Ladies and gentlemen, thank you for standing by, and welcome to Pinduoduo's Fourth Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to first speaker today, Mr. Jason Zhu. Thank you. Please go ahead, sir.

Yes, thank you, AJ. Hello, everyone, and thank you for joining us today. Pinduoduo's earnings release was distributed earlier and is available on the IR website at investor.pinduoduo.com as well as through GlobeNewswire services. On today's call, our CEO, Chen Lei, will make some general remarks on our performance for the past year and our strategic focus going forward; our VP of strategy, David Liu, will then elaborate further on specific strategic initiatives; our VP of Finance, Tony Ma, will then take us through our financial results for the fourth quarter and fiscal year 2020 ended December 31, 2020. So before we begin, I would like to refer you to our safe harbor statement in the earnings press release, which applies to this call as we will make certain forward-looking statements. Also, this call includes discussion of certain non-GAAP financial measures, so please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to GAAP measures. Now it is my pleasure to introduce our Chief Executive Officer, Chen Lei. Please go ahead.

Thank you, Jason, and hello, everyone. Thank you for joining us on our earnings call for the fourth quarter and fiscal year 2020. Pinduoduo delivered another quarter of strong growth and solid execution as our users continue to trust us with their purchases. Our annual active buyers increased by 57 million in Q4 to reach 788 million for the trailing 12 months. User engagement has also accelerated. Our MAU increased to 720 million. Total number of orders placed on our platform increased by 94% to reach 38.3 billion in 2020. Total revenues, excluding revenues from merchandise sales for Q4, was RMB 21.2 billion or an increase of 96% from a year ago. Non-GAAP operating loss narrowed in Q4 from the same quarter a year ago. 2020 was a challenging year for Pinduoduo, as it was for many others. The COVID-19 pandemic, which by now has already stretched over two winters, has put our team and platform through a tough test since we were founded six years ago. It has been a humbling experience for us. I'm glad that we have responded quickly and responsibly to continue serving our users better, thereby winning their invaluable trust. I would like to thank our users and our team for their continuous support. As we transition from 2020 to 2021, I would like to share some takeaways and do a recap of this very long year. First, 2020 has dictated our view from the get-go, which is that the separation of the online and offline worlds is increasingly irrelevant. With the advent of mobile Internet, the online/offline are just parts of a single world, branded together more seamlessly and complementary to each other. Unlike with desktops, smartphone users could go online anywhere, anytime, and for any length of time, users no longer had to carve out time and be confined to a specific place, which was common practice for the desktop era. This is why six years ago, we insisted on developing a mobile-only platform for our users. In fact, we are the only one among Internet companies of our scale to be mobile-only today. If anything, COVID-19 has accelerated this trend. It was already happening fast, even pre-COVID-19. Today, a younger generation that grew up with smartphones are not even conscious about the economies and seamless transitions they make each day between online and offline. Among other age groups, China's highly advanced online payment system and mobile communication tools have also made it nearly impossible to do anything purely offline. This has, in turn, helped increase familiarity and acceptance of its online world. With COVID-19, the adjustments that we have had to make to our routines have only expanded online space and expedited its integration with offline space. Consumers who frequent brick-and-mortar shops have turned to online platforms like Pinduoduo to purchase food and other groceries, as well as to preserve their connections to wet markets, which Chinese families visit not just to get groceries but as a social activity. Users who were able to travel back home to spend Chinese New Year with loved ones have also tapped on us to deliver gifts. They either send care packages of food and clothing to loved ones living elsewhere or order the taste of home for themselves. We rose to the challenge of delivering the best service to our customers. We went further than we had before. Over the Chinese New Year holiday, we worked with merchants to stay open and dispatch orders. We also worked with logistics partners to ensure that around 1 million deliverymen were deployed to deliver parcels. We fulfilled the surge of orders for hometown delicacies. As for fresh produce and groceries, we provided