Q2 2022 Luckin Coffee Inc Earnings Call

Thank you.

Ladies and gentlemen, welcome to Luckin Coffee's second quarter 2022 earnings conference call. All participants will be in the listen-only mode during management prepare remarks, and there will be a question and answer session to follow. Today's conference is being recorded. At this time, I would like to turn the call over to Mr Bill Zimmer at ICR for opening remarks and introductions. Please go ahead, sir.

Hello everyone and thank you for joining us on today's call. Lucky Coffee announced the second quarter of 2022 financial results earlier today. The press release is now available on the company's IR website at www.investor.lkcoffee.com. Q

Today you will hear from Janine Quo, Chairman and CEO of Lucky Coffee, and Rhine App Shaco, CSO of Lucky Coffee. After the company's prepared remarks, the management team will conduct a question and answer session based on questions submitted via the company's webcast. We will be referring to a slide presentation on today's call, which can be found via conference call webcast link, as well as on the company's IR website. Again, the IR website link is investor.lkcoffee.com. Thank you for BitG?ner at Wedend constructorfdSur. antenna.

During this call, the company will be making some forward-looking statements regarding the future and results. Statements are not historical facts, including but not limited to statements about the company's police and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties.

Further information regarding these and other risks is included in the company's filing with the FCC.

With respect to any non-get measures discussed during the call today, the accompanying reconciliation information related to those measures can be found in the police press release issue earlier. and the police press release issue earlier.

During today's call, Dr. Grove will speak in Chinese and his comments will be translated into English.

At this time, I would like to introduce Alicia Guo, Luckin Coffee's new investor relations director. Alicia, please go ahead. Alicia, please go ahead.

Thank you Bill. Hello everyone. Thank you for joining today's call. My name is Alicia and I am the IR Director of Locking Coffee. I joined the company in July and look forward to communicating with you moving forward.

Thank you, Alicia. I would now like to turn the call over to Dr. Jin-Yi Guo, Chairman and CEO of Luckin Coffee. Dr. Guo, please go ahead.

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Hello everyone and welcome to today's conference call. Thank you for your ongoing support of Blacking Coffee.

I'm Jin Yi Guo, Chairman and CEO of Lacking Coffee.

And please to share with you our second quarter results.

The ongoing COVID-19 situation in the second quarter remains very challenging for the catering and retail industry.

Many of our stores in Shanghai, Beijing and other cities in China experienced temporary closures at different times.

Despite these circumstances, lacking coffee still achieved a rapid growth and improved profitability profile.

In regard to doing with historical issues, following the successful completion of the restructuring of our financial indebtedness in the first quarter, the U.S. Federal Court recently granted final approval of the Security Class Action Settlement.

This marks an important milestone for lacking coffee as it results the overwhelming majority of the company's potential exposure related to the offshore class actual lawsuits. This marks an important milestone for lacking coffee

These achievements are the results of our strong focus on the coffee business.

which embodies our long-term development to technology and values. We believe that the Chinese coffee market has substantial upside potential with significant opportunities.

We hope to bring lacking moments and excellent experiences to consumers through every cup of coffee and an effort to make lacking coffee a part of people's everyday lives.

We strive to create a world-class coffee brand by adhering to the value of integrity, craftsmanship, innovation, ownership, and cooperation. We cultivate a world-class coffee brand. information.

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I would first like to discuss an important update regarding our management team that we announced in a separate price release earlier today.

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As a core member of the Senior Management Team, Rhinow worked to pyrrlyfully to complete our overseas restructuring and solve a number of historical problems. The Senior Management Team has been able to complete the first time in the world. The Senior Management Team has been able to complete the first

He also led the restructuring and reorganization of our finance team and functions over that same period.

and paved the way for our return to normalize the financial reporting.

I would like to express my sincere gratitude to Rhinow for his hard work and dedication.

We believe VINEL will continue to play an important role in creating substantial value for lacking coffee.

With this news, we're also delighted to welcome Ms. Kim and to our management team.

and succeed by now as Luckin Coffee's new Chief Financial Officer.

