Baozun Inc.

Good morning, ladies and gentlemen, and thank you for standing by for Baozun's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there'll be a question and answer session. As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Ms. Wendy Sun, Senior Director of Corporate Development and Investor Relations of Baozun Please proceed, Wendy.

Thank you, operator. Hello, everyone, and thank you for joining us today. Our second quarter 2022 earnings release was distributed earlier and is available on our IR website at ir.baozhen.com, as well as on Global Newswire Services. They have also posted a PowerPoint presentation that accompanies our comments to the same IR site, where they are available for download. On the call today from Baozhen, we have Mr. Vincent Chiu, Chairman and Chief Executive Officer, Mr. Arthur Yu, Chief Financial Officer, and Ms. Tracy Lee, our Vice President of Strategic Business Development. Ms. Chiu will review the business operations and the company highlights, followed by Mr. Yu, who will discuss financials and guidance. They will all 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 relating the meaning of the Security Exchange Act of 1934 and the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management current expectations and current market and operating conditions. and relates 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 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 US SEC any announcement on the website of Hong Kong Stock Exchange. The company does not take any obligation to update any forelooking statement except as required and applicable law. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB and the comparations are on year-over-year basis. It is now my pleasure to introduce our chairman and chief executive officer, Mr. Vincent Chiu. Vincent, please go ahead.

