ZKH Group Limited American Depositary Shares, each representing thirty-five (35) Class A Ordinary Shares

Ladies and gentlemen, good day and welcome to ZKH Group Limited's fourth quarter and fiscal year 2023 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jin Li, head of investor relations. Please go ahead.

Thank you, operator. Thank you, everyone. Welcome to our call today. Joining us today on the call are Mr. Eric Chen, our founder, chairman, and chief executive officer, and Mr. Max Lai, our chief financial officer. During this call, we will discuss our future performance, which are forward-looking statements made under the safe harbor provisions of the U.S. Private Security Litigation Reform Act. Such statements are not guarantees of future performance. and are subject to certain riskers and uncertainties. Some of these riskers are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release. A number of potential riskers and uncertainties are included in VKH Group's public filings with the Securities and Exchange Commission. VKH Group does not undertake any obligation to update this forward-looking information accepted as required by law. During today's call, we will also discuss certain non-GAAP financial measures for comparison purposes only. Please see the press release issued earlier today for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Eric and Max will show our business updates, operating highlights, and financial performance for the first quarter and the fourth year 2023. After the prepared remarks, we will have a Q&A section. With that, I will turn the call over to Eric. Eric, please go ahead.

Hello, everyone. Welcome to the fourth quarter of 2023. Hello, everyone.

Thank you for joining our fourth quarter and fiscal year 2023 earnings conference call, the first since our public listing on the New York Stock Exchange late last year. Our collective team effort and effective execution have gotten us where we are today. And despite macroeconomic uncertainties and challenges throughout 2023, we were able to end the year with solid financial results that placed us on firm ground for future growth.

In 2023, we achieved 11.8 billion RMB GMV, which is 18.2% of the total growth. In the fourth quarter, GMV reached 32.1 billion RMB, which is 20.2% of the total growth. This is the growth achieved in the case of construction and related industry decline. In 2023, our GMV reached 11.08 billion RMB, an increase of 18.2% year-on-year,

In the fourth quarter alone, our GMB increased by 20.2% year-on-year, reaching 3.21 billion RMB. Notably, we achieved this growth amid a downturn in the construction and construction-related industries. This means that we achieved outstanding sales growth stemming largely from our customers in manufacturing sectors, such as New Energy and NEV, manufacturing of machineries as well as chemicals.

In terms of profit and loss, in 2023, we will adjust the profit and loss rate to 2.88 billion RMB and reduce it to 3.39 billion RMB. We will adjust the profit and loss rate from 7.5% in 2022 to 3.3% in 2023. Looking at our bottom line, we narrowed our adjusted net loss by 339 million RMB in 2022 to 288 million RMB in 2023.

and our adjusted net loss margin improved from negative 7.5% in 2022 to negative 3.3% in 2023. Our improving metrics were underscored by our ability to reach break-even in the fourth quarter of 2023 with an adjusted net profit of 27.54 million RMB.

These gains were driven by our investments and efforts over the past year to enhance digital intelligence, product capabilities, and customer service capabilities. Throughout the year, we focused on strengthening our core competitiveness and improving operational efficiency.

To achieve this, we deeply integrated digital and intelligent technologies across our business to systematically build end-to-end digital capabilities spanning the entire value chain. Let's take a closer look at the details.

Our自然的RPA流程机器人以实现我们与Top100客户之间从巡驾、订单、发货到对账开票的主要流程、场景化的自动化

First, we've automated key customer processes and scenarios for our top 100 customers using RPA technology developed in-house to cover processes from inquiries, order placement, shipment, to reconciliation and invoicing.

Our AI business assistant is a dialogue robot developed by AI Big Model and ML Business Intelligence. Our proprietary ZKH AI Assistant, a chatbot developed based on AI models and the MRO industry knowledge base,

has been adopted by 95% of our staff since its launch in May 2023. This tool allows us to respond to a diverse range of business and product inquiries automatically, which significantly improves the efficiency of information gathering and knowledge sharing.

In the key supply and demand matching section, we will provide historical trading data, industry knowledge and expert experience

In the pivotal supply-demand matching process, we have greatly improved product matching accuracy across production lines for inquiries and quotes by using machine learning algorithms to incorporate historical transaction data, industry knowledge, and specialist expertise into our IT system.

