Good day, and thank you for standing by. Welcome to the Pinduoduo Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jason Shu. Please go ahead.

All right. Thank you, operator. Hello, everyone, and thank you for joining us today. Pinduoduo 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 Chairman and the Chief Executive Officer, Chen Lei, we will make some general remarks on our performance for the past quarter and our strategic focus going forward. Our VP of Finance, Tony Ma, will then elaborate further on specific strategic initiatives and take us through our financial results for the second quarter ended June 30, 2021. Before we begin, I would like to refer you to our Safe Harbor statements in the earnings press release, which applies to this call as we will make certain forward-looking statements. Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to GAAP measures. So, now it is my pleasure to introduce our Chairman and the Chief Executive Officer, Chen Lei. Lei, please go ahead.

Thank you, Jason. Hello, everyone, and thank you for joining our results announcement for the second quarter of 2021. Thanks to our users' trust, our total revenue for this quarter, excluding revenue from merchandise sales, was RMB21.1 billion. This represents a year-on-year increase of 73%. Our annual active buyers reached 849.9 million for the 12 months ending on June 30. Over the quarter, average MAU increased to 738.5 million, representing 87% of our annual active buyers. Our results this quarter demonstrate our enduring commitment to serve our users as well as their trust in us. We feel fortunate and are grateful for their consistent support and we will continue to do our best to serve them and all our stakeholders. Pinduoduo takes our responsibility to our users and society very seriously. Without them and their support, we will not be where we are today. This is why we are always there with them and for them in their times of need. After heavy rains struck Henan Province last month, we immediately mobilized our networks, our partners to provide relief. Close to 20,000 total grocery pickup points at Zhengzhou City helped to distribute emergency supplies to residents living in their vicinity. With Henan's agricultural supplies disrupted by COVID-19 and the rain, we linked up Henan's total grocery network with neighboring networks, including Shandong and Anhui to ensure that residents continue to have the supplies they needed at stable prices. As user demand in Henan rose significantly, we also increased our warehousing by four times and doubled our manpower there. In addition to these efforts, we contributed RMB100 million towards the rescue and relief efforts. Our support for Henan is in the same spirit as our earlier initiatives to leverage our platform to contribute to society. When COVID-19 disrupted traditional agricultural supply…

Thank you, Lei. Hello, everyone. Let me begin by providing an update on our progress in improving agriculture by applying technology and elaborate on how we will continue to deploy resources to do so, so as to achieve our mission to benefit all and I will then discuss our financials this quarter. First, our efforts on digital and technological inclusion on farmers and equity merchants. We are firm believers in online agriculture retail and have already connected over 16 million farmers. We are committed to do more for them and bring more farmers onboard and into the digital economy. Many farmers as small-holders and may not be digital natives. We will be directing resources to make it simple and worthwhile for them to embrace tech-enabled agriculture. Our platform helps farmers sell effectively online by making China's rich and the diverse agricultural produce discoverable and accessible our 850 million agri users, demand will then aggregate. As a foundation, we are committed to keeping our RMB10 billion program completely free for all agricultural produce. Further to that, we will be focusing on promoting quality agricultural produce. We have seen encouraging results from our third harvest festival last week. This year, pre-sale orders nearly tripled within the same timeframe with our users learning about and trying more special products including vegetables from Shouguang, mitten crab from Hongze Lake, and matsutake mushroom from Shangri-La. We see great potential for Pinduoduo to be the go-to place to discover unique produce and learn and experience China's rich agricultural diversity. We will continue to invest heavily to make this a reality. We will apply C2M to help them cultivate better and build their brands. Our pioneering C2M model was recently recognized by the Retail Asia Awards for helping many export-oriented OEMs to pivot to the domestic market…

Thank you. [Operator Instructions] Your first question comes from the line of Eddy Wang from Morgan Stanley. Please ask your question.

