拼多多 (PDD) 2019 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Pinduoduo 2Q 2019 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

I would like to hand the conference over to your first speaker today, Ms. [Sin Ye Lin], Director Investor Relations.

Thank you, please go ahead.

Thank you, Karina.

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 the call today, from Pinduoduo are Mr. Zheng Huang, Chairman and Chief Executive Officer; and Mr. David Liu, Vice President of Strategy.

Mr. Huang will review business operations and company highlights followed by Mr. Lu, who will discuss financials.

They will both be available to answer your questions during the Q&A session that follows.

Before we begin, I'd like to remind you that this conference contains forward looking statements made within the Section -- the meaning of 21E of the U.S. Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward looking statements can be identified by terminologies such as will, expect, anticipate and similar statements.

Such statements are based upon management's current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors are included in the company's filings with the Securities and Exchange Commission.

The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law.

Now, it is my pleasure to introduce Chairman and Chief Executive Officer, Mr. Huang.

Mr. Huang, please go ahead.

Thanks everyone for attending our second quarter 2019 earnings call.

The end of July marked our first anniversary as a publicly listed company.

During this past year, Pinduoduo has become widely recognized as China's leading new e-commerce platform.

We witnessed the strong growth in our annual active buyer base to 483 million and a significant increase in our last 12-months of GMV to RMB 709 billion.

Pinduoduo is not the first adventure for me, nor for some of our management team.

We founded Pinduoduo because we saw an opportunity to create something that could generate a positive and a lasting impact on the society, something that would create value not just for us as an enterprise but also for the society as we devote ourselves to benefit all, put people first and be more open.

Looking at our scale today, what we have accomplished together with our ecosystem partners and our users, we are one step closer towards that vision.

I am thankful for the continued support of our shareholders, our partners, our employees, and most importantly, our users in this journey.

When we were listed a year ago and unfamiliar to most people, despite our consistent messaging, some competitors tried to frame us as a platform that would only attract price-sensitive users in lower-tier cities, and that our products are cheap because they were low quality or even knockoffs.

Today, our results have firmly demonstrated otherwise.

In the past year, we have expanded our merchant base to over 3.6 million to serve our 483 million users with our broader product selections across all categories.

If a user is looking for beauty products, for example, they would be able to find a full range of unbranded, branded, and imported goods on Pinduoduo.

We appreciate that users' preference and the perception of value vary widely across different product categories and change as their life stages and the surrounding change.

Hence we have been working hard to serve the multiple aspects of our users' needs as they evolve.

In other words, we adapt and improve every day as our users grow.

As a result, we have seen an increase in user satisfaction, engagement, and a broader app penetration.

Our GMV from Tier 1 and Tier 2 cities are a percentage of total GMV has gone from 37% in January this year to 48% in June.

This meaningful change is the result of our relentless focus on serving our users, regardless of their location, age and gender.

It is what we mean by serving all and putting users first.

Our 6.18 campaign is the perfect example.

E-commerce shopping festivals in China have evolved over the years into complex promotional events that put consumers through a lot of hassle.

However, what consumers really want is to buy what they have been coveting at compelling prices without having to incur additional costs or complete arduous tasks.

As such, even though we're not a platform focusing on e-commerce shopping festivals, we did a successful trial this year during the 6.18 campaign by entering around our very simple and a consistent message, the price you see is the price you pay.

We identified in advance 10,000 [deals] be they branded or unbranded.

We then worked with our merchants to make possible the lowest prices.

We had a dedicated team to ensure that users were getting the best deals over a wide range of products.

So they wouldn't need to look any further.

The result was a 300% year-over-year GMV increase for the 6.18 promotional period from June 1 to the June 18 with daily order volumes averaging over 16 million.

We are pleased with this result and we will continue to delivering good and clear deals to our users consistently.

For merchants who are partnering with us during the 6.18 campaign, we're focused on ensuring they receive a fair amount of exposure for the savings they offer to our users.

This demonstrates how we abide our own principle of benefiting all, which we stand firmly for.

In the past, many merchants had participated in online shopping festivals but didn't always get a real benefit when they compared to certain brands with a preferential status.

This clearly doesn't benefit all.

Similarly, we don't and will never force anyone to take sides, or work exclusively with 1 platform over another.

Such tactics may prolong the platform's marketing influence in a short term, but it will only hurt merchants and users in the long run.

