Baozun Inc (BZUN) 2016 Q4 法說會逐字稿

Thank you for standing by and welcome to the Baozun fourth quarter fiscal year 2016 earnings conference call.

(Operator Instructions). I must advise you that this conference is being recorded today, February 22, 2017.

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

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 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 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 terminologies such as will, expect, anticipate, future, intends, plans, beliefs, 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 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, and thanks everyone for joining our earnings call today.

I'm excited to finish off the year on a strong note with another quarter of solid financial and operational results. Total GMV increased by 62% year over year to RMB4.8 billion during the fourth quarter, while non-GAAP net income surged 238% to RMB70.4 million, which marks the third straight year we have achieved profitability on a non-GAAP basis. 2016 also represents the first year in which we generated over RMB10 billion in GMV.

This strong performance continues to be driven by growth of our existing online stores and the expansion and further optimization of our portfolio of brand partners. Our total number of brand partners grew steadily to 133, while we continue to be in talks with a number of exciting new brands who are eager to benefit from China's explosive e-commerce growth.

We are investing heavily for future, especially expanding the array and the sophistication of our services by innovative new products that can easily be customized for each brand partner. Following successful trial in Hong Kong last year, Shopdog underwent its first largescale rollout in mainland China during the 2016 Double 12 promotional sales day. Initial feedback from customers and brand partners have been phenomenal, and we look forward to offering this exciting new product to our current and prospective brand partners. We will continue to leverage our vast in-house resources to develop and explore innovative ways to further provide unique value to our brand partners.

Our seamless and efficient IT infrastructure ensured that our brand partners would be able to maximize sales during China's Double 11 shopping festival. We were able to have successfully settle total order value of RMB2.5 billion during the sales period, more than double the amount on the same day last year. This strong performance, combined with seven years of (inaudible) experiences, adequate planning and strategic foresight clearly demonstrates the value we can provide to brand partners when it comes to providing our full range of end-to-end e-commerce solutions and (inaudible).

We were again awarded [Star] Service Provider from Tmall last month, which I believe demonstrates the outstanding quality of our services and undisputed leading position on Tmall. We are very proud to be recognized again for our capabilities.

I'm proud of the significant progress we have made over the quarter where we are clearly benefiting from our improved capabilities. This clearly demonstrates the sustainability and quality of our top line growth, improved margins and increasing economies of scale as our business continues to expand.

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'm going to give will be on that basis.

So, to start, GMV during the quarter increased by 62% to RMB4.8 billion. Our focus remains on growing our non-distribution model business which saw GMV increase 88% this quarter. We continue to optimize our business model mix towards the non-distribution model.

Total net revenues increased by 25% to RMB1.3 billion. Breaking down further, product sales revenue rose by 2% to RMB771 million. We continue to transfer part of our existing distribution business towards the consignment model which is impacting the year-over-year growth of product sales revenue.

Services revenue rose by 94% to RMB502 million. The increase in services revenue was mainly due to rapid growth in our business under the consignment model and service fee model, and in particular the growth in sales of apparel products sold by our existing brand partners as they expand their online presence.

Gross profit increased by 72% on a year-over-year basis. Total operating expenses were RMB1.2 billion. In particular, cost of products rose to RMB679 million, primarily due to the increase in the volume of product sales from our core brand e-commerce business.

Fulfillment expenses rose to RMB228 million, mainly due to the increases in GMV contribution from our consignment business, more orders fulfilled by the premium delivery service provider as a percentage of total orders, and warehouse and rental expenses.

Our current strategy is to shift our strategic focus towards higher value-added services such as fulfillment services which carry higher profit margins. We are pleased to see our customers and partners gravitate towards these higher value services where we are able to generate more profit.

Sales and marketing expenses rose to RMB247 million, primarily due to an increase in promotional and marketing expenses associated with our online stores.

Technology and content expenses rose to RMB29 million. The increase was primarily due to the increases in technology-focused staff and project-based variable technological expenses from brand stores.

G&A expenses rose to RMB26 million.

