JD.Com Inc

HKEX:9618

Earnings Call Transcript 2020-Q1

[Operator]

Hello and thank you for standing by for JD.com's First Quarter 2020 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect your lines 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, executive]

Thank you, operator, and welcome to our first quarter 2020 earnings conference call. Joining us today on the call are Mr. Richard Liu, CEO of JD.com; Mr. Lei Xu, CEO of JD Retail; and Mr. Zhenhui Wang, CEO of JD Logistics; Sidney Huang, our CFO; and Mr. Jon Liao, our CSO. For today's agenda, Sidney will discuss highlights from the first quarter of 2020, and other management will join the Q&A section.

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 direct comparable GAAP measures. Finally, please note, 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.

[Xuande Huang;Chief Financial Officer, executive]

Thank you, Ruiyu. Hello, everyone. Thank you for joining us today.

2020 has been an unprecedented year for all of us. As we mentioned on 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 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 logistics 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 revenues grew by 20.7% in the first quarter, ahead of our internal expectations as we ensured 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 8 quarters 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 contributed over 50% of our fulfilled GMV in Q1, which sets a new record. In the meantime, our mobile DAU grew 46% in Q1, the fastest in 9 quarters.

The level of user activities on our platform notably accelerated as we earned a greater consumer mind share by being the only fully functioning e-commerce platform with diverse product offerings and superior logistics services immediately after the outbreak. This is further evidenced by our #1 internal KPI, the Net Promoter Scores, which reached all-time highs across all of our core businesses.

Category-wise, revenue growth of general merchandise accelerated to 38%, the highest growth rate for the past 6 quarters driven by our newly integrated omnichannel supermarket business group growing 47% in the first quarter as well as strong performance from health care, cosmetics and household product categories.

Our omnichannel supermarket group basically combines our FMCG, fresh produce, 7Fresh and convenience store business units, most of which were launched and developed from 0 in the past 6 years. By 2019, the revenues of this group reached over RMB 115 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 offline supermarkets also sell home products and appliances, our leadership gap will be even wider.

In addition, our JD Health business unit also -- is also gaining consumer mind share 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 have communicated with many of you probably every time we spoke in the past, we will secure market leadership across most of our core categories one by one, and these are just 2 notable examples while a few others are hidden gem things. I'm thrilled that we have achieved quite a few of these milestones before my retirement. It's just a matter of time, and the snowball will continue to grow.

For now, our general merchandise sales in Q1 contributed more than 40% of our product revenues for the first time and further strengthened our brand recognition and consumer perception as an everything store 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 the 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. These are a few moving -- 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 the incremental gains from procurement economies of scale across all categories, particularly those with the market leadership positions. 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 1 to 2 years in the past 3 months. As a result, we are 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 costs from the operational disruptions, 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 13 basis points, respectively, compared to the same quarter last year. As a result, our non-GAAP operating income increased 65% to RMB 3.3 billion, and the non-GAAP operating margin was 2.2%, up 60 basis points from the same quarter last year.

On a segment basis, non-GAAP operating income of JD Retail group increased by 39% to RMB 4.5 billion in Q1, with operating margin improving 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 new categories and never tried to optimize our margins.

As I mentioned to many of you in the past, the relatively decent margin business has already been there for quite some time. In this quarter, we just narrowed the loss 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 RMB 3 billion compared to RMB 3.3 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 RMB 3 billion partly due to our early payments or prepayments to certain suppliers to support their operations and secure certain sought-after merchandise.

CapEx was prudent in Q1, and the spending for the development properties was for existing projects.

As disclosed, we established a second core fund with GIC in Q1 to dispose another RMB 4.6 billion of logistics assets, which remain the most resilient real estate asset 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 basis based on the accelerating growth in the first half of Q2 and assuming the COVID-19 situation does not create significant unexpected disruptions in the remainder of this quarter. We are 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 assessments on the various development scenarios of the COVID-19.

In summary, we are 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 are confident that we will emerge stronger on the other end with accelerated user growth, strengthened brand image and expanded consumer mind share. All of these validate our long-term approach to learning our business with a customer-centric focus. I'm more confident than ever about our market position and our mid- to long-term growth prospects. This concludes my prepared remarks.

And we can now move to the Q&A session. Operator?

