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, at which time, if you wish to ask a question, you would need to press star one on your telephone keypad. I must advise you that this conference call is being recorded today, the 20th of November, 2018. I would now like to hand the conference over to our first speaker today, Mr. Christian Arnell. Thank you. Please go ahead, sir.
Thank you, operator. Hello, everyone, and thank you for joining us today. Pinduoduo's earnings release was distributed earlier today and is available on our IR website at investors.pinduoduo.com, as well as through GlobeNewswire services. On the call today from Pinduoduo are Mr. Zheng Huang, 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&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 terminology such as will, expect, anticipates, future, intends, plans, believes, estimates, target, 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. Thanks everyone for joining us our third quarter results discussion. We just released our third quarter results. Our last 12-month GMV grew 86% year-over-year to RMB 344.8 billion. This was fueled by the growth in our annual active buyers, which more than doubled. Further compounded by a doubling in the annual spend per active buyer. Over the last 12 months, we had 386 million users make at least one purchase on our platform, an increase of 42 million users over the prior quarter. During the third quarter, we had an average of 232 million MAUs, an increase of 37 million users over the prior quarter this year.
Our revenue for the third quarter grew almost seven times over the same period in 2017 to RMB 3.4 billion, primarily driven by the growth in our online marketing services, which we only launched in April 2017. 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 the to their perceived value of those products.
We are very focused on improving the efficiency 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 unexpectedly 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 on the consumer demand. We hope that as our technology advances, our Team Purchase option could not only help aggregate demand quickly, but also be able to simulate the likely demand at a certain point in time and then relay this information to manufacturers. By equipping merchants with data analytics, they then have ample lead time to make adjustments and prepare the products for shipping.
Over time, based on our data, the merchants can also develop particular SKUs that are better suited to their target consumer tastes, and by cutting out the middleman, manufacturers retain more profits while our users get a better quality and a 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 needs. 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 5G, IoT, and AI. As 5G rolls out at 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 a 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 sell, and how much would it sell for. Making matters worse is convoluted distribution structure between farmers and the 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 a inferior product. Our solution today is to aggregate the demand of consumers through our Team 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 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 product directly to the 384 million 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 to [sell their both] their production quantity and quality.
This creates a win-win outcome, and it can have great impact on transforming agriculture and uplifting the poor. As an example, in Zigui 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 CNY 0.60 a kilogram, which is a shame as these are high-quality oranges.
With the onboarding of their produce on our platform, the farmers can realize a stable selling price of CNY 6 a kilogram. By year-end, Zigui County will cross the national poverty line. This is just one example out of the 730 impoverished counties we are working with. 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 aid farmers in impoverished counties. 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 first platform in China to strictly hold all our merchants to the standard of a 10X penalty on counterfeit goods. Of the 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 quote, unquote, "fake brands" never existed on our platform.
Of the other 30, we have finished our cleaning 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 residual buyer concerns. Since August, we have also upgraded our merchant onboarding system to integrate with the police identity and 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 the root and removing the 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 help merchants apply for their own trademarks and 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 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&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 on initiatives 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. We hope to share our results with the public at a later stage.
Finally, to end on a more lighthearted note, let's talk about Duoduo Orchard, which I mentioned last quarter. Duoduo 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 Duoduo Orchard is so strong that we now send out over 500 tons of fruit daily from farmers in impoverished areas like southern Xinjiang.
Duoduo Orchard allows us to delight our users while doing good and encapsulates our company's vision of offering the users a differentiated and entertaining shopping experience with value-for-money products. Last month, we celebrated the third-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, 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. Tian, please.
Thank you, Colin. Hello, everyone. Our total revenue in the third quarter was RMB 3.4 billion, growing strongly by 697% from RMB 423 million in the same quarter last year. The main driver of this growth was our online marketing services. 88% of the total revenue, or RMB 3.0 billion, were revenues from online marketing services, which increased significantly from RMB 290 million 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 CNY 398 million were revenues from commission fees, which increased from CNY 134 million 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 platform for merchants.
As we grow our buyer base and the breadth of our product selection, we 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 have dampened the growth in our monetization rate in the short term. 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 315% year-over-year to RMB 775 million from RMB 187 million 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 RMB 3.9 billion compared with RMB 471 million in the same quarter of 2017. In particular, sales and marketing expenses came in at RMB 3.2 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 RMB 306 million. The increase was primarily due to an increase in head count. Research and development expenses rose to RMB 332 million, primarily due to an increase in head count and the recruitment of very experienced research and development personnel, as well as an increase in our R&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&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 CNY 1.3 billion compared with a loss of CNY 234 million in the same quarter of last year. Non-GAAP operating loss was CNY 790 million, an increase from CNY 231 million during the same period last year. In the third quarter, net loss attributable to ordinary shareholders was CNY 1.1 billion compared with a loss of CNY 221 million in the same quarter of last year. Basic and diluted net loss per ADS were CNY 1.20 compared with CNY 0.52 during the same period of last year. Non-GAAP net loss attributable to ordinary shareholders rose to CNY 619 million compared with CNY 218 million in the same quarter last year.