Thank you, management, for taking my question, and congratulations on the strong earnings. So I have two quick questions. Firstly is about the consumption. So can you share some of your view or the - so far what have you witnessed for the consumption in China in the third quarter because I think some of the e-commerce - leading e-commerce players have indicated that the consumption is a little bit weak, but another leading e-commerce platform yesterday actually indicated a very strong resilient consumption? So I just want to check what you have seen on the consumption side, especially for the third quarter to-date situation. This is the first question. And the second question, actually, is about your profitability. I think if I remember correctly, this is the first time that we have seen very meaningful profitability for PDD on quarterly basis and the non-GAAP net margin is 18%. That's very impressive. So given that our business model has been more and more mature, should we expect that the profitability pattern in this quarter to be more stable going forward and is more expected going forward? Yes. Thank you.

Okay. Thank you, Eddy, for the question. Let me try to answer these two questions. Regarding your first question on the consumption, I think before we go to the third quarter, let's just recap what happened in Q2. I think, in general, with the COVID-19 pandemic under control in Q2, it is natural to see offline retail actually rebounded faster. At the same time, in 2020, the second quarter represented a much higher base as online retail grew faster due to the COVID-19-related stay-at-home measures. We are encouraged to see the continued and normalized growth in Q2 this year considering Q2 is usually a busy quarter for e-commerce players. In the past quarter, we continued to see this healthy improvement in our user engagement and growth on our platform. Our revenue in this quarter grew 89% year-over-year as a whole. And if we take out the one key merchandise sales, they increased 73% year-over-year. So I would say, the growth is still very strong. But coming to your question on the third quarter, Q3, I think we are still small compared to some of our peers in this sector. So we might not be a good barometer of the overall market growth. We are more focusing on ourselves. And speak of our growth, it's fueled by two main drivers, one is the user growth and as well as their mindshare And as we stated in the remarks, our user base has already reached 850 million and this growth will be inevitably slowed down. So we have shifted the focus really on how to serving our users better and steadily building and getting strengthened of their mindshare with the platform. And we see this still much room to further build and strengthen the trust that our users have in us and such a progress will take time. And coming to your second question on the profitability, our profit in this quarter was mainly attributable to the operating leverage from the sales and marketing expenses as I just stated in the remarks, due to the seasonality. It is a unique quarter as Q2 is typically a low season for us with less sales and marketing spending. And we do not think that this quarter's profitability should be an indicator or a reference for our future investment in user mindshare and as well as the agri-focused infrastructure. We are seeing more investment coming in the coming quarter. and as we invest more into agriculture, we do not expect the profitability to continue.

Thank you.

And let me just add one more comment on this. We will keep maintain the zero commission policy on our agriculture produce to help more farmers and agri-merchant and this type of investment will continue. Thank you.

Thank you, Tony. Thank you.

Operator, we can take the next question, please.

Certainly. Your next questions come from the line of Natalie Wu from Haitong International. Please ask your question.

Hi. Good evening, Lei Chen, Tony, and David. Thanks for taking my question and congratulations on another solid quarter. So I have two questions from my side. Firstly, last quarter, we cast on your views regarding the competitive landscape, but given that recently we have noticed that your peer is spending more aggressively and new players like Douyin are also gaining traction in e-commerce. So, just wonder if you can elaborate more on the latest competitive landscape dynamics and how do you think this will affect your strategy? And secondly, regarding the RMB10 billion investment program into agriculture you just announced, just wondering can management share a bit more color on this program, how will this impact your company's financial statement looking forward? Thank you.

[Foreign Language] Thanks for your question, Natalie. Let me address your question. I believe, your first question is related to the competitive landscape. So if we were to look at e-commerce as a whole, this is a fairly large industry. So as you mentioned, we think the rise of players like short video e-commerce is not really surprising given they have huge user base, high usage frequency and they also have very high user content. So based on our sort of operating observation, we are seeing the competition is becoming more intensified. There are more and more platform companies that are joining e-commerce, that are entering e-commerce and not only specific to the short video sites, but we expect more players to enter this field. So consumer demands actually are very multidimensional and constantly evolving. Six years ago when we started - when we first started, we chose to build a mobile-only platform that's around our P model, and this is a model that we feel that was quite distinct from the other players. So if you were to ask, is this model still the most innovative one that meets consumers' demand, we are also constantly discussing this and I think you may observe this from the decelerating trend of our user growth. So, as you know that we have been undergoing management transition in the past couple of months and the new management is asking the question about whether our team can adjust with the maximum speed to meet these evolving needs of our users. And also our current model still be relevant maybe five, seven, or even 10 years later and we are working really hard on this, and there will be many challenges and more unforeseeable difficulties. But I will also like to add that the Chinese…

