Good morning, ladies and gentlemen, and thank you for standing by for Baozun's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, today's conference call is being recorded. 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. Baozun'ssecond quarter 2019 earnings release was distributed earlier today and is available on our IR website at ir.baozun.com as well as on Global Newswire services. On the call today from Baozun, we haveMr. 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 and company highlights, followed by Mr. Lu, who will discuss financial and guidance. They will all 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 U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies 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 are 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. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Vincent, please go ahead.

Thank you, Wendy, and thanks to everyone for joining our earnings call today. We build up on our strong start to the year with GMV gaining further growth momentum, reaching nearly 60% year-over-year during the quarter, while encouragingly total net revenue grew at its fastest pace than it had, increasing 47% year-over-year. This solid growth was partially driven by our strong performance during the June '18 fiscal end and highlights the success we are having in acquiring high quality brands and capturing new emerging e-commerce opportunities. We continue to steadily accelerate brand acquisition, which is focused on generating high quality GMV, especially from brands in apparel and FMCG categories. During the quarter, we added a net of 12 new brands which brings the total number of brand partners to 212 compared with 162 a year ago. In addition to penetrating deeper into existing categories we’ve also been exploring new brands in -- with tremendous potential. As I'm sure you all know, the Chinese consumer is gaining more purchasing power. This is especially true for younger generation in particular, which are spending more on global premium and factory goods and are increasingly buying through e-commerce platforms. In addition to working directly with premium brands, we teamed up with Alibaba this quarter to fine tune customer engagement and the shopping experience for Luxury Pavilion, its dedicated channel for premium and luxury goods. We now provide services for both their premium sub-market places and a few imports on Alibaba’s first-party model for its luxury brands. While still in the early stage of this, we are very pleased with the initial results generated during the June ‘18 sales cycle. We strongly believe the unique value proposition we offer will help us to penetrate further into the premium category, where we are seeing an increasing…

Thanks, Vincent. We are happy to deliver another solid quarter of growth. Our shifting focus towards high quality GMV brands is clearly paying off, highlighted by over RMB100 million in non-GAAP operating income we generated for the fourth time during a non-Single’s Day quarter, a significant milestone for us. It clearly demonstrates how we are able to drive profitable growth, while at the same time expanding investments in warehouse upgrades, technology and digital marketing. Net income for the quarter grew 83% year-over-year but net margin expanded by 80 bps to 3.9% and the net margins remained flat at 4.9% on a non-GAAP basis. We also significantly improved operating cash flow during the quarter through enhanced management of our accounts receivables including making upgrades to our automated billing reconciliation system and closely monitoring collections. We also further strengthen our cash provision with the issuance of a 5-year convertible bond with a net proceed of around US$270 million. All these initiatives provide us with having the financial flexibility and the confidence in our future growth prospects, while we expect GMV to grow by 40% to 45% year-on-year for the third quarter of 2019 and today we reiterate our full year GMV growth outlook of 40% to 50%. Please note, this growth outlook hasn’t embedded the impact on GMV from the transitioning of electronics brand into potentially a non-GMV partner. Based on our profitability improving, addressable market is expanding and our strong cash position. We have decided to strategically reinvest some of our profits throughout the rest of the year to take advantage of the newly emerging opportunities so that we will strengthen our position over long-term. These opportunities improve early investments in some key new brands to support operations while they gradually ramp up technological infrastructure and warehouse upgrades in the high…

[Operator instructions]. Our first question comes from the line of Alicia Yap of Citigroup. Please go ahead.

Good evening, Vincent, Robin and Wendy. Thanks for taking my questions. Congratulations on the strong result. I have questions on the product revenues this quarter. So could you help us understand what are some of the reasons that contribute to the strength in product revenue this quarter? Was there any benefit from the VAT adjustment? If so, will the benefit be only one quarter impact? And then if we look at on the product revenue growth, how should we think about 3Q and into second half, will the reacceleration is sustainable? And can you remind us the total numbers of brands that are currently under the distribution model? Thank you.

