Hello and thank you for standing by for JD.com’s First Quarter 2021 Earnings Conference Call. [Operator Instructions] After management’s prepared session, today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Ruiyu Li.

Thank you, operator and welcome to our first quarter 2021 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, our CEO of JD Retail, Mr. Xu will share his thoughts on the Q1 performance, followed by our CFO, Sandy, who will discuss the financial highlights for the fourth quarter 2021. Both Lei and Sandy will join the Q&A session. Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will 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 directly comparable GAAP measures. Finally, please note, unless otherwise stated, all 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. This is Lei Xu, CEO of JD Retail. Thank you for joining us on this quarter’s earnings call today. This year marks the 18th anniversary of the establishment of JD.com in the past 18 years at the heart of the deep integration of China’s rail economy and digital economy we have faced many opportunities and challenges. JD has created a unique business model whose core philosophy for success is about providing the superior customer experience, cost optimization and operational efficiency. These pursuits also constitute our core competitive advantages. Our long-held business principle of doing the right things and our unique business model have helped us to win greater trust from our users and partners, while enabling us to stay resilient through economic cycles and weather all risks. As you can see, based on this JD’s business logistics has become increasingly open. We are enhancing our capacities to empower others, not only rising to the challenges we face, but also seeing opportunities for long-term growth. Here, I would like to share some key progresses that JD Retail achieved in the past quarter from the following three aspects. First, high-quality growth of business and users, JD Retail’s revenues maintained high-growth in the first quarter with continued improvement in both operating efficiency and profit margins. Our CFO, Sandy, will elaborate on this later. This lays the solid foundation for our businesses in the following quarters. We are even more encouraged to see that many of our suppliers and partners achieved healthy and sustainable business growth and profitability expansion in the challenging market environment through their partnership with JD. Coupled with robust operating performance, we are also inspired by the growth of our high-quality active users. By April 1, the number of our annual active users reached the 500…

Thank you, Lei. Hello, everyone. We are expected to get off to a flying start in 2021 with robust operating and financial performance in the first quarter. As Lei pointed out, our unique business philosophy and model allow us to embrace innovation and take advantage of structural changes that are taking place in China. Before going through the financial results, I will touch upon a few highlights from the first quarter. This year marks the 18th year since the launch of JD.com. Along the way, we have been able to build a comprehensive set of supply chain, fulfillment and technology capabilities to serve customers and business partners. Our business model has evolved from being the largest retail company in China by revenue to a supply chain based technology and service provider. We are rolling a snowball on a very long slope and continue to gain momentum. Some of these capacities that we have been building for years are turning into promising growth opportunities and achieving the important milestones as a number of our younger businesses are seeing exciting developments and rapid iteration. At this stage, the most notable among them include: first, JD Logistics, which has published its prospectus on May 17 and expect to list on the Hong Kong Stock Exchange on May 28, 2021; second, JD Property, which completed its Series A preferred share financing by end of Q1; third, our international businesses that grew triple-digits in Q1; and fourth, our Jingxi Business, which aims to synchronize our efforts and resources in lower tier markets. To help the investors better understand the different growth trajectories of our expanding business lines and how they are evaluating from the management’s perspective, starting from Q1 2021, we restructured our segment presentation. The changes in segment reporting mainly include: first, JD Logistics…

[Operator Instructions] Your first question comes from Eddie Leung from Bank of America/Merrill Lynch. Please ask your question.

Good evening. So I have two questions. The first one is about omni-channel threat. So we would like to hear from the management team about their thoughts on the competitive environment as well as the differentiation of JD in community group and new retail. And then secondly, just want to get a sense on the average order size because we know that in the first quarter, the growth of large ticket items such as home appliances, had very strong growth. But on the other hand, we continue to see the growth of small ticket items, like JD supermarket and grocery. So these are my 2 questions. Thank you.

