Vipshop Holdings Ltd (VIPS) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to Vipshop Holdings Limited second quarter 2015 earnings conference call.

At this point I would like to turn the call to Miss Millicent Tu, Vipshop's Director of Investor Relations. Please proceed.

Thank you, operator. Hello everyone and thank you for joining Vipshop's second quarter 2015 earnings conference call.

Before we begin, I'll read the Safe Harbor 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 that we make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipates, believe, continue, estimate, expects, intends, is/are likely to, may, plan, should, will, aim, potential, or other similar expressions. These forward-looking statements speak only as of the date hereof 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 Mr. Eric Shen, our Chairman, Chief Executive Officer and Co-Founder, and Donghao Yang, our Chief Financial Officer.

At this time, I would now like to turn the conference call over to Mr. Eric Shen.

Good morning and good evening, everyone. Welcome to our second-quarter 2015 earnings conference call. We are very pleased with this quarter's results which were driven by our mobile expansion, improved operating leverage, and the continued growth of our core business.

Let me start with the fast growth and the future potential of our mobile platform. We have always believed that our core flash sales offering is very well-suited for on-the-go shoppers over their mobile devic. For example, the conversion rate, ARPU and shopping frequency is all higher on mobile than PC. In the second quarter of 2015, the total active customers for mobile in our core flash sales business increased by 186% year over year. Mobile GMV increased to 76% of total GMV from 46% one year ago.

As we leverage our customer base and retail expertise, we believe there is great potential for us to help global brands get into the Chinese customer markets, especially in mother, baby, beauty, handbags, and other fashion categories. This is why we began our cross-border e-commerce business in the fourth quarter last year and ramped it up quickly. In just two quarters we were able to grow this business by over 10 times.

We have also opened several bonded warehouse to enable faster import process. The cross-border business provides us with good cross-selling opportunities as our customers tend to significantly increase their spending once they begin to use this offering. We believe cross-border business will speed up in the second half of 2015 in terms of total orders and sales contribution and are adding more category and expanding our network overseas merchandise and brands to support this growth.

We also continue to invest in last-mile delivery and warehouse expansion, which Donghao will discuss in detail. With China's large online shopping population and our low customer penetration reach, we believe that there is a lot of room for customer growth in the future.

At this point, let me turn over the call to our CFO Donghao Yang so that he may discuss our operations and financial results.

Thanks, Eric, and hello everyone. The strong results we delivered in the second quarter reflected the continued strength of our core discount retail business as revenues, orders and customers on our core platform all continued to expand in tandem. We are observing powerful economies of scale, demonstrated by our strengthening margins. What was particularly impressive was the sharp increase in operating margin to 4.9% from 2.9% in the prior-year period, primarily driven by the reduction in fulfillment and G&A expenses as a percentage of total revenue.

We made great progress continuing to enhance and expand our logistical capabilities. We now have approximately 1.4m square meters of warehouse capacity and recently commenced on construction of a new warehouse in Sichuan Province, putting us well on track to beat our 1.5m square meter yearend target.

On top of our warehouse expansion was warehouse enhancement throughout the nation, which we achieved this quarter in our Tianjin warehouse. This process improvement allowed us to improve the efficiency and reduce labor costs as a percentage of total revenues. Most importantly, our success in Tianjin can be duplicated in our other warehouses to ensure greater optimization in all locations.

Just like with our warehouse initiatives, we continue to make headway with our investment in local logistics providers. Currently we are utilizing our network of in-house and [invested] couriers to deliver over 70% of our total orders across almost all provinces in Mainland China. Our courier investment will greatly improve our ability to reduce the delivery time, provide more coordinated and friendly delivery service, and, in the mid to long term, reduce costs, as with greater scale, it will be cheaper to deliver ourselves.

Furthermore, we are also developing financial services for suppliers in the form of account receivable factoring to better support their business growth. The factoring will help us bring more small to midsize suppliers into our ecosystem. As we continue to improve the overall shopping experience and strengthen customer loyalties, we are confident that customers will continue to gravitate to our platform in increasing numbers. With growing scale, strong operational efficiency, promising new initiatives and a focus on our core high-margin flash sales business, we're very well-positioned to solidify our leadership in China's discount retail sector and deliver increasing returns to our shareholders.

