JD.Com Inc

HKEX:9618

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and thank you for standing by for JD.com Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Ruiyu Li.

[Ruiyu Li, executive]

Thank you, operator, and welcome to our Q3 2008 (sic) [ 2018 ] Earnings Call. Joining today on the call are: Richard Liu, our CEO; Lei Xu, our CMO and CEO of JD Mall; Sidney Huang, CFO; and Jon Liao, our Chief Strategy Officer.

For today's agenda, Mr. Huang will discuss highlights for the third quarter 2008 (sic) [ 2018 ]. Other management will join the Q&A session.

Before we continue, I refer you to the safe harbor statement in our 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 that, unless otherwise stated, all the figures mentioned during this conference call are in RMB.

Now I would like to turn the call over to Sidney.

[Xuande Huang, executive]

Thank you, Li, and hello, everyone. Thank you for joining us today.

We are pleased to report healthy development in major financial metrics in the third quarter. Our core e-commerce business continued its solid performance on both the top line and bottom line, while new businesses encouraging progress.

Net revenues in the third quarter grew a decent 25.1% year-on-year, in spite of slowing consumption affecting the large ticket electronics and appliances categories.

General merchandise revenues continued strong momentum, with over 40% in year-over-year growth during the quarter.

Also notable is our fulfilled GMV, which grew over 30% in the third quarter, supported by better long-tail product performance as a result of our focus on improving marketplace operations since last year.

Our preferred marketplace GMV grew over 40% across both electronics and general merchandise categories as we welcomed more than 20,000 merchants to our marketplace platform this quarter. Existing merchants also enjoyed our improving ecosystem, with both top-tier and the mid-tier merchants seeing reaccelerated growth on same-store sales in the quarter.

We are pleased to see JD.com remains one of the most attractive platforms for merchants in China to engage with end customers.

In addition, net service revenues grew 49% year-on-year and it contributed more than 10% of our total quarterly net revenues for the first time, supported by a strong growth in advertising and JD Logistics' third-party services.

Gross margin was relatively stable year-over-year, thanks to the gross margin expansion from the core JD Mall business, offset by JD Logistics, which is in an investment phase but has seen sequential improvement in unit economics over the past 3 quarters.

Non-GAAP gross margin in the third quarter was 15.2% compared to 15.3% in the same quarter last year.

If we look at JD Mall, gross margin on our direct sales business improved 15 basis points on a year-over-year basis on top of a very strong third quarter last year, driven by a continuous increase in economies of scale across all key categories.

During the third quarter, we continued to invest in R&D and technology infrastructure. Our R&D expenses totaled RMB 3.4 billion or 3.3% of total revenues, up approximately 120 basis points on the same quarter last year.

For the first 9 months of 2018, R&D expenses increased 88% to a total of RMB 8.6 billion. We believe these investments are critical to position ourself for the next phase of growth. With the key leaders and the various teams now in place, we expect the R&D expense ratio to begin to stabilize going forward.

Our fulfillment expense ratio improved 20 basis points in the third quarter, driven by better unit economics. Our marketing expenses ratio and G&A expense ratio was 3.9% and 1.3%, respectively, comparable to the same quarter of last year.

Non-GAAP operating margin was 0.6% in the third quarter compared to 1.8% last year, with the difference mostly attributable to the higher R&D expenses. Non-GAAP operating margin for JD Mall was 2.2%, 0.1% lower than the same period last year. For the first 9 months of 2018, non-GAAP operating margin of JD Mall was 1.7%, comparable to the level in the same period last year, thanks to continued improvements on our core e-commerce gross margin, offset by higher R&D expenses at JD Mall.

Our operating cash flow remained positive after the seasonally high second quarter, while free cash flow was negative due to high CapEx during the quarter, including RMB 3.6 billion in land use rights and construction of warehouses and RMB 5 billion in IT infrastructure.

As of September 30, 2018, our cash position remains strong, with cash and short-term liquid investments totaling RMB 42.9 billion.

In addition, as we communicated last quarter, we are in the process of transferring some of our logistics real estate assets into a core fund, which should help unlock the hidden value of these assets and to further strengthen our cash position.

Now let's discuss our financial outlook.

We expect Q4 2018 net revenue growth to be between 18% and 23% on a year-over-year basis. Our Q4 guidance reflects relatively soft retail sales in certain durable goods categories, as indicated in the latest National Bureau of Statistics report. Despite slowing retail sales according to the NBS data, we are encouraged by the 11/11 promotion season, where most categories showed above the industry growth rates based on our brand partners' feedbacks and third-party industry report, and our marketplace continued to grow faster during the promotion season.

