This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good morning, ladies and gentlemen, and thank you for standing by for DADA's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will 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. Caroline Dong, Head of Investor Relations for DADA. Please proceed, Caroline.
spk05: Thank you, Operator. Hello, everyone, and thank you for joining our second quarter 2022 Earnings Conference Call. On the call today from Data, we have Mr. Philip Kwai, Chairman and CEO, Ms. Jeff Wei-Jian He, incoming President, Mr. Back Chen, CFO, and Mr. Jun Yang, Co-Founder and CTO. Mr. Pai will talk about our operations and company highlights. Then, Mr. Chen 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 full looking statements. Please refer to our latest safe harbor statement in the earnings pressure list on our website, which applies to this call. Also, during this call, we will discuss certain non-GAAP financial measures Please also refer to our earnings pressure list, which contains the reconciliation of non-GAAP measures to the comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in RMB. It's now my pleasure to introduce our Chairman and CEO, Mr. Pai. Philip, please go ahead.
spk12: Thank you, Caroline. And thank you all for joining us today. Today, with mixed emotions, I announce my resignation from Dada as chairman of the board and CEO. I would like to take this chance to thank everyone who joined our journey together. I'm inspired and proud of what we have achieved. I believe this transition will take Dada to the next chapter, and we are now more ready than ever before to turn the leaf. I'm extremely pleased to announce that Jeff Huijianhe, our Vice President and my trusted business partner, has been appointed as our President. Jeff has been instrumental in our tremendous growth in the past eight years and our deepened collaboration with JD. Such contribution speaks for itself. With demonstrated strategy execution and leadership capabilities, he has won the trust and support from the team and the board. Meanwhile, I'm also thrilled to welcome Mr. Xinli Jun to join us as the chairman of the board. Under leadership of Jeff, Jun, and Beck, and with the long-standing support from Li Jun and JD.com, data will be in good hands. I look forward to the continued strong partnership with JD to create more compelling value for our shareholders and the society. Now, let's discuss our second quarter results. We are pleased to announce another strong quarter in which Data Group maintained rapid revenue growth with continuously improving operating efficiency. During the second quarter of 2022, total net revenue increased by 55% and adjusted net loss margin narrowed by 20% points year-over-year. I'd like to highlight some general market developments before providing more updates on the two platforms. In action, we'll then go through our financial results in greater detail. Starting with the current industry and regulatory environment, Dada Group fully embraced the pro-employment, pro-consumption policies. Recently, we supported consumption recovery and employment stability through participation in major government-led promotional events, such as 2022 International Consumption Season in Shanghai, as well as the pilot program of work-related injury insurance for riders. Meanwhile, as China aims to promote the robust development of the platform economy, Dada Group firmly supports regulatory policies We will seize the opportunity of high-quality growth to develop our platform in fully compliance with regulations. We believe our innovative and solid business model can play a part in improving the efficiency of resource allocation and facilitating the progress of the domestic economy. On the anti-pandemic front, we actively cooperated with local governments in Shanghai, Beijing, and other cities affected by COVID-19 during the second quarter to maintain the local supply of daily necessities, leveraging our strengths as an on-demand retail and delivery platform to fully embrace our social responsibilities. In June, received an appreciation letter from the Shanghai Municipal Commission of Commerce. That group's significant contribution to the COVID-19 fight in Shanghai were highly valued by the local government. Next, I would like to provide some updates on our deepened cooperation with JD.com. During the second quarter, the GMV of ShopNow or Xiaoshi Go, the unified brand for all on-demand retail services within JD ecosystem, more than tripled year-over-year. For search results optimization, in the second quarter, we further expanded ShopNow's merchant base and product offerings to improve the availability of one-hour delivery options in each local grid. As a result, our search exposure rate in JD increased by 3% points compared with the previous quarter. For nearby, or Fujin tab, Fujin Pingdao, we further roll out this entry point to more cities. So far, nearby has covered all cities nationwide in which we have launched the ShopNow service. Driven by the improvement in exposure, click-through rates, and the conversion rate, the GMV from nearby tabs increased by more than 80% year-over-quarter. Now, let me walk you through the operational highlights of our two platforms, JDDJ and DataNow. Before going into business details, I would like to highlight the results of June 18's grant promotion. a major mid-year online shopping festival in China. Both JDDJ and DataNow made breakthroughs in this year's promotion. For JDDJ, GMV on the peak day surpassed RMB 600 million, and GMV during the promotional increase by more than 70% year-over-year. For DataNow, the number of daily orders delivered exceeded 10 million for two consecutive days. Now, let's spend more time on JDDJ, the leading local