Missfresh Ltd (MF) 2021 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Missfresh Limited Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded.

I will now turn the call over to your host, Lingling Hu, Senior Director of Capital Markets for the company. Please go ahead, Lingling.

Thank you. Hello, everyone and welcome to Missfresh Third Quarter 2021 Earnings Conference Call. Our financial and operating results were issued via newswire services earlier today and are available online. You can also visit the earnings press release by visiting the IR section of our website at ir.missfresh.cn.

Participants today will be Mr. Zheng Xu, our Founder, Chairman and CEO; and Ms. Catherine Chen, Chief Financial Officer. Management will begin with the prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on the IR section of our website.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the relevant public filings of the company as filed with the U.S. Securities and Exchange [Commission] (added by the company after the call). The company does not assure any obligation to update any forward-looking statements, except as required as applicable law.

Please also note that Missfresh earnings press release and this conference call include the disclosure of the unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.

Missfresh earnings press release issued [earlier today] (corrected by the company after the call) contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. We also posted a presentation on our IR website providing details on the results in the quarter. We will reference those results in our prepared remarks but we will not refer to specific slides during today's discussion.

Now, I will turn the call over to our Founder, Chairman and CEO, Mr. Zheng Xu. Please go ahead.

(interpreted) Hello everyone and thank you for joining our earnings conference call today.

We are pleased to have maintained our strong growth in the third quarter of 2021. Our GMV reached RMB2.57 billion, representing an increase of 41% year over year. Total revenue grew 47% to RMB2.12 billion beyond the high end of our guidance of 40% to 45% range. In addition to accelerated revenue growth, our gross margin increased 480 basis points from the second quarter of 2021 to 12.3%, 130 basis points beyond the top end of our guidance range. We also see net loss narrowed with non-GAAP net margin improved 517 basis points sequentially compared to the second quarter.

Two forces were the main drivers of our robust performance, one external, one internal. Externally, the market environment and overall livelihood-related consumption trends in China continued to grow steadily.

We saw both digital acceleration in the neighborhood retail industry especially in fresh produce and FMCG sectors and rising popularity in online retailing. These changes were in part motivated by the Chinese government's efforts to promote consumption upgrades.

As part of this strategy, a number of policies were introduced to boost digital technology innovation of the neighborhood retail industry, including supportive guidelines for revamping and upgrading neighborhood fresh markets. Internally, our multi-pronged growth strategy is building on our long-term competitiveness as we move ahead.

We are focused on generating high-quality and sustainable growth by consistently improving customer neighborhood shopping experience and cultivating our high-value user base by understanding and shaping consumer habits across our platform.

With the on-demand DMW retail business model we invented in 2015, our goal is to establish DMW as the primary grocery shopping model for mainstream urban consumers in first- and second-tier cities. As urban shoppers in large and medium-sized cities grow their desire for a more convenient and high-quality lifestyle, this transformation is taking shape. Our attractive DMW model provides a more time-efficient, convenient and valuable fresh produce and FMCG shopping experience.

As of the end of September, we had expanded our DMV business to cover 17 first- and second-tier cities, offering over 5,000 SKUs and a delivery time of 36 minutes on average, per order.

On the user operations front, we remain focused on high value customers and high-quality growth. To that end, we continued upgrading our membership ecosystem in the third quarter. We enacted an array of measures, including the introduction of an innovative one-stop "Missfresh Advisor" service and cultivating users through private domains. Our efforts boosted paid membership revenue in the third quarter by 800% year-over-year.

With respect to our supply chain capabilities, we continued to broaden and deepen our direct sourcing partnerships with farmers and quality brand suppliers. These efforts further build out our demand-driven strategy to create a digital supermarket offering with a comprehensive selection of fresh produce and FMCGs. At present, we have expanded our direct-sourcing network to include approximately 200 farms nationwide producing vegetables, fruits, seafood and about 350 factories that produce meat, eggs and FMCGs.

