Ladies and gentlemen, good day everyone and welcome to Vipshop Holdings Limited’s Fourth Quarter and Full Year 2017 Earnings Conference Call. At this point, I would like to turn the call to Ms. Jessie Fan, Vipshop’s Senior Manager of Investor Relations. Please proceed.

Thank you, operator. Hello everyone and thank you for joining Vipshop’s fourth quarter and full year 2017 earnings conference call. Before we begin, I will read the Safe Harbor statement. During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Vipshop Holdings Limited and its industry. All statements other than statements of historical fact we may make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is and are likely to, may, plan, should, will, aim, potential or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at anytime and we have no obligation to update these forward-looking statements. Joining us on today’s call are Eric Shen, our Co-Founder, Chairman and CEO and Donghao Yang, our 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 fourth quarter and full year 2017 earnings conference call. We are pleased to have delivered solid results in the fourth quarter. Our total net revenue increased by 27% year-over-year. Our fashion-related categories have shown accelerated growth year-over-year, further strengthening the foundation of our platform. This success were the result of our strong execution on the promotional events, more than 3,600 brands participate on December 8, 2017, representing a 122% year-over-year increase as compared to the annual sale in 2016. This is a testament of the power of our platform and an endorsement of our value to brands. Our Super VIP paid membership program and the Internet finance business also helped to improve the ARPU and enhance customer stickiness. Going forward, we will continue to optimize our operations, so the positive trends can continue. On December 18, 2017, we announced the Tencent and JD’s strategic investment in our company. Through this strategic partnership, the two companies will provide us with three powerful traffic increase, one on WeChat Wallet; one on JD’s main page; and one on JD’s WeChat Discovery shopping portal. We are delighted about the transaction and are excited about the opportunities ahead. Tencent’s ecosystem is becoming even more powerful in recent years with many new functions and features. For example, we launched our WeChat Mini Program in August of 2017 and are encouraged by its performance. Since then, the number of new customers that came in through the Mini Program has doubled on the monthly basis. Therefore, we believe WeChat traffic will be more important and relevant than many of our other traffic channels, which was the key reason behind our decision to partner with Tencent and the JD. Leveraging Tencent’s robust social ecosystems and big data capability, we will be able to better understand the Chinese customers, which will enable us to acquire new customers and better serve our existing customers. This partnership changes the fashion industry landscape, which increase our bargaining power with suppliers. Existing suppliers are working even more closely with us and the new suppliers will now be more willing to being working with us. We opened the trial entry on WeChat Wallet in February and are on track to open the entry of JD’s App and the JD’s WeChat Discovery shopping portal in March. It will take a few quarters for top line and the customer growth to ramp up as it takes time for user to discover, browse and try the new channels. We believe Tencent and the JD will help to bring new customers to our platform, enabling us to grow our top line and the core categories as fast as possible. 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 the financial results.

Thanks, Eric and hello everyone. We delivered robust financial results in the fourth quarter with top line increasing by 27% year-over-year, which was above the high-end of our guidance range. Driven by the strong 22% year-over-year increase in average number of orders per customer our ARPU for the quarter improved by 22% year-over-year. In addition, we continued to make headway with the expansion of our warehousing capacity and the improvement of our logistics capability. During the quarter, we added a local warehouse in Quanzhou, China and currently have a total of 15 local warehouses nationally. We further expanded our international warehousing capacity for the cross-border business by adding new locations in Italy and the UK. As of the end of 2017, we have around 2.5 million square meters of total warehousing space, of which around 1.5 million square meters is owned by Vipshop. Our logistics efficiency also continued to improve. During the quarter, leveraging our proprietary last mile network, we delivered approximately 99% of our orders and handled more than 77% of customer returns in-house. On average, we delivered to our customers nationwide within 2 days in the fourth quarter. Turning to our Internet finance business, the spin-off was slightly pushed back due to the deal with Tencent and JD. However, we are currently working on the spin-off and aim to complete the process in the next couple of quarters. In the fourth quarter of 2017, the number of customers who used our consumer financing service increased by 107% year-over-year to 5 million from 2.4 million in the prior year period. As of December 31, 2017, the total balance of credit outstanding to customers was approximately RMB4.7 billion and the total balance of credit outstanding to suppliers was RMB1.5 billion. Looking ahead, we will continue to invest in our core…

Thank you. [Operator Instructions] Your first question comes from the line of Binnie Wong from Merrill Lynch. Please ask your question.