Ms. N has extensive financial expertise and a rich professional background.

He received a bachelor's degree in economics from Reming University of China.

and a Master in Management from Stanford University.

Prior to joining Lackin Coffee, she served as the CFO of publicly listed companies, including the CFO of the CFO of publicly listed companies, including the CFO of publicly listed companies,

as well as previously serving as an auditor at Price Waterhouse Coopers.

With Ms. N. N. Bourd, I am confident that Lucking Coffee will further enhance its financial organization capabilities. Ms. N. Bourd Congress?bing scholarships within the?? Stadium of Linda Auditor General L Sh teach T il first and foremost is the financial organization of ability.

Further improved the level of business and financial integration and coordination, and means end will help take us to a new level.

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In the second quarter, despite the continuing impact from COVID-19, we achieved growth and strong results in many metrics.

Total net revenue was 3.3 billion RMB representing a year over your increase of 72.4%.

Self-operated store profit margin was 30.6%.

and the same store sales growth was 41.2%.

The number of net news door opening was 615.

The average number of monthly transacting customers reached the 20.7 million, a year over your increase of 68.6%.

The continuous growth in performance was mainly attributable to the ongoing launch of popular products, rapid expansion of our store footprint, and an increase in the number of transacting customers.

Right now we'll share more details on the company's results later during the call.

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Thank you.

With the business back on track, we will more proactively address social responsibility and implement our sustainable development strategy.

We firmly believe that the ongoing creation of both customer value and social value is an important cornerstone for the long-term development of lacking coffee.

And July , our Board of Directors approved the establishment of our Sustainable Development Committee.

I will co-chair the committee along with our director, Michael Chen, a partner at Centrarium at the hospital. I will co-chair the committee along with our director, Michael Chen, a partner at Centrarium

In the fourth quarter of this year, we plan to publish a report on corporate governance with a systematic review of lacking coffee's transformation over the past two years.

in terms of our corporate governance as well as our cultural values and other important topics. Page 50 Star

This will help stakeholders better understand we have completely recreated our value and culture with improved corporate governance and internal compliance controls among other efforts.

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We believe our technological advantage sets us apart from traditional food and beverage companies.

There were two technical achievements in the second quarter I would like to share with you. The first is the Hybrid Multi-Cloud project that we built with five-quarters efforts.

We successfully launched this project at the end of June and achieved our target of supporting 5 million orders on a daily basis, which also has the potential to support 10 million daily orders in a near future.

This is an important milestone in our technical architecture.

Second, to further improve operational and financial transparency and continuously strengthen the reliability of our operational and financial data. And financial data.

We are introducing blockchain technology into our operational and financial data management system.

Using multi-party participation, non-tapering, traceability, and other characteristics of the blockchain, key control slots and important data are stored on a chain in real time to ensure the reliability of our operational and financial controls.

while improving the effectiveness of our management. Lacking Coffee is committed to become the pioneer in introducing blockchain into operational and financial systems in the food and beverage industry. AR paths are all gold.

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In the second quarter, we continued to face a challenging operating environment across the country. We had an average of around 670 temporarily daily store closures in China during this quarter. In April and May, that number was around 900 stores nationwide.

At the same time, the local government's restriction on transportation also brought challenges to our supply chain and logistic systems.

Despite a complex and challenging environment, we continue to show strong momentum, driven by our advantages in branding, product R&D, and store layout, and supported by our three pillars of people, products, and places.

From the perspective of people, Blackened Coffee is becoming the coffee brand of choice for more and more young people.

Our average monthly transacting customers have increased to about 20.7 million during the second quarter of 2022.

From the perspective of product.

Lacking Coffee continues to innovate and launch popular products.

In April , we launched the Coconut Club Latte, which sold over 24 million cups in the second quarter and contributed 400 million RMB in gross revenue across our store formats.

During the pandemic, our supply chain departments are made full use of our existing grid-based.

Warehouse Network in multiple locations.

quickly setting up emergency warehouses, transfer stations, and other measures to ensure sufficient supply. From the perspective of places, although we experienced indoor dining restrictions during the pandemic, our pick-up business model was less impacted.