Sure, Alicia. I think that’s my turn to answer your question. Yes, we have about 47% growth in the distribution model which is product sales. I think that’s two reasons. The first one, the existing brand is still capable of very constant high growth rate we enjoyed especially 6/18. And additionally, when we will -- call it we introduced some of key distribution model brands in last Q4 which fully ramped up in Q3 and contributed very high growth rate in our 6/18 and all Q3 quarter. So that’s the reason we enjoyed a very high growth rate in the product sales. And looking forward for the next two quarters we think the growth rate will be very in line with total growth rate of the revenue. And with better control of inventory, we take the full advantage of the experience and expertise in the product sales. Regarding VAT, basically in our model we have a very specific arrangement with brands. But in total it’s very mature impact on our product sales revenue numbers for the VAT tax. And for the total number of brands, we have some brands but it’s not very disposable in the total number. I would say they have -- about less than 20% of our brands and we have -- we use distribution model in different platforms.

Thank you. Next question is from the line of John Choi from Diawa. Please go ahead.

I have a couple of questions. First of all, I would like to ask about the -- Robin I think you mentioned in your prepared remarks that you guys will be reinvesting into your profit into the second half of this year. Can you kind of elaborate on that initiative? And also how should we think about the operating expenses towards second half of this year and also in terms of profitability? My second question is more about your existing brands. Can you share with us the same-store sales growth and also like the contribution from the new brands and what kind of trend that you guys are seeing from the these new brand partners? Thank you.

Okay. Thank you, John. Let me take the second question first. Our same-store sales growth which is existing brand is -- growth rate is about 48%. And if you do -- mathematically if you do rough calculations, use 60% minus 48% it’s around 10% to 12% GMV contributed by the newly acquired brands. And that was expanding -- has been expanding through this year because we -- virtually we accelerated the new brand acquired for this year. And back to the first question, yes, I mean strategically, for example, we think the direct cooperation with Ali for the high premium and Luxury Pavilion category is very a good opportunity for us for the future. And we do see -- we have some -- we’ve started some new cooperation from Q2 and now we do see the brand expansion for this category. And to do the business better in this section we think we need some new investments in the warehouse and the technology side. So, that's the reason why we think we want to reinvest on profits because that will guarantee our future growth and will give a very unique position to work with the platforms. For the operating margin, yes, we may have some impact because we do the investment. For this one, we think we have a little impact but we are very positive for the future, operating margin improvement in the next year. Thank you, John.

Thank you. Next question is from Natalie Wu of CICC. Please go ahead.

I have two questions here. First one is related with the Tmall 2.0 initiative. Just wondering how should we read through the related impact on Baozun for this initiative? Could it help your take rate or margin profile in the longer run? I just want to get a sense of that. And secondly, regarding the new brands you've added this year and to be added this year, I would appreciate if management can give us some color on the incremental operating income versus like GMV, this effect related with these new brands, just wondering if there is any difference that we should be noticing regarding that? Thank you.

Okay, Natalie, this is Junhua. So let me address your first question related to the full version 2.0 initiatives. So, the Tmall version 2.0 is a new initiative in terms of their back end store system. So it’s part of the Tmall growth plan after they appointed their new president. So the key point on the Tmall 2.0 is about, they implement a cascade model for helping those kind of brands and merchants to implement their membership management, and how they launch their new products and how do they set up a new scenario by crossing all those kind of online, offline supply cycles by implementing Tmall iStore system. So, their cascade models for this stage, they only launch the membership enhancements to link all those merchants and brands and us to just implement a very comprehensive membership management. So they provide a lot of back end tools, helping us to develop new membership loyalty program, and a lot of engagement and lot of new initiatives and mechanisms to engage the new memberships, to provide a deeper connection with all those consumers, to upgrade service level with all those consumers, providing a lot of new scenarios and opportunities, driving higher conversion rate by providing extra services related to membership. So with that kind of new tools and packages, we do have the opportunity to provide a lot of new extra services to our brand partners related to that. And in the future, while they keep releasing their new features, it’s good for us to keep increasing our stickiness with all brands, including providing add-value, extra marketing services, operational services and et cetera. So, by now, we see these initiatives from Tmall is really helping the brand partners’ growth and really helping to comprehensive our service offering. Thank you.

