JD.com, Inc. (JD) CEO Lei Xu on Q2 2021 Results – Earnings Call Transcript
JD.com, Inc. Q2 2021 Results Conference Call August 23, 2021 8:00 AM ET
Company Participants
- Sean Zhang – Director of Investor Relations
- Lei Xu – CEO
- Sandy Xu – CFO
Conference Call Participants
- Ronald Keung – Goldman Sachs
- Thomas Chong – Jefferies
- Eddie Leung – Bank of America
- Jerry Liu – UBS
Operator
Hello, and thank you for standing by for JD.com ‘s 2021 Second Quarter and interim earnings conference call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question and answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Mr. Sean Zhang, Director of Investor Relations. Please go ahead, sir.
Sean Zhang
Thank you, Leslie (ph). Good evening and good morning, everyone. Welcome to our 2021 Second Quarter and Interim Result Conference Call. Joining on the call today are Mr. Lei Xu, CEO of JD Retail, and Ms. Sandy Xu, JD.com CFO. For today’s call, Lei will kick off with opening remarks and Sandy will discuss the financial highlights.
Both Lei and Sandy would [Indiscernible] the Q&A session. Before we continue, let me refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make forward-looking statements. Also, this call will include a discussion of certain non – GAAP financial measures. Please refer to our earnings release,
Sandy Xu
Which contains a reconciliation of non – GAAP measures to the most directly comparable GAAP measures. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB. And now, I would like to turn the call to the CEO of JD retail, Mr. Lei Xu
Lei Xu
[Foreign]
Interpreter
Hello, everyone. This is Xu Lei CEO of JD Retail. Thank you for joining our earnings call today.
Lei Xu
[Foreign]
Interpreter
I believe you have all paid attention to and been concerned about the recent regulatory changes as shared 2 months ago on JDs Investor Day. Our observation is that these challenges are essentially adopted efforts made by the government as the industry undergoes high-speed growth. Regulators are working to bring platform economy-based enterprises into a standard regulatory framework, which can effectively rectify and regulate misconduct such as disorderly capital expansion, monopolistic contacts, and so on.
Lei Xu
[Foreign]
Interpreter
Therefore, we believe these policies are not intended to restrict or suppress the internet and relevant industries, but rather to create a fair and orderly business environment and promote long-term and sustainable development of these industries.
Lei Xu
[Foreign]
Interpreter
We believe that the regulatory goals are conducive to JD’s long-term business growth. So far, our business maintains steady growth while committing to best compliance practices. Looking at JD’s development in the past 18 years, our business model and strategy are proved to better position us moving forward in line with the general direction of regulations in China and even global markets.
Lei Xu
[Foreign]. [Indiscernible] [Foreign]
Interpreter
First, JD’s longstanding business principle of doing business in the right way echoes the movement towards the principle of business for good. Since day one, our priorities have remained the same. We always put customers’ needs at the core, respect every employee, and provide them with all-around safeguards, open up our capabilities to fully empower our business partners to achieve win-win results. On this journey, we keep on creating and sharing value for our stakeholders while doing our utmost to take on as much social responsibility as possible. Some of which are even beyond our scale. We believe these acts are worthy of recognition in China and across the world.
Lei Xu
[Foreign]
Interpreter
Second, JD.com is a new type of industrial enterprise that has both the traits of the real economy and digital technologies, which inherently differentiates us from the platform economy module. JD creates value along the entire industry value chain from providing marketing and transaction technology supports delivery, and after-sale services, all the way to the industry upstream of warehousing, inventory management, product selection, pricing, and manufacturing. By opening up all the various capabilities accumulated over years to the real economy, offering one-stop selection s — one-stop solutions, and continuously enhancing supply chain efficiency, which ensures we achieve a non-zero-sum value co-creation with our users and business partners.
