Caroline Dong - Investor Relations Vincent Qiu - Chairman and Chief Executive Officer Beck Chen - Chief Financial Officer.

Eileen Deng - Deutsche Bank Monica Chen - Crédit Suisse Binnie Wong - Merrill Lynch Nicky Ge - China Renaissance Billy Leung - Haitong International Ryan Roberts - MCM Partners Wendy Huang - Macquarie.

Good day, and welcome to the Baozun Inc. Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Caroline Dong, Investor Relations Officer. Please go ahead, ma'am..

Thank you, operator, and 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; 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'd 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 terminologies such as will, expects, anticipates, 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 current results -- 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's now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Vincent Qiu. Mr. Qiu, please go ahead..

Thank you, Caroline, and thanks, everyone, for joining our earnings call today. Total GMV increased by 64% year-over-year to RMB3.6 billion during the second quarter. Growth continues to be mainly driven by increases in sales from our existing online stores and the further optimization of our business model mix towards a non-distribution model.

In the annual Chairman's letter released in April 2017, we've outlined the essential role technology plays in our strategy and the prospects for the coming years. Technology is the key to our success and rapid expansion of our business and increase the significant barrier to entry, scale our business and increase our immense competitive advantage.

Since our founding, we have directed our focus towards anticipating and preparing for the future needs of our brand partners. We are investing heavily in our long-term competitive advantage by strengthening our proprietary technology infrastructure.

Our corporate philosophy, which originally consisted of home brands to consumers, has now been updated to brand consumers and technologies.

As the industry leader, this shift forms part of our drive to shape the market and to meet demand from more brands and merchants seeking personal e-commerce solutions and technologies in order to take advantage of the omnichannel shift that is taking place in the newly retailer Europe and China.

To further strengthen our leadership position and expand the scale of our technological services and generate greater value for shareholders, we established an innovation center during the quarter, which will focus on enhancing our IT capabilities and help us shift the market by developing and standardizing new services such as cloud based operating platforms, big data analysis tools or brand ecommerce and the implementation of AI in brand ecommerce overtime in order to serve a wider variety of the brands with a broader array of services.

We are recruiting leading talents to join this initiative. And as a part of this, we welcomed Michael Lee and Dr. Wen on board this quarter.

Michael currently serves as VP and Head of our Innovation Center and has extensive experiences in developing technology and the products as well as a profound understanding of ecommerce strategies, having worked at Best Buy, Cisco and Alibaba, among others. Dr.

Wen serves as principal scientist of our innovation center, where he is spearheading our R&D efforts and working to build the relationship with leading universities and research institutions across the globe. He received his PhD in electronic engineering from Tsinghua University and has extensive experience in managing R&D operations.

He was granted as [Indiscernible] fellow in 2010 and has obtained 28 patents in U.S. His research has been adopted by many global leading tech companies including IBM, Samsung, Huawei and China Mobile. Dr. Wen is a true visionary and a contributor in the field of broadcast, VR, AR, big data, cloud computing and immediate data mining.

I'm confident that he will add significant value to our technology and ecommerce capabilities in his new role. We have also brought a number of other senior professionals onboard, including senior engineers and product managers from leading Internet and technology companies.

With their help, we will be annually positioned to capitalize our market opportunities and to better anticipate and fulfill the needs of our brand partners.

I believe the benefits of our investment in technology and development of new and innovative services are already being seen in the growth of our market share, which increased to 25% in 2016 from 22% in 2015 and 20% in 2014 according to our research.

Our total transaction value in 2015 grew at a much faster rate than the overall trend in ecommerce market while our market share continue to increase, demonstrating the effectiveness of our strategy solution and the services and the appeal we have for brands across the globe seeking to benefit from China's ecommerce growth.

Leveraging our deep experience in big data analysis and in depth understanding of our [Indiscernible] behavior, we are able to further improve our brand partners' businesses by comprehensively [Indiscernible] off-line and online business models.

