Baozun Inc (BZUN) 2016 Q3 法說會逐字稿

Thank you for standing by and welcome to the Baozun third-quarter 2016 earnings conference call. At this time all participants are in a listen only mode. (Operator Instructions). I must advise you that this conference is being recorded today, November 16, 2016. I would now like to hand the conference over to Miss. Caroline Dong, Investor Relations Director. Please go ahead madam.

Thank you operator. Hello everyone and thank you for joining us today. This earnings release was distributed earlier today and is available on our IR website at ir.baozun.com, as well as on global news world 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 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 remember 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 of the (inaudible) Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the terminologies such as will, exact, anticipate, future, intend, plan, believe, estimate, target, going forward, outlook and similar statements.

Such statements are based on current management current expectations and current markets and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict in a manner 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 others risks, uncertainties and 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 statements as the result of new information, future events or otherwise, except as required under applicable 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. Thanks everyone for joining our earnings call today. I'm pleased to report another quarter of robust financial and operational growth in which total GMV increased by 71% year-over-year. Our growth was primarily driven by existing online stores and the expansion and the future optimization of our portfolio of brand partners.

We continue to partner with international leading brands that benefit from great customer recognition and demand of high-quality, authentic products. Our total number of brand partners increased to 127. With a number of strong brands in the pipeline we are confident that we will be able to increase the number of brand partners by at least 20 by the end of this year when compared to 2015.

We continue to attract high-quality brands seeking to benefit from China's rapid growth in e-commerce by diversifying and customizing the services we can provide and innovating new products. We finished successful trial runs of our new intelligent O2O app, Shopdog, in Hong Kong. Designed for use on tablets, Shopdog was developed to help brand partners closely integrate online sales channels with offline stores and allow offline stores to sell inventory through online stores with an integrated warehouse management system.

Shopdog enhances the customer experience by facilitating returns, exchanges and pickup of online orders at offline stores and also allows customers to make online orders in offline stores when products are out of stock. In addition, Shopdog incorporates merchant tools, such as a CRM system, to attract and retain customers. We are very excited to begin rolling Shopdog out across mainland China, where we know demand for innovative products such as this is very high.

With more and more brands and merchants seeking experienced and professional B2C warehouse and fulfillment services, we diversified the e-commerce services we can provide by establishing a logistics subsidiary, Baozun E-logistics, during the quarter. Baozun provides an enhanced and highly-customizable array of logistical services to a wide variety of brand partners across a number of categories and improves our operational efficiency.

Through Baozun we will be able to develop relationships with additional brand partners, starting with logistical services. In addition, Baozun became a certified Cainiao partner, which allows it to provide the best-in-class services to merchants on the Cainiao network.

We opened our first premium warehouse, which we have dubbed the Baotong Cube, in September. This premium warehouse marks the beginning of a new generation of intelligent warehousing and fulfillment services. The Baotong Cube demonstrated its value to brand partners during the Singles Day, where it was able to process and pre-sort orders for delivery to over 100 cities in China.

The Baotong Cube also serves as a proof of concept for a new supply chain model we are developing. Leveraging on our improved IT and logistical capabilities, we were able to successfully settle total order value of RMB2.5 billion during Singles Day, more than double the amount from the same day last year.

We are proud of our solid results during the Singles Day, especially the great performance from brands under the non-distribution model. Through our logistical services we sent out 1 million orders on November 11, a historical high and an increase of 130% compared with the same day last year.

To conclude, we have made significant progress over the quarter in developing deeper relationships with our brand partners, diversifying revenue and innovating new products and services. We will continue to invest in strengthening our market-leading position and long-term sustainable growth.

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 this quarter increased by 71% to RMB2.4 billion. Our focus remains on growing our non-distribution model businesses, where GMV increased by 107% this quarter. We continue to optimize our business model mix towards the non-distribution model.

Total net revenue increased by 28% to RMB749 million. Breaking down further, product sales revenue rose by 9% to RMB480 million. As we have mentioned during previous earnings calls, we began transitioning some of our existing distributional business towards consignment model since last year. As expected, this has impacted the year-over-year growth of product sales revenue. Maikefeng accounted for RMB7 million in product sales revenues.

Services revenue rose by 83% to RMB270 million, of which Maikefeng contributed RMB2 million (sic - see press release, "1.6 million"). The increase in services revenue was mainly due to rapid growth in our business under the consignment model and the service fee model, and in particular, growth in sales of apparel products sold by existing brand partners as they expand their online presence.

