Baozun Inc (BZUN) 2015 Q3 法說會逐字稿

Thank you for standing by and welcome to the Baozun third quarter 2015 earnings conference call. (Operator Instructions). Today's conference is being recorded. I would now like to hand over the call to your first speaker today, Caroline Dong. Please go ahead.

Thank you operator. Hello everyone and thank you for joining us today. Baozun's 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 are Mr. Vincent Qiu, Chairman and Chief Executive Officer, Mr. Junhua Wu, Chief Operating Officer, and Mr. Beck Chen, Chief Financial Officer. Mr. Qiu will review business operations and the Company's highlights, followed by Mr. Chen, who will discuss the financials and guidance. They will be available to answer your questions during the Q&A session 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 US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intend, imply, believe, estimate, 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 achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties and factors is included in the Company's filings with the US Securities & Exchange Commission. The Company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

It is now my pleasure to introduce Mr. Vincent Qiu. Mr. Qiu, please go ahead.

Thank you Caroline and thank you everyone for joining our earning call today. We are pleased to report another quarter of robust financial and operational results, mainly driven by strong growth from our existing online stores and the expansion and optimization of our portfolio of brand partners. On a year-over-year basis, total GMV increased by 69% while total net revenues increased by 58%, beating our guidance.

We are constantly on the lookout for new brand partners as our growth momentum picks up. Compared with the same period last year total number of brand partners increased by 17 to 109 while the number of GMV brand partners increased by 12 to 95.

We established partnerships with a number of new and exciting brands during the quarter, particularly in the apparel and cosmetics categories where we see great potential and higher profitability going forward. The newly signed brands includes several popular apparel brands from the US, Canada and Italy. We also have a number of Japanese brands, including a leading duty-free store and the leading online drug and cosmetics stores which are now available to Chinese consumers in the cross-border ecommerce platforms thanks to their association with us.

We have dozens of brand partners in our pipeline on top of these partners. They are drawn to us by our ability to provide high quality end-to-end ecommerce solutions as well as constantly improve our service capabilities.

We expanded our logistics network by opening our first warehouse in Northern China in September. At that time warehouse overload was the major concern for each of our brand partners as they were in the final stages of preparation for the Double 11 shopping festival. The Beijing warehouse seamlessly fits into our overall ecommerce logistics network in China, where it is helping to further reduce transportation costs and delivery times as well as providing next day delivery service to more northern cities.

With the addition of Beijing warehouse, we now operate geographically diverse warehouses in China, with an aggregate gross floor area of over 100,000 square meters, ample resources to meet the enormous surge that took place during the Double 11 shopping festival. We will continue to enhance our warehouse networks through automation and the implementation of the efficiency increasing measures in order to provide more flexible and customizable solutions for our brand partners and support long-term growth.

We are expanding our logistical presence geographically in China while at the same time looking to expand into new markets such as Taiwan, where we have just received authorization from the local authorities to begin operating our full range of ecommerce solutions there. I am proud of the fact that we are the first ecommerce company from Mainland China to receive authorization to expand our business into Taiwan. Many of our brand partners are keen to expand their online presence into Taiwan with our help. We aim to provide the same full range of end-to-end ecommerce solutions that we are currently offer in Mainland China to our brand partners there.

I am pleased to announce that Mr. Tony Wu was promoted to the Chief Technology Officer. Tony was previously our VP in charge of IT and has over 20 years of experiences in IT department management for multinational companies in China, including Sun Microsystems, Xerox and Sonic Solutions. Since joining us last year, Tony has already become an incredibly valuable part of our team with his outstanding technical and managerial abilities. Tony is currently working to further increase our operational efficiency and improve the IT infrastructures that backs up our business.

Moving to our newest business, GMV from Maikefeng increased by 532% from the same quarter of last year, as we opened up the platform to third parties through diversified product offerings and improved its operational efficiency since May.