Okay, let me take the second question about the margin. When we talk about the margin we like to speak to the product sales and the service models differently. For the product sales, the reason to improve our margins is we carefully select the higher margin products with better indicated growth as we reiterate every time and we think we are on the right track to have the expertise to select the products, we do the backfill. That’s the main reason why you see the gross margin improvement for the product sales. And about take rate, I think based on the number we provided you can quickly -- calculate it quickly. Even though there is some negative impact on the electronic brand we just talked about for the 2Q, they still have a slight increase in the take rate. That’s the main reason. It’s coming from the newly acquired brand with higher quality GMV, of course with higher take rate. And that’s why I need to mention it, even for the new brands, we still -- normally we still take a short or long-term to ramp up GMV because some brands have very key and very big and we deal with many platforms and many brand stores in different areas, and different platforms. So we still take a very long time to ramp up. So till now because we acquired much more new brands, some of are still in the very -- in the ramp up stage, which contribute not too much in the take rate and in turn have some net impact on cost perspective. Thank you.

Thank you. Next, we have Thomas Chong of Jefferies.

My question is on the GMV growth momentum of our brand by different categories in the quarter, and also a modest strategy going forward to brand partners and we have social revenue growth be driven more by same-store sales growth or new brand addition? Thank you.

Sorry, the line is not very clear. Can you just repeat your question please?

Yes. Sure, the first question is just on the growth momentum of our brand in GMV by different categories? And the second question is on, what is our strategy to onboard more brand partners in the second half? And also will revenue growth be driven more by same-store sales growth or the new brand addition in the second half? Thank you.

Sure, one is even though we don’t disclose details in the across category, I would like to give you some color about that and we think for the sport wear categories, we join by high growth rate. And also in the apparel, the men area we work is still very high growth. I would say, some of the key accounts where same-store sales growth is higher than same-store sales growth. So, we think we are in a very good track on that. And about electronic suite, we don’t think that’s a main area for us and that’s one of the reason why we just transit one GMV partner to a non-GMV. So, that’s a first question. About the second question, I would say, we focus more -- recently, we focus more on high premium brands we occurred, and we see some traction into Q3 already, and we -- that’s a kind of new category we work with. And regarding the FMCG, we are introducing more products, more brands in this category too. Does that answer your question?

Oh, yes. Thank you very much.

Thank you. We have Sally Chan from CLSA. Please go ahead.

Actually, I have a follow-up with shift for certain brand to non-GMV model that you mentioned just now. Even taking in the consideration that shifts also GMV guidance of 40% to 50% year-on-year is actually maintained. So just trying to understand the drivers behind the bear and bull case here? For example, are we seeing a stronger brand pipeline than we previously discussed? Or are we seeing better than expected performance from existing brands so leading to us maintaining that full year guidance? Any sort of color will be useful. And the second question is actually on the GMV impact from that shift if you could provide any sort of range or color on the G&A impact will be very helpful? And other question will be slightly different is actually on our cooperation relationship with Alibaba. It seems that we are working closer with Alibaba's Luxury Pavilion in the recent months. So, if you could share some sort of cooperation opportunities that we are looking for to that also will be very helpful? Thank you.

Thank you. Let me take the first question and Vincent will take the second question. You know, when we see the outlook for the whole year, we not only consider, I mean, this possible transition of the electronics brand. More importantly consider the uncertainty of the macroeconomics as we specified early in this year. So, even though we have a very positive 6/18 numbers, we feel very cautious about the economy going to the end of this year. So that's the key reason why we keep the 40% to 50% guidance unchanged. And fortunately, we just started preparation of Double 11. Based on very preliminary discussion with the brand across categories, we think we get very positive reaction from the brand for that. So, based on that, you know, as mix of all the information, we decided we don't change this guidance. If we have any update, we'll give you for the next earnings call. And specifically for this brand, yes categories will have some impact in our growth rate based on the mathematical calculation, but we think that's a one-time issue and we have very strong pipeline and we are very positive for the future growth, especially for the next year and also to improve our both take rate and the bottom line for this decision. Thank you.

I'll take the second question about the Alibaba cooperation. We have several weeks worked with Alibaba for the luxury category. First one is that we can bring our brands directly to our platform to operate to Tmall stores. For example, some of the luxury brands we are working with now just have official site we are constantly talking to them trying to bring them on to the Alibaba platform that is number one. Number two is that, Alibaba also have some invested brands. So, we are also working with this kind of brand to deliver our professional operational capabilities. Third on is that, we also work with the Luxury Pavilion as some market place to impact enabled wholesale. So, that is our general working with Luxury Pavilion. We are also talking to Alibaba about some other potential you know ways of improvement. So, yes, that is our continuous effort. Thank you.

Yes. I just want to add something, you know, from the Q3 the most recent results, we think it already got some traction for the, to attract more high premium brands come in. We will describe more in the next earnings call.

