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Edited Transcript of BZUN earnings conference call or presentation 21-Aug-19 12:30pm GMT

Q2 2019 Baozun Inc Earnings Call

Zhabei District, Shanghai Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Baozun Inc earnings conference call or presentation Wednesday, August 21, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bin Lu

Baozun Inc. - CFO

* Junhua Wu

Baozun Inc. - Chief Growth Officer & Director

* Wenbin Qiu

Baozun Inc. - Chairman of the Board & CEO

* Wendy Sun

Baozun Inc. - IR Director

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Conference Call Participants

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* Alicia Yap

Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research

* Hyungwook Choi

Daiwa Securities Co. Ltd., Research Division - Head of Hong Kong & China Internet and Regional Head of Small/Mid Cap

* Jiang Zhang

China Renaissance Securities (US) Inc., Research Division - VP

* Joyce Ju

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Ka Wai Leung

Haitong International Research Limited - VP & Sector Coordinator

* Sally Chan

CLSA Limited, Research Division - Research Analyst

* Thomas Chong

Jefferies LLC, Research Division - Equity Analyst

* Tianxiao Hou

T.H. Capital, LLC - Founder, CEO & Senior Analyst

* Yue Wu

China International Capital Corporation Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by for Baozun's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Investor Relations Director of Baozun. Please proceed, Wendy.

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Wendy Sun, Baozun Inc. - IR Director [2]

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Thank you, operator. Hello, everyone, and thank you for joining us today. Baozun's second quarter 2019 earnings release was distributed earlier today and is available on our IR website at ir.baozun.com as well as on Global Newswire services.

On the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Junhua Wu, Chief Growth Officer; and Mr. Robin Lu, Chief Financial Officer.

Mr. Qiu will review business operations and the company highlights followed by Mr. Lu, who will discuss financial and guidance. They will all be available to answer your questions during the Q&A section that follows.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intends, plans, believes, estimates, target, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict, and many of which are beyond the company's control, which may cause the company's actual results, performance or achievement to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company's filings with the U.S. Securities and Exchange Commission. The company does not take any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead.

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [3]

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Thank you, Wendy, and thanks to everyone for joining our earnings call today. We built up our strong start to the year with GMV gaining further growth momentum, increasing nearly 60% year-over-year during the quarter. More encouragingly, total net revenue grew at its fastest pace, reaching 47% year-over-year. This solid growth was partially driven by our strong performance during the June '18 sales campaigns and highlights the success we are having in acquiring high-quality brands and capturing new emerging e-commerce opportunities.

We continue to steadily accelerate brand acquisitions, which are focused on generating high-quality GMV, especially from brands in apparel and FMCG categories. During the quarter, we added a net of 12 new brands, which brings the total number of brand partners to 212 compared with 162 a year ago.

In addition to penetrating deeper into existing categories, we've also been exploring new brands in -- with tremendous potential. As I'm sure you all know, the Chinese consumers gaining more purchasing power. This is especially true for younger generation particularly, which are spending more on global premium inventory goods and are increasingly doing so through e-commerce platforms.

In addition to working directly with premium brands, we teamed up with Alibaba this quarter and fine-tuned customer engagement and the shopping experience on Luxury Pavilion, its dedicated channel for premium and luxury goods. We now provide services to both their premium submarket places and a few [imports] on Alibaba's first-party model, all investing -- invest in the brands. While still in the early stage of the relationship, we are very pleased with the initial results generated during the June '18 sales campaigns.

We strongly believe the unique value proposition we offered will help us to penetrate further into the premium category, where we are seeing an increasing number of luxury brands adopting e-commerce strategies. In addition, we are in the process of upgrading our warehouses, IT infrastructure for Luxury Pavilion and expect to gradually update -- upgrade to end-to-end solutions during the second half of the year.

We began working with 2 top-tier highly-respected video game companies during the quarter, one international and the other predominantly domestic under a new IP distribution model. Each company offers extremely popular video games in China and have authorized us to become the official distributor for their physical derivative products and branded us licensing rights for us to develop products of our own such as apparel and accessories, which means games' characters.

While GMV from these products won't be significant in the near term, we are very excited about the enormous opportunities this IP distribution model will create. Working with the brand partners under this IP model requires not only deep knowledge of store operations but also omnichannel marketing, user engagement and supply chain management, all of which Baozun is uniquely positioned to offer with our diverse array of cutting-edge solutions.

Growth of distribution model was also very robust during the quarter, leveraging our full scope of end-to-end solutions and a comprehensive branding and marketing capabilities. We successfully organized brand day campaigns to increase our engagement, sort of brand's own mini-single day style event that drives incremental growth in the sales.