Okay. Let me add some color onto this Natalie naturally on your question on the impact on our financial statement. I think, as Lei mentioned in his remarks, basically, the idea is to reinvest the profits of this quarter and any future potential profit into this RMB10 billion agri initiative. And in terms of the areas of interest of this investment, we are identifying like three key pillars, namely, food security, food safety, and agri food technologies. And this investment will certainly have an impact on the bottom line in the medium to long-term perspective, but in terms of which line will be affected in the P&L, it really depends on the nature of the spending. It could be hit on the research and development expenses or intangible assets when the software or technology is capitalized, or it could be sitting in our balance sheet like long-term investment.

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

Thanks, management, for taking my questions. I have two questions. The first question is about the online market take rate outlook as well as the measures to support the merchants in coming quarters. And my second question is about the competitive landscape in the online grocery space. Can management share about the recent developments as well as the business trends of Duo Duo Grocery? Thank you.

[Foreign Language] Thomas, let me address the second question on competitive landscape for total Duo Duo Grocery, first. So from the day that we started into grocery we have been saying that the intention behind this business is to meet - the diversified needs of our users, and it's a natural extension of our business. It's also part of our continued efforts in agriculture. So you know that this business - the total grocery business is quite different from what we have been doing for six years in Pinduoduo, Duo Duo Grocery is a heavier operation and our team is also constantly learning through trial and error. And I think we are still in early days. So I think it's not really necessary or important for us to pay too much attention on the competition right now, but rather we should focus on user demand and how to better serve them and whether our services are meeting their expectation. So let me give you a specific example. So in terms of fulfillment experiences in the business of Duo Duo Grocery, whether talking it off too early or too late at the pick-up points for consumers we will affect the user experiences. So how we should serve our users better and to improve in the areas that we are not doing a great job. These are the areas that we as a management are focusing on, on a daily basis rather than paying attention to the competition with others.

Yes. Sure. Thank you, David. Regarding your question on take rate, Thomas, our strategy has always been serving our users. We believe that growth and monetization are a natural result of that. Merchants highlight is already reflected in our revenues as you can see our revenue this quarter continue to grow which is an affirmation of the healthy ROI merchants are seeing as they sell more on our platform. We also keep launching new features that merchants can use to help themselves understand their target users better, and therefore, enhance their ROI. Specifically, on our RMB10 billion program, we continue to be committed to delivering the best value for money products through this channel. As we mentioned in the prepared remarks, we are raising the bar on the quality of merchants and products to meet our users' needs. That being said, we are committed to keeping the zero commission policy for agriculture and fresh produce. And in fact, we will increase our investments in agriculture products and we will see some of the impact in the near future. To give you an example, in Q1 this year, the number of agricultural produce SKUs with more than 100,000 orders exceeded RMB2,600, and in the recent launch, the Harvest Festival the pre-sales data of quality agricultural produce showed over 200% growth year-over-year on a single day. We are very encouraged by this and are committed to do more. So coming back to your question on the take rate growth, we do not focus on this on a quarterly basis as we believe monetization is a result of user satisfaction and merchants' ROI and our monetization rate has fluctuated in the past as you know.

Your next question comes from the line of Robin Zhu from Bernstein. Please ask your question.

Thank you. Thanks, management. Can I just have two questions, please. The first one on ARPU growth and cohort growth among your users, especially, any color on where ARPU is now on the platform excluding the very new users that have joined let's say in the last one year, where that now stands, where you think that that can go? Second question, we've noticed that the new Personal Information Protection Regulations and some of the platform changes make it more difficult for merchants to grab user information. I just wanted to get your thoughts on how that impacts the merchants' reliance onto this platform, the merchants' demand for advertising tools on your platform, and how you guys plan to address their needs to capture the direct consumer relationships? Thank you.