With the Double 11 shopping festival now over, I am pleased to tell you that we successfully settled total order value of RMB1.1b during the world's biggest shopping day. This is more than double the amount on the same day last year. Our logistical infrastructure, supply chain management system and IT infrastructure performed flawlessly.

This strong performance, combined with seven years of shopping festival experience, adequate planning and strategic foresight, clearly demonstrates the value we can provide to other potential brand partners, when it comes to providing our full range of end-to-end ecommerce solutions and meeting the surge. A number of our brand partners ranked among the top-selling brands in different categories on Tmall this year. We now began planning for next year's Double 11 shopping festival by focusing on further enhancing our services and improving efficiency across our entire business.

Before handing the call over to Beck, I would like to conclude my remarks by highlighting the 10m share repurchase program we announced today. This program reflects our confidence in executing our strategy and Baozun's future growth prospects. This also demonstrates our commitment to increasing the value of our shareholders.

With that, I'll pass the call over to Beck who will review our financials.

Thank you, Vincent. Just a few housekeeping items before I go through the numbers. We believe year-over-year comparisons are one of the most useful ways to judge our performance. All percentage changes I am going to give will be on that basis. Starting from this quarter, we will begin disclosing financials for Maikefeng, our online retail platform. By increasing our financial transparency, we are better able to tell our growth story and demonstrate the exciting opportunities our core brand ecommerce business and new mobile-based platform, Maikefeng, will provide.

So to start, as Vincent touched on earlier, total GMV increased by 69% to RMB1.4b and total net revenues beat our guidance by increasing 58% to RMB588m. Maikefeng contributed RMB66m to total GMV, an increase of 532%, and RMB17m to total net revenues, an increase of 94%.

Breaking it down further, product sales revenue rose by 55% to RMB440m mainly due to increased popularity of our brand partners' products and the competitive pricing offered to consumers. Maikefeng accounted for RMB17m in product sales revenue, an increase of 88%.

Services revenues rose by 66% to RMB147m, of which Maikefeng contributed RMB0.6m. The increase in services revenue was mainly due to growth in sales of apparel products sold by existing brand partners as we expand their online presence and the addition of new brand partners in the same category.

Total operating expenses rose by 32% to RMB589m.

In particular, cost of products rose by 53% to RMB397m primarily due to the increase in the volume of product sales. Maikefeng accounted for RMB14m in cost of products, an increase of 95%.

Fulfillment expenses rose by 91% to RMB68m because of the increases in GMV contribution from distribution and consignment models and in rental expense for our warehouses. Maikefeng accounted for RMB4m in fulfillment expenses, an increase of 179%.

Sales and marketing expenses increased by 73% to RMB94m primarily due to an increase in promotional and marketing expenses associated with our online stores and operational activities for Maikefeng as well as the increased sales and marketing staff headcount. Maikefeng accounted for RMB14m in sales and marketing expenses, an increase of 215%.

Technology and content expenses declined by 55% to RMB15m. The decline was primarily due to a decrease in share-based compensation expenses which was partially offset by an increase in headcount of technology-focused staff. Maikefeng accounted for RMB2m in technology and content expenses, an increase of 80%.

G&A expenses declined by 68% to RMB20m. The decline was mainly due to decreased share-based compensation expenses which were partially offset by increases in general and administrative staff headcount and rental and utility expenses to support business growth.

Excluding Maikefeng's respective revenues and expenses, our brand ecommerce business has a non-GAAP operating margin of 3.4%, an increase from 2.8% during the third quarter of last year.

Net income was RMB7m while non-GAAP net income rose by 108% to RMB12m. Net income translates into basic and diluted net income per ADS of RMB0.15 and RMB0.12 compared with basic and diluted net loss per ADS of RMB11.10. Basic and diluted non-GAAP net income per ADS were RMB0.24 and RMB0.22 respectively compared with basic and diluted non-GAAP net loss per ADS of RMB3.09 in the same quarter of last year.

