Missfresh Limited

Hello, ladies and gentlemen, thank you for standing by for MISPRESS Limited Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After management remarks, there will be a question and answer session. Today's conference call is being recorded. I will now turn the call over to your host, Lingling Hu, Senior Director of Capital Markets for the company. Please go ahead, Lingling.

Thank you. Hello, everyone, and welcome to Miss Fresh third quarter 2021 earnings conference call. Our financial and opt-in results were issued via Newswire services earlier today and are available online. You can also visit the earnings press release by visiting the IR section of our website at ir.missfresh.cn. Participants today will be Mr. Zheng Xu, our founder, chairman, and CEO. and Ms. Katherine Chen, Chief Financial Officer. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the relevant public filing of the company as well as with the U.S. Securities and Securities Exchange. The company does not assume any obligation to update any forward-looking statements, except as required in the applicable law. Please also note that missed first earnings press release and this conference call include the disclosure of unannotated GAAP financial matters, as well as unannotated non-GAAP financial matters. Ms. Fresh's Earnings Price Release issue of the day contains a reconciliation of the unaudited net gap merits to the unaudited net gap merits. We also posted a presentation on our IR website, providing details on the results in the quarter. We will reference those results in our prepared remarks, but we will not refer to specific slides during this discussion. Now I will turn the call over to our founder, chairman, and the CEO, Mr. Zheng Xu.

Please go ahead.

大家好,感谢参加我们今天的业绩报告电话会议。 Hello everyone, and thank you for joining our earnings conference call today.

2021年三季度,我们的业务继续保持强劲的增长态势。 GMV达到了人民币25.7亿,同比增长41%。 Revenue reached RMB21.2, the same as growth 47%, exceeding our revenue increase 40% to 45% in the index range. While revenue growth is accelerating further, the interest rate increased 4.8% compared to last quarter, reaching 12.3%, exceeding our index range of 1.3%. We are pleased to have maintained our strong growth in the third quarter of 2021. Our GMV reached 2.57 billion RMB, representing an increase of 41% year-over-year. Total revenue grew 47% to 2.12 billion RMB, beyond the high end of our guidance of 40% to 45% range.

In addition to accelerated revenue growth, our gross margin increased 480 basis points from the second quarter of 2021 to 12.3%, 130 basis points beyond the top end of our guidance range. We also see net loss narrowed with non-GAAP net margin improved 517 basis points sequentially compared to the second quarter.

Our strong performance in the industry is mainly due to two aspects. From the outside market environment, the overall private consumption is stable, and the community retail speed and online trend, which is mainly based on fresh and fast products, is accelerating. The government is also actively promoting consumer improvement, and has proposed many policies to encourage industry development, including the improvement and transformation of the community food market. From the internal factors, Two forces were the main drivers of our robust performance, one external, one internal. Externally, the market environment and overall livelihood-related consumption trends in China continued to grow steadily.

We saw both digital acceleration in the neighborhood retail industry, especially in fresh produce and FMCG sectors, and rising popularity in online retailing. These changes were in part motivated by the Chinese government's efforts to promote consumption upgrades. As part of this strategy, a number of policies were introduced to boost digital technology innovation of the Neighborhood retail industry, including supportive guidelines, were revamping and upgrading neighborhood fresh markets. Internally, our multi-point growth strategy is building on our long-term competitiveness as we move ahead. We are focused on generating high-quality and sustainable growth by consistently improving customer neighborhood shopping experience and cultivating our high-value user base. by understanding and shaping consumer habits across our platform.

With the on-demand DMW retail business model we invented in 2015, our goal is to establish DMW as the primary grocery shopping model for mainstream urban consumers in first-tier and second-tier cities.

As urban shoppers in large and medium sized cities grow their desire for a more convenient and high quality lifestyle, this transformation is taking shape. Our attractive DMW model provides a more time efficient, convenient, and valuable fresh produce and FMCG shopping experiences. As of end of September, we had expanded our DMW business to cover 17 first tier and second tier cities offering over 5,000 SKUs and a delivery time of 36 minutes on average per order. On the user growth front, we remain focused on high-value customers and high-quality growth. To that end, we continued upgrading our membership ecosystem in third quarter. We enact an area of measures, including the introduction of an innovative one-stop Miss Fresh advisor service and cultivating users through private domains. Our efforts boost the paid members' revenue in the third quarter by 800%. Year over year.

In terms of supply chain, Meizhouxian insists on supporting users' demand to create a fresh, fast-selling, all-in-one choice supermarket. On the other hand, it continues to expand its direct color cooperation with local high-quality brand suppliers. Currently, within the national scope, Meizhouxian already has nearly 200 direct color farms, covering products such as water, vegetables, fruits, and about 300 priority factories. covering meat, eggs, fast-food, and other products. On the other hand, we will further dig deeper into the needs of high-value users, realize product quality categories, and further upgrade, and at the same time create free brand products. For example, our main target, today's series of fresh pork, because of the freshness of the ingredients, and the timely reverse customization, it is close to the consumer's needs. In the third quarter of this year, the sales volume increased by 86% compared to the second quarter. With respect to our supply chain capabilities, we continue to broaden and deepen our direct sourcing partnerships

