Q2 2018 Vipshop Holdings Ltd Earnings Call
Aug 14, 2018 PM UTC
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VIPS - Vipshop Holdings Ltd
Q2 2018 Vipshop Holdings Ltd Earnings Call
Aug 14, 2018 / 12:00PM GMT
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Corporate Participants
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* Donghao Yang
Vipshop Holdings Limited - CFO
* Jessie Fan
* Ya Shen
Vipshop Holdings Limited - Co-Founder, Chairman & CEO
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Conference Call Participants
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* Alex C. Yao
JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research
* Alicia Yap
Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research
* Eddie Leung
BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst
* Monica Chen
Crédit Suisse AG, Research Division - Research Analyst
* Ronald Keung
Goldman Sachs Group Inc., Research Division - Executive Director
* Wai Yan Wong
BofA Merrill Lynch, Research Division - Research Analyst
* Wendy Huang
Macquarie Research - Head of Asian Internet and Media
* Xiaoyan Wang
86Research Limited - Research Analyst
* Yuan Liu
UBS Investment Bank, Research Division - Co Head of HK and China Internet Research
* Yue Wu
China International Capital Corporation Limited, Research Division - Analyst
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Presentation
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Operator [1]
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Ladies and gentlemen, good day, everyone. And welcome to Vipshop Holdings Limited Second Quarter 2018 Earnings Conference Call.
At this point, I'd like to turn the call to Ms. Jessie Fan, Vipshop Senior Manager of Investor Relations. Please proceed.
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Jessie Fan, [2]
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Thank you, operator. Hello, everyone, and thank you for joining Vipshop's Second Quarter 2018 Earnings Conference Call.
Before we begin, I will read the safe harbor statement. During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our recent expectations, assumptions, estimates and projections about Vipshop Holdings Limited and its industry. All statements other than statements of historical facts we may make during this call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is or are likely to, may, plan, should, will, aim, potential or other similar expressions. These forward-looking statements speak only as of the date hereof and are subject to change at any time, and we have no obligation to update these forward-looking statements.
Joining us on today's call are Eric Shen, our Co-Founder, Chairman and CEO; and Donghao Yang, our CFO. At this time, I would like to turn the call over to Mr. Eric Shen.
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [3]
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Okay. Good morning and good evening, everyone. Welcome, and thank you for joining our second quarter 2018 earnings conference call.
We are pleased that our active customers grew by 6% year-over-year in the second quarter with continued improvement in customer stickiness. Our collaboration with Tencent and JD are starting to show initial results. New customers from these channels accounted for 24% of our total new customers in the second quarter.
Our JD flagship store currently has around 1.5 million fans, and our WeChat mini-program is becoming a strong channel for new customer acquisition. New customers from the mini-program increased by over 5x quarter-over-quarter. We are also pleased to see improvement in its conversion rate.
Our core strength lies in discount retailing. Recently, we launched a few new initiatives to deepen our expertise in this field. For example, we launched the APP called Wei Pincang, which is a specialized platform for wholesalers. Through Wei Pincang, wholesalers and WeChat merchants can purchase off-season discounted inventories in bulk to be sold through their own channels. This is an extension of the discount retailer model which will help Vipshop and our suppliers clear inventory more efficiently.
With Wei Pincang, we can truly provide our brand partners with full product cycle inventory management service, helping them resolve their inventory issues more completely. Further, we added a new channel called [Huiho Funchao], which hosts products at over 70% off. This is another step we are taking to bring products with great value to our customers.
At this point, let me hand over the call to our CFO, Donghao Yang, so that he may discuss our strategy in more detail and go over our operational and the finance results.
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Donghao Yang, Vipshop Holdings Limited - CFO [4]
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Thanks, Eric, and hello, everyone. In the second quarter of 2018, driven by the large increase in shopping frequency, our average revenue per customer increased by 12% year-over-year. This is a testament of the loyalty of our customers and our operational capability.
We are keenly focused on serving our customers and providing them with a superior shopping experience. Therefore, we are increasingly focused on our merchandising strategy. As we continue to offer differentiated products at great value, we are confident we will expand our market share in the long run.
During the quarter, our Super VIP loyalty program continued to expand its customer base, adding around 430,000 paid members. As of the end of June, around 1.9 million customers enrolled in our Super VIP program, which represents a 30% increase quarter-over-quarter. In addition, we recently launched a joint membership program with Tencent Video. Now our Super VIPs are able to enjoy Tencent Video's annual membership at a deep discount, offering them even more value.
