speaker
Operator
Conference Operator

Ladies and gentlemen, good day and welcome to ZKH Group Limited's third quarter 2024 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.

speaker
Jin Li
Head of Investor Relations

Thank you, Operator. Thank you, everyone. Welcome to our call today. Joining me today on the call, I'm Mr. Eric Chung. our Founder, Chairman, and Chief Executive Officer, and next slide, 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 Securities 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 material from those mentioned in today's press release. A number of potential riskers and uncertainties are included in ZKH Group's public filings with the Securities and Exchange Commission. VKH Group does not undertake any obligation to update this forward-looking information, except 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 share our business update, operating highlights, and financial performance for the third quarter of 2024. After the prepared remarks, we will have a Q&A section. With that, I will turn the call over to Eric. Eric, please. 大家好,欢迎各位参加政风行2024年第三季度业绩发布会。

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

In the third quarter, we are very happy to see that our business structure, quality and stability have been continuously improved. This is due to the fact that over the past few years, we have actively optimized some of the businesses that have no value in the long-term competitiveness of the company. Although these mistakes have had some short-term effects on our overall income growth, but in the long run, this strategy is more conducive to the long-term healthy development of our company's business.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Hello, everyone. Thank you for joining VKH's third quarter 2024 earnings conference call. We are pleased to report continued improvements in our business structure, quality, and resilience during the third quarter, driven by our proactive efforts throughout the year to optimize and withdraw from certain business areas that did not align with our long-term competitiveness. While these optimization initiatives affected our overall revenue growth in the short term, this strategic approach will ultimately foster ZKH's long-term health and sustainability.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

财务方面,三季度我们的GMV和收入分别达到了26.9亿人民币和22.8亿人民币。 虽然公司整体GMV同比略有下滑, But deep into the business structure, our core industry large clients and small and medium-sized clients' business remains stable and growing. After the improvement of the technology, our three-level GMV still has the same two-digit growth. In terms of profit and loss, the interest rate and interest rate continue to maintain a growth pattern. The interest rate rose from 16.3% in the third quarter last year to 17% in the third quarter of this year. Among them, the self-sufficiency interest rate and the commission rate of platform businesses have been significantly increased. At the same time, we continue to get a significant reduction in losses by adjusting the net loss. By adjusting the loss rate from 4.4% in the third quarter of last year to 2.9% in the third quarter of this year, we continue to achieve the same level of improvement in the quarter. It is particularly worth mentioning that This achievement is achieved when we continue to invest in future development, including products, IT, and overseas business.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Looking at our financials, we achieved a GMV of RMB 2.69 billion and a revenue of RMB 2.28 billion in this third quarter. Despite a slight year-over-year decline in GMV, A deeper analysis of our business structure reveals that in our core customer industries, both large key account customers and SME customers continued to deliver steady growth. Excluding the impact of our business optimization initiatives, our third quarter GMB maintained double-digit year-over-year growth. In terms of profitability, both our gross profit and gross margin continue to grow, with gross margin rising from 16.3% to 17% year over year in the third quarter. Notably, the gross margin of our product sales business and the take rate of our marketplace business on the ZKH platform both improved significantly. Additionally, we substantially narrowed our adjusted net loss, with the adjusted net loss margin improving from 4.4% in last year's third quarter to 2.9% this third quarter, marking another quarter of year-over-year improvement. Notably, we achieved these positive outcomes while maintaining our commitment in investing in the future growth of our company, including products, IT capabilities, and global expansion.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

At the business level, we have been insisting on doing the right thing for a long time. The core of the real estate industry is always around creating value for customers and partners. by promoting digitalized and intelligent technology, enhancing product efficiency, and improving service efficiency to help customers achieve long-term stable performance.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

On the business front, we have consistently emphasized our commitment to doing the right things that position our business for long-term success. Creating value for our customers and partners has always been at the core of our mission. Through advancements in digital and intelligent technologies, enhanced product capabilities, and supply chain efficiency optimization, we empower our customers to sustainably reduce costs and improve operational efficiency.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