This concludes my prepared remarks. We will now take your questions.

[Operator]

[Operator Instructions] The first question is from the line of Eddie Leung from Merrill Lynch.

[Eddie Leung, analyst]

Could you comment on the macro environment, especially in the retail space? And how does it affect your monetization strategy, as well as your logistic expansion plans? And then just a follow-up question on the increase in the R&D investment. Could you talk a little bit about how various projects have helped your business in the past couple of quarters? Any examples and used cases would be great.

[Xuande Huang, executive]

Okay. So I will start and others may contribute later. So on the macro, I mentioned that we did see some impact on durable goods categories, and -- but during our latest promotion season, we actually saw JD continue to lead the industry growth when we check with our brand partners. But there seems to be some impact on the big ticket-sized items. While for general merchandise categories, we continue to see very healthy growth rate. And in terms of impact, because we are a mass-market retailer, our scale gives us unique pricing competitive advantage. So in -- even in an economically slowing time, we do believe our value proposition with quality at everyday low price and better services will continue to win customers. So we do not see any major impact on our overall profitability trend moving into next year. Now on the logistics investment, the type of customer experience that this service can provide is clearly showing the JD unique advantage, not only on our first-party business, but as I mentioned earlier, our marketplace business has expanded faster. And part of that growth is from our logistics services that are increasingly utilized by our top merchants.

[Jianwen Liao, executive]

Just to add one more, Ed. In terms of the technology investment, of course, we continue to invest in retail innovation, in terms of social commerce and common commerce. I think this would be on the next point here of profitable growth for JD. But additionally, we mainly look into smart suppliers, smart logistic and smart consumption in terms of pushing the frontier of efficiency in cost and the customer experience as well.

[Operator]

Next question comes from the line of Alicia Yap from Citi.

[Alicis a Yap, analyst]

I have questions on the JD initiative on this Retail as a Service and overall JD positioning. So could you help us understand a bit more about this Zu Chongzhi platform? Which industry vertical will that specifically target? How is that service JD's offering different from the service provider by the bigger peer? And related to that, appreciate if management could also help us redefine JD positioning. Will JD continue to sign up global brands on your platform? And it seems that JD is moving away from the local brands and put more focus on servicing the international brand. So any change of JD visions of being the retailer? Or is it JD shifting focus to become more a service provider?

[Jianwen Liao, executive]

Yes. Let me explain in the Retail as a Service concept first. As I mentioned in my previous earnings call, we define the future of retail as boundary-less retail, which means the retail industry will become even more fragmented and decentralized than ever before. So in this case, JD is moving away from a vertical industry model to more open model. So in other words, in the past, the one reason why JD had become so successful is because we provide end-to-end solutions for retailers, so like JD Mall, we have JD Logistics, and so on and so forth. So moving forward, we have to open up our retailing structure to [ complement ] our value chain. So in other words, we wanted to provide our retail and logistics service to the other retailers as well, meaning if we look at another way in innovation, common commerce, social commerce and so on and so forth, it can be conceivable for [ those retail ] innovators to develop those heavy assets in the network base, the retail infrastructure. So in this case, the JD retail opened up a retail infrastructure to enable and empower more retail innovation. So this is how we define Retail as a Service, which basically consists of 2 components: Number one, of course, is JD will continue to focus on retail innovation as our main focus. At the same time, we'll open up a lot of retail infrastructure like logistics, like our technology to connect and enable retail innovation. So that's how -- that's what we mean by Retail as a Service.

[Alicis a Yap, analyst]

Good. Sorry, what about the positioning as kind of a service provider versus the traditional retailer?

[Jianwen Liao, executive]

Yes. Of course, the retail infrastructure will become the service providers for other retailers. So we do expect, as indicated in our webinar, the service revenue has been growing significantly, and it's a part of our Retail as a Service strategy.

[Operator]

Next question is from the line of Ronald Keung from Goldman Sachs.

[Ronald Keung, analyst]

We're presently to see -- pleasant to see the third -- 3P growth, the strong growth of 40%, which is above the industry growth over the quarter. Can you share like what categories have brought this healthy growth? Particularly, how did apparel perform during the quarter? And how does management see sort of the 2019 for your marketplace growth with the new e-commerce law coming up in the upcoming year?

