Good morning, ladies and gentlemen, and thank you for standing by for Baozun's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. Before we begin, we would like to express our sincere apologies to Baozun and every participants on that call that due to a human mistake by the conferencing provider, the call wasn't able to take place as scheduled yesterday and the Company had to postpone the call. On behalf of the conferencing provider, we would like to extend their apologies to all of you for the inconvenience caused. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Investor Relations Director of Baozun. Please proceed, Wendy.

Thank you, operator. Hello, everyone, and thank you for joining us today. Once again, we apologize for postponing the call yesterday and for the delay in notification. As the operator just mentioned, we experienced some technical difficulties with our conference call service provider which we were not able to respect in time to hold the call at our original scheduled time. Thank you for bearing with us as this issue was sorted. Now, on the call today from Baozun, we have Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr. Junhua Wu, Chief Growth Officer; and Mr. Robin Lu, Chief Financial Officer. Mr. Qiu will review business operations on Company highlights, followed by Mr. Lu, who will discuss financial and guidance. They will be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intend, plan, believe, estimate, target, going forward, outlook or 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 risk, uncertainties or 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 risk, uncertainties or factors are included in the Company's filings with the US Securities and Exchange Commission. The Company does not undertake any obligations to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable laws. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in renminbi. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead.

Okay. Thank you, Wendy, and thanks to everyone joining our earnings call today. We're very pleased to announce a strong start to the year, with PMV increasing by more than 58% and our total revenue increasing by nearly 40% year-over-year, driven by healthy growth from both product sales and services. China's e-commerce sector, already the largest in the world, continues to generate strong and healthy growth momentum as online shopping increasingly integrates into the daily lives of the nation's consumers. Sales in the apparel category, especially sporting goods and menswear as well as electronics and the cosmetics categories performed well during the quarter and continue to gain growth momentum into the second quarter of 2019. As China's leading brand e-commerce service provider, we continue to strategically invest in developing innovative technologies that will allow us to lead the industry into the next phase of the e-commerce revolution. Our cutting edge omnichannel solutions, integrated retail operating supporting system, big data driven analytics and highly targeted digital marketing services are all able to seamlessly empower our brand partners to make better business decisions, improve operating efficiency and benefit from the enormous growth potential they have. In early 2019, we strategically restructured our growing organizations of three key groups, namely ECG, E-Commerce Group; LSG, Logistics and Supply Chain Group; and TIC, Technology Innovation Center. We're positioning our business for the future by creating a more effective and focused framework to serve our expanding portfolio of brand partners. To be more specific, ECG will focus on generating high quality GMV, mainly by concentrating on creating add value for partner brands, accelerating customer acquisition and pooling resources into market development. LSG will focus on boosting service quality to provide brands with more efficient and customized warehouse, logistics and supply chain solutions as well as improving…

Thank you, Vincent. We delivered another solid quarter of GMV increasing by 58% year-over-year. Non-distribution GMV, in particular, increased by nearly 62% year-over-year. Most importantly, we continued to grow our business at a sustainable and well-balanced manner, which we believe will better position us to drive growth over the long term and allow us to generate value for our brand partners. This April, we also issued our five-year convertible bond with a put on the third year and an interest rate of 1.625%. Net proceeds were around $270 million. With the substantial financial flexibility, we expect the use of the proceeds [indiscernible] to help support our growth initiatives -- our working capital over the next five years and the potential investment opportunities that may come up. This financing will further optimize our capital structure and lower our weighted average cost of capital. Now let's go over the first quarter 2019 financial results in details. We believe year-over-year comparison is the best way to reveal our performance. Our percentage change I'm going to give will be on that basis. Once again, please note that all figures mentioned in this financial review section are in RMB. Firstly, total GMV during the quarter increased by 58% to CNY7.83 billion. Our focus remains on growing our non-distribution business which showed GMV increase by 62% this quarter to CNY1.5 billion, in which service fee model is leading the pace. Total net revenues increased by 40% to CNY1.29 billion. Product sales revenue increased by 34% to CNY618 million. This record high growth rate in most recent three years of product sales was primarily attributed to more brands being introduced in the past 12 months and the solid performance of our existing brands due to the popularity of their products. Services revenue increased by 45% to CNY669…

Thank you, sir. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] Your first question is from Alicia Yap from Citigroup. Your line is now open. Please go ahead.

