Hello, and thank you for standing by for JD.com's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. And today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I would like to turn the conference -- turn the meeting over to your host for today's conference, Ms. Ruiyu Li. Thank you. Please go ahead.

Thank you, operator, and good day everyone. Welcome to our second quarter 2018 earnings call. Joining me today on the call are Richard Liu, our CEO; and Sidney Huang, our CFO; and Jianwen Liao, our Chief Strategy Officer. For today's agenda, Mr. Huang will discuss financial and operating highlights for the second quarter followed by brief remarks from Mr. Liu. After the prepared remarks, management will be available to answer your questions. Before we continue, I refer you to our Safe Harbor statements in the earnings press release which apply 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 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 Sidney.

Thank you, Ruiyu Li and hello, everyone. Thank you for joining us today. Today's call we also have our Chief Strategy Officer, Jianwen Liao on the line. I would discuss our financial performance first, and then Jianwen will discuss the industry trends and the company's development strategies. We are pleased to report another quarter of solid topline growth improving profitability for the core ecommerce business and exciting developments in our smart technology initiatives. For investors to better track the progress of our business, starting this quarter we will begin providing segment information and a more detailed revenue information on our different business lines on a semi-annual basis. I believe to increase the disclosure we'll give investors additional insights into the strengths of our core business, as well as our strategic initiatives. During the second quarter of 2018 our net revenues grew 31.2%, in particular growth from net service revenues was 51% year-on-year given by a strong momentum from supply chain management and advertising. In the first half of 2018, our marketplace and advertising revenues grew 37% year-on-year of which commission income has been negatively impacted by the anti-competitive practice in the industry, particularly in the power sector. On the other hand, advertising revenue continued to grow at an encouraging rate as our text-driven advertising products show improving ROI for our brand customers. Meanwhile, growth from logistics and other services revenues accelerated to 151%, mainly resulting from the robust growth from a supply chain management and technology service revenues. The worst thing in our third-party logistics services business remained a focus during the quarter. While this continued to impact the gross margin line, I'm pleased to report that loss ratio further narrowed during the second quarter, and we maintained a relatively stable gross margin at the group level. Non-GAAP gross margin…

Thanks Sidney, any thanks all for joining us today. As many of you know, I joined JD Chief Strategy Officer nearly one and a half years ago but today I'm pleased to offer our view on the retail of the future and related technologies and JD's overall long-term vision. Let me begin with overall industry. We believe the ecommerce industry is at a strategic inflection point. While it maintained healthy growth, we have observed changes taking place that may fundamentally reshape future development in four key areas. First, we are seeing a shift from centralization to decentralization, to bond between retail and other industries has become increasingly broadening which is why we defined a piece of retail as boundaries [ph]. China is uniquely seeing an influx of recurring innovation across industry boundaries, this includes as a emergence of a common commerce, social commerce, AI commerce, IoT commerce to name just a few; as such the retail space will become more disputed and decentralized than ever before. Second, ecommerce is moving away from focusing on mass traffic to position targeting. [Indiscernible] in the long which is about flexion, quality and closing but was increasingly about disrupting movement providing right products to the right customers is starting and that is the right client. This fast evolution of technology and big data, AI, IoT and a host of other areas involves retailers to interact with customers, get more touching points, and manage the business at a more granular level. We believe that to succeed players need to move from an average install mentality to advance store, meaning from the approach of a mass market to a market of one. Third, the supply chain is increasingly more important than a pure platform model, retail innovation and the supply chain completing enhancement of clearly is…

[Operator Instructions] Our first question comes from the line of Eddie Leung of Merrill Lynch.

I have a question on perhaps the [indiscernible]; Sidney you mentioned perhaps starting in the third quarter; could you elaborate a little bit more on some of the macro factors and seasonal factors we have seen or thought might affect the future growth of our business? And then, related to that or would that affect our near-term margin profile given the timing of the infringement in various new initiative?

I think you were asking about Q3 sales guidance. As I mentioned, July actually after our June '18 promotions in the last 10 days of June we started to observe somewhat of a softness in our sales growth. But we have -- since seeing a recovery in August basically back to the normal pace. We internally analyze that we believe there are mainly seasonality factors, polis [ph] for this year we may have seen a stronger than before seasonality post-promotion and tourist that we did have a very strong July last year in JD. So, I think it's a combination of these factors and obviously it is also some particular category was affected by the overall market environment but in any event we -- starting August, we have seen pretty well recovery across all categories; so we are still quite optimistic looking ahead. You asked about our view on the macro; I think we are still cautiously optimistic given that in China the overall consumption growth, consumer income, and also consumption as percent of GDP or all pointing to a continuous consumption growth for many years to come. So we are still quite bullish in terms of gross outlook.

