Vipshop Holdings Ltd (VIPS) 2012 Q4 法說會逐字稿

Thank you for standing by and welcome to the Vipshop fourth-quarter 2012 earnings conference call. (Operator Instructions) Please be advised that this conference is being recorded today, February 23, 2013.

I would now like to hand the conference over to your speaker today, Ms. Millicent Tu, Director of Investor Relations at Vipshop. Thank you. Please go ahead.

Thank you, operator. Hi, everyone, and thank you for joining Vipshop's fourth-quarter and full-year 2012 earnings conference call.

Before we begin, I will read the forward-looking statement. During this conference call we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates, and projections about Vipshop Holdings Limited and its industry. All statements other than statements of historical fact we may make during this call are forward-looking statements.

In some cases these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is unlikely to, may, plan, should, will, aim, potential, or other similar expressions. These forward-looking statements speak only as of today's (technical difficulty) and are subject to change at any time; and we have no obligation to update these forward-looking statements.

Joining us on today's call are Eric Shen, Chairman, the Company's CEO, and co-founder; and Donghao Yang, the Company's Chief Financial Officer. At this time I would like to turn the call over to Mr. Eric Shen.

Hello, everyone. Welcome to our earnings conference call. We are very proud to announce that we have achieved another major milestone for our Company by reaching GAAP profitability in the fourth quarter of 2012. This achievement, which came in well ahead of our initial schedule, further validated our strategy of balancing top-line growth while improving profitability at the same time.

Over the past year of being a public company, we have successfully and consistently executed upon a new and hugely successful e-commerce model that is very different from other industry players, as compared to conventional e-commerce business models like eBay's or Amazon's.

We have successfully proven there is a new, third e-commerce model that can provide huge scale and able to deliver strong profit growth by providing special offers and deep discounts on branded products. We have pioneered the online discount retail model in China and become the expert and the leaders trusted by our customers and brand partners alike.

From our very beginning we have focused on providing special offers that will delight our customers, building up a custom-made end-to-end logistics and ERP system that ensures consistent on-time delivery to our customers as well as a rapid cycle of inventory sell-down to cash return for our brand partners.

This early focus on building a scalable logistics platform, ERP, merchandising capability, and trusted partnerships with brands, as well as our major expansion in each of these areas over the past year since our IPO, we have created a huge lead, ahead of any potential competitors looking to copy our new model. The success our model is clearly shown by the fact that we are more than triple our revenues to over $692 million.

This was driven by several factors, including: total active customers was up more than 175% to over 4.1 million shoppers; total orders up over 200% to more than 21.9 million, of which we experienced a very high and stable rate of orders from repeat customers, accounting for over 93% of all orders.

These are very powerful numbers, underlying the strength of our business model, execution capability, and the industry growth potentials. At this point let me hand over the call to our CFO, Donghao Yang, so that he may discuss the general market and this quarter's achievements in greater detail.

Thanks, Eric; and hello, everyone. To begin with, I would like to elaborate on three highlights as we discuss the quarter in greater detail.

Firstly, our solid results for the quarter and increased business scale. Secondly, our proven strategy, reflected in our improved operational efficiency and increasing leverage. And lastly, our logistics expansion strategy going forward.

To begin with, I would like to discuss our strong quarterly results. We are pleased with our exceptional growth in both top line and bottom line, which exceeded our prior expectations and consensus estimates.

Net revenues for the fourth quarter of 2012 increased by 185% to $299.6 million from a year ago. Moreover, we achieved a net income of $6.3 million during the quarter, reaching GAAP profitability for the first time in our Company's history.

This robust growth was driven by our concerted efforts in optimizing and expanding brand and product selection. Sales events increased as well as regional expansion with warehouse capacity built out and subsite additions.

We were able to further leverage the scale effect inherent in our business by attracting online shoppers as well as the brands aiming to target them. Looking at our two key drivers specifically, for the fourth quarter of 2012 we grew our total active customers by 177% to 2.6 million and the number of total orders by 191% to 8.8 million.

