京東 (JD) 2016 Q2 法說會逐字稿

Hello, and thank you for standing by for JD.com's second-quarter 2016 earnings conference call. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Ruiyu Li. Thank you, please go ahead.

Thank you, Operator, and hello, everyone. Welcome to our second-quarter 2016 earnings conference call. Joining me today on the call are Richard Liu, our CEO, and Sidney Huang, our CFO. For today's agenda, management will discuss highlights for the second quarter 2016. Following the prepared remarks, Haoyu Shen, CEO of JD Mall, will join Mr. Liu and Mr. Huang for the Q&A session of the call.

Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call, as we will make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains our reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB.

Now I would like to turn the call over to our CEO, Richard.

Thank you, everyone, for joining today's call. We are pleased to report another strong quarter of healthy growth. Sidney will update you on your progress shortly.

Before we begin, as you saw in today's release, Haoyu will be moving to the US for family reasons later this year, and has been named President of JD International effective immediately. Working with me over the last five years, Haoyu has made outstanding contributions to the Company. We are very grateful to him and are glad we could accommodate his move. His new role will draw on his excellent international experience. We look forward to his future contributions.

I'm also pleased to report that we have been developing a strong financial talent in JD Mall over the last several years, in particularly the fixed business unit presidents in JD Mall, a highly talented group and we'll continue to work closely with them as we further grow the business.

(interpreted) Before Sidney's comments I want to just add a few general remarks. As you know, we have made a number of changes this year. One is our organizational change and then two is changes made to our marketplace platform.

So for our organizational change we have formed a new sales and marketing organization comprised of six large business units. Organizational changes have been put in place by now. So in the spirit of maintaining excellent customer experience and on our platform, we have during our annual renew process with online platform merchants, we discontinued contracts with over 20,000 merchants, smaller merchants.

Yes, over 22,000 merchants during the first half of this year. The vast majority of these merchants do have transaction volume. So by discontinuing contracts with these merchants, we do suffer some financial losses in the process.

We have, on the other hand, chartered around a similar number of new merchants onto our platform; howeve,r for new merchants to generate meaningful financial results, it would take normally six months for them to ramp up.

Yes, so as a result, the GMV from our marketplace business will see a meaningful slowdown in the second and third quarter of this year. Yes, but we believe these measures will improve our user experience and integrity of our platform, which will enable us to achieve much better growth in the future.

We hope we'll see starting fourth quarter of this year the same growth rate resumed growth in our platform.

Okay. So now I will give you our financial highlights for the second quarter. We're very pleased to report another quarter of solid growth with record non-GAAP operating margin and a record free cash flow.

I will start with the free cash flow this time, which I was told by a few investors had been somewhat overlooked by the market in the past. Given the seasonality of cash flows, we will focus on the trailing 12-month basis. Our free cash flow totaled RMB11 billion for the trailing 12 months ended June 30, 2016, up 67% from RMB6.6 billion for the trailing 12 months ended June 30, 2015.

This strong cash flow is probably the best validation for the underlying financial strength and working capital efficiency of JD.com. For your reference, we have also added the TTM JM free cash flow data for the past six quarters in the supplemental financial information table in our earnings release.

Now back to other financial metrics. Our GMV, excluding virtual items, grew 52% year over year in the second quarter 2016, reflecting the underlying strength of our growth momentum. GMV from general merchandise categories, excluding virtual items, grew 63% during the quarter.

Food and beverage was the fastest-growing general merchandise category, followed by cosmetics and home furnishing, while apparel and footwear continued to be the largest general merchandise category with solid growth. As a result of our anti-brushing efforts, high quality merchants are gaining better visibility and the top 100 apparel and footwear merchants had a year-over-year growth rate of well over 100% during the second quarter 2016.

GMV from electronics and home appliance products grew 43% during the quarter, led by the home appliance category.

Our net revenue grew 42% in Q2, supported by solid momentum in both direct sales and marketplace platforms. Our direct sales revenues grew 40%, led by food and beverage, cosmetics, home appliance, and home furnishing products. Our revenues from services and others increased 67% year over year, supported by better monetization of the platform.