Our next question is from the line of Alicia Yap of Citigroup. Present your question.

Hi, good evening. Management, thanks for taking my questions. I have a couple of questions if I may, could you actually -- maybe perhaps elaborate and share reverse on any update on the close of collaboration with Google so far, since the strategic investment in June and in the event if Google has interest to launch to Google Shopping action program in China, will JD be the strategic partner to what we stand. And a housekeeping question, Sidney, given all these initiative, I wasn't quite sure, are we still retaining the full year net margin guidance of 1% to 2%. Thank you.

Now, of course you know, JD and Kinko [ph] are very much complimentary in terms of lot of skillset. These partnerships obtained in JD were very much mutually beneficial for both companies, and of course, in your space the JD -- of course, we walk closely with shopping action to us as a gateway for JD products to be listed on shopping platform. And of course, on behalf of all domestically we have 170,000 high quality merchants. Also JD -- I mean core shopping action where important gateway follows high quality merchants as well. So clearly, of course we have greater vision and closer with Google in many ways. Now we wait for this kind of strategic collaboration, I think in the movements or initiatives coming along the way, so I will say in all of this -- unfold [indiscernible]. On our second question on the earnings guidance, I mentioned that we'll remain committed to the JD Mall core margin being stable. And -- but we are investing more in other initiatives as I mentioned. To compensate for that we actually accelerated our monetization plan for logistics properties, and which when realized should be more than compensating or at least compensating the short fall due to the additional investments. But as I mentioned earlier, the timing of the monetization is relatively -- we don't necessary can guarantee it will be completed by the end of this year. So that will create some non-linearity in earnings trend from this year and the next year. So that -- I know if that's -- that will end.

The next question is from the line of Alex [ph] of JPMorgan.

Can you elaborate a little bit more on the JD Logistics asset management to business; how does it work, how do they generate revenue free cash flow? What is the long-term vision for this initiative? And I think you kind of mentioned in the prepared remarks that the financial contribution from this product, the initiative will increase into the second half this year in terms of revenue and a free cash flow; can you maybe elaborate on the magnitude of these contributions? Also follow-up on Alicia's question; what exactly did it mean the earning or the margin trend will be longing year towards the rest of the year. Does it mean the margin could be more volatile than the historical pattern?

Sure. We actually mentioned in the past few quarters that the reason we were investing in logistics assets is because that JD is in a very unique position to acquire the land resources by working with the government, and obviously we're creating jobs for the local economies. So as a result of that effort we have now built over 2.5 million square meters on logistic properties but we actually have a lot more than that in the pipeline. And when we have that portfolio, we are in a very good position to monetize these properties by several ways; one is to sell it to outside investors, they are already investors for this type of assets in China because -- and actually globally, because the logistics assets have been appreciating quite steadily, and with steady rental increase. So it has been a very attractive asset class for many very long-term investors globally and domestically. So there are already investors to purchase these assets which will help us realize the hidden value appreciation that has not being realized currently on our financial statements. And after the transaction, we would also continue to serve as the management company for those assets; for that we -- as I mentioned, we established a separate operations which will continue to develop those warehouse facilities, and they will also monetize in the sales transaction, and also manage those properties afterwards; so there will be management income after we monetize those products. I mentioned that will happen in the next 6 to 12 months, so it may not have a very near-term impact on our financials in the second half, and that is why I said that non-linearity meaning that part of that -- essentially the monetization could happen by next year; so then it will impact our overall bottom-line forecast for this year.

The next question is from Ronald Keung of Goldman Sachs.

I guess I'll ask a similar question as last quarter but just want to hear any updates on your apparels, particularly we see a lot of new initiatives for JD Mall within the marketplace from this encouraging merchants to sell more targeted sales and with commissions and advertising -- I just want to hear how apparel growth -- has it resumed back to at least positive growth in the second quarter? How it's looking on our strategy for apparel in the second half of this year as we let the one year of exclusive partnerships I've seen at our competitor? Thank you.

First, we have not passed the one year anniversary of that impact competitive practiced by our competitors last year which has started in August. So as a result during the second quarter, unfortunately our fashion category is still under the shadow of this unfortunate entire competitive practice which essentially uses it's traffic control to force apparel merchants to stay off our platform, in fact, also other platforms. So this practice does affect our fashion business line but also have a ripple effect on our overall profitability. But we have been working very hard through other categories to better serve our customer base for enhancing our merchant products and services. So we remain optimistic about gaining the momentum in this category in the next few quarters.

Next question is from Jerry Liu of UBS.

My question is about JD mall, I understand when we look outside of that there are some -- maybe milestones such as the logistics asset management milestones that may or may not fall in this year, and that complicates the net margins a little bit. But if we just focus on JD Mall; how do we see the margins trending in the second half of the year versus last year or versus the first half of this year? Thank you.