Digitalization and intelligent development and application enhance our organization's internal capabilities and operation efficiency. Through the development and application of digitalization and intelligent technology, we connect with more customers to realize the system and complete more online transactions. In 2023, through the amount of online self-fulfilling transactions, Our overall GMV has reached 70%. At the same time, our organizational structure has also been improved, and the operating efficiency has been improved. This makes our overall personnel efficiency 39% improved in 2023, which is very helpful to speed up performance and profit.

Digitalization and intelligence play a vital role in improving our organizational capabilities and operational efficiency. Supported by digital and intelligent technologies, a broader range of customers can now directly interface with our systems, resulting in an increasing number of transactions completed online. In 2023, the amount of sales through digital footprint accounts for about 70% of our total GMB. Meanwhile, thanks to our streamlined organizational structure and enhanced operating efficiency, human resources productivity in 2023 increased by approximately 39%, accelerating our path to sustainable profitability.

Product competitiveness is one of our core competitiveness. We strive to provide customers with a one-stop purchase experience, so we continuously enrich the number of HQs and expand our products. As of now, our number of HQs has reached 17 million. We not only expand, but also deepen our products, especially to increase the strength, to make free brands, and to make product selection and recommendation services for customers, and to deliver high-end products to customers. As of now,

One of our core competencies is our product capabilities. We are committed to providing our customers with a one-stop purchasing experience, so we are continuing to add SKUs and cast a wide net with broad product lines. Right now, we have reached 17 million SKUs. In addition to expanding our product lines, we are deepening our involvement in product development every step of the way. Notably, we've intensified our efforts to grow our own private label products and offer customers an excellent product selection and recommendations, providing high-value products that are readily available. Currently, Private label products account for approximately 5% of our total GMV.

In terms of sales, our strategy is to start with large customers, then gradually cover and acquire small and medium-sized customers through online marketing. In 2023, we strengthened the centralized development ability of K Group customers, the regional service ability of small and medium-sized customers, and the customer capacity of online marketing. In terms of sales,

Our strategy is to focus on large corporate customers first and then gradually target and acquire small and medium-sized enterprise customers through online marketing. Over the past year, we have strengthened our ability to centrally develop and cultivate key accounts with large corporate customers and provide regional services to small and medium-sized enterprise customers. We've also greatly improved our customer acquisition capabilities through online marketing. Furthermore, we completed the transformation of our GBB platform into an e-commerce only platform to reach micro enterprise clients. These synchronized efforts propelled our customer base beyond 66,500 in 2023. an increase of more than 8,500 from 2022.

Next, I would like to share with you some of our achievements in ESG. We actively take on corporate and social responsibilities, promote sustainable development, green and low-carbon concepts, and build an all-round ESG management system. Specifically, in 2023, we promoted the replacement of self-driving car new energy, office and warehouse facilities to carry out LED energy generation and lighting transformation, to reach thousands of suppliers to popularize ESG standards and integrate into cooperation agreements, and to actively return to society through donations and voluntary services. As a result, in 2023, we have won the China Energy Association's carbon comprehensive industry growth enterprise award, as well as the Xinhua Network's double carbon innovation technology development case award,

Next, I'd like to share a few of our initiatives and accomplishments on the ESG front. We take our corporate social responsibility very seriously and are actively taking steps to ensure sustainable product development while implementing green and low carbon practices. We've built a comprehensive ESG management system. In 2023, this included adopting more new energy vehicles in our fleet, and retrofitting our offices and warehouses with energy-saving LED lighting. We also promoted ESG standards to thousands of our suppliers by including them in our cooperation agreements and actively gave back to the community through donations and volunteering. These efforts were recognized by the China Energy Conservation Association which named ZKH as one of the most promising enterprises for carbon neutrality in 2023. We also received the Dual Carbon Innovative Technology R&D Case Award from Xinhuanet.

Looking forward to the deepening of products and digitalization in 2024, and strengthening the global market is our main strategic goal, in order to consolidate and expand our leading position in the field of industrial products.

Looking ahead to 2024, our key strategic objectives are to consistently invest in products and digitalization and accelerate our globalization to bolster and expand our leadership in the MRO industry.