Total operating expenses were RMB727 million. In particular, cost of product rose to RMB420 million primarily due to the increase in the volume of product sales from our core branded e-commerce businesses. Maikefeng accounted for RMB7 million in cost of products.

Fulfillment expenses rose to RMB110 million. The increase was mainly due to the increases in GMV contribution from consignment businesses, more orders fulfilled by the premium delivery service orders -- service provider as a percentage of total orders and warehouse rental expenses. Maikefeng accounted for RMB2 million in fulfillment expenses.

Sales and marketing expenses rose to RMB152 million. The increase was primarily due to an increase in promotional and marketing expenses associated with our online stores. Maikefeng accounted for RMB2 million in sales and marketing expenses.

Technology and content expenses rose to RMB24 million. The increase was primarily due to the increases in technology-focused staff and project-based variable technology expenses from branded stores. Maikefeng accounted for RMB2 million in technology and content expenses.

G&A expenses rose to RMB22 million. Maikefeng accounted for RMB0.3 million in G&A expenses.

Non-GAAP income from operations was RMB31 million, a significant increase compared with RMB4 million in the same quarter of last year. And the non-GAAP operating margin improved significantly to 4.1% compared with 0.6% in the same quarter of last year.

In Q3 net income attributable to Baozun ordinary shareholders rose to RMB20 million, an increase of 172% compared with the same quarter of last year. Basic and diluted net income attributable to ordinary shareholders per ADS were RMB0.39 and RMB0.36 respectively compared to RMB0.15 and RMB0.12 respectively during the same period last year.

Non-GAAP net income attributable to Baozun ordinary shareholders rose to RMB28 million, an increase of 135% compared with the same quarter of last year. Basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS were RMB0.56 and RMB0.52 respectively, compared with basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS of RMB0.24 and RMB0.22 respectively for the same period of year 2015.

As of September 30, 2016 the Company had RMB671 million in cash, cash equivalents and short-term investment, a decrease from RMB837 million as of December 31, 2015, due to our procurement of inventory for the Singles Day, share repurchase program and the investment in logistics and office space.

Last quarter we raised our fiscal-year 2016 GMV guidance from an increase of over 50% to an increase of over 60% on a year-over-year basis. With GMV during each of the first three quarters of 2016 exceeding the 60% growth rate, and the strong confidence in our strategy and operations, we expect GMV during the fourth quarter of 2016 to continue to grow faster than 60% on a year-over-year basis.

Turning to our revenue guidance, for the fourth quarter of 2016 we expect total net revenues to be between RMB1.26 billion and RMB1.28 billion, representing a year-over-year growth rate of approximately 24% to 26%. Due to the continued strategic shift in our business model to increase our margin profile, our non-distribution model will continue to grow at a rapid pace, as will services revenues, which will increasingly contribute more to net revenues on a year-over-year basis and generate more profit.

This concludes our prepared remarks. Before we open the call up for the Q&A session I would like to remind everyone to please limit the questions to two. Operator, we are now ready to begin the Q&A session. Thank you.

Thank you sir. (Operator Instructions). Our first question comes from Evan Zhou from Credit Suisse. Please go ahead. Your line is open.

Hi. Good evening, Vincent, Beck, Caroline. Thanks for taking my questions. Very strong -- congrats on the very strong quarter guidance. Just wondering -- I notice that our non-distribution GMV continued to grow really well and the distribution GMV actually came down pretty meaningfully, so I was wondering are we ahead of plan in the mix of that? How do we forecast the outlook for the overall business model mix in 2017? And if we can have some more colors on the GMV outlook for 2017 that would be great. Thank you.

Okay, thank you. Thank you Evan. So basically we -- as we said, we have shifted the business towards more consignment model and service fee model. In the same time since last year we have successfully transferred some business -- existing business from distribution model to consignment. So like I said before in the introduction, the transition will impact the product sales line, so basically these numbers will be still sitting in the product sales revenue in the comparative figures, while during this year our -- actually our business revenues is going to the services revenues. So that's why in the transition period there will be some mix change.

So for the -- I think for the next year when -- if there is no more new transitioning happen, basically, I think the distribution model will grow -- still grow relatively faster than this quarter, because everything -- you don't just compare with apple-to-apple basis. And we believe that based on our strong capabilities to grow the numbers, like same-store sales growth, so we can still achieve a relatively reasonable growth rate for distribution model, if there is no more transition. But of course we will continue to negotiate to transfer the business towards a more profitable business model.