We have a huge potential customer base. No matter what industry or scale of enterprise, as long as the management is standardized, and good payment capabilities are our potential customers. Big companies are our important customer groups, because on the one hand, these big customers can promote the construction of our supply chain capabilities. On the other hand, leading top central enterprises, foreign enterprises, and private enterprises have a good demonstration effect on small and medium-sized customers. However, the size of the enterprise is just one of the factors we choose for our customers, and not the most important factor.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

We have a large potential customer base. We see businesses of all types, industries, and sizes as potential customers, as long as they are well managed, comply with procurement requirements, and have solid payment capacity and commitment. Large enterprises represent a key segment of our customer base. They not only help drive the development of our supply chain capabilities, but also as leading state-owned enterprises, multinational corporations, and private enterprises, they stand as influential role models for SMEs. However, company size is not the only factor in our customer selection. and it's not the most critical one either. In fact, for us, SMEs with sound management practices, compliance, strong payment capacity and willingness, and a focus on improving overall management efficiency also constitute a high-quality core customer group.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Developing and serving these high-quality core customer groups will drive long-term growth in our business, We mainly adopted the following strategies. Surround high-quality customers and areas, deploy personnel and resources. Our large customer sales team will continue to strengthen customer development capabilities. Currently, in China's China Group, more than 600 companies have become our customers. There are about 400 companies waiting for us to develop. At the same time, Effectively engaging these high-quality core customers and providing them with exceptional service will drive our long-term business growth.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

To achieve this, we've implemented the following key strategies. First, we strategically allocate personnel and resources, focusing on high quality customers and crucial regions. Our key account sales team continues to strengthen its customer acquisition capabilities. At present, we serve over 600 group enterprises out of China's top 1,000 group enterprises in the manufacturing industry. with around 400 in the pipeline for potential future engagement. Meanwhile, we consistently strive to deepen our cooperation with these key account customers. Currently, our average share of their procurement spending remains relatively modest, leaving substantial room for further, deeper engagement and growth.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

In the face of China's vast small and medium-sized customer base and market, Our strategy is through service regional organization management and network-based personnel layout to strengthen customer landing services, accelerate the coverage and acquisition of regional factories. We have selected Shanghai, Shenzhen and other high-quality areas to create regional coverage advantages. At the same time, we also use the Gongbangbang platform to serve small and medium-sized enterprises in the pure e-commerce model. In addition, Online sales of goods and services has also become an important means for our goods and services, and has achieved significant achievements. From January to September this year, our total sales of customers exceeded 75,000. It has exceeded the total number of customers last year, and has increased by more than 30%. In recent years, we have also achieved strategic cooperation with Taobao Tianmao Industries. We hope that through this cooperation,

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Given China's vast number of SMEs, we center our resource allocation strategy on a region-based service approach and a grid-based staffing approach to enhance on the ground services and accelerate regional factory coverage, market reach, and customer acquisition. We have strategically selected Shanghai, Shenzhen, and other high quality regions to establish a competitive edge in regional coverage. We also leverage our GBB platform to serve SMEs and micro enterprises through an e-commerce only model. Moreover, online marketing has emerged as a key customer acquisition channel, yielding impressive results. From January to September this year, We successfully catered to more than 75,000 customers, a year-over-year increase of over 30%. Recently, we also entered into a strategic partnership with Taobao and Tmall's MRO division to further enhance our coverage and service for SMEs.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

to achieve strategic goals from the sales drive mode to the supply drive mode. On the one hand, our product team will continue to organize and manage the products of important industries and customers, carry out product development and stocking in advance, in order to achieve cost and delivery improvement. On the other hand, we will delve into the origin of production, deepen strategic cooperation with suppliers, and form a long-term stable mutual supply-cooperation relationship. Second,

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Our second strategy involves refining product pools and supply chain management and deepening supplier collaboration to transition from a sales driven to a supply driven model. To achieve this, our product team will continue to streamline and manage our product pools for key industries and customers. proactively driving product development and inventory planning to improve cost and delivery efficiency. In addition, we'll deepen our strategic partnerships with suppliers at the manufacturing source, fostering long-term stable and mutually beneficial relationships to further enhance product quality and reduce costs. Currently, the vast majority of our procurement is conducted directly with original manufacturers or their authorized agents, ensuring that our procurement costs remain highly competitive.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

