May 15, 2020
Operator
Hello and thank you for standing by for JD.com’s First Quarter 2020 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. Today’s conference is being recorded.
If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Ruiyu Li.
Thank you please go ahead.
Ruiyu Li
Thank you, operator. And welcome to our first quarter 2020 earnings conference call.
Joining me on the call today are Mr. Richard Liu, CEO of JD.com; Mr.
Lei Xu, CEO of JD Retail; Mr. Zhenhui Wang, CEO of JD Logistics; Sidney Huang, our CFO; and Jon Liao, our CSO.
For today’s agenda, Sidney will discuss highlights in the first quarter 2020 and other management will join the Q&A session. Before we continue, I refer you to our Safe Harbor statement in the 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, unless otherwise stated, all figures mentioned during this conference call are in RMB. Now I would like to turn the call over to our CFO, Sidney.
Sidney Huang
Thank you, Ruiyu. Hello, everyone.
Thank you for joining us today. 2020 has been unprecedented year for all of us.
As we mentioned our last earnings call, JD.com and its heroic 200,000 strong frontline employees have been a unique force in supporting the livelihood of hundreds of millions of consumers. Helping them to adapt to a new normal under the social distancing measures and making notable contributions to productive and sustainable society throughout the COVID-19 crisis.
In that process, we’ve also navigated through all the operational difficulties and the disruptions resulted from the COVID-19 outbreak and delivered a solid set of financials for our shareholders in the first quarter of 2020. We accomplished many impossible missions by leveraging our unparalleled supply chain and logistic capabilities that were invested over the past 15 years as well as a strong corporate culture that cares deeply about our frontline employees, who in turn take great care of our valued customers.
Our net revenue grew by 20.7% in the first quarter ahead of our internal expectations as we insured the supply and fulfillment of essential products to our consumers amid this tough environment. The strong top line growth was accompanied by even stronger user engagement.
Our active customers in the past 12 months reached a total of 387 million, up 25% from a year ago. The highest growth rate in eight quarter.
With 25 million net additional customers on top of an already strong peak season net addition in the December quarter. Similar to Q4 last year, over 70% of new customers in Q1 came from lower tier cities.
The lower tier city customers contribute over 50% of our fulfill to GMV [ph] in Q1 which has set a new record. In the meantime, our mobile DAU grew 46% in Q1, the fastest in nine quarters.
The level of user activities on our platform notably accelerated as we earned a great consumer mindshare by being the only fully functioning economies platform with diversified offerings and superior logistics services immediately after the outbreak. This is further evidenced by our number one internal KPI, the Net Promoter Scores which reached all time high across all of our core businesses.
Category-wise revenue growth of general merchandise accelerated to 38%. The highest growth rate for the past six quarters driven by our newly integrated omnichannel supermarket business group growing 47% in the first quarter.
As well as strong performance from healthcare, cosmetics and household product categories. Our omnichannel supermarket group basically combines our FMCG, fresh produce, seven fresh and convenience store business units.
Most of which were launched and developed from zero in the past six years. By 2019, the revenues of this group reached over RMB115 billion roughly 20% higher than the revenues of the largest offline supermarket chain in China making us the largest retailer for this category in the country.
If you consider the fact that most often supermarkets also sell home products and appliances. Our leadership gap will be even wider.
In addition, our JD Health business unit. It’s also gaining consumer mindshare with quarterly active customers for medicine categories increased by triple digits.
Net revenues from JD Health increased 65% year-on-year in the first quarter surpassing the revenues of the largest offline pharmacy in China. As I’ve communicated with many of you probably every time we spoke in the past.
We’ll secure market leadership across most of our core categories one-by-one and these are just two notable examples while a few others are hidden trending. I feel that we have achieved quite a few of these milestones before my retirement.
It’s just a matter of time and snowball will continue to grow. For now our general merchandized sales in Q1 contribute more than 40% of our product revenues for the first time and further strengthened our brand recognition and consumer perception as in everything stocked with increasingly broader selections.
On the other hand the electronics and home appliance categories also performed extraordinarily well on a relative basis growing nearly 10% as compared to a nationwide decline of 21% in the first quarter according to the government data. As we discussed many times in the past.