Thank you. We now have Billy Leung of Haitong International. Please go ahead.

Hi Vince and hi Junhua, hi Wendy and thanks for taking my question. Just a few quick questions, my first question is on the general market trend. We’re seeing more and more Chinese e-commerce platforms increasing their efforts in lower tier or undeveloped areas in China. I was wondering, if this had any impact on our products and services? and that’s my first question. The second question is, with more new brands coming in, can we just get an idea of the concentration of our key brands in terms of GMV or even just by numbers? And the last question is just on the recent funding of the debt issuance, I was wondering if we have further details of how we’re going to use that funding? Thanks.

So I will take the first one, yes we do see some emerging channels, getting more and more active in markets. Our strategy is still unchanged, so firstly, talking about the GMV generation programs of course, we were quite focused on the existing GMV market places, like Tmall and JD. That is about the today’s sales performance, but we keep watching the emerging channels very actively. We work with many programs, social mediums and some other shopping sites, who trying to engage with the brand, with them in different ways, majorly not a GMV purpose yet, majorly for the consumer engagement serving purposes at present. But we do think, there are potential GMV opportunities ahead so that is above the market trend. Many new ways of doing business, no matter it’s a demand generation or demand fulfillment we’ll all pay attention to that, to first part. Secondly is about…

Yes. Thank you, Vincent. So decentralization of our brand base is well above the strategy. When you look at our numbers which as I mentioned, we have about 10% to 12% share coming from, a GMV share, coming from the new brands, which demonstrated we already, we are gradually decentralizing our purpose in the TL cost. But in other way, the TL cost is still very important for us, and we are improving the quality of the service for them continuously. And in the 6/18, we do see some of the TL cost, they just hit historical very high growth rate, and we mostly enjoy the results and we hope we can get similar result in Double 11. Thank you.

Okay, thank you and just on the…

And certainly about the, sorry, go ahead Billy.

Yes, thank you. I’ll just remind the last question, yes on the… Thank you.

Sure, yes about the usage of cash, right. Yes, I think we are in the parallel to strengthen our operating cash flow as we mentioned, and we think we’ve made some achievements in Q2 and very strong positive in both operating cash flow and free cash flow. And in the meantime, we have tons of cash to support our high growth in the operations and also another purpose of usage of the cash is for the potential M&A, but we are very careful to use this cash. And we must the purpose will be strategically effecting our business, but to now we still keep watch on that and we don’t see very specific target yet. Thank you.

Thank you. We now have the Tian Hou of T.H. Capital. Please go ahead.

I have two questions, one is regarding something related to Tmall, so the new CEO of Tmall, Zhang Yong, he said in the next three years including 2019 GMV Tmall is going to be double from 2 trillion to 4 trillion. So the CAGR will be 26%. So I just wonder as a partner on Tmall how are you guys going to benefit from that or how are you going to be part of that growth and the quantitatively, so how many new brands are you planning to added to platform or maybe also from other measurement if the management is going to give us some clarification, that’s number one question. Number two is the stock forward partnership with Alibaba which is exclusive. So in the past about when we understand is also one of the leading guys in those kind of SaaS programs. So its sounds like a quite negative for you guys. So can you give us some insight about their partnership impact to you? Thank you.

Hi Tian, this is Junhua, so let me answer your first question in terms of the GMV double of the year. So we did have a workshop as a strategic partner with Alibaba earlier so talking about this a bit. So I can share you some color on that, but don't treat my experience and my answer as official from Alibaba. So they have very comprehensive breakdown the GMV double including by three new set, one is the new customer, a new product and new scenarios. In terms of new customers it's all about acquisition of the basic traffic from the outside Tmall into the inside Tmall. So right now the monthly active dynamic consumer is about like a 100 million every month dynamically. So they have very strategic KPI about being as per 20 million new customers every quarter to Tmall in the future one two years that’s one thing. By expanding on Tmall service offering to strategically that’s one thing, by enrolling more brands on the Tmall by competing with the other ecosystem in there, under their radar that’s a new thing for new customers. The new product is like to about to open a lot of backend schools and extrapolate data driven tools is helping all those brands and merchant and partners to just create a design, create a new product by the consumer behavior, consumer need and global trend something like that. They are going to succeeding although brands merchants and partners is leveraging the Tmall Big Data to drive more active rate and new products to create new things for consumers. That's creating the demand and fulfill demand .The third is creating new scenario it's more like to Tmall version 2.0. So as far as I said last time, they're about to launch a new…

