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Edited Transcript of VIPS earnings conference call or presentation 21-Feb-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Vipshop Holdings Ltd Earnings Call

Guangzhou Feb 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Vipshop Holdings Ltd earnings conference call or presentation Tuesday, February 21, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Ya Shen

Vipshop Holdings Limited - Chairman and CEO

* Donghao Yang

Vipshop Holdings Limited - CFO

* Millicent Tu

Vipshop Holdings Limited - IR

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Conference Call Participants

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* Alan Hellawell

Deutsche Bank - Analyst

* Alicia Yap

Citigroup - Analyst

* Binnie Wong

Merrill Lynch - Analyst

* Alex Yao

JP Morgan - Analyst

* Jialong Shi

Normura Securities - Analyst

* Evan Zhou

Credit Suisse - Analyst

* Thomas Chong

BOCI - Analyst

* Ronald Keung

Goldman Sachs - Analyst

* Jin Yoon

Mizuho Securities - Analyst

* Ming Zhao

86Research - Analyst

* Alex Liu

Daiwa Securities - Analyst

* Dawei Fang

CLSA - 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's fourth quarter and full year 2016 earnings conference call.

At this point, I would like to turn the call to Miss Millicent Tu, Vipshop's Director of Investor Relations. Please proceed.

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Millicent Tu, Vipshop Holdings Limited - IR [2]

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Thank you operator. Hello everyone and thank you for joining Vipshop's fourth quarter and full year 2016 earnings conference call.

Before we begin, I'll 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, assumption, estimates, and projections about Vipshop Holdings Limited and its industry.

All statements, other than statements of historical fact, 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 unlikely, may, plans, should, will, aim, potential, or other similar expressions. These forward-looking statements speak only as of the day hereof and are subject to the change at any time and we have no obligation to update these forward-looking statements.

Joining us on today's call are Mr. Eric Ya Shen, our Co-Founder, Chairman, and Chief Executive Officer and Donghao Yang, our Chief Financial Officer.

At this time, I would like to turn the call over to Eric Ya Shen.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [3]

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Good morning and good evening everyone. Welcome and thank you for joining our fourth quarter and full-year 2016 earnings conference call. We completed the year on a strong note delivering robust operational results with strong customer growth and market share gains.

With over 50 million total unique active customers shopping on the Vipshop platform in 2016, Vipshop has always put the quality of our merchandise as a top priority. We provide each of our customers with high quality products selected by our 1,000 plus buyers, including many exclusive merchandise at guaranteed low prices. This includes more than 96% of our products checked by our staff for quality assurance before delivery.

Through the Vipshop platform, we enable more than 5,000 leading brands to liquidate products and generate large sales while gaining high quality customers. We provide these brands with extensive sales solutions and offer them a one-stop service for their full product lifecycle.

Vipshop has become one of the few most important channels for brands to reach Chinese consumers and generate rapid sales.

Providing these high quality products along with a superior customer experience is the backbone of our ongoing success. As such, we continued to expand SKUs, diversifying merchandising, and improve our overall logistic capabilities.

A big part of our recent moves was the expansion of our overseas office to 10 that are accountable for extending our global merchandising capabilities for the cross-border business.

Domestically, our 2 million square meters of warehouses and more than 20,000 full-time delivery staff can provide the customer with a fast and superior experience across -- all over China.

There are no [brand] of spots in China for Vipshop's service. Our in-house last mile delivery network currently covers 30 provinces, 300 cities, and 2,872 counties across the country.

Importantly, we are one of the very few leading e-commerce companies that can proudly say that we are able to make deliveries during the Chinese New Year holiday period.

Going into 2017, we remain focused on enhancing customer experience and strengthening our ecosystem to create more value for our customers, suppliers, and shareholders.

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 are pleased to highlight another robust quarter where we delivered solid top line growth with strong free cash flow while maintaining steady margins in the fourth quarter of 2016.

In the past quarter we saw remarkable growth in our free cash flow, which increased by over 600% year-over-year. This is a further testament of the successful execution of our business strategy and our ability to generate sustainable healthy cash flow.

