Dada Nexus Limited

Good morning. Ladies and gentlemen, thank you for staying by for DADA third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the management's prepared remarks, there will be a question and answer session. As a reminder, today's conference is being recorded. I will now turn the meeting over to your host for today's call, Ms. Caroline Dong, Head of Investor Relations for DADA. Please proceed, Caroline.

Thank you, Operator. Hello, everyone, and thank you for joining us today. Our third quarter 2021 earnings release was distributed earlier today and is available on our IR website at ir.mdata.cn, as well as on Google Newsword Services. On the call today from data, we have Mr. Philip Kwai, Chairman and the Chief Executive Officer. Mr. Jack Chen, Chief Financial Officer, and Mr. Jun Yang, Co-Founder and Chief Technology Officer. Mr. Kwai will talk about our operations and company highlights, followed by Mr. Chen, who will discuss the financials and guidance. They will all 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 follow-up statements as defining the Section 21E of the Securities Exchange Act of 1934 and the U.S. Privacy Securities Litigation Reform Act of 1995. This follow-up statement is a measurement of current expectations and current market and operating conditions and relates to events that involve known or unknown risks on certainties and other factors, all of which are difficult to predict and a matter of which are beyond the company's control. These risks may cause the company's actual results or performance to deform maturely. Further information regarding these and other risks on certainties or other factors is included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any bulletin statement as a result of new information, including events or otherwise, except as required under applicable law. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in R&B. It is now my pleasure to introduce our Chairman and the Chief Executive Officer, Mr. Quai. Please, please go ahead.

