Earnings Call: Q3 2018

Nov 20, 2018

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the Pinduoduo Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference call is being recorded today, 28th November 2018. I would now like to hand the conference over to our first speaker today, Christian Arnold. Thank you. Please go ahead, sir. Thank you, operator. Hello, everyone, and thank you for joining us today. Pinduduo's earnings release was distributed earlier today and is available on our IR website at investors. Pinduduo.com as well as through GlobeNewswire services. On the call today from Pinduoduo are Mr. Zheng Peng, Chairman and Chief Executive Officer and Mr. Tian Xu, Vice President of Finance. Mr. Huang will review business operations and company highlights, followed by Mr. Xu, who will discuss financials. They will be available to answer your questions during the Q and A session that follows. Before we begin, I'd like to remind you that this conference contains forward looking statements made within the meaning of Section 21E of the 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, expects, anticipates, future, intends, plans, believes, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward looking statements. Further information regarding these and other risks, uncertainties or factors is 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 statement as a result of new information, future events or otherwise, except as required under applicable law. It is now my pleasure to introduce Chairman and Chief Executive Officer, Mr. Huang. Mr. Huang, please go ahead. Thank you, Christian, and thanks, everyone, for joining us on our Q3 results discussion. We just released our 3rd quarter results. Our last 12 months GMV grew 3 86% year over year to RMB 344.8 billion. This was fueled by the growth in our annual active buyer. Over the last 12 months, we had 386,000,000 users make at least one purchase on our platform, an increase of 42,000,000 users over the prior quarter. During the Q3, we had an average of 232,000,000 MAUs, an increase of 37,000,000 users over the prior quarter this year. Our revenue for the Q3 grew almost 7 times over the same period in 2017 to RMB3.4 billion, primarily driven by the growth in our online marketing services, which we only launched in April 2017. Though our monetization rate continued to improve, it was partially offset by the strategy we announced last quarter of rewarding higher quality merchants with more traffic. We hope to create a virtuous cycle whereby high quality merchants who provide value for money products with good user experiences are rewarded attracting more high quality merchants to our platform. At Pinduoduo user satisfaction is our ultimate goal. We have created a platform where users can discover value for money products in a fun, social and entertaining setting. By aggregating the demand for each SKU into larger volumes through our team purchase option, we enable our merchants to better manage their supply chain and lower their production and logistics costs. The savings can then be transferred to our users. Therefore, users often find products at a cheaper price than expected as compared to their perceived value of those products. We are very focused on improving efficiencies and capabilities of our merchants so that they can serve our users better. Over the last 30 years, China has grown to become the largest manufacturing base for most consumer goods sold worldwide. However, it also has a complex distribution system. The average manufacturer lacks a good understanding of the consumers and doesn't have much visibility on the demand for their goods. As such, manufacturers may lose out on potential sales if their products are expectedly popular or they may end up having to discount deeply to move inventory if they overproduce. Our platform aims to let manufacturers have a more direct pulse and a consumer demand. We hope that as our technology advances, our team purchase option couldn't only help aggregate demand quickly, but also be able to simulate the likely demand at a certain point in time and relay this information to manufacturers. By equipping merchants with data analytics, they then have ample lead time to make adjustments and prepare the product for shipping. Over time, based on our data, the merchants can also develop particular SKUs that are better suited to their target consumer taste and by cutting out the middleman manufacturers retain more profits, while our users get a better quality and value for money products. Linking the users to manufacturers in this way reduces waste and allows manufacturers to build strong original brands over the long run. This is important as we have also observed that younger consumers increasingly prefer more personalized offerings that are tailored to their need. The supply chain therefore has to evolve in order to cater to this demand for personalization. The next step in this evolution is the utilization of 5 gs, IoT and AI. As 5 gs rolls out at a scale and adoption grows, the industrial supply chain will also be transformed as data flows and information exchange happens on a much faster level. Whether it be a tree in the orchard or a batch of raw materials in the factory, all of the information about different parts of the supply chain can be readily grasped. At the same time, as the vast amount of information gets processed, it paves the way for innovative new technologies. One of the industries that can be really transformed by this is agriculture. Most of the agricultural land in China are scattered through small scale farming. Unlike farming in U. S, which is more standardized, Chinese farmers often lack basic information on market demand, which means they face uncertainties throughout the farming cycle. For example, what to plant, how much would it sell and how much would it sell for. Making matters worse is convoluted distribution structure between farmers and consumers, resulting in a spoilage and a limited shelf time by the time the product reaches consumers. Farmers operating under this traditional structure are often forced to harvest their produce prematurely or to dose their produce in chemicals in order to prolong shelf time. Consumers end up paying not only a higher price, but get an inferior product. Our solution today is to aggregate the demand of consumers through our routine purchase option and a channel that is sizable demand to farmers. With more market intelligence and a transparent market