Ladies and gentlemen, thank you for standing by. Welcome to PDD's Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your host today, Mr. [Chen Pang]. Sir, please go ahead

Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Chen, and I will help host the earnings call. PDD earnings release was distributed earlier and is available on IR website at investor.pddholdings.com, as well as through GlobeNewswire services. 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 discussions of certain non-GAAP financial measures. So please refer to our earnings release, which contains a reconciliation of non-GAAP measures to GAAP measures. Joining us today on the call are Chen Lei, our Chairman and Chief Executive Officer; Liu Jun, our VP of Finance. Lei will make some general remarks on our performance for the past quarter and our strategic focus. Jun will then take us through our financial results for the third quarter ended September 30, 2022. During the Q&A session, Lei will answer questions in Chinese and I will help translate. Please kindly note that all translations provided are for reference purposes only. In case of any discrepancy between original remarks and the translated version, statements in the original remarks should prevail. Now, it is my pleasure to introduce our Chairman and Chief Executive Officer, Chen Lei. Lei, please go ahead.

Thank you, Chen, and hello everyone. Thank you all for joining our 3Q 2022 earnings call. Let me start by giving a brief overview of our third quarter results. Our total revenue for this quarter was RMB35.5 billion. This represents a year-on-year increase of 65%. Over the past quarter, we worked closely with our merchant partners to serve our customers. We continue to provide our users with an enjoyable and affordable shopping experience to meet their growing demand for high quality and value for money product. During the past few months, many product categories such as agriculture, consumer electronics, beauty and cosmetics they all enjoyed positive consumer feedback. Many brands joined Pinduoduo and extended our consumers their best deals. We are happy to keep creating value for our consumers, but the meanwhile we still have areas to improve and the current industry competition remains intact. We need to continue to deepen our value creation, increase our R&D investment to help further improve the supply chain efficiency, support upgrade of the price side and facilitate agricultural digital inclusion. We celebrated our seventh anniversary last month and we are extremely grateful for the support and trust from our consumers, merchants, farmers and society. And we will continue to uphold our core values of putting people first benefiting more and being more open so that we can create lasting value for all our stakeholders. Technology is at the heart of our value creation. From the very beginning, we committed to introducing technology to improve the efficiency of supply chain and create value to all the parties through digitalization. In the past year or so, we increased our investment in technology and focus on driving innovation through research and development. We have built a young, energetic, innovative team with strong technology background and we…

Thank you, Lei. Hello, everyone. I will go through our performance in the quarter ended September 30, 2022. In terms of P&L, our total revenues in the quarter were RMB35.5 billion, up 65.1% from RMB21.5 billion in the same quarter of 2021. This was mainly driven by an increase in revenues from online marketing services and transaction services. Revenues from online marketing services and others to RMB28.4 billion this quarter, up 58.4% compared with the same period of 2021. This was primarily due to an increase in merchant activities in Q3. Our transaction services revenue this quarter were RMB7 billion up 102% versus the same period of 2021. Moving on to cost and expenses, our total cost of revenue increased 13% from RMB6.6 billion in Q3 2021 to RMB7.4 billion this quarter. Total operating expenses this quarter were RMB17.6 billion versus RMB12.8 billion in the third quarter of 2021. Our investment in certain projects, including a few agricultural related projects, which have factored in Q3 and such our total operating expenses as a percentage of our total revenues have declined from 59.6% in Q3 2021 to 49.7% in this quarter. Looking into specific expense items, our non-GAAP sales in the marketing expenses this quarter RMB13.4 billion, 39% versus the same quarter of 2021. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 37.9%, compared with 44.9% for the same quarter in 2021. Our non-GAAP general and administrative expenses were RMB226.3 million versus RMB178.1 million in the same quarter of 2021. Our non-GAAP research and development expenses were RMB2.1 billion, an increase of 15% from RMB1.9 billion in the same quarter of 2021. The increase was primarily due to an increase in headcount and the requirements of more experienced R&D personnel. We're…

Thank you, Jun. Next, we will move on to the Q&A session. For today's Q and A session, Lei and Jun will take questions from analysts on the line. We could take a maximum of two questions per analyst. Lei will answer questions in Chinese and I will help to translate Lei's remarks for ease of reference. Operator, we may now take questions on the line.

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Joyce Ju from Bank of America. Please go ahead.

Thanks management for taking my question. I have two questions. My first question is. Your online marketing services revenue this quarter delivered a faster growth rate than last quarter. What's the reason for this reaccelerated growth in the third quarter? How should we understand the growth rate momentum in the future? And the second question is. Could management share the latest update on your international initiatives? Could you share your views or any takeaways at this stage? Does the current level of development made the management's original expectations?

