Aug 16, 2018
Executives
Ruiyu Li - IR Sidney Huang - CFO Jianwen Liao - Chief Strategy Officer
Analysts
Eddie Leung - Merrill Lynch Far East Ltd. Alicia Yap - Citigroup Global Markets Asia Ltd.
Ronald Keung - Goldman Sachs (Asia) LLC Jerry Liu - UBS Securities (Asia) Ltd. Thomas Chong - Credit Suisse (Hong Kong) Ltd.
Wendy Huang - Macquarie Capital Ltd. John Choi - Daiwa Capital Markets (Hong Kong) Ltd.
Natalie Wu - CICC Grace Chen - Morgan Stanley Taiwan Ltd. Tian Hou - T.
H. Capital LLC Xiao Yan Wang - 86Research Ltd.
Operator
Hello, and thank you for standing by for JD.com's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode.
After management's prepared remarks, there will be a question-and-answer session. And today's conference is being recorded.
If you have any objections, you may disconnect at this time. Now, I would like to turn the conference -- turn the meeting over to your host for today's conference, Ms.
Ruiyu Li. Thank you.
Please go ahead.
Ruiyu Li
Thank you, operator, and good day everyone. Welcome to our second quarter 2018 earnings call.
Joining me today on the call are Richard Liu, our CEO; and Sidney Huang, our CFO; and Jianwen Liao, our Chief Strategy Officer. For today's agenda, Mr.
Huang will discuss financial and operating highlights for the second quarter followed by brief remarks from Mr. Liu.
After the prepared remarks, management will be available to answer your questions. Before we continue, I refer you to our Safe Harbor statements in the earnings press release which apply 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 unless otherwise stated, all the figures mentioned during this conference call are in RMB. Now, I would like to turn the call over to Sidney.
Sidney Huang
Thank you, Ruiyu Li and hello, everyone. Thank you for joining us today.
Today's call we also have our Chief Strategy Officer, Jianwen Liao on the line. I would discuss our financial performance first, and then Jianwen will discuss the industry trends and the company's development strategies.
We are pleased to report another quarter of solid topline growth improving profitability for the core ecommerce business and exciting developments in our smart technology initiatives. For investors to better track the progress of our business, starting this quarter we will begin providing segment information and a more detailed revenue information on our different business lines on a semi-annual basis.
I believe to increase the disclosure we'll give investors additional insights into the strengths of our core business, as well as our strategic initiatives. During the second quarter of 2018 our net revenues grew 31.2%, in particular growth from net service revenues was 51% year-on-year given by a strong momentum from supply chain management and advertising.
In the first half of 2018, our marketplace and advertising revenues grew 37% year-on-year of which commission income has been negatively impacted by the anti-competitive practice in the industry, particularly in the power sector. On the other hand, advertising revenue continued to grow at an encouraging rate as our text-driven advertising products show improving ROI for our brand customers.
Meanwhile, growth from logistics and other services revenues accelerated to 151%, mainly resulting from the robust growth from a supply chain management and technology service revenues. The worst thing in our third-party logistics services business remained a focus during the quarter.
While this continued to impact the gross margin line, I'm pleased to report that loss ratio further narrowed during the second quarter, and we maintained a relatively stable gross margin at the group level. Non-GAAP gross margin in the second quarter was 13.3% compared to 13.4% in the same quarter last year.
If we look at the JD Mall, non-GAAP gross margin again showed an improving trend from last year's level, reflecting steady gross margin expansion in our first-party business, and fast growth in advertising revenue. Gross margin for the direct sales business improved over 50 basis points on a year-over-year basis in Q2 2018 due to increased economies of scale across all key categories.
During the second quarter we continue to invest heavily in R&D and technologies which we believe are JD's long-term growth. Our R&D expenses totaled RMB2.8 billion or 2.3% of total revenue, up approximately 60 basis points from the same quarter last year, mainly due to the continued investment in top R&D talent and a technology infrastructure to further enhance our capabilities in smart consumption, smart supply and smart logistics.
We believe these R&D investments are critical to extending our competitive strengths and transforming ourselves for the next phase of growth driven by retail infrastructure services. Fulfillment expense ratio improved to 6.7% in the second quarter, the best level in three years supported by higher average ticket size in the June promotion season.