Hi. Good evening, management. Thanks for taking my questions. I have one question. Could you elaborate a bit more and help us to maybe reconcile the differences between how the Company's effort in getting a higher quality GMV, which should imply higher take rate, while the implied take rate for the service revenue this quarter actually shows some declining trend. And similarly, based on your 2Q GMV and revenue guidance, it also seems to suggest that blended take rate will be similar to have some pressure on the service revenue. So can you help us understand the reasons? And should we expect to see the higher quality GMV eventually should translate to a higher take rate and revenue growth over time? Thank you.

Hello, Alicia, it's Robin, and thanks for your question. Quality of GMV is the strategy, I mean, the Company is pursuing. And give you some color about Q1. As we remember, back in -- in the -- from the beginning of the Q1, I mean, some lower take rate categories like electronics brands, which rebounded -- I mean, the GMV growth rebounded very quickly in Q1, which really lowered down our blended take rate in Q1. As we have explained before, when you look at the blended take rate, the major or the primary factor is the mix of the categories, which means if you have more GMV coming from the lower take rate categories, I mean, your blended take rate will be negatively affected. And I think that is a major factor in Q1. And there is another minor factor I would describe. Yes, we are -- when we develop our new brands, most of the brands are in very high take rate categories. But there you need some ramp-up to reach the ideal take rate level, which means -- for example, if you do the business very properly in the upfront way, do the store operations and [indiscernible] additional marketing and other services, record consignments, maybe, and then the take rate will be ramped up to some certain level as we agree for the both parties. So it takes some time. I mean, in general, the larger the brand is, and the longer the time is. So you still need some time to say the result for our take rate improvement. However, I would reiterate that quality of GMV is our target and our strategy. We are working very hard on that, and the new brands we acquired, they have a certain [indiscernible] take rate. So we hope in the mid term, we will see the result. Thank you.

Thank you.

Thank you, Alicia. Your next question is from Eileen Deng from Citibank. Your line is now open. Please go ahead.

Hi management. This is Eileen from Deutsche Bank. Thank you, Vincent, Robin and Wendy, and congrats on the strong quarter. Management shared with us some of your view about how do we help our brand partners to best fit into Alibaba's strategy of, number one, going to the lower tier cities and also, number two, the [indiscernible] recommendations. And do you see any of the -- our brand partners, their resources and being reallocated to the non-brands [indiscernible] in any of the case? Thank you.

Okay. This is Vincent. Let me answer this first and maybe Junhua can also add some comments later. Yeah, we are now -- we are taking this omnichannel strategy and taking a brand position, so helping brands to do business across all the different channels. And we notice that there are some change happening [indiscernible]. For -- number one for this [indiscernible] we are closely follow -- follow this up with Timo and also our brands to enable them to offer personalized experiences for different group of consumers through mobile [indiscernible] and also from the desktops. So in this kind of initiative, we work with the Timo guys and brand guys closely, not only from an operational perspective but also from the technology side. So I think we are quite confident with this kind of initiative. Secondly, about the traffic thing, we know that there are more and more marketing and promotion tools invented on the platforms like Tobo (ph). And also they have this initiative to penetrate the lower tier cities of consumers. Right now, I think for us we don't see a strong dilution of our traffic because we are working with the top brands. But even though, we do need to put more attention and efforts for the customers above their own traffic operation initiatives like CRM system and also better conversion rate, this kind of initiative. So that is basically our view for this trend. Junhua, anything to comment?