pricing, farmers can set their own price, compare their price with the nationwide peers and then work on how to market their products to users with the right price point and packaging. Thereafter, they can ship the products directly to the 384,000,000 users on our platform. While the existing logistics infrastructure in China is not well suited for delivering fresh produce, there is at least a basic network that farmers can tap on to reach consumers. Consumers end up getting fresher and safer products for a better price, while farmers get to make more money, which can be reinvested to improve their farming practices and set up both their production quantitatively and quality. This creates a win win outcome and it can have great impact on transforming agriculture and uplift in the poor. As an example, in Zhibuai County in Hubei, which is mountain and difficult to get into. There is often excess inventory of their locally produced oranges. At times, farmers cannot even sell their oranges for $0.60 a kilogram, which is a shame as these are high quality oranges. Now with the onboarding of their produce on our platform, the farmers can realize a stable selling price of RMB6 a kilogram. By year end, Ziguille County will cross the national poverty line. This is just one example out of the 3 730 impoverished counties we are working with. But it shows the real impact that technology can have and how we can do our part to uplift the poor. Going forward, we will continue our effort to aim farmers in impoverished countries. What we have achieved so far is just the first step and we look forward to contributing more. Next, I would like to take this opportunity to update you on our effort to fight counterfeit and infringing products on our platform. From the very beginning, we were the 1st platform in China to strictly hold all our merchants to the standard of a 10x penalty on counterfeit goods. After 50 odd brands, we were alleged to have counterfeit or infringing versions on our platform. We have thoroughly investigated over the past few months and found that 20 of these fake brands never existed on our platform. Of the other 30, we have finished our clean up efforts and have worked tirelessly to close every loophole and tackle all issues. Additionally, we set up a WeChat public account to clarify any residue buyer concerns. Since August, we have also upgraded our merchant onboarding system to integrate with the police identity verification system from the consumer end. We have refreshed our search algorithm to display the legitimate brand name even if users key in an infringing brand by striking at a root and removing incentive for copyright infringement, we hope to weed out bad behaviors. We will continue to invest in our technical capabilities in associated keyword identification, filtering, image, text and video imagery recognition and developing a blacklisting mechanism. We are also creating a fast track IP channel with the government to have merchants apply for their own trademarks and to build their own brands. At the same time, we continue to collaborate closely with the authorities to uphold the rights of consumers. We are grateful for all the parties that have made us a better platform throughout this process, especially the government, which has been extremely supportive and understanding. The media, which has helped us uncover cases of abuse and the users who have trusted us and help us with their candid reviews on our platform. All of the above wouldn't have been possible without our focus on technology. As we continue to grow in size and build out our offering to our users, we plan to invest more in our efforts in R and D and also upgrade our existing infrastructure to meet future demand. We continue to improve the accuracy of our product recommendations and ad targeting by enhancing our distributed AI infrastructure. We are also in discussions with various institutions worldwide to partner initiative to further our technical know how around distributed AI to help ourselves better understand user behavior and to enhance user data privacy protection capabilities. I myself will be leading this effort and we hope to share our result with the public at a later stage. Finally, to end on a more lighthearted note, let's talk about Dororo Orchard, which I mentioned last quarter. Dororo Orchard is a game that rewards users for completing a variety of missions daily as they try to grow a virtual fruit tree. Once a user tree bears fruit, we send an actual package of fruit to them as a reward. Participation on Dodo Orchard is so strong that we now send out over 500 tons of fruit daily from farmers in impoverished areas like Southern Xinjiang. Total Orchard allows us to delight our users while doing good and encapsulates our company's vision of offering to users a differentiated and entertaining shopping experience with value for money products. Last month, we celebrated the 3rd year anniversary of our app with our users, merchants and employees. We are grateful for all our ecosystem partners as well as all the experienced investors worldwide who have supported us. We still see ourselves as a very young company with much room for further improvement and we'll dedicate ourselves relentlessly to meeting our users' needs and overcoming all obstacles along the way. With that, I will hand the call over to our VP of Finance, Tian, to walk through our financial results in the quarter. Chen, please? Thank you, Colin. Hello, everyone. Our total revenue in the 3rd quarter was RMB3.4 billion, growing strongly by 697 percent from RMB423 1,000,000 in the same quarter last year. The main driver of this growth was our online marketing services. 88% of total revenue was RMB3.0 billion were revenues from online marketing services, which increased significantly from RMB290 1,000,000 during the same period last year and 25% from the prior quarter. The increase was due to our increased number of users and the growing user engagement, which supported our healthy GMV growth and demand for advertising on our platform. 