Marketing expense ratio energy and the G&A expense ratio of 4.3% and 1.1% respectively comparable to the same quarter last year. As a result of our continued investments in R&D non-GAAP operating margin was 0.1% in the second quarter.
Excluding new businesses the non-GAAP operating margin for JD Mall was 1.1% this quarter, up from 0.8% in the same quarter last year supported by higher gross margin, partially offset by the higher R&D spending. In the first half of 2018, non-GAAP operating loss from new business increased by approximately RMB2 billion on a year-over-year basis.
While JD Mall further improved the profitability and booked RMB3.4 billion in non-GAAP operating profit, we selected higher non-GAAP operating margin of 1.6%, the highest in any six month period since our IPO. Our free cash flow was RMB13.1 billion during the quarter driven by healthy operating cash flow of RMB16.4 billion partially offset by higher CapEx and logistics real estate assets.
As we mentioned previously, we are in the process of monetizing some of the logistics properties we have built in the past few years which should unleash both cash flow and hidden value underlying these highly sought after real estate assets. I'm also pleased to share with you that over the past two quarters, we've build a logistics as a management company with a dedicated team of experienced professionals.
This will be the third separate business after JD Finance and JD Logistics that we build by leveraging the capabilities and infrastructure of our core JD Mall operations. The row of the logistic assets management company is to develop, monetize and operate JD's massive logistics property portfolio, both before and after the properties are sold to outside investors or core investment vehicles.
As of the end of July, we already owned over 2.5 million square meters of completed warehouse space which could unlock billions of RMB in value appreciation and a steady flow of future management income. And this portfolio is only a fraction of the pipeline we have signed or under construction.
As a separate business, the logistics CapEx will be an integral part of it's operations. Leveraging existing portfolio and our large pipeline, we expect the development cells and management operations will begin generating significant cash flow and operating profit in the next 6 to 12 months.
In addition, we also began to see operational progress in other new initiatives this year. For example, as a result of our retail as a service initiative, we are now serving and empowering nearly 1 million business customers through multiple offerings including supply chain management, marketing solutions, logistic services, and the technology support.
We're also gaining traction with clients under WeChat Store many program toolkits that we launched at the end of Q1. On average, we launched more than 80 WeChat Stores each day for our planned partners during the second quarter.
Most of the new initiatives are yet to produce meaningful financial results but we believe we have made good traction since covering down on technology last year, and we remain optimistic about our future growth. This leads us to our financial outlook.
We expect Q3 2018 net revenue growth to be between 25% and 30% on a year-over-year basis. Our Q3 guidance is affected by the relatively soft sales growth after the June promotion season through the end of July due to a few seasonal factors, including the seemingly increased seasonality this year, and also an exceptionally strong July for JD last year.
We are pleased to see the growth rate has resumed to a normal pace since the beginning of August. I would also like to comment on our full year earnings outlook.
As many of you may observe, there are several new changes in industry and economic environment we are in along with tremendous opportunities in front of us. We will like to reiterate our commitment to a stable and improving margin on our core ecommerce business.
While retaining the flexibility to invest in R&D and new business initiative that Jian will further elaborate in a minute. We also expect the monetization of our logistics properties when realized will compensate part or all of the additional investments in technology initiatives this year and next year.
While this may create some non-linearity in earnings improvement between this year and the next year, we hope the underlying earnings can remain intact. This concludes my prepared remarks, and I now turn to the call to Jian who will highlight a few observations on the industry and our trends on the new business initiatives.
Jianwen Liao
Thanks Sidney, any thanks all for joining us today. As many of you know, I joined JD Chief Strategy Officer nearly one and a half years ago but today I'm pleased to offer our view on the retail of the future and related technologies and JD's overall long-term vision.
Let me begin with overall industry. We believe the ecommerce industry is at a strategic inflection point.
While it maintained healthy growth, we have observed changes taking place that may fundamentally reshape future development in four key areas. First, we are seeing a shift from centralization to decentralization, to bond between retail and other industries has become increasingly broadening which is why we defined a piece of retail as boundaries [ph].
China is uniquely seeing an influx of recurring innovation across industry boundaries, this includes as a emergence of a common commerce, social commerce, AI commerce, IoT commerce to name just a few; as such the retail space will become more disputed and decentralized than ever before. Second, ecommerce is moving away from focusing on mass traffic to position targeting.
