Caroline Dong - IR Director Vincent Qiu - Chairman and CEO Junhua Wu - COO Beck Chen - CFO.

Natalie Wu - CICC Evan Zhou - Credit Suisse Binnie Wong - Bank of America Merrill Lynch Nicky Ge - China Renaissance Thomas Chong - BOCI.

Welcome to the Baozun Fourth Quarter Fiscal Year 2016 Earnings Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded today, February 22, 2017. I would now like to hand the conference over to your first speaker today, Ms. Caroline Dong. Please go ahead Ms. Dong..

Thank you, Operator. Hello everyone, and thank you for joining us today. Baozun's earnings release was distributed earlier today and is available on our IR website at ir.baozun.com, as well as on global newswire services. On the call today from Baozun are Mr. Vincent Qiu, Chairman and Chief Executive Officer; Mr.

Junhua Wu, Chief Operating Officer; and Mr. Beck Chen, Chief Financial Officer. Mr. Qiu will review business operations and Company highlights, followed by Mr. Chen who will discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intends, plans, beliefs, estimates, targets, going-forward, outlook and similar statements.

Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in the Company's filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Mr. Qiu, please go ahead..

Thank you, Carolina and thanks everyone for joining our earnings call today. I'm excited to finish off the year on a strong note with another quarter of solid financial and operational result.

Total GMV increased by 62% year-over-year to RMB4.8 billion during the fourth quarter while non-GAAP net income surged 238% to RMB70.4 million which marks the strict year we have achieved the profitability on a non-GAAP basis.

2016 also represents the first year in which we generated over RMB10 billion in GMV, this strong performance continues to be driven by growth of our existing online stores and the expansion and further optimization of our portfolio of brand partners.

For total number of brand primary grew steadily to 133 while we continue to be in talks with a number of exciting new brands who are eager to benefit from China's explosive e-commerce growth.

We are investing heavily for future especially expanding the array and the sophistication of our services by innovating new products that can easily be customized for each brand partner.

Following successful trial in Hong Kong last year Shopdog underwent its first large scale roll out in Mainland China during the 2016 double trial promotional sales day. Initial feedback from customers and brand partners have been phenomenal and we look forward to offering this exciting and new products to our current and prospective brand partners.

We will continue to leverage our vast in half resources to develop and explore innovative ways to further provide the unique value to our brand partners. Our seamless and efficient IT infrastructure is sure that our brand partners will be able to maximize sales during China's 11:11 Shopping Festival.

We were able to have successfully settled total order value of RMB2.5 billion during the sales period. More than doubled the amount on the same day last year.

This strong performance combined with seven years of shopping festival experiences, adequate planning and strategic the foresight clearly demonstrates the value we can provide to potential brand partners when it comes to providing our full range of end to end e-commerce solutions and meeting the search.

We will again awarded the six star service provider from [indiscernible] which I believe demonstrates the outstanding quality of our services and undisputed leading position on Tmall. We are very proud to be recognized again for our capabilities.

I'm proud of the significant progress we have made over the quarter where we are clearly benefiting from our improved capabilities. This clearly demonstrates the sustainability and the quality of our top line growth, improved margins and increasing economies of scale as our business continues to expand.

With that I will pass the call over to Beck who will review our financials..

Thank you, Vincent. Just a few housekeeping items before I go through the numbers. We believe year-over-year comparisons are one of the most useful ways to judge performance. All %age changes I'm going to give will be on that basis so to start, GMV during the quarter increased by 62% to RMB4.8 billion.

Our focus remains on growing our non-GAAP [ph] model which saw GMV increase by 8% this quarter. We continue to optimize our business model mix towards the non-distribution. Total net revenues increased by 25% to RMB1.3 billion breaking down further product sales revenue rose by 2% to RMB771 million.

We continue to transfer a part of our existing distribution business towards the consignment model which is impacting the year over year growth of product sales revenue.

