Dada Nexus Ltd (DADA) 2020 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by for Dada's Second Quarter 2020 Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference call is being recorded.

I will now turn the meeting over to your host for today's call, Ms. Caroline Dong, Head of Investor Relations for Dada. Please proceed, Caroline.

Thank you, operator. Hello, everyone, and thank you for joining us today.

Our earnings release was distributed earlier today and is available on our IR website at ir.imdada.cn and as well as the global newswire services.

On the call today from Dada, we have Mr. Philip Kuai, Chairman and Chief Executive Officer; Mr. Jun Yang, Co-founder and the Chief Technology Officer; Mr. Beck Chen, Chief Financial Officer. Mr. Kuai will talk about our operations and company highlights, followed by Mr. Chen, who will discuss the financials and guidance. They will all 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 pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking 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 a matter of which are beyond] company's control. These risks may cause the company's actual results or performance to differ materially. Further information regarding these and other risks, uncertainties or factors is included in the company's filing with the U.S. SEC. 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 by law.

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Kuai.

Philip, please go ahead.

Thank you, Caroline. And thank you all for joining us today for our first conference call as a public company.

Our IPO in June was an important milestone for our continuous commitment to bring people everything on demand, and we are pleased to report the strong growth for the second quarter. Our total revenue for the quarter grew by 93% to RMB 1.3 billion on the year-over-year basis, and we are seeing stronger synergies between Dada Now and JDDJ platforms. So Beck will go into details about our financials and operating results in a little bit, and for now, I would like to give you some updates about our 2 platforms, the JDDJ and Dada Now.

So we'll start with JDDJ, our leading local on-demand retail platform. So for JDDJ, our fast growth is driven by a number of factors. Number one: So we have been constantly expanding our geographic coverage. During the second quarter, we successfully expanded to more cities and counties, especially a variety of lower-tier cities. So as of the end of quarter, we now cover around 1,000 city and counties compared to over 700 cities and counties as of March 2020, and bringing our convenient 1-hour on-demand experience to more consumers across the country. In this Q2, the GMV from lower-tier cities increased by over 170% year-over-year, and we believe these new cities we expand in Q2 will contribute to the growth of the platform since later this year. In the following quarters, we will continuously expand our geographic coverage, bringing more and more people everything on demand. Then we are also expanding our product category coverage. During the second quarter, especially, we achieved a significant breakthrough in the category of consumer electronics and smartphones. We have established partnership with consumer electronics chain retailers to provide 1-hour delivery service which bring products like smartphones to customers for as fast as 15 minutes.

And a second thing. So we are enhancing our collaboration with retailers both in scale and in depth. We are committed to further enhancing our empowerment capabilities to create more values to retailers. For years, with our strong growth, openness and integrity, we have won deep trust from leading retailers. As of the end of the second quarter, we now work with about 60 of the top 100 supermarket chains across China, which is an overwhelmingly leading position in the market. On July 24, we announced the extension of our partnership with supermarket chain CR Vanguard; and we will empower them with capabilities like omnichannel fulfillment, product assortment management, consumer insights and marketing.

Number three. So we are also enhancing our collaboration with brands through innovations. So during the second quarter, our revenues from brands increased by over 500% year-over-year. And we are quickly becoming a leading O2O platform in China, and as a fastest-growing sales channel, more and more brands are allocating a greater share of their marketing budgets to us. Through our JDDJ platform, the brands can connect with digitized consumers and improve sales and marketing efficiencies. We will also contribute -- continue to innovate new service models to create more value to brand partners. For example: So we pioneered a new 1-hour delivery for live streaming program in China. This service gives consumers a fantastic online shopping experience where they can watch an interactive live streaming program, have fun, order online and have the product delivered in an hour or less while they are still watching the program. It also has been very well received by the brands. Dozens of leading brands such as Unilever, P&G, Pepsi and so on have been working with us in this new initiative.

