Thank you for standing by and welcome to the First Quarter 2016 Baozun Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today Monday, May 23, 2016. I would now like to hand the conference over to your first speaker, Ms. Caroline Dong, Investor Relations Officer. Please go ahead ma’am.

Thank you, operator. Hello everyone and thank you for joining us today. Baozun’s earnings release was distributed earlier today and is available on our IR website at ir.baozun.com as well on global newswire services. On the call today from Baozun are Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Junhua Wu, Chief Operating Officer and Mr. Beck Chen, Chief Financial Officer. Mr. Qui will review our business operations and the Company highlights followed by Mr. Chen who will discuss financials and guidance. We will be available to answer your questions during the Q&A session that follows. Before we begin, I’d like to remind you that this conference call contains forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, target, going forward, outlook and similar statements. Such statements are based upon management’s current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company’s control, which may cause the Company’s actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the Company’s filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer Mr. Vincent Qiu. Mr. Qiu, Please go ahead.

Thank you, Caroline and thank you everyone for joining our earnings call today. Our business continued to gain momentum with another strong quarter of solid growth. On a year-over-year basis, total net revenue beat guidance again, increasing 40% while total GMV increased by 60% and the net income doubled. Two days ago, we celebrated our one year anniversary as a public company. Our listing was a significant milestone for us. We intend to keep learning, growing and improving as a Company while striving to live up to our corporate model, a superior model. Brand e-commerce, connecting brands and the consumers through official online stores and authorized marketplace stores have been growing even faster and more consistently than overall e-commerce market in China. We are seeing brands increasingly adopting e-commerce as their key retail strategy for China. This allows them to take advantage of the tremendous growth opportunities in brand e-commerce as consumer aspirations shifts towards branded products and services and to bypass China’s challenging offline retail landscape. Our growth continues to be driven by this trend. The total number of brand partners increased to 116 at the end of the first quarter. We signed a number of new brands that we are very excited to introduce to Chinese consumers. These brands include a leading electronics, a leading swimwear and a global luxury cosmetics brand. We’re also in talks with a number of other brands seeking to take advantage of the incredible growth opportunities that China’s e-commerce solutions, market and the growing consumer base presents. As we add new and innovative e-commerce solutions and expand our geographic presence, we expect to see more brand partners approach us. We expanded our brand partners’ end-to-end e-commerce solutions business into Taiwan in April, starting with a launch of a leading global sports organization’s official…

Thank you, Vincent. Just a few housekeeping items before I go through the numbers. We believe year-over-year comparisons are one of the most useful ways to judge our performance. All percentage changes I am going to give will be on that basis. So to start, GMV during the quarter increased by 60% to RMB1.9 billion, Maikefeng contributed RMB51 million to total GMV, an increase of 125%. Our focus remains on growing the non-distribution GMV business model which increased by 76% in Q1. We believe the continuous optimization of our business model mix will further decrease inventory risk, improve working capital position, and increase our margin profile. Total net revenues beat our guidance by increasing 40% to RMB668 million. Breaking it down further, product sales revenue rose by 32% to RMB466 million, mainly due to increased popularity of our brand partners’ products and increasingly effective promotional and marketing activities. Maikefeng accounted for RMB4 million in product sales revenues. Services revenue rose by 64% to RMB203 million of which Maikefeng contributed RMB3 million. The increase in services revenue was mainly due to growth in sales of apparel products sold by existing brand partners as we expand their online presence and addition of new brand partners in the apparel category. Total operating expenses were RMB664 million. In particular, cost of products rose to RMB411 million, primarily due to the increase in the volume of product sales. Maikefeng accounted for RMB5 million in cost of products. Fulfillment expenses rose to RMB93 million. The increase was mainly because of the increases in GMV contributions from the consignment business and increase in the proportion of deliveries made by a premium delivery service provider and increase in rental expenses for our warehouses. Maikefeng accounted for RMB1 million in fulfillments expenses. Sales and marketing expenses rose to RMB119…

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Robert Lin from Morgan Stanley. Please go ahead. Your line is now open.

