Ladies and gentlemen, thank you for standing by, and welcome to Pinduoduo Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to first speaker today, Mr. [Jason Zhu]. Thank you. Please go ahead, sir.

Yes, thank you, AJ. Hello, everyone, and thank you for joining us today. Pinduoduo's earnings release was distributed earlier and is available on the IR website at investor.pinduoduo.com as well as through GlobeNewswire services. On today's call, our CEO, Chen Lei, will make some general remarks on our performance for the past year and our strategic focus going forward; our VP of strategy, David Liu, will then elaborate further on specific strategic initiatives; our VP of Finance, Tony Ma, will then take us through our financial results for the fourth quarter and fiscal year 2020 ended December 31, 2020. So before we begin, I would like to refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make certain forward-looking statements. Also, this call includes discussion of certain non-GAAP financial measures, so please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to GAAP measures. Now it is my pleasure to introduce our Chief Executive Officer, Chen Lei. Please go ahead.

Thank you, Jason, and hello, everyone. Thank you for joining us on our earnings call for the fourth quarter and fiscal year 2020. Pinduoduo delivered another quarter of strong growth and solid execution as our users continue to trust us with their purchases. Our annual active buyers increased 57 million in Q4 to reach 788 million for the trailing 12 months. User engagement has also accelerated. Our MAU increased to 720 million. Total number of orders placed on our platform increased by 94% to reach 38.3 billion in 2020. Total revenues, excluding revenues from merchandise sales for Q4 was RMB 21.2 billion or an increase of 96% from a year ago. Non-GAAP operating loss narrowed in Q4 from the same quarter a year ago. 2020 was a challenging year for Pinduoduo as it was for many others. COVID-19 pandemic, which by now has already stretched over 2 winters, has put our team and platform through a tough test since we were founded 6 years ago. It has been a humbling experience for us. I'm glad that we have responded quickly and responsibly to continue serving our users better, thereby winning their invaluable trust. I would like to thank our users and our team for their continuous support. As we transition from 2020 to 2021, I would like to share some takeaways and do a recap of this very long year. First, 2020 has dictated our view from the get go which is that the separation of the online and off-line world is increasingly irrelevant. With advent of mobile Internet, the online/off-line are just part of a single world, branded together more and more seamlessly and complementary to each other. Unlike with desktops, smartphone users could go online anywhere anytime and for any length of time, users no longer had to…

Thank you, Lei. Hello, everyone. I'll further elaborate some points Lei made just now. First, on our continued efforts to improve the agriculture value chain; second, on our revenues from merchandise sales; and third, on our ESG priorities for 2021. Improving the agriculture sector to benefit our users, that's farmers and consumers, is a central and strategic priority for us. We take a systems-based approach to this and devote substantial resources to identify and implement improvements at all stages of the agricultural value chain. As Lei mentioned, we share the vision of transforming agriculture in China with technology and aim to increase food security. To begin at the upstream, we work with institute partners and universities to introduce more technology to farming. In 2020, we launched the inaugural small agricultural competition in partnership with China Agricultural University, where teams from around the world participated in investigating the use of artificial intelligence in optimizing strawberry planting. The competition identified cost-efficient and scalable technology that can potentially be standardized across China. The winning team has started to commercialize these research findings. Last year, Pinduoduo also supported the Global AgriInno Challenge 2020, which was co-organized by the Food and Agriculture Organization of the United Nations at Zhejiang University. The competition attracted over 150 teams from around the world to put forward our innovative solution to challenges in the distribution and sales of agri-food products during COVID-19. AquaFarms Africa, an agritech start-up based in Conkary, Guinea won the competition with its technique of aquaponics, which combine fish farming with soil-less vegetable growing, allowing the production of food and vegetables that are normally imported. We will continue investing in the promotion of digital agriculture and precision farming going forward. At the downstream, we have helped over 12 million farmers sell directly to our 788 million…

