Earnings Call Transcript - PDD Q3 2020

Operator, Operator

Thank you, operator. Hello, everyone, and thank you for joining us today. Pinduoduo's earnings release was distributed earlier and it's 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 third quarter of 2020 and our strategic focus going forward. Our VP of Strategy, David Liu, will then elaborate further on our specific strategic initiatives. Our VP of Finance, Tony Ma, will then take us through our financial results for the third quarter ended September 30, 2020. Before we begin, I'd 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 discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains the reconciliation of the non-GAAP measures to GAAP measures. Now, it is my pleasure to introduce our Chief Executive Officer, Chen Lei. Lei, please go ahead.

Chen Lei, CEO

Hello, everyone. Thank you for joining us on our third quarter results announcement. Pinduoduo turned five years last month, reaching another milestone on this incredible journey. This year, we continue to deliver strong user growth and build trust and engagement with consumers. We are facilitating more sales every day with the support of our users, merchants, and business partners. For the 12 months ended September 30, 2020, Pinduoduo's revenue yield of 731 million active buyers and generated nearly RMB1.5 trillion GMV. During our fifth anniversary campaign early October, the peak daily order volume surpassed 100 million, driven by increased demand for agricultural products. Strong consumer activities continue into Q4. We expect this growth to continue with our focus on user experience. We have observed an increase in the frequency of visits, the number of categories visited, and average daily time spent, which contributed to our average annual spending per user increasing from RMB1,857 in Q2 to RMB1,993 in Q3, despite a net add of another 48 million active buyers. Fueling our growth scale today, it still feels like we just started yesterday. We recognize that Pinduoduo's achievement today benefited from the growth and evolution of China's Internet, the development of the retail industry, and increased consumption power. We always believe that it is the consumers who make enterprises, not the other way around. This is why from the beginning we have built our platform with the principle of people first and benefiting all in mind. Over the past five years, we witnessed growing support for the new interactive mobile commerce experience that we championed. Our mobile platform has become a mainstream online shopping app, ranked first on various app stores. This is because China's Internet base has grown more vibrant, consumers have become more sophisticated, and they want the benefit of being served by more than one platform. They are constantly looking out for more options for better value and differentiated experiences. Our message is clear and straightforward: continue to serve customers and lead their changing preferences. This relentless focus on serving consumers has enabled us to attract more than 700 million users in record time. We also continue to be guided by the principle of being more open. We are committed to being an open and fair platform for our service providers and merchants. We are pleased to see an increasing number of enterprises choosing to work with Pinduoduo. In the past five years, more brands have joined hands with Pinduoduo to offer customized design and value for money SKUs for our users. At the same time, more own M have used our platform to gain relative consumer exposure. Some of them have even launched their own brands leveraging the consumer insight they can get from Pinduoduo. Lastly, and most importantly, Pinduoduo has also become China's largest online platform for agricultural products by enabling direct selling from farms to the dining table. We are mindful that with scale comes responsibility. To improve transparency and to inform our stakeholders of our progress in managing environmental, social, and governance matters, we did issue our first ESG report. Our corporate social responsibility efforts are guided by the goal of promoting digital inclusion. By bringing more people into the digital economy, we believe the local communities can benefit from new jobs and new market opportunities, sharing the rewards of greater productivity and convenience. As we look forward to the next phase of our journey, we remain steadfast in our vision of offering consumers a greater selection of value-for-money