with farmers and quality brand suppliers. These efforts further build out our demand-driven strategy to create a digital supermarket offering with a comprehensive selection of fresh produce and FMCGs. At present, we have expanded our direct sourcing network to include approximately 200 farms nationwide producing vegetables, fruits, seafood, and about 350 factories that produce meat, eggs, and FMCGs. We are also catering to the growing demand of high value users by improving product screening, testing, and quality, as well as rolling out our private label brand offerings. For example, our sales of killed pork featured in our today's production offerings grew by 86% quarter over quarter. Thanks to our state of the art fresh food control, and our ability to predict and act on consumers' needs. Furthermore, our private label, Fresh Food Friends, Xiang An Xin Fresh Joy, has expanded to over 200 SKUs, covering these vegetables and baked goods. We are glad to see that Fresh Joy, Xiang An Xin, is gaining momentum in the third quarter, with sales growing at 250% quarter over quarter, Additionally, during the third quarter, our average value per order continued to ramp up, maintaining its industry-leading position. At the same time, we are steadily laying a strong foundation to unlock solid growth and future profitability by leveraging our technology capabilities in big data and AI algorithms. These allow us to understand and cultivate users' shopping habits and improve operational efficiency, all of which underpinning our core competitiveness in the on-demand retail space.

The smart food industry is another main strategy of Meiyue County. It is mainly located in the mainstream consumer channels of the mainstream consumers in small and medium-sized cities in China. By upgrading the digital rich energy and private operation, we can provide better consumer shopping experiences for residents and help to expand the business and increase revenue. As of September 30, 2021, we have signed 73 food factories in 18 cities, of which 52 have begun operation.

我们智慧菜场业务将继续推动既定的百成千店计划,推动业务加速拓展。 Moving to another major Miss Fresh business arm, our intelligent fresh market business. This business segment aims to transform major neighborhood retail channels serving mainstream consumers in third-tier and fourth-tier cities. Through our services, we empower these traditional retailers to reinvent their business with our digital transformation solutions and data-driven private domain operations to help local retailers increase revenue and profit by delivering a better neighborhood shopping experience. As of September 30, 2021, we had entered into contracts to operate 73 intelligent fresh markets in 18 cities. 52 of which have commenced operations. In the near term, we will continue to promote our hundreds of cities, thousands of fresh malls initiatives, speeding up our intelligent fresh market business expansion. 我们的零售云业务旨在通过美流先多年积累沉淀的社区零售运营体系以及自研的智慧零售网络

helping traditional community retailers, mainly small and medium-sized businesses, to quickly establish intelligent online operation capabilities, creating a more efficient all-channel marketing, private operation, supply chain management, last-mile travel delivery, and other integrated community retail solution solutions, providing a wide-ranging consumer with a digital era of good and fast shopping experience. At the same time, the efficiency of digital drive is also extremely improved, helping retailers and customers to achieve better Supported by years of experience in operating a neighborhood retail platform and our in-house developed retail AI network, our retail cloud business is poised to

assist traditional neighborhood retailers. Here, we are targeting small and medium-sized supermarkets that want to swiftly build digital operation capabilities. Through our retail cloud business, neighborhood traditional retailers are empowered to develop more efficient, comprehensive neighborhood retail solutions consisting of omnichannel marketing, private traffic, supply chain, and last mile fulfillment capabilities. these are critical elements in the digital era to bring smaller markets more urban consumers by offering fast convenient and enjoyable shopping experiences digitalization is also driving the ultimate efficiency improvement for retail cloud customers to achieve higher operational returns as of september 30th 2021 we have signed contracts with 11 supermarkets customers we will take a step-by-step approach to implement our solutions and ensure customer success, building a solid foundation for rapid expansion moving forward.

In closing, China has over 12 trillion neighborhood retail markets, according to iResearch.

Our unique business matrix consisting of on-demand retail, intelligent fresh market, and retail cloud is well-suited to tap this vast potential. We are constantly growing and innovating. We will remain at the competitive forefront through our continuous business upgrades, operational breakthroughs, and technology empowerment that satisfy ever-changing consumer needs and promote industry innovation. In our pursuit of high-quality sustainable growth, we are dedicated to embracing common prosperity, boosting digital transformation across China's neighborhood retail industry, and fulfilling our mission to help every family enjoy quality groceries at their fingertips.