As such, we were also recognized as a six star service provider by Tmall for the third consecutive time last month, which I believe demonstrates the outstanding quality of our services and our undisputed leading position on Tmall. We are very proud to be recognized again for our capabilities.

As we continue to grow, we periodically conduct reviews of our business. Following a review of Maikefeng's operation and strategy, we've decided to cease this business starting in August 2017, and devote energy and resources towards our core business and strengthening our technological capabilities.

As a result, we did incur a onetime restructuring expense associated with MKF's closure during the third quarter of 2017. And I'll let Beck go into that in more detail later. Before I pass the call to him, I'd also like to warmly welcome Ms. Jessica Liu to our Board of Directors.

Jessica currently serves as the President of Tmall apparel at Alibaba Group. Alibaba has long been a strategic partner of ours, and Ms. Liu's extensive experience there as well as in China's e-commerce industry overall will greatly benefit us. I look forward to working closely with Jessica going forward.

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

Thank you, Vincent. We are proud of our results this quarter, especially the strong performance from brands and our nondistribution model. We believe expanding our nondistribution model will greatly benefit our brand partners in Baozun.

To further optimize our business model mix in transitioning more brands towards our nondistribution model, we finally concluded a discussion with a leading global electronics brand partner, who is also our largest brand partner in the distribution model, to transitioning its business from the distribution model towards the nondistribution model.

Under the distribution model, we recognize revenue on gross basis as product sales revenues because we take ownership of the inventory. Under the consignment model, we only recognize revenue on net basis as services to revenue.

The transition process for this electronics brand is expected to start in September this year, so our product sales revenue mix here is flat or negative year-over-year growth during the period stretching from the third quarter of 2017 to the third quarter of 2018.

But our cost of products will also decrease accordingly and services revenue will continue growing fast during the same period. Therefore, at the end of the day, the transaction will enhance our gross margin while mitigating inventory risks.

To provide more color on the scale of this shift, we expect this electronic brand business to contribute RMB850 million in total to our product sales revenue during the period stretching from the fourth quarter 2016 to the third quarter of 2017.

This figure takes into account previous three quarters number and includes our latest forecast for the third quarter of 2017. And we believe this is a major milestone in our strategy and reflects our strong belief in transitioning our venues towards the more asset-light, lower-risk and higher-margin distribution business model.

And we are confident that this shift will greatly benefit our business and generate long-term shareholder value. Let me now go over the numbers. A few housekeeping items before I do. I believe year-over-year comparisons are one of the most useful ways to judge our performance. All percentage change that I'm going to give will be on that basis.

Now let's start to review the financials. Total G&A during the quarter increased by 64% to RMB 3.6 billion. Our focus remains on growing our nondistribution business, which saw GMV increase by 81% this quarter. We continue to optimize our business model mix towards the nondistribution model going forward.

Total net revenues increased by 27% to RMB 888 million. Breaking down further, products sales revenue rose by 10% to RMB 504 million. We continue to transfer portions of our distribution business towards the nondistribution model, which impacts year-over-year growth of product sales revenue.

The services revenue rose by 60% to RMB 384 million during this quarter. We note that this figure excludes part of the cost of purchasing media on behalf of brand partners, which is a different accounting treatment since last quarter.

As a reminder, we began migrating parts of our media services last quarter towards a more asset-light model, which will decrease our media buying inventory risk and increase our working capital efficiency. Starting last quarter, we only recognized our net commission as revenue.

We don't record the cost of the media as either revenue or stating in the marketing expenses in the new model. In addition, please note that this change in accounting treatment has no impact on our operating profit. Total operating expenses were RMB 851 million.

In particular, cost of products rose to RMB 441 million, primarily due to the increase in the volume of product sales from our core brand e-commerce businesses.

Fulfillment expenses rose to RMB 173 million, mainly due to the increases in GMV contribution from our consignment businesses, more orders fulfilled by premium delivery service partner as a percentage of total orders and warehouse rental expenses.