consumers with most of what they wanted quickly and affordably. Consumers did not have to stock up before the long Chinese New Year break. In this way, we have filled a gap left by brick-and-mortar shops, thereby bringing value to our users. Going forward, Pinduoduo, as a pioneer in this space, will build on the lessons we have learned and double down to improve our offerings to our users. We will always be on the lookout for new ways to create more value for them. Second, 2020 has highlighted that we can do more for the agriculture sector and rural communities. Pinduoduo started off by selling fresh produce online. It was a conscious decision because we found them to be a necessity, and optimizing their production, distribution, and consumption would bring the greatest widespread benefit. The online penetration of the agricultural sector has also consistently lagged industry averages. We have never lost sight of this beginning, and agriculture has consistently been a strategic priority for us. We are proud to be China's largest agricultural platform. Our GMV for agricultural products doubled to more than RMB 270 billion in 2020. Twelve million farmers sold their produce directly to consumers via our platform. We were among the leading technology companies commended for making outstanding contributions to the war on rural poverty. We see this as affirming our investment to bring solutions to optimize every part of the agricultural value chain. In 2020, we also launched livestream sessions for farming communities and dedicated channels to promote their products to relieve difficulties brought about by COVID-19. We observed that order volumes were so high that our servers and delivery partners had issues fulfilling, especially in the summer. To solve this, in August, we launched Duo Duo Grocery, our next-day grocery pickup service that helps local farmers and distributors sell directly to consumers, increasing sales and cutting waste and cost for customers. Pinduoduo's vision of Costco + Disney started from agricultural products in the farmland. We are now already the largest agricultural platform in China. We can and should do more. We hope that in the next stage, Pinduoduo will become the world's largest agricultural and grocery platform, and make groceries sourced from around the world affordable and available to our users. To this end, we aim to build out an agri-focused logistics infrastructure platform that will reduce waste, lower costs, and speed up delivery for agricultural products. This is a work in progress. We expect to make a few more years of investment before it can realize its full potential and achieve efficiency. We share the vision of contributing to China's agricultural sector with technology to help increase the resilience of the food chain and stave off the looming global food crisis. We will continue to invest in agriculture and food technology and look into global investment opportunities in alternative proteins, food safety, and precision farming. Third, 2020 has also made us more committed than ever to continue to promote digital inclusion of rural communities and the disadvantaged. Pinduoduo has created a level playing field for businesses of all sizes, including in the agricultural sector, where margins are thinner. In addition, livestreams and online business on our platform have created new roles that prioritize different skill sets and allow inclusion of users who have otherwise been excluded. For instance, agriculture is traditionally labor-intensive. Women and physically weaker individuals may not be able to participate in it. Livestreams and online business operations do not carry the same physical requirements and these individuals are able to participate in them. In fact, of our stores actively engaged in the sale of agricultural products, over half are managed by women. This is a win-win situation for everyone. With our commitment to social responsibility, we definitely want to and will do more here, including providing further training for them to sell effectively on our platform. Last but not least, many of you have learned that Colin will be stepping down from his Chairman role effective today. On behalf of the Board, we would like to thank him for his leadership and contribution to Pinduoduo in the past six years. We will cheer him on as he explores new frontiers for Pinduoduo in the years to come. As the new Chairman of the Board, I would like to assure everyone that our strategy remains the same, which is to stay true to our value benefit and provide a more cost-effective and faster experience to serve our users on our platform. We are proud that we have become the world's largest e-commerce platform by user numbers. We will work hard to deliver even better results in the years to come. Now let me turn it over to David to provide an update on our recent initiatives.