接下来将由我们的CFO陈希为大家介绍我们第三季度的财务状况,谢谢。

Thank you, everyone. With that, I will now turn the call to our CFO, Ms. Katherine Chen, to discuss our financial performance for the third quarter. Thank you, Mr. Xu, and hello, everyone. We are delighted with our operational and financial performance for the third quarter, which continue to demonstrate our strong growth trajectory. Growth margin grew on a sequential quarterly basis and exceeded the high end of our guidance range, primarily due to our heightened focus on high value customers and the shift to higher margin direct sourced products. Our efforts to strengthen operational efficiency across multiple fronts also narrowed our loss with adjusted margin, improving by 517 basis points from the previous period. Now I'd like to walk you through our detailed financial results. Total net revenue reached RMB 2.1 billion in the third quarter of 2021, representing an increase of 47.2% on a year-over-year basis from RMB 1.4 billion in the same period of 2020 and exceeding the top end of our previous guidance range. Sales of products through online platforms increased by 48.1%, to approximately RMB 2.1 billion in the third quarter of 2021 from RMB 1.4 billion in the same period of 2021. The increase was primarily driven by an increase in the number of orders fulfilled as a result of an increased number of transacting users and an increase in the next day delivery sales. Other revenues reaching RMB 43.7 million in the third quarter of 2021 representing a growth of 14.1% from RMB 38.3 million in the same period of 2020. The increase was primarily due to increased sales of products through our Convenience Go business and the increase in the revenue contribution from membership fees as we enhanced promotional activities for our membership programs. Cost of revenue increased by 54.8% to approximately RMB 1.9 billion in the third quarter of 2021 from RMB 1.2 billion in the same period of 2020. Gross profit was RMB 260.6 million in the third quarter of 2021, representing an increase of 9% from RMB 239.6 in the same period of 2020. Gross margin increased to 12.3% for the third quarter of 2021, increasing by 480 basis points from the second quarter of 2021 and exceeding the top end from our previous guidance range by 130 basis points. Gross margin for the third quarter of 2020 was 16.6%, The year-over-year decrease was primarily attributable to an increase in discount coupons incentive offered to the customers in 2021 period. Operating expenses were RMB 1.2 billion in the third quarter of 2021, comparing to RMB 728.1 million in the same period of 2020. Breaking this down further, fulfillment expenses were RMB 637.9 million In the third quarter of 2021, compared to RMB 396.2 million in the same period of 2020, the increase was primarily attributable to more orders being fulfilled and increased headcounts of product delivery, warehouse operations, quality control, and customer service staff to provide better fulfillment capabilities. Sales and marketing expense were RMB 256.2 million in the third quarter of 2021, comparing to RMB 170.3 million in the same period of 2020. The increase was primarily due to the increased promotional expenses incurred from both online and offline advertising activities for new customer acquisition and current customer retention. General and administrative expenses were RMB 192.2 million in the third quarter of 2021, compared to RMB $74.5 million in the same period of 2020. The increase was mainly due to the increased recognition of share-based competition and the number of management staff for new business initiatives. Technology and content expenses were RMB $145.1 million in the third quarter of 2021 compared to RMB $87.2 million in the same period of 2020. The increase was mainly attributable to increase the recognition of share-based composition and the number of R&D staff for new business initiatives. As a result of the foregoing, loss from operations were RMB 970.7 million in the third quarter of 2021 compared with the loss of RMB 489 million in the same period of 2020 and narrowed by 35%. from the second quarter of 2021. Net loss attributable to ordinary shareholders were RMB 973.7 million for the third quarter of 2021, compared with RMB 616.2 million in the same period of 2020, and narrowed by 39% from the second quarter of 2021. Non-GAAP adjusted net loss attributable to ordinary shareholders was RMB $886.5 million in the third quarter of 2021 compared to adjusted net loss of RMB $469.9 million in the same period of 2020. Non-GAAP net margin in third quarter of 2021 narrowed by 5.2 percentage points from the second quarter of 2021. Non-GAAP Basic and diluted net loss for ADS were both RMB 3.87 in the third quarter of 2021 compared to basic and diluted net loss of RMB 13.86 per ADS in the same period of 2020. As of September 30, 2021, we had cash and cash equivalent restricted cash and short-term investment of RMB 2,479.5 million compared with RMB 1,041.5 million as of December 30, 2020. In the third quarter of 2021, net cash used in operating activities was RMB 669.2 million. Now turning to our business outlook and projections. For the fourth quarter of 2021, we currently expected net revenue to be in the range of RMB 2,232 million to RMB 2,315 million, representing a year-over-year growth of approximately 35% to 40%. We expect growth margin to improve by 100 to 150 basis points, quarter-over-quarter. And the non-GAAP operating margin to improve by 800 to 1,000 basis points quarter over quarter. This outlook is based on current market conditions and reflects our preliminary estimates of market and operating conditions and customer demand, all of which are set to change. With our highly competitive offerings, leading technology, operational acumen and understanding of the evolving market, we anticipate continued top-line growth and improved unit economics in the coming quarters. We will remain dedicated to serving both our growing customers and supplier partners with superior experiences and elevated efficiency. We look forward to further strengthening our core capabilities to seize the tremendous opportunities in China's neighborhood market amid the digital era. We invite you to watch our progress. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

As our reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. Please stand by while we compile the Q&A roster. For the benefit of all participants on today's call, If you wish to ask your question to management in Chinese, please immediately repeat your question in English. To be mindful of the length of our earnings call, please ask no more than two questions at a time. Should you have a follow-up question, please press star 1 again to go back into the queue. Our first question comes from the line of Andrew Chang from JP Morgan. Please ask your question.

Mr. Xu, Catherine, Lingling, thank you for your questions. First of all, congratulations on the very strong growth performance and the continuous improvement of financial indicators. I have two basic questions here. First, let's focus on the industry. The first one is about our growth, because the coverage of the city has not increased significantly. I would like to understand, as mentioned earlier, the growth of users, GERDA, and membership fees. I want to understand, if we look at it in detail, what kind of driving force is it? Is it that in certain specific areas, our users have more obvious progress, or is it that in some places, its frequency or penetration is improving, and the number of users and the frequency of transactions in all aspects, which side is making the most contribution? Can you provide us with more information here? So I will repeat my question in English. So thank you management for taking my question. Congrats on a very strong quarter of growth and improving financial indicators. So my first question is about the growth drivers. So we noticed that the company has increased the city coverage, but the growth has been pretty decent. management mentioned that the drivers are increasing users and more next-day delivery, membership fee, et cetera. So can you elaborate more about what's behind all of this? Is there any specific area that we've seen more user penetration, expansion of a network, or that there are some like certain scenario that the user transaction frequency are picking up or output is picking up? And the second question is about the guidance on the margin improvement. We noticed that first quarter margin improvement, the pace is going to be faster than the third quarter. So I wonder what's the driver behind it? Is there any space of the area of cost cutting? Or there are some like, you know, structure changes going on? Thank you.

