JD.com, Inc. (NASDAQ:JD) Q3 2022 Earnings Call Transcript

JD.com, Inc. (NASDAQ:JD) Q3 2022 Earnings Call Transcript November 18, 2022

JD.com, Inc. beats earnings expectations. Reported EPS is $6.27, expectations were $4.45.

Operator: Hello, and thank you for standing by for JD.com’s Third Quarter 2022 Earnings Conference Call. . 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, Sean Zhang. Please go ahead.

Sean Zhang: Thank you, Russell. Good evening, and good day, everyone. Welcome to JD.com’s Third Quarter 2022 Earnings Conference Call. For today’s call, CEO of JD.com, Mr. Lei Xu, will kick off with opening remarks. Our CFO, Ms. Sandy Xu, will discuss the financial results. After that, we’ll open the call to questions from analysts. I’d like to remind you that during this call, our comments and responses to your questions reflect management’s views as of today only, and will include forward-looking statements. Please refer to our related safe harbor statements in the earnings press release on our IR website, which applies to this call. We will discuss certain non-GAAP financial measures. Please also refer to the reconciliation of non-GAAP measures to the comparable GAAP measures in the earnings press release. Also, please note that, unless otherwise stated, all figures mentioned in this call are in RMB. With that, I will turn the call over to Mr. Xu, our CEO. Xu?

Photo by Igor Miske on Unsplash

Lei Xu: Hello, everyone. This is Xu Lei. Thank you for joining JD.com’s third quarter earnings call. 2022 has been a year full of challenges, a year both momentous and extraordinary. We have withstood nationwide COVID resurgences, challenging macro conditions, flattish consumption demand as well as supply chain disruptions. Facing the complex dynamics, JD has been making full use of our supply chain capability and a resilient business model, which we built over the years as we strived to provide best possible service to customers, raise operating certainty for real economy participants, while at the same time, delivering steady business growth of our own. Moreover, we are delighted to see substantial improvement in our growth quality this year.

Given the evolving economic and industry environment, since the beginning of the year, JD made preemptive decisions to focus on our core businesses while reinforcing quality, operations and management and attaching greater importance to business health. We believe this is the best way to maintain operating stability in times of external stress and ensure rapid regeneration while the economy recovers. As a result, along with our steady business growth, we have also experienced better operating quality, stability and profitability. This validates what we have communicated with investors many times before about the potential for margin improvement in our unique business model. It also builds a solid foundation for our sustainable development throughout different economic cycles.

We welcome and support the government’s recent move to further optimize COVID control measures with a more science-based and targeted approach. We believe that this is important to contain virus threats and maintain the stability of economic and social development. They are also supporting policies for companies like JD that play an indispensable part in supporting the industrial belt and people’s livelihood. We will fully cooperate with and implement the authorities’ relevant decisions and arrangements. It is true that COVID conditions will continue to pose challenges to the economy and consumption in the near term. That said, we remain confident in the continuous refinement of the COVID control measures, the resilience of the Chinese economy and the long-term prospects of the consumption market here.

We also see growth opportunities amidst all the challenges. As we made proactive adjustments and focused on our operating quality, we always put the essence of the retail business at the center of our core competencies and business model, namely customer experience, cost optimization and operational efficiency. With this long-held business philosophy in mind, we continue to achieve great progress in increasing customers’ mind share and supply chain efficiencies. In Q3, JD’s annual active user base reached 588 million, mainly driven by the net addition of over 10 million active users from our core retail business. Our DAU also recorded a double-digit year-on-year growth. In addition to user base expansion, we also saw better user structure and user quality.

