Earnings Labs

ZKH Group Limited (ZKH)

Q2 2025 Earnings Call· Fri, Aug 22, 2025

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Transcript

Operator

Operator

Ladies and gentlemen, good day and welcome to ZKH Group Limited Second Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jin Li, Head of Investor Relations. Please go ahead.

Jin Li

Management

Good morning, and welcome to our call today. With me are Mr. Eric Chen, our Founder, Chairman and CEO; and Max Lai, our CFO. Today's discussion may include forward-looking statements. Related factors are described in our today's press release. And we will also discuss certain non-GAAP financial measures for comparison purpose only. Please refer to the earnings release for definitions of these measures and a reconciliation of GAAP to non-GAAP results. With that, I will turn the call over to Eric, please go ahead.

Long Chen

Management

[Interpreted] Hello, everyone. Thank you for joining our Second Quarter 2025 Earnings Conference Call for ZKH. Despite ongoing macroeconomic challenges, we achieved solid business development in the second quarter through strategic focus and strong execution. Customer activity on our platform remained high with a number of customers reaching a new quality record, driven by growth in new customer acquisition and a sustained increase in repeat purchases from existing customers, due to the business optimization initiative related to state-owned enterprise, or SOE, and central SOE customers in the second half of last year. Our GMV for the second quarter declined year-over-year to RMB 2.42 billion. However, excluding the impact from this initiative on the total GMV base, our underlying GMV still demonstrated year-over-year growth. The quality of our business also continued to improve. In the second quarter, our gross margin on a GMV basis reached 14.8%, representing a 0.8 percentage point year-over-year increase. This marked our sixth consecutive quarter of year-over-year gross margin expansion, driven by procurement cost optimizations and our high-margin private label products robust GMV growth. In terms of profitability, our net loss narrowed to approximately RMB 53 million in the second quarter, a 20% year-over-year reduction. Notably, we once again achieved monthly breakeven in June following our first monthly breakeven in March this year. What's even more impressive is that we attained this milestone while continuing to invest in strengthening our core competencies, including product capabilities, AI and last mile delivery as well as expanding our overseas business. While maintaining our forward-looking investments to support our medium- to long-term growth, we have also optimized our organizational structure, streamlined processes and promoted the adoption of AI tools to enhance overall operational and workforce efficiency, all aimed at bolstering profitability. For example, in the second quarter, the average number of…

Chun Chiu Lai

Management

Thank you, Eric, and thanks, everyone, for making time to join our second quarter earnings call today. I'm pleased to walk you through our solid financial performance, highlighted by enhanced revenue quality and optimized operational efficiency. Let me start with the top line performance. Both GMV and revenues came under pressure in the quarter, with GMV declining by 12.1% year-over-year to RMB 2.42 billion and total revenues decreasing by 3.7% to RMB 2.17 billion. This was largely due to last year's high comparison base, which includes low-margin business from SOE and central SOE customers with extended credit terms that we have seen optimized. However, excluding these factors, our underlying GMV's do show year-on-year growth. We anticipate these challenges will continue to ease, setting the stage for a potential turnaround in top line growth in the second half of this year. Turning to business quality. Our business quality remains strong and healthy. Our gross margin was at 16.5%, slightly down from 17% in the previous year, primarily due to lower revenues from our marketplace model, which carries a 100% gross margin under the net revenue recognition basis. However, on a GMV basis, our gross profit margin continued to improve, expanding by 84.6 basis points year-over-year to 14.8%. Specifically, gross profit margin for our product sales 1P model increased by 45.2 basis points to 16% on ZKH platform and 137.6 basis points to 7% on GBB platform. Additionally, the takeaway of marketplace model, 3P model rose by 206.7 basis points to 14.2% year-over-year. These gains reflect our successful business optimization, procurement efficiency and focus on high-margin private label products. On operational efficiency, we made solid progress. Operating expenses decreased by 5.6% year-over-year to RMB 454.2 million, making up 19.8% of total revenues, down from 20.2% in the prior year period. This improvement…

Operator

Operator

[Operator Instructions] The first question comes from Leo Chiang and Deutsche Bank.

Leo Chiang

Analyst

[Interpreted] So my question is regarding growth strategy. The Chinese MRO market is huge and online penetration is still in its early stage, suggesting significant room for growth. However, we have observed that the company's business growth has been under pressure in the past few quarters, primarily due to the optimization and the adjustment of business from SOE. As the impact of this adjustment gradually diminish, what strategy does the company have for short, mid- and long-term business growth. Also, can management provide an overview of the company's business outlook for the second half of this year?