We have a best-in-class warehousing operation and fulfillment experience in the brand e-commerce industry, and we believe top-tier competitive within procurement are the main drivers of customer and brand structuring, which is a key factor to sustain our long-term goals.

Sales and marketing expenses rose to RMB 183 million, primarily due to an increase in operational staff and promotional and marketing expenses associated with our online stores. Technology and content expenses rose to RMB 31 million.

The increase was primarily due to the increases in technology-focused staff, share-based compensation expenses and project-based variable technology expenses from brand-operated stores. As Vincent mentioned in the earlier parts, we will continue to invest heavily in technology to enhance our competitiveness and drive long-term growth.

And G&A expenses rose to RMB 27 million. The increase was primarily due to the increases in administrative staff cost and share-based compensation expenses.

Income from operations was RMB38 million, a significant increase from RMB0.4 million in the same quarter of last year while operating margin improved to 4.2% compared with 0.1% in the same quarter of last year.

Non-GAAP income from operations was RMB51 million, a significant 612% increase compared with RMB7 million in the same quarter of last year, while non-GAAP operating margin improved to 5.7% compared with 1% in the same quarter of last year.

In Q2, net income attributable to Baozun ordinary shareholders rose to RMB30 million, a significant increase from RMB1.5 million in the same quarter of last year.

Basic and diluted net income attributable to ordinary shareholders per ADS is -- were RMB0.55 and RMB0.51, respectively, compared to RMB0.03 and RMB0.03, respectively, during the same period of last year.

In Q2, non-GAAP net income attributable to Baozun ordinary shareholders rose to RMB43 million, an increase of 422% compared with the same quarter last year.

The basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS were RMB0.80 and RMB0.73, respectively, compared with basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS of RMB0.17 and RMB0.15, respectively, for the same period of 2016.

That completes the profit and loss statement for the quarter. As of June 30, 2017, the company had RMB887 million in cash, cash equivalents and short-term investments, a decrease from RMB957 million as of December 31, 2016, due to investment in the company's logistics space. Turning to revenue guidance for the third quarter of 2017.

We expect total net revenue to be between RMB870 million and RMB910 million. We will begin providing growth guidance for services revenue as we transition more business under distribution model to the nondistribution model.

Under the distribution model, we only recognize revenue on -- on a nondistribution model, we only recognize revenue on a net basis as services revenue. For the third quarter of 2017, we expect services revenue to increase by over 50% on a year-over-year basis.

As Vincent mentioned earlier, MKF business was closed in August, and we expect to incur onetime expenses associated with its closure such as employee severance expenses, inventory clearance and other costs associated with ceasing operations.

These onetime expenses will all be incurred and accrued during the third quarter of 2017 and is expected to come out to around RMB10 million. However, MKF will no longer have an impact on our financials starting from the fourth quarter of 2017.

MKF's closure will benefit us in the long term by freeing up measurements [indiscernible] and allowing us to devote more resources towards our core businesses, exploring new and promising opportunities and developing technologies.

This includes our newly established innovation center, which is developing new and exciting software products, which will further strengthen our portfolio of solutions and services and enhance our value proposition and offerings to brand partners.

We will continue to invest heavily in technology by strengthening our talent pool to foster our creative and expert corporate culture, which will enhance our competitiveness and drive long term growth, and we are confident this is a great future. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you..

Thank you. [Operator Instructions] And our first question will come from Eileen Deng of Deutsche Bank..

First, congratulations on the strong result. My first question is regarding the third quarter guidance on service revenue. We see that it's 50% plus year-on-year growth. So I wonder what kind of non-distribution GMV growth behind that.

And could management also talk about this non-distribution GMV growth for the second half of this year? And the second question is regarding the brand update.

What kind of new brands have we added this quarter and any brands have we lost? And can management also talk about the brands decline in the second half of this year, maybe next year as well?.

Eileen, so can you repeat the question? It seems that it's not so clear on our side..

The first question is third quarter guidance on service revenue.