In particular, both the number of old users and PLUS members delivered higher growth rates than other groups of users and made up a larger proportion of total users. This helped to drive increases in overall average shopping frequency and ARPU. For PLUS members, along with the scale expansion, we also saw that each of them on average spent over 8x as much as a non-PLUS member, demonstrating their high degree of loyalty engagement and purchasing power. During the latest Singles’ Day Grand Promotion, JD highlighted the grand theme of cost-effectiveness and value for money, which helped us to onboard an increasing number of high-quality merchants and products. The promotion achieved a solid growth with a meaningful increase in the number of shopping users and a record number of participating brands, merchants and offline stores.

In addition, the promotion of Singles” Day growth for many agricultural households and areas with nearly 10,000 SKUs of agricultural products sold over RMB 100,000. JD is committed to promoting the virtuous cycle of rural revitalization from direct sourcing of high-quality agricultural products to consumption upgrades to increased income performance. During the promotion, we were also proud to see that over 500 million users clicked the best price guaranteed program in the app and aftersales service that JD has provided for many years. This reflects JD’s supply chain capabilities and showcases our commitment to providing the best possible user experience, helping users to feel reassured at all times when they shop on our platform. This service has become a hallmark of JD’s premium user experience and also pushes the boundaries of what the industry can do to advance user experience.

The continuous improvement of operating quality also makes a solid foundation for us to make further progress in our long-term strategies, namely our online marketplace ecosystem, omnichannel businesses and supply chain capabilities, to empower the real economy. Our online marketplace ecosystem made solid progress in Q3 with the number of third-party merchants recording over 20% year-on-year growth for the seventh quarter in a row. Fashion, home group, sports and outdoor categories all outperformed the industry. Notably, with the onboarding of the Italian fashion brand, Fendi, JD has become the first platform to establish an all-around partnership with the nine luxury brands under the LVMH Group. A collection of fashion, cosmetics and sportswear brands also joined JD in Q3, such as Christian Louboutin, La Prairie and lululemon, further expanding our brand base.

In addition, our supermarket business, JD Super, continued to roll out its National Pavillions program, providing consumers high-quality specialty products worldwide. In addition to the 70 National Pavillions already in operation, we welcomed nearly 20 countries who opened their National Pavillions on JD.com during the latest Singles’ Day Grand Promotion. Overall, JD is dedicated to build an online marketplace ecosystem, where merchants can thrive with lower entry barriers and operating costs, better traffic allocation and marketplace rules as well as higher operating efficiency driven by the best of JD’s supply chain, logistics and the technical capabilities. All these efforts have contributed to a sustainable growth of merchants and SMEs in times of uncertainty.

During the latest promotion, merchants on our platform reported stellar performance with higher sales contribution, both on a year-on-year basis and compared to this year’s 618 Grand Promotion. JD’s omnichannel intra-city business maintained a strong growth momentum in Q3. In particular, Shop Now, our 1-hour delivery service, recorded a triple-digit year-on-year GMV growth with the services covering the vast majority of supermarket chains in China. Shop Now has forged close collaborations with brands and offline stores and generated incremental growth through omnichannels for brick-and-mortar partners. During the latest promotion, as the only on-demand retail platform selected by Apple for the presales of new iPhone 14 series, JDDJ worked together with Shop Now and sold hundreds of thousands of new iPhone models, making a record for new iPhone sales using on-demand retail model.

In addition, JDDJ and Shop Now also partnered with over 200,000 offline stores during the latest promotion, covering a wide range of categories, such as supermarkets, mobile phones and electronics, cosmetics, home goods, baby and maternal and pets, and provided hourly delivery services in over 1,800 cities and counties. Despite the challenging environment, JD Logistics continued to provide up- and downstream industry partnering with reliable integrated supply chain solutions, supporting enterprise customers to mitigate risks, respond to rapid external challenges and optimize cost and efficiency. In Q3, JDL also expanded the depth and breadth of collaborations with a variety of leading players in FMCG, home appliance, furniture, apparel, 3C, automobile and fresh produce industries.