We will continue to expand our investment in product design, R&D, testing, and selection capabilities. In the near future, we are determined to set up a new R&D center in Taichung, Suzhou, by building a free brand product development system, constructing, developing, testing, and technical analysis capabilities, from product targeting, selection, optimization, and other dimensions, to provide customers with more professional product selection recommendations and promote free brand product development and sales. From January to September this year, our free brand GMV reached 4.9 billion RMB, which is 24% of the total growth, and 6.3% of the total GMV,

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

We will further ramp up our investment in bolstering our product design, R&D, testing, and selection capabilities. To that end, we recently decided to set up an innovation and R&D center at our Taichung facility in Suzhou Jiangsu Province. where we plan to establish a proprietary development system for our private label products, strengthening our R&D, testing, and technical analysis capabilities. Ultimately, this will enable us to provide our customers with more professional product selection and recommendation services across product benchmarking, selection, optimization, and more, while also driving the development and sales of our private label products. From January to September this year, the GMV of our private label products reached 490 million RMB, up 24% year-over-year, accounting for 6.3% of our total GMV. Our long-term goal is for our private label products to generate over 30% of our total GMV.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

We will continue to optimize and optimize our AI models through continuous data accumulation and AI models. to achieve the intelligentization of related scenarios of industrial equipment procurement, thereby increasing the efficiency of operation, strengthening the rationality and rationality of decision-making, and pushing the industrial chain to achieve higher values and higher costs. Recently, after the launch of these two AI products, such as AI business assistant and RPA robot, we have also newly launched several AI products, including AI logistics steward, As the third strategy is to elevate

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

operational efficiency, and workforce productivity through AI empowerment. As a digital MRO service platform, VKH is dedicated to leveraging AI to address pain points in the MRO procurement and sales process. Through continuous data accumulation and AI model optimization, we aim to achieve intelligent automation across various procurement scenarios improving our operational efficiency, enhancing compliance and rationality in decision-making, and increasing value at reduced costs along the industry value chain. Recently, following the launch of the AI Connoisseur Assistant and the RPA Robot, we also unveiled an array of new AI offerings, including the AI Material Manager, which is China's first generative AI tool for material management, the AI price comparison assistant, which can quickly identify the best prices among tens of thousands of suppliers' quotes, and the AI product recommendation brain, which helps customers select products faster and more accurately.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Regarding the strategy and progress of overseas business, We also have the opportunity to serve large local customers, because we have already provided services to many foreign companies in China. This is an opportunity for us to use existing customer relationships to connect with the U.S. We plan to officially launch the U.S. independent station on December 1st of this year. At present, we have completed the first stage of product selection, testing, verification, and backup. We will launch more than 1,000 SQs, mainly including personal protection, manual tools, packaging materials, and equipment, and then gradually expand to other categories. After the U.S. business model is basically mature and stable, we will further expand to Canada, Mexico, and the European market. As for the Southeast Asian market, we are using the strategy of following large customers to make domestic large customers in local factories

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Finally, regarding our overseas strategy and progress, we believe mature and developed industrial countries represent ideal markets for our business model. As such, we chose the United States as our first overseas destination and have already set up a local team to provide high-value-for-money products online, catering to US-based manufacturing SMEs. Of course, we also have opportunities to serve larger US customers, leveraging our existing relationships with the China operations of such multinational cooperations. Our US standalone site is scheduled to go live on December 1st, and our product selection, testing, validation, and inventory preparations are almost complete. In this initial phase, we'll launch more than 1,000 SKUs, focusing on categories including personal protective equipment, hand tools, packaging materials, and measuring instruments with plans to gradually diversify into other categories. Once our US business model matures and stabilizes, we'll expand into Canada, Mexico, and Europe. In Southeast Asia, our strategy is to follow our key account customers in China to offer localized services for their factories in that region. Recently, we established a subsidiary in Thailand to support these business operations.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

中国MO市场规模庞大 竞争格局日趋稳定 头部效应凸显 在当前的行业市场环境下 稳健的财务能力 产品力 供应能力 and digitalization and AI capabilities become the key. As China's leading industrial and digitalized service platform, we have already accumulated a certain customer base and established the leading product pool and supply chain system in the industry. In the future, we will continue to expand our investment and build our core competitiveness on the basis of financial documents to expand our overseas market, realize our company's