Thank you, Wendy. Hello, everyone, and thank you all for joining us. As you know, in April and May 2022, there was a strict COVID lockdown in many key cities of China, including Shanghai, where Bosnia is headquartered. In the face of COVID-related logistics interruptions, our team quickly mobilized infrastructures to minimize disruptions and maintain operations. Overall, as shown on slide number two, our total net revenue declined by 8% year over year, while services revenues increased by 7%, demonstrating once again our resiliency to macro uncertainties. The pandemic has accelerated the need to cope with drastic interruptions and the urgency of digital transformation across a wide range of brands that we serve. Please turn to slide number three. The failing trend in the rapid convergence between online and offline, or OMO, Baozhen's omnichannel solution enable OMO by integrating brand partners' resources including digitized avatars of brick and mortar stores, mobilized sales associates, and shared inventories. That has become the lifeline of e-commerce during the strict COVID lockdown. We also benefited from the deployment of our intelligent customer service management system, SAMI, which can support remote execution and enhance quality. With Sani, our staff can log in to the system from anywhere, and the system will keep monitoring real-time data of customer service behavior across channels. With our seamless integrated technology, we are pleased that Boson has become a brand de facto aid and relief when it comes to overcoming uncertainties and challenges like COVID lockdowns. And as always, we kept developing additional services. For instance, we updated, upgraded digital content and enabled more virtual reality functions for one leading sportswear brand and also launched short radio services leveraging our multi-regional service centers network. All these efforts helped enrich consumer experience and empower many of our brand partners to success during the 618 campaign. Now please turn to slide number four to share more about our progress on business development. During the quarter, luxury and the premium brands continue to surge forward. And we also added more subcategories, including outdoor cosmetics and fast-moving consumer goods, thereby enhancing our diversification. Overall, we added a net of 10 new brand partners in the second quarter. And the total number of brand partners for store operations increased to 355. While we prioritized the new partnerships, we inspire existing partners to launch more channels. By the end of the second quarter, we operated approximately 40% of our brand partners in omnichannel approach, compared with about 33% a year ago, making a milestone in our omnichannel vision. This August, Our capabilities and track record helped us gain greater recognition in the Tencent Mini Program e-commerce ecosystems. We were honored to be accredited by Tencent as a partner of excellent category for e-commerce operator and independent service vendor, or ISV, for Tencent Cloud Mall, an outstanding category for business development partner, which with this recognition, we became the only service partner that is top listed in both Alibaba Tmall and Tencent Mini program e-commerce ecosystems. We're now further collaborating with Tencent on several initiatives such as in-traffic acquisition and the smart new retail. Next, our momentum towards our vision of technology empowers the future success. We are seeing strong demand from our clients for technologies and solutions to manage not only retail but also distribution network. For example, our big successful project with leading electronics giant continue to expand. During the quarter, we completed a nationwide integration in mini program and JD Daojia for all of its over 3,000 stores, enabling us to generate license revenue in recurrent stream. We're now in next phase of incorporating Tmall and Meituan Dianping to this digital platform to fully integrate business flows from factories to stores and to consumers. Another example is one we were recently secured, a world-leading sports equipment retailer to co-build its digital operating platform. Thus far, we have established a business pipeline with over a dozen of brand partners in technology integration. We believe as brand partners elevate the efforts in digital transformation, technology remains the backbone of our widening competitive advantages. Now move on to our progress in logistics and supply chain businesses. Despite the disruptions in some areas during the COVID lockdown, we not only were able to uphold operations at our own warehouses, but also guided our brand partners to quickly transit from a centralized warehouse into a great management system. We further deepened our cooperation with Chinao to leverage its established infrastructure and network. During the quarter, we started to manage Chinao's warehouse in the apparel category, got some business referrals in luxury and the premium sector, and launched more RFID-based solutions for some of our key sportswear brands. Multiplied by these early synergies, we will appraise the existing alliance to further streamline and advance additional strategic objectives. Enduring all the external uncertainties, we were able to demonstrate our resiliency and accountability. Meanwhile, we are executing our midterm plan with discipline and strategically investing in our business transformation. to expand our total addressable market. For example, please turn to slide number five. In brand management, we see a natural move to expand upstream in the value chain, leveraging our digitalization capabilities, a growing penetration of e-commerce and the marketing insights. Brand management enhance value proposition from end-to-end solutions, which will also in turn enhance our strategic thinking and cultivate a brand-oriented service philosophy. Since last year, we initiated our brand management efforts via multiple approaches, including strategic alliance through minority investment and self-incubation. We have assembled a diverse and attractive portfolio of seven brands to start with, covering two major categories of apparel and accessories, and health and beauty. We are happy to report that we have empowered these brands to a mass of total GMB of approximately 80 million in the first half of 2022. This translated to a year-over-year growth rate of over 50%, strongly performing the general retail industry. Finally, on ESG and the sustainable growth, turn to slide number six. We issued our second annual ESG report this May and launched an additional set of green initiatives, including the introduction of carbon neutrality white paper in June. We are committed to reduce 50% of carbon emission by 2030, compared to the 2021 baseline, and the carbon neutrality by 2050. This quarter, we kicked off our public welfare initiatives by co-launching a used shoe cycling program with one leading national sportswear brand. As a leader in e-commerce services, we will always bear in mind to operate responsibly, accountably, and sustainably We look forward to expanding with our brand partners to mutual successes. I will now pass the call over to Arthur to go over our financials. Thank you.