We are also catering to the growing demand of high-value users by improving product screening, testing and quality, as well as rolling out our private label brand offerings. For example, our sales of chilled pork featured in our "Today's Production" offerings grew by 86% quarter-over-quarter, thanks to our state-of-the-art fresh food control and our ability to predict and act on consumers' needs.

Furthermore, our private label fresh food brand, Xiang An Xin Fresh Joy has expanded to over 200 SKUs, covering meat, eggs, vegetables and baked goods. We are glad to see Fresh Joy Xiang An Xin is gaining momentum in the third quarter with sales growing 250% [year over year] (corrected by the company after the call). Additionally, during the third quarter, our average value per order continued to ramp up, maintaining its industry leading position.

At the same time, we are steadily laying a strong foundation to unlock solid growth and future profitability by leveraging our technology capabilities in big data and AI algorithms. These allow us to understand and cultivate users' shopping habits and improve operational efficiency -- all of which underpin our core competitiveness in the on-demand retail space.

Moving to another major Missfresh business arm, our intelligent fresh markets business. This business segment aims to transform major neighborhood retail channels serving mainstream consumers in third-tier and fourth-tier cities. Through our services, we empower these traditional retailers to reinvent their businesses with our digital transformation solutions and data-driven private domain operations to help local retailers increase revenue and profit by delivering a better neighborhood shopping experience.

As of September 30, 2021, we had entered into contracts to operate 73 intelligent fresh markets in 18 cities, 52 of which have commenced operations. In the near term, we will continue to promote our "Hundreds of cities, thousands of fresh malls" initiative, speeding up our intelligent fresh markets business expansion.

Supported by years of experience in operating a neighborhood retail platform and our in-house developed Retail AI Network, our retail cloud business is poised to assist traditional neighborhood retailers. Here, we are targeting small- and medium-sized supermarkets, that want to swiftly build digital operation capabilities.

Through our retail cloud business, neighborhood traditional retailers are empowered to develop more efficient, comprehensive neighborhood retail solutions consisting of omni-channel marketing, private traffic, supply chain and last-mile fulfillment capabilities. These are [all] (added by the company after the call) critical elements in the digital era to bring smaller markets more urban consumers by offering fast, convenient and enjoyable shopping experiences. Digitalization is also driving the ultimate efficiency improvement for retail cloud customers to achieve higher operational returns.

As of September 30, 2021, we had signed contracts with 11 supermarket customers. We will take a step-by-step approach to implement our solutions and ensure customer success, building a solid foundation for rapid expansion moving forward.

In closing, China has over 12 trillion neighborhood retail markets according to iResearch. Our unique business matrix consisting of on-demand retail, intelligent fresh markets and retail cloud is well suited to tap this vast potential. We are constantly growing and innovating. We will remain at the competitive forefront through our continuous business upgrades, operational breakthroughs and technology empowerment that satisfy ever-changing consumer needs and promote industrial revitalization.

In our pursuit of high quality, sustainable growth, we are dedicated to embracing common prosperity, boosting digital transformation across China's neighborhood retail industry, and fulfilling our mission to help every family enjoy quality groceries at their fingertips.

Thank you, everyone. With that, I will now turn the call over to our Chief Financial Officer, Ms. Catherine Chen, to discuss our financial performance for the third quarter of 2021.

Thank you, Mr. Zheng. Hello, everyone. We are delighted with our operational and financial performance for the third quarter, which continued to demonstrate our strong growth trajectory. Gross margin grew on a sequential quarter basis and exceeded the high end of our guidance range, primarily due to our heightened focus on high-value customers and a shift to higher margin direct-sourced products. Our efforts to strengthen operational efficiency across multiple fronts also narrowed our loss with adjusted net margin improving by 517 basis points from the prior period.

Now, I'd like to walk you through our detailed financial results. Total net revenues reached RMB2.1 billion in the third quarter of 2021, representing an increase of 47.2% year-over-year from RMB1.4 billion in the same period of 2020 and exceeding the top-end of our previous guidance range.