12% of our total revenues for RMB398 1,000,000 were revenues from commission fees, which increased from RMB134 1,000,000 during the same period last year and 80% from the prior quarter. The increase was driven by the growth in our GMV. We continue to keep our commission rates low and offer some discounts to selected merchants. Our low fee structure, combined with our ability to aggregate large volumes of orders for merchants, has made us an attractive are confident that it will also increase the annual average spending per user, which as you have seen, has been doubling year on year over the last three quarters. You may also recall that last quarter, we talked about rewarding high quality merchants to create a virtuous circle and weed out the less compliant merchants. Specifically, we have offered more traffic with better pricing and discounted commission fees to those high quality merchants. This has dampened the growth in our monetization rate in the short term, but we believe this is the right thing to do as we strive to deliver the best customer experience. We are pleased with the results of our strategy so far and remain deeply committed to improving our platform. Moving on to costs. Total cost of revenue increased by 3 15 percent year over year to RMB775 1,000,000 from RMB187 1,000,000 in the same quarter of 2017. The increase was due to higher cost for cloud services, our call center and merchant support. Total operating expenses were RMB3.9 billion compared with RMB471 1,000,000 in the same quarter of 2017. In particular, sales and marketing expenses came in at RMB3.2 billion, mainly due to an increase in branding campaigns and online and offline advertisement and promotions as we continue to invest in strengthening our brand recognition and facilitating greater user engagement. The momentum seen in our MAU growth this quarter evidenced to a degree that the investment in marketing we have made in the past quarters is effective and will continue to pay off in the long term. General and administrative expense was RMB306 1,000,000. The increase was primarily due to an increase in headcount. Research and development expenses rose to RMB332 1,000,000 primarily due to an increase in headcount and the recruitment of very experienced research and development personnel as well as an increase in our R and D related cloud services expenses. As shared by Colin, we continue to focus on expanding our technological capability for the long term growth of our platform and expected our R and D expenses to grow further, we are in active discussions to launch research initiatives to help us improve our platform and services. Operating loss was RMB1.3 billion compared with a loss of RMB234 1,000,000 in the same quarter of last year. Non GAAP operating loss was RMB790 1,000,000, an increase from RMB231 1,000,000 during the same period last year. In the Q3, net loss attributable to ordinary shareholders was RMB1.1 billion compared with a loss of RMB221 1,000,000 in the same quarter of last year. Basic and diluted net loss per ADS were RMB1.20 compared with RMB0.52 during the same period of last year. Non GAAP net loss attributable to ordinary shareholders rose to RMB690 1,000,000 compared with RMB280 1,000,000 in the same quarter last year. Non GAAP basic and diluted net loss per ADS were RMB0.68 compared with RMB0.48 for the same period of 2017. That completes the profit and loss payments for the quarter. Net cash flow provided by operating activities was RMB250 1,000,000 compared with negative RMB682 1,000,000 in the same quarter last year, primarily due to an increase in our online marketing services revenue. As of September 30, 2018, the company had a strong balance sheet with RMB15 1,000,000,000 in cash and cash equivalents, an increase from RMB3.1 billion as of December 31, 2017. It is primarily from our IPO proceeds. On top of our cash balances, we also have another RMB7.5 billion of short term investments. Altogether, we have RMB22.5 billion of cash and short term investments. Our strong balance sheet and healthy operating cash flow highlights once again the extremely cash flow generative business model that we have and provides us with a good cushion to make necessary investments to grow our business. Lastly, I would like to make a quick comment in response to claims that the company has misrepresented our revenues and earnings. I would stress that we have always held ourselves to the highest standards and that the numbers in our consolidated financial statements are in compliance with the rules and regulations of the SEC. Our filings are in accordance with U. S. GAAP and the audited financial statements included therein has been audited by Ernst and Young. Similarly, our related party transactions as included in the IPO prospectus have also been disclosed in accordance with the U. S. Security laws, listing rules and NASDAQ regulations. This concludes our prepared remarks. Operator, we're now ready to begin the Q and A session. Thanks. Certainly, sir. Ladies and gentlemen, we will now begin the question and answer session. So we have the first question coming from the line of Mr. Thomas Chong from Credit Suisse. Please go ahead. Hi, good evening. Thanks management for taking my questions. I have two questions. The first question is about how should we think about the impact of macro headwinds to our business? And my second question is about any updates about the new e commerce law and about implementation plan? Thank you. Yes. There has been a lot of discussions on the potential slowdown in China as well as growing concerns about U. S. And China trade war. While we are following macro conditions closely, we haven't yet observed impact on our business. Our GMV is still growing healthily and we are strong in terms of user growth and all these metrics. We are feeling there is still a very strong unmet domestic demand for our users, which we are doing our best to fulfill. Ultimately, no matter how macro conditions may be, the demand for value for money goods is still constantly growing, I believe. For the consumers in lower tier cities, for instance, through our platform, they are able to find better quality goods at a similar or even lower prices versus what they may be available in their local stores. So I think this is going to be a trend. And we are also able to provide such value for money goods due to our C2M model where we aggregate users' demand and try to connect these demand directly to manufacturers and the merchants with a strong supply chain capability allowing users to save by reducing manufacturing costs and cutting down the layers of intermediary distributors. We do see our GMV growth growing faster than the online good sales growth rates reported by MBS, which shows that we are continuing to gain market share at this moment. Finally, on the trade war, I think we are fortunately relatively sheltered as our platform today is purely servicing domestic