And then the fourth. We are constantly developing innovative, new technology to empower our retailers and brand partners. Our Haibo omnichannel online retail operating systemss allow retailers to manage their orders, inventory and promotions and support a full omnichannel O2O e-commerce. To date, Haibo has been adopted by more than 1,200 large and medium-sized supermarket stores of leading chains across China, which is a remarkable milestone in history in industry. And our CRM solutions allow retailers to establish their own online membership programs, which can help to improve acquire new members, improve membership loyalty and increase repurchase frequencies. To date, our CRM systems have been adopted by around 200 retailers and now being used in more than 30,000 stores compared with 20,000 as of the end of December last year.

Another key milestone. We are happy to see the great progress in "Wujingtianze" project during the past couple of quarters, and the phase 1 was launched in April. So "Wujingtianze" is a key omnichannel collaboration program with JD Retail. Leveraging on our retailer partners' off-line stores and our local on-demand delivery infrastructure, we provide 1-hour delivery service from the nearby stores to the consumers shopping on JD.com, which greatly improve consumer experience and operational efficiencies. We truly believe that this type of integration is a win-win for all parties. While it still takes some time to ramp up, the future prospects are promising.

Now I would like to spend a few moments discussing Dada Now, the largest open on-demand delivery platform in China. In the second quarter, we upgraded our service capabilities by further enhancing our logistics infrastructure and scaling up last-mile delivery and intracity delivery services. In terms of the intracity delivery services, since 2019, we have started to develop an upgraded service that specifically target to serve key account chain merchants. After a number of iterations, we officially launched the upgraded service on July 28 under the name of Dedicated Delivery, also known as Quanxinda or Deliver with Full Heart. So the service is designed to serve key account chain merchants across China by providing them with customized service and products and meeting their tailored needs for omnichannel delivery. In this quarter, revenue from our key account chain merchants increased by 500% year-over-year. On the SMEs, small and media enterprise, and individual order side, we see another milestone that our business turned profitable across all cities in which we operate. We're happy with our performance this quarter as we continued to improve profitability and optimize efficiencies.

For last-mile delivery. So order volume hit the Single's Day record during the June 18 shopping festival. We benefited from enhanced synergies with JD Logistics as we continued to integrate our systems and further boost delivery efficiencies. We were able to ensure timely and efficient last-mile delivery for JD Logistics, especially during peak seasons, because of our elastic, efficient and scalable delivery network. In addition to the collaboration on delivery services with JD Logistics, we are recently launching the pickup service to strategically expand our partnership as well.

So overall, we're excited by our ability to strongly execute on our strategy, and we are looking forward to generating sustainable long-term value for our shareholders as we navigate a new era in China's retail industry.

With that, I will now pass the call over to Beck Chen to go over our financials for the quarter. Thank you.

Thanks, Philip.

We are pleased to deliver solid revenue growth and improved margins in the second quarter as we continued to drive economies of scale and operating efficiencies across our business. Before we go over the numbers, just a few housekeeping items in advance: We believe year-over-year comparison is one of the most useful ways to judge our performance. All percentage changes I'm going to give will be on that basis.

Total net revenues increased by 93% to RMB 1.3 billion. Total net revenues from JDDJ increased by 98% to RMB 486 million mainly due to 96% growth in GMV driven by increases in average order value and the number of active consumers. The number of active consumers for the 12 months ended this Q2 increased by 72% year-over-year to 32 million. We also saw a 500% increase in online marketing services revenue as a result of increasing promotional activities from brand owners. Net revenues from Dada Now increased by 90% to RMB 837 million mainly due to higher order volume of last-mile delivery services to logistics companies and intracity delivery services to chain merchants.

