Caroline Dong - Investor Relations Wenbin Qiu - Chairman and Chief Executive Officer Zhaoming Chen - Chief Financial Officer.

Joyce Ju - Citibank Eileen Deng - Deutsche Bank Monica Chen - Credit Suisse Binnie Wong - Bank of America Merrill Lynch Billy Leung - Haitong International Research Ltd. Nicky Ge - China Renaissance Securities.

Good day and welcome to the Baozun Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. All participants will be in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.

At this time, I would like to turn the conference over to Caroline Dong, Investor Relations, Director. Please go ahead..

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; 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 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, such 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, Caroline, and thanks, everyone, for joining our earnings call today. Total GMV increased by 71% year-over-year to RMB4.1 billion during the third quarter. Growth continued to be driven by increases in sales from our existing online stores and further optimization of our business model mix towards a non-distribution model.

During our Q2 earnings call, I reiterated the central role of technology plays in our strategy. Technology creates a significant barrier to entry, presence of competitive advantage, and has been the key for success since our founding.

Customer and brand succession plays a similarly crucial role in our strategy and therefore we need to continue to invest significantly in both of these strategy initiatives which strengthens our future business prospects.

We have always committed our focus towards anticipating the future needs of our brand partners across the entire brand e-commerce value chain. We will continue to invest in and strengthen our vast portfolio of technologies over the next three to five years.

This investment in our future will further strengthen our leadership position and long-term competitive advantage as well as the expense [ph]. This scale offers technological services to create greater value for clients, consumers, and shareholders.

We have been steadily expanding our array of services we are able to offer our brand partners in order to cover every aspects of their brand e-commerce value chain. I am very pleased with the progress we have made in our digital media business.

Last month, we were recognized with two bronze awards and one nomination during the ROI Festival 2017, which is one of the most influential creative festivals in Asia.

This was our first time participating in the ROI Festival as a digital marketing agency along with well-known multinational advertising peers, such as WPP, Publicis, Dentsu and I am pleased to have performed so well on our first attempt.

I believe our strong debut in the ROI Festival events demonstrates that our digital marketing services are on par with our global peers. Our digital marketing services include marketing services as well as the unified equal system digital marketing services that incorporates various strategies, communication channels, and operations.

We have been authorized as one of the first certificated data packed service provider and the independent software lender on Tmall’s Uni-CRM platform, multi-channel network providers.

Leveraging our competitive advantages in big data analysis and in-depth understanding of consumer behavior, we are using our digital marketing services to develop strong relationships with several global leading brands which I believe demonstrates the increasing recognition for quality our digital marketing capability has.

On a more recent note, we were able to successfully settle total order value of RMB5 billion during Singles Day earlier this month.

Almost double the amount on the same day last year; this solid increase in total order value was driven by our seamless integration of our IT infrastructure, online store management, digital marketing, customer service, warehousing and fulfillment, and back end administration.

We are very proud of this performance, additionally one of our largest sportswear brand partners successfully rolled out Shopdog in its first large-scale trial during Singles Day this year. Overall, I'm very pleased with our outstanding performance during the third quarter.

We will continue to drive growth momentum and expand the range of services we have on offer and generate great value for our shareholders. With that, I will pass the call over to Beck, who will review our financials..

Thank you, Vincent.

We are very proud of our results this quarter, especially the strong performance from brands and our non-distribution model to further optimize our business model mix and transitioning more brands towards our non-distribution model, we successfully transitioned leading global electronics brand partners business from the distribution model towards the non-distribution model in September.

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

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 non-distribution business model. We are confident that this shift will greatly benefit our business and generate long-term shareholder value. Let’s now go over the numbers.

A few housekeeping items in advance. We believe year-over-year comparisons are one of the most useful ways to judge our performance. All percentage changes that I'm going to be giving will be on that basis. Let's start to review the financials. Total GMV during the quarter increased by 71% to RMB4.1 billion.

Our focus remains on growing our non-distribution business, which saw GMV increased by 93% this quarter. We will continue to optimize our business model mix towards the non-distribution model going forward. The decrease of distribution GMV was permanently due to the transitioning of one electronic brand business to the non-distribution model.

The total net revenues increased by 19% to RMB890 million, breaking down further, products sales revenue decreased slightly by 1.5% to RMB473 million, in line with the distribution in GMV, which I just talked about. Services revenue rose by 55% to RMB418 million during the quarter.

The increase was primarily due to the rapid growth of our consignment and service fee business model, and in particular, growth in sales of apparel products as they expand their online presence.