demand. And our merchants manufacturing base is also mostly located in China. However, with all that said, we are part to a bigger and larger economy and wouldn't be fully insulated, of course. Therefore, we are also monitoring the economy and our business closely to be fully prepared for any market change in the future. Your second question is e commerce law. The e commerce law marks a positive development for the Chinese e commerce industry, I think. And it has been discussed for a long, long time, even it started even before PDG existed. We had participated very recently in several rounds of discussions with the authorities before it was published. The finalized e commerce law is along the lines of the previous drafts and has adopted many industries current best practices. As a platform that has been following the best practices and in the market, we welcome and fully support the condition of codification of such practices and underlying principles. And there are some rules in the law, which emphasis on the fair competition. The emphasis on fair competition is something that we think will pave the way for a more level playing field in the industry and it may change the competitive landscape a little bit in the future as well. The areas of consumer rights and the data privacy protection are also areas that we have spent a lot of efforts on internally. We have always had a strong focus removing infringing goods and merchants who spot our merchant our consumers' experience on our platform. And as I mentioned, I will be personally leading our research efforts on data privacy protection, which shows how seriously we as a company view this issue. We don't want to get into trouble the other companies have experienced. We expect that further consultation will be organized to provide detailed implementation guidance and procedures of the rules under the new e comms law. As the current law is more focused on broader principles, we will continue to participate in the consultation and if appropriate upgrade or enhance our system and the policy in accordance with the guidance procedures. But it will take some time. We don't think the very detailed rules will be rolled out very soon. We believe and it's going to be a process. We believe the government will take a balanced approach and also consider how e commerce has helped to grow domestic demand and rejuvenate domestic manufacturing capacity to support SME growth. Thank you. Thank you for the detailed answer. We have our next question coming from the line of Mr. Piyush Mubayi from Goldman Sachs. Please go ahead. Thank you for taking my question and congratulations on your numbers. I've got two areas of questions. The first is on your GMV growth rates, which have no doubt been very strong. Could you talk through the drivers of the 99% increase in annual spending per active buyer that you're seeing as well as the average team size that you observe right now? Also given how important 4Q is in terms of size, could you give us a sense of how it's been tracking through the last two months, if you could comment on that. The second is on the effective take rate, which excluding payment, we think to a certain degree is a factor under your control and has come down about 0.4% to 2.5% in 3Q. Now we know you described initially it's about rewarding quality merchants with traffic. Could you detail how successful this attempt has been, how many merchants you have on your platform and how long you believe it's necessary to continue to offer this discounted traffic and at what point in time in the forward could we expect this to trend back up towards 2.8% or 3%? Thank you. Hi, Pierce. This is Tian. We are pretty confident that our GMV will continue the strong momentum we've seen so far. This quarter, we have seen strong growth in our GMV driven by 2 doublings. 1 is the doubling in our annual active buyers. The other is a doubling in the annual spending per active buyers. Our user base distribution closely mirrors the population distribution of China, and we see the great potential as the Internet population in China continues to grow. This is because we are confident that our value proposition of offering value for money and fun, entertaining shopping experience has kind of universal appeal and is not constrained to only a particular demographic or geography. So for those who have used our Pinduoduo APP, we think you would agree that it has been a very engaging outlet for you to kill the time and discover new products. You might find some or bought some new products that you didn't even know you need. So for those who have not used our APP, we strongly encourage you to give us a try. So moving to the second part of this equation, which is annual spending per active buyer, we still see a lot of runway for our annual spending per active buyer to grow. As user mature, they came to trust the platform more and are willing to purchase a much bigger ticket items. And the fact is exponential. This is something that we have observed from our internal data, and it has increased our believing that our recent strategies are paying off with regards to improving the overall quality of our platform. And on top of that, we are also reaching our product selection. So there will be even more for our users to discover on our platform. So during the Double 11 sales period, for example, we sold over 200,000 units of Apple latest phones, the iPhone XS, XR, XS Max, etcetera, which demonstrated the strong purchasing power some of our users have. Your second question virtuous cycle of attracting these more capable and responsible merchants to our platform and also churning out the lower quality ones, we have been giving discounted traffic and discounted commission fees to some selected merchants who have demonstrated their willingness and the capacity to serve our users better. This initiative does affect the pace of our monetization growth in the short term. Nevertheless, we believe this is the right thing to do and this can help to drive the ecosystem in a positive way in the middle to long term. And in general, we are not concerned by this quarterly fluctuation as we continue to experiment with different strategies and advertising product offerings. And as we believe our efforts will eventually benefit monetization in the long run rather than the short run. And after all, we only started the monetization monetizing our platform in the middle of last year. So the results so far have already demonstrated that monetization