Services revenue rose by 94% to RMB502 million, the increase in services revenue was mainly due to rapid growth in our business under the consignment model and the service fee model and in particular the growth in sales of apparel products sold by. Our existing brand partners as they expand their online presence.

Gross profit increased the by 72% on a year-over-year basis. Total operating expenses were RMB1.2 billion in particular cost of product rose to RMB679 million primarily due to increase in the volume of product sales from our core grand e-commerce business.

Fulfillment expenses rose to RMB228 million mainly due to the increases in GMV contribution from our consignment business, more orders are fueled by the premium delivery service provider as a percentage of total orders and warehousing the rental expenses.

Our current strategy shift our strategic focus towards the higher value added services such as fulfillment services which carry higher profit margins. We are pleased to see our customers and partners gravitate towards these higher value services where we are able to generate more profit.

Sales and the marketing expenses rose to RMB247 million primarily due to an increase in promotional and marketing expenses associated with our online stores.

Technology and content expenses rose to RMB29 million, the increase was primarily due to the increases in technology [indiscernible] and project based variable technology expenses from brand stores. G&A expenses rose to RMB26 million.

Non-GAAP income from operations was RMB72 million, a significant 661% increase compared with RMB9 million in the same quarter of that year while non-GAAP operating margin improved significantly to 5.7% compared with 0.9% in the same quarter of last year.

In Q4 net income attributable to thousand ordinary shareholders rose to RMB61 million, an increase of 359% compared with the same quarter of last year. Basic and diluted net income attributable to ordinary shareholders for AVS [ph] were RMB1.20 and RMB1.11 respectively compared to RMB0.27 and RMB0.25 respectively during the same quarter of last year.

In Q4 non-GAAP net income attributable to ordinary shareholder's rose to RMB70 million, an increase of 238% compared with the same quarter of last year.

Basic and diluted non-GAAP net income attributable to ordinary shareholders per ADS were RMB1.38 and RMB1.26 respectively compared with basic and diluted non-GAAP net income attributable to ordinary shareholders per ADS of RMB0.41 and RMB0.39 respectively for the same period of 2015.

For the fourth quarter of 2016 net cash provided by operating activities was RMB102.6 million compared with net cash provided by operating activities of RMB17.2 million in 2015. That completes the financials for the quarter. I would like to quickly highlight a few year-end numbers which I believe demonstrate that the direction we are headed in.

For fiscal year 2016 total GMV increased by 67% to RMB11.3 billion and the total revenues increased by 30% to RMB3.4 billion. Gross profit increased the by 70% on a year-over-year basis. Net income attributable to ordinary shareholders significantly increased to RMB87 million compared with net loss of RMB3 million in fiscal year 2015.

Non-GAAP net income attributable to ordinary shareholders increased by 437% to RMB121 million. For the full year of 2016 net cash provided by operating activities was RMB13 million compared with net cash provided by operating activities of RMB2 million in 2015.

As of December 31, 2016 the company has RMB957 million in cash, cash equivalents and short term investments, an increase from RMB837 million as of December 31, 2016 due to these follow-on offerings we did during the fourth quarter which was partially offset by net cash used in the share repurchase program and investments in logistic and office space.

With our business growing sustainably and the increased confidence in our strategy and operations we expect GMV during fiscal year 2017 to grow by over 50% on a year-over-year basis as we further optimize our business model mix towards the non-distribution model, non-distribution GMV will continue to grow at a faster rate than distribution in GMV.

Turning to the revenue guidance for the first quarter of 2017 we expect a total invested revenues to be between RMB800 million and RMB810 million representing a year over year growth rate of approximately 20% to 21% again due to the continued strategic shift in our business model to optimize our margin profile, our non-distribution model will continue to grow at a more rapid pace as well services revenues which will increase and contribute more to net revenues on a year-over-year basis and improve our profitability.

This concludes our prepared remarks. Before we open the call up for Q&A I'd like to remind everyone please limit yourself to two questions. Operator we're now ready to begin the Q&A session. Thanks..

