Dada Nexus Limited (NASDAQ:DADA) Q2 2020 Earnings Conference Call August 24, 2020 9:00 PM ET

Company Participants

Caroline Dong - Head of Investor Relations

Philip Jiaqi Kuai - Chairman and Chief Executive Officer

Jun Yang - Co-Founder and Chief Technology Officer

Beck Zhaoming Chen - Chief Financial Officer

Conference Call Participants

Ronald Keung - Goldman Sachs

Thomas Chong - Jefferies

Alicia Yap - Citigroup

Binnie Wong - HSBC

Operator

Good morning, ladies and gentlemen, and thank you for standing by for DADA’s Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, there will be a question and answer session. As a reminder, today’s conference call is being recorded.

I would now turn the meeting over to your host for today’s call, Ms. Caroline Dong, Head of Investor Relations for Dada. Please proceed, Caroline.

Caroline Dong

Thank you, operator. Hello everyone and thank you for joining us today. Our earnings alert was distributed earlier today and is available on our IR website at ir.imdada.cn, as well as via Globe Newswire.

On the call today from Dada, we have Mr. Philip Kuai, Chairman and Chief Executive Officer; Jun Yang, Co-Founder and Chief Technology Officer; Mr. Beck Chen, Chief Financial Officer. Mr. Kuai will talk about our operations and the company’s highlights, followed by Mr. Chen, who will discuss the financials and guidance. We will all be available to answer your questions during the Q&A session that follows.

Before we begin, I would like to remind you that this conference call contains forward-looking statements pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond company’s control. These risks may cause the company’s actual results or performance to differ materially.

Further information regarding these and other risks, uncertainties or factors is included in the company’s filing with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise except as required by law.

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Kuai. Sir, please go ahead.

Philip Jiaqi Kuai

Thank you, Caroline. And thank you all for joining us today for our first conference call as a public company. Our IPO in June was an important milestone for our continuous commitment to bringing people everything on demand and we are pleased to report the strong growth for the second quarter.

Our total revenue for the quarter grew by 93% to RMB1.3 million on a year-over-year basis and we are seeing stronger synergies between Dada Now and JDDJ platforms. So Beck will go into details about our financials and operating results in a little bit and for now, I would like to give you some updates about our two platforms, the JDDJ and Dada Now.

So, starting with JDDJ, our leading local on-demand retail platform. For JDDJ, our fast growth is driven by a number of factors. Number one, we have been constantly expanding our geographic coverage. During the second quarter, we successfully expanded to more cities and countries, especially a variety of lower tier cities.

As of the end of the quarter, we have now covered around 1,000 cities and countries, compared to over 700 cities and countries as of March 2020. And bringing our convenience we are now on-demand insurance with more consumers across the country. In this Q2, GMV from lower cities – lower-tier cities increased by over 170% year-over-year and we believe these new cities we expanded in Q2 will contribute to the growth of the platforms since later this year.

In the following quarters, we will continuously expand our geographic coverage bringing more and more people everything on-demand. And we are also expanding our product category coverage. During the second quarter, especially, we achieved a significant breakthrough in the category of consumer electronics and smart homes.

We have established partnership with consumer electronics resellers to provide one hour delivery service, which brings product like smartphones to customers as fast as 15 minutes, and the second thing, so we are enhancing our collaboration with retailers, both in scale and invest. We are committed to further enhancing our capabilities to create more value to retailers.

For years with our strong growth and integrity we have won big shots from leading retailers. As of the end of the second quarter, we now work with about sixty of the top 100 supermarket channels across China, which are overwhelmingly leading for the China markets.

On July 24, we announced the extension of our partnership with a supermarket chain, CR Vanguard and we will empower them with capabilities like omni-channel fulfillments, product sourcing and management, consumer insights and marketing.

And we are pleased that we are also enhancing our collaboration with brands through innovations. During the second quarter, our revenues from brands increased by over 500% year-over-year. And we are principally currently leading wholesale platform in China and as a fastest growing sales channel more and more brands are allocating a greater share of their marketing budget for us.