As we mainly operate through small scale grab-and-go stores, combined with an advanced and intelligent store management system, we can achieve increasing efficiency in terms of store rental and labor structure. I would like to express my most sincere gratitude to our nearly 32,000 walking employees.

who have worked so hard through challenging times and to our customers for their ongoing love and support for lacking coffee.

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In terms of brand marketing and sales growth, we have built our brand based on professionalism, youth, fashion and wellness. In the second quarter, we successfully introduced our popular coconut croquette latte and attracted more new customers with our summer iced coffee season campaign.

For the second quarter, the number of new transacting customers exceeded 10 million.

At the same time, our official account has over 30 million subscribers and over 28 million users in our private traffic pool by establishing multiple self-owned traffic posts driven by data and technology. We have managed to reach users through multiple marketing channels and continuously attract and retain new users.

In return, this has allowed us to more effectively increase customer engagement further driving our strong performance. In addition, this has allowed us to more effectively increase customer engagement performance. In addition, this has allowed us to more effectively increase customer engagement

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Our focus on professionalism and good flavor is critical to our development and success. The pursuit of professionalism in a coffee industry goes hand in hand with our ongoing investment in a professional coffee supply chain.

In the second quarter, we signed an investment agreement for our second coffee roasting facility in Kuching.

designed for a capacity of 30,000 tons and is expected to start construction at the end of 2022.

By launching Vinden specialty coffee, we have significantly raised the popularity of China poro coffee. And lacking became one of the most important buyers of the United Green coffee beans.

The ongoing investment to expand the coffee bean supply chain is conducive to maintain raw material quality and effectively improving cost control capabilities.

which is expected to be one of our greatest competitive advantage in a long term.

The pursuit of good flavor is illustrated by our accelerating digitalization by our VAR and D mechanism and strategy. The pursuit of good flavor is illustrated by our VAR and D mechanism and strategy.

Through a comprehensive digital R&D framework, we have achieved a virtuous circle of combined front and operational data and back-end product development, increasing our ability to offer innovative and popular products and attract young customers. e

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Based on publicly available information, Blackened Coffee has become one of the largest coffee networks in China in terms of the number of stores and keeps growing. As of June 30, 2022, we had 7,195 stores in total, with 615 stores newly opened during the second quarter.

We saw strong performance from our newly opened self-operated stores in newly entered cities such as Inchuan and Hingyun.

Going forward, we will continue to maintain our store expansion strategy through a balanced mix of self-operative stores and partnership stores. The mix of self-operative stores and partnership stores.

While we expect to continue our expansion into top tier cities through our self-operative stores, we also intend to quickly enter lower tier cities through our partnerships through our model.

With belief, there is a great potential in China's coffee market and we're confident in our future store expansion. At this time, I would like to turn the call over to Rhino to discuss our financial performance during this quarter.

Thank you, G. And also thank you for your kind words.

Welcome everyone to today's call. I would like to start today by welcoming Ms. Ann as our new Chief Financial Officer of Luckin Coffee.

We're all very excited to have an executive of our caliber on board and I believe her appointment comes at the exact right time in a company's evolution.

Ms. Ahn brings over 17 years of corporate finance and management experience to Luckin' Coffee, and with her wealth of experience, she is the right person to lead our finance team going forward, and bring Luckin' Coffee to an even higher level.

I look forward to working closely together with Misan to ensure a smooth transition of finance and accounting responsibilities as I move into my new role as Chief Strategy Officer.

I feel incredibly privileged that I was given the opportunity to lead the reorganization of our finance team and functions, as well as our offshore financial restructuring, which now have been both successfully completed.

I would like to thank Ginny, our board, our management team, and our shareholders for their trust and support. Thank you.

Our outstanding Lock-in employees continue to deliver every day, including our finance, internal audit, legal and compliance, internal controls and investor relationship teams who have shown exceptional dedication, perseverance and hard work.

For all of us that have been on this journey together, we know it has been a great challenge, but I think we can be incredibly proud of what we have achieved so far.

I certainly know I am.