Thank you, David. Now let me take you through our financial results for the quarter and fiscal year ended December 31, 2020. Our annual active buyers for the last 12 months ending December 31, 2020 grew by over 200 million from the end of 2019 to 788 million. Our MAUs in Q4 grew by $77 million from the prior quarter to reach 720 million or an increase of 50% from the same quarter in 2019. Our MAUs in Q4 as a percentage of our annual active buyer exceeded 90% for the first time, which we see as a reflection that we are satisfying the needs of more users. Our last 12-month GMV for 2020 grew to RMB 1.67 trillion, representing 66% year-on-year growth. In comparison, our average annual spending per active buyer increased 23% to RMB 2,115. The lower rate of increase should be considered in the context of substantial increase of 203 million active buyers over the past year. Most of these new users are still building trust with our platform and have contributed less than a full year worth of purchases in 2020. We continue to observe that as our users season on the platform, they make purchases across more categories and increase their average spending over time in each category. We did observe an increase in purchase frequency in 2020, partly due to the grocery business we launched. In 2020, our platform generated a total of 38.3 billion orders or an average of 49 orders per active buyer. This is an increase of 44% from a year ago. As the average order value of gross rate are lower than our platform average, our AOV came down 15% to RMB 43.5 in 2020 as compared to RMB 51.1 in 2019. Please note that starting from Q1 2021, we…

[Operator Instructions] We have the first question from the line of Binnie Wong from HSBC.

Congrats on such a very robust quarter to conclude 2020. My first -- I have two questions here. First question is actually on the user side. So you look at the users, it's actually very amazing at 788 million. That, of course, surpassed your peers and is one of the largest. So can you help us understand what are the strategy that you have used to deliver such growth? And how would you think you can sustain that in terms of this user engagement level? My second question is also on the -- it's actually on the community group purchase. I think you mentioned it's a 3P model. Just want to take a dive into in terms of the accounting-wise. So how does it really work in terms of your commission pay to the community group leaders? Or is it that some of it will be transacted via our marketplace platform? So I guess it's just in terms of us to better understand the accounting, how it really works. And also in terms of the profit, I mean, like on the GP dollar side, how much losses are we running at? If you can give us some idea, not necessarily numerically, if this is not at the right level to disclose. But I guess more just in terms of clarity as to how we should think about the investments that we do need for the rest of the year. And I think management has mentioned about the infrastructure, the logistics side of things as well. So that will be great.

Thanks, Binnie. Why don't I ask Lei to address the first part of your question, and then I will have Tony talk a little bit about accounting, but some of the technical stuff, we can take it off-line as well.

So we continue to observe very good momentum in terms of our user growth. And in each of the past 4 quarters, we added on average over 50 million annual active buyers for each quarter of them. And that being said, as we are approaching 800 million user landmark and it's inevitable that our user growth will slow down, as we always said that we are less focused on the user numbers and that we are more focused on building users' satisfaction and trust by bringing them the best shopping experience and value for money products. And we believe that as long as we can continuously serve our users well that we will keep growing and thanks to their trusting us. And so 1 factor is we are -- actually, we always -- our priority is in the agriculture sector. Not only is agriculture the least digitized by mobile Internet, it's also the greatest widespread benefit that we can create as a big platform. And we are now China's largest agriculture platform, and so in the future, we will commit to do more for agriculture sectors and the rural communities. And the other thing earlier I talked about is the future, this integrated world of online/off-line. Definitely, we are targeting this kind of new world. So think about it, you really need to look at this wider retail market. So today, China's total retail sales for consumer goods already reached 39 trillion in 2020. And it is expected to grow at 5% per year over the next 5 years. And if you take a look at our numbers, so our GMV stand at only 4% of it. So I believe that as consumers' behavior of online and off-line continue to integrate and an opportunity for us will definitely will continue to expand.