Our aim is to build an open and transparent platform where merchants compete fairly to offer greater value and the services to our users on a sustainable basis.

User satisfaction is our sole KPI, and we will work tirelessly with all our ecosystem partners to achieve this common goal.

The benefits are shared with all participants and drive our virtuous cycle as we enable all our partners to deliver even more value to our users.

How to create long-term sustainable value is a question we reflect upon constantly.

Because of the scale of our user base, we're able to aggregate this amount and then dynamically recommend products that meet the user's need.

This enables our merchants to optimize supply chains to yield the cost efficiency that would support sustainable, competitive pricing.

More importantly, our traffic and data analytics capabilities provide visibility and insights into such demand, which we can share with merchants further to fundamentally improve their existing supply chain.

The value unlocked can be reallocated and drive further investments that would alleviate efficiency and improve income of our ecosystem partners.

This is the fundamental thesis of our C2M and Duo Farms initiatives, which we have continued to make progress on.

For the merchants on our platform, the traffic and the revenue for our platform not just generates employment but also gives them the assurance to expand their business, build their brand and do more.

To date, we have expanded in a number of manufacturers in our new brand initiatives from 20 to December -- at December 2018 to 63 and they cover industries ranging from large home appliances to glassware and kitchenware.

We've had over 1,300 products custom-made for our platform culminating in over 17 million orders during this year's 6.18 campaign alone.

We sold over 9 million items produced specially for Pinduoduo.

At the same time, we continue to deepen our agriculture involvement with launch of the Phase II of Duo Duo Farms in [Baoshan,] Yunnan as the largest e-commerce platform for fresh agricultural produced.

We're deeply committed to realize a win-win situation whereby farmers capture more of the economic benefits and the consumers get a better price to produce.

We recently extended this initiative through our agreement with the Yunnan province to help a total of 74 impoverished counties.

Working together with the local authorities, we're pioneering a self-driven cooperative system and we are educating farmers on how to get better plan their planting cycles.

How to efficiently modernize their production as well as how to market and price their produce.

The next step in that journey will be getting these fresh produce to consumers in an even more reliable and timely manner.

We often ask ourselves what else do users want beside value for money products.

And how do we help the people who actually produce these products.

One thing that keeps popping up is having cheaper, faster and a more reliable logistics and a supply chain network.

The current system has already improved significantly over the past decade, thanks to the economic growth China has experienced.

However, we believe technology building on what we have learned from all ecosystem participants on this platform could help further improve or even fundamentally change the structure of existing systems.

This is not a small task.

But doing so would significantly widen the range of products available to users, especially agricultural products and reduce logistics costs and the supply chain wastage.

Hence, we have started developing an open technology platform that can be a driving force for the logistics model of tomorrow or what we would like to call new logistics.

This asset slide model will be an open platform focused on leveraging technology to provide solutions to our sizable and growing merchants based to serve users.

We welcome all to participate.

The first pillar to our platform was the e-waybill system that we launched at the beginning of the year.

The rapid adoption of our ecosystem partners, including all the major 3PL providers, coupled with positive user feedback has propelled our e-waybill system to become the second largest in China within a few months.

To date, almost all of our orders have adopted our e-waybill system.

This is a result of us keeping enhancing our logistics platform by constantly introducing new features to satisfy users' needs, such as parcel intercept, delivery error warning, and the service provider recommendation.

Our merchants have the freedom to choose -- freedom to use ours or others' systems.

We thrive to offer the best product to them.

Building on top of the e-waybill, we are systematically rolling out other value-added services that form the foundation of our future logistics technology platform.

While increased economies of scale drove the improvements in industry efficiency previously, it is also beginning to reach its natural limitations.

New technologies, such as AI-driven route planning, IoT sensors and the devices, automated warehousing, sorting and routing, to name a few, will become the basis of the next-generation logistics services as we deepen our relationships with merchants, to C2M, cross-border e-commerce and other initiatives where we will be well-positioned to work together with all parties in all areas extending from supply chain to production to warehousing and to the deliveries.

Only through greater vertical integration and partnership will we be able to fundamentally change the allocation of economic value in the industry.

And we are committed to doing so such that greater value can be shared with our users and value creators across the value chain.

As an example, we have been spearheading some investments to drive innovation in agricultural logistics.