Thank you, Caroline. And thank you all for joining us today. We're pleased to announce another strong quarter. I would like to highlight recent progress and then provide updates on our two platforms. And that will go through our financial results in greater details. So earlier this year, the CPC Central Committee clarified China's strategic vision and the government's priorities in the 14th Five-Year Plan and long-range objectives through the year 2035. With this, it sets the goal of accelerating digital development and building digital China. So according to statistics from China Academy of Information and Communication Technologies, China's digital economy accounted for 38.6% of total GDP in 2020. While that number leads among developing countries, there is still a notable gap with the 54.3% average in developed countries. So the main engine to drive China's digital economy lies in industrial digitization, which contributes 80.9% of the total digital economy. First, industrial digitalization will build up the country's competitive edge of digital economy. It's a key theme that the Chinese government wants to promote. So Data Group is well positioned in the national trend of digital economic development. As a leading local on-demand delivery and retail company, we have always being committed to driving digital transformation in the retail industry. Together with JD.com, we are further empowering traditional industry and driving the development of the real economy. So this naturally leads to our strengthened strategic cooperation with JD. In October, Data Group and JD.com jointly launched ShopNow, or Xiaoshigou, a unified brand for all on-demand retail services within the JD ecosystem. Through ShopNow, users can access on-demand services via multiple channels on JD, including the Nearby, Fujin, Tab, and all the entry points of Wu Jing Tian Ze program. ShopNow is powered by Dada Group. Leveraging our years of LBS-oriented operational experience and accumulation of technological capabilities will fulfill all needs of local on-demand retail and delivery on JD. We both strongly believe in the huge potential of on-demand retail in China. With ShopNow, we will leverage our respective strengths to lead the development of this quick-growing industry and bring win-win results for both groups. For JD, ShopNow will enrich both product supplies and delivery options, providing consumers with a better shopping experience. For Dada Group, ShopNow will increase our penetration rate among JD's vast user base. This should become a stronger driver for our long-term development. Before discussing the recent performance of our two platforms, I would like to provide some highlights of our Level 11 Shopping Festival. With over 150,000 stores on JD.DJ participating in the event this year, JDDJ achieved record high in the peak day GMV and grew the total GMV during the 11 days from November 1st to November 11th. The 11-day campaign by over 100% year over year. Now let's move on to JDDJ, the leading local on-demand retail platform in China. KDDGA continues to drive the digitalization of offline retail in three ways. Empowering retailers at broader scale, helping brands improve marketing efficiencies, and innovating technology solutions. First, empowering retailers at broader scale. On one hand, Partnering with more retailers, helpers enrich product offerings and bring better shopping experience to more consumers. The number of active users on JDDJ increased by 53% year-over-year to 57.1 million. On the other hand, as we expand the merchants and category coverage, we're helping more offline retailers building digitalization capabilities. So let me take you through a few two different verticals and talk about some exciting recent developments. So in the supermarket category, we continue to enhance our leading position. We now have established partnerships with 82 out of the top 100 supermarket chains in China. And the super merchant day. The Super Merchant Day provides supermarkets with a great opportunity to engage with users on our platform. In the third quarter, during the eight Super Merchant Day sessions for local winner supermarkets, such as Jiajia Yue and Bubu Gao, the weekend sales all increased by over 200% year-over-year. In the smartphone category, we continue to expand partnerships with brands, This quarter, we established direct partnerships with Samsung and Honor. For Apple, we saw impressive results for new product launch. On September 24th, more than 900 authorized stores on the JDDJ platform started to sell the iPhone 13 series. On launch day, Sales on our platform were a remarkable seven times greater than the launch day of iPhone 12. For small home appliance, we deepened collaboration with the leading retailer chains, such as and to strengthen online-offline integration. Our efforts paid off. The GMV in the third quarter increased by about 100% quarter over quarter. In the pharmacy category, we launched a 24-hour free online medical consultation service to provide users with real-time assistance. Meanwhile, 24-hour retail and delivery services are also available in more than 3,300 pharmacy stores on our platform to meet consumers' needs for medicine at any time. Secondly, helping brands to improve marketing efficiency. In the third quarter, revenue from online marketing service on our JDDJ platform grew by over 140% year-over-year. a significant acceleration from the 110% growth in the previous quarter. In online marketing, monetization rates jumped to 3%, further demonstrating GDDJ as the go-to platform for brands to drive auto sales. We now have strategic partnerships with more than 200 brands. We are committed to help brand partners improve marketing efficiency and engage with consumers effectively. As part of this, we recently introduced a new marketing program called Super New Prada Day for product launch promotions. In August, Unilever launched a campaign under this new program. As a result, sales increased by 190% from the previous week. And thirdly, we're innovating technology solutions. Our HYBOR system continues to be popular among retailers. Recently, HYBOR now reached the milestone of serving 5,000 retailer stores. Based on the broad cooperation with retailers, we have a great understanding of their standpoint in O2O operations and are able to innovate quickly. For example, in the third quarter, to better support merchants holiday bundle promotions, we launched a new module on Hyboard to manage bundled products. This module provides a one-stop solution to address the pinpoints in inventory synchronization and expenses allocation. As a result, it could improve the processing efficiency for bundled products by as high as 20 times. In addition, Based on our capability to allocate expenses down to the SKU level, we launched a tool to enhance marketing efficiency. This tool integrates the subsidies from brand partners, merchants, and platforms into one single coupon, the three-in-one coupon, to improve the ROI of marketing dollars for brands and help merchants to improve sales by expanding the number of products on promotion. For example, this tool enables Jiajia Yue to create 3-in-1 coupons that cover around 2,000 SKUs across over 100 brands. In September, the average daily sales during the weekend that offered 3-in-1 coupons were more than 10 times than the sales in normal weekends. Our digitized in-store picking service, the Dada Picking, Dada Youjie, maintains strong growth momentum. In the third quarter, orders fulfilled by Dada Picking grew over 70% quarter over quarter. During the Double Eleven Shopping Festival, order volume more than doubled compared with June 18 promotional period, effectively helping merchants to improve downtime fulfillment rates while saving costs. I would like to move on to data now. Our revenue from on-demand delivery services to key accounts, or KA, the merchants increased more than 110% year-over-year. Revenue from supermarkets, KA, increased by over 90% year-over-year. In the third quarter, we added geofencing functions to our on-demand delivery service. Function enables merchants to accurately determine the delivery area for each store without additional investment. Revenue from restaurants' KA increased by 150% year-over-year. Orders from fast food chains and the tea beverage chains continued to increase significantly. So moving to SMEs. The number of SME merchants that completed orders on DataNow in the third quarter increased over 90% year-over-year. This was mainly driven by our refined, great-based operational strategy and continued optimization of our fulfillment capabilities. In September, we officially announced the launch of our logistics SaaS software as a service, the Dada Zhipei, the Dada Smart Delivery. So this product provides the third-party delivery service providers and merchants who deploy their own delivery fleets with a suite of digital tools to manage orders, dispatching, and routing for omnichannel on-demand delivery orders. Our digital logistics platform has helped a lot in improving our operation efficiency in the last seven years. And now, by opening up our technology in the form of a centralized SaaS product, we hope to further enhance the service capability and efficiency for the whole on-demand delivery industry. And lastly, last mile delivery. We saw strong growth in pickup services with the number of pickup orders in the third quarter doubling from the previous quarter. This growth is built upon our enhanced system integration with JD Logistics and increased penetration in various other types. Expect pickup services to be another driver for our last mile business. With that, I'll now pass the call over to Bai Chen to go over our financials for the quarter. Thank you.

