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 third quarter 2025 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.

Good morning and welcome to our third quarter earnings conference call. With me, I'm Mr. Eric Chen, our founder, chairman, and CEO, and mixed max line, our CFO. This discussion may include forward-looking statements. Related factors are described in our today's press release. And we will also discuss certain non-GAAP financial measures for comparison purposes only. Please refer to the earnings release for definitions of these measures and a reconciliation of GAAP to non-GAAP results. I will turn the call over to Eric. Eric, please go ahead.

大家好,欢迎各位参加征婚行 2025年第三季度业绩发布会。 在公司全员的全力以赴下, 我们欣喜地看到, 经过近四个季度的业务主动优化和调整, 我们整体业务在第三季度 展现出起稳回升的积极信号。 以成交客户数, Hello, everyone.

Thank you for joining the third quarter 2025 earnings conference call for ZKH Group. In the third quarter, thanks to our team's concerted efforts, we are pleased to see signs of stabilization and recovery in our business following nearly four quarters of proactive business optimization and adjustment. In the third quarter, the number of transacting customers exceeded 70,000, reaching a new quarterly high and strengthening the foundation for future growth. Both GMB and the number of transacting customers among industry T-accounts and regional SME customers continue to grow year over year. The company's gross margin continued its upward trend.

Since then, GMB's revenue and net profit have basically returned to the same level as last year. Looking at the trend at the order level, The number of Japanese orders has increased from about 37 million yuan in July this year to about 52 million yuan in November. The increase is more than 40%. In comparison with last year, Japanese orders also increased by more than 20%. We believe that the number of Japanese orders will continue to increase in the future. Based on the above trends, Please translate.

As a result, our third quarter GMV revenue and gross profit largely recovered to their prior year levels. From an order flow perspective, average weekday order value rose from approximately RMB 37 million in July to approximately RMB 52 million November to date, representing an improvement of over 40%. Compared to the previous year, this level has also grown by about 20%. We expect this positive momentum in average weekday order value to continue through the remainder of the year. Taken together, these advancements underscore that we are firmly back on a growth trajectory. In the third quarter, our total operating expenses were down by 14% year over year to approximately RMB 420 million.

In the third quarter, our operating expenses were down by 14% year over year to approximately RMB 420 million. fell by 78% again, and the net loss rate was reduced to 0.6%. Indeed, in September, we once again achieved a single-month profit balance. We are confident that the fourth quarter will achieve a strong quarter. In terms of cash flow, in the third quarter, the company achieved about 100 million yuan of business activity cash flow. As long as we can reduce the loss greatly, Overall, our profitability meaningfully improved during the quarter.

Operating loss, net loss, and adjusted net loss all narrowed significantly. Our adjusted net loss was down by approximately 78% year-over-year to just RMB 14 million. Our adjusted net loss margin also improved to 0.6%. Moreover, we once again achieved monthly break-even in September, and we are on track to deliver quarterly profitability in the fourth quarter. In terms of cash flow, we generated net cash of approximately RMB 100 million from operating activities for the third quarter, primarily driven by the substantial narrowing of losses and continued optimization of working capital management, including accounts receivable and accounts payable.

The development of business is inseparable from and AI technology to continue to grow, develop, and use. In the third quarter, we have achieved further results in these two areas, driving business growth and operating efficiency to increase at the same time. As a professional one-stop industrial product service platform, the breadth and depth of the product is our basis for growth. Currently, we have a total of 32 product lines. Based on the requirements of different product lines and the appropriate strategy, Some product lines will focus on selection. Some product lines will focus on supplementary products and suppliers. In the third quarter, we have added more than 2.3 million available SQs in the chemical market, machine processing, and transport. The total number of SQs available in the company has exceeded 19 million. At the same time, we have added more than 1,200 suppliers, mainly in the factory, to further