Our electronics and home appliance categories can always outperform because our cost structure is 50% lower than our peers which allows us to provide best value and best service to the consumers. Another remarkably resilient metric is our fulfilled gross margin which stood at 8.3% in Q1 comparable to the same quarter last year.
There are a few moving pieces in this metric. But essentially the lower fulfilled gross margin of the omnichannel supermarket business was substantially offset by incremental gains from procurement economies of scale across all categories particularly those with the market leadership position, to a lesser extent it also benefited from less subsidies used for traffic generation to cultivate consumer habit for online grocery shopping which has probably leapfrogged for one to two years in the past three months.
As the result, we’re approaching the inflection point of the supermarket business ahead of our original schedule. Another positive contribution to the fulfilled gross margin was from JD Logistics where the productivity gains from higher than expected orders more than offset the additional cost from the operational disruption, higher wages and staff protective measures.
If you look around today, you can probably identify a clear pattern those who treat their employees well in the normal time are the most resilient in the time of turbulence. Besides fulfillment expenses all other expense ratios declined due to our more disciplined spending amid uncertainties during Q1.
Our marketing R&D and G&A expense ratios in the first quarter improved 20, 38 and 30 basis points respectively compared to the same quarter last year. As the result, our non-GAAP operating income increased 65% to RMB3.3 billion and a non-GAAP operating margin was 2.2% up 60 basis points from the same quarter last year.
On the seven-month basis, non-GAAP operating income of JD Retail Group increased by 39% to RMB4.5 billion in Q1 with operating margin including to 3.2% up 44 basis points from the same quarter last year. While the margin improvement may surprise some, it is because we have been investing for the newer categories and never tried to optimize our margin.
As I mentioned to many of you in the past, the relatively decent margin business have already been there for quite some time. In this quarter, we just narrowed the gross margin ahead of schedule for certain categories that are under the investment phase.
Moving to the bottom line, our non-GAAP net income attributable to Ordinary Shareholders in Q1 was RMB3 billion compared to RMB3.3 billion in the same period last year. The decrease was primarily due to certain one-off gains in Q1 last year.
Our free cash flow for the first quarter was negative RMB3 billion partly due to our early payments or prepayments to certain supplies, to support their operations and secure certain sought after merchandize. CapEx was prudent in Q1 and the spending for the development property was for the existing project.
As disclosed, we established a second Core Fund with EIC [ph] in Q1 to dispose another RMB4.6 billion of logistics assets which remained the most resilient real estate assets class regardless of the COVID-19 situation. On the financial outlook, we expect net revenue growth in the second quarter to be between 20% and 30% on a year-over-year based on accelerating growth in the first half of Q2 and assuming the COVID-19 situation does not create significant unexpected disruption in the remainder of this quarter.
We’re not in a position to provide any full year guidance on the bottom line due to the uncertainties of the pandemic. However, the margin dynamics in our Q1 results may provide some basis for your own assessment under various development scenarios of the COVID-19.
In summary, we’re privileged to be in a unique position to leverage on the best of our capabilities to help the society during the COVID-19 outbreak including our broad product selection in consumer staple categories and our superior logistics infrastructure. We’re confident that we’ll emerge stronger on the other end.
With the accelerated user growth [indiscernible] brand image and expanded consumer mindshare. All of these validate our long-term approach to learning our business with the customer-centric focus.
I’m more confident than ever about our market position and our mid-to-long-term growth prospect. This concludes my prepared remarks and then we can now to the Q&A session.
Operator?
Operator
Certainly. The question-and-answer session for this conference call will start in a moment.
In order to be fair to all callers who wish to ask questions we will take one question at a time from each caller. If you have more than one question please request to join the question queue again after your first question has been addressed.
[Operator Instructions]. We have the first question from the line of Ronald Keung from Goldman Sachs.
Please go ahead.
Ronald Keung
I think this is very strong result and congratulations on the first quarter performance and with the first quarter we’re seeing how JD Logistics supply chain and logistics business proved to be exceptionally resilient over COVID and we’ve seen that there’s over 50% revenue growth for the logistics and others revenue line in the first quarter. So would like to hear, can management just outline some of the growth drivers and margin outlook for the logistics business particular and beyond fulfilling the first-party 1P retail orders, are there any plans to fulfill more of your PP marketplace and even CMC [ph] orders and what do we see as other opportunities beyond serving just within the JD Retail Group.
