JD.com (JD) Richard Qiangdong Liu on Q2 2016 Results - Earnings Call Transcript

| About: JD.com (JD)

JD.com, Inc. (NASDAQ:JD)

Q2 2016 Earnings Call

August 10, 2016 7:30 am ET

Executives

Ruiyu Li - Investor Relations Officer

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

Xuande Huang - Chief Financial Officer

Haoyu Shen - Chief Executive Officer-JD Mail

Analysts

Alan Hellawell - Deutsche Bank AG (Hong Kong)

Eddie Leung - Merrill Lynch Far East Ltd.

Poon Erica Werkun - UBS Securities (Asia) Ltd.

Wendy Huang - Macquarie Capital Ltd.

Alicia Yap - Citigroup Global Markets Asia Ltd.

Sean Zhang - 86Research Ltd.

Jin-Kyu Yoon - Mizuho Securities Asia Ltd.

Alex Yao - JPMorgan Securities (Asia Pacific) Ltd.

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

Jia Long Shi - Nomura International (Hong Kong) Ltd.

Rodney A. Hull - SunTrust Robinson Humphrey, Inc.

Tian Li Wen - Blue Lotus Capital Advisors Ltd.

Ella Ji - China Renaissance Securities (US), Inc.

Natalie Wu - China International Capital Corp

Piyush Mubayi - Goldman Sachs (Asia) LLC

Operator

Hello. And thank you for standing by for JD.com's Second Quarter 2016 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, Ms. Ruiyu Li. Thank you. Please go ahead.

Ruiyu Li - Investor Relations Officer

Thank you, operator, and hello, everyone. Welcome to our second quarter 2016 earnings conference call. Joining me today on the call are Richard Liu, our CEO; and Sidney Huang, our CFO. For today's agenda, management will discuss highlights for the second quarter 2016. Following the prepared remarks, Haoyu Shen, CEO of JD Mall, will join Mr. Liu and Mr. Huang for the Q&A session of the call.

Before we continue, I'll 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 the figures mentioned during this conference call are in RMB.

Now, I'd like to turn the call over to our CEO, Richard.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

Thank you, everyone, for joining today's call. We are pleased to report another strong quarter of higher sales growth. Sidney will update you on our progress shortly. Before we begin, as you saw in today's release, Haoyu will be moving to the U.S. for family reasons later this year and has been named President of JD International effective immediately. Working with me over the last five years, Haoyu has made outstanding contributions to the company. We are very grateful to him and glad we could (02:18) on his excellent international experience. And we look forward to his future contributions.

I'm also pleased to report that we have been developing a strong bunch of talent in JD Mall over the last several years, and particularly the six business unit presidents in JD Mall are a highly talented group. And we will continue to work closely with them as we further grow that business.

Before Sidney's comments, I want to just add a few general remarks. As you know, we have made a number of changes this year. One is our organizational change. And then two is changes made to our marketplace platform. So, for our organizational change, we have formed a new sales and marketing organization comprised of six large business units. All the organizational changes have been put in place by now.

So, in the spirit of maintaining excellent customer experience on our platform, we have – during our annual renewal process with online platform merchants, we discontinued contracts with over 20,000 merchants, smaller merchants. Yeah. Over, actually, 22,000 merchants during the first half of this year.

The vast majority of these merchants do have transaction volume. So, by discontinuing contracts with these merchants, we do suffer some financial losses in the process.

And we have, on the other hand, attracted around a similar number of new merchants onto our platform. However, for new merchants to generate meaningful financial results, it will take normally six months for them to ramp up. Yeah, so, as a result, the GMV from our marketplace business will see a meaningful slowdown in the second and third quarter of this year.

Yeah, but we believe these measures will improve our user experience and the integrity of our platform which will enable us to achieve much better growth in the future. We hope we will see, starting fourth quarter of this year, resume growth rate, resume the growth in our platform.

Xuande Huang - Chief Financial Officer

Okay. So, now I will give you our financial highlights for the second quarter. We are very pleased to report another quarter of solid growth with record non-GAAP operating margin and a record free cash flow. I will start with the free cash flow this time, which I was told about through investors had been somewhat overlooked by the market in the past. Given the seasonality of cash flows, we will focus on the trailing 12-month basis. Our free cash flow totaled RMB 11 billion for the trailing 12 months ended June 30, 2016, up 67% from RMB 6.6 billion for the trailing 12 months ended June 30, 2015. This strong cash flow is probably the best validation for the underlying financial strength and working capital efficiency of JD.com. For your reference, we have also added the TTM free cash flow data for the past six quarters in the supplemental financial information table in our earnings release.