Thank you, Philip. Before we go over the numbers, just a few housekeeping items in advance. We believe year-over-year comparisons are the most useful way to judge our performance. Therefore, all percentage changes I'm going to give will be on year-over-year basis, and all numbers are in RMB unless otherwise noted. Total net revenues increased to $1.7 billion. Aligning the revenue recognition method of DataNow Last Mile delivery services to a comparable net basis, performer revenue growth would have been 86% year-over-year, which represents an accelerated growth rate compared with 81% revenue growth in the last quarter. Net revenues from DataNow were $614 million. The performer revenue growth rate was 90% year-over-year, mainly driven by the increases in order volume of interest city delivery services to chain merchants. Net revenues from JDDJ increased by 84% to $1.1 billion, mainly due to the increase in GME, which was driven by increases in the number of active consumers and the average order size. The increase in online marketing services revenues as a result of the increasing promotional activities launched by our brand owners also contributed to the revenue growth of JDDJ. Moving over to the expenses side, The operation and the supporting costs were $1.2 billion. The rise was primarily due to an increase in rider costs as a result of increasing all the volume for intercity delivery services provided to various chain merchants on the Dynanow platform and the retailers on the JDDJ platform, and partially offset by the decrease of rider-related costs incurred by our business upgrade of last-mile delivery services. Selling and marketing expenses were 780 million. The increase was primarily due to the growing absolute dollar amount of incentives to daily DJ consumers and an increase in personal costs in connection with the company's growing businesses. The G&A expenses decreased to 99 million, primarily due to decreased share-based compensation expenses. R&D expenses rose to 148 million, mainly attributable to the increase in research and development personal costs as the company continues to strengthen its technology capabilities. The non-GAAP net loss attributable to ordinary shareholders of Dada was $480 million compared with $324 million in Q3 last year. And then gap-basic and diluted net loss per share was negative 48 cents compared with negative 36 cents in Q3 last year. So as of September 30, 2021, the company had $3 billion in cash, cash equivalents, restricted cash, and short-term investments. And under the $150 million share repurchase program announced in June 2021, As of October 31st, we have repurchased approximately US$131 million of ADSs. For the fourth quarter of 2021, we expect total revenue billion representing a pro forma growth rate of 88 percent to 97 percent adjusting 20 q4 and 21 q4s that are now last mile revenue to a comparable net basis in addition to the acceleration in revenue growth we further expect the pro forma net loss margin based on the comparable net basis revenue to continue to experience significant year-over-year improvement in the fourth quarter of 2021. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, press star 1 on your telephone. To cancel a request, press the pound or hash key. Your first question comes from Ronald Keung of Goldman Sachs. Please ask a question. Hi, Ronald. You may be on mute.

Hello? Hello? Can you hear me?

Yes, go ahead.

Okay. Sorry about that. Hello, Philip. I'm back, and congratulations on the results. I have two questions. Firstly is on the Shop Now function. How has that channel grew or how have we seen the traction with that with JD users clicking that nearby button? And is our fourth quarter revenue acceleration that we guided, is that mainly contributed from this new channel? And how do we see that Shop Now function that will progress through say the next one year in driving additional growth for the company? And then we've seen the sales and marketing costs come down as a percentage of revenue, which is encouraging. Could you just share how that subsidy rate trend has been going? And is that how a newer channel is driving efficiencies that is leading to a lower subsidy rate? Thank you.