[Indiscernible] in the long which is about flexion, quality and closing but was increasingly about disrupting movement providing right products to the right customers is starting and that is the right client. This fast evolution of technology and big data, AI, IoT and a host of other areas involves retailers to interact with customers, get more touching points, and manage the business at a more granular level.
We believe that to succeed players need to move from an average install mentality to advance store, meaning from the approach of a mass market to a market of one. Third, the supply chain is increasingly more important than a pure platform model, retail innovation and the supply chain completing enhancement of clearly is to most important drivers of success, both online and also in retail.
This is exactly why JD has emerged as a leader despite entrance market leader. It is also the reason why we remain dedicated to investing in small supply chain solutions which I will elaborate a bit more latter on.
Fourth, the market has proven to hold great potentials. In China there are many ecommerce companies focused on to be business innovation.
Meanwhile the to be Internet is still at it's nascent stage and the recognizable market leader remained absent. By contrast, in the US to be Internet comp store, 40% of market cap by some metrics.
Over the past few years have seen startups and visited capital shift attention towards -- to be marking in the field of enterprise service, self-service and AI service. We believe that to be market will soon take off in the near future in China which over supply and they track an opportunity for JD to extend it's completely into the scale [ph].
Now let me turn to how we view technology. On the line of the changes I just mentioned is technology innovation which continuously expands the possibility in reaching out cross areas including costs, efficiency, and customer experience.
Richard had made clearly that there are only three key words for the next package of JD, technology, technology and technology. Investing in technology what drives the company in suppose next decades much like logistic has given us a major advantage of the last decade.
Our vision is to leverage technology developed world-class tech-based supply chain plus one capabilities integrating both hardware and software solutions. In particular, we will focus on efforts or three key areas; smart assumption, smart supply, and smart logistics.
These three areas remains a focus of our continuing investment and R&D. Let me explain how those three areas will drive our development.
Smart consumption has moved the barriers for retailers and the customers across online and offline channels, and the goal is to improve consumer experience at every stage creating more engaging experience with greater customer retention and the royalty. Some of us prior improve the upstream supply chain will go off improving the operational efficiency of brand AI technology has been largely used on supply related applications such as sales planning, dynamic pricing, and inventory replenishment.
As a result, we are able to improve brands kind of market, inventory consumer, and product designs. Small logistics helps get product in the hands of our consumers with better speed and lower cost.
JD is still the market leaders in a small warehouse and smart transportation systems. We're also pioneering on main warehousing and joint delivery and joyous [ph] delivery continuous development in those areas remain critical for us to maintain and extend all competitive advantages.
Now I'd like to discuss our overarching strategy of retail [indiscernible] which you might have heard us discuss about before. You see this -- us covering both retail and retail infrastructure.
First and foremost, we will continue to expand our current retail business, and also focus on retail innovation. In the meantime, in the light of the future retail, JD will continue to develop and most importantly, open a retail infrastructure capabilities such as small supply chain to imbibe running power more retail innovation for other companies to leverage.
More specifically, we identify three categories of business for future growth on RAS [ph] with different growth model. Let's start with as core business.
There is a first area where we can grow this in our flagship online retail business. We can do this both through new customer acquisition, especially in Tier 3 to Tier 5 cities, as well as expanding our relationship with existing customers by increasing the customer royalty and spending with us.
We have more than 300 million high [indiscernible] customers including approximately 200 million who have joined us in the last three years. This growing customer base and expanding relationship offers tremendous loan for future growth for our core business.
Now let's look at our growth business. We believe we can expand our online capabilities towards categories where we -- to the categories that are under penetrated and ready for high growth.
Internally, we call this categories 100 million club. Those categories tend to be growing at least double the average for JD categories and they also tend to be in areas where quality is particularly important, a key strategic differentiator for JD.
Some example includes fresh cooked food and sales to the enterprise, achieving the full potential of these categories were our long-term growth in retail. Finally, we have the future business.
This combination in the way the retail business as well as the retail infrastructure with a focus on renovation and employment is the two-three area we will continue to place great emphasis on offline retail innovation and common commerce, social commerce, and an IoT commerce is to be area we are open off capabilities in advertising, store pack, supply chain and logistics, and the cloud to empower brand and other retailers. Sidney Huang just mentioned we having missed RMB2.8 billion last quarter with the majority of the investment invested in our retail infrastructure development.
