ATRenew Inc.

AT Renew Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question and answer session after management's prepared remarks. Please note, today's event is being recorded. I will now turn the call over to the first speaker today, Mr. Jeremy Gee, Director of Corporate Development and Investor Relations of the company. Please go ahead, sir.

Thank you. Hello, everyone. Welcome to ATRENEW's third quarter 2021 earnings conference call. With us today are Mr. Kerry Chen, our founder, chairman, and CEO, and Mr. Rex Chen, our CFO. Our third quarter 2021 financial results were released earlier today and are available on our company's IR website at ir.atrenew.com. For today's agenda, Kerry will share his thoughts on our third quarter performance and some updates on our strategy for our city-level service integration model, followed by Rex, who will discuss the financial highlights for the third quarter of 2021. Both Kerry and Rex will join the Q&A session. Before we continue, I refer you to our safe harbor statements in the earnings press release, which applies to this call. Any forward-looking statements that the company makes on this call today are based on assumptions as of today, and the company does not undertake any obligations to update these statements. Also, this call includes discussion of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. Finally, please note that unless otherwise stated, All figures mentioned during this conference call are in Gemini B, and all comparisons are on a year-over-year basis. With that, I will turn the call to Kerry for business and strategy updates.

Hello, investors and analysts. Welcome to the third quarter of the Wanmu Xinsen Group 2021. Hello, everyone, and thank you for joining us on our third quarter 2021 earnings conference call.

We are delighted to share our recent business developments for this quarter, as well as our strategic reasoning.

Before we start, let me share some thoughts regarding China's policies. According to the action plan for carbon dioxide picking before 2030, released by the State Council in late October,

The central authority issued a framework to address initiatives, including the promotion business model, combining internet and recycling. It clearly establishes synergy between the development of the circular economy and carbon reduction initiatives.

We believe that under a favorable macroeconomic environment, the industry in which Wan Wuxing lives has two important characteristics. The first characteristic is long-term. Wan Wuxing leads the second-hand consumer product cycle. We believe this backdrop is favorable to the development of AT Renewal.

Our business model is characterized by sustainability and stability. AT Renew is the leading player in the field of pre-owned consumer electronics transactions and services. Our business evolution derives from an industrial internet model and is in accordance with the nation's goals for the development of the circular economy. Thus, we have strong visibility on our long-term development while steadily evolve with the industry. Now I'd like to walk you through some of our business highlights for the quarter.

首先,万物新生在三季度继续取得了高质量的健康发展。 GMV同比增长56.6%,收入同比增长48%. 服务类收入占比进一步提升至15.2%,去年同期为13.4%。

We achieved notable organic growth in the third quarter, with a year-over-year increase of 56.6% in total GMB and 48% in total net revenues, respectively. As a percentage of total net revenues, net service revenues increased to 15.2% from 13.4% in the same period last year. 我们这里重点讲一下EP产品收入的增长。

The growth of product revenue this quarter is 45%, which is due to the steady growth of our door-to-door numbers and door-to-door performance, as well as the continued strengthening of supply and demand cooperation with partners such as Jindong. Our goal of adding 200 new door-to-door stores this year has been completed in advance in Q3. By September 30, the number of door-to-door stores has reached 956. At the same time, we focus on the quality of the newly opened stores and the continuous operation and improvement of mature stores. In terms of Jindong cooperation, in the case of the traditional third-party store e-sports, the revenue of e-sports players increased by 79.2% and continued to grow strongly. We upgraded the e-sports player service entrance on Jindong App in the third quarter, and improved the purchase and exchange experience of Jindong users.

In terms of 1P business, product revenues grew further, increasing by 45% year-over-year. This was driven by the steady expansion in our AHS store network and our volume of pre-owned device trading with strategic partners such as JD.com. We set a target of adding 200 stores per year at the beginning of 2021, and we have realized this target ahead of schedule. As of September 30th, the number of offline stores increased to 956. We are very attentive to the quality of our newly opened stores as we expand rapidly while also ensuring that we maintain healthy operations in our existing stores. In terms of our trading collaboration with JD, we had another strong quarterly revenue growth at 79.2% year-over-year. We upgraded the portal for one-stop trading on JD in the third quarter to provide users with a more convenient shopping experience, especially in effective preparation for the launch of iPhone 13 lineup and the single-state shopping festival.