on-demand retail platform in China. As of the end of June 2022, the number of annual active users on JDDJ increased by 42% year-over-year to 72.8 million. Retailer empowerment, brand cooperation, and technology innovation continue to be the focus of JDDJ in the second quarter. I will elaborate on each of the three areas. Firstly, we have continued in our efforts to empower retailers. Beginning with the supermarket category, we have now established partnerships with 87 out of the top 100 supermarket chains in China. In addition to onboarding more top 100 supermarket chains, we are also signing up more local regional leaders. Moreover, supermarket category is gaining momentum in ShopNow. Thanks to the increase in online traffic and the conversion rate, as well as offline customer acquisition, GMV of supermarket merchants in ShopNow channel increased by multiple times year over year. Let's move on to the consumer electronics and home appliance category. Based on our consumer insights at the grid level, we continued to move the right product supplies online. During the second quarter, more than 10,000 consumer electronics and home appliance stores were newly launched on JD.DJ. In the smartphone subcategory, as the largest O2O sales platform for Xiaomi products, we established an official partnership with Xiaomi brands in the second quarter. As of now, there are more than 3,000 Xiaomi home stores listed on JD.DJ. GNV, generated by Mi Home, the Xiaomi Home stores increased by more than 10 times year-over-year in the second quarter. In the PC and accessories subcategory, we further expanded offerings and penetrated new segments. During the quarter, we formed new partnerships with leading brands including Canon and Aurora. In the home appliance subcategory, in collaboration with merchants, we enhanced our service capability of integrated delivery, installation, and after-sales service for large home appliances. As a result, the GMV of home appliance subcategory more than doubled on a sequential basis. In the mom and baby category, we facilitated the cooperation between leading retailer chains and mom and baby brands, such as Waze and Ely. As a result, GMV of mom and baby trends on JDDJ more than tripled year-over-year. We also worked more closely with trends in the liquor category, such as JD Liquor Awards, and 1919, with GMV of liquor stores more than doubling year-over-year. In the home and the furniture category, We have further penetrated smart home products. For example, in the second quarter, JDDJ has established partnerships with more than 10 smart lock chains, including and brought 2,000 smart lock stores online. providing users with a convenient one-stop shopping experience, integrating delivery and installation. Secondly, we continue to push forward our cooperation with brands. During the quarter, we continue to solidify our leadership in the O2O space in terms of both the number of brands we work with and the depth of engagement with the brands. Our online marketing services recorded year-over-year growth exceeding over 80% in the quarter. In the second quarter, we further expanded our diversified brand partner base. We strike several new partnerships with food and beverage brands such as Yuanqi Sunling and Dongbei Daban, as well as beverage alcohol brands such as Diageo and Luzhou Laojiao. In addition, we sign up mom and baby brands such as Abbott and pharmaceutical brands such as Jiang Zhong. We also saw impressive results from our brand marketing campaigns. On June 1st, GDDJ teamed up with 11 mom and baby brands including Waze and Huggies to launch a joint marketing campaign aimed at creating a virtual mom and baby shop that offers extensive products in good price and available for one-hour delivery. Total GMV of participating brands increased nearly fourfold on a year-over-year basis. On June 17th, anchoring with JD's June 18th grand promotion that started at 8 p.m. We've partnered with 23 brands, including P&G, PepsiCo, and Ehai Carry to launch a live streaming campaign with the slogan, placing orders at 8 p.m. and get delivered to your doorstep by 9 p.m. On the day of the live streaming campaign, total GMV of these brands increased by more than three times year-over-year. Thirdly, we also continued our efforts to empower retailers and brands with innovative technologies. At the end of June, the Hybot system, our omnichannel operating system for retailers, had been deployed by more than 200 merchants in around 7,700 retailer stores. In addition, Hibor has successfully penetrated new categories, including pet stores and mom and baby stores, while serving more supermarkets and convenience stores. We continue to roll out new Hibor features to address what merchants need most and help them wherever they see challenges. One example is that we launched a new module enabling merchants to directly connect to JD's warehouse system through Hypo when they source supplies from JD. This helps retailers' procurement staff save significant labor hours. As a result, merchants adopting this module saw their procurement efficiency improve by three times. Our Earth Grid Systems, or Kunce, which helps brands boost sales by providing them with by-grid or by-store sales data, has been welcomed by a growing number of brands. In addition, as ShopNow becomes an increasingly important channel for brands' sales growth, we upgraded Kunce's SKU analysis feature to help brands simultaneously monitor the availability of their goods at both JDDJ and ShopNow so that brands can improve the product supply and sell. Our digitized in-store picking service, Datapicking, also made significant progress. Since the establishment of our partnership with Care4, we have helped them improve picking fulfillment rate customer experience and