We continued to expand our brand partner base, in a bid to increase our SKU portfolio while improving users' shopping experience. As of the end of 2012, we increased the number of brands on our sites to over 5,800, with top-10 brand partners accounting for less than 13% of our total revenues. This well-diversified brand base demonstrates our accepted value by many brands as an efficient platform to liquidate excess inventories while preserving the brand value.

More importantly, we are very pleased to see continued improvement in operational efficiency and leverage, further demonstrating the effectiveness of our growth strategy and its execution. To give you an example, in the fourth quarter of 2012 we further expanded our repeat customers as a percentage of total active customers to over a new high 72% from 69% a year ago. We believe these numbers truly reflected our high user stickiness and improving customer satisfaction, as well as the rising brand awareness of the Vipshop platform.

Heading into the new year, we plan to leverage this strong foundation and remain focused on improving our special offers and shopping experience for customers, expanding our logistics platform that is unique to our business model, cementing brand partnerships, and increasing our specialized merchandising expertise. These advantages will further increase the significant barriers to entry and expand our leadership in China's booming online retail market.

Looking forward we see expanding market opportunities ahead of us driven by China's growing population of online shoppers eager to buy branded products at bargain prices. Through our increased scale and improved operational efficiency, we remain confident in our capabilities to benefit from this surging demand while delivering sustainable growth going forward.

Moving on to our quarterly financial highlights, net revenues for the fourth quarter of 2012 increased by 185% to $299.6 million, from $105.2 million in the prior year. This tremendous growth was primarily attributable to a 177% increase in the number of total active customers to 2.6 million, and 191% increase in the number of total orders to 8.8 million over the quarter.

This user growth increase was primarily due to the Company's continued efforts to optimize an expanding brand and product selection, increase the number of sales events, and increase the number of SKUs available on our website. In addition our regional warehouse expansion into Shanghai, Chengdu, and Beijing has enhanced our ability to accommodate increased demand from the customers, while with our distributed logistics facilities and regional subsites targeting specific markets we have significantly improved our ability to target many shoppers in the underserved second- and third-tier cities, further increasing our market scale and footprint.

Like Eric highlighted earlier, this growth continues to demonstrate the network and scale effects associated with the value we provide to our growing base of brand partners and customers. As the market leader and a partner with a history of strong performance, Vipshop is able to negotiate gradually larger discounts, further decreasing product acquisition costs. As a result this led to gross margins further improving to 22.9% from 20% in the prior period and gross profit increasing by 227% to $68.7 million.

Moreover, as we discussed earlier, we continued to see improvement in the operating margins, resulting from improved economies of scale and increased operational leverage with our business operation. More specifically, fulfillment expenses increased by 91% to $37.4 million for the fourth quarter of 2012, from $19.6 million in the prior-year period. This primarily reflects an increase in sales volume and number of orders fulfilled.

As a percentage of net revenues, fulfillment expenses decreased to 12.5% from 18.6% in the prior-year period and 13.9% in the third quarter of 2012. As we discussed over the last few quarters, this improvement is very noteworthy in that fulfillment expenses are not only the largest component of our operating expenses but also critical to the customer experience.

This cost reduction was primarily due to the successful implementation of our distributed warehouse strategy and the strategy of shifting toward using regional and local delivery services. The sequential improvement in fulfillment expenses as a percentage of net revenues also reflected the seasonality associated with the increased average revenue per order due to higher-priced inter-season products.

We continued to expand our capacity to four warehouses, which are strategically located in Shanghai, Beijing, Chengdu, and Guangzhou. In addition we continued to shift more fulfillment need to high-quality regional and local couriers, lowering our fulfillment cost while shortening delivery times to our end customers.

Marketing expenses increased to $12.5 million from $6.7 million in the prior-year period. As a percentage of net revenues, marketing expenses decreased to 4.2% from 6.4% in the prior-year period and 4.7% in the third quarter of 2012.

As highlighted earlier, by maintaining customer satisfaction and high repeat customer demand, we are able to realize significant cost benefits associated with word-of-mouth referrals. In addition, with our disciplined marketing spend approach we have been diligently evaluating the effectiveness of our various promotional measures to optimize our advertising ROI. We believe the continued decrease in market spending as a percentage of revenues further proves the effectiveness of our marketing strategy in driving sales and traffic.