Sales of products through online platforms increased by 48.1% to approximately RMB2.1 billion in the third quarter of 2021 from RMB1.4 billion in the same period of [2020] (corrected by the company after the call). The increase was primarily driven by an increase in the number of orders fulfilled as a result of an increased number of transacting users and an increase in next day delivery sales.

Other revenues reached RMB43.7 million in the third quarter of 2021, representing growth of 14.1% from RMB38.3 million in the same period of 2020. The increase was primarily due to increased sales of products through our Convenience Go business and the increase in revenue contribution from membership fees as we enhanced promotional activities for our membership program.

Cost of revenues increased by 54.8% to approximately RMB1.9 billion in the third quarter of 2021 from RMB1.2 billion in the same period of 2020.

Gross profit was RMB260.6 million in the third quarter of 2021, representing an increase of 9% from RMB239.2 million in the same period of 2020.

Gross margin increased to 12.3% for the third quarter of 2021, increasing by 480 basis points from the second quarter of 2021, and exceeding the top-end of our previous guidance range by 130 basis points. Gross margin for the third quarter of 2020 was 16.6%. The year-over-year decrease was primarily attributable to the increase in discounts, coupons and incentives offered to customers in 2021 period.

Operating expenses were RMB1.2 billion in the third quarter of 2021, compared to RMB728.1 million in the same period of 2020. Breaking this down further, fulfillment expenses were RMB637.9 million in the third quarter of 2021, compared to RMB396.2 million in the same period of 2020. The increase was primarily attributable to more orders being fulfilled and increased headcount of product delivery, warehouse operations, quality control and customer service staff to provide better fulfillment capabilities.

Sales and marketing expenses were RMB256.2 million in the third quarter of 2021, comparing to RMB170.3 million in the same period of 2020. The increase was primarily due to increased promotional expenses incurred from both online and offline advertising activities for new customer acquisition and current customer retention.

General and administrative expenses were RMB192.2 million in the third quarter of 2021, compared to RMB74.5 million in the same period of 2020. The increase was mainly due to the increased recognition of share-based compensation and the number of management staff for new business initiatives.

Technology and content expenses were RMB145.1 million in the third quarter of 2021, compared to RMB87.2 million in the same period of 2020. The increase was mainly attributable to increased recognition of share-based compensation and the number of R&D staff for new business initiatives.

As a result of the foregoing, loss from operations was RMB970.7 million in the third quarter of 2021, compared with a loss of RMB489 million in the same period of 2020, and narrowed by 35% from the second quarter of 2021

Net loss attributable to ordinary shareholders were RMB973.7 million for the third quarter of 2021, compared with RMB616.2 million in the same period of 2020, and narrowed by 39% from the second quarter of 2021.

Non-GAAP adjusted net loss attributable to ordinary shareholders was RMB886.5 million in the third quarter of 2021, compared to adjusted net loss of RMB469.9 million in the same period of 2020. Non-GAAP net margin in the third quarter of 2021 narrowed by 5.2 percentage points from the second quarter of 2021.

Non-GAAP basic and diluted net loss per ADS were both RMB3.87 in the third quarter of 2021, compared to basic and diluted net loss of RMB13.86 per ADS in the same period of 2020.

As of September 30, 2021, we had cash and cash equivalents, restricted cash and short-term investments of RMB2,479.5 million, compared with RMB1,041.5 million as of [December 31, 2020] (corrected by the company after the call).

In the third quarter of 2021, net cash used in operating activities was RMB669.2 million.

Now turning to our business outlook and projections. For the fourth quarter of 2021, we currently expect net revenues to be in the range of RMB2,232 million to RMB2,315 million, representing a year-over-year growth of approximately 35% to 40%. We expect gross margin to improve by 100 to 150 basis points quarter-over-quarter, and non-GAAP operating margin to improve by 800 to 1000 basis points quarter-over-quarter. This outlook is based on current market conditions and reflects our preliminary estimates of market and operating conditions and customer demand, all of which are subject to change.

