Hello, ladies and gentlemen. Welcome to Pinduoduo Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Today’s conference call is being recorded. I’d now like to turn the conference over to your speaker today, Mr. [indiscernible]. Thank you. Please go ahead.

Thank you, Rachel. 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 global newswire services. On today’s call, our CEO, Chen Lei, will make some general remarks on our performance for the second quarter of 2020 and his primary areas of focus going forward. Our VP of Strategy, David Liu, will then elaborate further on our specific strategic initiatives. Last but not least, our VP of finance Jing Ma will take us through our financial results for the second quarter ended June 30, 2020. Before we begin, I’d like to remind you that this conference contains forward-looking statements within the meaning of SECTION 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, 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 U.S. 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 laws. Now it is my pleasure to introduce our Chief Executive Officer, Chen Lei. Lei, please go ahead.

Hello, everyone. It's a pleasure to welcome all you to our second quarter 2020 results announcement. This is my first time communicating with investors around the world as CEO, even though I met many of you 2 years ago in our IPO Roadshow. It's great to reconnect and I look forward working together again and building ongoing dialogue. I'm joined today by our Vice President of Strategy, David Liu and our Vice President of Finance Tony Ma. In the past [indiscernible] months, have been busy with management transition that was announced on July 1st. It was an evolving process that started 3 years ago, and the reason the decision was made with the full support of our Board. We've always been thinking about how to create more opportunities to grow the next generation of leaders, how to keep this organization young, vibrant and at the same time increasingly institutionalized. This is especially important in our fast changing technology. We challenge ourselves continuously and incorporate fresh perspective so as to constantly satisfy and serve our users' needs. At the same time, we need to build a solid foundation for long-term and sustainable development of the organization. Having built Pinduoduo into one of the bigger platforms in China and probably building numerous initiatives by the team during the pandemic, we feel the timing was right to pass on to our younger generation leaders more responsibility. Pinduoduo has grown at an extraordinary pace in the past 5 years. We are laser focused on our survival and growth. However, in the next few years, my goal is to translate this platform into a next level, one that is vibrant, innovative, energetic and institutionalized. The management and the Board hope to lay the strong foundation over the next few years to create a long lasting…

Thank you, Lei. One in four Chinese workers work in agriculture, but the industry makes them less than 10% of China's GDP. This is because agriculture has lagged behind other industries in digitization. Nearly 98% of farmers in China work on farms smaller than two hectares. It is difficult to standardize growing practices and achieve economies of scale. The rural workforce is aging and in decline as young people choose to work in the cities. The lack of coordination for food production makes farmers vulnerable to price swings, while wastage and high incremental distribution costs add to consumers' burden. Those are the challenges. And the opportunity is that agricultural e-commerce can solve a number of these problems. Based on figures from the Ministry of Commerce, the implied total addressable market in 2019 for PBOC agricultural goods sales in China was RMB8.1 trillion, with less than 7% of these sales taking place online. In contrast, the online penetration for physical goods in total was 23% in 2019. Pinduoduo is already one of the leading e-commerce platforms for agriculture. In 2019, we generated RMB136.4 billion or 13.6% of our GMV from agriculture produce and related goods. 1over 240 million or 38% of our annual active buyers purchased in this category last year, with a 70% repurchase rate. Pinduoduo has become the go-to destination for high quality, great value aquaculture products. This recognition deepens through the pandemic. During 6.18, we saw orders for agriculture products grew 136% to RMB380 million. Nearly three quarters of the orders came from Tier 1 and Tier 2 city users. We expect to continue gaining market share in agriculture and we see potential for our agriculture GMV to exceed RMB1 trillion in 5 years. Why do we think agriculture e-commerce can be tackled -- can tackle the challenges…