首先,我们将继续提升RPA流程机器人的覆盖率,计划2024年覆盖Top 500客户。 First, we will expand the deployment of RPA technologies

with which we aim to cover our top 500 accounts by the end of 2024, further elevating our overall process automation. This year, we'll also launch our ZKH AI Assistant to our customers and suppliers. Additionally, we're looking to develop a large model within the MRO vertical domain to enhance our ZKH AI Assistant features Improving its efficiency and performance in understanding customer needs, selecting products, responding to requests for quotations, and product matching.

In terms of product power, we will continue to promote products to be of better quality and lower cost. Based on the characteristics and development stages of different products, we will deeply participate in product definition, selection, development, and even intelligent manufacturing. In terms of product capabilities, we will continue to enhance our product quality and lower cost across our product portfolio.

tailoring our approach to each product's distinct features and development stage, we will selectively engage in comprehensive product development, including definition and selection, research and development, and even the smart manufacturing process. We'll create flagship products for each product line and consistently invest in bolstering our private label products. At the same time, We're looking to deepen our partnerships with suppliers, pooling resources, and fostering strategic alliances with compatible supplier partners to realize greater cooperative synergies.

In terms of opening up the overseas market, we will go to the U.S. for the first time this year, and enter the U.S. market with a high-performance and high-performance product strategy. Currently, we are in the process of selecting and setting up a warehouse in the U.S. Another area of focus lies in our global expansion aspirations.

For 2024, our primary target market is the United States, where we intend to penetrate the market with a product strategy focusing on curated high-value offerings. We're currently advancing towards our goals across product selection, establishing a U.S. company, warehouse site selection, local team recruitment, and the design and launch of a standalone U.S. website. Our team is efficiently executing each of these initiatives, and we expect to officially kick off our U.S. operations during the second half of 2024. Meanwhile, we will actively pursue overseas merger and acquisition opportunities to accelerate our overseas growth trajectory.

Through these four areas of continuous effort and innovation, we believe that we can provide customers with more valuable products and services. to maintain our business growth and achieve long-term development in the global industrial market. As a public company, we demand that we become a company that uses strong sense of mission and social responsibility. The more challenging the environment is, the more we must insist on our mission and values, and insist on doing what we love and are proud of. No matter how the environment changes, we must do our best to achieve our current goals

To conclude, we are confident that with our persistent execution and innovation across these areas, we can provide customers with higher value products and services that will sustain our growth and power our long-term development in the global MRO market. As a public company driven by a passion for improving commerce through transparency and efficiency, We hold a strong and clearly defined sense of purpose and hold ourselves to high social responsibility standards. The greater the challenges, the more committed we are to our mission and values, and the more devoted we must be to pursuing endeavors that we care about and take pride in. As we navigate our evolving dynamic business environment, we remain true to our foundational aspiration. Achieve today, thrive tomorrow. Thank you.