Thank you very much for your question. These two questions have very high quality. Regarding the first question, we see that in fact, we are currently showing a very good growth trend and it is improving very well. From the perspective of business, I think there are mainly two aspects. First, from our entire business structure, our front-end business is focused on the first and second-tier cities. to identify the mainstream users and mainstream channels. In the small and medium-sized market, we have more effective solutions, using smart factories. Back to our supermarket business, in the first and second-tier cities, we see that the penetration rate of users has a lot of room for improvement. So we will grow in these cities. In the past, we saw that the growth of Dongyin mainly came from two aspects. On the one hand, we continue to strengthen the coverage of users in these cities, and the coverage of the network density. This is our growth. I think half of it comes from this aspect. On the other side, it is actually the deep operation of our face-to-face users. Through this private operation, after we launched our steward service, we actually dug deeper into the needs of users in the service of goods, including some individualized needs. In relation to the shopping frequency and price of goods, we can see that there is actually a healthy improvement year by year. These two, I think, are one of the two factors that make 47% of our revenue growth very important. I think these two, if we talk about the whole weight, it's almost half and half, from a data perspective. So in general, this growth is very healthy. It comes from the growth of the number of users, from the continuous comparison and improvement of customer shopping bottles and retail prices. This brings a overall structural growth. The second one, I think, is that we can see that in the 4G guidance, we see that we will have further improvements in the operating profit rate. There will be 8 to 10 points of optimization. In fact, it mainly comes from several aspects. The first one is that in the process of continuing to root users, we have seen the user profit, the customer price of the user is very healthy and continues to improve, especially under our private operation. In fact, it brings us a lot of uh uh uh uh uh uh So basically for your first question that we focus on quality growth, and that consists from two sides. One is our on-demand

DMW retail business, which is facing the mainstream consumer base and first tier and second tier cities. And for the lower tier cities that we're using a lighter model from our intelligent fresh market to address those needs. And from the DMW side, we see that there is still lots of penetration now. It's still relatively low. And we still see there are lots of potentials to increase penetration in first-tier and second-tier cities. And on one hand, our growth in the past has been contributed by our strengthened network density among first-tier and second-tier cities and among our increasing user base in the first-tier and second-tier cities. And we continue to see there's a lot of potential to improve our penetration, our network coverage, our service to the customers. And on the second part, that facing our users, that we are focusing more on the user values like operation and private domain operation as well, that we launched our one-stop meet fresh advisor services, which helps to address the more tailor-made customers' needs. And we are able to addressing the customers in China the rising demand for upgraded consumption needs, and we are able to improve the consumption frequency as well as the average price per order at the same time. So these two parts has been driven the growth in the past, in the third quarter, and we see it's a very healthy growth trend and we'll continue to work on that. to drive the contracting user growth as well as with the frequency and average price per order. And for your second question, we have given the guidance of an improving operating non-GAAP operating margin to improve by 800 to 1,000 basis points in fourth quarter. And that mainly contributed by first that with our steady and effective user growth and operation strategy, we're able to improve our gross margin. As from the through our launch of private domain operations and improved customer services, that we are able to offer the best goods to our customers. And we are also able to underpin their demand for upgraded consumption needs. That helps to drive the increasing consumption level as well as the overall gross margin of the business. And on the second part, with an improving average price per order and improving efficiency, we're able to lower our fulfillment expense rate in the first quarter. And also at the same time, the company is also improving the operational efficiencies on the other expenses level to overall contributed to the 800 to 1,000 basis points improvement of the operating margin perspective. 从现在来看的话,我觉得公司应该是说在我们的简字仓业务上已经

We have built a very powerful high-quality engine, which shows two aspects. On the one hand, how to accurately acquire high-value users and continue to operate. On the other hand, through the management of the operating efficiency of our deep-rooted supply chain and supply side, we can cover enough labor costs to achieve the transfer of labor profits. In the future, I think the company will follow the scale of the city,

So for our on-demand DMW business, that high quality growth that we were able to build up the two engines for our high quality growth. That one side is on our high value customer acquisition as well as our continuous efforts to do customer growth and customer operations. And that helps us to continue to maintain and growing our high-value customer base. And the other side is on the supply chain side, that we have upgraded our supply chain capabilities, strengthened our direct sourcing capabilities, and also in order to use the improvement in the supply chain side to fully cover the fulfillment expense rate. So we were expecting we are gradually, steadily improving our gross margin to cover our fulfillment expense rate to achieve a positive fulfillment profit ratio. And also, on the other hand, that we steadily working on the different kind of geographics to orderly expand in the top first-tier and second-tier cities, and at the same time will gradually turn positive at the operating level from the geographic region perspective to steadily achieve a positive operating cash flow and a positive operating margin.

That's all our answers for the questions.

Thank you.

Our next question comes from the line of Charlie Chen from China Renaissance. Please ask your question.