Thank you, David. For the 12 months ended June 30, 2020, our GMV increased 79% to RMB1.27 trillion from RMB709 billion a year ago as a result of higher user engagement and increased spending per user. We report GMV on the same basis as other industry players to provide a meaningful comparison with that of our peers. The industry definition includes cancelled and returned orders. Comparing our GMV in Q2 versus Q1, the level of cancelled and returned orders has returned to normal historical level as China recovers from the pandemic. Our average monthly active users in the second quarter increased by 81 million from the previous quarter to 569 million, or an increase of 55% from a year ago. Our annual active buyers for the 12 months ended June 30 grow 41% year-over-year to reach 683 million. This represents a net add of more than 200 million in the past 12 months. The annual spending for active buyers in the 12 month period ended June 30, 2020 increased to 27% to RMB1,857 from RMB1,468 for the same period in 2019. The increase in annual spending per active buyer was moderated by significant number of new users added who contributed less than 12 months of purchases to our GMV. During Q2, China's economy continued its recovery from the disruption caused by the pandemic. According to National Bureau of Statistics, online sales growth of physical goods accelerated in the second quarter, resulting in 14.3% increase for the 6 months ended June 30, 2020 from a year ago. This is up significantly from 5.9% growth for the 3-month period ending in March. Consumer staples and household goods were significant growth contributors during this period. We observed a similar recovery trend on our platform. In Q2, our users had strong demand for household…

[Operator Instructions] Your first question comes from the line -- [Operator Instructions] Your first question comes from the line of the Gregory Zhao of Barclays. Please ask your question. Mr. Gregory Zhao, your line is now open.

Sorry, I was mute. So thanks for taking my question. So we saw PDD made some efforts to move to the high-end market and started to sell some luxury products, including Tesla cars. So I just want to understand a bit more about how this will help you improve the ARPU and help you to get expanded into the high-end market? A quick on the year-over-year growth of the GMV growth. So we know last year was the first time you joined the 6.18 promotion season. So how shall we think about the relatively high base, the impact to your 2quarter GMV growth? Thank you.

Gregory, thanks for the question. Let me take your first question around brands and products. Our products and brand strategy is actually oriented around giving users what they want and serving them well. So it is not our intention to build or engaging in the type of promotion that you have seen. The intention is not to drive our AOV. The aim is actually to build Pinduoduo into a destination for quality, authentic and value for money product across categories and price points. So we are continuing to grow the depth and breadth of SKU across the platform, whether they are branded or unbranded. In fact, as I highlighted in my comments earlier, we are highlighting agriculture as a product category where we think we can strategically add a lot of value over the next few years by investing in our supply chain and making available higher quality and better product for our users. And with regard to your question on GMV, first of all, I would like to just remind the audience that comparing GMV growth in the second quarter versus the first quarter is meaningful because of the impact of the pandemic. In fact, we are very pleased with our GMV growth this quarter, and particularly in the context of having added a 100 million of active buyers since the beginning of this year. Our focus as a company this year in terms of our strategy is to continue to invest in user engagement and to build our mindshare because as you look at the scale of the user base we have accumulated, 683 million active buyers, we believe that what we need to do is continue to improve our engagement with them and to grow their mindshare. The GMV for the second quarter are impacted. I will also note that changes in consumer spending, we saw a pickup in consumer activity since the first quarter as the economy recovered. However, we did notice that consumer spending was much more value conscious and consumers are looking for more household necessities such as FMCGs and agriculture produce among our platform. So as you saw in our 6.18 campaign, we actually expanded our coverage in the campaign to cover more products in these categories, and we are continuing to support the consumers in these efforts.

Okay, thank you.

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

Thank you for taking my question. May I just ask a couple of details of how the transaction commission revenues, marketing services revenues are progressing and how that take rate has evolved? Your marketing service sector seems to have gone up to 3.2% in the quarter, which is a huge improvement year-on-year on any other metric, probably the highest ever. Should we then think of that as the number that we can expect for you to continue to maintain in the future? And also, when you look at the growth rates in transaction commissions, which was 76% in 1Q, that's slowed down to 38%. Is there anything there that's different that would lead us -- lead to that slower growth rate? And in the similar manner, the marketing services revenue, which is at 71%, is meaningfully higher than the pace of growth that you're seeing in the GMV for the quarter. So if you could just take us through what's going on there. Then I have a few questions in agriculture, if I might. Thank you.

