Hello, and thank you for standing by for JD.com's second quarter 2014 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, to Ms. Ruiyu Li. Please go ahead, ma'am.
Thank you, operator, and welcome to our second quarter 2014 earnings conference call. Joining today on the call are Richard Liu, Chairman and CEO, and Sidney Huang, Chief Financial Officer. For today's agenda, management will discuss highlights for the second quarter 2014. Following the prepared remarks, Haoyu Shen, CEO of JD Mall, will join Mr. Liu and Mr. Huang for the Q&A section 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 our reconciliation of non-GAAP measures to most directly comparable GAAP measures. Finally, please notice that, unless otherwise stated, all figures mentioned during this conference call are in RMB.
Now, I would like to turn the call over to our Chairman and CEO, Richard Liu.
Good day, everyone. Welcome to our second quarter 2014 earnings conference call. Let me begin with a brief sector overview. The e-commerce market in China saw strong growth during the second quarter. The long-term shift in China towards B2C continued, feeding into JD's strength. Within this context, JD outperformed the industry, further gaining market share. JD's model of providing authentic goods, leading customer service, and a convenient one-day and next-day delivery helped us gain traction. But we remain focused on further strengthening our advantage in these areas. I believe that Chinese consumers deserve to know that everything they buy is authentic. This creates a better customer experience, and we continue to devote resources to ensure that products on our site are always real. Let me update you on our logistics.
While the foundation of JD's success is our self-operated nationwide fulfillment infrastructure, which is the largest among e-commerce companies in China. Our rapid last-mile delivery network creates a great experience that our customers know they can rely on. It also helps our third-party merchants simplify their businesses, enhance customer experience, and build loyalty. Expanding this network to high-growth markets is a top strategic priority, and at the end of the second quarter, our self-operated delivery network covered 1,780 counties and districts, up from 1,404 counties and districts at the end of the first quarter. Going forward, we will continue to strengthen our network in fast-growing lower-tier cities. This will enable JD to reach a much wider range of key consumer demographics. Turning to mobile. Creating the best mobile shopping experience is also core to our growth strategy.
Our mobile app is gaining strong traction, while smart devices are becoming central to China's internet users. Meanwhile, our close partnership with Tencent is vital to our mobile strategy. We recently introduced level 1 access to WeChat and Mobile QQ, which have more than 500 million active users respectively. This game-changing initiative brings JD's outstanding customer experience to China's two leading social communications platforms. Overall, we are seeing strong positive trends, with over 24% of our orders placed on mobile in the second quarter. Looking beyond JD Mall. In addition to our leadership in B2C e-commerce, JD also aims to provide a trusted C2C platform for buying authentic products online in China. We recently relaunched Paipai with the goal of bringing the JD experience to a Chinese C2C e-commerce market with lower marketing costs and access JD's delivery network.
We believe that the buyers and the sellers will understand the clear advantages our platform offers. Turning to the future, we see many opportunities for JD to extend our sector leadership. We will expand our range of products and services, build our fulfillment infrastructure, optimize our mobile offerings, and use technology like leveraging big data to continuously enhance customer experience. We are excited about our future potential and are committed to our vision of bringing world-class online shopping to customers. Now, I will turn the call over to Sidney Huang, JD's CFO. Thank you.
Thank you, Richard, and hello, everyone. I would like to spend the next few minutes to go through our Q2 financial results and our Q3 outlook. We are quite pleased with our second quarter top-line and bottom-line results. Our GMV more than doubled from the same period last year, benefiting from our continuously improving customer experience, enhanced brand recognition, lower-tier city penetration initiatives, and our strategic collaboration with Tencent. Even excluding the GMV contribution from Paipai and Wanggou, which are the two marketplace platforms acquired from Tencent, our JD.com GMV grew 85% year-over-year and 31% sequentially. A very strong showing given our large size. The GMV composition also showed an encouraging trend towards further category diversification. GMV contribution from electronics and home appliances decreased from 61% in Q1 2014 to 55% in Q2. GMV from general merchandise categories grew 167% and accounted for 45% of total GMV.