Hi, management. Thank you for taking my question and Happy Chinese New Year in advance and congrats on a robust quarter to end 2017. My question is on the user growth strategy, so with the addition of traffic channels from Tencent and JD to happen soon, I guess in March right, what is management’s expectations on the user growth contributions and savings that we can have on our marketing spend? And besides I think more traffic channels any other areas Vipshop can deepen the cooperation with Tencent and JD. So, any color would be greatly appreciated? And I also have a follow-up question on the margin trend. Thank you.

So, with the collaboration, our new customer acquisition costs will definitely go down and the new customer acquisition methods will be easier for us to acquire new customers. So as a result, our new customer number should also increase. We also have a lot other ways of collaboration with Tencent and JD, for example, on JD outside of just opening the flagship store, we can also have many of the other collaboration methods which are in discussion.

Thank you. Your next question comes from the line of Jerry Liu from UBS. Please ask your question.

Thank you very much for your time. Could you talk a little bit about when we can start to see some of the benefits in terms of customers and in terms of ARPU with the deal that’s going to start in March? Would it be a relatively slow ramp in the second half of the year and a bigger impact in 2019? Could you talk about that pace? Thank you.

So Jerry, we actually opened the testing channel on WeChat Wallet in January, about 5% of users can see that right now. And then for JD’s entries, we will open that at the end of the March. And after all the entries are opened, we will need some time to see traffic and [indiscernible] ramp up. So in the second quarter, we might see a little bit of contribution and then in the third and fourth quarter we will see more. This will be mostly on the user growth, but not necessarily on the ARPU side. We will need to continue to monitor it.

Thank you. Your next question comes from the line of Wendy Huang from Macquarie. Please ask your question.

Thank you. Can you shed some color on the economics with JD and Tencent, so what kind of take rate you would pay to JD? And for Tencent Wallet channel, so besides take rate on the payment, will you pay other fees to Tencent? Thank you.

So, Wendy, JD will be opening a Marketplace shop and we will need to pay a commission for that, but we don’t disclose the details of exactly how much that would be and for Tencent, our WeChat Wallet traffic, we will also need to pay a fee and that is also confidential.

Just one more explanation on that one, because both JD and Tencent, they have got other partners or investment companies. So, it’s kind of a bit sensitive to disclose that information. So, we do pay something, but the rates, well we still want to keep it confidential.

Thank you. Your next question comes from the line of Alicia Yap from Nasdaq.

Hi, good evening, Eric, Donghao, Millicent and Jessie. Thanks for taking my questions and congrats on the solid set of results. I have questions also related to these upcoming integration linked with Tencent and JD. Could management share with us if there is any thoughts about your plans or any needs to change of strategy on ensuring the retentions of those new users and you could successfully convert them to become the new return and new repeat customer in the subsequent quarters, will you think about change of the flash sales model for either the JD or Tencent channel to enable you to capture the different dynamic of the user base from those channels? Thank you.

Okay. So Alicia, first, JD is already e-commerce. We do believe that their customers are already on high quality. And for Tencent, because of this WeChat Wallet entry, which means people are thinking of the payments section already, which also leads us to believe that their customers would be high-quality. So, we don’t worry about the quality of the customers that will come through both channels. As regard to your question on the flash sale model, we will still maintain a flash sales model, but we will continue to adjust some features for JD and Tencent customers.

