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Edited Transcript of VIPS earnings conference call or presentation 15-Aug-19 12:00pm GMT

Q2 2019 Vipshop Holdings Ltd Earnings Call

Guangzhou Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Vipshop Holdings Ltd earnings conference call or presentation Thursday, August 15, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donghao Yang

Vipshop Holdings Limited - CFO

* Jessie Fan

Vipshop Holdings Limited - Head Of IR

* Ya Shen

Vipshop Holdings Limited - Co-Founder, Chairman & CEO

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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

* Chen Shen

BOCI Research Limited - Research Analyst

* Joyce Ju

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Lingshan Zhou

* Melissa Chen

China Renaissance Securities (Hong Kong) Limited, Research Division - Analyst

* Mon Han Chung

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* 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

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Presentation

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Operator [1]

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Ladies and gentlemen. Good day, everyone, and welcome to Vipshop Holdings Limited Second Quarter 2019 Earnings Conference Call. At this point, I would like to turn the call to Ms. Jessie Fan, Vipshop's Director of Investor Relations. Please proceed.

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [2]

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Thank you, operator. Hello, everyone, and thank you for joining Vipshop's Second Quarter 2019 Earnings Conference Call. Before we begin, I will read the safe-harbor statement.

During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Vipshop Holdings Limited and its industry. All statements, other than statements of historical facts we may make during this call, are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is or are likely to, may, plan, should, will, aim, potential or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at any time, and we have no obligation to update these forward-looking statements.

Joining us on today's call are Eric Shen, our co-Founder, Chairman and CEO; and Donghao Yang, our CFO.

At this time, I'd like to turn the call over to Mr. Eric Shen.

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [3]

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Good morning and good evening, everyone. Welcome, and thank you for joining our Second Quarter 2019 Earnings Conference Call. We delivered strong operational and financial results for the second quarter of 2019.

During the quarter, our total active customers continued to grow at a healthy pace, increasing by 11% year-over-year. Since we refocused on discount retail, the stickiness of both our existing and new customers have improved. We are pleased to see our existing customers becoming a lot more active, while at the same time, new customer repeat purchase rate in the quarter after first purchase has increased. This success was the result of our focus on merchandising.

Since we refocused on discount apparel and our profit, we have seen strong improvement in our financial results and key operating metrics, proving our strategy is very effective. We'll remain committed to executing on our merchandising strategy and further expanding our market share in the discount apparel sector in China. We are confident that we can continue to deliver steadily profit improvement in the future, which will generate sustainable long-term shareholder return.

We strive to be the one-stop discount retail platform for our suppliers, solving all their inventory management issues in the off-price segment within our ecosystem. We have over a decade of experience in online discount retail, and we believe in this age and time, online and offline are closely linked. Shoppers, who are increasing, demand omnichannel shopping experience. Given that, we begin to enter the offline discount retail segment this year. And our acquisition of Shan Shan Outlets is an important part of our new retail strategy.

Shan Shan Outlets is a profitable business with a healthy operating cash flow. Importantly, they have a top-notch management team with decades of experience in managing and operating outlets in China, who will stay with Vipshop after the acquisition.

Secondly, we will continue to focus on our online business, while our offline strategy, including our investment into Shan Shan Outlets, Vipshop offline stores and Vipmaxx offline stores, is complementary to our online business. Our goal is to help our suppliers manage their inventory cycles more effectively via different channels within our ecosystem.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategy in more detail and go over our operational and financial results.

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Donghao Yang, Vipshop Holdings Limited - CFO [4]

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Thanks, Eric, and hello, everyone. We finished the second quarter of 2019 with robust financial results. Our top line grew by about 10% year-over-year, exceeding our expectations. Importantly, our non-GAAP net margin attributable to Vipshop shareholders increased by 1.9 percentage points year over year, which is the result of improved gross margin and more effective cost control. During the quarter, we generated robust free cash flow of RMB 1.2 billion as compared with negative free cash flow of RMB 903 million in the prior year period, representing a RMB 2.2 billion increase year over year.

In the second quarter of 2019, we saw improved conversion rate and elevated customer engagement from both our existing and new customers. As a result of that, our GMV grew by 11% year-over-year, driven by the robust growth in our core categories. Specifically, GMV from apparel-related category has seen 19% year-over-year growth, which is the fastest among all major categories.