Lei Xu
[Foreign]
Interpreter
At the same time, JD.com itself is part of the real economy, operating and managing more than 23 million square meters of warehouses nationwide and over 9 million self-operated SKUs. We also operate tens of thousands of offline stores, including franchised stores of home appliances, digital products, pharmacies, 7Fresh omnichannel supermarkets, convenience stores, JD auto-car maintenance service stores, and more. While at the same time, leverage our omnichannel model and supply chain capabilities to connect with nearly 1 million based on modern stores out there on the market.
Lei Xu
[Foreign]
Interpreter
In addition, we have close to 400,000 employees including those in our unlisted subsidiaries and affiliates. And a majority of them work on the frontlines in delivery, warehousing, customer service positions, and more. The services they provide cover more than 550,000 administrative villages across China, enabling the country’s 92% counties and 84% rural customers to enjoy same or next day delivery services.
Lei Xu
[Foreign]
Interpreter
Take our delivery personnel as an example. Different from many express delivery companies, we offer full-time jobs with formal employment contracts to nearly 300,000 blue-collar workers. In addition to social insurance and housing fund, we also provide accident insurance subsidies for working under special environment COVID insurance, Employee Relief Fund, and more. This demonstrates the vast social value that JD creates, which sets us apart from platform economy model companies that reap ultra-high profit out of traffic and transaction flow.
Lei Xu
[Foreign]
Interpreter
JD’s business philosophy is to promote quality products and rational consumption. They will provide a best-in-class shopping experience. We are driving healthy growth of brands and merchants, which in turn helps to create stable and large-scale high-quality jobs. This enables us to form a virtuous cycle between commercial and social values. It is also fundamentally in contract to driving the economy into a vicious circle in which normal market competition is disrupted by excessive price subsidies and merchant’s profits are unreasonably squeezed.
Lei Xu
[Foreign]
Interpreter
With all that in mind, we believe JD’s business model and strategy position us well to move forward in line with the general direction of regulatory policy, as we’ll foster healthier growth in the future. Now, I would like to walk you through some of JD Retail’s business highlights in Q2.
Lei Xu
[Foreign]
Interpreter
JD Retail continued high-quality growth in Q2. Not only did we achieve continued top-line growth from a high base last year, but also maintained steady margin expansion on a comparable basis, thanks to our improved supply chain and operating efficiency. Despite the complex competitive landscape, we achieved a GMV growth of 27.7% year-on-year during the 618 Grand Promotion, sustaining the recovery momentum of the entire retail market and upstream industry in China. In a challenging market environment, such results are solid proof of JD’s rising recognition and mind share among customers, suppliers, and brands.
Lei Xu
[Foreign]
Interpreter
This is also evident in the high-quality growth of the active users in Q2 following the milestone of 500 million active users that we achieved on April the 1st. We’re excited to see our annual active usage increased by nearly 32 million, setting a new record of single-quarter net increment. At the same time, we see the quality of new users continue to improve on the aspects of retention rate, shopping frequency, and more.
Furthermore, the average revenue per user of existing users, as well as all users blending, continues to grow. This means that both the user base and their lifetime value on JD increased. There are many other operating and financial highlights in the Quarter that Sandy will elaborate on later.
Lei Xu
[Foreign]
Interpreter
Second, we pressed ahead on the omnichannel strategy. I’ve shared during Investor Day that the rationale behind our omnichannel strategy is to break the glass ceiling for JD’s long-term growth. I’d like to reiterate that only JD’s business model has the ability to truly bend the omnichannel plan.
Lei Xu
[Foreign].
Interpreter
This is because the strategy is founded on JD’s supply and chain capabilities which we have built and honed over the past 18 years with our supply and chain digital operation and integrated marketing capabilities in various shopping scenarios both online and offline. We can synergize with suppliers and partners to effectively meet the customer’s needs that can be met — that can be — that cannot be matched by a purely online platform or B2C model. Moreover, we have built an open platform to adapt to the ever-changing market with an ultimate goal to sell products from all over the world and sell products everywhere in the world.