We are also evaluating opportunities to reach our portfolio of brand partners with diverse new and existing brands -- exciting brands such as leading international premium infant formula brands we signed on during the quarter to drive the incremental growth in product sales. Years of operational experience on the distribution model has provided us with unique insights and very good understanding of inventory management, which we are leveraging to drive through -- to drive growth while minimizing inventory risk.

In addition to bringing new brands on board, we have also been working to identify ways to optimize our existing portfolio mix by evaluating a brand both quantitatively and qualitatively when it comes to GMV. After thorough consideration and start of our strategy to focus on high-quality GMV, we may strategically convert one of our electronics GMV brand partners into a non-GMV partner during the third quarter. Instead of handling their stock operations, we may provide IT and marketing solutions to continue our support to these brands. We believe optimizing our brand portfolio towards high-quality GMV, we can assure the effective and efficient usage of our resources, so we can capture additional market opportunities to drive future growth.

As we shared with you in our last call, the success we have had with our international brand partners is being replicated and customized to create solutions for domestic brands. Starting earlier this year, we began working with a leading domestic FMCG brand to help them benefit from the new era of e-commerce in China. We've formed a joint venture with them at the end of April to tap into the enormous growth opportunities. We finished building the infrastructure for this JV during the second quarter, which has already yielded solid success with brand's online GMV in the first half of 2019 more than doubling. This strong growth represents the unique value proposition we can offer to domestic brands by combining our in-depth knowledge of e-commerce and technology with the brand's comprehensive offer network and leadership position in the FMCG sector. The joint venture will soon begin helping other FMCG brands.

And now turning to the technology and digital marketing. During the second quarter, we fully integrated our servers with our hybrid cloud model, Baozun Cloud, to address growing needs for storage and computing capabilities from our SaaS platforms and technologies. After a smooth trial period, our core e-commerce systems were linked with Baozun Cloud in term to support operations during the June '18 sales campaign. We're extremely pleased with Baozun Cloud's initial results. We have significantly strengthened our technological capabilities, provided us with added flexibility to rapidly adjust and scale our servers within minutes and improve efficiency. With Tmall now upgrading to Tmall Flagship Store version 2.0, we believe our continued investment in R&D and technology will provide us with greater flexibility and will ideally position to help brands enhance the customer experience and drive higher e-commerce growth.

Digital marketing continues to be one of our most powerful tools when it comes to customer acquisition and reinforces the value-add we are able to offer existing brand partners. At the recent 10th Golden Mouth Awards, we were recognized as the Digital Marketing Benchmarking Company of the Year. We were also amongst 7 short-listed multichannel network, or MCN, service providers certified by Alibaba in the first round. We are very proud of the digital marketing unit on a well-recognized, full-spectrum marketing agency, specializing in not only ROI-driven optimization but also the broader strategic implementation of omnichannel brand marketing strategies, content creativity as well as event marketing.

Our outlook for the rest of the year remains very positive with China's e-commerce sector showing increased resilience. China's e-commerce industry continues to gain growth momentum as a total addressable market expense. According to Tmall, this year's June '18 sales campaign was the first time in history that over 120 brands in the sector were able to each generate over RMB 100 million in GMV, a significant milestone. As China's leading brand e-commerce service provider, we are well positioned to tap through growing opportunities in this huge market and benefit from China's consumption upgrade. We believe that as the addressable market grows, more and more brands will leverage their service partner's expertise with online business growth and options -- operations.

In May, we held our Fourth Annual Global Brand E-commerce Summit, which had the theme of Top Talking. We invited over 200 leading brands for in-depth discussion on GMV growth drivers and how technology, innovation and digitalization can improve them.

Brands are looking for solution providers who can help them integrate all operator systems and digitalize procedures, optimize their supply chains and develop innovative new business models, all of which Baozun is ideally positioned.

On that note, I'll pass the call over to Robin to go over our financials. Thank you.

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Bin Lu, Baozun Inc. - CFO [4]

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Thanks, Vincent. We are happy to deliver another solid quarter of growth. Our shifting focus towards high-quality GMV brands is clearly paying off, highlighted by the over CNY 100 million in non-GAAP operating income we generated for the first time during the non-Singles Day quarter, a significant milestone for us. It clearly demonstrates how we are able to drive profitable growth, while at the same time expanding investment in warehouse upgrades, technology and digital marketing.

Net income for quarter grew 83% year-over-year and net margin expanded by 80 bps to 3.9% and the net margins remained flat at 4.9% on non-GAAP basis.