While the investment is significant, we have already seen some positive only result. As Sidney mentioned, logistic and other service revenue has increased by 102% this quarter.
We have contest that with all continuous step to focus, retailing structure can be our next core competency, and our probably driver. In summary, JD is moving from a vertically integrated model to another model to become a technical [ph] retailer and a technology-based retail infrastructure service provider at the same time.
There would be challenging for sure but we believe that we have a clear vision, determination, and a capability to achieve our goals. At the end of the day delivering trust to our consumers, partners, investors, employees and broader society is something that sets us apart from our competitors.
With that, we will take your questions. Thank you.
Operator
[Operator Instructions] Our first question comes from the line of Eddie Leung of Merrill Lynch.
Eddie Leung
I have a question on perhaps the [indiscernible]; Sidney you mentioned perhaps starting in the third quarter; could you elaborate a little bit more on some of the macro factors and seasonal factors we have seen or thought might affect the future growth of our business? And then, related to that or would that affect our near-term margin profile given the timing of the infringement in various new initiative?
Sidney Huang
I think you were asking about Q3 sales guidance. As I mentioned, July actually after our June '18 promotions in the last 10 days of June we started to observe somewhat of a softness in our sales growth.
But we have -- since seeing a recovery in August basically back to the normal pace. We internally analyze that we believe there are mainly seasonality factors, polis [ph] for this year we may have seen a stronger than before seasonality post-promotion and tourist that we did have a very strong July last year in JD.
So, I think it's a combination of these factors and obviously it is also some particular category was affected by the overall market environment but in any event we -- starting August, we have seen pretty well recovery across all categories; so we are still quite optimistic looking ahead. You asked about our view on the macro; I think we are still cautiously optimistic given that in China the overall consumption growth, consumer income, and also consumption as percent of GDP or all pointing to a continuous consumption growth for many years to come.
So we are still quite bullish in terms of gross outlook.
Operator
Our next question is from the line of Alicia Yap of Citigroup. Present your question.
Alicia Yap
Hi, good evening. Management, thanks for taking my questions.
I have a couple of questions if I may, could you actually -- maybe perhaps elaborate and share reverse on any update on the close of collaboration with Google so far, since the strategic investment in June and in the event if Google has interest to launch to Google Shopping action program in China, will JD be the strategic partner to what we stand. And a housekeeping question, Sidney, given all these initiative, I wasn't quite sure, are we still retaining the full year net margin guidance of 1% to 2%.
Thank you.
Sidney Huang
Now, of course you know, JD and Kinko [ph] are very much complimentary in terms of lot of skillset. These partnerships obtained in JD were very much mutually beneficial for both companies, and of course, in your space the JD -- of course, we walk closely with shopping action to us as a gateway for JD products to be listed on shopping platform.
And of course, on behalf of all domestically we have 170,000 high quality merchants. Also JD -- I mean core shopping action where important gateway follows high quality merchants as well.
So clearly, of course we have greater vision and closer with Google in many ways. Now we wait for this kind of strategic collaboration, I think in the movements or initiatives coming along the way, so I will say in all of this -- unfold [indiscernible].
On our second question on the earnings guidance, I mentioned that we'll remain committed to the JD Mall core margin being stable. And -- but we are investing more in other initiatives as I mentioned.
To compensate for that we actually accelerated our monetization plan for logistics properties, and which when realized should be more than compensating or at least compensating the short fall due to the additional investments. But as I mentioned earlier, the timing of the monetization is relatively -- we don't necessary can guarantee it will be completed by the end of this year.
So that will create some non-linearity in earnings trend from this year and the next year. So that -- I know if that's -- that will end.
Operator
The next question is from the line of Alex [ph] of JPMorgan.
Unidentified Analyst
Can you elaborate a little bit more on the JD Logistics asset management to business; how does it work, how do they generate revenue free cash flow? What is the long-term vision for this initiative?
And I think you kind of mentioned in the prepared remarks that the financial contribution from this product, the initiative will increase into the second half this year in terms of revenue and a free cash flow; can you maybe elaborate on the magnitude of these contributions? Also follow-up on Alicia's question; what exactly did it mean the earning or the margin trend will be longing year towards the rest of the year.