During the quarter, we made further progress in outsourcing our last-mile delivery to third party couriers. Currently, around 30% of our daily orders are delivered by third-party partners. We continue to carefully monitor the effect on customer experience throughout this process and are evaluating whether or not it would be beneficial to outsource more orders, which will further reduce fulfillment costs.

We will be prudent in our investment in the offline segments as they are more asset-heavy than the online business, and we need some time to gain operating experience in these new areas. Rest assured, we will be monitoring the profitability and return on investment from all our businesses very closely. The focus on the high-margin apparel category has and will continue to enable us to deliver improvement in our gross margin and overall profitability.

Now, moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all the financial numbers presented today are in renminbi amounts, and all percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenue for the second quarter of 2019 increased by 9.7% to RMB 22.7 billion from RMB 20.7 billion in the prior year period, primarily driven by the growth in the number of total active customers.

Gross profit for the second quarter of 2019 increased by 25.9% to RMB 5.1 billion from RMB 4 billion in the prior year period. Gross margin increased to 22.4% from 19.5% in the prior year period.

Fulfillment expenses for the second quarter of 2019 were RMB 2.2 billion as compared with RMB 1.9 billion in the prior year period. As a percentage of total net revenue, fulfillment expenses were 9.7% as compared with 9.1% in the prior year period, primarily attributable to a write-down of RMB 276 million related to the Zhaoqing warehouse due to land subsidence during construction. Excluding the write-down, fulfillment expenses as a percentage of total net revenue for the quarter were 8.5%.

Marketing expenses for the second quarter of 2019 decreased to RMB 878 million from RMB 900 million in the prior year period. As a percentage of total net revenue, marketing expenses decreased to 3.9% from 4.3% in the prior year period.

Technology and content expenses for the second quarter of 2019 decreased to RMB 422 million from RMB 511 million in the prior year period. As a percentage of total net revenue, technology and content expenses decreased to 1.9% from 2.5% in the prior year period.

General and administrative expenses for the second quarter of 2019 were RMB 706 million as compared with RMB 615 million in the prior year period. As a percentage of total net revenue, general and administrative expenses were 3.1% as compared with 3% in the prior year period.

Our income from operations for the second quarter of 2019 increased by 141.2% to RMB 965 million from RMB 400 million in the prior year period. Operating margin increased to 4.2% from 1.9% in the prior year period.

Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, increased by 97.6% to RMB 1.2 billion from RMB 595 million in the prior year period. Non-GAAP operating income margin increased to 5.2% from 2.9% in the prior year period.

Our net income attributable to Vipshop's shareholders for the second quarter of 2019 increased by 19.3% to RMB 814 million from RMB 682 million in the prior year period. Net margin attributable to Vipshop's shareholders increased to 3.6% from 3.3% in the prior year period. Net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 1.21 from RMB 0.99 in the prior year period.

Non-GAAP net income attributable to Vipshop's shareholders, which excludes share-based compensation expenses, amortization of intangible assets resulting from business acquisitions and equity method investments, tax effect of amortization of intangible assets resulting from business acquisitions, investment gain and revaluation of investments excluding dividends, tax effect of the investment gain and evaluation of investments excluding dividends and share of gain in the investment of limited partnership that is accounted for as an equity method investee, increased by 84.2% to RMB 1.1 billion from RMB 577 million in the prior year period.

Non-GAAP net margin attributable to the Vipshop's shareholders increased to 4.7% from 2.8% in the prior year period. Non-GAAP net income attributable to Vipshop's shareholders per diluted ADS increased to RMB 1.58 from RMB 0.8 in the prior year period.

As of June, 30, 2019, our company had cash and cash equivalent and restricted cash of RMB 7.8 billion and short-term investments of RMB 238 million. So the second quarter of 2019, net cash from operating activities was RMB 3.4 billion.

Looking at our business outlook for the third quarter of 2019, we expect our total net revenue to be between RMB 17.8 billion and RMB 18.7 billion, representing a year-over-year growth rate of approximately 0% to 5%. These forecasts reflect our current and preliminary view on the market and operational conditions, which is subject to change.