Now, back to other financial metrics. Our GMV excluding virtual items grew 52% year-over-year in the second quarter 2016, reflecting the underlying strength of our growth momentum. GMV from general merchandise categories excluding virtual items grew 63% during the quarter. Food and beverage was the fastest-growing general merchandise category, followed by cosmetics and home furnishing, while apparel and footwear continued to be the largest general merchandise category with solid growth.

As a result of our integration efforts, high-quality merchants are gaining better visibility. And the top 100 apparel and footwear merchants had a year-over-year growth rate of well over 100% during the second quarter 2016. GMV from electronics and home appliance products grew 43% during the quarter, led by the home appliance category.

Our net revenue grew 42% in Q2 supported by solid momentum in both direct sales and marketplace platforms. Our direct sales revenues grew 40%, led by food and beverage, cosmetics, home appliance and home furnishing products. Our revenues from services and others increased 67% year-over-year, supported by better monetization of the platform.

As I mentioned previously, in light of our balanced focus on profitable growth in 2016, an alternative measure of the underlying growth momentum is the gross profit. As we discussed in earnings release, non-GAAP gross profit increased by 66% in the second quarter, which demonstrates the healthy monetization of both our 1P and 3P businesses, and it's very much in line with the growth rates in the past four quarters, ranging from 67% to 83%.

Our non-GAAP gross margin improved to 14.6%, up from 12.5% a year ago, as a result of higher 1P gross margin and higher growth in service revenues. Gross margin on direct sales revenue improved over 100 basis points on a year-over-year basis, mainly due to increased scale economies and higher volume-based rebates across all key categories.

Non-GAAP fulfillment expense ratio was 7.7% in Q2, compared to 7% in the same quarter last year. The higher fulfillment expense ratio was mainly due to our investments in the consumable product category, which has lower average order value. As we mentioned earlier this year, especially after our strategic alliance with Walmart, we will further expand our investment in FMCG category through both JD.com and Yihaodian platforms in the remainder of 2016.

The most recent example is Yihaodian's three-month promotion campaign launched this past Monday, on August 8, with a budgeted spending of up to RMB 1 billion, mostly funded by JD.com which will provide greater savings to our customers in the Tier 1 cities and the surrounding areas who love the supermarket products offered by Yihaodian.

Back to expenses. The non-GAAP marketing expense ratio was 3.5% in Q2, largely in line with the 3.6% in the same quarter last year. Our non-GAAP R&D and G&A expense ratios increased 26 basis points and 19 basis points respectively compared to the same quarter last year, which will affect our increased investment in R&D talents while the higher G&A was entirely attributable to our new businesses.

Our non-GAAP operating margin was a positive 0.6% in the second quarter, a little bit (12:50) high with a 100-plus-basis-point improvement over the same quarter last year. Excluding the new businesses defined as JD Finance, O2O, overseas business and technology initiatives, our core JD Mall business had an operating margin of 1.1% on a non-GAAP basis, another record high with a 60-plus-basis-point improvement over the same quarter last year.

This margin improvement was primarily driven by the higher gross margin partially offset by the higher procurement in R&D expenses discussed earlier. The new businesses, on the other hand, incurred a non-GAAP operating loss of over RMB 0.3 billion during the quarter, mainly from JD Finance and the technology initiatives.

We deconsolidated the O2O business following its merger with Dada on April 26, 2016. So, the Q2 operating results reflect only one month of the O2O operating loss. Loss from equity method investment in Dada will be recorded one quarter in arrears beginning in the third quarter of 2016.

With the improved JD Mall operating margin and the reduced new business operating losses, we are pleased to report a non-GAAP net profit of RMB 391 million with a net margin of 0.6% in Q2 2016. Our non-GAAP EBITDA for the JD.com group also set a record at RMB 852 million, with an EBITDA margin of 1.3%.

Now, let me give you an update on JD Finance. In conjunction with our anniversary promotion in the second quarter of 2016, net loan originations including consumer and supplier financing totaled RMB 9.4 billion, up 88% from the same quarter last year.

For the first six months of 2016, JD Finance incurred a net cash outflow of RMB 13.6 billion in loan originations and investments, while received a net cash inflow of RMB 19.6 billion through financing activities including asset-backed securitization and the Series A funding. In other words, JD Finance had a net cash inflow of RMB 6 billion from the originations investment and financing activities during the first six months of 2016, which is consistent with our commitment that it will self-fund its growth in 2016 and beyond.