So as we -- when we look at the second quarter, gross margin did expand on a first-party business over 50 basis points actually, still quite meaningful improvement. And also we continue to see robust growth in our advertising revenues. So these are the main drivers for our profitability for the JD More business and which we believe will remain at stable margin, and potentially higher margin for the remainder of the year.

Next in line to ask a question is Thomas Chong of Credit Suisse.

After the questions; the first question is about our thump [ph] initiatives. Can management give us some KPI that we may have over the next couple of years. And my second quarter is above second, certain I'll won't be the house status so far. And my first question is also about the late margin. Is there any color, that 1% to 2% net margin guidance that we still keep at least, thank you.

I think we have -- now if you look at our service revenue, vast majority of that is from – to be business segments. And -- but today majority of that is still coming over the next couple of years, and my second one recent example is that we're putting a lot investment third-party logistic services or supply chain management services. Set we have seen great attraction in that business line. Going forward, the investment we have made in technologies will also produce what we believe very solid revenue going forward and there are also areas that we can invest in the supply chain capability -- leveraging supply chain capabilities we have. On the seven fresh we have a couple of stores that are -- we have been observing the results of those stores which actually has shown very very encouraging results. Overall, our sales per square meters have seen at least 3x to 4x the traditional offline supermarkets, so we're very encouraged by the initial results and we are in the process of opening up another 20 to 30 stores in the next few months.

Next is Ms. Wendy Huang of Macquarie.

My question is mainly about your logistics; so you mentioned about the appreciation value of your logistic assets; so can you give us some color regarding the self-owned warehouses versus the warehouse among the 521 warehouses you are operating right now? Or maybe a split between the 12 meter square meter size that's fine as well. And also can you give us some color on the numbers?

The space that we own is roughly -- it's over 2.5 million square meters out of the 12 million warehouse space we have; so just for those self-owned facilities we can see, in fact billions of RMB from realized appreciation. And there are also multiple times of that space in the pipeline, so we do see great potential in this business as a standalone separate operations.

Next is Gene [ph] of New Street Research.

Just a couple of questions on the advertising front. My understanding is that the advertising seasonality is a little bit more positive in the second half of the year with 11/11 and so forth. But just wanted to see kind of how you're looking at that business; if you could share with us some metrics behind that including the number of advertisers, out-loads or anything that you can share with us that would be great. And second of all on the logistics…

So on advertising we mentioned -- I think that today or really in the past couple of years, our strategy has been using technology and artificial intelligence to provide better position and better ROI for our brands. So we have seen very very good results of that effort and this what's driving our advertising revenue growth besides [indiscernible] and we have not been very aggressive in increasing out-load at all. If anything we are on the monetizing in this area, but for JD we want to maintain that right balance between monetization and customer experience; so we will continue to adopt that approach, use more of a technology-driven approach to enhance our advertising revenue.

The next question is from John Choi of Daiwa.

I just want to ask more of a broader question regarding the overall industry; so right now we're obviously seeing a very intensive conversation here. So how does the management think about the long-term growth outlook or are we seeing -- there has been some -- the first half was very good particularly in the first quarter and starting from latter part of second quarter we've seen some sort of slowdown. So how should we think about that growth? And on that I mean are you seeing any new retail having a negative impact to our core business?

I think Jian has elaborated quite a bit on our gross strategy that we are still -- we still have a very long growth trajectory for our core ecommerce business and we are also investing in some of underpenetrated categories that will produce RMB100 billion revenue potential, and we also have a set growth curve as focusing on -- to the business, and also some of the innovation and empowerment driven businesses. So, internally we have a very clear strategy and we have various task forces to drive these initiatives. And we hope as we continue to grow the core business, you will start to see at a strange-off revenue being generated through these efforts.

Our next question is from [indiscernible].

My question is on the margin trend, I think any trails are in terms of closed margin improvements, some of the key drivers here. Can you elaborate a little bit on the expansion into business gross margins which [indiscernible] improvement here? And also you mentioned about in terms of -- whether scope in at and then also helps to drive anything on margins. Can you direct us ways in terms of advertiser that we've seen or others coming from the [indiscernible] that you have seen as you have mentioned in regional developments; what types of advertisers are you seeing mostly and in which category?

So as far as gross margin drivers, we do see gross margin expansion in all categories in the second quarter. Those are driven by our scaled economies as we purchase more from the prints we get natural rebates for gross margin expansion. So not only on the electronics and the home appliance categories which we continue to see margin enhancement but also on FMCG, for example, we're also gaining more and more scaled economies with the brands. So that's essentially the driver both on gross margin and also on our ability to provide competitive pricing to our customers which we expect will continue to drive our business for many years to come. As far as consumer -- for the brand advertising, it's the usual effect -- obviously, the consumer goods brands -- actually brands across all industries have been working closely with us, and obviously the brands that we work are the categories were the strongest will provide more advertising spending with us.