We also significantly improved operating cash flow during the quarter. We enhanced the management of our accounts receivable, including making upgrades to our autobilling reconciliation system and closely monitoring collections. We also further strengthened our cash position with the issuance of our 5-year convertible bond with the net proceeds of around USD 270 million. All these negatives provide us with aggregate negative profitability on the confidence in our future growth prospects, while we expect GMV to grow by 40% to 45% year-over-year for the third quarter of 2019, and we reiterate our full year GMV growth outlook of 40% to 50%. Please note, this growth outlook [has embedded] the impact on GMV from the transitioning of the electronics brand into potentially a non-GMV partner.

With our profitability improving, addressable market expanding and the strong cash position, we have decided to strategically reinvest some of our profits throughout the rest of year to take advantage of the newly emerging opportunities so that we will strengthen our position over long term. These opportunities include early investments in some key new brands choose a part of operations while they gradually ramp up technological infrastructure and warehouse upgrades in the high-premium categories and the technology and the digital marketing, which are experiencing our unique value proposition to brand partners. We believe these investments are critical and will significantly improve our competitive position in the market in the years to come, even if they temporarily impact our bottom line in the short term. We are building this business for the long term and are waiting to make investments now and, ultimately, will build a platform with sustainable and highly profitable growth in the future.

Now let's go over the second quarter 2019 financial results in details. We believe year-over-year comparison is the best way to review our performance. All percentage change I'm going to give will be on GAAP basis. Once again, please note that all figures mentioned in this financial review section are in RMB.

Total GMV during the quarter increased by 60% to CNY 9.73 billion. Our focus remains on growing our nondistribution business, which saw GMV increase by 62% this quarter to CNY 8.77 billion, in which service fee model leading the pace.

Total net revenues increased by 47% to CNY 1.70 billion, product sales revenue increased by 47% to CNY 849 million. This increase was primarily due to the acquisition of new brand partners, the increased popularity of the brand partners' products and Baozun's increasingly effective marketing and promotional campaigns.

Services revenue increased by 47% to CNY 855 million during the quarter. The increase was primarily attributable to the rapid growth of the company's consignment model and the service fee model and, in particular, the strong growth in digital marketing services.

Total cost and operating expenses were CNY 1.6 billion compared with CNY 1.10 billion in the same quarter last year. In particular, cost of products increased to CNY 679 million from CNY 464 million last year primarily due to higher costs associated with the increase in product sales revenue. Gross margin for product sales increased to 50% from 19.5% with the margin expansion mainly being generated from high-margin brands added over the past 12 months. Fulfillment expenses increased to CNY 392 million from CNY 278 million last year, mainly due to an increase in GMV from our distribution and consignment model and the warehouse rental expenses, which were partially offset by improvements in efficiency. As a percentage of GMV, our fulfillment expenses ratio improved to 4% from 4.6% a year ago mainly as a result of cost-control initiatives as well as efficiency improvements, which were partially offset by our investments in warehouse factories.

Sales and marketing expenses increased to CNY 413 million from CNY 273 million last year, in line with GMV growth as well as expansion in digital marketing, which was partially offset by efficiency improvements. As a percentage of GMV, our sales and marketing expenses ratio improved to 4.2% from 4.5% a year ago mainly attributable to labor efficiency leverage and improved profitability for digital marketing services.

Technology and content expenses increased to CNY 102 million from CNY 65 million a year ago and CNY 88 million last quarter. The sequential increase in technology and content expenses was mainly due to more upfront investments in emerging opportunities as well as a short-term overlap between our high comps in Chengdu R&D Center and Shanghai and our continued investments in innovation and productization. During the second quarter, our investments in technological innovation and productization totaled CNY 21 million, up from CNY 18 million last year.

G&A expenses increased to CNY 52 million from CNY 39 million last year primarily due to an increase in administrative, corporate strategy and business planning staff.

Income from operations increased to CNY 86 million with an operating margin of 5%, unchanged from the same quarter of last year. All in all, non-GAAP income from operations was CNY 103 million, an increase of 30% from CNY 79 million last year. Non-GAAP operating margin was 6.1% compared with 6.8% in the same quarter of last year. Offsetting interest income, net interest expense totaled CNY 3.4 million compared with the net interest income of CNY 145,000 last year and the net interest expense of CNY 6 million last quarter.

While we completed the CB financing in April with a much lower coupon interest rate, we have proactively retired some of the existing short-term backlogs to cut interest expense. As such, net interest expense was cut meaningfully on a sequential basis. In second quarter, net income attributable to ordinary shareholders of Baozun increased by 83% to CNY 67 million. Basic and diluted net income attributable to ordinary shareholders of Baozun per ADS were CNY 1.16 and CNY 1.13, respectively, compared to CNY 0.65 and CNY 0.62, respectively, during the same period of last year.