As a result, JDL maintained a resilient revenue growth in this quarter. Notably, both the number of JDL’s external customers and external revenue delivered double-digit year-on-year growth with the latter contributing nearly 70% of its total revenue in Q3. Moreover, JDL continued to expand its logistics infrastructure around the world. As of the end of Q3, JDL operated over 1,500 warehouses with an aggregate gross floor area of over 30 million square meters. It is also worth highlighting that JD Logistics Airlines, an affiliate of JD Logistics, commenced operation in Q3. In the future, JD Logistics Airlines will strengthen JDL’s integrated supply chain services and help drive lower cost and higher efficiencies along the supply chain. To conclude, amid the evolving external environment this year, JD had the foresight to double down on operating quality and the core business.

This has enabled us to comfortably deliver high-quality growth, generate healthy margins and cash flow and accumulate strength for long-term development down the road. As I mentioned last quarter, as we navigate through the cyclical economic adjustments and the short-term challenges, we expect to see the momentum and the tremendous growth opportunities ahead of us. As a company that is rooted in and services the real economy, JD supports the expansion of the demand side and the structural reform of the supply side in China, helping the real economy to achieve better quality and sustainable growth. Looking ahead, our well-established supply chain infrastructure, technical capabilities and the social responsibilities we are committed to will enable us to play a more important role in China’s new development phase.

We believe that only through our , determination and perseverance can we live up through the times. With that, I’d like to give the floor to Sandy.

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Sandy Xu: Thank you, Lei, and hello, everyone. As many of you can see here on the ground, the COVID situation is still evolving and may add complexities to consumer sentiment and the operational environment from time-to-time. Nevertheless, in the third quarter, we recorded a set of improving metrics and encouraging milestones across our financial and business operations. Our solid results in the quarter demonstrated our ability to cope with difficult external dynamics while improving our core competencies to support a more sustainable growth trajectory going forward. In the third quarter, our net revenues grew by 11% year-on-year to RMB 244 billion, returning to a healthy growth track. We navigated through a challenging time, impacted by COVID resurgence and macro uncertainties.

Our annual active user base also returned to growth and reached 588 million in total, representing a net addition of 7.5 million customers sequentially despite a partial drag due to our Jingxi business adjustment. More encouragingly, we saw more customers staying with us for a longer time. And average spending per customer has been consistently increasing as well. All of these improving metrics demonstrated deeper user engagement and enhanced customer trust. Breaking down the revenue mix. Product revenues were up 6% year-on-year, a recovery compared to 3% year-on-year growth in Q2. Service revenues grew by 42% year-on-year to RMB 46.5 billion, achieving a historic high of 19% of total net revenue. Logistics and other services revenues grew by 73% year-on-year in Q3.

Excluding the consolidation effect of Deppon, it still delivered a year-on-year growth rate of 36%, continuing the momentum from Q2. I will elaborate more on the underlying drivers later. Marketplace and marketing revenue grew by 13% year-on-year, up from 9% year-on-year growth in Q2. In order to drive recovery, we saw merchants becoming more active again and invested additional advertising budget on our platform, which helped to accelerate our advertising revenue growth. Also, thanks to our relentless focus in improving the 3P ecosystem, we successfully onboarded an increasing number of merchants onto our platform, including a few notable wins in the apparel category. This brought our merchant base to a new height, laying a solid foundation for our open ecosystem.

Now let’s turn to our segment performance. JD Retail maintained solid top line growth with a healthier business mix and a continued margin improvement on a year-on-year basis. JD Retail’s revenues reached RMB 212 billion in Q3, growing at a solid 7% year-on-year. Electronics and home appliance categories returned to an impressive 8% year-on-year growth, up from flat growth in Q2. During the quarter, as a result of our supply chain capabilities and strong consumer mind share, we swiftly matched the demand side for air-conditioners due to the unusual weather pattern, driving double-digit revenue growth in the home appliance category. Meanwhile, the launch of the latest mobile phone models in September helped to lift consumer demand and sales.

