Earnings Call: Q2 2020

Aug 21, 2020

Hello, ladies and gentlemen. Welcome to Pinduoduo Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a Q and A session. Today's conference call is being recorded. I would now like to turn the conference over to your speaker today, Mr. Hua Deng. Thank you. Please go ahead. Thank you, Rachel. Hello, everyone, and thank you for joining us today. Pinduoduo's earnings release was distributed earlier and is available on the IR website at investor. Pinduoduo dotcom as well as through Global Newswire services. On today's call, our CEO, Chen Lei, will make some general remarks on our performance for the Q2 of 2020 and his primary areas of focus going forward. Our VP of Strategy, David Liu, will then elaborate further on our specific strategic initiatives. Last but not least, our VP of Finance, Tony Ma, will take us through our financial results for the Q2 ended June 30, 2020. Before we begin, I'd like to remind you that this conference contains forward looking statements within the meaning of Section 21E of the U. S. Securities Exchange Act of 1934 as amended and as defined in the U. S. Private Securities Litigation Reform Act of 1995. These forward looking statements can be identified by terminologies such as will, anticipate and similar statements. Such statements are based upon management's current expectations, the current market operating conditions and relate to events that involve known risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance and achievements to differ materially from those in the forward looking statements. Further information regarding these and other risks, uncertainties or factors are included in the company's filings with the U. S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward looking statements as a result of new information, future events or otherwise, except as required under applicable law. Now, it is my pleasure to introduce our Chief Executive Officer, Chen Lei. Lei, please go ahead. Hello, everyone. It's my pleasure to welcome all of you to our Q2 2020 results announcement. This is my first time communicating with investors around the world as CEO, even though I met many of you 2 years ago in our IPO roadshow. It's great we connect and I look forward to working together again and building ongoing dialogue. I'm joined today by our Vice President of Strategy, Darren Liu and our Vice President of Finance, Tony Ma. In the past month and half, we have been busy with the management transition that was announced on July 1. It was an evolving process that started 3 years ago and a recent decision was made with the full support of our Board. We've always been thinking about how to create more opportunities to grow the next generation of leaders and how to keep this organization young, vibrant and at the same time increasingly institutionalized. This is especially important in our fast changing technology. We need to challenge ourselves continuously and incorporate fresh perspectives so as to constantly satisfy and serve our users' needs. At the same time, we need to build a solid foundation for long term and sustainable development of the organization. Having built Pinduoduo into one of the bigger platforms in China and observing the numerous initiatives by the team through the pandemic, The real timing was right to pass on to our younger generation leaders more responsibility. Pinduoduo has grown at an extraordinary pace in the past 5 years. We were laser focused on our survival and growth. However, in the next few years, my goal is to translate this platform into a next level, one that is vibrant, innovative, energetic and institutionalized. The management and the Board hope to lay the strong foundation over the next few years to create a long lasting organization and ecosystem that serve our society. Colin Hsing takes step back from the day to day management responsibility of a CEO, but he continues to be fully engaged and has been working closely with the Board and the management to explore the company's future strategic courses and other productizational structures. Colleagues also devoted more time to investigate and support foundational fundamental research in areas that become a future driver of our company, such as agitag. We believe this new division of labor allows Core and I to cooperate efficiently and steer company in its next phase of growth and development. With over RMB1 1,000,000,000,000 of GMV and 6 83,000,000 annual active buyers, Pinduoduo is operating at a significantly larger scale and with much greater complexity today. We have demonstrated that our user centric strategy works and we will continue to do what we do well, to offer value for money products to our users through a fun and interactive experience. As we continue to see significant potential ahead for our platform, my priority as CEO are on various internal and external initiatives that we deem necessary to support and generate long term sustainable values for our platform. Internally, it's important that we continue to make operational decisions efficiently despite our growing number of business units and employees. I'm working with our team to leverage more technology to streamline internal processes and institutionalize best practices. We are also focused on hiring the best talent and improving personal development. We continue to encourage mobility within our organization and motivate our employees to generate new ideas and compete for resources. Externally, we are going to increase strategic investments in our ecosystem, particularly in agriculture value chain. Our investment in the past 5 years has been primarily on our users by our sales and marketing expenses and we have successfully built a very substantial