Joyce, so let me take your two questions. With regards to your first question on growth, during the third quarter, we worked closely with our merchants to create value for our consumers. And we keep bringing our consumers more savings, more short-term experience in the Pinduoduo platform and we adopted different methods including coupons and also promotional events to better serve our consumers. And at the same time, we saw that our consumers demand for high quality products are growing. We actively make efforts to satisfy their demand. And this year, more and more brands have started to cooperate with us. They provide more choices for consumers and categories such as agricultural produce, electronics, home appliances, as well as cosmetics. These categories have received positive customer feedback and we are grateful toward the trust our consumers placing on us. But, in the meanwhile, we should see that industry competition is still intense. And also consumer preferences and demand become more and more diversified. So we still have many areas to improve. And the impact of our overall investment activity, in fact, is not beneficial to our long-term competitiveness. So in the future, we will continue to step up investments. And we will invest to better understand our consumers need and serve them better. And we will also need to continue to immerse ourselves deeply in the real economy and investing technology R&D to help improve the efficiency of the agriculture as well as the manufacturing sector. These would have support over a high-quality development over the long run. And as for your second question for our international business in our last quarter's earnings conference call, we share with you the international business that we are working out. And I believe that many of you may have noticed that we rolled out our international marketplace in September and it has just been a few months since we started this business. And for our team, the international business is a new area to tour and we will start from the fundamental needs of consumers and apply the operation and supply chain knowhow and experiences that we have gained over the years and strive to create our own unique value. And also we fully respect that there are many differences across different markets. And we also understand the need to constantly experiment and we expect that the process will be full of challenges. So we will be patient and work together with our partners to create long-term value for consumers. And currently, we are still in the early stages of exploration. And we have many areas to improve in terms of the services that we provide. We need to learn and also optimize. The process itself will take time. But I'm pretty certain that, the experience that we gain along the way will be very valuable for our company and also for our team. Thank you. So operator, we are ready to move on to the next question.

Thank you. The next question is from the line of Thomas Chong from Jefferies. Please go ahead.

Thanks management for taking my questions. My first question is related to the main drivers behind this quarter's revenue growth. If we further break down the revenue to GMV and take rates, can you share more about the trend in these two factors? Also, have you changed the take rate policy for merchants on your platform? And then I have another quick follow-up. And my second question is also related to the first one. Apart from take rate policies. I'm also wondering for merchants and the industry upstream. Can you also help to share, if you have support measures and policies? Could management share more about your progress again in this area? Thank you.

Hi, Thomas. So let me address your second question around our support for the manufacturing sector and the supply chain, first. From the beginning, we have been leveraging our technical background to help improve the efficiency in the manufacturing sector. And the team purchase model that we pioneered and aggregate order and connect the demand side and the supply side directly. And this helps manufacturers reduce the intermediary layers help them directly reach out to consumers. And in the process, it helps the brands create, their own brands will manufacture. So over the past seven years, Pinduoduo has helped to boot up nearly 1,000 brands through technology. And we are growing up with many manufacturers together. In addition, we also provide one stop digital solution covering the entire value chain to our manufacturing partners. In order to help traditional manufacturers and factories to go through digital transformation and we cooperate with these manufacturers, prior product designs and adjustment. This significantly lowers the cost and reduces the uncertainty during the R&D and also production processes. And all of these that we have done also help consumers get quality of products with savings and we can generate value for consumers in the process. This in turn can create a virtuous cycle amongst consumers, our manufacturing partners and also the Pinduoduo platform. And this year, we have introduced several dedicated initiatives to support manufacturers with technology. This includes many industries, such as consumer appliances, apparel, sports, cosmetics, homecare as well as our furniture. And we will continue to invest in this area to improve the efficiency of the supply chain. Thank you.

Thanks, Thomas. I will take your first questions about the GMV. Well, in the third quarter, we worked closely with our merchants to serve our consumers and improve their shopping experience. As the consumer activities and engagement grow, we think the merchants are actually coming to our platform for growth and opportunities. And for financial metrics such as GMV and revenue, they are mainly the reflection of the value we create. So, for us, the most important thing is to constantly increase value creation. We will continue to invest to deeper use much engagement and for the build up our technology capabilities, this will lay the foundation for our long-term development. Thanks.

Operator, we can move to the next analyst in line.

Thank you. The next questions come from Ellie Jiang from Macquarie. Please go ahead.