Thanks for taking my questions. I have two questions here. The first one is regarding the fulfillment expenses. As we have seen, the government seems to be pushing for the common prosperity and tries to lift the lifestyle of the delivery people. So I just want to get some color on how is that impact your fulfillment expenses and how do you feel the pressure going forward or how can you offset this potential impact? And the second question is regarding the fresh market business. Can you share with us more color about the ramping up of the GMB and margin and also the unit economics? Does that meet your original expectations? Thank you.

Charlie, can you please repeat your question in Chinese?

Okay, sure. Sorry. Did the company feel the pressure of rising costs? Did it hit the company's chart? Are there any ways to offset the impact in the future? Secondly, I would like to ask about the current development of the fresh market business. What is the current situation from the point of view of GMB, profit rate, or unit economics? Thank you. Let me give a brief answer and then look at Mr. Xu's supplement.

In the third quarter, the overall profit margin of the company is 12.3%. In contrast, we can see that at the contract level, our contract fee rate actually has room for further decline. So just now, we believe that the retail price is a major decision factor. On the one hand, the ratio of rental, discount, and other fixed costs will be further insured as the retail price increases. On the other hand, the cost-efficiency ratio will also be accompanied by the improvement and optimization of personnel efficiency and process. We will also continue to pay attention to the government's action to strengthen the rights and protections of flexible employment personnel. The job search group is also an important partner in our business. Their benefits and security guarantees are very important to us. We will also firmly implement the policy of the country to upgrade the protection of the job search group. But for our entire industry, our unit price is now at a level of about 90 yuan. I will translate by myself. As mentioned, in the third quarter, the company also sees there is a strong potential to further reduce the fulfillment expense rate, and we believe that the average price per order is a determining factor. On one side, for our fixed, like warehouse rental depreciation and those fixed costs, as percentage of the revenue will be further diluted as we have a rising average price per order. And on the other hand, the human related variable cost as percentage of per orders revenue will also be further diluted as we can improve the related like the people's efficiency and increase the number of orders. And we will continue to focus and keep focusing on the government's initiative to carrying out new measures to enhance the benefits and protection for flexible employment personnel. And we also think riders are important partners in our business, and their benefits and security are critical. We will implement the related policies and continue to upgrade our riders' welfare to improve their happiness. And at the same time, we want to emphasize our average price per order is nearly 90 RMB per order. And for each order, actually the last mile, the rider expense is less than 5 RMB. So actually it takes on a very small percentage as percentage of the AOV. So the related increase of the social welfare will not have a material impact to our fulfillment expense as overall speaking.

Let me answer the second question. I think we can see from the Q3 business figures, if we look at some more seasons, we will see that the company actually has a clear timetable to promote our entire supermarket business to achieve the transfer rate of profit and loss, and to ensure that the entire business achieves the transfer rate of operating cash flow. We have a timetable for this. From the current implementation plan, it is better than our timetable. Especially in the fourth quarter, we will see a continuous improvement of 8 to 10 points in the entire business profit rate, while maintaining the growth trend of the entire business. So I think this is because of the two engines that we just mentioned, the two engines of our high-quality growth, have been completely opened. One is for high-quality users and deep private operations. The other side is for supply and demand. In the supply and demand link, we have a deeper release of operations efficiency, which shows a continuous increase in profit margin and a continuous decline in demand and demand efficiency. We will have a timetable to promote the transformation of our entire supermarket business in demand and profit. So to your second question, the company has a clear timeline to further improve our unit economic model to realize a positive fulfillment profit margin

and also to realize positive operating cash flow. So we see that from the current progress that our execution on this timeline is better than what we expected as we have given out indication that on fourth quarter our operating net loss margin will improve by eight to 10 percentage points. And also we could see that that this kind of improvement is driven by the underneath like two important engines as we mentioned before. First is that our engine to acquire high value customers and deeply operating creating customer value through our private domain operations as well as our high quality services. And the second part is for the upstream, like supply chain side and our fulfillment and logistics side, to further have improvement on the operational efficiencies. So these two engines will drive our growth in first, the gross profit growth, at the same time optimizing our fulfillment and other operating expenses efficiencies. So this is an important factor that's helping us to improve our operating margin, at the same time maintaining a high quality growth. And also addressing from our financial perspective, when we realize a positive fulfillment of a profit level, then we are actually on a good track to turning a positive operating cash flow level.

The first is your user structure. Is it facing mainstream users, middle-class families, and consumer-advanced people? This actually determines your user structure. whether your client has such a need. I think this is actually very important. The second is the ability of your deep supply chain. Can you face the needs of these users, have a good supply chain resource integration and continuous operation, and the ability to optimize operation, in order to obtain a sufficient amount of price and profit margin to meet the needs of the users. The third is actually what we call the density of the basic facility network. Is it possible to achieve the efficiency of the contract under a suitable density? These three elements are the core key elements of the entire profit and return of the contract. Now we can see that these things are moving in the right direction.

