JD.com, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Hello, and thank you for standing by for JD.com's Fourth Quarter and Full Year 2020 Earnings Conference Call. . 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.

[Ruiyu Li:]

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.

[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 put our customer first in running our business.

[Sandy Xu:]

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.

[Operator:]

. Your first question comes from the line of Eddie Leung of Bank of America.

[Eddie Leung:]

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?

[Sandy Xu:]

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.

[Lei Xu:]

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.

[Operator:]

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

[Ronald Keung:]

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?

[Sandy Xu:]

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 early stage. We were entering into this group purchase business, we need to build localized supply chain, short chain logistics network as well as technologies and tools to support their operations. We also need to recruit group leaders, business development teams and educate our new users, step by step, city by city. So there are lots of areas need investments. But we are now starting entirely from the scratch. We test it, we have been testing the group purchase business model for a while in a very small scale. For our convenience store business, Xintonglu, now renamed Jingxitong, we already established some B2B supply chain primarily in the FMCG category, including some localized supply chain. We also have existing B2B logistics network and localized business development teams in certain regions of the country. Jingxitong now has over 1 million SME customers, and some of these convenience store owners can naturally be turned to the group leaders of our Jingxi Pinpin business. Our existing centralized procurement platform, the middle platform, mentioned by Lei just now, for FMCG, home products or other categories can support Pinpin shipment and provide users of Pinpin with more product selection. At the same time, that should generally still benefit for core retail through sales on Pinpin's channel. So we are working with various business partners, including China Dili, as the manufacturing basis for agricultural products to strengthen our supply chain capability further upstream and try to source the best value product for our users. At the same time, helping the existing market players on the supply chain with digital transformation, including the agricultural products wholesale market. Our Jingxi e-commerce platform aim to serve the users from the lower-tier cities, and they have accumulated a lot of loyal users since its establishment. Based on our initial test in a small group of users, we are pleased to see a good conversion of Jingxi users to Pinpin users. So we believe JD Group's existing teams and capabilities in the lower-tier cities form a good basis to drive our Jingxi business, although not sufficient to support the growth of the new business as we can quickly replicate, adjust and apply our existing securities, industry know-how and capabilities to the new model. Pinpin can also help increase the engagement of the users and merchants from the lower-tier markets, including convenience stores for Jingxi and Jingxitong business as well as supporting our main app. So these are also the logic of reorganizing and consolidating the 3 business units into 1 business group. Most importantly, JD is fully dedicated in this initiative. We sent our best people to this new business group, and they also got supply chain support from our core retail and logistics business groups. So talking about the investment, we have put aside sufficient budget to start and grow the business as we need to invest in many areas, as I just mentioned. And we will evaluate the ROI for the investments and make sure adequate adjustments based on the market situation. It's pretty difficult to accurately predict at this stage how much we are going to spend on these new initiates. As you can see, the market is very dynamic with many, many players. What I can tell you is our strategy is not to acquire users through short-term and crazy subsidies, but to really invest in building the hardcore capabilities and technology to run the business and create long-term value for our users and business partners and the society. So this is also consistent with our group's operating philosophy. To improve the transparency of our communication with investors, we plan to take out the operating results of Jingxi Business Group from JD Retail segment and report under new business starting from Q1 this year. We are excited about this business opportunity, and we look forward to sharing more with the investors as we develop the business.

[Lei Xu:]

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.

[Sandy Xu:]

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.

[Operator:]

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

[Alicia Yap:]

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?

[Lei Xu:]

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

[Sandy Xu:]

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.

[Operator:]

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.

[Ruiyu Li:]

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.

[Operator:]

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