General merchandise revenues were up 3% year-on-year in Q3. COVID situation and a hard macro continued to dampen spending in consumer discretionary products, such as cosmetics, beverages, and partially contributed to the soft growth of general merchandise. Meanwhile, we started to proactively optimize our product mix, particularly in the supermarket category, to improve operating efficiency and profitability, which we expect to impact its growth rate for transitionary period. However, we believe it is important for us to stay focused on our core categories and capabilities in order to establish a healthier and more sustainable growth trajectory for the long term. That said, for the emerging categories, such as health care, home goods, pets and sports and outdoor, we continue to experience double-digit top line growth in the quarter, demonstrating our compelling user mind share across a wide range of categories.

We are seeing the results of our business optimization. JD Retail’s fulfilled gross margin was up 80 basis points compared to the same quarter last year, mainly driven by our optimization efforts and the improving economies of scale. Also, as we continued to expand gross margin for most categories and remained disciplined in OpEx, JD Retail’s operating margin was up 115 basis points on a year-over-year basis to 5.2% in Q3, above the 5% mark for the first time since the founding of the company. JD Logistics, or JDL, maintained a solid top line growth in Q3 and has achieved breakeven for 2 quarters in a row. JD Logistics Q3 revenue grew by 39% year-on-year to RMB 36 billion, partially because JDL acquired a majority stake in Deppon, which was consolidated since the end of July.

Excluding the impact from the consolidation of Deppon, JDL’s revenues were up 16% year-on-year, mainly driven by the resilient growth in revenues from external customers, which also saw acceleration on a sequential basis. As a result, revenues from external customers once again achieved a record-high revenue contribution of nearly 70%. More encouragingly, as JDL relentlessly focused on improving customer mix, optimizing operations and realizing the economies of scale, its operating margin was up 350 basis points from a year ago to 0.7% in a seasonally low quarter. These results demonstrate JDL’s ability to maintain a resilient growth, even in a challenging environment, will remain well on track of improving its profitability. Dada reported revenues of RMB 2.4 billion and its operating loss sequentially to RMB 300 million.

Dada continues to work closely with both internal and external business partners. Notably, JD Super, our supermarket business within JD Retail, has been collaborating with Dada to broaden product portfolio that offers intra-city on-demand retail services. The Shop Now service to consumers achieved a triple-digit GMV growth in Q3. This initiative also contributed positively to the margin of supermarket category. Dada also established a collaboration with a variety of external brands. For example, Dada Now has been expanding instant delivery services to the coffee and the beverage category, which is now available in over 2,000 cities and counties nationwide. As you can see, with a broader spectrum of use cases offered by Dada, JD is in a much better position to serve our customers anytime, anywhere.

Finally, as I shared in the last quarter, we continued to pursue rational development across our New businesses segment. It reported revenue of RMB 5 billion and operating profit of RMB 280 million with a positive operating margin in the quarter. This was mainly due to the gain from the first tranche closing of JD Property’s third properties Core Fund in Q3 and the narrowing loss from Jingxi business. As JD Property has a well-proven business model with total transferred AUM surpassing RMB 27 billion, we remain committed to further expanding this business in line with our prudent investment philosophy. In the face of the complex macro conditions, both domestically and internationally, we have also been pursuing strategic alignment in other non-core business, such as the Jingxi business.

These measures resulted in a more moderate revenue growth but continued to narrow the operating loss sequentially even after excluding the gain from JD Property. Moving to the consolidated bottom line. As we proactively adopted measures to focus on our core businesses and improve operating efficiency, our bottom line reached a new milestone in Q3. Non-GAAP net income attributable to ordinary shareholders surpassed the RMB 10 billion mark for a single quarter for the first time in history. Non-GAAP net margin was 4.1%, representing an impressive year-on-year improvement of 180 basis points and reaching a historic high. On a GAAP basis, net income attributable to ordinary shareholders also improved to RMB 6 billion with GAAP net margin of 2.4%.