user base of nearly 600,000,000 in record time. Our average daily parcel volume accounts for approximately 25 percent of China's daily parcel shipment. However, in terms of average spending per active buyers, we still see substantial upside potential. We will continue to invest in building user engagement and make sure to grow our user frequency of purchases at average order value. At the same time, we plan to pursue more strategic investments and partnership opportunities that will allow us to assess the digitization of our supply chain and enhance efficiency and values that can be shared with our consumers. In particular, we started our business in agriculture and we plan to continue our focus in agriculture as our next strategic priority. Agriculture is a sector that touches largest number of people and yes, has had the least amount of digitization in the past decade. Any technology that can improve productivity and efficiency on our agriculture value chain will have a huge impact. Pinduoduo is already one of China's leading online distribution platforms for agriculture produce and agriculture products. We are uniquely positioned to drive trends in China's agriculture system. We comprise consumer demand on our platform to create scale and we can leverage consumer insights we gain to help farmers make more informed decisions across the campaign cycle, including what to plant and when to harvest. We are prepared to invest in technology and operations across different parts of agriculture value chain in order to assess the e commerce penetration for the category and generate more value for both the farmers and consumers. Our aim is to further consolidate our position as China's number one online agriculture platform and to build a worldwide presence in agriculture. Let me now turn over to David to discuss some of our specific thoughts around agriculture. Thank you, Wei. 1 in 4 Chinese workers work in agriculture, but the industry makes up less than 10% of China's GDP. This is because agriculture has lagged behind other industries in digitization. Nearly 98% of farmers in China work on farms smaller than 2 hectares. It is difficult to standardize growing practices and achieve economies of scale. The rural workforce is aging and in decline as young people choose to work in the cities. The lack of coordination for food production leaves farmers vulnerable to price swings, while wastage and high incremental distribution costs add to consumers' burden. Those are the challenges. And the opportunity is that agriculture e commerce can solve a number of these problems. Based on figures on the mystery of commerce, the implied total addressable market in 2019 for B2C agricultural goods sales in China was RMB8.1 trillion, with less than 7% of these sales taking place online. In contrast, the online penetration for physical goods in total was 23% in 2019. Pinduoduo is already one of the leading e commerce platforms for agriculture. In 2019, we generated RMB136.4 billion or 13.6 percent of our GMV from agriculture produce and related goods. Over 240,000,000 or 38% of our annual active buyers purchased in this category last year with a 70% repurchase rate. Pinduoduo has become the go to destination for high quality, great value agriculture products. This recognition deepened due to pandemic. During 6/18, we saw orders for agriculture products grew 136 percent to RMB 380 1,000,000. Nearly 3 quarters of the orders came from Tier 1 and Tier 2 city users. We expect to continue gaining market share in online agriculture and we see potential for our agriculture GMV to exceed RMB1 1,000,000,000,000 in 5 years. Why do we think agriculture e commerce can be tackled can tackle the challenges outlined earlier? Well, put simply, only when you digitize demand and supply, then can you drive efficiency and gains through the value chain in between. Online retail has an advantage in terms of greater visibility. From production all the way to distribution, we have a unique position to make the value chain more efficient and bring more value to producers and consumers through investment and partnership that can also unlock commercial opportunities. Our vision is to realize the economic potential of China's agricultural resources by improving its overall quality and production efficiency. Starting with production, our efforts thus far have centered around the development of human capital through farmer training as well as initiation of pilot farms in our Duo Duo Farms program. Together with partner institutions such as China Agricultural University, we have been part of farming knowledge and business training to almost 90,000 new farmers thus far, who tend to be younger and more digitally savvy. We see this initiative as a way to see a new generation of farmers who are more adaptive to new technologies. Zuzo Farms is a demonstration of how reorganizing resources through cooperatives and bringing agronomic expertise can help farmers living in impoverished regions sustainably improve their productivity and household income. Duo Farm serves as a test bed for us to introduce technology to farmers such as drip irrigation, while also meaningful change. Building upon these experiences, we plan to invest in technology necessary to implement precision farming such as robotics, IoT sensors and low power data transmission. Precision farming can help optimize inputs, better control diseases and reduce production costs. Our ongoing smart agriculture competition jointly with the Agricultural University of China and with the support of UN's Food and Agriculture Organization exemplifies our interest to identify cost efficient and scalable technology that can be promoted as standardized solution across China. Global