If you look at the number of orders, well over two-thirds of all orders are now for non-electronic products. Of the general merchandise categories, apparel and shoes, sporting goods, packaged food, jewelry, and handbags are the fastest-growing sub-categories. GMV from our marketplace business grew 246% in Q2 and accounted for 38% of our GMV during the period. This has clearly accelerated our original timetable of reaching 40% of GMV from Marketplace by 2016, thanks to the incremental GMV from the acquired Tencent e-commerce platforms. But even excluding Paipai and Wanggou contribution, our POP marketplace GMV grew nearly 150% from a year ago, as the number of third-party merchants grew 130% during the same period. The strong growth in our marketplace demonstrated our commitment and progress in bringing more long-tail products to our customers. Our net revenues grew 64% year-over-year and 26% sequentially.
The revenue growth reflects largely our 1P business momentum, with home appliances and general merchandise leading the growth. Services and other revenues began with a lower base and grew 186% year-over-year and 82% sequentially, driven by the higher marketplace GMV, increased advertising income, and logistics revenues from our third-party merchant services. This leads to my discussion on the gross margin. Before I continue, I would like to note that gross margin, in our case, is not a GAAP measure, partly due to the difficulty in separating fulfillment costs for third-party logistics services from our own fulfillment expenses. Therefore, we do not show gross profit on our income statements, and this analysis is for your information only.
If you take our total net revenues minus the cost of revenues, you will get a gross margin of 11% for the second quarter 2014, compared to 8.9% in the same period last year. The improvement is mainly a result of the higher service revenues discussed earlier. However, this is not to say that the higher gross margin was all contributed by our 3P business. In particular, a substantial amount of advertising income came from the suppliers of our 1P business, as JD.com increasingly becomes a powerful distribution channel for brand owners. Now let's discuss the operating expenses. For ease of comparison, I will focus on the non-GAAP expense ratios of these expense lines. First, the non-GAAP fulfillment expense ratio rose 96 basis points to 6.86%, compared to 5.9% in Q1 2014.
Of the 96 basis point difference, an estimated 30 basis points can be attributable to the expanded logistics services to our third-party merchants if we assume the incremental fulfillment cost is the same as the incremental logistics revenues booked under services and others. This estimate is a decent proxy because our current strategy is to price these services at breakeven to a slight loss in order to attract the merchants to try our service offerings. Nearly 30% of our top marketplace orders were delivered by our delivery staff in Q2. The remaining 66 basis point increase in fulfillment expense ratio is mainly due to two short-term reasons. One is the seasonal increase in the number of fulfillment employees hired in anticipation of our anniversary sales event to ensure a smooth customer experience during the mid-year peak shopping season.
The other is the short-term overcapacity resulting from the integration of Tencent logistics employees in certain overlapping regions. The non-GAAP marketing expense ratio remained at 2.6%, the same as the previous quarter, but higher than 2.4% in the same quarter last year, as we continue to invest in brand advertising and lower-tier city marketing activities. The non-GAAP R&D expense ratio increased to 1.4%, compared to 1.2% in the prior quarter and the same quarter last year. The increase reflects the additional R&D and mobile technology talent from the Tencent transaction and our commitment to hire more experienced R&D staff. Lastly, the non-GAAP G&A expense ratio remained stable at approximately 0.9%. As a result, non-GAAP operating margin was negative 0.8% compared to a negative 1% in the second quarter last year. Our non-GAAP bottom line was roughly at breakeven in the second quarter, which is better than expected.
I would like to reiterate that our current strategic focus is to grow our scale and enhance our customer experience. Our better-than-expected Q2 bottom line does not in any way reflect a change in our strategy, and our non-GAAP net margin outlook remains at breakeven to negative 1% for the remainder of this year, as well as for the year 2015. Let's turn to our cash flow and working capital. We are pleased to see a positive free cash flow in the second quarter, despite the increase the CapEx spending. Our inventory turnover and accounts payable turnover days are generally in line with previous quarters. I just want to explain one technical detail here. As disclosed in our earnings release, our supplier financing business has grown significantly over the past six months with a CNY 1.4 billion balance as of June 30th.
This amount offsets the accounts payable on the balance sheet. In calculating accounts payable turnover days, we added back to reflect the underlying payment terms to our suppliers. Similarly, for free cash flow calculation, even though the market practice is to classify our internet finance activities in operating cash flow, as they are deemed to be related to our e-commerce business, we added back the changes in supplier and consumer financing balances to the free cash flow analysis to reflect the underlying core business cash flow. I would like to give you a quick update on CapEx. Based on our first half actual spending and the second half forecast, we now expect our CapEx in 2014 to be between CNY 3.5 billion and CNY 4.5 billion, with part of the difference pushed into next year due to the lengthy land acquisition process typical in China.