[Operator]

[Operator Instructions] We have the first question from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

I think it's a very strong result, and congratulations on the first quarter performance. And with the first quarter, we've seen how JD Logistics supply chain and logistics business proved to be exceptionally resilient over COVID, and we've seen that over -- there's over 50% revenue growth for the logistics and others revenue line in the first quarter. So I'd like to hear, can management just outline some of the growth drivers and margin outlook for the logistics business in particular? And beyond fulfilling the first-party 1P retail orders, are there any plans to fulfill more of the -- your 3P marketplace and even Jingxi orders? And what do we see as other opportunities beyond serving just within the JD Retail group?

[Xuande Huang;Chief Financial Officer, executive]

Okay. Thank you, Ronald. So I'll start, and then maybe Zhenhui can add on. So the logistics business enjoyed a great brand recognition amid 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 a B2B business, this -- the impact of the brand enhancement will not come immediately. So there will be lasting effects 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 performance, the productivity of our logistics team was exceptional. In fact, the cost per order reached an all-time low during the first quarter because the order volume spiked unexpectedly. And our team, frontline workers, as I highlighted earlier, really, I used the term heroic because not only they were highly productive, but they are 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 harmed throughout the pandemic situation. But that additional productivity helped our overall margin in Q1 on a year-over-year basis. And this is a business that build on scale. 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 -- this quarter. So it's another milestone for the group.

[Zhenhui Wang, executive]

[Interpreted] This is Wang Zhenhui from JD Logistics. I want to add a few things.

And as Sidney just mentioned, the experience, actually, including our staff experience, is always at the core of our business. And during this very special time, the safety and health of our frontline logistics staff, they are the first priority for us 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 are working in relatively safe environment.

And in addition to that, we have bought over 70,000 thermometers and over 10,000 disinfectants, et cetera, in all different sites to ensure the operational state at the first place.

And with the academic situation getting better, JD Logistics was among the first, and actually, in some areas, it's only logistic company, our JD couriers, who can deliver our product to door to our customers. And this has fully manifested the trust we have been built among our customers, our communities and the government. And this is also very helpful for us to gain more external orders and increase our revenues and services to all our clients. Thank you.

[Operator]

We have our next question from the line of Alicia Yap from Citigroup.

[Yik Wah Yap, analyst]

Congratulation on the strong results and guidance. My question is, could management elaborate a bit 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 from the COVID? Or was that a benefit that we are 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 more normalized?

[Xuande Huang;Chief Financial Officer, executive]

Okay. So I will -- it's Sidney. I will give a first shot and then maybe Xu Lei can add.

Yes. So what 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 are now the largest omnichannel supermarket in China. So we are here to benefit from the increasing demand on this category. Essentially, people will be cooking at home, and so that will increase the overall demand for fresh and supermarket sales, both online and offline. And so that has -- will benefit, but it will be somewhat offset by slower growth from the discretionary categories, as we have seen.

Now that the country is gradually opening up and everyone 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, it was actually seeing accelerating growth over the past 3 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 being 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 categories.

So it's really depending on the development of the COVID-19 situation. But in either direction, our business, because we are 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.

[Lei Xu, executive]

[Interpreted] Xu Lei from JD Retail. And on the usage side, we can see in Q1 the growth rate was very healthy. And especially, if we see the internal statistics, the existing customers and those reactivated customers are becoming more active this quarter. And if you see by the inset receiving address, over 60% of our users are coming from the 3rd- to 6th-tier cities; and by GMV, they account for over 50% of the overall GMV now.

And we will adopt a number of strategies to develop our user base in the future and, first of all, to target on our lower-tier city markets and users, and we will -- we call our dwell driver system driven by our JD platform and also by our main sites based on our more precise customer algorithm.

And in terms of the income -- China's income landscape and online rating, the characteristics of JD users are featured. A lot of them are middle and high-end users and a lot of them are household users. And it is one that by end of this quarter or early next quarter, we'll provide a specialized program to provide more tailor-made services to our middle and high-end users, provide them with more selected products with some paid services.

And as introduced earlier, that -- earlier on, we have established a new [ first-tier ] department under JD Retail focusing on the usage growth and operations. And so this department, they focus on the optimizing of the user's algorithm and their database and assets to do more precise operations and conversion of the new users. And the results in Q1 is pretty effective.

