Ladies and gentleman, good day, everyone and welcome to Vipshop Holdings Limited Fourth Quarter and Full Year 2016 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 fourth quarter and full year 2016 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 of our Vipshop Holdings Limited and its industry. All statements, other than statements of historical facts 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, 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 the change at anytime and we have no obligation to update these forward-looking statements. Joining us on today’s call are Mr. Eric Shen, our Co-Founder, Chairman and Chief Executive Officer and Donghao Yang, our Chief Financial Officer. At this point, 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 fourth quarter and full year 2016 earnings conference call. We completed the year on a strong note delivering robust operational results with strong customer growth and market share gains, with over 50 million total unique active customers shopping on Vipshop platform in 2016. Vipshop had always put the quality of our merchandise as a top priority. We provide each of our customers with high-quality products selected by our 1,000 plus buyers, including many exclusive merchandise at guaranteed low prices. This includes more than 96% of our products checked by our staff for quality assurance before delivery. Through the Vipshop platform, we enabled more than 5,000 leading brands to liquidate products and generated large sales, while gaining high-quality customers. We provide these brands with extensive sales solutions and offer them a one-stop service for their full product lifecycle. Vipshop has become one of the few most important channels for brands to reach Chinese consumers and generates record sales. Providing these high-quality products along with superior customer experience is based on our ongoing success. As such, we continued to expand the SKUs by merchandising and improve our overall logistic capabilities. A big part of our recent moves was the expansion of our overseas offices to 10 that are accountable for expanding our global merchandising capabilities for the cross-border business. Domestically, our 2 million square meters of warehouses and more than 20,000 full-time delivery staff can provide customer with a fast and superior experience across all over China. There are no branded sports in China for Vipshop service. Our in-house last-mile delivery network currently covers 30 provinces, 300 cities and 2,872 countries across the country. Importantly, we are one of the very few leading e-commerce companies that can proudly say that we are able to make delivery during the Chinese New Year holiday period. Going into 2017, we remain focused on enhancing customer experience and strengthening our ecosystem to create more value for our customers, suppliers and shareholders. At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategy in more detail and go over our operational and financial results.

Thanks, Eric and hello everyone. We are pleased to highlight another robust quarter where we delivered solid top line growth with strong free cash flow, while maintaining steady margins in the fourth quarter of 2016. In the past quarter, we saw remarkable growth in our free cash flow, which increased by over 600% year-over-year. This is a further testament of the successful execution of our business strategy and our ability to generate sustainable healthy cash flow. In 2016, we made a number of important strides. To begin with, Fitch rated Vipshop as BBB+, Moody’s rated the company as Baa1 and Standard & Poor’s rated the company as BBB. These solid investment grade ratings from all the big three global rating agencies are endorsements of our business fundamentals, financial strengths, investment prospects and future market potential. Furthermore, in January 2017, a subsidiary operating the internet finance business completed its first offering of RMB-denominated asset-backed securities of RMB300 million, which is listed on Shanghai Stock Exchange in China. We are currently preparing for future follow-on ABS offerings in China. These transactions represent an important milestone in our plan to further grow this new business with the external sources of funding. Turning to our customer and supply financing programs, as of December 31, 2016, the total balance of credit outstanding to customers was approximately RMB2.17 billion and the total balance of credit outstanding to suppliers was RMB877.7 million. For the full year of 2016, we had 3.3 million users taking advantage of our consumer financing program. Looking forward, we will continue to invest in areas that are crucial to the customer experience across our platform, while balancing revenue growth and margins. This includes investing in our logistics network and establishing even more provincial and local warehouses and enabling faster delivery for high-frequency products.…

Your first question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your question.

Thank you very much and congratulations on the solid fourth quarter and encouraging first quarter guide. I wanted to ask about gross margin. I know you have mentioned on many occasions that gross margin and marketing as a percentage of sales will often offset each other. But in many ways, gross margin in isolation reflects our commercial leverage in supporting our brand partners. You mentioned that it should stabilize around fourth quarter levels of 23.5%. I am just wondering are we capable of recapturing the 25% levels that we used to have, and if not, what prevents us? And then secondly, we have obviously seen some very encouraging ARPU trends in the quarter, can you offer any further color on the drivers behind this and what should we expect going into 2017? Thank you very much.