teams are competing over 14 weeks to remotely grow strawberries using sensors and machine learning algorithms. The objective is to derive the most cost efficient techniques to improve yield by integrating technology with traditional growing practices. We also plan to further invest in and develop our proprietary agriculture analytics system by considering historical and projected data such as price, quantity, geographic distribution and logistical availability, the system will better advise farmers on which crops of high economic value to plant, how to optimize quality over quantity and how to achieve more tiny distribution. The system will also help refine our recommendations to consumers to reduce mismatch in supply and demand. Traditionally, agriculture produce go to at least 5 layers distribution before reaching consumers. Industry research estimates as much as 105% added cost, 30.7% wastage across the chain for vegetables. Single routine purchase model aggregates scatter interest into sizable coordinated demand and connects sellers directly with consumers to eliminate unnecessary cost. The next step is to find further is further optimize logistics for agricultural produce From how it is packaged, handled and routed, there are hardly any cost effective specialized solution for agricultural produce today. We plan to partner with logistics services providers to develop logistics dedicated to agriculture. As we can forecast demand by region, we can develop technology solutions with logistics partners to optimize delivery routes, coordinate delivery schedules, implement better quality service standards and optimize loading to and from the rural areas of China. We're also looking at advanced packaging solutions to offer our sellers and considering opportunities in warehousing technology and temperature control logistics. We will also invest in technology for quality control and food safety. Unlike manufactured goods, it is more difficult to provide assurance on the quality and safety of agricultural produce. As consumers in China become more health conscious, we expect more will be willing to pay a premium for quality and safety. We intend to address such needs through a combination of technology and certification backed by critical platforms. We started collaborating this year with a research institution to develop a cost effective robust method for testing fresh produce for contaminants like pesticides. We envision deploying such tests across a wide array of produce and at various points of the supply chain to provide greater assurance on food safety. We can offer such testing solutions and certification as value added services to our farmers and merchants. Certified products will receive preferential traffic support and command a premium from our users. Our ability to differentiate such products will allow us to curate and price SKUs based on quality and recommend them to the relevant target users. With better quality products, it is equally or perhaps more important to invest in marketing to grow brand awareness. Take the French regional champagne as an example. Sparkling wines made in champagne are tightly regulated and must be made from a few prescribed varitose using traditional methods to ensure consistent quality. Its sterling rigorously defended reputation fuels consumers' willingness to pay a premium. Similarly in China, given its vast agricultural resources, we see opportunity to help create new brands for consistently high quality produce from the various geographic indications around the country. In fact, one of our dodo farm projects in Yunnan is working to establish a nationally recognized designation for Yakan grown there. To meet the destination, farmers will have to standardize and improve their farming practices. Farmers are incentivized to improve their practices in exchange for their products touching a premium. And we as a platform can provide more visibility to farmers on sales volume and pricing. We can help build awareness and promote origin stories through marketing including virtual live streaming tours. The recognition of quality provides further opportunity to develop related sub industries from selling oranges to making marmalade and from selling peaches to the value team's ecotourism. We see potential to work with farmers and distributors to develop branding for their produce and to address other value opportunities leveraging our consumer insights. While this may be a long journey, we are committed to investing in agriculture and agri tech as it enables us to truly benefit all of our platform's participants. Now let me pass it to Tony to discuss our financial results for the quarter. Thank you, David. For the 12 months ended June 30, 2020, our GMV increased 79 percent to RMB1.27 trillion from RMB709 1,000,000,000,000 a year ago. As a result of higher user engagement and increased spending per user. We report GMV on the same basis as other industry players to provide a meaningful comparison with that of our peers. The industry definition includes canceled and returned orders. Comparing our GMV in Q2 versus Q1, the level of canceled and returned orders has returned to normal historical level as China recovers from the pandemic. Our average monthly active users in the Q2 increased by 81,000,000 from the previous quarter to 569,000,000 or an increase of 55% from a year ago. Our annual active buyers for the 12 months ended June 30 grew 41% year over year to reach RMB683,000,000. This represents a net add of more than RMB200 1,000,000 in the past 12 months. The annual spending per active buyer in the 12 month period ended June 30, 2020, increased 27% to RMB18 57 from RMB1468 for the same period in 2019. The increase in annual spending