cost efficiency. For example, customer compliance rates related with picking were lowered by half three months after stores started to utilize data picking. As a result of the impressive results, we have continued to deepen our collaboration with Calford. Now, data picking covers all of the chain, the key O2O stores. Driven by expanded store coverage and increased penetration of data picking in partnering stores, the total number of orders fulfilled by data picking in the southern quarter increased by more than three times year over year. Now, let's move to DataNow, the leading local on-demand delivery platform in China. While total revenue maintained rapid growth, data analysis operating efficiency also improved significantly as we optimized pricing strategy and merchant portfolio. I will start with our KA or Chain Merchants business. Revenue of our on-demand delivery services to KA merchants increased by 45% year-over-year, while average gross profit per order turned positive. Our ability to provide integrated fulfillment services consisting of warehousing management, picking and delivery gives us unique advantages. Therefore, we continue to consolidate our leading position in the supermarket KA category. In the second quarter, revenue generated from supermarket KAs increased by over 50% year-over-year. In addition, we sign up new supermarket chains like Walmart, Ume. In the restaurant and beverage K category, revenue generated from beverage K is maintained rapid growth more than doubling year-over-year. Moving on to our SME and C2C business, orders for food increased by over 30% year-over-year, while we continue to optimize unit economies significantly year-over-year. Thanks to our further penetration into lower tier cities, orders for SME merchants increased by more than 40% year-over-year. Lastly, last mile services. For last mile delivery, we continue to leverage our flexible cross-sourcing network to ensure the fulfillment of JD Logistics orders, especially amid the pandemic and during peak promotional campaigns. For pickup service, Others maintain strong growth momentum mainly driven by our further penetration into virus picking scenarios. And to wrap up, I would like to say a few words on ESG. As sustainable development plays an increasingly important role in China's economic strategy, we are committed to creating value, integrating social responsibility with corporate strategy, empowering our partners, caring for our employees' development and satisfying consumer needs so that we can achieve results that bring benefits to the company or shareholders and the society at large. At the end of June, we released our first ESG report, providing stakeholders with a comprehensive overview of our efforts and progress on key ESG issues. Going forward, we will continue to integrate ESG initiatives into our long-term development strategy and actively shoulder our corporate social responsibilities. With that, I will now pass the call over to Baek Chen to go over our financials for the quarter. Thank you.
spk11: Thanks, 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, our percentage changes I'm going to give will be on that basis. And all figures are in renminbi unless otherwise noted. The total net revenues in the second quarter increased by 55% to $2.3 billion. Net revenue from data now increased by 37% to $816 million, mainly driven by the increases in order volume of intra-city delivery services to chain merchants. Net revenues from JDDJ increased by 66% to $1.5 billion, mainly due to the increase in GNV, which was driven by increases in the number of active consumers and the average order size. The increase in online marketing services revenue as a result of the increasing promotional activities also contributed to the revenue growth of JDDJ. Moving over to the expenses side, operations and support costs were $1.4 billion. The increase was primarily due to an increase in rider costs as a result of increasing order volume for interested delivery services provided to various chain merchants on the DataNow platform and the retailers on the JDDJ platform. Selling and marketing expenses were $1.2 billion. The increase was primarily due to the growing absolute dollar amount of incentives to JD.DJ consumers, an increase in advertising and marketing expenses to attract new consumers to JD.DJ platform, and the amortization of the Venues Cooperation Agreement arising from share subscription transaction with JD.com in February this year. The GNA expenses were $100 million, The flat year-over-year is a result of our expenses control measures. R&D expenses rose to $160 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 data was $396 million. Non-GAAP net loss margin was 17%, improving by more than 20 percentage points year-over-year and 6 percentage points quarter-over-quarter. In addition, the JDDJ's direct margin turned positive during the quarter, making a remarkable milestone in our path to profitability. As of June 30, 2018, 2022, the company had $4.35 billion in cash, cash equivalents, restricted cash, and short-term investments. But when to our $70 million share repurchase authorization announced in March 2022, as of June 30, 2022, we had repurchased approximately and $33 million of ADA under this repurchase program. In terms of our outlook for the third quarter of 2022, we expect the total net revenue to be between $2.35 billion and $2.45 billion, representing a year-over-year growth rate of 39% to 45%. In addition, we expect the net loss margin in the third quarter of 2022 to continue to significantly narrow year over year and achieve sequential improvement for the sixth consecutive quarter. This concludes our prepared remarks. And operator, we are now ready to begin the Q&A session. Thank you.