Let me take the first one about the gross margin. Well, the contract take rates that we charge our suppliers have been quite stable. Gross margin declined slightly in Q4 because we run big promotions on October 11 [ph] and December 8, our anniversary sales. A strategy as we have communicated clearly to the capital market is to grow our top line as fast as possible, while maintaining a stable net margin level. Going forward, especially in the near and mid-term, we don’t expect the gross margin to fluctuate much further. But in the long-term, there will be plenty of room for us to improve on gross margin as we continue to gain market share and strengthen our marketing power. So, 23.5% in the long-term, I don’t think it’s going to be an issue. And I am pretty confident that over the long-term we can do even better than that as we gain even more dominant position in the market.

[Foreign Language]

So Alan, as you can see, the ARPU decline year-over-year actually improved towards the second half of last year. And in particular, in the fourth quarter, we saw average ticket size increase quite meaningfully and yet average revenue per user only declined by 1.9% to 1.8%. And so in the fourth quarter, average ticket size increased was largely due to our market share – largely due to that we encourage our customers to buy more items into one order to enjoy bigger discounts. And in the future, we believe that ARPU trend will continue to improve due to a number of factors. Number one, we will continue to improve user experience as well as do. Number two, we continue to optimize our category mix structure. Number three we are using big data to recommend more personalized services and also most accretable SKUs to our customers.

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

Hi, good evening, Eric, Donghao and Millicent. Thanks for taking my questions. My question is related to the operating metrics. So, we actually not yet seen some improvement in the user metrics this quarter, particularly on your new customer add and also the ARPU per order. So our interpretation such as that you have successfully added higher quality of user to our platform this quarter. And since the retention rate for this newly added user also improved and yet your sales and marketing spend actually are lower as a percentage of sales. So what are the main reasons that contribute to the improved user quality and operating metrics and your plans for your user acquisition strategy for this upcoming 2017? Related to that, is that could you share with us the product categories that attract these newly added user to spend. In other words, if you could share with us, for example, rough percentage breakdown among the various categories that are purchased by these new users during the fourth quarter? Thank you.

[Foreign Language]

Alicia, this is all due to our capabilities in our strong track record of execution in retail. We have made a few attempts to make balances between the customer – new user customer growth and customer quality. So, our strong track record in operations enabled us to do that, which is shown in this quarter’s numbers.

[Foreign Language]

So obviously, we will continue to make more – try different solutions to cater for different kind of customers. To give you an example, obviously, in the past we probably used a lot – we probably leveraged a lot on our customer just to try new users and that would be most probably the first order that customer or first category of that customer. But recently, we tried to use to recommend apparel, handbag and shoes which are core categories to our new users as obviously that have been improved new user quality. And we have seen some progress on that front. And we will continue to make different attempts and try to cater for different characteristics of new customers.

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

Hi, good evening management and congrats on both the top line earnings beat in fourth quarter. So following up on the encouraging signs we see in the ARPU trend, looking in 2017, how are we addressing the earlier concerns, we said new user and younger generation have a low ARPU. And then do you see that despite younger users are buying less in per order, but they can actually buy more frequently. And how do we do in terms of any elaboration you have on the cross-selling and the personalization technologies? Say any update in terms of using social media or maybe an update in your marketing strategies? That will be helpful. And second question is on the operating margins, which has been declining in FY ‘16, right? And our OP growth is also at a slower pace than top line growth, especially in the second half. How should we expect this to trend into 2017? As company, we will be investing more into internet finance and better technologies? Do you think this can be largely be offset by the operating leverage, and hence, would you be realistic to expect a stable margin trend going forward? Thank you.

