Ruiyu Li - JD.com, Inc. Sidney Huang - JD.com, Inc.

Richard Qiangdong Liu - JD.com, Inc.

Eddie Leung - Bank of America Merrill Lynch Alicia Yap - Citigroup Global Markets Asia Ltd. Ronald Keung - Goldman Sachs (Asia) LLC Jerry Liu - UBS Securities (Asia) Ltd.

Grace Chen - Morgan Stanley Taiwan Ltd. Jin-Kyu Yoon - Mizuho Securities Asia Ltd.

Natalie Wu - China International Capital Corp Chi Tsang - HSBC Alex Yao - JPMorgan Securities (Asia Pacific) Ltd. Jialong Shi - Nomura International (Hong Kong) Ltd.

John Choi - Daiwa Capital Markets (Hong Kong) Ltd. Wendy Huang - Macquarie Capital Ltd.

Thomas Chong - Credit Suisse (Hong Kong) Ltd. Alvin Jiang - Deutsche Bank AG (Hong Kong)

Thank you, operator, and welcome to our Q3 2017 earnings call. Joining me today on the call are Richard Liu, our CEO; and Sidney Huang, our CFO.

For today's agenda, Mr. Huang will discuss highlights for the third quarter 2017.

Following the prepared remarks, Mr. Liu and Mr.

Huang will answer your questions. Before we continue, I refer you to our Safe Harbor statement in earnings press release, which applies to this call, as we will make forward-looking statements.

Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

Finally, please note that otherwise stated, all figures mentioned during this conference call are in RMB. Now, I would like to turn the call over to, Sidney.

Thank you, Li. Hello, everyone.

Thank you for joining us today. We are pleased to report another quarter of solid top line growth and record profitability.

During the third quarter 2017, our net revenue from continuing operations grew 39.2%, a solid performance following an exceptionally strong second quarter. Our direct sales revenues grew 38%, led by home appliance, food and beverage, cosmetics, home furnishing and baby products.

General merchandise categories as a whole grew 67% in revenue on a year-over-year basis, despite the intense competition in these categories. Our revenues from services and others increased 46% year-over-year.

And acceleration from the growth rate in the seasonally similar first quarter of 2017, supported by improved brand engagement and better monetization of our platform. Some of you may have noticed that we moved our GMV disclosure to the back of the earnings release and are using just one instead of two different definitions for this non-GAAP metric.

As you may recall, we began to disclose two sets of GMV numbers since the fourth quarter of 2015 in order to provide an apples-to-apples comparison to our major industry peer, while maintaining our original definition in parallel for investors convenience. Over the past two years, we see continued confusion over these different definitions, so we decided to simplify it beginning this quarter.

Since the industry definition is broader with many unfulfilled orders in the numbers, we will not further analyze such a GMV figure, which are provided for industry comparison only, and should not be relied on for financial analysis purposes. However, we'll continue to provide qualitative analysis on our GMV trend based on the underlying transactions actually fulfilled.

For the third quarter of 2017, the fulfilled GMV grew in the low 30s, mainly attributable to two factors. First, the anniversary effect of integrating the Yihaodian platform, without which the GMV growth rate for JD Mall would be in the mid-30s.

Second, the impact from certain apparel and general merchandise merchants withdrawing from our platform. Based on the feedbacks we received from these merchants, the move was mainly due to the coercive tactics from our competition, which if proven true would be illegal and clearly against the merchants' will.

Despite this short-term headwind, we are pleased to see a very successful November 11 promotions season, which demonstrated the resilience of JD's powerful platform. We are also pleased to report very healthy gross margin expansion in the third quarter, which reached a record high of 15.3% on a non-GAAP basis.

Non-GAAP gross profit after fulfillment expenses, another important measure of our platform monetization grew 64% on a year-over-year basis as we gained further economies of scale from procurement merchant services and fulfillment network. Our collaborations with leading platforms such as Tencent, Baidu, NetEase, Qihoo and Toutiao have shown exciting early results as we provide better precision marketing tools to our merchants and brands to enhance the ROI on their advertising spending, while reaching a broad customer base on multiple platforms.