As I mentioned previously, in light of our balanced focus on profitable growth in 2016, an alternative measure of the underlying growth momentum is the gross profit. As we discussed in earnings release, non-GAAP gross profit increased by 66% in the second quarter, which demonstrates the healthy monetization of both our 1P and 3P businesses. It's very much in line with the growth rate in the past four quarters, ranging from 67% to 83%.

Our non-GAAP gross margin improved to 14.6%, up from 12.5% a year ago, as a result of higher 1P gross margin and higher growth in service revenues. Gross margin on direct sales revenue improved over 100 basis points on the year-over-year basis, mainly due to increased scale economies and higher volume-based rebates across all key categories.

Non-GAAP fulfillment expense ratio was 7.7% in Q2 compared to 7% in the same quarter last year. The higher fulfillment expense ratio was mainly due to our investments in the consumable product category which has lower average order value.

As we mentioned earlier this year, especially after our strategic alliance with Wal-mart, we will further expand our investment in the FMCG category through both JD.com and Yihaodian platforms in the remainder of 2016. The most recent example is Yihaodian's three-month promotion campaign launched this past Monday on August 8, with a budgeted spending of up to RMB1 billion, mostly funded by JD.com which will provide greater savings to our customers in the Tier 1 cities and the surrounding area who love the supermarket products offered by Yihaodian.

Back to expenses, the non-GAAP marketing expense ratio was 3.5% in Q2, largely in line with the 3.6% in the same quarter last year. Our non-GAAP R&D and G&A expense ratios increased 26 basis points and 19 basis points respectively, compared to the same quarter last year, which reflect our increased investment in R&D talent while the higher G&A was entirely attributable to our new businesses.

Our non-GAAP operating margin was a positive 0.6% in the second quarter, a record high with a 100% basis point improvement over the same quarter last year. Excluding the new businesses, defined as JD Finance, O2O overseas business and technology initiatives, our core JD Mall business had an operating margin of 1.1% on a non-GAAP basis, another record high with a 60-plus-basis-point improvement over the same quarter last year. This margin improvement was primarily driven by the higher gross margin, partially offset by the higher fulfillment and R&D expenses discussed earlier.

The new businesses, on the other hand, incurred a non-GAAP operating loss of over RMB0.3 billion during the quarter, mainly from JD Finance and the technology initiatives. We deconsolidated the O2O business following its merger with Dada on April 26, 2016 so the Q2 operating results reflect only one month of the O2O operating loss. Loss from equity method in Dada will be reported one quarter in arrears beginning in the third quarter of 2016.

With the improved JD Mall operating margin and the reduced new business operating losses, we are pleased to report a non-GAAP net profit of RMB391m with a net margin of 0.6% in Q2 2016. Our non-GAAP EBITDA for the JD.com Group also set a record at RMB852 million with an EBITDA margin of 1.3%.

Now let me give you an update on JD Finance. In conjunction with our anniversary promotion in the second quarter of 2016, net loan originations including consumer and supplier financing totaled RMB9.4 billion, up 88% from the same quarter last year.

For the six -- for the first six months of 2016, JD Finance incurred a net cash outflow of RMB13.6 billion in loan originations and investments while received a net cash inflow of RMB19.6 billion through financing activities including asset-backed securitization and a Series A funding. In other words, JD Finance had a net cash inflow of RMB6 billion from the originations investment and financing activities during the first six months of 2016 which is consistent with our commitment that it will self-fund its growth in 2016 and beyond.

Next I will like to give you an update on our Wal-mart transaction, which consists of the acquisition of the Yihaodian platform, Sam's club membership collaboration including an exclusive flagship store on JD.com and the O2O partnership with JD Daojia.

Our focus on the Yihaodian piece, which will have an immediate impact on our Q3 financial results. As many of you know, Yihaodian has been a well-known online supermarket brand with a loyal customer base in the Eastern and the southern regions of China. As part of the transaction, we have acquired this highly valuable brand and its customer base as well as its website and app, most of the marketplace business and/or related IT system and back office functions. As of today we have transferred approximately 900 employees, mainly R&D and platform supporting staff, to JD.com.