Our free cash flow for the trailing 12 months this quarter was RMB 25.8 billion. This was mainly driven by our improving operating cash flow while partially offset by an increased CapEx in our infrastructure expansion that would position us well for the future growth. By the end of Q3, cash and cash equivalents, restricted cash and short-term investments added up to a total of RMB 218 billion, up from RMB 207 billion last quarter. To close my remarks, the solid set of Q3 results demonstrated JD’s business resilience in the face of rapidly evolving macro conditions. There may be no better time than now to rebuild the progress across our business initiatives and make positive changes where needed. We believe it’s vital, especially in a time of uncertainty, to stay focused on delivering better operating efficiency, lower cost and best-in-class user experience, which represents the essence of the retail business and the bedrock of JD’s long-term success.

Our focus on building resilient business means that we are well positioned to help our users and business partners to cope with external challenges and make meaningful contributions to the society. All of these factors will make sure we are well prepared to benefit the next phase of great growth opportunities, which we believe won’t be too far ahead. With that, let’s open the call to the Q&A. Thank you.

Q&A Session

Operator: . Today’s first question comes from Ronald Keung with Goldman Sachs.

Ronald Keung: And congratulations on the strong third quarter results. I want to ask about the investment phase and mix growth drivers as we can see from the third quarter that Logistics, Dada and New businesses are no longer dragging the group earnings. So where are we thinking on mix, investments and growth areas? And then within JD Logistics, I’ve seen that the general merchandise, supermarket growth had moderated while margin level for JD Retail reached a new high. So heading into next year, how are we thinking about balancing growth, price advantage and stable margins?

Lei Xu: This is Xu Lei. Let me start the question by sharing with you our long-term health and philosophy to do business. This has remained unchanged for the 19 years of JD.com. We will always put great importance to the users’ experience and the cost and efficiency. No matter what kind of growth and new business we do, we will stick to these three points. And in terms of our two customer businesses, we’ll attach great importance to the quality of our product and prices — and good prices and premier services. So many of our investors know this is very difficult to always speak to these philosophies and concepts through the 19 years of JD’s development. And in terms of some changes this year, I would say that we’ll make more concentration and focus on our core businesses.

This is based on our analysis early this year. And we have made some proactive measures according to our early analysis, which to date, we think it’s very timely adjustments we have made and also taking the leading actions among this industry. And we are certain that even though many enterprises are facing challenges, we do see a brighter future. And there’s some obvious signs on the economic recovery. Even though the sign is very clear, but we are still not very clear about how fast the speed of the recovery. So from the management’s perspective, what we want to do is that we stick to our current strategies, and we should have a very clear view on the future in terms of which directions and what will be changing in this industry, in this market and how strong is this momentum so as to make our resources investment in a more clear pace.

And in terms of the strategies for JD Retail, we will continue to stick to the big four strategies, which are the building of the supply chain capability and expansion into the lower-tier markets and being open ecosystem and the intra-city retail. We will stick to these four. And in terms of the supermarket business, indeed, mainly affected by the COVID resurgence, and its growth is going in the down way. However, we saw many progresses made in these categories, including its healthiness, its profitability and its ability to manage categories. So overall, for the JD Super users, had accounted for over — or account for 50% of the overall JD.com platform. And we are confident for the future growth of this category. And we also made some new experiments in this category for our intra-city and lower-tier market expansion this quarter.

Operator: And our next question comes from Thomas Chong at Jefferies.

Thomas Chong: And congratulations on a very solid set of results. My first question is about the logistics disruption due to the pandemic recently. How should we think about impact to consumer sentiment, user experience? And on that one, how should we think about the short-term impact to GMV and revenue growth momentum? And my second question is about the latest product category trend, of course, smartphones, consumer electronics, FMCG and apparels.