The most important event during the quarter was clearly the June 18 midyear shopping festival. On JDDJ site, we cooperated with China's leading retailers and brand partners to launch our "JDDJ June 18 Lovely Life Festival". During that day, we hit a new record high for Single Day sales and doubled our GMV over last year. On the Dada Now side, we set a new record for Single Day delivery volumes and surpassed the delivery volume that we just recorded during last year's 11/11 campaign. On the other hand, during this quarter, revenues from our chain merchants increased by 500% year-over-year. We think this performance demonstrates the improved capabilities of our last-mile and intracity delivery services and highlights the value of our on-demand delivery infrastructure.

Moving over to the expense side. Operating and supporting expenses increased to RMB 1.1 billion mainly due to an increase in rider costs as a result of increasing order volumes for our last-mile and intracity delivery services provided to our clients on Dada Now platform and the retailers on JDDJ platform.

Selling and marketing expenses rose to RMB 386 million mainly due to an increase in personnel costs and the share-based compensation expenses related to IPO performance condition and also an increase in advertising and marketing expenses. G&A expenses rose to RMB 165 million mainly due to the IPO-related share-based compensation expenses. The R&D expenses rose to RMB 129 million mainly because we continued to hire R&D staffs and strengthen our technology capabilities.

So I'd like to highlight that the IPO-related share-based compensation expenses were booked in total of RMB 127 million in Q2, which was one-off expenses due to immediate-recognition expenses resulted from options granted to employees with an IPO performance condition.

Non-GAAP loss from operations decreased by 12% to RMB 244 million. Non-GAAP operating margin was minus 18%, improved from minus 40% in the same quarter of last year. The improvement of our operating efficiencies mainly comes from 2 areas: firstly, improved delivery efficiency due to increase of order density and optimization of the algorithm of our Automatic Order Pricing Mechanism.

The ratio of operations and supporting expenses as percentage of total revenues decreased to 83% this quarter from 90% in Q2 last year. The operations and supporting expenses mainly include new fulfillment expenses. Secondly, the ratio of adjusted selling and marketing expenses as percentage of total revenue decreased significantly to 26% this quarter from 44% in Q2 last year, which mainly thanks to the saving of consumer incentives because our platform becomes more attractive and the consumers become more loyal.

In Q2, non-GAAP net loss decreased by 9% to RMB 231 million. Non-GAAP net margin was minus 17%, improved from 37% in the same quarter of last year. Non-GAAP net loss attributable to ordinary shareholders was [RMB 390.4 million], which includes accretion of preferred shares of RMB 160 million recognized in Q2, but we do not need to recognize such amount after our IPO listing.

Non-GAAP diluted net loss per share for the second quarter of 2020 was RMB 0.80 compared to RMB 1.25 for the second quarter of last year.

As of June 30, 2020, we had RMB 4.4 billion in cash and cash equivalents, restricted cash and short-term investments.

In terms of outlook for the third quarter of 2020, we expect total revenue to be between RMB 1.28 billion and RMB 1.34 billion, representing year-over-year growth rate of 82% to 91%. And we are particularly excited about the organic strong growth momentum of our JDDJ platform, and we aim to grow JDDJ's revenue by 100% year-over-year in the second half of 2020. And meanwhile, we will continue to closely cooperate with JD Retail to further explore omnichannel new initiatives.

So this concludes our prepared remarks. Operator, we are now ready to begin the Q&A session.

Thank you.

(Operator Instructions) Your first question comes from Ronald Keung from Goldman Sachs.

Congratulations on the solid second quarter. I have 2 questions, first. And if there's space, I will follow up again with a bit more, if we get space. First is, could you share how, JDDJ, the ticket size trends have been in the second quarter and as we head into the third quarter? And then my second question, also mostly on JDDJ, is can you share a bit more on the JD Retail cooperation and, as you mentioned, about the further exploration. I just want to hear, from kind of first phase, what should we expect? Or what are the opportunities that you see for JDDJ and also for Dada in this omnichannel initiative? And will the benefits also apply to both of your businesses?