Okay. Hi, Ronald. So the shelf now certainly is a key factor it's growing very quickly and we expect it will become one of the key drivers of our future growth and we're happy to see the traction has been very good. And so the shelf now includes not only the nearby, the full gene channel, but also various entry points and collaborations. For example, if you are searching using the search engine on JD and you click on the search results, and the purchase is also considered as a part of the shop now so the contribution from the shop now will absolutely growing up for the foreseeable future and both jd and earth are very confident about the growth potential and in october we launched the unified brand of this uh so i think the consumers will be building up the mentality around the on-demand retail on JD. I think over time, we will see the potential going up. And also, we have a joint agreement with JD Retail to grow the user penetration of ShopNow, Xiaoshi Go. all the way to 50% of the user penetration. So I think that's the future we are looking at. At the same time, we're also very happy to see the subsidy level going down, partially thanks to the ShopNow, the new channel and the new traffic. And at the same time, we are... improving our marketing efficiencies overall, that also helps to drive down the subsidy level. So we are quite confident about both growth and the profitability in the future.

Thank you.

Thank you. Your next question comes from Eddie Leung of Bank of America. Please ask your question.

Good morning, guys. I have a follow-up question on Ronald's question about subsidies and sales and marketing. Could you elaborate a bit on the unit economics trend and whether it is still on track with our previous target in terms of the break-even point? And then related to that, could you also elaborate a bit on the competitive landscape in the overall grocery and fresh produce category? Because we have heard some potential reduction of subsidies in some of the other formats in these categories. So just wondering how that might affect our sales and marketing and subsidy strategy going forward. Thank you.

So Eddie, let me take the first question. Yeah, just like Felix said, in Q3, just like we have communicated in the last quarter, so in the second half, we expected the consumer incentives given to JDDJ consumers will decrease significantly compared to the first half of this year. And actually, in Q3, the incentive ratios was decreased more than our expectation before. So in Q3, it was 5% for the consumer incentive versus 6.2% in the first half of this year. So this is the main contributor to our greater improvement of our direct margin level. So in Q3, our direct margin was improved significantly to minus 0.6%, which is thanks to like the 120% BIPs improvement for the consumer incentives. So partially, this is improved because of the contribution of those . The other is like the tours implemented. Just Philip mentioned in the earlier script that, for example, we have created a three-in-one coupon to combine the platform money, merchant money, and also the brand owner's money together to improve the efficiency of the subsidies. So this also help us to improve a lot. And also, in our expectation for the fourth quarter, we believe the subsidy ratio should be no more than 5%, which will help us to further improve in the direct margin level in Q4.

Yeah, and in terms of the overall market landscape and the competitive landscape, so first of all, I think that we can all see that both retail and the economy are under general pressure. So most of the brands and the retailers are certainly under pressure. But at the same time, people are all looking for growth, and all looking for channels can provide efficiency improvements. And JDDJ is certainly considered as the fastest growing channel for most of the brands, and also can help them to improve their efficiencies. That's why, while we're seeing this pressure, at the same time, Most of the brands we have been working with are now more than willing to allocate more marketing resources through our channel, the JDDJ channel. So at the same time, we improve the ROI of such marketing dollars by the three-in-one coupons. So that's why we are not only getting more marketing resources from the brands, but also improving RI. And in terms of the competitive landscape, I think one of the key players in the market, or at least used to be the very key player in the market, is the community group buying. But as you probably have seen, that the regulations have recently tightened up on community group buying, and they certainly are now seeing some slowdown. And subsidies from the community group buying has certainly been reduced as well. all of the provinces that group buying are most active, we are seeing the GMV of 100% year-over-year growth in Q3. So again, we are able to grow despite the competition from the community group buying. I think looking forward, With the regulations as well as the economic pressure, we would envision that each player in the market will be more reasonable and rational instead of earning too much of subsidies. So we're certainly happy to see that as we are getting to a more healthy competition environment. I think that's good for everybody. At the same time, we are certainly strengthening our collaboration with JD to achieve a win-win situation. So to both increase the scale and improve the efficiencies for both JD Retail and JD DJ. So we are very confident about our competitive age going forward.

That's very helpful. Thank you, guys.

Your next question comes from Thomas Chung of Jefferies. Please ask a question.

Hi, good morning. Thanks management for taking my questions. I have two questions. My first question is about our KA business under Dada Now. The business growth momentum is very strong. I just want to get a sense about how we should envision the growth momentum as we enter into 2022. and also how we should think about the competition in this segment as well as the investment that we are going to be made in this KA segment. My second question is on JDDJ. Can management comment about the category mix in Q3 and also the average order value? On the other hand, with regard to our strong online marketing revenue growth, given that it is about 3% right now, how we should think about the takeaway for online marketing in future? Thank you.