In 2016, we made a number of important strides. To begin with, Fitch rated Vipshop as BBB+, Moody's rated the Company as Baa1, and Standard & Poor's rated the Company as BBB. These solid investment grade ratings from all of the big three global rating agencies are an endorsement of our business fundamentals, financial strengths, investment prospects, and future market potential.

Furthermore, in January 2017, a subsidiary operating the Internet finance business completed the first offering of RMB denominated asset backed securities of RMB300 million, which is listed on the Shanghai Stock Exchange in China. We are currently preparing for future follow on ABS offerings in China. These transactions represent an important milestone in our plans to further grow this new business with external sources of funding.

Turning to our customer and supplier financing programs. As of December 31, 2016, the total balance of credit outstanding to customers was approximately RMB2.17 billion and the total balance of credit outstanding to suppliers was RMB877.7 million. For the full year of 2016, we had 3.3 million users taking advantage of our consumer-financing program.

Looking forward, we will continue to invest in areas that are crucial to the customer experience across our platform while balancing revenue growth and margins. This includes investing in our logistics network and establishing even more provincial and local warehouses and enabling faster delivery for high frequency product.

Further, we will continue to provide a variety of value-added delivery services to enhance our customers' experiences. We are confident that we are making the right investments to improve our platform, enhance our ecosystem, and deliver incremental value to our shareholders.

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 the percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenue for the fourth quarter of 2016 increased by 36.5% to RMB18.98 billion, primarily attributable to a 39% year-over-year increase in the number of active customers which grew to 27.5 million and a 26% year-over-year increase in total orders to 82 million.

Gross profit for the fourth quarter of 2016 increased by 33.4% to RMB4.47 billion, primarily driven by the expanding scale of the business. Gross margin for the fourth quarter was 23.5% as compared with 24.1% in the prior year period. We expect our gross margin to remain stable as we balance our promotional activities and sales with our marketing expenses.

Fulfilment expenses for the fourth quarter of 2016 were RMB1.65 billion, as compared with RMB1.26 billion in the prior year period, primarily reflecting the increase in sales volume and number of orders fulfilled.

As a percentage of total net revenue, fulfilment expenses decreased to 8.7% from 9.1% in the prior year period, primarily reflecting the scale effect associated with our growth in total net revenue and improved fulfilment efficiency.

Marketing expenses for the fourth quarter of 2016 were RMB920 million as compared with RMB715 million in the prior year period, reflecting our strategy to drive long-term growth through sustainable investment and strengthening our brand awareness, attracting new users, and expanding our market share.

As a percentage of total net revenue, marketing expenses decreased to 4.8% from 5.1% in the prior year period, primarily attributable to our strategic balance between promotional activities and sales with our broader marketing efforts.

Technology and content expenses for the fourth quarter of 2016 were RMB471 million as compared with RMB322 million in the prior year period, reflecting our continued efforts to invest in human capital, advanced technologies such as data analytics, as well as new business opportunities, including our Internet finance unit. As a percentage of total net revenue, technology and content expenses were 2.5% as compared with 2.3% in the prior year period.

General and administrative expenses for the fourth quarter of 2016 were RMB624 million as compared with RMB421 million in the prior year period, primarily due to the buildout of our Internet finance team.

As a percentage of total net revenue, general and administrative expenses were 3.3% as compared with 3.0% in the prior year period.

Our income from operations increased by 17.1% to RMB939 million for the fourth quarter of 2016. Operating margin was 4.9% as compared with 5.8% in the prior year period.

Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from a business acquisition increased by 20% to RMB1.16 billion from RMB966 million in the prior year period.

Non-GAAP operating income margin was 6.1% as compared with 6.9% in the prior year period.

Our net income attributable to Vipshop shareholders for the fourth quarter of 2016 increased by 51.7% to RMB768 million from RMB506 million in the prior year period.

Net margin attributable to Vipshop shareholders increased to 4% from 3.6% in the prior year period.

Net income per diluted ADS increased to RMB1.26 from RMB0.84 in the prior year period.

Non-GAAP net income attributable to Vipshop shareholders, which excludes share-based compensation expenses, impairment loss of investment, and amortization of intangible assets resulting from a business acquisition and equity method investments increased by 30.9% to RMB970 million from RMB741 million in the prior year period.