[Foreign Language]

So, Binnie, overall the cohort of the younger demographic is trending for better. As you can imagine, for the – at the earlier stage, the retention rate, the ARPU including average ticket size and frequency will be lower compared to people both in the ‘70s and ‘80s, but it does take time for us to nurture these customers as their source of income increases over time. We actually track some of our younger demographics over a period of 7 quarters. And we are very encouraged to say that over that period, the ARPU of these younger demographics actually increased by 40% to 50%. And in some cases, we also saw that these – ARPU of these younger demographics is surpassing that of the post ‘80s.

Okay. Let me take the operating margin questions. Well, again, as we explained a lot of times that our strategy is to grow our top line as fast as possible, while maintaining a stable net margin. And similarly, we do expect our OP margin will be stable going forward. And even if we want to continue to invest in our internet finance business and other initiatives like big data analytics, we will still try to maintain a healthy market level.

[Operator Instructions] Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question.

I have a question on the long-term strategy in your finance business. What is your long-term goal for this part of the asset, say 5 years down the road? And also in order to penetrating to more financial service areas to be eligible for the domestic license, you guys probably need to restructure to a 100% domestic corporate restructure. So would you be considering supposing the financial assets at some stage just like some of the competitors are doing right now? Thank you.

Okay. Thanks Alex for your question. Let me take your questions. Well, the purpose of our internet finance business is to support our core e-commerce business and provide our customers with services that are actually a standard practice among our large e-commerce peer companies in China. And while if you look at our internet finance business, the depot rate has always been very low, so – and in mid-January in 2017, just last month, we completed our first ABS offering of about RMB300 million. So we have now got additional source of funding for our business and the impact of this internet finance business on our cash flow will be significantly reduced. And I mentioned the potential spin-off of our internet finance business from our core business we will certainly consider this possibility, but currently we don’t have any specific plan. If we do, we will communicate with the capital markets on a timely basis. Operator?

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

Hi, good evening. Thanks for taking my call. Congratulations on a very solid quarter. I have a follow-up question on the new customer growth and sorry if these questions have already been answered. I just want to find out what will be the trend for the new customer growth in 1Q and the year 2017. And shall we see the new customer growth to remain within around 20% level over the next few quarters? Thank you.

[Foreign Language]

So, Jialong as we are very pleased to tell you that Q3 user growth rate, Q4 user – so Q3 user growth rate year-over-year was 19%. The fourth quarter was over 20%. And in the first quarter, even the full year 2017, the growth rate will be better than that and that we have confidence in terms of the full year growth. And on the other thing – on the other hand, we also would like to point out that from the company’s perspective in order for us to grow healthily and sustainably, we not only pay attention to renew the growth metric, we also focused a lot on our old user analysis in terms of average ticket size, retention rate, increase in the average spend per customer and even the dormant user reactiveness. As you can see over the past few years, our old users have been the backbone of our business which it has contributed significantly to our top line.

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

Hi, good evening, Eric, Donghao, Millicent. Congratulations on very solid set of results and guidance. Question regarding our category mix, I think you mentioned that I think the power [indiscernible] has been driving the overall growth for 4Q, right. So, I am wondering how is the performance of the other categories like cosmetics or you also mentioned some cross-border updates in your prepared remarks, any colors from those, like non-apparel categories will be appreciated? Thank you.

[Foreign Language]

So Evan, in the fourth quarter, our cosmetics overall was growing very fast. During the quarter, we had RMB3.5 billion in terms of GMV for our overall customer retention. And in terms of cross-border, overall it was about 5% of our total GMV and we expanded a lot of categories. We also have overseas offices and warehouses. And this year, we will continue to add more SKUs and expand more categories to cater for the strong demand.

Your next question comes from the line of Thomas Chong from BOCI. Please ask your question.

Hi, thanks management for taking my questions. I have two questions. Can management talk about the quick even timing for Internet finance business? Should we expect it to happen in 2018? And my second question is about personalization, can management briefly talk about how we have strengthened our personalization capabilities in 2017, is it for R&D or for other initiatives? Thanks.