Our scale enables us to work with farmers to standardize fruit sizes and optimize packaging designs.

We're also working with ecosystem partners to evaluate having a dedicated e-waybill for agricultural produce and separate logistics from ordinary parcels to optimize efficiency and the quantity.

Our predictive modeling technology can help power and route planning behind the agricultural produce network.

We're confident that such optimization can be achieved because of the unique technology background of our team.

Our founding principle of being open and -- to all parties.

And the large and growing amount of the demand on our platform from our diverse user base.

We believe that one can only succeed by constantly innovating and being more open.

As we look forward to the second half of the year, we remain confident that our strategy of focusing on our users and benefiting all will continue to generate strong results and it will continue to invest in technology and capabilities that would enhance our users' experience.

With that, I will now hand over the time to David.

And thank you, Colin, and hello, everyone.

The second quarter of 2019 was a strong quarter for us as we continued to execute on our strategic priorities to serve our users.

Our last 12-months' GMV grew 171% over the same period last year to reach RMB 709.1 billion.

During this 6.18 campaign period, from June 1 to June 18, our GMV grew more than 300% year-on-year with over 1.1 billion orders.

Total revenues for the quarter grew 169% year-over-year to RMB 7.3 billion, up significantly from RMB 2.7 billion a year ago.

Our strong revenue growth was driven primarily by the rapid growth in our GMV coupled with our steadily improving monetization rate, which is a reflection of the value we have created for our users and our merchants.

Our last 12-month monetization rate for this past quarter was 2.9%.

Online Marketing and Services revenue was RMB 6.5 billion this quarter, constituting 89% of our total revenues.

This is up 173% from RMB 2.4 billion for the same period last year.

Our last 12-month online marketing services revenue increased for the seventh consecutive quarter in a row to reach 2.6% of our total GMV.

This sustained growth reflects the continuous expansion of our platform and our services.

As more buyers visit our platform more frequently, spend more time browsing through our product suites, and purchase with greater trust, the advertising ROIs for our merchants on platform also improve.

This encourages our merchants to leverage our advertising products more actively in order to ramp up their exposure to targeted users and drive more sales.

In the meantime, we also continue to enhance the advertising and selling tools available to our merchants.

For instance, this quarter, we introduced a feature that automatically scans all active product listings to see if they are optimized for display and discovery on our platform.

Merchants can now quickly identify inefficient listings and easily follow our system's prompts to fix these issues.

This helps merchants to reduce ineffective marketing spend and achieve better ROIs, which in turn drives greater investments by them on our platform.

Many of our merchants are still in the process of building out their presence and accumulating sales on our platform, and they're still familiarizing themselves with our platform's rules.

It is therefore critical to have more comprehensive tools and to educate our merchants about these tools.

We anticipate more participation of our active merchants on our platform.

Let me give you an example of a merchant who has built on his initial success on our platform with better use of our advertising tools.

This is a women's wear merchant, who has been on our platform for over 2 years.

They have their own factories and 30% of their sales are online, of which Pinduoduo constitutes 70%.

On Pinduoduo they decided to focus on higher ticket price, higher-quality women's wear, and their hit product is a trench coat, which they launched in late 2018.

The coat is priced 50% higher than that of their competitors but still offers great value given superior materials.

Despite the higher price, they sold over 40,000 units with the help of targeted advertising.

They spent initially on keyword bidding to grow out sales volume and through a continuous optimization of their keywords, creative and listing details improved their conversion rate to double that of their peers.

After building up their sales for a few months, they then added feed advertising on top of keyword bidding.

In their peak sales months, they have ramped their combined monthly spend to 3x of the prior month as they incrementally targeted users who had browsed competing products.

That way, not only the users who have searched for trench coats see their products, they would also be retargeted and re-exposed through the fee ads to different portions of the app as they continued to browse.

In the first quarter, the marketing spend helped them generate an incremental 10,000 units sold on top of the organic traffic and the merchants realized a net ROI around 10x.

This is just one example of a successful merchant, who on our platform -- gives some perspectives on the drivers of our online marketing service revenue.

Rounding our discussion on revenue, the remainder of our revenues come from transaction services.

Our transaction services revenue for the quarter grew by 143% year-over-year from RMB 338.1 million last year to RMB 822.9 million.

