Earnings Call: Q4 2020

Mar 17, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Pindroder 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference with your first speaker today, Mr. Jason Chu. Thank you. Please go ahead, sir. Thank you, Wei Jie. Hello, everyone, and thank you for joining us today. On today's call, our CEO, Chen Lei, will make some general remarks on our performance for the past year and our strategic focus going forward. Our VP of Strategy, David Liu, will then elaborate further on specific strategic initiatives. Our VP of Finance, Tony Ma, will then take us through our financial results for the Q4 fiscal year 2020 ended December 31, 2020. 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 discussion of certain non GAAP financial measures. So please refer to our earnings release, which contains a reconciliation of the non GAAP measures to GAAP measures. Now, it is my pleasure to introduce our Chief Executive Officer, Chen Lei. Please go ahead. Thank you, Jason, and hello, everyone. Thank you for joining us on our earnings call for the Q4 fiscal year 2020. Pinduoduo delivered another quarter of strong growth and solid execution as our users continue to track us with their purchases. Our annual active buyers increased 57,000,000 in Q4 to reach 788,000,000 for the trailing 12 months. User engagement has also accelerated. Our MAU increased to 720,000,000. Total number of orders placed on our platform increased by 94% to reach RMB 38,300,000,000 in 2020. Total revenues, excluding revenues from merchandise sales, for Q4 was RMB21.2 billion, an increase of 96% from a year ago. Non GAAP operating loss narrowed in Q4 from the same quarter a year ago. 2020 was a challenging year for Pinduoduo as it was for many others. The COVID-nineteen pandemic, which by now has already stretched over 2 winters, has put our team and platform through a tough day test since we were founded 6 years ago. It has been a humbling experience for us. I'm glad that we have responded quickly and responsibly to continue serving our users better, thereby winning their invaluable trust. I would like to thank our users and our team for their continued support. As we transitioned from 2020 2021, I would like to share some takeaways and do a recap of this very long year. First, 2020 has been dictated our view from the get go, which is that the separation of the online and offline words is increasingly irrelevant. With the advent of mobile Internet, onlineoffline are just part of a single were branded together more and more seamlessly and complementary to each other. Unlike with desktops, Smartphone users could go online anywhere, anytime and for any length of time. Users no longer had to carve out time and be confined to a specific place, which is common practice for desktop error. This is why 6 years ago, we insisted on developing a mobile only platform for our users. In fact, We are the only one among Internet companies of our scale to be mobile only today. If anything, COVID-nineteen has accelerated this branding. It was already happening fast even pre COVID-nineteen. Today, the younger generation that grew up with smartphones are not even conscious about the countless and seamless Transition they make each day between online and offline. Among other age groups, China's highly advanced online payment system and mobile communication tools have also made it clear may be nearly impossible to do anything purely offline. This has in turn helped increase familiarity and acceptance of its commingled word. With COVID-nineteen, the adjustments that we have had to make our routines has only expanded online space and expedited its branding with offline space. Consumers are Able to frequent brick and mortar shops turned to online platforms like Pinduoduo to purchase food at other groceries. An erstwhile preserve of web markets which Chinese families visit not just to get groceries, but as a social activity. Users unable to travel back home to spend Chinese New Year with loved ones have also tapped on us to deliver warmth. They either send care package of food and clothing to loved ones living elsewhere or order the taste of home for themselves. We rose to the challenge of delivering the best service to our customers. We went further than we had before. Over the Chinese New Year holiday, we worked with merchants to stay open and detach orders. We also worked with the logistics partners to ensure that around 1,000,000 delivery men were deployed to deliver puzzles. We fulfilled a search of orders from Hong Kong delicacy. As for fresh produce and groceries, We provided consumers with most of all they wanted quickly and affordably. Consumers did not have to Stop up before the long Chinese New Year break. In this way, we have to fill a gap left by brick and mortar shops, thereby bringing values to our users. Going forward, Pingdodu as a pioneer in this space We will build on the lessons we have learned and double down to improve our offerings to our users. We will always be on the lookout for new ways to create more value for them. 2nd, 2020 has highlighted that we can and should do more for agriculture sectors and rural communities. Pingloduo started off by selling fresh produce online. It was a conscious decision because we found them to be a necessity Optimizing their production, distribution and consumption would bring the greatest widespread benefit. The online penetration of agriculture sectors has also consistently lagged industry at average. We have never lost sight of this beginning, and agriculture has consistently been a strategic priority for us. We are proud to be China's largest agriculture platform. Our GMV for agricultural products doubled to more than RMB270 1,000,000,000 in 2020. 