YJ 云集

Operator

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to Yunji's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. With us today are Mr. Shanglue Xiao, Chairman and Chief Executive Officer; Mr. Chen Chen, Chief Financial Officer; Mr. Hui Ma, Chief Strategy Officer and Chief People Officer; and Ms. Kaye Liu, Investor Relations Director of the company. I would now like to hand the conference over to our first speaker for today, Ms. Kaye Liu, IRD of Yunji. Please go ahead, ma'am.

Kaye Liu

Hello, everyone. Welcome to our third quarter 2019 earnings call. Before we start, please note that this call will contain forward-looking statements. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. For detailed discussion of these risks and uncertainties, please refer to our latest document filed with U.S. SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we do not undertake any obligation to update these statements, except as required under applicable law. These forward-looking statements are based on management's current expectations, observations that involve known and unknown risks, uncertainties and other factors that are not in the company's control, which may cause actual results, performance and achievements of the company to materially different from the results, performance expectations implied by these forward-looking statements. Our forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company filing with the SEC. Yunji undertake no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. With that, I will now turn over to Shanglue Xiao, Chairman and CEO of Yunji.

Shanglue Xiao

[Foreign Language] Hello, everyone. Welcome to Yunji's third quarter 2019 earnings call. During the third quarter of 2019, our gains increased by 69.8% year-over-year to RMB 9.2 billion. We generated RMB 2.77 billion in total revenue while shrinking adjusted net loss by 37.7% to RMB 24.9 million in the prior year period. As of September 30, 2019, our cumulative membership increased by 14.2% to 12.3 million from 10.8 million as of June 30, 2019. In the 12 months ended September 30, 2019, the total number of our transacting members has increased by 122.7% year-over-year, further illustrating the ongoing expansion of our [indiscernible]. [Foreign Language] Such solid results backed our material exclusion of 3 competitive strategies. First, for things with sustainable growth and stable profitability. Second, building competitive differentiation through effective merchandising. And third, providing company value propositions to members with service managers through personalization. [Foreign Language] The backdrop of us pursuing those three strategies is that [indiscernible]. Economy centric on consumer designs to perform in the design economy, business need to proactively uncover consumer's desire and satisfy this design while in the current consumer market value with low end manufacturing products to invest, and focus our interest on collaborating with high end manufacturers. We believe that high-end products are not only enjoying favorable supply-demand dynamics, but also growing rapidly with a rising tide of CNY 800 million strong middle-income consumers in China. We are determined to also provide certified Chinese consumer design for consumption upgrade over the next 5 to 10 years, which is build to market, cheaply priced, low-end product that don't offer any compelling value to consumers. We don't [indiscernible] up by a multiple of 4x to 5x just to secure exclusivity for ourself with brand owners. Instead, we help them attain market share through our low-cost markup of only 2 or 2.5 times, that way brand owners can offer our members with high priority and high value products. Meanwhile, we are as internally, intermediarily can also achieve a reasonable ROI, thus creating a win-win situation for all these three parties involved. [Foreign Language] With the design economy as our backdrop, now let me explain our three competitive strategies in more detail. First, I would like to just crystallize our view on the essential components for healthy business. We believe that only those business with stable profitability and sustainable growth can be categorized as healthy. As such, we continue to optimize our market strategy and cost structure to maintain the healthy state of our business. [Foreign Language] During the third quarter of 2019, we refined our subsidy [indiscernible] and cost-control measures to improve our gross margins and operational efficiency by reassessing our dividend payout arrangement. For example, we were able to effectively reduce subsidies paid to [indiscenible], use our platform nearly as a sub-coordinate channel for marketing their products. As a result, we eliminated efficient and applicable market campaigns, thus improving our performance [ph]. Moreover, we also reduced subsidies for those products not meeting three criteria: first, high priority with competitive price; second, strong ROI potential; and third, high reliability in the eyes of a mainstream use consumer. For those suppliers whose product meet our aforementioned criteria, we prioritize their ranking in our network recommendation system and guarantee their marketing resources in our member community. This operational adjustment has led to more efficient utilization of our resource, gradual optimation of our serving structure, and stronger incentives for our employees and service managers to perform better. As a result, we achieved profitability during this year's Double Eleven campaign. We anticipate our operating expenses decline further in the fourth quarter of 2019. [Foreign Language] Now let me share with you our second competitive strategy, building on foundation of our durable business model incumbents, compassing post marketplace business and merchandisers. Our competitive [indiscernible] can be summarized into two words: inclusiveness and focus. [Foreign Language] First, allow me to [indiscernible] inclusiveness in more detail. In the first quarter of 2019, we have started to gradually optimize our operations, structure, and shift part of our business from merchandise sales to marketplace business model. In the