Let me translate my question. First, could management talk about the latest industry trends, including what we saw in fourth quarter, quarter-to-date, have we you talk about our performance during 11 promotion? What are the key industry themes have we seen for the 11 if so? And then second question, is only overseas. Could management share with us the financial impact for this initiative? What are the main financial statement line items, does it impact? Could you talk -- could you help us quantify the impact for the third quarter? And what level of investment do you expect to make going forward?

Hi, Ellie. So let me take your question on industry transfers. So for this question, we always start from consumers' fundamental need. And we hope to create value for consumers each single day throughout the year. And I think it is the core driver for the industry and also for ourselves. And we also fully understand that to improve consumer experience and deepen their trusting us, it takes time, and it is a gradual process. And for shopping festival and promotions, they are just one of the many ways to serve our consumers well. And we hope that consumers can get more savings and more fun from shopping on Pinduoduo. So when we plan shopping festivals and events, we remain consumer-centric and we use simple rules to provide consumers with an enjoyable shopping experience. This year, we have incorporated with many brands as well as merchants to bring more quality products to consumers in order to satisfy their diversified needs across different categories and different consumption scenario. And at the same time, if we look at the industry, we do see the competition remains intense and we need to invest patiently in the supply side. And we need to step up our investment in technology and innovation to further improve the overall supply chain efficiency. We need to support the development of the agriculture sector and also the manufacturing sector. This would essentially enable us to better serve our consumers' increasing demand for quality products. Thank you.

Thanks, Ellie. I will take your question about the financial statements on our international initiatives. Well, first of all, our international business currently in a very early stage. It is still going through constant trials whereas we focused on how to create unique value. We believe that financial metrics are the natural results from the value that we create. And the international business still very early, as I just mentioned. So if current impact on our financial numbers is small. And as with any other part of the business, we carefully evaluate the ROI of our investments. Thank you.

Operator, we can move on to the next question.

Thank you. The next question comes from Kenneth Fong from Credit Suisse. Please go ahead.

Thank you management for taking my question. Management shares about the latest thoughts and developments in agriculture. Are there any cases or projects that you're putting resource into? What are the latest financial impact on your financial statement? And also for your 10 billion agricultural initiative, is there any update to share? And my second question is about profitability. We have delivered profitability for six quarters in a row. We have also noticed that many of your peers have started to focus more on cost control and efficiency improvement. So that your profitability for the past 3 quarters means we have started to pursue a similar strategy? And should we expect a similar level of profitability to continue over the next quarter. Thank you.

Kenneth. So let me address your question on agriculture first. So we have shared with you before that agriculture is over a long-term strategy. We hope to promote agricultural development through technology. And for many of our efforts, we are still in the early stage of our agricultural strategy but we already see a lot of areas to create value. And we are also very happy to take this chance to introduce more about our latest developments in this area. First of all, we see technical background. We help improve the distribution efficiency of agriculture products. During the third quarter, in our dedicated promotional events such as the harvest festival and agricultural festival we cover thousands of production regions and help farmers broaden their market access. This also helps our consumers enjoy pleasure and high-quality agriculture produce within a shorter amount of time. On top of that, sales volume can also help commercialize agritech solutions and supports research efforts and improve the -- how commercialization happens. So for example, in our harvest festival event, we introduced many agricultural products created with the help of agritech and with resources that we devote into agriculture. We can help the products roll out to the market quickly and help turn more agritech breakthroughs and innovations into consumer products. As for our 10 billion agricultural initiative, we recently introduced a few new wheat varieties developed by China Agriculture University with support from this initiative. In agriculture, we will continue to remain down to earth and make long-term patient investment as well as bring more agritech results to the market. Going forward, we will continue to share updates with you in the future. Thank you.

Thanks Kenneth. I will take your second question about our profitability. Well, first of all, I would like to point out the high profitability level for Q3 is unlikely to continue. Over the past quarter, some of our projects, such as a few agriculture-related projects, as I just mentioned in my remarks, were impacted in terms of project time line and investment pace. So the expense line items on our quarterly results were affected and on the other hand, our quarterly revenue increased as a result of increased merchant activities. Therefore, profitability is partially due to such time lapse. And this shows that our business cycle and financial reporting cycle are not always in sync. We think such profitability level may not be sustainable. In addition, we are still in the development stage and profitability is not our current priority. We will continue to step-up investments, especially to support agriculture and manufacturing industry through technology. And this may cause fluctuations in our future profitability and the Q3 level will not continue. Thank you.

Okay. Operator, it's about time. And thank you, everybody, for joining us today on the conference call. If you have any further questions, please feel free to reach out to the IR team. Thank you all, and have a great day.

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