products through a fun and interactive discovery experience. We continue to observe how consumer behaviors are evolving and evaluate how technology could help. We are committed to adapting to change and pushing for innovation. We're prepared to invest capital and resources in our platform, supply chain, and ecosystem to realize this vision. There remains a lot we can do, particularly with agricultural products. Post-pandemic, we have noticed that consumer habits of grocery shopping in a wet market or supermarket are shifting. Many of our users have shifted to online channels for their daily staples. We saw a surge in orders for agricultural products in the first half of the year, not just for fruit and other root vegetables that can be easily transported, but also for leafy vegetables and delicate foods. We started to ask ourselves if more could be done for our users, given our familiarity with the sector and being China's largest online agricultural platform. The more we learn about the industry, the more we realize how much more we can do. The current logistics network has optimized to deliver steady manufactured goods, but not agricultural products. Today, Pinduoduo can leverage existing logistic networks to transfer certain produce, such as apples and potatoes across China within two to three days. Some merchants have even found ways to transfer eggs with minimal damage. As a result, we have made it possible for consumers across China to enjoy agricultural produce in good time and at good prices. However, in July and August, as more users started to buy leafy vegetables on our platform, the company experienced significant increases in complaints. Many packages sustained damage from heat and poor handling, which did not meet our users' expectations. We realized that we were only at the very beginning of our path to create new value in China's agricultural supply chain. One of the key factors and a critical roadblock is building a logistic infrastructure specifically for agricultural produce. Therefore, we decided to be more focused and launch the Duo Duo Maicai channel. We gather localized information on agricultural produce available nearby, identify and source from qualified vendors, and create a list of products we offer daily. We aggregate daily orders, provide the fulfillment services to enable pickup on location, and handle after-sale services. Each step in the whole supply chain and logistic workflow needs to be perfectly executed and live to ensure great value for our users. Of course, many aspects of Maicai operations leverage the existing e-commerce know-how of Pinduoduo, but others require significant development. It is not just about matching demand with supply, but matching demand with the most suitable supply, delivering next-day at attractive prices to our users. We are committed to driving a new infrastructure build for agricultural products for all consumers and farmers in China. Our management team believes that Maicai is highly aligned with our long-term vision for China's agriculture industry. You could say it touches our hearts because we started Pinduoduo with agricultural produce. It's now a natural extension of our mobile commerce platform, an integral part of our highly engaged ecosystem. For cities where the function is available, we feature Maicai on our main app. We want to offer our users the option to purchase curated natural SKUs at lower prices and pick up locally the next day. At the same time, they can continue to enjoy a fun and interactive experience and discover other categories of value-providing products. The insight we gain from our main app enables us to better create products for Maicai, which, in turn, provides us with a better understanding of what customers value in deciding how to buy their daily essentials and staples. As we invest in the infrastructures of agricultural produce, we are also providing technology and deploying talent to tackle the challenges that Maicai brings. We believe that it will pay off for the long-term value of Pinduoduo. As we mentioned last quarter, Pinduoduo is interested in partnership and investment opportunities in the whole value chain and infrastructure of agricultural goods. We're committed to helping farmers earn more and consumers save more. We will continue to leverage the insights we have gathered from the past five years to make agricultural value trends more efficient and benefit all. And now, let me ask David to share some details on our recent initiatives.