With that, I would now like to open the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Joyce Ju from Bank of America.

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Joyce Ju, BofA Merrill Lynch, Research Division - VP & Research Analyst [2]

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Congrats for the solid quarter. I have 2 questions. The first question is actually regarding our improvement in gross margin this quarter. May we have a general sense like how much of those gross margin improvement are actually from the category mix, i.e., like some highly profitable categories taking a bigger percentage of total GMV? And what part of them are actually coming from other reasons, such as we have less discount or promotions?

My second question is regarding the cash flow because we now have generated quite rapid, strong growth in terms of cash flow. Do we have any plans in terms of CapEx for this year or next? Except from CapEx, are we going to have any plans such as share buyback or dividend payout?

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Donghao Yang, Vipshop Holdings Limited - CFO [3]

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Let me take your first question about what caused the gross margin improvement in this quarter. Well, you mentioned that apparel has a bigger portion in the mix. I mean, that's absolutely right. We're now focusing more on discount retail and more on apparel category. But specifically, how much of the shift in mix has contributed to the gross margin improvement, I don't have that number as of now. We can do that calculation for you after this.

(foreign language)

Well, let me take your second question. Yes, we do have a very strong cash flow right now. But with that kind of cash flow, we don't have any plans to increase our CapEx for the foreseeable future. And I think we've guided the -- we've told the market that for this year, the total CapEx will be around RMB 3 billion, including warehouse construction and the headquarters building. And as of today, as of now, we do not have any plans to buy back any shares in the foreseeable future.

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Operator [4]

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Your next question comes from the line of Natalie Wu from CICC.

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Unidentified Analyst, [5]

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This is [Yung Wei] representing Natalie. First, congratulations on a strong quarter. We would like to understand, firstly, what is the rationale behind the acquisition of Shan Shan Outlets and when shall we expect to see synergies on this deal?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [6]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [7]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [8]

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[Interpreted] We have been an expert in discount retail in Chinese markets, and we have been doing this kind of retail online for over 10 years. And we've been called to the online outlets by many others. So we actually think that this acquisition is highly complementary because the outlet offline business is growing quite fast in China, and the market is currently underpenetrated.

The growth rate is around 20%, and customers nowadays will increasingly go both online and offline for their shopping needs. So we do think there will be a lot more synergy in the future. Through this acquisition, we will be gaining more bargaining power from our supplier side. And then, acquire an additional great channel to clear more inventory for our suppliers, and venture into areas such as online-offline integration, smart retail and so on.

In the future, we will be exploring different models for expanding the offering of [this deep] business, including lighter asset models in which we help manage and operate the outlets but not necessarily becoming the asset owners of the newer outlets that we will open in the future.

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Operator [9]

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(Operator Instructions) You have a follow-up question from the line of Joyce Ju from Bank of America.

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Joyce Ju, BofA Merrill Lynch, Research Division - VP & Research Analyst [10]

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I just have a follow-up question regarding your acquisition with Shan Shan. Just try to understand after we consolidate the Shan Shan business, how will it impact our financial numbers.

A second follow-up is just try to get a sense because we see our outlook for second -- for third quarter growth was seen decelerating from the second quarter. Just wondering Shen-zong's outlook in terms of -- into the second half, how the company is looking at the growth rate or general online retail segment or apparel sector's growth in the second half? Do we foresee a quick slowing down or it's just seasonality?

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Donghao Yang, Vipshop Holdings Limited - CFO [11]

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(foreign language)

Thank you very much for the question. Let me take your first question regarding the impact on our overall financials after the consolidation of Shan Shan business. Well, first of all, the impact on our top line, it's going to be limited because we will book the revenue from Shan Shan on net basis, meaning the number is going to be relatively small compared to our total revenue. And in terms of bottom line, Shan Shan is a profitable business. So after consolidation, Shan Shan's number will be accretive to our overall financial results. So there's no need to worry about that.