Thank you, Ronald. So this is Beck. Let me take the first question, and then I'll pass the second question to Philip. So for the ticket size of JDDJ in Q2, it will be average order value was around RMB 140. So some of that is contributed by some mix change because we are starting to sell consumer electronics, but even excluding this effect, our core categories like the supermarket are still maintaining the AOV of around RMB 130 in Q2 this year. And also, going to Q3, we think generally the AOV is relatively stable compared to Q2.

All right. And in terms of the JD Retail collaboration for omnichannel. So we are happy to see that, in the last couple of quarters, this collaboration has been fairly quickly ramping up and we are seeing some very exciting early progress. For example, many of our major retailers have now onboard. So it actually takes a while to signing contracts and do the system integration and bringing those retailers onboard, so we are progressing very well on that. And we have also built out a strong success case basically to demonstrate that this is very value-added to the retailers, the off-line retailers. And that's how we can convince more and more important retailers to come onboard. So this is the number one. And number two, as you might have seen on JD app, if you are searching for some keywords, you'll be seeing a tag called 1-hour delivery on the search result page. And if you click on that, you will see a dedicated search results page with all the off-line retailers and product items available for 1-hour delivery. So this dedicated entry point or the dedicated tag creates an important mind -- basically to view the mind share of the customer and to educate a customer to try and to get used to this 1-hour delivery. I think this is another major milestone. And the third one is so JD Retail has many business units. And we're happy to see, in the last quarter, a strong agreement has been achieved among many of the business units that the colleagues at JD Retail are very much convinced that this is a very key and strategic initiative for JD Retail, for Dada, for the entire ecosystem. And people are very much committed to push this forward. And we anticipate that, in the following quarter or the next few months, we'll be seeing some strategic initiatives that we might start jointly bringing more important chain merchants onboard across different product categories. So we started off with the grocery chains, but we might quickly expand to other categories as well. So those are some of the progress for this partnership, and we certainly believe this has a very promising future. And this will help both JDDJ and Dada certainly because Dada has the 1-hour delivery infrastructure. We will help to deliver all the orders generated through this channel. And JDDJ because we have a deep partnership and system integrations with the off-line retailers, and we will act as a very central role in this omnichannel partnership. So yes, we are very optimistic about it.

Your next question comes from Eddie Leung from Bank of America Merrill Lynch.

Congratulations on a pretty solid quarter. 2 questions. The first one is about your, like, user growth. Could you give us more granularity in terms of the traffic sources? So which channel has been seeing the majority of the growth, and why? And then secondly, also a follow-up question on "Wujingtianze" JD Retail cooperation just wondering how should we think about the so-called margin profile of this type of business versus our online JDDJ business.

Okay, thank you, Eddie. So the first one, the traffic source. So -- and we are happy to see our customer base continue to grow fast, and there are a few things we are particularly happy about. So number one, we opened a large number of lower-tier cities since last year. And by June 18 -- sorry, by June 30, we have now covered about 1,000 cities and counties. And both the user base and the sales growth in the lower-tier cities are particularly fast, actually much faster than our first-tier cities, so we are very happy about that. And another thing is we have been launching the membership program for the platform as well as we are providing this membership capability and empowering our retailers to build up their membership programs on our platform. This also greatly help to improve the frequencies and loyalties of the customers for them to continue to come back. So I think those are the few important things. And so I think, in the next quarter or the coming months, we will continue to open up new cities, and we will also work deeply with our retailers to expand this membership program. I think those are some of the key driver for the traffic. And certainly we are also happy to see that both in new cities and existing cities we are also getting good traffic support from JD as well, not only the existing -- like the entry points and the search results collaboration but also the "Wujingtianze" omnichannel partnership. These are also considered as a key traffic source, incremental traffic source going forward.