Leveraging in-house AI technologies, our real-time bidding advertising platform has generated triple-digit revenue growth in the past three quarters, and is now contributing a significant majority of our advertising revenue. During the third quarter, we continued to invest proactively in logistics, branding and technologies.

Non-GAAP fulfillment expense ratio increased 11 basis points from the same quarter last year, as we significantly expanded our warehouse network during the quarter to better serve our merchants and prepare for the November promotional season. At the end of September, we had 405 warehouses nationwide with approximately 9 million square meters in total space, up over 50% from 12 months ago.

Non-GAAP marketing expense ratio was 3.5% in Q3, higher than the 3% in the same quarter last year, as we continued to increase our branding effort to reach consumers in the lower tier cities. In spite of heavy investments for our future expansion, we are pleasantly surprised by another quarter of record earnings.

Non-GAAP operating profit increased 171% to a record high of RMB 1.5 billion in the third quarter. Non-GAAP net income attributable to ordinary shareholders was RMB 2.2 billion with an increase of 359% on a year-over-year basis.

And our GAAP net income attributable to ordinary shareholders was RMB 1 billion, also a record high with a healthy net margin of 1.2%. The result speaks for itself and provides a strong validation of JD's underlying earnings momentum.

Our free cash flow was negative RMB 9 billion during the quarter, mainly due to two reasons. One is the RMB 5.2 billion inventory buildup for the November 11 promotion season, which is largely a timing issue.

And two, is the much anticipated CapEx, including RMB 4.4 billion in new building – in new land use rights for more headquarter space and the new warehouses. As we communicated in the past, we normally acquire land use rights at very attractive economic terms, given our contribution to the local economies.

We expect such CapEx to be highly accretive to our shareholders, even with the cash outflow in the third quarter, our cash position remained very strong. As of September 30, 2017, cash and short-term investments, mainly in money market funds, totaled RMB 41.8 billion, up 71% from RMB 24.4 billion at the end of last year.

Now, let's discuss our financial outlook. We expect Q4 net revenue growth to be between 35% and 39% on a year-over-year basis, excluding any impact from JD Finance for both current and prior year period.

This concludes my prepared remarks and we can now move to the Q&A session.

Good evening. Thank you for taking my questions.

I have a question on the product mix you are sharing, because we read from Double Eleven press releases, actually not press releases, but some of your colleagues actually provided certain colors to the media. It seems like there has been an up upgrade in quite some of the product categories.

For example, we have seen your high-end products selling at triple-digit growth rates. So wondering, how that could affect our margins going forward?

Thank you.

So I assume you're referring to some of – some of the brand cap – higher level brands in general merchandise category. They obviously have very healthy margins.

This is also a result of our effort this year to reach out to global brands, and because the overall contribution of those brands are still relatively small, while the impact will be positive, but it would not be very material in the near term.

Got it. Sidney, may I have a follow-up on that front.

Are we sticking to our previous full-year margin guidance?

Yeah, we would try to stay away from any single quarter...

Got it.

...guidance on the bottom line. So because this is the last quarter of the year, so we would try to stay away from any further guidance.

Well, understood. Thank you.

You're welcome.

Hi. Good evening, Richard, Sidney, and Ruiyu.

Thanks for taking my questions. I actually have a follow-up questions related to margins, and specifically on the gross margin this quarter.

So it does looks like the strength is coming from the 1P business. And just curious is it driven by slow seasons that hence you don't have a lot of promotion?

Or is that driven by the change of category mix like Eddie mentioned. And then in related to that since you are retaining your full-year guidance, net margins of 1% to 1.5%, you are not changing it, but with the outperformance in the 3Q margins, if this is the case that you're retaining your full-year margin, should we assume that 4Q net margins will be much bigger sequential decline versus the 3Q.

Any color you could provide us to think about the margin directions or assumptions for 4Q would be great?

Sure. So for the gross margin question, I think there are three reasons, one is from our first party's business, the scale economies has been driving our procurement cost coming down on a consistent basis.