[Operator Instructions]. Your first question comes from Natalie Wu from CICC. Please go ahead. Your line is open..

Basically I want management -- if management can share with us color on the strategic plan this year regarding category expansion? So basically which specific you want to specifically efforts in 2017 and what's the progress now and also whether its going to affect our financials. Thank you..

As always our primary focus will be always on the same store growth, I think the -- 133 international brands there are still a lot of potential to work for so we work very closely with each of the brand trying to optimize all the operations, supply chain, digital marketing efficiency, everything to bring the business not only to a greater sales number but also lower cost.

In the meantime we are now promoting a lot of initiatives like O2O omnichannel, CRM and these kind of initiatives to the brands. So we need a lot of efforts and attention to work with the brands to make all of this happen. So talking about the expansion strategy I think the same brand across will be the first.

And then for the new category and new brands we're now very focusing on some of the categories like apparel and also cosmetics some of the category. I think a lot of our potential clients are there. We start acquiring our [indiscernible] and services very much.

So when we can serve the current existing brands very well as a second step we will acquire more and more new brands on board. Yes, that is a major I think task for as to expand our coverage. For the other regions we are working quite successfully in Hong Kong and we started to provide services in Taiwan.

We will continue to do so in this year, that is basically the three major dimensions, of course we will put a lot of efforts on the data analytical CRM its kind of the ability also as always improving our IT and logistic capabilities, that is all part of expansion strategy..

Your next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead. Your line is open..

Two questions, one is on the specifically the fulfillment expense for this quarter I think. It came in a little bit more than our expectation I was wondering like you mentioned that the reason being that we have more premium delivery service provider as a percent of total order to do that is one of the major factor.

I was wondering if we look at it on a unique economic basis are we having more leverages because of the scale and because of the scale we reached with premium service provider that we actually are on a order basis getting that economics of fulfillment side or its kind of in the range of expansion.

So if you could see some headwind on the fulfillment leverage for our [indiscernible] number in the coming quarters, so that's a first question. And the second question is probably more broadly related to the investment that you actually mentioned in the prepared remarks.

I was wondering I think our topline GMV outlook for '17 has been pretty great, and then on the cost side, what's the kind of the ballpark investment area and how should we overall expect the in-margin improvement or the bottomline delivery for 2017. Thank you..

Can you repeat the second question?.

Second question is more regarding on the investment, broadly speaking investment pattern other than just fulfillment its like, IT marketing, so I think you mentioned its going to grow GMV more than 50% this year while how does the cost side look like for 2017?.

Okay. So regarding the first question on the fulfillment side, we had the leverages because our volume generated and also because of our strategic partnership with our logistic and carrier vendors.

So for example just in Q4 our price per order for the higher delivery service partner was actually decrease by 9% year-over-year which means that we have a large leverage there but because we just shifted more business towards this higher value service providers so if you just look over all fulfillment expenses as a percentage of total GMV instance is not decreasing but actually as for the order value for the same substance we have achieved leverages there.

So are very confident that through the strategic partnership and also our higher value added to those consumers then our brand partners we can generate more margins in the bottom line.

In terms of the second question regarding fulfillment expenses we will continue to hire qualified for example qualified software engineers, qualified marketing and promotion experts but this is in the big background that we would continue to improve our gross margin on the top line and also improve our operating margin in the bottom line and we will do reasonable in that instead of crazy investment..

Your next question comes from Binnie Wong from Merrill Lynch. Please go ahead..

So my first question is that if you look at the distribution I mean the decline in contribution and distribution and GMV mix, right, that will have to drive overall in terms of a better earnings and I'm just wondering that how are we expecting margins to trend into '17 given that we talk about earlier that along with Alibaba's marketing strategy, in terms of upgrade, in marketing to do more brand building and then we also have to hire probably more sales staff that is more on the traditional marketing rather just focusing on transactional based marketing to more like a brand building type of advertising agency.

