Baozun Inc (BZUN) 2016 Q1 法說會逐字稿

Thank you for standing by and welcome to the first quarter 2016 Baozun Incorporated earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, Monday May 23, 2016.

I would now like to hand the conference over to your first speaker, Ms. Caroline Dong, Investor Relations Officer. Please go ahead madam.

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 our business operations and Company highlights, followed by Mr. Chen who will discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.

Before we begin, I would 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, intends, plans, believes, estimates, targets, 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 or factors is included in the Company's filings with the US Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

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

Thank you, Caroline, and thank you, everyone, for joining our earnings call today. Our business continued to gain momentum with another strong quarter of solid growth. On a year-over-year basis, total net revenues beat guidance again, increasing 40%, while total GMV increased by 60% and the net income doubled.

A few days ago we celebrated our one-year anniversary as a public company. Our listing was a significant milestone for us. We intend to keep learning, growing and improving as a company, whilst striving to live up to our corporate model, a superior Baozun.

Brand e-commerce, connecting brands and consumers through official online stores and authorized marketplace stores has been growing even faster and more consistently than the overall e-commerce market in China. We are seeing brands increasingly adopting e-commerce as their key retail strategy for China. This allows them to take advantage of the tremendous growth opportunities in brand e-commerce as consumer aspirations shift towards branded products and services and bypass China's challenging offline retail landscape.

Our growth continues to be driven by this trend. Baozun's total number of brand partners increased to 116 at the end of the first quarter. We signed a number of new brands that we are very excited to introduce to Chinese consumers. These brands include a leading electronics, a leading swimwear, and a global luxury cosmetics brand. We are also in talks with a number of other brands seeking to take advantage of the incredible growth opportunities that China's e-commerce solutions market and growing consumer base present.

As we add new and innovative e-commerce solutions and expand our geographic presence, we expect to see more brand partners approach us. We expanded our brand partners end-to-end e-commerce solutions business into Taiwan in April, starting with the launch of a leading global sports organization's official online store for Mainland China, Taiwan and Hong Kong. In addition to its current multi-channel e-commerce presence in Mainland China, which we manage and improve their official flagship store on Tmall, JD and WeChat, we are now able to offer the same full range of end-to-end e-commerce solutions in Taiwan that we currently offer in Mainland China and Hong Kong.

We're currently working with several of our other brand partners to prepare for their expansion into Taiwan market. So Baozun as their e-commerce partner for the Greater China region demonstrates the trust brands are placing in us and the ease with which we can help them quickly set up an e-commerce presence at lower cost, leveraging our sophisticated IT infrastructure, logistics footprint and deep experience.

We held the first global brand e-commerce meet earlier this month in Shanghai, which was a huge success. The summit brought together over 300 consumer brands, e-commerce industry leaders and government officials to discuss the future of brand e-commerce and industry trends.

With the rise of omni-channel shopping, success for brand e-commerce is predicted on reaching and tracking consumers on whatever devices or platform they choose and wherever they are. The market continues to grow and the brands continue to approach us, seeking our help to set up their e-commerce operations in China and then integrate them across all platforms.

As China's leading e-commerce and omni-channel solutions provider, we are focusing on expanding our capabilities into comprehensive online digital marketing and consumer management, which will leverage our fully-integrated product sales and procurement systems and infrastructure.

The overall mood of the industry remains incredibly upbeat and optimistic, despite the overall macroeconomic conditions. China's rising consumerism and the impact that will continue to have on brand e-commerce is creating a wealth of opportunities for us.

We were also awarded the only Six Star service provider award. Six Star is the highest level among all the 308 Star service providers which demonstrates our outstanding quality of services and incomparable leading position on Tmall. We are very proud to have been recognized for our capabilities.

We also welcomed two highly-experienced, independent directors, Steve Hsia and Benjamin Ye during the quarter to strengthen our Board. And that reiterates our commitment and responsibility to our brand partners, employees and shareholders. Steve and Benjamin bring with them a wealth of industrial knowledge and expertise. We look forward to learning and working closely with them in the years ahead, as we expand our leadership in China's brand e-commerce market.