Thank you, Chama. So let me firstly elaborate on the questions, and I will leave the competition Question to Philip and so for the number of things so first for JD DJ our Average order value in q3 was 100 in an in the 94 on B for the platform and so going forward we expect that this LB will be further increase the cost we further diversify our our platform categories mixture mix and also even for the supermarket category still it's very high it's like 146 in Q3 so we think that LV will further go up in the following quarters and in terms of the category mix in Q3 Q3 was coming from supermarket category, and 25% was coming from the 3C category, including smartphones, home appliances, and PC and iPad. So we also expect that the non-supermarket categories will contribute more and more gradually in the following quarters. And in terms of the online marketing services, so 3% of the GME in Q3, and we expect that this monetization rate should be, you know, at least be maintained in the following quarters if we will, you know, still we will be prudently further monetized for the online marketing revenues. But I believe that For the following quarters, it should be no less than 3% for the next few quarters. And also for the key accounts, chain merchants, delivery services, or the data now businesses, it is growing by more than 110% in Q3, and we think In Q4, it will be further grow by triple digit on a year-over-year basis. And yeah, I will leave the competition question to Philip.

PHILIPPE RIGOLLET. Yeah, so regarding the KA, the data and OK business, I would like to give more color and background. So first of all, one of the reasons why we can continue to grow very fast is we are building up a solid reputation among the key accounts players. Because in order to serve the KOL, you need to win the trust, and you need to get people's confidence in you. So as we are serving all the big names, well for quarters after quarters. So that's how we are now able to win the trust and build up a good reputation in the market. And in addition to reputation, we're also building up very solid capabilities and know-how. There are a few key segments of KA we are now serving, including supermarkets, restaurants, and the pharmaceutical chains. Each segment requires very different know-how and capabilities. For example, like a supermarket, as you can imagine, it requires to handle very heavy and bulky packages. And also, from packaging to delivery So the process is quite complex. So that's why leveraging our service of data picking integrated with our data now delivery. So we are providing a lot of value adds for the supermarkets. That's why most of the leading supermarket chains in China, most of them are using our service. And for restaurants, it's very different from supermarkets, as you may imagine. So restaurants, the number of stores can be much more than the supermarkets. But at the per-store level, the orders are much fewer than supermarkets. So it requires very different order bundling and routing operations. And for pharmaceutical, you need to be able to deliver around the clock, 24 hours. It also requires very different capabilities. So all of this, we have been building such capabilities and know-how and efficiencies over years. That's how we can win the customers. Last but not least, NNL is a third-party delivery platform considered by all the KAs. So we are very valuable as an independent player So unlike, for example, like Meituan or Erlemi, which owns the order-taking platform, they're not considered as independent. So most of the KA wants to use independent delivery services because they don't want to be too much tightened to the order-taking platforms. So all of this, as I mentioned, explains why we are able to continue to grow fast on data now, and at the same time, proving the profitability. And we are very confident to carry it on for the next year or so. Thank you.

Got it. Thank you.

Your next question comes from Alicia Yap of Citigroup. Please ask a question.

Hi, good morning, management. Thanks for taking my questions. I have two questions. First is, I think management mentions about you just launched this digital logistics service open to other players. So wondering if there's any revenue opportunity down the road from these services that you're licensing out. And then second is on the single sales performance. I think management mentioned JDDJ achieved over 100%. Just if management could elaborate a little bit the category performance during the single stage on the supermarket versus the non-supermarket. I would assume the 3C category probably contributed a much higher percentage during the single stage, so any colors on the category mix during the single stage would be helpful. And then just related to that is the consumer behavior. I guess given the macro slowdown, just not sure if you have experience or have seen any change of the consumer behavior during these single states in terms of their demand and category preference. Thank you.