Now, moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all financial numbers presented today are in RMB and all the percentage changes refer to year-over-year changes unless otherwise noted.

Total net revenue for the second quarter of 2015 increased by 77.6% to RMB9.0b, primarily driven by continued robust growth in the number of total active customers and total orders in our core discount retail business, as well as the increasing revenue contribution from our mobile platform.

We began to substantially scale down our group buy segment in the third quarter of 2014 due to its lower margins and cash flow retention rate. As you recall, the active customers for the group buy business as a percentage of Vipshop's total active customers decreased to 0.8% from 22.2% in the prior-year period, and orders for the group buy business as a percentage of Vipshop's total orders decreased to 0.7% from 13.2% in the prior-year period. Excluding the impact of the group buy business and Lefeng, the number of total active customers and total orders for Vipshop's core flash sales business increased by 84.4% and 86.1% year over year, respectively.

On the mobile platform, the number of total active customers and total orders for Vipshop's core flash sales business increased by 185.7% and 194.1% year over year, respectively.

Gross profit for the second quarter of 2015 increased by 78.6% to RMB2.3b, primarily driven by our increased bargaining power with suppliers due to the expanding scale of the Company and the growth of our marketplace platforms. Gross margin for this quarter increased to 25.0% from 24.8% in the prior-year period.

Fulfillment expenses for the second quarter of 2015 were RMB819.6m, as compared with RMB513.4m in the prior-year period, primarily reflecting the increase in sales volume and number of orders fulfilled. As a percentage of total net revenue, fulfillment expenses decreased to 9.1% from 10.1% in the prior-year period, primarily reflecting the scale effect associated with our rapid growth in total net revenue and the increase in average ticket size.

Marketing expenses for the second quarter of 2015 were RMB502.6m, as compared with RMB274.2m in the prior-year period. As a percentage of total net revenue, marketing expenses were 5.6%, as compared with 5.4% in the prior-year period, reflecting our strategy to drive long-term growth through increasing investments in strengthening its brand awareness, particularly for our mobile application, attracting new users, and expanding market share especially within product categories such as cosmetics, home goods, baby and child care products.

Technology and content expenses for the second quarter of 2015 were RMB245.7m, as compared with RMB131m in the prior-year period. As a percentage of total net revenue, technology and content expenses were 2.7%, as compared with 2.6% in the prior-year period, primarily reflecting our continued effort to expand headcount to better support future growth, as well as our investments in data analytics, which can help improve the ability to predict consumer behavior and further enhance user experience.

General and administrative expenses for the second quarter of 2015 were RMB286.7m, as compared with RMB225.9m in the prior-year period. As a percentage of total net revenue, general and administrative expenses decreased to 3.2% from 4.4% in the prior-year period, primarily reflecting the scale effect associated with our rapid growth in total net revenue.

Driven by the growing scale of our Company's operations and decreasing fulfillment expenses and general and administrative expenses as a percentage of total net revenue, our income from operations increased by 192.5% to RMB437.8m for the second quarter of 2015. Operating income margin increased to 4.9% from 2.9% in the prior-year period.

Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from a business acquisition, increased by 113% to RMB568.6m from RMB267m in the prior-year period. Non-GAAP operating income margin increased to 6.3% from 5.3% in the prior-year period.

Our net income attributable to Vipshop's shareholders for the second quarter of 2015 increased by 147.2% to RMB399.3m from RMB161.5m in the prior-year period. Net income margin attributable to Vipshop's shareholders increased to 4.4% from 3.2% in the prior-year period. Net income per diluted ADS increased to RMB0.66 from RMB0.27 in the prior-year period.

Non-GAAP net income attributable to Vipshop's shareholders, which excludes share-based compensation expenses and amortization of intangible assets resulting from a business acquisition and equity method investments, increased by 96.6% to RMB517.6m from RMB263.2m in the prior-year period. Non-GAAP net income margin increased to 5.7% from 5.2% in the prior-year period. Non-GAAP net income per diluted ADS increased to RMB0.86 from RMB0.44 in the prior-year period.