Does it mean the margin could be more volatile than the historical pattern?
Sidney Huang
Sure. We actually mentioned in the past few quarters that the reason we were investing in logistics assets is because that JD is in a very unique position to acquire the land resources by working with the government, and obviously we're creating jobs for the local economies.
So as a result of that effort we have now built over 2.5 million square meters on logistic properties but we actually have a lot more than that in the pipeline. And when we have that portfolio, we are in a very good position to monetize these properties by several ways; one is to sell it to outside investors, they are already investors for this type of assets in China because -- and actually globally, because the logistics assets have been appreciating quite steadily, and with steady rental increase.
So it has been a very attractive asset class for many very long-term investors globally and domestically. So there are already investors to purchase these assets which will help us realize the hidden value appreciation that has not being realized currently on our financial statements.
And after the transaction, we would also continue to serve as the management company for those assets; for that we -- as I mentioned, we established a separate operations which will continue to develop those warehouse facilities, and they will also monetize in the sales transaction, and also manage those properties afterwards; so there will be management income after we monetize those products. I mentioned that will happen in the next 6 to 12 months, so it may not have a very near-term impact on our financials in the second half, and that is why I said that non-linearity meaning that part of that -- essentially the monetization could happen by next year; so then it will impact our overall bottom-line forecast for this year.
Operator
The next question is from Ronald Keung of Goldman Sachs.
Ronald Keung
I guess I'll ask a similar question as last quarter but just want to hear any updates on your apparels, particularly we see a lot of new initiatives for JD Mall within the marketplace from this encouraging merchants to sell more targeted sales and with commissions and advertising -- I just want to hear how apparel growth -- has it resumed back to at least positive growth in the second quarter? How it's looking on our strategy for apparel in the second half of this year as we let the one year of exclusive partnerships I've seen at our competitor?
Thank you.
Sidney Huang
First, we have not passed the one year anniversary of that impact competitive practiced by our competitors last year which has started in August. So as a result during the second quarter, unfortunately our fashion category is still under the shadow of this unfortunate entire competitive practice which essentially uses it's traffic control to force apparel merchants to stay off our platform, in fact, also other platforms.
So this practice does affect our fashion business line but also have a ripple effect on our overall profitability. But we have been working very hard through other categories to better serve our customer base for enhancing our merchant products and services.
So we remain optimistic about gaining the momentum in this category in the next few quarters.
Operator
Next question is from Jerry Liu of UBS.
Jerry Liu
My question is about JD mall, I understand when we look outside of that there are some -- maybe milestones such as the logistics asset management milestones that may or may not fall in this year, and that complicates the net margins a little bit. But if we just focus on JD Mall; how do we see the margins trending in the second half of the year versus last year or versus the first half of this year?
Thank you.
Sidney Huang
So as we -- when we look at the second quarter, gross margin did expand on a first-party business over 50 basis points actually, still quite meaningful improvement. And also we continue to see robust growth in our advertising revenues.
So these are the main drivers for our profitability for the JD More business and which we believe will remain at stable margin, and potentially higher margin for the remainder of the year.
Operator
Next in line to ask a question is Thomas Chong of Credit Suisse.
Thomas Chong
After the questions; the first question is about our thump [ph] initiatives. Can management give us some KPI that we may have over the next couple of years.
And my second quarter is above second, certain I'll won't be the house status so far. And my first question is also about the late margin.
Is there any color, that 1% to 2% net margin guidance that we still keep at least, thank you.
Sidney Huang
I think we have -- now if you look at our service revenue, vast majority of that is from – to be business segments. And -- but today majority of that is still coming over the next couple of years, and my second one recent example is that we're putting a lot investment third-party logistic services or supply chain management services.
Set we have seen great attraction in that business line. Going forward, the investment we have made in technologies will also produce what we believe very solid revenue going forward and there are also areas that we can invest in the supply chain capability -- leveraging supply chain capabilities we have.
On the seven fresh we have a couple of stores that are -- we have been observing the results of those stores which actually has shown very very encouraging results. Overall, our sales per square meters have seen at least 3x to 4x the traditional offline supermarkets, so we're very encouraged by the initial results and we are in the process of opening up another 20 to 30 stores in the next few months.
Operator
Next is Ms. Wendy Huang of Macquarie.