This is Vincent. I will take the second one about Salesforce. Yes, we did notice that, there is some strategic announcement between Salesforce and Ali Cloud. It is actually Ali Cloud. So, Ali Cloud is user structure service provider so it is easy to understand that the SaaS software provider to work with cloud service provider is very natural. And you may also notice that, there is some strategic payment from Ali Cloud. They said, we don't use SaaS, but we just want to be integrated so that's the translation of the Chinese statement. Let me add, we in future can work much closer also with our cloud you know to bring our services to a broader base of customers. And also, we think the China market there is a need for some solutions and services which is very applicable and suitable for the local market. Actually, we are enabling the brands to directly facing their consumers that is our very important mandate so our SaaS solutions based on that to resolve the local business requirements to deliver a very efficient one in the market. Thank you.

Thank you. We now have Jiang Zhang of China Renaissance. Please go ahead.

Hey, guys. Good evening. Thanks for taking my question. So I just had a question on, regarding to the brand shifting from GMV to non-GMV. Can you just give me, like just let me know, what the reason is behind it? And is this more of a -- do you think this is more of a structural trend of brands wanting to let’s say, bring things, bring all the operations in-house? Or is it like one-off event? Any additional color would be greatly appreciated? Thanks.

Okay, thanks Robin, and let me answer this question. I think that not relate to the in-house or outsource ad hoc. That’s our decision to suspend the service. The reason for that is very simple because of very, very low take rates which impact our, I would say two factors. One is the very impact on our P&L; and the second one, really ways the sum of our limited sources. We want to better utilize limited resources to the product and based on the strong pipeline we have, we made this decision. So, I will say that there is some temporarily impact on the GMV, but there is not much impact on the revenue and no impact on our bottom line. Thank you.

Sorry, just to clarify, so you said there is a slight impact on the GMV and yet I understand this…

Very, very slight impact on the GMV, but no impact on our most bottom line…

Got it. Okay, great.

Sorry, there is impact in GMV, detailed impact in, very, very detailed impact in the revenue and no impact on the bottom line.

Thank you. Next question is from the line of Joyce Ju of Bank of America Merrill Lynch. Please go ahead.

Hi, thanks management for taking my question, my first question is about take rates. Can you give us more color on the take rate trend specifically your Q3 guidance? So, there is the revenue being slower than the GMV growth does it mean a decrease seen for take rates and the real the collaboration with Alibaba to add luxury or premier brand, can help us to improve our take rates? And my second question is about, your brand catalogue can you give us more color on the new brand to be added in the second half? And also, give us an update on your relationship with your existing keen brands. Thank you.

Sure, let me answer your question about the take rates. When we do simple take rate, you will see around 9.4% in Q1 and 9.7% in Q2. And for the GMV, I would say there are similar amount coming from the electricity brand we just mentioned, and we are going to transfer. And if you look at by the time Q1, Q2 I would say excluding that we have great improvement in our take rates, in the price excluding that one. I think that's very good results when we focus on the high quality genre and expect more new spreads come in. So, based on this trend, we have the reason to believe we will have a gradual improvement in our take rates overall. So what’s your second question please?

It's about your brand pipeline, any color to share with us of new brands we added, like what kind of category domestic brands. Also can you give us update on your relationship with your key brands let's say like Nike? Or, yes thank you.

Okay, this is Vincent. I will take this question. This year the whole year to now I think we have a very strong pipeline with very good potential from several of the key sectors including federal luxury FMCG and even some of the home products, so very strong pipeline, so there is one thing. The new brand is quite exciting to us, not only about the size of GMV, but also the comprehensiveness of different services. About the key brands, yes, we always keep a very close attention to the key brands, including those very famous ones, we're looking with them very closely and we think the key brand is very fine with our sources. We are also, have the willingness to work for long-term with them as well, so in this case both side potential to work closely and for now. Thank you.

Thank you. Ladies and gentlemen, that’s the end of our question-and-answer session. Now, I would like to hand the conference back to our presenters, Ms. Wendy Sun. Please go ahead.

Thank you, operator. In closing, on behalf of the Baozun management team, thank you for the participation today. 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. Ladies and gentlemen, that does conclude the conference for today and thank you for participating. You may now all disconnect.