Let's discuss our third quarter outlook. We expect our Q3 net revenue to be between RMB 280 billion and RMB 290 billion, representing year-over-year growth between 55% and 61%. We do not provide GMV guidance, but its growth rate is expected to be significantly higher than the revenue growth rate, fueled by our marketplace expansion. However, there will be little increase for both GMV and net revenue due to the seasonal high of the second quarter and the lack of holidays or shopping events in the third quarter. We will remain focused on improving our customer experience while executing our growth strategies. I will turn the call back to the operator for the Q&A session.
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 a question, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. Your first question comes from Eddie Leung from Merrill Lynch. Your line is open. Please go ahead.
Good evening. Thank you for taking my question. My question is on your mobile channel. You mentioned that it is about 24% of the orders coming from mobile. Just wondering, how can you compare the conversion rates as well as the order size of your mobile users versus your PC users? Any color would be very helpful. Thanks.
Hi, Eddie.
Yeah.
This is Haoyu. We are in a pretty early stage right now in our mobile strategy, right? When we look at our mobile strategy, it is a few different things. We have our own app, and we also have our level 1 entry point on WeChat and recently, QQ as well. Typically, you see conversion rate, if conversion is defined by number of orders divided by unique visitor, for example. It is higher on apps, and it is typically lower on WeChat, and It is very early days for Mobile QQ, right? We think that will also be lower than what we see on our app. And as far as basket size, it is also super low.
The app is slightly lower than what you see on PC, and on the other two entry points, the basket size is even lower.
Yeah. I think this is because, for the communication tools, people tend to shop on impulse versus for our own app and on PC-end, customers tend to come with a shopping desire to begin with.
Right. We're definitely planning to improve the conversion rate on the two new channels, Mobile QQ and on WeChat.
Got that. Very clear. Thanks.
Your next question comes from Eric Wen from UBS. Your line is open. Please go ahead.
Hello, good evening, management. Thank you for the presentation. My question is, if you can just share with us some of your operational updates on some of the key categories, such as 3C, apparel, cosmetics, packaged food, et cetera, whatever you feel comfortable sharing with us. Thank you.
Yeah. I mentioned earlier that home appliances and general merchandise led growth from a revenue line perspective. If you look at GMV, among the general merchandise categories, apparel and shoes, sporting goods, packaged food, jewelry, and handbags, those are some of the categories that we saw with above average growth rate.
The next question from-
Are you able to share with us some of the revenue breakdown or GMV breakdown from these categories?
Yeah. Right now, we are not disclosing the exact breakdowns.
Understand. Thank you.
The next question comes from Alicia Yap from Barclays. Your line is open. Please go ahead.
Hi. Good evening, Richard, Sidney, Haoyu, and Ruiyu. Thanks for taking my questions. I have a question. I think, Haoyu, just now you mentioned about the mobile's behavior is a little bit more impulse spending, and also slightly lower conversion rate on the apps versus, for example, the other integrations. Would you have a plan to launch on different type of interface, or maybe the SKU for your own app versus the one that link through the QQ or the WeChat? For example, would you have any interest or plan to launch like the flash sales for the smaller products on the QQ? Thank you.
Right. If you look at our user interface on our app and versus WeChat and Mobile QQ, they are already very different, because we do have hypothesis on people's mindset when they come to these applications or entry point, if you will. Again, everything mobile is in early stage, and we do, for example, when we think about WeChat and Mobile QQ, it's very different from app, right? It's in a social network context. How to do e-commerce in that context more effectively is still something that we are going to experiment with. As far as whether we will launch a separate app for flash sale, not at this point. I think overall for flash sale model, we are still exploring. We're doing a lot of testing and really ramping up that business.
At this point, we don't think No, once we have that business, we will definitely integrate that into our main app and integrate into our entry points. You never say never. Maybe when the business becomes at certain scale, we may think about launching a separate app. At this point, no.
The next question comes from Robert Peck from SunTrust. Your line is open. Please go ahead.