With our highly competitive offerings, leading technology, operational acumen and understanding of the evolving market, we anticipate continued top-line growth and improved unit economics in the coming quarters. We will remain dedicated to serving both our growing customers and supplier partners with superior experiences and elevated efficiency. We look forward to further strengthening our core capabilities to seize the tremendous opportunities in China's neighborhood market amid the digital era. We invite you to watch our progress.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

(Operator Instructions) Our first question comes from the line of Andre Chang from J.P. Morgan. Please ask your question.

(interpreted) So, I will repeat my question in English. So, thank you management for taking my question. Congrats on a very strong quarter of growth and improving financial indicators.

So, my first question is about the growth drivers. So, we noticed that the company has increased the city coverage but the growth has been pretty decent. Management mentioned that the drivers are increasing users more next day delivery, membership fee, et cetera. So can you elaborate more about what's behind all of this? Is there any specific area that we've seen more user penetration, expansion of a network, or that there are some like certain scenario that the user transaction frequency are picking up or ARPU is picking up?

And the second question is about the guidance on the margin improvement. We noticed the fourth quarter margin improvement, the pace is going to be faster than the third quarter. So I wonder what's the driver behind it. Is there any specific area of cost-cutting? Or there are some structural changes going on? Thank you.

(interpreted) So basically, for your first question that we focus on quality growth, and that consists from two sides, one is our on-demand DMW retail business, which is facing the mainstream consumer base and our first-tier and second-tier cities. And for the lower-tier cities that we're using a lighter model from our intelligent fresh market to address those needs. And from the DMW side that we see there is still lots of like the penetration now is still relatively low, and we still see there lots of potentials to increase penetration in first-tier and second-tier cities.

And on one hand, our growth in the past has been contributed by our strengthened network density among first-tier and second-tier cities and among our increasing user base in the first-tier and second-tier cities. And we continue to see there's a lot of potential to improve our penetration, our network coverage, our service to the customers.

And on the second part, that facing our users that we are focusing more on the user values like operation and private domain operation as well that we launched our one-stop "Missfresh Advisor" services, which help to address the more tailor-made customers' needs, and we are able to addressing the customers in China the rising demand for upgraded consumption needs, and we are able to improve the consumption frequency as well as the average price per order at the same time.

So these two parts has been driven the growth in the past in the third quarter. And we see it's a very healthy growth trend, and we'll continue to work on that to drive the transacting user growth as well as with the frequency and average price per order.

And for your second question, we have given the guidance of improving operating non-GAAP operating margin to improve by 800 to 1,000 basis points in fourth quarter. And that's mainly contributed by first, that with our steady and effective user growth and operation strategy, we're able to improve our gross margin through our launch of private domain operations and improved customer services that we are able to offer the best goods to our customers. And we are also able to underpinning their demand for upgraded consumption needs. That's helped to drive the increase in consumption level as well as the overall gross margin of the business.

And on the second part, with the improving average price per order and improving efficiency, we're able to lower our fulfillment expense rate in the fourth quarter. And also at the same time, the company is also improving the operational efficiencies on the other expenses level to overall contributed to the 800 to 1,000 basis points improvement of the operating margin perspective.

So for our on-demand DMW business, the high-quality growth that we were able to build up the two engines for our high-quality growth. That one side is on our high-value customer acquisition as well as our continuous efforts to do customer growth and customer operations. And that helped us to continue to maintain and growing our high-value customer base.

And the other side is on the supply chain side that we have upgraded our supply chain capabilities, strengthened our direct sourcing capabilities, and also in order to use the improvement in the supply chain side to fully cover the fulfillment expense rate. So we were expecting -- we are gradually steadily improving our gross margins to cover our fulfillment expense rate to achieve a positive fulfillment profit ratio.

And also, on the other hand, that we are steadily working on the different kind of geographics to already expand in the top first-tier and second-tier cities and at the same time we'll gradually turn positive at the [fulfillment profit] (corrected by the company after the call) level from the geographic region perspective to steadily achieve a positive operating cash flow and a positive operating margin.