per active buyer was moderated by significant number of new users of Abbott, who contributed less than 12 months of purchases to our GMV. During Q2, China's economy continued its recovery from the disruption caused by the pandemic. According to National Bureau of Statistics, online sales growth of physical goods accelerated in the 2nd quarter, resulting in a 14.3% increase for the 6 months ended June 30, 2020, from a year ago. This is up significantly from 5.9% growth for the 3 month period ending in March. Consumer staples and household goods were significant growth contributors during this period. We observed a similar recovery trend on our platform. In Q2, our users had strong demand for household necessities and agriculture products and continue to be more selective and cautious on their discretionary spending. To address their needs, we expanded our promotional offering under the June 18 campaign to cover more household necessities, food and beverage products and agriculture produce. We are continuing our efforts to provide compelling value in these categories together with China Consumer Association in early July. Our total revenue in June quarter were RMB12.2 billion, representing an increase of 67% from RMB7.3 billion in the same quarter last year. The increase was driven primarily by the strong momentum in online marketing services. Our online marketing services revenue grew 71% to RMB11.1 billion and our transaction service revenue increased 38% to RMB1.1 billion. We continued our support for certain SME merchants in Q2 by offering discounted transaction fees, but in general observed a healthy recovery in merchant advertising activities. We benefited from merchants pent up demand and deferred marketing budget from the previous quarter. We also attribute higher advertising activities to better merchant ROIs due to higher user engagements on our platform and more compelling advertising products. The implied monetization rates defined as total revenue divided by GMV, for the last 12 months ended June 30, 2020, was 2.9%, in line with the same period in 2019. Now moving on to costs. Our total cost of revenue this quarter increased 67% from RMB1.6 billion in the same period last year to RMB2.7 billion this quarter, translating to a gross margin of 78%. Total cost of revenues increased mainly due to higher costs for cloud services, call center and merchant support services. Total operating expenses this quarter were RMB11.2 billion as compared to RMB7.2 billion in the same quarter in 2019. Our sales and marketing expenses this quarter increased 49% to RMB9.1 billion from RMB6 point 1 billion in the same quarter of 2019. On a non GAAP basis, our sales and marketing expenses as a percentage of our revenue was 73% as compared to 81% for the same quarter last year. We manage our sales and marketing spending dynamically based on expected ROI, Recognizing the fierce market dynamic in this year's 6/18 promotion events, we decided to moderate our investment during the Q2. We continued with our RMB10 1,000,000,000 program and expanded our offering to cover household staples that our users were looking for. Looking ahead, we see significant potential to improve our users' annual spending on our platform by building more user mindshare and trust. We expect to continue our sales and marketing investment in the second half of twenty twenty to drive more user engagement. We will continue to spend whenever we see attractive opportunities that meet our internal ROI hurdles. General and administrative expenses were RMB395 1,000,000, an increase of 42% from RMB278 1,000,000 in the same quarter of 2019, primarily due to an increase in headcount. On a non GAAP basis, our G and A expenses as a percentage of our revenue was 1.1% in Q2. Research and development expenses were RMB1.7 billion, an increase of 107% from RMB804 1,000,000 in the same quarter of 2019. The increase was primarily due to an increase in headcount and the recruitment of more experienced R and D personnel and an increase in R and D related cloud service expenses. On a non GAAP basis, our R and D expenses as a percentage of our revenues was 10.4% in Q2. Technology is fundamental to our operations, and we plan to increase our spending on engineering talent and technological capabilities going forward. Some of our key R and D initiatives include developing our demand forecasting system for agriculture, database for C2M manufacturers and the logistics planning system. As a result, our operating loss for the quarter was RMB1.6 billion on a GAAP basis, compared with operating loss of RMB1 point 5,000,000,000 in the same quarter of 2019. Non GAAP operating loss for the quarter was RMB725 1,000,000 compared with RMB RMB898 1,000,000 in the same quarter of 2019. For the quarter ended June 30, 2020, we recorded net non operating income of RMB740 1,000,000 compared with RMB487 1,000,000 in the same quarter in 2019. The increase primarily reflects the net impact of higher interest income, interest expenses from amortization of our outstanding convertible bonds and the gain on fair market value change from long term investments. We excluded the latest two items in addition to share based compensation in our presentation of non GAAP metrics. To sum up, our net loss attributable to ordinary shareholders was RMB899 1,000,000 on a GAAP basis, as compared to net loss of RMB1 1,000,000,000 in the same quarter of 2019. Basic and diluted net loss per ADS was RMB0.75 on a GAAP basis, compared with RMB0.88 in the same quarter of 2019. Non GAAP net loss attributable to ordinary shareholders was RMB77 1,000,000, compared with RMB411 1,000,000 in the same quarter last year. Non GAAP basic and diluted net loss per ADS were RMB0.06 compared