Our business development is underpinned by the ongoing advancement, refinement, and application of our product capabilities and AI technologies. In the third quarter, we continued to make strides in both areas, propelling business growth while enhancing operational efficiency. As a professional one-stop MRO procurement service platform, the breadth and depth of our product offerings are fundamental to our growth. We strategically operate 32 product lines, each with a tailored approach. Some product lines are highly specialized with an emphasis on curation, while others prioritize expanding product variety and supplier base. In the third quarter, we added over 2.3 million sellable SKUs across categories such as chemical reagents, machining, and transmission, bringing our total sellable SKUs to more than 19 million. We also onboarded over 1,200 new suppliers, primarily OEMs, further enriching our product offerings and solidifying our core advantage as a one-stop procurement platform.

GMV保湿,染味素的增长,

Our private label products are a key strategic initiative to provide our customers with high value for money offerings, enhancing our overall product competitiveness. In the third quarter, we launched over 600 new private label SKUs, spanning categories such as security-related products, personal protective equipment, tools, and material handling and storage products. The GMV of our private label products maintained double-digit growth, outpacing the company's overall growth rate. Looking ahead, we plan to steadily increase our private label products contribution to total GMV from around 8% today to approximately 30%.

We will continue to focus on professional and industrial-level ML products, that is, back-to-back products, chemical products, and home-made products. This is also our focus on the important capabilities and values of our business. Therefore, we have established a unique product line, such as the chemical product line represented by industrial lubricant and lubricating agent. We have built a safe and reliable supply chain system, which includes 13 professional chemical warehouses, 3 safety warehouses, and self-supply fleet warehousing capacity. We will continue to strengthen the product selection to the end of delivery, We will continue to focus on professional and industrial-grade MRO categories, that is spare parts, chemicals, and manufacturing parts.

These areas serve as key differentiators and value drivers that set us apart from our competitors. For product lines where we have distinct advantages, such as our chemical product line of industrial lubricants and adhesives, we have developed a robust and reliable supply chain comprised of 13 specialized chemical warehouses three of which are dedicated to hazardous materials, and an in-house fleet for distribution and delivery. We will continue to enhance our integrated capabilities from product selection to last-mile delivery and on-site service, further reinforcing our competitive moat. In the third quarter, our chemical product line achieved double-digit year-over-year GMV growth.

In terms of AI intelligentization, we continue to promote the development of data and applications, focus on the intelligentization of business processes and data governance, and systematically improve the sales and operation efficiency of companies. We have already seen that in our business scenarios, including material processing and management, product selection recommendation, sales transformation, data standardization, process promotion, and other aspects, AI has produced a deep integration. AI has been helping to slow down the effects, promote business growth, enhance R&D efficiency, and support digital assets to become an increasingly important driving force.

In the AI realm, we are continuing to advance our AI infrastructure across both the data and application layers, focusing on intelligent business processes and data governance to systematically improve our sales and operational efficiency. We have already deeply integrated AI across various business scenarios, including material cataloging and management, product recommendation, sales conversion, data standardization, and workflow automation. AI has emerged as an increasingly important driver of cost reduction, efficiency improvement, business growth, R&D productivity, and data asset enhancement.

In the opening event of the 8th China International Import and Export Conference in November, we officially released the self-proclaimed AI model of the consumer. The AI model of the consumer is an AI model in the field of industrial products. It marks a key step in the field of industrial products and AI applications. As one of the core applications of the consumer model, the AI smart workstation achieves a single project order, a single development ticket, Forty-five process scenarios are automated operations to reduce cross-system artificial operations and significantly improve process processing efficiency and platform co-operative capabilities and human resources efficiency. The number of orders per person is close to three seasons, and the number of customers is 42% compared to the number of people. The number of people provided is 52%.