OK. Thank you, Vincent. And hello, everyone. Now let me first do a quick review of financial of second quarter in 2022. Please turn to slide number seven. During the quarter, our total GMV increased by 47% to $23 billion. The strong GMV growth was mainly due to outstanding performance by one leading electronics brand and the Service C model. And excluding this particular brand, the adjusted GMV would have grown by 2.4%. Total revenues declined by 8% to $2.1 billion, of which product sales declined 29%, while service revenue increased by 7% compared with the same period of last year. Now let's turn to slide number eight for a breakdown of revenue. During the quarter, revenue from our traditional e-commerce partner business accounted for 50% of total business. Revenue for warehouse and logistics contributed 29% and digital marketing and IT solutions contributed the remaining 21%. The outbreak of COVID and subsequent strict lockdown in April and May had a general negative impact on our business. However, we are glad to see that our luxury category still achieved double-digit growth. There was also more resiliency in value-added services, where warehouse and fulfillment service revenue increased by 20%, and digital marketing and IT solution declined only 4%. And due to COVID lockdown impact, Product sales revenue declined by 29%, reflecting a general weak sentiment in product sales, as well as our proactive measures to optimize working capital efficiency. And given the current uncertainty in geopolitical events and the micro-environment, we believe it is critical to continue to focus on high-quality revenue stream to minimize risk in the coming quarters. And as such, we have put more effort on non-distribution model to grow revenues from value-added services, while de-emphasizing distribution model on product sales. Now turn to slide number nine. During the quarter, our cost of products decreased by 26% to $602 million. mainly due to a reduction in product sales. Our growth profit margin for product sales was 13.2% for the quarter, mostly due to a change in pricing strategy, an adjustment in category mix, and the increase in cost related to default and imperfect products. But if we take into account service revenue, our growth Our overall gross margin improved 7% to 72%, driven by higher revenue stream contribution that generates a higher margin. Now let's turn to operating costs and expenses on slide number 10. Fulfillment expenses were $725 million, an increase of 29%. which was largely due to the revenue growth in warehouse and logistics services, and some incremental costs related to COVID protection for front-end fulfillment staff. We are glad to see our regional service center ramp up, and the efficiency of customer service has improved to a point that such costs declined by 2% year over year. Our sales and marketing expenses were $668 million, an increase of 3%, mainly due to increased business development-related staff costs to drive business growth, and offset by efficiency improvements. Technology and content expenses were $112 million, a decrease of 3%. The decrease was mainly driven by the company's cost control initiatives. and efficiency improvements, which was partially offset by companies' ongoing investments in technology innovation and productization. GMA expenses totaled $92 million, a decrease of 6%. The decrease was primarily attributable to the company's cost control initiatives and efficiency improvements. and a higher base from due running period for the company's new headquarters in the same period of last year. Now turn to slide number 11. Based on the above-mentioned items, our non-GAAP income from operation was $47 million during the quarter, and non-GAAP operating profit margin was 2.2%. we have prepared waterfall diagrams depicting our analysis of how our top line and bottom line evolved year over year. As a reminder, this analysis is unaudited and should solely be used as supporting numbers to aid discussion. First, on slide number 12, this waterfall diagram shows our net revenues walk from Q1 2021 to Q2 2022. In red, you can see that the biggest item impacting our revenue this quarter was product sales. As mentioned earlier, the two major factors contributing to this drop were our continuous efforts in brand optimization and the weak product sales due to COVID lockdown. mainly from one key brand in personal care product categories. Revenue from digital marketing and IT services, which we view as value-added services, declined slightly this quarter by 4%. This slight decline in digital marketing and IT revenue can also be attributable to the COVID lockdown that negatively impacts several new projects launched from brand partners. On a positive note, this initiative in value-added service led to better profitability. And please follow me to slide number 13 for the indicative work of non-GAAP operating profit and cost stream. As shown, Non-GAAP operating profit from digital marketing and IT improved by 19%. We also generated a positive saving of $15 million from cost optimization. While at the same time, we kept investing in new opportunities. We spent $14 million on brand management, overseas expansion, and COVID protection and welfare for employees during the lockdown. For our traditional store operation business and warehouse and fulfillment business, the challenging external environment dragged down the overall top line will also trigger higher operating expenses during COVID lockdown. Please turn to slide number 14. To counter these headwinds caused by COVID lockdown, we continued our cost transformation and optimization efforts mainly focus on four areas. Firstly, we proactively minimize the risk by diversifying regional service center functions, including stock operations, design, digital marketing, and technology capabilities. Following our success with regional service center in Nantong and Hefei, we have selected more cities for the next phase of expansion. including Jinan, Chengdu, and Anqing. Secondly, we continue to re-engineer our business processes by centralizing our operating capabilities, where we use one team to serve multi-brands with similar tasks. We also introduced a couple of new automation and intelligent tools to increase productivity and reduce labor costs. Thirdly, we rationalized our compensation incentive for our frontline employees by introducing the Belgian business owner, i.e. BPO concept, which was designed to motivate our employees to take ownership of their roles and offer more entrepreneurial incentives to reward performance. And finally, after moving into the new headquarter building, we were able to consolidate the office footprint across all departments into one place and further streamline supporting functions such as finance, administration, and procurement to reduce cost. Now let's turn to page 15 about our cash flow. As of June 30, 2022, our cash and cash equivalents totaled $3.1 billion. In light of the market uncertainties, we continue to prioritize working capital efficiency enhancement and launched new initiatives to further advance our back-end process to improve inventory management, billing, and collection activities. As a result, we are pleased to sustain a positive operating cash flow of $405 million during the challenging period of COVID lockdown. Meanwhile, we moved forward with our share buyback efforts and purchase of convertible senior notes, which totaled $992 million during the quarter. And lastly, Our board of directors has approved us to pursue the voluntary conversion to dual primary listing on the Hong Kong Stock Exchange. As of today, we are happy to announce that we have received the acknowledgement from Hong Kong Stock Exchange regarding the conversion to dual primary listing. We expect the primary conversion to become effective on November the 1st 2022. After the primary conversion becomes effect, Baozhen will become a dual primary listed company on the Nasdaq global selected market and the main board of Hong Kong Stock Exchange. By becoming primary listed on both exchanges, we anticipate expanding our access to a wider investor base. Overall, Despite some turbulence in the market environment, our ability to conduct business during the lockdown highlights the flexibility and resilience of our business model. We will continue to prioritize resource allocation, drive cost transformation, and improve working capital efficiency. We believe our solid balance sheet, our improved momentum in value-added service, And our well-diversified brand partner portfolio will not only prepare us to get through the tough market environment ahead, but also enable us to emerge as a stronger business with sustainable long-term growth. So this is my financial review section, and that concludes our prepared remarks. Thank you, everyone. Operator, we are now ready to begin the Q&A session.