Two questions here. I guess, could you provide a little more color on your same-store sales growth, may be for the first quarter as well as some color on the second quarter so far, if possible? And second is that we know that your gross profit is growing faster relative to your total GMV, which implies that your margin is improving. Now the margin improvement, could you quantify how much of that is coming from value added service that we are providing to the brands or the platform conversion is becoming better, meaning like Tmall has been pushing a lot more data analysis that provide high conversion for us and the brands; kind of give a little more color on that. Thank you.

So, for your first question about the same-store sales growth for Q1 is around 50%, a little more than 50%. So for the whole year, I believe for the whole year of the same store for existing store, the growth rate year-over-year could be 40% to 50% for the whole year basis. And about the second question on the gross profit, right now, I mean for right now for the most of the sales is being Q1, and the same store growth is coming from the general sales growth instead of lot a of marketing -- sorry, a lot of value added services being sold. This is our next step and we will develop and further respond in this gold mine.

And I guess the follow-up on this, could you provide a little bit about your mix of your GMV and by category if there’s going to be a lot changes through this year? We know this last year you took out some of the electronics, PC, and how should we think about that this year?

In the release, we emphasized that the revenues increased mainly and primarily due to increases in sales of apparels and sportswear categories. So generally, compared to last year, apparel is still the leading category of our holdings. And electronics and together with appliances is relatively stable but apparel category has definitely gained shares of the total amount. Instead of that for the traditional very big GMV contributor like auto industry, so this year, we expect the automobile industry in our total business’s GMV contribution will be much less compared to the previous two years. So, in conclusion for the whole year, apparel will be continuously gaining the share, stable together with electronics and appliances will be relatively stable and also automotive category will lose shares to apparel.

Our next question comes from Binnie Wong from Bank of America Merrill Lynch. Please go ahead. Your line is open.

I have three questions here, so first one, the difference model. I understand we are gradually transitioning from some of the brands to a more profitable non-distribution model in which one of those brands is our top brand in the distribution model as well on the electronics. What are the strategies that we have adopted to continue the brand to do so; and how are we going to further to do so, so that our mixed shift will be seeing more GMV actually coming from the more profitable non-distribution model front? And then the second is actually on the omni-channel strategies that we have heard on the summit. To support your strategy, basically order from anywhere, you can fulfill from anywhere. It seems to be most optimal is that brand controls all of its online offline inventory but in China most of the brands actually sell via the distributors there. So just wanted to see how are we thinking on the omni-channel strategy, would love to see how this fit into? Thank you.

This is two questions, right?

Two questions; I will ask the follow-up later. Yes, just two. Thank you.

Yes, we are seeing that our model mix is getting better and better as we expected in the past. So, right now, we have more and more non-distribution business and non-distribution business contributing more gross margin as well. So, typically when we do this non-distribution business, we are talking about the apparel industry. So, not only the existing brands, I mean apparel brands are performing well and we also have some more and more new apparel clients. So, we can expect that we will have more non-distribution business and more value added service related business in the future. So, in doing this, we have to have our -- firstly, we have to have our strong IT system to be built better and better and also we have to enable us with a strong logistics network to enable this consignment business model, so which is most favorable for us. So, we are giving more support on IT and logistics and also talent pool to support this non-distribution business to go forward. That’s number one. Talking about the omni-channel model, of course firstly, we and most of our brands believe that omni-channel is the strategy to adopt in the coming three to five years. Right now, partially we have already realized some of the functionalities like the integration of the inventories in some online and offline or even some of the offline stores inventory integrations. That is one. And also we are helping the brands to build their orders and also product data, essentially managing this. So that is all about the omni-channel strategy. We all believe that it is happening. But, we feel we can demonstrate a very strong capability from Baozun and there are just the few service providers who can do this today. So, our value is very big for them. There are some of the difficulties like the not all of the brands are doing retail and sales, so you can imagine that the control over the network is not as strong as when they do this themselves. And even in some of the retail stores, maybe the franchise stores, they are not using the unified version of the POS system. So, these kinds of things all create difficulty for the brands to realize their omni-channel strategy. But first, at the time being, we think more and more brands will take control or promote a unified version of POS in their networks, so to give us better condition to realize this omni-channel initiative. So for us, we are educating the brands that omni-channel is the direction. And in the meanwhile, we will accomplish the milestones one by one in this omni-channel direction. So, that is what we are doing with the brands.