12,000,000 farmers so they are produced directly to consumers via our platform. We were among the leading technology companies commended for making outstanding contribution for the world on rural property. We see this as affirming our investment to bring solutions to optimize every part of agriculture value chain. In 2020, we also launched live stream sessions for farming communities and dedicated channels to promote their products to relieve difficulties brought about by COVID-nineteen. We observed that order volume was so large that our sellers and delivery partners had issues fulfilling them, especially in the summer. To solve this, in August, we launched Duo Duo Grocery, our next day grocery pickup service that helps local farmers and it filters to sales directly to consumers, increasing sales and cutting waste and costs for customers. Pingdu Duo's vision of Costco plus Disney study from agriculture products in the farmland. We are now already the largest agricultural platform in China. We can and should do more. We hope that in the next stage, Pinduoduo will become world's largest agriculture and grocery platform and make groceries sourced around the world affordable and available to our users. To this end, We aim to build up an equity focused logistics infrastructure platform that will reduce waste, lower costs and speed up delivery to agricultural products. This is a work in progress. We expect to make a few more years of investment before it can realize its full potential and achieve efficiency. We share the vision of contributing to China's We will continue to invest in agriculture and food technology and look into global investment opportunities in alternative proteins, food safety and precision farming. 3rd, 2020 has also made us more committed to Digital inclusion of rural communities and this is advantaged. Pingdoduo has created a level playing field for business of all sizes, including in agricultural sector, where margins are thinner. In addition, live streaming and online business on our platform have created new roles that prioritize different skill sets and allow inclusion of users who may otherwise be excluded. For instance, Agriculture is traditionally labor intensive. Swimming and physically weaker people may not be able to participate in it. Live streams and online business operations do not exact the same physical requirements, and these individuals are able to participate in them. In fact, our stores actively engaged in the sale of agricultural products, over half are managed by women. This is a win win situation for everyone. And with our commitment to social responsibility, We definitely want to and will do more here, including by providing further training for them to serve well on our platform. Last but not least, many of you can learn that Colin will step down from his Chairman role in fact today. On behalf of the Board, we would like to thank him for his leadership and contribution to Pinduoduo in the past 6 years. We will check him on as he explores new frontiers for Pinduoduo in years to come. As the new Chairman of the Board, I would like to ensure everyone that our strategy remains the same, which is to stay true to our value benefit and provide a more saving, more fun experience to serve our users on our platform. We have found that we have become the world's largest e commerce platform by using user numbers. We will work hard to deliver even better results in years to come. Now, let me turn it over to David to provide update on our recent initiatives. Thank you, Lei. Hello, everyone. I'll further elaborate some points Lei made just now. First, on our continued efforts to improve the agricultural value chain second, on our revenues from merchandise sales And 3rd, on our ESG priorities for 2021. Improving the agriculture sector to benefit our users, that farmers and consumers, is a central and strategic priority for us. We take a systems based approach to this and devote substantial resources to identify and implement improvements at all stages of the agricultural value chain. As Lei mentioned, we share the vision of transforming agriculture in China with technology and aim to increase food security. To begin at the upstream, we work with industry partners and universities to introduce more technology to farming. In 2020, we launched the inaugural small agriculture competition in partnership with China Agriculture University, where teams from around the world participated in investigating the use of artificial intelligence in optimizing strawberry planting. The competition identified cost efficient and scalable technology that can potentially be standardized across China. The winning team has started to commercialize its research findings. Last year, Pingdo De also Supported the Global Agreno Challenge 2020, which was co organized by the Food and Agriculture Organization of the United Nation and Zhejiang University. The competition attracted over 150 teams from around the world to put forward innovative solution to challenges in the distribution and sales of agri food products during COVID-nineteen. Aqua Farms Africa, an agri tech startup based in Kanakri, Guinea, Won the competition with the technique of aquaponics, which combines fish farming with soilless vegetable growing, allowing the production of fruit and vegetables that are normally imported. We will continue investing in the promotion of digital agriculture and precision farming going forward. At the downstream, we have helped over 12,000,000 farmers sell directly to our 788,000,000 consumers. We trained more than 100,000 new farmers who returned to their rural communities from urban areas to operate online businesses and vitalize their hometowns. We have committed to training another 100,000 new farmers over the next 5 years. To relieve difficulties brought about by COVID-nineteen, we sponsored live streaming