spk02: Thank you. Ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you are on a speakerphone, please pick up your handset to ask your question. We will wait for a moment while the question queue assembles. Our first question is from the line of Ronald Keong from Goldman Sachs. Please go ahead.
spk09: Thank you. Thank you, Philip, Beck, and Caroline. So I have two questions. First is how should we think about this executive and board changes? Would there be a future CEO role, as I think you've now filled the president and chairman roles respectively, and also see an increase in independent directors? So is that part of a kind of board change to align with some of the Hong Kong Stock Exchange guidelines and any comments on eventual listing or dual primary listing in Hong Kong? And my second question is on the encouraging 18 percentage points improvement in net margins, if you flag that back. So where has user subsidy rates trended so far? And are we continuing to expect the direct margin break even this year and EBIT turn around by next year? Thank you.
spk11: Okay, so thank you for the question, Rona. For the first question, yeah, so we have actually net added one independent director and now actually three out of six directors are independent, which is fully compliant with the potential Hong Kong listing rule. And also right now, four out of six board directors are female directors, which is which are very diversified, and they all have very solid international backgrounds, and we hope that all those directors will contribute to the growth of the company in the future. Also, we will be proactively, you know, push forward the Hong Kong listing procedures to protect our shareholders' interest. And also, in order to thank for the contribution of Philip to the company for the past eight years. So after internal discussion, we are now positioning a CEO role and actually President Jack will be executing and be responsible and in charge of the daily operation and report to the board in the future. And about the second question, Yes. So, actually, our overall subsidies ratio is actually decreased by 20 bps compared to the first quarter. So, in Q2, actually, our consumer incentives decreased to 4.5% as percentage of JDDJ-SGME. And in the third quarter, we expected the incentive ratios will be decreased more and they will all be contributing to our direct margin level. And for the whole year, we maintain the forecast that the direct margin will be turning positive and the company will be turning positive profit in the first half of next year.
spk08: Wonderful. Thank you. And thanks, Philip.
spk02: Thank you, Rana. Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead.
spk07: Hi. Good morning. Thanks, management, for taking my questions. My first question is about the competitive landscape as we are seeing an increasing number of entrants entering into the space. these days, for example, like short-form video and different players also launch Suncoast services. How should we think about the competitive advantage of JDDJ? And my second question is about after the board change, how should we think about our cooperation with JD going forward? Should we see accelerating synergies with JD? Thank you.
spk06: Hello everyone, I am He Huijian. Let me answer these two questions. Please translate them for me. The first question is about the advantages and disadvantages of this kind of business. The first one is about the advantages and disadvantages of cooperating with the business. Okay, so this is Jeff. First and foremost, our positioning as a
spk11: a pure marketplace and our enabling digitization capabilities has enabled us to work more extensively with all those leading chain merchants and brands, which makes us more competitive in the variety, quality, and prices of product supplies. Yes, so as we always tell our partners, as a pure marketplace, we never compete with our retail partners. So we are not engaging retailing ourselves. So that's why those retailers are more willing to work with us.
spk06: Even if there is a large number of subsidies, the impact on our subsidies is very limited. The reason is that subsidies can only stimulate demand in the short term, and the demand of consumers needs to be better in the long term. So even though our competitors are cities more, but the impact to us is very limited. And as I said, our incentive ratios are decreased sequentially.