And just one last question is basically on the social commerce side; we have been seeing a lot of this long-haul, [ph] basically using the key opinion leader and then they’re trying to promote more the social commerce and also on the sales for those KOL branded ones. So, how do you see that growth? I know it’s small right now and probably is still at the beginning stage, but how do you see it could evolve or will that become meaningful?

Okay. Thank you for the question Ms. Wong; this is Junhua. So, let me address this question for you. Yes, you are right. And in this -- especially this year, a lot of big players in ecosystem, they are talking about shifting their operational strategy from operating the assortment to operating via content and more membership driven. So, the KOLs long-haul [ph] that is more toward that trend. And then, Baozun is taking very active initiative to accomplish these huge files, like we’re signing some kind of fashion brand with very esteemed celebrity as a fashion icon from Honk Kong and to helping them to drive more business not just for right assortment online but also putting more content and more word of mouth and key opinion leader power to the website. So, this is at a very initial stage after whole operations; it’s very also very new to the Baozun but we have already made several successful cases based on different projects and the marketing events with our existing brands. We believe that gradually in this year or next year, we will do more about this new initiative and to accomplish the customer needs.

Your next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead. Your line is now open.

Just two questions for me. First one is just wanted to ask about your gross margin outlook and incrementally for the new partners that we actually -- brand partners that we actually sign is the -- within the same category, is the take rate on that reached higher than the previous brand partners that we signed, so do have incremental take rate improvement within the same category? And secondly, second question is on the OpEx specifically on the fulfillment. I think we’re going to have some important fulfillment facilities close to completion in the coming months; wondering how would that be kind of help or impact our fulfillment expense line and what shall we expect the efficiency to go down the road?

For the first question about the margin profile from the new brand partners, you are right, so for newly signed brand partners in the same categories, usually we have better commercial terms against the existing ones in the same category. So, this is definitely is. And this is one way to improve our margin in the long run. And also for the second question about OpEx -- about fulfillment expenses ratio as of the revenues or GMVs, yes, you’re right. So, we’re building up premium service fulfillment center in our centralized warehouses right now. So this project is expected to be completed in July this year. So, the capacity right now is fully booked by a leading sportswear brand. And so, we think in the following period, we will have more, actually we will generate more fulfillment revenues from providing such premiums services to cover all the relative expenses incurred. So, this is also one way for us to improve operating margin as a total.

So, let me give you some color regarding the warehousing expansion. So, at the end of March, we had seven self-operated warehouses with aggregate gross floor area of 110,000 square meters and high end automatic warehouse like for our top tier brand partner into the construction and it will be completed by July of this year. And we will update you the market and the news when it’s completed via the press release. So, in order to meet evolving demands of our brand partners and the addition of new brand partner, so we will definitely expand out of this and work accordingly.

Just one quick follow-up on warehouse, so you mentioned we’re going to have more opportunities on having more service revenues from the front brand partners. What about on the cost side; will the initial ramp up of the warehouses having some pressure on our fulfillment line in the like in the initial phase or since you mentioned it’s being like sportswear brands, so the utilization of that warehouse, it will be like ramp up to a ideal level in a pretty quick time?