Let me pick up on the second question on Duo Duo Grocery, I guess. As you mentioned, Duo Duo Grocery, we operate at a 3P offering. From an accounting point of view, we generate transaction service revenues for the services provided to our merchants and some farmers. The contribution in Q4 and fiscal year 2020 of the total grocery products is immaterial. Most of the costs associated of running Duo Duo Grocery operations, such as warehouse rental and delivery logistics are captured and our cost of revenues. Just to note, Duo Duo Grocery is a very young business, we just started with a few months, and it is still evolving. But we are very confident about this business model, and it brings significant value to our consumers and other participants among this value chain. A few key drivers we can think of on the UE side, let's take if we are able to streamline unnecessary layers of the distribution and each layer traditionally would take up a meaningful markup, so a more efficient supply chain would also mean less spoilage. And all these factors put in together will definitely bring additional value to the stake for all the participants, the stakeholders to share in this business model. But like I said, the development on the infrastructure on the whole process will take time to be there. So at this moment, profitability won't be a target for us to set for Duo Duo Grocery.

Yes. And Binnie, I just want to add on top of that, to say that PDD at the end of 2020, we are the largest e-commerce platform by users already. And as we have always talked about, focusing on engagement really is the core of our strategy, and we are confident now with an even further enlarged base that is continuing to grow at good momentum. We should be able to drive even better engagement. And Duo Duo Grocery really plays into that by giving us an additional access point to address the needs that we previously couldn't have. So we have our high hopes for the Duo Duo Grocery business because it is integral. It is the extension of our overall platform. And as the model evolves, I think the roles of the different constituents of the Duo Duo Grocery ecosystem, we may also evolve as well. So stay tuned and bear with us. We think this could be tremendous opportunities. We are confident that we'll be able to execute, but it will take some iterations to find the perfect model.

The next question comes from the line of Thomas Chong from Jefferies.

I think in the prepared remarks, management comments about Duo Duo Maicai has the merchandise sales, which is a 1P trial business, and it is not significant to the GMV. So I just want to get a sense about when the business is getting bigger and bigger, should we expect the merchandise sales are continuing to decline in absolute amount in coming quarters? And on that front, is it possible to give us some color about the GP margin of this 1P trial business as well as the overall Duo Duo Maicai GP margin as well? And my second question is about the GMV growth. I think management also talked about the focus on monetization. How should we think about the GMV per buyer going forward?

Sure, Thomas. I think you asked quite a number of questions in your two questions. So let me try to maybe take that in bits and pieces of it. The first thing I want to make clear if there is any confusion is that the merchandise business -- merchandise sales business that we are reporting as an additional revenue item has nothing to do with Duo Duo Grocery or Duo Duo Maicai, so we are referring this too as Duo Duo Grocery in English going forward. So the 1P merchandise sales business has nothing to do with Duo Duo Grocery, so I want to make sure that is very clear. The 1P business, as we mentioned, is because we have noticed that there are consumer demands on our platform, which we haven't been able to identify the appropriate merchants for. And we have to step in these situations temporarily to make sure that our users can find the product they want at the prices that they are looking for, all right? So because this is a temporary measure, we have no intention to grow this into a larger scale business. In the fourth quarter, the 1P business is less than 1% our GMV. And I think you should expect that to stay as a small percentage of our GMV going forward. As to the Duo Duo Maicai, it is, as Tony mentioned, it is a very new business initiative, and the business model continues to evolve. I would say that the first thing I do want to take the opportunity to clarify is that the Duo Duo Grocery business itself is not a community group purchase business. It's important that the investors understand this distinction because it impacts, I think, your understanding of how the economics works, right? So first…

The next the next question comes from the line of Alicia Yap from Citi Group.

I have very 2 quick ones. One is I wanted to follow-up what exactly is the item category in this 1P trial that we have? And then second is, could management comment on this Duo Duo Grocery performance? I know it is still early, but then how do you rate the performance so far for the fourth quarter? Is that in line, above or below your internal expectation?