Thank you.
Sidney Huang
Thank you, Ronald. So I’ll start and then maybe Zhenhui can add on.
So the logistics business enjoyed great brand recognition amidst the COVID-19 situation. We were widely recognized by the consumers but also by the government.
We were awarded multiple actually awards across the region. So very, very strong performance and along with that we absolutely attracted some new customers during the pandemic because of the resilience of our operations.
But as B2B business - the impact of the brand enhancement will not come immediately. So there will be lasting effect of that positive impact.
But in Q1, we did see pretty strong demand from the existing clients and also new customers outside of the JD ecosystem. And as I mentioned earlier, the productivity of our logistics team was exceptional.
In fact the cost per order reached the all-time low during the first quarter because the order volume spiked unexpected daily and our team frontline workers as I highlighted earlier, I used the term heroic because not only they were highly productive. But they’re also very brave to fulfill the orders for consumers amid a lot of uncertainties.
We of course also provided all the necessary safety measures to protect our employees, who in the end really didn’t get harm throughout the pandemic situation, that additional productivity helped our overall margin in Q1 on a year-over-year basis. This is the business that build on scale, so as we continue to grow in scale our margin will naturally trend better and the business has been positioned to attract external customers.
I did mention earlier, in Q1 our external revenue actually contributed more than 40% this year at this quarter. So it’s another milestone growth for the Group.
Zhenhui Wang
[Foreign Language] This is Wang Zhenhui on JD Logistics. I want to add a few things.
[Foreign Language] And as Sidney just mentioned the experience actually including our staff experience is always a core of our business and during the very special time. The safety and health of our frontline logistics staff they are the first priority who are to operate and during this time, we provided over 10 million masks and 70,000 gloves and all kinds of protective gears to our logistics staff to ensure they’re working in relatively staff environment.
[Foreign Language] And in addition to that we have brought over 70,000 thermometers and over 10,000 disinfectants etc. in all different place to ensure the operational safety at first place.
[Foreign Language] And with epidemic situation getting better. JD Logistics is some of the first and actually in some areas is to only logistics company our JD couriers can deliver of a product to door to our customers and the trust us, we manifest trust we have built among other customers, our communities and government and this is also very helpful for us to gain more external orders and increase revenue services to all our clients.
Thank you.
Ronald Keung
[Foreign Language]
Operator
Thank you. We have our next question from the line of Alicia Yap from Citigroup.
Please go ahead.
Alicia Yap
Congratulations on the strong results and guidance. My question is, could management elaborate how we should reconcile the strong guidance you provide versus the current macro situation and the consumption sentiment?
How much of the outperforms are driven by the consumption stimulus and the consumer wanted to buy more things coming out of the COVID or was that the benefits that we’re seeing from the offline to online shift. How sustainable is this strong momentum into the back half of the year?
Do you anticipate the demand to be normalized? Thank you.
Sidney Huang
Okay, so I’ll - it’s Sidney I’ll give first shot and then maybe Xu Lei can add. Yes so, we have observed is that when the pandemic situation was highly uncertain and social distancing was at the most strict time.
There will be a huge spike in orders for fresh products and other daily necessities. And as I mentioned earlier, we’re now the largest omnichannel supermarket in China.
So we are here to benefit from the increasing demand from this category essentially people will be cooking at home and so that will increase the overall demand for fresh and supermarket sales. Also online and offline and so that will benefit but it will be some offset by slower growth from the discretionary categories as we have seen.
Now that the country is gradually opening up and everyone is resuming to work. We do start to see pent up demand on the slower categories starting in March and particularly in April and May as I mentioned we’re actually seeing accelerating growth over the past three months.
So that is in a relatively good scenario. Our strong categories will start to recover and at the same time because of the cautious measures still be undertaken by the majority of the consumers for example, you still don’t see many people in restaurants.
So most people still will cook from home. So that will continue to create higher than normal demand for the supermarket product category.
So and really depending on the development of the COVID-19 situation in either direction our business because we’re full category retailer and we have - we cover all the major categories particularly the consumer staples. So we are in a position to grow regardless.