Technology and content expenses increased to $6.3 million from $3 million in the prior-year period. As a percentage of net revenues, technology and content expenses remained stable at 2.1% compared with 2.8% in the prior-year period and 2.1% in the last quarter. This is a part of our continued efforts to invest in our website and IT system to better support future growth.

General and administrative expenses decreased to $7.9 million from $55.5 million in the prior-year period, primarily due to decreased stock-based compensation expenses. As a percentage of net revenues, general and administrative expenses were 2.6%, compared with 52.8% in the prior-year period and 4.1% in the third quarter of 2012. The cost reduction reflected our Company's continued cost control efforts and increased operational leverage.

Driven by the growing scale of our Company's operations, improved gross margin, and cost control, we realized $5.4 million in income from operations for the fourth quarter of 2012. This is compared to a loss from operations of $63.5 million in the prior-year period.

Operating income margin was 1.8% compared to an operating loss margin of 60.3% in the prior-year period and an operating loss margin of 2.1% in the third quarter of 2012.

Non-GAAP income from operations, which excludes the impact of share-based compensation expense, was $7.2 million compared to a non-GAAP loss from operations of $11.1 million in the prior-year period. Non-GAAP operating income margin was 2.4%, compared to a non-GAAP operating loss margin of 10.6% in the prior-year period and a non-GAAP operating loss margin of 0.7% in the third quarter of 2012.

Our net income attributable to ordinary shareholders for the fourth quarter of 2012 was a positive $6.3 million, compared to a net loss attributable to ordinary shareholders of $63.5 million in the prior-year period. Net income margin was 2.1%, compared with a net loss margin of 60.4% in the prior-year period and a net loss margin of 0.9% from the third quarter of 2012. Net income attributable to ordinary shareholders per diluted ADS was $0.12, compared to a net loss attributable to ordinary shareholders per diluted ADS of $2.75 in the prior-year period.

Non-GAAP net income attributable to ordinary shareholders, which excludes share-based compensation expenses, was $8.1 million compared to a non-GAAP net loss of $11.2 million in the prior-year period. Non-GAAP net income margin was 2.7%, compared with a non-GAAP net loss margin of 10.6% in the prior-year period and a non-GAAP net income margin of 0.4% from the third quarter of 2012. Non-GAAP net income attributable to ordinary shareholders per diluted ADS was $0.16 compared to a non-GAAP net loss attributable to ordinary shareholders per diluted ADS of $0.48 in the prior-year period.

As of December 31, 2012, the Company had cash and cash equivalents of $124.5 million and held-to-maturity securities of $86.1 million. For the fourth quarter of 2012, net cash from operating activities was $86 million.

Lastly, I'd also like to update you on our warehouse capacity expansion strategy. We are in the process of moving into a new leased facility in Guangzhou. This move, once completed in the first half of this year, will more than double our warehouse capacity for the southern China market to approximately 90,000 square meters. We are confident in our ability to carry out this continued expansion plan as we aim to keep up with growing demand for 2013.

Looking at our business outlook, for the first quarter of 2013 we expect our net revenues to be between $265 million and $270 million, representing a year-over-year growth rate of approximately 162% to 167%. These forecasts take into consideration the seasonality associated with the Chinese New Year holiday period and reflect our current and preliminary view on the market and operational conditions, which are subject to change.

With that I would now like to open the call to Q&A. Operator?

(Operator Instructions) Alex Yao, Deutsche Bank. That question has been withdrawn. Eddie Leung, Merrill Lynch.

The first one is about the strategy. Right now you have been doing very well in executing the core business expansion plan. But then my question is, going forward, say in a couple of years, would the Company consider entering other product categories, or even more focusing on in-season goods rather than off-season goods? And related to that, would there be any plan of consolidating the market beyond just organic growth? Thanks.

(spoken in Chinese)

(spoken in Chinese)

So just to translate Eric's answer to the question, Eddie, in terms of category expansion what the Company is saying is: we will continue to offer the existing product, including apparel, shoes, handbags, and cosmetics, because the majority of our customers are female and these females have a lot of need for our branded products. Unlike three-C or other -- not other commodity type of products, where consumers buy one in a number of years; for instance, digital products or three-C products.