What is the non-distribution GMV growth behind this? And also, could management comment on second half of this non-distribution GMV growth? Second question is, any brand update this quarter? Any new brands we added? What are the new brands have we added and any brands have we lost? And also the top line of the brands in the second half of this year and also next year..

Okay. So now I get it. So thank you for the question, Eileen. So for the first question, in terms of second half or third quarter non-distribution -- I mean, maybe asked non-distribution GMV growth expectation, we expect just like, I think, like last earnings call, we expect non-distribution model GMV will grow about 80% for the third quarter.

And in terms of the new brand addition and pipeline, during this call, the newly added brands are mainly in the apparel category, and it's under our non-distribution model. So we are developing the non-distribution model and we put a lot of effort into expanding categories like fashion and apparel brands.

So we value quality over quantity, like we said in the last time. And also, in terms of the pipeline, still apparel, sportswear, and also like what we call FMCG and mother and baby products line It's our mainly focus for the second half of this year and for next year as well..

And our next question will come from Monica Chen of Crédit Suisse..

I have two questions. First question is regarding our same-store sales growth for this quarter.

Can management share any color for the same-store growth? And also what's the same-store growth by category? Also, we heard from one of our major e-commerce partner, they reported 49% year-over-year in their major online marketplace platform and also like 50% in home appliance and 57% year-over-year growth in FMCG.

So comparing with our brand, so do we see also a similar growth trend? And which category do we see the fastest growth for this quarter? And then I have a follow-up..

Okay. So thank you for the question, Monica. In terms of the asset growth in Q2, our asset growth rate was 50% for the existing store of last year. And in terms of the growth rate of Q2, we are very satisfied with the overall growth results and the potential from the marketplaces.

So in terms of the category, not only like those traditional strong categories of Baozun like electronics and -- I mean, and apparel products. Even like very established categories like appliances, we have seen a very strong growth, not only in GMV but also in margin as well.

So we do believe, right now, as long as e-commerce is an essential part of the Chinese people here, so more and more people are very used to buying online, and more and more people are used to buying from those, established and global brand partners. So this is very good signal for us as well..

My second question is actually related to our technology investment. So we mentioned in this earnings press, we established innovation center during this quarter and we will continue to invest heavily in the area.

So I want to understand, what is our budget for the technology investment for this year? And which kind of technology is our focus? So is that more towards digital marketing capability or like more a new technology to improve the procurement efficiency? I'll appreciate any color at it by the management..

Yes. As we mentioned, we established the innovation center this quarter, and we start to form out the team, including several of very good talents who have already joined us. The technology direction for the innovation center is quite clear.

It is about to deliver a cutting-edge technology to serve today's modern retail era as long as the physical space is -- continuously turns to digital one, and everything, not only the front end facing the customer but also the back-end supply chain and also digital marketing, all this kind of services has been changed in the market.

So we need a whole bundle of new technology to make that more efficient, more visible to other brands. So in technology, we are going to research and utilize. We will be quite focused on big data, SaaS and cloud-based computing also data mining and analysis, this kind of thing technologies.

So yes, we -- our team is now very focusing on deliver things one by one, but it's our way to enable a better technical competency in the whole business..

And our next question will come from Binnie Wong of Merrill Lynch..

Thank you Vincent and Beck for taking my questions, so I have two questions here. First is on the SaaS offering in September launch that we talked about later on in the year and also in Vincent's opening remarks and in press release about the establishing an innovation center to enhance our IT capabilities and technology services.

So can you give us more color on that, on -- also on the software update? What type of customers are we going to be going after? And also, how do we expect that would be comparing to our existing business model in terms of like take rate or revenue contribution, the type of customers? That will be very helpful.

And then my second question is that if we look at the first half of the year, right, GMV is around 62% already.

So how should we think of like shimmy down the road on the -- for the rest of the year? And relating to that is that, I think, Beck mentioned that the service revenue will be increased by over 50% on the future outlook, and that's because of the change of one of the electronics brand service model that's reflected in the guidance.

So there's a shift in business model.