Well, internet finance business, as I explained earlier, the main purpose is to support our core e-commerce business. So this year, we will – our first priority for our internet finance business is actually to grow more – to acquire more users to use our product. So for this year, it will continue to be a loss-making unit. Next year, hopefully, we can breakeven in the business. But there is no guarantee, because again, the profitability of the internet finance business in the near-term is not our priority.

[Foreign Language]

So Thomas, we will continue to invest in the personalization as we shared with the investment community that we have already seen some early results, which is improving the sales and also the conversion rate. So previously, we had the personalized web pages for people going to 70s, 80s, and 90s and autumn mayo customers. And this year, we are going to expand that to improve – to have altogether 16 different consumer groups in terms of personalization.

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

Thank you Yang-zong, Shen-zong and Millicent. It’s a very strong set of results and congratulations. I have further question on your finance business. Given your consumer financing of around 2 billion loan book, can you just go through, for example, what’s the average lending period? If you could share interest rate spreads and what we want to know is how much has this boosted the GMV growth if considering the 2 billion of loan book at the end of December? And what this flows through to consider your cash flows. So if you could go through the cash flows of the impact – we know the impact and what’s your CapEx plan and ultimately the free cash flow targets that you have? Thank you.

Okay, thank you for the question. Let me answer that. Well, the majority of our – most of internet finance loans and/or between 3 to 6 months. And the interest that we – interest rate that we charge on those loans are anywhere between 10% to 12% and the contribution of the internet finance business to our GMV was less than 10%. On the cash flow question, as you may have already noticed that in Q4, we had very, very strong both operating cash flows and free cash flow and we will continue to make investments in our warehouse expansion this year and next year, 2017, 2018 to build more warehouse space. But we believe that starting from 2019 our CapEx level will be significantly lower than the current level, because by then, most of our warehouses will be completed. And our headquarters in Guangzhou, the large building project will also be completed. So then, by – starting from 2019, we are expecting to have even greater operating cash flow as well as free cash flow.

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

Good evening, management. Thanks for taking my question. This is [indiscernible] on behalf of Natalie Wu. I have two questions. First one is regarding the other revenue, which nearly doubled in 4Q ‘16. Could you please help us to breakdown this part of revenue? And could you please collaborate more on the main driver of this fast growth? My second question is about the shipping and handling expenses per order, which also increased to 210 what’s the reasons behind that and how should we expect this trend going forward? Thanks.

Well, okay. So, thanks for the question. On the other revenue question, in 2000 – in Q4 2016, about 37% of the other revenue line was delivery revenue from the services that we provided to third-party clients and then, 21% was advertising – 28% was advertising revenue. About 21% was from our POP platform revenue. And then – this is too much detail, I am not sure if that’s what you are looking for, but again 13% from POP. So there are a bunch of items included in that line item.

Shipping and handling trends?

Okay. So, shipping and handling trends, we still believe that there is going to be room for us to further improve on shipping and handling trend as we continue to achieve economy of scale and implement automation systems in our warehouses.

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

Hi, good evening guys. Donghao, I think you mentioned a couple of times that you continue to see operating margin leverage on the OpEx line, but if we could drill in a little bit deeper just line-by-line, just the question on the fulfillment expense. On the quarter we saw fulfillment expense per unit up year-over-year. Is this the one-time headwind? Are we going to see further fulfillment leverage be more challenging going forward? Thanks.

Well, in the long-term, I think, we will be able to achieve operating leverage almost in every line item of operating expenses. For example, marketing, now marketing expense was about 4.8% in Q4, but going forward, as our penetration continues to get deeper and our market share continues to go up, we don’t need to spend as much as that level of marketing down the road. So if you look at most of the large retailers in China or outside of China, their marketing expenses as percent of revenue are much lower than the knowledge. And fulfillment expenses, the unit cost went up slightly in Q4. A lot of that had to do with the seasonality because in Q4, we tended to deliver more in heavier jackets stuff. And also, as we pointed out earlier in the conference call, some of our average assets size went up in Q4 too. And per order – the number of items per order also went up. So people were buying one stuff per order and heavier. So that’s one reason why the unit cost went up. But going forward, we will continue to make efforts to lower our fulfillment cost as percent of revenue by implementing automation systems and building more efficient and larger warehouses.