David Liu, VP of Strategy

Thank you, Lei. Pinduoduo has built one of the world's largest online communities in the past five years by focusing on bringing consumers more savings and more fun. As user behaviors evolve, we have also adapted to meet and exceed their expectations. Five years ago, we started our team purchase model, which led users to pin and save together as they browse. Two years ago, we started our New Brand Initiative, which enabled capable manufacturers to launch their own brands with products tailored to our users' preferences. And now, we are pushing ahead on an even bigger user need: fresh, affordable agricultural products. We never choose to do what is the easiest but what is right. We have made important progress on our New Brand Initiative this past quarter. We launched the New Brand Initiative as part of our C2M effort to help capable merchants and manufacturers gain valuable insights into their target customers, design and manufacture tailor-made products for our users, and leverage our interactive channels to sell with more accurate predictions of the price and quantity they can potentially achieve. It is a new road into reverse and just-in-time manufacturing, which can potentially solve inventory and supply chain inefficiencies that have been troubling the retail sector for decades. Seeing the results, we started helping these capable and proven merchants and manufacturers establish their own brands and teach them, not just about the new channel we have created at Pinduoduo, but also marketing tools and tips tailored to the increasing number of users we have accumulated. Even though brand making takes time, we hope that with our help, these new brands could become national or even global brands one day. China has been the world's factory over the past 20 years. It has largely been following the conventional workflow of receiving orders, making products, conducting quality control, and shipping them out to brands globally. Manufacturers do not have full insights into how brands plan their production and sales cycle, which means their revenue and potential are always capped by brands. COVID has forced many of these capable manufacturers to turn back to the domestic market. We see a great market opportunity that these manufacturers could become important brands in the next ten years. We are happy to see that today we have worked with more than 1,500 companies, launched more than 4,000 SKUs, and generated over 460 million cumulative orders. This quarter, we pledged to provide more marketing support and expand the program's coverage to 5,000 companies. We are targeting to offer 100,000 customized C2M SKUs with aggregate GMV of RMB1 trillion by 2025. To facilitate that, we plan to continue our investments in technology to enable them. We have created a unique prediction model, taking into account users' changing behavior on Pinduoduo platform in different regions of China. We plan to make it more user-friendly for our merchants and manufacturers to take advantage of the insights we have and are confident about gaining. Further, we are exploring more software services to make it easier for merchants to streamline their operations, such as raw material analysis, inventory prediction, supply chain tracking, and partial industrial automation. You would have already seen the reduction in the product cycle for apparel. It is possible to have a style or a model designed, manufactured, and displayed to consumers in just 15 to 20 days. We hope to offer such capability to our ecosystem partners in the future and extend it to other categories. Besides C2M efforts, we recently launched a new function, Duo Duo Maicai. It is another area where we believe it will pay off in the long term. We view the entire agricultural value chain in three parts: production, transportation, and consumption. What we have done in the past five years was to connect farmers directly with our users, i.e., the consumption part. No doubt our efforts have created efficiencies, cut unnecessary intermediaries, and helped farmers earn more and users save more. However, we have not addressed other fundamental roadblocks, such as the lack of a dedicated logistics infrastructure for agricultural products, farm productivity, and food safety. In the past, Pinduoduo operated our own fulfillment network, so we have some experiences in this. But what we need to build now is of a totally different scale. It is an infrastructure build-up, leveraging our prior experience. We are working closely with warehousing service providers and delivery fleets to meet the demand in next-day delivery requirements. Sometimes we have to step in to design and manage the warehouse workflow ourselves. We also plan to explore more demand-driven localized coaching options at reasonable costs in order to deliver a better consumer experience. We are already investing in people and warehouse and fleet management systems, and when needed, we are willing to invest in key players in the warehousing and coaching logistics sectors to accelerate the improvement of the entire agricultural value chain. With more localized supplies being fulfilled more efficiently, we can meet users' daily consumption needs with better quality produce in shorter time. In addition to logistics infrastructure, we are making bigger R&D investments in product creation, sourcing, and demand aggregation to further enhance our understanding of user needs and creation accuracy. We're taking into account the mode of our consumer engagement from Maicai and its impact on pricing and convenience. By improving our ability to predict demand, we can work with the local top distributors of agricultural goods to source directly from upstream farmers cheaper and faster. Over the past five years, we have already accumulated substantial insights into agricultural goods, which can give us a kick start as we fine-tune Maicai. Another important area we have not done enough in is production. As a technology company populated even more than half by engineers, we are exploring technological solutions for food production and have started to explore various investments in agritech. We believe there is a huge market opportunity for smart agriculture to address challenges in food supply, food safety, and labor shortages. We are well-placed to facilitate the adoption of agritech, given the demand visibility we have and our access to a vast community of agricultural producers. We will explore the commercial viability of new agritech solutions our potential partners have. For more interest in innovation, we initiated the smart agriculture competition this year, which gathers top minds in AI and agronomy worldwide to develop growing methods that can generate the highest yield while economizing on inputs, such as labor. The tech competition pits four teams of AI growers against four traditional foreign teams in growing strawberries. The winner will be determined based on profitability, reliability, scalability, and technical merits of the agritech solutions they have deployed. Through this competition, we hope to inspire more young farmers and researchers to develop localized smart agriculture solutions. By working with the winner to implement their solution on an actual farm, we hope to demonstrate that their agritech solution is suitable for smaller-scale Chinese farms and we plan to standardize solutions for broader deployment across China. We see a bright future for agriculture in China. We generated RMB136 billion of GMV in this category in 2019 and expect it to hit RMB250 billion this year. Consumers have come to identify PDD as the go-to platform for agricultural goods. Our aim is to lead the industry in innovation and be a driving force in agriculture infrastructure buildup. Our efforts in agriculture and manufacturing sectors seek to create long-term structural changes that will improve our users' experience and contribute to the value creation of the industry. They are not the easiest, but they certainly are the right things to do. We believe that our hard work will pay off in the long run. Now, let me invite Tony to walk through the details of our third-quarter results.