sessions for publicly stricken funding communities and established dedicated channels to promote their products. We continue to work with these communities to drive direct access to our consumers. Circling back to the midstream, as mentioned in our earnings call last quarter, the rapid increase in orders for fresh produce, particularly leafy vegetables via our platform, surface the urgent need to develop a dedicated logistics infrastructure to deliver fresh produce to our users in the optimal condition at compelling prices and within 24 hours. This new solution goes beyond streamlining distribution. It will be different from existing ones and it will take time, resources and multiple iterations for us to Eventually arrived at what works best. However, we believe that we have made some progress in the right direction through Duo Duo Grocery, our next day grocery pickup service that intelligently connects local farmers and distributors directly to local consumers, thereby reducing spoilage from storage and transport. We have been increasing the number of agricultural producers Regional distributors and expanding the number of pickup points. However, there's still so much more we can do. We will need to make substantial investment in people, technology, potentially capital assets. While our preference is to work with strategic partners Towards this goal, we are prepared to make equity investments to expedite the requisite development or purchase assets in places where they are unavailable. We are prepared to persevere in this endeavor even though it could take some time to pay off. As we are confident of how it will benefit our users, we hope that investors will be patient and supportive of this challenging but meaningful endeavor. Next, I would like to say a few words regarding our revenues from merchandise sales. This quarter, you have noticed that we are reporting additional revenue line item, merchandise sales. This This line item captures the revenues generated from the 1P trials we started last year. In our 1P trial, we aim to temporarily fill the gap The missing product our users need on our platform, while we look for merchants who can offer these products on our marketplace. We have no plan to grow this business. We expect this line item to remain very small percentage of total GMV we generate. As of Q4, it is less than 1% of total GMV we generated. Now on to our ESG priorities for 2021. As we continue to manage the challenges caused by the global health crisis, We are pausing to reflect on what more we can contribute to a more sustainable and equitable future. Specifically, we have identified the following ESG priorities for 2021. Firstly, Continue to promote digital inclusion in rural communities, China's largest agriculture platform with 788,000,000 users. We firmly believe in playing our part to empower people and businesses to take part in the digital economy. Since our inception, we have connected farmers directly with consumers, coached With access to end demand and help them to increase household income, our efforts have helped more than 100,000 young men and women return to their hometown and become e commerce savvy new farmers. They have gone from to become champions of digital inclusion, often catalyzing a multiplier effect and wealth creation for their local communities. We have also partnered with China Post and Farmers Cooperatives to bring agricultural products from remote areas to the national market to boost rural incomes. In this three way collaboration, China Post local offices opened online stores on Pinduoduo and sourced directly from agriculture co ops. This approach has proven very effective in helping to tackle rural poverty. Looking ahead, We are continuing our efforts to work with local communities, regulators and academics in modernizing farming practices. In addition, we see technology such as the finding from our smart agriculture competition last year to play a more central role in driving China's agriculture revolution. We also see investment opportunities in food and agro technology technology that we can help to extend across farms in China. Secondly, continuing to empower women and the physically challenged. Pinduoduo 0 additional commission policy and our SKU oriented recommendation approach creates a more level playing field for smaller entrepreneurs. We have seen many success stories on our platform from women and physically challenged entrepreneurs who might otherwise be excluded from the offline job market. As Lei mentioned, We are and will continue to provide more training to enable these entrepreneurs and look forward to helping them create further success stories on our platform. Thirdly, continuing to make our service greener and more efficient. Pingyoudou is committed to protecting the environment. And as we mentioned in our ESG report last year, we're investing in technology and working with our logistics partners to optimize delivery route planning. We are also investing in research and development of green packaging design and materials. We're working with our merchants eliminating excessive packaging and providing them with more suitable environmentally friendly solutions, such as different sizes and biodegradable materials. We see ourselves making a positive difference for the environment, especially as order volumes on our platform rise. Now let me pass the floor to Tony to discuss our financial results. Thank you, David. Now let me take you through our financial results for the quarter and fiscal year ended December 31, 2020. Our annual active buyers for the last 12 months ending December 31, 2020, grew by over RMB 200,000,000 from The end of 2019 to 788,000,000. Our MAUs in Q4 grew by 77,000,000 from the prior quarter to reach RMB720 1,000,000 or an increase of 50% from the same