Non-GAAP net margin attributable to Vipshop's shareholders was 5.1% as compared with 5.3% in the prior year period.

Non-GAAP net income per diluted ADS increased to RMB1.58 from RMB1.22 in the prior year period.

As of December 31, 2016, our Company had cash and cash equivalent of RMB4.11 billion and held to maturity securities of RMB672 million.

The fourth quarter of 2016 net cash from operating activities was RMB0.80 billion.

Looking at our business outlook for the first quarter of 2017, we expect our total net revenue to be between RMB15.3 billion and RMB15.8 billion, representing a year-over-year growth rate of approximately 26% to 30%.

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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Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions).

Your first question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your question.

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Alan Hellawell, Deutsche Bank - Analyst [2]

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Thank you very much and congratulations on the solid fourth quarter and encouraging first quarter guide. I wanted to ask about gross margin. I know you've mentioned on many occasions that gross margin and marketing as a percentage of sales will often offset each other. But in many ways, gross margin in isolation reflects our commercial leverage in supporting our brand partners. You mentioned that it should stabilize around fourth quarter levels of 23.5%. I'm just wondering, are we capable of recapturing the 25% levels that we used to have and if not, what prevents us?

Then secondly, we've obviously seen some very encouraging ARPU trends in the quarter. Can you offer any further color on the drivers behind this and what should we expect going into 2017? Thank you very much.

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Donghao Yang, Vipshop Holdings Limited - CFO [3]

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Thank you Alan for the questions. Let me take the first one about the gross margin. Well the contract take rates that we charge our suppliers have been quite stable. Gross margin declined slightly in Q4 because we run big promotions on Double 11 and December 8, our anniversary sales. Our strategy, as we have communicated clearly for the capital market, is to grow our top line as fast as possible while maintaining a stable net margin level.

Going forward, especially in the near and mid-term, we don't expect the gross margin to fluctuate much further. But in the long-term, there will be plenty of room for us to improve on gross margin as we continue to gain market share and strengthen our bargaining power.

So 25% in the long term, I don't think it's going to be an issue. And I'm pretty confident that over the long term we can do even better than that as we gain an even more dominant position in the market.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [4]

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(Interpreted) So Alan, as you can see, the ARPU decline year over year actually improved towards the second half of last year. And in particular, in the fourth quarter, we saw average ticket size increase quite meaningfully and yet average revenue per user only declined by 1.9%, 1.8%. So in the fourth quarter, average ticket size increased was largely due to our marketing -- largely due to that we encourage our customers to buy more items into one order to enjoy bigger discount.

In the future, we believe the ARPU trend will continue to improve due to a number of factors. Number one, we will continue to improve user experience as we always do. Number two, we will continue to optimize our category structure. Number three, we are using big data to recommend more personalized services and also more suitable SKUs to our customers.

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Operator [5]

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Your next question comes from the line of Alicia Yap from Citi Group. Please ask your question.

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Alicia Yap, Citigroup - Analyst [6]

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Hi. Good evening Eric, Donghao and Millicent. Thanks for taking my questions. My question is related to the operating metrics. So we actually noticed a decent improvement in the user metrics this quarter, particularly on your new customer app and also the ARPU per order. So our interpretation suggests that you have successfully added higher quality of user to your platform this quarter and since the retention rates for these newly-added user also improved and yet your sales and marketing spend actually are lower as a percentage of sales. So what else are the main reasons that contribute to the improved -- in user quality and operating metrics and your plans for your user acquisition strategy for this upcoming 2017?

Related to that, is that could you share with us the product categories that attracted these newly added users to spend? In other words, if you could share with us, for example, a rough percentage breakdown among the rarest categories that are purchased by these new users during the fourth quarter? Thank you.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [7]

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(Interpreted) Alicia, this is all due to our capabilities in our strong track record of execution in retail. We have made a few attempts to balance this between the customer growth -- new user customer growth and customer quality. So our strong track record in operations enabled us to do that, which has shown in this quarter's numbers.

So, obviously, we will continue to make more -- try different solutions to cater for different kind of customers. To give you an example, obviously in the past we probably used a lot -- we probably leveraged a lot on our customers to drive new users and that would be most likely the first order that customer -- the first category the customers are buying.