All right, thanks Beck. The second question regarding our outlook in the new customer brand acquisition. Wondering -- I think we've been having a pretty successful Singles Day event and we all know that fourth quarter is probably like our -- relatively speaking a very busy quarter in terms of execution, but not that so in customer acquisition. So I was wondering, looking to the following quarters, any kind of major pipeline brands or categories of brands that you guys are working on that you can share with us? Thank you.

Talking about the -- our [BB] process, right now we are seeing very positive pipeline of brands. The majority of the potential clients we are talking to is majorly from the apparel industry, which is of the biggest potential and also will benefit from the e-commerce a lot for the category.

So talking about the total numbers, we think we are still confident that we will increase the number of brand partners by at least 20, so that is the goal for today. So number of brands is important for us and also the same-store growth is even more important for us to carry on.

Right now we would talk to different categories, including the apparel, luxury and even some of the electronics, but we think most of the potential clients will be from the apparel industry. And the other most important thing is that we -- when we're talking to some new brands we are trying to get a much better term than the existing ones, so this will also help us to better our future financial performance.

Thanks. That's very helpful. Thanks, Vincent, for the color.

Thank you.

Your next question comes from Julia Zhu from Morgan Stanley. Please go ahead.

Hi management and thank you for taking my questions. And congratulations for the strong quarter. I have two questions here. First one is one same-store sales growth. Could you share with us that -- the trend for the same-store sales growth for the third quarter? And also by category performance which are the fastest and the slowest growth category et cetera?

My second question is regarding Baotong. We understand that it's still early in operation, but could you share with us the implication of fulfillment expenses in the future from Baotong operation, and also, for example, CapEx and other P&L lines? Thank you very much.

Thanks, Julia, for the question. For the first question, the growth rate -- high growth rate is in the category of apparel and electronics for this quarter. And in terms of the same-store sales growth rate, for Q3 we achieve almost -- around 60% year-over- year, six, zero, 60% year-over-year.

And in terms of the fulfillment expenses we had some investment into -- to build out the higher automated -- automation streamline and we already see a lot of opportunities to be -- benefit from this investment. So we can -- generally we have more value-added services packaged to fulfill the demands -- or escalated demands from those brands, so we can achieve a higher services revenue from fulfillment while we can achieve actually a better operating profit through this enhanced fulfillment services as well.

Can I have a follow-up question on the same-store sales growth?

Yes.

For the same-store sales, if it's 60% year-on-year, we know that it does not decelerate much from the second quarter, so we note for the overall GMV growth, for example, reported by National Bureau of Statistics, the overall GMV is decelerating in the third quarter. So is that representing that the key brands, the top brands, are still seeing very healthy growth and faster growth than the overall brands in their performance?

So actually, Julia, let me clarify. So for second quarter our true GMV is growing more than 80% while our same-store sales growth rate is more than 70 -- around 70%, 70% year-over-year. So for the third quarter our GMV growth rate is more than 70% while the same-store sales growth rate is around 60%, so generally it's in line with the total businesses.

And we think right now our revenues, our GMVs, contributed by the leading brands is actually decreasing year -- on a year-over-year basis. Although it may not be so fast, but we still achieve it year-over-year.

Okay, thank you very much. It's very helpful.

Your next question comes from the line of Binnie Wong from Merrill Lynch. Please go ahead.

Hi. Good evening. Thank you for taking my questions. I have two questions here. First question, I was wondering that -- can you explain to me -- can you clarify in terms of the -- we understand that there potentially could be some take-rate expansion in the consignment model. And I understand that we are talking about expansion more in the apparel and that we are offering more branding budget.

And then we're helping more -- picking more branding budgets rather than just doing transactional marketing. So from there can you maybe add some more elaboration as to how Baozun can do more market -- branding marketing for their brands? And I guess that is taking away some of the market budget from traditional media. That would be very helpful. And I will follow up with my second question. Thank you.

Yes, actually, we basically start to work the brands to do the transactional online retail for the brands in -- with our different service categories, including the customer service, warehouse management and also IT, these kind of services. We keep expanding our service offerings to all these kind of brands and also we keep improving our service quality -- service qualities to them as well.

So in the transactional-based services we not only help them to achieve a higher sales volume, but also help them to restructure their back-end supply chain system to reduce the cost of the fulfillment. So actually we provide a lot of savings values to the brand and in return we have more and more margin of profit. That is one thing.