Non-GAAP income from operations was RMB72 million, a significant 661% increase compared with RMB9 million in the same quarter of last year, while non-GAAP operating margin improved significantly to 5.7% compared with 0.9% in the same quarter of last year.

In Q4, net income attributable to Baozun ordinary shareholders rose to RMB61 million, an increase of 359% compared with the same quarter of last year. Basic and diluted net income attributable to ordinary shareholders per ADS were RMB1.2 and RMB1.11, respectively, compared to RMB0.27 and RMB0.25, respectively, during the same quarter of last year.

In Q4, non-GAAP net income attributable to Baozun ordinary shareholders rose to RMB70 million, an increase of 238% compared with the same quarter of last year. Basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS were RMB1.38 and RMB1.26, respectively, compared with basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS of RMB0.41 and RMB0.39, respectively, for the same period of 2015.

For the fourth quarter of 2016, net cash provided by operating activities was RMB102.6 million, compared with net cash provided by operating activities of RMB17.2 million in 2015.

That completes the financials for the quarter. I would like to quickly highlight a few year-end numbers which I believe demonstrate the direction we are headed in.

For fiscal year 2016, total GMV increased by 67% to RMB11.3 billion and total revenues increased by 30% to RMB3.4 billion. Gross profit increased by 70% on a year-over-year basis. Net income attributable to Baozun ordinary shareholders significantly increased to RMB87 million, compared with net loss of RMB3 million in fiscal year 2015.

Non-GAAP net income attributable to all Baozun ordinary shareholders increased by 437% to RMB121 million. For the full year of 2016, net cash provided by operating activities was RMB13 million, compared with net cash provided by operating activities of RMB2 million in 2015.

As of December 31, 2016, the Company had RMB957 million in cash, cash equivalents and short-term investments, an increase from RMB837 million as of December 31, 2015, due to the follow-on offerings we did during the fourth quarter, which was partially offset by net cash used in the share repurchase program and investment in logistics and office space.

With our business growing sustainably and the increased confidence in our strategy and operations, we expect GMV during fiscal year 2017 to grow by over 50% on a year-over-year basis. As we further optimize our business model mix towards the non-distribution model, non-distribution GMV will continue to grow at a faster rate than distribution GMV.

Turning to the revenue guidance. For the first quarter of 2017, we expect the total net revenues to be between RMB800 million and RMB810 million, representing a year-over-year growth rate of approximately 20% to 21%. Again, due to the continued strategic shift in our business model to optimize our margin profile, our non-distribution model will continue to grow at a more rapid pace as well as services revenues, which will increase and contribute more to net revenues on a year-over-year basis and improve our profitability.

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

We will now begin the question-and-answer session. (Operator Instructions).

Your first question comes from Natalie Wu from CICC. Please go ahead, your line is open.

Hello?

Hi.

Hi, Natalie.

Hi. Okay, sorry for that. I didn't expect that. Okay.

So, thanks for taking my questions. So, basically I want management, if management can share with us some color on the strategic plan this year regarding category expansion. So, basically, which specific category you want to especially put extra efforts on in 2017, and what's the progress now, and also whether it's going to affect your financials. Thank you.

Okay. Thank you for the question. As always, our primary focus will be always on the same-store growth, as you may already know. Because we think the -- right now, among all these 133 international brands, there's still a lot of potential to work for, so we work very closely with each of the brands, trying to optimize all the operations, supply chain, marketing efficiency, everything, to bring the business not only to a greater sales number but also lower cost.

In the meantime, we are now promoting a lot of initiatives like O2O or omni-channel (inaudible - technical difficulty) this kind of initiatives to the brands. So we need a lot of efforts and attention to work with the brands to make all these happen. So, talking about the expense strategy, I think the same brand growth will be [the first].

Then for the new category and new brands, we are now very focusing on some of the categories like apparel and also cosmetics, this kind of category. I think a lot of potential clients are there, you know, who is requiring our solutions and services very much. So when we can serve the current existing brands very well, as a second step, we will acquire more and more new brands onboard. Yes. So that is the major I think tasks for us to expand our coverage.