So that has always been part of the contribution as I mentioned this in the past. And second is that, I mentioned earlier about our enhanced user engagement, also the brand engagement through better advertising products, monetization has improved for our overall platform.

So, really those are the two key drivers. Clearly, without major promotions in the third quarter would also contribute to the sequential increase in the gross margins.

So, related to that, to come back to your question on fourth quarter, I think if you – well, we don't guide for any single quarter, but if you want to take a benchmark, I should probably benchmark to the second quarter when we had also a very major promotion to the fourth quarter rather than comparing to the third quarter. But again, we are not providing any guidance on the bottom line for any single quarter.

Yeah, so over the long-term, our commitment is to improve our profitability on an annual basis. And with that in mind, we do not manage earnings on a quarterly basis, and if any certain quarter has outsized profitability, we may decide to reinvest part of that excess return back into the business to pursue further growth.

So that strategy has not changed. We do not intend to pursue very large outsized increase in net margin for any single year, but we want to make sure that margin will increase steadily over a very, very long period of time.

Yes, so if you look at it over the long-term, any excess return beyond our expectations will be reinvested roughly 30% to 40% of those excess returns back into the business and half of that will be in technologies.

Thank you, Richard, Sidney, and Ruiyu, on a very strong set of results. I think on the 3P revenue as, Sidney, you've mentioned it's very strong 67%, that makes me think about the 3P business given the challenges in the apparel brand, can you just share how the merchant number, which has seen a massive increase on a quarter-on-quarter basis to 160,000 merchants.

So if we think about apparel and other marketplace merchants by category, could you share just a strategy from now on given the exclusive contracts or competition that we've seen, what is the strategy in our marketplace business, and specifically for apparel moving to high-end with top line? So I just want to share – hear your thoughts on the 3P business by category?

Thank you.

So let me quickly translate, you may have learned from the media that we are experiencing some headwinds over 100 merchants in the general merchandise category has withdrew from – withdrawn from our platform due to certain competition's practice in the market. And leading to some of the merchants going to one platform rather than going to both.

So those brands, all of them are Chinese brands, they are relatively smaller, and so it's – we actually haven't seen any large global brands in this way. So we have throughout our history experienced many of these competition, where our competitor would force the merchants choose one out of two platforms, almost every two to three years.

In the earliest days that our digital IT products, we faced this competition, and then later was in the books and the media segment for two years, and then in the home appliance with our major competitors for almost three years, and that we have overcomed all those competitive pressures and have become the largest category leader in all of these categories. So, today out of the 14 major categories, we are the leader in 12 of them, and with only two remaining.

So, we do believe that while this is not the first time we're facing this kind of competition, this should be the last time. So, the key for us to overcome the competition was because we have always worked very hard to help our brands to grow and help our brand partners to make profit, and which in return would also help us to grow with these brands.

So, today maybe in the apparel segment, we are only one-third to one-fifth of our major competitor's size. But over time, if you actually check with these brands, the brand's net profitability on JD's platform may not be actually any less than their profit on the larger platform.

So, throughout our history, in any category and every category, we always encountered this competitive tactic, and it's almost inevitable, but it's also – it can always be overcomed. And so, we believe this is the last category and the fact that we are facing this competitive tactic again, is also suggesting the competition may be running out of – this is really the last result in terms of competitive tactic.

Another interesting fact that for global brands that stayed on our platform during the most recent November 11 promotions, all of them grew over 200%, which really validated the power of the platform. Another point I want to add is that over the past few quarters, the categories which are mostly targeting female customers are growing the fastest.

All of them are being growing in a relatively – in as accelerating fashion. And this demonstrate really our platform has been offering the female customers a great value proposition.

I just want to add one more point that Richard mentioned earlier is that, even though our current quarter actually saw stagnant growth in the apparel category, which could also last two quarters to three quarters, but we are confident that past – beyond the next two quarters to three quarters, we will see growth resume again and just as we saw in other categories reach inflection point.

When we have more and more female consumers on our platform, the growth from the apparel segment will be almost inevitable.

Hey, thank you. My question is relating to the cash flow statement.