Through our JDDJ platform, the brand can connect with digitized consumers and improved sales and marketing efficiencies. We will also continue to innovate some new service models to create more value to brand partners. For example, we pioneered a new one hour delivery for live streaming program in China.

This service gives consumers a fantastic online shopping experience where they can watch and interact to live streaming programs, order online and have the product delivered in an hour or less while there are few watching the program. It also has been very well received by the brands. Dozens of leading brands such as Unilever, P&G, Pepsi and so on, have been working with us in this new initiative.

And then reports, we are constantly developing innovative new technologies to empower our retailers and brand partners. Omni-channel online retail operating systems allow retailers to manage their orders, inventory and promotions and support the full omni-channel and also e-commerce.

To-date, Haibo is being adopted by more than 1200 large and medium size supermarket stores of leading channels across China, which is a remarkable milestone in the history in the industry.

And our solutions allow retailers to establish their own online membership programs which can help to improve, acquire new members, improve membership loyalty and increase new purchase. To-date, our CRM systems has been adopted by 200 retailers and now being used in more than 30,000 stores compared with 20,000 as of the end of December last year.

Another key milestone, we are happy to see the great progress in Wu-Ching tender projects during the past couple of quarters and the Phase 1 was launched in April. The e-tender is a key omni-channel collaboration program with JD Retail.

The leveraging on our retailer partners of stores and local on-demand delivery infrastructure will provide one hour delivery service from the nearby stores to the consumers shopping on JD.com, which greatly improved consumer assurance and operational efficiency.

We truly believe that this type of integration is a win-win for all parties. While it still takes some time to ramp up, the future prospects are promising.

Now I would like to spend a few moments discussing Dada Now, the largest open on-demand delivery platform in China. In the second quarter, we upgraded our service capabilities by further enhancing our logistics infrastructure and the scaling up last mile delivery and intra-city delivery services. In terms of the intra-city delivery services, since 2019, we have started to develop an upgraded service that specially targets to serve key accounts chain merchants.

After a number of iterations, we officially launched the upgraded service on July 28 under the name of Dedicated Delivery also known as [Foreign Language] or delivery with full heart. So the service is designed to serve key accounts chain merchants across China by providing them with customized service and products and meeting their tailored needs for omni-channel delivery. In this quarter, revenue from our key account chain merchants increased by 500% year-over-year.

On the SMES, small and medium enterprise, and individual order sites, we also see another milestone that our business turned profitable across all cities in which we operate. We are happy with our performance this quarter as we continue to improve profitability and optimized efficiencies.

For last mile delivery, order volumes hit a single day record during the June 18 shopping festival benefit us from enhanced synergies with JD Logistics as we continue to integrate our systems and further boost delivery efficiency. We are able to ensure timely and efficient last mile delivery for JD Logistics, especially during peak seasons, because of our – efficient and scalable delivery networks.

In addition to the collaborating on delivery services with JD Logistics, we are recently launching the pickup service to specifically extend our partnership as well. So, overall, we are excited with our ability to strongly execute on our strategy and we are looking forward to generating sustainable long-term value for our shareholders as we navigate a new era in China’s retail industry.

With that, I will now pass the call over to Beck Chen to go over financials for the quarter. Thank you.

Beck Zhaoming Chen

Thanks, Kuai. We are pleased to deliver solid revenue growth and improved margins in the second quarter as we continue to drive economies of scale and operating efficiencies across our business. Before we go over the numbers, just a few housekeeping items. With the year-over-year comparison it would not the most useful way to judge our performance or percentage changes I am going to give.

Total net revenues increased by 93% to RMB1.3 billion. Total net revenues from JDDJ increased by 98% to RMB486 million mainly due to 96% growth in GMV driven by increases in average order value in a number of active consumers. The number of active consumers for the 12 months ended in Q2 increased by 72% year-over-year to RMB32 million.

We also saw high ranges of net increase in online marketing services revenue as a result of increasing promotional activities from brand owners.

Net revenues from Dada Now increased by 90% to RMB837 million, mainly due to higher order volume of last mile delivery services to logistics companies and intra-city delivery services to chain merchants.