Sorry, Alicia, I was distracted. But on your question regarding the 1P business, the product categories is actually quite diversified. How we approached it was really identifying -- looking at items we execute on our platform where we know there are clear consumer demands but we aren't able to source sufficient merchants for. So the product categories are quite diverse, and the strategy itself, it is not category-specific. The second thing I would say on your question regarding the progress of Duo Duo Grocery, as both I think Lei and Tony have commented, this is a very long-term commitment for us and because we think the opportunity is immense, and because we think we can really create some values here for the users. So as such, I think we are experiencing as we move forward, as I mentioned earlier in my response, the service is now available across the nation in over 300 cities. So I think we are pretty comfortable with the progress or the pace of the rollout on the geographic footprint. What is more interesting from our perspective, however, is to build and develop a corresponding infrastructure network, right? It's easy to drive user growth. And particularly for a platform like us, we naturally have a very intrinsic advantage, I guess, from a traffic perspective. The question we are more concerned about is what investments do we need and how can we deliver the right type of user opportunities to -- the user experience to address the opportunities we see. Because I think one of the few elements of success to the Duo Duo Grocery business in our mind, I guess, maybe to highlight 2 things in particular, one of which is sourcing and forecasting, right? How much you can sell or how -- what price can you sell the SKUs for ultimately depends on your ability to forecast the demand properly and be able to organize the supply chain around it in the most efficient way possible. And of course, the second part of it is an infrastructure that can be aligned appropriately and largely for agriculture and fresh produce, such that we can arrange the fulfillment and deliver in this less than 24-hour type of cycle. So we are still really in the very early innings of what we consider to be kind of our approach to grocery business in China. And I think we are pleased with the progress that we have made so far, but there's definitely still a lot more we can do.

The next question comes from the line of Natalie Wu from Haitong International.

Just a little bit add on the synergy question of the last question. Just wondering what kind of the synergy between Duo Duo Grocery and your original marketplace business in terms of the supply chain should we expect in the longer term future. And what's your progress now? And also, wondering if that could be the key competitive edge that differentiates us from other competitors in the longer run.

Thank you, Natalie. So as we have discussed, we can see Duo Duo Grocery really as an integrated part of our marketplace, right? So it is an extension of the experiences that we can offer. It is an extension, an ability to address more of consumers' needs and use. So -- and you -- from listening to what we have said about being focused on building on infrastructure, the idea is really to figure out how we can address their needs better, both really continuing to leverage on the existing express delivery infrastructure network as well as to develop this less than 24-hour type of fulfillment infrastructure for Duo Duo Grocery. If we can organize both these delivery logistics very efficiently and actually be able to forecast and recommend the appropriate SKUs to consumers based on their desirable use case and fulfillment case, we actually see a lot of opportunities to drive synergy between the platform marketplace today and the Duo Duo Grocery scenarios. And certainly, on the supply chain side, as I mentioned earlier, most of the suppliers today are local. That said, there are 12 million farmers on PDD today who are sourcing and -- who are supplying to our users on a nationwide basis. These could all be potential sellers or suppliers into the Duo Duo Grocery scenario, provided that they have enough support around logistics and BI coordination. So certainly, over time, I think we see the infrastructure being able to support not only locally driven supplier, but on a nationwide basis to really leverage the supply chain available on PDD's marketplace, but also extend beyond pure agriculture produce. And this is the reason why Lei in his remarks pointed out that we are -- our vision is really to become China's largest agriculture producer. And by doing so, in that process, become the largest grocer for the world.

We have our next question from the line of Piyush Mubayi from Golden Sachs.