quarter in 2019. Our MAUs in Q4 as a percentage of our annual active buyer exceeded 90% for the first time, which we see as a reflection that we are satisfying the needs of more users. Our last 12 months GMV for 2020 grew to RMB1.67 trillion, representing 66% year on year growth. In comparison, our average annual spending per active buyer increased 23% to RMB 2,115. The lower rate of increase should be considered in the context of substantial increase of 203,000,000 active buyers over the past year. Most of these new users are still building trust with our platform and have contributed less than a full year worth of purchases in 2020. We continue to observe that as our users season on the platform, they make purchases across more categories and increased their average spending over time in each category. We did observe an increase in purchase frequency in 2020, partly due to the grocery business we launched. In 2020, our platform generated a total of 38,300,000,000 orders or an average of 49 orders per active buyer. This is an increase of 44% from a year ago. As the average order value of gross rate are lower than our platform average, our AOV came down 15% to RMB43.5 in 2020 as compared to RMB51.1 in 2019. Please note that starting from Q1 2021, we will retire the disclosure of quarterly GMV, But we will continue to disclose full year GMV, which is the practice adopted by our peers. Since our IPO, when we were operating as a 3 forward marketplace model, we have reported both quarterly and annually and use GMV on the same basis as our peers in order to provide the public with a meaningful parameter to assess our progress as a new market entrant. However, as the complexity of our business grows, Quarterly GMV is increasingly less relevant to evaluate our overall business, nor is it reflective of our Strategic priorities, especially when we do not manage our business against the quarterly GMV targets. As our revenues grow in scale and with the introduction of new initiatives such as Store Door Grocery and our 1P trials, We would encourage investors to focus on our P and L and cash flow metrics going forward to assess our ability to generate sustainable value. In terms of P and L, our total revenues in this quarter December 31, 2020, were RMB26.5 billion, up 146 percent from RMB10.8 billion in the same quarter last year. As David mentioned, we reported revenue from merchandise sales of our 1P trials this quarter. While it's the contribution of our 1P trials to our GMV is negligible, we are reporting it as a separate line item as it accounts for 20% of our total revenue in Q4. To give you an apples to apples comparison, Excluding revenue contribution from 1P trials, our total revenue grew by 96% to RMB21.2 billion in Q4 2020. The main driver of this growth was our online marketing services. Online marketing services revenue was RMB18.9 billion this quarter, up 95% compared to the same period last year, due primarily to an increase in merchants' recognition of our platform's capability to help them reach to their target buyers effectively and efficiently. Our merchants are spending more on our platform because Our online marketing services revenue As a percentage of our GMV in the last 12 months end, December 2020, was 2.9% as compared to 2.7% for the same ending in December 2019. We are pleased to see the growing endorsement by our merchants and our users. Our transaction service revenue this quarter amounted to RMB2.3 billion, which is up 105 percent compared with the same period last year. On the trailing 12 month basis, our transaction service revenues As a percentage of our GMV has been quite stable at around 0.3%. Now moving on to cost. Our total cost of revenues increased from RMB 2,000,000,000 in Q4 2019 to RMB 11,500,000,000 this quarter. The increase in our cost of revenues was mainly due to the cost associated with the 1P merchandise sales, Costs related to the operation of Dodou Grocery, such as warehouse rental costs and higher costs of cloud services, call center and merchant support services. The total operating expenses this quarter were RMB17.1 billion as compared to RMB10.9 billion in the same quarter of 2019. On a non GAAP basis, our total operating Expenses as a percentage of our revenue, excluding the 1P contribution, has been declining from 112% to 94% to 76% for Q4 of 2018, 2019 and 2020, respectively. The gradual improvement continues to demonstrate the operating leverage in our business model. Our sales and marketing expenses this quarter increased 59% to RMB14.7 billion from RMB9.3 billion in the same quarter of 2019. This is mainly due to an increase in online and offline advertisements and promotions. As we continue to invest in user engagement and mindshare, on a non GAAP basis, our sales and marketing as Percentage of our revenue, excluding 1P trials this quarter, was 68% as compared to 84% and 103% the same quarter in 2019 and in 2018. The decrease in sales and marketing as a percentage of revenue, excluding 1P trials, has demonstrated scale of economy and the fact that our strategy of having a higher bar of ROI in our sales and marketing investment has worked well. In fact, since we started Pingboduo, we have accumulatively spent RMB81 1,000,000,000 in sales and marketing expenses. On a non GAAP basis, which average to about RMB103 per active buy in users, We have accumulated up to date. We will continue to consider our sales and marketing decision holistically and invest whenever we see opportunity that meet our ROI requirement. On a non GAAP basis, Our general and administrative expenses were RMB153 1,000,000, an increase of 26% from RMB121 1,000,000 in the same quarter of 2019, primarily due to an increase in headcount. Our non GAAP research and development expenses were RMB1.56 billion, an increase of 65% and