eyes of general public, post misperception and disfavor of our business model share, I would like to take this opportunity to explain from the operational efficiency perspective the mirrored benefit of our durable business models that include both merchandise sales and marketplace business. The first benefit is that the marketplace business model is SLI. As we transfer portions of those low-margin merchant brands from merchandise sales to marketplace business, we are able to reduce our expenditure in logistics, customer service, and operation headcount significantly. The third - the second benefit is that marketplace business model is speedy. For example, the apparel category requires intensive time and effort in product selection, review, and verification. At the same time, its innate nature of seasonality and thickness [ph] puts the stringent demand on these challenged markets. The marketplace business model is especially suitable for the apparel category, profit gives suppliers far more operational flexibility and freedom thus allowing them to shorten their pre-market preparation operations timeline. Third benefit is that's why we keep our marketplace business platform open. We continue to process the nature of selection of high quality suppliers with premium products through sufficient [indiscernible] controlled competition. We believe that our inclusive marketplace business model is conducive to continuous improvement in both our suppliers and our own operations, which should lead to a win-win in the long run. [Foreign Language] In addition, to improve this, the other pillar of our competitive differentiation strategy is focus. We are now anticipating our focus on one target, cross sale of each individual super products or super fresh. The cross sale format focus on top tier SKUs by sales volumes, enables leading global manufacturers to incubate products and brands that distinguish four ways – four characteristics. First, high quality, second, attractive design, third, compelling value, and fourth, high throughput. Through the past 3 or 4 months we were able to cultivate brand capable for generating millions or even billions of RMB in sales. Increasing return for our Service manager, provide more value to our members, improve the profitability of our platform, all at the same time. As we continue to find our selection of innovative brands, private labels, investable brands, we have build up a deeper reservoir of million or billion RMB brand categories. Many of which are already in the lead in sales volume. For example, [indiscernible] and units to private labels, within the cosmetic and beauty categories, continue to maintain their million-dollar sales volumes. Another example is the food category, in which multiple brands have achieved million dollar sales volume as a per day and per SKU basis. We have also brought into health supplement categories through our Inner Beauty, a brand that delivered advanced manufacturing technology and product formula from the United States DuPont to create probiotic product in China. Through our unique integrated markets and sales system, Inner Beauty has attained an excellent market reception upon it's launch in our platform. [Foreign Language] Turning to our third competitive strategy, which is also our most unique strategy, we mentioned prior with the brand value in which individual consumer trust one another. This strategy builds upon the foundation of a member quality and social sharing system, in which we have achieved a number of innovative food [ph] source. First, we find our membership enrollment system and further stimulate my - our users' transaction interest through a three month trial membership and high quality product. As the initiative of member benefit during trial periods, upon trial expiration, users will further entice to remain their full member status, either through purchase of membership package or by meeting the cumulative purchase amount requirement, which is a controlled path using a small local user after launching the trial membership in the first quarter of 2019. After three calendar quarters of continuous observation and adjustments, we discovered, there are members acquired through trial membership of high quality. Consequently, we plan to promote trial membership at a greater scale. [Foreign Language] Beyond the success of our member enrollment systems, we also provide service manager with incentives to boost their engagement in current event to discover, represent and promote on our platform, those products with high quality, but little notoriety available on other platforms. For instance, apparel products often have difficulties standing out in their category due to the tremendous variety of portion available. By sharing a pilgrim, by trying our apparel product and passing along word of mouth recommendation, our service managers have made it easy for members to discover and select those products of their liking. Such promotion method does not require endorsement for well known internet celebrities. It can boost member engagement and improve their shopping experience with us, adding a lot of marketing power. [Foreign Language] On interactive activities, our platform helped to establish trust relationship between our members and service managers. Moreover, to enhance those relationships, we organized a variety of offline events. The majority of our offline events were not intending to drive product sales or promotions, but instead to provide our members and service managers with opportunities to learn something new, share their experience and better interact with each other. As a result, our offline events have attained positive feedback from both our members and service managers. [Foreign Language] In summary, all three of our competitive strategies have formed the upwards spiraling growth funnel. As we continue to optimize our cost control measures, increase profit margins, we are confident that we will be able to grow our profitability steady and generate attractive returns for our shareholders. [Foreign Language] With that, I will turn the call over to our CFO, Chen Chen, to go through the details of our financial results.