can grow very healthily if merchants are seeing good returns on our platform. So overall, we still take a conservative approach towards growing our platform's monetization. I would say monetization is not our near term goal, but a result of user satisfaction and good user experience. And we will continue to enable our ecosystem counterparties to improve their capacity and to serve our users. Thank you. Operator, next question please. Sure, sir. The next question comes from the line of Alicia Yap from Citigroup. Please go ahead. Hi. Good evening, management. Thanks for taking my questions. Congrats on another strong quarter. I have two questions. Number 1 is that, since you actually have attracted the numbers of big brands to open the flagship stores on your platform recently, just wondering, have these brands been contributing to the accelerated growth of the GMV this quarter or these brands will still take some time to get used to our platform? And in the next few quarters, how should we think about the GMV contribution from the bigger brands versus the longer tail merchants? And second question is regarding the sales and marketing. Seems like there is some leverage on the expense ratio achieved this quarter. But given sales and marketing is also critical in terms of driving the top line growth. And if we look into 4th quarter, given this is a seasonal promotional quarter, will the expense ratio be actually going up on a percentage of sales? And then over time, is there any kind of target ultimate percentage of sales that the sales and marketing could ultimately come down to? Thank you. Okay. I'll ask the first question first and maybe the second question can add a little bit. Well, the first question is about high end brand. There were a lot of media talking about that. In general, my opinion is no hurry and it's a process. But I see no reason why higher priced branded goods wouldn't transact on our platform, just as how people are not one dimensional. Our users also have a multitude of product needs. And we think regardless of the price point, the demand for getting a good deal in a fun and entertaining way doesn't change. More and more branded merchants are approaching us, partially because of all these VR, negative or positive. And they all set up shops on our platform after seeing our continued momentum. We already have merchants such as Xiaomi as a well known cell phone brand and also like offline retailers like Gourmet and also even online retailers like Dantan, they brought in array of SKUs and brands onto our platform. During the Double 11 sales period, for example, as Tian just mentioned, we sold over 200,000 units of Apple's latest phones, including iPhone XS, XR and XS Max and all of these. That being said, we view every brand as we do all our merchants. And we have the same requirement that they collaborate with us and serve our users. We treat them all equal. And I believe it's just a matter of time. There will be more and more different kinds of products, different kinds of brands coming into the platform and serving a variety of our users' needs. With that said, maybe Tian, you take the second question first. Yes. In terms of our marketing expense in the next quarters, I would say we cannot provide a guidance in terms of percentage of revenue also, which is also depends on the revenue growth. But we look at our marketing spend as a long term investment and it is difficult to provide guidance because it depends on expected returns. But I can elaborate our rationale behind it. We are investing primarily to build user trust and brand recognition. So far, we have seen good ROIs on our marketing investments, and we will continue to build awareness of our brands and user engagement. Meanwhile, we are very disciplined in studying the ROI of our spending. For example, for coupons, we deploy different algorithm to do AB testing. For each user group, we will track their behaviors after receiving the coupon, such as any change in user retention or any change in user spending, etcetera. So please note that marketing spending also depends on season and opportunities. So it will not be that linear quarter by quarter. For instance, in the Q2, there was a FIFA World Cup. So we shifted some advertising budget to it. And we also continue to spend on the World Cup in July, which fell into some of the sales and marketing spending you saw this quarter. Just like investors in the capital markets, when we are presented with good opportunities to make marketing investments with good returns, we will be active. So we also do not want to constrain us in this regard. So all that said, as our general approach in terms of investing to grow our business, we look at marketing spend very thoughtfully and will not spend irresponsibly. But I could say, in the long term, the percentage of marketing expense will go down. That's pretty much what I can tell you right now. Thank you. Okay. Thank you. Thank you, sir. We have our next question coming from the line of Natalie Wu from CICC. Please go ahead. Hi, good evening, management. Thanks for taking my question and congratulations on very solid quarter. I have two questions here. First one is regarding Tencent collaboration. I noticed that you opened up the Weixin Wallet access last month. It would be great if management can share some color with us on the update regarding this collaborations, say how much GMV comes from Weixin Access, the additional user growth from that channel, etcetera. And curious if there would be any further collaboration with WeChat Max here, say, more direct and more frequent powerful access maybe? And next second question is regarding the your selected merchants rewarding program. Just curious what kind of the what set of the factors will you consider the most when choosing those high quality merchants, which you will grant with favorable take rate and traffic privilege? And how much does that group of the high quality merchants account for your GMV? Thank you. I will answer your first question first. About Tencent, we have been working very closely with Tencent. We appreciate and value their partnership very much. They are also a very good shareholder and has been supported since Series B round. As disclosed, we use Tencent Cloud. We also advertise on Tencent and leverage both WeChat and QQ for our users to share interest in products together. The working teams on both companies often discuss new user trends and the behavior and the behaviors together. In