While the deal does not include 1P business of Yihaodian, as JD owns the platform we are permitted to sell our own 1P products through the Yihaodian channels after we complete the system integration during the third quarter. Having said that, our objective is to preserve Yihaodian's premium product selection, competitive pricing strategy and unique user experience so that Yihaodian platform can continue to attract and maintain its unique customer base. As a result will continue to work closely with the Yihaodian 1P team to jointly promote this platform for the years ahead.

On the financial impact to our results, we will pick up the GMV from the Yihaodian platform, but only part of the commission income and the related R&D and back office expenses going forward. In addition, we may promote select FMCG categories through Yihaodian's 1P business by funding the incremental cost and expenses associated with such promotions. We treat it as an investment in the Yihaodian platform which will be reflected in the various cost and expense line items on our income statement. For the second half of 2016 we expect an incremental operating loss of approximately RMB1 billion from these promotion-related costs and integration expenses in relation to the Yihaodian transaction.

Finally, let's discuss our financial outlook. We expect Q3 net revenue growth to be between 34% and 38% on a year-over-year basis. This guidance reflects the increasingly pronounced seasonality pattern that we observed in the past two years, given the major sales in June and in November as well as our conservative outlook in light of the slowing consumption growth in 2016.

For the non-GAAP net margin outlook we maintain our previous guidance of positive 0.5% and a negative 0.5% for the full-year 2016 excluding Dada-related losses from the equity method pickup which is not within the control of the Company.

This concludes my prepared remarks and we can now move to the Q&A session.

(Operator Instructions) Alan Hellawell, Deutsche Bank.

Great, thank you very much. I had a question about your ad business. The very impressively services and other revenues came in well above what we would have anticipated. I'm wondering is it ad revenues that may have surprised on the upside? I ask that because our understanding was there was indeed higher adoption of ad tools as we started clamping down on brushing but not rapid enough to possibly backfill the loss of commissions as we remove brushing.

I'm just wondering whether you can give us any more color on what the merged entity with Dada, what it actually does on the non-operating basis? Thank you very much.

So, Alan, this is Sidney. So we mentioned advertising revenue really as a result of monetization from also 1P and 3P businesses. So as the platform continued to grow stronger we will receive more and more advertising budget from both our merchants and suppliers. So I think that will probably answer -- address your question. You did mention that of course with the anti-brushing effort, at least some of the merchants will start to look at advertising as an alternative much better approach to promote their own store front.

So Alan, this is Haoyu, maybe add more color to what Sidney just mentioned. So we used to have most our ad inventory on PC but PC traffic is stagnant. In the last quarter we've added a lot of inventory on our mobile property and we improved our algorithm, ad algorithm in our app and also we added some ad inventory in WeChat and QQ platform. So that's also part of the reason why we're seeing meaningful growth of ad revenue.

Great, thank you very much.

Thank you very much.

Eddie Leung, Merrill Lynch.

Hi, good evening. Thank you for taking my question. I have a question more on the logistic business. The first one is, as you mentioned that you would be doing more FMCG product category, so just wondering how could that affect your fulfillment cost in the upcoming several quarters?

Then secondly, more a big picture question. We have seen quite some last-mile delivery companies preparing for IPO either in China or overseas. How could that change the competitive landscape for ecommerce and especially yourself? Thanks.

FMCG, getting more on our GMV or sales from FMCG does put pressure on our logistics cost in terms of fulfillment cost per order because they tend to be comparing traditional 3C or appliances, they tend to be smaller ticket and also heavier and bulkier and because of more to deliver it's also cost us more to pick and pack and store in our warehouses. But so far I think we're definitely the best operator of FMCG logistics. We are continually innovating in our fulfillment process. I think there's still a long way to go. I think down the road more innovations I think will help us to control the logistics cost better for FMCG.

As far as your second question, Eddie, yes, there's (inaudible) a lot of them are going public. We don't work with a whole lot. We deliver over -- well over 95% of the parcels that come out of our own warehouses and we do work with some regional players for the areas that we do not cover, but we're happy to see that this industry's getting more mature in China. I think the customers are getting better service and we're happy to be a part of that evolution.

(Spoken in Chinese).

So that was Richard. He gave a technical point about why FMCG these days we're seeing higher fulfillment costs, because there are many, many SKUs in that category. So a lot of times we fulfil the same order, one order from multiple warehouses because we don't have a lot of the warehouses are not big enough to house all the SKUs. So by fulfilling one order through or by multiple warehouses that will increase our cost. In future when we have more mega warehouses such as H No. 1 online, this problem can also be mitigated.