And in terms of the margin of this "Wujingtianze" program. So first of all, I think this is still at a very early stage for the business. And we focus more on the growth of the sales volume rather than the margins, but I think overall we're really focusing on improving the efficiencies because there are a lot of product categories that are not as efficient if JD is selling on B2C, for example, with bulky and heavy things. The delivery cost is rather very high, but those inventories are located near the customer already so the delivery cost is much lower than as procured from the warehouse. So I think the efficiencies like that will generate a good margin potentials for all the parties involved in these ecosystems. And also I think the efficiencies overall for the off-line business is rather low. And we are very happy to see that, in this quarter, partially thanks to the impacts from the COVID-19, because all the retailers are really, really into the digital business with e-commerce and really want to digitize their business and improve the efficiencies, that's why we are seeing that almost all of our off-line retail partners have been investing heavily in upgrading and digitizing their off-line business. I think this is very well connected with the omnichannel, the "Wujingtianze" program. And all the digitization of the off-line business will again create significant potential for the improvement of efficiencies and the margin. So in the long run, we are very optimistic about it, but as for now, we are focusing on making this happen, basically to grow the volume first.

Your next question comes from Thomas Chong from Jefferies.

Congratulation on the success of the IPO as well as the solid momentum for JDDJ monetization. I have a question about the outlook of JDDJ with regard to the take rate and timing for profitability. How should we think about the take rates across the different business segment? And how we should think about the competitive landscape, in particular, the sales and marketing trend.

Right. So thank you, Thomas. I will have a brief answer and see if Beck will have anything to add. So first of all: So we are happy that for the JDDJ business we have 3 major revenue source, which are the take rate from the retailers as well as the marketing dollars from the brands and also the delivery fees from the customers. And if you look at our Q2 performance, the revenue from the brands grew by 500%. So this is a very significant growth, and we anticipate this strong momentum will carry on as we are delivering more and more significant value for the brand. As a matter of fact, we are now considered to be the fastest growing for many of the consumer brands in China, and that's why the brands are more and more willing to allocate more marketing budget dollars. I think the marketing dollars from the brands create a significant potential, and also at the same time, we don't have to push the take rate from the retailers too much. This is also very different from the restaurant food delivery business. SoI think this is the number one. And number two, we are bringing more and more new product categories. As we mentioned earlier, we are very happy to see that, in this first half, especially Q2, we were seeing significant growth of our consumer electronics business. And this business is growing very fast. We are generating a lot of value for the customer and offline, the retailers. And the ticket size is certainly much higher than the growth rate ticket size, all right, but the take rate for this business is certainly lower than grocery, as you can imagine. So as we are growing more product categories, I think the take rates might have a moderate change going forward as we are expanding and having more categories. And certainly, we are happy to update you on the progress of our new product line expansion going forwards.

Yes. So yes, Thomas, I'd like to share a little bit more about the profitability. So just like we mentioned earlier ago, so JDDJ has a much higher basket size, and our average order value in Q2 is around RMB 140. And it's like Philip mentioned, that we have lots of brands who are very willing to spend marketing promotion dollars on our platform, and also, we usually watch like the metric of direct margin instead of units economics. So the direct margin equals like to revenues minus direct costs then divided by GMV. So our direct margin has improved significantly in recent years from minus 11% in 2018 to minus 6% in 2019. In Q2, direct margin is about minus 1%, and also our overall monetization rate has increased to 9.3% in Q2 versus 9.2% last year because our online marketing revenue increased significantly. And we also anticipate that, for the second half of this year, our monetization rate shall also grow compared to the first half of this year. So -- and also in the same time, on the direct costs side, as our platform becomes more attractive and consumers become more loyal, the consumer incentives as percentage of GMV in Q2 this year decreased significantly by 50% from 7.4% to 3.9%. And in the same time, our fulfillment -- operation and fulfillment cost keeps reducing as the order density goes up and our algorithm optimizes. So overall I think we are still on the right track and that for -- the JDDJ business is going to break even and also like the whole company base break even within like 1 or 2 years.