Lei Xu
[Foreign]
Interpreter
As of Q2, the O2O supply chain and solutions, omnichannel marketing, and other models, JD’s omnichannel business has covered millions of brick-and-mortar merchants. And our goal this year is to further expand our universal capabilities in omnichannel, making breakthroughs in key areas and then introducing these capabilities into more business formats and regions.
Lei Xu
[Foreign]
Interpreter
Third, empowering merchants under the third-party marketplace, we have been working to alleviate burdens and improved efficiency for merchants this year. We introduced the theories of smart operation tools such as simple onboarding process, intelligent customer service management, single advertisements placement, merchants growth center, as well as our integrated supply and chain solution which helped to lower the entry barriers for new merchants and improve their operating growth efficiency.
Lei Xu
[Foreign]
Interpreter
In this quarter, our marketplace business made progress in three main areas. First, the overall number and types of merchants grew both year-on-year and quarter-over-quarter. Second, merchants’ operating efficiencies, satisfaction levels, and retention rates further improved. And third, the net promoter scores of our marketplace business continued to improve. This all speaks to the increasing recognition of merchants and customers and healthy business growth.
Lei Xu
[Foreign]
Interpreter
We’re encouraged to welcome a number of new brands on JD.com, including BVLGARI, men’s wear Berluti, and other brands enter the LVMH group, as well as many returning brands, including Victoria’s Secret, [Indiscernible].
Lei Xu
[Foreign]
Interpreter
I hope the brand sharing can help you better understand that JD’s business philosophy and model, strategies, and development are moving ahead in line with the general direction of the regulatory and market development. In the current market environment, we believe JD is set to have more strategic advantages and development opportunities over the long term. Finally, I’d like to reiterate that JD is committed to delivering certainty and high-quality growth in a time of uncertainties, and living up to everyone’s support and faith in us. This concludes my remarks today. Now, I’d like to give the floor to Sandy for more details.
Sandy Xu
Thank you, Lei. Hello, everyone. Today, JD is reporting [Indiscernible] second quarter with healthy growth across many of our operation and financial metrics, as well as many exciting progress along our new strategic direction. This is particularly encouraging amidst the dynamic competitive landscape. I’d like to echo what Lei had charged that our persistent performance has clearly been guided from day 1 by our business philosophy of value creation for all, and supported by our unique business model that is deeply rooted in the real economy. As you may recall, we demonstrated the resilience of our business model and execution a year ago at the height of the COVID challenge. I believe we will continue to show resilience and thrive in the current changing environment as well. Before going through the financials let me share a few convincing business progress we have delivered and some of the positive trends we saw during the Quarter. First, I want to add some color to user trends. We are encouraged by the continued growth of our active user base, with our LTM total active users reaching 532 million in Q2, up 27 year-on-year on a high comp from last year. We are excited to welcome 32 million new users this quarter, which is the largest quarterly addition in our history.
We are heartened by the fact that this is driven by the increase in trust and engagement from users with different demographics and diverse demands. We continue to win over price-sensitive users with our growing selection of value for many products and diverse services. Users from lower-tier markets not only continued to contribute nearly 80% of our new users in Q2, but they also accounted for over 70% of our total active users in the last 12 months by shipping address. Along with the healthy growth of our new users, we are also encouraged by the higher engagement from our existing users. More notably, the number of paying members in the JD Plus program grew 30% year-on-year during the quarter, further strengthening its position as the largest paid e-commerce membership program in China.
As Plus members now enjoy a broader array of benefits on the JD app and in offline stores, there are those who continue to increase, reaching over 9 times that of non-app users. So for our brands and merchants, JD Plus creates both effective engagements with JD’s high-value users and meaningful incremental sales. Overall, the improving engagement of our users was reflected in the higher average number of orders per user and the acceleration of total order volume growth to over 40% in Q2, which is faster than our LTM active user growth. We believe our strong user growth is healthy and sustainable. Now let’s turn to our financial performance in the Second Quarter. We set a new Quarterly revenue record of RMB 254 billion in the Second Quarter, up 26% year-over-year against our high comparable base from last year, and maintained a robust 30% two-year K-Cup. Our net service revenues continue to grow rapidly at 49% year-on-year, more than double the 23% year-on-year growth of net product revenues in the Quarter.