Our transaction services revenue as a percentage of our GMV fluctuates from quarter-to-quarter, primarily as a result of our tactical adjustment to incentivize merchants and partners to provide superior services to our users.

We continue to build out other value-added services such as logistics and merchant advisory to help our merchants grow their business more rapidly on our platform and realize better returns.

Moving onto cost.

Our total cost of revenues increased from RMB 387.8 million in the same period last year to RMB 1.6 billion this quarter.

This translates to a gross margin of 78% this quarter as compared to 86% a year ago.

The lower gross margin this quarter as compared to the prior year reflects our investment in network infrastructure, the merchant support services to support our rapidly growing operations.

Total operating expenses this quarter were RMB 7.2 billion as compared to RMB 9 billion in the same period last year.

Our sales and marketing expenses this quarter increased from -- increased to RMB 6.1 billion as we made a large marketing push towards the second half of the quarter with promotional activities leading up to and throughout our 6.18 campaign.

Over the course of June 1 to June 18, we saw our GMV grow over 300% year-over-year as we generated a huge amount of interest and engagement from new and existing users alike.

We received over 1.1 billion orders during this campaign, which translates to over 60 million orders daily.

In just the first week of our campaign, we saw over 12 million buyers place at least 5 orders each indicating a high level of repeat visits.

Over the course of our quarter, we also saw higher average order values and growing purchase frequency, which combine to drive our annual spending per active buyer to RMB 1,468 representing a 92% increase from RMB 763 for the June 2018 quarter.

Sales and marketing expenses as a percentage of revenue this quarter came in at 81% on a non-GAAP basis against meaningful GMV growth and revenue uplift.

We continue to be very focused and targeting in our marketing strategy.

As we shared previously, when we strictly, and on a real-time basis, evaluate the ROI of our sales and marketing investments.

We go beyond financial metrics to include the changes in engagement that these investments bring about.

For example, has the users gone from being active annually to being active monthly or even daily.

In that journey has the user been sharing more with their friends and family or inviting new users to the platform?

User engagement influences user trust, user spending, merchant ROI, merchant spending, and more importantly, our entire platform's user satisfaction level.

We believe that our strong results this quarter demonstrate the meaningful underlying leverage of our business model and the initial benefits from the investments that we have made in the past.

We continue to see significant value and potentially enhancing our user engagement, and we'll remain disciplined and optimistic with our sales and marketing investments.

We will only invest when ROI requirements can be met and if the investments accrue to the intrinsic value of the company.

Our general and administrative expenses this quarter were RMB 278.3 million, a significant decrease from last year due to lower share base compensation expenses.

On a non-GAAP basis, our G&A expenses as a percentage of our revenue was 1%.

Our research and development expenses were RMB 803.7 million this quarter, a significant increase from last year as we invest in hiring more experienced algorithm engineers and spent more on R&D-related cloud services.

On a non-GAAP basis, our R&D expenses as a percentage of our revenue was 8%.

We are on track with our plan to add at least 2,000 engineers this year, and we'll continue to invest in our distributed AI infrastructure.

Operating loss this quarter came to RMB 1.5 billion compared with loss of RMB 6.6 billion in the same period last year.

Non-GAAP operating loss was RMB 898.4 million compared with a loss of RMB 815.7 million in the same period last year.

Net loss attributable to ordinary shareholders was RMB 1 billion compared with net loss of RMB 6.5 billion in the same quarter last year.

Basic and diluted net loss per ADS were RMB 0.88 compared to net loss per ADS of RMB 13.4 during the same period of last year.

Non-GAAP net loss attributable to ordinary shareholders were RMB 411.3 million compared with net loss of RMB 673.4 million in the same quarter last year.

Non-GAAP basic and diluted net loss per ADS were

RMB 0.36 compared with RMB 1.4 for the same quarter of 2018.

That completes the profit and loss statements for the second quarter.

Net cash flow provided by operating activities for the second quarter was RMB 4.1 billion compared with RMB 1.1 billion in the same quarter last year, primarily due to an increase in our online marketing services revenues.

As of June 30, 2019, the company had a strong balance sheet with RMB 40.7 billion in cash, cash equivalent and restricted cash.

Excluding restricted cash, we had RMB 23.9 billion in cash and cash equivalents.

In addition, we had RMB 7.9 billion in short-term investments bringing our total cash available to RMB 31.8 billion.

