PDD Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 29, 2023

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to PBD Holdings Inc. 2nd Quarter 2020 3 Earnings Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. 3.

Operator

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 Teng. Sir, please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining us today. My name is Chen, and I will help host the earnings call. PD Holdings earnings release was distributed earlier and is available from our website at investor. Pdholdings.com as well as through GlobeNewswire services.

Speaker 1

Before we begin, I would like to refer you to our Safe Harbor statement in the earnings press release, which applies to this call as we will make certain forward looking statements. Also, this call includes discussions of certain non GAAP financial measures. 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 Zhaojiaozheng, our Executive Director and Co Chief Executive Officer Liu Jun, our VP of Finance. Lei and Zhaojian will make some general remarks our performance for the past quarter and our strategic focus.

Speaker 1

Jun will then walk us through our financial results for the Q2 ended June 30, 2020 3. During the Q and A session, Lei and Zhejiang 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 2, our Chairman and Co Chief Executive Officer, Chen Lei. Lei, please go ahead.

Speaker 2

3. Hello, everyone. Thank you for joining our earnings call for the Q2 of 2023. 3. I will start by giving a brief overview of our 2nd quarter results.

Speaker 2

We achieved a total of $52,300,000,000 in revenue this quarter, representing a 66% year on year increase. 3. This reflects the growing trust that consumers place in our products and services. 2017. During the past quarter, we observed a continued improvement in consumer sentiment, resulting in increasing consumer demand across multiple product categories.

Speaker 2

We also actively launched various promotional initiatives that boosted consumer demand. For instance, we supported a 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 3. Since the start of 2023, our main focus has been high quality development.

Speaker 2

3. The results from this quarter offer concrete evidence that our strategy is starting to bear fruit. 3. 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, exceeded R and D10 1,000,000,000 with Q2's R and D spending hitting a new high, reflecting our dedication to investing in the future.

Speaker 2

We will continue to increase our investments into R and D as innovation represents 2019, the future engine of growth for the company. As a consequence its roots in agriculture, 2nd. We have been first hand witnesses to how technology can transform and drive farming practices. 3. A key driving force behind our emphasis on agriculture is our belief in social impact of innovation.

Speaker 2

This has motivated us to support talent cultivation, promote the 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 farming. 3rd. We partnered with leading agronomic institutes including China Agricultural University, Zhejiang University, FAO China and the Shanghai Academy of Agriculture Sciences. The latest iteration involves the use of 2nd quarter, compact spaces like shipping containers for vertical farming.

Speaker 2

Aspiring teams challenge themselves to come up with cost effective ways to growing and marketing high quality screens. With our help, many teams have turned their innovation into real time application. For example, by 30%. They achieved this while at the same time reducing overhead costs related to labor, $1,000,000,000 fertilizer and prime protection. A team from this year's event is in the process of utilizing an algorithm 3.

Speaker 2

We have supported the creation of many AgriTech demonstration hubs. By giving Baqing Sciences the platform to validate their research and the real world condition, 3. We envision speeding up the digital transformation of agriculture to the collective benefit of flight. We also strive to help push the boundary of AgriTech through our support for fundamental research. To further accelerate the pace of innovation, we made a donation of RMB100 1,000,000 to China Agricultural University.

Speaker 2

As a part of our 10,000,000,000 agricultural 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, Here, I'm happy to announce the appointment of Professor Yvonne Richard as an independent director to PDD's Board. Professor Lu Chen with her long standing tenure since 2,001 2. As a professor at Wafeking University and currently a Department Head of Toxiology, is a well respected expert in food tech research. A 3 decade expertise in food safety will no doubt be a huge support to our agri tech initiative.

Speaker 2

With her on board, our Board of Directors now have 7 members and the majority being independent directors. 3. First appointment not only enriched our Board of expertise, but also adds to its diversity. 3. In addition, to strengthen our global footprint and operations, we will set up a legal and compliance committee to build and oversee regional legal and compliance matters given the complexity and different requirements of each region, I will chair this committee, TD is still a young organization that will continue to adapt its drive to be a mature global institution.