I was wondering if you could maybe talk a little bit more about the advertising business. It seems we may have had an inflection point in that business this quarter. Can you give us any color on the revenues generated by it and the margins on it, and maybe the expectations of that going forward, given the increased interest from clients?
We did launch, I think we probably mentioned in the press release. We did launch our advertising platform officially in Q2. I think that helps. It's essentially a platform for our vendors and our suppliers to buy ads on our own website, on JD's website. Also we have a platform for them to bid on other media. It's sort of a DSP kind of arrangement. We help them to buy traffic from other websites. The advertising revenue we get from Sales of our own traffic and also what they are bidding on other websites, both are counted towards advertising revenue.
Are you able to break out how much revenue that was during the quarter? Or just the margin profile on that? Is that a very high-
margin business?
It's definitely a higher margin than our traditional business. At this point, I don't think we're planning to break down all the items within the service and others line item.
Yeah, just from an accounting perspective, as I mentioned, the gross margin is not a GAAP measure here. Basically all the related costs is booked through our marketing expense line.
All right. Thank you very much.
No problem.
The next question comes from Cynthia Meng from Jefferies Asset Management. Your line is open, please go ahead.
Thank you, management, for giving us the chance. My question is on the push to lower-tier cities. Can management give us some color or update on the push to the lower-tier markets? Any plan to do it on your own with more promotions, or through M&A to go into the lower-tier cities. If possible, we would appreciate some color on the initial observation that management could share from the launching of mobile through WeChat and also Mobile QQ JD shopping app. Thank you.
Okay. Let me translate. In the second quarter, we accomplished two initiatives. One is we significantly expanded our delivery network to cover more counties and districts. We opened up delivery stations in more than 300, roughly 20% increase, in the second quarter, so that we can cover more of these lower-tier cities. The second initiative is, we call it One City, One Billboard. In 146 cities, we have a very large advertising billboard in probably the most visible area in the city center to really call attention to the local residents. The next step, we want to expand our SKUs that are more suitable for lower-tier city consumers. This is another initiative that we're still working on in the third quarter. The launch of level 1 entry point on Mobile QQ will also help us in the penetrating efforts.
With these initiatives, we expect to see more results in improving business volume from lower-tier cities, starting in Q4 of this year. On the WeChat entry point, since we started in late May, we have seen improving conversion ratio and also improving UV value. However, there are no precedents in this kind of mobile interface historically, so both teams are still working very closely on this new entry point. We have over 1,000 R&D and product development staff in Shenzhen, working side by side with the Tencent team, so that we can create a more user-friendly interface. In fact, we have recently started a contest to aim to reward the best design for our Weixin entry point interface. We gave CNY 8 million bonus rewards in total to various winning teams. Both Tencent and JD.com on the teams can participate.
We have seen very positive feedback and participation. I believe both Weixin and Mobile QQ are two gold mines. We have not fully explored the great potential in those two entry points.
Just a bit more color to add to what Richard and Sidney said. So far, we found it to be, both Weixin, I guess, and the Mobile QQ, to be a great channel for us to reach new customers and to reach people in lower tier cities. Also we found it to be a great channel to launch new products, to sell hot items, if you will.
Yeah, just to add on that, if you look at our active customers in Q2, we had over 38 million versus about 31 million in Q1. A net add of 7 million new customers. That actually is a validation of what Hao just mentioned, attracting new customers.
Thank you.
Welcome.
Your next question comes from Ella Ji from Oppenheimer. Your line is open. Please go ahead.
Thank you. Congratulations on a strong quarter. I just wonder if management can share with us, in 2Q GMV and revenue, how much of that is your organic versus the one that you acquired from the Tencent partnership?
Right. I mentioned earlier, if you look at the total GMV, if you exclude Paipai and Wanggou, our GMV would grow 85% on a year-over-year basis. From a revenue perspective, because both Paipai and Wanggou are marketplace businesses, the revenue could be basically ignored in this case. Essentially all of the 64% revenue growth came from organic sources.
Got it. If I can sneak in one more. Relating to your fulfillment expenses, first of all, I think you indicated some delays in building other warehouses due to land acquisition process. Can you give us an update? When do you think additional warehouses can be started to construct? Also, we have discussed previously that those Asia No. 1 are highly automatic and will help with your efficiencies. How about the benefits in P&L? How much and when do you think we can start to see the savings in P&L to show up?