Net service revenues were mainly driven by 72% year-on-year growth of logistics and other service revenues. And 35% year-on-year growth of marketplace and advertising revenues. Note that within logistics and other services, the near triple-digit growth of JD Logistics ‘ external revenues was partially offset by the deconsolidation of the Cloud and AI business. Net service revenues contributed 13.4% of total revenues in Q2, up 200 basis points from a year ago, demonstrating the potential of our diversifying revenue growth. Turning to the segment Performance, our core business JD Retail’s revenues reached 233 billion RMB in Q2, with 23% year-on-year growth. Our high cost 33% year-on-year growth in Q2 last year. The two-year revenue CAGR was 28%. We continue to see successful category expansion as general merchandise revenues grew 29.5% year-on-year, and 37% two-year CAGR in Q2. This was led by our supermarket categories, including food and beverage, cleaning, and personal care categories.
Meanwhile, our electronics and home appliance revenues grew 20% year-on-year on the high comp, with a two-year CAGR of 24%. Furthermore, our third-party marketplace business continued to grow faster than our 1P business in terms of both year-on-year and the 2-year taker in the second quarter, especially during our June 18th anniversary sale, boding well for the healthy improvement of our marketplace eco-system. It’s worth highlighting that JD retail’s long LTM active users grew 27% year on year and remains the predominant driver for our new user growth. Thanks to its superior user experience and strong user men share.
The solid revenue growth of our core retail business was accompanied by remarkably resilient margin performance. In the Second Quarter, JD Retail fulfilled gross margin improved 30 basis points year-on-year, and operating margins remained stable at 2.6%. Considering the one-off COVID -related impact, resulting in less resources spent on marketing activities, as well as the social security benefits we received in the Second Quarter last year. The operating margin of JD Retail actually improved in Q2 this year on a comparable basis. Mainly thanks to technology like overall operating efficiency improvement. Our core retail business is set to maintain its trajectory of sustainable, healthy growth and steady margin improvement. Our JD Logistics business remains in a highly secular growth stage.
JD Logistics’ revenues grew 46% year-on-year and 45% two-year CAGR to 26 billion RMB in the second quarter. It’s worth highlighting that JD Logistic is a great example of JD’s commitment to investing in long-term value creation for the benefit of society and taking on more social responsibility. This includes not only creating high-quality employment but also providing sufficient protection and social, as well as commercial insurance coverage for all of our broadband employees.
This [Indiscernible] effort deeply resonates with our employees who do provide best-in-class services to and build a personal connection with our customers. Our efforts have also resonated with the government and regulators evidenced by the social insurance reduction benefits and other supportive measures from the government we received last year. JD Logistics has reinvested these investments — this benefit in logistics, infrastructure, and technology to expand its total adjustable market and support e-commerce development in the less developed regions. While these long-term focusing investments continue to weigh on near-term profitability, it’s encouraging to see that JD Logistics ‘ operating loss has largely narrowed sequentially.
JD Logistics currently operates over 1,200 warehouses with an aggregate gross floor area of 23 million square meters. Our new business segment revenues reached 7 billion RMB in the second quarter with both year-on-year, and a two-year taker accelerating to approximately 60%. The revenue growth of new businesses was primarily driven by the triple-digit growth of Jingxi business and partially offset by the deconsolidation of our Cloud and AI business. Operating loss in new businesses was 3 billion RMB as compared to 2.3 billion in the first quarter, mainly driven by the investments in infrastructure and the capabilities in lower-tier markets.
