Vipshop Holdings Ltd (VIPS) 2016 Q3 法說會逐字稿

Ladies and gentlemen, good day, everyone and welcome to Vipshop Holdings Limited third quarter 2016 earnings conference call.

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

Thank you, operator. Hello, everyone and thank you for joining Vipshop's third quarter 2016 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 expectation, assumption, 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 be only as of the day itself 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, our Co-founder, Chairman and CEO and Donghao Yang, our CFO. I would now like to turn the call over to Mr Eric Shen.

Good morning and good evening, everyone. Welcome and thank you for joining our third quarter 2016 earnings conference call. We are pleased to have delivered solid financial results and healthy customer growth despite a seasonally soft quarter for retail.

Our third quarter results continue to assume the power of our platform to attract and expand our customer base, while retaining our low yield customers. The superior user experience led to improved user stickiness, as proven by the strong 49% year-over-year increase in repeat customers to 16.7 million.

Despite macro weakness, our robust customer growth and retention is the foundation of our business model.

Our active customers for the past 12 months ending in September 2016 exceed 46 million, up 57% year-over-year. And compared to our peers, this means that we do have a lot of room to grow in terms of customer base expansion.

We are confident that our strong foundation will continue to drive our business growth and enable us to maintain our market leadership, regardless of macro environment changes.

As a leading online discount retailer for brands in China, we are committed to advancing the end-to-end shopping experience with diverse products, one of our key focus areas, and to use big data to better understanding our users. We continued to expand the numbers of brands on our platforms, while optimizing the overall brand portfolio.

Moving on to our successful single day this year, sales surpassed RMB100 million in the first 15 minutes and the total GMV increased by 75% from last year's event. This robust performance shows the strength and the potential of our platform.

Lastly, as you know, we recently announced our acquisition of Pui Fu, a third party payment license holder. This investment allows us to lower costs, improve information security and to retain payment information for big data analysis.

It represents an important milestone in our journey to advance our platform and to complete our ecosystem.

At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategy in more detail and go over our operational and financial results.

Thanks, Eric and hello, everyone. We are pleased to announced solid operational and financial results for the third quarter of 2016.

Consistent with our core strategy, we were able to achieve strong top line growth and market share gains, while maintaining stable margins.

In the process, we are making solid progress with the cross border business, which contributed 5% to our GMV in the quarter and represented more than 50% year-over-year growth. We expect this business to grow much more as we introduce more foreign brands to our platform.

As we experience an ongoing evolution of shopping habits around China, we strive to evolve with the customer habits in order to constantly stay in front of them and provide them with increasingly personalized merchandise. As an example of this, during the past quarter we launched a series of content marketing programs that enhance our customers' shopping experience.

These programs include live broadcasting channels, shopping guides with featured graphics, grand events and proprietary video shopping guides.

Going forward, we will continue to explore and embrace new retail formats and technologies that help us further engage our customers and understand their preferred shopping habits.

Turning to logistics, we continue to focus on building a strong infrastructure and warehouses and logistics networks, which enhance our order fulfillment capabilities.

We have made initial progress in introducing customized automation in our warehouses. As of September 30, 2016, we have approximately 1.7 million square meters of warehouse capacity and are on track to reach approximately 2 million by the end of this year.

Moving on to our customer and supplier financing programs, we remain focused on investing in these efforts and continue to build on our initial success here.

As of September 30, 2016, the total balance of credit outstanding to our customers was approximately RMB1.5 billion and the total balance of credit outstanding to suppliers was RMB525 million.

Looking forward, we will stay focused on market share gain, while balancing our margins. We are big believers in building long-term sustainable relationships with our suppliers. This means that we will provide our suppliers with high value-added services, including data and knowledge sharing and customer profiles and shopping behaviors, third party logistics and proprietary [assistance] for inventory management to maximize those opportunities. We are confident that we are investing in the crucial areas to enhance our ecosystem and generate sustainable value for all of our stakeholders.

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

Total net revenue for the third quarter of 2016 increased by 38.4% to RMB12 billion, primarily attributable to a 43% year-over-year increase in the number of active customers, which grew to 20.8 million and a 34% year-over-year increase in total orders to RMB60.1 million.

Gross profits for the third quarter of 2016 increased by 36% to RMB2.93 billion, primarily driven by the expanding scale of the business. Gross margin for the third quarter was 24.4%, as compared with 24.9% in the prior year period.

Fulfillment expenses for the third quarter of 2016 were RMB1.03 billion, as compared with RMB778 million 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 8.5%, from 9% in the prior year period, primarily reflecting the scale effect associated with our growth in total net revenue and improved fulfillment efficiency.