In conclusion, I'm pleased to have completed our first year as a listed company on such a strong note. We will continue to develop deep relationships with our brand partners and implement the best practices for the industry across the Greater China region. We are constantly working to provide our brand partners with the next generation of tools and strategies to ensure that they are able to benefit from China's rising consumer spending, just as we are.

With that, I will 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'm going to give will be on that basis.

So to start, GMV during the quarter increased by 60% to RMB1.9b. Maikefeng contributed RMB51m to total GMV, an increase of 125%.

Our focus remains on growing the non-distribution GMV business model which increased by 76% in Q1. We believe that continuous optimization of our business model mix will further decrease inventory risk, improve working capital position and increase our margin profile.

Total net revenues beat our guidance by increasing 40% to RMB668m. Breaking down further, product sales revenue rose by 32% to RMB466m, mainly due to increased popularity of our brand partners' products and increasingly effective promotional and marketing activities. Maikefeng accounted for RMB4m in product sales revenues.

Services revenues rose by 64% to RMB203m, of which Maikefeng contributed RMB3m. 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 addition of new brand partners in the apparel category.

Total operating expenses were RMB664m. In particular, cost of products rose to RMB411m, primarily due to the increase in the volume of product sales. Maikefeng accounted for RMB5m in cost of products.

Fulfillment expenses rose to RMB93m. The increase was mainly because of the increases in GMV contribution from consignments business, an increase in the proportion of deliveries made by a premium delivery service provider and increase in rental expenses for our warehouses. Maikefeng accounted for RMB1m in procurement expenses.

Sales and marketing expenses rose to RMB119m. The increase was mainly due to an increase in promotional and marketing expenses associated with our online stores. Maikefeng accounted for RMB9m in sales and marketing expenses.

Technology and content expenses rose to RMB21m. The increase was primarily due to increases in technology-focused staff and project-based variable technology expenses from brand stores. Maikefeng accounted for RMB2m in technology and content expenses.

G&A expenses rose to RMB20m. The increase was mainly due to increases in professional service fees associated with being a public listed company. Maikefeng accounted for RMB0.5m in G&A expenses.

Excluding Maikefeng's direct impact on revenues and expenses, non-GAAP income from operations was RMB24.1m compared with RMB14.8m in the same quarter of last year. And the non-GAAP operating margin was 3.6% compared with 3.2% in the same quarter of last year.

In Q1 net income rose by 108% to RMB4m, while non-GAAP net income rose by 85% to RMB14m. Non-GAAP net margin was 2.1% compared with 1.6% in the same quarter of last year.

Basic and diluted net income attributable to ordinary shareholders per ADS was RMB0.09 compared with basic and diluted net loss attributable to ordinary shareholders per ADS of RMB2.49 for the same period of 2015.

Basic and diluted non-GAAP net income attributable to ordinary shareholders per ADS were RMB0.29 and RMB0.27 respectively, compared with basic and diluted non-GAAP net loss attributable to ordinary shareholders per ADS of RMB1.89 for the same period of last year.

As of March 31, 2016 the Company had RMB683m in cash, cash equivalents and short-term investments, a decrease from RMB837m as of December 31, 2015, due to share repurchase program, investment in logistics and office space and procurement of products for end-of-season sales campaigns.

As of March 31, 2016 the Company had repurchased approximately $10m in aggregate of its own ADSs, completing the share repurchase program announced in November 2015.

Turning to the guidance, we reiterate our previous expectation of total GMV for fiscal year 2016 to increase by over 50% year over year, as we shift our business towards the non-distribution model.

For the second quarter of 2016, we expect the total net revenues to be between RMB680m and RMB690m, representing a year-over-year growth rate of approximately 31% to 33%.

This concludes our prepared remarks. Operator, now we would like to open the floor to Q&A session. Thank you.

(Operator Instructions). Robert Lin, Morgan Stanley.

Hi. Good evening, management, and congratulations on the results. I've got two questions here. Could you provide a little more color on your same-store sales growth, maybe for the first quarter as well as some color on the second quarter so far, if possible?