the recruitment of more experienced RMB personnel. The increase was primarily due to an increase in headcount and the recruitment of more experienced R and D personnel as well as an increase in the R and D related cloud service expenses. On a non GAAP basis, our R and D expenses as a percentage of our revenue, excluding the 1P contribution this quarter was 7.3% as compared to 8.7% for the same quarter last year. Now to sum up, Operating loss for the quarter was RMB2 1,000,000,000 on a GAAP basis compared with operating loss of RMB2.1 billion in the same quarter of 2019. Non GAAP operating loss was RMB1.1 billion compared with operating loss of RMB1.3 billion in the same quarter of 2019. Net loss attributable to ordinary shareholders was RMB1.38 billion as compared to net loss of RMB1.75 billion in the same quarter last year. Basic and diluted net loss per ADS were RMB1.13 compared with RMB1.52 in the same quarter of 2019. Non GAAP net loss attributable to ordinary shareholders were RMB185 1,000,000 compared with RMB815 1,000,000 in the same quarter last year. Non GAAP basic and diluted net loss per ADS were RMB0.15 compared with RMB0.72 in the same quarter of 2019. That completes the profit and loss statement for the Q4. Our net cash flow from operating activities was RMB14.9 billion compared with RMB9.6 billion in the same quarter of 2019, primarily due to an increase in online marketing service revenues. Net cash used in investing Activities in this quarter increased from RMB11.5 billion in 2019 to RMB26.6 billion. The increase was primarily due to our decision to invest a portion of our cash reserve in cash management products. As of December 31, 2020, the company had RMB87 1,000,000,000 in cash, cash equivalents and short term investments. As of the end of Feb 2021, US712 $1,000,000 of our 0% convertible bonds due in 2024 have been converted into equity. Thank you, operator. We are ready for questions. Certainly. Ladies and gentlemen, we will now begin the question and answer session. Call. We have the first question from the line of Binney Wong from HSBC. Please go ahead. Hi, good evening, management. Congrats on such a very robust I have two questions here. First question is actually on the user side. So you look at the users As you've been raising at $78,000,000 that of course surpassed your peers and is one of the largest. So Can you help us understand what are the strategies that you have used to deliver such growth? And how would you think you can sustain that in terms of this user engagement level, my second question is also on the it's actually on the community group purchase. I think you mentioned it's a 3P model. Just want to take a deep dive into in terms of the accounting wise. So how does it really work in terms of your commission paid to the community group Leaders or is it that some of it will be transacted via our marketplace platform? So I guess it's just in terms of To better understand the accounting, how it really works? And also in terms of the profit I mean, like on the GP dollar side, How much losses are we running at? If you can give us some idea, not necessarily numerically, if this is not at the right Not going to disclose, but I guess more just in terms of clarity as to how we should think about the investments that we do need for the rest of the year. And I think management does mention about the infrastructure, the logistics side of things as well. So that will be great. Thank you. Thanks, Pimi. Why don't I ask Lee to address the first part of your question and then I will have Tongming talk a little bit about accounting, So we continue to observe very good momentum in terms Our user growth in each of the past 4 quarters, we added on average over 50,000,000 annual active buyers for each quarter of them. That being said, as we are approaching 800,000,000 user landmark, And it's not inevitable that our user growth will slow down. As we always said that We are less focused on the user numbers and we are more focused on building users' satisfaction And trust by bringing them a better shopping experience and a value for money product. And we believe that as long as we can continuously serve our users well and we will keep growing, and thanks to their customers. So, one sector we are actually, we always say our priority is in the agriculture sector. Not only is agriculture digitized by mobile Internet, it's also the greatest widespread benefit Actually, we can create as a big platform. And we are now China's largest agricultural platform. And so, In the future, we will commit to do more for agriculture sectors and Google communities. And the other I'll let you talk about the future, this integrated world online and offline. Yes. Definitely, we are targeting this kind of new work. So think about it, you really need to look at this wider retail market. So today, China's total retail sales of consumer goods already reached RMB 39,000,000,000 in 2020. And it is expected to grow at 5% per year over the next 5 years. And if you take a look at our number, so our GMV stands at only 4% of it. So I believe that as consumers' behavior Online and offline continue to integrate and an opportunity for us will definitely will continue to expand. Let me pick up on the second question on Zodal Grocery, I guess. As you mentioned, those are groceries, we operated as a 3P offering. From an accounting point of view, we generate transaction service revenues for the service provided to our merchants and some farmers. The contribution in Q4 and fiscal year 2020 of the Zouozhou grocery part are still Immaterial. Most of the costs associated of running Doutou Grocery operation, such as warehouse rental and delivery logistics, That captures our cost of revenues. Just so you know, Duo Duo Grosso is a very young business, We just started