Thank you, Eric. And thanks, everyone, for making time to join our earnings call today. I'll make a slide, therefore, of the company. I will provide an overview of our 2023 fourth quarter and year end financial results. In the interest of time, I will be presenting highlights only. We encourage you to refer to our prior release issues earlier today for complete details. For the fourth quarter of 2023, our GMV increased by 20.2% year-over-year to RMB 3.2 billion from RMB 2.7 billion a year ago. GNV generated from ETH platform grew 18.3% year-over-year to RMB 2.9 billion. And GNV generated from GBP platform grew 41.8% year-over-year to RMB 300 billion. By business model, GNV coming from a product sales model reached RMB 2.3 billion, up 6.8% year-over-year, while GNV from marketplace model was RMB 885.3 million, up 78.6% year-over-year. The proportion of GMV generated from marketplace model was 27.6% for the fourth quarter of 2023, compared with 18.6% in the prior year period. Our total net revenues for the fourth quarter of 2023 were RMB 2.44 billion, representing an increase of 8.2% from RMB 2.26 billion for the prior year period, with increases in all categories of net revenues due to continued growth in MRO market demand. Looking at breakdown of our total net revenues, net project revenues for the fourth quarter of 2023 were RMB 2.32 billion, an increase of 6.2% from RMB 2.19 billion in the prior year period. The increase was mainly attributable to higher revenues generated from ECCH platform and GBP platform, primarily driven by an increase in the number of customers. Net surface revenues for the fourth quarter of 2023 account for RMB 98.6 million, an increase of 73.1% from RMB 56.9 million in the prior year period, primarily due to the growth of marketplace model or ECCH platform. Other revenues for the fourth quarter of 2023 were RMB 20.4 million, an increase of 47.2% from RMB 13.9 million in the prior year period, mainly attributable to high revenues generated from our warehousing and logistics services. Gross profit for the fourth quarter of 2023 grew 10.9% year-over-year to RMB 417.2 million, resulting in a gross margin of 17.1% compared with 16.7% in the prior year period. The increase was driven by the significant growth of marketplace model of ETH platform and a lower gross profit margin on product sales model was due to the impact of inventory write-downs. Operating expenses for the fourth quarter of 2023 were RMB 423.9 million, a decrease of 8.9% from RMB 465.3 million in a year before. Operating expenses as percentage of net revenues were 17.3% compared with 20.6% in a prior year period demonstrating our improved operating efficiency and leveraging. Fulfillment expenses for the fourth quarter of 2023 were RMB 107.8 million, an increase of 9.8% from RMB 98.2 million in the prior year period. The increase was primarily attributable to higher employee benefits costs. Fulfillment expenses as percentage of net revenues were 4.4% compared to 4.3% in the prior year period. Sales and marketing expenses for the fourth quarter were RMB 170 million, an increase of 3.2% from RMB 164.7 million in the prior year period. The increase was primarily attributable to the increased travel as well as marketing and promotion expenses. as business travels and marketing and promotion activities resumed after COVID-19 restrictions were lifted. Sales and marketing expenses as percentage of net revenues were 7%, compared with 7.3% in a year before. Research and development expenses for the fourth quarter were RMB 37.8 million, a decrease of 36.4% from RMB 59.5 million in a prior year period. The decrease was primarily attributable to lower employee benefit costs. R&D expenses as percentage of net revenues were 1.5% compared with 2.6% in the year before. General and administrative expenses for the fourth quarter of 2023 were R&B 108.2 million, a decrease of 24.2% from R&B 142.8 billion in the year before. The decrease was primarily attributable to lower employee benefit costs as a result of reduced average headcounts. General and administrative expenses as percentage of net revenues were 4.4%, compared with 6.3% in the year before. Loss from operations for the fourth quarter of 2023 was RMB 6.8 million, compared with RMB 89.1 million in the year before. Non-GAAP EBITDA for the fourth quarter was RMB 43.3 million compared with negative RMB 56.7 million in the prior year before. Net profit for the fourth quarter of 2023 was RMB 20.2 million compared with net loss of RMB 63.5 million in the year before. Non-GAAP adjusted net profit for the fourth quarter was RMB 27.5 million, compared with non-GAAP adjusted net loss of RMB 62.2 million in the prior year before. Adjusted net profit margin was 1.1% for the fourth quarter, compared with adjusted net loss margin of 3.6% in the prior year period, marking the seventh consecutive quarter of year-over-year improvement. Now I would like to briefly walk you through the highlights of our fiscal year 2023 results. For the fiscal year of 2023, our GMV increased by 18.2% year-over-year to RMB 11.1 billion from RMB 9.4 billion in 2022. By platform, GMV generated from executive platform grew 18.1% year-over-year to RMB 10.1 billion. and GMV generated from GBP platform grew at 19.8% year-over-year to RMB 970.2 million. By business model, GMV of product sales model reached RMB 8.3 billion, up 5.1% year-over-year, with GMV of marketplace model worth RMB 2.7 billion, up 19.2% year-over-year. The proportion of GMV generated from marketplace model was 24.8% in 2023, compared with 15.4% in 2022. The total net revenues were RMB 8.72 billion, representing an increase of 4.9% from RMB 8.32 billion in 2022, with increases in all categories of net revenues due to continued growth in IMO market demand. Net product revenues were RMB 8.34 billion, representing an increase of 3.1% from RMB 8.09 billion in 2022. The increase was mainly attributable to higher revenues regenerated from executive platform and GBP platform driven by the increase in the number of customers. Net service revenues were RMB 307.4 million, an increase of 71.3% from RMB 179.5 million in 2022, primarily due to the significant growth of marketplace model on ESAC-H platform. Other revenues were RMB 72.2 million, an increase of 47.8% from RMB 48.8 million in 2022, mainly attributable to higher revenues generated from our warehousing and logistics services. Gross profit was RMB 1.45 billion, an increase of 10.2% from RMB 1.32 billion in 2022. Gross margin was 16.7% compared with 15.8% in 2022. The increase was driven by the significant growth of our marketplace model on ETH platform. Lower gross margin of product sales model was due to the impact of inventory write-downs. Total operating expenses were RMB 1.85 billion, a decrease of 7.6% from RMB 2 billion in 2022. Operating expenses as percentage of net revenues were 21.2% compared with 24.1% in 2022. showing improved operating efficiency and leverage. Loss from operations was RMB 398.7 million compared with RMB 685.7 million in 2022. Non-GAAP EBITDA was negative RMB 211.9 million compared with negative RMB 561.3 million in 2022. Net loss was RMB 304.9 million compared with RMB 731.1 million in 2022. Non-GAAP adjusted net loss was RMB 287.5 million compared with RMB 626.1 million in 2022. Adjusted net loss margin was 3.3% compared with 7.5% in 2022. As of December 31st, 2023, we had cash and cash recuperance, restricted cash, and short-term investments of RMB 2.12 billion, compared with RMB 2.01 billion as of December 31st, 2022. Net cash used in operating activities with RMB at 59.3 million in the fourth quarter of 2023, compared with net cash generated from operating activities of RMB 31.8 million in the prior year before. Net cash used in operating activities was RMB 567.9 million in 2023, compared with RMB 504.2 million in 2022. With that, I would now like to open the call to Q&A. Operators, please go ahead. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. 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. And our first question today will come from Leah Xiong of Deutsche Bank. Please go ahead.