That's all our answers for the question. Thank you. Next question please, operator.

Our next question comes from the line of Charlie Chen from China Renaissance. Please ask your question.

I have two questions here. The first one is regarding the fulfillment expenses. As we have seen, the government seems to be pushing for the common prosperity and tries to lift the lifestyle of the delivery people. So, I just want to get some color on how is that impact your fulfillment expenses and how do you feel the pressure going forward, or how can you offset this potential impact?

And the second question is regarding the fresh market business. Can you share with us more color about the ramping up of the GMV margin and also the unit economics? Does that meet your original expectations? Thank you.

Charlie, can you please repeat your question in Chinese?

Okay, sure. Sorry. (Spoken in Chinese).

(interpreted) I will translate by myself. So, as mentioned that in the third quarter, the company also see there is a strong potential to further reduce the fulfillment expense rate and we believe that the average price per order is the determining factor. On one side that for our fixed like warehouse rental depreciation and those fixed costs as percentage of the revenue will be further diluted as we have a rising average price per order.

And on the other hand, the human related variable cost as percentage of per order's revenue will also be further diluted as we can improve the related like the people's efficiency and increase number of orders. And we will continue to focus and keep focusing on the government's initiatives to carrying out new measures to enhance the benefits and protection for flexible employment personnel.

And we also think riders are important partners in our business and their benefits in security are critical. We will implement related policies and continuous upgrade our rider's welfare to improve their happiness.

And at the same time, we want to emphasize our average price per order is nearly RMB90 per order and for each order, actually the last mile the rider expense is less than RMB5. So, actually, it takes on a very small percentage of the AOV. So, the related increase of the social welfare will not have a material impact to our fulfillment expense as overall speaking.

(interpreted) So to your second question, the company has a clear time line to further improve our unit economic model to realize a positive fulfillment profit margin and also to realize positive operating cash flow. So we see that from the current progress that our execution on this time line is better than what we expected as we have given out indication that on fourth quarter, our operating net loss margin will improve by 8 to 10 percentage points.

And also, we could see that with this kind of improvement, it's driven by the underneath like two important engines as we mentioned before. First is that our engine to acquire high-value customers and deeply operating, creating customer value through our private domain operations as well as our high-quality services.

And the second part is for the upstream supply chain side and our fulfillment and logistics side to further have improvement on the operational efficiencies. So that these two engines will drive our growth in, first, the gross profit growth, at the same time, optimizing our fulfillment and other operating expenses efficiency.

So this is an important factor that's helping us to improve our operating margin, at the same time, maintaining high-quality growth. And also addressing our -- from our financial perspective, when we realized a positive fulfillment profit level, then actually we are actually on a good track to turning a positive operating cash flow level.

So behind the high-quality growth, what's driven the time line and timetables to achieve a positive fulfillment profit level, there are three core factors. The first one is on the demand side, whether you are facing the mainstream middle-class families and who have the upgraded consumption needs and whether you can save this kind of demand. That's the foundation of the future growth of the company.

And the second part is on the supply chain part that whether you can integrate the related supply chain resources and to provide sufficient supply for high-quality products that satisfy the consumers' needs, which is also driving the improvement of the average price per order as well as the gross profit margin.

And the third important factor is density that whether you can operate on the appropriate enough density that helps you to improve the fulfillment efficiency as well as operational efficiencies. These three factors are the key drivers to achieve a positive fulfillment profit level, and we are working hard on these three factors. And also, we are seeing good progress in the execution side, and we are on track with our timetable.

Next question, please.

Our next question comes from the line of Vincent Yu from Needham & Company. Please ask your question.

Hi, management. Thanks for taking my question. I have two questions and a follow up on the margins question. My first question is about the marketing expenses in operating expenses. What's the current CAC is now and what we see the potential of market expenses optimization.

My second question is, as management has mentioned on the reflection point of operating cash flow. But how about the EBIT margin seeing that we have improved our margins quite a lot and what we see for the whole company and then for certain markets when these margins turn positive?