Thank you, Lei. Hello, everyone. I'll further elaborate on some points Lei made just now. First, on our continued efforts to improve the agriculture value chain; second, on our revenues from merchandise sales; and third, on our ESG priorities for 2021. Improving the agriculture sector to benefit our users, that's farmers and consumers, is a central and strategic priority for us. We take a systems-based approach to this and devote substantial resources to identifying and implementing improvements at all stages of the agricultural value chain. As Lei mentioned, we share the vision of transforming agriculture in China with technology and aim to increase food security. To begin at the upstream, we work with institute partners and universities to introduce more technology to farming. In 2020, we launched the inaugural small agricultural competition in partnership with China Agricultural University, where teams from around the world participated in investigating the use of artificial intelligence in optimizing strawberry planting. The competition identified cost-efficient and scalable technology that can potentially be standardized across China. The winning team has started to commercialize these research findings. Last year, Pinduoduo also supported the Global AgriInno Challenge 2020, which was co-organized by the Food and Agriculture Organization of the United Nations at Zhejiang University. The competition attracted over 150 teams from around the world to put forward innovative solutions to challenges in the distribution and sales of agri-food products during COVID-19. AquaFarms Africa, an agritech startup based in Conakry, Guinea, won the competition with its technique of aquaponics, which combines fish farming with soilless vegetable growing, allowing the production of food and vegetables that are normally imported. We will continue investing in the promotion of digital agriculture and precision farming going forward. At the downstream, we have helped over 12 million farmers sell directly to our 788 million consumers. We trained more than 100,000 new farmers who returned to their rural communities from urban areas to operate online businesses and revitalize their hometowns. We have committed to training another 100,000 new farmers over the next five years. To relieve difficulties brought about by COVID-19, we sponsor livestreaming sessions for poverty-stricken farming communities and establish dedicated channels to promote their products. We continue to work with these communities to provide direct access to our consumers. Circling back to the midstream, as mentioned in our earnings call last quarter, the rapid increase in orders for fresh produce, particularly leafy vegetables via our platform, surfaced the urgent need to develop a dedicated logistics infrastructure to deliver fresh produce to our users in optimal condition, at compelling prices and within 24 hours. This new solution goes beyond streamlining distribution. It will be different from existing ones, and it will take time, resources, and multiple iterations for us to eventually arrive at what works best. However, we believe that we have made some progress in the right direction through Duo Duo Grocery, our next-day grocery pickup service that intelligently connects local farmers and distributors directly to local consumers, thereby reducing spoilage from storage and transport. We have been increasing the number of agriculture producers and regional distributors and expanding the number of pickup points. However, there's still so much more we can do. We will need to make substantial investments in people, technology, and potentially capital assets. While our preference is to work with strategic partners towards this goal, we are prepared to make equity investments to expedite the required development or purchase assets in places where they're unavailable. We are prepared to persevere in this endeavor even though it could take some time to pay off. As we are confident of how it will benefit our users, we hope that investors will be patient and supportive of this challenging but meaningful endeavor. Next, I would like to say a few words regarding our revenues from merchandise sales. This quarter, you will have noticed that we are reporting an additional revenue line item, merchandise sales. This line item captures the revenues generated from the 1P trials we started last year. In our 1P trial, we aim to temporarily fill the gap of missing products our users need on our platform while we look for merchants who can offer these products on our marketplace. We have no plan to grow this business. We expect this line item to remain a very small percentage of total GMV we generate. As of Q4, it is less than 1% of total GMV we generated. Now onto our ESG priorities for 2021. As we continue to manage the challenges caused by the global health crisis, we are pausing to reflect on what more we can contribute to a more sustainable and equitable future. Specifically, we have identified the following ESG priorities for 2021. Firstly, to continue to promote digital inclusion in rural communities. As China's largest agriculture platform with 788 million users, we firmly believe in playing our part to empower people and businesses to take part in the digital economy. Since our inception, we have connected farmers directly with consumers, coached them on setting up their stores online, provided them with access to demand, and helped them increase household income. Our efforts have helped more than 100,000 young men and women return to their hometowns and become e-commerce-savvy new farmers. They have gone on to become champions of digital inclusion, often catalyzing a multiplier effect and wealth creation for their local communities. We have also partnered with China Post and farmer cooperatives to bring agricultural products from remote areas to the national market to boost rural incomes. In this three-way collaboration, China Post local offices opened online stores on Pinduoduo and sourced directly from agricultural cooperatives. This approach has proven very effective in helping tackle rural poverty. Looking ahead, we are continuing our efforts to work with local communities, regulators, and academics in modernizing farming practices. Additionally, we see technology, such as the findings from our smart agriculture competition last year, playing a more central role in driving China's agriculture revolution. Secondly, we are continuing to empower women and the physically challenged. Pinduoduo's zero additional commission policy and our SKU-oriented recommendation approach creates a more level playing field for smaller entrepreneurs. We have seen many success stories on our platform from women and physically challenged entrepreneurs who might otherwise be excluded from the offline job markets. As Lei mentioned, we are and will continue to provide more training to enable these entrepreneurs and look forward to helping them create further success stories on our platform. Thirdly, we are continuing to make our service greener and more efficient. Pinduoduo is committed to protecting the environment. As we mentioned in our ESG report last year, we are investing in technology and working with our logistics partners to optimize delivery route planning. We are also investing in the research and development of green packaging design and materials. We're working with our merchants to eliminate excessive packaging and providing them with more suitable environmentally friendly solutions, such as different sizes and biodegradable materials. We see ourselves making a positive difference for the environment, especially as order volumes on our platform rise. Now let me pass the floor to Tony to discuss our financial results.