terms of transactions and orders, actually, mostly happen on our own app. And this has been the case for more than a year. This is because as users shop our platform a couple of times, they would naturally download the app to enjoy more fun and cost saving features on our app. While social platforms are used to share products with the social context, when users just want to get something quickly, they may just choose to join existing team or our app directly. The X experience is overall smoother and it provides a richer set of features for our users. And you also mentioned the icon WeChat Wallet, especially on that, As we just launched that on October 10th, so it is probably still too early to tell and it's pretty hard at this stage for us to comment on the impact of that. However, this does demonstrate the value that Tencent sees in our platform. And overall, we are grateful to have Tencent as a shareholder, a partner and a great platform for us to learn and grow. And about future collaborations, I think we are we do see a lot of areas and very concrete projects that can be done together. And it wouldn't be surprising that we will sort of further the collaboration a lot more and there will be new innovations coming out of a closer relationship. Yes. I would add a few color on this high quality merchant questions. We look at our high quality merchant at a variety of factors. For instance, service quality and their specific GMV generated, etcetera. Now the strategy of rewarding these high quality merchants so far is paying off, and we will continue to incentivize them to create this virtuous cycle to keep attracting better merchants to improve our user experience. So it's really hard to differentiate the GMV generated by this high quality merchant because they improved the user experience as a whole, not only to their stores or to their specific product. Thank you. Okay. Thanks. It's hard. In general, it's pretty hard to kind of say this is high quality merchant and that one is not high quality merchant. I mean, it's a lot of times it's blurred, but we do have scores and review systems for different kind of merchants. So depending on the user feedback and how hard to get them, we'll sort of sometimes have tailor made commission rate or add plans for them. Thank you, sir. We have our next question coming from the line of Joyce Chu from Merrill Lynch. Please go ahead. Thanks, Colin, Tian for taking the questions. I would like to have some more colors in terms of Pinduoduo's like efforts in clean up problematic products as well as those not authorized merchants. Could you help us quantify the impact on the overall platform as well as on GMV or down the technology expenses? A quick follow-up is also I want to ask if we have any specific numbers in terms how the new e commerce law will affect our merchant base, especially in the VAT side. What percentage of our merchants right now are not really paying the VAT? Thanks a lot. About the cleanup process and fighting against the counterfeit goods, as we mentioned as we have mentioned in our last call and this call, we have always been committed to finding counterfeit goods and have ramped up our efforts in the last few months. We see this as a good opportunity to make us a better platform and are very grateful for the support we have received from the government and our users. In the month of September alone, we have proactively closed down over 5,500 stores on our platform, removed over 7,700,000 problem products and pre blocked over 3,000,000 links to suspected infringing products. You might have also read from the news that we have reported to the police IP violation cases of some of our merchants. And in fact, some of these merchants have already been arrested by the police. And so it's a constant battle and we take it very seriously and fought against that full heartedly actually. We will continue to invest in developing better technical solutions to enhance our ability to detect infringing items and take down items in stores of merchants who are non compliant. I also mentioned video image recognition earlier in the call. This is actually a very interesting area since they can go beyond the traditional image recognition in ascertaining the identity of merchants applying to our platform. And in fact, I myself, like 15 years ago, I was doing as a student, I was doing learning the image recognition and the video recognition. And it's kind of interesting to me personally. The knowledge of learning at school actually can be applied to some degree in practice and it's helping the platform and also helping the society. Now the vast majority of merchants on our platform are actually merchants who share our vision of providing good value for money products to our users. They just need a little bit help. Sometimes these merchants also violate some of the rules, but the majority of them actually start doing business out of their good intention. We at Paydee are constantly pushing ourselves to do more and more to help these merchants and we thought deeply about how we can better help our merchants. Many of them in China have the capacities to manufacture high quality products and have very strong willingness to create their own brands, but they lack the resources and the distribution channel. As such, we have built up Duo Duo University to help train merchants and unlock their potential. Douodou University has just launched in the past quarter. We have helped the merchant develop their own brands and try to make sense of their user behavior and try to advise them on how to better capitalize on the seasonal trends and also consumer taste in their listings. This will also raise the effectiveness of their marketing spend and the feedback into awareness to spend on our platform. As a result, it would improve, in fact, our long term monetization capability. With that said, I will also want to emphasize the fight against counterfeit goods, Because you asked about how sort of what's the effect or negative effect this fight may have on our platform. I think I need to point out that in we fundamentally believe this is the important to take swift action to deal with irresponsible merchants as this is the right thing to do for our platform. And the value of our company are such that we will never back away from doing the right things, even if it may cause short term frictions. A lot of the news we face and that things we faced, criticism we faced in August, it is a good test of our company