Thanks, Eddie. This is Sandy. Maybe let me take the Jingxi related question first, and Xu Lei can comment on the omni-channel strategy. So on Jingxi strategy, first of all, we believe this social book purchase model is definitely a long-term initiative. There is a structural opportunity for JD to further penetrate down to the lower tier markets to provide the price sensitive consumers with more product selections and services. In particular, the products within the relatively low price range. And we have strong commitment and desire to explore the future addressable market opportunity with our Jingxi brand, as I just mentioned. Even though the existing players in the market focus more on traffic operation at this stage, we believe, by end of the day, the key to win the game would be the supply chain capability and logistic infrastructure driven by technology. Because with these core capabilities, we can provide our users with better shopping experience and quality products with better pricing. These are the areas where we have unique advantages and experiences through our 1P business and our logistics business. On one hand, we could leverage our existing supply chain network through our B2C e-commerce business, our long-term relationship with the brands to provide our users with more SKU selection. On another hand, we see this as a business heavily relied on local supply chain, especially for the fresh produce products. It is possible that a platform can quickly build up a nationwide service network, but if it cannot provide the users with competitive pricing and good shopping experience, it can easily be replaced by other platforms as well. So as a supply chain driven platform, we would not compete on speed with other platforms, but taking a long-term approach through investing in infrastructure, focusing on building our own teams and supply chain. Only the traffic driven platforms would compete on speed through heavy subsidy. So, we will enhance our collaboration with JD – within JD’s various business lines to satisfy our users’ different shopping demands and different scenarios, leveraging our existing technology and infrastructure as much as possible.

This is Xu Lei. I will comment on the omni-channel business and of our FMCG and some high value products as you can see from the government release that the online regulation will take a greater part of the overall social retail. And we have all seen that the decentralized trend continue to grow online and more and more traffic platforms are being more active online. And also, we see the digital transformation is happening quickly for our – for the off-line businesses. For the goal of JD Retail is to integrate in these trends and continue to promote the overall development of China’s retail industry. And in terms of our omni-channel businesses, by leveraging our strong capacities in supply chain, our digitalization capacities and our integrated marketing capacities, we will put all of these capacities in the use of different consumption scenarios to give support to our merchants and partners to help them to adapt to the changing market environment and to help them to achieve all kinds of shopping scenarios to satisfy the needs of the customers anytime and anywhere. And based on our unparalleled capacities in supply chain and fulfillment, we can better serve our partners in this very complicated industry environment to help them to enter more emerging new traffic platforms. So, these have already been welcomed by more and more of our partners. And for our offline partners, they have also very welcome our methods to empower them with our capacities and resources rather than just taking advantage of the traffic. So in this way, we can better serve our business partners and also our consumers in more diversified shopping scenarios. And the comment on the FMCG categories, we can see that this category achieved accelerated – faster growth last year due to the pandemic,…

[Foreign Language]

Yes. Thank you.

Yes. And Eddie, to respond to your question regarding the average order value, this is not a key operating metric that we manage on a daily basis. But in Q1, our total order number actually increased slightly faster than our top line – than our GMV growth, so that means the average order value remained largely stable compared to same period last year.

Thank you very much.

Your next question comes from Ronald Keung from Goldman Sachs. Please ask your question.

Thank you. Thank you, management. Thank you, Xu, Sandy and team. My question is mostly on our investments and how we see the balancing between kind of growth, our core profitability and investments given quite a lot of our peers have been saying reinvesting a lot of the profits or all of the profits, incremental profit. So in our case, we’ve seen a very good balance in the first quarter that we have delivered basically still growth in EBIT, but quite big investments into logistics and new businesses that you have now disclosed separately. So how should we think about that trend, say, into the next few quarters? And how should we – how do we think about that balance and – for logistics and new businesses and the Jingxi business unit, if management could share those strategies and likely the trends in investment? And how do we think about that? Thank you.

Thanks, Ronald. Let me take this question first. I think, first of all, we prioritize growth above the importance of profitability because across all of our business lines, we are still in high-growth stage. But each segment or each business line is actually in different development stage. So we have kind of a differentiated investment strategy. So for JD Retail, we still – you can see that for the first quarter and in the past few quarters, they continue to maintain a high-growth rate. And we – as I mentioned, at the call last quarter, we expect that in 2021, our retail business will largely maintain the strong growth momentum from 2020. But with that, because of the scale benefits and operating leverage that we are gradually realizing from our core retail business, we – our expectation for the longer term margin expectation for retail remain unchanged. So that means we still expect over a longer term period, our JD Retail net margin will maintain a steady growth trend. So really, the underlying margin drivers for JD Retail are the scale economy as well as the improvement of our 3P ecosystem. I remember I discussed this before, our procurement cost for many products within supermarket category is still 3% to 5% higher than the off-line retailers. So there is great potential for margin improvement as we grow our scale for this particular category. And we actually have similar situation in many other categories. And our 3P business, as everyone knows, our apparel category was under abnormal competitive pressure in the past few years. So if the marketplace business performs better, that will definitely be a driver for margin improvement, but having said that, the longer term profitability will be affected by the category mix and service revenue contribution. And when…

So let’s move on to the next question.