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

Good evening and thank you for taking my question. I have a question with regards to the margin trend going forward. So I think, Eric you mentioned during the prepared remarks that customer acquisition costs should considerably come down. So, could management give us some more color on what kind of customer acquisition cost decline we are talking about and hence how will this benefit the margins? And secondly, just quick on the Mini programs you mentioned and it seem it doubled the users since its launch, so could we talk about a bit more about the benefits that you have seen for the Mini programs through Tencent, WeChat and how this has able to change the users engagement for us? And lastly, I think this quarter we also have seen a pretty big step up on the number of purchases, 22% year-over-year. So, any details on that will be very helpful? Thank you.

Well, thanks Choi for question. Let me take the first one and then I feel Eric will take the other two. Well, as Eric just mentioned, hopefully through working with both JD and Tencent, we can acquire a lot more new customers at a relatively lower cost. So hopefully, this collaboration or this partnership will help us bring down the new customer acquisition cost, which will obviously be a benefit in terms of our margin improvement. But our strategy will continue to be the same as in the last several years, which is we will try to grow our top line as fast as possible while maintaining a stable margin. So again, for the foreseeable future, we will continue to reinvest the benefits or the profits that we have got from either in the lower customer acquisition costs or higher operating leverage to drive faster in the top line growth.

So John, regarding the Mini app, the user quality is actually quite high. The shopping frequency and the ARPU might be a little bit lower than the users that we see on the Vipshop app, but the quality is definitely there and we are seeing pretty robust new customer acquisitions as well and so we do believe it will be a good channel to continue to explore in the future. So John, regarding your question on why ARPU and shopping frequency has increased, there are three major components. First one is the Super VIP program which has been fully opened to all the customers enrolling for 4 months and we are seeing ARPU lift from that program, which has contributed to the overall ARPU increase. And secondly, our Internet finance continued to contribute to the ARPU trends. And lastly, we did focus more on encouraging existing customers to buy more and buy more frequently, so that’s also reflected in the increased ARPU year-over-year.

Thank you. Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Alex, your line is open. Please ask your question.

Yes, sorry I was coming off mute. Hi, good evening everyone. Thank you for taking my questions. [Foreign Language] So I have a question regarding your logistic strategy. So, you guys made a lot of investment into the logistic in 2017 and also you talked about long-term ambition in building an independent third-party logistic services strategy in the past, would this investment strategy and long-term plan change at all after the investment from JD given that they also have independent logistic development plan, will there be redundant investment or efforts on this particular area? And then very micro level, Donghao, can you talk about the logistic headcount as of the end of December quarter versus the end of the September quarter? Thank you.

So, Alex, JD Logistics is quite sizable right now and they offer to a lot of third-party orders. We want to do the same. We do believe there is room for both of us in the marketplace as China’s logistics needs are massive. And we are both solid, self-operated logistics teammates. So, we do believe that there is enough market share for both of us. And given that we have the strategic collaboration relationship with JD, even though we are operating our own independent logistics units and we are going to do our own last-mile, we are in certain discussions about potential ways of collaboration, such as warehousing, truck transport and so on. So, we do want to reach an agreement where there is it could be a win-win situation where we both lower our cost and improve our efficiency.

Okay. Well, Alex, let me take your second question. Well, as of end of 2017, we had about 30,000 employees in our last mile delivery operations. For the vast majority, well as of end of – at the beginning of last year, we had about 20,000. So in the course of 1 year, last year we hired about, we added about 10,000 people to our last mile delivery operations, but the vast majority of the addition naturally happened in the first half of last year. That’s why if you look at our financials, fulfillment expenses as a percent of revenue in Q3 was a lot higher than that in Q4, because Q4 was our peak season and our top line grew by about 57% sequentially over Q3. So, that’s why our fulfillment expenses in Q4 last year came down quite a bit compared to the previous quarter.

Thank you. Your next question comes from the line of Wayne Wang from HSBC. Please ask your question.

Thank you, management for taking my questions and congratulations on the robust results. I have a question regarding to the future cooperation with Tencent and JD. So, is there any like further potential for VIPS to further leverage on Tencent’s social traffic? Will VIPS encourage users to like forward and process their Mini app with each other?

So Wayne, we are actually having a lot of discussions with Tencent regarding the social collaboration, which is a key part of the strategic relationship and we want to leverage their resources to learn how to be more social, which is why we are working quite closely on the Mini program. And we have switched a lot of the resources from H5 to Mini programs and are now exploring more opportunities.