Now for the other regions, you know we are working quite successfully in Hong Kong and we started to provide services in Taiwan. We'll continue to do so in this year. That is basically the three major dimensions. Of course, we'll put a lot of the efforts on the data analytical, CRM kind of capability, also, as always, keep improving our IT and logistics capabilities. Yes, that is all part of the expansion strategy.

Okay, great. Thank you.

Your next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead, your line is open.

Hi. Hi, good morning, Vincent. Thanks for taking my question. Congrats on a very solid set of numbers.

Thank you.

I had two questions. One is on the, specifically, the fulfillment expense for this quarter. I think there's -- it came in a little bit more than our expectation. I was wondering like, you mentioned the reason being that we had more premium delivery service provider as a percentage of total order (inaudible) that's one of the major factors. I was wondering, if we look at it on a unit economic basis, are we having more leverages because of scale, and because of the scale we've reached with the premium service provider that we actually, on a per order basis, getting better economics on fulfillment side? Or it's kind of in the range of expansion, so we still could see some happening on the fulfillment leverage for our [old] members down the road in the coming quarters? So that's the first question.

And second question is probably more broadly related with the investment that you actually mentioned in the prepared remarks. I was wondering, I think our top line GMV outlook for 2017 has been pretty great but on the cost side, what's the kind of the ballpark investment area and how should we overall expect the margin improvement or the bottom line (inaudible) for 2017? Thank you.

Excuse me, Evan, so, can you repeat the second question?

Second question is more regarding on the investment, broadly speaking, other than just fulfillment, like IT, marketing. So I think you mentioned that we're going to grow GMV more than 50% this year, while -- how does the cost side look like for 2017?

Okay. So, regarding the first question, on the fulfillment side, we had the leverages because our volume generated and also because of our strategic partnership with our logistic and courier vendors. So for example, just in Q4, our price per order for the higher value delivery service partner was actually decreased by 9% year over year, which means we have a large leverage there. But because we just shifted more business towards these higher value service providers, so we, you know, if we just look at overall fulfillment expenses as a percentage of total GMV, it seems that's not decreasing -- it's not decreasing, but actually per order value for the same services, we have achieved leverages there. So we are very confident that through the strategic partnership and also our higher value added to those customers and our brand partners, we can generate more margins on the -- in the bottom line.

In terms of the second question, except for fulfillment expenses, we continue to hire for example qualified software engineers, qualified marketing and promotion experts. But this is definitely in the big background that we will continue to improve our gross margin on the top line and also improve our operating margin in the bottom line, and we will do reasonable investment instead of crazy investment.

Got it. Thanks for the color, Beck. Thank you.

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

Hi. Good morning, Vincent, Beck and Caroline. Thank you for taking my question.

So my first question is that, if you look at the distribution -- I mean, the decline in contribution distribution, GMV mix, right, that will help you drive overall in terms of better earnings. And I'm just wondering that, how are we expecting margins to trend in 2017 given that we talked about earlier that, along with Alibaba's marketing strategy, in terms of upgrades in marketing to do more brand building, and then we also have to hire probably more sales staff that is more on the traditional marketing rather than just focusing on your transactional-based marketing, to more like a brand-building type of advertising agency. So with those investments and then with those plans that -- investment we have in mind when we do the fundraising, how should we expect margins to trend?

And then just a quick question on the same-store sales growth. How does it trend? And do you see a same-store sales growth really driven -- which category do you see higher same-store sales growth? And how does that tie in with, like, in terms of like say omni-channel strategy that we have talked about in our annual event last year, right? And then how are you seeing that progressing? Thank you so much.

Binnie, thanks for the two questions. I will address the second question first and then Vincent will address the first.

So, for the second question, our total GMV is growing 57% on a full year basis. For the same-store sales growth rate, for fiscal year 2016, it's 55% on a year-over-year basis.

And we will continue to give, you know, contribute more efforts in driving the daily operations of our existing stores. So, generally, we just see overall, because we are just serving those brands with good customer recognition, so, not only those big categories, even for some small categories, they are all growing very well, like apparel -- big categories like apparel, electronics, smaller categories like cosmetics, they're all growing very well.