Your next question comes from the line of Erica Werkun from UBS. Please ask your question.

Hi, good evening management. This is Angela asking on behalf of Erica from UBS. So, I have two quick questions. The first is regarding the guidance. The management guided 30% top line growth in Q1. So have they already incorporated stronger seasonality in this year and so can we expect stronger growth in Q2 and Q4 this year? And also another question is on the operating metrics, nowadays a lower percentage of repeat customers and orders from repeat customers in Q4. So may I check what is key reason and how about the trend going forward? Thanks.

[Foreign Language]

So Angela, so the repeat question raised about the fourth quarter was about 75% and then the orders by repeat customers is actually 92% attrition.

[Foreign Language]

So historically, it has been quite stable order over here and there you have a bit of fluctuation, but largely, it’s quite sticky – quite high and quite sticky in terms of our customer repeat purchase rate.

Okay. Your first question was about the guidance. As always, we give our guidance based on the best knowledge that we have, where we give the guidance, and which is our best estimate for the top line of the quarter. And also – for the question on the unit cost increase in our fulfillment line item, there was another reason why the unit cost went up this Q4 compared to a year ago, that was because of the growth in our third-party courier business. So, the way we book that business, we booked that the revenue from that business in other revenue line, but we have booked the cost associated with those third-party courier services in the fulfillment line item. So that’s another reason why the unit cost went up year-over-year. Because a year ago, Q4 2015 our third-party courier business was not nearly as big as it was in Q4 2016.

Your next question comes from the line of Ming Zhao from 86 Research. Please ask your question.

Thank you. So, my question is what are the management’s top strategies for 2017 and what can investors expect as the major changes happening to Vipshop this year? Thank you.

[Foreign Language]

So Vipshop, it’s core business is actually retail. So, we are focused a lot on our merchandising, which is to offer our customers lowest possible prices, good selection and of course consistent services – after sale services. We also play a lot of attention on technology investment, which is to improve our big data drive our top line growth. And we are reducing that going forward, there will be other areas that we will focus to improve our efficiency. Yes.

Your next question comes from line of Alex Liu from Daiwa. Please ask your question.

Thanks, Shen-zong, Yang-zong, Millicent. So, my question is on the logistic positioning of Vipshop. I think we start to see some revenues related to the logistic performance to external clients. I am just wondering, I think if on a very long-term, what does the management think about that the positioning of logistic in a way that now it’s more of a cost center to Vipshop. Is there any plan of it will be monetized to become sort of the revenue centers for the company in the future? Thank you.

[Foreign Language]

So actually, Alex, our last capability, the primary goal is to serve our core business. As you have seen in the press release, over 90% of our orders are actually delivered by our in-house team. And in addition, we also opened up platform and delivered for orders for suppliers outside on vipshop.com. And that portion of the business might continue to grow over time, but actually, the primary goal is to have Vipshop’s customers to have more consistent personalized services. Vipshop’s core category is actually apparel. So if you look at delivery speed at successful rate, we are much better compared to some of our competitors.

I am sorry. Just one more clarification, the third-party courier service is not only a cost center. It has already generated some revenue for the company, which was booked in the other revenue line.

Your next question comes from the line Dawei Feng from CLSA. Please ask your question.

Actually my question is regarding the dividend payout. We have seen the CapEx maybe is picking and then also the internet financing have started to have external funding source. So, are we considering to start to give dividend back to the shareholders? If not, then what will be the major considerations? Thank you.

[Foreign Language]

So Eric mentioned that we are still very small in terms of where we want to be in terms of market share penetration. We will continue to invest in marketing other infrastructure to maintain a long-term sustainable growth. And we are not, at this moment, not a priority to consider maximizing the returns at this point, because we think over time when the company becomes much more sizable, the returns will be much more rewarding.

I would now like to hand the conference back to today’s presenter. Please continue.

I am sorry operator I didn’t get what you said just now.

I would now like to hand the conference back to the presenter. Please continue.

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

Thank you.