Okay. Let me take this one, then. We do saw a stronger-than-expected recovery in merchants advertising in Q2. Our merchant had more budget to spend, given limited activities in Q1, and they were eager to make up for their loss in Q1, and higher user activities and advertising also helped to improve the advertising returns. Our higher take rate in Q2 reflects the supply demand dynamic post to the pandemic actually. The level of returned and unpaid order also return to the normal level. If we take together our Q1 and Q2 number as an aggregate level, the takeaway for the first half of the year actually is 2.9% in line with our historical results. Takeaway for us, it's an output, not an KPI we try to optimize. Our priority is on our user engagement. With stronger user engagement, merchants would naturally want to advertise more. We will continue to support good quality merchants and incentivize them to improve the service and provide better value to our users. And regarding the second question or the question on the transaction service revenue, the transaction service revenue comprised primarily of what we previously termed commission fees, the payment process fees, which we charge as a standard rec rate of 0.6%. However, we continue to offer a preferential rate for certain merchants as incentive.

And may I just ask a follow-up question? Just wanted to understand where -- what percentage of the GMV today is agriculture, or say, for the second quarter? And when you talk about RMB1 trillion 5 years out, we presume that's about 15% to 20% of GMV at that point of time, would that be the right mix to think through for agriculture? And if you could just give us a feel for what sort of take rate that we could earn from the business. Would it be commensurate to or comparable to the 3.2%, for example, that you’ve shown us in Q2, 5 years down the line, I mean. Thank you.

Piyush, thank you for that. Let me just also add a little bit to context around the take rate. As we have communicated to the market previously, the take rate really is an output. It's a function of the merchants advertising on our platform and seeing the right levels of return. So we actually saw in the second quarter very strong merchant activities as merchants tried to some more -- move on inventories and goods in the second quarter. And as a result, we saw very strong advertising demand, which we think actually contributed to that take rate. Similarly, I would note that on our platform, we are seeing advertising activities really across the board from many different sectors. So it is in particular categories per say. And similarly, we do believe they are potentials in agriculture merchants, I mean, distributors to contribute to advertising as long as they are able to actually offer the type of premium product that allows them to generate the type of return. So while we are seeing this, given the low e-commerce penetration rate in agriculture, we actually see substantial opportunity for us to invest in our supply chain and to drive more value creation down the road. So, yes, we do believe that certainly generating a type of return commensurate with what the platform is generating today is possible in agriculture. But that may come in the form of both advertising and also us providing technology solutions to the participants in our ecosystem.

Thank you.

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

Hi. Good evening, management. Thanks for taking my questions. I have a question related to more medium longer term. So how will PDD attract broader varieties of merchants and brands to join the platform when you indeed now have a larger base of merchants, and then you also have -- that your user base also reaching quite large number. So how do you balance and ensure all the merchants will receive the relevant exposure? And what does PDD need to do to serve this broader range of the merchants? And how will the team purchase model evolve if we get more branded products or branded merchants on our platform? Thank you.

Thank you, Alicia. Our strategy around branded products and brands has not changed. In fact, as I mentioned earlier today, the idea is to continue to focus on providing what the users want. So from that perspective. What we are seeing is the team purchase model working, and this is the reason why we have been able to accumulate 700 million users, it was in such a short period of time. And this continues to work because we are a recommendation based business model focusing on specific SKUs as opposed on brands, right? So we do believe that as everyone's demand on the platform really ranges across different price points for different categories. And through -- as we continue to get better, our recommendation, we understand the users better, we are able to push them the most relevant products at the most relevant price points. And as the user activities and user engagement grows, the merchants naturally are coming to our platform, seeking for growth and more opportunities. And the merchants themselves would be able to get the right level of traffic if they are able to offer the right value for their customer base. So what we are doing is through the algorithms and through our recommendation, working with the merchants to help them provide more suitable products that are targeted at the users. And we believe the algorithm is working and continuing over time, our recommendation will get better. And through a combination of offering the right product and also advertising on the platform, we believe the merchants will continue to see the attractive returns on their investments.

I see. Okay, thank you.

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

Hi. Thanks management for taking my questions. My question is about the business momentum in July and August across different product categories? Thanks.

Sorry, Thomas.

Hey, Thomas, is the question around our strategy or the trends we're seeing across different categories?

Operator, maybe we can take the next question first before we take Thomas back.

Certainly. Your next question comes from the line of Tina Long of Credit Suisse. Please ask your question.

