Ladies and gentlemen, good day to everyone and welcome to Vipshop Holdings Limited’s Third Quarter 2017 Earnings Conference Call. At this point, I'd 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 third 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, 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 any time, 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, CFO. At this time, I would like to turn the call over to Mr. Eric Shen.

Good morning and good evening, everyone. Welcome and thank you for joining our third quarter 2017 earnings conference call. We're pleased that our strategic shifts to focus on our old customers and attract high quality new customers is delivering consistent results. Our ARPU increased by 11% year-over-year to RMB643 in the third quarter, driven by the robust increase in average ticket size and the shopping frequencies. In addition, our total active customers for the TTM ended September 30, 2017 reached 6.5 million, increasing by 22% from the same period last year. We are pleased with the robust growth we have seen in our core categories. Further, we continue to enhance the selection of our product offerings to meet our customer's needs. In the past quarter, we made more progress in terms of our category expansion, including the offering of our pharmaceutical related products. Meanwhile, we have seen strong growth in our sports, cosmetics, and Vipshop live channel. We are in the process of continuing to open up our market place, which will lead to increase up better customer service and the incremental margin contribution. Recently we added more than 100 popular domestic and international fashion brands. For this year's Singles’ Day, we delivered the solid robust that exceeded our expectations, over 4,000 brands participated in the events and total orders exceeded 10 million. On the CRM side, we made further progress with the new Super VIP program. With this new offering, we have seen that our loyal customers shop with us more regularly. We began to roll out the program to all customers at the end of the third quarter and believe the positive trends will continue. Our customers financing service has seen increased popularity, which is helping with uplift. We are leveraging our 10 overseas offices and six overseas warehouses to bring highly desirable products to consumers in China, which helps to include spending of our post 90's customers. Leveraging our 2.4 million square meters of specialized warehousing space, 27,000 delivering staff, and the 3,700 stations, we aim to continue to improve our end-to-end user experience. 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 third quarter we further advanced our warehousing expansion, adding three more local warehouses, which brings our total number of local warehouses to 14 as of the end of September. Further as we continue to expand our cross-border business, we added more warehousing space in Hong Kong, France, Australia, and the United States. Currently we have approximately 2.4 million square meters of total warehousing space. We are delighted to see that our delivery efficiency improved consistently. In the third quarter, we delivered over 98% of our orders through our proprietary last mile network up from 90% in the prior year period. Our logistics capability is an important component of our core competency and a big reason of why customers prefer to shop with us. Looking forward, we remain committed on improving our efficiency and lowering our cost. On the Internet finance side, we continue to make progress with the proposed spinoff, which will improve our cash flow and earnings. We are pleased that the Internet finance subsidiary completed its second offering of asset-backed securities totaling RMB500 million. Our consumer financing service has seen increased popularity, which is helping with the ARPU uplift. In the third quarter of 2017, the number of customers who used our consumer financing service increased by 146% year-over-year to RMB3.8 million from RMB1.5 million in the same period last year. We also increased the proportion of interest-bearing loans in the third quarter. As of September 30, 2017, the total balance of credit outstanding to customers was around RMB3.4 billion and the total balance of credit outstanding to suppliers was RMB1.2 billion. Now moving on to our quarterly financial highlights, before I get started, I'd like to clarify that all the financial numbers presented today are in Renminbi amounts and all…

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Wendy Huang from Macquarie. Ms. Wendy, please ask your question.

Thanks for taking my question and congratulations on the strong [EBITDA]. So, can management give us some color and detail about what kind of technology or product innovation that you have done recently to drive down the [indiscernible] cost in order to improve the user retention rates? And also, housekeeping question about upcoming December 8 promotion. So how is December 8 promotion different from the previous year? Thank you.

Wendy, we only could hear the second part. We'll take question in terms of the December 8 promotion, and then we can catch on the first one. [Foreign language] Okay. So, Wendy, for the December 8 promotion, which is the single biggest one for the company within the year, obviously is to celebrate our anniversary; and this year we will start early. So, we enter the promotion on the 1 December, which will last to about 12 December, but the biggest promotion -- the biggest discount, the bigger discount that we are going to offer will come in on 7th of December. So, this year, the duration will be longer compared to previous years. Operator, can we let Wendy to get back on the line to ask the first question?

Sure, please bear me for a moment. I will open her line.

Wendy, you are online. Could you please just repeat your first question?

[Operator instructions]. Please ask your question now Wendy.