Next, I would like to give you an update on our Walmart transaction, which consists of the acquisition of the Yihaodian platform, Sam's Club membership collaboration including an exclusive flagship store on JD.com and the O2O partnership with Jingdong Daojia. I will focus on the Yihaodian piece which will have an immediate impact on our Q3 financial results. As many of you know, Yihaodian has been a well-known online supermarket brand with a loyal customer base in the Eastern and the Southern regions of China.

As part of the transaction, we have applied this highly valuable brand and its customer base as well as its website and app, most of the marketplace business and/or related IT system and back-office functions. As of today, we have transferred approximately 900 employees mainly R&D and platform supporting staff to JD.com. While the deal does not include 1P business of Yihaodian, as JD owns the platform, we are committed to sell our own 1P products through the Yihaodian channels after we complete the system integration during the third quarter. Having said that, our objective is to preserve Yihaodian's premium product selection, competitive pricing strategy and unique user experience, so the Yihaodian platform can continue to attract and maintain its unique customer base. As a result, we will continue to work closely with the Yihaodian 1P team to jointly promote this platform for the years ahead.

On the financial impact to our results, we will pick up the GMV from the Yihaodian platform, but only part of the commission income and the related R&D and back-office expenses going forward. In addition, we may promote select FMCG categories through Yihaodian's 1P business by funding the incremental costs and expenses associated with such promotions. We treat it as an investment in the Yihaodian platform, which will be reflected in the various cost and expense line items on our income statement.

For the second half of 2016, we expect an incremental operating loss of approximately RMB 1 billion from this promotion-related costs and integration expenses in relation to the Yihaodian transaction.

Finally, let's discuss our financial outlook. We expect Q3 net revenue growth to be between 34% and 38% on a year-over-year basis. This guidance reflects the increasingly pronounced seasonality pattern that we observed in the past two years, given the major sales in June and November, as well as our conservative outlook in light of the slowing consumption growth in 2016.

For the non-GAAP net margin outlook, we maintain our previous guidance of positive 0.5% and a negative 0.5% for the full-year 2016, excluding Dada-related losses from the equity method pickup, which is not within the control of the company.

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

Question-and-Answer Session

Operator

Thank you. 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. So, your first question comes from the line of Mr. Alan Hellawell of Deutsche Bank. Please ask your question.

Alan Hellawell - Deutsche Bank AG (Hong Kong)

Great. Thank you very much. I had a question about your ad business. The – very impressively, services and other revenue came in well above what we would have anticipated. And I'm wondering, is it ad revenues that may have surprise on the upside? I asked that because our understanding was there was, indeed, higher adoption of ad tools as we started clamping down on brushing, but not rapid enough to possibly backfill the loss of commissions as we remove brushings. And then, I'm just wondering whether you can give us any more color on what the merge entities with Dada, what it actually does on the non-operating basis? Thank you very much.

Xuande Huang - Chief Financial Officer

Sure, Alan. This is Sidney. So, we mentioned that advertising revenue really is a result of monetization from both 1P and 3P businesses. So, as the platform continue to grow stronger, we will receive more and more advertising budget from both our merchants and the suppliers. So, I think that will probably answer – address your question. And you did mention that, of course, with the integration effort, at least some of the merchants will start to look at advertising as an alternative, a much better approach to promote their own storefront.

Haoyu Shen - Chief Executive Officer-JD Mail

So, Alan, this is Haoyu. Maybe I'll add more color to what Sidney just mentioned. So, we used to have most of our ad inventory on PC, but PC traffic is stagnant. In a tough quarter, we've added a lot of inventory on our mobile property. And we improved our algorithm in our app and also we added some – add inventory in WeChat and QQ platform.

So, that's also a part of the reason why we're seeing meaningful growth at ad revenue.

Alan Hellawell - Deutsche Bank AG (Hong Kong)

Great. Thank you so much.

Operator

Thank you. Your next question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.

Eddie Leung - Merrill Lynch Far East Ltd.

Good evening. Thank you for taking my question. I have a question more on the logistic business. The first one is, as you mentioned that you would be doing more FMCG product category, I was just wondering how could that affect your fulfillment costs in the upcoming second quarters?

And then secondly, more a big picture question. We have seen quite some last-mile delivery companies preparing for IPO either in China or overseas, how could that change the competitive landscape for e-commerce and especially yourself? Thanks.