Marketing expenses for the third quarter of 2016 were RMB642 million, as compared with RMB470 million in the prior year period, reflecting our strategy to drive long-term growth through sustainable investments in strengthening our client awareness, attracting new users and expanding our market share. As a percentage of total net revenue, marketing expenses decreased to 5.3% from 5.4% in the prior year period.

Technology and content expenses for the third quarter of 2016 were RMB374 million, as compared with RMB253 million in the prior year period, reflecting our continued efforts to invest in human capital, advanced technologies such as data analytics, as well as new business opportunities, including our internet finance unit.

As a percentage of total net revenue, technology and content expenses were 3.1%, as compared with 2.9% in the prior year period.

General and administrative expenses for the third quarter of 2016 were RMB501 million, as compared with RMB297 million in the prior year period, primarily due to the build-out of our internet finance team. As a percentage of total net revenue, general and administrative expenses were 4.2%, as compared with 3.4% in the prior year period.

Our income from operations increased by 21.3% to RMB529 million for the third quarter of 2016. Operating margin was 4.4%, as compared with 5% 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 24.8% to RMB732 million, from RMB587 million in the prior year period. Non-GAAP operating income margin was 6.1%, as compared with 6.8% in the prior year period.

Our net income attributable to Vipshop's shareholders for the third quarter of 2016 increased by 8.3% to RMB343 million from RMB317 million in the prior year period. Net margin attributable to Vipshop's shareholders was 2.9%, as compared with 3.7% in the prior year period. The decline is primarily attributable to a RMB65.9 million impairment loss of investments. Net income per diluted ADS increased to RMB0.58 from RMB0.53 in the prior year period.

Non-GAAP net income attributable to Vipshop's shareholders, which excludes share based compensation expenses, impairment loss of investments and amortization of intangible assets resulting from a business acquisition and equity method investments, increased by 31.5% to RMB595 million from RMB453 million in the prior year period.

Non-GAAP net margin attributable to Vipshop's shareholders was 5% as compared with 5.2% in the prior year period. Non-GAAP net income per diluted ADS increased to RMB1 from RMB0.76 in the prior year period.

As of September 30, 2016, the Company had cash and cash equivalents and restricted cash of RMB4.94 billion and held-to-maturity securities of RMB71.3 million. For the third quarter of 2016, net cash from operating activities was RMB0.65 billion.

Looking at our business outlook, for the fourth quarter of 2016, we expect our total net revenue to be between RMB18 billion and RMB18.5 billion, representing a year-over-year growth rate of approximately 30% to 33%.

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

Thank you. Ladies and gentlemen, we will now begin the question and answer session (Operator Instructions). Alan Hellawell, Deutsche Bank.

Great, thank you very much. Just with that seasonal and sequential decline in active users and new users in the third quarter, how should we think about these trends going into the fourth quarter?

Also I think new user acquisition costs rose in the third quarter and similarly, where do you expect that to head in this quarter?

And then finally, more of a big picture question, regarding visibility going into 2017, what specifically might you point to that drives your confidence in growth next year?

Thank you very much.

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So Alan, to quickly summarize what Eric just said, so obviously Q3 is the low season.

And in terms of the slower growth on new users during the quarter, Eric mentioned that we have done some things to optimize the new user quality to balance between the growth of the new users and the quality of the new users.

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So Alan, in the third quarter the new user acquisition cost increase was due to a one-off pre-committed marketing or branding related expenses, which we do not have that much in the fourth quarter.

And in the third quarter, we spent some money on something in singing contest, which is called China Voice and that is a one-off.

And looking into the fourth quarter, even into 2017, we believe the new user acquisition cost is going to be largely stable.

(Spoken in foreign language).

So we are still very confident of our growth in 2017 and that kind of confidence is largely deriving from the good foundations that we have laid over the years, in particular in 2016.

And also the prospect of the new user growth into 2017, in China there's a big population for online shopping and we still have a lot of room to grow in terms of customer base assumption.

Binnie Wong, Merrill Lynch.

Hi management, thank you for taking my questions. I have a question on the personalization technologies. As our business grows bigger and bigger, being able to do more cognitive personalization becoming more and more important, can you just share with us your latest update on the strategy and also any key metrics that you can say maybe in your conversion rate?

How that has been improving quarter-on-quarter.

And then can you also talk about your internet financing strategy? How are we going to manage the customer default list? Thank you.

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So Binnie, in terms of personalization and big data, we have invested a lot of human capital, technology and resources to explore ways and means to improve that.