The most important event during the quarter clearly is mid-year shopping festival. On JDDJ site we cooperated with China’s leading retailers and the brand owners to launch our JDDJ June 18 lovely life. During that day, we hit a new record high for single day sales in a double – over last year.

On the Dada Now side, we set a new record for single day delivery volume and surpassed the delivery volume that we just recorded during last year campaign. On the other hand, during this quarter, revenue from our chain merchants increased by 500% year-over-year. We think this performance demonstrates the improved capabilities of our last mile intra-city delivery services and highlights the value of our on-demand delivery infrastructure.

Moving over to the expense side, operating and supporting expenses increased to RMB1.1 million, mainly due to an increase in rider cost as a result of increasing order volumes for our last-mile and intra-city delivery services provided to our clients on Dada Now platform and retailers on JDDJ platform.

Selling and marketing expenses rose to RMB386 million mainly due to an increase in personnel cost and the share-based compensation expenses related to IPO performance condition, and also an increase in advertising and marketing expenses.

G&A expenses rose to RMB165 million mainly due to the IPO-related share-based compensation expenses.

R&D expenses rose to RMB129 million, mainly because we continue to hire staffs and strengthen our technology capabilities. So I would like to highlight that the IPO-related share-based compensation expenses were booked in total of RMB127 million in Q2, which will be on-off expenses due to immediate recognition expenses resulted from options granted to employees with an IPO performance condition.

Non-GAAP loss from operations decreased by 12% to RMB244 million. Non-GAAP operating margin was minus 18%, improved from minus 40% in the same quarter of last year. The improvement of our operating efficiencies mainly comes from two areas. Firstly, improved delivery efficiency due to increase of order density and optimization of algorithm of our auto method order tracking mechanism.

The ratio of operations and expenses as a percentage of total revenues increased to 83% this quarter from 80% in Q2 last year. The operating and – business mainly include new procurement expenses.

Secondly, the ratio of adjusted selling and marketing expenses as a percentage of total revenue decreased significantly to 26% this quarter from 44% in Q2 last year, which mainly thanks to the saving of consumer internships because of platforms accounts more attractive and consumers become more loyal.

In Q2, non-GAAP net loss decreased by 9% to RMB231 million. Non-GAAP net margin was minus 17% improved from 37% in the same quarter of last year. Non-GAAP net loss attributable to ordinary shareholders was RMB390 million, which improved appraising of preferred shares of RMB160 million recognized in Q2. So we do not need to recognize such amount at our auditing.

Non-GAAP diluted net loss per share for the second quarter of 2020 was RMB0.80, compared to RMB1.35 for the second quarter of the year. As of June 30, 2020, we had RMB4.4 million in cash and cash equivalents with restricted cash and short-term investments. In terms of outlook for the third quarter of 2020, we expect total revenue to be between RMB1.28 million and RMB1.34 million representing year-over-year growth rate of 82% to 91%.

We are particularly excited about the organic strong growth momentum of our JDDJ platform and we aim to grow JDDJ revenue by 100% year-over-year in the second half of 2020. Meanwhile, we will continue to closely cooperate with JD Retail to further explore omni-channel new initiatives.

So this concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you

Question-And-Answer Session

Operator

[Operator Instructions] Your first question comes from Ronald Keung from Goldman Sachs. Please ask the question.

Ronald Keung

Thank you. Thank you, Philip, Beck, Caroline and team and congratulations on the solid second quarter. I have two questions first and as space I will follow-up again with more to get space. First is, could you share how JDDJ ticket size trends have been in the second quarter and as we head into the third quarter?

And then my second question also mostly on JDDJ is, can you share a bit more on the JD Retail cooperation. As you mentioned about the further exploration, just want to hear from kind of first phase, what should we expect – what are the opportunities that you see for JDDJ and also for Dada in this omni-channel initiative? And will the benefits also applies to both of your businesses? Thank you.

Beck Zhaoming Chen

Thank you, Ronald. So, this is Beck. Let me take the first question and I will pass the second question to Philip. So for the ticket size of JDDJ in Q2, it will be at average order value at around RMB140. So, some of that is contributed by some mixed changes because we are helping – we are starting to sell in consumer electronics.