Thank you. As a reminder to ask a question you will need to press star 1 and 1 on your telephone and wait for your name to be announced. Once again if you would like to ask a question please press star 1 and 1 on your telephone keypad.

We will now take our first question. Please stand by. And your first question today comes from the line of Alicia Yap from Citi.

Please go ahead. Your line is open.

Hi. Thank you. Good evening, management. Thanks for taking my question. I have two questions. The first one is related to the progress and traction for the non-TMO channels. It seems like this quarter, The contribution declined from last year to 24%. Could management share more color the reasons of this mix and how we should be thinking about the future growth opportunity for all these alternative channels? For this quarter specifically, is this suggesting the brands remain quite resilient or actually returning more to the T-Mall channels? And then the second question is, can you update us on your relationship with iClick? How is the business cooperation with iClick so far? Is the investment and strategic business collaborations working as planned? Any color that management could provide would be appreciated. Thank you.

Okay, Alicia, I will take your questions. So this is Arthur here. So first of all, on the non-TIMO percentage, so basically the number you have seen is based on including a very strong performance of one major leading electronic brand during the 618. And if we exclude this one leading electronic brand, actually non-TIMO represents 48%. of total hour GMV this quarter, compared with 43% last year, which is an improvement of 5% year-over-year. And this is actually demonstrated our omni-channel strategy has continued to make the effort. We also see that more brands are starting to utilize the non-TMOS channel to grow their e-commerce business. And as we have mentioned earlier, we have made good progress in not only Tencent, but also we made good progress in JD and other private domain channels as well. On your second question, regarding the cooperation with iClick, So basically, just a recap, the main purpose of us making the investment into iClick is to enjoy the operational synergy by Bulgin operating the back end of operations and iClick having a front end kind of system which allow us to jointly feed and pitch more customers. Basically, the integration was fully completed and we have seen good progress in terms of the joint BD. As a result, you can see we mentioned earlier, our Tencent ecosystem has made a major progress in this year. where we were voted, I mean, we were awarded two good ratings, one, I mean, in two categories. One in the e-commerce operations. Our Tencent ecosystem has made a major progress in this year, where we were voted, I mean, we were awarded two good ratings, one, I mean, in two categories. One in the e-commerce operations, and another in the ISV. Both of them is actually in the top category of the Tencent ecosystem. And that cannot be achieved without the support along with iClick. So after that, we actually become the only one company in China which enjoys the top rating in Tmall, which is the six-star rated TP. and also the top rated in the Tencent system, making us the best service provider for both the public domain and private domain. So this is what we have seen the progress and the strategic kind of opportunity we opened along with the investment into iClick.