The other -- of course, right now we are enlarging our digital marketing service coverage and we are improving the capability of our team. Because in the market there is a big potential when we just want to integrate the sales and marketing together to provide a target -- more target and more performance-based marketing capability, not only CRM, but also Zoho and [Mizning]. And we just want to put everything together to form up a very sophisticated solution -- digital marketing solution for the brands.

So I believe that in the future not only we can provide a wider range of services with a better service quality in the transactional side, but also we will provide more and more digital marketing services to the brands and we integrate all this together. And also we will have more innovations in the O2O integration and also omni-channel coverage. So by doing so we just want to expand our take-rate from the business we are operating for the brands.

Okay, thank you. My next question is just about -- on the -- because I think the way to understand strategy is also similar from what we understand from Alibaba this year. They are also getting incremental marketing dollars on branding budget, besides just the -- on the transactional side, right? So in terms of the --

Yes.

-- marketing dollars, when you talk to the brands what will -- because if it is actually more -- because for those branding budgets it's not just really focused on the ROI. It's something beyond that, right? When you talk to those four agencies, it's beyond that. So what are the key KPIs that they will -- that you will be -- that you will monitor here for us to negotiate for more?

And just a final, more like a housekeeping, question is -- because I remember earlier this year you were talking about this year we should focus more on the gross profit growth rather than on the revenue or GMV growth, given the mix of the transitional mix change between distribution model to consignment model.

So I was wondering that -- should we expect this shift to be continuing into next year, because I think we are talking about this almost every quarter? So I just want to understand that -- should we expect that maybe it should be -- it will take until fourth quarter, or maybe even into next year? How should we think about that? So is just one of the -- when we are looking -- measuring the companies in terms of the performance, which line should we be focusing on? Thank you.

Yes, we can see the trends that brands are putting more and more investments into the digital side, not the traditional side, so that is a good thing to improve or to drive more sales online. And also it gives also the opportunity to develop our -- enhance our digital marketing services to benefit our business and also the brands' business.

I think right now the reality side is that ROI is still the very important thing. When the brands spend marketing dollar they just want to get a direct result from that expense. So ROI is still very important for each of the marketing dollar spent on (inaudible), but the trend -- yes, you are right. We think that the trend is -- in the future will be beyond ROI itself, so not only they just want to help the people to buy products, but they also want to use this digital channel to deliver things, the messages, the branding positioning and also some of the interactions in between.

For example, today we are developing some of the comments and review analysis tools for the brands. That is also a good example of where the marketing dollar can be spent and to interact with your consumers. So Baozun here is to develop the transactional-related marketing services capabilities and also the non-transactional based marketing services to them. So by doing so we can deliver a better ROI for the marketing dollar spend and also we can help brands to talk to their customers in a more efficient way and in return they can know more of the customers' voices and improve their products and branding.

Related to the question about the gross profit growth, yes, for Q3 we have successfully grown the gross profit by over 70% year-over-year basis and we expect that we will still keep the momentum in Q4 and next year, so on a year-over-year basis. So I think we have addressed your questions Binnie.

Okay, thank you.

Your next question comes from the line of Nicky Ge from China Renaissance. Please go ahead.

Good evening management. This is Nicky Ge from China Renaissance. Congratulations on a strong quarter. I have a question about your logistics subsidiary, Baotong. In your prepared remarks we saw Baotong is already a partner of Cainiao and I'm wondering what kind of collaboration can we expect from Baotong and Cainiao. And could you give us more color on the detail of collaboration, such as the data or warehouse sharing et cetera? Thanks a lot.

Thanks. Right now as a separated subsidiary Baotong right now is going faster than before, because it can work with the external customers and also business partners, like Cainiao. So in September we established this relationship with Cainiao and right now we have already become a certified partner of Cainiao.

So right now we work with Cainiao through our Guangzhou logistics warehouse and for us we are a good addition to Cainiao, because we are providing premium services and also supply chain integration for the order back-end of the brands. Not only just manage the warehouse and deliver goods, but also working with our IT capability we connect to Cainiao and to other brand partners to form up a very good network to talk to each other.

And then we help to reshape all the back-end supply chain of not only the brands, but also us and [Tmong] and also Cainiao, so this one will be a very efficient network and help each party to reduce the cost in fulfillment and also more intelligence and it can deliver a better service and experiences for the customers. So this one is a very promising direction for us to follow.

Very helpful, thank you.

Thank you.

(Operator Instructions). There are no further questions at this time. Miss. Caroline Dong, please continue.

Okay, 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 any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.

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