Haoyu Shen - Chief Executive Officer-JD Mail

So, FMCG, getting more of our GMV or sales on FMCG does put pressure on our logistic cost in terms of fulfillment cost per order because they tend to be comparing with (23:59) 3C or appliances, they tend to be small, thick and also heavier and bulkier. And it costs us more to deliver, it also costs us more to pick and pack and store in our warehouses. But so far, I think, we are definitely the best operator of FMCG logistics. And we are continually innovating in our fulfillment process. And I think there's still a long way to go. I think, down the road, more innovations I think will help us to control the logistics cost better for FMCG.

As far as your second question, Eddie – yeah, the (24:49) a lot of them are going public. We don't work with them a whole lot. We deliver well over 95% of the parcels that come out of our own warehouses, and we do work with some regional players for the areas that we do not cover. But we're happy to see that this industry is getting more mature in China. I think that customers are getting better services, and we're happy to be part of that evolution.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

[Foreign Language] (25:25-25:56).

Haoyu Shen - Chief Executive Officer-JD Mail

So, that was Richard Liu. He gave technical point about why FMCG these days were seeing a higher fulfillment costs. Because there are many, many SKUs in that category. So, a lot of times, we fulfilled the same order, one order from multiple warehouses because we don't have – a lot of the warehouses we have are not big enough to house all the SKUs. So, by fulfilling one order through – or by a multiple warehouses, that will increase our cost. In the future, when we have more mega warehouses, such as Asia, number one, online, this problem can also be mitigated.

Eddie Leung - Merrill Lynch Far East Ltd.

Perfect. Thank you, Richard and Haoyu.

Operator

Your next question comes from the line of Erica Werkun of UBS. Please ask your question.

Poon Erica Werkun - UBS Securities (Asia) Ltd.

Hi. Thank you. My questions are for Richard. Hello, Richard. Firstly, just wondering over the next two years, three years, how do you plan to allocate your capital over your ever-growing business, which now encompass e-commerce penetration, expansion of logistics network, auto business, for example, Daojia, internet finance cloud, et cetera, et cetera? And then, follow-up question is, I'm wondering, what is your tolerance, your overall tolerance of having occasional operating losses in certain quarters? Thank you.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

[Foreign Language] (27:49-28:20).

Xuande Huang - Chief Financial Officer

So, this is saying that in terms of capital allocation, we do expect one of the major new areas will be in cloud computing, which may absorb steady amount of new capital for our O2O initiative as Jingdong Daojia has been merged into Dada, so the combined entity will seek its own capital for its future growth. So, it will not take additional capital from the JD Group. And for JD Finance, as we mentioned earlier, it has and will continue to be self-funded going forward.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

[Foreign Language] (29:13-29:21).

Xuande Huang - Chief Financial Officer

So, at this point, other than these areas, we don't see any major capital expenditure, obviously, other than our ongoing warehousing buildout.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

[Foreign Language] (29:34-29:45).

Xuande Huang - Chief Financial Officer

Yeah, so based on internal projection, we do expect very strong free cash flow over the next five years. So, we're clearly not – we don't have any issue with our internal cash and capital.

Poon Erica Werkun - UBS Securities (Asia) Ltd.

Thank you. And the tolerance for...

[Foreign Language] (30:07-30:37)

Xuande Huang - Chief Financial Officer

So, yeah, given the competitive nature of e-commerce, we do expect from time-to-time maybe one specific area that require a lot of investment like FMCG that we are investing right now. But as we continue to grow in scale, these investments will become less and less significant in light of the overall company's operating results.

So over time, we hope this kind of regional or areas of investment will have smaller and smaller impact on our overall financial performance.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

[Foreign Language] (31:20-31:37).

Xuande Huang - Chief Financial Officer

Yeah. And given what I just mentioned about strong, very strong cash reserve, if necessary and if we believe it will create a long-term shareholder value that we will not hesitate to invest very aggressively in any select areas and categories in any single quarter.

Poon Erica Werkun - UBS Securities (Asia) Ltd.

Thank you very much, Richard and Sidney.

Operator

Your next question comes from the line of Wendy Huang of Macquarie. Please ask your question.

Wendy Huang - Macquarie Capital Ltd.

Thank you. My question is still mainly about Yihaodian still. You just mentioned that actually JD has very strong cash reserve, if that's the case, actually, what actually prevent you to go for that transaction with all cash consideration, so now you're actually giving away 5% of your stake when the JD own variation (32:40) at relative low level? And also earlier, I think you mentioned that JD will pick up the GMV from Yihaodian, but only a portion of the commissions. So, does that mean that you will consolidate both 1P and 3P platforms of Yihaodian, but only recognize part of its revenues? Thank you.