Non-GAAP net income attributable to ordinary shareholders of Baozun increased by 46% to CNY 84 million. Basic and diluted non-GAAP net income attributable to ordinary shareholders of Baozun per ADS were CNY 1.45 and CNY 1.41, respectively, compared with CNY 1.01 and CNY 0.96, respectively, for the same period of last year.

As of June 30, 2019, we had CNY 2.55 billion in cash and cash equivalents and short-term investments compared with CNY 540 million as of December 31, 2019 (sic) [2018]. The significant improvement in cash position was mainly attributable to our CB insurance with the net proceeds of approximately USD 270 million and a strong operating cash flow during the quarter, which was partially offset by the retirement of short bank loans a net of CNY 258 million.

Turning to guidance. Based on current macroeconomic and operating conditions, for the third quarter of 2019, we expect total net revenues to be between CNY 1.5 billion and CNY 1.55 billion, which represents a year-over-year growth rate of approximately 35% to 40%, in which service revenues increase in line with the growth rate of total net revenue on a year-over-year basis.

This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alicia Yap of Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [2]

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Congratulations on the strong result. I have questions on the product revenues this quarter. So could you help us understand what are some of the reasons that contribute to the strength in product revenue this quarter? Was there any benefit from the VAT adjustment? If so will the benefit be only 1 quarter impact? And then if we look at on the product revenue growth, how should we think about 3Q and into second half? Will the reacceleration be sustainable? And can you remind us the total numbers of brands that are currently under the distribution model?

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [3]

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Sure, Alicia. I think that it's my turn to answer your question. Yes, we have about 47% growth in the distribution model, which is the product sales. I think that's 2 reasons. The first one, the existing brand is still capable of very constant high growth rates we enjoy, especially in 6/18. And additionally, [one maybe call the way,] introduce some of the key distribution model brands in last Q4, which fully ramped up in Q3 and contributed very high growth rate in our 6/18 and Q3 quarter. So that's the reason we enjoyed a very high growth rate in the product sales. And looking forward, the next 2 quarters we think the growth rate will be very in line with total growth rate of the revenue and the way things are -- with the better control of the inventory, we take the full advantage of our experience and expertise in the product sales.

Regarding VAT, basically in our model, we have a very specific arrangement with brands. The total is very mature impact on our product sales revenue numbers for the VAT tax. And for the total number of brands, we have some brands, but it's not very disclosable in the total number. I would say, with our [model] less than 20% of our brands we have -- we use distribution model in the different platforms.

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Operator [4]

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Next question is from the line of John Choi of Daiwa.

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Hyungwook Choi, Daiwa Securities Co. Ltd., Research Division - Head of Hong Kong & China Internet and Regional Head of Small/Mid Cap [5]

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I have a couple of questions. First of all, I would like to ask about the -- Robin, I think you mentioned in your prepared remarks that you guys will be reinvesting into your profit into the second half this year. Can you kind of elaborate on that initiative? And also how should we think about the operating expenses towards the second half this year and also in terms of profitability? My second question is more about your existing brands. Can you kind of share with us the same-store growth and also like the contribution from the new brands? And what kind of trend that you guys are seeing from the -- these new brand partners?

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [6]

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Okay. Thank you, John. Let me take the second question first. Our same-store sales growth, which is existing brands, is -- growth rate is about 48%. And if you do -- mathematically, if you do the rough calculations, use 60% minus 48%, around 10% to 12% GMV contributed by the newly acquired brands. And that was expanding -- has been expanding for -- through this year because we virtually accelerated the new brand acquired for this year. And back to the first question, yes. I mean strategically, for example, we think, the direct cooperation with Ali for the high-premium and Luxury Pavilion category is a very good opportunity for us for the future. And we do see -- we have some -- we started some new cooperation from Q2, and now we are -- we do see the brand expansion for this category. And to do the business better in this section, we think we need some new investments in the warehouse and the technology side. So that's the reason why we say we want to reinvest some profit because that will guarantee our future growth and will give a very unique position to work with the platforms. For the operating margin, yes, we may have some impact because we do the investment. For this one, we think we have little impact, but we are very positive for the future operating margin improvement in the next year.

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Operator [7]

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Next question is from Natalie Wu of CICC.