And in terms of the categories, actually on our platform, some of the categories have been benefited from the coronavirus situation and some have been badly battered, and their supply chains, et cetera, was slower than expectation. However, looking at the performance during the main holiday, we do see rapid growth in the home appliances and the fashion apparel segments.

And we'll also give a few words about our most important marketing activity, that is 6.18, in this quarter. And due to the epidemic earlier this year, we can see that the enthusiasm to participate into our 6.18 shopping festival from our brand partners, merchants and other retailers, online, offline, are very high. I think it's the highest since -- in the past 17 years. They were very engaged. And we can also expect that all the major players and competitors on this market are also very active in preparing for this event.

And as all of you know, that, 6.18 was created by JD 17 years ago. This was the 17th 6.18 event. And so -- and by nature, we will 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 investments from the merchants and brand makers to -- are coming our way.

If there's another major outbreak of the coronavirus again, we do think the 6.18 this year will be a golden opportunity for all the merchants and brand makers to recover and offset their loss in Q1. Thank you.

[Operator]

We have the next question from the line of Tina Long from Crédit Suisse.

[Yuanyuan Long, analyst]

Congratulations on the very strong results. I want to follow up on the lower-tier penetration because now, as Mr. Xu Lei just mentioned that we have seen, and recently I also noticed that we have Jingdong [indiscernible] Bang or JD Light. And also, we do have probably over 10,000 of JD Jingdong, Dada and [indiscernible]. So those stores in lower-tier cities. So -- and also, we sort of gave the first-level entry -- access point of WeChat to Jingxi since late last year.

So I want to know, first of all, from each app we just talked about when also including those offline shops, what kind of product offerings 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 after we sort of gave access to JingXi instead of JD?

[Lei Xu, executive]

[Interpreted] Let me just share some of our operations and our observations on the lower-tier markets. And so first of all, in building different shopping scenarios and places, we will not, like, rely on any single shopping scenarios. Besides the Jingxi platform, which is targeted to the lower-tier customers, we will also use our main site through algorithms to play a role in expanding our shopping scenario.

And just to be frank speaking, for Q1, the Jingxi platform in February and March was affected by both the spring festival and the epidemic situation. But as you can see on this earnings call results, on this platform, the percentage of our users and our GMV are all growing in the rate of -- also growing very healthily. So we are also adapting different measures to go down into the lower-tier markets.

And with the situation of the epidemic getting better, now the operation of Jingxi has come back to the normal level, the level before our spring festival.

And in the meantime, we also identified several opportunities for Jingxi to grow. First of all, due to the epidemic impacts, actually a lot of factories who originally produced commodities for export now is -- are looking at domestic sales opportunities, and Jingxi can find a good way to collaborate with them to help these factories to transform their business. And at the same time, Jingxi has done a lot of jobs to support the farmers to sell their agriculture produce, and so this is -- and -- through live streaming and different ways. This -- at the same time, it's also the social responsibility we are performing to help the farmers, et cetera.

And another shopping scenarios we have is our offline stores. We have build -- sanitized the stores of home appliances, consumer electronics and convenience stores, et cetera, and all these physical offline stores are playing a very important and positive role for us to go down to the lower-tier markets.

And besides our various ways to create shopping scenarios, we are also bringing our products down to the lower-tier cities through our C2M products and the self-owned brands and are working with different industrial belts to leverage all kinds of resources and to collaborate with the merchants and the makers, et cetera, 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 question.

[Operator]

We have our next question from the line of Jerry Liu from UBS.

[Yuan Liu, analyst]

My question is about margins. If we look at the first quarter, margins were -- 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 may be 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 margins. So just want to get a sense of the appetite for reinvestment or letting the margin come up a little bit.

[Xuande Huang;Chief Financial Officer, executive]

Yes. Sure, Jerry. This is Sidney. Yes, the plan -- 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. We'll definitely continue to invest, as we have always done, to seek the opportunities, to seize the opportunities. Xu Lei mentioned earlier about June 18 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 a great opportunity for us to retain the new customers that we acquired and also to build -- continue to build consumer behavior for multiple categories that we have gained so much in the past 3 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. Because it is an 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.

[Operator]

The next question comes from the line of Thomas Chong from Jefferies.

[Thomas Chong, analyst]

Congratulations on a very strong set of results. I have a question. It's about our suppliers. We have quite a lot of support to our suppliers to surpass through the challenging situations. Can management comment about the environment for suppliers in China? Are we seeing -- 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 passing through the situations? Or should we expect they will recover in the second half?