with RMB0.36 in the same quarter of 2019. That completes the profit and loss statement for the Q2. Now on the cash flow. Our net cash flow generated by operating activities was RMB5.5 billion as compared to RMB4 point 1 billion in the same quarter of 2019, primarily due to an increase in online marketing service revenues. As of June 30, 2020, the company's cash reserve comprising of cash, cash equivalents and short term investments was RMB49 1,000,000,000 as compared to RMB41.1 billion at the end of December 2019. We allocated most of our cash reserve to a highly liquid short term investment to receive better cash yield and maintain flexibility to withdraw and deploy capital strategically as necessary. Finally, let me touch on the ongoing development in the U. S. To prohibit foreign issuers access to U. S. Capital market, if sufficient audit access cannot be provided to the U. S. Public Company Accounting Oversight Board. On August 6, the President's Working Group on Financial Market released its report recommending SEC to implement rules that would require issuers to grant PCAOB access to work papers of the principal audit firm in order to maintain this thing by January 1, 2022. The recommendations also provide an option for companies to provide a co audit from an audit firm that meets PCAOB's inspection requirements. The administration's recommendation, if adopted, would still require SEC to design and put in place detailed implementation rules. We continue to monitor the situation closely and are prepared to work with relevant regulators in China and the U. S. To address these concerns when there's more clarity. We completed our SOX internal control audit for 2019 with no material deficiency identified. We are confident of the quality of our disclosure and the financial reporting, and we are committed to continuing our efforts to provide a high degree of integrity in our accounting. This concludes our prepared remarks. Operator, we are ready for questions. Your first question comes from the line Your first question comes from the line of Gregory Zhao of Barclays. Please ask your question. Mr. Gregor Zhao, your line is now open. Sorry, I was mute. So thanks for taking my question. So we saw PPD made some efforts to move up to the high end market and started to sell some luxury products, including Tesla cars. So just want to understand a bit more about how this will help you to improve the ARPU and help you to get expanded into the high end market. A quick one on the year over year growth of the GMV growth. So we know last year was the first time you joined the 618 promotion season. So how shall we think about the relatively high base, the impact to your 2Q GMV growth? Thank you. Gregory, thanks for the question. Let me take your first question around brands and products. Our product and brand strategy is actually more oriented around giving users what they want and serving them well. So it is not our intention to build or engaging in the type of promotion that you have seen, the intention is not to drive our AOV. The aim is actually to build Pinduoduo into a destination for quality authentic and value for money product across categories and price points. So we are continuing to grow the depth and breadth of SKU across the platform, whether they are branded or unbranded. In fact, as I highlighted in my comments earlier, we are highlighting agriculture as a product category where we think we can strategically add a lot of value over the next few years by investing in our supply chain and making available higher quality and better product for our users. And with regard to your question on GMV, first of all, I would like to just remind the audience that comparing our GMV growth in the Q2 versus the Q1 is meaningful because of the impact of the pandemic. In fact, we are very pleased with our GMV growth this quarter, and particularly in the context of having added 100,000,000 of active buyers since the beginning of this year. Our focus as a company this year in terms of our strategy is to continue to invest in user engagements and to build our mind share. Because as you look at the scale of the user base we have accumulated at 6.80 1,000,000 active buyer, we believe that what we need to do is continue to improve the engagement with them and to grow their mind share. The GMV for the Q2 are impacted. I will also note that changes in consumer spending. We saw a pickup in consumer activity since the Q1 as the economy recovered. However, we did notice that consumer spending was much more value conscious and consumers are looking for more household necessities such as FMCGs and agricultural produce among our platform. So as you saw in our 618 campaign, we actually expanded our coverage campaign to cover more products in these categories and we are continuing to support the consumers in these efforts. Okay. Thank you. Your next question comes from the line of Piyush Mubadhi of Goldman Sachs. Please ask your question. Thank you for taking my question. May I just ask a couple of deals with how the transaction commission revenues, marketing services revenues are progressing and how that take rate has evolved. The marketing service take rate seems to have gone up to 3.2% in the quarter, which is a huge improvement year on year on any other metric, probably the highest ever. Should we then think of that as a number that we can expect for you to continue to maintain in the future? And also when you look at the growth rates in transaction commissions, which was 76% in 1Q, that's would lead to that slow growth rate? And in the similar manner, the marketing services revenue, which is at 71%, is meaningfully higher than the pace of growth that you're seeing in the GMV for the quarter. So