So behind the high quality growth was driven the timeline and timetables to achieve a positive fulfillment profit level. There are three core factors. The first one is on the demand side, whether you are facing the mainstream middle class families and who have the upgraded consumption needs and whether you can save this kind of demand. That's the foundation of the future growth of the company. And the second part is on the supply chain part, whether you can integrate the related supply chain resources and to provide sufficient supply for high-quality products. that satisfy the consumer's needs, which is also driving the improvement of the average price per order as well as the gross profit margin. And the third important factor is density, that whether you can operate on the appropriate enough density that helps you to improve the fulfillment efficiency as well as operational efficiencies. These three factors are the key drivers to achieve a positive life fulfillment profit level. We are working hard on these three factors, and also we are seeing good progress in the execution side, and we are on track with our timetable.

Thanks, Charlie. Next question, please.

Our next question comes from the line of Vincent Yu from Needham and Company. Please ask your question.

Thank you, Bonnie. Thank you, Mr. Xu and Catherine. I just want to ask a few questions. Actually, my question and the first question I asked are quite similar. It's about the improvement of our leverage. The first question is about the sales team in our operating cost. I want to ask, now we have uh uh uh uh uh The profit rate has improved much faster than expected. I would like to ask if the whole company or some key regions have any new opinions on this. Finally, I would like to follow up on the first question about the frequency of purchase. I would like to ask if it is convenient to shrink the frequency now. To what extent? How many units can be sold per month? For example, if it is a high-end customer, Hi, management. Thanks for taking my question. I have two questions and a follow-up on the margins question. My first question is about the market expenses and operating expenses. What the current CAC is now and what we see the potential of market expenses optimization? My second question is as the manager has mentioned on the reflection point of operating cash flow, but how about the even margin, seeing that we have improved our margins quite a lot, and what we see for the whole company and for certain markets when these margins turn positive. And lastly is the follow-up on the chance orders placed per customer. You can comment and share what the current level is for an average customer, the shopping frequency, and for an ideal high-end user. Thank you.

Thank you very much for your question. Catherine, please continue to translate for me. I think the first one is about marketing customers. In fact, we just mentioned that most of our high-quality expansion engines are in the acquisition and operation of users. Among them, the customer acquisition is emphasized. In fact, it is a more precise customer. When we turn to the marketing methods of many of our markets, when we focus more on high-quality users, we can see that the efficiency of our entire customer will be improved. Because the user group in front of you So let me translate the first one. So thank you for your question that on the sales and marketing side that we focus on

acquiring high value customers and continuously improving our services and to further boost the new customer growth as well as the repeat purchase by existing customers. So what we have launched is our Mixed Flash Advisor one-stop services, which is focused on private domain operations of our users. So as a result that we see there's a continuously growth of our high value customer base and reducing customer acquisition cost. And from the sales and marketing expense as percentage of the revenue part that we see that in the coming quarters there will be significant reduce in terms of the sales and marketing expense rate in the coming fourth quarter. So that's addressing your first question.

Regarding the second question, in our supermarket business, we have a very clear timetable to promote the entire business to achieve the transfer rate of profit and loss. It is also equivalent to this business itself has achieved the transfer of cash flow. On this timetable, in fact, our factory business will also form a certain scale. Our retail cloud business also enters a very fast growth channel. In that cycle, So in terms of the entire business, I think the entire company still needs to achieve a large market with a community of 120 million people. It is still the first direction of growth. So in the supermarket business, we are not so desperate to achieve the entire business profit. As long as it is in the case of cash loss, we will still prioritize to make the increase faster. To make this this this we are in the first and second line of the market. In the face of the penetration rate of high-quality users and the priority of market share, we can do better. So in this regard, we really don't have a very clear timetable for everyone. The third question is about the shopping platform. In fact, over the past period, we have been continuously promoting a lot of deep user operations, We just talked about two aspects. One is to promote our membership system. The second is to do our private manager service. Through these two aspects, the quality of the purchase of users has been significantly improved. And the improvement of the purchase of users itself is also one of the important factors of our overall growth. You see, half of our 47% growth is from the growth of the number of users. Part of it comes from the growth of the shopping frequency, and part of it comes from the growth of the price. In typical users, it's like buying about six to eight times a month. That's a shopping habit. On average, we have about one to two such groups of customers every week. These groups, these groups of high-end shopping habits, account for our entire income mix. It also accounts for a sufficient proportion. Such a group of users, in fact, is the fastest growing group of users in the past. This is actually the cause of our growth. You can see that the income growth of our entire paid members is 800% year-on-year. And then our high-end, we call it high-end, which is the increase in the number of users in high-end, high-end-priced purchases. It is also the fastest increase in the group of all users. This is the whole thing.

So to address your second question, so our on-demand BMW business that we will continue to work on to turning our fulfillment profit to be positive and also turning the operating cash flow to be positive for this business. On the overall perspective, the group is targeting a massive market with around 12 trillion market size, and also our retail cloud business and our intelligent fresh market business are also growing. So in terms of the timeline of overall business turning operating profit positive, that we will focus on turning the operating cash flow positive first, and we'll still continue to focus on growth in the first tier and second tier cities as we still have a lot of potential to improve our market percentage, our penetration among the high value customer base among first tier and second tier cities. So for the overall perspective that we don't have a clear timeline yet, but we will focus on our Angimang DMW business with improved margins and positive like a fulfillment profit margin and positive operating cash flow for this business. And we'll continue to invest for our growth and also coupled with our retail cloud business and our intelligent fresh market business that we are aiming a large market and with a fast growing outlook. And for your question on the frequency of our customer base, So basically that we have been focused on deepening our customer service, customer operations, and private domain-like services. For example, that we launched our One-Stop Meets Fresh Advisor services. And this is helping to drive the core growth factors. that the core growth factors of the third quarter and the past is first on contracting user, second on shopping frequency, and third on our average price per order. So for a typical customer of Miss Fresh, that they will shop for six to eight times per month. And that means each week for one to two times. And we see that high frequency customers and high value customers are among the fastest growing segment among our customer base. And we are continuing to focus on providing superior services and superior high standard products to tailor made to this batch of consumers. And we also see the revenue contributed by our paid members that grew on a YY basis 800% of growth. That's mainly driven by our continuous improved growth to providing high-quality products and high-quality services. That's driving the shopping frequencies of our high-value and high-frequency customer base.