Sidney, I wanted to get your view on cash conversion cycle and how quickly that can improve without JD Finance, and whether, as you gain scale – economies of scale, you can see further improvement even excluding this benefit from the financing business? Thank you very much.

Well, there is no impact from JD Finance at all. As I mentioned earlier, the cash flow – negative cash flow this quarter was, one, is the timing issue for inventory buildup.

We did stock up a higher inventory level than the prior year as we focus – trying to overcome some of the merchant withdrawing from our platform. So we revert to the first-party for those products.

So this is really a timing issue post November 11, and also in December there may be another promotion, then the inventory will be digested. And another factor was the CapEx, right.

So none of these are related to JD Finance. In fact, we are supporting JD Finance, not the other way around.

(30:04).

So on a full year basis, you can be assured that our free cash flow will always be positive from JD more along.

In fact, if you look at the last 12 months, the free cash flow was still very, very strong.

Hi, thank you for taking my call. We can see that JD has been doing very good margin improvements.

But at the same time, we also see that you're accelerating investments as well. I think Richard mentioned that JD in general will reinvest the excess returns, 30% to 40% of the excess return, and half of that will be in technology.

But, as you can see, we have many other investments including we'll invest in FMCG, branding, logistics, overseas expansion as well. So what would be the priority of these other investments?

And also can you help us rank them (31:20) investments in terms of size? Thank you.

Yeah, so most of the items you mentioned earlier are actually part of our regular businesses, which will see continued investment.

What Richard mentioned earlier was any excess return beyond that and we will reinvest part of that, and technology will be the most important element for those reinvestment.

Hi, good evening, guys. Sidney the 100 merchants or so that left the platform or allegedly left the platform, is that a net number or gross number of additional merchants that you have added on during that period?

And second of all, just going back to the CapEx, are we pretty much done with the CapEx spending for this calendar year or should we – some of that, that land rights investments, should that trickle into the fourth quarter as well? Thanks guys.

So, for the 100-plus merchants that left the platform, essentially they actually – they are the ones closed the shops at least for the recent promotion period. So it is – there's no consideration on the new ones.

So these shops had a specific act of closing the shops actually in – all in a very short period of time. So this is clearly by no coincidence, and they are all major domestic apparel brands.

So all around the same time. On the CapEx, we – clearly there won't be as much in the fourth quarter.

But, as I said, if we do get invest in new land use rights, we normally get them at a very attractive economic terms. So it is something that's very good for our shareholders, just to reiterate that point that we could always turnaround and get a third-party to pay a much higher dollar amount for those, and that we can lease them back.

So they can be easily monetized. And, it's actually a very scarce resources that only JD and very good dual economy companies can have the privilege to acquire them.

Hi, management. Thanks for taking my question.

Richard, you've just mentioned that as long as the net profit margin to be improved at similar level scale every year, so you are happy to invest actual money into the R&D growth, et cetera. So can it be interpreted as margin guidance, let's say, next year, it could be 1% higher than this year?

Yes. So, I can promise you that net margin would increase every year.

But as I said earlier that which we can't give you more specific guidance, but improvement should be meaningful.

Great. Thank you.

Good evening, thanks very much for taking my question. I'm wondering if you can comment a little bit on your M&A strategy, both internationally and domestically.

I know you've been exploring expansion in ASEAN and sort of domestically, what is your appetite for consolidation to increase your market share? Thank you.

So we are – as we mentioned in the past, we are taking quite conservative approach in terms of international expansion. We had an earlier joint venture with a partner in Indonesia, and we also recently announced a partnership with Thailand's Central Group.

In both cases we have similar equity interest with our joint venture partners. And the rational is that, we wanted to leverage our technology and e-commerce know-how, and then at the same time, leverage local partners, local expertise, and their local consumer insight.

So it is a relatively conservative, but also we believe a very effective way to expand in the international market. And at this point, our focus is in Southeast Asia, until we gain some valuable experience.

So we will pretty much stick to this region. For domestic investments, it's been also quite consistent that we wanted to invest in the companies, in our ecosystem where we can create synergies between us and investees.