Are those initiated by the brand or is it by Baozun? If that is the case, by Baozun, then how do we convince like existing or any new brands to adopt a nondistribution model, which I think is more preferable, I guess, on our end? How do we do so?.

Binnie, so I heard the second question.

So can you repeat the first question?.

Sorry. My first question is on the SaaS offering. So -- well, the software launch, basically, we're talking about in the second half. And I guess, how -- like is this -- like the new software launch is, I guess, like a simplified version for brands online strategy.

We standardize a lot of these processes, right? So and then, I guess, that is relation to Vincent's opening remark that we talk about the enhancement of our IT capabilities or expanding our scale of IT services. So I just want to have an update on the launches of the software and then also what type of customers are we targeting at.

And in terms of the take rate or revenue or GMV contribution that we are thinking about. So I guess update on the stop -- Shopdog rate..

So let me just rephrase the question.

It's -- the first question mainly about the Shopdog, right?.

Right, that's correct..

Okay. So now I get it. So okay, so let me address the question one by one. So first thing is basically around the Shopdog. So as you may know, Shopdog is our self-developed intelligent application to help brand partners closely integrate online and our brand stores in the self channels.

So since this launched before the Double 11 last year, Shopdog has been adopted by more and more brands to execute their O2O strategies. And also, you may know there's right now in the whole e-commerce society of China, everybody is talking about new retail.

So one of our largest global sportswear brand partners launched a trial run during the midyear campaign in June, so -- which was very successful test run, so prompting them to initiate a large-scale implementation of our Shopdog for the Double 11 campaign.

And in the same time, as you may know, as you have in the news, Baozun Shopdog is already recommended as one of the solutions by Alibaba to all their merchants.

And in the same time, we are establishing an omnichannel team, omnichannel center to not only to the -- targeted not only to implement the solution with our existing brands in our portfolio but also to provide the solutions and tools to other broader variety of clients, not only to the national brand but also most Chinese brands who have such kinds of new retail demand.

So in the future, we believe Shopdog is more like standardized tools not only to improve, like you said, the take rate of our existing partners.

Of course, it's value-added services and solutions to be provided to our existing brands, but also, it's a standardized product and tool, which we can enlarge our client base to provide to more variety of brand. So this is what we would like to emphasize for the first question.

And in terms of the second question, in the services revenue guidance we have provided just now at 50%, we don't account into any potential like transitioning revenue from those -- from these leading global brands. So it's very -- I think it's very limited contribution to the 50%.

Of course, it's an addition, but even without that, we can achieve 50% -- over 50% growth rate for services revenue. And in terms of the process and negotiation of process, it's actually initiated by Baozun, and we had some ways and reasons to persuade our brand. But this is like ongoing -- this was ongoing for around 12 months.

So [Indiscernible] is a very leading one, so we need to do a lot of negotiations and discussions and to persuade not only for China but also the global headquarters. So it's a long process. But finally, we concluded a process in August. So that's why we had such kind of latest update to you guys.

So in terms of how to persuade those brands, in terms -- so we said that it benefits both of the parties because the distribution model, of course, people know that there are benefits -- or it's good for Baozun, but -- for the non-distribution model, it's good for Baozun.

But also, on the brand side, we can help them to have more control on the pricing and to binding our like interest with them on a pure partnership. So that's why we have found reasons and some ways to convince our brand to believe that this is the best partnership model.

It's the same like in the past, we transitioning our existing -- all the existing brand to the non-distribution model. So it's a process, but mainly because of the company wise. It's not about the model wise. So there's a generally business news but it's just you need some time to transition. So we are very happy that, finally, we finished it..

Okay, thank you Beck and Vincent, just one follow up on the SaaS launches.

So how do you think they will compare to one of the global peers, right, like [Indiscernible] right, in terms of being they actually originated with this type of software? How do you think our SaaS will be comparing to them? And then also, what is the breadth of your model like and what type of brands, right, are we going after for thinking that those type of brands will be using or maybe we will teach them to use our -- the like SaaS platform -- the SaaS that we are launching?.