value. Cleaning up our own platform and incentivizing the high quality and more capable merchants will ultimately improve the quality of our platform in the longer run. It is actually quite difficult for us to try to isolate the impact of any one given action, but we take heart from the numbers that more and more users are still finding value in our platform. And in fact, the customer's action probably we gained the most support from our users. As you can see from our 3Q numbers, our active annual buyers continue to grow very fast. Year to year, it's 144% growth to 386,000,000 users already. And also it comes along with the increase of annual spending per active user. This has gone up 99% year over year to reach almost RMB900 per active user, per active buyer. So these numbers are actually very encouraging to us. So basically, we should always stick to our value and try to do the right thing first and then try to figure out to do the things more cleverly and to do the things right. I mean the principle is first and then the result will come. And in our case, looks like the result comes even faster than we expected. So all of this just encourages us to fight against those bad behaviors even more harshly and more swiftly. And it's a very good beginning for all of this. Tian, you want to add something? No. Is there another question from here? Yes. Next question. Go ahead. The follow-up questions was regarding the percentage of merchants who are now not paying the VAT and probably subject to yes. Okay. Wai Ting, you want to answer or you want to answer? Answer? Yes. As a platform, I can say we are fully in compliance with the tax laws and regulations. And next year, we will be in compliance with the e commerce laws. So we are not in a position to track or to judge the merchants' tax liability. Well, also now I remember in your question you said the merchants are not paying VAT. I think that's not true. The merchants in different provinces are subject to different local authorities to their behavior. And I believe I mean the VAT tax fairly common and it won't change. I mean, the rules are there. I mean, it won't change significantly before the law put into place or after. And also, when you if you're asking about this very specific details and you try to drill down, then we should really wait a little bit to see the detailed kind of execution plan of the e commerce law. And with that, I think all the e commerce platforms are equal. They are the same. We are the same and I don't think that sort of make any differentiation between different platforms. We have our next question coming from the line of Binnie Wong from HSBC. Please go ahead. Thank you. Good evening, management. Thank you for taking my questions. Two questions here. One is on your assessment priorities. So for longer term to continue to drive better value for our merchants and to help them to grow bigger on the platform, can you tell us actually areas of where management thing will really have to step up in terms of investment, say maybe in logistics or any because I think Tian mentioned that there will be more research initiatives to drive better conversion. Are those things that we should expect where we'll be investing and in terms of the priorities? That will be very helpful. And how are we going to drive better conversion for our merchants in our feed? So this is my first question. And my second question, actually, I think the agricultural strategy, if you can elaborate a little bit more, both on the user side and also on the execution. On the user side, because we understand that more online leading platforms are expanding their presence in the fresh foods online, right? And also for, of course, a modification of the traditional business model. So in terms of the competition on the user side, can you help us to understand our competitive edge here? And second is in terms of execution. I think management has emphasized that this is, of course, it's a very fragmented market in China. So what are the key challenges in terms of execution, I. E, in terms of assessing, say, which farmers who have the best products that fit the demand for our customers and also how do you determine the pricing, etcetera? And how do we support them with the logistics? That will be my 2 questions. Thank you. Okay. It's not the 2 questions, but I'll try to answer them 1 by 1. The investment strategy, I think we believe we have managed to build a fairly successful business thus far by staying very focused on what we're doing at. We have a very good working relationship with the various counterparties in our ecosystem, including the logistics part. We have no ambition to do everything ourselves. In fact, we have no ambition to do anything that someone else is doing better than us. We see ourselves as an enabler to help our merchants, manufacturers and the logistics providers and other service providers to grow and improve. We will only invest strategically in areas where we think we can make a difference or provide an even better user experience. With that said, you mentioned agriculture. It is a strategy, but it is also not a strategy because this is an area we see we can do a lot of things. And this is also an area we start with actually. We started with agriculture. Once upon a time, we were selling all the kind of 100 percent of the things selling our platform more fruits and agricultural products. So we should never forget about our roots, right? And if you look at agriculture problem from the user side, you asked the kind of competitive advantage we have. So I will give you example to demonstrate the value creation of the team purchase model we have for the peasants. For the garlic in Henan Province, the price we pay at the field is probably around RMB 1 per 0.5 kilogram. And the price per 0.5 kilogram in Shanghai or in Shanghai's kind of the neighborhood, it's around RMB 4 to RMB 5 per program. So because so that's a 4 to 5x, right, from few. That's because there is 1st tier, 2nd tier and 3rd tier middleman in between, right? And there was a lot of moving around at repackaging and taking the things out and repackaging them again. So in our model, because we're able to assemble enough demand from the user side, sort of like trying to aggregate demand from this district and other district and all of a sudden, 1,000 people, even 10,000 people are buying the same garlic on the same day. So with that, we can actually have the peasant kind of packaging their garlic into small boxes and send