As of June 30, 2015, our Company had cash and cash equivalents and restricted cash of RMB4.4b and held-to-maturity securities of RMB2.9b.

For the quarter of 2015, net cash used in operating activities was RMB467.4m, as compared with net cash from operations of RMB183.7m in the prior-year period. This was primarily due to Vipshop substantially expediting our payments to suppliers in order to support their growth and create an ecosystem that will strengthen our competitive advantage. As a result, accounts payable days decreased to 71 days in the second quarter of 2015 from 80 days in the prior-year quarter. Meanwhile, we also definitely increased our supplier financing, and this was one of the largest cash outflow items in the second quarter.

Looking at our business outlook for the third quarter of 2015, we expect our total net revenue to be between RMB9.1b and RMB9.3b, representing a year-over-year growth rate of approximately 71% to 74%. These forecasts 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 Instructions). Alan Hellawell, Deutsche Bank.

Great. Thank you very much. My main question is, Donghao, as you rightly mentioned, we saw some very encouraging operating leverage, specifically in fulfillment and G&A this quarter. I just want to know how we should view margin trends throughout the rest of the year and in 2016. I ask this because the market seems to be quite fixated on top line growth and I know that the Company has in the past revealed a willingness on occasion to invest in marketing and other areas to stimulate growth. I sense that instead we're more satisfied with slowing but still very strong growth, and instead we're focused on cultivating profitability. Is that correct?

And then just very quickly, it looks as though maybe our cosmetics business may not be growing as quickly as the rest of our business and maybe even compared to our competitors. Would love some color there. Thank you very much.

Okay, Alan, thank you very much for your questions. On your first question, margin trend, and I believe the current margin level is sustainable in the long term. And the idea for this management team is to maintain the current margin level for a while, while focusing our resources in the cash and on top line growth.

And on the second question -- Millicent?

(Spoken in Chinese)

So, Alan, to summarize what Eric said. Q2 beauty over GMV was $246m, slumped down slightly compared to Q1 because, as you recall, in Q1 we had a major promotion on cosmetics in this year. And the other reason for that was, after we acquired Lefeng, we substantially cut their budget and their investment and to reduce loss, so that obviously impacted the overall top-line growth of Lefeng. But as a whole, Vipshop's overall beauty product is growing very strong and we continue to believe that in the future that segment is a major category for Vipshop. We continue to record healthy and fast growth going forward.

Alicia Yap, Barclays.

Hi. Good evening, Eric, Donghao, Millicent. Thanks for taking my questions. So I wanted to ask, given your fast expansion of the warehouse capacity and also your ability now to provide colocation service to some of your brands and also with your own delivery team, will you do anything differently this year for the single-space promotions in Q4? In other words, can you leverage your infrastructure advantage this year to orchestrate a differentiated November 11 promotional campaign that maybe allow you to capture more market share and user conversion? Thank you.

(Interpreted). So, Alicia, you mentioned that we have aggressively invested warehousing scale, last-mile capability and launched colocation. We have invested greatly in our logistics infrastructure to cater for any significant major promotion that we could consider in the second half. So, obviously, Singles Day is a major promotion in Q4, but we even have a bigger one in December which is to celebrate our anniversary.

So to sum it up, we have enough capacity and capability to handle any major promotion in the second half, in order to ensure smooth operation.

Natalie Wu, CICC.

Hi, good evening. Thank you for taking my question. I have two questions actually. The first one is, just wondering, if I look at your new customer acquisition cost, it seems to be growing rapidly for latest several quarters. So, how should we expect the sales and marketing expense for the following quarters?

And the second is, if I look at your other income item, it actually experienced some weakness on a sequential basis. Wondering whether it is due to the commission or advertising revenue on the marketplace. And can you share with us some color behind that? Thank you.

(Interpreted). So, Natalie, as a percentage of total net revenues, as you can see, marketing expenses increased only slightly from 5.4% in the second quarter last year to 5.6% in the current quarter, because we still believe that it is very important longer term to reinvest some of our profit into marketing by increasing our brand awareness, in particular to acquire more new mobile users. Marketing as a percentage overall will remain similar to the current level at around 5%.