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Yue Wu, China International Capital Corporation Limited, Research Division - Analyst [8]

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I have 2 questions here. First one is related with the Tmall 2.0 initiative. Just wondering how should we read through the related impact on Baozun for this initiative. Could it help your take rate or margin profile in the longer run? I just want to get a sense of that. And secondly, regarding the new brands you've added this year and to be added this year, I would appreciate if management can give us some color on the incremental operating income versus like GMV. This effect related with these new brands, just wondering if there is any difference that we should be noticing regarding that.

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Junhua Wu, Baozun Inc. - Chief Growth Officer & Director [9]

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Okay, Natalie. This is Junhua. So let me address your first question related to the full version 2.0 initiatives. So the Tmall version 2.0 is a new initiative in terms of their back-end store system. So it's part of their -- Tmall growth plan after they are appointed their new president. So the key point of the Tmall 2.0 is about they implement a cascade model helping those kind of brands and merchants to implement their membership management and how do they launch their new products and how do they set up a new scenario by crossing all those kind of online, off-line by implementing Tmall iStore system. So their cascade models for this stage, they only launch the membership enhancements, relating all those merchants and brands and us to just implement a very comprehensive membership management. So they provide a lot of back-end tools helping us to develop the new membership launching program and a lot of engagement and a lot of new initiatives and mechanisms to engage the new membership to provide a deeper connection with all those consumers to upgrade the service level with all those consumers, providing a lot of new scenarios and opportunities, drive a higher conversion rate and providing extra services related to memberships. So for that kind of new tools and packages, we do have the opportunities to provide a lot of new extra services to our brand partners related to that. And in the future, while they keep releasing their new features, it's good for us to keep increasing our stickiness with all brands, including providing add value, extra marketing services, operational services and et cetera. So by now, we see this initiative from Tmall is really helping the brands partners grow and really helping to comprehensive our service offering.

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Bin Lu, Baozun Inc. - CFO [10]

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Okay. Let me take the second question about the marketing. While we talk about margins, we would like to speak to the product sales and service model differently. For the product sales, our marketing, the reason to improve our margins is we calculate like the higher-margin products with the better indicated growth as we reiterate every time, and we think we are on the right track to have the expertise to select the products we do the backfill. That's the main reason why you see the gross margin improvement for the product sales. And about take rate, I think based on the number we provided, you can quickly calculate the take rate. Even though there is some naturally impact on the electronic brand we just talked about, for the Q2, we still have a slight increase in the take rate. That's -- I mean that's the main reason is coming from the newly acquired brand with the higher-quality GMV, of course, with a higher take rate. And the last thing I need to mention is, even for the new brands, we still -- normally, we still take a short or long term to ramp up GMV because some brands has very key and very big, and we deal with many platforms and many brand stores in different areas and different platforms. So we still take a very long time to ramp up. So till now, because of the Alberta, much more new brands with -- some of brands still in the ramp-up stage, which contribute not too much in the take rate and have some net impact on our cost perspective.

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Operator [11]

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Next we have is Thomas Chong of Jefferies.

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [12]

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Congratulations on the solid results. My question is on the GMV growth momentum of our brands by different categories in the quarter. And also what is our strategy going towards more brand partners? And will our same-store revenue growth be driven more by same-store sales growth or new brand additions?

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Bin Lu, Baozun Inc. - CFO [13]

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Sorry, can you -- the line is not very clear. Can you just rephrase your question, please?

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [14]

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Yes, sure. The first question is just on the growth momentum of our brand in GMV by different categories. And the second question is, what is our strategy to onboard more brand partners in the second half? And also will our revenue growth be driven more by same-store sales growth or the new brand addition in the second half?

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [15]

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Sure. Even though we don't disclose details in the -- across categories, I'll give you -- I would like to give you some color about that. And we think for the sportswear categories, we enjoy very high rates. And also in the apparel, the men area we work on is still very high growth. I would say, I mean some of the key accounts where same-store sales growth is higher than the average same-store sales growth. So we think we are in a very good track on that. And about electronics, we don't think that's the main area for us, and that's one of the reasons why we just transit one GMV partner to a non-GMV. So that's the first question.

About the second question, I would say, we focus more on -- recently, we focus more on high-premium brands we acquired, and we see some traction in Q3 already. And we -- that's kind of a new category we work with. And regarding the FMCG, we are introducing more products, put more brands in this category, too. Does that answer your question?

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [16]

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Yes.

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Operator [17]

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We have Sally Chan of CLSA.