As such, we are in a good position to make the necessary investment this year to build our platform and strengthen our competitive advantage.

We still see a lot of room to innovate and deliver more value to our users and merchants, and we will invest prudently to further our strategy.

This concludes our prepared remarks.

Operator, we are now ready for questions.

(Operator Instructions) Your first question comes from the line of Piyush Mubayi from Goldman Sachs.

I'll limit it to one, but it's a big question.

When I look at competition, I look at your market share, you captured more than 31% of the GMV growth in China for the second quarter.

And that's up from 21%, 25%, 19% in the last couple of quarters.

At that run rate, by the time we get to the end of the year, your market share will be fairly significant.

I wondered if you could comment on the competitive landscape currently at the end of the year.

How this is likely to change?

And what are the challenges you think you will face in the coming quarters?

Okay, a lot of people ask me about competition.

E-commerce in China is indeed a very competitive landscape, but I wanted to reiterate here that we are more focused on our operations and how we preserve our users, rather than look at what others are doing.

With that said, competition has always been here.

We have always operated in a very, very competitive industry, and we have managed to grow to our current scale despite these competitions.

Actually, we should be thankful to these competitions since they help us to learn faster and innovate faster to serve our users.

To some degree, the results of last quarter is somewhat a result of the competition.

One example is the 6.18 campaign, which shows that we are on the right path.

We saw good results this year because we are laser focused on our users instead of our competitors.

Speaking of the specific competition techniques.

On the merchant side, there indeed has been very intense competition, some of which are against the recent e-commerce law.

And forces merchants to pick sides and work exclusively with 1 platform.

This actually goes against our principles to provide an open platform and a fair platform to all the merchants.

Recently, actually, we noticed that the General Office of the State Council released the guidelines for regulating and nurturing the sustainable development of the e-commerce industry to boost economic growth.

It reiterated the importance of fair market competition and a product quality control for consumer perception.

So the state administration for market regulation has been tasked to implement these guidelines.

So maybe there is some short impact by the forced exclusivity, but it doesn't seem to be sustainable, and so far, it looks like -- to some degree, it stimulates innovation within our own team and help us iterate much much faster than before.

And if we look at this problem as a long-term question, then it is very clear that forced exclusivity is against the fundamental interest of the brand owners and all the users.

So with that, I don't think it can last that long.

So if we look even longer term, so we should notice, today, the e-commerce market in China is still not a zero-sum game yet.

I would say it is still sort of the early to middle kind of stage faced with a growing -- RMB 30 trillion market plus a retail sales opportunity.

This industry should focus resources and energy on innovation, instead of looking at what others are doing, trying to take others' pie or something like that.

So if we look at China's total retail and I would say e-commerce will still take more and more market share, or a bigger pie of the overall retail.

So with that, this huge growing e-commerce market, all the players, I think, will still have a large room to grow, despite the severe competition in between.

So does that answer your question?

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

Congratulations on a strong set of results.

I have a question relating to sales and marketing expenses.

I noticed that the sales and marketing expenses, RMB 6.1 billion for this quarter, which is slightly higher than the Street expectations.

But what we see is that as a percentage of revenue, it came in better than expected because of better monetization.

So my question is about the trend, where is the delta coming from compared with Street expectations?

And how should we think about sales and marketing expenses as we go into the second half?

Thank you, Thomas.

We understand sales and marketing spend is a focus of our investors, and we would like to again reiterate that our strategic focus in terms of what we want to achieve with our sales and marketing investment has not changed.

That is to say that we seek an enhanced user recognition of our platform, increase user engagement, and build users' trust.

Because we believe this will translate into growth of both our GMV and revenue, and ultimately, margins and accrue to our long-term intrinsic value.

As such, sales and marketing leverage as demonstrated by our second quarter result is really an output.

The RMB 6.1 billion you see, this is not a target variable that we optimize for.

We also do not manage towards a fixed budget in terms of dollar or ratio.

This is because blindly adhering to such targets, we believe may result in us missing out on good investment opportunities in today's dynamic environment.

So going forward, we'll continue to make investments in sales and marketing as long as our ROI requirements are met.

We see our results in the second quarter as a good indication of our strategy being on the right path.

However, we are not in a position to comment whether our sales and marketing numbers will increase or decrease.

And we hope that investors appreciate our discipline and strength to always act quickly on marketing opportunities.

