Pinduoduo: Inevitable slowdown in growth and decline in profit margins!

The following is a summary of the second quarter financial report conference call for Pinduoduo in 2024. For financial report analysis, please refer to " "Legend" Instantly surpasses into "Ghost Story", Is Pinduoduo Really Collapsing?! "

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1) Business Progress:

① Strategic Update:

• In the first half of 2024, the company adhered to a strategy of high-quality development, continued to invest in the platform ecosystem, achieved positive results, and made long-term investments to support both ends of the platform.
• Facing future challenges such as changing consumer demands, intensified competition, and global environmental uncertainties, the company will enter a new phase and will need to increase investments to maintain high-quality development, with expected decline in future profitability.

② Supply Chain Optimization:

• Strengthening the supply chain foundation and improving supply chain efficiency are key to future development.
• Promoting the Agricultural Cloud Project to support local agricultural products reaching consumers directly, and improving the agricultural supply chain through supporting agricultural intelligence and research projects.

③ Product Innovation: The company collaborates with high-quality brands and manufacturers to launch customized products, meet diverse consumer needs, and drive the development of new and existing brands .

④ High-Quality Development:

• Supporting small and medium-sized enterprises to innovate using digital capabilities, and promoting high-quality development of local manufacturing.
• The company will strongly support quality merchants, incentivizing merchant participation in high-quality development through measures such as reducing transaction costs.

⑤ Business Assessment and Strategies:

• Global business faces intense competition and uncertainties brought by external environmental changes, with inevitable future business fluctuations and profit declines.
• The company will focus on core competencies, enhance supply chain, customer service, and compliance capabilities to cope with the complex global environment.

⑥ Support for Supply and Demand Sides:

Supply Side: Increase support for quality merchants and brands, guide more traffic to high-quality products through measures such as the billion subsidy plan. Focus on improving supply chain quality and efficiency, promote agricultural and industrial regional development, support local brands and quality agricultural products.

Demand Side: Focus on consumer demands, enhance cost-saving and service capabilities, upgrade after-sales service, provide consumers with a better shopping experience. Launch new promotional activities, meet diverse consumer preferences, introduce more product categories to third and fourth-tier cities, and promote regional consumption upgrades.

⑦ Agricultural Strategy and Local Support:

• Support the rural appliance "Going to the Countryside" plan, invest 1 billion RMB to drive growth of local brands in categories such as electronics and home appliances
• Further promote the agricultural strategy, initiate the Science and Technology Institute project and Smart Agriculture competition, and promote the commercial application of agricultural research.
• Use digital technology to help local brands adapt to market demand and achieve sales growth.
• Actively take on social responsibility, provide direct discounts and knowledge dissemination, and support the development of agriculture and other industries.

2) Financial Highlights

① Future Outlook and Strategic Focus: The company will continue to invest in the high-quality development of the platform, support premium merchants, optimize the supply chain, and enhance customer experience.

Revenue growth in this quarter has significantly slowed down, and it is expected to further slow down in the future due to competition and global uncertainties. Management emphasizes that although profitability may fluctuate or rebound in the short term, a decline in profitability in the long term is inevitable. The company will continue to focus on long-term development and ecosystem building.

2.2 Analyst Q&A

Q: Total profit growth was strong this quarter, but management mentioned in their remarks that due to competition, there will be increased investments leading to profit fluctuations. What are the profit plans for the future? Additionally, regarding shareholder returns, are there plans for stock repurchases or dividends?

A: We have mentioned multiple times that profit growth in the past few quarters should not be taken as long-term guidance, as it is a result of business investments not aligning with financial reporting cycles. Additionally, we are currently facing intense competition and external environmental changes, which will bring business fluctuations and slow down revenue growth. We are transitioning to high-quality development and need to patiently invest in the long-term health of the platform. In the next 12 months, we will allocate significant resources to support premium merchants. In the short term, profitability may fluctuate, but overall it will gradually decline. Supporting merchants in building a high-quality supply chain and a strong platform ecosystem is crucial. In the long term, this will bring a virtuous cycle to the platform, so even if short-term profits are affected, we will continue to invest. Regarding shareholder returns, the company is still in the investment stage, facing intense competition and external uncertainties. We believe now is not the right time for stock repurchases or dividends, and we do not consider doing so in the next few years.

Q: Management emphasized the merchant ecosystem and support policies in their remarks. How should we understand and evaluate the merchant ecosystem? Why is this the focus of the next stage of the platform?

A: Our platform is a mutually dependent community, including merchants, consumers, and the operations team. Merchants are important partners for us to serve consumers. As industry competition intensifies, we, as a platform, need to support premium merchants to promote the healthy development of the ecosystem while ensuring product quality and fairness. Therefore, we will firmly shift towards high-quality development, support merchants with product and technological innovation capabilities, and reduce transaction fees for these premium merchants by approximately 10 billion RMB in the next few years, while strengthening platform governance and removing illegal merchants.

We grow together with premium merchants, provide consumers with high-quality products and services, form a virtuous cycle, and achieve the long-term healthy development of the platform. To achieve this goal, the management unanimously agrees to make long-term investments to build a healthy, sustainable ecosystem.

Q: Your company's global business growth is strong, but some external data show that growth and investments in certain markets are slowing down. In the remarks, the company appears relatively cautious about the future development of global business.Q: Is this actively managing risks? Can management elaborate on their considerations in this regard?

A: Our global business is still growing and actively exploring new opportunities, currently operating in over 70 markets. We always consider compliance as the foundation of our development, and in the past few quarters, we have invested heavily in creating a secure shopping environment.

As our business progresses, we have observed that external environmental changes are accelerating, non-business factors are increasing their impact, and uncertainty is significantly rising. At the same time, competition in the e-commerce industry is intensifying, expected to become even fiercer. This intense competition, coupled with external factors, will inevitably cause some disruptions to our global business. However, we remain committed to enabling more consumers to benefit from the advantages of the digital economy. Faced with a complex environment, we will focus on our core strengths, continuously enhance our supply chain, customer service, and compliance capabilities to better meet the needs of global consumers and achieve high-quality development of our global business.

Q: We have noticed that the competitive environment is very intense. Has this affected the company's growth? In this environment, how will the company adjust its investment focus? How does management view the company's positioning?

A: In the past few quarters, competition in the e-commerce sector has intensified, which is a normal phenomenon. In this environment, our revenue growth has slowed down, with a decrease in revenue growth in the second quarter, indicating that high growth rates are not sustainable. Consumer demands are becoming increasingly diverse, and all e-commerce platforms are adjusting their strategies to address these changes. Each platform has its strengths and invests heavily to meet these demands. We will focus on our core strengths and continue to drive high-quality development.

For e-commerce platforms, a robust supply chain is key to providing quality services. To meet diverse demands, we focus on the basics and innovate the supply chain. In the second quarter, we continued to promote agricultural projects in major production areas, helping local agricultural products establish brands and supporting small and medium-sized agricultural businesses. In addition to agricultural products, we also support manufacturers through digitization, collaborate with premium brands, launch customized products, drive innovation, and high-quality development. We will strongly support high-quality merchants dedicated to business and innovation, reduce transaction costs, and leverage platform supply chain capabilities to enhance merchant quality and efficiency.

We believe that optimizing and upgrading the supply chain is key to meeting consumer demands and ensuring the long-term healthy growth of the platform.

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