This also further explains that, especially in the second half of the economy, the second-hand economy has the characteristics of a retrograde period and can grow in a retrograde way.

Notably, it appears that the pre-owned consumer electronics transaction industry was basically immune to the macro challenges in the third quarter. To elaborate, consumer acceptance towards trading services and shopping for pre-owned devices increased during a slowdown in economic conditions and consumer spending. This demonstrates the circular economy's ability to thrive even during economic slowdowns.

The service income of the platform continues to grow. The income ratio has increased to 15.2%. The service income of the third quarter has increased by 67.3%. This is mainly due to two aspects. On the one hand, there is an increase in the size of the platform's transaction. On the other hand, there is an increase in the comprehensive fee rate. Through better commercial service capabilities, PaiPai has achieved an increase in the fee rate through more competitive service options. PaiPai has achieved an increase in the fee rate through better retail services.

The second highlight is the development of our revenue mix trending in a favorable direction. Service revenues increased by 67.3% year-over-year and accounted for 15.2% of total net revenues in the third quarter. The increase in service revenues was primarily due to the expansion in GMV of our marketplaces and the steadily rising service take rate. This demonstrates that AT Renews So value-added services and the consignment model of HiPi are widely acknowledged by merchants and consumers.

第三个业务亮点是公司的盈利性持续改善。 三季度我们在保持规模继续快速增长的前提下, Nangap 的运营亏损和 Nangap 的净亏损数字环比二季度收窄了约50%。 展望四季度以及明年,我们预计今年四季度将实现

The third highlight is that we are on track to reach profitability in the near future. In the third quarter 2021, non-GAAP operating loss and non-GAAP net loss halved. Looking ahead, we anticipate non-GAAP operating profit and are confident in securing non-GAAP profitability for the fiscal year of 2022. Outside of these highlights, I'd like to take a moment to introduce some details about our strategy update on city-level service integration.

把我们过去积累的C2B, B2B, B2C三条业务线的核心能力以城市为单位。 We allocate our resources in each city and integrate our core capabilities of C2B, B2B, and B2C offerings locally to establish a cohesive operating unit in each city.

We then review the financial performance of each city and provide incentives to the local teams. We then measure city-level market penetration rate to evaluate and optimize growth strategies locally. There are a couple of reasons for implementing city-level service integration. 首先,中國的二手手機市場,供給端和需求端都有比較強的城市地域特徵。

The market penetration rate in the city is a very important indicator. We will share some data here. The sales volume of new machines in each city is divided into our recovery units, including C recovery and B recovery. Calculate the market penetration rate of a city. For Shanghai, our market penetration rate in 2020 was 9.3%, and 12.5% in 2021. However, In 2021, the market penetration rate in more than 70% of the cities in the country was lower than 5%. These data show that not only in cities such as Shanghai and Beijing, the market penetration rate has a great room for improvement. In more cities across the country, the market penetration rate also has a huge room for improvement. We are very necessary to use the city as a guide to carry out economic operations, and use the city's market penetration rate as the core indicator to measure market space and drive business growth.

First of all, China's secondhand mobile phone market has relatively strong geographic characteristics on both the supply and the demand side, and the market penetration rate within each city is a very important indicator. We calculate the penetration rate as the number of recycling orders divided by new direct sales. Take Shanghai as an example. Our penetration rate increased to 12.5% in 2021 from 9.3% in 2020. However, the bigger picture in China is that the penetration rate in 70% of cities are below 5%. These numbers indicate that the ceiling is still quite high and it's meaningful to exploit the growth potential of local markets.

Second, city-level service integration is an extension in reach for our omni-channel platform strategy. Through the consolidation of our C2B, B2B, and B2C offerings,

Following the acquisition of Python Marketplace in 2019, we are able to offer integrated platform capabilities in hundreds of cities for a more refined operation.