with a few months and it is still evolving. But we are very confident about this business model, and it brings significant value to our consumers and other participants among this value chain. A few key drivers we can think of On the UE side, let's take If we are able to streamline unnecessary layers of the distribution and each layer traditionally would take up a meaningful markup. So a more efficient supply chain would also mean less spoilage. And all these factors putting together We'll definitely bring additional value to the stake For all the participants, the stakeholders to share in this business model. But like I said, the development On the infrastructure, on the whole process will take time to be there. So at this moment, profitability won't be a target for us to set for total grocery. Yes. And Binny, I just want to add on top of that to say that PDD as the end of 2020, we are the largest e commerce platform by users already. And as we have always talked about, focusing on engagement really is the core of our strategy and we are confident now with Even further in large base that is continuing to grow at good momentum, we should be able to drive even better engagements and Duo Duo Grocery really plays We previously couldn't have. So we have high hopes for the total bridge 3 business because it is integral. It is the extension Our overall platform and as the model evolves, I think the roles of the different constituents of the global blockchain ecosystem may So stay tuned and bear with us. We think this could be tremendous opportunities. We're Confident that we will be able to execute, but it will take some iterations to find the perfect model. Why don't we move on to the next question? Thank you. The next question comes from the line of Thomas Chong from Jefferies. Please go ahead. Hi, good evening. Thanks management for taking my questions. I think in the prepared remarks, management comments about Godomoichai has the merchandise sales, which is a 1P Trial business and it is not significant to the GMV. So I just want to get a sense about when the business is getting bigger and bigger, Should we expect the merchant buy sales continue to decline in absolute amount in coming quarters? And on that point, is it possible to give us some color about the GP margin for this 1P Trial business as well as the overall daughter Maicai GP margin as well. And my second question is about the GMV growth. I think management also talked about the focus on monetization. How should we think about The GMV per buyer going forward? Thank you. Sure, Thomas. I think you asked quite a number of questions in your two questions. So let Can you try to maybe take that in bits and pieces of it? The first thing I want to make clear if there is any confusion Is that the merchandise business merchandise sales business that we are reporting as an additional revenue item has Nothing to do with Duo Duo grocery or Duo Duo Maicai. So we are referring to Sichu as Duo Duo grocery in English going forward. So the 1P merchandise sales business has nothing to do with Duo Grocery. So I want to make sure that is very clear. The YP businesses we mentioned is because we have noticed that there are consumer demands on our platform, which we haven't been able to The appropriate merchants for and we have to step in these situations temporarily to make sure that our users can find the product they want at The prices that they are looking for. So because this is a temporary measure, we have no intention to grow this into a larger scale business. In the Q4, the 1P business is less than 1% of our GMV, and I think you should expect that to stay as a small percentage of GMV As to the, it is as Tony mentioned, it is a very new business initiative And the business model continues to evolve. I would say that the first thing I do want to take the opportunity to clarify is that the Duo Duo Grocery Business itself is not a community group purchase business. It's important that the investors understand this distinction, because it impacts, I think, your understanding of how the economics works, right. So first of all, Right. So first of all, it is not a typical community group purchase because Like group purchases where neighbors or group leaders or store owners actually aggregates a group and Earn a commission for organizing that purchase. With an active buyer base of 788,000,000 users, Duo Duo Gersi does not actually rely on community leaders to attract users. And users can just place order independently by themselves through our app. So this is the reason why we are approaching DuoDuo Grocery as an integrated and an extension of our e commerce platform. So accordingly in the type of roles that these group leaders play are quite different. Secondly, I would say is we Reduced Rode Grocery to cater to that rising demand that consumers have for convenient affordable grocery and it is now available in 300 cities across China. The key part of this offering is really the agriculture focused logistics infrastructure that we are working to build and The idea here is to really reduce waste to lower costs and to speed up delivery of agriculture products. To that end, we are leaning on technology to achieve better quality control, better sourcing, better forecasting of demand, which can We are working with 3rd party providers now to make strategic investment where needed to accelerate the build out of the necessary infrastructure, so we can achieve less than 24 hour turnaround time for the orders. We believe that has proven out in the last five and a half years. As long as we remain laser focused on anticipating and meeting the Users' needs, users they will continue to vote for us with their wallets. I think Thomas, you also asked about gross margin trends and with regards to the individual businesses. We're