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Sally Chan, CLSA Limited, Research Division - Research Analyst [18]

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Congratulations for a very strong GMV and revenue. I actually have a follow-up question on the shift for certain brand to non-GMV model that you mentioned just now. Even taking into consideration that shift, our full year GMV guidance of 40% to 50% year-on-year is actually maintained. So just trying to understand the drivers behind bear and bull case here. For example, are we seeing a stronger brand pipeline than we previously discussed? Or are we seeing better-than-expected performance from existing brands so leading to us maintaining that full year guidance? Any sort of color will be very useful. And the second question is actually on the GMV impact from that shift. If we -- if you could provide any sort of range or color on the GMV impact will be very helpful. Another question will be slightly different. It's actually on our cooperation in relationship with Alibaba. It seems that we are working closer with Alibaba's Luxury Pavilion in the recent months. So if we could share some sort of cooperation opportunities that we are looking forward to, that will also be very helpful.

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Bin Lu, Baozun Inc. - CFO [19]

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Thank you. Let me take the first question, I think Vincent will take the second question. When we see the outlook for the whole year, we not only consider, I mean this possible transition of the electronics brands, more importantly, we consider the uncertainty of the macroeconomics as we specified in the early of this year. So we -- even though we have a very positive 6/18 numbers, we still very cautious about the economy going to the end of this year. So that's the key reason why we keep the 40% to 50% guidance unchanged. And fortunately, we just started preparation of Double 11. Based on very preliminary discussion with the brands across the categories, we think we get very positive reaction from the brands for that. So that's -- based on that, and the mix in all the information, we decided we don't change this guidance. If we have any updates, I'll give you for the next earnings call. And for -- specifically for this brand, yes, temporarily we will have some impact in our growth rate based on the mathematical calculation. But we think that's onetime issue, and we have very strong pipeline and we are very positive for the future growth especially for the next year and also trying to still improve our both take rate and bottom line for this decision. Thank you.

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [20]

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I will take the second question about the Alibaba cooperation. We have several ways to work with Alibaba for the luxury category. First one is that we are -- we can bring brands directly to our mall platform to operate their Tmall stores. For example, some of the luxury brands we are working with now just have their official sites. We're talking -- constantly talking to them trying to bring them onto the Alibaba platform, that is number one. Number two is that Alibaba also have some invested brands. So we are also working with these kind of brands to deliver our professional operational capabilities. The third one is that we also work with the Luxury Pavilion as a submarket place to enable the hosting. So that is our channel of working -- ways of working with Luxury Pavilion. We are also talking to Alibaba about some other potential ways of improvement. So yes, that is our continuous efforts.

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Junhua Wu, Baozun Inc. - Chief Growth Officer & Director [21]

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Yes. I just want to add up something. From the Q3, the most recent result, we think we already get some traction for -- to attract more high-premium brands come in. We will describe it more in the next earnings call.

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Operator [22]

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We now have Billy Leung of Haitong International.

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Ka Wai Leung, Haitong International Research Limited - VP & Sector Coordinator [23]

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Just a few quick questions. My first question is on the general market trend. We're seeing more and more Chinese e-commerce platforms increasing their effort in lower tier or undeveloped areas in China. I was wondering if this has any impact on our products or services. That's our first question. The second question is, with new -- more new brands coming in, could we just get an idea of the concentration of our key brands in terms of GMV or even just by numbers? And the last question is, just on the recent funding of the debt issuance, I was wondering if we have further details of how we're going to use that funding.

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [24]

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Yes, I will take the first one. Yes, we do see some emerging channels getting more and more active in market. Our strategy has stayed unchanged. So firstly, talking about the GMV generation for the brands, of course, we will quite focus on the existing GMV marketplaces like Tmall and JD. That is about the -- today's sales performance, but we keep watching the emerging channels very actively. We work with many programs, social mediums and some other short video sites to trying to engage the brand with them in different ways. Majorly, not a GMV purpose yet. Majorly for the consumer engagements and certain purpose at present, but we do think there is potential big GMV opportunities ahead. So that is about the market trend. New -- many new ways of doing business, no matter it's a demand generation or demand fulfillment, we will all pay attention to that. That's the first one. Second one was about...

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Bin Lu, Baozun Inc. - CFO [25]

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Yes. Thank you, Vincent. So decentralization of our brand base is well above strategy. When you look at our numbers, which, as I have mentioned, we have about 10% to 12% share coming from -- GMV share coming from the new brands, which demonstrate that the already we are gradually decentralizing our focus in the key accounts. Put another way, the key account is still very important for us, and we are improving the quality of the service for them continuously. And in the 6/18, we do see some of the key accounts, they just hit historical very high growth rate, and we mostly enjoyed the result, and we hope we can get similar results in Double 11.

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Ka Wai Leung, Haitong International Research Limited - VP & Sector Coordinator [26]

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And I was just reminding the last question, yes, on the...