But even excluding this impact our core categories like the supermarket still maintaining AOV of around RMB130 in Q2 per year. And also during Q3, we are seeing generally the AOV virtually stable compared to Q2.

Ronald Keung

Thank you, Beck.

Philip Jiaqi Kuai

Right. And in terms of the JD Retail collaboration for omni-channel, so we are happy to see that in the last couple quarters, this collaboration has been fairly quickly recognized. And we are seeing some very exciting early progress. For example, many of our major retailers have now on board. So it actually takes a while to signing contracts and do the system integration and bringing those retailers on board.

So, we are progressing very well on that. And we have also build up a strong success case typically to demonstrate that this is very value-added to the retailers, and that’s how we can convince more and more important retailers to come on board. So, this is the number one.

And number two, as you might have seen on JD App if you are searching for some keywords, you will be seeing a hash called one hour delivery on the search result page. And if you click on that, you will see a dedicated search result page with all the offline whistlers and product items available for when our delivery.

So this dedicated entry points or the dedicated path creates a importance – it’s basically to do the mind share of the customer and to educate the customer to try and to get used to this one hour delivery. I think this is another major milestone.

And the third one is the JD Retail has many business units and we are happy to see in the last quarter, a strong agreement has been arrived among many other business units that the colleagues of JD Retail are very much coming that this is a very key and strategic initiative for JD Retail, for Dada, for the entire ecosystem and people are very much committed to push this forward.

And we anticipate that in the following quarter or the next few months, we will be seeing some strategic initiatives that we might start jointly on bringing more important merchants on board across different product categories. So we started off with a grocery chain that we might quickly expand to other categories as well.

So those are some of the progress for the partnership and we certainly believe this has a very promising future. And this will help both JDDJ and Dada, certainly. Dada has the one hour delivery infrastructure we will help to deliver further – other generators through this channel and JDDJ, because we have deep partnership and system integrations with the top-line retailers and we will act as a very essential role in this omni-channel partnership. So, yes, we are very optimistic about it.

Ronald Keung

Very useful. Thank you.

Philip Jiaqi Kuai

Sure. Thank you.

Operator

Your next question comes from [Indiscernible] from Bank of America Merrill Lynch. Please ask the question.

Unidentified Analyst

Good morning, guys. Thank you for taking my questions. Congratulations on the pretty solid quarter. Two questions, the first one is about your user growth. Could you give us more granularity in terms of other traffic sources?

So, which channel has been seeing the majority of the growth and why? And then, secondly, also a follow-up question on e-tender, JD Retail collaboration. Just wondering how should we think about the so-called margin proof of these types of business of our JDDJ business? Thank you.

Philip Jiaqi Kuai

Okay. Thank you, Eddy. So, the first one, the tapping source, so, we are happy to see our customer base continue to grow fast and there are few things we are particularly happy about. So, number one, we opened large number of lower-tier cities since last year and by June 18 – sorry, by June 30 we have now covered about 1,000 cities and countries.

And both the user base and the sales growth in the lower tier cities are particularly fast – are pretty much faster than our first tier cities. So we are very happy about that. And another thing is, we have been launching the membership program for the platform, as well as we are providing this membership capabilities and empowering our retailers to build up their membership programs on our platform.

This also greatly helped to improve the frequencies and loyalties of the customers for them to continue to come back. So, I think those are the few important things. And so, I think in the next quarter or coming months, we will continue to open up new cities and we will also work deeply with our retailers to expand this membership program.

I think those are the – some of the key drivers for the traffic. And certainly we are happy – also happy to see that both in new cities and the existing cities we are also getting good traffic support from JD, as well. Not only the existing like the entry points and search results collaboration, but also the e-tender omni-channel partnership. This is also considered as a key traffic source, incremental traffic source going forward.

And in terms of the margin of this e-tender program, so first of all I think this is still at a very early stage for the business and we focus more on the growth of the self follow, rather than the margins. But I think, overall, we are really focusing on improving the efficiencies, because there are lot of product categories that are not as efficient if the JD is selling on to B2C for example, right and heavy things the delivery costs are rather very high, but those – are located near the consumer already.