Tony Ma, VP of Finance

Thank you, David. For the 12 months ending September 30, 2020, our gross merchandise volume increased by 73% to nearly 1.5 trillion RMB from 840 billion RMB a year earlier. This growth was driven by an expanding user base and increased spending per user, with our average monthly active users in the third quarter rising by 74.6 million from the previous quarter to 643.4 million, reflecting a 50% increase compared to last year. Our annual active buyers for the same period grew by 36% year-over-year, reaching 731.3 million, which is a net addition of 195 million in the last year. The annual spending per active buyer increased by 27% to 1993 RMB from 1567 RMB the previous year. This rise was somewhat tempered by a large number of new users who contributed less than a year’s worth of purchases to our gross merchandise volume. Our strategy focused on enhancing user engagement has led to increased user activity in Q3 and higher average spending per active buyer. During the third quarter, China's economy continued to recover from the pandemic, and consumer behaviors began to normalize, resulting in increased offline retail activities. In contrast to the 22% year-over-year increase observed during the high season of Q2, online sales of physical goods grew more slowly at 17% in Q3 compared to last year. Our GMV growth continued to outperform the industry, demonstrating a rise in GMV growth in Q3. For the nine months ending September 30, 2020, total parcel shipment volume in China grew rapidly by 27.9% compared to the same period last year, in contrast to a mere 15.1% increase in online sales of physical goods. This trend reflects a decrease in average value per parcel, in line with strong demand for lower-priced items, such as household necessities and agricultural products on our platform. We have consistently provided promotions and support in this category, as they represent what consumers need most. These frequently purchased items have helped us build trust and engagement with our users, leading to better responses and conversions for other promotional activities. Our total revenues for the September quarter reached 14.2 billion RMB, an 89% increase from 7.5 billion RMB in the same quarter last year, primarily driven by robust online marketing services. Our revenue from online marketing services and other sources was 12.9 billion RMB, up 92% year-over-year. Transaction service revenue grew by 66% to 1.3 billion RMB. We observed strong merchant advertising activity in Q3, which offered attractive returns on investment due to heightened user engagement and more appealing advertising products. The implied monetization rate for the last 12 months ending September 30, 2020, was 3%, consistent with the same period last year, and up from 2.9% for the 12 months ending in Q2 2020. Now regarding our costs, total revenue costs this quarter rose by 78% from 1.8 billion RMB in the same period last year to 3.3 billion RMB for this quarter, resulting in a gross margin of 77%. This increase was primarily driven by higher bandwidth and server costs, employee costs, and other expenses associated with our online marketplace and additional revenue. Our total operating expenses for the quarter reached 12.2 billion RMB, compared to 8.5 billion RMB in the same quarter of 2019. Sales and marketing expenses rose by 46% to 10.1 billion RMB from 6.9 billion RMB in the same quarter of 2019. On a non-GAAP basis, sales and marketing expenses accounted for 69% of our revenues, down from 89% in the same quarter last year. This year, our focus is on enhancing user engagement and capturing more consumer attention. We have actively pursued sales and marketing initiatives in Q3 wherever we identified internal ROI opportunities. Users who have been with our platform longer tend to shop more often and across a wider range of categories, also spending above our average annual spending per user. We attribute the increase in average annual spending per user in Q3 to our investments made in previous quarters to nurture engagement with our rapidly growing buyer base. Our current investments in users will continue to position us favorably for the long term. General and administrative expenses were 368.6 million RMB, down from 436.6 million RMB in the same quarter of 2019 due to the absence of one-off expenses related to our rural poverty initiatives last year. On a non-GAAP basis, G&A expenses represented 1% of revenues in Q3. Research and development expenses amounted to 1.8 billion RMB, a 60% increase from 1.1 billion RMB in the same quarter of 2019, mainly due to a rise in headcount and ongoing recruitment of talented engineers, along with an increase in cloud service expenses. On a non-GAAP basis, our R&D expenses constituted 10% of revenue in Q3. Technology remains fundamental to our operation, and we plan to increase our investments in engineering talent and technological capabilities in the future. Key R&D initiatives include developing demand forecasting systems for agriculture, creating databases for C2M manufacturers, and enhancing logistics planning systems. Consequently, our operating loss narrowed to 1.3 billion RMB on a GAAP basis, compared to an operating loss of 2.8 billion RMB in the same quarter of 2019. The non-GAAP operating loss was 339.8 million RMB, compared to a non-GAAP operating loss of 2.1 billion RMB in the same quarter of 2019. For the quarter ending September 30, 2020, we recorded net non-operating income of 475.6 million RMB, slightly up from 465.2 million RMB in the same quarter of 2019, primarily due to higher interest income offset by losses from fair market value changes in long-term investments and interest expenses related to our outstanding convertible bonds. We have excluded the impact of fair market value changes and convertible bond amortization, along with share-based compensation, from our non-GAAP presentation. To summarize, the net loss attributable to ordinary shareholders was 784.7 million RMB on a GAAP basis, an improvement from a net loss of 2.3 billion RMB in the same quarter of 2019. Basic and diluted net loss per ADS was 0.66 RMB on a GAAP basis, down from 2.0 RMB in the same quarter of last year. On a non-GAAP basis, we saw a net income attributable to ordinary shareholders of 466.4 million RMB, improving from a non-GAAP net loss of 1.66 billion RMB. Non-GAAP basic and diluted net income per ADS were 0.39 RMB and 0.33 RMB, respectively, this quarter, compared to a non-GAAP net loss of 1.44 RMB in the same quarter last year. Duo Duo Maicai is still a nascent initiative, with minimal impact on our Q3 results. We carry out Maicai using a third-party model, recognizing transaction service revenues for facilitating sales while incurring logistic costs as part of cost of goods sold and additional sales and marketing expenses. That concludes our profit and loss statement for this quarter. Our net cash flow from operating activities this quarter was 8.3 billion RMB, compared to 2.6 billion RMB in the same quarter of 2019, largely driven by a rise in online marketing services revenues. Our operating cash flow has remained positive annually since 2017. As of September 30, 2020, our cash reserves, including cash, cash equivalents, and short-term investments, totaled 45.6 billion RMB, up from 41.1 billion RMB at the end of December 2019. We allocated a majority of our cash reserves to highly liquid short-term investments to achieve better cash yield while maintaining the flexibility to strategically withdraw and deploy capital as needed. This concludes our prepared remarks. Operator, we are now ready for questions. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong, Analyst