Now that we've played the company back and have passed the word sustainable long-term growth, we believe the company is now in a position of strength with significant growth opportunities he had.

In my role as chief strategy officer, I will strive to continue to support Lackin' Coffee and reaching more important milestones, principally focusing on long-term strategic planning, helping identify and execute growth opportunities, and leading the execution of Lackin' Coffee's to develop a market strategy.

I will now turn to our Q2 performance.

Like last quarter, I would like to provide some context on the current COVID-19 situation in China and the impact on our business.

During the second quarter, the negative impact of the COVID-19 pandemic and the company has gradually lessened. In particular, follow the listing of COVID-19 related restrictions in Shanghai starting June 1-2-3-2-3-2-1. Thank you. first.

To provide some perspectives, we had an average of 900 temporary daily store closures during April and May 2022, and this number reduced to just over 150 temporary daily store closures during June , and even further decreased to around just under 100 during the month of July .

Despite these encouraging improvements, the impact on our financial results in the second quarter was nonetheless substantial, and we anticipate that our operations will continue to be negatively affected by pandemic-related market pressures but a foreseeable future. An

The lack of visibility from this uncertain and unclear operating environment means we are not providing any forward-looking guidance at this time.

Despite these pandemic-related headwinds, and as Ginni mentioned earlier, we have been able to deliver yet another quarter of outstanding financial and operational results.

Here are some of the quarterly highlights.

I reported operating profit margin was over 7%, a material improvement compared to last year and also last quarter.

We reported 3.3 billion revenue of net revenues and increased the more than 70% compared to the same period last year. In both of our store formats reported strong top line growth.

Our self-operated stores reported the same store's sales growth of over 40% and partnerships grew by almost 180%.

This was due to very strong demand for our products and supported by our innovative product development strategy highlighted by the success of our Coconut Cloud Latte.

We also saw substantial growth in transacting customers.

We acquired more than 10 million new customers in the quarter, a quarterly record high, as well as an increase in the average monthly transacting customers to close to 21 million, an increase of almost 70% year over year.

We are very pleased with our results as these clearly demonstrate a strong momentum and we believe further validates our business model.

In terms of store growth, we open 650 net new stores, an acceleration compared to the first quarter, to meet the ever growing demand of our products, and an anticipation for the summer month, which are seasonally our strongest month.

We now have a nationwide footprint of close to 7200 stores as of June 30, 2022, which provide us significant benefits of skill.

In terms of store mix, we opened 322 net new partnership stores and entered into 11 new lower tier cities.

For our FELF-UP-RIDED stores, we opened 293 net-new stores and entered into three new low material cities. As I mentioned earlier, we saw a further material improvement in our profitability profile during the second quarter.

Specifically, we achieved a store-level margin of over 30% for our self-operated stores in a seasonally strong second quarter.

This is the highest store-level margin we have achieved since our inception and a notable improvement compared to the 23.1% achieved in the same period last year.

For our partnership stores, we do not disclose any metrics on profitability. However, as can be seen from our partnership store revenue breakdown in the 6K files earlier today, revenue contribution from profit sharing, one of the contributors to partnership revenue and profit, increased by 261% year over year to 105 million renminbi during the quarter.

In terms of our overhead expenses, the trends are also favorable due to benefits of skill.

Our general administrative expenses increased by around 55 million revenue year over year, which reflects our continued investment in our business. However, as a percentage of revenue, these expenses decreased from 15% in Q2 last year to 10.4% this quarter.

Same for our fill-as-a-marketing expenditures.

If we remove the impact of free cups, we increase our spending by 38 million RMB compared to last year, as we spend more on advertising and commission fees to third-party delivery platforms.

As a percentage of revenues, these expenses decreased from 4.7% in Q2 last year to 3.9% this quarter.

And as I mentioned last quarter, our current organization is built to support our future growth. And we currently expect these expenses to further decrease as a percentage of revenues over the coming years, if we can continue to deliver growth.

There are two other areas I would like to point out on this call.

First, as you can see from the 6k we filed earlier today, we booked an impairment loss of long-list assets of 221.8 million RMB, which is around 6.7% of net revenues during the quarter.