So, we obviously have a great channel – distribution channel. We are also developing our technologies to empower other partners.

So some of those potential investments could be also in technologies. So not only from in-house on the development point of view, but we would also take a minority stake in other leading technology companies, so that we could leverage their technology as well.

Hi good morning and good evening everyone. Thank you for taking my question.

I have a question regarding customer growth, you guys grew the customer base by 34% in this quarter, actually in the past 12 months. I'm just wondering can you share with us what is the key driver for the user growth, is it the sales marketing effort, is it the pricing subsidy or is it more because category expansion into female-oriented categories such as FMCG?

And I also would you like to hear update in terms of traffic contribution from Tencent. Is there anything that you guys can do such as data exchange, product integration, et cetera, to drive more user growth from Tencent's social platforms, and how should we think about the user growth trend in the next couple of quarters?

Thank you.

Yeah, so really two customer segments were seen the greatest growth, one is female customers, and two is customers from the lower tier cities. Yeah, so these are also the two segments where JD was historically having a lower penetration, and we've been making a lot of efforts to increase our penetration, and we've seen very encouraging results in the recent quarters.

So, we've had a very, very good partnership with Tencent over the past three years. We are seeing the relationship deepening, and more recently we are also planning to extend our partnership not only online, but also to offline where we can create synergies between the two companies.

I will translate the questions into English myself. I have two questions here.

My first question is, I just wonder if there will be any changes in the terms of the new business agreement JD will renew with Tencent next year? My second question is the management mentioned earlier, they expect the apparel business to recover from 1Q next year.

So, I just wonder what strategies management may have to turnaround the apparel business? Thank you.

Yeah, so first, our agreement with Tencent will not expire into 2019, so it's still quite early before we'll start discussions with Tencent. Yes, so we believe we'll have clearly priorities in getting new support, and if we can reach agreement that will be great, if not, we'll also have great options.

Yeah, so maybe the type of collaboration could be different, but we are very certain that the two companies will cooperate closely together. Yeah, so in terms of apparel, obviously this is in the midst of intense competition, so for trade – for confidentiality reasons, we would rather not share anything further at this point.

But if you look at our promises in the past 10-plus years, all of our promises would always realize in the end.

Good evening, and thanks for taking my question. I have a question on your services and other revenue.

Could you give us some more color on, especially given that the third-party GMV might have slowed down quite a bit this quarter. So, should we assume that advertising revenue and logistics revenue have done a bit more this quarter?

Any color will be appreciated. And secondly, if you just give – could let us know the current status or the relationship with Walmart given that it's been about a year since you have (45:56), so where have you guys achieved, how do you think this relationship will evolve into?

Thank you.

Yeah, so on the service revenue, as I mentioned earlier, advertising revenue definitely led the growth in the category followed by logistics. And so, the business has been growing overall at a pretty healthy rate.

So advertising is really the standout within that service revenue category. As far as Walmart, we mentioned in the earnings release that, we actually – one of the recent initiative is to promote a joint membership between JD Plus and Sam's Club membership.

So we definitely just – this is just one example, we're definitely seeing a lot more collaboration going on between the two corporations, and there will be lot more exciting news in the near future.

Yeah, so we are exploring additional collaboration in our online, offline effort. Yes, so another point I want to add is, even though we're facing some headwinds for the apparel category, we may lose some commissions in GMV, but because our platform continues to offer many different kinds of value to the merchants.

So you actually see these merchants still utilizing JD platform for other services such as advertising and marketing services. Yes, so we have in the most recent quarter 266 million active customers, and these are all very, very valuable middle-class and upper middle-class consumers.

So, it definitely creates a great platform for the brands and the merchants. Any smart merchants would clearly not walk away from our platform in the – over an extended period.

Not only smarter merchants, but also stupid ones (49:19).

Thank you. I have two questions.

First, just to follow-up on Richard's comment about female users, and also penetration into the lower tier cities, can you give us a breakdown of your 266 million customers by genders as well as different tier cities? My second question is about JD's B2B strategy.