Your next question comes from Billy Leung from Haitong International.

Congratulations on such a great first set of results since your IPO. I have 2 questions. The first question is a more higher-level question. Can management share what the priorities are for the next 5 years? And Philip mentioned a lot of things we've been doing within expanding geographically, increasing SKUs, et cetera. I just wanted to know how management ranks all these things we are doing in terms of priority. That's my first question. My second question is probably more for Beck. I just wanted to understand our quarter 3 guidance. We mentioned that JDDJ revenue will grow by 100%. Could you share more color on the assumptions behind this? I mean we know that KA is growing very fast, so just any color to help in terms of understanding quarter 3 would be great.

Okay. So yes. So let me take the second question, first, and I think Philip will answer the first question. So I would -- like the guidance. We gave the guidance earlier today. And for Q3, the total net revenue is growing by like 82% to 91% year-over-year. Breaking it down further, we think still like that JDDJ is growing faster than the Dada Now businesses, which means JDDJ is growing like almost 100% for the revenue side. And also, for Dada Now we believe that the key account chain merchants business is still growing faster because the momentum is really good. And I think we can still grow by multiple times, while we think, for these e-commerce package delivery businesses, we think the growth rate should be a little more decelerated compared to Q2 because the overall traditional B2C e-commerce businesses decelerated growth in Q3 versus Q2. So this is about the Dada Now businesses. So yes. Philip shall be able to answer this first question.

Thank you. Yes, the next 5 years -- as a matter of fact, for the last 6 years or the next 5 years and in the foreseeable future, we carry the consistent mission, which is to bring people everything on demand. I think this is the vision that -- it's really an inspirational and we are fully committed to do that. And in terms of the geographic expansion, the category expansion, so everything is basically for that long-term goal. To be more specific: In order to achieve the "bring people everything on demand", we need a solid 1-hour delivery infrastructure. This is Dada Now's infrastructure, and the efficiency and service level of this infrastructure is the key. That's why we continue to invest heavily in technology and to improve both the efficiency and also the service quality of the platform, and we are happy to see that. And as we mentioned earlier, we are happy to see that, in this Q2, we are seeing our -- the SME and the individual order business are turning profitable in all cities. As a matter of fact, for all major categories for our Dada Now business are having positive unit economies and keep growing both profitability and scale. So I think that's the foundation.

On top of that, well, we believe there are 2 things that are very important to achieve this vision. Number one is that retailers, especially the traditional off-line retailers, needs to be digitized and to upgrade, and we are fully aligned on that vision. And this digitization requires a lot of technology and operational innovation, and this is something we have been very much heavily focusing on. And one of the key driver behind it is our Haibo system, which is the operating system for the omnichannel business for our retailers. And we're very happy to see the strong momentum for Haibo adoption by the leading retailers. So by using these, our operating systems, the traditional retailers will be able to do the digitized omnichannel business easily. And we will certainly continue to invest heavily and to empower our retailer to do the omnichannel e-commerce. I think this is number one. And we start from grocery. And then we gradually expand to other categories, like pharmaceutical, like the consumer electronics, to apparel, to one category after another. So we will continue to expand to different categories and continue to empower our retailer partners for digitization. I think that's number one. Number two is to empower our brands. So the brands, well, like Unilever, Pepsi or P&G because all those brands have very significant footprint and business in offline, but historically the efficiencies of these off-line businesses are rather low. Most of their activities or their marketing or promotional investments in offline are difficult to monitor or measure, at least like on a timely fashion or a very quantitatively fashion. So there's a lot of potential there. At the same time, those FMCG brands, they literally hires millions of off-line promoters; and how to manage and measure and motivate those off-line promoters to be more efficient is another key thing for the brands. And also for the brands, historically both brands and retailers, they don't have any so-called users. They only have customers. Customer comes in, buys stuff, check out. And you never know who they are and you have no like a digital knowledge about your customer. They're not users. So that's another thing we are dedicated to help our brands and retailers, to digitize their customer base and to digitize and make their off-line business much more efficient. I think those are the key things that will help to make our vision come true.