So to answer the question, we will continue to offer what we have in the existing category offering.

So for this question, obviously we will continue to sell off-season excessive inventory, but we will continue to help brands monetize their excessive inventory. But because of their success in working with us, brands are beginning to further assess avenues for deepening our relationship. Some early examples include brands offering reproduction of earlier style, as well as customized products to sell through our website.

So at the moment we don't have any tangible, specific targets for acquisition. But in the future if we come across any suitable targets and at the right time, we might be considering that. But at the moment, no specific plans as yet.

Got that. Thank you, Eric. Another quick question, perhaps to Donghao, just for housekeeping purposes. What was the capital expenditure for last year, and what could be the capital expenditure for this year, given the expansion in logistics network? Thanks.

Well, I'm sorry; we are not providing guidance beyond the top line of the next quarter. As to the CapEx expenditure that's -- definitely we have a plan for that. And as you know we filed our F-1 document after the market closed yesterday, and one of the uses of proceeds is going to be building our own warehouse and expanding our own warehouse facility.

Got that. I will get back to the queue. Thank you.

Alex Yao, Deutsche Bank.

Hello, guys. Good morning and good evening, everyone, and thank you very much for taking my question. Firstly, congratulations on a very solid quarter.

My first question is about 2013 growth strategy. Can you comment on the top three priorities in 2013? And the related question is: how would you acquire users in 2013? Thank you.

(spoken in Chinese)

(spoken in Chinese)

Okay. So Alex, in terms of the top three priorities in 2013 Eric just mentioned, number one is to continue to expand our warehousing capacity, including constructing our own warehousing as well as improve or increase our leased space capacity. And then we might be also thinking, introducing semiautomated equipment into our warehouses.

And number two, because the discount retail market in China is extremely underdeveloped and is extremely fragmented and there are lots of opportunities for Vipshop to grow, so the priority obviously is to continue to acquire more customers to come to shop with VIPS, Vipshop.

Number three is to continue to improve our customer experience including our delivering speed, the quality that we offer online, the brands that we work with. And also we continue to monetize the snowball effect and network effect to increase our customer base. And because of that we continue to leverage on word-of-mouth referral strategy to acquire new customers.

Got it. My follow-up question is regarding the first priority, the logistic: to expand the logistic capability and efficiency. How should we think about the fulfillment expense as a percentage of total revenue in 2013?

For instance, when you guys finish the Guangzhou warehouse in this year, will there be an increase of fulfillment cost as a percentage of total revenue because of the incremental fixed cost? Or is it going to decline because you guys will have more local deliveries, etc.? How should we think about it?

Well, our goal for expanding our warehouse space is of course to reduce our fulfillment expenses as a percentage of revenue. In Q4 last year it was 12.5%, and that's a very significant improvement compared to 13.9% in Q3 last year.

I think the other part of the question was, if we moved to a much larger facility -- warehouse facility in Guangzhou, how is the fulfillment expenses going to look like? Well, I think in the near term, in the short term, very short term, because there is going to be a ramp-up stage for any new facility, which is natural, for that short period of time the rental cost per unit may go up. But our business is growing very fast, and we are confident that the utilization rate of the new facility is going to ramp up very quickly.

So the trend -- even for that facility the trend of warehouse cost is going to go down again very soon.

[Chen Liu], China Renaissance.

Hi, congratulations on the strong quarter and thank you for taking my questions. I have three questions.

The first is regarding active customers in this quarter, as your customers continue to grow at a strong pace as well as the volume of orders, despite decreasing marketing expense as a percentage of revenue. So the question is: are those active customers new customers, or are they repeat customers that are contributing to the growth?

Moreover, for the new active customers, could you please elaborate on how you improved marketing efficiency in this quarter?

(spoken in Chinese)

(spoken in Chinese)

And also, the new customer acquisition strategy. Yes; thank you.