I noticed that in the past one year, there has been lot of players in the market start to revamp their B2B product to connect with hundreds of thousands of mom-and-pop shops in China. For example, Alibaba has Ling Shou Tong and Best (50:13) is also doing similar stuff.

Sard (50:16) also launched a B2B sourcing platform. And JD, I think also has a product called Jinhuobao (50:23).

So can you share with us about your thinking behind your B2B strategy and also what's in your view the JD's competitive advantage in this regard? Thank you.

Yeah, so let me answer the second question first. We do have a new business unit (51:06) and the app is on Weibo.

So we are targeting the mom-and-pop shops and we've now opened over 10,000 of them with JD brand and on the Singles' Day alone opened 1,111 new stores on one single day. So we have two key competitive advantages.

First is our supply chain resources, because many of the suppliers to the convenience stores are already our biggest partners, such as P&G. So we will help these brand partners to penetrate and reach those convenience stores as a part of their channel expansion.

Yeah, the second advantage is our logistics network. By the end of this year, we are already covering 100% of the provinces and counties and we can also serve even in the rural areas.

In each village we will have (52:45). Yeah, so because we already have our own logistics network extending to every counties and every villages, so in order to serve the convenience stores in those regions, there is no incremental cost to us.

Yeah. So without the existing logistics network, any third-party, any other players who wanted to reach these stores in the rural areas will be highly, highly cost.

And on the users, we don't disclose specific breakdowns, but what we can tell you is, our female customers has been growing much faster than male customers, and also the lower-tier city customers have been outgrowing the Tier 1, Tier 2 cities.

Hi. Thanks management for taking my questions.

I have a quick question about JD Logistics. Can management give us some update about the business outlook, given we see our competitor also steps up in their the logistics business over the last couple of years, and how we can differentiate from our peers?

Thanks.

Yeah, so as you know, JD's Logistics network is fully integrated covering all the steps and processes in the logistics and workflow. So we've built that over the past 10 years.

Yeah, so we'll have three ways to improve our logistic network. First is through increased order numbers, so that we can further enhance order density and efficiency.

Yeah, so, second is that, we will make great efforts to expand our business serving third-party merchants and partners, so our objective is in five years the external revenue will be above 50% of the total logistics revenue. So, within the last two quarters, we already attracted over 100 major brands into our logistics platform.

Yes, so, in addition to the service level and great coverage, we'll also innovate constantly in our logistics capability. One example is that we expanded our cold chain logistic capabilities and for products that require cold chain storage, where actually we can monitor the whole delivery process, the temperature of the products, so that consumers can actually track those fresh products in route to their home, so you can see the temperature movement throughout the delivery process.

Yeah, we will also expand the same city delivery services through our partner, New Dada. As we extend our partnership with Tencent towards offline retail network, we believe that in the future maybe half of the products will be available in the same city from the merchants and retailers, and the same city delivery network will be very critical to provide those services.

Yeah, so we have also launched the first ever online sortation center, covering the full sortation process without any single man. So this is definitely one of – the first of its kind in the world.

We've also had 170,000 testing hours for our drone delivery service and also in roughly 100 universities we have tested our automated delivery robots. So all of these great innovations will put us clearly as the leader in modern innovative logistics solution provider.

So another fact that I wanted to mention is that, our automated self-driving trucks, we have tested that for 500 kilometers, we only need human intervention two times, right? Less than two times.

Less than two times.

Hi. Good evening, management.

Thank you for taking my question. We noticed that JD has announced a series of corporations with other Internet companies in addition to Tencent, like Baidu, like NetEase.

So my question is, what's the underlying reason to do that and how is our expectation on these corporations? Thank you.

Yeah. So, one of the key objectives of those partnerships is to leverage each other's unique consumer insight and unique consumer data to provide much better target marketing for our brands.

So that's one of reason. And clearly two is that, all these platforms have their own very large user base.

So it also help us reach a broader consumer base.

Thank you for joining us today. Please feel free to contact us if you have any further questions.

Thank you for your continued support, and looking forward to speaking with you in the future.