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Joyce Ju, BofA Merrill Lynch, Research Division - VP & Research Analyst [12]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [13]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [14]

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[Interpreted] In the second half, e-commerce industry still looks to have a very healthy growth. But for us, since we're mainly an apparel discount retailer, 3Q is traditionally a very light season, due to seasonality for the apparel category. Therefore, for us, in the third quarter, we usually tend to be more conservative with the growth rate, given that there are limited promotional events and the seasonality. However, for the second half, we continue to have confidence in customer growth, repeat purchase and other operating metrics going forward.

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Operator [15]

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Your next question comes from the line of Alicia Yap from Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [16]

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Sorry, can you hear me okay?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [17]

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Yes, we can hear you.

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Donghao Yang, Vipshop Holdings Limited - CFO [18]

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Yes. Please go ahead.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [19]

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Sorry about that. I joined the call late, so I'm not too sure if this has been asked, apology in advance. Actually, I have a question on the Shan Shan outlet acquisition. Can management elaborate a little bit in terms of the near-term and short-term synergy you expect to realize through the expansion into the physical outlet store exposure? How will that bring synergies to Vip online market site, both in near term and short term -- near term and long term?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [20]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [21]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [22]

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[Interpreted] So Alicia, we love the brands that Shan Shan carry and the brands that we sell and found that the brands highly overlap. And therefore, there is a lot of synergy on the brand side, giving us more bargaining power and giving us more access to inventory.

Additionally, we strive to create a better inventory solutions platform for our suppliers and that does mean we need various channels, both online and offline, to clear inventory more comprehensively for our suppliers. Additionally, this also offers more channels for us to acquire customers and explore online and offline integration.

Going forward, we will be looking at expansion plans for Shan Shan. In the long term, we do believe that there is a lot of growth potential in the outlet industry in China as the market is currently quite underpenetrated. However, we will be looking at more asset-light models in which we do more management for the outlets and the operating side of the outlets rather than owning and building the physical land and the assets -- and the commercial assets.

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Operator [23]

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Your next question comes from the line of Sally Chan from CLSA.

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Sally Chan, CLSA Limited, Research Division - Research Analyst [24]

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I have a question on the VAT reduction in China from 16% to 13%. How should we think about the benefit to our top line and margins in the second quarter? And have we factored in the benefit in our 3Q guidance, or are we planning on passing on the benefits to our customers?

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Donghao Yang, Vipshop Holdings Limited - CFO [25]

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Let me take your question. Well, the 3 percentage point reduction on VAT tax rate, the impact of that on top line is close to 3%. And the impact on our bottom line is roughly 0.5% to 0.6%. All positive. We've already considered the impact of the new VAT tax rate when we give the guidance for Q3.

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Operator [26]

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(Operator Instructions) And your next question comes from the line of Melissa Chen from China Renaissance.

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Melissa Chen, China Renaissance Securities (Hong Kong) Limited, Research Division - Analyst [27]

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I have a question regarding our outsourcing delivery to the third parties. I'm just wondering like how big impact shall we expect on the financial statements? And when shall we expect the impact?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [28]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [29]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [30]

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[Interpreted] We started to outsource, I think, the portion of our orders starting the second quarter to third-parties and delivery couriers. In the second quarter, around 12% of our orders were outsourced. So we are already seeing some benefit in terms of delivery savings in the second quarter.

In the third quarter, we'll continue to outsource more orders and around now, around 30% of daily orders have been outsourced. We will continue to evaluate the shopping experience and the potential savings from outsourcing orders and continuing to evaluate whether or not it will be more beneficial to outsource more orders and save more, while the customer experience should be undisturbed.

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Operator [31]

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(Operator Instructions) You have a follow-up question from the line of Alicia Yap from Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [32]

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I wanted to ask on these ASP orders and also the orders number growth. It does look like the ASP per order is trending down, and then -- versus the order number growth is reaccelerated a bit. Can we get some dialogue in terms of what are some of the reasons to attribute to that? And then, will we actually see the trend continue in the next quarter?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [33]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [34]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [35]

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[Interpreted] So Alicia, ticket size declined year-over-year for several reasons. The first is that since we rolled out the Super VIP membership, the customers get free shipping and free return. And therefore, they will tend to order smaller sizes and order more frequently. That's not the reason that ticket size has declined, but order frequency has increased substantially.