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [27]

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Sure. Yes. As about the usage of cash, right? Yes. And I think we are in the parallel to strengthen our operations cash flow as we mentioned, and we think we made some achievement in Q2 and very strong positive both operating cash flow and free cash flow. And in the meantime, we have tons of cash to support our high-growth in the operations. And also another purpose of usage of the cash is for the potential M&A but we are very careful to use this cash and we must think the target will be strategically building our business, but till now we are still keep watch on that, and we don't see very specific target yet.

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Operator [28]

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We now have Tian Hou of T.H. Capital.

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Tianxiao Hou, T.H. Capital, LLC - Founder, CEO & Senior Analyst [29]

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I have 2 questions. One is regarding something related to Tmall. So the new CEO of Tmall, Zhang Yong, he said in the next 3 years, including 2019, GMV and Tmall is going to be doubled from CNY 2 trillion to CNY 4 trillion. So the CAGR will be 26%. So I just wonder, as a top partners on Tmall, how are you guys going to benefit from that? Or how are you going to be a part of that growth? And quantitively, so how many new brands are you planning to add to your platform? Or maybe also some other measurement, if the management can give us some clarification. That's number one question. Number two is the Salesforce partnership with Alibaba, which is exclusive. So in the past, Baozun we understand is also one of the leading guys in those kind of SaaS program. So it sounds like a quite negative for you guys. So can you guys give us some insight about their partnership impact to you?

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Junhua Wu, Baozun Inc. - Chief Growth Officer & Director [30]

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Okay, Tian, this is Junhua. So let met answer your first question in terms of the GMV doubling in 3 years. So we did have a workshop as a strategic partner with Alibaba earlier. So I'm talking about this conversation. So I can share you some color on that, but please don't treat my things -- my answers as official from Alibaba. So they have very comprehensive plans for breakdown the GMV double plan. Including like 3 new stuffs, one is a new customer and new products and new scenarios. In terms of the new customer, it's all about acquisition of the basic traffic from this -- from outside Tmall into the inside Tmall. So right now, the monthly active dynamic consumer is about, like, 700 million every month dynamically. So they have a very strategic KPI about bringing extra 20 million new customers every quarter to Tmall in the future, 1, 2 years. So that's one thing. By expanding all the Tmall service offering to Tier 3 to Tier 6 cities, that's one thing. By enrolling more brands on the Tmall by competing with the other ecosystems in their -- under their radar, that's one thing for new customers. The new product is like they're about to open a lot of back-end tools and especially data-driven tools helping all those brands and merchants and partners to just create a design, create a new product by the consumer behavior, consumer needs and global trend, something like that. They are going to facilitate all those brands, merchants and partners deleveraging the Tmall big data to drive more accurate and new products to create new things for consumers. That's creating the demand and fulfill demand. The third is putting new scenarios is more like to the Tmall version 2.0. So as far as I said last time, they're about to launch a new implementation regarding their membership upgradation. So this is their first approach. So we are -- we have a lot of capabilities to just create a new zone in each brand flagship store to create a membership launching program based on the brand policy and based on the brand's existing CRM program to deeply engage with their existing customer and with enrolling new customer driving higher growth. So they are providing a lot of tools and policies to empower us as an equal player to adjust in our -- set up our growth. We do benefit a lot of discounted things from the 3 new -- from Tmall, so we can just leveraging their resources to create our own growth.

Besides that -- maybe you don't know that before. So according to Tmall announcement, it's over 50% of the Tmall GMV actually came from a nonbrand merchant and nonbrand entities, which means that the branded GMV like a lot of [name the] brands, including the national brands and domestic brands, it fell 50% of the total Tmall GMV. So the rest, a little bit over 50% GMV came from the nonbranded entity like us. Factories, manufacturers and some kind of the retailer and some kind of the local brand owner or something like that. So Tmall is about to set up a very strategic partnership with all those brands, especially by providing an official Tmall TP services to those nonbranded kind of the entities. This is also increasing and expanding the Baozun's addressable market, not by only serving international and domestic brands, but also by having opportunities of serving all those nonbrand entities by selling their products and goods online. So we can see that based on the roughly an explanation on the growth strategy, we have a lot of potential. Thank you.