Chen Chen

Thank you, Shanglue. Hello, everyone. Before I go through our financial results with you, please note that all numbers stated in the following remarks are in RMB terms, and our percentage changes are on a year-over-year basis unless otherwise noted. During the third quarter of 2019, our GMV increased by 69.8% to CNY 9.2 billion, and our total revenue were CNY 2.77 billion compared with CNY 3.08 billion in the same period of 2018. Since it's launch in the first quarter of 2019, our marketplace business platform has attracted a growing number of merchants interested in tagging to our massive user group. Additionally, some merchants from our merchandise sales platform have decided to move on to our marketplace business platform and is, therefore, have taken responsibility for the procurement storage and the management of their own inventory. As a result of this transfer, a portion of our revenues previously generated on our merchandise sales platform are recognized on a gross basis was shifted to our marketplace business platform, which recognize sales on a net basis. In the third quarter of 2019, revenues from net sales of merchandise were CNY 2.47 billion, accounting for 89.1% of our total revenue. As we continue to attract a more popular brands to our marketplace business platform and improve our commission rate, revenues from our marketplace business were CNY 86.3 million compared with nil in the same period of 2018. During this quarter, as we continue to enhance our merchandising mix, refine our value proposition and engage more users through our diversified membership enrollment system, revenues from our membership program increased by 16.3% to CNY 206.7 million. Meanwhile, as some merchants move to our marketplace business platform, a portion of our product purchasing and storage activities was shifted back to the merchants, which reduced our costs related to other activities such as unit write-down in the merchandise procurement. More importantly, our gross profit margin expanded to 17.8% from 16.8% in the prior year period, which was mainly attributable to our subsidy allocation plan improvements and there's a refinement of our product offerings for both our marketplace business and the merchandise sales platforms. Now let’s move to our operating expenses. During the third quarter, the shift in our portion of merchandise sales to the marketplace business model and our ongoing efforts to improve our logistic efficiency led to a decrease in procurement expense. Additionally, we also invested more in sales and marketing as well as general and administrative expenses to attract the more popular brands and the merchants onto our platform, support our increased number of business initiatives and capture additional market share. Moreover, in line with our efforts to improve users' shopping experience, we continue to invest in our debt and the technology capabilities. And as a result, our total operating expenses increased to CNY 636.4 million in third quarter of 2019 compared with CNY 492.9 million in the prior year period. Despite the uptick in operating expenses, we are confident in the strengths of our long-term plan to streamline operations going forward. We will continue to perfect our product mix, engaging prudent resource planning and allocate subsidies to those brands and the suppliers that meet our criteria. For the third quarter of 2019, our loss from operations was CNY 132.3 million compared with CNY 74.7 million in the prior year period. We expect our operating income to be improved continuously in the fourth quarter of 2019 and 2020. Net loss decreased by 4.3% to CNY 51.3 million in the third quarter of 2019 from CNY 33.6 million in the prior year period. Our adjusted net loss decreased by 77 - 37.7% to CNY 24.9 million in the third quarter of 2019 from CNY 39.9 million in the prior year period. Basic and the diluted net loss per share attributable to ordinary shareholders were CNY 0.02 in third quarter of 2019 compared with CNY 0.17 in the same period of 2018. Now let's also take a look at our cash and liquidity positions. As of September 30, 2019, we had a total of CNY 2.3 billion in cash and cash equivalents, , and the short-term investments on our balance sheet. Heading into the fourth quarter of 2019, we're focused on advancing towards healthy profitability and continuing to develop our competitive value propositions. We plan to take advantage of our solid cash position, to convert to more users into members, stimulate service and manager engagement, enhance brand equity and cultivate more strategic partnerships with reliable suppliers and the quality brands. Furthermore, we are confident that our prudent balance of sales between both our marketplace business and the merchandise sales platform will help us to drive our long-term profitability. This concludes our prepared remarks for today. We’re now ready to take questions.