In Q1 of this year, we began migrating part of our media services towards a more asset-light model, on an apple to apple basis excluding the costs of media procurements from services revenue in both Q3 2017 and Q3 2016. Services revenue during the third quarter of 2017 grew about by 65% on a year-over-year basis.

Total operating expenses were RMB862 million. In particular, cost of products decreased to RMB408 million, primarily due to the decrease in the volume of product sales from our core brand e-commerce businesses.

Fulfillment expenses rose to RMB173 million, mainly due to the increases in GMV contribution from our consignment businesses, more orders fulfilled by premium delivery service providers as a percentage of total orders, and warehouse rental expenses.

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

Starting from July, our team began to prepare for the 11.11 Campaign and had some pre-investments into the infrastructure and capabilities. During the Singles Day, our logistics team performed extremely well when compared to our market competitors in terms of efficiency, accuracy, stability and flexibility.

So our investment has been well paid back and appreciated by our brand partners.

Sales and marketing expenses rose to RMB222 million primarily due to an increase in store operation staff and promotional and marketing expenses associated with our online stores with the area in particular we began investing and rolling out unified marketing campaigns for Singles Day in conjunction with our brand partners in August which is earlier than usual.

We believe that Baozun and our brand partners benefit from this marketing campaign strategy during Singles Day earlier this month. Technology and the content expenses rose to RMB36 million.

The increase was primarily due to increases in technology-focused staff, share-based compensation expenses and project-based variable technological expenses from branded stores.

We will continue to increase our investment in technology following the establishment of our innovation center in June 2017 to further enhance our competitiveness and to drive long-term growth. G&A expenses rose to RMB30 million. The increase was primarily due to increases in administrative staff cost and share-based compensation expenses.

Income from operations increased to RMB28 million, while operating margin improved to 3.1% compared with 3.0% in the same quarter of last year.

Non-GAAP income from operations was RMB41 million, an increase compared to RMB31 million in the same quarter of last year, while non-GAAP operating margin improved to 4.6% compared with 4.1% in the same quarter of last year.

In Q3, net income attributable to Baozun ordinary shareholders rose to RMB22 million, an increase of 12% from the same quarter of last year. Basic and diluted net income attributable to ordinary shareholders per ADS were RMB0.40 and RMB0.37, respectively, compared with RMB0.39 and RMB0.36, respectively, during the same period of last year.

Non-GAAP net income attributable to Baozun ordinary shareholders rose to RMB35 million, an increase of 25% compared with the same quarter of last year.

Basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS were RMB0.64 and RMB0.59, respectively, compared with basic and diluted non-GAAP net income attributable to Baozun ordinary shareholders per ADS of RMB0.56 and RMB0.52, respectively, for the same period of 2016.

That completes the profit and loss statement for the quarter. As of September 30, 2017, the Company had RMB510 million in cash, cash equivalents and short-term investments, a decrease from RMB957.3 million as of December 31, 2016 due to the investment in the Company’s logistics space and procurement for the Singles Day shopping festival.

Like we have told previously, we successfully completed the land purchase and obtained land certificate in September. The investments account for US$40 million. Turning to revenue guidance for the fourth quarter of 2017. We expect total net revenue to be between RMB1.49 billion and RMB1.53 billion.

While we are transitioning more of our benefit from the distribution model towards the non-distribution model, we expected to provide that guidance, consolidated revenue since last quarter. Under the non-distribution model, we only recognize revenue on net basis and services revenue.

For the fourth quarter of 2017, we expect services revenue to increase by over 55% on a year-over-year basis. Last quarter, we raised our fiscal year 2017 GMV guidance from an increase of over 50% to an increase of over 60% on a year-over-year basis.

With strong confidence in our strategy and operations, we expect GMV during the fourth quarter of 2017 to grow faster than 70% on a year-over-year basis as services revenue continues to grow rapidly. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you..

Thank you. [Operator Instructions] We will take our first question from Joyce Ju with Citibank. Please go ahead..

Good morning, Vincent, Beck, and Caroline. Thank you for taking my questions and congrats on the strong quarter. I have two questions. My first question is actually regarding the non-GAAP operating profit. This quarter, we saw GMV growth accelerating to 71% year-over-year which is very strong.

While we see non-GAAP operating profit only grow 33% year-over-year, historically revenue growth, gross profit growth could be slower than GMV growth because of the model shift and the media service migration, but the impact on the operating income were really muted.

So I wonder for this quarter what factor has changed the trend mix the operating profit growth actually slowing down, and how should we model the OP profit growth for the future quarters when you compare to the GMV growth? My second question is regarding the housekeeping question for the same brand store sales, if you can give us some update on the numbers? Thank you very much..