if you could just take us through what's going on there? Then I have a few questions in agriculture, if I may. Thank you. Okay. Let me take this one then. We do saw a stronger than expected recovery in merchant advertising in Q2. Our merchant had more budget to spend given limited activities in Q1, And they were eager to make up for their loss in Q1 and higher user activities and better advertising product also helped us to improve the advertising returns. Our higher takeaway in Q2 reflects the supply demand dynamic post of the pandemic actually. The level of returned and unpaid order also returned to the normal level. If we take together our Q1 and Q2 number as an aggregate level, the take rate for the first half of the year actually is 2.9%, in line with our historical results. Tick rate for us is an output, not an KPI we try to optimize. Our priority is based on our user engagement. With stronger user engagement, merchants would naturally want to advertise more. We will continue to support good quality merchants and incentivize them to improve their service and provide better value to our users. And regarding your second question or the question on the transaction service revenue, The transaction service revenue comprised primarily of what we previously termed commission fees, the payment process fees, which we charge at a standard record rate of 0.6%. However, we continue to offer a preferential rate for certain merchants as incentive. And may I just ask a follow-up question? Just wanted to understand where what percentage of the GMV today is agriculture, say, for the Q2? And when you talk about a 1,000,000,000,000 5 years out, we presume that's about 15% to 20% of GMV at that point of time. Would that be the right mix to think through for agriculture? And if you could just give us a feel for what the sort of take rate that we could earn from the business, would it be commensurate to or comparable to the 3.2, for example, that you've shown us in Q2, 5 years down the line, I mean? Thank you. Pierce, thank you for that. Let me just also add a little bit to our context around the take rate. As we have communicated to the merchants advertising on our platform and seeing the right levels of return. So we actually saw in the Q2 very strong merchant activities as merchants tried to move more inventories and goods in the Q2. And as a result, we saw very strong advertising demand, which we think actually contributed to that take rate. Similarly, I would note that on our platform, it's online platform, we are seeing advertising activities really across the board from many different sectors. So it isn't any particular categories per se. And similarly, we do believe there are potentials in agriculture merchants and distributors to contribute to advertising, as long as they are able to actually offer the type of premium product that allows them to generate the type of return. So what we are seeing is given the low e commerce penetration rate in agriculture, we actually see substantial opportunity for us to invest in our supply chain and to drive more value creation down the road. So yes, we do believe that certainly generating the type of return commensurate with what the platform is generating today is possible in agriculture. But that may come in the form of both advertising and also us providing technology solutions to the participants in our ecosystem. Your next question comes from the line of Alicia Yap of Citigroup. Please ask your question. Hi, good evening, management. Thanks for taking my questions. I have a question related to more medium, longer term. So how will PDD attract broader varieties of merchants and brands to join the platform when you indeed now have a larger base of merchants and then you also have that your user base are also reaching a quite large number. So how do you balance and ensure all the merchants will receive the relevant exposure? And what does PDD need to do to serve these broader range of the merchants? And how will the team purchase model evolve if we get more branded products or branded merchants on our platform? Thank you. Thank you, Alicia. Our strategy around products and brands have not changed. In fact, as I mentioned earlier today, the idea is to continue to focus on providing what the users want. So from that perspective, what we are seeing is the team purchase model working and this is the reason why we have been able to accumulate 700,000,000 users within such short period of time. And this continues to work because we are recommendation based business model focusing on the specific SKUs as opposed to on brands, right? So we do believe that everyone's demand on the platform really ranges across different price points for different categories. And through as we continue to get better our recommendation, we understand the users better, we are able to push them the most relevant products at the most relevant price points. And as the user activities and user engagement growth, the merchants naturally are coming to our platform seeking for growth and more opportunities. And the merchants themselves would be able to get the right level of traffic if they are able to offer the right value for their customer base. So what we are doing is through the algorithms, through our recommendation, working with the merchants to help them provide more suitable products that are targeted at the users. And we believe the algorithm is working and continuing over time while our recommendation will get better. And through a combination of offering the right product and also advertising on the platform, we believe the merchants will continue to see their attractive returns on their investments. I see. Okay. Thank you. Your next question comes from