The only product will be the Flash-purchase model website, will not be involved in price war

The report showed that only the third-quarter revenue of the goods will be 155.9 million U.S. dollars, an increase of 197% per cent, the net loss attributable to ordinary shareholders is 1.5 million U.S. dollars, lower than the same period last year, the net loss of 17.5 million U.S. dollars.

After the release of the earnings, only the Chairman and CEO Shenya and CFO Yangdonghao attended the conference call, read the earnings points, and answer the analyst questions.

The following is the main part of the conference call question:

Alex Yao, analyst at Deutsche Bank, Alex Lian: I have two questions, first, can we talk about where the main driving force for the third-quarter surge in traffic is coming from? Does Taobao "double 11" activity affect you? How will you implement your marketing strategy in the next few quarters? Second, the Logistics centre. In the past few quarters, the proportion of logistics costs in overall revenue has been declining, when will the ratio be maintained at a relatively stable level?

Shenya: The third quarter, the company carried out a large number of Word-of-mouth publicity and marketing, coupled with the consumer more and more recognition of our model, therefore, Q3 traffic growth is very rapid. Taobao "Double 11" has no effect on us, "double 11" that day, we did not carry out any promotional activities, but sales still increased by 15%. In the future, we will continue to implement Word-of-mouth publicity and performance based marketing strategy.

Yangdonghao: Over the past few quarters, our logistics costs have indeed fallen in proportion to the total revenue. We believe that through two operating strategies, logistics costs still have a further reduction in space, first, expand our warehouse and warehouse volume. Currently, we have 4 warehouses nationwide, with a total area of 120,000 square meters, and we plan to expand the warehouse area to 400,000 square meters by the end of next year. By expanding the warehouse capacity, we can further improve the operation efficiency of our warehouse, and the automation system will help us to further reduce labor costs; second, we will transfer the national logistics to low-cost Local logistics, which helps us to further reduce the performance of expenditure.

Alex Lian: What is the return rate for the third quarter? What is the trend?

Shenya: The return rate in the third quarter was 19.2%, down 1.6% from 20.8% in the second quarter. In the foreign similar electric quotient, the clothing class electric dealer's return rate is 25% to 35%, therefore, our return rate is below the international level. In addition, the return rate is not the lower the better, because the blind pursuit of low return rate will have an impact on customer experience and sales.

Piper Jaffray analyst Gine Monster (Gene Munster): I have two questions. First, did you increase the number of regional stations last year and whether it will continue to increase this year? Second, the third quarter sales schedule, in the future will increase the sales file?

Shenya: We added 3 sites last year, and our strategy for this year and next year will not add new sites, a total of 4. In addition, we increased our sales schedule from 5,300 in the second quarter to 7,400 in the third quarter, well above 1900 in the same period last year. In the future, we will be appropriate to increase the schedule, the pursuit of the larger sales of each schedule.

Gine Monster: Does this indicate that the sales schedule for next year will not be further increased and that the current 7,400-time schedule is maintained?

Shenya: We expect our sales schedule to increase to 8000 to 9,000 in the fourth quarter, and we won't be able to dramatically increase sales schedules in the short term.

Gine Monster: Will your bargaining power change as the market becomes more competitive? Will it affect the business?

Shenya: As our sales continue to increase, our bargaining power with the brand is strengthening, which can be seen from our growing gross margin. Suppose, originally we and brand business cooperation five days of sales of 2 million, and now we cooperate with the brand sales up to 8 million, we can pursue more to profit, but we have to follow commercial principles, to maintain a good ecological environment, we will not ask the brand to too high gross margin. We expect a reasonable gross margin of 26% to 28%, which is close to the gross profit margin of a foreign discount retailer.

Yangdonghao: Our sales cap is not determined by the sales schedule, but by sales per sales schedule. Therefore, our primary goal in the future is to increase sales, rather than increasing the absolute number of sales schedules.

86 Securities Research Analyst C. Ming Zhao: I have two questions, the first question about the fourth quarter performance forecast, your performance is a sharp growth trend, seasonal factors will make the third quarter operating profit margin positive? In the first quarter of next year, will negative seasonal factors such as off-season make profit margins negative?

Yangdonghao: Our business does have a light season. Quarter Four is our most important quarter of the year, and the first quarter is relatively low season, because of the Chinese New Year holiday affected. In the first quarter of this year, our total revenue was 101 million U.S. dollars, compared to the fourth quarter of last year's revenue of 103 million U.S. dollars. Therefore, it is really a short season, but if the fourth quarter and the first quarter of the performance comparison, there is not much difference, it is not that the seasonal factors on our chain rate of return caused a greater impact.

C. Ming Zhao: The second question concerns the proportion of platform sales products. What is the conversion rate of sales?

Yangdonghao: As far as our gross margin is concerned, there are mainly two methods, one is, we purchase prophase inventory from the partner, then raise the price according to our cost. The other is that we get a conversion rate based on the total sales schedule.

C. Ming Zhao: Can you analyze the two patterns and the future impact on gross margin?

Yangdonghao: That depends. These two pricing models sometimes do not have the same business, and the two pricing models of the gross margin is not much different.

Oppenheimer analyst Andy Yang (Andy Yeung): My first question relates to expenses. In the third quarter, the ratio of performance expenditure to total revenue fell year-on-year, which contributed to the decline in the implementation of expenditure? In the long run, what is the percentage trend of performance expenditure in total revenue?

Yangdonghao: In the third quarter, our performance expenditure did fall sharply, for two reasons, we have the expansion of warehouse area and the transfer of national logistics to Low-cost and high-quality local logistics. As I said earlier, we plan to significantly expand our warehouse capacity, we will continue to low-cost local logistics transfer, in the future, we are confident that we can further reduce the performance of expenditure in the proportion of revenue.

Andy Yang: Now there are some industry integration in China's E-commerce market, in your opinion, does the market competition pattern change? How do other e-commerce companies affect your overall sales and expansion plans?

Shenya: The industry does have some consolidation, and the competition is grim. In the field of flash purchase, we mainly have two major competitors, such as Fclub and Ihush, in E-commerce, Day Cat Mall is one of our opponents, but we do not directly with its competition. We do have a lot of competitors in the area of flash buying, but we've made the effort to distance ourselves, and our sales are even more than 20 times times that of theirs. Therefore, we are not worried. Flash-mode sites like ours are not involved in price wars, and our SKU (inventory unit) is very rich. Consumers have to make choices within a short period of time and we are not involved in price wars such as books or 3C products.