拼多多 (PDD) 2023 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings, Inc. Second Quarter 2023 Earnings Conference Call. (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. Cheng Peng. Sir, please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Cheng and I will help host earnings call. PDD Holdings' earnings release was distributed earlier and is available on our 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 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 non-GAAP measures to GAAP measures.

Joining us today on the call are Chen Lei, our Chairman and Co-Chief Executive Officer; Zhao Jiazhen, our Executive Director and Co-Chief Executive Officer; Liu Jun, our VP of Finance. Lei and Jiazhen will make some general remarks on our performance for the past quarter and our strategic focus. Jun will then walk us through our financial results for the second quarter ended June 30, 2023.

During the Q&A session, Lei and Jiazhen will answer questions in Chinese, and we will help translate. Please kindly note that all translations provided are for reference purpose only. In case of any discrepancy between the original remarks and the translate version, statements in the regional language should prevail. Now it's my pleasure to introduce our Chairman and Co-Chief Executive Officer, Chen Lei. Lei, please go ahead.

Hello, everyone. Thank you for joining our earnings call for the second quarter of 2023. I will start by giving a brief overview of our second quarter results. We achieved a total of RMB 52.3 billion in revenue this quarter, representing a 66% year-on-year increase. This reflects the growing trust that consumers place in our products and services. During the past quarter, we observed a continued improvement in consumer sentiment, resulting in increasing consumer demand across multiple product categories.

We also actively launched various promotional initiatives that boosted consumer demand. For instance, we supported June 18 shopping festival with attractive promotions and discount coupons to encourage spending. The response from consumers was positive. Recognizing this trend, we remain devoted to connecting products directly with consumers so that they can enjoy a wide range of quality products at attractive value with great service satisfaction.

Since the start of 2023, our main focus has been high-quality development. The results from this quarter offer concrete evidence that our strategy is starting to bear fruit. This gives us more confidence that we are on the right path that our investments are laying the foundation for continued quality growth.

A cornerstone for achieving high-quality growth is our commitment to research and development, which is the lifeblood of innovation. Over the past 12 months, our R&D expenditure exceeded RMB 10 billion with Q2's R&D spending hitting a new high, reflecting our dedication to investing in the future. We will continue to increase our investments in R&D as innovation represents the future engine of growth for the company.

As a company with its growth in agriculture, we have been first-hand witnesses to how technology can transform and drive farming practices through technological advancement, we have optimized the matching of demand and supply helping farmers to sell their products and consumers to get fresher produced. A key driving force behind our emphasis in agriculture is our belief and social impact of innovation. This has motivated us to support talent cultivation, promoting adoption of practical and cost-effective technology and transform scientific research into tangible commercially viable solutions.

For the past 3 years, our annual Smart Agriculture Competition has been a platform to advance precision funding. We partnered with leading agronomic institutes including China Agriculture University, Zhejiang University, FAO China and the Shanghai Academy of Agricultural Sciences. The latest iteration involves the use of compact spaces like shipping containers for vertical funding, aspiring teams challenge themselves to come up with cost-effective ways to growing and marketing high-quality grid. With our help, many teams has turned the innovation into real-time applications.

For example, a pioneering team from our inaugural competition deploy 40 cutting-edge systems in powering farmers to boost their yield by 30%. We achieved this while at the same time, reducing overhead costs related to labor, fertilizer and plant protection. A team from this year's event is in the process of utilizing the algorithm that moderate neutron combinations with the aim to make it easy for more people to use.

Our diverse projects and to bridge the gap between research and real-time application. We have supported the creation of many agritech demonstration hubs. These centers of excellence served us fertile ground to combust [dynamic] learning with hands-on experience. By giving medical sciences, the platform to validate their research and the real-world conditions, we envisage speeding up the digital transformation of agriculture to the collective benefit of society. We also strive to help push the boundary of agritech to our support for fundamental research.

In May to further accelerate the pace of innovation, we made a donation of RMB 100 million to China Agriculture University. As a part of our 10 Billion Agriculture Initiative, this contribution established a dedicated research fund aimed at addressing critical needs in agriculture. Additionally, we have partnered with FAO China to start a 3-year research program that focuses on 4 key themes, namely agriculture modelization, precision funding, sustainability and health nutrition.