So that will be my take.
A –Lei Xu
[Foreign Language] Xu Lei from JD Retail. [Foreign Language] And on the usage side, you can see even the grocery is very healthy and especially if we see internal logistics, so existing customers and those deactivated customers are becoming more active this quarter.
[Foreign Language] And if you see by the users recipients address over 60% of our users are coming from the 36 tier cities and GMV they come for 50% of the overall GMV now. [Foreign Language] And we will adopt number of strategies to develop our user base in future and first of all to target on our lower tiers city markets and users and we call it our dual driver system given by JD platform and also by our main sites based on our more precise customer algorithm.
[Foreign Language] And in terms of the China’s income landscape and online rating. The characteristics of JD users are featured long-term are middle and high end users and one of them are household users.
[Foreign Language] And it is planned that by end of this year with early next quarter we’ll provide specialized programs to provide more tailor-made services to our middle and high end users and providing them with more selected products with some paid services. [Foreign Language] And as introduced earlier on, we have established new our first tier our department under JD Retail forecasting on the users growth and operations and for this department.
They focus on the optimizing after users algorithm and their database and access to do more precise operations and conversion of the yield research and results in Q1 it’s pretty effective. [Foreign Language] And in terms of the category actually on our platform some of the categories have been benefited from the Coronavirus situation and some have been badly affected due to supply chain etc., due to lower than expectations.
However looking at the performance during the name on holiday we do see rapid growth in home appliances and special apparels segment. [Foreign Language] And we also we still work our most important marketing activities that is 618 in this quarter.
[Foreign Language] And due to the epidemic earlier this year, we can see that the enthusiasm to participate into our 618 shopping festival from our brand partners, merchants and other retailers online, offline very high I think it’s the highest since in the past 17 years. They’re very engaged.
[Foreign Language] And we also expect that all the major players’ competitors on this market are also very active in preparing for this event. [Foreign Language] And as all of you know that 618 was created by JD, 17 years ago this is the 17th [indiscernible] event and by nature we’ll take more center stage in this activity and so far we have received very positive attention from our customers and also a lot of invitation and investment from the merchants and the brand makers to coming all the way.
[Foreign Language] There’s another major outbreak of the Coronavirus again, we do think this [indiscernible] this year will be a golden opportunity for all the merchants and its brands later to recovery and offset their life in Q1. Thank you.
Alicia Yap
[Foreign Language]
Operator
Thank you. We have the next question from the line of Tina Long from Credit Suisse.
Please go ahead.
Tina Long
I want to follow-up on the lower tier of penetration because now as Mr. Xu Lei [ph] just mentioned that.
We have [indiscernible] and recently I also noticed that we have [Foreign Language] or JD Lite [ph] and also, we do have probably over 10,000 of JD [Foreign Language] stores in lower tier cities. So and also, we sort of gave the first level access point of WeChat’s to these businesses late last year.
So I want to know first of all from each apps we just talked about and also including those offline shops what kind of product offering we tend to acquire those lower tier city users and also the contribution from the newly sort of upgraded access point, how much of our user contribution actually come from the WeChat actually when sort of give access to [Foreign Language] that of JD. Yes, thank you.
Unidentified Company Participant
[Foreign Language] Let me just share some of our operations and our observations on middle tier market. [Foreign Language] The first off in building different shopping scenarios and places we will not rely on any single shopping scenarios besides JD platform which is targeted to the lower tier customers.
We will also use all the paying sites to algorithm to play a role in expanding our shopping scenarios. [Foreign Language] And just to relatively frankly speaking for Q1, the JD platform in February and March was affected by both spring festival and epidemic situation.
[Foreign Language] As you can see on the earnings calls result. On JC platform the percentage of our users and our GM [ph] base are going very healthy so we’re also adapting different measures to go down into the lower tier market.
[Foreign Language] And with the situation of the epidemic getting back here now the operation of Jhingsi [ph] come back to the normal the level before spring festival. And in the meantime, we also identified several opportunities for Jhingsi [ph] to grow.