the line of Thomas Chong of Jefferies. Please ask your question. Sorry, Jerry. Sorry, Thomas. Thomas, is the question around our strategy or the trends we're seeing across different categories? Operator, maybe we can take the next question first before we take comments back. Certainly. Your next question comes from the line of Tina Long of Credit Suisse. Would ask your question. Hi, management. Thank you for taking my questions. I have two questions. The first one is on the sales marketing, because in your prepared remarks, you mentioned that you intentionally moderate the sales and marketing spending due to I think probably peers actually have been pretty aggressive. And also you expanded the 10 year program to some daily necessities. So I want to know in the next 2 quarters, Q3 and Q4, what are the plans for your sales and marketing? And under what circumstances you will actually set up the sales and marketing? That's the first question. I'll do the second one after that. Thank you. Sure, Tina. Let me ask Tony to address the question. First of all, the Q2 on sales and marketing expenses, we say to moderate our sales and marketing spending It's when we observe this aggressive promotion spending by our peers on electronics. Relative to that, we saw household goods as more attractive opportunity to advance user engagement. Therefore, household goods actually has a higher purchase frequency than electronics. So we choose a different strategy to invest in Q2. We actually plan to deepen our user engagement going forward so that we will continue to spend on sales and marketing in the coming quarters to grow the mind share and trust among our users. We expect to increase our sales and marketing investment in second half of twenty twenty in a prudent manner as long as we spend whenever we see opportunity meets our internal ROI hurdles. Our annual spending per active user are still lags behind our peers. We believe we can narrow that difference by growing our mind share with users and gain greater to get more wallet share. That's why we have to continue this type of investment. Okay. Thank you, Tony. Yes, my first question is sort of related to this because I think based on the public data, the cash flow volume is actually very strong from TV. So but the GMV actually was sort of slower. So does that imply the average order size, is that actually trending down? Can you share a little bit more about the average order size and also the outlook? Because if you continue to allocate more traffic to the half of group, so will we continue to see the average order size to stay at a low level? Thank you. Let me take this. Users tends to associate Pinduoduo as their go to platform for great savings every day. So for us, we also tend to have a less of concentrated spike in GMV and user activities around shopping promotion unlike our users our peers. Our user engagement tends to trend in a steady fashion and reflective which reflected of our gain in building mindshare. We will continue to invest in the user Mindshare and build on high frequency of engagement. In fact, that's what we did in Q2. We noticed the consumer spending was more value cultures and the consumer were looking for more household necessities, including our pharmacy and agriculture produce. That's why we dedicated our promotional programs during the June 2018 to include more products in these categories. This definitely have an impact on the AOV. Also, we add almost 100,000,000 active buyers since beginning of this year and these users are just getting to know Pinduoduo and actually their contribution to the GMV is less than 12 months. Also, they are still developing their spending behavior on our platform. Okay. So does that mean the outlook of AOV will stay at a lower level for a longer period time? Tina, so what we have seen in the second quarter is a growth across the categories. But as I mentioned, the consumer behaviors in the Q2 were more value conscious and we adapted the marketing strategy accordingly. So we do believe that Pinduoduo many users associate Pinduoduo as a platform where they would go for great value product and we have seen people coming to us in the Q2 particularly looking for those products. We find these product categories to be quite compelling in a sense because they are very high frequency, high engagement and we do believe that over time the AOV will continue to grow as they build their shopping behavior, their spending behaviors on platform over time. Okay, got it. Thank you very much. Your next question comes from Thomas Chong of Jefferies. Please ask your question. Thomas, in terms of live streaming, we have seen continuing adoption of our merchants using the live streaming as a feature to create engagement with the consumers on our platform. However, we do not position or do not consider live streaming to be a separate marketing tool. We consider really as part of the integrated experience in our platform. So on Pinduoduo, as you will note, that we don't have actually a dedicated channel at entrance for live streaming. Instead you actually are our users come in contact or coming access to the live streaming room through their browsing experiences. As they explore the SKU, they will notice that this particular SKU may be in live streaming and they will click into the live streaming and view the product being introduced. And in that context, they may choose to purchase or they may choose to bookmark the seller. Actually, they may have seen something and then through the browsing next time they end up purchasing. Holistic experiences that our merchant can offer to our users and seem to add to that exploration, exploratory experiences that our users have on the platform. Yes. One more thing