Jingxi business is on track to meet its long-term goals of improving the cultural supply chain and retail infrastructure efficiency in lower-tier markets, serving price-sensitive customers under the Jingxi brands, and creating value for the local economies. During our June 18th Anniversary Sale, Jingxi sold a total of 22.5 million kilograms of agricultural products with orders delivered from over 200 industrial farms. We are again in a better position to empower local SMEs, including the [Indiscernible] top stores, by providing supply chain support for their businesses and creating diverse revenue streams for them.
Overall, we will continue to pursue new growth opportunities with financial discipline for long-term sustainable growth for our business. Now, turning to the consolidated margin, non – GAAP net income attributable to ordinary shareholders was 4.6 billion RMB. Where the non – GAAP net margin was 0.8% down from 2.9 in the same quarter last year, mainly due to the Social Security reduction we received last year and increased investments in our logistics and new business opportunities to position us for the long term.
Our inventory turnover days further shortened to 31 days in the last 12 months, remaining at the lowest level among leading global retailers, thanks to our continuously improving operating efficiencies, even as the total number of SKUs directly managed by us under the 1P model continued to expand to over 9 million in the second quarter, up from 8 million last quarter. As of June 30th, 2021, cash and cash equivalents, restricted cash and short-term investments added up to a total of RMB 178 billion up from 139 billion at the end of Q1.
Our free cash flow for the trailing 12 months was 31.9 billion up from 22.7 billion a year ago. In summary, we achieved healthy user and topline growth which diversified growth drivers, while maintaining solid profitability in our core retail business. Going forward, we will continue to balance growth and investment while remaining committed to our business philosophy, shouldering our responsibilities as corporate citizens and creating long-term value for shareholders and society. With that, let’s now open the call for Q&A. Thank you.
Question-and-Answer Session
Operator
Thank you, ma’am. The question-and-answer session for — of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again, after your first question has been addressed. [Operator Instructions] We have the first question from the line of Ronald Keung from Goldman Sachs. Please ask your question.
Ronald Keung
Thank you, and congratulations on the strong results, [Indiscernible] Sandy, and Sean. My question would be on new businesses and we have seen the new business loss have widened sequentially. So just want to hear, can management share some of the latest developments in this segment? Let’s see — I believe the Jingxi business unit. Any user trends or overlap with JD Retails that need to — is probably on user trends are spent versus on JD Retail and the group, and our expectations into the second half this year, particularly on our arrow eye-focused investments, but also earlier we commented in the past on a 6-month lag of the ramp-up of investments versus some of the communal group purchases. Let me translate my question if that helps. [Foreign]
Interpreter
[Foreign]
Sandy Xu
This is Sandy, let me take this question. Since it’s well on track, has the long-term goals of better serving the price-sensitive customers with value for many products. In Q2, we are seeing some initial results of our efforts to [Foreign] expanded by over 300 quarter-over-quarter in both daily order volume and GMV second quarter, with active users growing even faster. I want to emphasize that we believe cost efficiency and customer experience are always the key to the long-term success of the retail industry, which translates into the supply chain and logistics capabilities, rather than merely competing through subsidies to expand scale at whatever cost. To reflect this, we made some strategic adjustments for this business recently as you may have seen from the media.
First, we focused on building capabilities in certain selected regions with strategic superiority, i.e. in the regions s that we can achieve better customer experience and operating efficiency based on our phase 1 business development results. We will continue to drive the efficiency in these selected regions through increasing order density and enhance the local supply chain and the logistics network. And second, on the supply chain side, we will collaborate with the local governments to better promote the vegetable basket project and better integrate our weeks and leverage our existing retail supply chain.
Third, we will explore to better integrate our customers’ interfaces of WeChat mini program and our agency app. And then we will also further integrate our logistics networks for the long-chain, short-chain, and B2B network to drive better efficiency and user experience. We will also increase the penetration of Jingxi Pinpin ‘s business in the mom-and-pop stores that are already our customers for our B2B convenience store business, creating more traffic and value for these store owners.
