Hello, and thank you for standing by for JD.com's Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this point. I would now like to turn the meeting over to your host for today's conference, Ruiyu Li. Thank you. Please go ahead.

Thank you, operator. And welcome to our Fourth Quarter and Full Year 2020 Earnings Conference Call. Joining me on the call today are Mr. Lei Xu, CEO of JD Retail; and Sandy Xu, our CFO. For today's agenda, Mr. Xu will share his thoughts on the recent business trends, followed by our CFO, Sandy, who will discuss highlights for the fourth quarter and full year 2020. Both of them will join the Q&A session. Before we continue, I refer you to our safe harbor statements in the earnings press release, which applies to this call as we make forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most direct comparable GAAP measures. Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB. Now I would like to turn the call over to our CEO of JD Retail, Mr. Lei Xu.

Thank you, Ruiyu. Hello, everyone. Thank you for joining our Q4 earnings call. This is Xu Lei, CEO of JD Retail. I'm glad to take this opportunity today to share with you JD Retail's 2020 review and our outlook for the new year. 2020 was no ordinary year. We observed significant changes in the macro economy, the retail industry and the way our customers live their lives. The global pandemic greatly impacted society and everyone's lives. It also brought many uncertainties to the global economy. But great opportunities can be found amidst great challenges. With the profound changes in consumers' mindsets and behaviors during this period, China's online retail penetration continues to deepen. Consumers' needs, attention, spend, contact forms and means of communication, all underwent many changes. Consumer's demographics and use cases became increasingly segmented and diversified. The lower tier market, the silver economy, the users who were born after 1990s and the year 2000, the community economy, the on-demand consumption and many more engaging trends have presented us a wide range of growth opportunities. In the face of these challenges and opportunities, JD's business model has proven to be resilient through different economic cycles. We adopted a more open approach to running our business and continuously enhance our ability to enable our business partners. Our long-standing business philosophy of noble principle of doing business served as our true north in navigating the uncertainties and changes. All these efforts have helped us to gain the trust of many more users and business partners. Over the past year, we have not only successfully withstood the challenges, but also seized the opportunity for further growth and iteration. JD.com delivered a strong set of financial results in 2020. This is mainly attributable to our continuous investment, improving our users' experience and also always…

Thank you, Lei. Hello, everyone. We were pleased to finish 2020 with exceptional business and financial performance in the fourth quarter. We outperformed our expectations with accelerated user and top line growth and exciting progress in multiple new businesses, while maintaining solid bottom line performance and strong cash flow during the fourth quarter and throughout the full year 2020. These results were driven by our relentless focus on customer experience and investments in supply chain capability, technology and in logistics infrastructure over the past years, which has become a hallmark of JD.com. As we embrace change and position our business for the long run, JD has been at the forefront of many innovative initiatives and structural shifts that are taking place in China. In addition to the exciting developments at JD Retail that Lei just described, I would like to further elaborate on some operating and financial highlights. First, let me add more color on our user base. By the end of Q4, we hit a new high watermark for our annual active customers in the past 12 months at 472 million. We saw accelerated user growth to 30% year-on-year and added 110 million new active customers from a year ago. In addition, we managed to grow our user base, while continuing to reduce our marketing expense ratio in 2020. This improved marketing efficiency was driven by our long-term user-centric operating philosophy and technology-driven marketing efficiency improvement, paving the way for our sustainable user growth going forward. Let's turn to a number of our new business initiatives, which are making exciting progress. First, on JD Logistics. Began as JD Group's in-house logistics department in 2007, JD Logistics has been building logistics infrastructure and technologies as well as operational and industry know-how for over a decade. It has become the leading…

[Operator Instructions]. Your first question comes from the line of Eddie Leung of Bank of America.

Just a couple of quick follow-ups after your presentation. Firstly, your user growth is pretty impressive, very strong. Wondering if there is any impact on the ticket size? If the ticket size is coming down because of new users, does it affect the operating leverage of your logistics pieces? Seems like the fulfillment cost as a percentage of sales is a bit higher than our expectations. So just wondering your thought. And then I think Xu Lei mentioned the renewal rate of your platform merchants improved last year. So just wondering how quickly is the number of marketplace and merchants are growing because of the improved renewal rate?