So if those investments and then with those plans that we investment we have in mind when we do the fundraising how do you expect margins to trend.

And then just a quick question on the same store sales growth, how does it trend and do you see a same store sales growth really driven -- which category do you see higher same store sales growth and how does that tie in with like in terms of omnichannel strategies that we have talked about in our annual event last year right and then we are seeing that progressing? Thank you so much..

I will address the second question first and then Vincent will address the first.

So for the second question, our total GMV is growing 7% on a full year basis and for the same store growth rate for fiscal year 2016 is 55% on a year-over-year and we will continue to give [indiscernible] in driving really operations of our existing source so generally we see a overall because we are just serving those brands with good customer recommendations so not only those big categories even for some small categories they are all going very well like apparel, big categories like apparel, electronics, smaller categories like cosmetics they are all growing very well and in terms of channel so we think Tmall and brand officials site is driving most of the growth..

Okay about the first question more about marketing trend. Yes, right now after the phrase of our transaction focus e-Commerce I think right now every of the brand you're thinking about when we're marketing as well in this digital space.

We can as you said we can see a lot of initiatives and movements from the Alibaba marketing arm, a lot of resources have been consolidated and a lot of new initiatives are happening there. So of course, actually as you know we always stand with the brands and we think a lot from the brands perspective.

So for us we have a broader view than each of the marketplace. So of course we will be very focused on analytical database marketing tools, initiatives, capabilities not the creative side. So for those creative side we will work with the other partners of the brands to deliver a holistic result to the brands.

So this year 2017 will put a lot of resources and a lot of IT capabilities into this marketing side and help the brands to deliver in integrated and sales and marketing solution to enrich our service offerings and therefore we improve our value and also profitability in this business..

Your next question comes from [indiscernible] from Deutsche Bank..

I have two question, the first one is we actually see faster migration of the distribution model to the consignment if we look at GMV growth slowdown for the distribution GMV site.

So I wonder how fast do you expect this migration will be in this year and what kind of a GMV contribution from non-distribution model do you expect? And my second question is regarding the microphone, can management growth again on the microphone GMV this year and also we actually see microphone incurred about 6.2 million operating loss in the fourth quarter.

So I wonder what the loss trajectory will be going forward. In what pace do you see the impact [indiscernible] margin could narrow down. Thank you..

So in terms of the GMV growth expressed by distribution and non-distribution we expect like we said in the prepared remarks so that non-distributing GMV will grow faster just for example for fiscal year 2016 our non-distribution GMV is growing by over 90% on year-over-year basis so we still think non-distribution GMV were growing at a higher, very higher speed compared to the distribution GMV and for the several quarters of this year we think we can make [indiscernible] almost complete during this year.

For the second question about MCAP [ph] so if we look at the MCAP [ph] note compared to the past year same period of past year actually the loss is narrowing down loss on a year-over-year basis and we think for this year we'll continue to narrow down even on a Q-o-Q basis and the [indiscernible] to the total overall profitability can be almost ignored..

Your next question comes from Nicky Ge from China Renaissance. Please go ahead..

I've two questions here, first is about your brand partner this year, since it has very strong first quarter guidance, I guess we have a better visibility now how we are doing like powerful [ph] like Nike this year to all and second question is a housekeeping question about our GMV outlook, could you help us book down your GMV in terms of consignments.

And going forward as consignment is growing faster than the other two business models can we share the percentage going forward in 2017? Thank you..

So in terms of the new client pipeline. So we are -- contacting a lot of leading brand in certain category especially in the apparel category and [Technical Difficulty] cosmetics category.

Vincent said the apparel category will maintain a strong growth this year, so definitely we are foreseen to have almost like an over close to 20 new clients this year..

Especially like the least leading brands -- but leading brands being men's apparel, leading brands being women and wear so those kinds of new brands and also we have some pipeline project basically for example in cosmetics and fast moving consumer products.

About the second question, we expect the consignment model will be the biggest contractor in our total GMV contribution.