that directly to Shanghai or to other cities. Although they are going to pay a little bit extra for the delivery to the delivery companies, in our calculation, they probably pay RMB0.6 per half kilogram because at one package, it usually comes with 2.5 or 3 kilograms each. So with that, the retail price on our platform is about RMB 2 per half kilogram. So which is almost half the price of the retail price downstairs in the stores or in the supermarket. But even with this half the price, if you cut out the RMB0.6 paying to the delivery companies, the peasants on the field at the field is still earning $0.5 more per half kilogram. So this is I think the patents earns more and the users actually get the garlic at a much cheaper price and even fresher. So it's a win win situation. Of course, we there were the current delivery system used to ship the garlic from Henan Province to Shanghai is not optimized for shipping agricultural products, because before PDD comes into place, there is no e commerce platform is selling agricultural products at this scale. So the current delivery system is optimized for shipping household goods from Zhejiang province, Guangdong province to the cities or to the villages. So because of PED and the team purchase model, we sort of created this kind of market and created this kind of business model. And this enables us to kind of help our delivery companies to revise their procedures and then trying to improve the delivery quality of those agricultural products, try to reduce the percentage of damage during the whole process. It's not an easy job to do. It's always easy to say and easy to imagine, but it's really hard to implement. But we do see a huge value creation that can be done on our part and also on delivery company's part and also on the field on the peasants' part. So this is the area we're kind of very excited about and not only because it creates a good user experience, but we're also thinking we're doing some social good and it brings gives all the employees a better sense of achievement. Does that answer your question answer all of your questions? Yes. Yes, I think it is. Thank you. Thank you. Thank you for the clarification. Thank you. Okay. Thanks. We have our next question coming from the line of Nikki Jie from China Renaissance. Please go ahead. Good evening, management. Congratulations on the strong quarter. I have a question about the competition. On one side, our peers are starting to offer value for money merchandise as well. And on the other side, total is actually also penetrating into the branded merchandise segment. Just wondering whether management can share your view on the competitive strategy for that? Thank you. Yes. I will start by say something about this other platforms copying this team purchase model, then Colin might make some compliment. We cannot speak for others who copying this team purchase model, but we are still seeing strong growth in our own models. We see growth in our active buyers, MAU, GMV, etcetera. So in fact, the recent trend of this many players adopting similar Team Precious format, actually, we believe they validate our business model. So I would say it's relatively easy to copy platform user interface or team purchase options. This is something we have been seeing for the last 2 years. But we believe what truly differentiate us from our competitors is a fundamental philosophy behind our platform. We have been focused on incentivizing our ecosystem counterparties, including those merchants, logistic providers, customer service agents, etcetera, in order to serve our user better and continuously offer them value for money products and a fun social dynamic shopping experience. And on top of that, what makes this possible is our distributed AI infrastructure. User preference are complex and multidimensional. This distributed AI infrastructure we have enable us to solve complex learning decision making problems based on the large scale social data that we have accumulated. And our system allows the source data set to change or update itself even during the course of the computation. And this capacity serves social simulation scenarios very well. And this is our competitive advantage. And as user interact with different people, our dynamic this distributed AI can understand them better and avoid narrower recommendation over time. So we are the pioneer in creating fun interactive shopping experience as well. We mentioned several times our Douro or chart has seen early success already. So we will always focus on innovating, disrupting ourselves to serve our users better. Instead of focusing on our peers or other noise in the market. So, in short, we remain confident that we are well positioned to serve the needs of our users as we see those copycats. Well, I'll add a few words. I think I personally feel being praised by the ones who's copying us. The more people are copying us, one way you would think they are stealing away the market share. But on the other hand, you should also think they are actually enlarging the market and they are helping educating a lot of our users. The beauty of Internet platform model is that it has a very strong network effect and a 1st mover advantage. So the bigger the pie is, the 1st mover will eventually take very significantly, if not all, of the whole pie. So I would actually encourage more people kind of copy and experiment to different variations. And it has been the case, as Tian pointed out, for the past 2 years. And I guess it will continue for another 2 years. And hopefully, along the way, some of them will invent some new formats, which we can learn from. And also, I'm fairly confident that we will create new formats as well, like other variations of Ping or other kinds of Duo orchard will come out. And with those new inventions, I also encourage others to try and help us to figure out how to fine tune these models and help educate our user base help educate new users and enlarge our user base. So is that okay? Yes. Thank you very much. Okay. Thank you. Thank you, sir. I would now like to hand the conference back to our speaker. Mr. Arnold, please take over, sir. Thank you, operator. Unfortunately, that's all the time we have tonight. Thank you very much for joining us. On behalf of the entire Pinduoduo management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please do reach out to us. Thank you for joining. This concludes the call. Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may disconnect now.