And lastly is a follow-up on the orders placed per customer, that part can comment your what current level is for an average customer placed shopping frequency and for like ideal the high-end user. Thank you.

(interpreted) So, let me translate for the first one. So, thank you for your question that on the sales and marketing side that we focus on acquiring high value customers and continuously like improving our services and to further boost the customer growth as well as the repeat purchase by existing customers.

So, what we have launched is our "Missfresh Advisor" one-stop services, which is focused on private domain like operations of our users. So as a result that we see there's a continuously growth of our high value customer base and reducing customer acquisition costs.

And from the sales and marketing expense as a percentage of the revenue part that we see that in the coming quarters, there will be a significant reduce in terms of the sales and marketing expense rate in the coming fourth quarter. So that's the addressing for your first question.

So to address your second question, so our on-demand DMW business that we'll continue to work on to turning our fulfillment profit to be positive and also turning the operating cash flow to be positive for this business. On the overall perspective, the group is targeting a massive market with around 12 trillion like market size and also our retail cloud business and our intelligent fresh market business are also growing.

So in terms of the time line of overall business turning operating profit positive, that we will focus on turning the operating cash flow positive first, and we will still continue to focus on growth in the first-tier and second-tier cities as we still have a lot of potential to improve our market percentage, our penetration among the high-value customer base among first-tier and second-tier cities.

So for the overall perspective that we don't have a clear time line yet, but we will focus on our on-demand DMW business with improved margins and positive fulfillment profit margin and positive operating cash flow for this business. And we'll continue to invest for our growth and also coupled with our retail cloud business and our intelligent fresh market business that we are aiming a large market and with a fast-growing outlook.

And for your question on the frequency of our customer base, so basically that we have been focused on deepening our customer service, customer operations, and private domain services, for example, that we launched our one-stop "Missfresh Advisor" services.

And this is helping to drive the core growth factors that the core growth factors of the third quarter in the past is first on transacting user, second on shopping frequency, and third on our average price per order. So for a typical [core] (added by the company after the call) customer of Missfresh that they will shop for six to eight times per month, and that means each week for one to two times. And we see that high-frequency customers and high-value customers are among the fastest-growing segment among our customer base. And we are continuing to focus on providing superior services and superior high-standard products to tailor made to this batch of consumers.

And we also see the revenue contributed by our paid members that grew on a Y-o-Y basis, 800% of growth. That's mainly driven by our continuous improved growth engine to providing high-quality products and high-quality services that's driving the shopping frequencies of our high-value and high-frequency customer base.

Thank you. (Spoken in Chinese).

Thank you. Next question please, operator.

Our next question comes from the line of Thomas Chong from Jefferies. Please ask your question.

(interpreted) I have two questions. My first question is about our private label strategies. Given that we have experienced very strong growth momentum on that front, can we talk about our 2022 outlook and strategies on private labels and how it helps to improve our GP margin?

And then the second question is also relating to our user acquisition strategies. We understand that the company has a different way to acquire new users, but more from an operational standpoint, can you talk about the main channel that we acquire users and how we are making our sales and marketing as a percentage of revenue continue to achieve leverage? Thank you.

(interpreted) So addressing your question on private label products that we see that from the supply chain development, there are three stages. The first stage is more on channel trade that's more focused on procurement, and the second stage is on category management that you are able to provide full category selection for your customers. And the third stage is on private label that we could see that the first part on the trade part is more like, for example, Walmart and other supermarkets. They are majority of their channels is rely on buyers. It's more on trade for commodities.

And the second part on the full category selection that's more focused on category management. That's more similar to Sam's Club and Costco, which focus on the capabilities of full category management that they are able to select the correct products among category to satisfy the consumers' needs and they are providing a selection among the categories.

And after the completion of the category management, it will be the stage for the private label products. And for typical brands would be like -- which have a very strong supply chain and they roll out their private label products. And for us, that actually Missfresh has already have been laying a solid foundation on the first stage and second stage and we are able to face our customers to provide a full category selection for our customers.