So obviously during the second quarter we shared with investors that in terms of improvement to sales is more than 17% and the good news is that in the third quarter that improvement is even bigger compared to that in the second quarter.

And we have also tried to utilize a lot of resources and data to understand different customers, each profile, their gender, their shopping habits, their search function and their mobile application, et cetera.

So we believe that there's a lot of room to improve that going forward.

So to answer your question which is concerning the conversion rate, we have seen some meaningful improvement year-over-year and the conversion actually improved by more than 10% in the third quarter, compared to that in the same period last year.

Okay, Binnie, thanks for your question, let me take your question about our internet finance unit. Our internet finance business is growing healthily and in an orderly fashion. The goal is to strengthen supplier relationships and improve our user stickiness.

The total outstanding balance for supplier financing at the end of third quarter 2016 was approximately RMB525 million and RMB1.47 billion for consumer financing respectively. Internet finance business, of course, Vipshop is still in its infancy and not yet profitable.

How do we control risks? We have a very good and seasoned team of experts responsible for monitoring fraud, analyzing default behaviors and with the help of big data, adjusting credit approval metrics accordingly.

Also members of the team come from professional backgrounds in the fields of credit cards, banks and information services, with an average relevant experience of seven years.

And also recently we've hired a Chief Risk Officer for our internet finance unit, who has got over 20 years of financial risk control experience in the banking and credit card industries.

Jin Yoon, Mizuho Securities.

Hi, good evening, guys, just a couple of questions from me. First of all, can you just talk about your double 11 sales in 2016? I know that GMV, I think, in 2015 grew north of 200%. If you could give us an update on what happened on 2016, that would be great.

And then second of all, Donghao, in your prepared remarks you mentioned that you guys are going to be working more closely with international brands.

If so, is there a balance sheet risk to that, where you have to actually carry inventory more so than your traditional products, as well as potentially cash flow, given the fact that you may have to pay them at a faster rate? Any insights there? Thanks, guys.

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So Jin, for the singles day we recorded more than 75% of our year-over-year growth in GMV.

Well let me take your second question about the inventory risks in our business with international brands.

I think if you're talking about international brands, most of them are actually doing business in China. So we take the inventory within the country and most of the business is on consignment basis, so we do not carry much inventory risk.

But if you were talking about our cross border business, then we do carry -- we do have to purchase some of the inventory from our overseas suppliers upfront.

But for most of our double 11 business, the FTUs that we carry are for the sterilized products. For example, cosmetics and healthcare and mum and baby products. A lot of the (inaudible) move really fast, so the inventory risk is very, very low.

(Operator instructions). Alicia Yap, Citigroup. Please ask your question.

Hi, good evening, Eric, Donghao, Millicent, thanks for taking my questions.

I have a question regarding your customer metrics and also the orders number. So we're seeing that the repeat customer percentage and also the orders from repeat customers actually improved, slightly higher this quarter.

So does this imply that the new and younger customer that you acquire in the second quarter did not return to buy in the third quarter? And do you think these young customers would come back in the fourth quarter and future quarters? Thank you.

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So Alicia, yes, actually for the third quarter repeat purchase was historic high. This is very good for our foundation. And the second quarter, yes, we added quite a lot of new users, some of the new users may not return in the third quarter, but are likely to return in the fourth quarter, even in the future.

The question that we are thinking is on one hand it's important to grow the user quantity, but on the other hand, we do want to make sure that the quality of the new users that we're adding to our platform is optimized.

So we continue to make more effort on this regard, to make sure that we're not only able to grow our new users, but on the other hand, our existing users are able to increase their repeat purchases and ARPU on our platform going down the road.

Jialong Shi, Nomura Securities.

Hi, good evening, Eric, Donghao and Millicent. Thanks for taking my question. I have a question about your Internet finance business.

We learned that some of your peers, like JD, decided to dispose of this Internet finance business in order to enable the Internet finance subsidiary to conduct more licensed finance business, and meanwhile to reduce the strain on the parent company's cash flow and the margins.

For your company, we also saw Internet finance business had a quite meaningful pressure on your margin for Q3, so I just wonder -- I just wonder how much losses this Internet finance business caused in Q3 and how much you will invest in this business for next year.

And lastly, just wonder if [Shen-zong] may consider following in suit of your peers like JD to restructure your Internet finance business as well. Let me translate the question myself.

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Okay, so Jialong, the main purpose of our Internet finance business is to help our core retail business. The function is to facilitate credit to our existing customers to help them increase our ARPU and spending on our website over time.

And actually, we have some early numbers -- earlier show with investors how Internet finance is helping our existing customers.

And next down the road we'll probably increase our customer penetration for this business. In terms of spinning off and pursue listing, currently, we do not have clients yet.