This impairment relates to a full and final impairment of our Lackin Coffee Express machines. In the short term, we believe the Chinese coffee market is still at an early development phase, and unmanned coffee machines mainly serve needs of more mature coffee consumers, which we release will take more time.

Compared to our store operations, which have huge growth potential, the cost-benefit analysis does not stack out for lack of an express at this time.

Although we will continue to operate some machines in select cities, further optimize the business model and monitor market demand, we do not expect these operations to reach profitability in the foreseeable future, resulting in a full impairment.

Apart from the impairment, the impact on our financials is minimal, given the limited scale of this business.

Secondly, in line with expectations, there has been a further reduction of loss within expenses related to the restructuring since the provisional equity of the company and the K- wingis as completed in March 2022. Justended as an summary, there has been a further reduction of loss within expenses related to the restructuring since the provisional equity of the company and the K- wingis as completed in March 2022. 2022.

Now before I discuss our balance sheet and liquidity, first brief update on the status of the US Security's litigation, and their impact on our financial statements.

As Ginny mentioned earlier during the call, we've made substantial progress in resolving outstanding US security litigation.

The federal class action settlement, which resolved the overwhelming majority of the company's potential exposure, received final approval from the federal court overseeing the case on July 22nd.

and we funded the $175 million settlement amount into an escrow account prior to June 30, 2022, which is reflected in our latest cash position and therefore have fulfilled all our obligations on the settlement.

We were also able to make substantial progress in resolving the remaining opt out securities litigation, which is reflected in an increase in our provision for equity litigants in the second quarter as filed in our 6K.

If we look at our operating cash flow,

During the quarter, we had a positive operating cash flow of 619 million Remabie, which is just over 90 million US dollars, after stripping out the payment of $175 million to the federal class.

Our operating cash flow, excluding the settlement payment, increased by more than 70% compared to the same quarter last year, and easily covers our capital expenditures during the quarter, which amounted to just under 70 million RMB.

Following the payment of the federal class settlement, our cash position remains very strong, which close to 4.5 billion Rememabee of cash and cash equivalents as of June 30, 2022.

We have a healthy balance sheet and will continue to review our liquidity requirements on an ongoing basis to ensure that we can meet all of our business needs and continue to further optimize our capital's structure. But that ends my prepared remarks for today. Thank you to all shareholders for your trust and support and I look forward to continuing our dialogue in my new role together with Alicia Gwell who recently joined us as the head of Investor Relations at Larkin Coffee.

I'll now turn it over to Jingyi for concluding remarks and then we'll have Q&A.

Thank you for your attention.

What's next, Moving forward, thank you all for supporting yourself to your HP and knowledge of the taste and taste of coffee.

If you have any questions, please leave them in the comments.

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Finally, I'd like to thank all of our stakeholders again for their ongoing attention and long-term support of lacking coffee. The long-term development of lacking coffee is directly tied to our shareholders and investors, as well as the support of our customers and the entire society.

We look forward to having meaningful conversations with our customers, investors, regulatory authorities and other stakeholders as we continue to focus on creating long-term value for them.

We remain committed to building lacking coffee into a long-standing world-class coffee brand and achieve sustainable, healthy and long-term growth. In 1918,ubsellschaftenables Discovered C

Thank you. Now we would like to open the floor to questions.

Ladies and gentlemen, we will now begin the Q&A session. I will now turn the call over to Alicia Kuo at Luckin Coffee, who will moderate today's Q&A session.

Thank you operator and thanks for all of those who submitted your questions online. We truly have had an overwhelming response since finding our pre-announcement last week.

Due to the volume of the question, we have on the best efforts basis, try to categorize your question and select those questions that have been asked most frequently. Due to the time limitation, we have only been able to select five questions this quarter. We will endeavor to continuously engage with all of our investors in an open and constructive dialogue and strive to address all of your key questions over time.

in no particular order. Let's start with the first question. Product development and success of your new products seems to have materially contributed to your recent operational success. Can you tell us more about your R&D process and also how sustainable this is?