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Ivy Liu of Credit Suisse. Please go ahead.

Ivy Liu

[Foreign Language] I’ll quickly translate myself. So my first question is on GMV. Will 3P GMV continue to expand in terms of the contribution ratio? And what will the stabilized level be like looking into 2020? And what type of merchants or brands are management particularly interested in working with or bringing in onto the platform? So my second question is on member growth. So will there be other user acquisition strategies or tactics aside from the existing ones? And is there any specific target number in terms of the transaction numbers for 2019? That's it. Thank you.

Chen Chen

Thanks, Ivy. I will take this question. So for your first question, it is that GMV allocation between the 1P model and the 3P model. So currently, because our focus is due on the - to select the products that member needs, and we focus on what products and what sales format can best fit our members' needs. So, we do not set the expectations on the percentage of how much GMV will come from 1P or how much GMV will come from 3P. So if the 3P platform -- if 1 product in 3P platform can provide more value and more efficient logistic efficiencies to our members, we'll choose the 3P model. And if 1 product can provide us our member more value and bring us more gross margin in the 1P model, we'll choose the 1P model. So we do not have the detailed expectations. But we hope we can balance the 1P and the 3P business in the 50-50 in 2020. And of course for the brands to couple with. So because, if we want to differentiate us with other e-commerce platforms like JD, Alibaba, PDD, I think our unique place is to promote the emerging brands with high-mark gross margin and high profit because these brands need more - need a moderate communication between the platform members and the buyers. And these brands need Yunji to have some -- to educate the market. So, because Yunji has a larger social network, so I think for these brands, it's the best for these brands to couple with Yunji and each can also gain more profits through cooperation with these brands. So, the good emerging brands, which removes a very high profit of the well-known famous brands and can also bring us more profit is the brand Yunji wants to couple with. So for your last question, our member acquisition strategy, I think we will continue to use our current path strategy to recruit members, but we will use both online/offline activities to do the recruitment. So traditional - I said in previous years, we already use the online method to acquire the members, use WeChat to send the link and ask the young people to register as the members. But starting from this year, we think that if we do more offline promotions, which can bring us more - the members thickness will be much, much higher. So we set a lot of trainings and workshops in the offline and also, we encourage our active members and our managers to do the experience sharing and to hold the offline gathering and also expect - also other kind of the sharings to recruit the members. So, our key member acquisition method will not be changed. We’ll continue to use our method, but we will allow more and more offline activities.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Andre Chang of JPMorgan. Please go ahead.

Andre Chang

[Foreign Language]

Chen Chen

Thank you, Andre. So for your first question about the gross margin in Q3 is lower than Q2. So if we look at the gross margin, it -- traditionally, in Q3, some gross margin is lower than Q2 and also lower than Q4. So in Q4, you can expect the gross margin will be higher than the Q3. So it - and the second reason is that, starting from this quarter, as our CEO stated in the CEO statement, so that we -- our focus is to introduce more emerging brands to our members and to our buyers. And of course, these new and introduced emerging brands, because we need more time to do the education in the market, and also we need to encourage our members to do more communication between the members and the buyers to facilitate the transactions. So in this quarter, indeed, we set higher member commissions if a member refers a product to the buyers or if the member do the self purchase, so that is what you think. And in addition, we also set a little bit higher service and manager service fee to encourage the new-introduced emerging brands sales. So, I think the gross margin for these new-introduced products will be in effect in Q4. So in Q4, because we have already some - did some education of these brands, so these brands' margin will be higher in Q4. So you can expect our gross margin and both - also the operating income will be increased in Q4. So, it's your first question. And then for your second question, it is our private label. The private label GMV in Q3 is around close to 12% in Q3, and we estimate that - our target for the whole year is also close to 13% in whole year of 2019.

Operator

Thank you. [Operator Instructions] Now I’d like to hand the conference back to our management for closing remarks. Please continue.

Kaye Liu

Thank you, everyone, for joining today. And we are looking forward to speaking with everyone next quarter. If you have any questions, please contact the IR team of Yunji. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes our conference for today and thank you for participating. You may now all disconnect.