Ladies and gentlemen, good day everyone and welcome to Vipshop Holdings Limited’s First Quarter 2017 Earnings Conference Call. At this point, I would like to turn the call to Ms. Millicent Tu, Vipshop’s Director of Investor Relations. Please proceed.

Thank you, operator. Hello everyone and thank you for joining Vipshop’s first quarter 2017 earnings conference call. Before we begin, I will read the Safe Harbor Statement. During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Vipshop Holdings Limited and its industry. All statements other than statements of historical fact we may make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is are likely to, may, plan, should, will, aim, potential or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at anytime, and we have no obligation to update these forward-looking statements. Joining us on today’s call are Eric Shen, our Co-Founder, Chairman, and CEO; and Donghao Yang, our Chief Financial Officer. At this time, I would like to turn the call over to Eric Shen. Shen-zong

Good morning and good evening, everyone. Welcome and thank you for joining our first quarter 2017 earnings conference call. We are pleased to have reported solid results in the first quarter of 2017. Our total active customers for the trailing 12-months ending with March 2017 increased by 38% to over 55 million. Our user penetration in China’s online shopping population is still small. Therefore, we continue to believe that there is plenty of room to grow our customer base in the years ahead. We continue to make efforts to improve our user stickiness. Recently, we tested a new Super VIP paid membership program, which offers exclusive or early access to promotional events, special savings, and free shipping and returns. Early results show significant improvements in average order frequency and average revenue per user for those who joined the program. As always, we care a lot about product quality and merchandising improvements. On our hand, we added more sub-categories to our existing portfolio and increased the daily average SKUs online by 161% to 1.7 million compared to the same period last year. On the other hand, we remain focused on bringing in high quality international brands such as Giorgio Armani, Guess, and Versace. We are also preparing for more custom made and exclusive SKUs that will only be available on Vipshop and are very excited about the opportunities. In addition, we remain focused on new technologies to improve our efficiency and lower our costs. For example, we are in the process of developing intelligent customer service chatbots that provide shopping guides before purchase and after-sales services. We also added a number of warehouse automation and intelligent logistics initiatives during the quarter, which Donghao will discuss later on. Overall, we are pleased to have started 2017 on a strong note both financially and operationally. Over the past few years, we gained trust from our customers and suppliers as we scaled our business and delivered on our promises. We have become an important partner for brands to manage their product life cycle, which leads to more high-quality and diversified merchandise to our growing user base. At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategies in more detail and go over our operational and financial results.

Thanks, Eric, and hello everyone. In the past quarter, we delivered robust results with solid top line growth while balancing our profit margins. Importantly, we continued to generate sustainable, healthy cash flow in the first quarter of 2017 with free cash flow of RMB0.43 billion. Our free cash flow trailing twelve months ended March 31, 2017 remained positive at RMB3.26 billion. Moving on, we are pleased to announce that our Board of Directors has authorized the Company to explore a proposed spin-off of our Internet finance business into a dedicated entity. The objective of the proposed spin-off is to shift any associated incentives and risks to this dedicated entity and alleviate the Internet finance business’ financial impact on our core e-commerce business. Additionally, it may enable the Internet finance business to accelerate its growth as an independent entity going forward. It has been proposed that Vipshop will inject all of our Internet finance business and related assets into the dedicated entity and restructure the existing variable interest entity arrangement with that dedicated entity. Certain key members of the Internet finance business’ management may acquire minority equity interests in the dedicated entity. Our Board of Directors has authorized our directors and officers to further explore, negotiate, and finalize the terms and arrangements of the proposed spin-off for its final approval. Our Board of Directors also authorized the formation of a new entity dedicated to our logistics business, aiming to open up our logistics services to a broader market. This will lower costs for both Vipshop and our business partners by accelerating increased economies of scale in this part of our business, as well as enable us to explore a new initiative of online and offline retail integration and provide consistent delivery services with a more comprehensive nationwide network coverage. During the…

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Alan Hellawell of Deutsche Bank. Please ask your question.

I assume that user acquisition costs have stayed at relatively elevated levels. Is that likely to remain the case? Should it increase or decrease? And what would drive us and in such direction? And secondly, ARPU continue to improve and pickup size increased significantly and we appreciate the explanation there. Where can we expect these figures to trend through the rest of the year? And then finally, you've increased SKU very impressively. What does it mean for our business economics from warehousing configuration and costing to fulfillment and other costs? Thank you very much.