[Xuande Huang, executive]

Sure. So we have seen actually growth across multiple categories on our marketplace, mainly from long-tail products and the long-tail merchants. We added a fairly large number of new merchants now, with total over 200,000 merchants on our platform. Both our electronics categories and general merchandise categories saw growth rate over 40%. So it is really a part of a result of our overall platform improvement. We are also pleased to see that the general merchandise GMV as a total of our overall fulfilled GMV now surpassed the 50% mark during the third quarter, which is again, a great validation that JD continues to become a full category platform that attracts the customers and merchants across all the key categories.

[Operator]

Next question is from the line of Alex Yao from JPMorgan.

[Alex Yao, analyst]

Can you help us understand your top strategic focus for 2019, given the macro outlook for the emerging growth opportunities across off-line retail, logistics, et cetera, et cetera? Where will you be focusing on for 2019? And then related to that, how would you prioritize the financial resource allocation, i.e. in a macro consumption backdrop when your financial flexibility is relatively weaker, will you continue to invest aggressively across the new initiatives? Or are these initiatives will slow down a little bit depending on the macro condition?

[Xuande Huang, executive]

Our overall growth strategy has always been long-term driven, so we'll continue to invest for various long-term initiatives. However, after the last couple of years of investments, particularly for example, in R&D areas, we have now have our key teams and key leaders in place. And some of our initiatives over the past 2 years have beginning to see some very positive results. So we will continue to invest for the future, while we will obviously put more discipline, and at the same time, on our more developed, more growth business so that there will be a very good balance in the future. We will always be mindful of the resources we have and strike a good balance of both long-term growth and the near-term financial results.

[Jianwen Liao, executive]

Yes. We -- I think we have to have a new growth mindset moving forward in terms of 3 different balances: Number one, a balance in the top line and the bottom line to make it more profitable. That's the first one. Number two, to balance core business, growth business and the future business to make it more sustaining. Number three, to balance net profit, people and the place to make it more sustainable. So I think that's a new way we define our growth mindset.

[Operator]

Next question comes from the line of Jerry Liu from UBS.

[Yuan Liu, analyst]

Sydney and Jon, from your comments so far on this call, I'm hearing about logistics unit economics improving, R&D expense ratios stabilizing, no macro impacts on the profitability trends and just now talking about balancing top line and bottom line. So despite year-to-date net margins being lower this year than last year, I'm hearing a lot of things that suggest maybe net margins can stabilize or improve as we head into next year. Is that the right read?

[Xuande Huang, executive]

Sure. Yes. We have maintained that, on a long-term basis, our margin should gradually improve. So this year because of JD Logistics was in an investing year, so my last earnings call, we mentioned that this year will be more making sure that JD Mall will maintain a stable margin trend with some upside. But if you look at from a couple more years or from last year to next year, we do see the margin continue to gradually improve. Obviously, there will be some of the other new business lines, like I mentioned, JD Logistics real estate business as part of the contribution as well. So overall, we do intend to have the full intention to grow the business, investing for the long term, while gradually improving the bottom line.

[Operator]

Next question is from the line of Thomas Chong from Crédit Suisse.

[Yiu Hung Chong, analyst]

I have 2 questions. My first question is about the customer growth during the quarter. We have seen negative sequential growth. Can management explain about the reason and how we should think about the trend going forward? And my second question is about our CapEx. How should we think about the CapEx in 2019 and 2020 as a percentage of revenue, if there's any?

[Xuande Huang, executive]

Yes, I'll take the CapEx question first and Xu Lei will take on the on the user question. So for CapEx, this is definitely a very heavy CapEx investment year. Partly, it's driven by our logistics warehousing build-out and partly is because of our IT infrastructure, but both of which, we hope will complete the heaviest investing phase this year and there should be somewhat of a moderating trend moving into -- moving to next year.

[Lei Xu, executive]

[Foreign Language] Let me take the question about users. [Foreign Language] As the economy slows down and in the light of JD.com having already more than 100 billion, 300 billion users, I think at this particular stage, we need to focus more on the quality of growth -- quality of users. [Foreign Language] As our logistics network penetrates into the lower-tier cities, we have recently started to step up our marketing efforts towards those areas. [Foreign Language] And also, we find it very effective to attract new users, particularly lower-tier users and the female users through initiatives in the area for decentralized and now open-shelf models like Google buying, Mini Programs and Kepler and et cetera. [Foreign Language] Some categories enjoy ample room for growth off-line, especially in lower-tier cities. To capture this opportunity, we will integrate online with off-line operations, come up with new product models and create new off-line selling scenarios. [Foreign Language] And also, I'd like to add 2 more points. One is that we find there are plenty of middle-income and the low-income people in first and second-tier cities. We have extensive market penetration and brand awareness, so we will tap into that segment, too. [Foreign Language] We will also work to boost our retention rate and the ARPU, average revenue per user, by enhancing our cross-category penetration.