So there is more relating to the free cash flow side. Should we expect the free cash flow to turn positive in coming quarters?

[Xuande Huang;Chief Financial Officer, executive]

Okay. I'll first give a shot. Just on the support to suppliers, it happened mostly in February and maybe early -- 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 was quite effective. So by March, there are -- 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 to secure sought-after merchandise, to -- and is, to a lesser extent, just to pay payable earlier.

So I think overall, the financial health of the suppliers we work with, they are mostly mid- to large suppliers and brand owners, financially they are quite sound. There may be -- for the small/medium enterprises, there might be issues. So that's why we -- for our Jingxi business, for example, Xu Lei mentioned that there were some slowdown, but we are also seeing the activities picking up. So overall, we are cautiously optimistic.

Now on our own free cash flow, we do expect it to gradually return to normal but, on the other hand, just stay alert about a potential future W-shape, for example, scenarios. Then -- so cash flow will be -- 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, analyst]

Congratulations again.

[Xuande Huang;Chief Financial Officer, executive]

Thank you.

[Operator]

Your next question comes from the line of Eddie Leung from Bank of America.

[Eddie Leung, analyst]

Congratulations on a good quarter amid a difficult time for everyone. I have bigger-picture question. Given the strategy and aggressive tactics of some of our competitors, so do you see a risk to the industry's long-term margins? If not, why not?

[Xuande Huang;Chief Financial Officer, executive]

Yes. I think we have -- as I mentioned in my earlier remarks, we have been as aggressive as we could in our own right. We have been investing heavily in all of the categories. We always strive to provide the best value on top of the best service. So that's why I mentioned also earlier in response to Gary's question that we will clearly also step up our own investments given the strong -- relatively strong performance and investing back, basically giving back to our consumers, as we always do. And when we do that, we also work with brand and -- in a joint effort in those promotional activities and on top of our everyday low price.

So the fundamental driver for our margin -- I can't speak for others. The fundamental drivers for our business is from the economies of scale because as we continue to grow, we can gain more and more procurement benefits. Some are as straightforward as rebates, volume-based rebates. Others could be in the form of customized models and their private label products. So a lot of those tools will become available once you are the largest retailer in a category. So we will not be affected by others in the industry, which is the trend you have been seeing over the past few years. Because every year, if you recall, every year, there's a reason to believe the competition is stronger. Every year, there's a reason the competition become more fierce.

So -- but we continue to perform pretty well and with growth now accelerating and margin expanding.

[Operator]

We have our next question from the line of Gregory Zhao from Barclays.

[Gregory Zhao, analyst]

Congratulation to a strong quarter. So a really quick one. So we know a large majority of the products are produced by the local manufacturers. So -- but you still have a portion of the products are imported from the oversea market. So as the pandemic is still ongoing, right, in the rest of the world, how shall we think about the impact to your imports and the cross-border business?

[Lei Xu, executive]

[Interpreted] This is Xu Lei. For JD, our very fundamental and the highly well-known categories is our electronics and PC segments. And for the home and appliances categories, the supply chain was not heavily affected by this coronavirus, but a flat driver is more from the demand side because these products won't be delivered and installed at door. And for the mobile phone category, its development will not be -- the sales will not be heavily impacted -- affected in the later quarters as well. And the major impact on this category is the 5G new products released, which were planned to be launched in the first quarter, has now been postponed to be launched in this quarter. So you will see more new products of the 5G phones released in April and May.

And for the IT category, this will be -- have a -- or have more impact from the global supply chain, especially, you can see from 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 secure our leading positions and -- against all the odds of the coronavirus.

And for some categories, what may help them are from overseas willing to import, for example, baby products, cosmetics. And all of these, their impact in the first -- or in the second quarter is not very big, but there is uncertainty on the third quarter, and this will mainly depend on the epidemic situation in the manufacturer regions. Thank you.

[Operator]

We have our next question from the line of Eddy Wang from Morgan Stanley.

[Eddy Wang, analyst]

Congratulations on the great results. So I have a question regarding the advertising and the marketplace revenue. So we understand that in the first quarter, because of the COVID-19, they have an active impact on the -- parts of the revenue in terms of revenue growth. So have you witnessed this strong recovery, especially in terms of the advertising revenue from the third-party merchants in the second quarter so far?