Thirdly, the integrated city model strategy is a channel of the company's long-term ability to accumulate. In the past 10 years, Wanwu Xinsheng has accumulated a lot of supply chain capability, scene capability, and user service capability. As of now, we have nearly 1,000 second-hand stores in 195 cities. In addition to seven regional operating centers, there are 67 city-level operating centers, and there are more than 200,000 businessmen and nearly 500 salespeople all over the country. These have formed our firm offline city ability layout. We plan to combine these abilities at the city level, provide better business policies, and open more second-hand repair stores.

Third, it's the natural path in the evolution for our company to explore the city-level service integration strategy following the successful establishment of our supply chain capabilities, service scenarios and customer service capabilities over the past decade. As of November, of a total number of AHS stores nationwide exceeded 1,000. As of September 30th, we have seven regional operation centers, 67 city-level operation stations, over 200,000 merchants registered as buyers or sellers on PJT Marketplace, and a sales team of nearly 500 people to promote PJT Marketplace. These form a solid foundation for the integration of our offline and online capabilities within each local market. We aim to extend consumer reach and to provide premium consumer services through AHS stores and PiPi selection stores while attracting an incremental supply of goods locally.

做好一体化城市模型战略,我们认为有四点重要的意义。 We believe this strategy is meaningful in four aspects. 第一点意义是更加有效的拉动增长。 First, city-level service integration can effectively drive business growth.

We will be able to evaluate growth performance and market potential at a micro level. The analysis could dive deep into each of the business offerings in specific cities, leading to more effective operational optimization. Secondly, we can optimize team structure and personnel, improve resource allocation, and enhance the synergy between all three business offerings, further improving operational efficiency and our cost control. Thirdly, this new management matrix enhances our management and structure capabilities. We are able to review the financials of each city unit to ensure fair incentive mechanisms. Last but not least, the strategy sharpens our competitive edge. The pre-owned consumer electronics industry is not purely online. It requires both online traffic and offline operational capabilities. Over the years, we have invested in offline consumer range and accumulated profound technological capabilities. Carrying out refined management within each city unit will fortify our mode. In the past few months, we have established initial proof of concept for our city-level service integration strategy. Since July, we tested the model with our two pilot cities in Langfang of Hebei Province and Huzhou of Zhejiang Province. In terms of GMV, growth rate in the pilot cities during October significantly outgrew that of the national level. We are delighted to see the efficacy of our city-level service integration and are optimistic about its future results.

Three years ago, we proposed a target of 100,000 stores. This target has now been achieved. The number of stores across the country has exceeded 1,000. Next, we will propose a new strategic goal called 100 times 100 billion. In 2022, we will implement the integrated city model strategy in more than 50 cities. In the next three to four years, we will gradually implement the integrated city model strategy in hundreds of cities across the country, driving business growth from more than 3 billion GMV this year to more than 10 billion GMV in 2025.

Three years ago, we proposed a strategic goal of establishing 1,000 stores across 100 cities. As of today, our total number of offline stores has already exceeded 1,000. Having achieved this milestone, we are setting a new strategic goal of achieving 100 billion GMV per year. In 2022, we will roll out city-level service integration in 50 cities. In the next three to four years, We will gradually expand its implementation to over 100 cities. We seek to secure scalable GMV growth to exceed 100 billion RMB by 2025. 最后更新一点信息,关于集团品牌建设的进展。 11月15日,我们已经将公司的英文名从爱回收International改名为AT Renew,并且启用了全新的官网和IR网站域名。

For the more, on November 15th, we made an announcement regarding changing the name of the company from Ai Huishou International to ATRenew.

which stands for All Things Renew, and updated the domain of our corporate and IR website to atrenew.com. Following our initiative to unify our brand at home and abroad, we continue to actively engage with both domestic and international stakeholders in a timely and transparent manner. With great depth, We also continue to devote ourselves to long-term value creation for the environment and for society along with the development of circular economy in China. With that, I will hand the call over to our CFO Rex to go over the financials.