So last, Pinpin business is a good supplement of JD Retail’s omnichannel strategy, which can provide users with different products selections and shopping experiences. So we have more confidence in this business model under the current microenvironment if everyone competes on building capabilities and drives the efficiency instead of competing on subsidies. On the investment side for this new business, as I mentioned in the opening remarks, that we will — going forward, we will continue to balance growth and investments and drive — find growth potentials for our long-term sustainable growth.
At this stage, we will continue to focus our customer experience and service quality for the new business. The investment level will be somewhere relatively consistent with what we communicated with the market before.
Ronald Keung
That’s good. Thank you, Sandy.
Sean Zhang
Operator, next question, please.
Operator
We have the next question from the line of Thomas Chong from Jefferies. Please ask your question.
Thomas Chong
[Foreign] [Foreign] Thanks, management, for taking my questions, and congratulation on a very strong set of results, in particular, JD Retail that we are seeing the growth and the margin where we sold it. Just want to get a sense about our JD Retail second-half outlook on the revenue and margin side, given that we have seen the recent outbreak of COVID. Thank you.
Lei Xu
[Foreign]
Interpreter
This is [Indiscernible] from JD Retail to give you a brief introduction to the outlook for the second half of the year.
Lei Xu
[Foreign]
Interpreter
And we have seen that in July, we have kicked a steady growth momentum which is thanks to our years of accumulated capability down for supply chain and services.
Lei Xu
[Foreign]
Interpreter
At the same time, we also [Indiscernible] of feedback in Q3, we were faced with multiple challenges from the macro-environment, including some extreme weathers, the reoccurrence of COVID cases, and complicated international economic situations such as the commodity price fluctuations at a high level. So these are all the challenges we’re facing. And we all see that for the government and all the companies, we’re making our efforts to save these adverse factors.
And for JD.com, JD’s development is deeply rooted in the growth of the real economy. For the second half of the year, we will continue to open up our capabilities in supply chain and services to provide more stability and certainty, and support for our customers and partners under a time of uncertainty. So on this point, we are optimistic about our performance in the second half of the year.
Lei Xu
[Foreign]
Interpreter
Despite all these uncertainties from the external environment, we also see some accounting back of the consumer’s shopping demands and consumption power. So overall, I think the micro policy is in favor to support domestic consumption and encourage the digital transformation of old industries to strike a balance of development both online and offline and to promote the capability construction of the modern industrial chain. So all this has also — as well as the promotion of — to promote domestic consumption. So overall, we think it’s on the right track.
However, we also noticed that for some consumption areas, such as those related to travels and the physical contact-related areas, they’re coming back to be slower. At the beginning of the year, we’ve said that for 2021, we expect our retail business to largely maintain the growth momentum from 2020 on an apple-to-apple basis. That means we need to take out the impact of some COVID -related non-recurring sales. At this stage, our expectation for JD Retail’s full-year growth remains unchanged for the second half. And then on the user’s side, we continue to see user growth and improving engagement.
So for the second half, we expect to see continued momentum in user order frequency and order volume from both new and [Indiscernible]. Typically wise, we expect to see that the capital mix shift will continue, general merchandise categories to grow faster than electronics and home appliances, in particular, the supermarket and healthcare factories. On the back [Indiscernible] looking ahead, we remain confident that we can deliver steady improvement in that margin in the long term for JD Retail. So first, the margin for most of our key categories is still much lower than the industry level and our business partners.
So we have a healthy upside for sustainable margin improvement. And second, the underlying drivers for our margin improvement are the technology-driven improvement in scaling economies and operating efficiency. Again, I want to emphasize, we don’t manage the short-term quarterly profitability due to the dynamic market conditions and the flexibility required to manage our growth strategy, including adjusting our promotion and marketing strategy from time to time. If you look at a relatively long time period, we have been delivering and are well on track with our long-term margin trajectory for our retail business.
Thomas Chong
Got it. Thank you.
Sean Zhang
Thank you, Thomas.
Operator
We have a question, please. Eddie Leung from the Bank of America. Please ask your question.