Thank you. Your next question comes from the line of Yufei Gao from 86Research. Please ask your question.

Hello, management. Thank you for taking my questions. So my question is about category expansion strategy. What’s our plan for the category expansion this year? And also on the balance sheet, it seems like the inventory balance increased a lot, so I wonder what’s the reason behind that? Thank you.

So as you say we did expand into new categories this year and at the end of – beginning of this year, we are largely down with expansion of ourselves. Going forward, we will look to open up a lot of marketplace as discussed to bring in more big furniture – categories such as big furniture and some of the categories that are not our core.

And your question about inventory, you are right, the inventory was higher on our balance sheet as of the end of Q4 than the previous quarter, because Q4 was the peak season, our sales went up by 57% sequentially. And also, Q4 was the coldest season in the year. We sold a lot of heavy clothes, jackets and more expensive stuff, which also drove the value of inventory up.

Thank you. Your next question comes from the line of Nicky Ge from China Renaissance. Please ask your question.

Hi, management. Thank you for taking my questions. I have a question on the supply side. As Shen-san mentioned in the beginning that VIPS and JD are discussing cooperation on the supply side, I just wonder what kind of cooperation are are talking about here. And is there a differentiation between merchandise we can get and JD can get from here? Thank you.

Because of our strategic relationship, Nicky that we will be able to have some synergies on the merchandising side and our relationships with the supplier.

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

Thank you for taking my questions, Shen-san and Yang-san. Congratulations on the very strong results. I see 2017 as the investment year particularly for your finance business and logistics. I just wondered if you could share just how much of a drag that was for the full year of 2017? And what I am thinking is as we head into this year, do we expect this drag to be smaller, i.e., your 30,000 staff in logistics now maybe of the right scale to realize operating leverage and whether the finance business with scale being much larger over the past four quarters, do you expect the drag to be smaller and I am thinking of your expectations for 2018 net margin as a group overall because of potentially maybe through a drag on these two new businesses? Thank you.

Well, thank you very much for your question. Yes, you are right in 2017 Vipshop company did invest heavily in the two businesses that you have just mentioned in our last-mile logistics network and Internet finance. As I just mentioned earlier, we added about 10,000 people to our last-mile delivery unit, which substantially drove up our fulfilling expenses as a percentage of revenue, especially in Q3. And also, we invested in our Internet finance business, on one hand, as you just mentioned, it was a drag to our bottom line, but on the other hand, the Internet finance business also helped company to increase ARPU and shopping frequency of our customers. So net-net, it’s really hard to tell, but going forward in 2018, as the two business grew larger and also the revenue of the company as a whole will become much bigger business and I would believe the drag would become a lot smaller than in 2017.

Thank you. Your next question comes from the line of Monica Chen from Credit Suisse. Please ask your question.

Hi, good evening management. Thank you for taking my question and congratulations on a very strong quarter. I have a question regarding our 1Q guidance, which I noticed is actually stronger than we expected. Can management provide a breakdown for the strong guidance, like by user growth and ARPU? Just wondering how do we think about the sustainability of the high ARPU growth like 22% in this quarter, can it be sustainable in the upcoming quarters? Thank you.

Let me take this question. Thank you very much for your question. Well, typically we only provided guidance for the revenue – top line for the following quarter and we don’t provide a detailed breakdown for that guidance, because it’s only a range and it’s only an estimate at this point of time by the management. Well, our best estimate, as Jessie just mentioned in the Safe Harbor statement and if you look at our Q4 2017 top line, we grew by 27% year-over-year, and for Q1 2018, our forecast is between 20% and 25% I think which is quite reasonable.

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

Good evening, Shen-san and Yang-san and Jessie. Thanks for taking my questions. We know JD recently has a setback in the apparel category as quite a few of the top apparel brands left JDs marketplace. Given that you guys officially joined JD’s camp, I just wonder if we should worry that you guys may eventually face the same kind of situation. And also we noticed from Chinese media you guys recently opened convenience stores in Guangzhou, just wonder how many offline stores VIPS plan to open in 2018? How should we assess the margin impact? Lastly, how many logistic people you aim to add in 2018? Thank you.