Your next question comes from Thomas Chong from Jefferies. Please ask your question.

Hi, thanks management for taking my questions. My question is more about user growth as well as penetration to lower-tier cities. Can management share about our strategies on how to further grow our users for this year after reaching the 500 million milestone? And on that front, can you also comment our strategies in lower-tier cities penetration this year? Thank you.

And this is Xu. I though your questions on the users, we will adopt a more flexible approach this year from two aspects. First, we will increase – we will diversify the channels and the approaches for our new user acquisition. At the same time, we will manage more high quality – we will manage our cost and the quality of the cost in the new users acquisition. And in overall, both the numbers of users and the users’ operating efficiency continue to grow, and users’ conversion rate is also better compared with the performance in 2019 and 2020. And on the new users, we see the qualities of the new user continues to be improved in terms of their repurchase rates and retention rates as well as their average spending on our platform. And for our existing old users, their performance is on the right track and with – across the board, good performance in terms of their shopping frequencies, the variety of products. they choose our platform, their average spending and retention rates. We will continue to improve their shopping experience on JD.com to improve their further engagement with us. And in terms of the category’s contribution to new customers’ acquisition, our consumer goods such as food, FMCGs, they make the biggest contribution to new user acquisition and for mobile and home appliances, also attracting more new users this quarter. And for our makeup, beauty and clothing categories, which has a weaker appeal in the past, they also did a better job in acquiring new users this quarter. For the lower tier market, it continues to be the main source of our new users. In this quarter, the new users coming from the lower-tier markets for the first time reached 81%. We will continue to expand our touch points with the customers in the lower-tier markets by leveraging various sales channels and interfaces with our customers to reach the new users and also to providing more tailored supply chains and product mix to offer more precise matching of products to the lower-tier market users. And we estimate that the new users growth from trends will continue in the following time of 2021. Thank you.

Next question, please.

Your next question comes from Alicia Yap from Citigroup. Please ask your question.

Hi, thank you. Good evening, management. Thanks for taking my questions. Congrats on the strong results. I have a question regarding how should we be thinking about for the second quarter trend? I believe – I think, Sandy, you previously mentioned we should look at on the first half growth rate as comparable to the first half last year. So given such a strong performance in first quarter, are we still implying the first half this year will be similar to last year? If that’s the case, then it will be implying second quarter only growing at 20% year-over-year. But then given your upcoming 18 years’ anniversary of this June 18 promotion, it also doesn’t sound reasonable. So any color you can give us in terms of the second quarter trends that we should be thinking about? Thank you.

Thanks, Alicia. During the COVID outbreak had very significant and very different impact on the performance of our various categories last year. For example, I still remember that the home appliance category was extremely weak in Q1 last year but was extremely strong in Q2 when the pent-up demands were released in April into May. So, you know, when we manage our business internally or think about the trend of our retail business, as I just mentioned, we either will catch the two-year CAGR or will catch the year-over-year growth for the entire first half. Of course, there was also impact from the nonrecurring sales of the COVID-related protection products, such as face masks and thermometers last year. So I think your understanding is largely correct. We expect the whole year for retail business to largely maintain the growth momentum from 2020. So this includes what we both look at from the 2-year CAGR perspective and look at it from the first half year perspective. We expect to see that the category shift – category mix shift will continue, general merchandise category to grow faster than the electronics and home appliance, and in particular, the supermarket and health care categories. Advertising revenue will also grow faster than product sales. And – but this is only for the retail business. If you look at our group as a whole, the other business lines are less affected by the COVID impact last year. So you should also consider the growth of services revenues, in particular, the logistic services now contribute quite significant portion of our total revenue.

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

Thank you, operator, and thank you for joining us on today’s conference call. Please feel free to contact us if you have any further questions.

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