And very importantly. So we will never compete with our retailers or brands. We will never become a retailer. We will never like sell inventory. This is a very unique positioning of our platform. Unlike almost every other guys in the market, like almost everyone -- either they have their 3Ps, the marketplace business, at the same time aggressively expanding to the first-party business or their first-party business themselves. We are the only pure third-party marketplace. And we'd never compete our retailers and brands. I think this serves as another key foundation for the long-term successful partnership with the ecosystem. So with that, I think our 5-year priority is focusing on achieving the vision of bringing people everything on demand and, by doing that, to empower our retailer brands and help them to grow their digital business more efficiently. Thank you.

Your next question comes from Alicia Yap from Citigroup.

Congrats on the solid results and also the successful IPO. I have a couple questions. Number one is regarding the demand for the consumer electronics on the JDDJ. Do you think this is actually a one-off? Because of the COVID, people are looking for more cooking appliance and all that. Or will that be sustainable? What are the category and also the most potential that you could expand to attract the consumer purchasing demand? And then second question is what would be the margin profile looks like for Dada Now and JDDJ in the more medium- to longer-term time frame?

All right, I will take the first one, and Beck will answer the margin outlook question.

Yes.

So yes. Thank you for the question. So consumer electronics, we are certainly generating a lot of value in this. And we don't believe this is a COVID-19, just a onetime opportunity. So basically we're seeing there are thousands and thousands of off-line consumer electronics stores, chain stores selling cell phones or laptops and so on in offline. And the retailers are very much looking forward to having a digitized user base and getting more the customer orders, and we can certainly helping them. And at the same time, the customers are looking for a faster and more convenient experience as well. Because the whole e-commerce is turning to the 1 hour era and people are just willing to have faster delivery and more like efficient experience. So I think this is a long term, this trend, and we believe this is sustainable. At the same time, we're also happy to see that we are generating a lot of synergies with especially JD's ecosystem. As you might have noticed, JD have recently acquired or significantly invested in many of the leading off-line consumer electronics channel retailers. And we are certainly establishing partnership with those guys and to provide a 1-hour delivery for those retailers. I think those are the definitely win-win synergies.

In terms of the further product category expansion. So as I said earlier, we believe that most of the off-line business that are selling products, selling stuff will be able to turn to the 1-hour delivery business. And I think this is universal, and most of the categories eventually will be. And I think, one thing after another. For example, we'll start with grocery, because grocery is a very high-frequent sort of gateway for people's daily shopping. That's why we'll start with grocery and achieve a very solid foundation. And then we expand to pharmaceutical because the pharmaceutical products is also a very much on demand and widely -- like almost everyone, at some point, will need some pharmaceuticals products and service. So this is second category expansion, which also has very good traction so far. Almost all of the leading pharmaceutical chains in China have now partnered with us. And we have integrated almost all the membership bases with the pharmaceutical chains, which is like nearly 100 million of the digitized members with the pharmaceutical chains. This is the second category expansion. And then one category after another, like consumer electronics is one example. And we believe, in the following quarters, we will be having more exciting categories onboard as well. So eventually, I think, most of the categories that we can imagine will be on demand.

Okay, so let me take the second question. So for the margin profile of the 2 business units and, first of all, Dada Now businesses. So like we mentioned earlier before and for the SME and individual order businesses, this business turned profitable across each city in which we operate in China, which means that for all the business units in the Dada Now, including last mile, including chain merchants and including SME clients and individual orders, we all made profit at each city level. And so right now the general -- like the margin after tax is around 6% to 10% for the different businesses. And for the next 1 year or -- and probably 2 years, our priority is still to grow the businesses of the various business lines instead of growing the margin quickly. And for JDDJ: JDDJ, we usually like to watch the metric of direct margin. So like I said before, the direct margin has improved greatly from minus 11% to -- in 2018 to minus 6% last year. And we anticipate still, for the full year of this year, it could be very close to breakeven, say minus 1%, around minus 1%, when we are still targeting to break even on direct margin level next year.