So, Alan, the first question is, in the first quarter, the user acquisition cost increased slightly year-over-year, but actually adopt sequentially and in respect be train to be, it was maintain at a reasonable healthy level, and this is not expect a significant fluctuation from where we are now. The average ticket size actually rose year-on-year due to two factors. So the increase contribution of higher ticket size category, the improved personalization, which encourage customers to buy more items and also our quality directed to customers which encourages them to buy multiple items into one order has some benefit to the fulfillment cost. But as you mentioned and the trend of the of the ARPU declined, actually in narrow substantially compared to the first half of last year and we expect trend to continue to improve down the road. So actually the substantial increase of SKU numbers increases the complexity of our operations in our warehouse substantially. But actually in terms of impact of the warehouse is not significant.

And to add to that point, our warehouse is actually designed and set out for handling most standardized products and one of the characteristic of most standardized product category is that the huge numbers of SKU. So our warehouse is actually well positioned to handle huge amount of SKUs.

Your next question comes from the line of Binnie Wong of Merrill Lynch. Please ask your question.

So my question here is on the spin-off proposal of the Internet finance business. So wonder, what is the operating cash flow impact as that was one of the major trend to working capital last year? And following on this is that Vipshop shareholders also have a exposure to the potential upsize on the growth in the Internet finance business, any potential option to convert into equity stake or profit sharing? And second question is one the logistic unit, with the formation of this new unit and also the fast growing revenue from fees earned on last mile for Vip motions. Is this fair to say we're transitioning this unit from a cost to revenue centre too? Thank you.

Well, Binnie, thanks -- thank you very much for the question. First of all after the spin-off the Internet finance business is going to be robust in terms of the cash flow from the e-commerce business prospective. Because at the end of the first quarter of 2017, the total outstanding credit balance for the Internet finance business was about RMB2.3 billion. So just imagine if the spin-off being completed in Q1, it would have been RMB2.3 billion cash flow increase on the e-commerce business unit prospective. Secondly we had just authorized by the board of directors to start exploring potential terms and agreements for this spin off on this business, so we do not have it the specific detail to share with you. But if you look at what our peer companies have done in there spin-off of their own finance business units, I would say as some type of profit sharing arrangement will be negotiated and put in the final agreement. Your second question about the, I'm sorry, can you repeat your second question.

Thank you Donghao, the logistic unit with the formation of the new business unit for the logistic business and also the fast grow in revenue right in auto revenue line, we see from the fees we earned from the last-mile delivery service. What is or -- is it fair to say that we also transitioning from just a cost center a logistic business unit to potential revenue center that we're charging on top of by not just actually premium generate revenue from this logistic unit?

Yes, the answer is obviously, yes. If you look at our financial statement right now, there is one. There is some revenue from the logistics business that has been booked in the other revenue line. So and our logistics business has launched revenue profit generating business rather than a cost center, a pure cost center. And in the future, I believe as our logistics business especially of last-mile delivery business continues to grow to a much bigger scale, the contribution of that business to the revenue and profit for our core e-commerce business is going continue to grow.

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

My question is actually regarding your experimental with new Super VIP paid membership program, so can you share with us some color in terms of how much you plan to charge? Would that be an annual fee or a monthly fee? And who were the target audience during your trial period and so far what are the feedbacks from the customer? Thank you.

So Alicia, as Eric mentioned, the Super VIP paid program at the moment is still in trial and we're experimenting and at the moment we're not charging anything. We might be thinking charging of fixed annual fee but in terms of how much that would be we haven't decided yet, but we believe it's going to be affordable level. In terms of the coverage of the customers at the moment it's less than 1 million and we had selected very carefully the different ranking of our customers across the board. And so each tier of our customers showed significant improvement in terms of the frequency -- shopping frequency and also the average rent per customer, so we're actually quite pleased to see the initial results.

Your next question comes from the line of Evan Zhou of Credit Suisse. Please ask the question.

I have questions regarding our gross margin and sales and marketing trend because I think we've been talking about this kind of rebalancing from using these two cost lines to acquire customers in a more efficient way. I think it used to be a more skewed to the cross cutting side and I think for this quarter's input it's kind of I think kind of doing more or less promotions on rebate side for the consumer, so how should we expect the trend going forward and also on the sales and marketing side, shall we kind of expect some leverage on the sales and marketing on the back of the gross margin sacrifice from the rebate?

So, Evan in terms of the gross margin as you've continued to see that we're still trying to strike a balance between marketing expenses and then reinvestment into gross margin with the aim to gain more customer and gain more market shares. So obviously in the near term, it is our ability to grow as fast as we can and during that period we do think that gross margin we wanted to be largely stable. Longer term, we do believe as it is now probably improves much gain, we will be able to increase the gross margin where I mean it cannot be more sizeable. So I think we do say when it comes to user acquisition as I can come from the gross margin level in the form of repaid or comes into the other shafts the marketing spend that's in the form of acquiring traffic both of which is actually sharing one goal and that would be top line growth, user growth and then market share gain. So we believe short-term is going to be largely stable.