At the opening of the ACE China International Import Expo in November, we officially launched Expert Ling Long, our proprietary AI large model and intelligent agent suite, specifically designed and developed for the MRO industry vertical. Expert Ling Long marked a significant milestone for ZKH in empowering the entire MRO supply chain with AI. Our AI Smart Workbench, one of Expertling's core applications, enables automation across 45 business process scenarios, such as creating orders or issuing invoices with a single prompt. It has significantly reduced cross-system manual operations and enhanced process efficiency, platform-wide synergy, and workforce productivity. measured by order volume processed per employee, in the third quarter, our customer service productivity increased by 42% year-over-year, while procurement productivity increased by 52%.

AI has also become the core engine for us to dig up customer needs and enhance the efficiency of supply and demand. Through AI, we have achieved more accurate product recommendations. Since the launch of the fourth quarter last year to the end of the third quarter this year, we have accumulated more than 100 million yuan in increased sales. In complex business scenarios, AI also performs well. For example, the 300-caliber customer service order that needs to be processed in three hours in the transit area can be completed in just 30 seconds by combining expert experience with AI. Accuracy reaches 98%. Since the beginning of the year, we have introduced AI tools We will continue to develop a self-developed and intelligent purchasing smart body, shorten the use cycle, and improve customer experience.

Moreover, AI has become the key engine for capturing customer needs and improving supply-demand matching efficiency. Our product recum agent continues to improve product recommendation accuracy, generating over RMB 100 million in new incremental sales revenue since its launch in the fourth quarter of 2024, through the end of the third quarter this year. Our AI tools also excel in complex business scenarios. For example, processing a 300-line customer inquiry traditionally takes three hours. By combining AI with expert experience, this task can now be completed in 30 seconds with 98% accuracy. Since the start of the year, we have utilized AI to optimize our product classification models and system rules, boosting the platform's automated product classification rate from 11% to 31%. This not only reduces manual intervention, but also increases product onboarding efficiency and improves the accuracy of matching customer needs. Moving forward, we'll continue to develop our self-service, AI-driven procurement agent to speed up responses and further elevate customer experience.

We, Hangjia Linglong Big Model, are also driving the upgrade of the R&D system. Our R&D team widely uses AI coding tools. The code generation rate exceeds 15%, which greatly improves the development efficiency. Our expert Ling Long large model is also empowering upgrades across our R&D system.

Our R&D teams have widely adopted AI coding tools, with over 15% of our code now being generated by AI, significantly improving development efficiency. Looking ahead, the expert lean loan large model will remain at the core of our AI development, driving deeper technological empowerment across our product, supply chain, and last mile delivery capabilities. We believe that AI is more than a tool. It is a key force reshaping the MRO supply chain ecosystem.

To sum up, the third quarter is a quarter full of results. All of our business lines are steadily advancing according to strategic plans. Business growth is capable of growing. Facing the future, we will insist on deepening our products, drive AI, grow profitably, In summary, the third quarter was highly productive.

We drove steady progress in all of our business segments in line with our strategic roadmap, building stronger growth momentum across the board. Looking ahead, we remain committed to advancing our development goals of product excellence, AI-driven growth, and profitability improvement, delivering long-term value to our customers and shareholders. Now I'll turn the call over to our CFO, Max Lai, to present our financial results. Thank you, everyone.