Wendy Huang
My question is mainly about your logistics; so you mentioned about the appreciation value of your logistic assets; so can you give us some color regarding the self-owned warehouses versus the warehouse among the 521 warehouses you are operating right now? Or maybe a split between the 12 meter square meter size that's fine as well.
And also can you give us some color on the numbers?
Sidney Huang
The space that we own is roughly -- it's over 2.5 million square meters out of the 12 million warehouse space we have; so just for those self-owned facilities we can see, in fact billions of RMB from realized appreciation. And there are also multiple times of that space in the pipeline, so we do see great potential in this business as a standalone separate operations.
Operator
Next is Gene [ph] of New Street Research.
Unidentified Analyst
Just a couple of questions on the advertising front. My understanding is that the advertising seasonality is a little bit more positive in the second half of the year with 11/11 and so forth.
But just wanted to see kind of how you're looking at that business; if you could share with us some metrics behind that including the number of advertisers, out-loads or anything that you can share with us that would be great. And second of all on the logistics…
Sidney Huang
So on advertising we mentioned -- I think that today or really in the past couple of years, our strategy has been using technology and artificial intelligence to provide better position and better ROI for our brands. So we have seen very very good results of that effort and this what's driving our advertising revenue growth besides [indiscernible] and we have not been very aggressive in increasing out-load at all.
If anything we are on the monetizing in this area, but for JD we want to maintain that right balance between monetization and customer experience; so we will continue to adopt that approach, use more of a technology-driven approach to enhance our advertising revenue.
Operator
The next question is from John Choi of Daiwa.
John Choi
I just want to ask more of a broader question regarding the overall industry; so right now we're obviously seeing a very intensive conversation here. So how does the management think about the long-term growth outlook or are we seeing -- there has been some -- the first half was very good particularly in the first quarter and starting from latter part of second quarter we've seen some sort of slowdown.
So how should we think about that growth? And on that I mean are you seeing any new retail having a negative impact to our core business?
Sidney Huang
I think Jian has elaborated quite a bit on our gross strategy that we are still -- we still have a very long growth trajectory for our core ecommerce business and we are also investing in some of underpenetrated categories that will produce RMB100 billion revenue potential, and we also have a set growth curve as focusing on -- to the business, and also some of the innovation and empowerment driven businesses. So, internally we have a very clear strategy and we have various task forces to drive these initiatives.
And we hope as we continue to grow the core business, you will start to see at a strange-off revenue being generated through these efforts.
Operator
Our next question is from [indiscernible].
Unidentified Analyst
My question is on the margin trend, I think any trails are in terms of closed margin improvements, some of the key drivers here. Can you elaborate a little bit on the expansion into business gross margins which [indiscernible] improvement here?
And also you mentioned about in terms of -- whether scope in at and then also helps to drive anything on margins. Can you direct us ways in terms of advertiser that we've seen or others coming from the [indiscernible] that you have seen as you have mentioned in regional developments; what types of advertisers are you seeing mostly and in which category?
Sidney Huang
So as far as gross margin drivers, we do see gross margin expansion in all categories in the second quarter. Those are driven by our scaled economies as we purchase more from the prints we get natural rebates for gross margin expansion.
So not only on the electronics and the home appliance categories which we continue to see margin enhancement but also on FMCG, for example, we're also gaining more and more scaled economies with the brands. So that's essentially the driver both on gross margin and also on our ability to provide competitive pricing to our customers which we expect will continue to drive our business for many years to come.
As far as consumer -- for the brand advertising, it's the usual effect -- obviously, the consumer goods brands -- actually brands across all industries have been working closely with us, and obviously the brands that we work are the categories were the strongest will provide more advertising spending with us.
Operator
And next question is from the line of Natalie Wu of CICC.
Natalie Wu
Just curious, what's your view on the industry competitive landscape change, especially as the rising up from social economics platforms? Did you see any kind of the impact in terms of shopping frequency for your certain category?
Sidney Huang
As I mentioned in my statement, we have seen an influx of new innovators in the landscaping. Now however, you know, that JD is a quality internet platform, now with less emergence social commerce platforms, I think it will provide tremendous opportunity to educate new customers.
So in other words, we do see this as a consumption upgrading while as well as downgrading as many of you have pointed out. So what I mean by operating is, they provide the new source of commerce, provide customers with a choice, meaning in the past you had no choice, now you have a choice.