I see. This is very helpful. Thank you, Arthur. Congrats on this solid achievement.

Thank you, Alicia. Thank you.

Thank you. We will now move to our next question.

Please stand by. The next question comes from Thomas Chong from Jefferies.

Please go ahead. Your line is open.

Can management comment about the impact of the macro headwinds and the consumer sentiment to our overall business and also the trends of different categories in July and August so far? And my second question is about our cooperation with Tynel. Can management provide some update about the cooperation and also share our thoughts about the expansion into Southeast Asia markets? Thank you.

Okay, so maybe Tris, you can answer the first one, then I will take the one about China.

Thank you, Jeffrey. I'm going to cover the first one. Regarding the digital consumption, actually, we've been monitoring closing in the three months. After two months, the rough time, actually, the accumulated consumer demands have helped us to achieve a very successful 618, as Vincent mentioned. And since this two months, we can see the traffic and GMB is up from July to August. So the overall consumption has gradually recovered. Although it hasn't been fully recovered to the same level compared with last year, but we think the trend is good. And it is a very similar situation on the consumer sentiment here. The market is facing the challenge of the free traffic and the lower rate of the conversion. and also the higher rates on cancel and return cross categories. And I think this is the shared landscape across different categories, the 5% up and down across different categories. But we can see the platform are taking many initiatives to upgrade the APP's consumer experience, like they initiated the market delivery address in one order in those two weeks. So we believe All of those investments will harvest the consumer's preference in longer term. And from Baozun's side, actually in the past one quarter, we put a lot of attention on the consumer experience too. We're actually working with our brand partner to launch new features, like to digitalize the poster sales, consumer care service, like we help many of our clients. to enable the cleaning and the maintenance service of over 1,000 products so that our consumer can enable to enjoy the same premium service online and offline. And also our design hub to launch the 3D display monitoring service and also the VOS gift card and also the TML exclusive capsule in the CBD period. So all of these tactics I think will help us to communicate with the young generation. And also, I think in the longer term, we will build the confidence in the consumer sentiments and the consumption. Yeah.

OK. Thank you, Tracy. I will answer the second question. I think this question actually has two parts. Under cooperation with China, we are making good progress quarter on quarter. So basically, we have cooperated mainly in three areas. So the first one, we have been jointly BD in several luxury and primary apparel brands with some good results. And we see that as one of the major opportunities for us in cooperating with China. And secondly, Baozhen was able to utilize China's national-wide capability on logistics and warehouse. So during the 618, we were able to use the China capability to operate a great management system which allows the delivery in a faster speed to the customers. So that helped us to achieve a good result in the 618 campaign. Both Chineo and Baozhen are actually technology very strong company. So basically in this quarter we start cooperation on the RFID technology and we adapt that technology on a few international sportswear brands which help to improve the efficiency and to improve the customer satisfaction. So we see a great future and continued success in working together with Chineo. On your second part of the question, in terms of expanding overseas markets. So basically, since early this year, we have started to expand outside of China. So far, we have offices in Singapore and also in Paris, in France. And we start to build our footprint in both Asian outside of China and also Europe with additional people and additional kind of the network underground. So as of this quarter, we actually can see about 200 million GMV which we're generating from outside of China. And this amount is actually growing quarter by quarter. Our international growth strategy is focused on replicating our China e-commerce success and take the learnings we have in China and adjust it for the local practice and also to utilize the local know-how to make it a second generation of e-commerce in each of the markets we aim to operate. And in our approach to grow internationally, we will consider both the organic growth and also the inorganic growth, as we mentioned in the past, as part of our M&A strategy. So that is about our OAT expansion.

Got it. Very helpful. Thank you.

Thank you.

Thank you. We will now take our next question. Please stand by. And your next question comes from the line of Joyce Chu, Bank of America. Please go ahead. Your line is open.