And second is that we notice that your gross profit is growing faster relative to your total GMV, which implies that your margin is improving. Now, the margin improvement, can you quantify how much that is coming from value-added service that we are providing to the brands, or the platform conversion is becoming better, meaning Tmall has been pushing a lot more data analyses that provide a high conversion for us and the brands? Give a little more color on that. Thank you.

Okay. So, Robert, thank you for the questions. So for the first question about the same-store sales growth, so for Q1 it's around 50%, a little more than 50%. So for the whole year, I believe for the whole year of the same-store, for the existing store, the growth rate year over year could be 40% to 50%, for the whole-year basis.

And about the second question on the gross profit, right now for most of the services in Q1, the same-store growth is coming from the general sales -- sell-through instead of a lot of marketing -- sorry, a lot of value-added services put in. So this is our next step and we will develop and further respond in this gold mine.

Okay. And I guess a follow-on is, could you provide a little bit about your mix of your GMV and by category, if there's going be a lot of changes throughout this year? We know that last year you took out some of the electronics, [VC] and how should we think about that this year?

Yes, so -- yes, in the release we emphasized that the revenues was increased mainly, primarily due to increases in the sales of apparel and sportswear categories. So, generally, compared to last year, apparel is still the leading category of our whole business. And electronics and together with appliances, is relatively stable, but apparel category is certainly gaining the shares of the total amount.

Instead of that, for the traditional very big GMV contributor like auto industry, so this year we expect the automobile industry in our total business's GMV contribution will be much less compared to the previous two years.

So, in conclusion, for the whole year, apparel will be continuously gaining the shares, stable together with appliance -- electronics and appliances will be relatively stable. And automotive categories will lose share to apparel. Contribution will be much less compared to the previous two years. So in conclusion, for the whole year, apparel will be continuously gaining the shares, stable together with -- electronics and appliances will be relatively stable and automotive categories will lose share to apparel.

Okay, thank you.

Binnie Wong, Bank of America Merrill Lynch. Please go ahead, your line is open.

Hi, Vincent and Beck, thank you for taking my questions. I have three questions here. So first one the business model, I understand we are gradually transitioning from some of the brands to a more profitable non-distribution model, which one of those brands is the top brand in the distribution model in electronics? What are the strategies that we have adopted to convince the brand to do so and how are we going to further to do so, so that our mix shift will be seeing more GMV actually coming from the more profitable non-distribution model side?

And then the second question is actually on the omni-channel strategies that we have put on the (inaudible) to support your strategy, basically order from anywhere, you can be fulfilled from anywhere. It seems to be most optimal if the brand controls all this online, offline inventory, but in China most of the brands actually sell it via the distributors instead. So I just want to see how our thinking on the omni-channel strategy will love to see how this fits into. Thank you.

So this is two questions, right?

No three, right?

Yes, two questions, I will ask a follow-up later. Yes, just two to be -- thank you.

Yes, we are seeing that our model mix is getting better and better as we expected in the past, so right now we have more and more non-distribution business and the non-distribution business are contributing more gross margin as well. So typically, when we do this non-distribution business we are talking about the apparel industry, so not only the existing brands -- I mean apparel brands are performing well and we also have more and more new apparel clients. So we can expect that we will have more non-distribution business and then more value-added service related business in the future.

So in doing this, we have to have our -- firstly, we have to have our strong IT system to be built better and better and also we have to enable us with a strong logistics network to enable this consignment business model, which is most favorable for us. So we are giving more support in IT and logistics and also talent pool to support this non-distribution business to go forward. That's number one.

Yes, talking about the omni-channel model, of course firstly we and most other brands believe that omni-channel is the right strategy to adopt, even though in the coming three to five years. Right now, partially we have already realized some of the functionalities, like the integration of the inventories in some online, offline or even some of the offline stores inventory integrations. That is one.

And also, we are helping the brands to build their orders and also product data, centrally managing the matter. So that is all about the omni-channel strategy, we all believe that it is happening. By doing so we can demonstrate very strong capability from Baozun, not the -- there are just a few service providers can do this today, so we are valued very big for them.