Now of course from no choice to have a choice, and then JD on the other hand, from a choice to have a better choice. So in this case I think that the customer education will provide a foundation for the future in terms of JD's growth.
So I think this -- so in other words, there will be new customers moving to the online space, so which could provide better growth opportunities for JD. So we have our own team purchase product called Kinko on our WeChat interest point and interestingly, we are also seeing a lot of demand from both, our merchants and from our customers on this purchase product that we offer.
So just to give you a couple of data points, in the second quarter the percent of merchants that participated in our Kinko program up from 16% in Q1 to 40% in Q2, so very active participation, the high quality SKUs participating in our Kinko. And if you look at the purchase orders for our 3P platform, the Kinko transaction volume is now over 10% already.
Operator
Our next question is from Grace Chen of Morgan Stanley.
Grace Chen
I have two questions. The first question is about the overall consumer demand in a market, there have been some talks about demand slow down; so will you just share with us your observation of the consumer demand?
And if possible, by second such as home appliance, we see apparel FMCG. And my second question is a follow-up of the margin guidance, specifically on JD Mall margin; we talk about JD Mall margin to be stable -- that is -- does that mean we are expecting to see a flattish JD Mall operating margin year-over-year?
Can you add bit more color in terms of JD Mall margin trend? That will be great.
Thank you.
Sidney Huang
On the consumption trend, as I mentioned, other than the somewhat soft July sales, which we believe is more due to seasonality, we actually don't see much of impact at this point starting August. To close still quite solid and I think we are -- given that the consumer income growth continue to be faster than the GDP growth, employment level continues to be very high in China.
And also the consumption as percent of GDP is still quite low; so I think given all those dynamics we do feel -- still quite optimistic about the consumption trends. On the JD Mall margins, I mentioned it should be -- remain stable with some upside throughout this year.
Again, it's driven by our economies of scale in first-party's business. And also driven by advertising growth.
Operator
Our next question is from Tian Hou of T.H. Capital.
Tian Hou
I have two questions. One is again related to the company's margin.
So Sidney, you give revenue guidance as a combined entity, JD Mall and the logistics, and now where we know the JD Mall margin is going to be stable with some upside, so I wonder investment side on the logistics, how much you expect to have a margin drag? So that's on the logistics side, and also how much revenue contribution should we expect from logistics?
So that's number one question.
Sidney Huang
Sure. So on the logistics margin, we are pleased to see margin -- the loss ratio has been narrowing in the second quarter but this year is an investing year for JD Logistics.
And so we do expect some losses in the remainder of this year, and we do hope the loss margin will continue to narrow. The growth rate is well over 150%, we did separate the logistics out of services in a separate line in our half year supplemental information section.
So we wanted to provide some color on this new business along with a few other new business lines. So very very strong growth rate, very good customer adoption -- our corporate customer adoption of our service.
So very good revenue growth but we'll continue to sustain some short-term losses.
Operator
Our next question is from the line of Xiao Yan Wang of 86Research.
Xiao Yan Wang
So we noticed in second quarter the JD Logistics launched a flash delivery initiative, so can you offer more color on this new delivery model? For example, what kind of category are you focusing on?
And do you expect to expand this kind of shop more faster delivery to consumer to expand in geographic expansion and also the category extension? Currently what kind of percentage of GMV or orders is from this model?
I think my second question would be -- we know your…
Sidney Huang
On first delivery we have been always stayed in the innovation forefront for logistics services, so this is just one of the recent examples that we established a new product, really providing customers with one hour delivery in selected cities. So it is another -- really higher service level delivery product that we offer but even before that we -- as we mentioned, for over 90% of all of our first-party orders, we deliver either within same day or next day across the country.
Our own delivery and warehouse network will cover well over 2,800 counties and districts, essentially 99.9% of the country is covered by our differentiated logistics services. So we will introduce more and more of differentiated products at different tiers of the cities providing differentiated solutions to our customers.
Operator
Thank you. We are now approaching the end of the conference call.
I'll now turn the call over to JD.com's Ruiyu Li for closing remarks.
Ruiyu Li
Thank you, operator, and thank you everyone for joining us on the call. Please feel free to contact with us if you have any further questions.
We look forward to talking with you in the coming months.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Good day.