Okay. So let me take the question. So first base, in the past, we have our own internal generated NEBULA System. So NEBULA System is a highly customized graphic nature to provide and host the ecommerce platform for leading global brands. Usually, they're kind of big brands.

So right now, we are developing the SaaS platform which we call the Nebula 5.0 SaaS platform. It's currently going through the final phases of development. The Nebula 5.0 SaaS platform is a great use software framework with functional modules that targets more to medium brands by providing omni-channel solutions for online shopping.

So we developed this platform based on over 10 years of experience in serving various kinds of global brands. But by standardizing common features and services needed to establish online stores, it will enable the potential brand partners to geographically and efficiently create off line brand -- official online brand stores to retail stores.

So we already have a leading kitchen utensil brand signed up to get Nebula 5.0 cloud SaaS platform a test run by creating their China website in a shorter time during the fourth quarter of 2017.

So the advantages of the Nebula SaaS when compared to the others and the previous versions of Nebula, so the first one is easily update so functional modules, which can be rolled out and applied quickly. Second, more standardized features. Third, less time and a lower cost for a broader variety of brand.

And I would like to emphasize that, here, it's the brand, it's not merchant. So really, it's is targeted to brands not merchant. That's different..

And our next question will come from Nicky Ge of China Renaissance..

I have two questions here. Number one is our GMV guidance for the full year. Given we have very strong top line in the second half, are we [indiscernible] yearly guidance? And the second question is for our take rate for new brands.

How do we compare the take rate trends, especially the take rate for new brands versus the existing brands in the same category?.

Okay. So I thank you for the question, Nicky. So in terms of the GMV guidance for the full year, as you may know, for the first half of the year, our total GMV is growing more than 60% on year-over-year basis, and we expect the GMV growth for the second half of this year will still be over 60% on a year-over-year basis.

And in terms of the new brands commercial terms versus existing brands, in a broader way, we achieved better and higher commercial terms in the margins for the same category brands against the existing brands. This is mainly because, right now, Baozun is in a very leading position in the industry.

As we have said in the earlier prepared remarks, our market share is growing, and our variety of solutions and services are growing. In some ways, we don't have enough and very close competitors, which makes us to have a better position to improve our commercial terms. That's it..

And we will take our next question from Billy Leung of Haitong International..

Vincent, Beck and Caroline, just on our technology investments focus again.

Considering that we are focusing on AI big data, are we going to be working with partners such as Alibaba? Or is this investment on technology more an independent development by ourselves? And sorry if I missed the previous question, but will this technology investment have a material impact on our margins going forward?.

There are some [indiscernible] talks about now our investment technology will cover the whole process from demand generating all the way to the demand fulfillment.

So talking about the help the technology can provide to the margin, I think it's more about more services with certain packages and solutions we will develop based on the fundamentals of the technology platform.

So in this case, of course, we can deliver more quality services and solutions to the brand, and in turn -- and in return, we can have better margin upon this kind of services provision. For the procurement part, of course, that is, I think, even bigger potential to work out.

Because the whole process to fulfill the e-commerce order and customer demand is complicated, so we -- each of the nodes and process is your sort of big potential to save cost, make a better efficiency and better also the consumer experiences. So this kind of technology data, AI analysis, all this is serving with kind of purpose.

For example, AI, we target to calculate the inventories before we work out any of the marketing plans so that we will make the whole phase much more efficient than yesterday. Thank you..

Okay, just a quick follow-up.

Does management have any M&A plans in the near future?.

We are open in this market, and if there's any kinds of capable, applicable opportunity, we will look..

And we will take our next question from Ryan Roberts of MCM Partners..

A couple of quick ones from me. Just, first, can you like give us an overview on how much of a drag Maikefeng was providing on the P&L previously? That's going to give us a sense of how that might shape up again after Q3, because I know that there's you mentioned earlier there's going to be a hit, about RMB10 million or so.

Just kind of give us a sense of how that should shape up afterwards. And I have a follow-up after that..

All right. Are we talking about, Maikefeng, right? So....