There are some difficulties, like not all of the brands are doing the retail themselves, so you can imagine that the control over the network is not as strong as when they do this themselves. And even in some of the retail stores, maybe the franchise stores, they are not using the unified version of the POS P-O-S system. So these kinds of things all give difficulty for the brands to realize their omni-channel strategy, but for us in the time being we think more and more brands will take control or promote a unified version of POS in their network so to give us a better condition to realize this omni-channel initiative.

So for us, we are educating the brands that omni-channel is a better action and in the meanwhile we will accomplish the milestones one-by-one in this omni-channel direction. So that is what we are doing with the brands.

Okay, thank you. And just one last question is basically on the social commerce side. We have been seeing a lot of this [wanhong] basically using a key opinion leader and then they try to promote more on social commerce and also on the sales for those KOL branded ones. So how do you see that growth? I know it is small right now and probably is still at the beginning stage, but how do you see that it could evolve, or would that become meaningful? Thank you.

Okay, thank you for the question, Ms. Wong, this is Junhua. So maybe I just discuss it for you. Yes, you are right, and in this year, especially this year, a lot of big players in ecosystems they are talking about shifting their operations strategy from upgrading the assortment to upgrading the content and be more membership driven. So that KOL, the wanhong that is more toward that trend.

And then Baozun is taking very active initiative, accomplished this new new trial, like we sign some fashion brands with a very keen celebrity as a fashion icon from Hong Kong and helping them to drive more business, not just for are they putting the right assortment online but also putting more content and more word of mouth and key opinion leader power to the west side.

So this is actually a very initial stage of the whole operation; it's also very new to Baozun, but we have already made several successful cases based on different projects and marketing events with our existing brands. We believe that gradually in this year or next year we will do more about this new initiative and to accomplish the trend of the customer [needs]. Thank you.

Okay, thank you. That's it, thanks.

Evan Zhou, Credit Suisse. Please go ahead, your line is now open.

Hi, good evening, Vincent and Beck. Thank you for taking my question. Congrats on a solid quarter. Just two questions from me. The first one is I just want to ask about your gross margin outlook and incrementally, for the new partners that we actually -- brand partners that we actually sign, is the -- within the same category is the take rate on average higher than on the previous brand partners that we signed? So do we have incremental take rate improvement within the same category?

And secondly, the second question is on the OpEx, specifically on the fulfillment, I think we're going to have some important fulfillment facilities close to completion in the coming months. I'm wondering how will that be help or impact our fulfillment expense line and where should we expect the efficiency to go down the road?

So, Evan, thank you for the questions. So for the first question about the margin profile fro, the new brand partners, you are right. So for newly signed brand partners in the same categories usually we have better commercial terms against the existing ones in the same category. So this is definitely in and this is one way to improve our margin in the long run.

And also, for the second question about fulfillment expenses ratio as of the revenues or GMVs, yes, you are right. So we are building up a premium service fulfillment center in our Suzhou centralized warehouses right now. So this project is expected to be completed in July this year, so the capacity right now is fully booked by a leading sportswear brand. So we think in the following period we will have more -- actually we will generate more fulfillment revenues from providing such premium services to cover all the related expenses incurred. So this is also one way for us to improve the operating margin as the total.

This is Junhua, so yes, sorry, so let me give you some color regarding the warehousing expansion. So at the end of March we had seven self-operating warehouses with average a gross floor area 110,000 square meters. A high-end automatic warehouse just for our top tier brand partners is under construction and will be completed by July of this year and we will update you, the market, on this news when it's completed via a press release.

So in order to meet the evolving demands of our brand partners and the addition of new brand partners, so we will definitely expand our logistic warehouse accordingly.

Thanks, Junhua, for the color; thanks, Beck. I just want a quick follow-up on warehouse, so you mentioned we're going to have more opportunities and having more service revenues from brand partners, what about on the cost side? Will the initial ramp-up of the new warehouses having some pressure on our fulfillment line in the initial phase? Or since you mentioned it's been kind of fully booked by leading sportswear brands, so for the utilization of that warehouse it will be ramp up to an ideal level at a pretty quick time, is this the case? Thank you.