Thank you, David. Now let me take you through our financial results for the quarter and the fiscal year ended December 31, 2020. Our annual active buyers for the last 12 months ending December 31, 2020 grew by over 200 million from the end of 2019 to 788 million. Our MAUs in Q4 grew by 77 million from the prior quarter to reach 720 million or an increase of 50% from the same quarter in 2019. Our MAUs in Q4 as a percentage of our annual active buyer exceeded 90% for the first time, which we see as a reflection that we are satisfying the needs of more users. Our last 12-month GMV for 2020 grew to RMB 1.67 trillion, representing 66% year-on-year growth. In comparison, our average annual spending per active buyer increased 23% to RMB 2,115. The lower rate of increase should be considered in the context of substantial increase of 203 million active buyers over the past year. Most of these new users are still building trust with our platform and have contributed less than a full year’s worth of purchases in 2020. We continue to observe that as our users season on the platform, they make purchases across more categories and increase their average spending over time in each category. We did observe an increase in purchase frequency in 2020, partly due to the grocery business we launched. In 2020, our platform generated a total of 38.3 billion orders or an average of 49 orders per active buyer. This is an increase of 44% from a year ago. As the average order value of groceries is lower than our platform average, our AOV came down 15% to RMB 43.5 in 2020 as compared to RMB 51.1 in 2019. Please note that starting from Q1 2021, we will retire the disclosure of quarterly GMV. But we will continue to disclose full-year GMV, which is the practice adopted by our peers. Since our IPO, where we were operating as a straightforward marketplace model, we have reported both quarterly and annual GMV on the same basis as our peers in order to provide the public with a meaningful barometer to assess our progress as a new market entrant. However, as the complexity of our business grows, quarterly GMV is increasingly less relevant to evaluate our overall business, nor is it reflective of our strategic priorities, especially when we do not manage our business against quarterly GMV targets. As our revenues grow in scale and with the introduction of new initiatives such as door-to-door grocery and our 1P trials, we would encourage investors to focus on our P&L and cash flow metrics going forward to assess our ability to generate sustainable value. In terms of P&L, our total revenues in this quarter ended December 31, 2020 were RMB 26.5 billion, up 146% from RMB 10.8 billion in the same quarter last year. As David mentioned, we reported revenue from merchandise sales of our 1P trials this quarter. Whilst the contribution of our 1P trials to our GMV is negligible, we are reporting it as a separate line item as it accounts for 20% of our total revenue in Q4. To give you an apples-to-apples comparison, excluding revenue contribution from 1P trials, our total revenue grew by 96% to RMB 21.2 billion in Q4 2020. The main driver of this growth was our online marketing services. Online marketing services revenue was RMB 18.9 billion this quarter, up 95% compared to the same period last year, due primarily to an increase in merchants' recognition of our platform's capability to help them reach their target buyers effectively and efficiently. Our merchants are spending more on our platform because of our constantly improving services and the increasing user traffic. Our online marketing services revenue as a percentage of our GMV in the last 12 months ending December 2020 was 2.9% as compared to 2.7% for the same period ending in December 2019. We are pleased to see the growing endorsement by our merchants and our users. Our transaction service revenue this quarter amounted to RMB 2.3 billion, which is up 105% compared with the same period last year. On a trailing 12-month basis, our transaction service revenues as a percentage of our GMV has been quite stable at around 0.3%. Now