Xuande Huang - Chief Financial Officer

Right. So, on the deal transaction, it's really from the Walmart side that it is not – they don't treat it as an exit from China e-commerce. So, Walmart, in fact, insisted that they will receive stock for this transaction, so that they can continue to participate in the e-commerce growth in China through JD.com.

And on the 1P and 3P pickup, yes, because even if – the 1P business also running through the platform, so we will pick up the GMV after 1P platform, but we will not pick up the revenue out of the existing Yihaodian 1P business.

Wendy Huang - Macquarie Capital Ltd.

So, I just want to clarify that, so if you're already picking up the 1P's GMV, does that mean the 5% of the stake you paid for this transaction actually already includes the 1P platform?

Xuande Huang - Chief Financial Officer

Well, as I mentioned in my earlier remarks, and because we own the platform, over time we could obviously sell our own 1P product through this platform. So, over time, you will have 1P revenue. And so, yes, you can interpret that way, but clearly, it's not including the existing Yihaodian 1P revenue.

Wendy Huang - Macquarie Capital Ltd.

Thank you.

Xuande Huang - Chief Financial Officer

And by the way, we did mention previously at various investor conference, for Yihaodian, its GMV size last year was around 5% of JD.com's GMV. But this year, because it was not growing, so on a standalone steady state basis, it would contribute roughly 2% to 3% of our GMV base this year which will pick up starting Q3.

Operator

Your next question comes from the line of Ms. Alicia Yap from Citigroup. Please ask your question.

Alicia Yap - Citigroup Global Markets Asia Ltd.

Thank you. Good evening, Richard, Sidney and Haoyu. Thanks for taking my questions. I have a question related to your gross margin improvement for your 1P business, so it does look like you are increasing about 102 basis points. So, just wanted to get a sense, is that mainly come from the home appliance category rather than the 3C? Is that due to the pricings on your sourcing? Any macro headwinds that you are seeing on your smartphone category?

And just kind of related to the GMV from merchants side. I wanted to get a sense, out of the 22,000 merchants that you removed in April on the general merchants side, can you give us a sense what type of categories these merchants are, and for the new merchants that you are adding in and what type of categories are there? Thank you.

Xuande Huang - Chief Financial Officer

So, on the 1P gross margin, as I mentioned, it's mainly from our scale economies. So, when you buy more from suppliers, normally suppliers will give you volume-based rebate. So, their improvement is primarily from these volume-based rebates and better purchasing terms as we continue to grow. And it is again across all categories, not just home appliance. It does come from the 3C categories, mobile phones, every category, and obviously, general merchandise as well.

Haoyu Shen - Chief Executive Officer-JD Mail

I don't have the sort of the 22,000 that we decided not to renew contracts with. I don't have the exact statistics in front of me, but I think they are probably spread pretty evenly across all categories because we don't sort of – in particular treat different categories differently. These tend to be merchants or sellers that are lower quality, and probably in the past, repeatedly violated some laws or rules.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

[Foreign Language] (37:53-38:12).

Haoyu Shen - Chief Executive Officer-JD Mail

So, Richard said about 70% are from home and apparel BU and the rest from consumables and general merchandise because these are the two categories that we have the bulk of the merchants anyway.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

[Foreign Language] (38:37-38:47).

Haoyu Shen - Chief Executive Officer-JD Mail

The new entrants also from those major categories, those tend to be longer tail categories where marketplace can be a good fit. But recently, we're also looking at extending our merchant base of appliances and 3C categories to complement our selections. So, these are – comparing with the number of merchants in the two other BUs, these are still not – interpreted numbers are small.

Alicia Yap - Citigroup Global Markets Asia Ltd.

Okay. Thank you.

Operator

Your next question comes from the line of Sean Zhang of 86Research. Please ask your question.

Sean Zhang - 86Research Ltd.

Great. Thank you for taking my question, management. Two things, number one, on the category focus, am I right to understand that the FMCG or the online supermarket grocery category is our new focus to drive user growth, to drive our total GMV? Can you tell us what's the main logic of going heavily into this category?

And number two, maybe on the personalization. I think we have discussion before about compared to competitor, JD mobile app doesn't offer the same level of personalization or kind of database curated sale environment. So, consumer come to our platform to search, mainly search, but there's a lot of sense of window shopping, but we see the content driven that creates a UGC kind of content are driving a lot of traffic, our competitor app. And they generated book markings, they generated box ticking (40:41) and for potential sales in the future. So, I want to understand what we have done to improve our personalization in this regard. Thank you.