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

China's MRO market is vast and becoming increasingly stable, with leading companies strengthening their competitive positions and benefiting from their market dominance. In this environment, product and supply chain capabilities as well as digital and AI capabilities are key to success. As China's leading digital MRO service platform, we have built a solid customer base and an industry-leading product pool and supply chain system. Moving forward, we'll continue to invest in elevating our core competitiveness and expanding into overseas markets, while strengthening our financial foundation. to propel the company's long-term sustainable development. Now, I'll turn the call over to our CFO, Max Lai, to present our financial results. Thank you, everyone.

speaker
Max Lai
Chief Financial Officer

Thank you, Eric, and thanks, everyone, for making time to join our earnings call today. I will now provide an overview of our 2020 first quarter financial results. In the third quarter, we continue to deliver solid performance with further improvements in probability and strong GMV growth based on a framework that includes the impact of the optimized business. However, our overall GMV decreased by 7.2% year-over-year to RMB 2.7 billion from RMB 2.9 billion, with the optimized business accounting for approximately 20% of GMV in the third quarter last year. As the optimizer business was primarily generated by the marketplace model, the proportion of GMV generated from marketplace model was about 17% in the third quarter of 2024, compared with 24.7% in the prior year period. Our total net revenues in the third quarter of 2024 were RMB 2.28 billion, representing a slight year-over-year increase of 0.7%, mainly due to an increase in the number of customers, partially offset by effects of business optimizations. Looking at the breakdown of our total net revenues, net product revenues were RMB 2.21 billion, an increase of 2% from RMB 2.16 billion in the prior year period. Net surface revenues amount to RMB 57.7 million, a decrease of 27.8% from RMB 79.9 million in the prior year period, primarily due to a lower proportion of GMV generated by the marketplace model on user-gauge platform, due to the reason I mentioned above. Other revenues were RMB 15.7 million, compared with RMB 21.7 million in the prior year period, mainly due to a lower revenue from operating these services for certain types of machinery and equipment. Gross profit in the third quarter of 2024 grew by 5.1% year over year to RMB 388.4 million, resulting in gross profit margin of 17% compared with 16.3% in the prior year period. The increase in gross profit margin was driven by an improved gross profit margin of product sales model, which rose from 13.9% to 16% year-over-year, and a higher takeaway of marketplace model, which increased from 11.2% to 12.6% year-over-year on the EasyGauge platform. The overall improvement in the gross profit margin was largely due to the expanding proportion of GMV contributed by our private label products, which typically have higher gross profit margin, and changes in our business mix as a result of our business optimization. Operating expenses in the third quarter of 2024 were RMB 493.8 million. Operating expenses as percentage of net revenues were 21.6% compared with 21.7% in the prior year period. Fulfillment expenses in the third quarter of 2024 were RMB 100.2 million, a decrease of 11.8% from RMB 113.6 million in the prior year period. The decrease was primarily attributable to lower employee benefit costs, warehouse rental costs, and distribution expenses. Fulfillment expenses as percentage of revenues were 4.4%, compared with 5% in the prior year period. Sales and marketing expenses in the third quarter of 2024 were RMB 168.2 million, a decrease of 7.7% from RMB 182.3 million in the prior year period. The decrease was primarily attributable to lower marketing and promotion expenses and travel expenses. Sales and marketing expenses as percentage of net revenues were 7.4% compared with 8% in the prior year period. Research and development expenses in the third quarter of 2024 were IMB 49.8 million, an increase of 12.2% from IMB 44.4 million in the prior year period. The increase was primarily attributable to higher employee benefit costs and expenses related to technology and information services, such as cloud services. Research and development expenses as percentage of net revenues were 2.2%, compared with 2% in the prior year period. General and administrative expenses in the first quarter of 2024 were IMB $175.6 million, an increase of 16.6% from RMB 150.7 million in the prior year period. The increase was primarily attributable to higher share-based compensation expenses and allowance for credit losses, which were partially offset by decreased employee benefit costs and travel expenses. General and administration Administrative expenses as percentage of net revenues were 7.7%, compared with 6.7% in the prior year period. Net loss in the third quarter of 2024 were RMB 81.8 million, compared with RMB 97.7 million in the prior year period. Non-GAAP adjusted net loss in the third quarter of 2024 was RMB 66.2 million, compared with RMB 98.7 million in the prior year period. Non-GAAP adjusted net loss margin was 2.9% in the first quarter, compared with 4.4% in the prior year period, showing that we continue to advance along the path to profitability year over year. Our cash position also continued to strengthen. We generated net cash from operating activity of RMB 160.5 million in the first quarter of 2024, compared to net cash used in operating activity of RMB 9 million in the prior year period. Before I conclude, I would like to reiterate our commitment to the referring value to our shareholders. Throughout this quarter, We continue to execute our share repurchase program as announced in June. This ongoing effort underscores our strong confidence in the company's growth prospects and reflects our dedication to create a long-term value for shareholders. With that, I would now like to open the call to Q&A. Operators, please go ahead.