Thank you, Joyce. Let me take the question, first of all regarding the first question about operating profit or operating margin growth, so there are three reasons I think we can share with you.

First is we have talked in the prepared remarks, we have some pre-investments this year in Q3 for the 11.11 Campaign especially in infrastructure and procurement capabilities, and also we started to do the marketing campaign with our brand partners to secure marketing resources.

And usually if we start earlier in August, in September for marketing resources, it’s much cheaper than we start to do it after the national holidays and right before the 11.11, so that's why we think it’s a very proactive strategy and we have already been paid back by the results in the 11.11 campaign and – yes and the results are truly appreciated by our brand partners.

So this is the reason one, the reason two is like we have talked about in the last quarter’s earnings call, we shutdown MKF, and it had incurred one-time severance costs as you dismissed the employees, and shutdown for some other like kind of infrastructure and services. So this will also incur one-time expenses in Q3 as well.

The third reason is relatively electronics and appliances grew very well and even better than our expectations so and there is some dilution effect from those relatively lower fixed rate categories, and so this is how I address your first question.

And for the second question about same-store sales growth rate, and actually for the first half of this year, we talked about the same-store sales growth like growth by around 50% on year-over-year basis. And for Q3, the same-store sales growth rate is accelerating to about 60% on a year-over-year growth. Thank you..

Thank you very much..

Thank you. We will take our next question from Eileen Deng of Deutsche Bank. Please go ahead..

Thank you, management for taking my question. First, congratulations on the strong results. I have two questions. The first one is regarding our fourth quarter guidance on service revenue growth. The 55% is the same as a third quarter service revenue growth rate.

So wonder what’s the reason driving this growth rate to be flat – is to be the same as this quarter is – especially when we see the Singles Day results largely meet rising expectation? I am wondering, what the level is like if we exclude the accounting treatment adjustments? I am wondering what’s the non-distribution GMV behind this in the fourth quarter.

And my second question is regarding the fulfillment expense. It seems like this quarter saw the expense ratio as a percentage of the corresponding GMV drop clearly on a quarter-on-quarter basis.

I am wondering is this because of our upgraded logistics system and we see that operating efficiency increase and how should we think about the trend going forward? Thank you..

Okay, so thank you for the question Eileen. So regarding the first question, fourth quarter revenue – the services revenue and guidance, and yes usually we think we are fully capable to give the guidance of the services revenue going by over 55% fully accounted and improved end to end.

Also we talked about that we began migrating our media service towards a more asset-light model starting from generated this year, and the previous media service model last year, we recognized the cost of media purchase and our net commission as revenues. So under this new model, we only recognize our next commissioning as our revenues.

So it's like an apples-to-oranges base. So if we look at like apple-to-apple base, and pro forma base and the services revenue for Q4 just like for the 55% increase, it could be like 68% year-over-year increase at least if we exclude the effect of migrating the media services model from gross to net basis.

And in terms of non-distribution model for the first three quarters of this year, the non-distribution model is growing – I think every quarter is growing over 80% on a year-over-year basis. And so for Q4, we think we are fully capable that we feel can maintain relatively such kind of very high growth rate for non-distribution model.

And again in regard to the second question about fulfillment expenses. So in Q3, we feel like we said that we still had some investments, pre-investments to expand capabilities, especially for like 11.11 for next year.

So there is some pre-investment and that we also purchased one of the land of warehouse, so there we have incurred some cost for the future and we think we can have more leverages going forward. And especially starting from this year, I think we had started to provide services for Cainiao Logistics Network as well.

So in the future it will keep you grow and this is also can bring us additional services to revenue in the future as well. So yes, this is how I address the two questions from you..

Thank you..

Thank you. We will take our next question from Monica Chen with Credit Suisse. Please go ahead..

Hi. Good morning, management Beck, Vincent and Caroline. I have two questions. So first one is regarding our total brand partner numbers. So we see our total brand partner number increased by 6 to 146, while our GMV brand partner accelerated more from 129 to 141 this quarter.

So I was wondering who are the new GMV brand partners and what category are this brand belongs to? And my second question is regarding the recent with the intensified competition among the major e-commerce platforms, especially in our apparel category? So as we are the omnichannel, e-commerce service provider for this apparel brand, so what is the impact to our platform and to our brand? So while our brand partner start to think to focus only on one of the major platforms instead of both channels? Thank you..