Thank you, Richard and Haoyu.

Erica Werkun, UBS.

Hi, thank you. My questions are for Richard. Hello, Richard. Firstly, just wondering over the next two, three years, how do you plan to allocate your capital over your ever-growing business which now encompass e-commerce penetration, expansion of your logistics network, O2O business, for example, [Galtia], Internet finance, cloud, etc, etc.

Then a follow-up question is wondering what is your tolerance, your overall tolerance of having occasional operating losses in certain quarters? Thank you.

(Interpreted) In terms of capital allocation, we do expect one of the major new areas will be in cloud computing, which may absorb a certain amount of new capital. For our O2O initiative as JD Daojia has been merged into Dada, so that the combined entity will seek its own capital for its future growth. So it will not take additional capital from the JD Group.

For JD Finance, as we mentioned earlier, it will -- it has and will continue to be self-funded going forward.

Yes, so at this point, other than these areas we don't see any major capital expenditure obviously other than our ongoing warehousing build-up. Yes, so based on our internal projection, we do expect very strong free cash flow over the next five years. So we're clearly not -- we don't have any issue with our internal cash and capital.

Thank you, and the tolerance for losses?

(Interpreted) So yes, so given the competitive nature of e-commerce, we do expect from time to time maybe one specific area that require a lot of investment, like FMCG, that we are investing right now. But as we continue to grow in scale, these investments will become less and less significant in light of the overall Company's operating results. So over time we hope these kind of regional or areas of investment will have smaller and smaller impact on our overall financial performance.

Given what I just mentioned about strong, very strong cash reserve, if necessary and if we believe it will create a long-term shareholder value, we will not hesitate to invest very aggressively in any select areas and categories, in any single quarter.

Thank you very much, Richard and Haoyu.

Wendy Huang, Macquarie.

Thank you. My question is still mainly about Yihaodian's deal. You just mentioned that actually JD has very strong cash reserve. If that's the case actually what actually prevent you to go for that transaction with O cash consideration? So now you're actually giving away 5% of your stake when the JD's own variation at relative low level. Also earlier I think you mentioned that JD will pick up the GMV from Yihaodian but only portion of the commissions. So does that mean that you will consolidate both 1P and the 3P platforms of Yihaodian but only recognize part of its revenues? Thank you.

Right, so on the deal transaction, it's really from the Wal-Mart side that it is not -- they don't treat it as an exit from China e-commerce. So Wal-mart in fact insisted that they will receive stock for this transaction and so that they can continue to participate in the e-commerce growth in China through JD.com.

On the 1P and 3P pickup, yes, because even if in the 1P business also running through the platform, so we will pick up the GMV of the 1P platform but we will not pick up the revenue out of the existing Yihaodian 1P business.

So I just want to clarify that. So if you're already picking up the 1P's GMV, does that mean the 5% of the stake you paid for this transaction actually already includes the 1P platform?

Well, as I mentioned in my earlier remarks, because we own the platform, over time we could obviously sell our own 1P products through this platform. So over time you will have 1P revenue and so yes, you can interpret that way but clearly it's not including the existing Yihaodian 1P revenue.

Thank you.

By the way, we did mention previously at the various investor conference, for Yihaodian its GMV size last year was around 5% of JD.com's GMV. But this year, because it was not growing, so on a standalone steady-state basis, it would contribute roughly 2% to 3% of our GMV base this year which we will pick up starting Q3.

Alicia Yap, Citigroup.

Thank you, good evening, Richard, Sidney and Haoyu, thanks for taking my questions. I have questions related to the gross margin improvement for your 1P business. So it does look like you are increasing about 102 basis points. So just wanted to get a sense, is that mainly coming from the home appliance category, rather than the 3C? Is that due to the pricing on your sourcing?

Any macro headwinds that you are seeing on your smartphone category?

And just related to the GMV from merchant side, I wanted to get a sense, out of the 22,000 merchants that you removed in April on the general merchandise side, can you give us a sense what type of categories these merchants are? And for the new merchants that you are adding in, what type of categories are there? Thank you.