[Foreign Language] Let me address the second part of your question relating data protection. So I think the recently issued laws and regulations around data security and data protection have provided guidelines for all companies dealing with data. We think these guidelines are beneficial to the long-term healthy development of the companies, platforms, and consumers within the entire sector. So in the short to medium term, I do think that we'll see some impact from these changes depending on the different model, whether that's advertising that you mentioned. But in the longer term, we think these measures are beneficial. As you know, we have always been strictly compliant with China's data security standards. As regulators and the industry as a whole continue to raise the bar on data security and data protection, we will also keep holding ourselves to the highest standards. This is to help provide to our users and merchants a safe and efficient shopping environment. So we are currently working diligently to master the future policy requirements and we would adjust our other operational protective benefit to data accordingly.

Okay. Robin, let me come to your question on the ARPU. First, let me clarify, as we continue to improve our product offering and the user experience, users on our platform tends to trust us more, and therefore, support us more. This is a function of our user gaining greater familiarity and building more trust with our platform. We are also working to increase the breadth and depth of our product selection across all product categories and price points. We believe that as we provide the users with more options and keep meeting their demands, the ARPU will naturally increase. You put it very right. We have an enormous number of new users coming - less than 12 months. And this is actually our key task and it's a challenge for us as well to understand the needs of these new users. It takes more time for the new users to get familiar with our platform, to build their mindshare with the platform, and even for users more than two years, three years, their demands are also evolving. So putting the user needs at the heart of our strategy and to fulfill their experience, providing the better service, and therefore, we will continue to invest in the coming quarters when the high season is coming, albeit sales and marketing spending or other investments, these are our priorities to come and not just the ARPU as a KPI itself is the focus.

Your last question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.

Thank you, Lei, Tony, for taking my questions. When I look at your RMB10 billion initiative, where you are talking about spending your profits on agriculture modernization as well as the rural revitalization. And I look at that in combination with the fact that your customer growth numbers are now reaching that point where further growth is going to be harder and harder and the visible profitability in the second quarter, are we at that point of time where the business model outside the RMB10 billion initiative is at that stage where the continued profitability is inevitable and it's going to be hard to hide away from, and that 10 billion is going to come from further profits? Or is that RMB10 billion going to be over in about the profitability that the business is likely to generate or between the lines, did I read you right when you said that sales and marketing spend is likely to rise in the third and the fourth quarter, potentially taking away or eating away profitability in the next couple of quarters? So, I wasn't sure I understood fully, if you could just elaborate to the extent you can, I'd be grateful. Thank you.

Thank you, Piyush, for the question. I think in general, it's about the overall agriculture investment you're talking about. The COVID-19 has really challenged the whole current logistic and distribution network and surfaced some of the pressing issues, so this demand for new logistic network that could better support the distribution of fresh produce and agriculture product. And this is a complex system that requires innovation and some trial and error. To give you some color let me give you some questions that we keep asking ourselves in the management when thinking of the improvement in this sector, which obviously is the number one priority - strategic priority for us for now. Examples like how can we use technology to reduce the waste and environmental footprint and what type of route planning can cut the food waste and transportation emission, what kind of transportation and storage condition could ensure longer shelf life and better preservation of nutritional value of the agriculture produce and what technology might be needed to realize such conditions. So this is a huge white space that requires patients and long-term investment. So this - a lot of areas we are looking at for the moment and we are at the very beginning of it. So I think in Lei's remark we mentioned that the RMB10 billion agri initiative, actually profitability, and any commercial KPIs are not being considered. So we are only at the very beginning of this stage, we are very committed to invest into the future and into this sector for long-term period of time.

Thank you. And could I just ask the scale of grocery in the quarter, or give us a feel for agriculture in terms of importance, either percentage of GMV or any other metric you could share with us that would be great?

Thank you, Piyush, for the question. But as you know, at the end of Q4 last year, we adopted the market practice, we stopped disclosing any GMV. So I'm not in a position to share this number.

Okay.

Okay. Operator, thank you so much. This concludes the earnings call for this season. Thank you so much for everyone joining. Have a good day.

Thank you, all.

Thank you. This concludes our conference for today. Thank you for participating. You may all disconnect.