Yes. So, for the new warehouses now being build up, so we achieved like 100% utilization quickly after it’s completed. So for this year’s, Double 11 campaign, we will start since the mid of the year, which is July and August is the perfect time for us to move the stocks into our warehouses. So, utilization is not a problem. And also for the warehouses side, generally I think warehouses expenses will not increase dramatically because of these new warehouses. But because we are building more and more leading brands being kind of non-distribution model especially in consignment model, and as you may know we are one of the top five customers of the China’s leading delivery service logistics partners in China, so definitely we will have more delivery expenses included in the fulfillment expenses, but which also means we will generate more delivery and fulfillment revenues from our brand partners. And also I explained in a call before that, our procurement expenses in Q1 has increased year-over-year partially because of the ratio increase -- the increase of the ratio fulfilled by leading premium service providers. So, this is also a good thing for us to generate some more operating margin and also to enhance the consumer experience in China.

[Operator Instructions] Our next question we will take from the line of Sean Zhang of 86Research. Please go ahead, your line is open.

I just wanted to get your high level thoughts on our growth trajectory versus Alibaba versus Tmall. So, we see Tmall growth rate kind of has slowed down to the low 30s while our growth rate kind of hold up well in the quarter in the 60s. How do we view this trend? Are we gaining share in terms of as one of the bigger Tmall brand operator? And also just our non-distribution brand is 18 in the quarter; I want to confirm that number. It seems to grow quite dramatically year-on-year. Is that the main reason for our non-distribution GMV reacceleration? So, these are the two questions. And also, I have follow-up on the cash flow. Any color on CapEx or cash flow for the quarter will be very helpful. Thank you.

Let me address one by one. The last one is CapEx guidance for the cash flow. So, in Q2, we will still have some CapEx for in the warehouse building and also part of our office space decoration. But generally, it will be within control. And about the second question on the...

This is Vincent. Let me do the first one first. I mean your first question is about the growth rate of Baozun, 60% growth versus the low 30% of Tmall. Actually, we are seeing -- two trends are very clear. First is that as we said, we just had this brand e-commerce summit days ago, and we can see the brands are pouring in more and more resources and their strategy is more and more focused on online sales. So, brand e-commerce today gained a lot of attention from the strategic level of the global brands. So, this gives us a very big power, very big power and tailwind to help us to -- that’s one of the drivers. The other one actually comes from the consumer side. Today, the consumer is more and more depending on branded services and partners. So, you can see that people are going to more and more flagship stores on Tmall versus other non-branded stores. So, these two drivers give us this acceleration of this growth rate, which is much higher than the total e-commerce growth rate. So, I think this trend is going to -- it’s going to continue in the coming 3 to 5 years, because brands are – they prepare a lot. And right now we have the full set of the strategies to make this sustain in the future. So we will be very happy to do so, not only the transactional volume but also we are delivering these omni-channel solutions to integrate all these different channels together, enable better inventory trends, better P&L for the brand. So, this brand e-commerce I think not only for transactional volume but also the other costs side can also deliver a very good scale of economy. So, everybody in this marketplace is very excited.

Yes, and about the number, Sean, let me clarify what you were saying. So, you were saying the non-distribution brands are 18, but actually we will have the disclosure, but it’s non-GMV brands are 18. So, GMV brands are…

Okay.

Yes, so, non-distribution brands. But about your question how we grow our non-distribution model businesses, so basically one way is that for all the new business, we have onboard usually majority of the new businesses was sitting in the non-distribution models. And also we were talking about in the last quarter, in Q4 last year, we have successfully transferred part of the business of leading electronic brand for our distribution model to non-distribution model and we will continue to do that with more brands in the distribution model businesses. So, this is the other way to transfer the existing distribution model to non-distribution model. And also for the categories right now like apparel, sportswear, cosmetics are our main targets for business development. So usually for these brands in these categories, we’re doing by non-distribution model.

There are no further questions at this time. So, Ms. Dong, please continue.

Thank you, operator. In closing, on behalf of entire Baozun management team, we would like to thank you for your interest and participation in today’s call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. That concludes the call.

Thank you, all.

That, ladies and gentlemen, does conclude our conference for today. Thank you for participating. You may all disconnect.