Okay. And I want to add something related to the personalization [indiscernible] stuff. So that kind of mechanism is based on the data bank from Alibaba back-end system. So the data bank [indiscernible] emphasized more on the AIPL stands for aware, interested, purchase and loyal. So in terms of the traffic reallocation, that mechanism doesn't really just shift from traffic from one side to another but helping us the operation business partner like us to be more accurate to target the right consumers to our brand, to drive higher conversion rate for our brand partners in terms of product selling and making transactions and to keep the loyalty programs being long-term to make more repeat purchase rate. So, as Vincent said, we haven't witnessed any kind of the traffic reallocation from Tobo to Timo, but in the future years and the future [indiscernible] we can also keep tracking on the change of the Alibaba's strategic movement and let you know in the future. Thank you.

Thank you very much. That will be very helpful.

Thank you, Eileen. Your next question is from Joyce Ju from Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Good evening, Vincent, Junhua, Robin and Wendy. Thanks for taking my questions. My question is regarding our technology side. Because we actually been to our annual conference in Shanghai in May and also we saw like there are new, good technology product launched, and also we heard like we are also opening a new technology studio or like -- or like a center -- technology center in Chengdu. Just want to understand like in terms of our overall technology team's headcount expansion plan or like investment on their side, what's our plan and also for those technology products what's our expectation on them and how it will help add value to our overall service to the brands. And secondly is a housekeeping question for our same-store sales growth for existing brands for this quarter. Thank you.

Sure. I think I can't answer part of questions. If you -- maybe Vincent and Junhua will add up something. Regarding R&D headcount plans, I would say we are working very aggressively to keep the balance between the headcount and the investment and our productization and our innovation because -- just now you mentioned about our seminar in Shanghai and one way approach to the clients are reducing -- technology is playing more and more important role and our products and our service is really very good position to work with the partners. So I think we still need to invest in the technology and meanwhile we keep the balance between the headcount and the investment. For example, this quarter, we opened our R&D center in Chengdu temporarily increased technology investment. But as you know, Chengdu is in the -- and a bit of low-cost headcount resources and also have more like technological talent, resources that we can acquire over there. So it's kind of like a long-term proposition for us to -- for our technology investment, yeah.

Got it. Then the sales increase forecasts [indiscernible] for the existing brands, this quarter?

It's not clear. Sorry?

The growth forecast we have like existing brands drive -- drove the growth and also the incremental brand -- new brands, right...

Okay. The same -- yeah, I think you are asking the same store sales growth, which is 46% versus (ph) the growth is 48%. When you compare with the last few quarters, you can see the trend. We are -- we have more share or more contribution of GMV coming from the new brands.

Cool. Cool. Got it. Thank you.

Thank you.

Thank you, Joyce. Your next question is from Monica Chen from Credit Suisse. Your line is now open. Please go ahead.

Hi. Good evening, management, Vincent, Junhua, Robin and Wendy. So firstly, congratulations that we have established a close relationship and set up a JV with this leading domestic brand, which is quite a milestone for us. So what is our following strategy to acquire more domestic customers and in what kind of category are we interested in? And also in addition, should we expect the margin profile or the take rates for these domestic brands being similar or better than the global brands that we have been working with in the past? Thank you.

Okay. I think I can take this question. It's Robin, Monica. For the second question, I mean, it really depends on what category we work with and is not related to the brand, either it's international or domestic brand. That's the answer for the second question. For the first question, I think there is a trend with more and more emerging local brands or the larger brands coming up, and the way to think -- there is a potential market we can do with the accumulated experiences and our strong technology support and the services. In the meantime, we do think with the milestone of the JV with one of the leading FMCG local brands we set up last month, we can just have a -- progressively we will make the progress in the domestic brands.

Yeah. Just one more comment from here, Monica. This is Vincent. You talked about the margin trend of the domestic customer -- domestic brands. We think this -- direction for us to get a better quality of GMV as well because for the major domestic brands, we are targeting to provide more services like IT -- technology related -- digital marketing related, these kind of services. So we are expecting a better quality of GMV from these kind of brands.

Thank you, Vincent.

Thank you, Monica. [Operator Instructions] Your next question is from Billy Leung from Haitong International. Your line is now open. Please go ahead.