Here, I'm happy to announce the appointment of Professor Ivonne Rietjens independent director to PDD (inaudible). For a solution, with the long-standing tenure since 2001 was a professor at Wageningen University and currently a department head of toxicology is a well-respected expert in food tech research. For 3-decade, expertise in food safety will no doubt be huge support to our Agritech initiatives. With her on board, our Board of Directors now have 7 members and the majority is being independent directors.

Third appointment not only English our Board of expertise, but also adds to its diversity. In addition, to strengthen our global footprint and operations, we will set up a legal and compliance committee to build an overseas regional, legal and compliance committee given their complexity and different requirements of each region. Agriculture Committee, which will replace the general counsel role at function.

As we stated in our IPO latter, PDD is still a young organization that will continue to adapt as it strives to be a mature global institution. During this journey, our goals remain the same. We will continue to champion innovation, nurture emerging talents and constantly seek to bring on the best people to guide us towards our goal of seeking quality development. And now I will hand over to our co-CEO, Jiazhen, who will go into more details about our quality development.

[Interpreted] Thank you, Lei. Hello, everybody. This is Zhao Jiazhen. In Q2, with various pro consumption policies, we observed a clear trend of consumption settlement improvement. To support consumption in this year's June 18 promotion, we increased our efforts. We received positive responses and saw a further increase in consumer demand on the Pinduoduo platform.

Riding on the encouraging industry trend, we proactively seize the opportunities to fully embrace high-quality development. Our strategy includes the following aspects.

First, high-quality consumption to meet consumers' continued growing demand for quality, we strive to better serve consumers with more savings, better services and upgraded consumer protection. Second, high-quality supply. We go deep in the industrial and agriculture production areas, leverage our tech capabilities to support digital transformation and bring more quality products to the national and global markets; third, high-quality ecosystem.

We shoulder our social responsibilities and further refine our platform governance capability by supporting quality merchants with our 10 Billion Ecosystem Initiative we promote our virtuous cycle, which accelerates the upgrade of our platform ecosystem.

We are fully aware that high-quality development requires patient investment. Over the past quarter, we have seen some encouraging early results from our efforts in giving back to consumers, supporting quality merchants and enhancing our platform ecosystem. Our business also delivered decent growth.

Now let me walk you through some specific measures that my team and I are actively implementing under our high-quality development strategy. First, for high-quality consumption, we are working hard to deepen more savings and better services so that we can give good experience. This improves consumer trust in our platform, which in turn stimulates spending.

In Q2, we continued to promote a wide range of merchandise of consumers' preference. As mentioned, during this year's June 18 promotion, we increased efforts to give back to consumers. The promotions cover a full range of product categories, including electronics, cosmetics, fresh produce as of apparel. This stimulated full category consumption demand.

In addition to solidifying more savings, we continue to provide better services, which increased consumer trust in our platform. For example, during June 18, we upgraded logistics and aftersales services, such as price protection, 10x compensation for counterfeit and to door delivery. These measures make sure consumers can buy with confidence and return with ease. We also cooperate with established insurance companies and brands to offer quality guarantee insurance, which covers situations such as inaccurte, product descriptions or product quality issues. .

After the June 18 promotion, we remain focused on adjusting fundamental consumer needs and continued with our (inaudible) approach. We provided quality products and services at good prices, consumer demand potential to support new product categories. As our platform continues to gain trust and recognition, we are delighted to see that a growing number of brands across multiple categories have started to cooperate with Pinduoduo as the primary channel to reach consumers.

Another crucial aspect of high-quality development is the co-development and integration of the digital economy and the traditional industries so that more quality products can reach the national and global markets. This is what we call high-quality supply.

Pinduoduo has deep root in agriculture, it will continue to be a focal point in our pursuit of high-quality development as we bring more agri produce to market. Innovation is the key to enhancing quality and creating added value. So it is crucial to meet consumers' growing demand for high-quality, safe and healthy agriculture produce through innovation and the adoption of Agritech.