Haoyu Shen - Chief Executive Officer-JD Mail

FMCG is definitely one of our top priority categories. This is a great category for e-commerce because these tend to be – for the most part, tend to be standardized products, and it creates loyalty with our customers, it creates traffic. It's definitely challenging for our economics as we mentioned earlier as far as not just the cost is concerned, but we're confident that we will figure out ways to make this category profitable.

Your question about personalization, we do have quite a big effort in the company looking at personalization to our customers and on PC or app. Actually, in the past June 18 campaign, we tried out an algorithm of personalization. So, the results are quite encouraging. Of course, there's still a long way to go. And also, as far as content and making the site or app more interesting or more plausible, if you will, we also have big effort going on. Recently, we actually – as part of the recent reorganization, we consolidated multiple groups within the company working on content under one organization. So, I think hopefully not – in near future, hopefully you will see some changes in our site and app on these dimensions.

Operator

So, your next question comes from the line of Jin Yoon of Mizuho Securities. Please ask your question.

Jin-Kyu Yoon - Mizuho Securities Asia Ltd.

Hi. Good evening. A couple of things, so we've seen a nice ramp-up again in customer growth, how much of that is incrementally contributed by JD Finance? And where would that customer growth be without the contribution from JD Finance? And second of all, if I remember, I think you mentioned that there is going to be an incremental RMB 1 billion cost structure associated with the new acquisitions. Can you kind of break down in terms of where is that RMB 1 billion hitting? You mentioned promotions and so forth. Can you just kind of give us a clear color in terms of where that numbers are actually going into? Thanks.

Xuande Huang - Chief Financial Officer

Sure. So, for JD Finance customer bases, there are actually a lot of overlaps, particularly the JD consumer financing customers, they tend to buy products on JD Mall. So, we do have internal analysis on the overlap customer base in terms of incremental contribution to our overall user growth, it's been very, very small. So, the vast majority of the growth, they come from the JD e-commerce platform.

Richard Qiangdong Liu - Founder, Chairman & Chief Executive Officer

[Foreign Language] (44:32).

Xuande Huang - Chief Financial Officer

So, yes. On the RMB 1 billion, as I mentioned, we will be supporting Yihaodian's platforms promotional activities. And because at this point, the 1P business is run by the Yihaodian 1P team, so we will be supporting its efforts through marketing activities and through, for example, promotional coupons and expense reimbursements, et cetera.

So, basically, we will absorb the majority of the investment in the recent three months' marketing – promotional campaign that we just started in the past Monday. So, that's probably the bulk of it. And then there will be other ongoing expenses. I mentioned about, obviously, we took over the IT system and staff and also all the back-office expenses. And there will be also some integration-related charges, but mostly will be coming from incremental investment in this category through various promotions.

Jin-Kyu Yoon - Mizuho Securities Asia Ltd.

Great. Thanks.

Operator

Thank you. As a reminder, we will be getting one question at a time from each caller. Thank you. Your next question comes from the line of Mr. Alex Yao of JPMorgan. Please ask your question.

Alex Yao - JPMorgan Securities (Asia Pacific) Ltd.

Hi. Good evening, everyone. Thank you for taking my question. Just a quick one regarding the transaction with Walmart and Yihaodian. I'm just wondering, does the transaction enable you to cooperate with Walmart in the areas such as the supply chain and the merchandising? Thank you.

Xuande Huang - Chief Financial Officer

Yes. So, we are, as part of the transaction, we've agreed to work together in select areas and particularly in FMCG category that we could leverage each other's strength especially expanding our product selections. So, definitely there will be very close collaboration on that front.

Alex Yao - JPMorgan Securities (Asia Pacific) Ltd.

Thank you.

Operator

And your next question comes from the line of John Choi of Daiwa. Please ask your question.

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

Thanks for taking my question. Just a quick one on the margin trend right now. We've seen a nice bump I think on this quarter. I think, as we go into second half this year and also next year, should we be continuing to expecting this kind of trend particularly from the 1P business? And also, secondly, on the 3P, Richard did mention, starting from fourth quarter we should see a nice reacceleration of the business. I was wondering if you could elaborate a bit more on that, is it going to come from the new merchants or is it more from the broader category from the general merchandise? Thank you.

Xuande Huang - Chief Financial Officer

Thanks. So, on the margin for 1P business, we have, in fact, (48:12) business, we have committed at the beginning of the year that we will improve our JD Mall operating margin in a meaningful fashion, so we have proved that in the past two quarters.