Thanks, Eddie. This is Sandy. Let me take your first question regarding the fulfilled margin. So I think for gross margin, we would look at 1P and 3P separately. If we look at the pure B2C gross margin in Q4, it went down a little bit, but if we include advertising revenue in relation to our 1P product, that is how internally we manage the operating results. The gross profit margin for 1P actually slightly increased. So this is after considering all of our reinvestments in Q4 for the additional profits that we generated from the first 9 months in the year. As I mentioned at the earnings call last quarter, we plan to reinvest some of the additional profits generated from the first 9 months in the fourth quarter to really provide value to our customers and also to reinvest to build our logistics infrastructure. So again, to emphasize that the gross margin for 1P actually slightly increased compared to the same quarter last year. If you look at the fulfilled gross margin for 1P, there is also a slight improvement from last year compared to the Q4. And we see very meaningful improvement for the full year compared with last year by about 20 basis points. So this is driven by the steady improvement of gross margin by many categories, including the category mix shift towards lower-margin supermarket category. So the relief of social benefits has no impact on the improvement for the full year of our fulfilled gross margin as we had the onetime VAT benefit in 2019. So the amount is almost the same. Really, what's dragging down the total fulfilled gross margin were also -- is the 3P revenue contribution. We can see that the contribution for -- from the 3P revenue went down a little bit in the fourth quarter, even though the 3P contributed more GMV in Q4 as compared to Q4 last year. We were quite encouraged by the healthy performance of our marketplace business model, but the category mix within the marketplace business model also changed slightly. The health care, supermarket, electronics and home appliance categories outperformed the apparel and home products. So that means the categories with relatively lower take rate are growing faster than categories with higher take rates under our marketplace business model. Again, we believe this is a healthy move and a good indicator of our efforts in building a better marketplace ecosystem, particularly for our historically strong 1P categories.

And to answer your second question, you have all known that JD's reputation is the strongest in terms of the consumers' impression of our service experience. And through the year, you can see that the number of merchants on our platform has enjoyed a steady growth. As the consumers have a higher expectation on our service, we will also have a higher expectations on the qualities and the products from our merchants on the platform. During the last year, we have done some screening work over low efficiency and low operation merchants, and still, we see the overall number of our merchants on the platform is steadily growing. And this year, we have been recruiting more high quality merchants. They have -- they are more experienced and running their business in a more efficient way. So we will pay a close attention on the efficiency of our internal platform and also the operational efficiency of our merchants on the platform and how well they are running their stores. And for this year, the cut-off time for the merchants renewal is on March 30. So we have seen the renewal rate is much higher than in the past. And we've also seen the improvement of our merchants satisfaction rate of our platform. Thank you for the questions.

Your next question comes from the line of Ronald Keung of Goldman Sachs.

Congratulations on the strong 2020 performance. I think my question would be on both of you, Lei Xu and Sandy, you mentioned about a lot of new business, which are very exciting. And I could see you just launched Jingxi, also all the different initiatives in -- both in the kind of new businesses. How should we think about our kind of plan to invest in these? I think, because, of course, JD Retail is very strong on itself, but given some of the exciting initiatives, could you go through these initiatives maybe 1 by 1 or the biggest key? And how should we think about our commitment or the plan to invest in terms of magnitude?

Thanks, Ronald. This is Sandy. Maybe let me take the question regarding Jingxi and then Lei can comment on some other new initiatives. So in Q4, as I mentioned, we did a restructuring for our Jingxi Business Group to really try to generate synergies from the 3 separate business units. We see there is a great opportunity in this group purchase business -- group purchase industry or the fresh produce category. So we firmly believe there is a structural opportunity, the huge market size and highly fragmented supply chain with lots of opportunities and potential to improve the operating efficiency through technology and innovative business model. And we also see that the group purchase business model works better for smaller ticket size items in the lower-tier market as it can generate better fulfillment efficiency through short chain logistics and be more efficient in inventory management and marketing, especially for perishable and non-food products and provide users from the lower tiers markets with better experience. So even though at present, most players in this market build their food purchase business model primarily driven by traffic, we believe by end of the day, it will go back to the basis of retail business, i.e. platforms will compete on cost of products, operating efficiency and customer experience. So we see this to be a long-term initiative and ultimate goal is to improve the operating efficiency of supply chain, the wholesale and retail business in the lower-tier market through technology and improve people's living standards. JD is fully dedicated in this initiative, and we will take a somewhat differentiated approach to be more focused on supply chain and logistics network and try to leverage our existing capabilities. So we launched our Pinpin business in certain cities from January, and it's still in a very…