not going to comment on the specifics, but suffice to say that excluding the impact of our first If we actually exclude the impact of the 1P business, the 4th quarter bottom line margins are actually And I think lastly you talked about ARPU's spendings per user. Look, I think without taking too much time, I would just say With the user base that we have and with the focus that we are spending around engagement, we are very confident That as user activity grows, the availability of merchandise on our platform will grow. And As the users season our platform as we have seen in the past, they will continue to shop across more categories. They will make Purchases within those categories because as the trust level builds, that mind share, that market share or wallet share we have with them will also grow. So we are I'm confident with the outlook on the ARPU. The way I would think about the monetization point you alluded to earlier or is that say the 3.2% kind of LTM monetization you see in the Q4. That really is an endorsement of the merchants seeing good conversion for advertising stand. And that is only possible if the user activities are translating into sales. So let me actually stop there and then move on to the next question. Thank you, David. Definitely. The next question comes from the line of Oeyssa Yaa from Citigroup. Please go ahead. Hi, thank you. Good evening, management. Thanks for taking my questions. I have very 2 quick ones. One is, I wanted to follow-up on what exactly is the ICANN category in this 1P trial that we have? And then second is, could management comment on the store door grocery performance? I know it is still early, but then how do you rate the So far for the Q4, is that in line above or below your internal expectation? Thank you. So sorry, Alicia, I was sidetracked. But on your question The 1P business, the product categories is actually quite diversified. So how we approached it was really identify looking Items are excused on our platform where we know they are clear consumer demand, but we aren't able to source sufficient merchants for. So The product categories are quite diverse and then the strategy itself, it is not category specific. The second thing I would say is your question regarding the progress of DuoDuo Grocery. As both I think Lei and Tony have commented, this is a very long term commitment for us and because we think the Opportunity is immense and because we think we can really create some values here for the users. So as such, I think we are experiencing Across the nation in over 300 cities. So I think we are pretty comfortable with the progress or the pace of the Rollout on the geographic footprint. What is more interesting from our perspective, however, is to build and Develop a corresponding infrastructure network, right. It's easy to drive user growth and particularly for a platform like us, we We actually have very intrinsic advantage, I guess, from From a traffic perspective, the question we are more concerned about is what investments do we need and how can we Lever the right type of user opportunities to the user experience to address the opportunities we see. Because I think one of the few elements of success to the Duo Duo grocery business in our mind, I guess maybe to highlight 2 things in particular, One of which is sourcing and forecasting, right? How much you can sell or how what price We will organize the supply chain around it in the most efficient way possible. And of course, the second part of it is an infrastructure that can be aligned appropriately and largely for agriculture and fresh produce such that we can arrange the fulfillment and deliver in This less than 24 hour type of a cycle. So we are still really in the very early innings of While we consider it to be kind of our approach to grocery business in China And I think we are pleased with the progress that we have made so far, but there's definitely still a lot more we can do. Okay. Thank you. Next question, please. Thank you. The next question comes from the line of Natalie Wu from Haitao International. Please go ahead. Hi, good evening. Thanks for taking my question. Just a little bit add on the synergy Synergy question of the last question. Just wondering what kind of the synergy During digital grocery and your original marketplace business, in terms of the supply chain, Should we expect in the longer term future and what's your progress now? And also wondering if That could be the key competitive edge that adversely fund other competitors in the longer run. Thank you, Natalie. So as we have discussed. We can see Duo Duo Goh Free really as an integrated part of our marketplace, Right. So it is an extension of the expenses that we can offer. It is an extension of our ability to address more of consumers' needs and use. So from listening to what we have said about being focused on building our infrastructure, The idea is really to figure out how we can address their needs better. Both really continue to leverage on the existing express delivery infrastructure network, as well as to develop this less than 24 hour type of fulfillment infrastructure for Duo Duo grocery. If we can organize both of these delivery logistics very efficiently and actually be able to and recommend the appropriate SKUs to consumers based on their desirable use case and fulfillment case, We actually see a lot of opportunities to drive synergies between the platform marketplace today and the Duo Duo grocery scenarios. And certainly on the supply chain side, as I mentioned earlier, most of the suppliers today are local. That said, there are 12,000,000 farmers on PDD today who are sourcing and who are supplying to scenario provided that they have enough support around logistics and via coordination. So certainly over time, I think we see