In order to capture more growth opportunities with the WeChat ecosystem, we recently launched around 400 official WeChat mini-programs for our brand partners. Further, our initiatives to focus on male customers and Post '90s customers are starting to bear fruit. In the second quarter, the number of male customers grew by over 35% year-over-year. Conversion rate for both male customers and Post '90s customers increased by around 10% year-over-year, which was driven by more precise targeting as a result of our improved algorithm.
Turning to logistics. We continued to invest into our warehousing capacity in the second quarter, adding another regional logistics hub in Shenyang, China. With this addition, we currently have 6 regional logistics hubs located in Guangdong, Jiangsu, Sichuan, Tianjin, Hubei and Liaoning.
As of June 30, 2018, we have approximately 2.9 million square meters of total warehousing space, of which around 1.8 million square meters is owned by the company.
During the quarter, we delivered around 99% of orders through our own last-mile delivery network, up from 95% in the prior year period. More than 81% of customer returns were handled directly by our in-house last-mile delivery network, up from 68% in the prior year period.
Turning to our Internet finance business. Approximately 5.8 million active customers used our consumer financing during the quarter, which accounted for around 22% of GMV. As of June 30, 2018, the total balance of credit outstanding to customers was approximately RMB 4.4 billion and the total balance of credit outstanding to suppliers was approximately RMB 1.6 billion.
Going forward, we will continue to work closely with Tencent and JD in order to realize the potential the partnership presents for all 3 companies. We are focused on our merchandising strategy, aiming to bring the best products to our customers at the most favorable cost. Over time, this will create more differentiation and further solidify our leading position in China's online discount retail space.
Now moving on to our quarterly financial highlights. Before I get started, I would like to clarify that all the financial numbers presented today are in renminbi amounts and all percentage changes refer to year-over-year changes unless otherwise noted.
Total net revenue for the second quarter of 2018 increased by 18.4% to CNY 20.7 billion, primarily driven by the growth in the number of total active customers and the improvement in average revenue per customer. Gross profit for the second quarter of 2018 increased by 4.8% to CNY 4 billion from CNY 3.9 billion in the prior year period. Gross margin was 19.5% as compared with 22% in the prior year period, primarily attributable to our investment into promotional activities.
Fulfillment expenses for the second quarter of 2018 were CNY 1.9 billion as compared with CNY 1.6 billion in the prior year period, primarily reflecting an increase in sales volume and number of orders fulfilled. As a percentage of total net revenue, fulfillment expenses decreased to 9.1% from 9.4% in the prior year period.
Marketing expenses for the second quarter of 2018 were CNY 900 million as compared with CNY 752 million in the prior year period. As a percentage of total net revenue, marketing expenses remained stable at 4.3% year-over-year.
Technology and content expenses for the second quarter of 2018 were CNY 511 million as compared with CNY 448 million in the prior year period. As a percentage of total net revenue, technology and content expenses decreased to 2.5% from 2.6% in the prior year period.
General and administrative expenses for the second quarter of 2018 were CNY 615 million as compared with CNY 579 million in the prior year period.
As a percentage of total net revenue, general and administrative expenses decreased to 3% from 3.3% in the prior year period.
Our income from operations for the second quarter of 2018 was CNY 400 million as compared with CNY 622 million in the prior year period. Operating margin was 1.9% as compared with 3.5% in the prior year period.
Non-GAAP income from operations, which excludes share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, was CNY 595 million as compared with CNY 888 million in the prior year period. Non-GAAP operating income margin was 2.9% as compared with 5.1% in the prior year period.
Our net income attributable to Vipshop shareholders for the second quarter of 2018 increased by 76.4% year-over-year to CNY 682 million from CNY 386 million in the prior year period. Net margin attributable to Vipshop shareholders increased to 3.3% from 2.2% in the prior year period.
Net income attributable to Vipshop shareholders per diluted ADS increased to RMB 0.99 from RMB 0.64 in the prior year period. Non-GAAP net income attributable to Vipshop shareholders, which excludes share-based compensation expenses, impairment loss of investments, amortization of intangible assets resulting from business acquisitions and equity method investments net of tax and gains on disposal or revaluation of the investments net of tax, was CNY 577 million as compared with CNY 673 million in the prior year period. Non-GAAP net margin attributable to Vipshop shareholders was 2.8% as compared with 3.8% in the prior year period. Non-GAAP net income attributable to Vipshop shareholders per diluted ADS was RMB 0.84 as compared with RMB 1.09 in the prior year period.