speaker
Operator
Conference Operator

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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 2. 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. At this time, we will pause momentarily to assemble our roster. The first question comes from Leo Chang with Deutsche Bank. Please go ahead.

speaker
Leo Chang
Analyst at Deutsche Bank

Thank you for accepting my question. I have two questions. The first question is, please share with us the situation of Q3 this year in terms of industry and product. My second question is, please share with us the latest updates in the Chinese MRO market and the outlook for 2025, especially some recent stimulus policies that have had an impact on the MRO industry. I'll translate myself. Thank you, management, for taking my questions. I have two questions. My first question is, could management please share with us the performance of product and industry verticals in third quarter? My second question is, Our commencement provides an update on recent China's MRO procurement service market and outlook for 2025, and may increase economy stimulus policies and the company's business outlook for 2025. Thank you. Thank you.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Regarding the first question, from the perspective of the industry, this year's Xinhua Motors Please translate.

speaker
Max Lai
Chief Financial Officer

Thank you very much for your questions. From the perspective of industries, when it comes to EVs, electrical and equipment manufacturing, food, medication, agriculture, communication, electronics, and property management, these sectors have maintained pretty high growth on our platform. But when it comes to traditional ICE cars, mining, coal and construction, including cement and steel. These sectors have seen year-over-year decrease in terms of their procurement on our platform. 从产品维度看, 备品备件里的MRO的紧箍件, 电气自动化, 系统液压, 化学品里的车间化学品,

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

and chemical technology, molding and molding materials, tools and tools for processing, personal protection in general goods, power tools, welding and tape labels, office supplies in the administrative department, etc. are purchased on our platform to maintain a higher market share growth. These types of products generally have a slightly higher profit margin than those with a drop in market share. In terms of products, we have seen pretty high UVA growth for categories such as spare parts, MRO fasteners, electrical automation products,

speaker
Max Lai
Chief Financial Officer

pneumatic and the hydraulic products. In chemicals, we saw high year-over-year growth for workshop chemicals and chemical reagents. For manufacturing, there's grinders, abrasives, knives, measuring tools, and also for general consumables, there's PPEs, power tools, welding, tapes and labels, and also office suppliers for administrative materials. All these things have seen pretty high year-over-year growth on our platform, and these categories tend to have pretty high growth margins as well. And for categories that are seeing year-over-year decreases are cables, wires, renovation products, apparel, furniture, renovation, furnishing materials, and administrative procurement. Thank you.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Regarding the second question, I think overall, the MR market in China has not undergone any fundamental changes. These features include a huge market, a market that is in demand, Are you ready for your next question? Go ahead. Sorry. Yeah, to your second question,

speaker
Max Lai
Chief Financial Officer

I don't think the overall MRO marketing in China has fundamentally changed, meaning it's still a vast market with very inelastic demand, meaning demand has always been strong, and there's lots of customers looking to buy. The market is very fragmented, and it's also going through a transition from procuring offline to procuring online. Let's continue.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

But this market competition or development has also reached a new stage. I think there are three obvious characteristics. The first characteristic, we need to look at the product management capabilities of each company or e-commerce platform, storage capabilities and delivery capabilities. In other words, the products we serve customers Specifically, when it comes to competitive landscape, I think it has also entered a new phase characterized by three things. Firstly, when we compare ourselves with competitors,

speaker
Max Lai
Chief Financial Officer

It comes down to whether you're able to manage your products, warehousing, and delivery capabilities, or are you entrusting those things to a third party to do? So I think being able to do everything in-house is one of our core competencies in this year.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