[Operator]

We'll now go on to the next question from Grace Chen from Morgan Stanley. We'll move on to our next question from the line of Jin Yoon from New Street Research.

[Jin-Kyu Yoon, analyst]

Sidney, in your prepared remarks, you talked about strength in advertising. Can you just talk about the drivers behind that in the quarter? Any potential structural meaningful changes you have seen in the recent quarter as well?

[Lei Xu, executive]

[Foreign Language] Let me take the question. The consumers' growth in our advertising income is mainly due to the optimization of our algorithm and the improvement in technology capacity. Our ECPM is at constant rate. [Foreign Language] Since JD's retail business includes both direct sales and marketplace platform, we will balance advertising income with user experience. Also, in the utilization of traffic, we will try to strike a balance between retail sales and advertising monetization. [Foreign Language] As our algorithm optimized, we have changed the composition of our advertising products, cutting down on CPD and jacking up RTD. However, our advertising income has still maintained a very good revenue growth momentum. We aim to get win-win situation with both the ad monetization and merchant satisfaction.

[Operator]

We'll now move on to the next question from James Lee from Mizuho Securities.

[James Lee, analyst]

Yes. And this question is for Richard specifically. Maybe can you help us understand how your role will be changed at the firm going forward, given that a new leadership team has been put in place? And what's your key focus going forward? And what business segment will you be focusing on personally?

[Qiangdong Liu, executive]

[Foreign Language] As you correctly pointed out, the leadership team of JD has already been put in place, and they're staying very steady, good job. [Foreign Language] For me personally, I will focus more on new businesses. For mature businesses, our team can handle that. [Foreign Language] Since some friends have raised a question about our growth strategy for next year, so I'd like to take this opportunity to say a few words about that. [Foreign Language] As was just mentioned, our R&D expenditure for the first 9 months, from January to September, experienced a growth of 88% year-on-year, and the number actually hasn't included Jingdong's [ Shenyang ] R&D expenditure. [Foreign Language] We have started a lot of new R&D projects. And also, we encourage competition across -- among different R&D teams. For example, our store-based technology, we encourage them to compete. [Foreign Language] In the past year, we've tried out in many ways. And now actually, we can see the future, see the direction very clearly. So we are now deploying our teams to the right R&D projects, to the right direction. [Foreign Language] So for next year, the total amount of R&D expenditure might not increase, will not grow. [Foreign Language] At the same time, the net profitability of JD Logistics will boost a lot. [Foreign Language] So I do think next year our net profit performance will be better than this year. [Foreign Language] In terms of growth, the customer will grow faster than investor average to gain more market share. [Foreign Language] Just in terms of cash flow, this year, the underwrites cost and logistics -- the investment be coming this year, so put our cash flow position into quite a strong pressure. For next year -- a severe pressure. Next year, I do see we will improve a lot in this area. [Foreign Language] In a nutshell, next year, we will grow much higher than the investor average and we will improve on our gross profit and also net profit. [Foreign Language] And with this consistent investment in R&D for so many years, I do think next year, we can get the results. We will do better in technology income. [Foreign Language] For me, I personally focus on 4 things: one is strategy, the other is culture, and then team and then new business.

[Operator]

I will continue with the next question from Wendy Huang from Macquarie.

[Wendy Huang, analyst]

I just had 2 quick questions. One is on the competitive landscape in the logistics space. So on the one hand, you are expanding aggressively into third-party logistics with several initiatives in the past few quarters. But on the other hand, we also noticed Gome, Suning, they are fighting back in business. They're set to build a large automatic sorting center in Shenyang as well. So maybe if you can give any color on that will be great. And certainly since Richard is on the call, I just wonder if you can give us any update on the allegation against the prison case?