Good evening, Vincent, Arthur, and Wendy. Thanks for taking my questions. I have two questions. The first one is the big picture one. As we all know, there's actually a lot of change in macroeconomic conditions in regulatory requirements in industry dynamics and also the competitive markets. So I want to know, like, you know, from the management perspective, what's the top priority of Bolzano right now? Is there any change in the company's strategic direction? And my second question will be regarding the, like, upcoming Singles Day promotion. I'm wondering, like, you know, how is the preparation from the brand's perspective? Have we made any plans? And how does the momentum look like at this time? Yeah, thank you.

Okay, thank you, Joyce. I think maybe, Vincent, you can share some high-level thoughts on the first question, and Tracy, you may be able to cover the second one.

Sure, thank you. Yeah, others, thank you. Thank you, Joyce, for the question. Yes, talking about the priorities of the strategy, I'll pick three. I think the first one is, of course, the China e-commerce market. which is our core business. I think despite all the negative impact from different angles, we still think the Chinese e-commerce market will be quite robust and there's still a lot of potential to grow in the future. So we will still focus a lot in this area. trying to not only to have more valuable customers, but also make our operations and technologies more efficient to support the future growth. That is number one. Number two is we think technology, as always, we keep investing in this area. And right now we think we are stronger and stronger in the industry. And we, you know, want to touch the existing and potential new users through this technology arm. And we are seeing really good progress in the first half of this year as well. And I think also the charm between these two is that when these two can be connected to each other or leveraged to each other, we see a much, much better result of effect of one plus one, much bigger than two effect. That means that when we talk to potential technology clients, our experience in e-commerce will help a lot. And when we talk to e-commerce customers, technology will also play a very important role. So I think the charm between the two is very important. So number three, I think, will be overseas expansion. As you'll see, we have a lot of progress, too. And we use this business plus investment, you know, approach, which Arthur just said, organic and inorganic together. So we're quite confident we can continuously make progress in the second half of this year as well. So I think these three are quite important top priorities for today's work, and it's quite in line with our midterm plan. Yeah, so that is the first part of our thinking. The second one about the W-11 thing, I think, Tracy, you can answer this.

Yeah, sure. Thank you, Vincent. So actually talking about W-11, I think it's still in the early stage because we have been moving the – real estate to talk about the inventory and the investment level. But soon the top conversation with their leadership team in marketing brands, I think their ambition is still there. They seek for the next second half of the year. I think most of brands, their new product launch plan and also the marketing investment is still at the same level right now. But from the attitude part, right now they are sitting on the fence. For some of the brands, I think they have the healthy economy situation based on their omni-channel landscape and also their product volumes part. Their market investment stock level is a little bit higher, I mean, prepared for the W11, but we still put close monitoring on ROI and the cost of structures. But at current stage, I think When we see the W11 in the next maybe three months later, I think the most important thing is we are still in the recovery period. Actually, from Boson's operation plan point of view, we think we need to take at least a six-month plan to focus on two things. First is to move the focus of daily sales to margin part and new product part, not that discount concentrate. And the second is on the, I mean, the resource concentration and the stock level and the budget part to put efforts on the big promotion. And the third part is to mitigate actually the, I mean, the impact of the missing of the top KOL host and to build metrics for new live stream ecosystem. So that is the top three, including the daily sales and the big promotion and also the live stream part. we will build into our six-month plan to work with our brand partner to mitigate the impact of COVID-19. I hope this will help to solve the problem and we keep close, communicate with brand and share more information later.

Thanks a lot.

Thank you.

Thank you. We will now take our next question.

Please stand by. And your next question comes from the line of Charlie Shen from China Renaissance. Please go ahead. Your line is open.