Yes, yes..

So -- yes, yes, okay. So like I said, the onetime restructuring cost for MKF is around RMB10 million in Q3. And in terms of the previous number, for example, for Q1 and Q2, each quarter, the impact is like -- MKF is bringing about RMB5 million to RMB7 million on the -- to our operating -- actually it's an operating loss for MKF.

So they have negative impact of around RMB5 million to RMB7 million each quarter to our financials..

Got you. Okay.

And then kind of -- can I stay on the GMV just a bit? Just in terms of the overall effort to shift our distribution to nondistribution, that entire process, can you give us a sense of where we are along that path?.

Ryan, can you repeat the question?.

Yes. My question is, with the strategy to shift the GMV from distribution to nondistribution, can you kind of give us a sense of where we are in that entire process? You mentioned earlier you have a large electronics firm that your -- that has agreed to shift from distribution to non-distribution.

And just kind of where we are, more generally speaking, in this entire plan..

Okay. So I think, more than one year ago, we started to transfer our business model more towards non-distribution model. It's by two ways. First way, for the new client addition, we are preparing to start from the non-distribution model.

So most likely, when those new brands come onboard, they are working with us starting from the non-distribution model. So this is for the new brands.

And for the existing, older brands, old brand partners, we evaluate the possibility of transferring the business model in terms of the background, in terms of the business nature, in terms of the brandings in their categories. So we initially discussing with targeted brands. So it's like a ongoing process that's going through lots of discussions.

So right now, we have announced that we successfully completed discussion with the largest brand in our distribution model. So to transfer their business model to consignment model. So in this way, we typically expect after the third quarter of 2018, most likely, our major business transaction process is complete..

And we will take a question from Wendy Huang of Macquarie..

I have three quick questions.

First, can you give us your progress on the logistics side, i.e., the so-called [Foreign Language], and what's your CapEx budget for this? And second, can you give us update on your revenue related to the Tmall brand center merchants so that we can check on the concentration risk of your business? And third, can you give us update or disclosure on your cash flow or working capital, especially on the operating cash flow and the free cash flow?.

Okay. So the first thing is about the progress in terms of logistics side. So we have said in the previous earnings call that we are preparing to purchase a logistics space in our central warehouse area. So right now, after six months -- it's a six month approval process by the local government. We successfully completed the majority of part.

So hopefully, during this quarter, we can officially purchase the land, by us. So this is the first one, and this is only -- I think this is a limited case that we will purchase the land. And by this one, we think our whole operating expenses for this land warehouse can be improved, our operating efficiency can be improved for this land.

But still, majority of our logistics space is leased for a long term. So we don't expect we have further large scale investment in the CapEx for logistics' end. For the second question, in terms of Q2, the -- in terms of just -- in terms of the Q2, revenues coming from Tmall platform is growing big.

It's growing bigger compared to the same period of last year. And in the same time, we have seen a broad variety of demands and request to set up and establish, build-up the official brand site from the brand partners.

So we expect, with those brands onboard and we establish their brand official site based on Nebula system in the second half of this year, our brand -- official brand size then is also growing as well, growing bigger as well. In terms of the third question about the operating cash flow. For Q2, our operating cash flow is positive over RMB60 million.

So in the first -- even for the first half of this year, the operating cash flow is positive over RMB5 million versus a negative figure in the same period of last year. Yes, that's it. Thank you, Wendy..

How about CapEx and free cash flow?.

Like we said, so for the first half, we had some deposit for purchasing the land. So in terms of free cash flow, I think it's breakeven. And in terms of the third quarter, we need to pay like around RMB180 million for purchasing the land. So for the third quarter, it should be negative for the free cash for a while.

But in the -- for the whole year base, we think we still have a large chunk to reinvest..

And that concludes today's question-and-answer session. I would now like to turn the call back over to Ms. Caroline Dong for any additional or closing remarks..

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

And ladies and gentlemen, once again, this does conclude today's conference. We thank you for your participation. You may now disconnect..