Thank you. So, my first question, is can management give us more color and detail regarding what kind of product and technology innovation you have done recently to actually drive down the user acquisition cost in order to improve the user retention rate? [Foreign language]

So internally, we are developing own priority target to the advertising platform so that we can match the traffic with our customers a bit more accurately, and we are still in the process of doing the optimization and from the external marketing or traffic acquisition channel, obviously we're looking at social platforms including WeChat and even mini programs in a way. We just started a mini program and so far, the results are showing some good signs. Obviously, we are still testing it and it must turn out to be one of the very effective way to acquire traffic for Vipshop.

The next question comes from the line of Binnie Wong from Merrill Lynch. Mr. Binnie, please ask your question.

Thank you. It's Binnie here. So, thank you management for taking my questions and congratulations on a solid quarter. So, my question is on the user growth strategy. How much do you see active customer growth this quarter comes from repeat customer? How much is it coming from the new customers? This quarter it looks like the growth has been moderated. Can management give us any color on that in terms of any update on the user growth strategy? And also, it looks like company this quarter has prioritized ARPU growth because ARPU has been growing quite nicely compared to the active customer growth. Can you elaborate on -- is that due to more ARPU consumption upgrade or is it because an expansion as customer buy from multiple categories or any other reasons? Thank you. [Foreign language]

So, Binnie to summarize what Eric just said, overall our user growth is quite healthy, although our new user growth was not growing as fast compared to when we were a lot smaller in the past, but something to highlight this quarter. Obviously, the quality of new users and even the old users improved quite substantially, which was demonstrated by our ARPU lift for this quarter by 11%. Eric also mentioned that we're working on conversion rate improvement constantly and we have seen some continued progress on this front. And to answer your question what contributed to the ARPU uplift, there are four components here, the number one our personalized packaging using our data and matching our customers a bit more accurately. And secondly, the category expansion to offer more SKUs and more product to our customers; and thirdly, the Super VIP program roll out, obviously customers that buy more regularly on our platform; and last but not the least is the adoption of our internet finance offering installment payments to our users. So all of these contributing to ARPU uplift and we believe that trend will continue down the road.

The next question comes from the lien of Alex Yao from JPMorgan. Sir, please ask your question.

Hi, good evening, management and thank you for taking my question. Let ne translate the question myself. So for this quarter, sales marketing seems to be a bit lighter than the previous quarters in terms of actual terms and in terms of percentage of revenue. We understand from past conversation that you guys take the combination of cost of revenue and the sales and marketing as combined to resource to drive new user growth, but this quarter, you have sequential improvement in gross margin, but you actually cut sales and marketing, but you meaningfully both in actual terms and as a percentage of total revenue. Can you share with us how you think about the sales and marketing strategy and how should we look at this line item for the next few quarters? Thank you. I'll stop here.

Okay. Well Alex, this is Donghao. Thank you very much for your question. Well, the reason that our marketing expenses went down in Q3 was because we shifted some of our marketing budget from the third quarter to fourth quarter. The third quarter is typically our low season. The temperate is usually very hot in July, August and first half of September and just people simply don't buy that much apparel product. So, we've decided that we should probably shift some marketing budget to the fourth quarter, which is our peak season quarter when the weather, the temperature is very cold and people tend to buy a lot of clothes. So that's exactly what happened and this will help us achieve higher ROI for our marketing budget and going forward in Q4 I think the marketing expenses as a percent of revenue will come back up to its normal level. So, this trend this low marketing expense level will not continue into the next couple of season -- quarters.

The next question comes from the line of Jerry Liu from UBS. Please ask your question.

Thank you very much. My question is relating to competition and when we look at the December quarter, should we expect gross margin to trend down sequentially as is the case the last two years and how do we look at this December quarter generally from a competitive standpoint? And then the second question is on a fulfilment expense. Given the higher percentage of revenue in the September quarter, do we expect that to remain in this level or trend down in the December quarter and maybe some comments on initial plans for next year. Thank you.

All right. Thank you for the questions. Let me try to answer those questions. First on gross margin, usually we don't give guidance on gross margin, but if you look at our strategy, which is to grow our top line or is possible while maintaining a relatively stable bottom line. So, we could be flexible the other line items. We don't see much change in the competitive landscape in Q4 versus Q3, but Q4 is typically our peak season and we will have our biggest promotional campaign in the whole year on December 8. So again, we'll try to grow our top line expenses as possible while maintaining a stable bottom line. And fulfilment, the reason our fulfilment expenses went up in Q3 was because we made quite a lot of investment into our last mile deliver network as we mentioned in our earnings release and our call script, we added quite substantially like more than 70,000 delivery staff to our delivery operations in the first nine months of this year, which obviously has added to our fulfilment cost. And going forward, as our business continues to grow and as we gain more businesses from outside of Vipshop platform, the utilization of our fulfilment network will go up substantially, which will definitely help bring down the fulfilment expenses as a percent of revenue.

