continue to outgrow the principal business in the foreseeable future. So Q1 was more of a seasonality issue rather than company's strategic shift. And for what's the second part of the question? Okay. Your next question comes from Sean Chung from 86 Research. Your line is open. Please go ahead. Hi, good evening, Richard, Sydney, Haoyuan, Ryu. Congratulations on a strong quarter. So my understanding is JD is still in a very rapid growth stage. I think the biggest driver for me is the user growth and the market penetration. So 90% user growth year over year, is that a surprise to management as well? Or going forward, what do you see the trend will be? And 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. Yes. So 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. And the order number is actually consistent with my earlier comment on average ticket size, right? So we suspect partly the reasons for lottery tickets even though the GMV contribution was very small, but the ticket size was also really, really small. So that's why it actually impacts the number of orders. But 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 3rd party merchants in your VP 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? And secondly, for fulfillment, can management share some color about the fulfillment as a percentage of revenue that comes from your warehousing and delivery services provided to third party partners? Thanks. Yes. 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. So in a really in an effort to continue to focus on the larger and number to increase. I think our target is, number to increase. I think our target is somewhere around 100,000 merchants that would be probably optimal. As far as fulfillment as percent of revenue for 3rd party, it's very difficult to separate that we actually did because the same delivery staff will deliver for both 1P and 3P parcels. So 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. But it's somewhere if you just take a look at revenue and assume expense is same as the revenue because we're learning at a breakeven at this point. It's roughly 1% to slightly higher depending on the quarter. I'll just add to what Cindy 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. So are not looking to grow this market place 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. So going forward, we're going to definitely add more to our platform, but in a very measured way. Your next question comes from Eric Yuan from Blue Lotus. Your line is open. Please go ahead. Hi, good evening. Thanks very much for taking my questions, Sidney and Hao Yu. 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 RMB2.1 billion worth of positive change in working capital in this quarter. Now I understand that coming off inventory buildup in Q4, we always have a positive cash flow in Q1. But 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 results? Thanks. Right. So there is a little one time effect. As you recall that in Q4, we mentioned a few reasons for negative operating cash flow. One of the reasons was we had some prepayments to stock up for the Chinese New Year holiday season. So that obviously in Q1 will be reversed. But 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 quarter, which is probably the lowest in the industry. So we at some point this payable cycle will gradually increase, which will certainly add a lot of cash flow to our business. So we haven't really pulled the trigger, but the trend should be moving up in the next 3 to 5 years. If you look at 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 and 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. And we're now 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. Go ahead. Hi, Richard, Cindy and how are you? Question related to your expansion. And in the Tier one cities like what we live in Beijing, we saw JD deliver everywhere and from morning to the night and very active. So as company's expansion strategy, you're going to lower tier cities and that will related to the lower tier cities, warehousing, deliverings and labors. So I wonder what's the fulfillment cost is going to look like comparing the Tier 1, Tier 2 city merchants or purchase? That's the number one question. So the second one is really related to your overseas direct Haitao program. Haitao is such a big new thing, new trend. And 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. Yes. So, Sunil, 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 6 tier cities. So there will be inefficiency at the beginning, but as the order density improves throughout the year, we do see improvement on efficiency. So we do select the areas with very good population density. If you look at the latest coverage, we now have we now cover about 19 61 counties and districts out of 2,800 nationwide. So these are still highly populated areas. We do see good potential to have highly efficient last mile operations in those areas. So 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 data rate services. And we're seeing great improvement over the past 12 months. I'll add to Cindy said about fulfillment into lower tier cities. So we've over the past years, we've been through this process many times, We were only the 1st tier cities in the early years. When we go to 2nd tier cities, we always had 6 months or a year where when it's very uneconomical when we do deliveries ourselves. But having people in JD uniform on the ground delivering parcel to our customers is the most powerful marketing tool for us. And very quickly we see order going up, order density going up and the cost per order will take care of itself. So now we're going to 4th tier, 5th tier cities and 6 tier cities and we're very confident that as our orders order density goes up, we will benefit tremendously. Your second question about Haitao, yes, it is a very complicated business, a lot of SKUs. So there are a few things we're doing as which I mentioned earlier that we've been 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. So we're trying a few different approaches. For the brands that really meet Chinese consumers' needs, Right now we are working probably working with distributors and to import into China. But over time we want to work directly with the brands to get their through a first party business 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 could share any progress and more color to share with us? And also 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 exact numbers, but it's still if we look at the Q1 numbers, it's still growing very fast sequentially and also year over year. And a significant portion of that business now uses our warehouses and delivery. But it's if you look at overall, it's still a small number, they're growing fast. 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 we are looking forward to talking with you in the future.