But recently we tried to use -- to recommend apparel, handbag, shoes, which are core categories to new users as obviously that helped improved the new user quality. We have seen some progress on that front. We will continue to make different attempts and try to cater for different characteristics on new customers.

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Operator [8]

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Your next question comes from the line of Binnie Wong from Merrill Lynch. Please ask your question.

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Binnie Wong, Merrill Lynch - Analyst [9]

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Hi. Good evening management and congrats on both the top line earnings bit in fourth quarter. So following up on the encouraging signs we see in the ARPU trend, looking into to 2017, how are we addressing the earlier concerns? We said, okay new user and younger generation have a lower ARPU. Then do you see that despite younger users are buying less in per order but they can actually buy more frequently? How do we do -- in terms of any elaboration you have on the cross-selling and the personalization technologies, say any update in terms of using social media or maybe another update in your marketing strategies, that would be helpful.

The second question is on the operating margins which has been declining in FY16 and our OP growth is also at a slower pace than top line growth, especially into second half. How should we expect this to trend into 2017, as Company will be investing more into Internet finance and better technologies? Do you think this can be largely be offset by the operating leverage and hence, will it still be realistic to expect a stable margin trend going forward, thank you?

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [10]

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(Interpreted) So Bini, overall the cohort of the younger demographic is trending for better. As you can imagine, at the very early stage the retention rates, the ARPU, including average ticket size and frequency, will be lower compared to people in their 70s and 80s. But it does take time for us to nurture these customers as their disposable income increases over time.

We actually track some of our younger demographic over a period of seven quarters and we are very encouraged to say that over that period, the ARPU of these younger demographics actually increased by 40% to 50%. In some cases, we also see -- saw that the ARPU of this younger demographic is surpassing that of the post 80s.

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Donghao Yang, Vipshop Holdings Limited - CFO [11]

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Let me take the operating margin question. Again, as we have explained a lot of times, that our strategy is to grow our top line as fast as possible while maintaining a stable net margin. Similarly, we do expect our OP margin will be stable going forward and even if we want to continue to invest in our Internet finance business and other initiatives like big data analytics, we will still try to maintain a healthy margin level.

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Operator [12]

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(Operator Instructions) Your next question comes from the line of Alex Yao from JP Morgan. Please ask your question.

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Alex Yao, JP Morgan - Analyst [13]

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Hi. Good evening everyone. Thank you for taking my question. I have a question on the long-term strategy in your finance business. What is your long-term goal for this part of the asset, say five years down the road? Also, in order to penetrate into more financial service areas, to be eligible for the domestic license, you guys probably need to restructure to a 100% domestic corporate risk structure. So would you be considering disposing the financial assets at some stage just like some of the competitors are doing right now? Thank you.

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Donghao Yang, Vipshop Holdings Limited - CFO [14]

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Okay. Thanks, Alex, for your question. Let me take your questions. Well, the purpose of our Internet finance business is to support our core e-commerce business and provide our customers with services that are actually standard practice among our large e-commerce peer companies in China.

Well, if you look at our Internet finance business, the default rate has always been very low, so -- and in mid-January in 2017, just last month, we completed our first ABS offering of about RMB300 million. So, we've now got an additional source of funding for our business and the impact of this Internet finance business on our cash flow will be significantly reduced.

And you mentioned a potential spin-off of our Internet finance business from our main -- core business. We will certainly consider this possibility, but currently we don't have any specific plan. If we do, we will communicate with the capital markets on a timely basis.

Operator?

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Operator [15]

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Your next question comes from the line of Jialong Shi from Nomura Securities. Please ask your question.

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Jialong Shi, Normura Securities - Analyst [16]

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Hi. Good evening. Thanks for taking my call. Congratulations on the very strong quarter. I have a follow-up question on the new customer growth and sorry if this question has already been answered.