Hi, management. Thank you for taking my questions. I have two questions. The first one is on the sales marketing because in your prepared remarks, you mentioned that you intentionally moderate the sales and marketing spending due to, I think, probably peers actually have been pretty aggressive. And also, you expanded the RMB10 billion program to some [indiscernible]. So I want to know in the next two quarters, third quarter and fourth quarter, what are the plans for your sales and marketing and under what circumstances you actually set up the sales and marketing? That's the first question. I'll do the second one after this. Thank you.

Sure, Tina. Let me ask Tony to address the question.

First of all, the Q2 on sales and marketing expenses, we say to moderate our sales and marketing spending is when we observe this aggressive promotion spending by our peers on electronics. Relative to that, we saw household goods as more attractive opportunity to advance user engagement. Therefore, household goods has -- actually has a higher purchase frequency than electronics. So we choose a different strategy to investing in Q2. We actually plan to deepen our user engagement going forward so that we will continue to spend on sales and marketing in the coming quarters to grow the mindshare and trust among our users. We expect to increase our sales and marketing investment in the second half of 2020 in a prudent manner as well as we spend whenever we see opportunity meets our internal ROI hurdles.

Got it.

Our annual spending per active user are still -- lags behind our peers. We believe we can narrow that difference by growing our mindshare with users and -- to get more wallet share, that's why we have to continue this type of investment.

Okay, thank you, Tony. Yes, my first question is sort of related to this, because I think based on the public data, the actual volume is actually very strong from PDD, so -- but the GMV actually was sort of lower. So does that imply the average order size, is actually trending down? Can you share a little bit more about the average order size and also outlook? Because if you continue to allocate more traffic to the household goods, so will we continue to see the average order size to be -- to stay at low level? Thank you.

Let me take this. Users tends to associate Pinduoduo as their go-to platform for great savings every day. So for us, we also tend to have a less of concentrated spike in GMV and user activities around shopping promotions unlike how we use this -- our peers. Our user engagement tends to trend in a steady fashion and reflective -- which reflective of our gain in building our mind share. And we will continue to invest in the user mind share to build on high frequency of engagement. In fact, that's what we did in Q2. We noticed the consumer spending was more value cautious and the consumer were looking for more household necessities, including FMCG, agriculture produce. That's why we dedicated our promotional programs during the June 18 to include more products in these categories. This definitely have an impact on the AOV. Also, we add almost 100 million active buyers since beginning of this year and these users are just getting to know Pinduoduo, and actually their contribution to the GMV is less than 12 months. Also, they are still developing their spending behavior on our platform.

Okay. So does that mean the outlook of AOV will stay at a lower level for a longer period of time?

Tina, so what we have seen in the second quarter is growth across the categories. But as I mentioned, the consumer behaviors in the second quarter were more value conscious and we adapted the marketing strategy accordingly. So we do believe that, Pinduoduo -- many users associate Pinduoduo as a platform where they would go for great value product, and we have seen people coming to us in the second quarter, particularly looking for that -- for those products. We find these product categories to be quite compelling in a sense, because they have a high frequency, high engagement. And we do believe that over time the AOV will continue to grow as they build their shopping behavior, their spending behavior on our platform over time.

Okay, got it. Thank you very much.

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

Hi. Good evening. Thanks management for taking my questions. Can you comment about the livestreaming online shopping strategies? Thank you.

Thomas, in terms of livestreaming, we have seen continuing adoption of our merchants using the livestreaming as a feature to create engagement with their consumers on our platform. However, we do not position or do not consider livestreaming to be a separate marketing tool. We consider really as part of the integrated experience on our platform. So -- also Pinduoduo, as you will note, that we don't have actually a dedicated channel of entrance for livestreaming. Instead, you actually are -- our users come in contact or come in access to the livestreaming road [ph] through their browsing experiences as they explore their SKUs, they will notice that this particular SKU may be in a livestreaming and they will click into livestreaming and view the product being introduced. And in that context, they may choose to purchase or they may choose to bookmark the seller, or actually they may have seen something through their browsing next time they end up purchasing. So we do and we position intentionally livestreaming to be part of the holistic experiences that our merchant can offer to our users and begin to add to that exploration -- exploratory experiences our users have on the platform.