(spoken in Chinese)

So to answer the question, actually the drivers both come from the repeat customers and new customers. Obviously in Q4 last year the existing customers purchased more orders from us within the three months ended December 31, 2012.

And for new customers we continue to see the growth momentum. Even though they quickly become a registered member and a new customer within the quarter, but they start to purchase at least once, twice, or three times from our website. (spoken in Chinese)

(spoken in Chinese)

So going forward, in terms of absolute dollar amount, obviously it will continue to rise as our top line continues to grow. But as a percentage to net revenues it will continue to come down.

Our marketing efforts are carried out both online and offline. So online channels, just to explain this further, we primarily rely on navigation, search engine, affiliates' marketing, all of which we assessed based on our [high] performance.

Okay, thank you. Okay, a follow-up question. The new customer acquisition cost, can you indicate the cost for the new customer in Q4 and in 2013? Thank you.

All right, okay. Well, again I'm sorry that we are not providing guidance beyond the top line of the next quarter. But as Eric explained earlier, we are very confident that going forward marketing expenses as a percent of revenue will continue to go down.

Okay, thank you. The last question is about the apparel industry. The apparel industry's excess inventory is a crucial part of your supply chain. However, we also see that many apparel companies have dedicated themselves to improving this situation by tightening their inventory excesses.

What is your outlook on the excess inventory of the apparel industry and its potential effort on your bargaining power and the supply chain? Thank you.

(spoken in Chinese)

(spoken in Chinese)

Okay. The apparel industry is actually CNY1 trillion in China. And as you may know, there are statistics saying that by 2013 the total apparel market will reach CNY2 trillion, which will be increased to CNY2.7 trillion by the end of 2016.

So if we look at the mature, efficient apparel market, such as the US, where discount retailers' inventory typically accounts for approximately 20% of the overall market, in China where the market is not nearly as efficient we guess that the percentage would naturally be higher. So in other words, let's be more specific: even by this very conservative estimation, our addressable market for monetizing apparel inventory was worth more than CNY400 billion this year and almost CNY550 billion by 2016.

(Operator Instructions) Andy Yeung, Oppenheimer.

Good evening. Congratulations on another good quarter. Thank you for taking my questions. My first question is about your competitive landscape.

The general B2C e-commerce market has been experiencing pretty strong growth in terms of revenues, but also pretty intense price competition. Yet your business seems to enjoy very nice both top revenue growth and margin trajectory.

So can you help us understand a little bit about the differences between the competitive landscape for your market segments and the overall B2C commerce?

(spoken in Chinese)

(spoken in Chinese)

Andy, as you recall in the last quarter 2012 e-commerce players launched a series of promotional activities. But from one perspective, it was good to encourage online shopping in China on a national scale.

But the price war hasn't affected us. On the contrary, which is shown in our Q4 numbers, we recorded 185% top-line growth year-over-year and also achieved a major milestone by reaching GAAP profitability in that quarter.

The reason is that we primarily sell apparel and fashionable products, and these are non-commodity type products which have higher gross margin than that of three-C categories. We are not selling products like both digital cameras or three-C type of products, which are highly standardized and have lower gross margin.

Okay, got it. Then my next question is about your customer retention strategy. My first question is: what is your customer acquisition cost versus customer retention cost?

And also, you mentioned in your prepared remarks that the return customer accounted for 72% of your total in the quarter, up from 69% a year ago. Did you guys do anything differently this year to drive the improvement? And how do you see it going into 2013?

(spoken in Chinese)

(spoken in Chinese)

Andy, our repeat customers are obviously the core customers of Vipshop. However for this year, for 2013, one of our top priorities, as Eric mentioned earlier, is to continue to acquire new active customers.

We are not in a position to provide specific numbers at this point. But we can see from the trend that from the acquisition cost for new customers for 2012 has been actually decreased from that in 2011 and 2010. And for this year we will continue to spend, to invest, to acquire more new customers.

But for our existing and repeat customers, we will continue to improve our shopping experience to leverage the word-of-mouth referral strategy and also utilize social media networking platforms to acquire more customers. And we project that the acquisition cost for new customers will continue to trend down this year.

Gene Munster, Piper Jaffray.