One thing to highlight, the mobile new user acquisition cost is going up year over year. However, we believe this is a worthwhile investing from the longer-term perspective because of customers have high retention rates and they have a long-life value, which enjoys very high consumer economics to Vipshop's business.

Okay. Let me take your second question. I'm afraid I'm a bit confused by your second question. You said our other revenue in Q2 was down compared to Q1. But I just checked the numbers, it was actually up because we had a stronger [BLT] platform revenue. So I'm not sure if I got your question clear.

But anyway, we can take this offline if you want to continue to talk about it.

Gene Munster, Piper Jaffray.

Hey, good evening. And a question on the macro, I think there is some broader concern that some of the changes in the speed of the growth in China could impact your business. Any thoughts on how we should think about that going forward? And maybe over the last three months, how you feel that that's been impacting your business? Thanks.

(Interpreted). Okay. So, Jean, overall Chinese economy is achieving a new normal kind of growth rate, but overall online is joining for this to continue the same old market share for offline, so we are still enjoying the golden era in terms of growth for the entire e-commerce.

In particular, we are Vipshop in the countercyclical business nature. So we should be actually benefiting from, if in the future any potential slowdown of the economy, because we are selling substantially discounted products which is very affordable for a lot of consumers in China.

George Askew, Stifel.

Yes, thank you for taking the question. In the release you state that the Company is substantially expediting payments to suppliers in order to support their growth. What is the benefit to Vipshop here? Is it to win more suppliers, more categories, does it help your platform, your colocation business? And is this a permanent change? Thanks.

(Interpreted). We believe in creating a win-win business relationship with suppliers. So we always have suppliers interest in mind. As you mentioned that we recently shorten the account payable turnover days because our business in nature is very profitable. And we don't need to delay payments in order to generate further cash or further earnings. The ability to shorten the payment of the turnover days is to help our suppliers to offer term that working capital management.

Cynthia Meng, Jefferies.

Thank you, management. I have a follow-up question on the cross-border e-commerce business. Can management give us a more color on current GMV contribution to total from this part of this new initiative and is there any margin difference between cross-border and your core business. In addition, if there's any description of your customer profile, particularly interested in our cross-border e-commerce inbound business and that will be great. Thank you.

(Interpreted). So Cynthia, we are not disclosing the specific GMV contribution, but what we can say is just within a short period of two quarters, we recorded 10 times the growth in terms of GMV for the cross-border. And we are pleased to find that our margin for the cross-border is actually higher than our domestic core flash sales business.

And in terms of customers, we are nurturing and pleased to find that some of our existing customers once they're engaged shopping on their cross-border business, they are spending much more compared to their previous shopping behavior.

In terms of categories, we are aggressively adding more. We already established bonded warehouses in China to insure faster customs clearing to expedite delivery. At the same time we have overseas merchandises ready to engage cooperation with global brands.

Jin Yoon, Mizuho Securities.

Hey, good evening guys. I think I have a bit of confusion around your 84.4% total customer growth. Any chance you could reconcile that number for us between the count for the core versus the group buying in the Lefeng? And what was the number for the repeat? And can you kind of break that out for us for the last handful of quarters so we can actually see the run rate heading into this quarter? Thanks.

Thank you very much for you question. This is Donghao. Well, obviously you're asking there a lot of details in non-written data. I'm afraid we can't go into that much of detail on this call and we hope we can take your question after this call.

Wendy Huang, Macquarie.

Thank you. I have two very quick questions. First, can you give a sense how big your in-season product sales is, whether it has exceeded 20% of the total GMV? And also are you seeing your business affected by the declining inventory level in the retail industry?

Secondly, recently we have seen some M&A activities in the baby maternity category such as (inaudible) acquisition of Baobaoshu. So how will this actually affect your baby and maternity business growth going forward. Thank you.

(Interpreted). So Wendy, currently we do have brands who indigenous selling in-season inventories of official-made products that account for 30% of our apparel category.