Dr. Guel, could you take the first question please?

Thank you.

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Thanks for your question. Our digital and systematic R&D process is the key to our product development success. We digitalize all raw materials and tastes in order to track beverage trend, build the basic menu, and direct numerous product combinations.

Through the integrated process that covers menu management, R&D, testing, and optimization, we're able to stabilize the overall menu structure and consistently innovate to meet changing preferences of our customers. With this mechanism, we have successfully launched a series of popular products over the past two years. —

with an average of 35 new products launched each quarter. For example, Neuer Latte and Coconut Milk Latte have sold over 100 million cups respectively since their launch.

And nearly 30 other products have sold over 10 million each. And many of them have received numerous awards and widely praised by our customers.

Supply chain also plays an important part in the sustainability of our R&D process.

We have been investing in the coffee supply chain as well as working on upstreams and downstream integration, which not only ensures the quality and stability of raw materials, but is also more cost effective.

In terms of logistics, by taking advantage of our grip base the warehouse network in multiple locations, we have been able to not only continuously improve our efficiency, but also avoid that the negative impact on our raw material supply from traffic lockdown.

This in turn guarantees product delivery and continued product launches with the support of this innovative R&D system as well as supply chain and logistics system. Lacking can maintain its industry leading position in terms of product R&D. Thank you, Dr. Guol. Let's move to the next question. Like for like sales has been very strong over the last quarter. Can you give us some guidance on key drivers? Price versus item sold.

as well as any guidance on how to look at this longer term. Do you think you can keep that momentum in Q3 and beyond?

Maybe I'll take that one, Alicia. Thanks for the question. We're very pleased with the progress that we've made so far, especially since mid-2020, under the revised strategic plan and our current leadership. Now, this plan included a very detailed review of our store portfolio, tightening of a store opening criteria, reviewing of our pricing strategy, and really focusing on the core competencies. And really focusing on the core competencies.

The strengths of our product development, of course, are brand.

The results speak for themselves. Since the start of 2021, we reported SSSG for a self-operated stores between 40 and 95% over six consecutive quarters, despite the impact of COVID.

At this quarter, we reported SSSG for a cell-operated stores just over 40%. And if we break down that growth into its component, it's fair to say that this quarter, the majority of that growth was from an increase in the average items sold to store per day, reason the ready to discuss from the call today, and to a lesser extent from increase in price point.

Now, we will not provide any forward looking guidance in this call, but what I can say is that, as I'm sure everyone will appreciate, these types of growth percentages are unusual, and also due to the comparative periods for the 2021 results, when we're in the middle of implementing any of our strategic initiatives.

Now we do expect these percentages to normalize over time.

In terms of our pricing strategy, our affordability proposition is an important differentiator in growing our market share and expanding our customer base further. More importantly, we are profitable at these prices as demonstrated by our store-level margins during the quarter.

I therefore do not proceed a substantial change in our pricing strategy in the foreseeable future.

We will of course closely monitor general inflationary pressures, including any increases in prices of raw materials.

In terms of items sold to store, we continue to see substantial room for growth.

As mentioned by Genie earlier, we have a very strong product development team and philosophy and a large customer base in a market that is growing very, very quickly.

It's also clear that when we look at the overall penetration rate of coffee consumption, despite recent high growth, it is still a fraction of more developed coffee markets.

And finally, in addition, we will continue to roll out new stores in both existing and new cities, continue with the launch new products, and also further increase our brand awareness going forward, which I hope will in turn reflect on our revenue growth and profitability profile. Thank you. Thanks, Rhino. We have the next question about transacting customers continues to grow and is currently at around 20 million, in material increase year over year.

What are the main initiatives on attracting new customers and what can you tell us in terms of maintaining those customers going forward?

Can Dr. Guo take this question, please?

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Thank you for the question. I will answer it from two perspectives, attracting new customers and maintaining loyal customers. Regarding attracting new customers, Chias Coffee Market is still in the early stage of development with significant growth potential. In the second quarter, our average monthly transacting customers had substantial improved. The average transacting customers had substantial improved.

reaching 20.7 million, representing a year-over-year growth of nearly 70%.