Yes, so for the new warehouse it's now being built up, so we can achieve 100% utilization quickly after it's completed. So for this year, Double 11 campaign usually we would start things the mid of the year, which is July and August is a perfect time for us to move the stocks into our warehouses. So utilization is not a problem.

And also for the warehouses side, so generally I think warehouses' expenses will not increase dramatically because of these new warehouses, but because we are serving more and more leading brands, being kind of non-distribution model, especially consignment model. And as you may know, we are one of the top five customers of the China's leading delivery service logistics partners in China, so that means that we will have more delivery expenses included in the fulfillment expenses, which also means that we will generate more delivery and fulfillment revenues from our brand partners.

And also I explained in the call before that our fulfillment expenses in Q1 has increased year over year partially because of the increase of the ratio fulfilled by the leading premium service providers. So this is also a good thing for us to generate more operating margin and also to enhance the consumer experience in China.

Great, thank you.

(Operator Instructions). Sean Zhang, 86 Research. Please go ahead, your line is open.

Thank you for taking my call and good evening, management. Just want to get your high level thoughts on our growth trajectory versus Alibaba or versus Tmall? Obviously Tmall growth rate kind of slowed down to the low 30s, where our growth rate trend held up well in the quarter in the 60s. How do we view this trend? Are we gaining share in terms of as a Tmall -- one of the biggest Tmall brand operators?

And also, just our non-distribution brand is 18 in the quarter, I want to confirm that number, it seemed to grow quite dramatically year on year. Is that the main reason for our non-distribution GMV reacceleration?

So these are the two questions and also I have a follow-up on the cash flow; any color on CapEx or cash flow of the quarter will be very helpful. Thank you.

Sean, thanks for the questions. So let me address one by one. So the last one is CapEx guidance for the cash flow; so in Q2 we will still have some CapEx for the warehouse building up and also parts of our office space decorations, but generally it will be within control.

And about the second question on the --

Let me -- this is Vincent, let me do the first one first. Your first question is about the growth rate of Baozun, 60% growth versus the low-30s percent of Tmall. Actually we are seeing two trends are very clear. The first one is, as we said, we just had these brands e-commerce submit days ago and we can see the brands are pouring in more and more resources and their strategy is more and more focused on online sales. So brand e-commerce gained a lot of attention from the strategic level of the brands, global brands. So this gives us a very big power, very big power and tailwind to help us to -- that's one of the drivers.

The other one actually comes from the consumer side. Today the consumer is more and more depending on branded services and partners, so you can see that people are going to more flagship stores on Tmall versus other non-branded stores. So these two drivers give us this acceleration of this growth rate, which is much higher than the total e-commerce growth rate.

So I think this trend is going to continue in the coming three to five years, because brands are -- they prepared a lot and right now they have the full set of the strategy to make this a thing in the future. So we will be ever happy to do so, not only the transactional volume but also we are delivering these omni-channel solutions to integrate all these different channels together. It may work better inventory turns, better P&L for the brand, so this brand e-commerce I think, not only for the transactional volume but also the other costs side, can also deliver a very good scale of economy. Everybody in this market today is very excited.

Yes and about numbers, Sean, let me clarify what you were saying. So you were saying the non-distribution brand are 18, but actually -- we have the disclosure but it's non-GMV brands are 18. So GMV brands are -- yes, so non-distribution brands.

But about your question how we grow our non-distribution model benefits, so basically one way is that for all the new business we have onboard, usually a majority of the new business is, well, sitting in the non-distribution models and also we were talking about, in the last quarter, Q4 last year, we had successfully transferred a part of the business of leading electronic brands from distribution model to non-distribution model and we will continue to do that with more brands using the distribution model benefits. So this is the other way to transfer the existing distribution model to a non-distribution model.

And also for the categories right now, like apparel, sportswear, cosmetics are our main targets for business development, so usually for these brands in these categories we are doing by non-distribution model.

Thank you so much and congratulations on a strong quarter.

Thank you.

There are no further questions at this time, so Miss Dong, please continue.

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

Thank you.

That, ladies and gentlemen, does conclude our conference for today. Thank you for participating, you may all disconnect.