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

Thank you and congratulations on the strong results Yang Donghao and Millicent. Just want to ask about the growth by categories I remember you mentioned about home goods was a very fast growing segment. If you could break down home goods, apparel, toys, kids and baby that segment actually saw some slower growth in 2016 how has it been tracking and also cosmetics and longer term do you see any new category that could come in? Thanks.

So, Ronald actually to review 2017, the first quarter across the Board, most of the categories achieved stable year-over-year growth rate compared to our overall top line growth. And if anything I think two of the categories might be growing, we need to be slower than the overall business, but having said that we continue to adjust and optimize the portfolio going forward. Your second question on new categories as mentioned. Yes, we are actually proactively thinking a slower rate opportunities in this regard. In the few areas such categories that we actually at the moment not offering which are not available for our testament, and some products that are already on the website, but are not in all of these places and we might need to made adjustment to the deployed what pages. And in particular some hike frequency patches skews and categories that at the moment not actually available on that platform. And in these regards, we will be making relentless effort and aggressively exploring opportunities ahead.

Your next question comes from the line of Natalie Wu of CICC. Please ask your question.

Hi, good evening. Thanks for taking my question. So basically two questions here. The first one is about the spin-off of the Internet finance business. You talked about the positive effect on your cash flow. So just wondering what kind of the impact that endeavor will have on your income statement except for R&D, G&A expenses? And the second one is about the average return rates. So just wondering is there any notable change for the average return rate for your top brands as well as the platform -- the overall platform versus a year ago? Thank you.

Thanks for your question, let me answer your answer your first one about the spin-off of our Internet finance business. Well, our Internet finance business has been growing really fast, but there is also been a loss making business. So I think the potential spin-off is completed, we will have a roughly 0.5% part to be impact on our bottom-line through the -- for a public company.

So, Natalie, the return rates for our product is actually has been very stable at around 20%.

Your next question comes from line of John Choi of Daiwa. Please ask your question.

I have a couple of questions here on -- the first of all on the fulfillment expense, we notice that was slight upward trend and management did highlight the reasons behind it, but going forward for the subsequent quarters, how should we be thinking about this fulfillment expense? And secondly just to follow up on the impact on the higher number of SKUs, I think if you look at the traditional of last year's model, will this have any impact on the sales through and in longer term, how this is going to really impact when it comes to the business model, are you guys thinking about more of a large size, more of a BTC model on a change of the business? Thank you.

So the John the first question on the fulfillment cost. Actually as a percentage of top line, we remain largely stable compared to the first quarter of 2016. And obviously if you look at the economic in my calculation in my increased trolley, but that’s due to the increasing portion of our last mile capability. So it would be two simple just to calculate using the total orders and huge investor to fulfillment cost to get a -- pay unique cost. But your second part of question would be what kind of the trend going forward. As Eric and Donghao mentioned in the prepared remarks, we're doing automation as it initiatives. So we're doing on the road, there will be some room to achieve, to further include efficiency and lower cost. So the sales grew were actually will not be impacted due to the increasing number given, because we explain that in the logistics, while logistics we have different modules, we have the tradition pas in, pass out and then we have the increase in portion in just in time and obviously we have the quotation as well. So, overall is not, no impact on rate, because they are just in time model, it becomes a significant portion of our business.

Just to add one small thing on your question, as of today more than our 50% of our inventory is under the so called just in time model. Significant time model means the further as the full we can order from a customer, the inventory that we're selling, so fits in the warehouses of our suppliers. So that means of the SKU that we add into our website are not actually sitting in our warehouses and before we actually get an order from the customers. So by that we can add a lot of SKU to sell on our website without adding to much complexity to our own warehouse operations.

Your next question comes from the line of Penny Tu of JP Morgan. Please ask your question.

So my question is, you mentioned that the benefits from send of Internet finance may result in 0.5% positive impact. What's your plan reaching a point that positive impact? Do you plan to reinvest to generate more fast or top line growth or you are happy to realize the margin increase? Thank you.

Well, our strategy will not change due to the spinoff of the Internet finance business. Meaning we will continue to try to grow our top line as fast as possible while maintaining a stable net margins. So basically we will most likely reinvest the positive impact from the spinoff of the finance unit back to our business, the e-commerce business to drive faster top line growth.

Your next question comes from the line of Eric Wen of Blue Lotus. Please ask your question.

Just want to know more about our logistic ambitions, as we know our sales our fast sales model keep cellular inventories and now with our renewed focus on providing a local ware house in each provinces by the end of this year how does this translate to impact to our gross margin and fulfillment cost going forward?