In terms of sourcing or supply from our brand partners, we haven't and we don't expect to experience any bottlenecks, because a lot of the brands, we have a lot of inventories to be cleared. And at the same time there probably are in-season inventories ready to be moved through our channel and even take it further, down the road we can consider customers' products if we wish. So we are not seeing any bottleneck in this regard.

(Interpreted). So yes, so we had seen a lot of verticals in the baby and maternity making a lot of moves recently and we at Vipshop are not staying complacent and we are catching up very quickly and making a lot of new initiatives. To catch up with this big trend, in the past we have done quite a bit of maternity in terms of shoes, apparel and recently we expanded into milk powder, diapers and other categories. So we expect that in the future this category will recall more progress in future.

Binnie Wong, Merrill Lynch.

Hi, thank you for taking my questions. So I have two questions here. One is just a quick follow up on the margin improvement. So we look at the G&A and the larger expenses, compared to first quarter is actually declining in both absolute values and also as a percentage of sales. So just want to see what has changed just from first quarter to drive this? And I guess going into second half, what is Company's strategy, whether it will be reinvesting in the margin upside? Just wanted to get a sense of the sustainability of margin improvement.

And a second question was just a quick follow-up on the [hitao] business. Can Company share with us what are the core key categories would be? And also, why is that [Donghao] was saying that we can have a higher margin than you see in the core business. So just want to see where is the margin upside coming from. Thank you.

Well, thank you, Binnie, for your questions. Well G&A in Q2 was only down slightly than Q1, basically it was largely flat, well, due to our cost control efforts and also due to being a low season in the year. And you're right. The idea now is to reinvest some of the profits back to the business to drive topline growth, while maintaining the current margin level. So we believe, as we continue to grow our volume and achieve more operating leverage, the current margin level is sustainable in the long term.

And your second question, now the biggest category for our cross-border business is mom and baby, cosmetics and apparel. And actually the cross-border business has higher gross margin in our core business. Let me be a bit more clear on the margin profile of our cross-border business. The gross margin is higher, but if you consider the fulfillment cost both overseas and inside China, so the net margin level is very similar to our core domestic business.

Tian Hou, TH Capital.

Hi, Millicent, Donghao and Eric Shen, couple of questions. One is related to your recent promotional activities in the second quarter and July and early August. One thing we have seen is, instead of a big storewide promotions once in a while, you have a lot of small promotions. And I wonder what's the thought behind the new promotion arrangement? Is that helpful to you more than occasional big promotions or otherwise? So what's the thought behind it? That's number one.

Number two, last year this time you announced the investment in US to have a R&D center. I wonder a year later, how does R&D center contribute to your technology improvement and where we are in terms of the center.

The last question is the guidance. Guidance is slightly below Q2 growth guidance and I wonder based on what you gave this kind of a guidance? Do you see any weakness in July? That's all my questions. Thank you.

(Interpreted). Okay, so, Tian, so you just mentioned that this year, yes, rather than doing more major promotions, instead we're doing more promotions surrounding different categories, different brands and different sales events in order to capture customers' attention to encourage them to spend. And as you can see recently we work very closely with brands to do more brands sales to give them maximum exposure. And the effect has been very effective.

And then your second question on the R&D contribution, it has been a year since we had that R&D. It's starting to contribute in a lot of ways. Number one, the teams are working more closely within the US office and the China office and obviously they are -- the brand are able to bring a lot of new ideas, innovations or creativity back to China and to do some pioneering programs. So it has been worthwhile and hopefully in the future we'll see further contribution from the team.

Let me take your third question about our guidance. I think our guidance is okay compared to Q2 and we guided RMB9.1b to RMB9.3b topline for Q3 reflecting about 71% to 74% year-over-year growth and that's exactly the year-over-year growth when we give guidance for our Q2 revenue. So overall, we believe that the growth of our core business that we actually saw is still very fast and strong and healthy.

Thomas Chong, Citigroup.

Hi, thanks, management, for taking my questions. I have one question regarding the supplier chain financing business. Can you comment about the scale of this business in the second quarter? And also can you talk about whether this business is profitable business? Thanks.