moving on to cost. Our total cost of revenues increased from RMB 2 billion in Q4 2019 to RMB 11.5 billion this quarter. The increase in our cost of revenues was mainly due to the costs associated with the 1P merchandise sales, costs related to the operation of Duo Duo Grocery, such as warehouse rental costs, and higher costs of cloud services, call center, and merchant support services. The total operating expenses this quarter were RMB 17.1 billion as compared to RMB 10.9 billion in the same quarter of 2019. On a non-GAAP basis, our total operating expenses as a percentage of our revenue, excluding the 1P contribution, has been declining from 112% to 94% to 76% for Q4 of 2018, '19, and 2020, respectively. The gradual improvement continues to demonstrate the operating leverage in our business model. Our sales and marketing expenses this quarter increased to 59% to RMB 14.7 billion from RMB 9.3 billion in the same quarter of 2019. This is mainly due to an increase in online and offline advertisement and promotions. As we continue to invest in user engagement and mindshare, on a non-GAAP basis, our sales and marketing as a percentage of our revenue, excluding 1P trials this quarter, was 68%, as compared to 84% and 103% for the same quarter in 2019 and 2018. The decrease in sales and marketing as a percentage of revenue, excluding 1P trials, has demonstrated a scale of economy, and the fact that our strategy of having a higher bar for ROI in our sales and marketing investment has worked well. In fact, since we started Pinduoduo, we have cumulatively spent RMB 81 billion in sales and marketing expenses. On a non-GAAP basis, this averages to about RMB 103 per active buying user we have accumulated to date. We will continue to consider our sales and marketing decisions holistically and invest whenever we see opportunities that meet our ROI requirements. On a non-GAAP basis, our general and administrative expenses were RMB 153 million, an increase of 26% from RMB 121 million in the same quarter of 2019, primarily due to an increase in headcount. Our non-GAAP research and development expenses were RMB 1.56 billion, an increase of 65% from RMB 943 million in the same quarter of 2019. The increase was primarily due to an increase in headcount and recruitment of more experienced R&D personnel as well as an increase in R&D-related cloud services expenses. On a non-GAAP basis, our R&D expenses as a percentage of our revenue, excluding the 1P contribution this quarter, were 7.3% as compared to 8.7% for the same quarter last year. Now to sum up, the operating loss for the quarter was RMB 2 billion on a GAAP basis, compared with an operating loss of RMB 2.1 billion in the same quarter of 2019. Non-GAAP operating loss was RMB 1.1 billion compared with an operating loss of RMB 1.3 billion in the same quarter of 2019. Net loss attributable to ordinary shareholders was RMB 1.38 billion as compared to a net loss of RMB 1.75 billion in the same quarter last year. Basic and diluted net loss per ADS were RMB 1.13 compared with RMB 1.52 in the same quarter of 2019. Non-GAAP net loss attributable to ordinary shareholders was RMB 185 million compared with RMB 815 million in the same quarter last year. Non-GAAP basic and diluted net loss per ADS were RMB 0.15 compared with RMB 0.72 in the same quarter of 2019. That completes the profit and loss statement for the fourth quarter. Our net cash flow from operating activities was RMB 14.9 billion compared with RMB 9.6 billion in the same quarter of 2019, primarily due to an increase in online marketing service revenues. Net cash used in investing activities in this quarter increased from RMB 11.5 billion in 2019 to RMB 26.6 billion. The increase was primarily due to our decision to invest a portion of our cash reserves in cash management products. As of December 31, 2020, the company has RMB 87 billion in cash, cash equivalents, and short-term investments. As of the end of February 2021, USD 712 million of our 0% convertible bonds due in 2024 has been converted into equity. Thank you, operator. We are ready for questions.