Next question?

Yes.

Your next question comes from the line of Alicia Yap from Citigroup.

Congrats on the solid quarter.

My question is related to your new user growth.

Given this 483 million active buyers, this quarter is very solid.

Just wanted to get a sense among ordered user acquisition strategy that you engage in the past, which one does stand out as the most effective in acquiring the new user?

And then given the step-up effort by some of your peers to aggressively penetrate into the lower-tier cities, are you seeing any change in the cost of a new user acquisition?

Any change in the user retentions?

And even if we look into longer term, say, let's say, PDD able to achieve the similar size of the user base of our largest peer, how do you see the user on your platform versus the competition?

How -- what are the attractiveness on PDD platform that could continue to attract and retain the user to shop on PDD?

Thank you for your question.

I understand that you're curious about which technique might be the most effective or most useful, but I'm sorry to say that this is the result of a consistent strategy.

Really it's not a secret, but to be honest, it is -- there is no secret there.

It's just that we keep doing the same thing and we keep laser focused on our users.

So the user acquisition is a result of the user satisfaction level.

Sometimes the number will be higher, sometimes the number will be lower, but if you forget about quarter-by-quarter numbers instead you look a little bit longer you look at the year or several years, then you will gradually sort of believe in a simple philosophy, which is if you do the right thing continuously and consistently then you will see the power of compounding.

So this quarter to us, it's just a normal quarter.

There's really nothing dramatic has been happening, but the beauty of our model is that it's simple and it's -- there is no magic there.

Hey, Alicia, just to add on top of Colin's comments.

I would say that on a longer -- if you look at our results, it is really a reflection of us continuing to focus on what users need and want and being able to deliver on that value.

So as a result, you can see that almost half of our GMV in June, well -- almost half of our GMV in June actually came from Tier 1 and Tier 2 cities.

This shows that our investment in building our brand recognition are paying off.

And we also continued through user ads in the lower-tier cities as well.

So as we have mentioned or communicated in the past, Pinduoduo is really designed to be a full-grown e-commerce platform to serve the entire population of China, and we are really seeing ads -- user ads being across the board.

We would further highlight that because of our better understanding of users' preference and how they interact and influence the network, this actually has helped us refine the relevancy of recommendations.

And we now have -- and because we now have a wider array of products, tacked with more characteristics for us to utilize and down from our nuanced recommendations, we have seen this make reflected in increasing our AOV now to over RMB 50.

Your next question comes from the line of Natalie Wu from CICC.

Congratulations on a very robust result.

My question is regarding the JD's upgrade, which had Level 1 entry starting from this October, which is going to be more targeted to the lower-tier city users with value-for-money goods.

So just wondering should we worry about any potential impact on us?

I would appreciate it if management can give us some color on that.

Well, in general, we don't comment on others' strategy or others' activities.

But I can say a little bit.

I think the slot is already there and they have been doing this for quite a while, and in parallel, I think we're just doing our own thing.

And this strategy has been stayed the same, and we have always been focusing on our own users instead of worrying about what others are doing and looks like our simple-minded strategy does reward us in the past.

So we will just stay with what we are.

Next question?

Yes.

Your next question comes from the line of Binnie Wong from HSBC.

Congrats on an epic quarter with beat across the board.

So speaking of logistics, right, as one of the key investment for e-commerce companies in general to ensure the order efficiency and also ensure the quality delivery to our customer.

Especially important, as you said, we are moving to -- in the Tier 1, 2 cities where users are -- they tend to demand more.

So our question here is what is the business model here?

And that as we see earlier this year, Pinduoduo has been offering more logistic software and proactively working with merchants, the e-waybill?

And also what is the -- how much capital investment we need for our logistic support?

And how would you compare your logistic support versus our competitor, who already has a more well-established logistic network there?

Thank you for the question.

As Colin mentioned, we always ask ourselves what else we can offer to our users to enhance their user experience and to further enhance their trust.

And logistics is one thing that we focus on, and it keeps coming back.

We launched our e-waybill system at the beginning of the year to make shipping information more transparent and more up-to-date to our users.

And as you may have seen, in the first half of the year we had over 7 billion orders on our platform.

So according to China Post's tally of 27.8 billion completed parcel deliveries during the same period in China, our implied parcel market share is well over 25%.