OK. So actually, there's three questions. So Alicia, let me take the first two questions and leave the macro question to Philip. About the data to pay the data as a logistic SAS product, it's a pure SAS platform which can be provided to all those third-party service merchants or those service providers. So up to now, it was implemented or used by like 5,000 stores. So right now, it's I think the revenue contributing to our 6 billion RMB revenue per year is still very minimum, but it will further expand our service scope to be fulfilled by data. So we don't need to physically fulfill the orders by our data writers. We can even provide a software or SaaS product to those merchants And so we are right now in close review about the development of the Logistic SaaS product. So I think maybe it will be better to further talk about the revenue contribution and those expectations in the next few earnings call. And also for the single-stay mix the single-stay growth and for the category mix you're right so 3c product is growing faster than the like the supermarket categories but generally right now we think and supermarket categories um for the double double 11's campaign period is still growing very promising and that's why our like the revenue guidance for Q4 is given and also we believe that the JDDJ growth rate will be still very fast which is mainly contributed by the revenues of supermarket category because supermarket categories monetization including the online marketing services is is more much more than the 3c Categories, so I don't actually I don't you know I don't look at the detail like the mixed growth rate for the development campaign period, but I believe the overall Double 11 campaign period promotion Results should be very satisfied to you know, all those merchants. For example, like for even for like Walmart. So Walmart, the annual campaign, usually annual campaign peak is their August 8th promotion day. But for the singles day, the singles day, like the November 11th, it's like still growing by 25% compared to their August 8th. And they're selling all supermarket category products.

Right. And in terms of the consumer behavior and the market situations, there's an interesting small accelerator, I would say, for the Singles Day is that right before Singles Day, the government encouraged consumers to stock up a little bit at home. You might have seen on the news. So I think this also helps to boost the sales a little bit. But overall, I think if you look at the big picture, we're seeing two things happening. One thing is the consumers are now more and more used to on-demand retail. So historically, they may buy restaurant food and get delivered on demand. But now, a large number of consumers are now used to buy everything on demand. I think this is a very important trend we're absolutely seeing. At the same time, we also see, mostly from this year, that more and more vertical retailers are now willing or more than willing to work with SIRS and get listed. For example, like a smartphone consumer electronics, and also like personal care cosmetics, and like a parenting. or pet supplies, or liquid and alcohol. So all those kind of vertical specialty stores, they didn't work with an online platform before. But especially this year, we're seeing a strong trend that the vertical retailers are now very much willing to work with us. This creates a very good situation. While consumers are more used to on-demand retail and get delivered instead of going offline to visit the stores, at the same times, all the stores, the quality supplies are now getting online. So we're happy to see this combination.

Great. Thank you.

Your next question comes from Ashley Xu. of Credit Suisse. Please ask a question.

Thanks, management, for taking my question. I actually want to follow up on our nearby entry point. I understand that it has been gradually rolling out and still under a test stage, but could management share more color on the recent progress and our plan or target by year end? At the same time, for those rolled out regions, what's the effectiveness we have seen in attracting more users? And for our focus guidance, does that reflect any contribution from this new entry point? Thank you.

Yeah, so give you some background And the color about this nearby and perhaps back end will have anything to add. So first of all, the nearby channel is now available for access. So in most of the tier 1 and tier 2 cities and some of the lower tier cities. So we're happy to see that since June, when the nearby channel launched, we're happy to see the technology and the engineering behind it. As you can imagine, there are a lot of engineering work behind the scenes because literally we are transforming the JD app from a B2C app and now to a location-based app. And there are a lot of technology needs to be done. And we're working very closely around the clock with the JD technology team to make that happen. So with that happening, we're happy to roll out the service to most of the tier one, tier two cities. At the same time, we keep enriching the product supplies and the store supplies to the consumers and expanding our geographic coverage. So like every week, we are seeing more retailers sign up and get listed on the nearby channels. So I think that's the fundamental because you need to have quality supplies and broad coverage. At the same time, we're also happy to see the operation matrix around nearby channels has continued to improve everything's launched. So going forward, we plan to be focusing on the key cities, the top cities, to improving mentality of consumers and to build up the ShopNow brands among consumers and also to improve the penetration into the JD user base at the same time to improve all the conversion rates, conversion levels of this nearby channel. So I think this is certainly significant, very significant uh step and uh still just with like a six months so far or five months so far so we're still seeing this channel at a very early stage and we are very looking forward to grow this and to expand it uh in the future and and also in the 4q guidance we are very prudent in

calculating the benefits coming from the Fu Jing type, the nearby type in Q4. So more benefits of JD ecosystem should be coming from the traditional those Wu Jing Tian Ze or like the search results in Q4 because it's a more mature product and for I think, like Felix said, it takes a few time to just further improve for the product and enlist all those merchants and build up the consumer mind for the nearby shopping.