First of all, due to the epidemic impact actually a lot of factories who originally produced commodities for export now is looking at domestic sales opportunities and Jhingsi [ph] can find good ways to collaborate with them to help the factories to transform their business and at the same time, Jhingsi [ph] had lot of jobs to support the farmers, to sell their agricultural produce and with this and through live streaming and different ways and at the same time with social responsibility we’re performing to help the farmers etc. [Foreign Language] And another second scenario is we have is our offline stores.
We have franchise stores of home appliances, consumer electronics and convenience stores etc. and all this physical offline stores are playing a very important part - to go down to the lower tier market.
[Foreign Language] There’s just ways to create shopping scenarios we’re also bringing our products down to the lower tier cities with our featured end products and cell phone brands and what’s difference in [indiscernible] to leverage all kinds of resources to collect with the merchants and the makers etc. to meet the need and tailor the need of the local market.
But only through building different shopping scenarios and making tailor made products with combined efforts we can achieve the current accomplishment. Thank you for your questions.
Operator
Thank you. We have our next question from the line of Jerry Liu from UBS.
Please go ahead.
Jerry Liu
My question is about margins. If we look at the first quarter net margins were quite strong actually reaching a level we saw throughout 2019 despite COVID and earlier we talked about some of the investment areas.
Actually maybe improving ahead of schedule, so as we look forward do we see opportunities where we want to step up reinvestments of some of these profits into other areas or do we want to let margins continue to rise a little bit higher. I know management has talked about this long-term target in the past of maybe even high single-digit margin.
So just want to get a sense of the appetite for reinvestment of letting the margin come up a little bit. Thank you.
Sidney Huang
Yes, sure. Jerry.
This is Sidney. First of all there are still a lot of uncertainties due to the COVID-19 situation.
But clearly, we will act on the increasing customer base the enhanced user engagement will definitely continue to invest as we have always done to seize the opportunities. Should I mention earlier about June 2018’s [ph] festival which will be a great opportunity for us to work with brands, work with suppliers to really make up for the lost sales for everyone in Q1 due to the pandemic.
So we will put in our share for sure, not only to drive growth but also to support the recovery of the overall from a society point of view clearly it’s also great opportunity for us to retain the new customers we acquired and also to continue to view consumer behavior for multiple categories that we have gained so much in the past three months. So I guess the short answer is we will as always continue to reinvest.
We will continue to keep an eye on the margins as you can see what we did in Q1. It is in uncertain time, we will remain very, very disciplined.
But on the other hand, we will never stop investing in our customers. We’ll never stop investing in improving the user experience and to that end, the investment will always continue.
Jerry Liu
Got it. Thank you.
Operator
Thank you. The next question comes from the line of Thomas Chong from Jefferies.
Please go ahead.
Thomas Chong
Congratulations on very strong set of results. I have a question, it’s about our supplier.
We have quite a lot of supplier to pass through the challenging situations. Can management comment about the environment of the suppliers in China?
How long do you think our suppliers will be back to normal? And the support measures that we provide to them, will we step up the efforts to help them improve the situations or do we expect they will recover in the second half.
So there is more relating to the free cash flow side, should we expect free cash flow to turn positive in coming quarters. Thank you.
Sidney Huang
Okay, I’ll first give a shot. Just on the support to new suppliers.
It happened mostly in February and maybe in early March when the pandemic was in the most severe situation when the whole country was locked down. But I think fortunately the control is quite effective.
So by March there were very few new cases, so many factories and producers had already started to resume work especially for the essential categories. So from our overall assessment on our suppliers because we work with leading brands across the country.
So most of them are back to work, their cash flow has resumed somewhat back to normal. So towards the later part of the quarter, there were more prepayments rather than basically just to cure sought after merchandize and is to a less extent just to payable earlier.
So I think overall the financial health of the suppliers we work with they’re mostly net to large suppliers and brand owners and financially they’re quite sound. There may be for the small-medium enterprises there maybe issues.
So that’s why for our Jhingsi [ph] business Xu Lei that there were some slowdown but we’re also seeing the activities picking up. So overall we’re cautiously optimistic now on our free cash flow we do expect its gradual return to normal.
But on the other hand, just stay alert about potential future W shape for example scenarios. So cash flow will remain to be a focus for us as well.
Free cash flow should be a function of our overall bottom line but we do expect free cash flow to perform better than our net profit as we did last year.