Now, we don't give you quarter-by-quarter forecast. And in light of the recent FMCG expansion effort, we are giving back to our consumers through the promotions in conjunction with Yihaodian, for example. So, you don't necessary see the same extent. But I think through the past two quarters, you can see that this is something clearly achievable, and it's sustainable as we have repeatedly mentioned in the past that the scale will bring margin upside. So, it is very, very visible. But there will be discretionary spending along the way such as the one we are going through at this point.

And on the GMV improvement starting fourth quarter, I think Richard was mentioning that for the new merchants that we recruited, it will take normally six months for them to ramp up their sales volume. So, I think it's just a matter of time for those new merchants to begin contributing to the platform.

Ruiyu Li - Investor Relations Officer

Hello? Operator, next question please.

Operator

Thank you. Your next question comes from the line of Jia Long Shi of Nomura. Please ask your question.

Jia Long Shi - Nomura International (Hong Kong) Ltd.

Hi. Good evening, Richard, Haoyu and Sidney, thanks for taking my call. I have a quick follow-up on RMB 1 billion incremental operating loss related to Yihaodian. I just wonder, shall we classify this loss as part of your core business or your new business? And also in your earning release, you mentioned that you will adopt a new share buyback scheme. And I just wonder why you decided to adopt this new share buyback scheme, and how is it different from buyback shares directly from open market?

Xuande Huang - Chief Financial Officer

All right. So, the RMB 1 billion investment is definitely part of the core business because it's related to mainly the FMCG category.

The second question on buyback, it's actually the same buyback program we announced last year. So, there's no new buyback plan.

Jia Long Shi - Nomura International (Hong Kong) Ltd.

Thank you.

Xuande Huang - Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Rodney Hull of SunTrust. Please ask your question.

Rodney A. Hull - SunTrust Robinson Humphrey, Inc.

Yes. Good morning or good evening, Richard, Sidney and Haoyu. I would like to ask on the Tencent relationship. Just as we anniversary that relationship, I want to see if management can provide an update on how that is impacting user growth, as well as GMV going forward. Thanks very much.

Haoyu Shen - Chief Executive Officer-JD Mail

All right. So, the partnership has hit its two-year mark. We, actually, last year – I reviewed with the top management at Tencent our collaboration in the past two years. And we're all happy about the progress we've made in the past two years in terms of traffic, GMV, especially new customers. And we are – now these – I don't want to say these entry points are maturing, but they're definitely past their first phase, and we're continuing to look at how to add some social components through shopping, through collaboration with Tencent.

And also, we are looking into differentiating our entry point or our gateway on WeChat versus our gateway on QQ because, as you know, they have drastically different user base. And we haven't – in the past, we haven't been differentiating these two very much. Now, we've reached agreement with Tencent, we'll be looking at these two gateways separately and cater to the different user bases. And its coverage and all other dimensions such as advertising, data sharing, app promotion, app installation, I think all of these are going quite well on track. So, management of both companies are happy with the relationship and progress. The relationship that we build, the trust we built, and the progress we make.

Xuande Huang - Chief Financial Officer

Yeah. Just add one data point that the key contribution from – the two traffic entry points from WeChat and Mobile QQ is to attract new users to the JD platform. So, in the most recent quarter, again, those two channels continue to contribute around one quarter of our new user base. So, it is very, very powerful and continue to contribute significantly to our user growth.

Rodney A. Hull - SunTrust Robinson Humphrey, Inc.

Thanks very much.

Operator

Thank you. Your next question comes from the line of Eric Wen of Blue Lotus. Please ask your question.

Tian Li Wen - Blue Lotus Capital Advisors Ltd.

Hi. Thank you, management, for taking my questions, Sidney and Haoyu. My question is regarding your working capital, it seems to be continued to demonstrate very nicely the negative cash cycle especially in account payables and accrued expenses. Can you comment on how sustainable these two changes are going forward, and how would the integration of Yihaodian and Dada do to your working capital items? Thanks.

Xuande Huang - Chief Financial Officer

Right. So, we have discussed this in the past, and you probably have seen the comparison of our working capital days to our industry peers, both in China and internationally. So, JD's operating efficiency has been clearly market leading, and as demonstrated in our inventory turnover days continued to be at the industry low.

On the other hand, payable cycles despite of some increase over the past few quarters continued to be at the low end versus our industry peer in China. So, that's why Richard mentioned earlier that we do see continued free cash flow improvement in the next three years to five years. This will not actually be affected by the Dada transaction because, again, Dada is deconsolidated from JD.com, which will self-fund its own growth.