As of September 30, 2015 the Company had RMB868m of cash, cash equivalents and short-term investments, an increase from RMB206m as of December 31, 2014. During the third quarter, net cash used by operating activities was RMB33m, mostly on inventory procurement for Double 11 shopping festival. Moving to our healthy working capital position, our working capital involves inventory, accounts receivable and accounts payable. The working capital days were 24 days in the third quarter of 2015 compared with 32 days in the third quarter of last year and 24 days in the prior quarter this year.

Now for our guidance. For the fourth quarter of 2015 we expect the total net revenues to be between RMB935m and RMB955m representing a year-over-year growth rate of approximately 37% to 40%.

As Vincent mentioned earlier, both the total order value settled through payment gateways on all ecommerce channels and the number of paid orders during the shopping festival doubled when compared to last year in Double 11 day. So by the end of Double 11 day, sales from two stores exceeded RMB100m in order value and another 26 stores exceeded RMB10m in order value. Our sophisticated IT infrastructure combined with adequate and flexible warehouse capacity allowed us to ship over 400,000 orders on Double 11 day, more than doubled last year's total for the same day. This strong performance clearly demonstrates why our brand partners trust us with such an important part of their business.

This concludes our prepared remarks. Operator, now we would like to open the floor to question and answer session. Thank you.

(Operator Instructions). Binnie Wong, Merrill Lynch.

Hi management. Thank you for taking my questions. I have three questions here. The first question is on the mix of the distribution and consignment and the service fee model. Understand when you talked about earlier on [restructuring], is that we have higher proportion of the consignment model, our operating margin is higher and that lead to a future more healthy margin trend, so I just wanted to see how was that progressing.

And second is that what are our thoughts on the Maikefeng sales channel. I understand earlier you said that will help us to build an extension of product categories and what is our key advantages of these other flash sales channel? Because as like other platforms were also increasing their effort like say JD, Tmall or even obviously Vipshop right, they have been doing that for years, so what is our competitive edge here? Would that be our relationship with the brand partners and we were able to help them channel off their flash sales? Would that be our key strength?

And just lastly, third question is on the industry-wide, on the apparel business. Competition is getting more intensified. When you're talking to your brand partners, have they been also seeing that they were also be allocating their spending differently across the different ?- sorry, I mean the GMV or the distribution channel differently across the various platform? Thank you so much.

Okay. Thank you Binnie. So I will answer your first question and Vincent will take the second and the third question.

So for the first question, as we disclosed in the earnings release, the total distribution model accounts for -- sorry, yes, the total distribution model accounts for 35% of the total in the -- total GMV amount. And then the non-distribution model accounts for 65% of the total GMV in the third quarter. Especially within the 65%, I would say for the consignment model, it's like 33% of the total GMV was coming from the consignment model. So the service model accounts for 32% of the total GMV amount. So in the following quarters we expect, still we would expect the consignment model will be the fastest growing business model in our business.

Yes, for the Maikefeng question, actually Maikefeng is more focused on younger generation, so you have should already know that Maikefeng is very popular for the young generations, especially the post 90s. And it's almost 100% on mobile so it's very light-weighted and younger-generation oriented. That's the first thing.

The other thing is that talking about the omni-channel initiatives of the brands, they actually need more platforms to sell their products and Maikefeng can be a good way to do this. In terms of the brand products lifecycle we are doing the brand official sites for the new brands and also Tmall, JD, these mainstream stores for their mainstream products. And then Maikefeng is one part of the whole lifecycle; it is for the closeout products. So we are saying that we are offering this end-to-end solutions for brands, so actually new products, mainstream and also closeout we can all cover with the help of Maikefeng.

For your other question, for the apparel brands on different platforms, yes, of course they will have some of the considerations to manage the different channels well. But actually right now the strategy is very clear; they want to go omni-channel. So they will have stores not only on the major platforms but also their own brand official stores and also their mobile coverage. So Baozun's job here is that we help them to deliver the best products to different channels and also integrate all the channels and allow better efficiency across all the channels. Share the products and the customer data can also be a very important initiative for them. Thank you Binnie.