So the delivery cost is much lower than for - from the warehouse. So, I think the efficiency is like that. We will generate a good margin potential for all the parties involved in this ecosystem. And also, I think efficiencies overall for the offline business is rather low.

And we are very happy to see that in this quarter, partially since the impact from the COVID-19, because all the retailers are really, really include a digital business that’s e-commerce and really want to digitize their business and improve the efficiencies.

That’s why we are seeing that almost all of our offline retailer partners has been investing heavily in upgrading and digitizing their offline business. I think this is very well connected with the omni-channel with the e-tender program and all the digitization of the offline business will again create significant potential for the improvement of the efficiencies and the margins. So, in the long run, we are very optimistic about it, but as for now, we are focusing on making this happen. This equates to grow the volume first.

Unidentified Analyst

Got it. Thank you very much. That’s all very helpful

Philip Jiaqi Kuai

Thank you.

Operator

Your next question comes from Thomas Chong from Jefferies. Please ask the question.

Thomas Chong

Hi, good morning. Thanks management for taking my question. Congratulation on the success of the IPO as well as the solid momentum for JDDJ monetization. I have a question about the outlook of JDDJ with regards the take rate and the timing for profitability.

How should we think about the takeaways about the different business segments and how we should think about the competitive landscape, in particular the sales and marketing trends? Thank you.

Philip Jiaqi Kuai

Thank you, Thomas. I will have a brief answer and see if Beck will have anything to add. So, first of all, so we are happy that for the JDDJ business, we have three major revenue source, which are take rates from retailers, as well as the marketing dollars from grants and also the delivery fees from the customers. And if you look at our Q2 performance, the revenues from the grants grew by 500%.

So this is a very significant growth and we anticipate this strong momentum will hereon as we are delivering more and more significant value for the grant. As a matter of fact, we are now considered to be the fastest growing for many of the consumer brands in China and that’s why the brands are more and more willing to allocate more marketing budgets on us.

I think the marketing dollars from the brands create a significant potential and also at the same time we don’t have to push the take rates from the retailers too much. This is also very different from the restaurant food delivery business. So, I think this is the number one.

And number two, we are bringing more and more new product categories. As we mentioned earlier, we are very happy to see that in this first half, especially Q2, we are seeing significant growth of our consumer electronics business and this business is growing very fast. We are very generating a lot of value for the customer and offline retailers.

And the ticket size is certainly much higher than the growth rate ticket size, alright? But the take rates for this business is certainly lower than the growth as you can imagine.

So, as we are growing more product categories, I think the take rates might have moderate change going forward as we are expanding and having more categories. And certainly we are happy to update you on the progress of our new product line extensions going forward.

Beck Zhaoming Chen

Yes, so – yes, Thomas, I’ll likely share little bit more about the profitability. So, just like we mentioned earlier ago, JDDJ has a much higher basket size and the average order value in Q2 is around RMB140 and it’s like, as we mentioned, we have lots of grants while they are waiting to spend marketing promotion dollars on our platform.

So, and also, we usually work like the magic of direct marketing if that [Indiscernible] So, the direct marketing – to revenue is minor, direct cost is then divided by JD. So our direct marketing has improved significantly and we’ve been here from minus 11% in 2018 to minus 6% in 2019. In Q2, direct marketing is about minus 1%.

So, and also, overall monetization rate is increased to 9.3% in Q2 versus the 9.2% last year, because our marketing grant increased significantly. And we also anticipate that for the second half of this year, our monetization rate share also grew compared to the first half of this year. So, also in the same time, on the direct cost side, as our platform becomes more attractive and consumers become more loyal, the consumer incentive as a percentage of G&A in Q2 this year increased significantly by 50% from 7.4% to 3.9%.

And in the same time, our procurement - operating and procurement cost keeps reducing at the order density and our grant optimizes. So, overall, I think we are still on the right track and for the JDDJ – is going to breakeven and also like to – something breakeven we think that after a year.

Thomas Chong

Got it. Thank you.

Operator

Your next question comes from [Indiscernible] Please ask the question.