With regard to the Yihaodian business, the existing 1P business will not affect – so, it's really – to put it simple, there wouldn't be much impact on our working capital going forward.

Tian Li Wen - Blue Lotus Capital Advisors Ltd.

Thanks. Very helpful.

Operator

Your next question comes from the line of Ella Ji. Please ask your question.

Ella Ji - China Renaissance Securities (US), Inc.

Hey. Good evening, management. I just want to clarify regarding the RMB 1 billion investments. So, will it be – only includes the promotions on Yihaodian platform or does it include the promotions on your own platform as well? And then, relating to that, since Yihaodian, you will maintain the domain separately, can you talk about how you think about trying to cross-sell the customers you gain on Yihaodian platform and trying to get them to become your own JD platform customer?

Xuande Huang - Chief Financial Officer

Okay. So, on the RMB 1 billion, it will be all spent on the Yihaodian platform. It will be supporting the existing Yihaodian 1P promotions. And possibly in Q4, it could also support our own effort obviously on the Yihaodian platform. So, again it's all related to its incremental spending on Yihaodian excluding our own spending on FMCG category, which could also see its own promotions.

On the customer base, we intend to maintain the Yihaodian platform as is. And so, we were working with the existing team as I mentioned earlier to maintain its own selection and also its own pricing strategy, which has been very, very competitive. So, we don't intend to necessarily move the customer base to JD.com. I think the two platforms have worked very well in the past, attracting their respective customer base and we intend to keep it that way. Obviously, there will be future cross-sell opportunities maybe in other categories like the 3C and home appliance categories, but I think as far as FMCG goes, the existing positioning of the two companies, we think it's very well positioned and will be kept at that way.

Ella Ji - China Renaissance Securities (US), Inc.

Thank you.

Operator

Your next question comes from the line of Natalie Wu of CICC. Please ask your question.

Natalie Wu - China International Capital Corp

Hi. Good evening, management. Thank you for taking my question. So, my question is regarding Yihaodian deals. So, just to confirm with what you said before, are you saying that Yihaodian 1P GMV will be consolidated, it seems this third quarter, into JD's 1P GMV or to be included into JD's 3P GMV? And also, you mentioned that for the RMB 1 billion sales campaign to be carried out by Yihaodian JD Mall most funded – mostly funded, but you – it seems you haven't consolidated with Yihaodian on your income statement yet. So, just wondering what kind of impact will this promotion be to our JD's income statement?

Xuande Huang - Chief Financial Officer

All right. So, on the GMV, it will be a 3P GMV because we operate the platform, and Yihaodian 1P business will be acting as the merchant on the platform. So, it's all 3P GMV. On the promotional impact, it will be most likely through marketing and potentially some fulfillment expenses and also R&D as we are already running the entire IT infrastructure of the platform. And the G&A, of course.

Natalie Wu - China International Capital Corp

Thank you.

Operator

Your next question comes from the line of Piyush Mubayi of Goldman Sachs. Please ask your question.

Piyush Mubayi - Goldman Sachs (Asia) LLC

Thank you for taking my question. You've talked about in terms of new businesses JD Finance and O2O. I wonder if you could shed light on technology initiatives you're undertaking and what these big projects might be with a three-year view? And also any big changes we can see on the overseas business side? Thank you.

Haoyu Shen - Chief Executive Officer-JD Mail

Yeah. On the tech front, Richard mentioned about cloud computing, which we started fairly late, but is making a major push into the space. We have also invested in smart devices area. So, those are really our key technology initiatives which will take a multi-year phase of investment.

On the international front, we now have a joint venture in Indonesia. And we are gaining momentum in less than a year period. But at this point, we don't have any other tangible plan on the international front.

Piyush Mubayi - Goldman Sachs (Asia) LLC

And the investment in cloud computing, to what scale is this going to be?

Haoyu Shen - Chief Executive Officer-JD Mail

Yes. So, until we provide more color on that, right now, it's still very early stage. And you will see that reflected in the new businesses as we disclose every quarter.

Piyush Mubayi - Goldman Sachs (Asia) LLC

Thank you.

Operator

Thank you. We are now approaching the end of the conference call. I will now turn the call over to JD.com's Ruiyu Li for closing remarks.

Ruiyu Li - Investor Relations Officer

Thank you, operator. Thank you, everyone for joining us today. Please feel free to contact us if you have any further questions. Thank you for your continued support, and we are looking 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.

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