Thank you. May I just have one quick follow up here? Just in terms of the brands, when they expand into omni-channel, how much of that, say, is online sales? Say it's maybe, for example, for like Nike or Philips, how much are they seeing as a percentage of online sales versus their own website and Tmall, so just we get a sense of how the breakdown of the distribution channel is? Thank you very much.

Actually it depends. Different brands have different percentage distributed through different channels and also different stage also reflects different distribution of numbers. But we can say that omni-channel of course as a whole is a very important initiative for them and also they care about their official web store because it is a good platform for them to connect to their consumers. The other channels are also important because they should be where the consumers are, so that is also important.

For different platforms, the product assortment could be a little bit different. So, for example, on the official web store of course it will have more limited offers, on Tmall more discounted products. Again, for the percentage, we can see that several of the major brands can have a very high percentage on their brand official store already, but I think you know that majority of the sales today, around 70%, is still from the biggest platforms in our revenues.

Okay. Thank you so much. I got it. Thank you.

Sean Zhang, 86Research.

Thank you for taking my question and congratulations on a solid quarter. It's just a follow up on the Tmall versus JD sales, as the sales channel. As you mentioned over, as Vincent mentioned, over 70% of sales come from the biggest platform. Just wondering what trend do you see from sale from JD? Is there any change of dynamic? As we know, previously you operate mainly on Tmall. Do you have an increase, still increasing trend of sales coming from JD or do you have plan to open more stores? Any breakdown between Tmall and JD would be helpful.

Secondly, on the cross-border ecommerce business, I understand you work with the brands primarily within China. So any color on your, in terms of percentage, what the percentage of cross-border ecommerce contributing this quarter versus before. And how is your cross-border ecommerce strategy impacted or influenced by the trend that we're seeing, increasing trend of cross-border ecommerce on other platforms? We're seeing Tmall Global doing well. We're seeing a meaningful percentage of sales on Vipshop coming from cross-border ecommerce. Just want to get management's understanding on this.

Thirdly, on your logistics, you are talking about your warehouse network. Would you be able to share with us your plan going forward next year and your CapEx budget going forward? Thank you.

Okay. Thank you. So I will take the first two and our COO, Junhua, will take care of your third question. Let me just do the first two.

Talking about the different platforms, as maybe you already know that Tmall is most ?- how to say -- it's with the longest history and it's more matured among all the platforms. And we started our first store on Tmall. So right now Tmall is the biggest contribution of revenue; it is not a surprise. And also most of our stores already on Tmall for several years. So really for retail we need a lot of years to work with different parties, including the logistics partners, Tmall and also the brand partners, to get a very solid operational efficiency. So that is one thing.

Talking about the trend, we think right now the brand they want to go different channels and meet different requirements from different consumers. We will follow the strategy of the brands because we are quite brand-oriented, our strategy. So we will monitor all the dynamics across different platforms, but we will work with each of the platforms very closely to enable a better business for brand partners. That is one.

Number two is cross-border strategy and also dynamics here. Yes, we are seeing that there is a very strong growth power from this cross-border business. Although cross business today, cross-border business today for Baozun is just a category, we can still see a very strong growth there. We are putting more resources in this segment and we're hoping next year we'll have big growth from this category.

So for the logistics?

Yes, thank you Vincent. So regarding your warehouse expansion question, the answer is positive. So we expanded our logistics network to meet the evolving demands of our brand partners. And we always focus on continuously enhancing our warehouse network through automation and the implementation of efficiency-increasing measures in order to provide more customizable solutions for our brand partners and support their long-term growth.

And, yes, so we lay our emphasis on South East Asia right now and we don't have any plan in place to open a warehouse in Western China so far, but we will continue to monitor the geographic distribution of orders and expand our logistics network according to demand. Thank you.

Dick Wei, Credit Suisse.

Hi. Good morning. Thanks for taking my questions and congrats on a good quarter. I think I just have a couple of smaller questions. First of all, there is a RMB5m, around RMB4.6m, disposal gain. Is it possible to discuss what that is about?