As of June 30, 2018, our company had cash and cash equivalents and restricted cash of CNY 6.4 billion and short-term investments of CNY 2.1 billion. For the second quarter of 2018, net cash used in operating activities was CNY 502 million. Looking at our business outlook for the third quarter of 2018, we expect our total net revenue to be between CNY 17.3 billion and CNY 18.1 billion, representing a year-over-year growth rate of approximately 13% to 18%.
With that, I would now like to open the call to Q&A.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Your first question comes from the line of Alicia Yap from Citigroup.
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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [2]
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I have a question regarding the collaborations with Tencent and JD. Could you help us reconcile the 24% of the new user coming from these 2 channels this quarter, which we thought is a positive signal? And even if it takes time to ramp and convert, and -- why couldn't we see the revenue growth rate either stabilizing or even reaccelerating? Instead, I think, from the 3Q guidance that you provide, it actually shows a pretty surprise deceleration. So could you help us to analyze what happened to your user base and also the new user acquired from those channel? Any color will be appreciated.
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Jessie Fan, [3]
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(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [4]
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Okay.
(foreign language)
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Jessie Fan, [5]
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So Alicia, in the second quarter, we did receive help in terms of new customers from Tencent and JD, but because these customers are new to Vipshop, their ticket size and shopping frequency is lower than our existing customers. But these -- the revenue contribution is not shown as significantly as the customer growth in the second quarter. As we continue to work with Tencent and JD, we expect to get new customers from these channels consistently. And due to our CRM expertise and our merchandising capability, we do believe that over time, we'll be able to turn these new customers into high-quality existing customers, and over time, we would see higher revenue contributions from these new customers acquired from Tencent and JD.
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Operator [6]
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Your next question comes from the line of Eddie Leung from Merrill Lynch.
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Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [7]
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I also have a follow-up question on new customers. Actually, not so much about the new channels like JD and Tencent, I'm more curious on your strategy in acquiring new customers from other channels, perhaps mobile and other channels. If we look at the marketing expense as a percentage of sales versus a year ago, it's still quite stable. So should we expect some leverage on sales and marketing going forward if we can rely more on JD and Tencent providing new customer traffic? Any thought on that front will be great.
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Jessie Fan, [8]
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(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [9]
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(foreign language)
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Jessie Fan, [10]
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So Eddie, at this point in time, we continue to invest into other channels besides just Tencent and JD, so we continue to invest into other digital channels, also doing mobile phone pre-installation and working with app stores and so on. Through Tencent and JD, we do have high hopes in terms of customer acquisition, and we do believe that over time, it would be more meaningful. However, in the interim, we are still investing into other channels, and we do expect to see operating leverage over the long term.
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Operator [11]
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Your next question comes from the line of Wendy Huang from Macquarie.
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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [12]
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Can you share some detail about the user demographics of those new users acquired through the JD and the Tencent channels, i.e., the age and also city and whether those users are complementary to your existing user base? And also, a small question about Wei Pincang you mentioned in the prepared remarks. Can you give some color on the [brand new] and also fulfillment cost impact from this new product?
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Jessie Fan, [13]
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(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [14]
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Okay.
(foreign language)
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Jessie Fan, [15]
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So Wendy, regarding the first question regarding the mini-program customers and what they are like, so the mini-program customers are quite similar to our own. It's heavily -- heavier male contributions than our core app, and the new customers have lower ticket size comparing to those of our native app. But as we mentioned, as we continue to work with them and show them better products and operationally know better of what these customers want, we will continue to improve the product offering for these new customers and also improve their overall spending on our platform. We did try some group buys and things like that over the WeChat channel over the past few months, and what we noticed is that although customer growth is quite fast, the quality of those customers is not there. So I think we had some learnings from there, and over time, we will be able to more sustainably gain quality new customers from the WeChat channel.
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [16]
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(foreign language)
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Jessie Fan, [17]
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So regarding -- Wendy, regarding the second question about Wei Pincang and the fulfillment expenses, so with Wei Pincang, the product won't be sitting in our warehouse, but they will be using our last-mile delivery service from Tianjin. So in terms of the delivery components, there's one less, and also, the costs should be lower than our core business.
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Operator [18]
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Your next question comes from the line of Binnie Wong from HSBC.