We have the first question from Binnie Wong from HSBC.

Congrats on a strong quarter to end 2020. I have two questions. The first concerns your user base. It's impressive that you have 788 million users, which exceeds your competitors and ranks among the largest. Can you explain the strategies you employed to achieve this growth and how you plan to maintain this level of user engagement? My second question pertains to community group purchases. I believe you mentioned it's a third-party model. I would like to understand the accounting details—specifically, how commissions are paid to community group leaders. Is there a portion of this that goes through your marketplace platform? I'm seeking clarity on how the accounting functions and regarding profitability, could you provide insight into any losses we might be experiencing on the gross profit side? It would be helpful to understand the investment needs for the remainder of the year, especially in relation to the infrastructure and logistics that management has referenced. Thank you.

Thanks, Binnie. Why don't I ask Lei to address the first part of your question, and then I will have Tony talk a little bit about accounting, but some of the technical stuff, we can take it offline as well.

So we continue to observe very good momentum in terms of our user growth. In each of the past four quarters, we added on average over 50 million annual active buyers for each quarter of them. That being said, as we are approaching the 800 million user landmark, it's inevitable that our user growth will slow down. As we have always said, we are less focused on user numbers; we are more focused on building users' satisfaction and trust by bringing them the best shopping experience and value-for-money products. We believe that as long as we can continuously serve our users well, we will keep growing, thanks to their trust in us. One factor is our priority on the agriculture sector. Not only is agriculture the least digitized by mobile Internet, but it’s also the greatest widespread benefit that we can create as a big platform. We are now China's largest agriculture platform, and in the future, we will commit to do more for agriculture and the rural communities. The other thing I talked about earlier is that we see the future as this integrated world of online and offline. Definitely, we are targeting this kind of new world. So think about it, you really need to look at this wider retail market. Today, China's total retail sales for consumer goods reached 39 trillion in 2020, and it is expected to grow at 5% per year over the next five years. If you take a look at our numbers, our GMV stands at only 4% of it. So I believe that as consumers' behavior of online and offline continues to integrate, the opportunities for us will definitely continue to expand.

Let me pick up on the second question regarding Duo Duo Grocery, I guess. As you mentioned, Duo Duo Grocery operates as a 3P offering. From an accounting point of view, we generate transaction service revenues for the services provided to our merchants and some farmers. The contribution in Q4 and fiscal year 2020 of the total grocery products is immaterial. Most of the costs associated with running Duo Duo Grocery operations, such as warehouse rental and delivery logistics, are captured in our cost of revenues. Just to note, Duo Duo Grocery is a very young business; we just started it a few months ago, and it is still evolving. But we are very confident about this business model, as it brings significant value to our consumers and other participants in this value chain. A few key drivers we can think of on the user engagement side are if we are able to streamline unnecessary layers of distribution, which traditionally would take up meaningful markups. So a more efficient supply chain would also mean less spoilage. All these factors combined will definitely bring additional value to all the stakeholders involved in this business model. But like I said, the development of the infrastructure and the whole process will take time. Therefore, profitability won't be a target for us to set for Duo Duo Grocery.

Yes. And Binnie, I just want to add on top of that, to say that PDD at the end of 2020, we are the largest e-commerce platform by users already. And as we have always talked about, focusing on engagement really is the core of our strategy, and we are confident now with an even further enlarged base that is continuing to grow at good momentum. We should be able to drive even better engagement. Duo Duo Grocery really plays into that by giving us an additional access point to address the needs that we previously couldn't meet. So we have high hopes for the Duo Duo Grocery business because it is integral. It is an extension of our overall platform. As the model evolves, I think the roles of the different constituents of the Duo Duo Grocery ecosystem may also evolve as well. So stay tuned and bear with us. We think this could be tremendous opportunities. We are confident we can execute on this, but it will take some iterations to find the perfect model.

The next question comes from the line of Thomas Chong from Jefferies.

I think in the prepared remarks, management comments about Duo Duo Maicai has the merchandise sales, which is a 1P trial business, and it is not significant to the GMV. So I just want to get a sense about when the business is getting bigger and bigger, should we expect the merchandise sales to continue to decline in absolute amount in the coming quarters? And on that front, is it possible to give us some color about the GP margin of this 1P trial business as well as the overall Duo Duo Maicai GP margin as well? And my second question is about the GMV growth. I think management also talked about the focus on monetization. How should we think about the GMV per buyer going forward?