So on the 1P gross margin, as I mentioned, it's mainly from our scale economies. So when you buy more from suppliers, normally suppliers will give you volume-based rebate. So the improvement is primarily from these volume-based rebates and better purchasing terms as we continue to grow.

And it is, again, across all categories. Not just home appliances. It does come from the 3C categories, mobile phones, every category, and obviously general merchandise as well.

I don't have the -- as far as the 22,000 that we decided not to renew contracts with, I don't have exact statistics in front of me. But I think they are probably spread pretty evenly across all categories because we don't in particular treat different categories differently. These tend to be merchants or sellers that are lower quality and probably in the past repeatedly violated some of our rules.

(Spoken in Chinese).

So Richard said about 70% are from home and apparel BU and the rest from consumer consumables, general merchandise because these are the two categories that we have most of the merchants anyway.

(Interpreted) The new entrants also from those major categories. Because those tend to be longer-tail categories where marketplace can be a good fit. But the reason we're also looking at expanding our merchant base of appliances and 3C categories to complement our selection. But these are -- comparing with the number of merchants in the other BUs, these are still, in terms of numbers, very small.

Okay, thank you.

Sean Zhang, 86Research.

Great, thank you for taking my question, management. Two things, number one on the category focus. Am I right to understand that the FMCG or the online supermarket grocery category is our new focus to drive user growth, to drive our total GMV? Can you tell us what the main logic of going heavily into this category?

And number two, maybe on the personalization, I think we have discussion before about compared to competitor, JD mobile app doesn't offer the same level of personalization or database curated sale environment. So consumers come to our platform to search, mainly search, but there is a lesser extent of window shopping. But we see the content-driven -- the curated, UGC content are driving a lot of traffic on our competitor app. They generated bookmarkings, they generated [bucketing] and for potential sales in the future. So I want to understand what we have done to improve our personalization in this regard? Thank you.

FMCG is definitely one of our top priority categories. This is a great category for e-commerce because these, for the most part, tend to be standardized products. It creates loyalty with our customers. It creates traffic. It's definitely challenging for our economics, as we mentioned earlier, as far as the logistic cost is concerned. But we're confident that we will figure out ways to make this category profitable.

Your question on personalization, we do have quite a big effort in the Company, looking at personalization to our customers on PC or app. Actually in the past, June 18 campaign, we tried out an algorithm of personalization. So the results are quite encouraging. Of course there's still a long way to go. Also as far as content, and making the site or app more interesting or more browse-able, if you will, we also have a big effort going on.

As part of the recent reorganization, we consolidated multiple groups within the Company working on content. And they're under one organization. So I think in the hopefully not -- in the near future, hopefully you will see some changes in our site and on these dimensions.

Jin Yoon, Mizuho Securities.

Hi, good evening. A couple of things. So we see a nice ramp up again in customer growth. How much of that is incrementally contributed by JD Finance? And where would that customer growth be without the contribution from JD Finance?

And second of all, if I remember, I think you mentioned that there is going to be an incremental RMB1 billion cost structure associated with the new acquisitions. Can you break down in terms of where is that RMB1 billion hitting? You mentioned promotions and so forth. Can you just give us a clearer color in terms of where those numbers are actually going into? Thanks.

So for JD Finance customer base, there are actually a lot of overlaps, particularly the JD consumer financing customers. They tend to buy products on JD Mall. So we do have internal analysis on the overlap customer base in terms of incremental contribution to our overall user growth it's been very, very small. So the vast majority of the growth did come from the JD e-commerce platform.

(Spoken in Chinese).

Yes, on the RMB1 billion, as I mentioned, we will be supporting Yihaodian's platforms promotional activities. Because at this point the 1P business is run by the Yihaodian 1P team, so we will be supporting its effort through marketing activities, through for example promotional coupons and expense reimbursements, etc. So basically we will absorb the majority of the investment in the recent three-month promotional campaign that we just started in the past Monday.

So that's probably the bulk of it. And then there will be other ongoing expenses. I mentioned about obviously we took over the IT system and the staff and also all the back-office expenses. And there will be also some integration-related charges. But mostly it will be coming from incremental investment in this category, through various promotions.

Great, thanks.