And next question is from the line of Natalie Wu of CICC.

Just curious, what's your view on the industry competitive landscape change, especially as the rising up from social economics platforms? Did you see any kind of the impact in terms of shopping frequency for your certain category?

As I mentioned in my statement, we have seen an influx of new innovators in the landscaping. Now however, you know, that JD is a quality internet platform, now with less emergence social commerce platforms, I think it will provide tremendous opportunity to educate new customers. So in other words, we do see this as a consumption upgrading while as well as downgrading as many of you have pointed out. So what I mean by operating is, they provide the new source of commerce, provide customers with a choice, meaning in the past you had no choice, now you have a choice. Now of course from no choice to have a choice, and then JD on the other hand, from a choice to have a better choice. So in this case I think that the customer education will provide a foundation for the future in terms of JD's growth. So I think this -- so in other words, there will be new customers moving to the online space, so which could provide better growth opportunities for JD. So we have our own team purchase product called Kinko on our WeChat interest point and interestingly, we are also seeing a lot of demand from both, our merchants and from our customers on this purchase product that we offer. So just to give you a couple of data points, in the second quarter the percent of merchants that participated in our Kinko program up from 16% in Q1 to 40% in Q2, so very active participation, the high quality SKUs participating in our Kinko. And if you look at the purchase orders for our 3P platform, the Kinko transaction volume is now over 10% already.

Our next question is from Grace Chen of Morgan Stanley.

I have two questions. The first question is about the overall consumer demand in a market, there have been some talks about demand slow down; so will you just share with us your observation of the consumer demand? And if possible, by second such as home appliance, we see apparel FMCG. And my second question is a follow-up of the margin guidance, specifically on JD Mall margin; we talk about JD Mall margin to be stable -- that is -- does that mean we are expecting to see a flattish JD Mall operating margin year-over-year? Can you add bit more color in terms of JD Mall margin trend? That will be great. Thank you.

On the consumption trend, as I mentioned, other than the somewhat soft July sales, which we believe is more due to seasonality, we actually don't see much of impact at this point starting August. To close still quite solid and I think we are -- given that the consumer income growth continue to be faster than the GDP growth, employment level continues to be very high in China. And also the consumption as percent of GDP is still quite low; so I think given all those dynamics we do feel -- still quite optimistic about the consumption trends. On the JD Mall margins, I mentioned it should be -- remain stable with some upside throughout this year. Again, it's driven by our economies of scale in first-party's business. And also driven by advertising growth.

Our next question is from Tian Hou of T.H. Capital.

I have two questions. One is again related to the company's margin. So Sidney, you give revenue guidance as a combined entity, JD Mall and the logistics, and now where we know the JD Mall margin is going to be stable with some upside, so I wonder investment side on the logistics, how much you expect to have a margin drag? So that's on the logistics side, and also how much revenue contribution should we expect from logistics? So that's number one question.

Sure. So on the logistics margin, we are pleased to see margin -- the loss ratio has been narrowing in the second quarter but this year is an investing year for JD Logistics. And so we do expect some losses in the remainder of this year, and we do hope the loss margin will continue to narrow. The growth rate is well over 150%, we did separate the logistics out of services in a separate line in our half year supplemental information section. So we wanted to provide some color on this new business along with a few other new business lines. So very very strong growth rate, very good customer adoption -- our corporate customer adoption of our service. So very good revenue growth but we'll continue to sustain some short-term losses.

Our next question is from the line of Xiao Yan Wang of 86Research.

So we noticed in second quarter the JD Logistics launched a flash delivery initiative, so can you offer more color on this new delivery model? For example, what kind of category are you focusing on? And do you expect to expand this kind of shop more faster delivery to consumer to expand in geographic expansion and also the category extension? Currently what kind of percentage of GMV or orders is from this model? I think my second question would be -- we know your…

On first delivery we have been always stayed in the innovation forefront for logistics services, so this is just one of the recent examples that we established a new product, really providing customers with one hour delivery in selected cities. So it is another -- really higher service level delivery product that we offer but even before that we -- as we mentioned, for over 90% of all of our first-party orders, we deliver either within same day or next day across the country. Our own delivery and warehouse network will cover well over 2,800 counties and districts, essentially 99.9% of the country is covered by our differentiated logistics services. So we will introduce more and more of differentiated products at different tiers of the cities providing differentiated solutions to our customers.

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

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

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