Yes, one more thing I'd like to add is livestreaming will be one of the key demands our customers post -- in this year. And actually there are many others and we try to have a full [indiscernible] understanding about our customers, and we actually have more than just one features, try to capture different kind of needs -- different kind of demand our customer has had since the starting of this year. So I believe that livestreaming just is one of them, but not all of them.

Thank you.

Thank you, Thomas. Operator, next question, please.

Your last question comes from the line of Binnie Wong of HSBC. Please ask your question.

Hi. Good evening, management. Congrats on a strong improvement in the bottom line. I’ve two questions here. First question is on the monetization rate. It's true that -- I mean, the second quarter, the monetization rate sharply increased to 3.2%. But if we look at on a half year basis, right, there's only -- that’s around 2.5%, which is just similar to what we have done in the past years. So should we just think of it this is more about a rise in spending from the pent up demand? Or should we think about second quarter as there's some structural positive drivers that can last into the second half of the year, so just directionally thinking about it. And then following on, on that is that if you’re thinking about the rising online marketing from which pool -- which advertising category. Is it because there we also do more -- management said about the agricultural advertiser and FMCG. Do they tend to see bigger ad spending? Like do they have a bigger ad pocket? Thank you. And I just have a quick follow-up. Thank you.

Hey, Binnie, thank you for the question. Your question around the take rates, I would say that and as -- I would say that take rate itself really is a function of merchant investing or pay -- and buying advertising to generate return for their sales. And as many of you have noted in your interviews with merchants, the advertising return on our platform are better than that relative to our peers. So it is I would consider -- I urge you to consider the advertising spend from merchants from that perspective. Of course, it is true that because in the first quarter, the merchants weren’t in a position to spend their advertising budget. So we did benefit from some of that pent up demand. But our conviction is that as long as we continue to deliver better or solid attractive advertising return to the merchants, they will continue to advertise. So we're doing this both in terms of improving our recommendation algorithm, but also improving better advertising products. So as an example, we rolled out at the end of last year product that helps -- a smart tool that helps merchants to optimize their advertising return, as an example. So many of the merchants on platform may not be as savvy and they don't really understand how to optimize for keywords or for banner ads. However, by using our automated system, they at least are guaranteed a minimum threshold return, so they are in a better position and more willing to spend. So we do think that part of that -- pickup has to do with the better advertising products that we are providing. And also, of course, you cannot do this without a very, very active user. So as I mentioned on our call, our strategy this year is to continue to invest in user engagement. And with user engagement we believe the return to merchants advertising will continue to be attractive and they will continue to have that demand over time. As to your question specifically around advertising tools, as you know, we started our business -- advertising business in -- primarily in search. But as our business model focuses on recommendation, we have seen pickup and we expect to continue to see pickup, see advertising as a contributor to the online marketing services revenue.

Okay. Thank you so much. And just a quick question here is that is -- I mean, it's a very good quarter that we see the operating margin is historically the narrowest in terms of the losses. It's a significant improvement in the operating margin side. Do you think this is something that we can extrapolate because of this efficiency and we reached kind of like an equilibrium as to how much we spend and then how much we can grow our top line? Or is it that we should expect some quarterly fluctuation? Because I do understand sales and marketing is -- that’s quite impacted by seasonality. So should we think about this to extrapolate into the second half? And is there something that is kind of like we wish this inflection point already? Thank you.

Yes, I think you're talking about the profitability question here.

Yes. That’s right.

Our Q2 results do demonstrate how leverageable our business model is and how we could deliver profitability in the short-term. But we don't believe it is the right strategy to focus on the short-term profit over a sustainable long-term value. Our vision is to offer value for money products to all users through fun and interactive shopping experience. We still need to continue our investment to grow user mind share and engagement, as we mentioned several times in the prepared remarks. So we are not considering profitability this year.

Okay.

Actually we also plan to step up our investment in our ecosystem through strategic partnership and capital investment to better support our merchant in offering better value and better service to our users.

Okay. Thank you. That’s very clear, super clear. Thank you so much.

Thank you.

Thank you, Binnie.

I would not like to hand the conference back to the presenters for their closing remarks. Please go ahead.

Thanks, operator. Thanks, everyone, for joining us on the conference call today. If you have any further follow-up questions, please feel free to reach out to the IR team. We are always here for you. Thank you and have a good weekend.

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