In Q2, we launched the third smart agriculture competition and a second Pinduoduo Crop Growing competition. Through this initiative, we are actively engaged in agritech innovation and support technology adoption in agriculture. Our vision is to further improve the quality and the efficiency of agricultural production through technology. At the same time, we are stepping out support for products enabled by agritech, on our platform to accelerate our research funding translate into products.

For the more driving the digital transformation of manufacturing with new tools and new models leveraging our consumer insights and tech capabilities will help manufacturers that understand evolving consumer demand and improve production efficiency. Last quarter, our team went into industrial belts and launched a series of live streaming events to showcase the broad selection of local products to consumers. This helps consumers learn about the product tangibly and enhance their trusting online shopping.

We are also deep in collaboration with merchants in areas such as product design and marketing so they can better meet diverse consumer needs. This is welcomed by many merchants. For example, we recently partnered with a well-known liquor brand. Together, we experimented with online plus offline approach, which has offline pop-up shops. This format led to their record-breaking sales of our platform. And, at the same time, enable the brand to reach young consumers effectively and obtain valuable consumer insights.

High-quality ecosystem is the foundation that nurtures the sustainable and mutually beneficial growth of the platform and all its participants.

Last quarter, we launched a 10 Billion Ecosystem Initiative to support quality merchants and products. This initiative provides incentives for SME merchants and quality merchants to upgrade their service offerings. Thereby creating a robust environment to drive up efficiency and service quality of the entire ecosystem.

We also made significant efforts in platform governance areas such as food and drug safety, model protection and live streaming compliance.

We hope to accelerate the positive momentum in platform ecosystem with both the 10 Billion Ecosystem Initiative and our platform governance efforts.

For example, we collaborated with major publishing houses and book brands to launch the (inaudible). We continue to invest hundreds of millions of RMB in coupons in an effort to promote a sustainable online authentic book market and to strengthen IP protection. Our efforts covered 6 million copies of (inaudible), connecting quality content directly with consumers. As of today, over 2,700 publishing houses, food companies and distributors have joined the Pinduoduo platform.

Throughout our journey to a high-quality development, we are always looking for opportunities to show them more social responsibilities and create value for the society. Earlier this month, the (inaudible) region was hit by severe rainfall. (inaudible) RMB 30 million to support the flood relief efforts. At the same time, in partnership with People Sale, we launched a dedicated relief campaign to help businesses in the affected regions, reduced losses from production disruptions and inventory damage and help them get back to normal operations quickly.

Furthermore, to help book merchants in [Duo Duo], we set up a dedicated book selling channel and provided relief measures such as traffic support and 0 commission policy to help these merchants reduce losses and resume normal operations.

We are well aware that our value creation is acceptable from our long-term strategy of high-quality development. Our focus on high-quality development and ecosystem and also we lay a solid foundation for the future, but also earns immediate policy feedback from consumers and merchants. Looking forward, we will continue to support quality merchants and SMEs and to promote digital inclusion agriculture. We will keep doing the right things and keep up our investments in the key areas to speed up our progress towards high-quality development. Now I'll hand it over to Jun. She will provide you with an update on our financial performance.

Thank you, Jiazhen. Hello, everyone. Let me walk you through our financial performance for the second quarter ended June 30, 2023. In terms of income statement, in the second quarter, our total revenues increased 66% year-over-year to RMB 52.3 billion. Our top line growth was mainly driven by consumption recovery and the early feedback from excluding our high-cost development strategy. .

Revenues from online marketing services and others to RMB 37.9 billion this quarter, up 50% from the same quarter of 2022. Revenues from transaction services this quarter were RMB 14.3 billion, up 131% from the same quarter of 2022.

Moving on to costs and expenses. Our total cost of revenues increased 135% from RMB 8 billion in Q2 2022 to RMB 18.7 billion this quarter, mainly due to increase in fulfillment fees and payment processing fees.

On a GAAP basis, total operating expenses this quarter increased 41% to RMB 20.9 billion from RMB 14.8 billion in the same quarter of 2022. On a non-GAAP basis, our total operating expenses increased to RMB 19 billion this quarter from RMB 12.9 billion in Q2 2022.