Speaker 2

During this journey, our goals remain the same. We will continue to champion innovation, And now, I will hand over to our Co CEO, Jasen,

Speaker 1

Thank you, Lei. Hello, everybody. This is 3. In Q2, with various proconsumption policies, we observed a clear trend of consumption percent improvement. To support consumption in this year's June 18 promotion, we increased our efforts.

Speaker 1

We received positive responses And saw further increase in consumer demand on the Pinduoduo platform. Right on the encouraging industry trend, we proactively seize the opportunities to fully embrace high quality development. 2. Our strategy includes the following assets. 2.

Speaker 1

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. 2nd, high quality supply. We go deep in the industrial and agricultural production areas, leverage our tech capabilities To support digital transformation and bring more quality products to the national and global markets. 3rd, high quality ecosystem.

Speaker 1

2. In addition, we promote our virtual 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 Now let me walk you through some specific measures that my team and I actively implementing under our high quality development strategy.

Speaker 1

1st, 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 2. 2nd quarter 2020. In Q2, we continue to promote a wide range of merchandise of consumers' preference. As mentioned, during this year's June 18 promotion, 3.

Speaker 1

We increased our efforts to give back to consumers. The promotions cover full range of product categories, including electronics, cosmetics, Fresh produce as well as apparel. This stimulated full category consumption demand. 3. 3.

Speaker 1

In addition to solidifying more savings, we continue to provide better services, which increased consumers' trust in our platform. For example, during June 2018, we upgraded logistics and after sales services such as price protection, 10x compensation for counterfeits 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 3. After the June 18 promotion, we remained focused on addressing fundamental consumer needs and continued with our Air Days June 18 approach.

Speaker 1

We provided quality products and services at good prices, unleashing demand potential to explore 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. Has deep roots in agriculture.

Speaker 1

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 agricultural produce through innovation and adoption of agri tech. In Q2, we launched the 3rd Smart Agriculture Competition and the 2nd Pinduoduo Cup Growing Competition. Through these initiatives, we're actively engaged in agri tech innovation and support technology adoption in agriculture. Our vision is to further improve the quality and efficiency of agriculture production through technology.

Speaker 1

At the same time, we are stepping up support for products enabled by ABRISAC on our platform to accelerate how research findings translate into products. Furthermore, we are driving the digital transformation of manufacturing with new tools and new models, leveraging our consumer insights and tech capabilities will help manufacturers better understand evolving consumer demand and improve production efficiency. Last quarter, our team went into industrial belt and launched a series of live streaming events to showcase a broad selection of local products to consumers. This helps consumers learn about the products tangibly and enhances their trust in online shopping. 3.

Speaker 1

We are also deepening collaborations 2nd quarter 2020. 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, 2, which has offline pop up shops.

Speaker 1

This format led to their record breaking sales of our platform and at the same time enabled the brand to reach young consumers effectively and obtain valuable consumer insights. A 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 the RMB 10,000,000,000 Ecosystem Initiative to support quality merchants and products. This initiative provides incentives 3. We also made significant efforts in platform governance in areas such as food and drug safety, market protection and live streaming compliance.

Speaker 1

We hope to accelerate the positive momentum in platform 2. With both the RMB10 billion ecosystem initiative and our platform governance efforts.

Speaker 2

3.

Speaker 1

For example, we collaborated with major publishing houses book brands to launch the 5th total reading month. We continue to invest 100 of 1,000,000 of rmb in coupons In an effort to promote a sustainable online authentic book market and to strengthen IP protection, our effort covered 6,000,000 copies of bestselling books, connecting quality content directly with consumers. As of today, over 2,700 Through our journey towards high quality development, we are always looking for opportunities to show the more social responsibilities and create value for the society. Earlier this month, the Jinyanji region was hit by severe rainfall, respond to action and donated RMB30 1,000,000 to support the flood relief efforts. 2.