Thomas Chong
Thank you, Sidney, for the detailed answer and congratulations again.
Sidney Huang
Thank you.
Operator
Thank you. Your next question comes from the line of Eddie Leung from Bank of America.
Please go ahead.
Eddie Leung
Congratulations on a good quarter amid difficult time for improvement. A bigger picture question given the strategy and aggressive tactics some of our competitors, so do you see a risk to the industries long-term margins, if not, why not?
Thanks.
Sidney Huang
I think we have as I mentioned in my earlier remarks. We have been as aggressive as we could in our right.
We have been investing heavily and in all of the categories. Before we subscribe, provide the best value on top of the best service.
So that’s why I mentioned also earlier in response to Jerry’s question that we will clearly also step up our own investments given the relatively strong performance basically given back to our consumers as we always do. And when we do that, we also work with brands and in a joint effort in those promotional activities and top of everyday low prices.
So the fundamental driver for our margin, I can’t speak for others. The fundamental driver for our business is from the economies of scale because as we continue to grow, we can gain more and more procurement benefits some stay forward as volume base rebates others could be in the form of customized models and private label product.
So a lot of those tools will become available once you’re the largest retailer in the category. So we will not be affected by the others in the industry, which is a trend you have been seeing over the past few years because every year if you recall every year there’s the reason to believe the competition is stronger.
Every year there is the reason the competition become more fierce. But we continue to perform pretty well and with growth not expirating [ph] and margin expanding.
Eddie Leung
Thank you very much.
Operator
Thank you. We have our next question from the line of Gregory Zhao from Barclays.
Please go ahead.
Gregory Zhao
Congratulations to strong quarter. So really quick one, so we know large majority of the products are produced by the local manufactures.
So but you still have portion of products are in project for over the market? So as the pandemic is still ongoing in the rest of the world, how shall we think about the impact to our imports and the cross-border business?
Thank you.
Unidentified Company Participant
[Foreign Language] For JD are very fundamental and the highly well-known categories is our electronics and PC segment. [Foreign Language] And for the home appliances categories the supply chain was not heavily affected by this Coronavirus but a select driver is more from the demand side because these products won’t be delivered and in-store next door.
[Foreign Language] And so the mobile phone categories it’s development will be not detailed, will not be heavily affected, in the later quarter as well and so major impacts on these category is 5G new products released they’re going to be launched in the first quarter has now been postponed to be launched in this quarter so you will see new products of 5G phones release in April and May. [Foreign Language] And for this IT category, this will be having a more impact from the global supply chain especially if you see some storage pieces, the supplies and the prices are going up, however thanks to our market share online, offline on the Chinese market.
We will strengthen our collaborations with our brand partners globally and to cure our leading positions and against all the odds of the Coronavirus. [Foreign Language] And for some categories which may help them are from overseas during to import mom and baby products, cosmetics and all of these their impacting the first and the second quarter is not very big.
But there’s uncertainty on the first quarter and this will mainly depend on the epidemic situation in the manufacturer region.
Gregory Zhao
Thank you.
Operator
Thank you. We have our next question from the line of Eddy Wang from Morgan Stanley.
Please go ahead.
Eddy Wang
Congratulations on the great results. So I have a question regarding the pricing in the marketplace revenue.
Well we understand that in the first quarter because of the COVID-19 they have an activity impact on the part of the revenue in terms of revenue growth. So have you witnessed this strong recover especially in terms of the pricing revenue from the third-party merchant in the second quarter so far?
Thank you.
A –Lei Xu
[Foreign Language] This is Xu Lei. We received results in 2019 in the advertising market it only achieved single-digit.
But the interest advertising has taken a deeper share. [Foreign Language] And in this Q1, the overall Chinese market advertising revenue is negative growth and for those trends advertising also negative growth.
[Foreign Language] And what made our JD Advertising business different and first of all, where other advertising services is highly integrated with branding advertising and the sales because we’re very close to the customers shopping. And secondly, among all other advertisers there’s a lot of that are from SME however to just give actual value there’s a very heavy investment from the large and medium size companies.