In the fourth quarter, we seized the opportunities of favorable consumption trends by investing family and responsibly to support our long-term high-quality development. Our total non-GAAP operating expenses as a percentage of total revenue this quarter was 36% compared to 41% in the same quarter last year.

Looking into specific expense items. Our non-GAAP sales and marketing expenses this quarter were RMB [16.6] billion, up 53% compared to the same quarter last year. On a non-GAAP basis, our sales and marketing expenses as a percentage of our revenue this quarter was 32% compared with 34% for same quarter in 2022.

In Q2, we stepped up efforts during the June 18 shopping festival and throughout the entire quarter to provide more savings to consumers. We also improved our service quality to deliver better services and support consumption.

Our non-GAAP general administrative expenses were RMB 370.2 million versus RMB 164.7 million in the same quarter of 2022. Our research and development expenses were RMB 2.1 billion this quarter on a non-GAAP basis and RMB 2.7 billion on a GAAP basis, setting a new high.

R&D is fundamental to the high-quality development of our platform ecosystem. We will continue to grow our R&D capabilities so that we can understand consumer moving demand and serve them better.

Operating profit for the quarter was RMB 12.7 billion on a GAAP basis compared with RMB 8.7 billion in the same quarter last year. Non-GAAP operating profit was RMB 14.6 billion versus RMB 10.5 billion in the same quarter last year. Non-GAAP operating profit margin was 28% this quarter, compared with 34% for the same quarter last year.

Net income attributable to ordinary shareholders was RMB 13.1 billion for the quarter, compared to RMB 8.9 billion in the same quarter last year.

Basic earnings per ADS was RMB 9.64 and earnings per ADS and diluted earnings per ADS was RMB 9 versus basic earnings per ADS of RMB 7.06 and diluted earnings per ADS of RMB 6.22 in the same quarter of 2022. Non-GAAP net income attributable to ordinary shareholders was RMB 15.3 billion compared with RMB 10.8 billion in the same quarter last year. Non-GAAP diluted earnings per ADS was RMB 10.47 versus RMB 7.54 in the second quarter of 2022.

To sum up, over the past quarter, we delivered solid financial results and high quality development began to show impact. Looking ahead, we will continue to invest with determination and patience to execute our high-quality development strategy. We also react positively to competition by keeping our more savings and better services capabilities.

That completes the income statement. Now let me move on to cash flow. Our net cash flow generated from operating activities was RMB 23.4 billion, compared with RMB 19.4 billion in the same quarter last year. As of June 30, 2023, we have RMB 179.5 billion in cash, cash equivalents and short-term investments. Thank you. This concludes my prepared remarks.

Thank you, Jun. Next, we will move on to the Q&A session. Today's Q&A session, Lei, Jiazhen and Jun will take questions from analysts on the line. We could take a maximum of 2 questions by analysts, Lei and Jiazhen will answer questions in Chinese, and we will help translate the remarks for easier reference. Operator, we may now take questions on the line. .

(Operator Instructions) Your first question will come from Joyce Ju of Bank of America.

My first question is, we note Pinduoduo has started a new long-term strategy of focusing on high-quality growth since last quarter. Could management elaborate a bit more on the implementation of this strategy. What business measurement and movement having been taken and how this strategy is going to affect company's financial outlook in the near and longer term. .

My second question is that we understand agriculture has been Pinduoduo's key strategy for a very long time. And it is also a core merchandise category for the platform, how this strategy and how agriculture fit under the company's new strategy of high-quality developments. What impact will it have on the company's operations and financials. Will company address your investment budget and pace in the corresponding areas .

[Interpreted] This is Jiazhen. I'll answer your question on our high-quality development strategy.

So over the past few years, we gradually transitioned from fast growth to solid development from marketing-driven to R&D driven. And starting from the first half of this year, we fully embraced the high-quality development strategy. And this helps a new development phase for us, which prioritizes quality .

We are in the development stage, and there are still many areas to improve in terms of certain consumer as well and building driving ecosystem. So strengthening our capability and embracing high-quality development is a necessary path to take to further deepen our value.