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Wai Yan Wong, BofA Merrill Lynch, Research Division - Research Analyst [19]
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My first question is on the new users that we acquired from Tencent and JD channels. What is our strategy down the road to raise the frequency and [ticket] size and eventually to turn them into our core users? And also, in terms of the data sharing, what are the -- because, I guess, most important for users to come in to our store is for us to understand why they do not buy too, right? It's not just that they come in. And then -- especially for customers that have left the channel. They just come and visit, but they did not, essentially, add -- like add the product into the basket. So for those kind of customers on our core platform, you will have access to those. We realize those data. But then from Tencent and JD channels, any sort of those data that they will share back with (inaudible) so that we can target those customers, shift to better targeting? And my second question is to Yang-zong. I was wondering that -- in terms of the margins that we see here. Because we understand that margins have been on a downtrend even if we continue be investing. How do we see such trends to proceed into the second half? How should we think about the margin trends?
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Jessie Fan, [20]
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(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [21]
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(foreign language)
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Jessie Fan, [22]
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So Binnie, with JD, because it's not our intention to bring them to our own app, so they will just continue to shop via JD. And in terms of Tencent, we do get certain customer tags from WeChat in terms of customer demographics, such as gender, age and so on. And for that, we'd be able to better target these customers with different versions of landing pages, showing them different products depending on what our big data team and our own merchandising team think that is suitable for those customers. Over time, that will help a lot with conversion rates. And also, in terms of WeChat, one good thing that it has is there are drop-down users, meaning once you click into the WeChat Wallet and enter Vipshop app, even if you didn't buy, you're tagged as a drop-down user who has entered Vipshop mini-program in the past. So we will be able to reach those customers, and we'll continue to get and receive tags on those customers' demographics. And we also have our public accounts in the WeChat ecosystem. So we are trying to do better in terms of connecting the same customers in different ecosystems, such as the WeChat mini-program, public accounts and our own native app. And over time, as we better understand those customers and their shopping behavior in each channel, we'd be able to better convert their -- better convert them into our customers and also improve their conversion rate on products over time.
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Donghao Yang, Vipshop Holdings Limited - CFO [23]
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And Binnie, let me take your second question about margin. Well, in Q2 2018, our margin came down due to a couple of things. One, we reclassified costs related to our third-party logistics business from fulfillment expenses to cost of revenue, which had a 1.1 percentage point impact on our gross margin for the current quarter. And then, secondly, during the second quarter, we had a few major promotional events, namely April 19, May 20 and June 16. In those events -- promotional events, we offered deeper discounts to our customers. Going forward, we will focus more on our merchandising strategy, and our buyers will try to negotiate better deals with the suppliers so that we can improve on our gross margin in the long term. But in the next few quarters, there might be some fluctuations in our margins, but over the long term, we are quite confident.
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Operator [24]
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Your next question comes from the line of Xiaoyan Wang from 86Research.
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Xiaoyan Wang, 86Research Limited - Research Analyst [25]
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Two questions here. First one is regarding your wholesale business, Wei Pincang. So how will you recognize the wholesale business GMV? Will it be in the total GMV? And also, on the revenue side, is it the 1P revenue or you are recognizing in other revenue line? And the second question is regarding your cash flow this quarter. Operating cash flow is again negative, and I think the most -- the biggest impact is still the comparable item, which lead to a negative free cash flow. So can you provide some color on the outlook of the operating cash flow and the free cash flow in the quarters ahead?
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Donghao Yang, Vipshop Holdings Limited - CFO [26]
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Okay. Let me take your questions. Well, for the revenue generated from our Wei Pincang business, we will recognize gross sales [as our] revenue. And for your second question, our operating cash flow, well, there were a couple of things that resulted in our -- in the negative cash flow in Q2. Number one, there was decline in our margins. And secondly, starting from the second half of 2017, payment from customer returns are deposited directly back to the customer's original payment method instead of being returned to their Vipshop wallet. This change has resulted in a decrease in our advanced receivables from third-party platforms, which impacted our operating cash flow. Going forward, this -- well, the second reason is actually a temporary thing, and we're expecting the impact from that to go away in the next 1 or 2 quarters. And also, going forward, as I said earlier, as we focus more on our merchandising strategy, we will push our buyers to negotiate better deals, higher margins with the suppliers in order to improve our gross margin. So operating cash flow, I think, will come back to its normal level or will start to go up in a few quarters.
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Operator [27]
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Your next question comes from the line of Alex Yao from JPMorgan.