Thank you, Eric, and thanks everyone for making time to join our earnings call today. I'm pleased to walk you through our robust financial performance, driven by revenue recovery, enhanced profitability metrics, and possible operating cash flows. Let me begin with the top line. Both GMV and revenues returned to approximately last year's levels, with GMV down 2.3% year-over-year to RMB $2.62 billion, and total revenues up 2.1% to RMB 2.33 billion. This performance indicates that the helpings from our business optimization initiatives has largely cycled through, providing greater visibility for renewed top-line growth in the quarters ahead. Notably, the number of transacting customers exceeds 70,000, reaching a new quarterly high and private label GMV grew 16.7% year over year, outpacing the overall business and reaching 8.2% of total GMV. Turning to business quality, our gross margin remained healthy at 16.8%, compared with 17% a year ago. On a GMV basis, our gross margin continued to improve, expanding by 41.5 basis points year-over-year to 14.9%. Specifically, gross margin for our product sales 1P model increased by 11.2 basis points to 16.2% on ExecAge platform and 223.8 basis points to 7.7% on the GBP platform. Our take rate of marketplace model rose by 47.5 basis points, so 13.5% year-over-year. These gains were mainly driven by our optimized procurement cost and a high contribution from our private label products, which typically deliver high margins. On operational efficiency, our disciplines focus on streamline cost and enhancing productivity continue to yield tangible results. Total operating expenses decreased 14.4% year-over-year to RMB $493.8 million, representing 18.1% of net revenues, a significant improvement from 21.6% in a prior year period. Breaking this down, Fulfillment expenses were RMB 90.4 million, down 9.8% year-over-year, reflecting lower employee benefits and warehouse rental costs. Sales and marketing expenses declined 13.2% to RMB 145.9 million, primarily driven by lower employee benefits and travel expenses. R&D expenses decreased 19% to RMB 40%. mainly attributable to lower employee benefits, and general and administration expenses were RMB 145.8 million, down 17% year-over-year, driven by lower employee benefits expenses and lower credit loss allowances. Efficiency gains underpinned margin improvements and a substantial reduction in losses Operating loss narrowed 69.3% to RMB 32.3 million, with margin improving to negative 1.4% from negative 4.6%. Non-GAAP EBITDA improved to a loss of RMB 8.5 million from RMB 62.8 million, with margin improving to negative 0.4% from negative 2.8%. Adjusted net loss narrowed to RMB 14.1 million from RMB 66.2 million and margin improved to negative 0.6% from negative 2.9%. As of 30 September 2025, our cash position remains strong at RMB 1.9 billion. Net cash generated from operating activity was RMB 105.5 million. compared with net cash used in operating activity of RMB 160.5 million in the same period of 2024. To conclude, our first quarter results demonstrate clear signs of stabilization and recovery, underpinned by a more balanced customer mix, a higher margin product portfolio driven by private label growth. and a structural efficiency gain from AI-enabled process optimization and strengthened supply chain capabilities. Looking ahead, we expect to capitalize on this momentum through disciplined investment in AI and data capabilities, continuous enhancement of our product and supply chain capabilities, and focused execution while advancing our international expansion. We remain focused on top-line growth further margin expansion, and loss reduction on our path towards sustainable profitability. Thank you. And I would like to now open the call for Q&A. Operators, please go ahead.

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're 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. Again, you may press star then 1 to ask a question. The first question comes from Xiaodan Zhang with CICC. Please go ahead.

Hello, Mr. Manager. Thank you for accepting my question. From the public information, we can see that the financial industry is also preparing for the listing of Hong Kong shares. I would like to ask Mr. Manager to share his opinion on the current competitive environment of the domestic MRO market. Let me quickly translate my question. So according to publicly available information, JD Industries is preparing for an IPO in Hong Kong. So could management share your views on the competitive landscape of MLO market in China? Thank you.

我觉得京东工业品的上市呢, 对整个行业的推动和发展, 我觉得也是一件非常好的事情。 因为有京东,我们政府好像这样的, to promote the online purchase of iModels, a one-stop purchase, to help companies better reduce management costs. I think this is also an opportunity for the development of the times. Another point, I think China is the world's largest manufacturing country. I think on the basis of China, it should be able to cultivate very world-leading enterprises.

So I believe this JDMRO looking to get listed is a very good thing for ZKH and for the industry at large because it's a very in terms of spreading this idea of doing one-stop purchasing on e-commerce platforms. And it's definitely an opportunity that our times have afforded us. China being the number one manufacturer in the world is actually big enough for leading MRO companies to exist. And these MRO companies can not only serve Chinese manufacturers, but also benefit global ones.