I just want to find out what would be the trend for the new customer growth in Q1 and the year-to-date 2017. And shall we see some new customer growth to remain in around 2% level over the next few quarters? Thank you.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [17]

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(Interpreted) So, Jialong, as we are very pleased to tell you that Q3 user growth rate, Q4 user -- so Q3 user growth rate year over year was 19%. The second -- the fourth quarter was over 20%. And Eric said in the first quarter, even the full-year 2017, the growth rate will be better than that. And that we have confidence in terms of the full-year growth.

On the other thing -- on the other hand, we also would like to point out that from the Company's perspective, in order for us to grow healthy and sustainably, we not only pay attention to the new user growth metrics, we're also focused a lot on our own user analysis in terms of average ticket size, retention rate, increase in the average spend per customer and even the dormant user reactiveness. As you can see over the past few years, our own users have been the backbone of our business, which has contributed significantly to our top line.

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Operator [18]

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Your next question comes from the line of Evan Zhou from Credit Suisse. Please ask your question.

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Evan Zhou, Credit Suisse - Analyst [19]

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Hi. Good evening, Eric, Donghao, Millicent. Congratulations on a very solid set of results and guidance. A question regarding our category mix. I think you mentioned that it's still, I think, the apparel and shoes and bags that has been driving the overall growth for Q4.

I was wondering how is the performance of the other categories, like cosmetics? Or you also mentioned some cross-border updates in your prepared remarks as well. Any colors from those non-apparel categories will be appreciated. Thank you.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [20]

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(Interpreted) So, Evan, in the fourth quarter, our cosmetics overall was growing very fast. During the quarter, we had RMB3.5 billion in terms of GNV for our overall cosmetics.

And in terms of cross-border, overall it was about 5% of our total GNV and we expanded a lot of categories. We also have overseas offices and warehouses and this year we will continue to add more SKUs and expand more categories to cater for the strong demand.

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Operator [21]

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Your next question comes from the line of Thomas Chong from BOCI. Please ask your question.

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Thomas Chong, BOCI - Analyst [22]

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Hi. Thanks management for taking my questions. I have two questions. Can management talk about the breakeven timing for Internet finance business? Should we expect it to happen in 2018?

And my second question is about personalization. Can management briefly talk about how we can strengthen our personalization capabilities in 2017? Is it through R&D, or through other initiatives? Thanks.

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Donghao Yang, Vipshop Holdings Limited - CFO [23]

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Well, Internet finance business, as I explained earlier, the main purpose is to support our core e-commerce business. So, this year we will -- our first priority for our Internet finance business is actually to grow more -- to acquire more users to use our products, so for this year it will continue to be a loss-making unit. Next year, hopefully, we can breakeven in the business, but there is no guarantee, because, again, the profitability of the Internet finance business in the near term is not our priority.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [24]

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(Interpreted) So, Thomas, we will continue to invest in the personalization, as we've shared with the investment community that we have already seen some early results, which is improving the sales and also the conversion rate. So previously we had personalized web pages for people born in the 1970s, 1980s, 1990s, and also male customers, and this year we're going to expand that to improve -- to have all together 16 different consumer groups in terms of personalization.

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Operator [25]

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(Operator Instructions). Your next question comes from the line of Ronald Keung from Goldman Sachs. Please ask your question.

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Ronald Keung, Goldman Sachs - Analyst [26]

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Thank you, Yang-zong, Chen-zong and Millicent. It's a very strong set of results, and congratulation. I've a further question on your finance business. Given your consumer financing of around RMB2 billion loan book, can you just go through, for example, what's the average lending period? If you could share the interest rate spreads.

And what we want to know is how much has this boosted the GNV growth if -- considering the RMB2 billion of loan book at the end of December, and what this flows through to consider your cash flows. So if you could go through the cash flows of the impact -- we know the impact, and what's your CapEx plan and, ultimately, the free cash flow targets that you have. Thank you.

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Donghao Yang, Vipshop Holdings Limited - CFO [27]

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Okay, thank you for the question. Let me answer that. Well, the duration of -- the maturity of our -- most of our Internet finance loans are anywhere between three to six months. And the interest that we -- interest rate that we charge on those loans are anywhere between 10% to 12%. And the contribution of the Internet finance business to our GNV was less than 10%.

On the cash flow question, as you may have already noticed that in Q4 we had very, very strong both operating cash flows and free cash flow, and we will continue to make investments in our warehouse expansion this year and next year, 2017/2018 to build more warehouse space.