Thank you, Manager Chen, for accepting my question. Congratulations, Manager Chen, for a very strong performance this quarter. I have two questions. The first question is about your entire industry. Can you share with Manager Chen about the market growth and competitive environment of the industrial product purchasing service industry in 2024? 我的第二個問題是,如果從我們的客戶行業來分,可以請管理層分享一下不同的客戶行業今年的預算的展望如何? I'll translate myself. Thank you, management, for taking my question and congratulations on the strong results. I have two questions. My first question is regarding to the overall industry trend. Could management share the outlook, 2024 outlook, for China's MRO procurement service industry and competitive landscape? My second question is, if we look by customer vertical, could management share the 2024 outlook of our customer spending budget by industry vertical? Thank you.

OK, thank you. I think the overall basic aspect of the Chinese MR market hasn't changed much, because China's manufacturing industry is still the largest in the world. Of course, over the past few years, we have been affected by real estate. Real estate is affected by, for example, the cement industry, the construction industry, including the steel and steel used for construction, and so on. These aspects have been affected. The construction industry In 2021, our sales reached 20% of our total sales. Now it has dropped to 5%. On the other hand, the future impact of real estate-related industries is very small for us. We see that the overall development of China's manufacturing industry is relatively stable, including in the past year, including chemical engineering, coal, seasonal manufacturing, automobile, and so on, these industries are basically relatively healthy. So the big basic face has not changed. This is still a huge stock market. And this huge stock market is also in the process from offline to online. This trend has not changed. This is a very good opportunity to promote our rapid growth. On the other hand, the bigger the challenge the enterprise faces, The bigger the demand for corporate capital, the more obvious it is to solve the trend of purchasing capital in a linear way. From this perspective, it is beneficial to the development of our industry. Another change in trend, as you can see, is the emergence of China's manufacturing industry. More and more Chinese manufacturing industries are moving overseas to deal with the restructuring of the global industrial chain. not only to Southeast Asia, to Mexico, to Europe, etc. There are more and more overseas companies. This situation is also an opportunity for us to develop. In order to meet the needs of our customers, we must decisively go overseas to market and develop. So everyone can see that the service industry industry is now also starting to go overseas. In the choice of going overseas, our choice is not the same as other companies. Our main choice is to go to the US market first, and then Europe, Japan, and other large countries. This logic is because our online business model is more suitable for the purchase system for a harmonious and transparent market. Let me translate it for you. Thank you. Thank you, Mr. Chen.