The next question comes from the line of Alex Liu from Daiwa. Mr. Alex, please ask your question.

So, my question is on the categories, so I was worrying whether the management can give us some update on the gross perspective of the entire apparel shoes cosmetic categories in online market in the coming few years and specifically our market share outlook given the fact that we're already quite sizable in these core categories? And for the new categories which categories are we targeting and how should we think about revenue contribution from these new categories in the coming three years, thanks? [Foreign language]

So, Alex, I will summarize Eric. So, you're right, we're quite strong in particular our core categories, which include apparel, shoes, which has demonstrated quite robust and steady growth over the past few quarters and we continue to believe that there is a huge demand for these categories online in China as we have already become a vital business partner for these key suppliers. In terms of cosmetics, Mom and Baby and home goods, we also recorded quite strong growth in particular cosmetics and in terms of the new category expansion, Eric mentioned that we added Vipshop life channel and we have seen although a small pace, it grew more than 300% year-over-year and we're in the process of trying to increase some categories to include both key items into our third-party platform to offer more skews more choices and selections to our customers.

The next question comes from the line of Yufei Gao. Please ask your question now from 86Research.

Hello management. Thank you for taking my question. My question is about the internet finance. So, for this quarter what is the revenue contribution of internet finance business and what percentage of GMV is generated through internet finance? Thank you.

Okay. So Yufei, I think your question on the interest bearing for our internet finance, if you look at the other net revenue line is about 4% of the contribution?

And in terms of the potential GMV supported by internet finance units, it's about 20%.

The next question comes from the line of [Regina Yu] from Citigroup. Please ask your question now.

Hi management. Thank you for taking my question. This is Virginia asking on behalf of Alicia. So, we have two questions to you. firstly, we would like to know about the trends in ARPU per customer. So, we are wondering whether you will continue to grow double-digits in the next quarters and in addition, can management share with us the demographic breakdown of the added users to right now in terms of age group, income group or the geographic location. The second question is can management also update us on the warehouse utilization rate and also the profitability of logistics business? Thank you.

So, the first question whether we are able to continue to maintain double-digit ARPU, earlier on the call Eric mentioned that the whole primary reason why ARPU increased by 11% in the quarter compared to the same period last year, given on the trends that we're seeing now, we believe that the trend is sustainable and even perhaps leading to further improvement down the road and obviously the net conversion rate improvement too. And the second question in terms of the customer breakdown by geography, Eric mentioned that when we look at the past two quarters, some cities might, some Tier cities might grow by 1% whereby the average cities might be 1% up, but overall the breakdown has not changed too much over the past few quarters. It's been quite stable. So, the utilization rate of our current warehouse space is roughly standing at around 80% to 85%.

The next question comes from the line of Mitchell Kim from Maybank. Mr. Mitchell, please ask your question now.

Yes. Thanks for the opportunity to ask question. I have a question on the logistics business including third party or external logistics business. If you could just help me understand what's the rationale behind it? I understand that you're trying to reduce cost per shipment basis, but other than that, do you expect this business to further aid your revenue growth in terms of leading to further revenue growth opportunity or is this more just purely on a cost basis? And if so if your warehouse utilization rate is already running at 80% to 85%, do you need to provide this service to third party in order to maximize your utilization?

Okay. Let me take this one. Well, our expansion to clients outside of VIP platform is to reduce our fulfilment cost. As we explained earlier, the more intensity you can bring to the delivery staff, the lower the cost per package. So that is actually the biggest reason. And one other reason is if we want to compete effectively outside the Vipshop, we really need to build more stations, hire more staff and increase our coverage nationwide and if we do that, we can further reduce the delivery time to our customers, which is always an important component in our customer satisfaction. So basically, it's both to reduce cost and to improve efficiency to make our customers happier. So, the goal is not to actually aid in any way our revenue growth because compared to our huge revenue generated from our regional business, this third-party logistics last mile delivery revenue outside of Vipshop is just very, very small. It's not really meaningful. And in terms of warehouse expansion, currently our utilization is quite high. You're right -- absolutely right. it's 80%, 90%, especially when we go into the peak season and expecting another successful big promotion on December 8. But we are still building more warehouse space right now and we are hiring more land, building more warehouse space. Anticipation is the need going forward. So, as we build out more warehouse space, we will definitely need more packages to fill the space, increase the utilization rate whether it be our own platform or outside of Vipshop.

The next question comes from the line of Monica Chen from Credit Suisse. Please ask your question now.

Good evening, management. Thank you for taking my question. I have one question regarding our fourth quarter business. So, I think our prepared remarks earlier, we are talking about where actually actively expanding our warehousing space overseas and also adding new locations overseas. So, I would like to hear management's latest thoughts on our strategy on this fourth quarter business, especially how it like the current contribution to our total revenue or to our GMV and how is the margin profile looks like compared to our other core categories? Thank you.