My first question is about a comment in Colin's letter to shareholders where he mentions that traditional approach to competing -- of competing through scale and efficiency has its inevitable limitations. I wonder if you could elaborate. And in the interest of time, I wonder if you could talk through the impact of Duo Duo Grocery on the broader business, i.e., when I look at your take rates there, a record high of 3.23% and you expounded on that. When I look at your sales and marketing spend is that it's one of the lowest we've seen at 77.8% if you strip out the merchandise sales and just look at marketing services. But that seems to be the start in the right direction. If you could just expound on that. And also elaborate on, if possible in the limited time, the impact of Duo Duo Grocery on the gross profit line, that would be great.

Piyush, I think the way you should think about the Duo Duo Grocery's impact on the business model overall is highly synergistic, right, in the sense that we now have an incremental scenarios of being able to fulfill the users' needs that we previously weren't able to address. So that increases our ability to address that need over time. And so -- and because of that, we certainly expect the engagement overall on the platform to continue to improve. And as more users become more familiar with our platform, we also expect their spending will continue to improve. So one of the things that I think you may notice that from an average order value perspective, for the year, it has actually decreased Y-o-Y over the prior year. But you need to take that in the context of the significant number of user add and also the increase in order numbers. So we are quite confident, actually, as the business continue -- the users continue to mature on our platform. With the improvement in engagement level, this will continue to trend in the right direction and resulting in more operating efficiency that, Piyush, you have identified. In the interest of time, why don't we take one last question.

We have the next question from the line of Eddy Wang from Morgan Stanley.

The question is also related to the grocery business. So as you mentioned that Duo Duo Grocery is not a community grocer business. But if we look at the competition in the fresh grocery side, actually you are competing with the other community grocer players. As you said that next step will be invest in this kind of asset-heavy warehouse and agriculture-focused logistics, so just want to know, you also -- whether or not in terms of this -- all these players, they are -- now that the next focus will be the infrastructure investment and user engagement instead of the user acquisition maybe very aggressively in the past 6 months? And how -- what's your view on the competition in terms of fresh grocery, online fresh grocery, in this year?

Sure, Eddy, thank you for that. So we're obviously not in a position to comment on other players' strategy. But as we -- so I would say instead, let's focus on what we are doing, right? So if you look at what PDD is today, we are an e-commerce platform with 788 million users, highly active users at that rate. So the MAU for the quarter was at 720 million. So almost 90% of my annual active user. And we are confident that the user engagement metrics will continue to trend. As we have communicated through the past quarters, growing user base has never really been our priority, but the entire year was really focused on engagement. But with better engagement, with better trust building on the platform, the user number have grown. We have seen very strong growth momentum in that. But as Lei mentioned, given the scale of our user base today, it's inevitable that user growth will start to trend down. And it's much more important that we are focused on engagement and focused on satisfying their needs on our platform. And then Duo Duo Grocery provides us that opportunity to -- or I would just say incremental opportunity to address that additional aspect of needs for groceries, for grocery on a more timely basis and at more compelling value. And I think it's important to recognize the fact that Duo Duo Grocery appropriately, we as a platform do need to become more heavy. It is an operational-heavier business. We are getting involved in warehousing operations, we're getting involved in delivery logistics operations. So the investments in off-line operations will be an important part of the success factor. But I would say to -- in thinking through the competitive dynamic, it's important not to lose sight the strategic advantage that we, as a platform, with 700 or almost 800 million users have over in this business model, right? So we will continue to focus what we have been doing well, which is understanding what consumers are looking for, recommending them the most appropriate product based on our understanding of what their needs are, what their expectation of value for money is and accept the differences now instead of having to rely only on express delivery. We actually have an additional fulfillment mechanism that can actually enable a shorter turnaround of delivery for particular categories of product where that time sensitivity actually matters, right? So we are fully committed to making sure that we have the right infrastructure in place to win in this business because we think by doing this right, the opportunity is immense and highly synergistic to the marketplace business that we continue to see a very long runway for. With that, we will wrap up the call for the evening. Thank you very much, everyone, for your time and look forward to speaking again in the next quarter.

Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may all disconnect now. Thank you.