And in terms of channel, so far we think Tmall and brand official sites is driving most of the growth.

Okay. About the first one, the first question, more about marketing trend. Yes, right now, after the phase of transaction-focused e-commerce, I think right now every other brand is thinking about doing more marketing as well in this digital space. We can, as you said, we can see a lot of initiatives and movements from the Alibaba marketing arm. A lot of resources have been consolidated and a lot of new initiatives already happening there.

So for Baozun, actually, as you know, we always stand with the brands and we think a lot from the brand's perspective. So for us, we have a broader view than each of the marketplace. So, of course, we will be very focused on analytical database marketing tools, initiatives, capabilities, not only creative side. So for those creative side, we will work with the other partners of the brands to deliver a holistic result to the brands.

So this year, 2017, we'll put a lot of resources and a lot of IT capabilities into this marketing side and help the brands to deliver integrated sales and marketing solution to enrich our service offerings and therefore to improve our value and also profitability in this business.

Thank you so much. Very clear. Thank you.

Your next question comes from Eileen Zhang from Deutsche Bank. Please go ahead.

Thank you, Management, for taking my questions. Congratulations on the strong results. I have two questions. The first one is we actually see faster migration of the distribution model to the consignment if we look at the GMV growth slow down for the distribution GMV, right?

So, I wonder how far do you expect this migration will be in this year? And what kind of a GMV contribution from land distribution model do you expect?

And my second question is regarding the Maikefeng, could Management clarify again the Maikefeng GMV this year? And also, we actually see Maikefeng incur about RMB6.2 million operating loss in the fourth quarter. So I wonder what the loss trajectory will be going forward, in what pace do you see the impact to Baozun or the margin could narrow down?

Thanks, Eileen. So in terms of the GMV growth, it's based by distribution, and in distribution, we expect like we said in the prepared remarks, so non-distribution GMV will grow faster just for example, for fiscal year 2016, our non-distribution GMV is growing by around over 90% on a year-over-year basis so we still think that -- non-distribution GMV will be growing at a higher -- very higher speed compared to the distribution GMV.

And for the several quarters of this year, we think we can make the strategy shift almost complete during this year.

And for the second question, about [NPS] so if you look at the NPS loss compared to the past year same period of past year, actually the loss, we have been narrowing down the loss on a year-over-year basis. And we think for this year, we will continue to narrow down the NPS loss even on a Q-on-Q basis, and the NPS dropped back to the total overall profitability can be almost ignored.

Thank you.

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

Hello?

Hi, Nicky. Please go ahead.

Hi, Vincent and Caroline, thank you for taking my questions. I have two questions here. The first is to our brand pipeline this year since you have a very strong first quarter guidance, I guess we have better visibility now how do we expect like powerful brands like Nike this year as well.

And the second question is a housekeeping question about our GMV breakdown. Could you help us breakdown your GMV in terms of consignment and service? And going forward as the consignment is growing faster than the other two business models, can you share the percentage trend going forward in 2017.

Thank you.

Okay, so Junhua will address the first question and I will follow with the second.

Yes, hi, Nicky, this is Junhua, so in terms of the new client pipeline, so we are getting -- we are contacting a lot of leading brands in the certain category especially in the apparel category and luxury category, and the cosmetics category. As Vincent and Beck said, the apparel category will maintain a strong growth in this year, so definitely, we are seeing to have an almost like over close to 20 new clients this year.

Okay, thank you.

Especially like the leading brands being -- where the leading brands in men's apparel, leading brands in women underwear, so those kinds of new brands. And also, we have some pipeline project in practically -- for example in cosmetics, and in fast moving consuming products.

Yes, about the second question, so, we expect the consignment model will be the biggest [contributor] in our total GMV contribution. So for this year, we think the consignment model will grow to almost 60% of total GMV amount.

And the service model will follow and the consignment model as a second. And we think, as the strategic shift towards non-distribution model our overall profitability will be increased a lot and our inventory exposure will be less.

Thank you.

Thank you, that's very helpful. Thanks.

Your next question comes from Billy Leung from Haitong International. Your line is now open. Please go ahead.