[Lei Xu, executive]

[Interpreted] This is Xu Lei. You will see the results in 2019 in the advertising market. It only achieved single-digit growth, but the Internet advertising has taken a bigger share. And in this Q1, the overall Chinese market advertising revenues is a negative growth. And for those brands, advertising is also negative growth.

And what makes our JD advertising business different? First of all, well, our advertising services is highly integrated with branding advertising and sales because we are very close to the customers' shopping decision. And secondly, among all other advertisers, there's a lot who are from SMEs. However, you can see the absolute values, there's a lot of -- there's a very heavy investment from the large and medium-sized companies.

And thanks to all these factors, we have seen ROIs for our advertisers and the merchants are actually going up. And this, in turn, has given them much higher app value. And during this epidemic, special period of time, JD has become a very important place for those medium and big-sized enterprises, especially those brand partners, a favorite place to place their advertisement.

And with the COVID situation getting better, we have seen that the SMEs are being more active on the advertising transactions. And the difference was actually, for SMEs, they have even higher requirement on their ROI, and among all the Chinese e-commerce platforms, JD is doing a great job in providing the ROIs. And relatively speaking, I believe, for some e-commerce platforms that is not delivering good ROI results, will be -- will have a very big pressure this year.

So overall, we are satisfied with the performance of our advertising business performance for Q1. Thank you.

[Operator]

We have our next question from the line of James Lee from Miho (sic) [ Mizuho ].

[James Lee, analyst]

Can you give us an update on the state of deregulation 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 doing your experience with COVID-19, what gives you the confidence that the user behavior that you're seeing will remain? And how are you uniquely positioned to take advantage of this category?

[Lei Xu, executive]

[Interpreted] Xu Lei. I would like to give you a brief introduction on our JD Health development. Because of the epidemic outbreak, it gives us opportunity for faster growth of our JD Health. And this is such a young team and a young business, and they have contributed a lot to the society to fight against the coronavirus. We have been providing to ensuring the supplies of all kinds of medical materials and to provide free online telemedicine consultations and through the live streaming to spread knowledge about the virus, et cetera. So they have really done a lot of great jobs.

And besides the normal business of 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 consultation. And also, we are the first telemedicine platform to provide the coronavirus -- the nucleic assay testing services, which is very needed for a lot of workers who are waiting to -- waiting for coming back to work.

And in terms of our customers, for those young customers, the telemedicine is not a very easy thing to get used to. And for this COVID situation, it's very helpful for us to be known and used by the senior people, the over 50, 60 years old.

And on the government policy side, we have seen the opening of the online payment of the medical insurance, and this will greatly promote the development of telemedicine and online health services.

We're also seeing those hospitals and the pharmacies and all these related players, they are also actively embracing the Internet. And the value proposition of JD Health is to leverage our core capacities on supply chains and to provide our health services with our technologies to provide a whole, like, users services to more customers. And for the next step, we'll continue to strengthen our supply chains on the medicines and drugs and improve operability on health services. Thank you.

[James Lee, analyst]

And if I could ask a follow-up question maybe to Sidney about the long-term margins of the online pharmacy business. How should we think about that relative to your other categories?

[Xuande Huang;Chief Financial Officer, executive]

Well, yes. So if you look at -- when we look into this space, if you look at the off-line 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 a very similar pattern as our electronics/home appliance business, where I mentioned earlier that our expense ratio is 50%, 5-0 percent lower than the leading offline players. And here, for health care, our expense ratio was also significantly lower, probably 10 percentage point advantage versus the offline pharmacies. So this also give us the ability to provide the best value and best service to our consumers. So that is why our pharmacy business has been quietly growing tremendously over the past few years.

And it leverages our -- as Xu Lei mentioned, we have the existing customer base. We have the consumer recognition of JD as a trusted platform, which is quite essential for health care 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, great combination because of our cost structure driven by our technology. Cost structure is lower, so we can also have a decent margin for this business.

So this is where we are already. And we are seeing, as I mentioned, tremendous growth with this fundamental economics basically underlining our business model here.

[Operator]

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, executive]

Thank you, operator. Once again, thank you for joining us today. 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.

[Operator]

Thank you for your presentation in today's conference. This concludes the presentation. You may now disconnect. Goodbye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]