So for this year we think consignment model will grow close to almost 60% of total GMV amount and service model will follow the consignment as a second and we think as the strategic shift towards non-distribution model, our overall profitability will be increased a lot and our inventory exposure will be less. Thank you..

Your next question comes from [indiscernible]. Your line is now open. Please go ahead..

Just two quick questions, I mean the first one is I think a lot of people have asked about this but in terms of our GMV growth expectation of 50% this year, could you just sort of give us more color in terms of how you came about with this year? Is it because of the outlook provided by existing partners or is because the potential partners are going to be the major contributor to this 50% growth? That’s the first question.

And the second question, is the distribution business is growth is slowing down, is there a chance that this part of the business will actually decline this year? Thank you..

The first thing is we don't expect the distribution GMV for the decline this year and also for the first question still we think the majority of the business of growth will driven by existing stores. So if we have some new brand on-board we expect our GMV is growing more than 50%..

Your next question comes from Thomas Chong from BOCI. Your line is now open. Please go ahead..

I've a question about international strategy and market share gains solely in China. For international strategy we have presence in Hong Kong and Taiwan. So how do you think about the use of cash in acquiring other overseas partners if any and my second question is about the China business, given the e-commerce solutions -- pretty fragmented in China.

Should we see potential M&A in China that we consolidate other smaller players around the world. Thanks..

First talking about the international strategy is what I said, Baozun strategy is quite in-line with the brand strategy so actually we are not seeing a very aggressive international expansion stage now. It is a more like a reactive strategy. We follow very closely with brands development and their requirements.

When there is a need from these you know existing brands or potential brands for us to develop the overseas market we would do it immediately and very efficiently.

So that is the strategy and the situation here is that a lot of our existing brands have already reached up these kind of requirements you know for Baozun to our delivered services outside China and outside Greater China region.

So right now we are very actively working with this kind of brands developing solution proposals and we can expect that we will do more and more these kind of service offerings overseas. So that is about our international expansion strategy, it is not I would say aggressive one but it is will be a very efficient one.

Talking about the potential M&A, yes if there will be some of the very good target, share the same model and the value of Baozun and also the timing is right yes we are open to that kind of potential investments or M&As..

Also we still see a great room for us to grow even in China although as you can see the China e-Commerce growth for Alibaba and JD is slowing down a lot in the past year but actually we have seen great room and potential room for us to grow because -- a lot of the brand they are already existing brands to Tmall or JD but they are not existing grants with Baozun.

With our higher capabilities in omnichannel end to end service solutions we think right its time for us to grab those account into our pockets. So since this year we could be more open to solicit and to welcome those brands already in e-Commerce..

Your next question comes from Ryan [ph] from MCM Partners. Please go ahead. Your line is now open. .

A couple of quick ones for me, the first question is kind of on the fulfillment expense and how that's going to shape up over the year over 2017.

We mentioned that we were looking to use more kind of value added partners for some of the fulfillment I'm just curious does that going to have any impact on the pricing strategy as well or kind of what's the strategy there?.

Okay, so we generally we partner with courier service partners to deliver the orders to the consumers.

So generally we will charge the brands with a higher price, so we will also generate very decent profit from the services and also from the management of the services so that’s why if you just look at the procurement as a percentage of GMV is not [indiscernible] but actually we generate most of it on the top line..

Oka.

And then kind of maybe a question on you mentioned the GMV kind of this year looking like consignment of the bulk, I'm just curious can you give us any kind of color where you see kind of take rates trending this year?.

Just like past years we expect GMV is growing stably and stably up, the take rate..

[Operator Instructions]. It appears there are no further questions at this time. I would now like to hand the call back over to you Ms. Caroline Dong..

Thank you., Operator. In closing on behalf of Baozun management team we would like to thank you for your interest and the participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know and thank you for joining us today. This concludes the call..

This concludes our call for today. Thank you. for participating. You may all disconnect..