So, Eric maybe to begin with for the co-location and third party logistics, it's actually accounting for around 20% of other net revenue in terms of compensation so we believe that -- and also just a bit more information on the other net revenue line where people are also asking about the last-mile contribution and that is also 45 -- 44% of the other net revenue. So, the contribution to the gross margin is actually reflecting in the other net revenue line which over then it has increased and it became accretive to our overall gross margin.

Okay, let me take it. Well, Eric, thank you very much, well sorry about the misunderstanding of your question. Well, I think the addition of more regional warehouses it will help us shorten the delivery time to our customers which will obviously make our customers happier and more satisfied and of course if they're happier and more satisfied they'll come by more often, buy more stuff from us, so I think initially the addition of more regional warehouses may have the negative impact on our margin but in a long term it'll help us grow our business even faster and achieve better margins.

Your next question comes from the line of Mitchell Kim of Maybank Kim Eng. Please ask your question.

I had a question on your strategy regarding in season versus off season items, so if you could share with me what percentage of your inventory or product sold is in season versus off season and if you could share also about overall longer term strategy, what does this mean as you go towards in season more, is that going to help your gross margin or is that going to hurt your gross margin but helps on the growth side?

So, in season and custom made products account for one third of our overall business and we don't charge our suppliers differently whether it's in season, off season or custom made channel at the moment.

Your next question comes from the line of [indiscernible] of 86Research. Please ask your question.

So my question is regarding your opening of logistics services, so is this going to be primarily on the last-mile delivery or comprehensive logistic solution including warehousing and the packaging and also what's your advancement in logistic services when compared to other logistic service providers? Thank you.

So, we will open both our warehousing and logistic to third party but including our inter-cities as trucking and transportation SKU. So for the warehouse it depends on our core purchase growth and the size of warehouses. We will then as decide on how much efforts made to be open for third parties. And as you can imagine for logistic it's actually economic scale of business as over the more order that we can take outside of the acquisition of platform better. So that would enable us to continue to lower the cost and improved efficiency. So in terms of our advantages, so obviously we have five regional and centralized warehouses and on top of that we have close to 10 local warehouses nationwide, we have our trucking and transportation as I had mentioned and 2,800 they are operated and delivered to station and of course 20,000 plus are delivery staff all of these were at to enable the results to provide consistent competitive delivery servicing.

Your next question comes from the line of Jin Yoon of Mizuho Securities. Please ask your question.

Just couple of first one just a question on your year-to-date business. Just in the second quarter, can you give me any trends to see what you are seeing quarter-to-date, perhaps your success level on your mid-April sales campaign as kind of and what gives you the confidence and towards them where as the rate are stable revenue trajectory in the second quarter giving a guidance compared to the deceleration we thought in the first quarter? Thanks guys.

Well thanks Jin Yoon for the question. Usually we don’t comment on the current quarter except with the guidance that we provide to the capital market and guidance, we do expect our revenue to grow in the second quarter from 26% to 30% year-over-year. And I can tell you that to mid-April promotion went really well. That’s part of the reason why we have this confidence in our guidance.

Your next question comes from the line Jialong Shi of Nomura Securities. Please ask your question.

I have two questions, first is about your CapEx, can you give us an update on the CapEx for this year and next year? And second question is it appears you guys are now adding more brand to each sales event, and this may mean like more the right is for your customers but it may also dilute the user traffic each in the major brand can receive from your platform. So I just wanted management to provide some color on that?

Let me take your first question. Our CapEx for this year 2017 and next year will be around RMB3 billion each year. And the major CapEx items will include, of course, the expansion of warehouses and construction of our headquarters in Guangzhou. So the second question, Millicent, I think...

So Jialong, the great demand for different plans to cater for different age group of customers and actually that is a good thing have because we can use big Data and personalization and launch different brands to different age groups of customers. And Eric just mentioned briefly that will also make progress in terms of personalization and to improve a much bigger number of age groups compared to what we disclosed on last quarter.

Your next question comes from the line of Tian Hou of T.H. Capital. Please ask your question.

I have some question related to your fulfillment, as you open up your logistic services, delivering services, so I wonder what's the impact to your bottom line, so if you have any services or orders from the third party and that’s consider to be the revenue of logistics, how you are going to report that, report as something against your expenses or as revenue? So that is my question.

Well thank you very much for your question, I think in a long-term the open up of our logistics services to third party customers will definitely have a positive impact on our bottom line because, the biggest driver in P&L specially in the four year operations is actually the scale, the more you deliver the lower your average cost. So in the long-term it's going to be a definitely a positive impact. And the revenue that our logistics operations generate by delivering for third party customers is now reported in the other revenue line items, so its revenue cost or negative against the cost.

There are no further questions at this time. I'd now like to hand the conference back to management for closing remarks. Please continue.

Thank you all for taking the time to join us. And we look forward to speaking with you next quarter. Thank you.

Thank you.