I'd like to add is live streaming will be one of the key demands our customer as opposed to in this year. And actually, there are many others. And then we try to have a 4% prospective understanding about our customers and we actually have more than just one feature try to capture different kinds of needs, different kinds of demands our customer has had since the starting of this year. So I believe that let's just use one of them, but not all of them. Thank you. Thank you, Thomas. Operator, next question please. Your last question comes from the line of Binnie Wong of HSBC. Please ask your question. Hi, good evening management. Congrats on the strong improvement in the bottom line. I have two questions here. First question is on the monetization rate. It's true that I mean the Q2, the monetization rate sharply increased to 3.2%. But if we look at on a half year basis, right, there's only there's around a 2.5, which is just similar to what we have been in the past years. So should we just think of it this is more about a rising ad spending from the pent up demand? Or should we think about Q2, is there some structural positive drivers that can last into the second half of the year? So it's just directionally thinking about it. And then following on, on that is that if you're thinking about the rising online marketing from which pool which advertising category? Is it because that we also do more management said about the agricultural advertiser and FMCG? Do they tend to see bigger ad spending? Like do they have a bigger ad pocket? Thank you. And I just have a quick follow-up. Thank you. Hey, Binny. Thank you for the question. Your question around the take rate, I would say that take rate itself really is a function of merchant investing or pay on buying advertising to generate return for their sales. And as many of you have noted in your interviews of merchants, the advertising return on our platform are better than that relative to our peers. So it is I would consider I want you to consider the advertising spend from our merchants from that perspective. Of course, it is true that because in the Q1, the merchants weren't in a position to spend the advertising budget. So we did benefit from some of that pent up demand. But our conviction is that as always continue to deliver better or good solid attractive advertising return to the merchants, they will continue to advertise. So we're doing this both in terms of improving our recommendation algorithm, but also improving better advertising products. So as an example, we rolled out at the end of last year a product that helps a smart tool that helps merchants optimize their advertising return as an example. So many of the merchants on platform may not be as savvy and they don't really understand how to optimize for keywords or for banner ads. However, by using our automated system, they at least are guaranteed a minimum threshold in turn. So they are in a better position and more willing to spend. So we do think that part of that Paypal has to do with the better advertising products we are providing. And also, of course, you cannot do this without a very, very active user. So as I mentioned on our call, our strategy this year is to continue to invest in user engagement and with user engagement we believe the return to merchants advertising will continue to be attractive and they will continue to have that demand over time. As to your question specifically around advertising tools, as you know, we started our business advertising business in primarily in search, but as our business model focuses on recommendation, we have seen pickup and we expect to continue to see pickup fee advertising as I mean, it's a very good quarter that we see the operating margin. Is it is a very good quarter that we see the operating margin is historically the narrowest in terms of the losses. It's a significant improvement in the operating margin side. Do you think this is something that we can extrapolate because of this efficiency and we wish kind of like an equilibrium as to how much we spend and then how much we can grow our top line? Or is it that we should expect some quarterly fluctuation? Because I do understand sales and marketing is that's quite impacted by seasonality. So should we think about this to extrapolate into the second half? And is that something that is kind of like we reached this inflection point already? Thank you. Yes, I think you're talking about the profitability question here. Yes, that's right. Our Q2 results do demonstrate how leverageable our business model is and how we could deliver profitability in the short term. But we don't believe it is the right strategy to focus on a short term profit over a sustainable long term value. Our vision is to offer value for money products to all users through fun and active shopping experience. We still need to continue our investment to grow user mind share and engagement as we mentioned several times in the prepared remarks. So we are not considering profitability in this year. Actually, we also plan to step up our investment in our ecosystem through strategic partnership and the capital investment to better support our merchant in offering better value and better service to our users. Okay. Thank you. That's very, very clear, super clear. Thank you so much. Thank you. Thank you, Binhui. I would now like to hand the conference back to the presenters for the closing remarks. Please go ahead. Thanks, operator, and thanks, everyone, for joining us on the conference call today. You have any further follow-up questions, please feel free to reach out to the IR team. We're always here for you. Thank you, and have a good weekend. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.