Okay. Thank you for the question Monica. Let me address the first question and Vincent can take the second question about the platform and competition. So like we said, we always value the quality over the quantity in acquiring new branded partnership.

So we think GMV brand partner is more valuable compared to non-GMV partner for our opinion in the long-term brand. So that’s why we focused on transitioning non-GMV partner to GMV partner.

And in regard – with regard to new brand addition, we think the GMV brand partners, especially in Q3 we still have a lot of leading international brand in apparel and software, and we expect we will have more brand addition in capital apparel and software. We will have more brand addition in FMCG, Mother & Baby products in the coming years..

Okay. Thank you for the question Monica. I will take the second one.

For the competition across the platforms, I think right now from our perspective, the major brand partners we are serving are quite – you wonder as this quite focused on back-end improvements including the fulfillment network restructure and also technology preparation like data analytics and AI these kinds of things.

So I think the platform for them is about the same competition like before. So several major platforms for them will be Tmall official web store and also JV as before, so that structure doesn’t changed. Then also that’s one thing. But along with the establishments of the very strong backend capability.

I think we can have more, I’d say distinctions to be credited in the future. So, of course, the brand partners, major ones, they’re focusing on Tmall today, especially those apparel brands.

And JD, I think the situation doesn’t change a lot, but the brands are talking more about Tencent, WeChat even some smaller and more interesting new platforms and wished to come back to their digital marketing and sales. So of all these here we are helping them only from the front end – so helping them a lot of back end initiatives innovations.

So for us we take brands as our priority and then prepared for all the business opportunities in the future. Thank you..

Thank you, Vincent and thank you, Beck..

Thank you. We will take our next question from Binnie Wong with Merrill Lynch. Please go ahead..

Hi. Good morning, Vincent and Beck. Thank you for taking my question. I have two questions here. My first question is that on the longer-term perspective.

Maybe Vincent, can you give us small color on how do you see the take rate in terms of the potential upside that we could see? Basically we are providing more services, say we have like Shopdog, ShopCat and then also Shopify right, but similar to what we have sort of like a software system to Shopify like in terms of the potential surfaces that we can provide.

Those are things that investors generally see an upside for take rate. But this quarter, we see just maybe surface is likely flattish.

So how do we see the take rate in terms of – I'm not asking for exact number, but I'm just asking for Company’s direction in terms of how we see the trend could be? And then second question is that we see this quarter is actually a very solid quarter in terms of the GMV growth.

GMV growth actually accelerated from the third quarter and potentially if we look at like last year is not that relatively an easy comp, but then we still were able to manage – an accelerated growth in GMV. So I think that's very impressive.

Can management highlight to us what categories do you see the fastest growth and what are the reasons in terms of is it because we expand into new categories, or is it because we have additional services we provide, which brand see as value added? So can you help elaborate on those? Thank you so much..

Binnie, let me take the second question first. Yes and also, yes – also I can take both the questions and then Vincent can give some additional comments. So firstly for the long-term growth and first I want to clarify we are not satisfied, okay, so this is the first point..

Sorry, I mean in terms of the similar…?.

Yes, just for clarification, for the long-term when I think right now we have demonstrated our strong capabilities. We think the brand e-commerce industry not only to platform, but also to competitors and to brand partners as well.

So we are one top service package provider with integrating capabilities and also with strong innovation thinking in strategy, so that’s why those top lending brand partners would like to cooperate with Baozun in the long run. But still, the first thing as we can still partnership with those leading brands and provide more value added services.

Traditionally we may provide service within the platform or within the integration. Right now, we can provide more innovation to them.

So that’s why we have some very deep dive talk with those senior measurement team of those global brands in global and we started to have some volume in the pilot projects to provide innovation services and the innovation technology capability solutions to those global brands and we expect that we can achieve not only like the benefit, but also the financial returns as well.

This is one way. The other way is of course, we had both top leading global brands as our benchmark to lead the way and also to acquire more relatively smaller brands in a way. So obviously we can have a better commercial term again – with those second tier brand partners, compared with the first tier.

So this can also help us to improve the long-term revenues and take rates from the benefits as well. And regarding the second question about the GMV growth by category, so yes, the GMV growth is very promising and accelerating to over 70% to this quarter and in Q4.

So generally, our growth rate for those like apparel, the biggest category apparel is still very solid, very high speed. While we have seen that electronic and appliances categories and they are also accelerating – the growth rate also accelerating in Q3 and as we expect in Q4 as well.