Now let me add something on the new business. And not only for the e-commerce, but essentially for all the retail business, we will focus on the customers' products and the platform. So since the beginning of JD Retail's development, we started from our products, and we start to expand our product selection. So we do our first-party and then the third-party product offering. And for the next step, we focused on our customers, and we start with providing products to the targeted customer cohorts who are interested in the customer -- consumer electronics and digital products, and then we will continue to expand our consumer base to more people in the lower-tier cities and senior users, et cetera. And in terms of the platform, we started to build our platform in a centralized way, and then now we are moving to more decentralized formats. And in the past 2 years, we have been exploring new formats with the off-line businesses and our omnichannel initiatives. So this is now the basic JD's business logic. And behind that, the most important thing is that we are thinking and doing things to see what type of pain points, what we can solve the pain points about bringing down the cost and improve the efficiencies and giving better shopping experiences for our customers. So this you can see is the process we are looking for some solutions for the pain points and also whether there will be new ways to find -- there will be new or more leading or robust models or methodologies to do retail. So we have seen that in the past years, JD Retail has incubated JD Health and JD MRO. And all of this being created based in our principle to solving some pain points and create value for this industry. And we have seen that in JD's development history and this has happened to many other companies as well, when we are considering to enter a new market, we'll first look at the scale of the market. However, we'll think deeper and see whether this new business will truly create long-term value for the industry and for the society. So this is, as I mentioned, the basic logic when we are making our decisions to enter a new business or not. So eventually, we'd love to create a sustainable and constant value to the society and our customers.

Yes, it also supplements our businesses other than the retail business. For JD Logistics, it will continue to build technology and infrastructure to further expand its product and service offerings. And we also have JD International. So we have a small operation in Southeast Asia. They are in the fast hyper growth stage, but still in the investment stage.

Your next question comes from the line of Alicia Yap of Citigroup.

Congrats on the solid results. Just very quickly, I wonder, have you already generated any revenue from community group buy in the fourth quarter? Just wondering your FMCG category, have you seen any impact given the rising intensity of these community group buy platform from the peers? And then just quickly on the first quarter Chinese New Year. So any qualitative color that you could share with us, given this year is also another -- a little bit special year given the stay in the cities measure. So what have you observed in terms of the category demand as compared to the normal Chinese New Year period? Any category that you have seen are abnormally strong this year?

This is Xu Lei. We'll answer the questions related to FMCG and Chinese New Year brand promotion. And overall speaking, we have seen the forecast of the community group buying in these -- in the following areas: first is the fresh produce and also the FMCGs and some may related to the digital products, but mainly focusing on the first two. And we don't see a quite big impact of -- we don't see the JD's business has been having a big impact from the fast development of community group buying. I think this is mainly related to our customers' shopping behaviors and their mindset -- mind shares and also their preference on our product. And it's also worth mentioning that some of our SKUs has been of some favorable items that some community group buying companies want to work with them through our supply chain, enabling our business formats. And regarding the question about the spring festival -- shopping festival because compared with last year's COVID situation, this year, there's some major changes on the consumption, we do see a healthy consumption results and our consumers' participation in this year's shopping festival. We have seen some categories enjoying a very fast growth rate during this year's spring festival grand promotion, such as the gift, beauty products and food and also home appliances. The home appliances suffered from the pandemic the most last year. And this year, the demand is coming back fast. And in contrast, some categories, which had a good sales performance last year, such as some home cleaning, health care and masks, they're coming back to the normal level. So generally speaking, we do see this is a very healthy consumption trend. And one more point to add is that because the government encouraged people to stay at their working place to celebrate the New Year, we do see a surge of remote orders among our platform. The remote orders are those orders the buyers that make the orders and sending to the recipients living in other cities. And the sales of the remote -- the numbers of remote order actually doubled on our platform. And also because of the staycation, a lot of merchants continue to operate their business on the platform during the grand promotion and even extent their working hours there. So we do see they are very engaging and very active in participating in this sales event.

Yes. And on the revenue contribution from community group purchase in Q4, we're only experimented in very small-scale in the fourth quarter in 1 or 2 cities. So you can ignore the revenue contribution.

We are now approaching the end of the conference call. I will now turn the call over to JD.com's Ruiyu Li for closing remarks.

Thanks, operator. Thank you for joining us today on the call. Please feel free to contact us if you have any further questions. We look forward to talking with you in the coming months. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.