The second reason is starting from the end of last year, we rolled out a no bundling policy. This means that customers no longer have to buy multiple items in order to get free shipping at CNY 288 in order to get some discounts. This policy means that they will tend to order what they like instead of buying additional items in order to get an incremental 10%, 15% of discount. It does affect ticket size, but it also improves the shopping experience and reduces the return resulted from buying items just to get a discount.

And lastly, our marketplace contribution has increased year-over-year, from 4% in the second quarter of 2018 to 8% in the second quarter of 2019. Since orders in the marketplace tend to be smaller in order size and they're shipped separately from our 1P orders. It did add a lot more orders as a result of increasing marketplace contribution.

However, regardless of the ticket size decrease, because the orders have grown very strongly, our ARPU remained healthy. This is a good sign. That means that shoppers are shopping more frequently on our platform. So going forward, we will continue to balance the ticket size and the shopping frequency. We don't believe that ticket size should fall a lot more as these various factors are evened out on a year-over-year basis, likely around 4Q or next year.

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Operator [36]

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Your next question comes from the line of Lisa Zhou from 86Research.

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Lingshan Zhou, [37]

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Congratulations on the strong quarter. So my question is about the supply. So according to the NBS data, growth of the apparel sector has been very slow this year. And from what I see in the financial reporting of the Asia companies, the branded apparel -- a lot of branded apparel companies are also facing a lot of pressure, particularly on the inventory level. So I want to understand, what's the implication for Vip? Will that help you obtain better merchandise and grow your top line growth?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [38]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [39]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [40]

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[Interpreted] We are also looking at the macro very closely. Because we are mainly an apparel retailer focused on the discount apparel segment, we are actually seeing more inventory to be sold through the off-price channel. Therefore, we will continue to execute our merchandising strategy, bringing deep discounted products to our customers.

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Operator [41]

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Your next question comes from the line of Thomas Chong from Jefferies.

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [42]

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May I ask about our offline strategies over the next coming years? Should we expect -- we invest our better-than-expected earnings into the offline segments so as to deepen our integration between online and offline?

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [43]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [44]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [45]

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[Interpreted] So Thomas, we have 2 types of offline stores that we have opened in the past year. One type is called Vipshop, similar -- they are opened in the mall, and we have opened slightly over 100 stores. And the other type is called Vipmaxx. It's mostly open in the communities and have a lower positioning than the Vipshop offline stores. We have opened a few dozen of the Vipmaxx stores as well. Both stores are focused on the apparel category and discounted retail in apparel.

Currently, we are only experimenting and exploring the offline segment. Therefore, the revenue contribution to our overall business is still quite small. No matter if the business is online or offline, our goal is to have a profitable business. Therefore, in the future, we will continue to look at the profitability of both our online and offline business, looking at the best way to both expand the business while also making the businesses very margin accretive.

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Operator [46]

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Your next question comes from the line of Tian Hou from T.H. Capital.

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Tianxiao Hou, T.H. Capital, LLC - Founder, CEO & Senior Analyst [47]

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Shen-zong and Donghao and Jessie, the question is -- I'm not sure if it's been answered. If it's been answered, then I'll move to the next one. Has your acquisition of this Shan Shan commenced? What's the synergy between Vipshop's online and Shan Shan? So that is one of the questions.

The second question is, we saw the bigger commerce vendors, [Alibaba], JD as well as Pinduoduo, they all go to offline and the lower-tier cities. That's their sort of a common approach. I wonder what's Vipshop's approach going forward in terms of customer acquisition. That's 2 questions.

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [48]

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(foreign language)

So on the Shan Shan acquisition, because we're an expert in discount retail and have been operating in this business online for 10 years, we do see that there's still a lot of opportunities offline. The offline outlet business is growing fast at around 20%, and customers will increasingly go both online and offline to satisfy their shopping demand.

Therefore, we do see a lot of synergy, especially on the supplier side, where we will enlarge our bargaining power with a lot of our key suppliers because the brand overlap is quite big. And we will gain more channels to clear our supply inventory more effectively for our supplier.

(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [49]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [50]

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[Interpreted] Tian, we are not particularly focused on a certain tier of city in our marketing and our target audience. Our goal is to focus on apparel, and particularly apparel in the off-price segment. Actually, if you look at our marketing targets, we are quite even across the board, attracting customers who are receptive to the discounted branded apparel segment.