Hi, Management, thanks for taking my question and congrats on the great results. Just two quick questions. The first one is I think, (inaudible) asked about this, but in terms of our GMV growth expectation of 50% this year or [30% to 50%] this year, could you just sort of give us more color in terms of how you came about with this number? Is it because of the outlook provided by existing partners or is it because we are the potential partners going to be the major contributor to this 50% growth?

That's the first question. And the second question is the distribution business is going to be slowing down, is there a chance that this part of the business will actually decline this year? Thank you.

Thank you for the question, Billy. So the first thing is we don't expect the distribution GMV could decline this year and also for the first question, still, we think the majority of the business growth will be driven by existing source so if we have some new brands on board, we expect our GMV is growing far more than 50%.

Thank you.

Your next question comes from Thomas Chong from BOCI. Your line is now open. Please go ahead.

Hi, Vincent, Beck, Caroline, thanks for taking my questions.

I have a question about international strategy and market share gains falling in China, for international strategy, we have presence in Hong Kong and Taiwan, so how would we think about the use of cash in acquiring other overseas partners if any?

And my second question is about the China business given the e-commerce solutions, the providers are pretty fragmented in China. Should we see potential M&A in China that we consolidate other smaller payers around the globe? Thanks.

Thanks for the question. You are talking about the international strategy, the financial strategy, just as what I said. Although the strategy is quite in line with the brand strategy so actually, we are not in a very aggressive international expansion stage now. It is more like a reactive strategy.

We follow very closely with the brand development and their requirements. When there is a need from an existing brand or potential brand for us to develop the overseas market, we will do it immediately and very efficiently and so that is the strategy.

And the situation here is that a lot of our existing brands have already raised up this kind of requirements for Baozun to deliver services outside China and outside the Greater China region. So right now, we are very actively working with these kind of brands developing solution proposals and we can expect that we will do more and more this kind of service offerings overseas. So that is about our international expansion strategy. It's not, I would say, aggressive one but it will be a very efficient one.

Talking about the potential M&As, yes, if there will be some of the very good target, share the same model and the value of Baozun and also the timing is right. We are open to the kind of potential investment for M&As.

And also, we still see a great room for us to grow even in China, although as you can see the China e-commerce growth for Alibaba and JD is slowing down a lot in the past year, but actually we have seen great room and potential room for us to grow.

So a lot of the brand, they are already existing brands to [TIMO] or JD, but they are not existing brands to Baozun. With our higher capabilities in the omni-channel, end-to-end service solutions, we think right now is the time for us to grab those accounts into our pockets.

So since this year, we could be more open to solicit and to welcome those brands already in e-commerce.

Thank you.

Your next question comes from Ryan from MCM Partners. Please go ahead, your line is now open.

Ryan, please go ahead.

I was wondering if you can hear me. Okay.

Hi good morning, thank you for taking my question, Management. A couple of quick ones for me, the first question is kind of on the fulfillment expense and how that is going to shape up over 2017. You mentioned that you are looking to use more kind of value added partners for some of the fulfillment. I'm just curious if that's going to have any impact on the pricing strategy as well. Or kind of what is the strategy there?

Okay, so we generally, we partner with a third party courier service partner to fulfill or to deliver the orders to the consumers. So we will generally will charge the brand with a higher (inaudible) price so we will also generate very decent profit from the facilities and also from management of the facilities. So that's why if you just look at the consumer expenses as a percentage of GMV, it is not [greeting] but actually we generate more services on the top line. Most of the --

(Multiple Speakers)

Okay, and just -- and then kind of maybe a question on you mention the GMV this year looking like that -- for consignment to be the bulk. I'm curious if you can give us any kind of color on where you see kind of take rates trending this year?

Just like the past year, we expect the GMV is growing stably and steadily up the take rate.

Got you, thank you very much.

(Operator Instructions)

It appears there are no further questions at this time, I would now like to hand the call back over to you, Ms. Caroline Dong.

Thank you, operator. In closing, on behalf of the entire Baozun Management team, we 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 our conference for today, thank you for participating. You may all disconnect.