Thank you, . Thank you, Catherine.

Thank you. Next question, please, up here.

Our next question comes from the line of Thomas Chong from Jefferies. Please ask your question.

早上好,谢谢管理层接受我的提问,也感谢许总,Catherine Ling Ling. 我有两个问题,第一个问题是刚才在PPA Remarks我们也提到我们的既有品牌从增速方面或者是contribution方面都有所提升, We also mentioned that we have high-value customers, ASP, and order frequency. But from the perspective of private people, can we talk about how to improve our GP margins in the future from the perspective of GME? Another question is, we also mentioned that we can be more efficient in acquiring new users. Can you tell us more about the most important method in terms of user acquisition channels? And then, in terms of small cities and mini-programs, what kind of operations have we done? seen their strategies there. Thanks, management, for taking my questions. I have two questions. My first question is about our private label strategies. Given that we have experienced very strong growth momentum on that front, can we talk about our 2022 outlook and strategies on private labels and how it helps to improve our GP margin? And then the second question is also relating to our user acquisition strategies. We understand that the company has a different way to acquire new users, but more from an operational standpoint, can you talk about the main channel that we acquire users and how we are making our sales and marketing as a percentage of revenue continue to achieve a leverage? Thank you.

Thank you very much for your question.

These two questions have a very high quality. In terms of free brands, there is a very detailed plan for each of them. From the perspective of long-term sales, we believe that an online supermarket, in the process of managing its products or its product range, There are three categories. The most basic one is the trade-based supply chain, or buyer, which is to buy things. The next one is called product management, which is to meet the needs of the users to make the entire category of products. At this point, you need to make a selection of products. At this point, you will become a more single product structure and SKU. The next one is called the stage of the free brand. So this shows that the most typical trading methods, such as Walmart, the wholesale market, are more profit-oriented. Only if it makes its product structure into a full-fledged market, such as CM Club, or Costco, will there be a better chance to make a profit on the free brand. Of course, the most extreme ones, such as, for example, a typical clothing store, is a clothing-oriented supply chain and buyer, which is all based on free brands. In the entire development process of priority, I think we have done a very solid job in the second stage. Through continuous deep operation of user demand and deep operation of supply chain, we have done a very good job in the selection of all products. The most direct performance is that we are far ahead of the industry in terms of the ability to hit the customer demand of 4,000 to 5,000 SKUs. It shows that our customer price to the industry, whether it's online or offline. This means that we can start to work on free brands on this basis. Because you are a full-fledged choice, a large number of single products, your supplier structure has been running for many years. At this time, it is a stage where free brands are considered to be a failure. In fact, next year, free brands will be a big year on our supply chain. The sales of the entire free brand has increased by more than 200% in the last three seasons. I believe that such a trend will continue in the future. I believe that the sales of the free brand will reach a certain level in the mid-term of next year. It will also be a powerful engine for the continuous improvement and improvement of our entire retail business. So addressing your question on private label products, we see that from the supply chain development, there are three stages. The first stage is more on channel trade that's more focused on

procurement and the second stage is on category management that you are able to provide full category selection for your customers and the third stage is on private label that we could see that the first part on the trade part is more like for example Walmart and other like supermarkets they are majority of their channels rely on like buyers it's more on trade for commodities And the second part on the full category selection, that's more focused on category management. That's more similar to Sam's Club and Costco, which focus on the capabilities of full category and category management, that they are able to select the correct products among categories to satisfy the consumer's needs. And they are providing a selection among the categories. And after the completion of the category management, it will be the stage for the private label products. And for typical brands would be like UEQ which have a very strong supply chain and they roll out their private label products. And for us that actually Miss Fresh has already laying a solid foundation on the first stage and second stage. and we are able to face our customers to provide a full category selection for our customers. Among our 4,000 to 5,000 SKUs for our speedy delivery SKU portfolio that we are able to select among categories to fit and satisfy the customer's needs. And with the data algorithm and the supply chain capabilities, we already have solid capabilities to satisfy such kind of needs. So for full category selection, that means that you need to have a good category management capability at the same time for a single commodity that you are able to offer big demand over that single commodity, generate a big demand for that single product. So after laying a strong foundation over that, we are going to further develop our private label products. And we see that next year will be a big year for private label products. Now we already have several private label products among all categories on our platform. For example, our Fresh Joy private label products, now already cover over 200 SKUs. That's covering categories including meat, eggs, vegetables, and bakeries. And we are glad to see that the fresh joy, Jiang Anxin products, is gaining momentum. In the third quarter, the sales grew by 250% on a worldwide basis. And we see that it's very, very important that we have laid a foundation in different categories of our private label. And we also have private labels in other categories like diary, et cetera. And we see with the foundation, of the second stage, we already have full capabilities to further develop and it is the correct timing for us to further develop our entering into the private label stage. And the development and expansion of private label products also help us to improve our gross margin and also to further satisfy the customer's quality goods needs.