Non-GAAP basic and diluted net loss per ADS were CNY 0.68 compared with CNY 0.48 for the same period of 2017. That completes the profit and loss statement for the quarter. Net cash flow provided by operating activities was CNY 250 million compared with negative CNY 682 million in the same quarter last year, primarily due to an increase in our online marketing services revenue. As of 30September , 2018, the company have a strong balance sheet with CNY 15 billion in cash and cash equivalents, an increase from CNY 3.1 billion as of 31 December , 2017. It is primarily from our IPO proceeds. On top of our cash balances, we also have another CNY 7.5 billion of short-term investments.
Altogether, we have RMB 22.5 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 the 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 US GAAP, and the audited financial statements included therein has been audited by Ernst & 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&A session. Thanks.
Certainly, sir. Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask an audio question, please press star followed by one on your telephone keypad and wait for your name to be announced. 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? My second question is about any updates about the new e-commerce law and about the implementation plan. Thank you.
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're strong in terms of user growth and all these metrics. We're 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. I think this is going to be a trend. 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 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 goods sales growth rate reported by NBS, which shows that we are continuing to gain market share at this moment.
Finally, on the trade war, I think we're fortunately relatively sheltered as our platform today is purely servicing domestic demand, and our merchants manufacturing base is also mostly located in China. With all that said, we are part to a bigger and larger economy and wouldn't be fully insulated, of course. 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. It has been discussed for a long, long time. Even it started even before PDD 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. There are some rules in the law which emphasizes 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 data privacy protection are also areas that we have spent a lot of efforts on internally.
We have always had a strong focus on removing infringing goods and merchants who spoil our merchant or consumer's experience on our platform. As I mentioned, I will be personally leading our research effort 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-commerce 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 and the procedures. It will take some time.
We don't think the very detailed rules will be rolled out very soon. 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 2 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? 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.
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? At what point in time in the forward could we expect this to trend back up towards 2.8 or 3%? Thank you.
Hi, Piyush. 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 two doublings. One is a doubling in our annual active buyers. The other is a doubling in the annual spending per active buyers. Our user base distribution closely mirror the population distribution of China. 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 a value for money and a 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. For those who have not used our app, we strongly encourage you to give it a try. Moving to the second part of this equation, which is the annual spending per active buyer, we still see a lot of runway for our annual spending per active buyer to grow. You know, as user mature, they came to trust the platform more and are willing to purchase a much bigger tickets items, and the effect is exponential.
This is something that we have observed from our internal data, it has increased our believing that our recent strategies are paying off with regards to improving the overall quality of our platform. On top of that, we are also enriching our product selection, There will be even more for our users to discover on our platform. During the Double 11 sales period, for example, we sold over 200,000 units of Apple latest phones. You know, the iPhone XS, XR, XS Max, et cetera, which demonstrated the strong purchasing power, some of our users have. Your second question is about monetization.
You know, as Colin mentioned, in order to create a 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 the positive way in the middle to long term. In general, we are not concerned by this quarterly fluctuation as we continue to experiment with different strategies and advertising product offerings.
As we believe our efforts will eventually benefit monetization in the long run, rather than the short run. After all, we only started the monetization, monetizing our platform in the middle of last year. The results so far have already demonstrated that monetization can grow very healthily, if merchants are seeing good returns on our platform. 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. 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 one 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? These brands will still take some time to get used to our platform. In the next few quarter, how should we think about, you know, the GMV contribution from the bigger brands versus the longer tail merchants? Second question is regarding the sales and marketing. Since that, you know, there is some leverage on the expense ratio achieved this quarter.
Given sales and marketing is also critical in terms of driving the top-line growth. If we look into fourth quarter, given this is seasonal promotional quarter, will the expense ratio be actually going up on a percentage of sales? 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 will answer the first question first, and maybe the second question, Tian 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 high-end, 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. 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 PR, negative or positive.
They all set up shops on our platform after seeing our continual momentum. We already have merchants such as Xiaomi, is a well-known cell phone brand, and also, like offline retailers like Gome, and also, even online retailers like Dangdang. They brought in a 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 iPhone 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. I believe it's just a matter of time.
There will be more and more different kinds of products, different kinds of brands coming onto the platform and serving a variety of our users' needs. With that said, maybe Tian, you take the second question first.