As I have mentioned earlier, implementing this strategy mainly involves 3 key areas. First is high-quality consumption. We are always consumer-centric. We work hard to strengthen our capability to give more savings and better services. So we can deliver a 360-degree good experience to consumers and meet their diversified demand.

Second is high-quality supply. We leverage our tech expertise, and we go deep in the supply chains. We promote digital inclusion in manufacturing and also agriculture sectors, and we hope to directly connect more quality products to the nationwide and also the global market.

Third is high-quality ecosystem. With our 10 billion Ecosystem Initiative, we actively support quality merchants, SME businesses and pharma merchants. And we also enhance our overall platform governance.

And for the foreseeable future, Lei and I will lead our team together to invest in these areas persistently and also patiently. We strive to enhance consumer experience, optimize efficiency of the agriculture and manufacturing supply chains and also reinforce the positive trend of our platform ecosystem, and execute our high-quality development strategy in every single detail of our operations.

[Interpreted] This is Lei. I will take your question on agriculture strategy. Pinduoduo started out in agriculture, and our development is deeply connected with this agricultural supply chain. We are proactively leveraging our tax background to promote digital inclusion in agriculture.

Online penetration of agricultural produce remains relatively low. There is a lot of room to streamline the agricultural supply chain, and we can create our unique value by using our tech capabilities to facilitate the development of agriculture. Going forward, agriculture will continue to be a major focus for us.

Recently, we continued our efforts in bringing together industry and academia. We hosted several advertised competitions, such as the Smart Agriculture competition, Pinduoduo Crop Growing competition and the Global Agriculture Innovative competition. We are happy to see our contribution to the commercialization of research funding.

As I mentioned, it is our pleasure to welcome Professor Ivonne Rietjens to join our Board as Independent Director. She has been a 10-year provider at Wageningen University since 2001, and she currently serves as the Head of Toxicology Department. The Netherlands is an agricultural powerhouse and Wageningen University is a globally renowned institution in agronomic research.

Ivonne has decades of experience in food safety. She will bring to our Board deep expertise in food technology and cutting-edge agritech research trends. With Ivonne on board, we look forward to deepening our contribution in the modernization of agriculture. Thank you.

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

Our next question today will come from Yang Bai of CICC.

I have 2 questions on financials. You booked total revenue growth of 66% and the online marketing service growth of 50%.What do you think contributed to that highlight in the past quarter, and do you think this momentum will continue into the second half of the year?

My second question is, we noticed your profit margin decreased slightly year-on-year. What are some of the key areas you are putting results into? And how should we understand the fluctuation of your profit margin as industry competition further intensified.

[Interpreted] This is Jiazhen, and I'll take the question on growth rate first. So in short, growth this quarter can be attributed to 2 factors. The first is the positive industry trends. And second is the early positive feedback towards our high-quality development strategy.

Our business is closely tied to the overall consumption market. And we noticed a continued improvement in the market trends and also consumers increasing witness to shop. We think this is inseparable from the introduction and also implementation of various promote consumption support measures.

In Q2, we seized opportunities to enhance our capability to gain more savings and better services. We expanded our valuable money product choices. And also we executed our high-quality development strategy with determination. For example, during the June 18 event, we increased promotions and also invested billions in coupon to give back to consumers. And this helped stimulate demand for all merchandise categories. And beyond this promotional event, we also follow through with our concept of (inaudible) June 18 and has provided consumers with savings nonstop.

And our efforts improved consumption settlement, and this in turn generated more sales opportunities for the merchants, also our support for quality merchants encourage them to invest resources and collaborate with us serving customers well together. So as a result, we recorded decent revenue growth.

We believe that revenue is a natural result of our value creation and high-quality development is our long-term strategy. We do not prioritize growth over a single quarter. We think that if we can better serve the diverse consumer needs with enhanced services and better savings, and if we can build our robust ecosystem, I think our platform will naturally achieve sustainable and high-quality development.