Unidentified Analyst

Hi. Hi, management. Thanks for taking my question and congratulations on such a great first set of results since your IPO. I have two questions. And the first question is a more high level question. Can management share what the priorities are for the next five years? And also if you could mention of what the things you’ve been doing with the expanding geographically, increasing SKUs, et cetera.

I just wanted to know how management ranks all these things we are doing in terms of parity. That’s my first question. My second question is probably more for Beck. I just wanted to understand how quarter three guidance.

You mentioned that JDDJ revenue growth of 100%. Could you share more color on the assumptions behind this? I mean, we know that KA is growing very fast. So, just any color to help in terms of understanding quarter three will be great. Thank you.

Beck Zhaoming Chen

So, yes, let me take the second question first and I think Philip will answer the first question. So, like the guidance, we give the guidance earlier today and for Q3, the total net revenue is growing by 82% to 91% year-over-year. Breaking it down further, we think if you like – JDDJ is growing faster than now which means JDDJ is growing like almost 100% for the revenues.

And also, but right now, we believe that the share count, this is doing, this is still growing faster because you know the momentum is very good and I think we can still grow by almost four times while we think for the e-commerce – e-commerce didn’t really benefit.

E-commerce package revenue that we think the growth rate still be a bit more decelerate compared to Q2 across the overall traditional features to e-commerce and it’s decelerated the growth through in Q3 versus Q2. So, this is more like – yes, this is all that I know. So, yes, Philip shall be able to answer the first question.

Philip Jiaqi Kuai

Thank you. Yes, the next five years, as a matter of fact, for the last six years or the next five years in the foreseeable future, we carry the consistent mission which is to bring people everything on-demand. I think this is the vision that is really a inspirational and we are fully committed to do that. And in terms of the geographic expansion, the category expansion, everything is basically for that long-term goal.

To be more specific, in order to tweak the – bring people everything on-demand, we need a solid one hour delivery infrastructure with Dada Now, our infrastructure and the efficiency and service level of this infrastructure is a key. That’s why we continue to invest heavily in technology and to improve both the efficiency and also the service quality of the platform.

And we are happy to see that. And as we mentioned earlier, we are happy to see that in this Q2, we are seeing our – the SME and individual other business are turned profitably in all cities. As a matter of fact, for all major categories for our Dada Now business are having partnership in economies and keep growing both profitability and scale.

And I think that’s the foundation. On top of that, we think there are two things are very important to achieve this vision. Number one is that, retailers invest through the traditional offline retailers needs to be digitized and to upgrade and we are fully aligned on that vision. And this digitization requires a lot of technology and operational innovation.

And this is something we are been very much heavily focusing on. And one of the key drivers behind that is our Haibo system which is the operating system for the omni-channel business for our retailers and we are very happy to see the strong momentum for Haiguo by the leading retailers.

So by using our operating systems, the traditional retailers will be able to digitize omni-channel business easily. And we will certainly continue to invest heavily and to empower our retailers to the omni-channel e-commerce. This is number one.

And we start from grocery and then we gradually expand to other categories like pharmaceutical, like consumer electronics, to apparel, to one category after another. So we will continue to expand to different categories and continue to empower our retailer partners for digitization. I think that’s number one.

Number two is to empower our brands. So, the brands, like Unilever, Pepsi or P&G, all those brands have very significant footprint and business in offline. Historically, the efficiencies of this offline business are rather low. Most of their activities or their marketing or promotional investments in offline are difficult to monitor or mature at least like on a timely fashion or a very positively fashion.

So, there is a lot of potential there. At the same time, those FMCG brands they literally hired millions of offline promoters and how to manage and measure and motivate those offline promoters to be more efficient is another key thing for the brand. And also for the brand, historically both brands and retailers they don’t have any, so-called users.

They don’t have – they only have customers. Customers counting, I saw, check out and you never know who they are. And they have no – like digital knowledge about your customers. They are not your users. So that’s another thing we are dedicated to help our brands and retailers to digitize their customer base and to digitize and make their offline business much more efficient.