So, Monica, as of now in the third quarter, sorry, in the third quarter cross boarder accounted for about 5% to our GMV, which has been growing quite steadily over the past few quarters. We have heard from Donghao Yang that we added more warehouse space including six internationally. And we have had overseas offices. We add a lot of merchandizes, buyers and recruiters and we are in the process of building infrastructure in order to bring more skews, the prices to meet the demand in China. As we continue to invest for this business down the road we might be expecting some kind of reacceleration for this particularly business once the infrastructure investment is largely paid. So, our overall cost for the business is slightly profitable although the profitability is lower compared to our domestic co-business.

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

I will translate my questions into English. I have two questions here. My first question is big picture question, with the competition is intense on the two top eCommerce giants in apparel and some other rented categories. So, I was just wondering what's management view on the competition and whether we are seeing -- whether Vipshop in a particularly impact on apparel business from the competition. My second question is about the private label business. Just wonder if management can provide any updates on the development of this private label business and also with the Netease has been about to grow its private label business at a really fast pace. So, we just wonder if we can see Vipshop's private label business, that's one of the key topline drivers down the road? Thank you.

So Jialong, for the benefit of others, I will quickly translate the answer. In terms of competition, Eric said, this year we have seen intensifying competition compared to last year or even the year before in particular in the current users from online and we have seen this year adversely expanding into FMCG and trying to create further demand online. However, our core categories in apparel, handbag and shoes and we have already accumulated a lot of experiences and we have established a very strong host in these core categories and supported by our loyal customer base. And earlier on the call, Eric mentioned that we recorded quite strong growth in Mom and Baby, home goods and even cosmetics. So, these are all solid evidence to share but our key categories will continue to be very strong. As for your second question for private label, we're going to launch sometime in December. We're not trying to copy exactly what others are doing, but obviously we're trying to do is to offer good products and good quality, good pricing to up skew to customers in China and is in the process of exploring and we don't anticipate that contribution will be meaningful in the future or any time soon because we are still a very bunch of many, many brands here in China. So, we've made the right deals there.

The next question comes from the line of Chi Tsang of HSBC. Please ask your question now.

Hi management, this is Heather Li dialing on behalf of Chi Tsang. Thank you for taking my question. I wanted to get some color on what you expect in the next quarter and years specifically in regards to customer growth and fulfilment expenses with the big promotional event in December. So, should we expect number of active customers to be close to this quarter's levels going forward and fulfilment expenses to keep increasing? Thank you.

So, the fourth quarter as you can understand is golden period for all retailers. It's the peak season for Vipshop and if you look at our single stage promotion performance, it was actually quite encouraging and obviously the promotion that we're going to do largely in December on the 8th is going to be even bigger than the single state event. So, Eric believes that the user growth will continue to be quite healthy and even the ARPU trend is going to be encouraging too.

All right. Let me take your other question on fulfilment. Well as I have explained earlier, the reason why our fulfilment expenses as a percent of revenue went up substantially in Q3 was because we have invested heavily in our last mile delivery operations. We added about 7,000 people in the first three quarters of the year to our last mile delivery operations and also in the mean time we added about 1,000 delivery stations in a number of local warehouses and some overseas warehouses as well. And also, I explained the reason we make these investments is to reduce cost and improve efficiency and customer satisfaction. So, going forward, as our own business continues to grow and as we continue to grab more business from outside of Vipshop, the utilization of our logistics network will continue to improve, which will eventually bring the cost, fulfilment cost down in the long run. And we typically don't provide guidance for those expensive line items, but in the long run, we are confident that the fulfilment expenses will eventually come down.

The next question comes from the line of Tian Hou from T.H. Capital. Tian, please ask your question.

So, my question is really related to our your overseas commerce. So, for the overseas commerce, what are the expansion plan? You have a six rated or six country already and so do you plan to build more warehouse in the existing six country or expand to other countries? This is the first question. And also in terms of CapEx as you build up more warehouse in China and overseas, so I would like to know the CapEx plans for the next 12 months. That's my question.

So currently we have 10 overseas internationally and six internal warehouses and we're in the process of adding more, but the space per region is much smaller compared to what we have currently in China.

In terms of CapEx for the next 12 months, I expect that to be around RMB3 billion in total including warehouse expansion, both overseas and domestic and the construction of our new headquarters in Guangzhou.

There are no further questions at this point of time. Over to your Sir.

Oh! Thank you all very much for taking the time to join us and we look forward to speaking with your next quarter.

Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect now.