Yeah. 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. We look at our marketing spend as a long-term investment. It is difficult to provide guidance because it depends on expected returns. 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 brand 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 A/B testing. For each user group, we will track their behaviors after receiving the coupon, such as any change in user intent-retention or any change in user spending, et cetera. 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, in the second quarter, there was a FIFA World Cup, so we shifted some advertising budget to it, and we also continued to spend on the World Cup in July, which fed 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. We also do not want to constrain us in this regard. 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. 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 updates regarding this collaboration. Say, how much GMV comes from the Weixin access, the additional user growth from that channel, et cetera. I'm curious if there will be any further collaboration with WeChat next year, say, more direct and more frequent, powerful access maybe. Second question is regarding 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? 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 supportive 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 interesting products together. The working teams on both companies often discuss new user trends and the behavioral and the behaviors together. In terms of transactions and the orders, actually mostly, most happen on our own app, and this has been the case, for more than a year.
This is because as users shop on our platform, a couple of times, they would naturally download the app to enjoy more fun and cost-saving features on our app. While our 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 an existing team or our app directly. The app's experience is overall smoother, and it provides a richer set of features for our users. You also mentioned the icon on WeChat Pay. Especially on that, as we just launched that on October the 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. Overall, we are grateful to have Tencent as a shareholder and partner and a great platform for us to learn and grow. About future collaborations, I think 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.
Further the collaboration a lot more and there will be new innovations coming out of a closer relationship.
Yeah, 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, et cetera. 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. It's really hard to differentiate the GMV generated by this high-quality merchant because they improve the user experience as a whole, not only to their stores or to their specific product. Thank you.
Okay, thanks.
Pretty 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 in the review systems for different kind of merchants. Depending on the user feedback and how hard to get them, we'll sort of sometimes have a tailor-made commission rate or ads plans for them.
Thank you, sir. We have our next question coming from the line of Joyce Ju 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 efforts in cleanup, problematic products as well as, you know, those not authorized merchants. Could you help us quantify the impact on the overall platform, as well as on GMV or on 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 counterfeited goods, as we have mentioned our last call and this call, we have always been committed to fighting counterfeited 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, our platform, removed over 7.7 million problem products and pre-blocked over 3 million 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.
In fact, some of these merchants have already been arrested by the police. It's a constant battle, 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 the 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 it can go beyond the traditional image recognition in ascertaining the identity of merchants applying to our platform. In fact, I myself, like 15 years ago, as a student, I was learning the image recognition and the visual video recognition, and it's kind of interesting to me personally.
The knowledge I learned at school actually can be applied to some degree in practice, and it's helping the platform and also helping the society. 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, the majority of them are actually start doing the business out of their good intention. We at PDD 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, 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 Duod uo University to help train merchants and unlock their potential. Duod uo 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 tastes in their listings. This will also raise the effectiveness of their marketing spend and feedback into their willingness to spend our platform. As a result, it would improve, in fact, our long-term monetization capability.
With that said, I will also want to emphasize on the fight against the counterfeit goods. You asked about how sort of what's the effect or net effect this fight may have on our platform. I think I need to point out that, 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 negative things we faced, criticism we faced in August, it is a good test of our company value.
Cleaning up of our own platform and incentivizing the high quality and the 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. We take heart from the numbers that more and more users are still finding value in our platform.
In fact, because of our action, probably we gained more support from our users. As you can see from our 3Q numbers, our active annual buyers continue to grow very fast. Year-over-year, it's 144% growth to 386 million users already. Also it comes along with the increase of annual spending per active user.
This has gone up 99% year-over-year to reach almost 900 RMB per active user, per active buyer. These numbers are actually very encouraging to us. 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. In our case, looks like the result comes even faster than we expected. All of this just encourage us to fight against those bad behaviors even more harshly and more swiftly. It's a very good beginning of all of this. Tian, you wanna add something?
No.
No. Is there another question from here or?
Oh, yes.
Next question.
new question.
Yeah. Go ahead.
Go ahead
The follow-up questions was regarding the percentage of merchants who are now not paying the VAT.
Oh, okay. Well, Tian, you wanna answer, or you want me to answer?
Yeah. As a platform, I can say we are fully in compliance with the tax laws and regulations, and next year we will be compliance with the e-commerce laws. We're not in a position to track or to judge the merchants' tax liability.
I think, now I remember your, 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. I believe, I mean, the VAT tax is fairly common, and it wouldn't change. I mean, the rules are there. I mean, it wouldn't change significantly before the law put into place or after. If you are asking about its very specific details and then 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. With that, I think, all the e-commerce platforms are equal. They're the same.
We're the same, and, I don't think that sort of make any differentiation between different platforms.
Okay, thanks.