Lei Xu: And indeed, as you pointed out that the logistic fulfillment has been severely impacted by the COVID situation actually in the past 2 years. This year, it’s the most heavily affected. I want to share with you actually data here that in September to present in terms of our logistic fulfillment, 17% of our customer home addresses have been affected by these COVID control measures. And this doesn’t mean that it affects the order amount and the sales on JD. But indeed, this is the worst year in terms of fulfillment. And indeed, this situation — difficult situation will affect our sales and fulfillment. But also, I’m proud to share with you, according to China’s Post Bureau service recently, in terms of the service experiences, JD Logistics stands number one among this industry, which once again validated our efforts made in our supply chain capability building to help us to stand out and gain consumers’ trust in this difficult time.

And just also based on our data from the Singles” Day Grand Promotion, we do see a higher rate of order cancellations. It’s a higher cancellation rate than the past years because of the fulfillment difficulties and the longer waiting times. However, I want to emphasize here that people come to JD.com for more brand shopping. So we believe the cancellation rate for these platforms with more impulsive shopping or shopping based on their interest, the cancellation rate should be higher. And another group of people has attached great importance on our brand partners and merchants. And based on JD’s shopping features with more brand shopping and premier shopping experiences, this can translate to the better operating cost and the profitability for merchants and brands and make us stand out among all the other e-commerce platforms.

And in terms of the faster-growing categories, in Q3, we’ve seen that home appliances, fresh goods, health, sports and pets are doing a good job, also including our Shop Now services for the intra- retail and our offline business, Five Star Appliance stores. And for these less ideal-performing categories include cosmetics and mobile phones and — but also, we see that since September, some new phone model releases, the situation is getting better. And this will continue in the lead-up to Q4. And for this category, it’s affected by the limited shopping scenarios due to the COVID. And also, the baby and the mother category is affected due to the reduced newborns. And there are many categories on JD.com. And we are regularly reviewing those loss-making categories and make dynamic adjustments to maintain the healthiness across all categories.

And we have seen improvements on the performance of all categories and better satisfaction among brands and merchants. And despite of , we see their market share all continue to increase.

Sandy Xu: This is Sandy. I can add more color on the short-term trends. So as Xu Lei just mentioned, we are still facing some short-term challenges due to the COVID control measures. And also, we view the 20 new rules guiding COVID control policies to be very positive and constructive for the recovery of domestic supply chain and consumer confidence. But it will take some time to actually see the positive impact on consumption data, given the current situation. So in the short term, we recommend analysts to be more conservative in modeling the top line performance. But we are more confident in the long-term strategies and the growth next year. Specifically for JD Retail, yes, we see that the recircling of the COVID situation affects more regions in the country at this time.

And also, there are disruptions to logistics and fulfillment, resulting a decrease in the successful procurement rate as Xu Lei just mentioned as well as an increase in the order cancel or return rate compared to prior years. So the consumers also become more conservative or rational under the current macro environment. And in fact, the demand was good during the major promotions but softer before and after the promotion. So in Q4, we see that different categories performed differently. But in general, the essentials, daily necessity products performed stronger than the discretionary products. In particular, for apparels and other discretionary products remained relatively soft. So we are — the management team is paying more attention to operating quality this year, taking proactive initiatives, including making some structural adjustments to the SKUs or subcategories with heavy investments.

So we still have some negative impact on the short-term top line growth. But we believe it will build very good foundation for our long-term top line performance. So with all these factors considered, the category trend will continue in Q4 but may slow down a bit moderately from Q3. And then for JD Logistics, its organic top line growth will be similar in Q3 — to Q3 and the internal revenue will again be affected by the decrease of the orders of Jingxi business. And JD Logistics’ external revenue growth will significantly outpace that of the internal revenue again in the fourth quarter. Deppon was consolidated at the end of July. And it will contribute more to external revenue in Q4. On the New businesses segment side, so the revenue growth of Jingxi Pinpin will still be negative, will be adjusted for our overall revenue performance.