Thanks, Karen. We are excited to report another strong quarter. Our growth momentum continued with beyond expectation scale and revenue growth. as well as sequential improvement in revenue mix and the margins. We'd like to share with you some financial highlights before we go into a more detailed look at the numbers. Please note that all amounts are in RMB and all comparisons are on a year-over-year basis unless otherwise stated. We maintained strong financial growth with total net revenue increasing by 48%, exceeding the high end of our previous guidance range. Service revenues as a percentage of total revenue improved to 15.2% from 14.2% in the previous quarter. Total GMV grew by over 56%, while our gap operating loss further narrowed to 28.5 million. Gross margin for our 1P product sales business remained stable at 13.3% compared with previous quarter. Going forward, we will focus on consumer electronic categories, including smartphones for our 1P business. reinforce the supply side of high-quality pre-owned products, and continue to improve customer services. In addition, we will expand our retail footprint rationally and improve the operating efficiency of our offline stores. For platform services, the average take rate continues to improve, rising to 4.6% in the third quarter. In addition, our B2B platform enhanced its service capabilities to small and mid-sized merchants and lowered the threshold of conducting trading services for those merchants in low tier set markets and upgraded services to improve user experiences. Moreover, we also optimized our B2C consignment service capabilities with GMV for consignment model contributing to 20% of the total Pi Pi GMV. Nangat fulfilled gross margin remained stable at 12.8%. This number has been around 13% for six quarters. We aim to further cut down fulfillment expenses, leveraging automation, technology, and advanced system. Now let's take a look at the detailed financials. In the third quarter, total revenues increased by 48% to $1,962 million. Total GMV increased by 56.6% to $8.3 billion. Net product revenues increased by 40%. 5% to $1,665 million, while GMV for our 1P business increased by 58.3% to $1.9 billion. The increase was mainly driven by the rapid growth in our trading business, collaboration with JD, as well as the opening of new stores nationwide. The iPhone 13 lineup came to market in late September, and thus showed no significant growth driving force in Q3 revenues, but in Q4. Even so, our trading business grew by 79.2% in Q3. In addition, faster sales growth of 1P devices on PiPi also contributed. Net service revenues increased by 67.3% to 297.3 million while GMV for marketplaces, including PiGT and PiPi, increased by 56.1% to 6.4 billion. This was mainly driven by strong demand from consumers and the merchants alike and the continued expansion of our platform's network effects. As our platform service capabilities improved, the overall service takeaway of our marketplaces grow to 4.6% and the service revenues accounts for a larger proportion at 15.2% compared with 13.4% in the third quarter 2020. Thus, our revenue mix continues to develop in a more beneficial direction. Next, turning to our operating expenses. Operating costs and expenses increased by 49.5% to 2,123 million. To provide greater clarity on the trends in our actual operating-based expenses, we will share the trends of our non-GAAP expenses, which better reflects the views of management. Under the non-GAAP measure, which excludes share-based compensation expenses and amortization of intangible assets Resulting from business acquisitions, total operating expenses increased by 49.1% to $2,001.5 million. Before we go into details, I'd like to mention that we did not have any share-based compensation expenses in the third quarter of 2020. Merchandise costs increased by 46.8% to $1,480. This was in line with the growth of our 1P products business. We didn't have any adjustment to merchandise costs. Fulfillment expenses increased by 61.7% to $273.4 million. This increase was primarily due to, first, an increase in personnel cost in connection with the company's growing business. especially the upfront investments in the expansion of AHS store, number, and city-level operation station network. And second, the increase in logistic expenses and operation center-related expenses, which were in line with the increasing sales of pre-owned consumer electronics, excluding share-based compensation expenses. The net gap fulfillment expenses increased by 57.7% to $266.6 million. Selling and marketing expenses increased by 59.8% to $299 million. This increase was mainly due to, first, an increase in sales promotion and coupon expenses in connection with our 2C business development. And second, an increase in personnel cost in connection with the company's growing business. And third, an increase in sales commissions in connection with traffic acquisition and the sourcing of prolonged devices. Nangap's selling and marketing expenses, excluding share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, increased by 85.5% year-over-year to $205.6 million. Nangap's selling and marketing expenses account for 10.5% of total revenue, decreased by approximately 1% sequentially. General and administrative expenses decreased by 0.2% to $42 million. There was no significant change compared with the previous quarter. Excluding the share-based composition expenses, Nangapit's G&A expenses decreased by 37.8% to $26.2 million. The decrease in G&A expenses reflected an improved cost efficiency in our middle and back offices. Technology and content expenses increased by 71.1% to $65.2 million. The increase was primarily due to the increasing personnel costs in connection to the expansion of the company's research and development activities. Nangap technology and content expenses, excluding SPC and amortization of intangible assets, increased by 62.3% to 59.3 million. As a result, our Nangap operating loss was narrowed to 28.5 million in the third quarter of 2021. and the gap operating margin was negative 1.5% compared with negative 0.5% in the same period last year. As of September 30, 2021, cash and cash requirements, short-term investments, and funds receivable from third-party payment service providers increased to $2,538 million compared with $1,114 million as of December 31, 2020. Of note in September, We procured pre-owned devices in preparation for the shopping festivals during China's National Day and Golden Week and Singles Day, and topped up the balances to third-party payment service providers in preparation for peak period of recycling during the Golden Week. We have gradually recovered these funds as of now. We believe that the sufficient liquidity on hand will be able to fuel our business development and strategic partnerships with which generate lasting shareholder value. Now turning to Outlook, first, we expect the growth target for the fiscal year 2021 to remain unchanged. Second, for the fourth quarter of 2021, the company currently expects its total revenues to be between RMB 2.3 billion and RMB 2.35 billion. This forecast already reflects the company's current and preliminary views on the market and operational conditions. However, some might be mild uncertainties. For example, the occurrence of the COVID-19 Delta variant in multiple regions in China, which might adversely impact our offline stores and the business. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. When asking your question, please take your question in Chinese first and then repeat your question in English for the convenience of everyone on the call. Today's first question comes from George Yu with VOA. Please go ahead.