Hi. Thanks for taking my questions. I got two questions here. The first one is about the performance of some international brand partners. From some international apparel brands, financial reports, we can see their performance in China has been rather disappointing. as Baozhen has been an existing long-term partner with some of the key international apparel brands. What is the management strategy to basically turn around this trend, or is there any other brands that can compensate the revenue shortfall from the international apparel brands? So that's the first question. And the second question is basically a follow-up question. So, Baozhen has been the partner of internet marketing for a lot of brands for a long time. So, going forward, I want to get some color on how Baozhen can sustain the growth or even create the second growth curve. In particular, is there any further penetration that we can do with international brands in China or we should bring some international brands into Chinese market? Or on the other side, is there strong enough demand from domestic brands in internet marketing, or do we have any plan to bring those domestic brands outside of China to the overseas market? So I want to get some color on that. Thank you.

Okay, so on the first one, maybe I just share some brief thoughts, and Tris, you can add on top of that. So, given the current challenge, we're actually looking at two ways of counter the challenge at the moment. Number one is, you can see we put more emphasis on the value-added service. The things like our digital marketing, our IT solution, and also our logistics and warehouse services. These are value-added service on top of the e-commerce operation, which on one hand is going to generate new revenue stream and also plays a part to helping us to get more penetration into the new customer base. So that's one. Secondly, we have made a lot of efforts and have seen good progress in terms of the BD since last year. We now have established a central business development team across all the different categories and at this moment we have created a long list of potential BD and which we have seen good opportunity to go further in terms of getting more brands on board with our capability on offer. So maybe Tracy wants to add more?

Sure, thanks. I think I can add more elements on the second point because actually I think BD has been proven one of the key driving factors for our business right now. We have three highlights in the first half of the year. I think the first one is we have very solid programs on the Jindong and the BrandSite meeting program channel. Actually, we're going to have I think at least 20 significant store opens by this year. and is cross-category in luxury, in beauty, and in sports category. And also in this, and we can see from the genome channel, actually, they show relatively higher growth, especially in the 618, and their potential on sales haven't been fully unleashed, considering most of the stores are in early stage of the operation. So it should contribute more in our business landscape for next year. And secondly, I think, for the category part. Besides the parallel and the 3C digital, we also have very good progress in lifestyle-related category to work with the higher quality brands, actually, including foreign and local brands. In food and house living, things related, we are able to balance the category mix and seek sustainable growth.

Thank you. Thank you, Tracy. And also, I think for the second question on the on the second curve in terms of the business? I think it's a very good question. Before we talk about the second curve, actually, the main priority for us is to make sure our existing e-commerce business is growing in a very solid way. Basically, as I mentioned earlier, we will prioritize quality over above the pace of the growth. We will protect our margin and protect our cash flow. And we hope that e-commerce, which, as Vincent mentioned earlier, which still presents quite a significant opportunity in the Chinese market, we will tackle this market to protect our existing business and profitability. And on top of that, so we will focus on a few areas which in line with what Vincent just said, our strategic priority, The first one is technology and digital enhanced value-added service. So this is the core capability of Bolzun, which we have been building over the last 15 years. We have made a big investment and our capability is very unique and highly valued by the enterprise client, which they need our OMS and our kind of the back-end system to integrate for the e-commerce operation. So given today, many of our enterprise customers pushing into the D2C initiative and also driving the digital transformation, we have seen in the market a growing demand for those kind of technology solutions, which Baozhen is very good position to offer. So that's on the technology. On top of the technology, If we combine the technology transformation capability we have and also the e-commerce operation capability we have, we actually will be able to enter into the brand management space by utilizing our digital capability to transform a brand end-to-end. In the slides we have shown earlier, the brands we invested and we deeply managed end-to-end has showed a over 50% growth year-over-year, which is quite a good result. At the same time, from the learning of managing a brand end-to-end, we will be able to build more experience and more learning which we can come back to feedback to our existing TP customers to benefit. So that's where we see the second part of our growth. And then finally, as I mentioned earlier, is the overseas expansion. So basically, technology, brand management, and overseas expansion will play a big part in our second curve of growth.

Thank you very much. OK. Thank you.

Thank you. Once again, if you would like to ask a question, please press star 1 and 1. We will now take our next question. Please stand by. Your next question comes from the line of Leo Yu from CLSA. Please go ahead. Your line is open. Hi.