But we believe that starting from 2019, our CapEx level will be significantly lower than the current level because by then most of our warehouses will be completed and our headquarters in Guangzhou, the large building project, will also be completed. So then by -- starting from 2019, we're expecting to have an even greater operating cash flow as well as free cash flow.

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Operator [28]

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

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Unidentified Participant [29]

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Good evening, management. Thanks for taking my questions. This is Sharia on behalf of Natalie Wu. I have two questions. The first one is about -- is regarding the other revenue, which increased -- which nearly doubled in 4Q 2016. Could you please help us to break down this part of revenue and could you please elaborate more on main driver of this fast growth?

My second question is about the shipping and handling expenses per order, which also increased to 2.10. What's the reasons behind that and how should we expect this trend going forward? Thanks.

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Donghao Yang, Vipshop Holdings Limited - CFO [30]

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Well, okay, so thanks for the questions. On the other revenue question, in Q4 2016, about 37% of the other revenue line was shipment -- delivery revenue from the services we provided to third party clients and then 21% was advertising. 28% was advertising revenue. About 21% was from our PoP platform revenue. And then maybe this is too much detail. I'm not sure if that is what you are looking for. But again 13% from PPR. So there are a bunch of items included in that line item.

Sorry, this is --

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Millicent Tu, Vipshop Holdings Limited - IR [31]

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The shipping handling trend.

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Donghao Yang, Vipshop Holdings Limited - CFO [32]

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Okay, so shipping handling trend, we still believe that there is going to be room for us to further improve on shipping and handling trend as we continue to achieve economy of scale and implement automation systems in our warehouses.

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Operator [33]

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Your next question comes from the line of Jin Yoon from Mizuho Securities. Please ask your question.

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Jin Yoon, Mizuho Securities - Analyst [34]

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Good evening, guys. Donghao, I think you mentioned a couple of times that you continue to see operating margin leverage on the OpEx line, but if we could drill in a little bit deeper, just going by line -- line by line. Just a question on the fulfilment expense. On the quarter, we saw fulfilment expense per unit up year over year. Is this a one-time headwind, or are we going to see further fulfilment leverage be more challenging going forward? Thanks.

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Donghao Yang, Vipshop Holdings Limited - CFO [35]

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Well, in the long term, I think we will be able to achieve operating leverage almost in every line item of our operating expenses, for example, marketing. Now our marketing expense was about 4.8% in Q4. But going forward, as our penetration continues to get deeper and our market share continues to go up, we don't need to spend as much as that level of marketing down the road. So if you look at most of the large retailers in China, or outside of China, their marketing expenses as a percent of revenue are much lower than ours.

And fulfilment expenses, the unit cost went up slightly in Q4, A lot of that had to do with the seasonality because in Q4 we tended to deliver more heavier jackets or stuff. And also, as we pointed out earlier in the conference call, some of -- our average basket size went up in Q4 too.

And per order -- the number of items per order also went up, so people were buying more stuff per order and heavier. So, that's one primary reason why the unit cost went up.

But going forward, we will continue to make efforts to lower our fulfilment cost as a percent of revenue by implementing automation systems and building more efficient and larger warehouses.

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Operator [36]

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Your next question comes from the line of Erica Werkun from UBS. Please ask your question.

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Unidentified Participant [37]

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Hi. Good evening, management. This is Angela asking on behalf of Erica from UBS. So I have two quick questions. The first is regarding the guidance. The management guided 26% to 30% top line growth in Q1. So has it already incorporated stronger seasonality in this year and so can we expect a stronger growth in Q2 and Q4 this year?

And also another question is on the operating metrics. So, we know there is a lower percentage of repeat customers and orders from repeat customers in Q4, so may I check what is the key reason and how about the trend going forward? Thanks.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [38]

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(Interpreted) So, Angela, so the repeat purchase rate for the fourth quarter was about 75% and then the orders by repeat customers is actually 92%.

Attrition? So, historically, it has been quite stable, although here and there you have a bit of fluctuation. But largely it's quite sticky -- quite high and quite sticky in terms of our customer repeat purchase rate.