spk11: So the rationale behind it is that the subsidies only drive up the demand, but it needs to be continuously fulfilled with high quality supplies. So partnering with those leading retailers gave us a clear edge on the supply chain front over our peer and so for the long term.
spk06: Another very important advantage of digitization is the ability to digitize negative energy. First of all, our Haibo system continues to do the function of relaying to help these forestry companies to solve the pain points in the auto operation, to realize the effect of the downfall in the entire auto operation. Currently, it has covered 7,700 forestry stores. and the integrated solution of warehouse-save-package. These solutions are different from the delivery of food and take-out. The delivery of food and take-out in various parts of Liyue, including pick-up, packaging, and other parts, our warehouse-save-package integrated solution can help retailers to shorten the whole pick-up process. Okay, so we also enable our
spk11: retail partners with our capabilities in digitalization. For example, take Hybor system as an example. We continue to rolling out our new Hybor features to address what merchants need most and help them reduce costs while enhancing the operating efficiencies. As of June 30th, it has been deployed in around 7,700 retail chain stores. Another example is our integrated fulfillment solutions consisting of warehousing management, picking, and delivery. There is a key difference between the on-demand retail and the food delivery. This is the picking and the packing in the retail stores. So our integrated fulfillment solutions enable retailers to reduce the order picking time, while our data picking service help them mitigate labor shortage through its innovative digitized crowdsourcing model, which are more highly valued by our retail partners. And lastly, our control of the earth grade system helps brands boost the sales by optimizing channel supply down to each grade of the area.
spk06: We are also proactive to expand across different categories. So our capabilities in the system of digitization can
spk11: easily help us to expand from the most complicated supermarket categories to other categories like 3C categories, appliance categories, as we have said before. So this is also clearly a better capability of our platform compared to our peer company.
spk06: Finally, we also have a lot of advantages in terms of brand sales. The leading chain of chain stores on our platform is also a very important offline sales channel for brands. We can provide online and offline-linked marketing services for brands and tools for socialization. We have not only created a positive sales volume, but also improved the ability of consumers and channels to search. And also the brand partnership. So, apart from the top retailers, we have extensive partnerships with the brands.
spk11: Since the retail chains on our platform are critical offline distribution channels to many consumer product brands, we can offer our brand partners integrated marketing service across both online and offline channels, as well as digitization tools. So through our collaboration, brands are not only able to generate more sales, but also improve their consumer insights and the channel insights. And we can also leverage JD's resources to bring more brands on board. And in particular, like brands in consumer electronics, where JD enjoys strong consumer mindshare. And our peers are actually liking us in terms of both the number of brands and the depth of the engagement with the brands.
spk06: The second question is about some of the progress we have made in cooperation with Jindong. In this quarter, we have further deepened our cooperation with Jindong in all of its auto businesses. In terms of business results, in this quarter, GMV has grown more than twice as much as GMV in the past 10 years.
spk11: Yeah, let's talk about the collaboration with JD. So we continue to deepen cooperation with JD.com. And during the quarter, the second quarter of this year, GMV of ShopNow, Xiao ShiGou, more than tripled year over year.
spk06: Indeed, through continuous expansion and supply, we have increased the coverage of JD.com. Our search exposure has increased by 3%.
spk11: In the second quarter, we further expanded the ShopNow's merchant base and the product offerings to improve the availability of one-hour delivery options in each local grid. So as a result, our search exposure rate in JD increased by 3 percentage points quarter over quarter.
spk06: Finally, we have now covered all the small and medium-sized cities in China. So for nearby or
spk11: We further rolled out these entry points to more cities. So far, the Nearby tab has covered all cities nationwide in which we have launched ShopNow services. And driven by the improvement in exposure, click-through rate, and conversion rate, the GMV from Nearby tab increased by more than 80% quarter-over-quarter and contributing 10% of ShopNotes GME.
spk06: Thank you, Thomas.
spk11: Thank you, Thomas.
spk07: Thank you.
spk02: Thank you. Our next question comes from the line of Eddie Luong from Bank of America, Merrill Lynch. Please go ahead.