Basically, the MRO landscape in China hasn't fundamentally changed because the manufacturing sector in China is still the largest in the world. If you look to industries like real estate, related industries like construction, concrete and steel industries, these industries have indeed taken a hit in recent years due to the changes in the Chinese policies and the economy. In 2021, construction accounted for 20% of our GMV, but now it's down to only 5%. Going forward, the impact from the construction sector to us will be minimal. And the manufacturing sector in general is still very stable. So in the past year in China, sectors like chemicals, coal, machinery, manufacturing, cars, EVs, all these have been growing very healthily. So MRO is still a very large existing market and this trend of moving procurement from offline to online has not changed. So this is a great opportunity for quick growth for our industry. And second point is in times that are challenging, the need for the companies to optimize their costs will become even greater. So this online trend, this moving things online thing hasn't really changed and that's really beneficial for the entire industry. In terms of Chinese business going abroad, we have seen a lot of Chinese manufacturers moving their facilities and supply chain from inside of China to Southeast Asia, Europe, and Mexico. They're setting up entities there. So there's more and more companies going to these different geographies, and that is a great opportunity for us because if we want to keep meeting their needs, we need to go where they go. And in terms of going abroad and setting up a presence overseas, our selection, our choice, is different from other companies. So the order is the U.S. market first, followed by the EU and Japan and other developed Western markets. The logic behind that is the online model suits better with companies or rather with the markets that are compliant and transparent. Chen Long, please continue.

Okay. We just mentioned the competition of the market. I think when it comes to In 2023 and 2024, we are more and more aware that the competition between companies, our industry, is still relatively stable and leadership. In addition, I think the advantages of leading companies are becoming more and more obvious. Because our core competitiveness construction, including cost and efficiency, has a great advantage in terms of value creation for our customers. Please help me translate.

So in terms of the market competition, in 2023 and 2024, I believe market competition in our industry is getting more stable and more rational. As a market leader, I believe our advantages are becoming increasingly marked because we are enhancing our core competitiveness and our cost advantages and bringing benefits to our customers.

So the

MRO industry is a large existing market and the different types of companies exist in this market and there's different types of business models and we believe there's good opportunities for all. And as for us, we decided to focus on MRO and we hope to become the most specialized and professional player in this space.

In general, we will see that in 2023, the growth rate of relatively stable industries will be faster. Let me give you an example. For example, the chemical industry. The chemical industry has grown by 46% last year. Of course, the new energy industry, the new energy car industry will grow faster. For example, the new energy car industry has grown by 147%. The property industry is also a traditional industry, but it is more stable. It is not as fluctuating as the real estate industry. We also have 49% growth. Food industry, mining industry, these aspects have growth. But we will also see industries like cement, indeed there is a decline. The cement construction industry, including the steel industry, also has a decline. Then I judge this year, the impact of the construction industry has come to an end. The negative impact has come to an end. The enterprise will continue to produce. So on this basis, I think there is no problem with the recovery of these industries. In other industries, relatively stable industries, including transportation, chemical, coal, food, new energy, car, property, including electrical equipment, communication, I think there is a chance to achieve 20% or even 30% growth.

As for our customers and the different verticals, in 2023, we have seen that the more conventional and stabler industries have seen higher growth. For example, we grew by 46% in the chemicals vertical last year, and with EV, the growth was even faster, 147% there. With the property management, which is a more conventional business, and more stable, not as volatile as the real estate industry. The growth there was 49%, and we also saw growth with the food and mining industries. Concrete, you know, were things like concrete, business did slide, and with steel industry, the growth there was negative. This year, we believe the negative impact from the construction industry has already been capped, and as people need to go back into construction. So construction needs to continue. We believe there will be some kind of recovery when it comes to construction, the construction business. And for industries ranging from transportation, chemicals, food, EVs, property management, coal, telecom, and communications in general, the growth there will be 20% to 30% this year. Please continue. So that's it from me for this question. Thank you.

Thank you. And our next question today will come from L.O.G. of China Renaissance. Please go ahead.