the infrastructure Being able to support not only locally driven supplier, but on a nationwide basis to really leverage the supply chain available on PDD's marketplace That also extends beyond pure agricultural produce. And this is the reason why in May, in his remarks, pointed out that we are Our vision is really to become China's largest agriculture producer and by doing so in that process become the largest grocer for the world. Got it. That's clear. Thank you. Thank you. We have our next question from the line of Piyush by He mentions that traditional approach to competing through scale and efficiency has its inevitable limitations. I wonder if you could elaborate. And in the interest of time, I wonder if you could talk through the impact of Dodo Grocery on the broader business, I. E. When I look at your take rates there, record And you expanded on that. When I look at your sales and marketing spend is that it's one of the lowest we've seen at If you strip out the merchandise sales and just look at marketing services, but that seems to be the start in the right direction. If If you could just expand on that and also elaborate on, if possible in the limited time, the impact of Dodo grocery on the gross profit line, that would be great. Thank you. I think the way you should think about the Grocery's impact on the business model overall is Hailixin Synergistics, Right. In a sense that we now have an incremental scenarios of being able to fulfill the users' needs that we previously weren't able to address. So that increases our ability to address that need over time. And so then because of that, we certainly expect the engagement overall on the platform to continue to improve. And As more users become more familiar with our platform, we also expect their spending will continue to improve. So one of the things that I think you You may notice that from an average order value perspective for the year, it has actually decreased Y o Y over the prior year. But you need to take that in the context of the significant number of user ads and also the increase in order numbers. So we are quite confident actually as the business The users continue to mature on our platform with the improvement in engagement level. This will continue Trend in the right direction and resulting in more operating efficiency that you have identified. In the interest of time, why don't we take one last question? Definitely, we have the next question from the line of Eddie Huang from Morgan Stanley. Please go ahead. Thank you, management, for taking my question. The question is also related to the So as you mentioned that total of Bostwick is not a committed group purchase business. But if you look at the competition in the 1st quarter side, actually, you are competing with the other company group players. As you said that Next step will be investing this kind of as a heavy warehouse and agriculture focus on logistics. So Justin wants to know your thoughts whether or not in terms of this, all these players, they are now the next Focus, what will be the infrastructure investment and user engagement instead of the user acquisition maybe in the past 6 months. And how what's your view on the competition in terms of flash grocery online flash grocery in this year? Thank you. Sure, Eddie. Thank you for that. So we are obviously not in a position to comment on other players' strategy, but as we So I would say, instead, let's focus on what we are doing, right. So if you look at what PDD is today, we are an e commerce platform with 7 88,000,000 users, highly active users at that rate. So the MAU for the quarter was at 720,000,000, so almost 90 And we are confident that the user engagement metrics will continue to trend. As we have communicated through the past quarters, growing user base has never really been our priority, but the entire year was really With better engagement, with better trust building on the platform, the user number have grown. We have Very strong growth momentum in that. But as Lei mentioned, given the scale of our user base today, it's inevitable that User growth will start to trend down and it's much more important that we are focused on engagement and focused on satisfying their needs on our platform. And then, Duo Duo Gostry provides us the opportunity to or I would incremental opportunity to address that additional aspect of needs for groceries, For grocery on a more timely basis and at more compelling value. And I think it's important to recognize And the fact that to do Golar grocery appropriately, we as a platform do need to become more heavy. Investments in offline operations will be an important part of the success factor. But I would say, in Thinking through the competitive dynamic, it's important not to lose sight the strategic advantage that we as a platform with 700, almost 800,000,000 users Have over in this business model, right. So we will continue to focus what we have been doing well, which is Understanding what consumers are looking for, recommending them the most appropriate product, based on our Understanding what their needs are, what their expectation of value for money is and except the difference is now instead of having to rely only on express delivery, we Actually have an additional fulfillment mechanism that can actually enable a shorter turnaround of delivery for particular categories of product where that time sensitivity actually matters. So we are fully committed to making sure that we have the right infrastructure in place to win in this business because we think by doing this right, the opportunity is immense and is highly synergistic With that, we will wrap up the call for the evening. Thank you very much everyone for your time and look forward to speaking again in the next quarter. Thank you. Thank you. Ladies and gentlemen,