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [31]

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This is Vincent, I will take the second one about the Salesforce. Yes, we did notice that there's a strategic announcement between Salesforce and Ali Cloud. It is actually Ali Cloud. So Ali Cloud is infrastructure service provider. So it is easy to understand that the SaaS software provider to work with a cloud service provider is very natural. And earlier, we can -- you can also -- you may also notice that there's some strategic payments from Ali Cloud. They said, we don't do SaaS, whereas this, we just want to be integrated. So that's the translation of the Chinese statement. That means that we, in the future, can work much closer also with Ali Cloud to bring our services to a broader base of customers. And also we think that in China market, there is a need for some solutions and services, which is very applicable and suitable for the local market. Actually, we are enabling the brands to directly facing the consumers. That is our very important mandate. So we -- our SaaS solutions will quite based on that to resolve the local -- to fulfill the local industry requirements to deliver a very efficient one for the market.

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Operator [32]

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We now have Jiang Zhang of China Renaissance.

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Jiang Zhang, China Renaissance Securities (US) Inc., Research Division - VP [33]

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So I just got a question regarding the brands shifting from GMV to non-GMV. Can you just give me -- just let me know what the reason behind it? And is this more of a -- like do you think this is more of a structural trend of brands wanting to, let's say, bring things -- bring all the operations in-house or it's like a one-off event? Any additional color will be greatly appreciated.

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [34]

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Okay. Thanks, Robin. Let me answer his question. I think that's not related to the in-house or outsource ad hoc. That's our decision to suspend the service. The reason for that is very simple because of the very, very low take rate, which impact our, I would say, 2 factors. One is, it will impact our P&L and the second one, really ways to sum up our limited resources. We want to better utilize the limited resources to the higher GMV and based on the strong pipeline we have, we made this decision. So I would say that there is some temporarily impact on the GMV, but there is not much impact on the revenue and no impact on our bottom line. Thank you.

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Jiang Zhang, China Renaissance Securities (US) Inc., Research Division - VP [35]

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Sorry. Just to clarify, so you said there is a slight impact on GMV and -- yes, so I am understanding this...

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [36]

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A very, very slight impact on the GMV, but no impact on our bottom line. Sorry, there is a impact in GMV, little impact in -- very, very little impact in the revenue and no impact on the bottom line.

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Operator [37]

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Next question is from the line of Joyce Ju of Bank of America Merrill Lynch.

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Joyce Ju, BofA Merrill Lynch, Research Division - VP & Research Analyst [38]

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My first question about take rates. Can you give us more color on the take rate trends specifically? Your Q3 guidance for service revenue seems lower than the GMV growth. Does that mean a decrease in trend for take rates? In view of the cooperation with Alibaba to add a luxury premium brand that can help us to improve our take rate. And my second question is about your brand pipeline. Can you give us more color on the new brand to be added in the second half? And also give some updates on your relationship with your existing key brands.

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Bin Lu, Baozun Inc. - CFO [39]

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Sure. Let me answer your question about the take rate. When you do a simple calculation, let's say, around 9.4% in Q1 and 9.7% in Q2, and for the GMV, I will say, there are similar amounts coming from the electric brands we just mentioned and we are going to transfer. And if you look at that by Q1, Q2, I would say, excluding that, we have a great improvement in our take rate in the -- in brands, excluding that one. I think that's a very good result when we focus on the high-quality GMV and attract more new brands coming in. So based on this trend, we have the reason to believe we will have a gradual improvement in our take rate overall. So what's your second question, please?

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Joyce Ju, BofA Merrill Lynch, Research Division - VP & Research Analyst [40]

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It's about your brand pipeline. Any color to share with us of new brands we added, like what kind of key category domestic brands. Also can you give us updates on your relationship with your key brands, let's say, like Nike?

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Wenbin Qiu, Baozun Inc. - Chairman of the Board & CEO [41]

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Okay. This is Vincent. I will take this question. We -- this year, the whole year till now, I think, we have a very strong pipeline with very good potential from several of the key sectors, including apparel, luxury, FMCG and even some of the home products. So very strong pipeline. So that is one thing. The new brands is quite exciting to us, not only about the size of GMV, but also the comprehensiveness of our different services. About the key brands, yes, we always keep a very close attention to the key brands, including those very (inaudible) we are working with them very closely. And we think the key brands is very satisfied with our services, and we are also have the willingness to work for long term with them as well. So in this case, both sides just mentioned to work closely and for long. Thank you.

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Operator [42]

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Ladies and gentlemen, that's the end of our question-and-answer session. And I would like to hand the conference back to our presenters, Ms. Wendy Sun. Please go ahead.

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Wendy Sun, Baozun Inc. - IR Director [43]

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Thank you, operator. In closing, on behalf of Baozun's management team, thank you for your participation today. If you require any further information or keen to visit us in China, please let us know. Thank you for joining us today. This concludes the call.

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Operator [44]

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Thank you. Ladies and gentlemen, this concludes the conference for today, and thank you for participating. You may now all disconnect.