Oh, the second question is about... The second question is about the continuous improvement of our profit margin. I think I'm also adding something to this. I think the improvement of profit margin is mainly in two aspects. On the one hand, we just talked about whether your users' quality is good or not. When the focus of the users is on the service of goods quality, this type of users, then your profit margin will naturally have a better structural basis. On the other hand, your supply chain deepening and satisfying the users' need for the ability to supply or supply. So these are some of the things that we can see, whether it's in terms of the deep operation of our high-value users. We can see in our internal data that every month, the number of users who purchase at a high level and high unit price has increased significantly. Their monthly flow rate is very good. The flow rate of users is about 98% to 99% per month. At the same time, the monthly flow rate of their business is growing every month. I think this is actually a very good performance. It has a self-growing engine itself. The second one is actually from the other side, which is our supply chain deepening. As we work with the upstream supply chain, whether it is the landing of the priority farm project or the priority factory project, we will have a deeper and more stable long-term cooperation. In fact, for us and the upstream supply chain, the reduction of the total cost of the joint project and the improvement of the profit margin are of great help. So on these two sides, I think we will do more. Then let our profit margin in a So I will add a few more points on the gross margin side. So from the user part, it is very important that you have a high-value, high-quality customer base that who are you facing to.

That's very important in terms of the margin perspective. If you are facing the customers who are focused on high-quality products and high-quality services, then that provides a guarantee for the gross profit margin. And the other side is on the supply chain side, that whether you are selecting the correct portfolio of products to satisfy your customers' needs. whether you have the capability to select and source the correct products and develop the correct products. And among our internal data from our deepening operations from our customers that we see the high frequency and high value customers has already contributed a decent portion of our whole business. And also these customers, their retention rate is also remain high And the sales contributed by this type of customers continues to grow, and they are realizing a self-growing engine among this kind of high-value customer base. And on the supply chain side, we already developed a network of 200 Miss Fresh farms and over 350 Miss Fresh factories. Among the upstream collaborations and synergies among our supply chain ecosystems, that we are able to create better margins along the value chain. And also that we will see that this also help us to achieve a good progress on our timetable to realize a positive fulfillment profit.

Thank you. Next question, please, operator.

Our next question comes from the line of Bian Fu from Prime Number Capital. Please ask your question.

Hi, President Shi, Catherine, Linlin, hello everyone. Thank you for accepting my question. Many questions have been answered before, so I have a few follow-up questions. The first question is about AOV. I would like to hear about the behavior of users. LV has increased by 4% year-on-year, but it has decreased by 8% in comparison. So I'd like to ask, is the decrease behind this mainly due to the growth of new users, or due to other reasons, such as changes in the business structure of Cirrida, or seasonality, and so on? That's one aspect. The second question is, You mentioned the transfer rate in New York and the cash flow transfer. I'd like to ask, based on the company's transfer rate and roadmap, and the current financial situation of the company, do you think the company will need to raise funds again? I will translate in English. So thanks for taking my question. So my first question is about AOV. So year-over-year AOV increased by 4.8%. I just wonder quarter-over-quarter it declined by 8%. Is this driven by increasing first new users? Or is it for there's some other reasons, maybe it's an empty or changing the revenue mix of different services. So that's my first question. And the second question is about capital sustainability. So the company talked about the roadmap to profitability and getting positive operating cash flow. I wonder, With all this roadmap and your current cash on hand, what's your expectation for your capital sustainability in the next year? Do you expect to raise capital somewhere in 2022? Thank you for your question.

First of all, I think about the price of the goods, I think the operation of online supermarkets, the price of goods actually has some It's seasonal. Generally speaking, for example, the 10 o'clock in the third quarter, July, August, and September, it's summer. And then the people eat less meat. And then the fruits we eat, because it's the time when the domestic fruits of our northern hemisphere are more fruity, the proportion of domestic fruits will be higher. So in general, the price of kudan is generally, in terms of the whole year, it will be relatively seasonal. So if it's online supermarket business, I think the annual price will be the same as the seasonal price. The second thing I just mentioned is that the company does have a timetable to calculate our profit and loss rate. uh uh uh uh

So in terms of first your question on the AOV, that we see that AOV is also being impacted by seasonal reasons. For example, like in the third quarter that because it's summertime that people have reduced the demand on meat and some of the heavy like grocery part. And they will have a more like a consumption of fruits and fruits are directly more like sourced from like the local like sources which is relatively like more like lower prices. So that's becoming from a whole year perspective that there is a seasonality on that. That if you see it on year over year basis that we have increased five percent on the the average price per order on year-over-year growth side. And from your question on the capital planning, so the companies do have a good, like, balance on cash and cash equivalent, and we are also seeing improving, like, operating cash flow, like, status. So we'll see, like, depending on the capital market environment and future, like, business development needs, we'll further think about like funding plans. For now that the company doesn't have a concrete plan yet.

In view of time constraints, I will now turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Ms. Fresh Investor Relations through the contact information provided in our website or the PSCT Group Investor Relations. Thank you.

This concludes this conference call. You may now disconnect your line. Thank you.