Speaker 1

At the same time, in partnership with People's Daily, we launched a dedicated relief campaign to help businesses in the affected regions reduce losses from production disruption and inventory damage and help them get back to normal operations quickly. Furthermore, to help book merchants in Zheuzhou, we set up a dedicated bookselling 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 inseparable from our long term strategy of high quality development. Our focus on high quality development and ecosystem not only lays a solid foundation for the future, but also earns immediate positive feedback From consumers and merchants. Looking forward, we will continue to support quality merchants and SMEs and to promote digital inclusion agriculture.

Speaker 1

3. 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 Jane. She will provide you with update

Speaker 3

Thank you, Jiajun. Hello, everyone. Let me walk you through our financial performance for the 2nd quarter ended June 30, 2023. In terms of income statement, in the second quarter, Our total revenues increased 56% year over year to RMB62.3 billion. 6.

Speaker 3

Our top line growth was mainly driven by consumption recovery and the early feedback from executing our high quality development strategy. Revenues from online marketing services and others were RMB37.9 billion this quarter, up 50% from the same quarter of 2020 2. Revenues from transaction services this quarter were RMB 14,300,000,000, up 131% from the Q2 of 2022. Moving on to costs and expenses. Our total cost of revenues increased 135 percent from RMB 8,000,000,000 in Q2 2022 to RMB 18.7 billion this quarter, mainly due to increase in fulfillment fees and payment processing fees.

Speaker 3

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 1,000,000,000 this quarter from RMB12.9 billion in Q2 2022. In the 4th quarter, we faced the opportunity to serve variable consumption trends by investing family and responsibly Just for our long term high quality development. Our total non GAAP operating expenses as a percentage of total revenues 3rd quarter was 36% compared to 41% in same quarter last year. Looking into specific expense items.

Speaker 3

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 revenues this quarter was 32% compared with 34% for the same quarter in 2022. In Q2, we set 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 and administrative expenses were RMB RMB370.2 million versus RMB164.7 million in the same quarter of 2022.

Speaker 3

Our research and development expenses were RMB2.1 billion this quarter on a non GAAP basis and RMB2.7 billion on a GAAP basis, Starting a new high. R and D is fundamental to the high quality development of our platform ecosystem. We will continue to grow our RMB capabilities so that we can understand consumer's moving demands and serve their needs better. Operating profit for the quarter was RMB12.7 billion on a GAAP basis compared with RMB8.7 billion in the same quarter last year. Non GAAP operating profit was RMB14.6 billion versus RMB10.5 billion in the same quarter last year.

Speaker 3

Non GAAP operating profit margin was 28% this quarter compared to the 34% for the same quarter last year. Net income attributable to ordinary shareholders was RMB13.1 billion for the quarter, compared to RMB8.9 billion in the same quarter last year. Versus base earnings per ADS of RMB7.06 and diluted earnings per ADS of RMB6.22 in the Q2 of 2020 3. Non GAAP net income attributable to ordinary shareholders was RMB15.3 billion compared with RMB10.8 billion in the same quarter last year. Non GAAP diluted earnings per ADS was RMB10.47 versus RMB7.54 in the Q3 of 2022.

Speaker 3

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 environment strategy. We also react positively to 3. Now let me move on to cash flow. Our net cash flow generated from operating activities was RMB23.4 billion, compared with RMB 19,400,000,000 in the same quarter last year.

Speaker 3

As of June 30, 2023, We have RMB179.5 billion in cash, cash equivalents and short term investments.

Speaker 1

3. Thank you. This concludes my prepared remarks. Thank you, Jun. Next, we will move on to the Q and A session.

Speaker 1

For today's Q and A session, Lei, Jiajun and Jun will take questions from analysts down the line. We could take a maximum of 2 questions per analyst. Lei and Jiajun will answer questions in Chinese,

Operator

participants are requested to restrict it to questions at each time. Your first question will come from Joyce Ju of Bank of America. Please go ahead.