Thank you, sir. 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 investment priorities. 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 think we will have to step up in terms of investment, say maybe in logistics or any? 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? In terms of the priorities, that will be very helpful. How are we going to drive better conversion for our merchants in our feed? This is my first question.
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 there are more online leading platforms are expanding their presence in the fresh foods online, right? Also through, of course, the modification of the traditional business model. In terms of the competition on the user side, can you help us to understand our competitive edge here? Second is, in terms of execution. I think management has emphasized that this is, of course, it's a very fragmented market in China.
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 to determine the pricing, et cetera. And how do we support them with the logistics? That would be my two questions. Thank you.
Okay. It's not two questions. There's a bunch of questions. I'll try to answer them one by one.
Investment
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 a enabler to help our merchants, manufacturers, and the logistic 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 area, we started with actually. We started with agriculture. Once upon a time, we were selling, all the kind of 100% of the things selling on our platform were fruits and agricultural products. We should never forget about our roots, right?
If you look at the agriculture problem from the user's side, you asked, the kind of competitive advantage we have.
I'll give you an 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 CNY 1 per half kilogram.
the price per half kilogram in Shanghai or in Shanghai's kind of the neighborhood, it's around CNY 4-CNY 5 per half kilogram.
Mm. Mm. Mm.
That's a 4x-5x, right, from the field.
That's because there is 1st tier, 2nd tier, and 3rd tier middleman in between, right? There was a lot of moving around and repackaging and taking the things out and then repackaging them again.
Because we're able to assemble enough demand from the user side, it's, sort of like trying to aggregate demands 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. 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.
They're going to pay a little bit extra to the delivery companies. In our calculation, they probably pay CNY 0.6 per half kilogram because the one package, which usually comes with 2.5 or 3 kilograms each. The retail price on our platform is about CNY 2 per half kilogram. Which is almost half the price of the retail price downstairs in the supermarket. Even with this half the price, if you cut out the CNY 0.6 paying to the delivery companies, the peasants at the field is still earning CNY 0.50 more per half kilogram.
So, so this is-
I think the peasants earns more, and the users actually gets the garlic at a much cheaper price and even fresher.
it's a win-win situation.
Of course, 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. The current delivery system is actually.
is optimized for shipping household goods from Zhejiang Province, Guangdong Province to the cities or to the villages. Because of PDD 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 in trying to improve the delivery quality of those agricultural products, try to reduce the percentage of damage during the whole process. It's not a, 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.
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 on the field of cra- on the peasants part. This is the area we're kind of very excited about, and not only because it creates a good user experience, but we also think we are doing some social good, and it gives all the employees a better sense of sense of achievement. Does that answer your question or 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 Nicky Ge 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. On the other side, Duoduo 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.
Yeah, I will start by saying something about this other platforms copying this Team Purchase model, then Colin might make some comment. 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, et cetera. In fact, the recent trend of this many players adopting similar Team Purchase format, actually we believe they validate our business model. I would say it's relatively easy to copy a platform user interface or Team Purchase options. This is something we have been seeing for the last 2 years. We believe what truly differentiate us from our competitors is the fundamental philosophy behind our platform.
We have been focused on incentivizing our ecosystem counterparties, including those merchants, logistic providers, customer service agents, et cetera, in order to serve our user better and continuously offer them value for money products and a fun social dynamic shopping experience. On top of that, what makes this possible is our distributed AI infrastructure. You know, 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 allow.
Data set to change or update it itself even during the course of the computation. This capacity serves social simulation scenarios very well. This is our competitive advantage. As user interact with different people or dynamic, this distributed AI can understand them better and avoid narrower recommendation over time.
We are the pioneer in creating fun in active shopping experience as well. We mentioned several times our Duo Duo Orchard has seen early success already, we will always focus on innovating, disrupting ourselves to serve our users better, instead of focusing on, you know, our peers or, you know, other noise in the market. In short, we may 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. You know, the more people are copying us, one way you would think they are stealing away the market share. On the other hand, you should also think they're actually enlarging the market, and they're helping educating a lot of our users. The beauty of internet platform model is that it has a very strong network effect and a first mover advantage. The bigger the pie is, the first mover actually will eventually take a very significant, if not all, of the whole pie. I would actually encourage more people kind of copy and experiment with different variations. It has been the case, as Tian pointed out, for the past two years.
I guess it will continue for another two years and hopefully, along the way, some of them will invent some new formats, which we can learn from. Also, I'm fairly confident that we're well create new formats as well, like other variations of paying or, other kinds of Duo Duo Orchard will come out. 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. Is that okay?
Yeah. Thank you very much.
Okay. Thank you.
Thank you, sir. I would now like to hand the conference back to our speaker. Mr. Arnell, 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.