Right. For Asia No. 1, our first mega warehouse has started in operation in late June, as we disclosed. This one has been put into operation, it will take some time to get to full capacity because it's a very large warehouse. It probably will take 6-12 months to get to the full capacity level. Before that, you may not see any cost savings. It does create a great technology know-how for our future warehousing build-up. On the other projects, right now, the Shenyang and Guangzhou ones are still in construction and we-
Wuhan.
Wuhan, right. We expect those to be put in operation next year. Yeah. Even though a single Asia No. 1 warehouse is fairly large, because we already have a very large warehouse capacity nationwide already, any single Asia No. 1 warehouse will not have a huge impact on the overall capacity.
Thank you.
You're welcome.
Your next question comes from Gene Munster from Piper Jaffray. Your line is open. Please go ahead.
Good evening and congratulations. My question is a follow-up from the previous question. As far as the build-out of the fulfillment centers that gets pushed a little bit into 2015, how should we think about that having an impact on revenue growth? I realize you don't give guidance, but as these fulfillment centers start to get opened up, would they have some longer-term positive impact on revenue growth that would be helpful to think about when we're modeling 2014 and 2015?
Well, we have been operating at very fast growth pace over the past 10 years without the big Asia No. 1 warehouses. We can certainly continue to grow If we need capacity, we can always lease the warehouses in various locations. I don't see any impact on our GMV or revenue growth. The strategic significance of opening Asia No. 1 warehouses is really to allow us to provide our third-party merchants warehousing services. That we can provide more integral logistics services, including both warehousing and delivery to our merchants, which in turn will improve our user experience.
That makes sense. Thank you.
Sure.
Your next question comes from John Blackledge from Cowen and Company. Your line is open. Please go ahead.
Great. Thank you. I have 2 questions. I know you don't guide to GMV growth, but could you give us a sense of the drivers of GMV growth in the third quarter? My second question is drivers of CapEx, and how we should think about the CapEx to sales ratio over the long term. Thank you.
If you look at, as I mentioned in my prepared remarks, the Q3 GMV growth, although it's fairly high, I mean revenue growth. On a sequential basis, it actually has a fairly limited upside given the seasonal changes. Q3 is a seasonally low quarter. We will just continue focusing on the current categories that we have been in, and grow our business throughout our platform. On the CapEx, we have disclosed in our prospectus that we expect to spend about $1 billion-$1.2 billion over the next three years. Currently, we do not have any change to that original CapEx plan. That's $1 billion-$1.2 billion in total.
Thank you
for the next three years.
Your next question comes from Ada Yu from CICC. Your line is open. Please go ahead.
Hi. Good morning. Oh, sorry. Good evening. Can you just give us some more updates about your June 18th on operation side? Can you also share some of your opinion to see the competition between Suning.com and Gome as you see they both announced a price war in August. How would you see that? Thank you.
What's the first question?
On June 18th, we had a very short press release. Our order number more than doubled from a year ago. Basically, we received very, very good reception from consumers. Because of our well-prepared logistics network, we actually also ensured time delivery.
Right. Just to add to what Huang is saying, overall in Q2, we see very good results in our home appliance sector. We are really gaining share from the entire market perspective. We did notice that some of the other players are giving up on their e-commerce business. What's important for us is to focus on what we do.
To respond to the question on the price war, Richard is saying that, today, any simple price war will not be effective, or at least not as effective as several years ago. Today, consumers in China will look for a variety of attributes in their shopping decision. They will look at the quality of products, the variety of products available, the service level, as well as the price. Price is only one attribute in this whole shopping decision-making process. A simple price war should not have a very effective consequence.
Thank you very much.
Your next question comes from Mark Miller from William Blair. Your line is open. Please go ahead.
Thank you, good evening. Regarding the third parties using JD's fulfillment capabilities. Beyond the Asia No. 1 fulfillment center, what are the other things you're doing to try to get them to adopt this service? Once the Asia No. 1 facility is running and you have broad coverage, how high do you think that penetration can go for third parties? From a third-party seller standpoint, what kind of savings do they see using JD services compared to shipping on their own? Thank you.