Hi. Thanks, management for taking my questions. Can you comment about our strategies in community group purchase? And how we see the competitive landscape going forward? And how big is the addressable market? Thank you.

Chen Lei, CEO

Hi, thank you for your question. First, I want to clarify a common misconception. Duo Duo Maicai is not just a community group buy business. While it is location-based and customers pick up their orders nearby, it differs from previous community buying models we've seen over the last seven years. We believe Maicai is a natural extension of our current operations, leveraging our expertise in agriculture and its ecosystem. We introduced Maicai to address a new customer need that our current infrastructure cannot fulfill. Since the first half of this year, we have noticed a strong demand for more convenient and frequent purchases of fresh groceries. Our current offerings do not meet these changing preferences focused on fresh and next-day consumption. Therefore, we are operating Maicai as a separate business, integrated with our existing platform, allowing users to choose from various services, such as next-day pickup or door-to-door delivery within three to five days. This is a crucial need for our customers. We are dedicated to investing in the infrastructure necessary to deliver fresh produce from farms to homes both quickly and cost-effectively. Regarding the landscape, we need to consider two aspects. Firstly, I believe a significant portion of consumers will complete their grocery shopping online in the future. This shift towards online grocery shopping is reminiscent of the changes we witnessed five to seven years ago with apparel. Back then, it was hard to imagine that many consumers would choose to shop online for clothing, try it on, and return items. I anticipate something similar will occur in grocery shopping. The second aspect is the synergy between Maicai and our main eCommerce platform, as Maicai has a high purchase frequency. Our users will engage more with our platform, allowing them to access a wider range of product categories offered on our eCommerce platform.

Operator, Operator

Thank you. Next question is from the line of Joyce Ju of Bank of America. Please go ahead.

Joyce Ju, Analyst

Good evening, management. Congrats on the very strong results this quarter and thanks for taking my questions. I would like to take this opportunity to get more clarity on your strategic new initiative, Duo Duo Maicai. As we all know, like you mentioned in the opening remarks, you actually chose the 3P marketplace model to conduct your business, but we've seen 1P models and 3P models. Could you elaborate a little bit more on why the platform decided to do so? Is there any special advantage or key advantage you have seen, like why you particularly chose this model? And how are we differentiated compared to other major players on your entrance in this market? Additionally, I think a lot of industry experts are commenting this is a business that actually heavily relies on the supply chain. From our company perspective, we typically have a lighter business model. So, are we going to spend much money to invest in logistics or supply chain? How big will be the CapEx related? On the investments front, I would also like to know what's the plan for the sales and marketing budget investment to acquire new users for this business? Thanks.