Hi management, thanks for taking my question and congrats on a solid results and also a very strong outlook as well. I've just got two questions. I think the first question is related to our domestic clients. Could management share how much the domestic clients are actually accounting for in GMV right now? And do we have a preferred level or a target level of the split between global and domestic client GMV? That's my first question. My second question is, can management share if we have any new products or services in the pipeline? So, for example, maybe even talk about how SHOPDOG is doing and being adopted by clients. Thank you.

Sure. Hi Billy, I'm -- it's Robin. I can take the first question. As of today, we are -- most of the brands coming from the international brands, but what I can -- I will tell you is, even though they are international brands, they have been localized in China for many years and their supply chain in China and all around Asia. So it's not very different from the local brands even though there is something like a different model or different approach. And regarding the local brands [indiscernible]. I mean, the last month is kind of like -- first half, we moved down to the -- we moved up to the local brands. And we are -- that's our addressable -- [indiscernible] addressable market in our sector. So, we are still working on that. Thank you.

Okay. Let me take the second one. Technology is always a very important element in the strategy. And just now, we -- in the prepared remarks, we just mentioned about three family of technology products. First one is about the core e-commerce system. Second one is the retail operations support system. We call it ROSS. And then there is the brand -- official store system. Three families have different abbreviations. For the first one, I mean, the e-commerce core system, we are gradually building a better version of that and then gradually move some clients onto that platform. And that platform is getting much better than the previous versions; so more stable, more scalable. So that is the first one. This one is very important for us because we need it to accommodate all the attractive transactions happening in the Company. And the second one, ROSS, is a quite big and growing family. A lot of different names. Before, maybe you have some of the -- heard of that. Most of them are incorporated right now into this ROSS family. And also some newer projects and modules are also adding to this family. So I think this will be a very important year for us. So, we are expecting a lot of more -- better efficiencies, better automation elements added into the family. And then about the third one I mentioned is the about the brand official store system. This one we developed this last year and this year is quite a harvest year. We have more and more brands sitting on this new platform, SaaS based and also much better manageability and good support for the future potential. So that is about the updates of that. SHOPDOG is a -- quite a [indiscernible] initiative. I think the segregation of SHOPDOG is quite healthy. We're helping different brands adapting to that tool as well.

Okay. Thank you, Vincent. Thank you, Robin.

Thank you, Billy.

Thank you, Billy. Your next question is from Sally Chan from CLSA. Your line is now open, Sally. Please go ahead.

Yes. Hello. Good evening and thank you, management, for taking my question. My question is on the accounts receivable days, which lengthened to over 100 days in this quarter. And still a large part of that is actually driven by business mix shift toward the services model. Just wondering are we doing any initiative to stabilize the rate of increase going forward. If so, how is the progress so far? Do we have some metrics or targets to share on that front? Thank you.

I think that's my question. You know, first of all, in Q1, when you look at the accounts receivables levels, kind of like more than CNY200 million coming from our larger accounts because of the system update, it coincidentally returned back to our accounts right after April 4. So you'll see a relatively larger number in the accounts receivable. And in Q2, as of -- up to the day, pretty normal. We have a very strict plan for every month collectibles. And also, we are improving the automated billing and cancellation system for each brand partners, and we do think that is a welcome tool and we can see the progress in Q2.

Hi Sally, any more follow-up questions?

Yes. Thank you. Okay. I actually have one more on the -- sort of on the trade war impact. How should we think about trade war's impact on our business? And have we observed some deceleration in overall consumption sentiment, especially in terms of sentiment toward US or foreign brands? How should we think about that? Thank you.

Sure. This is Robin again. Let me take this question. I don't think there is any impact up to today about what -- the macro condition you talk about. And as I mentioned just now, I mean, almost all the brands we serve, they are -- they have been localized in China for many years, not only the brand image but also the supply chain are around the China or Asia. So for business itself, we don't see any impact now. But we are cautiously watching all the macro conditions, which we cannot control but we can watch and take some actions if it's necessary. But now everything's OK. In the meantime, as I mentioned, in these macroeconomics conditions, we do see some opportunities in the local brands, which -- we are working on that now. So, we think that no actual impact in our business till now.