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Donghao Yang, Vipshop Holdings Limited - CFO [39]

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Okay, your first question was about the guidance. As always, we give our guidance based on the best knowledge that we have when we give the guidance and which is our best estimates for the top line for the quarter.

And also, for the question on the unit cost increase in our fulfilment line item, there was another reason why the unit cost went up this Q4 compared to a year ago. That was because of the growth in our third party courier business.

So, the way we book that business, we book the revenue from that business in other revenue line so we book the cost associated with those third party courier services in the fulfilment line item. So, that's another reason why the unit cost went up year over year, because a year ago, Q4 2015, our third party courier business was not nearly as big as it was in Q4 2016.

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Operator [40]

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Your next question comes from the line of Ming Zhao from 86Research. Please ask your question.

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Ming Zhao, 86Research - Analyst [41]

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(Spoken in Chinese). So, my question is what are the management's top strategies for 2017 and what can investors expect as the major changes happening to Vipshop this year? Thank you.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [42]

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(Interpreted) So, Ming, Vipshop's core business is actually retail, so we're focused a lot on our merchandising, which is to offer our customers lowest possible prices, good selection and, of course, consistent services after sale -- aftersales services.

We also pay a lot of attention on technology investment, which is to improve our big data to help drive our top line growth. And we do think that going forward there will be other areas that we will focus to improve our efficiency.

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Operator [43]

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Your next question comes from the line of Alex Liu from Daiwa. Please ask your question.

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Alex Liu, Daiwa Securities - Analyst [44]

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Thanks, Shen-zong, Yang-zong, Millicent. So, my question is on the logistic positioning of Vipshop. I think we started to see some revenues related to the logistic performance to external clients. I'm just wondering, I think, if on a very long term what does the management think about the positioning of logistic in a way that now it's more of a cost center to Vipshop? Is there any plan to evolve the Mai Tie to become revenue centers for the Company in the future? Thank you.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [45]

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(Interpreted) So actually, Alex, our mass market ability, the primary goal is to serve our core business. As you've seen in the press release, over 90% of our orders are actually delivered by our in-house team. And, in addition, we also open our platform and deliver for orders for suppliers outside of Vipshop.com.

And that portion of the business might continue to grow over time, but actually the primary goal is to help Vipshop's customers to have more consistent personalized services. Vipshop's core category is actually apparel. So if you look at the delivery speed and successful rate, we are much better compared to some of our competitors.

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Operator [46]

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Your next question comes from the line --

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Donghao Yang, Vipshop Holdings Limited - CFO [47]

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Yes, there is just one more clarification. I'm sorry, just one more clarification. The third party courier service is not only a cost center. It has already generated some revenue for the Company, which was booked in the other revenue line.

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Operator [48]

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Your next question comes from the line of Dawei Fang from CLSA. Please ask your question.

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Dawei Fang, CLSA - Analyst [49]

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Hi, Eric, Yang-zong and Millicent. (Spoken in Chinese). So, my question is regarding the dividend payout. We are seeing the CapEx maybe is peaking and then also the Internet financing have -- started to have an external funding source. So are we considering to start to give dividend back to the shareholders? If not, then what will be the major considerations? Thank you.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [50]

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(Interpreted) So, Eric mentioned that we are still very small in terms of where we want to be in terms of market share penetration. We will continue to invest in marketing, other infrastructures to maintain long-term sustainable growth.

And we are not -- at this moment it's not a priority to consider maximizing the returns at this point, because we think over time, when the Company becomes much more sizeable, the return would be much more rewarding.

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Operator [51]

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I would now like to hand the conference back to today's presenter. Please continue.

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Donghao Yang, Vipshop Holdings Limited - CFO [52]

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I'm sorry, operator, I didn't get what you said just now.

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Operator [53]

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I would now like to hand the conference back to the presenter. Please continue.

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Donghao Yang, Vipshop Holdings Limited - CFO [54]

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Okay, all right. Thank you all for taking the time to join us and we look forward to speaking with you next quarter. Thank you.

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Eric Ya Shen, Vipshop Holdings Limited - Chairman and CEO [55]

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Thank you.

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Operator [56]

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

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Editor [57]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.