The second point, the development and research capability of free brand has become a very important competitive indicator. And secondly, the ability to develop our own private labels has become extremely important as a metric of competency.

speaker
Max Lai
Chief Financial Officer

As our share of private labels keeps rising, it will not only help our customers achieve cost downs, but also it will drive up our growth margins significantly. Thirdly, overseas markets are becoming increasingly important in terms of our exploration of those markets and our product R&D locally. So this has become an extremely important source of growth for us.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Although the competition pattern of the entire market has entered a relatively stable period, I think that companies that have no need to reinvest or have already listed will actually have a better chance to focus on business development and focus on improving the value of our customers. And

speaker
Max Lai
Chief Financial Officer

the current competitive landscape has pretty much stabilized so for companies who do not have a need to finance to do more financing rounds or companies who have already become listed companies there's more of an opportunity to focus on developing their own business and to drive value creation for their customers and the zkh is definitely one of them so under today's circumstances it is a very good tailwind and important opportunity for for us to grab. As long as we focus on doing the right things, we will definitely achieve better results.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

So, in terms of 2020 and the future, we are full of confidence and optimism. Because in the course of the past few years, we have not only built our platform development capabilities, But I don't think the flat platform is enough. And the ability to really support B2B industrial products, I think it's a heavy-duty, three-dimensional ecosystem. That is to say, the development of products, even the extension of the production capacity of upstream, etc. These abilities are our future more important abilities.

speaker
Max Lai
Chief Financial Officer

Looking to the future, we are embracing the future with lots of confidence and optimism. Because over the past several years, we have built ourselves out as a platform company, but that alone will not help us succeed and thrive. Because being in the B2B MRO space, just being a platform is simply not sufficient. we have to build out this vertical three-dimensional ecosystem where we develop our products in-house and also reach upstream to acquire manufacturing capabilities as well. So these capabilities are the determinants of our success down the road.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

So that was my answers to these two questions.

speaker
Max Lai
Chief Financial Officer

Thank you.

speaker
Operator
Conference Operator

The next question comes from Ella Ji with China Renaissance. Please go ahead.

speaker
Ella Ji
Analyst at China Renaissance

Thank you. So I just wanted to your management's comments regarding a potential higher tariff between the U.S. and China. What could be the potential impact and what are the company's measurements to help deal with the situation? Thank you.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

Thank you. The U.S. MR market is a huge market. At the same time, So thank you very much for that question. When it comes to the US MRO market, it is a very large and also very lucrative market. Even though there has been several big players around,

speaker
Max Lai
Chief Financial Officer

the market overall is still pretty fragmented. 请继续。 那我们在美国市场的策略呢, 希望用新的方式来跟美国的传统企业来竞争。 那我们给自己打比方的说法, 就是做工业品领域的Costco, 我们更加聚焦于工业品的精品, 核心产品,

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

So our strategy in the U.S. How did I?

speaker
Max Lai
Chief Financial Officer

Our strategy in the U.S. is to break into it and compete with those conventional players with new business models, meaning we are intending to become the Costco for the industrial sectors by way of selecting and cherry-picking the best products. So basically we're minimizing the volume of our SKUs. with better product quality. So with lower costs and fewer SKUs, we are better serving our customers.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

The ML market is a relatively transparent market in the United States. In other words, what kind of products do our customers need? We can see the current market price. The US MRO market has already become a pretty transparent one, meaning whatever products are needed

speaker
Max Lai
Chief Financial Officer

or their ASPs, everything is available and visible. So they can be studied and prepared in advance. Everything is basically on the table. So as long as we keep improving our capabilities and keep our products competitive, we will be able to grow very quickly.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

I've already mentioned that on December 1, which is next month's 1st, the U.S. independent war will be launched. 我们第一轮是先上线1000多个SQ 然后逐渐增加 为了让我们更加聚焦于产品的开发 我们的第一个阶段的仓储物流 都是用第三方的公司来实现的 3PL公司来实现 这样的话 我们希望先验证我们的产品能力 然后再建设我们的供电能力 请翻译

speaker
Max Lai
Chief Financial Officer

Like I said in the prepared remarks, we will be launching our first independent shop on December 1st this year. It will go live with more than 1,000 SKUs before we will gradually expand that SKU base. And for this initial preliminary phase, we will be relying on 3PLs or third-party logistics providers to provide logistical services. So we could focus our energy on validating and improving our product capabilities first before we go out to build out our own logistical capabilities. Please go on.