In our numbers, Tier 4, Tier 5, customers contribute around 30%. Therefore, it is quite a substantial part of our business. We have tried in the past to expand more and do more marketing in the lower-tier cities, but we have not found that to be more effective than our investments elsewhere. Therefore, we will look at things across the board but continue to be active with merchandising strategy in all price segments.

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Operator [51]

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Your next question comes from the line of Jamie Shen from Bank of China International.

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Chen Shen, BOCI Research Limited - Research Analyst [52]

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I just have a very quick follow-up on the acquisition of Shan Shan Outlets. Along with the existing stores, I think there are still a few new ones to be opened in the future. And usually, like for offline retail outlets, it will take some time for the operation and profitability level to ramp up. So I just wonder will there be any financial impact that we should be taking into account related to new store opening?

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Donghao Yang, Vipshop Holdings Limited - CFO [53]

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Okay. Thanks for your question. Let me take your question. Shan Shan's management team is actually, we mentioned it in our script, top-notch management in China's outlet industry. They have a great track record in turning a new store into a profitable one within a very short period of time.

So in the past 8 to 9 years, they've opened 5 stores already. On average, it took them 18 months to turn a store profitable. So we're very confident in the future, when they continue to open more stores and they will still be able to turn the new stores into profitable ones within a relatively short period of time. And since they already got 5 big stores that are already profitable, we believe that going forward, even with the plan to open more stores, the consolidation of Shan Shan's financials to Vipshop will be accretive in terms of bottom line.

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Operator [54]

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(Operator Instructions) You next question comes from the line of Hans Chung from KeyBanc Capital Market.

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Mon Han Chung, KeyBanc Capital Markets Inc., Research Division - Research Analyst [55]

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Congratulations on the strong results. Just a quick question regarding the gross margins. Though I know the pretty good gross margin this quarter might be driven by the higher growth in apparel and also perhaps the VAT reform may contribute a little bit. Just going forward, how should we think about the gross margin in the second half and next year? Is the gross margin in the second quarter could be a new base and then how many upside from here going forward?

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Donghao Yang, Vipshop Holdings Limited - CFO [56]

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Thank you for your question. The biggest reason why in Q2 our gross margin went up so substantially compared to last year or this Q1 -- this past Q1, was our refocus on discount retail in apparel. The impact of the new lower VAT tax rate on our gross margin is roughly 0.5% to 0.6%. So compared to the shifts on apparel, that is relatively small. So that's why we are confident that if we continue to execute our new strategy of focusing on discount retail in apparel, we will be able to continue to deliver steady improvement on our gross margin.

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Operator [57]

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You have a follow-up question from the line of Tian Hou from T.H. Capital.

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Tianxiao Hou, T.H. Capital, LLC - Founder, CEO & Senior Analyst [58]

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Shen-zong, Donghao and Jessie, the follow-up question is, I do realize Tencent and JD still have some options to buy up more of Vipshop's shares. I wonder what's going to happen in that front.

And also, for Shan Shan, if they continue to open more outlets, is that going to cost Vipshop more CapEx? So that's the 2 questions.

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [59]

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(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [60]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [61]

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[Interpreted] So Tian, Tencent is supposed to buy up to 12% and JD 8%. And if they do buy incremental shares, we will be issuing a public announcement via a filing.

(foreign language)

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [62]

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(foreign language)

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [63]

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[Interpreted] So Tian, for the 5 outlets in the pipeline for Shan Shan, the CapEx need is not too big as the land has already been secured. For additional projects in the future, we will be exploring more asset-light models in which we don't necessarily have to go out there and buy land and build out each outlet. But rather we would be engaged with the outlets in terms of managing and operating the outlets.

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Operator [64]

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If there are no further questions at this time, I would like to hand the conference back to today's' presenters. Please continue.

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Donghao Yang, Vipshop Holdings Limited - CFO [65]

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Thank you for taking the time to join us, and we look forward to speaking with you next quarter. Thank you very much.

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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [66]

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Thank you.

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Jessie Fan, Vipshop Holdings Limited - Head Of IR [67]

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Thank you.

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Operator [68]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]