And international business strategy has also been adjusted and put in plan to improve the operating efficiency, and while our JD Property maintains a relatively high growth momentum.

Operator: Our next question comes from Eddy Wang with Morgan Stanley.

Eddy Wang: My question is that we have already witnessed a part of signal in terms of the COVID policy relaxation as well as the potential reopening in early next year. So I just want to hear your view that, assuming that this reopening will gradually to happen in next year, what kind of preparation or strategy changed in our — based on our current strategy in this year? And the follow-up question is that we have seen very strong margin improvement in terms of the JD Retail business and the other business. So if assuming that there will be a very strong recovery in terms of consumption next year, are we able to achieve both strong margin improvement together with the top line reacceleration? Or it will be a balance between the margin improvement with — and the top line growth?

Lei Xu: And let me answer the first question. And firstly, I want to make a bit of correction. There are certainties and uncertainties. By the certainties I mean that we do see there are some new signals, and we are getting ready for the good things to come. I believe that the worst time has been passed, and we do receive some signals and some good information and factors for a brighter future. However, for the rebound, the question is when and how strong? So these are the uncertainties. We are not quite sure how strong and what’s the time the recovery will come. So for JD.com, we are such a large company that covering the whole country from the first- to fifth-tier cities. And we believe the recovery will come in different formats and different times on different groups of people in different regions.

And since our — based on our communications with our brand partners, they all expressed to — their strategy to focus on profit this year, and this also coupled with their concerns on the supply chain impact made by the Ukraine war. So whether or not next year, they will focus more on profitability or on the growth, it’s really hard to tell at this moment. So we will also make our dynamic evaluations and to make the investment decisions at the right time next year. Hope this answers your question. And on the profit, I want to make a further explanation here. For JD’s growth throughout the years, there are two main drivers. One is for the product structure changes. With a higher percentage of certain products, their gross margins will improve steadily and also the increase in revenue from the services we provide.

So throughout the years, you can hear that all the companies are talking about lower the cost and improve efficiency. And for JD.com, this year, we focus more on lower the cost and to improve stability for the internal management. And I believe in next year and the year — in the next 2 years, we will focus more on the improvement of the efficiency. I can see there’s many areas we can continue to improve efficiency. That’s what I want to add.

Sandy Xu: And this is Sandy. I want to advertise that our long-term margin target hasn’t changed, which is based on the industry-level margin and the operating efficiency we can generate through technology and the scale of our business operation. If the consumer confidence is largely recovered, we will add more investments to drive growth in users and the market share. However, at the same time, we will also gain additional operating efficiency, as Xu Lei just mentioned, due to spillover benefit, due to technology and due to the increased contribution of our service income. So this is the beauty of retail business. Although we achieved a very important milestone for net income this quarter at the group level, but on an annual basis, our margin is still below the industry level for almost all business segments.

So we always — so there’s still room for us to continue to improve our bottom line performance. JD always pursue sustainable growth. And we will try to deliver stable margin with steady improvement year-over-year until our long-term margin target is met. Of course, during that journey, we will make dynamic adjustments based on the market situation.

Operator: And our next question today comes from Lingyi Zhao with SWS Research.

Lingyi Zhao: This is Lingyi Zhao from SWS Research. I would like to congratulate the management team on the great results. My first question is about on-demand retail. What is the long-term vision we see in on-demand retail market? And after Dada’s integration, what adjustments have been made? And which fields will be summarized? We all see the article by in People’s Daily, which talks about promoting the deep integration of digital and real sectors of the economy. My next question is could you please introduce JD’s measures in these big trends?

Lei Xu: Thank you for the question. And I have shared a lot about the intra-city retail before. And now I want to give you some update on our thoughts and observations. So first, I want to say that for JD.com to enter into the intra-city retail business, it’s purely based on the need drive of the users, if not some opportunity, business opportunities, we jump in. It’s based on the users’ demand. And we’re looking at this business. And our understanding is based on the perspective of supply chain — I don’t want to like think in other people’s brain about how they think about intra-city retail. This is where we start from. And in terms of the entry point, different companies adopt different dimensions. For JD.com, we entered this market by building a relation with the big supermarket chains as our .