So, Jialong, regarding the first question on the apparel side, we believe actually suppliers will be pleased to see that there is more choices for both us and JD. So regarding the second question Jialong on the offline stores, currently we have 6 stores that are opened under Tianjin, which is our logistics units and because they have 3,700 stations nationwide, they can have many uses for them outside of just delivery. So, they are in trial to see if they can use the delivery stations for convenience stores, some convenience services and so on. Currently, we have 6 stores and we will need to evaluate whether the performance are good before we make the next step plan.

And to your last question, I think the impact on our margins would be minimal, because there are just only less than 10 of them and it’s still in the very early pilot trial period and we still haven’t decided if we want to expand that business or not. So at least for 2018, the impact on margin would be very, very small.

So, Jialong, on the logistics side, we currently as of the end of December 2017 have around 30,000 people and in 2018 we will likely need to add a minimum of 10,000 people, because our business will be growing and our third-party logistics business will also be growing.

Thank you. Your next question comes from the line of Mitchell Kim from Kim Eng Securities. Please ask your question.

Yes, hi. Thanks for the opportunity. I have two questions. One is on your strategy now does your overall strategy change as a result of Tencent/JD investment and does it really affect your customer acquisition strategy? By that I mean, do you think these are completely new customers that you will be targeting through JD and Tencent platforms or these will be lower cost – lower acquisition cost way of acquiring customers? And secondly for your longer term growth in terms of category, do you expect there is more room for growth within your strong core category that is apparel or do you think your growth will depend on expanding into other categories more such as cosmetics?

So Mitchell, on your first question regarding the customer, we are constantly adding in new customers from different channels. So, there might be some overlap from Tencent’s new customers, JD’s new customers and our new customers, but we believe that will be small and it will just give us more channels and room for growth. So, Mitchell, on your second question regarding our long-term growth and where that will come from, our core category is apparel and our focus in the future will still be on apparel category and we are pleased to see that in the fourth quarter actually our apparel growth was quite strong ahead of the overall top line growth.

Well, just one more thing on your first question, both JD and Tencent are much bigger than Vipshop in terms of total traffic and customers. We believe that the new customers that we will acquire from both Tencent and JD will be just entirely new – it will be from new customer pools that would be difficult for us to reach otherwise so – meaning, those other channels would be very, very important – would be very important.

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

Good evening, management. Happy Chinese New Year and the question is related to your expansion in international brands, so we look at the website, there are lots of international high-end brands are introduced or are sold on your platform. So I wonder, going forward, if we look at a GMV per order, will the GMV per order increase better – higher than before? That’s my question.

Tian, so we are actively adding more luxury items and also into more international brands, but the contribution is actually still quite low probably low single-digit from the overall apparel category. So in the short-term, we don’t expect to see notable changes on ticket size, but in the long-term, it is definitely positive given that the average ticket size on people who buy these – from these brands are around 3,000, but our normal – the mass customers, our ticket size around RMB300.

Thank you. Your last question comes from the line of Natalie Wu from CICC. Please ask your question.

Hi, good evening management. Thanks for taking my question. My question is regarding the Mini program, you mentioned that the new user’s number doubled on a monthly basis. Just wondering what the exact scope are you referring to and also what’s the current user acquisition cost related with that channel? And lastly, what’s your strategy to operate and manage those customers coming from Mini program? Will you do anything to transform those users into your own app? Thanks.

So Natalie, our own users actually share their purchases with their friends through WeChat with the Mini program. So, it’s actually a tool that Tencent provided to us and so we don’t have any strategy to try to acquire those customers into our own app unless if they find the app actually very interesting that they go themselves, but they will be most likely staying in WeChat themselves. And as for the fee, it’s very minimal.

Okay. Well, time is up. Thank you for taking the time to join us and we look forward to speaking with you next quarter.

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