speaker
Eric Chung
Founder, Chairman and Chief Executive Officer

In order to respond to possible geopolitical reasons or tax reasons, our overseas product supply we must realize the choice of global suppliers to avoid the possible risks in the future. As a global supplier, we are in the process of continuous promotion. We believe that we can avoid the big impact of tariffs in the future. This is the answer to this question.

speaker
Max Lai
Chief Financial Officer

As for your question regarding geopolitical factors and the potential tariffs that we will be faced with, we are tackling those by trying to diversify our supplier base by reaching out to a global pool of suppliers in order to avoid those risks. So we have been pushing for that diversification of suppliers very hard, and we believe our efforts will pay off, and eventually we will be able to circumvent those geopolitical risks. So that was my answer to this question. Thank you.

speaker
Operator
Conference Operator

The next question comes from Sophie Zhang with CICC. Please go ahead.

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Sophie Zhang
Analyst at CICC

So thanks, management, for taking my questions. Could you please give us more details on the strategic cooperation with Tmall, please? Thank you.

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Eric Chung
Founder, Chairman and Chief Executive Officer

Okay, thank you. We know that in China, there are a lot of small-scale manufacturers. Some small-scale manufacturers, their purchasing habits are very similar to their personal purchasing habits. They also like to use The way of commercialization To purchase Taobao industrial products In the category of industrial products There are now more than 100 billion Sales scale There are a large number of Small-scale manufacturing industry customers Then I think Taobao and Zhengfeng Hang Have a good ability to complement At the same time Using Taobao as a platform We can also help Our suppliers better cover some long-term small customers. Because our suppliers, if they develop these small clients themselves, their costs will not be reduced. So whether it is from the ability of HUBU or to help our suppliers, it is a very valuable and meaningful thing. Please translate.

speaker
Max Lai
Chief Financial Officer

So thank you very much for that question. We know that in China there's a lot of SME manufacturers, and their procurement habits are no different from those of individuals. Namely, they all like the e-commerce model, buying online. And the Taobao MRO has already been generating 100 billion plus RMB of annual GMB. So they have covered large quantities of the small and medium sized customers. So we believe there's a complementarity when it comes to the capabilities between our platform and the Taobao. So we can leverage Taobao to help our suppliers to cover our long tail SME customers. Because for our suppliers to develop those long tail customers themselves, the cost of customer acquisition is simply too high to make any economic sense. So for those two reasons, we are working with them.

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Eric Chung
Founder, Chairman and Chief Executive Officer

Taobao Tianmao is a typical platform-based operating method. Zhen Kunhang has the professional capability of industrial products, including the ability to store and deliver. So I think this is a very good ability to complement each other. On the other hand, we can use our good cooperation with suppliers to help these brands open flagship stores on Taobao And for Taobao and Tmall,

speaker
Max Lai
Chief Financial Officer

running like a platform. And when it comes to MRO, it takes warehousing and the delivery capabilities, which we have. So that is what I meant by complementarity. And so by working with the Taobao and Tmall MRO, we can help their suppliers and our suppliers to serve the brands, to open flagship shops on Taobao and Tmall MRO to better serve the SMEs. And also, there are still counterfeits in the MRO space. Counterfeits are still an issue. So by working with the suppliers on Tmall MRO, we can help solve that issue to a very large extent, which will certainly create lots of value for SMEs. So my expectation of this collaboration is that there's a lot of headroom for growth, and it's going to be a win-win collaboration. It will help Taobao develop their customer base better, serve their customers, and it will also help our business grow. That was my answer to your question. Thank you.

speaker
Operator
Conference Operator

And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

speaker
Jin Li
Head of Investor Relations

Thank you, Operator. And thanks once again for everyone joining us today. You can find the webcast of today's call on ir.vkh.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 great day.

speaker
Operator
Conference Operator

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

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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