Long Chen

Management

[Interpreted] Yes, indeed, our performance for the last few quarters has been under a lot of pressure, primarily due to the aforementioned business adjustment and optimization, and we decided to optimize this part of the business because we didn't believe it was going to be very valuable and meaningful for our long-term competitiveness. So -- and this part of the business used to account for more than 20% of our total GMV. So as we were phasing out of this 20% of GMV, the reason our total GMV didn't decline severely was primarily due to the fact that we added a lot of new large customers as well as SMEs. And the business from these 2 groups have more than made up for the -- have made up for the loss from the adjusted and optimized the business. So it's been very clear that our business has been driven primarily by these 2 groups of customers, and we are greatly increasing the number of SMEs, thanks to our online technologies and capabilities. And we're also trying to cover more key -- KAs or key accounts, large customers. Out of the top 1,000 manufacturer customers in China, we have already covered 670 of them, and we are proactively increasing our wallet share with them. And so there's a lot of potential to tap in there. And we are proactively reaching out to penetrate the other 300 as well. So in terms of another aspect, which is GBB, our GBB platform has been focusing more on construction materials and hardware in order to serve the needs of SMEs and consumers better. And of course, from our perspective, in order to grow more sustainably and strongly in the mid- to long term, a lot of the growth drivers will come from overseas markets, including Europe and America. So our investment efforts in those overseas markets, I believe, will start to show effect starting the second half of this year. And starting June and July this year, the -- our performance from the central SOEs and local SOEs have pretty much bottomed out in June and July. And starting August, we have seen from data that things started to turn around and rebound. So we are very, very confident that recovery and the growth -- positive growth for the second half is very likely.

Operator

Operator

Leo, did that answer your question? Did you have any follow-up?

Leo Chiang

Analyst

Yes, answered.

Operator

Operator

The next question comes from Xiaodan Zhang and CICC.

Xiaodan Zhang

Analyst

[Interpreted] So in the increasingly competitive landscape of platforms, there is significant concern about the long-term competitive advantages of enterprises. Beyond scale, what do you believe are the true competitive barriers or moats that ZKH has built in the China's MRO sector that are difficult to imitate or surpass. The company has consistently emphasized the construction and investment in the long-term core competitiveness. Please share specific investments made in these areas as well as their impact and results on that business development.

Long Chen

Management

[Interpreted] Okay. So compared to traditional trading companies and hardware stores, we have absolute advantages when it comes to things like our product capabilities, our IT capabilities and our nationwide supply chain as well as our talent reserves. I'm not going to delve into the details. But compared to other MRO e-commerce marketplaces, I would like to focus on 3 areas where we have an edge. First is our product capabilities. Due to historical reasons, we are very versed when it comes to real industrial-grade MROs. So these are real MROs by definition. And specifically, we have an absolute advantage when it comes to things like spare parts, chemicals and manufacturing. Second, we have a 600 strong persons of product expert team. And we absolutely take a lead in the industry, and they are very specialized -- have specialized know-how about various industries and products. Thirdly, we have very strong R&D capabilities, and our Taicang factory is definitely going to increase our advantage. So this plant in Taicang enables us to do innovation of products as well as product selection, testing and recommendations. The second point I would like to stress is our digitization and AI capabilities. We have a data dictionary built based on 17 million SKUs of MRO. And this database is still quickly expanding. And I believe firmly that in the future, in order to have success in the MRO space, having a highly sophisticated and large database for the MRO vertical definitely lays the groundwork. And we also have a very large MRO IT team, about 200-something people, they include algorithm engineers, data engineers, development engineers from both front and back ends and system maintenance engineers. So among the MRO companies in China, we have one of the largest IT teams. So with these 2 aforementioned…

Operator

Operator

The next question comes from Ella Ji with China Renaissance.

Diying Ji

Analyst · China Renaissance.

[Interpreted] So my question is regarding your overseas business. Your U.S. business has been running for over half a year. And you also plan to expand to the European and the Southeast Asia market. What are the main competitive advantages of ZKH comparing to the local players? What are the biggest challenges as well as the strategies to counter with those challenges? And then lastly, is there a timetable for the revenue and maybe profit of overseas operations?

Long Chen

Management

[Interpreted] Thank you very much for your question. So when it comes to our overseas expansion, we primarily adopt 2 models, which were mentioned in my presentation earlier. First is to go into advanced economies and to do localized operations there, namely to set up our own e-commerce marketplaces. Second is to follow Chinese large customers wherever they go, like it was mentioned earlier, we already started receiving orders from plants of Chinese customers that have set up shop in geographies such as Thailand, Indonesia, Malaysia and Mexico. But I believe, relatively speaking, out of the 2 models, model 1 is the more challenging one because we have to build our own brand there, right? And being a new start-up from China, our reputation locally, we have to build that from scratch. And the learning curve is going to be pretty steep. So it's going to take some time for us to learn about the local cultures and the customers. But our advantages come from different places, primarily because we have a strong supply chain and a relatively low cost, but another factor, which is equally important and cannot be neglected, is entrepreneurship from being Chinese. And so being Chinese and being the Chinese start-up, we have the high efficiency, and we are very quick to react to things, and these things make us stand out among companies globally. And we have already passed some learning periods, and we are already entering a phase of acceleration. So I believe in the second half of this year, both models, model 1 and model 2 will start to pick up some pace and truly accelerate.

Operator

Operator

Did that answer your question, Ms. Ji?

Diying Ji

Analyst

Yes.

Operator

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments.

Jin Li

Management

Thank you once again for joining us today. You can find the webcast of today's call on ir.zkh.com. If you have any further questions, please feel free to contact us. Our contact information can be found in today's press release. Thank you, and have a great day.

Operator

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]