Among our 4,000 to 5,000 SKUs for our speedy delivery SKU portfolio that we are able to select among categories to meet and satisfy the customers' needs. And with the data algorithm and the supply chain capabilities, we already have solid capabilities to satisfy that kind of needs.

So for full category selection, that means that you need to have a good category management capability at the same time for a single commodities that you are able to offer big demand over that single commodities generate a big demand for that single product. So after laying a strong foundation over that, we are going to further develop our private label products. And we see that next year will be a big year for private label products.

Now we already have several private label products among all categories on our platform. For example, our Fresh Joy of private label products, Xiang An Xin, now already cover over 200 SKUs. That's covering categories, including meat, eggs, vegetables, and bakeries. And we are glad to see that the Fresh Joy Xiang An Xin products is gaining momentum in the third quarter, the sales grew by 250% on Y-o-Y basis. And we see that it's very, very important that we have laid a foundation in different categories of our private label. And we also have private labels in other categories like dairy, et cetera.

And we see with the foundation of the second stage, we already have full capabilities to further develop and it is the correct timing for us to further develop our entering to the private label stage. And the development and expansion of private label products also help us to improve our gross margin and also to further satisfy the customers' quality goods need.

So I will add more points on the gross margin side.

So from the user part it is very important that you have a high-value, high-quality customer base that who are you facing to. That's very important in terms of the margin perspective. If you are facing the customers who are focused on high-quality products and high-quality services, then that provides a guarantee for your further gross profit margin.

And the other side is on the supply chain side that whether you are selecting the correct portfolio of products to satisfy your customers' needs, whether you have the capability to select and source the correct products and develop the correct products. And among our internal data from our deepening operations from our customers that we see the high frequency and high-value customers has already contributed a decent portion of our whole business. And also these customers, their retention rate is also remained high and the sales contributed by this type of customers continue to grow, and they are realizing a self-growing engine among this kind of high-value customer base.

And on the supply chain side that we already developed a network of 200 Missfresh farms and over 350 Missfresh factories. Among the upstream collaborations and synergies among our supply chain ecosystems that we are able to create better margins along the value chain and also that we will see that this also help us to achieve a good progress on our timetable to realize a positive fulfillment profit.

Thank you. Next question please, operator.

Our next question comes from the line of Yang Pu from Prime Number Capital. Please ask your question.

(interpreted) I will translate in English. So, thanks, Mr. Xu, Catherine, and Lingling for taking my question. So my first question is about AOV.

So year over year, AOV increased by 4.8%. I just wonder, quarter over quarter, it declined by 8%. Is this driven by increasing first time new users? Or is it for us -- there is some other reasons, maybe seasonality, or change in the revenue mix of different services? So that's my first question.

And then the second question is about capital sustainability. So the company talking about the road map to profitability and getting positive operating cash flow. I wondered with all this road map and your current cash on hand, what's your expectation for your capital sustainability next year? Do you expect to raise capital somewhere in 2022?

(interpreted) So in terms of, first, your question on the AOV that we see that AOV has also been impacted by seasonal reasons. For example, like in the third quarter that -- because it's summertime that people have reduced the demand on meat and some of the heavy grocery part and they will have more consumption of fruits and fruits are directly more sourced from the local sources, which is of relatively more lower prices. So that's becoming from a whole year perspective that there is a seasonality on that, that if you see it on a year-over-year basis that we have increased 5% on the average price per order on year-over-year growth side.

And from your question on the capital planning. So the company still have a good balance on cash and cash equivalent. And we are also seeing improving operating cash flow status. So we'll see depending on the capital market environment and future business development needs, we will further think about funding plans for now that the company doesn't have a concrete plan yet.

(Spoken in Chinese).

In view of time constraints, I will now turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Missfresh's Investor Relations through the contact information provided via our website or the Piacente Group Investor Relations.

(Spoken in Chinese).

This concludes this conference call. You may now disconnect your line. Thank you.