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. Chen Peng. Sir, please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Chen, and I will help host the earnings call. PDD 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 Cen 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 transformations 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 RMB52.3 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 and 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 life blood of innovation. Over the past 12 months, our R&D expenditure exceeded RMB10 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…

Thank you, Lei. Hello, everybody. This is 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 showed our social responsibilities and further refined 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 a 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.…

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 RMB52.3 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 RMB37.9 billion this quarter, up 60% from the same quarter of 2022. Revenues from transaction services this quarter were RMB14.3 billion, up 131% from the same quarter of 2022. Moving on to hosting expenses. Our total cost of revenues increased 135% from RMB8 billion in Q2 2022 to RMB18.7 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 RMB20.9 billion from RMB14.8 billion in the same quarter of 2022. On a non-GAAP basis, our total operating expenses increased to RMB19 billion this quarter from RMB12.9 billion in Q2 2022. In the past quarter, we served 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 RMB16.6 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…

Thank you, Jun. Next, we will move on to the Q&A session. Today's QA session, Lei, Jiazhen, and Jun will take questions from analysts on the line. We could take a maximum of two 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. Please go ahead.

My first question is, we note Pinduoduo has started a new long-term strategy of focusing on high-quality growth since last quarter. Could not 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 the 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 we are culture fits under the company's new strategy of high-quality developments. What impact will it have on the company's operations and financials? Will the company address your investment budget and pace in the corresponding areas?

Hi, 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 helping 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 consumers as well as building a 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 three 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. The 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 receptors, and we hope to directly connect more quality products to the nationwide and also the global market. Third is a 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 the 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.

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. How long 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 any culture. 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 tenured professor at Wageningen University since 2001, and she currently serves as the Head of the 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. Please go ahead.

I have two questions on financials. [indiscernible] 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?

This is Jiazhen, and I'll take the question on growth rate first. So, in short, growth this quarter can be attributed to two 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 pro 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 coupons 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 every day’s [ph] 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 encouraged 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. Thank you.

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 a 10 billion Ecosystem Initiative to manipulate [ph]. 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 one more analyst.

Our next question will come from Ellie Jiang of Macquarie. Please go ahead.

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 very closely in the recent periods. 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, and any financial metrics management could share? Thank you.

Hi. This is Jiazhen, Thanks for the questions, and I'll share some thoughts on the 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 goals 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 consumers route 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, there'll be invested a balance 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 me to help consumers shop with peace of mind. We also work very hard to provide better services, which include, for example, upgrading logistics and also after-sale support. And high-quality supply is for metal to offer value for money product. And we are promoting digital transformation in 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 comfort, 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. We do not focus on my position or other financial metrics at the current stage? We hope to leverage our tax background and supply the 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 environments, 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.