Got it. Thank you. Thank you, Robin.

Thank you, Sally. Your next question is from Tian Hou from T.H. Capital. Your line is now open. Please go ahead.

Yeah. Good evening, management. Congratulations on a good quarter. Can you guys give us some updates on your brand development targets in 2019? So, if it's possible, can we have a breakdown between international brands and the domestic brands? So that's on the brands. The second question is really what is the take rate outlook for the rest of the year? Thank you.

Sure. It's Robin again. I think that's my question. We are targeting over 40 new brands [indiscernible] this year and most of the brands are international brands and we -- we do have -- and some of the local brands and about the whole market size, we are -- as we talked about, as I remember last year, we are targeting top 1,000 brands internationally and top 200 brands domestically for -- we regard that as our fourth stage of addressable market. On the further [indiscernible] take rate, I explained the primary factor is the mix of the categories. Based on the current performance of Q2, we are expecting we have a slightly better take rate than Q1, and for the next earnings call, we would update for the -- for the second half of the take rate. But we do hope we can get a better take rate for the next half year.

Thank you.

Thank you, Tian. Your next question is from Chris Zhou from Blue Lotus. Your line is now open. Please go ahead.

Hi. Good evening, management. Thanks for taking my questions. I just have one question. As we see the distribution GMV grew by 32% [indiscernible] year-over-year, overseas [indiscernible] and [indiscernible] in Q4, I want to just ask, would you acquire more brands in product sales model? And how should we think about the product sales gross margin impact by new brands? And thanks -- thanks a lot.

Sure. Let me take this question. It's Robin. For the distribution, yes, we are [indiscernible] big brands back in Q4, which utilized -- utilizing the distribution model. I want to specify we are focused on service model, which -- the way you see the revenue pie, service model is sharing a larger pie from the total revenue, and also the growth rate is -- is outpacing distribution model. However, as long as we can control the inventory -- we can control the inventory risk, we are not going to eliminate distribution model, which means we would carefully select the products appropriate for our distribution model. That's why we chose the two large brands in Q4 as a -- to use the distribution model. That's the reason why we see the higher growth rates than before, more than 30% year-over-year growth. And for the margin, just the same route to the service model. In the very beginning, yes, we are -- we sacrificed a little bit in the gross margin for the new brands. But regarding the Q1 gross margin, which is flat with the year ago, I think the main reason is that [indiscernible] because of the Chinese New Year and some other factors. Thank you.

Thank you, Chris. Your next question is a follow-up question from Alicia from Citigroup. Your line is now open. Please go ahead.

Hi. Thanks for taking my follow-up question. Just very quickly on overall margins trend. Because in Q1 we did see some leverage on the fulfillment and also the sales and marketing. So how should we think about overall trend for the second quarter and even into the second half? Will the second half be better than the first half in terms of the year via comparison? Thank you.

Sure. My question again, Alicia. Thank you for your -- for this question. Yeah, we do see some leverage in the fulfillment and marketing in Q1. And I don't think we can comment on the following quarter specifically. But in the trend, we do think we will have more space for our cost saving initiatives at the technology [indiscernible] so that we can improve our efficiency and apparently reduce our costs. Yes, in a way, we are very confident on our margin improvement. And regarding the nice margin, I think we have another factor, which is, we are -- we have a CB financing and we can better balance our '19 [indiscernible] interest expense which includes both interest income and expenses and we can decrease our net interest expense with the benefit from the interest difference between the financing -- financing costs we get and the current [indiscernible] banking savings interest. So for the net margin, we do think we have the -- we have the chance to improve too.

I see. Thank you.

Thank you.

Thanks, Alicia. As there are no more questions in queue, I'd like to hand the call over back to Wendy for her closing remarks. Wendy, please continue.

Thank you, operator. In closing, on behalf of the Baozun management team, I would like to thank you for the participant into this call. If you require any further information or keen to visit us in China, please let us know. Thank you for joining us today. This concludes the call.

Thank you, Wendy. Ladies and gentlemen, this concludes our conference call for today. Thank you all for your participation. You may all now disconnect.