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Alex C. Yao, JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research [28]
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I think that you guys mentioned quite a few initiatives that are already done in relation to the integration with the Tencent and JD platform. Can you give us a road map in terms of the -- for the next 12 months? What else would you be doing to further improve the efficiency of the integration or the conversion ratio from traffic to transactions? I think that a follow-up and a related question is that the market generally expects your revenue to accelerate in the next 1 or 2 quarters, given the relatively [scale] in user base between you and these 2 partners. Is that assumption at risk or it's still reasonable?
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Jessie Fan, [29]
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(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [30]
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Okay.
(foreign language)
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Jessie Fan, [31]
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So Alex, on JD, our goal is to sell more merchandise, so that's why we're exploring different entries on JD's app. We switched from the 1 and 3 on the front page to 4 different entry points, including a spot in the same panel of the original but also, in terms of categories and flash deals, now you're able to see Vipshop entry point. So we're continuously learning about the channels and different panels within the JD app, trying to gain higher efficiency and more revenue from the JD customers. In terms of Tencent, as Eric mentioned, we already are seeing new customers coming in, and we're also exploring for new ways to gaining more customers from Tencent and also the WeChat team and the mini-program team. So in terms of how we view the growth, we are pretty confident that in the next 12 months, we are able to meet our expectations in terms of new customer acquisitions from Tencent and JD. But if we want to see a lot more than that, then we would have to continue to work with them to find a new way to grow and an effective way to gain new customers.
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Donghao Yang, Vipshop Holdings Limited - CFO [32]
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Okay. Let me -- Alex, thanks for your question. Let me take your second part of the question. Well, we are acquiring a lot of new customers from both Tencent and JD. But you know what, the new customers, their ARPU are relatively low, and it takes time for them to improve or increase their ARPU or improve on their average basket size. So it takes time for the new customer acquisitions to have a meaningful impact on our revenue. So it's hard to say if in the next couple of quarters, our revenue growth will start to reaccelerate. But going -- in the long run, I think we will see meaningful or a significant impact on our revenue from the new customer growth from the 2 partners.
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Operator [33]
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Your next question comes from the line of Ronald Keung from Goldman Sachs.
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Ronald Keung, Goldman Sachs Group Inc., Research Division - Executive Director [34]
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I have a question more on the business model. I think we've talked a lot on the channels, how to attract customers. But more back to basics, our business model. How do we see our core apparel business sort of in terms of the focuses on, for example, off-season? Second would be, how are we in our strategy for marketplace? Just share from a 1p to a 3P model, and even possibilities of, for example, cooperation with any offline players. It could be an asset-light but some form of cooperation. And besides apparel, how are we with our category expansion? Or are we now focused on apparel? Would like to hear your thoughts.
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Jessie Fan, [35]
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(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [36]
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(foreign language)
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Jessie Fan, [37]
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So Ronald, to answer your questions, apparel is our core and why customers come to us in the first place. So we'll continue to focus on this as our core customers, attracting more customers to come into us because we have the best selection of apparel at the most favorable prices. And for e-commerce, obviously, you can't just have one category. So we already have a variety of categories, and we also have a marketplace model, although a small contribution. So going forward, this model won't change too much. We will have the other categories even though the reason that customers come to us is mainly because they're coming to us for the selection of apparel on our platform. But we will continue to have marketplace and other categories in order to meet customer demand. We are a discount retailer, so we are deeply focused on heavy and deep discounts, giving back value to our customers. Regarding offline, we're learning about the offline business model, and we are exploring certain opportunities.
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Operator [38]
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Your next question comes from the line of Jerry Liu from UBS.
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Yuan Liu, UBS Investment Bank, Research Division - Co Head of HK and China Internet Research [39]
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(foreign language)
My question is on competition. Just wanted to get an update on how we see the competitive landscape most recently with major players, including Ali, JD and Pinduoduo. But also, as we do more on JD's platform and on -- in Tencent mini-programs, how do we see some of the other competitors that are on those programs? And then the third-party flagship stores, and whether that changes some of our promotions and even the business model a little bit going forward?
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [40]
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Okay.
(foreign language)
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Jessie Fan, [41]
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So Jerry, there's always competition, and in the future, there's going to be competition. But our positioning is that we are a discounted retailer focused on the apparel category, and that's where our strength is at. So we'll continue to focus on our core and leverage our expertise in our core category and the deep discount field to offer back value to our customers. And we believe that with this strategy in mind, we will continue to gain and retain these customers. Regarding your question about the different competitors that are emerging from the WeChat ecosystem, we believe that the group buy model is quite different from us. And we've, as we mentioned in previous remarks, tried the group buy model and didn't find it to be too suitable for our business model and the kind of customers that we want to serve in the long term. So in terms of ticket size, we're around RMB 300, which is quite a bit higher than those of the group buy competitors in the WeChat ecosystem.