The number of new transacting customer is over 10 million. This result is driven by three factors.

First, rising brand recognition. We have built our brand based on professionalism, youth, fashion and wellness. Lacking coffee has become the coffee brand of choice for more and more young people through these brand efforts.

Second, the continuous rollouts of our store networks to bring our services and products closer to customers. As of the end of second quarter, we had 7,195 stores in total, more than 230 cities.

With our current footprint, we're able to provide services in different consumption scenarios where a customer wants to be met, such as offices, buildings, shopping malls, schools, and transportation centers.

Third, continued success in product R&D. For instance, we launched a series of products like coconut milk latte and the coconut cloud latte, which were major drivers for attracting new customers.

In terms of maintaining loyal customers, we adopt a three main strategies. First, through continuously investing in the coffee supply chain and upholding product quality, to bring our customers with product and services with a stable quality and affordability. We can improve the thickness of our customers.

Second, focus on the changes in customer demand and continuously launch more innovative and popular products.

Third, continuously increasing the purchase frequency by using promotion strategies such as private traffic operation, customer differentiation, and membership system, and focusing on...

Choreometrics such as customer retention and a repurchase rate, realizing a sustainable growth.

Thank you, Dr. Gua. So our next question is, what is the company's type of market strategy, and can you tell us if and when there will be a real estate on the main board? What are the key factors driving that decision? I wonder if you could please provide further comment on this.

Thanks, Alicia, and thanks for this question. It's certainly a question that we get quite regularly, including from the online submissions. I'm happy to address it here to the extent I can.

First of all, as we have expressed on several occasions and I do think it's important to reiterate the company is and remains committed to US capital markets.

Now the priority for us is providing sustainable long-term value for shareholders by executing our business strategies and delivering outstanding products and services to our customers.

We're also very focused on maintaining a strong balance sheet and a measured approach to capital allocation, maintaining strong internal controls over our financial reporting to ensure we operate with the utmost integrity and act responsibly to resolve all of our historical issues.

And, with the establishment of our new ESG Sustainability Committee, we also want to ensure that we can give back to our communities and operate in a socially responsible manner.

Now these are all the factors that are within our control and where we've made significant progress and will continue to focus on going forward

Now specifically in relation to our capital market strategy, for the extent we have further updates to share, we will provide them.

The board and management team will continue to monitor all relevant developments and take actions believes are in the best interest of the company and our stakeholders.

Thank you. Thanks, Raino. The last question is, the company has entered many lower tier cities through partnership stores in Q2. What is the company's overall network expansion plan in terms of geographic and high slash low tier city distribution? Can you hear me?

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Thank you for the question. Our self-operated stores are many located in Tier 1 and Tier 2 cities. Partnerships stores million covers the lower tier cities. Those two store models are highly complimentary to each other. Self-operated stores are located in the more matured markets with higher density, where there are still numerous available locations to be selected. These markets have room to further expansion, where we can reduce costs in a timely fashion.

by leveraging increasing economy of scale. On their other hand, cities in early development of stage.

of coffee consumption are suitable for a partnership store. Those cities are normally geographically scattered with challenging site selection as well as cost control. By leveraging our advantage of the local partners as well as the remote intelligence monitoring measures, we can quickly penetrate the lower tier cities while ensuring product quality and effectively reducing our overhead costs.

Based on our site selection digital analysis system, would believe that the market is far from saturated with many potential new locations for lacking stores, driven by the promotion of coffee consumption.

Going forward, we will continue to maintain a rhythmically pace of opening new stores based on the same assessment criteria we have been using.

Focusing on both door counts and quality.

In Tier 1 and Tier 2 cities will continue to increase store density and rapidly penetrate in lower tier cities to further improve store coverage and better meet consumer needs. Thank you Dr. Gua that is all the time we have for today's earnings conference call. We thank you for your participation on today's call. We look forward to providing you with regular business updates and look forward to speaking with you again next quarter. This concludes our call today. You may not today. You may now disconnect.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 11. The conference will begin shortly.

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