David Liu, VP of Strategy

Joyce, thank you for that question. It's very comprehensive. Let me point out a few things. First of all, as Lei mentioned in his remarks, we see Duo Duo Maicai as a natural extension of our e-commerce model and our emphasis on agriculture. What we have seen is that as the country emerged from COVID-19, consumer behaviors are changing, and they are looking for alternatives to wet markets and supermarkets, desiring quick delivery times, so next day, while continuing to get great value. As the PDD platform addresses various use cases, we recognized certain deficiencies. For example, the next day delivery isn't something that PDD's platform has optimized for to date. Therefore, the extension of Duo Duo Maicai feels very natural for us. We can't comment on other players' decision to enter similar businesses. Whether they are more like a community purchase or not, from our perspective, what we see in Duo Duo Maicai is really addressing this different way of engaging with consumers, fulfilling that different type of usage patterns and needs. And you are right to point out that we do think this will require a much better infrastructure tailored specifically for agricultural products. So, we are prepared to go heavy in building and accelerating the development of agricultural infrastructure. Today, we have teams on the ground working with third-party service providers. We have been getting them involved in establishing SOPs for warehouses and getting involved in workflows. We have already invested in warehouse and fleet management systems and are looking for ways to continue optimizing that, leveraging the technology platform from our e-commerce platform. However, we anticipate that there will be scenarios where we need to make certain capital investments to facilitate the development of that infrastructure, including potentially build-out, but more localized coaching operations that are demand-driven and therefore cost-efficient. We are looking to leverage existing service providers to do this, but in some instances, we may need to develop and test cases ourselves. Let me pause there and let Tony address the question regarding sales and marketing on Duo Duo Maicai.

Tony Ma, VP of Finance

Yes, and as David just mentioned and also Lei mentioned in his remarks, Duo Duo Maicai is a natural extension from our main e-commerce model. So, we will budget our sales and marketing investment for Duo Duo Maicai in the same way we invest in our e-commerce platform. The guiding principle is we focus on the long-term ROI we can generate from the business, rather than short-term profitability.

Joyce Ju, Analyst

Got it. May I have a quick follow-up? Can we get clarity on the current overlap between suppliers for our main PDD marketplace and Duo Duo Maicai, specifically in terms of agricultural or fresh produce suppliers?

David Liu, VP of Strategy

Joyce, I'm actually not sure if that question is that meaningful. The reason I say this is that we offer Duo Duo Maicai as an integrated part of our e-commerce platform. The merchants who work with us in the Maicai scenario can also be merchants online. It depends on their capabilities and whether they can work with on the localized scenario in Maicai. They are more than welcome to continue dispatching nationwide, working with the delivery forces on our platform. I would also say that our credibility as China's second largest e-commerce platform by users gives us incredible leverage with merchants, and we see many merchants looking to work with us in localized scenarios as well.

Operator, Operator

Next question, please.

Operator, Operator

Yes. Next question is from the line of Eddy Wang of Morgan Stanley. Please go ahead.

Eddy Wang, Analyst

Hi. Thank you to the management for addressing my question and congratulations on the impressive results. I have a follow-up question regarding Duo Duo Maicai. Could you provide us with insights on the momentum of Duo Duo Maicai over the past three months? Additionally, how do the average order value and average selling price of this business compare to the purchasing behavior of users in agricultural products? Thank you.

David Liu, VP of Strategy

Sure, Eddy. Thank you for that. As you rightly pointed out, the Duo Duo Maicai is still a very new business for us. We are also fine-tuning our operations, so we are not going to be able to comment on specifics. But you would note that the Maicai function is now available across most of the provinces in China, and we featured an entry way for Maicai on the main app itself very prominently. So, we are seeing good momentum and good user pickup and great adoption. In particular, the visibility on the main app is also helping to drive our traffic to the Maicai business itself. You also asked about the AOV; I think it's fair to say that the Maicai scenario is catered to address the daily grocery needs of consumers on our platform. So, naturally this lends itself to a higher frequency of purchases and engagements. It's true that the AOV today for those orders is lower relative to our average AOV on our platform; however, it is compensated by a much higher frequency. The way we look at the Maicai business is that if we continue to serve the consumers well, the frequencies will increase, and as we build out the infrastructure over time, the AOV will also increase. We see tremendous potential in this business, and for now, we are just focused on providing them the best experiences for their daily grocery needs.