Right now, as we mentioned, we handle about 30% of the parcels sold by third-party merchants on our site. As Richard mentioned, this is only last mile. Not many of the merchants are putting their inventory in our warehouse yet because we don't have much extra capacity for them to use. Once we have more warehouses constructed, such as Asia No. 1, we will have more capacity for them to put their stock into our warehouses. Only by doing this, can we offer them the best service. If you think about it, if the packages sold by the third-party merchants come out of our warehouses and go into our last mile system, it's really controlled. The end-to-end experience is controlled by us. It will be very similar or the same to what we are offering to our own merchandise.
We're really very much looking forward to providing the combined warehouse and last mile service to our merchants. At this point, we don't know where the ceiling is or what's the highest % we can reach as far as parcels we can handle warehouse-wise and last mile-wise. Competition on price is not what we're focusing on. I don't think our merchants are getting a much cheaper price from us. I think the key here, the pitch for us to our merchants is once we handle logistics, the entire logistics process for them, they can sell more because customer experience will be much better.
Great. Thank you.
Your next question comes from Wendy Huang from Standard Chartered Bank. Your line is open. Please go ahead.
Thank you. Can you provide the GMV or orders breakdown by different payment channels? Do you have any plan to further utilize Tencent's Tenpay and Weixin payments? One more housekeeping questions about your P&L. I think there is over CNY 300 million adjustment item related to the marketing amortization from the business acquisition. Is that something related to your transaction with Tencent? Should we expect this item to be recurring for the future quarters? Thank you.
Let me answer the last question first. Yes, the amortization is related to the Tencent transaction, and it will recur for the next five years. The bulk of it will be the same for the next five years, but part of that will be amortized in a shorter period. For the payment question, right now, if you look at our principal, out of overall orders, over half of the orders were paid through credit cards, and the remaining was through cash on delivery.
Right. If you look at our traditional PC, I would think it's probably similar in our app's case. The majority is still COD, but it's not really cash. It's probably credit cards on delivery, and the rest would be online payment. The % of online payment is going up gradually, but not very fast. As far as payment on Weixin entry point, we still offer COD, of course, but then as far as online payment, I think the majority is Weixin Pay.
We do plan to have both Weixin and our own payment solution available on our PC end.
Okay, that's great.
Your next question comes from Jiong Shao from Macquarie. Your line is open. Please go ahead.
Hi. Thank you for taking my question. I have a follow-up question on your mobile product. Would you be able to share with us the rough mix in terms of your mobile traffic into your own mobile app, the Weixin level 1 access, and the Mobile QQ level 1 access? What's the current mix looks like, and what do you think the mix will look like, say, three years from now? Thank you.
Yes. As Haoyu mentioned earlier, this is really too early at this point. Any breakdown is not going to be very meaningful. I think our focus is to enhance the overall customer adoption on mobile and for JD shopping. We still look at it as a whole package instead of looking at the different various channels. Long term, we certainly hope most of shopping activities will happen on the JD app, because that's a more complete shopping experience, especially with the user interface. Yeah. Okay. Thanks, Jimmy. No problem. I just want to also quickly make a correction. I think I may have misspoken about the revenue outlook. It should be CNY 28 billion to CNY 29 billion, consistent with what's in the earnings release.
The next question comes from Sean Zhang from 86Research. Your line is open. Please go ahead.
Hi, management. Thank you for taking my question. My first question is the comparison between JD.com and Tmall. We get this question a lot. The investor asks, what's the driver for a merchant to come to JD.com, or choosing JD.com as their number one choice for marketplace? My second question is, I see your gross profit margin increasing quarter-on-quarter. This is the result that we proactively increase our bargaining power, or is this the result of the change of product mix? What's the trend going forward in the next two years? Thank you.
First, JD.com, through our past 10 years, have accumulated a very large customer base with a very good consumption ability. This is actually the best consumer class, middle-class consumers, who are paying attention to the quality of products and services. Secondly, even for the merchants, we believe merchants will prefer to be selling their products on a platform that's known for authentic products offerings, instead of mixed with a very large number of merchants selling products from gray channels. Third, JD Marketplace platform provides a fair playing ground for the merchants, which is certainly very important, for the merchants to conduct business. Just to share with one data point. Through our past two years of efforts, we have now attracted most of the name brands in the apparel category onto our JD POP platform.
The next question comes from Tian Hou from TH Capital. Your line is open. Please go ahead.