The bulk of these parcels, the bulk of our parcels are now processed through our e-waybill system.

The success of our e-waybill system is what prompted us to -- with the idea to build on top it, an open technology platform to further enhance logistics and supply chain efficiency in our ecosystem.

The efficiency in the current logistics industry has driven largely by economy of scale and we had realized that there is significant room to improve using technology.

So our initiative will be as [SLA] as possible.

We do not plan to invest in warehousing assets or build delivery fleet.

Our aim is to connect and optimize available capacity in the industry to provide better service quality and realize greater efficiency to further lower per-unit costs.

We have already started to do this in agriculture as part of our Duo Duo Farm initiative.

Over the long run, we actually anticipate using this platform to address different supply chain SaaS opportunities that may arise from working closely with our factories and agricultural producers.

And to realize further restructuring of the value chain, in order to reallocate economic value across the supply chain to the producers and benefit our consumers.

Next questions, please?

Your next question comes from the line of Tina Long from Crédit Suisse.

Congratulations on the good results.

The question is on the take rates because I understand that the company started to give some discounts for quality merchants, but I think the take rate has seen some recovery in this quarter.

So I want to know what's the direction of the take rate for the next few quarters.

Are we start to -- will we start to narrow down or scale back the discounts to those quality merchants?

And secondly, very small on the sales and marketing, sort of as a follow-up.

Because in -- during June 18 campaign, there has been talk -- basically we have RMB 10 billion subsidy program.

But after the month of June, basically now, we're still seeing the [bogan] in the apps in July and August.

So does that mean that we should have prolonged this campaign for a longer period of time?

And also what would be the implication for the full year and especially second half sales and marketing?

Thank you for the question.

As I mentioned, we will -- user experience or user satisfaction is our priority.

So we will always continue to support quality merchants on our platform, but I think the way that -- the way to think about the transactions services take rate this quarter, we actually began during this in last quarter, and we continue to be mindful of balancing that versus growth.

This quarter, we actually continued to tactically reduce transaction services fee for some merchants, but you should expect fluctuation in this ratio because as we mentioned, we do not actually manage to a specific target.

Yes, so I will add a few words.

Speaking of take rate, in my mind the fluctuation we are seeing right now is negligible, and I do not recommend that you -- don't focus too much on the fluctuations either increase or decrease of the take rate.

In the [medium term], I think, it will be fairly stable in my mind, and speaking of the specific campaign the RMB 10 billion campaign, I would say, I want to take this opportunity to remind you that not like other platforms, they are more event- and festival-driven, but we are really not that festival-driven.

So the 6.18 event is just a little kind of a trial for us to participate and it's a place for us to train our staff.

But all the other campaigns we launched before the 6.18, during 6.18 or after that may last longer or last shorter.

But basically what I'm trying to say is, all the campaigns you see today are not related specifically to a particular festival.

So it should be there, or you should expect the campaign to be there for some time and our colleagues will decide when to change the new one.

Your next question comes from the line of Charlie Chen from China Renaissance.

I have 1 question regarding your C2M business.

So can you share with us your current status of the C2M business?

And also what is the value proposition of the products of your C2M business?

So is that just a cheaper alternative to your other products?

Or is it actually an upgrade of your non-branded products?

Okay, thank you for your question.

Our -- I will speak of C2M.

I'm proud to say that our new brand initiative has been very popular, and we have received over 6,000 applications thus far, and with about 500 companies participating in pilot tests.

And as you know, our partnership model for the new brand initiative is built in an open- and asset-light manner.

We don't have binding targets set for our partners, and it is really more of a two-way process as we learn from each other to see what value we can bring to benefit our users.

And during our 6.18 campaign, we sold over 9 million C2M products.

And we also featured both our new brand initiative and Shanghai heritage brand initiative partners such as Warrior shoes and Bee and Flower.

So going forward, we will continue to deepen our engagement with our manufacturers on our platform.

One of our recent partner is Shenzhen MTC, an ODM, who produces over 10 million TV sets annually for brands like Philips and JVC.

So MTC provides us with information related to their product design and the cost structure, and we share with the team -- we share with them the consumer data, and make suggestions on product development and the pricing strategy.

So MTC uses these inputs to further improve their supply chain and can roll out quality products to our users, offering great value for money.