So even for some – and also we shared the same-store sales growth rate before that the Q3 same-store sales growth rate is also accelerating. So that what we have seeing in the e-commerce market and we can sales that the Chinese – especially the Chinese consumers just want to consume more like top-tier and quality authentic products and brands.

So we have still on confidence that and this moment we will keep you go for the next coming year..

Well, Beck..

Thank you..

If I can just have a quick follow-up question here, when you see it like the innovative services, can you elaborate a little bit more as to what are the innovative services or what are the differentiation against other peers, because we constantly have investors would be asking or what are like I think a general question – a common question is that the differentiation here.

So since you highlight about the innovative services, maybe can you elaborate more on how Baozun will differentiate from its peers? Thank you..

As you may know, last caller, we announced that the setup of the innovation center and also the joining of our Professor [Wan]. So right now, our technology research direction is about three ones. First one is about the computer vision and then the big data and then the AI.

So this three technology directions is very in line with what the brands needs today together their capability in such e-commerce era. So for example you see the historic operational data about the products.

We can use the computer vision data for AI to feather the product development efficiency quality or we can deliver this kind services and products to them. We help them to do the better offerings for the market.

And also for the year, the engagements for example, we can use learning technology and data to provide them with the – how the consumers ranked rates on their products? How they like the way we deliver to them? So in this case, we call this would be a worth of commerce and this can also be very helpful for the – I’ll just give you a few examples that what we're doing much more than that.

Thank you..

Thank you. We will take our next question from Billy Leung with Haitong International. Please go ahead..

Hi, management. Thanks for taking my question. I'm just focusing on technology, our investments technology. Could – management be more specific in what we investing in, in terms of how much we are putting in terms of talent and how much we are putting in terms of technology upgrade? That's number one.

And number two is in terms of this investment should we expect the investments in technology to grow incrementally, so is it going to be large in next year and this year and so forth? And finally, the final question is could the management sort of give us some color on any M&A plans are possibilities in the future? Thank you..

So let me take the second and the third question and then Vincent can take the first question about the Talent’s acquisition or the strategy about the tech investment.

So in terms of the investments deal – sales, so we generally we would have talked about the investments and we will be – we will increase our investment in technologies in the following period. But we believe that the generally we have a very targeted vision. So we don't waste money. So we just want to invest a very targeted area and people.

So we expect the technology expenses as a percentage of revenues or as a percentage of GMV we will continue to grow in Q4 next year, but within a reasonable speed. And in terms of the potential M&A, we are always open to have the opportunity to do merger and acquisition and we will update to the market if there is any material M&A opportunities..

Yes. Let me answer first one. Yes, as we passed several months of our research and technology team increases a lot. So now we have more than 500 engineers in the Company. We are serving in different functions, including the basic research, application research, engineering, customer support and vendors are different functions.

I think now the key and core innovation team already been set up, so I think the team is very strong including a lot of very good talents.

So I think combined with the innovation and also engineering piece together, we can not only develop very good technologies for the applications in the e-commerce scenario and also who are very good engineering jobs who adopt all this kind of results into the commercial practice and in return benefits our financials. Thank you..

Thank you..

Thank you. We will take our next question from Nicky Ge with China Renaissance. Please go ahead..

Good morning, Vincent, Beck, Caroline. Thank you for taking my question and congratulations on the strong quarter. I have two questions here. I just want to get more color on the fourth quarter guidance.

Our guidance for the services revenue seems like accelerating from the third quarter, presenting that our non-distribution GMV accelerating from the third quarter as well? That’s the first question. And the second question is the housekeeping question about marketing cost. The marketing cost as a percentage of GMV increased a lot this quarter.

Just want to know that the reason behind that and the trends going forward? Thank you..

Okay. Thank you for the question Nicky.

Yes, for the first question, like I said before, we think the non-distribution GMV growth rate will keep to – high speed and that is over like 80% in the previous three quarters, so – and also in Q4 usually it’s like a peak season and especially for apparel products and also even for our apparel products they had big average order sites, bigger average on the sites, so that’s why we expect that we can generate higher delinquency revenues from fourth quarter as well.

And in the second quarter marketing expense, depending on the marketing expenses like I have said in the earlier prepared remarks.

So especially for this quarter, we had some pre-marketing investment for the coming 11.11 in Q4 and it has been paid back through the delta rollout, and financially we think we are solidifying, and in Q4 we think the marketing cost as a percentage of GMV or the revenues..

Thank you, Beck. End of Q&A.

[Operator Instructions] And there are no further questions at this time. I would like to turn the conference back over to Caroline Dong for any additional or closing comments..

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 us know. Thank you for joining us today. This concludes the call..

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