Good evening. Thanks for the management for taking my question. My question is related to the internet finance. There are lots of reports and talk about that you're entering into internet finance business. Currently, we saw two products. One is Jing Bao Bei, the other one is Jingdong Baitiao. I wonder, what's the progress on these two product fronts? When you get revenue from those two products, how do you record them? That's the number one question. Number two is, there are some press report talking about your O2O, such as you want to utilize your logistics infrastructure to serve your clients by cooperating with local convenience stores to deliver general merchandise products. Can you elaborate on that, and what's your strategy on that front? Also, you guys also develop into online travel channel. What's the progress and strategy on that front?
That's all my question. Thank you.
Okay. Let me take the first question, and later on, Hao, you will take the next two. Just for the internet finance, we mentioned earlier the supplier financing business has seen tremendous growth over the past six months. The ending balance at June 30th was roughly CNY 1.4 billion. The revenue from that, accounting-wise, is actually quite interesting. Based on accounting rule, the revenue is actually counted as a reduction to Cost of revenues.
I see.
That is in the cost. For consumer financing, Jingdong Baitiao, right now, we are also seeing fairly meaningful growth, but the balance is actually very insignificant at this point. This is still in the experimental phase. Yeah. For the O2O-
In the second quarter, basically, we have connected an increasing number of offline convenience stores. Right now, it's still in the process of integrating the inventory systems. We expect to have a more meaningful impact or really to fully roll out to the consumers in the fourth quarter.
Is that going to be a revenue going forward or it's going to be revenue deduction on the fulfillment side? What's that impact going to be?
Yeah. The revenue model will be actually similar to our POP marketplace. Basically, we'll have a take rate from those transactions.
I see.
It'll be in other service revenues.
That's good. What about the travel channel?
We've had our travel channel for a while now. We do sell airline tickets and hotel room nights, and we do that really to complement our selection, really to make sure that our customers, if they do want to buy travel products, we offer them on our site.
They're very helpful. Thank you. That's all my question.
Your next question comes from Eric Wong from China Renaissance Securities. Your line is open. Please go ahead.
Hello, can everyone hear me? Hello?
Yes.
Yeah. Hi. Yeah, sorry. I have a bad line. China Mobile has really a very cranky line, maybe speaks to your MVNO business. If everyone can hear me, good night. I have two questions. The first question is regarding, Sidney, if you can share some color on your food, beverage, and alcohol category of business. Second is your home electronics business. What's the growth, and is company trying to spend any additional effort for build up this category? The second question is Hello?
Sorry. We are losing you. Let me first answer your first question on the I believe you were asking about food and beverage growth. I mentioned earlier it was actually growing above average during the second quarter, so it's a very strong-performing category. For home appliance, it's also a very strong growing category, growing above average from a revenue perspective. We lost you on the remainder of the question. Yeah. Richard just added some points on our wine and liquor category. In Q2, JD became the only online platform that is authorized by the top eight liquor brands in China, including Moutai, Wuliangye, all eight of them. We are the only one that is authorized by all of them. We also formed a professional team to work on imported wine from all over the world.
We believe this is a very promising category going forward.
Okay, thanks very much. I can hear very clearly. My second part of question is your home electronics business. If I may, if you are still hearing me, Sidney, can you give us some indication of your profitability of your supply chain finance? I heard you mention your is around CNY 1.4 billion. Can you comment on what interest rate you are generating and the income you are generating? That's all my questions. Thanks.
Okay. For the electronics category, if you exclude the home appliances, the mobile devices category was also growing very nicely. IT digital products category, growing slower than a company average, which has been the trend. The gross margin for Q2, in particular, because it's our anniversary sales season, normally, the gross margin will not be the highest during the year among the different quarters. We are working to improve profitability for our home electronics category because we are the market leader in those categories. For the supplier financing, the effective interest rate, I believe, is roughly 9%, in the neighborhood of 9%. It is not really a pure financing business. This is also to provide a service to our suppliers.
Thank you very much. Congratulations on the strong growth.
Oh, thank you.
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.
Thank you, operator. Thank you all for joining us today. Please feel free to contact us if you have any further questions. We're looking forward to talking with you in the future.
Thank you for your participation in today's conference call. This does conclude today's presentation. You may disconnect.