I think those are the few things that will help to make our vision come true. And very importantly, we will never compete with our retailer brands. We will never become the retailer. We will never like sell inventory. This is a very unique positioning of our platform. Unlike, almost every other guys in the markets, like almost everyone either they have their three keys, market at the first – at the same time aggressively expanding to the first party research or their third party research has been dealt.

We are the only pure third-party market players and we never compete our retailers and brands. I think this has served as another key foundation for the long-term success of partnership with the ecosystem. So, with that, I think our five year parity is focusing on achieving the vision of doing and keeping everything on-demand.

And by doing that, to empower our retailers, brands and help them to grow their digital business more efficiently. Thank you.

Unidentified Analyst

Great. Great. That’s very clear. And thanks, Philip. Thanks, Beck. Thanks, Caroline.

Operator

Your next question comes from Alicia Yap from Citigroup. Please ask the question.

Alicia Yap

Thank you. Good morning, management. Thanks for taking my questions and congrats on the solid results and also the successful IPO. I have a couple questions. Number one is, regarding the demand for the consumer electronics on the JDDJ. Do you think this is actually a one-off because of the COVID, people are looking for more cooking appliance and all that?

Or will that be sustainable? What are the category and also the most potential that you could expand to attract the consumer purchasing demand? And then, second question is, what would be the margin profile looks like for Dada Now and JDDJ in the more medium to longer-term? Thank you.

Philip Jiaqi Kuai

I will take the first one and Beck will answer the margin outlook question. So, yes, thank you for your question. So, consumer electronics, we are certainly generating a lot of value in this and we don’t believe this is a COVID-19, it’s just a one-time opportunity. So, basically it’s been there is thousands and thousands of offline consumer electronics stores, chain stores selling cell phones or laptops and so on in offline.

And, they are very much – the retailers are very much looking forward to having a digitized user base and getting more user – customer orders and we can certainly help them and at the same time the customers are looking for a faster, and more convenient experience, as well, because the whole e-commerce is turning to the one hour envelope.

And people are just willing to have faster delivery and more like efficient experience. I think this is a long-term trend and we believe this is sustainable. At the same time, we are also happy to see that we are generating a lot of synergies with especially JD ecosystem. You might have noticed JD has recently acquired or significantly invested in many of the leading offline consumer electronics chain retailers.

And we are certainly establishing partnership with those guys and to provide one hour delivery for those retailers. I think those are definitely win-win synergies. In terms of further product category expansion, so, as I said earlier, we believe that most of the offline business that are selling products will be able to turn to the one hour delivery business.

And I think this is the universal and most of the categories eventually will be and I think one thing up another, for example we started with grocery, because grocery is a very high frequent, it’s a gateway for people to daily shopping. That’s why we started with the grocery and achieved a very solid foundation. And then we extend to pharmaceutical.

The pharmaceutical products is also a very much on-demand and widely – like almost everyone at some point will need some pharmaceutical product and service. So that’s the second category extension, which also has very good traction so far.

Almost all of the leading pharmaceutical chains in China has now partnered with us and we have integrated almost all the membership with the pharmaceutical chains, which is like, nearly 100 million of the digitized members with the pharmaceutical chain. This is the second category expansion.

And then, one category after another like consumer electronics is one example, and we believe in the following quarters, we will be having more exciting categories on board, as well. So, eventually, I think most of the categories as we imagined will be on-demand.

Beck Zhaoming Chen

Okay. Let me take the second question. So, the marketing – the two million units, first of all, that are now – so, like we mentioned earlier before, for the SME and individual other benefits this business turned profitable across each city in which we operate in China, which means that all business units that are now including last mile, including chain merchants, including SME clients and individual others, we all made profits at each city level.

So, right now, the margin after tax is around 6% to 10% for these different businesses and for the next one year to two years, our priority is to grow the business of the various business lines instead of grow the margins quickly.

And for JDDJ, JDDJ we usually like – watch the magic of direct margin, so, like I said it was the direct margin is improved gradually from minus 11% to – in 2018 to minus 6% last year and we anticipate here for the full year of this year it could be very close to breakeven, say, minus 1% - around minus 1% when we are still targeting to breakeven on direct margin level next year.