Operator, Operator

Thank you. Next question is from Piyush Mubayi of Goldman Sachs. Please go ahead.

Piyush Mubayi, Analyst

Thank you for taking my question. Congratulations, Lei and David, on the superb results. When I look at the active buyer numbers you obtained of 731 million, you are not that far from the market leader. The question now is, after what we've seen thus far, what is the next step you'd like to pursue? The second question is we're trying to better understand the community buying side. What is the profitability level? If you go through on a city-by-city basis, could you just take us through examples of where profitability could be? Or how should we be thinking of the cost side of the equation? I'd appreciate that. Thank you.

Chen Lei, CEO

Okay. Let me first address your first question. We currently have 731 million active customers. It's inevitable that growth will slow down. That said, we see room for us to grow in terms of expanding our user base. However, the bigger issue is that we are still lagging behind in user share and their trust with us. This is a key area we are focusing on now. I believe it is also one of the reasons we launched Maicai: to meet their changing behaviors and preferences. I do believe that this is a very key approach for us to win their trust, looking at the structural trend as a result of the high mobile Internet penetration. This whole process is also expedited by the COVID-19 pandemic. Our younger generations, they fall into this mobile Internet era, and to them, there is no kind of consumption of online or offline; all these things are integrated. If you look at mobile payment and live streaming, they are good examples. Things, technology, and online channels typically provide a bit higher efficiency. I do believe that most activities will focus online. We hope to capture this kind of opportunity. However, one thing that won't change is that, in order to succeed in the long run, you really need to constantly meet user satisfaction and expectations. It boils down to two factors for us: one is value for money, and the other is the expanded interactive experience the user will have. So hopefully, that answers your first question.

Tony Ma, VP of Finance

Thank you, Lei. As for profitability on Maicai, I think Maicai is a long-term opportunity for us to address and fulfill user needs, which are today limited by the agricultural infrastructure. We are committed to invest and keep innovating in this initiative, trying to reduce the additional layers in the process and cut some waste to create more value for users. With that, the economic outlook for Maicai will be very different from today. For us, the monetization model can be built along with the evolution of this journey, which may include advertising but is not limited to it. In summary, I think it's too early to tell after only two or three months of operation. There is much to be determined after we have rolled out and covered all the cities in China. We will keep all investors informed about our progress.

Alicia Yap, Analyst

Hi. Good evening management. Thanks for taking my questions. Congratulations on the strong results. My question is also related to community grocery shopping. Just looking at the competitive landscape, what is your PDD's commitment and the success factors of winning this battle? Just wondering how much of the investment in infrastructure and supply chain that we need to do as well. Will we consider seeking partnerships with other players or leverage cooperation with ride-sharing players or even cloud sourcing partners to support our delivery capability? Thank you.

David Liu, VP of Strategy

Thank you, Alicia. As I mentioned earlier, Duo Duo Maicai is core to delivering the type of consumer experience we believe they want. We think the crucial component to fulfilling those experiences is to build dedicated infrastructure on a localized level for agricultural products. We don't see this type of infrastructure readily available in the market today. This is why we are committed to going deeper to necessary to build this. We will evaluate what is available and see how we can work with partners as we believe being an open platform will be the most efficient way to deliver the right experiences. We will be informed by how the demands of consumers evolve and how we can best fulfill that need. This may mean we need to invest in specific players to help facilitate or accelerate that deployment. We think these investments will pay off in the long term for our shareholders.

Tony Ma, VP of Finance

Let me comment on this. Pinduoduo is still a very young platform. In today's remarks, I believe both Lei and David mentioned the numerous opportunities we're pursuing. When we speed up on these investments, it's likely to impact near-term profitability. These opportunities include investing in agriculture infrastructure, technology, talent, and continuous investment in sales and marketing to further engage with our increasing user base. We won't focus solely on profitability on a quarterly basis; however, we are confident that all these investments will generate long-term value for our shareholders.

Operator, Operator

Thank you, everyone for joining us on the conference call today. If you have any further follow-up questions, feel free to reach out to the IR team. Thank you, and have a great day.

Operator, Operator

Thank you, ladies and gentlemen. That concludes the conference for today, and thank you for participating. You may now all disconnect.