Thank you for accepting my question. Congratulations on your excellent performance. My question is mainly to understand our company's two areas of growth in 2024. The first is the private label. I would like to talk about the management of the private brand. One of the main goals of 2024 is to focus on the core category. We hope to reach about how much of the overall business. The second is about our first wave. Then I also heard that Guancheng is the first market to be chosen by the United States this year. Then I would like to ask how much budget we will have this year to get the goal of this GNV to the end of the year. And the main way is to choose to break through or choose to follow some overseas So my question is regarding the business development plan and the budget and the target for the two growth areas. One is the private label and the other one is the U.S. expansion. Could management elaborate on the detailed plan for these two growth areas in 2024. Thank you.

In terms of free brands, we focus on general products, luxury products, and non-sensitive products. This is where we start to develop our free brands, especially in the field of production in China, where there is absolute competitiveness. In terms of free brands, last year, we achieved more than 27% of the net profit. We initially estimated that the net profit was around 30%. But there are also some brands that will exceed 30%, at least 30% is our basic goal. Whether it's in China or in overseas markets, free brands are a very important force for us. What we are planning is that in 2024, the growth rate of our free brands, we hope to achieve growth at a speed of nearly three times that of free brands. As I mentioned, in overseas markets, Foreign markets, we are basically prepared to launch in the United States in June. We chose in the United States is in Texas. The first warehouse is in Texas, then to California and the east of the United States, gradually developing. Choosing Texas, mainly considering that Texas's main cost is relatively low. At the same time, it is also more convenient to use Texas to cover the Mexican market. We think using American companies to cover the Mexican market. In our specific approach, our approach in the United States is different from that in China. Our strategy in the United States is to make Costco industrial products, a more elite strategy, because in the United States, it was difficult to organize a supply chain of many products at the beginning. We hope to make elite products so that our supply chain can be built more easily. What about customer coverage? Thank you very much for that question.

So as for private labels, this is definitely a key to our future competitiveness. And our plan is to have 30% of our GMV coming from our private label sales. And this figure was 5% last year. And when it comes to private label product selection, we will start with the products that are more generic in nature, products that are consumables and products where our customers don't have a lot of brand loyalty and are insensitive to exactly which brands they're using. And also products where made in China has a clear advantage in terms of costings. GM gross margin from private label last year was over 27% already. And our goal is to hit 30% for private labels across the board. For some private label SKUs, the GM there might be more than 30%. And we believe, be it the China market or overseas markets, private label will be a very potent force. And our expectation for growth for private label in 2024 is threefold or 3X. For overseas market business development, the plan is to start with the U.S. and our first warehouse in Texas will go live in June. And then we will expand to California, then the East Coast in that order. The rationale behind choosing Texas as the first stop is the costs in Texas are generally speaking lower than other states, and it's more convenient to cover the Mexico market from a geographical perspective. So we're going to use our U.S. market to cover the Mexico market from Texas. Specifically, the approach will be different from our China strategy. So our goal in the U.S. is to become a Costco in MRO. So the product selection-wise, it's going to be more curated and cherry-picked because it's going to be hard in the preliminary stage to be all-encompassing, right? So it's going to be easier to build our supply chain with more highly selected SKUs. And in terms of the customers we're going to target, we're going to serve primarily SMEs and we're going to use purely e-commerce to serve them.

So even though we're going to use the online model to serve SMEs primarily, we also know that a lot of the Chinese companies that are currently

have a presence in Mexico. They are already customers in China and a lot of US companies are also being served by us in China. So some large companies and customers have already approached us and are in talks with us in terms of hoping that we can serve them in those markets as well in Mexico and in the US. So that's something we're planning on doing as well.

From the perspective of supply chain, our suppliers are not only from China. Each of our products will choose the second-hand supplier in the world in order to deal with some changes or risks in the possible supply chain in the future. So our purchasing strategy is a global product selection strategy. Thank you.

In terms of our supply chain strategies, we're not going to just use Chinese suppliers or suppliers that are located in China. For each SKU we're going to sell, there's going to be a secondary or backup supplier. And this is to fend off any potential risks and changes when it comes to supply chain. So we're going to use this global sourcing strategy going forward. Please continue.