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Operator [42]
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Your next question comes from the line of Monica Chen from Crédit Suisse.
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Monica Chen, Crédit Suisse AG, Research Division - Research Analyst [43]
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I have one question regarding our paid membership program, so which we actually see quite decent growth for this quarter. So I want to understand how many of the users who actually convert into the paid members after their free trial period. And how is the retention for that? And also, for this membership, how is this -- our service different from some of the other membership products launched by other e-commerce platforms? And how do we expect this service to further improve our user stickiness and ARPU trend in the future?
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Jessie Fan, [44]
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(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [45]
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(foreign language)
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Jessie Fan, [46]
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So Monica, we are seeing quite good results from our Super VIP program, and on average, the ARPU from these customers are 50% higher than those of the non-Super VIPs. And as you mentioned, we do have a lot of trial members who are testing this program for free, and they have the option to become a paid member at the end of their trial period. And the current conversion rate we have seen is around 18% to 20% from trial to becoming a paid member. So as we disclosed, we had around 30 million customers total in the second quarter and only 1.9 million Super VIPs. So we do believe that there's a lot of room to continue to convert our existing customers into Super VIP paid members and over the long term, continue to improve their ARPU and continue to improve their stickiness on our platform.
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Operator [47]
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Next question comes from the line of Natalie Wu from CICC.
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Yue Wu, China International Capital Corporation Limited, Research Division - Analyst [48]
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I have 2 here. First one is how do you see the competition from some newly emerging players, such as (inaudible). I saw you launch the Wei Pincang. So just wondering, how do you prepare to attract merchants? As you know, those merchants are of very different nature versus those existing ones on that platform. And also, how do you compete with those existing players as I just mentioned before, those like mainly backed up by those VC capital? Also, given that Wei Pincang is an independent app, just wondering, will you invest heavily to accumulate users for this independent app? Will this impact your margin in the upcoming quarters? Second question is that -- actually, you have very good cash flow, and you have very loyal customer group and several nice start-up programs which can grow into unicorns given the example of their peers in the private market. But actually, your valuation is kind of depressed in the secondary market. So just wondering if there are any chances that you would consider taking your company private.
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Jessie Fan, [49]
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(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [50]
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(foreign language)
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Jessie Fan, [51]
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So Natalie, we -- our goal is to solve problems for brands. Our consignment model works quite well. However, we do return the products that we can't clear to our brand partners. And the returned products are still an issue for those brands, and they struggle to clear the inventory that is not able to be cleared by the Vipshop platform. And on the other hand, there are lots of wholesalers and WeChat merchants and mini merchants out there looking for products to sell, but they also don't have a lot of reliable and trustable sources to source those products, and our goal is to connect those 2 groups, the brands and then the wholesalers and the WeChat merchants. We are strong in the discount retail space, and that's how we are able to grow to the size today. So we certainly recognize that there are some other players doing similar things out there. But we work with brands directionally, and our DNA is in clearing inventory for brands. And by launching Wei Pincang, we are able to solve them -- to help them solve their inventory issues end to end. And we do believe that as soon as we enter the space, we will be able to capture a lot of the opportunities within this space.
(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [52]
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(foreign language)
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Jessie Fan, [53]
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So Natalie, regarding your second question on whether or not this would affect margins in terms of marketing expenses, because Wei Pincang is business-to-business model, we are selling to smaller businesses, merchants and wholesalers. We don't need to do a whole lot of marketing in B2C. So we do believe that in a market as big as China, we like really need around 50,000 users and sellers that use the Wei Pincang platform. And we don't need to do a lot of marketing to attract them. But instead, we attract them with good brand resources and our operational strength as well as ease of using our app.
(foreign language)
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [54]
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(foreign language)
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Jessie Fan, [55]
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Natalie, we're currently not thinking of taking the company private.
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Operator [56]
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That's all the time we have for questions today. I'd like to hand the call back to today's presenters for their closing remarks.
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Donghao Yang, Vipshop Holdings Limited - CFO [57]
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Thank you all for taking the time to join us, and we look forward to speaking with you next quarter. Thank you.
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Ya Shen, Vipshop Holdings Limited - Co-Founder, Chairman & CEO [58]
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Thank you.
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Operator [59]
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Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.
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