Speaker 3

5.

Speaker 4

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 My second question is that we understand our agriculture has been Kingold's key strategy for a very long time.

Speaker 4

And it is also a core merchandise category for

Operator

the platform.

Speaker 4

4. How this strategy and how agriculture fit under the company's new strategy of high quality development? What impact will it have on the company's operations and financials? Will company adjust your investment budget and pace in the corresponding areas?

Speaker 1

Hi. This is Jiajun. I'll answer your question on our high quality development strategy. 3. So over the past few years, we are gradually transitioned from fast growth to solid development from marketing driven to R and D driven.

Speaker 1

And starting from the first half of this year, We fully embraced high quality development strategy and this helps in 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 and building a thriving ecosystem. So, strengthening our capability and embracing high quality development is a necessary path to take to further deepen our value. 2. As I have mentioned earlier, implementing this strategy mainly involves 3 key areas.

Speaker 1

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 3 60 degree good experience to consumers and meet their diversified demand. 2nd is high quality supply.

Speaker 1

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 3rd is high quality ecosystem. With our 10,000,000,000 ecosystem initiative, we actively support quality merchants, SME Businesses and Pharma Merchants, and we also enhanced our overall platform governance. 3.

Speaker 1

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 our 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. Thank you.

Speaker 5

2. This is Lei Lu. I'll take your question on agriculture strategy. Pinduoduo started out in agriculture And our development is deeply connected with this agriculture supply chain. We are proactively leveraging our tech background

Speaker 1

6.

Speaker 5

3. Online penetration of agricultural produce remains relatively low. There is a lot of room to streamline the agriculture 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. 3.

Speaker 5

Recently, we continued our efforts In bringing together industry and academia, we hosted several agri tech competitions such as the Smart Agriculture Competition, growing competition and the global agriculture innovator competition. We are happy to see our contribution to the commercialization of research findings. 3. As I mentioned, it is our pleasure to welcome Professor Evona Richens to join our Board as Independent Director. She has been a 10 year supervisor at Baohi Nying University since 2,001 and she currently serves as the Head of Toxicology Department.

Speaker 5

The Netherlands is an agricultural powerhouse and Baqingling University is a globally renowned institution in agronomics research.

Speaker 1

2.

Speaker 5

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

Speaker 1

Operator, we can move to the next

Operator

today will come from Yang Bai of CICC. Please go ahead.

Speaker 1

2. 2.

Speaker 6

2. I have two questions on financials. You booked total revenue growth of 66% and online marketing service growth of 60%. What do you think contributed to this? What has the highlight in the past quarter?

Speaker 6

And do you think this momentum will continue into the second half of 3. The year. My second question is, we noticed your profit margin decreased slightly year on year. What are some of the key areas 3. You are putting results into and how should we understand the fluctuation of your profit margin

Speaker 1

Hi. This is Jiajun. And I'll take the question on growth rate first. 3. So in short, growth this quarter Can be attributed to 2 factors.

Speaker 1

The first is the positive industry trends and second is the

Speaker 5

2.

Speaker 1

Our business is closely tied to the overall consumption market, and we noticed Continued improvement in the macro trends and also our consumers' increasing willingness to shop. We think this is inseparable From the introduction and also implementation of various pro consumption support measures. 3. In Q2, we seized opportunities to enhance our capability to give more savings and better services. We expanded our value for money product choices and also we executed our high quality development strategy with determination.

Speaker 1

For example, during the June 2018 event, we increased promotions and also invested 1,000,000,000 in coupons to give back to consumers. And this helps stimulate demand for all merchandise categories. And beyond this promotional event, we also Follow through with our concept of Air Base June 18 and also providing consumers with savings non stop. And our efforts improved consumption settlement. And this, in turn, generated more sales opportunities for the merchants.