So the customized TVs that they produce for us under the JVC brands, which was licensed from the JVC is launched a few days ago, and they have sold out of their first 2 SKUs within a few days, selling 1,000 65-inch 4K TVs and 1,500, 62-inch 4K TVs.

So these TV sets are just the tip of the iceberg.

And there are still many other industries where we can lock and unlock value through our C2M partnerships with merchants.

So further, we're developing our logistics technology platform to further help them with supply chain and the logistic efficiencies such as packaging, route optimization, warehousing systems, et cetera.

So we do hope to bring a holistic upgrade to our partners and make fundamental change in the vertical value chain of various sectors.

So with that said, it's really a long-term goal.

You shouldn't expect this can happen overnight.

But the initial efforts we have made does give us a positive feedback.

So this will provide meaningful value not only to our merchants, but to our users as well.

So we will expect them to grow significantly in the future, and it will become a trend, not just on our platform, I believe, other platforms will follow and should follow I guess in the near future as well.

Your next question comes from the line of Joyce Ju from Bank of America.

Congrats on the solid quarter.

My question is related to the progress of our category expansion and development of key categories.

What's the key category actually driving our strong growth -- GMV growth this quarter?

And how's the development of our -- some signature categories such as agricultural products?

How much they are now representing our total GMV?

And what's the strategy to further increase their strength in these categories down the road?

Okay, thank you very much for your question.

Well first of all, I want to say that we don't really focus on categories, we focus on users.

We're trying very hard to match different kind of products to the users' needs.

As long as our users want those products, we'll just try very hard to bring them on to the platform and make them available with the lowest possible price.

Speaking of agricultural category, it is a special category.

It's not because we sort of GMV growth relies on that, it's just because we start with agriculture produce at the very beginning of our platform.

We don't -- we -- usually don't disclose GMV breakdown, but we are encouraged to see agriculture as an important part of our platform.

As I mentioned multiple times in my shareholder letters and other communications, agricultural sector landscape is different in China compared to other countries, such as the U.S. Therefore, we need to take a very different approach.

The supply of agricultural products is very scattered across China, and of smaller scale.

Though in aggregate, it's a very large industry involving hundreds of millions of people.

And therefore, we need to tailor the logistic system, the growth cycle, the marketing strategy, and the distribution network of this industry to return value to the farmers.

So in 2018, we handled RMB 65 billion worth of agricultural products selling them directly from farmers to consumers.

This year, we still see very strong growth in this segment, and with Tier 1 and Tier 2 city users accounting for 70%, almost 70% of the agricultural product orders during our 6.18 campaign.

So in 2019, we are continuing seeing a good runway for sustainable growth and a lot of potential for us to help improve industry efficiency.

And on the supply side, we're working with both farmers and the local authorities to effective change.

We have signed agreement with the Yunnan province to help a total of 74 impoverished counties and take a comprehensive approach towards reshaping the economic value chain.

So for example, to help farmers learn how to sell directly on Pinduoduo, we have provided the training courses on marketing and also provided AI-driven farming suggestions utilizing predicted approaches, patterns for fruits and the likely delivery schedules.

Farmers are better enabled to plan their planting schedule making their production process more scientific, and reducing wastage.

We're also working with authorities and the agricultural universities to grow agricultural talent in this regard.

So we hope, and we do hope that what we learned in that Yunnan province can be transplanted to other provinces as well.

And I also mentioned, how we are leveraging the logistic technology to improve agricultural sector just now.

So over time, this will allow more good and a fresh produce from all parts of China to reach our consumers and providing them with even more choice at an affordable price.

We do all of this not only because it's a very good category, a very large market, it can grow our GMV.

More importantly, we view agriculture as a very special category that has a special meaning to China, which involves hundreds of [our] million people whose [food] and also affects the daily life and the health of the citizens in Tier 1, Tier 2 cities.

So it is a very good category.

We both view it of very long-term investment value.

We also view this category as a place where a lot of innovation can be done and should be done, and we also feel this is a category we should take our responsibility and do more social good.

Thank you, ladies and gentlemen.

Unfortunately, we have run out of time for any further questions.

I would now like to hand the conference back to these presenters.

Please continue.

Thanks everyone for listening in to our call, and if you have any follow-up questions, IR is always available.

Thank you.

Ladies and gentlemen, that does conclude the conference for today.

Thank you for participating.

You may now disconnect.