spk03: Good morning, guys. I have two quick questions. The first one is about consumer behavior. Could you give us an update on your observations of what consumers are doing in the recent months after the reopening of Shanghai amid inflation? For example, any change in their preferences for border categories? And then secondly, could you also remind us of the AOV of JDDJ? I think you mentioned that you have seen AOV continuously going up.
spk11: Okay, so Eddie, let me answer the second question first, and I will pass the first to Philip to answer. The average order value of our JDG and Xiaoshiguo platform in Q2 was 225 RMB, which is increasing by 10 RMB compared to the first quarter. In the long term, we think we will continue to Drive up the average order value as we decided we said so we will have more diversified various new categories products and they are all with higher AOV and contribute positive direct margin to the platform, which would also not only help us to increase the diversity of our products to be offered to the consumers and also contribute to our profit improvement.
spk12: Eddie, I'll give you some updates on both the supply side and demand side from short-term and long-term perspective over observation. In short term, we are seeing from the supply side, we are working with the key merchants chains with the strong supply chain capabilities, and they're much more resilient to the turbulence. Therefore, under this challenging environment, the retailers we have been working with are much stronger to deal with the challenge. At the same time, most of the retailers are facing difficulties to get offline customers in store. That's why they really need to expand O2O business. That's why our partnership with the retailers has been further improved over the last couple of quarters. So that's from the supply side. And from the demand side, we're seeing that For example, in July, after Shanghai reopened and the COVID continued to happen in different cities across July and August, it did absolutely bring some uncertainties. And we're seeing the confidence of the consumers and their willingness to pay do have some way to recover. And it does have some impact on our business as well. I think going forward, we're confident and we believe that the demand side will pick up over time, while our supply side remains very strong. And for the long term, I think the on-demand retail penetration as a percentage of the local retail is still very low at the single digits. the room for long-term growth is just tremendous. And most of the retailers and the brands believe that O2O is the future, the absolutely number one growth area for the future. So we are very much confident.
spk03: Thank you, Philip and Beck. Thank you.
spk02: Thank you. Our next question comes from the line of Alicia Webb from Citigroup. Please go ahead.
spk04: Hi, thank you. Good morning, management. Thanks for taking my questions and congrats on the solid results. I have a follow-up on the competitive landscape for JDDJ. So I think we're also seeing more players actually more aggressively penetrate to non-supermarket categories. that which I think JD and Dada actually used to enjoy the synergies and the advantage. So can management comment if you expect the landscape, especially for the non-supermarket category, to get more intensified? If so, how would that affect the take rate or even the margins and the volume growth in the coming future? And then a follow-up on that is what do we expect for the direct margins target? for JDDJ in the medium term, which is in two to three years. Thank you.
spk12: Hi, Alicia. I will give you some of my thoughts and see if Jeff and Becca had anything to add. So we are seeing more players coming on board in the non-supermarket category. But more SA followers, as we have been quite successful expanding in the non-supermarket category, so they're following us without too much of the development. So if you break down the so-called non-supermarket category, you will see that The category we're talking about mainly covers consumer electronics, the mom and baby parenting, the liquors, or home appliance. All of those categories have very different consumer mindsets comparing to restaurant food delivery. This is totally different. It's very remotely linked for any consumers to think of like buying a smartphone or buying a home appliance from a restaurant food delivery platform. So I think that's the key. And for JD, we are very happy and I think we're very lucky to deeply collaborate with JD that the consumers come on board on JD, they have the strong mindset to buy those category products on JD. And with the development of our Shop Now business, we can easily leverage the traffic and the consumer mindset on those categories. I think those are the advantages we enjoy that all of the other players have. It's very difficult for them to build a similar mindshare anytime soon.
spk11: Yeah, and also about the take rate and also about the direct margin. All those new categories, actually, if we subsidy, we are subsidizing much less compared to the supermarket categories, which means that they all generate positive American margin to the company. So we are welcoming all those new categories on board. And about the trend of our company's direct margin level, actually in Q2 our direct margin turned positive to 0.4%, so we are expecting the direct margin level to be further increasing to 1% or more than 1% in the second half of this year. And we believe it will keep increasing in 2023, which is very key and essential to the company's overall profit breakeven. Thank you.
spk02: Thank you. Our next question comes from the line of Andre Chang from JP Morgan. Please go ahead.