Speaker 1

Also, our support for quality merchants encourage them to invest resources and collaborate with us in serving consumers well together. So as a result, 3. 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 need with enhanced services and better Savings and if we can build our robust ecosystem, I think our platform will naturally achieve a sustainable and high quality development.

Speaker 3

2. This is Jane. Let me take your second question. Well, 2? First, we are still in the development phase.

Speaker 3

Profitability itself is not our priority. As Jatin just mentioned, it's a natural result of the value we create. So with that said, in Q2, we 2. So given financial results, showing early results from our high quality development strategy. And in this process of 2.

Speaker 3

Excluding 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 agriculture and manufacturing 2. And the Panbin ecosystem initiative to name a few. These efforts are reflecting our financial results. As competition further intensified, we will react positively by enhancing our more savings and better service 2. And giving back to our consumers and merchants.

Speaker 3

On our road 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.

Speaker 1

Hi, operator. I think we have time for one more analyst.

Operator

Thank you. Our next question will come from Ellie Zhang of Macquarie. Please go ahead.

Speaker 7

2. 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 promotions and low pricing categories. Also, we are seeing pretty strong active buyers and merchants data from the peers.

Speaker 7

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 Tmoo. We have seen Tmoo following Tmoo very closely in the recent periods. We understand that this is still very early stage and might have limited financial contribution.

Speaker 7

But I wonder if management could share with us the latest progress of TIMU and talk about the overall strategy, any financial metrics the management can share? Thank you.

Speaker 1

Hi, there. This is Jiajun. Thanks for the questions. And I'll share some thoughts on competition first. We noticed changes in the industry.

Speaker 1

And as consumption recovers and consumers show a strength of demand, it's not surprising for us to see appears stepping up on subsidies. Competition is indeed becoming more intense. And we believe that Healthy competition, which is driven by consumer centric goal, can benefit industry, which includes not only the consumers, but also 3. The e commerce industry is always Rapidly volume. And for us, the key to adapting to the rapid changes is not to focus on what our competitors are doing.

Speaker 1

Instead, it is to stay laser focused on consumer demand and sharpen our own skills And also to face competition directly and also briefly. We channel competitive pressure more motivation to strengthen our core competencies and focus on implementing our high quality development strategy.

Speaker 2

2.

Speaker 1

And serving consumers well is at the core of our value creation. We are deepening our capabilities 2. And last quarter, for example, So we invested 1,000,000,000 in the generating promotion to cover all product categories and Make sure consumer had access to quality products at affordable prices. 2. And positive consumer experience requires a comprehensive 3.

Speaker 1

It is not just about price. And we continue to focus on R and D to understand and also adapt to consumers' Evolving means to help consumers shop with peace of mind. We also work very hard to provide better services, Which includes, for example, upgrading logistics and also after sales support. 2. And high quality 2.

Speaker 1

The client is a fundamental to offering value for money products, and we are promoting digital transformation Agriculture and also manufacturing. Our team is active in the fields and also in the factories To help farmers and also SME manufacturers standardize and also improve design, production as well as logistics. With our 10,000,000,000 ecosystem initiative, we also provide support to quality merchants and products, and this incentivizes them 3. We received positive feedback From this effort, this gives us confidence to continue on this path of high quality development. Our strategy is very clear, but executing well is not that easy.

Speaker 1

It actually requires a long term commitment, and we all 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.

Speaker 3

2? Thank you. First question, allow me address your second question on TIMU. Well, for our global initiative, Tmue is currently in a learning stage. Our key focus right now is how we can apply our expertise to create our unique value.

Speaker 3

We do not focus on my 2nd quarter 20 20. We hope to leverage our tax background and subsequently know how to bring quality products at good prices to consumers in various markets globally. This presents us with both challenges and learning opportunities. Currently, our team is like focused on Spending and effecting to different cultural preferences, social environments and consumer demands in different markets with the aim of creating more unique value. As we continue to understand and explore Consumer demand from the different markets, we will carefully evaluate the ROI of every investment opportunity and make responsible

Operator

Chintoday. You may now disconnect.

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