Okay. All right, Jialong, thank you very much for your questions and let me take your second one. Well, we have two major business lines within our Internet finance business. One is the product financing.

The other one is consumer financing. Actually, we've been doing our supplier financing for almost three years, and the business itself has already turned profitable.

Consumer financing we've just started for about a year, and currently, it's not profitable, but the loss is very, very small, because the default risk is very low. It's between 0.2% and 0.5%, so as you can see in our income statement, our G&A expenses have gone up slightly as a percent of revenue.

One main reason behind that increase in our G&A expenses is actually because we've hired key people for our Internet finance unit.

And going forward in 2017, we will continue to make investments in that unit, and I think most of the investment will go to the hiring of key people, building the strong, capable team.

In terms of business risk, we will continue to be very, very conservative, very, very careful in terms of risk control, so that I believe the total loss from our Internet finance unit will be well under control.

Julia Zhu, Morgan Stanley.

Hi, [Shen-zong], [Yang-zong], Millicent, thank you for taking my questions. I have two questions here.

We note that overall Internet users, online shoppers and industry GMV has been decelerating this year, with the expectation also being reset.

Could management share with us how we should look at the future general trend and industry wise or company specific, like how to maintain a faster than industry average growth rate?

Could you also give us more colors on some social e-commerce initiatives underway? And I will have a follow-up question later.

(Spoken in foreign language).

(Spoken in foreign language).

So, Julia, just for the benefit of others, I will quickly translate that. So for your first question is -- so Eric's response is yes, overall, the e-commerce growth rate is not as strong compared to that in the past, but don't forget the China online shopping population base is actually quite sizable, so we don't see the ceiling for our growth.

We will continue to use our entry barrier, which is the substantial discounting, discount retail and differentiation to gain market share from our peers.

And in terms of engagement with our users, so obviously in the past was purely on display functions, but now we are pursuing more and exploring more ways and means to engage with our customers.

That includes content driven, includes [former] online streaming and broadcasting and imaging and data reading, etc. So we continue to explore and be open-minded to pursue different ways and means to increase the engagement from our customers.

So, Julia, do you want to ask another question?

(Operator Instructions). Monica Chen, Credit Suisse.

Hi, management, Eric, [Vincent] and Millicent. Thank you for taking my questions. I have one question regarding our fulfillment expense, so we continue to see very strong fulfillment leverage in this quarter, so as presented your revenue, it's 8.5, same as last quarter, which is it's a continuous decrease from the past quarters.

So we just want to understand how should we think about these trends in the future? Can we maintain this strong consumer leverage going forward? Yes, thank you.

Okay, well thanks for the question. Let me take this one. We have done quite a lot of things to lower our fulfillment expenses as a percent of revenue. One, we're building massive warehouses to achieve economies of scales.

By the end of this year, we're expecting to have about 2 million square meters in total warehouse space.

And secondly, we're making huge investments in the automation systems in our warehouses. The first automation system was implemented in our Tianjin warehouse about a year ago.

The automation system has helped us improve efficiency, reduce labor cost and achieve economies of scales in our warehouses.

Thirdly, we have always been trying to increase our average ticket size, so that as a percent of revenue, the fulfillment costs will continue to go down.

Going forward, I believe that we can maintain our fulfillment costs at a low and stable level, but whether or not we can further lower the fulfillment expenses really depends on a few things, and one of which is actually out of our control.

The labor cost in our warehouse operations is a significant part of total cost, and as we know, labor cost in China has been going up very rapidly in the last five years.

Although we're trying very hard, working very hard, to improve efficiency and lower costs in our warehouses, but again, the general trend of labor cost going up may offset some of our, if not all of our, efforts going forward.

Ms. Wendy Huang, Macquarie.

Thank you. I have a few housekeeping questions. First, could you give an update on the cosmetic sales and also cross-border sales GMV data?

And also secondly, on the Internet finance side, you just mentioned about the [earning] balance of the consumer credit and supply credit. How about the total loan amount for these two Internet finance businesses, respectively?

Lastly, on the operating cash flow, we noted there were a little bit of scale-backs from last quarter's RMB1.2 billion to RMB800 million this quarter. Was this due to the seasonality or is there another reason affecting this?

And also free cash flow also seems decreased sequentially. Besides a CapEx increase, is there any other reasons affecting the cash flow? Thank you.

(Spoken in foreign language).

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So in the third quarter, first quarter contributed 5% to our total GMV, and we recorded substantial growth year over year. Eric believes that the cross-border business, the market is quite sizable, so he will continue to invest more in this business to obtain more growth down the road.