Sure, Thomas. You raised several points in your questions, so I’ll address them step by step. First, I want to clarify that the merchandise sales we report as additional revenue is not related to Duo Duo Grocery or Duo Duo Maicai. We will refer to Duo Duo Grocery in English from now on. The 1P merchandise sales business is independent of Duo Duo Grocery. We noticed consumer demand on our platform that we couldn't fill with existing merchants, so we temporarily stepped in to ensure users find the products they want at the right prices. This approach is only a temporary measure, and we don't plan to grow it into a larger business. In the fourth quarter, 1P business accounted for less than 1% of our GMV and we expect it will remain a small portion of our GMV going forward. As for Duo Duo Maicai, as Tony mentioned, it’s a new initiative and the business model is still evolving. I want to emphasize that Duo Duo Grocery is not a community group purchase business. This distinction is crucial because it influences how the economics function. Unlike typical community group purchases where neighbors or leaders organize orders for a commission, Duo Duo Grocery relies on our 788 million active users placing orders independently through our app. This is why we view Duo Duo Grocery as an integrated part of our e-commerce platform. The economics and roles of group leaders differ significantly. We created Duo Duo Grocery to meet the growing consumer demand for convenient and affordable groceries, and it’s now available in 300 cities across China. An essential element of our offering is the agriculture-focused logistics infrastructure we are developing. The goal is to minimize waste, reduce costs, and expedite the delivery of agricultural products. We are utilizing technology to enhance quality control, sourcing, and demand forecasting, which can help cut waste and boost supply chain efficiency. We are collaborating with third-party providers to make necessary investments that will help us achieve a turnaround time of less than 24 hours for orders. Our experience over the past 5.5 years indicates that by staying focused on anticipating and fulfilling users' needs, we will continue to receive their support financially. Lastly, regarding gross margin trends, we won't provide specifics on individual businesses, but overall, excluding the small influence of our first-party merchandise business, this segment is currently operating at a loss. If we disregard the impact of the 1P business, the bottom line margins in the fourth quarter are comparable to the non-GAAP net margins we reported for the third quarter.

I have two quick questions. One is I wanted to follow up on what exactly is the item category in this 1P trial that we have? And then second, could management comment on this Duo Duo Grocery performance? I know it is still early, but how do you rate the performance so far for the fourth quarter? Is that in line, above, or below your internal expectations?

Sorry, Alicia, I was distracted. But on your question regarding the 1P business, the product categories are quite diversified. How we approached it was really by identifying items we execute on our platform where we know there are clear consumer demands but we aren't able to source sufficient merchants for. So the product categories are quite diverse, and the strategy itself is not category-specific. The second thing I would say about Duo Duo Grocery, as both I think Lei and Tony have commented, this is a very long-term commitment for us because we think the opportunity is immense and we believe we can really create value here for users. So, as such, I think we are experiencing good progress as we move forward, as I mentioned earlier in my response, the service is now available across the nation in over 300 cities. We feel comfortable with the pace of the rollout on the geographic footprint. What is more interesting from our perspective, however, is to build out the corresponding infrastructure network. It's easy to drive user growth, particularly for a platform like us, as we have a natural advantage from a traffic perspective. The question we are more concerned about is what investments do we need and how can we deliver the right type of user experience to address the opportunities we see. One of the elements of success for the Duo Duo Grocery business, in our mind, is twofold: sourcing and forecasting. How much you can sell or what price you can sell the SKUs ultimately depends on your ability to forecast demand properly and organize the supply chain in the most efficient way possible. The other part of it is infrastructure that can be aligned appropriately, largely for agricultural and fresh produce, such that we can arrange fulfillment and delivery in less than a 24-hour cycle. We are still in the very early innings of our approach to the grocery business in China. I think we are pleased with the progress we've made so far, but there’s definitely still a lot more we can do.

Just a little bit add on the synergy question of the last question. Just wondering about the kind of synergy between Duo Duo Grocery and your original marketplace business in terms of the supply chain we should expect in the longer-term future. And what's your progress now? And also, wondering if that could be the key competitive edge that differentiates us from other competitors in the longer run.