Kelly, Rex, Jeremy, good evening. I'm very happy to have this opportunity to ask you a question. My question is about some trends in competition as well as in this quarter. The first question is because we see that the 1P interest rate in this quarter seems to have decreased a little compared to the same as last year. Because recently we also saw that there may also be some friends who are doing similar recovery businesses in Paris. I want to ask this. Is this same price increase caused by competition? How should we look at the competition pattern here? And what kind of challenges do we see now? Or what kind of opportunities? Then the second question is about this quarter. We see that the increase in our GMV is still very strong on each business line. The first question is related to the 1P growth margin. We see that 1T growth margin declined slightly over the years. So we'd like to know, is it because of the competitive pressure or any other particular reasons? My second question was related to the strong growth momentum like the company had and also the guidance. Just try to understand what's the volume and the AOV behind this strong growth GMV momentum and how we should understand like ALV and, you know, device, number of devices or transaction volume, which one should be the main drivers of the future growth and how should we understand the trend? Thanks.

Okay, thank you very much. Let me answer this question. First of all, let me answer the question about the interest rate of EP. This year, the entire market environment is still in short supply. So, through the for the investment in the recovery of add-on vouchers, which has increased the strength of the control of the goods, and increased the acquisition of high-quality second-hand goods. Due to our business characteristics, the investment in add-on vouchers will be reflected in the increase in the cost of collection, so it will have a certain impact on the labor. In addition, the recovery channel has also changed. From the perspective of business health, the company actively reduced, although high labor, low-cost, single-priced business channels. This also has a certain impact on our profit margin. We believe that the profit margin of a batch of self-serve businesses will remain relatively stable and continue to improve. We are more willing to sell the sales end at a higher price and return the profit to the recovery end to improve the user experience of the recovery end. In the future, the overall profit margin of the company Thank you for your questions. Firstly, I would like to address your question regarding the gross profit of our wanted business. Supply constraints have become headwinds of the pre-owned industry.