We all know that in the market of MR in China, there are different types of companies involved, including traditional office products companies. They are also involved in the market of MR. I think Zeng Guohang is a professional B2B service company. In the early days of our business, we started to produce industrial products and chemical products in the MR field. So our positioning gives us our own positioning, which is the real professional M.O.W. of such a company. Whether it's in a factory, a hard-to-understand backup, chemical products, processing and manufacturing, these types. On the other hand, you see, we are also in Taichung to build our innovation center. We will be more involved in M.O.W.' 's products. Participate in product research and testing, . . . . . . . .

And in the MRO space, we have seen different kinds of players, including those players traditionally engaged in supplying office supplies. As VKH, we started out in serving and selling chemicals and industrial-grade MROs. So we specialize in selling steel parts, chemicals, and manufactured goods. And we have built an innovation center in Taitung. This goes to show how we are committed to be deeply involved and integrating our services. And so in terms of R&D, testing, product selection, and comparison, and we would like to use this specialty of ours to help our customers better. We have also built our own warehouses and last mile delivery capabilities. So this supply chain capability can not only serve the whole of China, but also the rest of the world.

在整个市场的竞争格局来看, 总体的趋势是竞争格局逐渐趋于稳定。 那头部领先的企业呢, The advantage is that after these years of construction, the advantage is gradually becoming more and more obvious, including the acquisition of our company's large-scale market-based medium-sized enterprises. I think this is a very good proof that our supply chain capacity has been improved. So from this point of view, we will continue to focus on the construction of our professional MOU capacity. This is my overall answer to this question.

And in terms of the competitive landscape, I would say over the years, things have really stabilized. And as leaders in this space, our advantages are becoming increasingly marked. And the fact that we are able to have acquired lots and lots of SMEs goes to show that there has been a great improvement to our supply chain capabilities. So basically, At the end of the day, we are committed and focused on beefing up and enhancing our supply chain capabilities in the MRO space. That was my answer to your question. Thank you.

Are you ready for your next question? The next question comes from Leo Chang with Deutsche Bank. Please go ahead.

Let me translate myself. Thank you, management, for taking my question. Management just mentioned that the company will commit to advancing development goals of probability improvement. What are the reasons the company has not been profitable so far? And how does the company consider and balance between probability and the mid to long-term development investment?

Thank you. The development of the real estate industry has received a lot of investment support. The development of a startup company will have different stages. Generally speaking, in the early stages of entrepreneurship, more attention is paid to the health of the current trend. At this time, the invested funds are more invested in the construction of infrastructure and the construction of the core competitiveness. So at this stage, We say it is a loss. In fact, it is a kind of investment in core competitiveness. I think at such a stage. So I think we have experienced this stage in the past. Now we are gradually entering a new stage of development. That is, from this early entrepreneurial stage, which is based on building core capabilities, to relying on profit, using profit to further build core competitiveness. This is a new stage of development. So we got lots of investment and funding along our journey.

As a startup, startups have different phases, right? In early days, we were more focused on the health of our cash flow. So more of the funds were used and spent on infrastructure build-out and the build-out of our core capabilities and the competencies. So we were suffering losses primarily due to these investments that we made in order to beef up our core competencies. But I believe we are entering a new phase now this is a phase marked by profitability. And we're gonna use some of the profits and the standard profits to further build our core competencies.

陈总,请继续。 那我们这样的发展模式呢, 就是一旦解决了亏损的问题, 一旦开始实现盈利, 那我们就会有什么现象呢? 要经营杠杆的效应就会越来越明显。 那基本的逻辑就是, Now that we are profitable, one thing that is clear is

we are having an increasingly strong operating leverage. Specifically, our expense ratio keeps dropping, while our fulfillment growth margin keeps rising. And our profitability is getting better, and this is very much in line with our original plan for our developments.

总结一下, 回顾一下过去四年的我们的财务的业绩, For example, in 2021, we lost 9.1 billion yuan. There was a lot of investment. In 2022, the loss was 6.3 billion yuan. In 2023, it was 2.9 billion yuan. In 2024, it was 1.6 billion yuan. This year, it is expected that the loss will be significantly reduced. And in the fourth quarter, we are confident that we will achieve record profits.