Your next question comes from Binnie Wong from HSBC.

Congrats on the successful IPO and also the good quarter. My question here is on the operating leverage side. I mean you see meaningful improvement on a Y-o-Y basis on the margin improvement and also on the efficiency, demonstrating the success of the model. I just wonder. Any of the structural drivers here that you think should able to last, right, maybe in the -- in maybe second half? And then how should we think about in terms of management's priorities in your investments as well? And then just very lastly is that we're talking about more and more of this investment in technologies, right, that will drive the operating efficiency. So if you can elaborate more on that comment. And how should we think about that would actually help us to drive maybe in terms of like the order growth or maybe in terms of the value-added services to our customers to help us to drive the more longer-term growth? That will be very helpful.

Okay, thank you, Binnie. So (inaudible) for the expense side is Dada is actually a technology-driven company, so we are very asset light. So we enjoy significant improved operating leverage and economies of scale in terms of those shared expenses, operating expenses, middle and back end. And so as you can see, our adjusted operating expenses item grew slowly, very slowly, while the top line doubled in the first half of this year. So we anticipate, for the second half of this year and also for next year, the trend will still maintain. So you will see operating leverage, and you will see the margin improvement greatly for the bottom line because of our efficiency, operating leverage and our technologies. And in terms of the technology empowerment, Jun can give you more color on that.

I will give color on how technology helps to improve the efficiency of the Dada Now business and to make us more competitive. So 2 examples. So we invest in technology like order dispatching and recommendation systems. It's a fully automated system that's making sure that we always assign orders to most efficient riders in order to improve the efficiency of the entire rider network while still keeping the fulfillment standard really high. And that helps to drive down the per-order costs. This technology that we have been investing in for many months and we keep investing in future is called dynamic pricing. Basically we price each order. We price the payment that we made to each rider on the real-time supply and demand, each location. And that also help to keep the delivery costs really low. And all those technologies will keep the efficiency of the delivery networks really high, help us to improve the costs. And that in turn make us more competitive in terms of pricing that we provide to the customers and will eventually drive the growth of the delivery orders.

Yes. I'll also add a couple of things on the technology improving efficiencies on JDDJ. So I think one of the single largest cost factor for the omnichannel business is the fulfillment costs, right? The fulfillment, including like order picking, packing, delivery. So fulfillment is certainly very key thing; and the technology behind it is very, very important. For example, we are providing a picking app for the store associates to pick efficiently. And then we're also providing a systematic and a comprehensive solution for the in-store picking zone for the store to manage the entire inventory and picking process within the picking zone in a store. And also we provide a -- the packing and then delivery, the handling solutions as well, which helps to improve both efficiencies and also to reduce any like shrinkage or anything. So the fulfillment is certainly very important, and technology can help a lot on that. Another thing as well is about the CRM because, as I mentioned earlier -- so both retailers and brands, they don't have any like the users, digitized users, for their off-line business historically, but this is a huge potential. So we provide a -- CRM solutions for both retailers and brands to manage -- to digitize and manage their membership. There are -- now over 30,000 stores are adopting our CRM solutions to manage their customers. I think this is another very key initiative that will help the retailers to improve their efficiencies and also to improve their business. So technology is our foundation, and we believe lots of the values can be generated and will be generated from our technology innovation.

There are no further questions at this time. I'd now like to turn the conference back to Caroline. Please continue.

Thank you, operator.

In closing, on behalf of the Dada's management team, we'd like to thank you for your participation on today's call. If you require any further information, feel free to reach out to us directly. Thank you for joining us today.

This concludes the call.