We ensured accessibility to resources of premium pre-owned devices by investing in top-up coupons. As coupons increase the cost of procuring pre-owned devices, such investments are reflected in the increase in merchandise cost, which directly impacts the growth profit. In addition, there were adjustments to the recycling channels to ensure healthy growth The company lowered the proportion of low ASB but high growth margin cooperation from other channels, thus impacting the growth margin. We think that the growth margin for 1B business will remain stable with modest improvement. We tend to increase the recycling price for the betterment of users at the recycling end along with higher sales price. In the future, the improvement of the company's overall growth margin will majorly come from the growing contribution of service revenue while 1P Business continues its contribution.

Then I will answer the question about the industry competition. In general, the growth trend of all new products, including the continued growth in the scale of leading and third-party platform transactions, as well as the steady increase in platform revenue, and the operating loss rate is expected to continue to shrink. The data shows that our business has not been affected by too much competition. The second-hand industry is a core industry with the ability of the supply chain. We are more comprehensive compared to our competitors. We also continue to maintain competitive advantages. Through the third-party monitoring platform, we can see that after Q3, the number of users and traffic of QC businesses continued to decline in the second half of the year. QB platform is more capable, even in the case of basic non-consumption, and the impact on our party business and the small and medium-sized businesses we are good at is relatively small. Third, we are implementing a integrated city model strategy, which will better play out our offline capabilities, advantages and organizational capabilities, and will further expand our competition, leading advantage and pattern.

So to address your question regarding the competitive landscape, regarding competition overall, HREnew has strong growth momentum. This is seen in GMV growth of 1P business and 3P business as well. There is a steady expanding overall take rate of marketplaces as well as a narrowing non-gap operating loss. Our business operation has limited impact from peer players. This is backed by results from our data provider. We firmly believe that the pre-owned industry is driven by the supply chain capabilities. We believe that our all-round development of supply chain capabilities suffices as competitive edge. Through third-party data providers, we noticed decreases in traffic of peer players in the second half of 2021 as reduced marketing investment in the third quarter. We are confident that PJT Marketplace is an attractive platform to meet as small business owners and that the negative impact to the PJT marketplace from its peer players remains limited, even though the peer player platforms take negligible service fees. I'd like to mention that the city-level service integration that we are implementing will give better play to our offline capabilities and structure management advantages and will further widen the gaps with our peer players.

The third question I will answer is about the reason why our three-week trading volume has slowed down. From the financial report, we can see that our unit volume has increased by 23.4% in the three-week period. It seems that the increase in the unit volume has slowed down, but it is mainly due to the change in the unit volume of the business. It is a new business that aims to attract users. It uses a one-dollar model. It is mainly used to deal with tailings. The price of goods is lower. In the third quarter of 2021, it is no longer our focus business. Last year, Q3, the trading volume of Duobao was 850,000 orders. This year, Q3 has only 150,000 orders. This part of the business has a greater impact on the unit volume, but in fact, it has a very small impact on JMV and income, because the price of the customer is only RMB 50. If we remove the unit volume of Doubao Island this year and last year, the unit volume after adjustment is 38.7%. In other words, the growth of our core main business mobile phone 3C unit volume has not been affected or maintained a good state. Thank you.

To address a question regarding the number of consumer products transacted in the third quarter, the number actually increased by 23.4% year-over-year, as you can tell from the earnings release. To clarify, there were decreases in contribution from Pai Pai Fund Bidding, namely Pai Pai Zoubao Dao. Pai Pai Fund Bidding is an innovative project to attract traffic to PiPi marketplace with lower ASP bidding from one RMB. This is no longer an operation with key investment to the operations. Although in the third quarter there were 150,000 transactions on PiPi fund bidding compared with 850,000 in the same period of 2020, the business has minimal impact on GMV as ASP was about 50 RMB. the performance increase in 3P transactions were 38.7% increase year-over-year.

Okay.

Thank you. Thank you. Our next question comes from Lucy Lee at Goldman Sachs. Please go ahead.