On the other hand, a market like this in the United States There are already some large MR companies. The market of MR in the United States is generally a relatively scattered market. In such a market, we actually have a chance. After our U.S. company is established, we have to do one thing as soon as possible. See if there can be a channel company to acquire a channel company. Acquiring a channel company now, plus the competitiveness of our Chinese products. I think this situation will promote our business in the United States.

In terms of the U.S. MRO market, we understand that there's already some large MRO companies around, but overall this market is still very fragmented in the U.S. So a big opportunity for us once we get up and running in the U.S. is to hurry up and look to acquire some significant channel companies or intermediaries in this space in the U.S. So, you know, having an intermediary in the U.S. combined with the competitive products from China is going to propel us to grow faster in the U.S. That was it. Thank you.

Thank you. Our next question today will come from Brenda Zhao of CICC. Please go ahead.

Good evening, Eric and Max. Thanks for taking my questions. I got two here. One is about the GPM. We've seen that the GPM increased 80 bps in 2023. May I know your 2024 strategy for GPM improvements? And second, what's your supply chain and fulfillment infrastructure investment plan in 2024? Thank you.

I think in the early days of our entrepreneurship, everyone's pricing was still very aggressive. At that time, we mainly pursued growth in scale. Of course, it also has to do with the situation of the entire capital market. In the past two years, everyone's entire competitive attitude has also become more and more rational, pursuing financial health. In this case, our price strategy is also to make appropriate adjustments. We need to maintain the appropriate competitiveness of the price. Sure, in terms of improving growth profit margin, there are a number of things that we are working on. First is regarding pricing. In the early days of our business, we priced very aggressively in order to grow our scale.

And capital markets condition were also quite different back then. But in the past couple of years, we've seen the markets becoming much more rationalized and greater focus is being placed on financial health. Therefore, we are adjusting our pricing strategy. We still want to maintain our price competitiveness, but we no longer see a need for over-competition or excessively aggressive pricing.

In order to help customers reduce their costs, another important way to increase the profit margin is to work closely with partners, that is, to reduce costs on a larger scale. At the same time, we have just mentioned free brands. We are constantly increasing the proportion of free brands. It is another very important direction for us to increase the interest rate. We hope that in the next two or three years, the interest rate will not increase by nearly 2%.

Another thing that we're working on is to deepen our collaboration with our supplier partners in order to further help reduce costs for our customers. And the third, which is also an extremely important thing that we're working on, is to grow our private label products as a share of our total GMV. And in the next two to three years, we overall are seeking to grow our growth profit margin by 2%.

Another one is the overseas market. After continuous research on the overseas market, including the benchmark of overseas markets, we found that even with the premise of price competitiveness, the net profit margin in the overseas market is generally more than 50%. We are also benchmarking against our competitors overseas and we are seeing in general our overseas counterparts reaching over 50% in their growth profit margin.

And as we expand our business internationally, we are hoping to also further increase our overall GM, GPM.

In terms of supply chain, I think the overall efficiency of supply chain, including cost reduction, is also an important point of our work. The main investment in supply chain construction in the future is in the automation of warehouses. The investment in this aspect will help to reduce our operating costs and improve our operating efficiency. I think this question is also quite coincidental today. Tomorrow, the automation of the warehouse in Jinggujian will start to be officially used. I will go to the scene tomorrow. This marks the improvement of the automation capability of the warehouse in the entire Zhengyuan industry. Please translate.

In terms of our supply chain efficiency and cost reduction, this is yet another priority that we're working on. Notably, we are increasing investments in automating our warehouses. This will, we believe, further improve our operational efficiency and reduce operational costs. And coincidentally, we are going to launch tomorrow an automated warehouse for fasteners tomorrow, which I will go and open tomorrow. And I believe that with further warehouse automation, we will be able to further improve our GPM as well.

As for the warehouse, We are going to continue to rent our warehouses.

because we believe that there is still an oversupply of commercial warehouses and office spaces here in China, and there is opportunity for us to lower the rents for warehouses. That is my response to your question. Thank you.

And that will conclude our question and answer session. At this time, I would like to turn the conference back over to management for any closing comments.

Thank you once again for joining us today. You can find the webcast of today's call on ir.dkga.com. If you have any further questions, please feel free to contact us. Our contact information can be found in today's press release. Thank you and have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.