Thank you, Natalie. As we have discussed, we see Duo Duo Grocery as an integrated part of our marketplace. It is an extension of the experiences that we can offer. From what we've said about being focused on building infrastructure, the idea is to figure out how we can address users' needs better, leveraging the existing express delivery infrastructure network as well as developing this less-than-24-hour fulfillment infrastructure for Duo Duo Grocery. If we can efficiently organize both these delivery logistics and forecast the appropriate SKUs to consumers based on their use case, we see a great opportunity to drive synergy between the marketplace today and the Duo Duo Grocery scenarios. Certainly, on the supply chain side, most of the suppliers today are local. There are 12 million farmers on PDD today who are supplying our users on a nationwide basis. These could all be potential suppliers into the Duo Duo Grocery scenario, provided that they have enough support in logistics and business intelligence coordination. Over time, we see infrastructure supporting not only locally driven suppliers but on a nationwide basis, leveraging the supply chain available on PDD's marketplace, also extending beyond purely agricultural produce. This is the reason why Lei pointed out that we aim to become China's largest agricultural producer. In that process, we aspire to become the world's largest grocer.

My first question is about a comment in Colin's letter to shareholders where he mentions that the traditional approach to competing through scale and efficiency has its inevitable limitations. I wonder if you could elaborate on that. In the interest of time, could you discuss the impact of Duo Duo Grocery on the broader business? For example, your take rates have reached a record high of 3.23%, and you provided some insights on that. Additionally, your sales and marketing spend is one of the lowest we've seen at 77.8% when excluding merchandise sales and focusing only on marketing services, which seems to indicate positive progress. If you could elaborate on that, and also touch on the impact of Duo Duo Grocery on the gross profit line, that would be appreciated.

Piyush, the way you should think about the impact of Duo Duo Grocery on the business model overall is highly synergistic. In the sense that we now have incremental scenarios for fulfilling user needs that we haven't previously been able to address. That increases our ability to address those needs over time. Because of that, we certainly expect engagement overall on the platform to continue to improve. As more users become familiar with our platform, we also expect their spending to improve. One thing you may notice is that from an average order value perspective, for the year, it has actually decreased year-on-year over the prior year. However, that must be considered in the context of the significant number of user additions and increased order numbers. We are confident that as our user base and engagement levels continue to improve, the trend will go in the right direction, resulting in more operating efficiency, as you identified. In the interest of time, why don't we take one last question?

We have the next question from the line of Eddy Wang from Morgan Stanley.

The question is also related to the grocery business. So as you mentioned, Duo Duo Grocery is not a community grocery business. But if we look at the competition in the fresh grocery side, actually, you are competing with other community grocery players. As you said, the next step will be to invest in this kind of asset-heavy warehouse and agriculture-focused logistics. I just want to know whether or not in terms of these players, their next focus will be on infrastructure investment and user engagement instead of user acquisition, which may have been very aggressive in the past six months? And how do you view the competition in fresh groceries, online fresh groceries this year?

Sure, Eddy, thank you for that. We're obviously not in a position to comment on other players' strategy. But let’s focus on what we are doing. If you look at what PDD is today, we have 788 million highly active users. Our MAU for the quarter was at 720 million, almost 90% of our annual active users. We are confident that the user engagement metrics will keep trending up. As we have communicated in the past quarters, growing the user base has never really been our priority, but the entire year has focused on engagement. With better engagement and trust-building on the platform, user numbers have grown significantly. It's inevitable that user growth will begin to slow down, but it is crucial that we focus on engagement and satisfy users' needs. Duo Duo Grocery provides us an opportunity to address additional grocery needs in a more timely manner and a compelling value. We recognize that Duo Duo Grocery appropriately requires us to become more operationally heavy. We are engaging with warehousing and delivery logistics. Thus, investments in offline operations will be a key success factor. In considering the competitive dynamic, don't lose sight of the strategic advantage we have with almost 800 million users. We will keep focusing on our strengths, understanding what consumers need, and recommending appropriate products based on their expectations for value. So we are fully committed to putting the right infrastructure in place to win this business because we think the opportunity is immense and highly synergistic with the marketplace business. We continue to see a very long runway for growth. With that, we will wrap up the call for the evening. Thank you very much, everyone, for your time, and we look forward to speaking again in the next quarter.

Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may all disconnect now.