Thank you, Carrie, Rex, Jeremy. Congratulations on your performance today. I really want to know more about the integrated city model. Carrie just shared a lot. Can you help us explain the actual path, the specific measures and how to measure them? Also, what kind of investment is there related to this? I also want to clarify, does this mean that our business focus is more towards the present? Going forward. Another question is about the fast hand. Do we have any updates on the business? Congrats, management, for the results, and thank you for sharing. I have two questions in here. Firstly, I would like to learn more about a city-level operation model in terms of our implementation steps and how do we measure success. what's the kind of investment we're looking at and whether this means that we're shifting our business focus to offline. And the second question is on the business update with the question. Thank you.

First of all, let me explain. Our integrated city model strategy does not mean that our focus is completely put on the offline, but rather We have re-organized all our existing capabilities, including online traffic and offline capabilities, into a new combination and configuration using the program as a unit. Our online capabilities are also very important. Because the flow on the line still has to flow down to the bottom of our various cities. Our offline ability layout is a better result for our online flow. The foundation of our development of the integrated city model is very solid. Because we have 1,000 resale stores on the receiving end. There are about 500 B2B offline sales and service teams. On the processing end, We have provided in 67 cities in a front-line operation center way to provide local members with quality inspection and operation capabilities. In terms of sales, our online and offline integration has both online auction and live sales, and also offline auction, selection, and store display sales. These elements are re-combined in the local market. On the one hand, it can improve the flexibility of this service of local merchants, Okay, so to clarify that implementing our city-level service integration does not mean that we are transferring our strategic emphasis purely to the offline model.

Actually, over the years, we have accumulated ample resources for rolling out city-level service integrations, including 1,000 AHS stores on the supply side, 500 B2B sales and service specialists for merchants. On processing, there are 67 city-level operation stations for localized quality control and operational support. On distribution, we integrate online sales channels, including PiPi Marketplace, and live streaming sales channels, and offline display and sales channels through PiPi selection stores. These resources, when rearranged locally, not only improve service agility for local merchants, but also reduce cross-regional shipping and processing, which ultimately optimizes the inventory turnover.

We will look at the specific implementation path of the integrated control model from four perspectives.

So in terms of the implementation, there are four priorities.

First on management, city managers will be in charge of local operations and management.

We are developing a new performance review and incentive mechanism to keep CD managers engaged while reviewing the local business progress of each offering in detail.

第二点在数据经营上,在过去我们是从C2B,B2B和B2C这三条业务线各自的经营角度去看的。 今后我们也将从经营层次的维度去看。 Secondly, on operational metrics,

City-level operational metrics will be reviewed as a localized extension to the operational review of our three main business lines. As such, we are able to evaluate our offerings' aggregate empowerment to local pre-owned transaction markets and local retail stores. Our long-term goal is to exploit local market penetration. 商务政策上是在同一个城市里将爱回收年一门店的经营资格

Thirdly, on local collaboration, we aim to attract more qualified partners and obtain

Premium sources of supply locally through opening up the franchise of AHS store, city-level operation station, PiPi selection stores, and the supplier qualification to consignment sellers on PiPi marketplace. 在业务拉通上,在一个城市里通过线上回收订单的导流,通过爱回收门店以及线下手机新机零售门店的赋能实现全掌紧的收获。

Through the front-end small operation center to provide quality control and custom service, through the online retail service of PaiPai and the joint store business of PaiPai Yanxuan to achieve the QC sales of high-quality goods, through the sales ability of PaiQiTang to achieve the rapid circulation and circulation of all goods.

On business synergy, we aim to realize all local scenarios recycling through leading online orders to offline AHS stores and empower existing retailers within each city. We provide quality inspection and grading services through city-level operation stations. By leveraging PiPi's confinement model and franchise to retail stores, we prioritize the distribution of premium goods to consumers. In addition, PJT Marketplace backs up and guarantees the faster distribution. Through such synergized mechanism, we further increase the efficiency of transactions and turnover.

We test the data and initially verify the effect of the city model. Currently, we are testing in two cities, namely Hefei's Langfang and Zhejiang's Huzhou. The J&V return rate of these two cities in July to October is significantly higher than that of the national market. Q4, we will implement this strategy in more cities, including Chongqing and Suzhou. In 2022, we plan to gradually implement this strategy in about 50 cities. We believe that in the next three to four years, the urban model will be one of our core growth strategies. We will gradually implement it in more cities across the country to promote continuous growth of business. Thank you.