Thank you.

Your next question comes from Wei Xiong of UBS. Please ask your question.

Hi. Good morning, management. Thank you for taking my questions. First, I want to get an update on the geographical coverage expansion. Could management share your latest update of JDPJ in terms of further expanding the geographical coverage this quarter? And also, do we have a target for the number of cities and counties we cover next year? If there is a GMV contribution from the lower tier market that you can share, that would be appreciated. And second, I just want to follow up on the point that we mentioned as the non-supermarket categories continue to grow their GMV contribution. I was wondering could we get an update on the different commission level across different product categories and how will that makeshift affect the future trends of our commission level? Thank you.

Okay, I will give you my view and see if I have anything to add. So first of all, in Q3, the GMV from our lower tier cities on JDDJ grew by about 100%. And so far, we have covered over 1,700 cities and counties, and we will continue to penetrate into the lower tier cities. For now, we will be focusing on especially the category development and expansion in the existing cities, the cities we have already opened. And so that's about the geographic coverage. And in terms of the commissions, I think different categories have different commission rates. But with different categories, we are improving the commissions and improving the monetization from each category. So with our stronger collaboration with the brands, and also we are generating more value to the retailers. So that's why we can improve the permissions in different categories. That's independent from the mix of segments.

and uh yeah i'll see if that have anything to that uh yeah so uh for supermarket categories usually uh you know we have commissions delivery fees and also especially for uh fmcg products we have uh marking dollars from those brand owners. But in the same time, we are also given lots of subsidies to consumers because they should be more frequent to purchase FMCG products instead of other non-supermarket categories like 3C products, home appliances. So for all those other newer categories, including smartphones, home appliances, past products so their money touching rate is lower than the supermarket overall money touching rate but you don't need to give so much incentive to them so this will give us like the positive direct margin for each order generated for those non-supermarket category products So the contribution from those non-supermarket categories will also contribute to the overall margin improvement of the platform. But we still emphasize that the FMCG products is the most important category of the platform. So we still need to give some incentive and subsidies to consumers to retain them. So that's why up to this moment, we still have a slightly negative director margin for the platform-wise, for the platform because our investment in the FMCG and the supermarket categories. So in the long run, we believe that we can still improve our overall manufacturing rate while significantly improving the direct margin level, because we continue to improve our incentive ratio by decrease the incentives given to FMCG and supermarket categories, while we don't give so many incentives to other non-supermarket categories. So through the mixed contribution, we believe that And our overall director margin is on track to break even next year for the whole year base.

Thank you. We still got time for one last question. And our final question comes from Robin Liu of Diva. Please ask your question.

Hi, management. Thanks for taking my question. Actually, it's just a follow-up question. Looking into 2022, on one hand, I understand that we will realize some cost savings from user acquisition in the JD ecosystem. On the other hand, if user contribution starts to kick in, is it possible that JDDJ will step up its spending again if the ROI is strong and is further improving? like what you mentioned, are we going to actually increase the subsidies in those FMCGs categories? If management could share some of our strategy within the JD ecosystem, that would be great. Thank you.

Okay, so first of all, as you said, we are happy to see we're getting strong support from JD in terms of user acquisition. This can certainly help us to reduce the cost for user acquisition. And still, we are in the early stage of this journey. And our goal is to reach the 50% of the penetration. We are now at a single digits. So there's a long way to go. And in terms of the subsidies, I think overall the trend and our goal is to improve the efficiencies and not to increase the subsidies. As we explained earlier, we are getting more and more marketing dollars from the brands and also the resources from the retailers. So we are combining all these and improve the overall efficiencies instead of increasing them. And we're happy to see the ROI of our incentives has continued to grow. I think that's very important for all parties and we will continue that way. And also for the general competitive landscape, as we explained earlier, we're happy to see that most of the players are now more rational and not burning too much of the subsidies as they used to be. So that's why overall, I think we are optimistic about both growth and probability going forward.

Thank you.

Great. Thanks.

I would now like to hand the conference back to Caroline. Please continue.

Thank you, Operator. In closing, on behalf of the Data Management Team, we'd like to thank you for your participation on today's call. If you require any further information, feel free to reach out to us directly. Thank you for joining us today. This concludes the call.

This concludes today's conference call. Thank you for participating. You may disconnect.