Okay, well, let me take your second question about cash flow. I think our cash flow has been quite healthy and stable.

I think you were probably talking about the fluctuations in our capital expenditure in Q3 versus Q2 or a year ago, which is very normal, because we're building massive warehouses and spending massive amount of money every quarter, and the capital expenditures could fluctuate according to the construction schedules or payment schedules.

So overall, if you look at our cash flows in the past few quarters, it has been quite stable, and I'm pretty confident that going forward our cash flows from operating cash flows or free cash flows will remain in a healthy situation.

Ronald Keung, Goldman Sachs.

Thank you. Thank you, [Shen-zong], [Yang-zong] and Millicent. Just a question on the customer background and behavior.

Could you share with us the demographics of post-'90s split between top and lower-tier cities, female and male? And most importantly, just want to know the time spent, if you have any data about the time that they spend on the app of the big data.

And just lastly on the customer side is we've seen some stabilization of ticket sizes or GMV per order.

What's your expectations of that as we head into next year and also with Internet financing, is that boosting your overall ticket size? It may actually begin to grow, to increase. Thank you.

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(Spoken in foreign language).

So the first question first, in terms of different tier cities' contribution, so the tier-one cities is actually 14%, 38% for tier two, 25% for tier three and the remaining 23% from tier four and below.

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In the third quarter, actually more than 50% of new users are coming from the post-'90s, and that percentage has been going up quite steadily over the past few quarters.

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So we're actually quite optimistic in terms of the improvement and the optimization of the ARPU going forward, so as you can imagine, it's an increase in number of new users that are younger on our platform, so in the near term, the ARPU declined, which is inevitable.

But as you can see, in the first quarter and second quarter versus the third quarter, that decline has been actually narrowed.

So as we're continuing to optimize the balance in quantity and quality of new users, we believe that there's still a lot of room to improve their ARPU going forward.

John Choi, Daiwa.

Good evening. Thanks for taking my questions. Just a quick follow up on the optimizing the quality of new users. Could you guys elaborate a bit more on here and what exactly you are doing differently to achieve this?

Does this mean that you guys will be less focused on the younger generation and perhaps the user retention rate will go up?

Secondly, just quickly on the G&A expense, right -- [3%] for this quarter sequentially is up by 70 basis points. I remember, Donghao, you just mentioned it's mainly because of the Internet finance business unit hiring. Is this going to be the new norm going forward?

Thank you.

(Spoken in foreign language).

(Spoken in foreign language).

So, John, we have different webpages for new users. In the past, we have using different ways and means to improve the conversion rate by offering coupons and perhaps more SKUs that have lower average ticket size.

However, we found that actually overall the news quality is less ideal, so what we have done here is we have still a little bit of rebalance between the categories that we offer to our new customers and also the [ASPs] that we offer to them.

So less standardized categories.

So as we continue to do this, we believe that this is actually quite beneficial to optimize and balance the overall quality and growth rate of our new users.

Okay, well, let me take your second question about our investment in our Internet finance unit.

Well, in order to full a strong (inaudible) we've been hiring very good people for our Internet finance unit in the last few quarters, so as you can see in our financial expenses, our G&A expenses as a percent of revenue have gone up.

For the near term, for the next several quarters, I think you may see a similar pattern in slightly increasing our G&A expenses, but I do believe in the long term, as our top line continues to grow, and as our Internet finance team continues to mature, the G&A expenses as a percentage of our total revenue will go down.

[Eric Glen] of [Blue Lotus].

Hi. Good evening. Thanks, Eric, Donghao and Millicent for taking my questions. Can management give us some color on the preparation to the December 8 anniversary sale in terms of eventually stocking and brand recruiting?

And also last year I remember our Q4 and Q1 result was impacted by the warm weather, and how do you see the weather shaping up this year and how would it impact revenue growth in these two quarters?

(Spoken in foreign language).

(Spoken in foreign language).

So, Eric, as there are no [December], the eighth is the single biggest promotion that we will do every year.

We have already invested a lot of energy, time, resources and have a lot of high hopes for that particular promotion. Obviously, our goal would be to surpass what we did last year.

We internally have targets for our sales, GMV and then our new users. We're still pretty confident in terms of what we can achieve out of these promotions, and whether wise, this year honestly, Q4 is generally speaking a little bit colder compared to last year.

However, weather is nothing that we have control of. We will adjust our brands and our categories accordingly.

At this time, I would now like to hand the conference to Mr. Donghao Yang for the closing remarks.

Thank you all for taking the time to join us, and we look forward to speaking with you next quarter. Thank you.

Thank you.

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