So we preliminarily verified the city level service integration model through testing. From July to October, the sequential increases in GMV of Langfang and Huzhou, our two pilot cities, outperformed the national level. We plan to roll out this strategy in more cities in the fourth quarter, such as Chongqing and Suzhou. We plan to gradually set up test runs in 50 cities in 2022. In three to four years, the city-level service integration will be our core growth strategy. We plan to roll it out in hundreds of cities in China so as to drive our business growth to the next level.

Okay, thank you. Regarding the question of fast hands, due to the fast hands issue, There has been a lot of change in the organization structure. The entrance to our recovery business has already been settled in July. We are still actively advancing the optimization of some of these jobs. So, as there have been some personnel changes at Kuaishou recently, we have

gradually roll out the exclusive cooperation. One implementation is that the exclusive cooperation portal was launched on Kuaishou in July. And we are also actively promoting the recycling business. Currently, on Kuaishou, through live streaming distribution from consumers, there could be approximately 20 million RMBs in terms of GME per month.

Okay, thank you. Thank you.

Thank you. Our next question today comes from Sam Lee at China Renaissance. Please go ahead.

Thank you. Hello, Manager. I am Sam Lee, the Director of the Research Department of Huaxing Basic. Congratulations, your performance is very good. I have two questions to ask the manager. The first is that the sales rate in the last quarter is actually relatively high. May I ask what caused this? For example, is it because of the increase in investment in channels? What about the results? The second question is, in the third quarter, we saw that the cost of the month, the Fulfillment Cost, has also risen. At the same time, we also saw that this quarter, there are more new stores and small stores in the city that love to recycle. How is the performance of the new stores? In the next few quarters, what is the plan for the new online stores and small stores in the city? I will translate it in English. My first question is what are the main reasons behind the increase in the sales and marketing cost in the first quarter? Did you increase the spending on new sales channels? How is new sales channel performing so far? And also, in terms of the fulfillment cost, it has also increased during this quarter. And we noticed that you have opened more offline stores and also city-level distribution centers. Can you discuss the performance of this newly opened facility so far? What's your opening target for the coming quarters? Thank you. Thank you.

Okay. Thank you. Selling and marketing expenses mainly included personal expenses for our B2B sales team, channel fee and commission fees paid to JD, as well as promotion and marketing fees for each different business line. And yes, you are correct. The year-over-year growth of the selling and marketing expense was mainly due to the expansion of our Pi Pi 2C business, including the consignment business and the new channel sales. But the new channel sales and the consignment business contribute to the higher tech rate so they can cover the higher selling expenses compared to the other pop-up businesses. And as you can see, the sequential selling and marketing expenses decreased compared with Q2 2021, which was due to the reasons that we began to take more control over the distribution of the coupons and reduce certain marketing promotion activities. As we leverage multiple marketing approaches, we believe NetGap operating profit closely reflects our views on the performance of the business. Once we can meet our internal target of the NetGap operating margin rate, we will invest more asset expenses and resources to expand our business and the scale. For the question related to the fulfillment expenses, The increase was primarily due to the expansion of new self-operated stores and city-level operating stations. Civil War 56 newly opened self-operated stores and 11 new city-level stations in the third quarter, which were not fully utilized by the end of Q3. Such additional costs totaled 8 million RMB. The labor costs also increased due to more stores and operation centers opened in this quarter. This is expected to decrease in the following quarters once new stores and operation stations become mature. And if we look at the UE of the mature stores and the operation centers, the UE is stable in the store level. We also aim to further cut down fulfillment expenses by leveraging the automation technology and advanced systems in the coming quarters.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to our management for closing remarks.

Thank you. Thank you again for joining the call. A reply to today's call will be available on our IR website. If you have any additional questions, please feel free to contact us or request through the mailbox, ir.atgregion.com. We look forward to speaking with you in our next earnings call. Have a nice day. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.