spk10: Thank you, management, for taking my question. I have a follow-up question regarding our cooperation with JD. So now we saw this infrastructure laid out, right, the shop now and the nearby tab, the ads load, et cetera. So I wonder what will drive further growth driven by our cooperation with JD. For example, will there be more ad load or like there will be more exposure or ad from different category beyond electronics, FMCG, etc. Or we are going to promote more to get more visibility for consumers within JD ecosystem, etc. So any color for the drivers in the second half and in next year to increase our traffic contribution from JD will be helpful. Thank you.
spk12: Hi, Andrew. I'll also give you some of my perspectives and see if the rest of the team has anything more to add. So in terms of the driver for growth on JD, I think there are a few key things we're looking at. Number one is the penetration of the user base. So we're fully aligned with JD to increase the penetration of consumer on JD.com. So now the penetration is still at the single digit while quickly growing. And then we are aiming at 50% penetration in the long term. So I think this is the number one driver in short term and in long term. And there are a few things to help us to improve the penetration. For example, like the exposure. So we're getting more and more space if you will, on JD.com and you're able to see Earth more and more often everywhere. At the same time, we are expanding geographically and also bringing more and more supply from various categories. So therefore, when people are searching or browsing, products from various categories, now they can see us more and more often. Because before, we don't even have the supply of the products in that new category. Now, as we expand and bring more stores and supplies on board, the customers are able to see them on JD.com. So all those help us to improve the exposure and the penetration. In terms of promotion, I don't think it will be a heavy promotion-driven expansion at all. Other than that, we actually can fully leverage all the existing successful promotion on JD already, like the June 18th or the 11th and so on and so forth. So JD has a lot of successful promotion, and now we can ride together with them. So I think those are the strategies we are looking at.
spk06: I'd like to add a few things, and then I'd like to ask Beckett to translate for me. I'd like to add a few things about our exposure strategy. The first one is the maximum traffic at the intersection. If you search for Shenzhen today, you can see that our exposure has more traffic. This strategy will be used in the future to expand to more categories, especially in search results for some heavy and heavy objects. The second is that we are also working with Jindong to promote the LBSization of other core traffic modules, including秒杀, OK.
spk11: I'll further elaborate on the exposure opportunities. So for example, if a consumer is searching the fresh produced products in the search tab, there will be more exposure to the ShopNow choices. So for the next step, we will expand it to more category products. For example, those heavier products or big bulk products in the supermarkets. And also, we will further increase exposures in different channels, like the second cooling channels. And also when the consumers are placing the orders, so when they finish and complete the orders, there will be recommendation for them for the nearby stores. And this is all in the testing procedures. And so we are very confident that we, as ShopNow and JDDJ will be acquiring more traffics in the consumer minds within the JD ecosystem. Thank you, Andre.
spk02: Thank you. Our next question comes from the line of Vy Xiong from UBS. Please go ahead.
spk01: Hi. Thank you, management, for taking my question. My question is around, I want to follow up on the supply side advantage that you guys mentioned just now. I wonder how do we see the return rate of merchants, especially on the SME side? after the very challenging second quarter. Will that affect our product supply for certain long tail categories? I understand this might not be an issue with our partnership with the leading supermarket chains, but I do believe we do have a large number of smaller merchants on the platform. So just want to hear your thoughts on this. Thank you.
spk12: Sure. So for our supply side, So our strategy is to firstly work with the key chains, not only supermarket chains, but also other vertical specialty store chains, like consumer electronics, mom and baby, liquor, and so on. So all those CA chains retailers are much more resilient. And all of them are still there. And the business are relatively well. So we're not seeing any substantial impacts from the supply side. And on the other hand, we're actually happily seeing that almost all of our retailer partners have strengthen the partnership with ours because they're seeing more challenges and are looking for our help. So I think the partnership with our retailers has actually got improved and we're very much confident that we will be able to go through all the turbulence in any circumstances.
spk00: Thank you.
spk02: There are no further questions at this time. I will now hand back the conference to Ms. Caroline Dong for closing remarks.
spk05: Thank you, operator. In closing, on behalf of DADA's management team, we'd like to thank you for your participation in 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.
spk02: Thank you. The conference of DADA has now concluded. Thank you for your participation. You may now disconnect your line.
Disclaimer