Good evening. Congratulations on the solid results. So I have a question on the margin outlook of the second half. So would we expect further margin improvement compared to what we have last year? Will we see any further benefits arising from our continuing cost transformation efforts? And also a small question on the use of cash. So how should we think about the capital expenditure in the second half? Thank you.

Thank you for the question. I think for the first half, I mean for the first question on the margin, we will keep driving the cost of transformation and also we will prioritize our cash flow for the improvement in the second half of the year. But in terms of the overall market dynamic, there are still a lot of uncertainty which caused by the potential COVID lockdown and also the slowdown of the overall economy, which has a knockdown impact into the product sales margin and also our overall growth. So which I would just only to say we will try our best to protect and improve our margin with the initiative we have on the ground. But in terms of the end result, we have to wait and see. But we will keep the market updated when we see a little bit more coming in towards the later part of this quarter. On the second one, in terms of the cash, at this moment, we actually prioritize the cash above the growth. So basically, during the period of uncertainty, cash is the king. So, on one hand, we are improving our working capital to reduce the inventory level, at the same time to increase the speed of collection, trying to improve our operating cash flow. At the same time, in terms of the investment activities, we put a higher quality for our investment in this year. And also given the uncertainty into the Chinese market, we actually put some of the activity, especially the consolidation of the similar TP on hold in China. But outside of China, we do look at opportunity to further grow. As we mentioned, in terms of the investment into the brand management, the investment the overseas expansion are the two directions that we will keep making the investment. And finally, as we have always seen, a bulging technology company and the investment into the technology will be one of our priorities. And we think that will help us to build a sustainable business into the future.

Okay.

Thank you. I'm not sure if Leo is still connected. I will go to the next questions.

Please stand by.

And your next question comes from the line of Van Gial from CICC. Please go ahead. Your line is open. Good.

Evening, management. My question is also about brand partners. As the macro environment is weak, did you lose any big brand partners this quarter due to the truth-to-do operations by themselves or due to foreign brands closing offline stores in China? Thank you.

Okay, so maybe I will share a little bit of insight and more. Basically, what we have seen at this moment is the brand partner starting to put more cautious approach in terms of the e-commerce, how they run the e-commerce. On one hand, they also focus on the efficiency over the growth and several of the brand partner has put a kind of quality over the growth speed. They're actually looking for a stable partner to work with them to develop a long-term approach. So this is what we have seen. The trend has been reduced over the last couple of quarters with the uncertainty increase. And secondly, in the China e-commerce market, it's actually the evolvement of this market has changed very quickly. New channels coming out every several quarters, new ways of operating the e-commerce has changed over time to time in a very fast pace. So in order to catch the market, the brand partner actually needs the service provider like Baozhen who has the capability to keep in the front of everything that's happening on e-commerce. We will be able to learn from the many different brands and we'll bring the knowledge and also experience from the e-commerce and adds value to our brand partners. So that gave us a good advantage in terms of keeping and expanding our service into the brand partners. So that's some of the insight I have seen. Tracey, you want to add more?

Very happy. Yeah, I think exactly as a strategic partner, actually right now the key is about the long-term direction things. At Baldwin, we're working with our brands to develop them I think at least the 18-month operation plan to conquer the impact of COVID-19. Like in this two or three months is the quiet period. How to rationalize the investment and save the effort, test the water, that is the key. But for the next six months is the recovering period. As I mentioned, how to move the focus of the daily sales and also prepare for the big promotion and to mitigate the top KOL missing issues. But turning into the next year in the developing period and how we can work with the brands to use marketing, how to say, values on the channel content and the marketing campaign to rebuild the brand equity and recall the consumer group. And that is the key. I think in the longer term, we work with the brands to support the impact of the COVID-19. Yeah.

Thank you. Very clear. Thank you.

Thank you. Thank you. I will now hand the call back to Wendy for closing remarks.

Okay. Thank you, operator. In closing, on behalf of the management team, we would like to thank you for all your participants today. To Wendy for closing remarks. To reach out to us. Thank you for joining us. And this concludes the call.

Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect. Speakers, please stand by.