(spoken in Chinese).

Sorry, okay, let me take that question. Well, we started our supplier chain financing business in September 2013, so it's a little less than two years. As of the end of the second quarter of this year 2015, the daily balance of our factoring business was about RMB350m. So it's growing very fast. It's still not a profitable business at the current scale, but we believe over the long run, number one, our factoring business will support our suppliers to do more business with us, and number two, the factoring business itself will become a profitable business.

Xiaoyan Wang, 86Research.

Hi, Donghao, Eric and Millicent. Thank you for taking my question. Congratulation on the solid quarter. I have two questions. Donghao mentioned you will reinvest, you've refocused on topline growth, so I just want to get a little bit more color on your user growth momentum going forward. It would be nice if you can breakdown for example the user from tier one, tier two city and lower tier cities or breakdown the orders from the different two markets.

I have another question on cash flow. Because of your returning that payment to supplier faster than before to improve relationship, can you give a sense of how we should look at the comparable days going forward, now we are around 70 days coming down from 80 days last quarter. What will that be in the next few quarter or this year?

And I also see that the advance from customer also actually reduced by somewhere around $60m. Can you give us some color on that? That will be questions. Thank you very much.

(Interpreted). So Xiaoyan, if we look at the growth rate excluding the impact of [Weipinhui] and Lefeng, our core business has recorded very strong and healthy growth and we expect that trend to continue in future.

Okay, let me take your other question about our cash flow. Well, in the long term as the impact from these new payment policies and supply financing activities are fully reflected in our operating cash flow situations. We believe our operating cash flow will be positive as we continue to grow our volume and improve profitability.

John Choi, Daiwa Capital.

Thanks, guys, for taking my question. I have actually a couple of questions. Remember that during the prepared remarks, you guys talked about the automation that has been quite successful in the Tianjin facilities. I was wondering how much investment as you acquired in order to replicate this other fulfillment facilities and in that case, how much saving or in terms of the fulfillment expenses, how were this positive impact on operating margins going forward?

Secondly, I want to quickly go back to the hitao margin business. Remember, Donghao, you mentioned that gross margins are higher and the net margins are more similar. That more or less means the fulfillment cost is higher. So, in the longer run, how should we be seeing this and going forward? Thank you.

(Interpreted). Okay, so, John, the Tianjin automation CapEx is around RMB100m and obviously with that automation, we don't need to increase the labor as fast compared to that in the past and with that CapEx we can reduce the headcount of around 300 people and based on initial calculation, it might take around three years to break even that project.

Let me take your second question on the fulfillment cost for last quarter business. While the fulfillment cost for cross-border business are definitely higher because we have to take care of the shipping cost overseas, but again in the long run as we improve the efficiency of our fulfillment or supply chain, and also we can achieve more operating leverage as our volume continues to grow, we believe that the total fulfillment cost will go down.

Henry Guo, WR Hambrecht.

Hey thanks for taking my question, so quick one, on the warehouse capacity, so what is the utilization rate as for now? So in management view what is the best utilization rate coming into the Q4 this year?

And also, CapEx, do you guys have any visibility in terms of CapEx for second half of this year and next year. Thank you.

(Interpreted). So obviously as you are aware we are still building and adding more capacity, so we are not running at full utilization. But what we are saying is with the current capacity, we have not experienced any buffer next for our business. And obviously July is the low season, so there is still room to improve the ramp up that utilization rate.

And there is very strong seasonality in our business as the major apparel retailer in China. And every year our Q4 is our peak season, so we're expecting the utilization rate of our warehouse to go up significantly as we get into the fourth quarter of this year.

And about the CapEx, we have told our investors that this year and most likely for the next couple of years, we're going to spend about $250m roughly every year on our warehouse expansion project.

Thank you. There are no further questions at this time. I would now like to hand the conference over to Mr. Donghao Yang, the CFO. Please go ahead, sir.

Well, thank you again very much for coming to our call. And I am looking forward to seeing you guys in a few months.

Thank you.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, you may all disconnect. Thank you.

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