And in terms of the categories, we start with our 3C and supermarket category. And for other players, they might start with some SME stores. So we are entering in different directions. And our resources and relationships with brand partners is one of the key strengths for us in this intra-city business. And this has been based on our long-time collaboration with our already existed B2C models. We have been collaborating with our partners in many directions, in many dimensions on the supply chain cooperation, on marketing and sales, the release of new products, et cetera. And altogether, we are forging three-party winning situations among JD, brand partners and the offline supermarkets. Let me make one example about the intra-city retail cooperation with Apple.

As you know that in the September, Apple released its iPhone 14. And a lot of companies are taking this opportunity to do marketing. And according to the data we collected on this market during the same period of time, JD.com and our intra-city retailing business topped in terms of the sales. And we are 7 to 9x higher in terms of sales of iPhone 14 series as opposed to the second place, the runner-up retailer platform. However, we did not want to brag about it. Because our starting point to do this collaboration is to provide more convenience for consumers to buy the new series of iPhone. And we believe the value to collaborate with the official brands and to improve efficiency for this new phone release. And as opposed to traditional B2C model, this intra-city retail is a new type of supply chain we are building.

There’s still a big improvement room for us to improve, such as on users’ experience, the synergies we formed with our brand partners, the LBS-based services and then optimize the fulfillment and the transportation power improvement. So for now, we will focus on several indicators for this business, including user experience, their repurchase rate, improvement — the number of orders, et cetera. So still, we focus on the efficiency and experience to develop this business. And in terms of the integration with the real economy, I want to share that JD is building a responsible supply chain. And this does not only provide more stabilities and reliabilities for our own supply chain, we also opened ourselves with this capability to support our partners upstream and downstream to help in their digital transformation and improve cost and efficiency and to promote a high-quality real economy development.

And for JD’s supply chain services, we are now serving over 8 million active enterprise customers. This includes over 90% of Global 500 companies who operate in China and nearly 70% of the so-called specialized and sophisticated SMEs. And we also provide some specialized supply chain services to the manufacturing and energy fields. At the same time, JD’s supply chain has been connected with millions of small and medium/small stores across China in over 300 cities. There are many forms, I won’t just elaborate. And we are not only providing the last-mile solutions on their sales and services but also helping them on the first mile of the supply chain in upstream. This has been a very effective support for them to drive more traffic and lower their cost and improve their business efficiency.

And here, I just want to add that JD.com generates rational profits. And we’re running based on the low cost. And we fully understand the difficulties for the SMEs. They work — they do their business in the offline scenarios. So while we are doing the supply chain support for them, we don’t want to eat their profits. We want to form synergies with them. And together, we build rational profit. So this will not make us as some other companies who are entering the entering this offline market and generate also profit. This is not something I think rational. And lastly, I want to mention that in 2020, JD has launched our rural revitalization initiatives named — called March to Rich Plan. And this plan has driven tens of billions of industrial output in the rural areas and helping millions of farmers to increase their income.

And we feel confident that — we set a goal to achieve CNY 1 trillion of industrial output under this program in rural areas within 3 years’ time. And we can accomplish this ahead of the schedule. And so all of these are our understanding as a new type, real economy company. However, we know we are not doing enough. We are still improving ourselves, improving our capabilities. However, this is the goal we set, and we will stick to it.

Operator: Thank you. We are now approaching the end of the conference call. I will now turn the call over to JD.com and Sean Zhang for any closing remarks.

Sean Zhang: Thank you for joining us on the call today and for your questions. If you have further questions, please contact me and our team. We appreciate your interest in JD.com as always, and looking forward to talking to you next time again. Thank you.

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