In terms of specific profits and losses, 21, we made a loss of 910 million RMB due to the lots and lots of investments that we made. 2022, we made a loss of 630 million RMB. 23, losses were 290 million RMB. 24, 160 million. 25, we saw losses greatly narrowed, and in Q4, we are very likely to turn a profit.

从未来来看,我们的GMV保持在15%到20%之间的这样的每年的增长是比较有确定性的。 那怎么样去把握好当下的盈利和长期的发展的这样一个平衡呢? 我们就觉得一方面我们要管理好各种费用,提升各方面的效率, Ah, add to our ability in the market, etc. On the other hand, it is about the construction of core capabilities and the investment in these aspects of the future core competitiveness. We want to continue to promote it under the premise of ensuring profit, including product research, including digitalization and AI research, including overseas markets. What is it to ensure? On the one hand, it is to ensure sustainable profit.

So we are pretty certain that our GMV growth year over year could reach 15 to 20% per year going forward. In terms of how we're gonna go about striking a balance between profitability and long-term growth. I think it comes down a lot to control of expenses. So we will continue to improve our efficiency and control our expenses as well as enhancing our capabilities of customer acquisition. We will also keep investing in our core competencies while ensuring profitability. So these core competencies include R&D when it comes to AI, R&D when it comes to product capabilities, and our overseas business expansion. So we will not only make sure that our profitability is sustainable, but also we will enhance it while ensuring long-term growth. Thank you.

Are you ready for your next question? The next question comes from Ruchen Pan with CITIC. Please go ahead.

Okay.

Generally speaking, we have two aspects in terms of overseas business. One aspect is to serve Chinese companies overseas. As you all know, our Chinese manufacturing industry is in the process of globalization. We have to do this service well. This is one aspect. The other aspect is what we plan to do in the United States, including the development of this business in Europe. After a year of testing, in the future, our entire overseas business There will be appropriate adjustments. The first aspect of the adjustment is that in the short term, we will pay more attention to the services of Chinese enterprises. This aspect of investment is also relatively limited, and business certainty is relatively high. In the third quarter, we have completed the delivery of M2 purchases of many Chinese customers in Thailand, Malaysia, Indonesia, and Mexico, and completed the certification of these countries' products. including customs and so on. So this is a point that Chinese companies pay more attention to. What about the European and American markets? Because the European and American markets, we judge, are a relatively medium-term market. Products entering, including European markets, need a lot of certification and so on. This is not a short-term or rapid growth. Our strategy is to properly control the investment in Europe and the United States. Let me quickly translate the question first.

So looking for, looking out on your latest developments and the future plans for overseas expansion. Could you talk a little bit about how you think about developing your business in the States versus serving Chinese companies as they go abroad? Overall, when it comes to going abroad, there's two parts. One is serving Chinese companies as they go abroad, as there's lots and lots of Chinese companies that are currently taking their business globally. Also, we're going to develop business in the U.S. mainland and Europe. We're actually already actively doing that. But after a period of testing things out, we have made some adjustments as well. So firstly, we still highly value Chinese companies going abroad and because investments there on our part are pretty limited and the certainty of this business is very high. So in Q3, for example, we have already finished the MRO purchasing and delivery for some of our customers, for quite a few Chinese customers rather, in Thailand, Malaysia, Indonesia, and Mexico for their local factories. And we have finished things like product certification, customer clearance, et cetera. As for our business in the U.S., we believe that's going to be a mid- to long-term play because it's going to take longer time in terms of product prep, getting to the market. So we have decided to control our investment pace and cadence in the U.S. And overall, we believe our overseas business will achieve break-even in the whole of 2026.

Okay, my answer is over. Thank you.

So that was actually all of my answer to this question. Thank you.

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.

Thank you once again for 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.

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