And then also I think for this quarter the gross margin looks a bit lower than what you were expecting. I wonder what's the reason behind that. And I probably have another follow up. Thanks.

Okay. So, Dick, so about the gain on disposal of investment and share of loss in equity method investment, these two items are both associated with our investment in Automoney, the automobile performance-solution provider which we jointly established with another investor. So we picked up investment loss in Automoney with the amount of RMB2.6m in Q3 and further gained RMB4.7m by disposing some portion of our investment. So the total P&L impact in Q3 related to Automoney is RMB2.1m gain. So as of September 30 the investment cost has been written down to nil, meaning that we will not pick up any more investment loss in Automoney in future and we will keep to monitor the business operation of this investee.

And regarding the second question about the gross margin, so if you look at the product sales margin, in Q3 the margin is around about 10% and higher than Q3 last year; it's 8.2%. So this is basically because in Q3 we have achieved some very good sales result in beating our own guidance. But the increase mainly comes from still, our business model is still, for the distribution model, they are mainly related to [3C] products, appliance products. So for these two categories the margin are basically lower than the average. So that's why in Q3 for the product sales margin it's still improving but it's still not so higher compared to Q2 this year.

Thank you. Got it. And maybe overall MKF, what's the business plan going forward? Are we going to think about some more of the, any of the external strategic investors to help with the business down the road?

MKF's strategy stays the same as we've said before. So we are still trying -- you can see the performance of this quarter for Maikefeng is great. So in the future we are continuing to optimize our business model and to uplift the sales revenue and acquire more new users. But of course we will also take more management efforts and attention into this business to make it more efficient in terms of turnover of the inventory and also the gross margin, and also the efficiency of our marketing dollar, all these kind of things. So the business growing very quickly right now and we are going into this direction as we did before. So no change, no big change right now.

Okay. Great. And maybe just lastly on the cross-border ecommerce, do we have any expectation how much of our maybe the brands or maybe in terms of revenue, how big is it going to be, say, maybe by next year?

Dick, let me take your question here. So basically I just want to add more color to what Vincent said before regarding the question about the cross-border business. So this actually Tmall ?- sorry, Tmall Global and JD Worldwide they are both very good cross-border businesses for us to operate on. So basically the cross-border business is growing very fast than the other platforms.

So we think, for example, like on Double 11's day our cross-border business this year is seven times the amount achieved last year same day. So basically we don't have a very solid forecast for cross-border business next year, but definitely we expect the cross-border business next year will be much higher than this year because, for example, like some leading cosmetics stores from Japan or leading drugstores from Japan, we just opened these stores within two months. So we expect for them we have a full-year operating history and we will keep to introduce more good brands from overseas to our Chinese consumers. We expect this amount from cross-border businesses will increase a lot next year.

Okay. Great. Thank you very much Beck and Vincent. Thank you.

Dick Wei, Credit Suisse.

Hi guys. Maybe just one more question. What kind of post November 11 are we seeing? What's the market trend is shaping up now in terms of ecommerce? Is it slower than previous year or still quite strong compared to prior years? Thank you.

Dick, you mean the Double 11 results compared to last year, what is the big change, right? This is your question?

I am more thinking about -- yes, that will be, and then also after November 11, because this year looks to be pretty strong, so I don't know, after November 11 do we see any slowdown in the online shopping right now or are we seeing still pretty good pick up in Black Friday that many people are focusing on?

Yes. Today the Double 11 day already the world's biggest shopping festival and we were very excited to be part of that. And this year I think the result is just over our expectation and we are still seeing a very strong demand from the Chinese consumers, not only the domestic merchandising, but also the overseas products. So that is very strong.

And I see that today this year's Double 11 is very comprehensive and, more, including all the entertainment elements it is very comprehensive, not only shopping, but also a festival. So we think the next we can see a very strong demand from the consumers. So there seems not a lot influence from the macro slowdown. So I think for Baozun we're today operating the best brands doing this brand ecommerce business. So not only the brands are very active in this market and also consumers value more authentic products. So in this case we are very confident to deliver a good result next year and going forward.