Eddie Leung
Good evening. I have a question on the gross margin for the Second Quarter. We understand that there must be different factors at work because I think Sandy also mentioned that you’ve JD Logistics, you got that new makeshift, we have some of the new pieces such as JD growing. So could you talk a little bit more about the different factors behind the trend of gross margin in the second quarter and perhaps in an upcoming couple of quarters? So that’s my first question.
Then just a follow-up question on the economy side. Sandy, should we expect any change in the forward tax rate given some of the other Internet companies mentioned the potential change in the policy of some of the preferential tax policies. [Foreign]
Sandy Xu
Thanks, Eddie, for your questions. For gross margin, I guess, let me walk you through segment by segment. I mentioned in my opening remarks that for JD Retail if you look at the fulfilled gross margin, it actually went up by 30 basis points this quarter compared to the same quarter last year. So it’s a positive improving trend. And this was driven by our technology-driven scale economy and fulfillment efficiency. Because of the category mix shifts, internally, we don’t manage and we don’t look at the gross margin movement. On one side, it is the tech pre-mix shifts that will affect the overall gross margin trends.
And secondly, as we are adopting our omnichannel strategy, because we are leveraging warehouse and the inventory resources of offline business commerce, in this case, sometimes we would share some of the gross profit with them but at the same time, it helps us save the fulfillment costs. So the fulfilled gross margin improved when we — well, you may see a decline in the gross margin under the omnichannel strategy. So gross margin is no longer very meaningful for retail business.
So going forward, I would also encourage the investors and analysts to look at the fulfilled gross margin for retail business. And then secondly, on logistics, I talked about their operating margin a little bit. It’s mainly due to the Social Security refund that we received last year. So on the consolidated financial statements, this refund is going to actually affect two financial statement line items. One is our cost of sales for the Logistics business, and the second is the procurement health for Retail business. This — and for the margin of logistics, it is also affected by the pace of investments in capacity, because in the first half-year, last year, we didn’t make the investments incapacity to support their future growth as normal. So ideally that will make some forward investments in the second half of the year, which will be gradually absorbed as we grow in scale.
And then third, on the new business at this stage and — it is an operated at a relatively lower gross margin compared to our core retail business as we are still in the process of building our supply chain capabilities. So these investments are for future growth potential as I mentioned. And so, that’s why on the consolidated level, you’ll see our gross margin may be affected a little bit. And on your second question, regarding the effective tax rate. I’ll say — so first of all, JD has been generating a very slim profit margin compared to some other technology companies.
We had significant accumulated losses at the consolidated level until the end of 2019. And you can see from our discussion in the annual report, as of December 31st, 2020, some of our subsidiaries still have pretty significant net operating loss carried forward, which can be used in the future for a tax deduction. And then second, most of our subsidiaries in China are subject to an income tax rate of 25%. While certain subsidiaries benefit from the preferential tax-free treatment under the relevant tax law and regulations, including the high new technology enterprises — software enterprises, and encouraged the industries in the western regions.
Certain R&D expenses of our subsidiaries are also qualified for a super deduction of 175%. These are — were all disclosed in our annual report. As of today, we have not received any notice that the existing tax preferential treatments we applied for have been — has been rejected and we have not received any notice. So the recent news regarding tax rebates from other companies you have heard is focused on the key software enterprises.
So non of JD’s subsidiaries has ever applied for the key software enterprise in our history. So we believe going forward, JD is a new type of real economy-based enterprise with revenue mainly coming from retail and logistic business, as well as supply chain-related service fees. Therefore, our tax treatment won’t be affected by the change of the policy of key software enterprises.
Eddie Leung
Got that. Thank you.
Sandy Xu
Thank you.
Sean Zhang
Next question, please.
Operator
We have the next question from the line of Jerry Liu from UBS. Please ask your question.