Alicia Yap

Thank you.

Philip Jiaqi Kuai

Thank you.

Beck Zhaoming Chen

Thank you.

Operator

Your next question comes from Binnie Wong from HSBC. Please ask the question.

Binnie Wong

Hi. Good morning, management. Thank you for taking my question and congrats on a successful IPO and also the quarter. My question is on the operating leverage side, I mean, you see meaningful improvement on a Y-on-Y basis on the margin improvement and also on the efficiency demonstrates the success of the model.

I just wonder any of the structural drivers here that you think should able to large like maybe in the - maybe second half and then how should we think about in terms of management’s priorities in investment as well? And then, just lastly, we are talking about more and more of this investment in technologies, right, that would drive the operating efficiencies.

So, if you can elaborate more on that comment and how should we think about that would actually help us to drive, maybe in terms of the order growth or maybe in terms of the value as it benefits to our customers to help us to drive more longer term growth. That will be very helpful. Thank you management here, and thank you, Beck and Caroline, thank you.

Beck Zhaoming Chen

Okay. Thank you, Binnie. So, for the expense side, as Dada is actually a technology-driven company. So, we have very expense light. So we enjoy significant improved operating values and economies of scale in terms of those shared expenses - operating expenses middle and the back end. So, as you can see, our adjusted expenses items grew slowly, very slowly while the top-line doubled in the first half of this year.

So, we anticipate for the second half of this year and also for next year, the trend will still enhanced. So you will see operating leverage and you will see the margin improvements greatly for the bottom-line because of our efficiency of the business and our technologies. And in terms of the technology empowerment, Jun can give you more color on that.

Jun Yung

Hi. I would give a color how technology helps to improve efficiency of the Dada Now business and to make us more competitive. So, three examples, so, we invest in technology like order dispatching and the recommendation systems. It’s a forward automated system that’s making sure that we always assign orders to most efficient riders in order to improve the efficiency of entire rider network while still keeping the fulfillment standard really high.

And that helps to drive down the order task. The other technology that we have been investing for many months and we are repeating that in the future is for dynamic pricing. Basically we price each order. We price the payment that we made to each rider on the real-time supply and demand, each location and that also helped to keep the delivery costs really low.

And all those technologies will keep our efficiency of the delivery networks really high, help us to improve the costs and that in turn make us more competitive in terms of pricing that we provide to customers and we’ll eventually drive the growth of the delivery orders.

Philip Jiaqi Kuai

Yes. I also have some of the things on the technology improvement, this is on JDDJ. So, one of the – I think one of the single largest cost factor for the omni-channel business is the fulfillment cost. Right, the fulfillment is including like order picking, packing, delivery. So, fulfillment is certainly very key I think and the technology behind it was very, very important.

For example, we are providing a picking App for the store associates to pick efficiently and we are also providing a systematic and comprehensive solutions for the in-store picking room for the store to manage the entire inventory and the picking process within the picking room in a store. And also, we provide a – the packing and then delivery, the handling solutions as well, which helps to improve both efficiencies and also to use any like, shrinkage or anything.

So, the fulfillment is certainly very important and the technology can help a lot on that. Another thing that’s around like that’s still in, because as I mentioned earlier, so, both retailers and brands, they don’t have any like the users, digitized users for their offline business historically. But this is a huge potential. So, we provide a CRM solution for both retailers and brands to manage – their business to digitize and manage their membership.

There are now over 30,000 stores are adopting our CRM solutions to manage their customers. I think this is another very key initiative that will help the retailers to improve their efficiencies and also to improve their business. So, the technology is our foundation and we believe lots of the value can be generated and will be generated from our technology innovation. Thank you.

Binnie Wong

Thank you. That’s very helpful. Thank you, management.

Operator

There are no further questions. At this time, I would like to turn the conference back to Caroline. Please continue.

Caroline Dong

Thank you, operator. In closing, on behalf of the Dada’s management team, we’d like to thank you for your participation on today’s call. If you require any further information, feel free to reach out to us directly. Thank you for joining us today. This concludes the call.