This is Jun. Thanks. Let me take your second question. Well, first, we are still in the development phase. Profitability itself is not our priority. As Jiazhen just mentioned, it's a natural result of the value we create. So with that said, in Q2, we saw different financial results, showing the early results from our high-quality development strategy. And in this process of executing our high-quality development strategy, we are stepping up investment in many key investment areas. For example, giving back to consumers, supporting SME merchants investing with cultural and, manufacturing supply chains and 10 billion Ecosystem Initiative to many [areas]. These efforts are reflecting in our financial results.

Also, as competition further intensified, we will react positively by enhancing our board savings and better service core capabilities and giving back to our consumers and merchants.

I'll now go to high-quality developments. When we see opportunities to create long-term value, we will continue to exercise financial prudence and invest with determination. Thank you.

Operator, I think we have time for 1 more analyst.

Our next question will come from Ellie Jiang of Macquarie.

Let me quickly translate myself. My first question is on the competition. So we're seeing a lot of the competitors putting more emphasis towards the promotions and low pricing categories. Also, we are seeing pretty strong active buyers and merchant data from the peers. How do management evaluate the impact on our operations? Are we feeling more pressure, and that would potentially impact our strategy going forward. .

And the second question is on Temu. We have seen Temu, following Temu closely in the recent period. We understand that this is still very early stage and might have limited financial contribution. But I wonder if management could share with us the latest progress of Temu and talk about the overall strategy, any financial contribution management can share.

[Interpreted] This is Jiazhen, and thanks for the questions, and I'll share some thoughts on competition first. We noticed changes in the industry. And as consumption covers and consumers show stranded demand, it's not surprising for us to see peers setting up on subsidies. Competition is indeed becoming more intense. And we believe that healthy competition, which is driven by consumer-centric goal can benefit the industry, which includes not only the consumers, but also the platforms as well.

The e-commerce industry is always rapidly evolving. And for us, the key to adapting to the rapid changes is not to focus on what our competitors are doing. Instead, it is to stay laser-focused on consumer demand and shop our own skills and also to face competition directly and also briefly. We channel competitive pressure into more motivation to strengthen our core competencies and focus on implementing our high-quality development strategy.

And serving customers well is at the core of our value creation. We are deepening our capabilities of providing more services, more savings remains very important to us. And last quarter, for example, we invested $1 billion in the generating promotion to cover all product categories and make sure consumers have access to quality products at affordable prices. And positive consumer experience requires a comprehensive effort. It is not just about price, and we continue to focus on R&D to understand and also adapt to consumers' evolving needs to help consumers shop with a peace of mind. We also work very hard to provide better services, which includes, for example, upgrading logistics and also after-sale support.

And high-quality supply is for merchants to offer value for money product. And we are promoting digital transformation agriculture and also manufacturing. Our team is active in the field and also in the factories to help farmers and also SME manufacturers standardize and also improve design, production as well as logistics.

With our 10 Billion Ecosystem Initiative, we also provide support to quality merchants and products. And this incentivizes them to improve product and service quality. I think this in turn promotes a healthy and high-quality development of our platform ecosystem.

We received positive feedback from these efforts. And this gives us confidence to continue on this path of high-quality development. Our strategy is very, very clear, but executing well is not that easy. It actually requires a long-term commitment, and we will need to do the right things and also do things right. We will continue to stick to our benefit, improve ourselves in the face of competition and create greater value. Thank you. .

Thanks for your question. Let me address your second question in Temu.

Well, for our global initiative, Temu is currently in a learning stage. Our key focus right now is how we can apply our expertise to create our unique value? Would you not focus position or the financial metrics at the current stage. We hope to leverage our tax background and supply chain know-how to bring quality products at good prices to consumers in various markets globally. And this presents us with both challenges and learning opportunities.

Currently, our team is laser focused on understanding and accepting to different cultural preferences, social environment and consumer demand in different markets with the aim of creating more unique value.

As we continue to understand and explore the consumer demand from the different markets, we carefully evaluate the investment opportunity and make responsible capital allocation decisions.

Thank you, everybody, for joining us on the conference call today. It's about time. Thank you and have a great day.

The conference has now concluded. We do thank you for attending the presentation today. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]