[Foreign Language] And thanks to all these factors, we have seen ROI for our advertisers and our merchants are actually growing up and this in turn has given them much higher up value and during this epidemic special period of time JD has become a very important places for those medium and big size enterprises especially those brands partners favorite place to place their advertisements. [Foreign Language] Hence with COVID session getting better we have seen that the SMEs are being more active on the advertising transactions.
And the difference that actually the SMEs they have even higher requirements on their ROI and among all the Chinese ecommerce platforms and JD reach out in providing the ROIs and relatively speaking I believe for some ecommerce platform that is not delivering good ROI results. We’ll have a very big pressure this year.
[Foreign Language] So overall we’re satisfied the performance of our advertising business from performance for Q1. Thank you.
Eddy Wang
[Foreign Language]
Operator
Thank you. We have our next question from the line of James Li [ph] from [indiscernible] please go ahead.
Unidentified Participant
Can you give us an update on the state of the regulation for online pharmacy here and help us understand a little bit how you’re working with the government and hospitals to drive the adoption here? And also maybe during your experience of COVID-19, what gives you the confidence that user behavior that you’re seeing will remain and how are you uniquely positioned to take advantage of this category?
Thanks.
A –Lei Xu
[Foreign Language] Xu Lei. I would like to give you a brief introduction on our JD Health development.
[Foreign Language] Because of the epidemic outbreak, it gives us opportunity for such growth of our JD Health. [Foreign Language] And this is such a young team and young business and they have contributed a lot to the society to fight against Coronavirus we have been providing to ensuring the supplies of all kinds of medical materials and to provide free online medicine consultations and do the [indiscernible] spread knowledge about the virus etc.
so they’ve really done a lot of great job. [Foreign Language] And besides normal business for providing medicines and drugs.
We have also done a lot to provide the health services. We have experienced an explosive growth on the online medical consultations and also, we are the first telemedicine platform to provide the Coronavirus nucleic acid testing services which is very useful workers who are waiting to come back to work.
[Foreign Language] And in terms of our customers, so those young customers and the telemedicine is not very easy thing to get used and we’re still in COVID situation it’s very helpful for us to be knowing and used by the senior people over 50, 60 years old. [Foreign Language] On the govern policy side, we’re doing the opening of the online payment of the medical insurance and this will greatly promote the development of telemedicine and online health services.
[Foreign Language] With all this assisting those hospitals and pharmacies and all this related players, they’re also actively embracing the internet. [Foreign Language] And develop a position of JD Health is to leverage our core capacities on supply chains and to provide our health services with other technologies to provide a whole life users services for customers.
[Foreign Language] And for the next step we’ll continue to strengthen our supply chains on the medicine and drugs and improved all the abilities on health services. Thank you.
Unidentified Participant
And if I could ask a follow-up question maybe to Sidney about the long-term margins, so the aligned pharmacy business how should we think about that in relative to your other categories? Thanks.
Sidney Huang
Yes, so if you look at when we looked into this space. If you look at the offline pharmacy financials.
What’s interesting is that, this sector has roughly 40% gross margin but with very high expense ratio of over 30% and here we actually saw very similar pattern as our electronics home appliance business where I mentioned earlier that our expense ratio is 50% lower than the leading offline players and here for healthcare our expense ratio was also significantly lower probably 10 percentage point advantage versus the offline pharmacy. So this also give us the ability to provide the best value and best service to our consumer so that is why our pharmacy business has been quietly growing tremendously over the past few years and it leverages our, as Xu Lei motioned we have existing customer base, we have the consumer recognition of JD as a trusted platform which is quite essential for healthcare services.
So that trust element, the fulfillment reliability, the speed and our value proposition meaning we can provide lowest price. All that combined is a great combination because of our cost structure driven by technology, our cost structure is lower but we can also have a decent margin for this business.
So this is where we are already and we’re seeing as I mentioned tremendous growth with this fundamentals economics basically underlying our business model here.
Unidentified Participant
All right, thanks so much.
Operator
Thank you. We’re now approaching the end of the conference call.
I would now turn the call over to JD.com’s Ruiyu Li for closing remarks.
Ruiyu Li
Thank you, operator. Thank you for joining us.
Please don’t hesitate to contact us if you have any further questions. We’re looking forward to talking to you in the coming months.
Thank you.