Okay. Thank you.

Binnie Wong, Merrill Lynch.

Hi management. Just a quick follow up here. I guess it's also a follow up on Dick's questions earlier. So because just concerned that there could be the spending, the Double 11, on the day or maybe on that period, was much higher. But is there any you see a slowdown in terms of the spending later from the customers' perspective?

And also particularly on the apparel side of the business, given that there are many more channels for the apparel brands that you could use now, do you see later on the reliance of that they can use their own channel more, maybe say, as you said, right, their own website more, and rely less on the bigger platform? Thank you.

Thank you Binnie. So I will address the post Double 11 day daily sales question. So basically from our understanding and observation the post -- after Double 11 day daily sales is soon recovered to a normal level and compared to the same period last year we have achieved a very satisfactory growth rate year over year.

And also for Double 11 day you are right, but for us we are, somehow we are different with the other players on the marketplaces because we are operating very good brands. So basically on Double 11 day we don't expect to do a lot of discounting in product sales. So for us we will still, together with the brand partners we will still keep to maintain the premium or the level of the brand. So we don't want to hurt the daily sales after the Double 11 day. So this is the mindset.

And also about the reliance of different channels or own-platforms, so omni-channel clearly is right now a strategy and change from the brand side. So we can say that more and more brands will focus on doing the business on different channels and also especially their own channels. This is the change. But we still expect the shifting from the marketplaces to the own-brand site, official site, is still in the progress so we still have some time for more and more brands to shift their business to different channels.

Sean Zhang, 86Research.

Management, my understanding is Baozun, we represent the brand, the higher, premium-brand portfolio of any marketplace, say, for example, Tmall. And now there's a consumption upgrade and consumer are increasingly more brand driven, pursuing quality, and am I right to assume that we actually represent the fastest-growing trend on Tmall?

And so following on that, can you give us some color on any brands that we're working with, any brands in the pipeline, the portfolio growth next year? Thank you.

Okay. We are -- talking about the brand, different channels for the brand to do their ecommerce business, as we said, the brand store is also a big part of that. And also they're using these channels for different reasons. The brand store is not only for the sales purpose, but also for a lot of marketing and CRM purpose, so that's why this one is very important.

I missed the other part of your question. Can you do it again? Sorry.

Yes. Just my understanding is we work with the fastest-growing trend on Tmall, because now Tmall growing has outpaced Taobao, is clearly a focus of Alibaba as consumers become brand-oriented. So am I right to assume we actually represent the fastest-growing trend on Tmall?

And also what's the pipeline for brands in next year?

Understand. Understand. Thank you. Yes, we see there's a clear trend that -- the one trend is that all the brands today want to step into the ecommerce market because it's closer path for them to touch point with the consumers. The other trend is, just as you mentioned, is also very clear, is that consumers are more and more brand-oriented, yes, as you have stated. So we can see that today how important that Tmall is playing a role in the Alibaba group. And also we can see our business growing very fast versus the others. And also, as mentioned by Beck, right now the brand also have a good business for their brand official stores.

All these just reflects the trend that the consumers are wanting more and more authentic products and more brand oriented. I agree with you, yes.

And any color on the pipeline for brands? What are our expectations for brand portfolio next year.

Okay. Yes, glad to tell you this. Actually in Q4 recently we have very exciting results with our different brands. And I can tell you that several of the very famous and big brands are now working with us. So you can maybe see more and more news and next quarter maybe we'll disclose more names for you. Yes, so very strong demand from the brands. Yes.

Got it. Strong pipeline. Thank you.

Thank you.

(Operator Instructions). It appears there are no further questions at this time. I will now hand it back to Caroline Dong for any closing remarks.

Thank you operator. In closing on behalf of the entire Baozun management team I would like to thank you for your interest and participation in today's call. If you require any further information or have an interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.

This concludes today's conference. Thank you all for your participation.