Jerry Liu
[Foreign] My question is related to regulation. I just wanted to get a little bit more color around the puts and takes on potential impact, for example, relating to either user data or the ability to invest in the second half of the year and on potentially half that side. If regulation has a bigger impact on our peers, it could affect, for example, the user or GMV growth in the second half of the year. Thank you.
Lei Xu
[Foreign]
Interpreter
[Indiscernible] undoubtedly, we believe that the introduction of regulation policies on the Internet industry recently, is a good thing for the long-term and healthy development of the industry. In JD’s development industry, we had suffered from unfair market behavior such as peak one from two, excess of price subsidies, entered disordered capital expansion, and more. JD.com since stepping up on regulations in this industry, we firmly believe this will be good for the long-term development of industry and related companies.
Lei Xu
[Foreign]
Interpreter
Based on our observation and understanding, the recent wave of regulations focused on the following main areas; disordered expansion of capital, market monopolies, data security and privacy, misuse of technologies and algorithms, closed systems that attract a fair market competition, and so on. So for now we have completed a round of our internal sales review and rectification according to the regulatory requirements.
And we have also set up our internal supervision systems to work on the fixed data security safeguard systems, and we also carry out active communications with the regulators and got their positive feedback. So for now, we don’t see a major impact on our business operations [Indiscernible].
Lei Xu
[Foreign]
Interpreter
And also I want to mention that JD has always paid great importance to data security and personal information. So the rival of the new regulations was — are not making a big impact on — in terms of our advertising business and [Indiscernible].
Lei Xu
[Foreign]
Interpreter
And we can perceive that this will be our main trend to strengthen the regulations on personal data, personal information not only in China but on the global horizon and this will have a greater impact on those advertising-driven platforms.
Lei Xu
[Foreign]
Interpreter
And there are more words about the pick one from two actually seen since early this year. We have welcomed the number of new products and also some products — some brands are returning to our platform. Those returned platforms — returned brands include Starbucks, Estee Lauder, and more. And for the new products, as I mentioned in my remarks, that they were BVLGARI and a number of emerging Chinese brands. They are also — carrying out a number of innovative ways to collaborate with us.
And for us, we’re also providing different reports for initiatives for this brand to better operate on our platforms. For example, we have a special initiative to support new brands to grow and drive our platform and we also plan out some growth roots and making up their growth roots for the [Indiscernible] this year. So as I mentioned earlier in our earlier callbacks for these new brands, they’re joining or they’re rejoining our new platform. It takes time for them to adapt to JD’s platform in terms of their operating styles and how they interact with their customers.
This will take a bit of time and to help them, we will also make up our efforts to help them to build up their brands and their market shares among our JD customers.
Lei Xu
[Foreign] [Foreign]
Interpreter
[Indiscernible] mentioned that I want to mention during this year’s 618 Grand Promotion, we have seen a big growth on our marketplace platforms. As the growth rate of our pop business with the marketplace platforms has a 9% — 9 basis points higher growth rates than our self-operated platform. Actually, the pop business has become the main force, the main driver for our business growth. And a lot of our analysts and consumers might believe that JD is a platform to better sell our self-operated products, or expand our products such as mobile phones or PCs.
Actually, for this quarter, we have seen that — of our marketplace platforms — the sales of — for example, the mobile phones increased a 100%, which also confirmed the healthy growth trend of our ecosystem, for our marketplace platform. And in the future JD has — will continue to commit to the building of multiple channel platforms backing the B2C models of our marketplace platform, omnichannel, and our on-demand consumption model.
Jerry Liu
[Foreign]
Interpreter
Thank you.
Lei Xu
[Foreign]
Operator
Ladies and gentlemen, we’re approaching the end of the conference call. I will now turn the call over to JD.com ‘s Sean Zhang for closing remarks.
Sean Zhang
Thank you for joining us today on the call and for your questions. If you have any further questions, please contact me and our team. Thank you for your continued support in JD, and we look forward to talking to you next quarter. Thank you.
Operator
Thank you, sir. Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
Source: JD.com