Good morning. I was hoping you could briefly just touch on the fulfillment picture. Just what does your number of locations look like, and capacity as well, at the end of 2012 compared to where you think it will be at the end of 2013?

Well, thank you for the question. Well, as of the end of 2012 we have four locations strategically located in Beijing, Shanghai, Guangzhou, and Chengdu. As of the end of this year, 2013, I think we will still remain four locations, but we are going to move into much bigger warehouses.

Okay, great. Thank you. And then when thinking (technical difficulty)

Hello?

Thank you. Then also just turning to your customer base, when thinking about the different websites or the different domain names, does each one have a different customer base and geographic location? Or are they all pretty similar across the board?

Well, no. We actually have four regional websites in the country corresponding to our four warehouse locations. And our system can automatically direct our customers' visits to different regional websites by their IP address.

For example, if you are a customer in Shanghai and if you try to come to our website which is www.Vipshop.com, we only have one same Web address. But if you are coming from Shanghai, our system will detect automatically your IP address and direct you to our Shanghai regional website.

The products that we present on our Shanghai regional website are stocked in our Shanghai warehouse. So by doing this we can significantly reduce the shipping time and shipping cost, thus improve our customer satisfaction.

[Jin Eun], Nomura Securities.

Hi, this is [Ruby Zheng] calling on behalf of Jin Eun. We just have a quick question regarding your recent stock offering. We are wondering: how much of it is primary versus secondary shares?

And after the offering, how much ownership will the VCs have? Are we going to see further dilution, or can we just assume this is it?

Well, thank you very much for asking the question. Well, our offering will likely be a mixture of primary and secondary; but the exact mix will only be determined at a later date.

So if there is going to be a primary component in the offering, of course there is going to be some dilution. But we will make that decision at a later date.

I see. But after the offering, do you know how much ownership the VCs will have? And are you going to see any -- do you think you are going to issue any other offerings in the future?

Well, we haven't made a decision on that regard.

I see. Okay, thanks.

Wendy Huang, CIMB.

Thank you. My first question is regarding the fulfillment cost. I remember previously you were guiding the long-term fulfillment cost to be around 13% of the total revenue; and in Q4 you actually already hit that target. So early on you mentioned that with the new warehouses you may actually see the rental cost per unit go up. But the [addition] rate of the new facilities may also ramp up quickly; so the warehouse cost may go down again very soon.

So should we expect the fulfillment cost as a percent of your revenue to maybe go below the 4Q level, and there is still room for the leverage of the fulfillment cost? Thank you.

First of all we've never guided on our future fulfillment expenses as a percent of revenue. I am not sure where you got that 13%, but we've never provided guidance on anything beyond our next-quarter top line.

And your second question, fulfillment expenses: again, we can't guide on specific numbers going forward. But as we explained earlier, the management team here is very confident that there is still room to improve in our fulfillment expenses as a percent of revenue.

Okay. Then for the Q1 guidance, can you maybe help to quantify the impact of the late Chinese New Year on your Q1 guidance, and also the number of the orders and the number of active customer change that's implied in your Q1 top-line guidance? Thank you.

Well, our Q1 guidance is $265 million to $275 million for top line. And of course that is lower than what we did in Q4 2012; and the primary reason behind that is of course the seasonality related to the Chinese New Year holiday.

Well, even with that number, if you look at the year-over-year growth rate it's still between 162% and 167%, and that is still a very fast growth rate. Beyond that, I'm sorry we cannot elaborate more on the guidance. But what I can tell you is we always provide our guidance based on the best available information at the time we do it.

Ming Zhao, 86Research.

Thank you. Thank you for taking my questions. Two questions.

The first question is about your fourth-quarter performance. Compared with your high-end guidance, $240 million, you delivered almost $300 million. So there is almost $60 million upside to the high end.

I just want to ask what had happened in the second half of the fourth quarter that caused such a big discrepancy between your guidance and your performance. Going forward is it possible we're going to see the same kind of upside? So that is the first question.

The second question is really about your capacity, or your growth drivers let's say. On one hand, you are doubling your warehouse capacity.