(Operator Instructions). Alex Yao, JPMorgan.

Hi, good evening everyone. Thank you for taking my question. Just a quick one regarding the transaction with Wal-mart and Yihaodian. I'm just wondering, does the transaction enable you to cooperate with Wal-mart in the areas such as supply chain and merchandising? Thank you.

Yes, so we are -- as part of the transaction, we've agreed to work together in select areas and particularly in FMCG category that we could leverage each other strengths, especially expanding our product selection. So definitely, there will be very close collaboration on that front.

Thank you.

And John Choi, Daiwa.

Thanks for taking my question. Just a quick one on the margin trend right now. We've seen a nice bump, I think, this quarter. I think as you go into the second half this year and also next year, should we be continue expecting this kind of trend, particularly from the 1P business?

And also secondly on the 3P, Richard did mention, starting from fourth quarter we should see a nice re-acceleration of that business. I was wondering if you could elaborate a bit more on that? Is it going to come from the new merchants or is it more from the broader category from the general merchandise? Thank you.

Right, so on the margin for the 1P business, we have -- in fact for the JD Mall business, we have committed at the beginning of the year that we will improve our JD Mall operating margin in a meaningful fashion. So we have proved that in the past two quarters.

Now we don't give you quarter-by-quarter forecast and in light of the recent FMCG expansion effort, we are giving back to our consumers through the promotions in conjunction with Yihaodian for example. So you don't necessarily see the same extent but I think through the past two quarters you can see that this is something clearly achievable. And it's sustainable. As we have repeatedly mentioned in the past that the scale will bring margin upside.

So it is very, very visible. But there will be discretionary spending along the way, such as the one we are going through at this point.

And on the GMV improvement, starting fourth quarter, I think Richard was mentoring that for the new merchants that we recruited, it will take normally six months for them to ramp up their sales volumes. So I think it's just a matter of time for those new merchants to begin contributing to the platform.

Hello operator, next question please.

Jialong Shi, Nomura.

Hi, good evening, Richard, Haoyu and Sidney. Thanks for taking my call. I have a quick follow up on the[ RMB1 billion] incremental operating loss related to Yihaodian. I just wonder, shall we classify this loss as part of your core business or your new business?

And also in your earning release you mentioned you will adopt a new share buyback scheme. And I just wonder why you decided to adopt this new share buyback scheme and how is it different from buying back shares directly from other markets?

Right, so the RMB1 billion investment is definitely part of the core business. Because it's related to mainly the FMCG category.

The second question on buyback, it's actually the same buyback program we announced last year. So there is no new buyback planned.

Thank you.

Sure.

Rodney Hull, SunTrust.

Yes, good morning or good evening, Richard, Sidney and Haoyu. I would like to ask on the Tencent relationship, just as we anniversary that relationship, I wanted to see if management could provide an update on how that is impacting user growth as well as GMV going forward? Thanks very much.

So the partnership has hit its two-year mark. We actually last year -- I reviewed with the top management at Tencent our collaboration in the past two years. And we're all happy about the progress we've made in the past two years in terms of traffic GMV, especially new customers.

And we are -- now these -- I don't want to say these entry points are maturing but they're definitely past their first phase. And we're continuing to look at how to add some social components to shopping through collaboration with Tencent.

And also we're looking into differentiating our entry points or our gateways, WeChat versus our gateway QQ, because as you know they have drastically different user base. And in the past, we haven't been differentiating these two very much. Now we've reached agreement with Tencent, we'll be looking at these two gateways separately and cater to their different user bases.

And the collaboration on other dimensions such as advertising, data sharing, app promotion, app installation, I think all of these are going quite well, on track. So both management -- the management of both companies are happy with the relationship and progress. The relationship we've built, the trust we've built and the progress we've made.

Yes, just to add one data point, the key contribution from the two traffic entry points, from WeChat and Mobile QQ is to attract new users to the JD platform. So in the most recent quarter again, those two]channels continued to contribute around one quarter of our new user base. So it is very, very powerful and continues to contribute significantly to our user growth.

Thanks very much.

Eric Wen, Blue Lotus.

Oh hi, thanks management for taking my question, Sidney and Haoyu. My question's regarding your working capital. Seems to be continuing to demonstrate very nicely the negative cash cycle, especially in account payables and accrued expenses. Can you comment on how sustainable these two changes are going forward? And how will the integration of Yihaodian and Dada do to your working capital items? Thanks.

Right, so we have discussed this in the past and you probably have seen the comparison of our working capital days to our industry peers both in China and internationally. So JD's operating efficiency has been clearly market leading and as demonstrated in our inventory turnover days continues to be at an industry low.

On the other hand, payable cycles, despite some increase over the past few quarters, continue to be at the low end versus our industry peers in China. So that's why Richard mentioned earlier, that we do see continued free cash flow improvement in the next three to five years.

This will not actually be affected by the Dada transaction because again, Dada is deconsolidated from JD.com which will self-fund its own growth.

With regard to the Yihaodian business, the existing 1P business will not affect -- so it's really, to put it simply, there wouldn't be much impact on our working capital going forward.

Thanks, very helpful.

[Ella Gi].

Hey, good evening, management. I just want to clarify regarding the RMB1 billion investments. So will it be only including the promotions Yihaodian platform? Or does it include the promotions on your own platform as well?

And then relating to that, since Yihaodian you will maintain the domain separately, can you talk about how you think about trying to cross-sell the customers on Yihaodian platform and trying to get them to become your own JD platform customers.

Okay, so on the RMB1 billion, it will be all spent on the Yihaodian platform. It will be supporting the existing Yihaodian 1P promotions and possibly in Q4 it could also support our own effort, obviously on the Yihaodian platform.

So again, it's all related to -- it's incremental spending on Yihaodian, excluding our own spending on FMCG category which could also see its own promotions.

On the customer base, we intend to maintain the Yihaodian platform as is. And so we will -- working with the existing team, as I mentioned earlier, to maintain its own selection and also its own pricing strategy, which has been very, very competitive. And so we don't intend to necessary move the customer base to JD.com. I think the two platforms have worked very well in the past attracting their respective customer base and we intend to keep it that way.

Obviously there will be future cross-sell opportunities, maybe in other categories like the 3C and home appliance categories. But I think as far as FMCG goes, the existing positioning of the two companies, we think it's very well positioned. And will be kept that way.

Thank you.

Natalie Wu, CICC.

Hi, good evening, management, thank you for taking my question. So my question is regarding Yihaodian deal. So just concerned with you said before. Are you seeing that Yihaodian 1P GMV will be consolidated since the third quarter into JD's 1P GMV or should be included into JD's 3P GMV?

And also you mentioned that for the RMB1 billion sales campaign to be carried out by Yihaodian, JD Mall's mostly funded it. But since you haven't consolidated it with Yihaodian on your income statement yet, so just wondering what kind of impact will this promotion be to our -- JD's income statement?

So on the GMV, it will be a 3P GMV because we operate the platform and Yihaodian 1P business will be acting as a merchant on the platform. So it's all 3P GMV.

On the promotional impact, it will be most likely through marketing and potentially some fulfillment expenses. And also R&D as we're already running the entire IT infrastructure of the platform. And G&A of course.

Thank you.

Piyush Mubayi, Goldman Sachs.

Thank you for taking my question. You've talked about, in terms of new businesses, JD Finance and O2O, I wonder if you could shed light on technology initiatives you're undertaking and what these big projects might be with a three-year view?

And also any big changes we can see on the overseas business side? Thank you.

Yes, on the tech front, Richard mentioned about the cloud computing which we started fairly late but is making a major push into the space. We have also invested in smart devices area. So those are really our key technology initiatives which will take a multi-year phase of investment.

On the international front, we now have a joint venture in Indonesia. And we are gaining momentum in less than a year period. But at this point, we don't have any other tangible plan on the international front.

And the investment in cloud computing, what scale is this going to be?

Yes, so in [Q] we provide more color on that. Right now, it's still very early stage. And you will see that reflected in the new businesses as we disclose every quarter.

Thank you.

Thank you. We are now approaching the end of the conference call. I will now turn the call over to JD.com's Ruiyu Lee for closing remarks.

Thank you, operator. Thank you, everyone, for joining us today. Please feel free to contact us if you have any further questions. Thank you for your continued support. And we are looking forward to talking with you in the coming months.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.