[Xuande Huang, executive]

Okay. So on the logistics, as we mentioned in the past, JD Logistics has built the unrivaled infrastructure by serving our own first-party e-commerce business. And along the way, earned a great customer -- earned very, very good service quality and -- over the years. So -- and as we continue to implement our retail infrastructure strategy, the service strategy, we have seen merchants actually and the brand came to us to provide similar logistics services to these third-party partners. So this has been a theme that we mentioned since earlier of this year. And obviously, with the sales growth this year at a triple digit for the past several quarters, clearly, there are very unique value being provided by the JD Logistics. And on your second question, I just want to answer that. We really do not have any information to share with you. And honestly, we cannot further comment because it is important that we respect the due process of the U.S. justice system. As you see, Richard has been back to work as usual in the company and the situation did not and is not expected to have any material impact on JD operations. Our strong senior leadership team, with most of its members having spent 5 to 10 years with the company, continues to effectively guide our company towards its goal to grow our business and serve our customers. So as the purpose of today's call is to discuss our earnings results, so we would appreciate you limit -- limiting further questions to this topic. Thank you.

[Operator]

We'll take the next questions from Jialong Shi from Nomura.

[Jialong Shi, analyst]

I will ask my question first in Chinese, then I will translate into English myself. [Foreign Language] So I have 2 questions. My first question is about 7Fresh. I just wonder what management's store open plan under 7Fresh initiative and whether or not 7Fresh will be accounted as a part of JD Mall? And how shall we assess the margin impact from 7Fresh for this year and next year? And for JD Logistics, and I just wonder if the management can provide an update on the progress of capitalizing the JD Logistics, some of JD Logistics resources, which CFO mentioned on last quarterly call. And now I just wonder how should we assess the margin impact from this initiative.

[Xuande Huang, executive]

Sure. So for 7Fresh, we expect, in aggregate, a dozen or so stores by end of this year and probably another 20-plus stores in the first half of next year. Now because we want to be -- expand the business in a prudent manner, we're actually opening the stores in a very careful and be well prepared for orders' initial preparations. So in terms of impact on the margins, we do not expect any material impact on our overall margin. And for the current performance of the existing stores, we are actually pretty comfortable that, on a single-store basis, the margin should be breakeven and turn positive in a relatively short period of time. And for the logistics assets, we are transferring some of the existing assets into a core fund. And we've received a very good initial investor interest, very good indication. We still expect that transaction to happen in the first half of next year.

[Operator]

Next question comes from the line of Natalie Wu from CICC.

[Yue Wu, analyst]

Just wondering, for the contract with Tencent regarding the Weixin level 1 access point should be terminated next year, can management update us the following the newer progress?

[Jianwen Liao, executive]

Yes. Since the Tencent investment into JD, we have been collaborating really well in a number of fronts in terms investment, in terms of off-line retailing such as [Foreign Language], right, and [Foreign Language] as well. I think for the next level of collaboration, of course, we will extend the ground base for bringing the assets to multiple fronts, such as social commerce and to [ e- ] business as well. So right now, we are continuing our discussion, and we should have more updates in the near future.

[Operator]

Next question is from the line Tian Hou from T.H. Capital.

[Tian Hou, analyst]

The question is related to the country category expansion. So as Sid mentioned, the general merchandise the first time was about 50%. I remember since the day JD become a publicly listed company, this has been the goal and seems like the final review accomplished that. And however, given the fact that cellphones and home appliances increasing some enhancements, what's the company's strategy in expanding in other categories rapidly to really offset this heightened interest in other 2 major categories? [Foreign Language]

[Xuande Huang, executive]

Yes, sure. So as we mentioned in the past, JD as a platform has always invested, first, in the overall marketplace operations, including merchant experience. We talked about for some time. And also, from our overall strategic planning point of view, Jon mentioned the last time that we, in addition to growing our more established business, we have been also investing in some of the so-called the $100 billion club into some of the new categories. So it's really a result of all of these efforts that helped us expand our general merchandise categories. So we did mention some of the categories in the past. Obviously, our home products, FMCG, our fresh products, also our -- a number of other ones that we mentioned along the years. Because when you look at these categories, we do see fairly consistent growth across all of these categories. So it is really the power of the overall platform rather than any particular focus on just one of them.

[Operator]

Next question is from the line of Binnie Wong from HSBC.

[Wai Yan Wong, analyst]

My first question is on the Retail as a Service strategy. So I think in the last few quarters, we have been seeing that we have been gaining traction as we open up to a wide range of partners. So can management update -- share with us any progress update in terms of like the number of partners or any use cases of how our strategy has improved the productivity for our retail partners? And also, update on any monetization strategy in this area will be very helpful. And my second question is a follow-up on the growth strategy, right? Because we -- I think you mentioned or have mentioned that the decline in the annual active customers this quarter was because you want to focus on the quality. So we, of course, see the GMV per customer has been improving. So I just want to see that, that focus isn't mainly the driver for the GMV increase like the quality customer. Is it mainly from the consumption upgrade? Or is that because that we -- the customers are buying in more categories? So how should we think of that? And second to that is that, on the loyalty program, because we see good progress, right, on the premium membership, how much higher is the users that have the premium membership? How much bigger basket size are they buying versus those that do not have this premium membership?

[Xuande Huang, executive]

Yes. So try to limit 2 questions each person. I'll try to answer the first one and then Xu Lei can answer on the Plus membership program. So for the 2B business, I mentioned first our service revenue has surpassed 10% of total revenue for the first time. So a lot of that is happening, obviously, mainly with JD Logistics is one of them. But also, on our Mini Program on the, we call it Project Kepler internally, as Xu Lei mentioned earlier. These are all also generating meaningful progress for our merchants, brands and also for our customers and the partners. So some of these are -- in terms of revenue contributions, it's still small. But clearly, we are gaining traction in these areas. Xu Lei?

[Lei Xu, executive]

[Foreign Language] In the third quarter, Plus members have exceeded 10 million. These are our core users with the strongest purchasing power, performing great in terms of buying frequency and average revenue per user, ARPU. [Foreign Language] We will continue to optimize and invest in membership benefits with more and more brands and partners becoming aware of the value to those Plus members. A co-membership and value-added service will be our focus for the next stage. [Foreign Language] Our co-membership project with IT has been doing very well. So we'll look at expanding from videos to travel to entertainment, catering, [ knowledge quotient, ] et cetera. That's it.

[Operator]

Our next question is from the line of Susanna Chui from RBS (sic) [ DBS ].

[Man Nga Chui, analyst]

Could management update 7Fresh operating data? For example, so sales per square meter versus their traditional supermarket and the online order contribution? And could management share how your retail strategy differentiate from their competitors?

[Xuande Huang, executive]

Yes. On 7fresh, because the current scale is still relatively small, I did mention last quarter that sales per square meters is roughly 3 to 4x of the traditional off-line retail sales figures. Sorry, I lost the second question.

[Jianwen Liao, executive]

Can you ask the second question again?

[Man Nga Chui, analyst]

Yes, sure. I would like to -- management to share how is your retail strategy differentiate with your other competitors? Yes.

[Jianwen Liao, executive]

I think in the mall centers, I think we're moving in -- I mean, because we look at retail for the future, I guess, a different way. As such we have a different strategy. From JD's standpoint, we moved from a vertically integrated model to become more open model. And comparatively speaking, our competition is moving from the open model to become more a vertically-integrated model. So that's the simple way to put it.

[Operator]

Next question is from the line of Hans Chung from KeyBanc Capital.

[Mon Han Chung, analyst]

I have a question regarding the JD Logistics, and the management team mentioned earlier the profitability will improve a lot next year. So I just want to know, is it driven by that like pricing or new customer growth or the cost reduction initiatives? And then follow-up is, when will we start to see the logistics start to breakeven?

[Xuande Huang, executive]

Yes, sure. It's actually from multiple areas. So we mentioned because it was the initial year, we did expand the capacities at the beginning so that we can have ample capacity to serve the new customers very well. And so initially, there was some overcapacity, that was one initially. Then two, is that we offered discounted trial period for the customers to try out our services. Part of the reason for that is our supply chain management services involving the integrated warehouse and delivery service. So for the warehousing part, there is a natural kind of a start-up cost because the merchant and brands tend to have their own warehouses, existing warehouses. So any migration to our service may incur initial incremental cost. So our initial trial period essentially lowered the barrier for this initial service period. And as we move past those initial periods, obviously also with the capacity, warehouse capacity better utilized, loss ratio will gradually shrink. So that's actually a fairly natural outcome after the initial investing phase. So for the third quarter, which is actually a seasonally low quarter, we were very pleased to see continued narrowing on loss ratio because the business volume still grew on a sequential basis for this particular business, which continued to have better -- improving the utilization for our overall capacity.

[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]

Thanks, operator, and thank you, everyone, for joining us today. Please feel free to contact us if you have any further questions. We look forward to talking with you in the coming months.

[Operator]

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