Is it linear in terms of the leads to the revenue? In other words, if you double your warehouse is that able to support a double in your revenue? Thank you.

Well, let me try to get your first question. You are right; our Q4 top line was about $60 million more than our guidance, and there are a few reasons behind that.

First of all, towards the end of last year we did see a very favorable e-commerce market situation in China. A lot of people may know this: Tmall had a big promotion on November 11, the Singles Day; and according to some news report they generated CNY19.1 billion revenue.

That actually shows that more and more customers, people in China are shifting to shopping online. That is a very favorable trend that, as one of the major e-commerce players in China, Vipshop has benefited very significantly.

Secondly, the winter was extremely cold towards the end of 2012. So a lot of our winter clothing was selling very well, and that is another contributing factor to our better-than-expected Q4 top-line performance.

Going forward, well, some of the factors I have just talked about will continue to impact our business favorably. But some other factors, for example the extremely cold weather, nobody can really expect or forecast what the winter is going to look like in 2013.

So to your question, I believe that the Company's growth is going to continue to be very strong. But I am not sure if that kind of better-than-expected top-line growth can be expected again in the fourth quarter of 2013.

Eric Qiu, Guosen Securities.

Good evening, everyone, and I have two questions. First is regarding to the stock offering.

I noticed that in the announcement it said the offering is to raise capital response for capital expenditure and general corporate purpose. But I also notice that in Q4 the cash flow is quite healthy; you generated $86 million for operating cash flow.

And [Senzong] also mentioned in the IPO process that the Company is not in a hurry for a second offering. I wonder what has been changed, and are you planning to build new factory or new warehouse or increase this expenditure in 2013?

Well, our IPO proceed has been set aside as a cushion, given the amount was limited. So our long-term CapEx needs require further financing. And also our Company needs to maintain a healthy cash cushion for daily operations and unexpected circumstances.

But yes, you are right. As we said in our F-1 filing the use of proceeds will include building our company-owned warehouse.

I am sorry; I think back to the question of Ming just now I missed one of his questions, which was related about warehouse space. I think his question was: if the warehouse space doubles will our revenue double?

Well, the answer is no. Because the warehouse space is only a measure of our capacity -- capacity of supply, so to speak. So the doubling of our warehouse space may not necessarily result in doubling of our revenue. But of course the management team hopes that we can quickly ramp up the newly added warehouse and fully utilize it, so that we can double our revenue as a result of doubling our warehouse space.

Okay. My second question is for the mobile Internet. Can you give some color? Like how many orders or percentage of orders will come from mobile Internet? Thank you.

(spoken in Chinese)

(spoken in Chinese)

Our mobile application at the moment generates approximately 5% of our total revenue. Recently we have seen a significant growth in this application, and we have high hopes for the mobile application and believe that this will continue to grow in the future.

Eric Wen, China Renaissance.

Hi, good evening. Congratulations on a very strong quarter, Shen, Donghao, and Milli. I just have a housekeeping question to add, which is your tax rate. You seem to have about a 10% tax rate this quarter. What is the tax outlook for next year going forward? Thanks.

The reason that we only had a 10% tax rate last year was because, first of all, we had only a small profit. We only turned profitable on a GAAP basis in the last quarter of 2012; but on a full-year basis we still had a small loss.

But as a Company, Group Company, we had different entities, subsidiaries, and branch companies. And some of those subsidiaries actually turned profitable for the full year.

That is why for the full year we had a small loss but we still paid some corporate income tax. And the reason that our tax rate was so low is because we had a pretty significant amount of loss carryforward, which we could use to deduct from our profit before we paid tax.

Going forward, we believe -- we are trying to get more favorable tax treatment from various levels of government. But until we get there, so far we are still using the 25% corporate income tax rate. If you take into consideration some of the tax rebates that we are getting already from some of the local governments, I think the effective tax rate is going to be around -- it is going to be around 20% to 25%.

Thanks very much. Congratulations again.

We have reached the allotted time for questions. I will now turn the call back to Donghao Yang for closing remarks.

Well, thank you, everyone, for taking the time to join us; and we look forward to speaking with you again in the next quarter's conference call.

Thank you.

Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect.