PDD Holdings Inc. (NASDAQ:PDD) Q1 2023 Earnings Conference Call May 26, 2023 7:30 AM ET Company Participants Lei Chen - Chairman and Co-Chief Executive Officer Jiazhen Zhao - Executive Director and Co-Chief Executive Officer Jun Liu - VP of Finance Conference Call Participants Joyce Ju - Bank of America Natalie Wu - Haitong International Kenneth Fong - Credit Suisse Operator Ladies and gentlemen, thank you for standing by, and welcome to PDD Holdings, Inc. First Quarter 2023 Earnings Conference Call. [Oper ...

PART I [Introduction and Forward-Looking Information](index=4&type=section&id=Introduction%20and%20Forward-Looking%20Information) This section defines key terms used throughout the annual report and includes a forward-looking statement disclaimer regarding future business developments and financial performance - Defines key terminology for the report, including **PDD Holdings**, **ADSs**, **Pinduoduo platform**, **Temu platform**, and **VIE** (Variable Interest Entity)[83](index=83&type=chunk)[87](index=87&type=chunk)[100](index=100&type=chunk) - The report contains forward-looking statements regarding business strategies, market acceptance, and competition, which are subject to known and unknown risks and uncertainties[89](index=89&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk) [Item 3. Key Information](index=6&type=section&id=Item%203.%20Key%20Information) This section provides an overview of PDD Holdings' business, its corporate structure involving a Variable Interest Entity (VIE) for China operations, and a detailed summary of principal risks - PDD Holdings is a multinational commerce group operating platforms like Pinduoduo and Temu, aiming to bring more businesses into the digital economy[129](index=129&type=chunk) - The company operates in China through a **VIE structure** due to PRC restrictions on foreign investment in value-added telecommunications services, meaning ADS holders do not have direct equity ownership in the China operating entities[111](index=111&type=chunk)[133](index=133&type=chunk)[119](index=119&type=chunk) - Revenues from the VIE and its subsidiaries constituted **56.2% of the company's total revenues in 2022**, highlighting the significance of the contractual arrangements[240](index=240&type=chunk)[299](index=299&type=chunk) - In December 2022, the PCAOB vacated its determination that it was unable to inspect auditors in mainland China and Hong Kong, reducing the immediate risk of delisting under the HFCA Act, though future uncertainty remains[117](index=117&type=chunk)[387](index=387&type=chunk) [D. Risk Factors](index=13&type=section&id=D.%20Risk%20Factors) This section details the principal risks faced by the company across various categories [Risks Related to Our Business and Industry](index=26&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Industry) This section outlines key risks stemming from intense competition, reputational damage, and operational dependencies - The company faces intense competition from major e-commerce operators, traditional retailers, and large internet companies that may have greater resources and brand recognition[51](index=51&type=chunk)[36](index=36&type=chunk) - The company's reputation is critical and can be harmed by negative publicity regarding counterfeit products, data security, or poor consumer services, with the Pinduoduo platform identified as a **notorious market** by the USTR since 2019[7](index=7&type=chunk)[76](index=76&type=chunk)[57](index=57&type=chunk) - Dependence on third-party logistics and payment providers exposes the company to risks of service interruptions, failures, or increased costs that could harm operations[47](index=47&type=chunk)[23](index=23&type=chunk) - The business is subject to complex and evolving laws regarding data privacy and cybersecurity in multiple jurisdictions, where non-compliance could lead to significant fines, regulatory investigations, and reputational damage[30](index=30&type=chunk)[228](index=228&type=chunk)[235](index=235&type=chunk) - Although profitable in 2021 and 2022, the company incurred net losses in the past and may not maintain profitability due to increasing operating costs, investments in new initiatives like Temu, and marketing expenses[61](index=61&type=chunk)[26](index=26&type=chunk) [Risks Related to Our Corporate Structure](index=63&type=section&id=Risks%20Related%20to%20Our%20Corporate%20Structure) This section addresses risks inherent in the company's Variable Interest Entity (VIE) structure and its contractual arrangements - The **VIE structure**, essential for China operations, relies on contractual arrangements rather than direct ownership, and if the PRC government deems these arrangements non-compliant, the company could face severe penalties, including being forced to relinquish its interests, which could render ADSs worthless[273](index=273&type=chunk)[95](index=95&type=chunk)[301](index=301&type=chunk) - The enforceability of the VIE contracts has not been tested in a PRC court, creating uncertainty, and enforcing these rights could be costly and subject to the complexities of the PRC legal system[134](index=134&type=chunk)[279](index=279&type=chunk) - Shareholders of the VIE, who are company employees, may have conflicts of interest that could lead them to act in ways detrimental to PDD Holdings[305](index=305&type=chunk)[143](index=143&type=chunk) - The PDD Partnership has the right to nominate executive directors and the CEO candidate, which may limit the influence of public shareholders on corporate matters[303](index=303&type=chunk)[665](index=665&type=chunk) [Risks Related to Our Multi-jurisdictional Operations](index=72&type=section&id=Risks%20Related%20to%20Our%20Multi-jurisdictional%20Operations) This section discusses risks associated with operating in multiple jurisdictions, particularly concerning PRC regulatory oversight and capital controls - The PRC government has significant oversight and discretion over the company's business, and changes in laws, regulations, or policies could materially impact operations and the value of ADSs[316](index=316&type=chunk)[123](index=123&type=chunk)[967](index=967&type=chunk) - While the PCAOB can currently inspect the company's auditor, if this access is revoked in the future, the company's ADSs could be prohibited from trading in the U.S. under the HFCA Act[124](index=124&type=chunk)[386](index=386&type=chunk)[365](index=365&type=chunk) - PRC government controls on currency conversion and capital flows may restrict the ability of PRC subsidiaries to transfer funds or pay dividends to the offshore holding company, limiting its ability to fund operations or distribute profits[145](index=145&type=chunk)[323](index=323&type=chunk)[350](index=350&type=chunk) - There is a risk that the company could be classified as a PRC resident enterprise for tax purposes, which would subject it to a **25% tax** on its worldwide income and could result in PRC withholding taxes on dividends paid to non-PRC shareholders[331](index=331&type=chunk)[378](index=378&type=chunk)[358](index=358&type=chunk) - Future offshore offerings may require approval from the CSRC or other PRC authorities, and failure to obtain such approvals could result in penalties and hinder access to capital markets[672](index=672&type=chunk)[185](index=185&type=chunk)[362](index=362&type=chunk) [Risks Related to Our ADSs](index=94&type=section&id=Risks%20Related%20to%20Our%20ADSs) This section highlights risks specific to the company's American Depositary Shares, including price volatility and shareholder rights - The trading price of the company's ADSs has been and may continue to be volatile due to market factors, industry performance, and company-specific news[674](index=674&type=chunk)[367](index=367&type=chunk) - The company does not expect to pay cash dividends in the foreseeable future, meaning investors must rely on ADS price appreciation for returns[395](index=395&type=chunk)[372](index=372&type=chunk)[396](index=396&type=chunk) - As a Cayman Islands company, shareholder rights and legal protections may differ from those in the U.S., potentially making it more difficult for shareholders to protect their interests[398](index=398&type=chunk)[418](index=418&type=chunk)[399](index=399&type=chunk) - The deposit agreements for the ADSs include a waiver of the right to a jury trial for claims arising under the agreements, which could limit legal recourse for ADS holders[419](index=419&type=chunk)[420](index=420&type=chunk) [Item 4. Information on the Company](index=104&type=section&id=Item%204.%20Information%20on%20the%20Company) This section details the company's history, business operations, organizational structure, and the complex regulatory landscape it navigates - The company commenced commercial operations in 2015 and was renamed from Pinduoduo Inc. to PDD Holdings Inc. in February 2023[462](index=462&type=chunk)[466](index=466&type=chunk) - The Pinduoduo platform pioneered a **team purchase model** to encourage social sharing and create a virtuous cycle between buyers and merchants, and the company also launched the global online platform Temu in September 2022[490](index=490&type=chunk)[491](index=491&type=chunk)[528](index=528&type=chunk) - The company operates its PRC business through a **VIE structure**, relying on a series of contractual agreements (e.g., Exclusive Option, Equity Pledge) to control its PRC operating entities and consolidate their financial results[464](index=464&type=chunk)[434](index=434&type=chunk) - The business is subject to extensive PRC regulations, including those governing foreign investment in value-added telecommunications, e-commerce operations, data security, and cybersecurity reviews for overseas listings[510](index=510&type=chunk)[533](index=533&type=chunk)[553](index=553&type=chunk) [A. History and Development of the Company](index=104&type=section&id=A.%20History%20and%20Development%20of%20the%20Company) This section traces the company's incorporation, operational milestones, and significant financing activities - The company was incorporated in the Cayman Islands in April 2015 and commenced operations through its VIE structure, later renamed from Pinduoduo Inc. to PDD Holdings Inc. in February 2023[462](index=462&type=chunk)[463](index=463&type=chunk)[466](index=466&type=chunk) - The company has conducted several major financing rounds, including its IPO in July 2018, follow-on offerings, and convertible senior notes offerings in 2019 and 2020[484](index=484&type=chunk) [B. Business Overview](index=106&type=section&id=B.%20Business%20Overview) This section describes the company's core platforms, business models, and competitive landscape - The Pinduoduo platform offers a comprehensive selection of merchandise and uses a **team purchase model** to drive user engagement through social networks[470](index=470&type=chunk)[490](index=490&type=chunk) - The company launched Duo Duo Grocery, a next-day grocery pick-up service, in 2020 and the global e-commerce platform Temu in September 2022[496](index=496&type=chunk)[528](index=528&type=chunk) - A key corporate social responsibility focus is on agriculture, aiming to promote digital inclusion for farmers and improve the farm-to-table supply chain through initiatives like the **10 Billion Agriculture Initiative**[501](index=501&type=chunk)[502](index=502&type=chunk) - The company faces intense competition from major e-commerce operators and traditional retailers, competing on factors like price, product selection, user experience, and brand recognition[523](index=523&type=chunk)[524](index=524&type=chunk) [C. Organizational Structure](index=145&type=section&id=C.%20Organizational%20Structure) This section details the company's corporate structure, emphasizing the Variable Interest Entity (VIE) arrangements for PRC operations - PDD Holdings is a Cayman Islands holding company that controls its PRC operating entities through a **VIE structure** to comply with Chinese laws restricting foreign investment in value-added telecommunications services[111](index=111&type=chunk)[133](index=133&type=chunk) - Control over the VIE (Hangzhou Aimi) is established through a series of contractual arrangements, including a **Shareholders' Voting Rights Proxy Agreement**, **Equity Pledge Agreement**, and **Exclusive Option Agreement**[434](index=434&type=chunk)[403](index=403&type=chunk)[404](index=404&type=chunk) - PRC legal counsel has opined that the VIE structure and contractual arrangements are valid and enforceable, but substantial uncertainties remain regarding their interpretation and application by PRC authorities[409](index=409&type=chunk)[410](index=410&type=chunk) [Item 5. Operating and Financial Review and Prospects](index=148&type=section&id=Item%205.%20Operating%20and%20Financial%20Review%20and%20Prospects) This section provides management's discussion and analysis of the company's financial performance, covering revenues, costs, liquidity, and critical accounting policies Consolidated Revenue Breakdown (2020-2022) | Revenue Source | 2020 (RMB in thousands) | 2021 (RMB in thousands) | 2022 (RMB in thousands) | | :--- | :--- | :--- | :--- | | Online marketing services and others | 47,953,779 | 72,563,402 | 102,721,924 | | Transaction services | 5,787,415 | 14,140,449 | 27,626,494 | | Merchandise sales | 5,750,671 | 7,246,088 | 209,171 | | **Total revenues** | **59,491,865** | **93,949,939** | **130,557,589** | Key Profitability Metrics (2020-2022) | Metric | 2020 (RMB in thousands) | 2021 (RMB in thousands) | 2022 (RMB in thousands) | | :--- | :--- | :--- | :--- | | Gross Profit | 40,213,224 | 62,231,846 | 99,095,291 | | Operating (Loss)/Profit | (9,380,325) | 6,896,762 | 30,401,921 | | Net (Loss)/Income | (7,179,742) | 7,768,670 | 31,538,062 | - Total operating expenses increased by **24.1% in 2022 to RMB 68.7 billion**, driven by higher sales & marketing and general & administrative costs[717](index=717&type=chunk) - As of December 31, 2022, the company held **RMB 34.3 billion in cash and cash equivalents** and **RMB 115.1 billion in short-term investments**, indicating a strong liquidity position[779](index=779&type=chunk)[653](index=653&type=chunk) - Net cash from operating activities was **RMB 48.5 billion in 2022**, a significant increase from **RMB 28.8 billion in 2021**[759](index=759&type=chunk)[761](index=761&type=chunk) [Item 6. Directors, Senior Management and Employees](index=171&type=section&id=Item%206.%20Directors%2C%20Senior%20Management%20and%20Employees) This section provides information on the company's leadership, governance structure, workforce, and compensation policies - The company has an executive partnership, the **PDD Partnership**, which has the right to nominate executive directors and the CEO candidate, influencing corporate governance[820](index=820&type=chunk)[825](index=825&type=chunk)[849](index=849&type=chunk) - As of December 31, 2022, the company had **12,992 employees**, with the largest group (**6,444**) in product development[1197](index=1197&type=chunk)[1198](index=1198&type=chunk) - The company utilizes two main share incentive plans, the **2015 Plan** and the **2018 Plan**, to grant equity awards to employees, directors, and consultants[866](index=866&type=chunk)[893](index=893&type=chunk) Share Ownership of Major Shareholders (as of Feb 28, 2023) | Principal Shareholder | Percentage Owned | | :--- | :--- | | Entities affiliated with Zheng Huang | 26.5% | | Entities affiliated with Tencent | 14.7% | | Entities affiliated with PDD Partnership | 7.0% | [Item 7. Major Shareholders and Related Party Transactions](index=191&type=section&id=Item%207.%20Major%20Shareholders%20and%20Related%20Party%20Transactions) This section outlines the company's major shareholders and details its transactions with related parties, including a strategic cooperation agreement with Tencent - The company has a strategic cooperation framework agreement with Tencent, a principal shareholder, covering payment solutions, cloud services, and user engagement[1112](index=1112&type=chunk) - In 2022, the company purchased services totaling **RMB 7.1 billion (US$1.0 billion)** from Tencent, including payment processing, advertising, and cloud services[1113](index=1113&type=chunk) - To mitigate payment service provider risk, the company provided interest-free loans of **RMB 697.6 million** to an entity controlled by executive officers to acquire a controlling interest in Shanghai Fufeitong, a licensed payment service company[1116](index=1116&type=chunk) [Item 8. Financial Information](index=194&type=section&id=Item%208.%20Financial%20Information) This section contains the company's consolidated financial statements and provides information on legal proceedings and dividend policy - The company has faced several putative shareholder class action lawsuits in the U.S. related to its IPO disclosures; these cases were dismissed[1248](index=1248&type=chunk)[1210](index=1210&type=chunk) - The company does not currently plan to pay any cash dividends, intending to retain earnings to operate and expand the business[1249](index=1249&type=chunk)[1212](index=1212&type=chunk) [Item 10. Additional Information](index=197&type=section&id=Item%2010.%20Additional%20Information) This section provides supplementary details about the company's corporate governance and tax status, including share classes and PFIC rules - The company's ordinary shares are divided into **Class A (1 vote per share)** and **Class B (10 votes per share)**, with Class B shares convertible to Class A but not vice-versa[1203](index=1203&type=chunk)[1260](index=1260&type=chunk) - The company is an exempted company under Cayman Islands law, which has different corporate governance standards than the U.S., for example, it is not required to have an annual general meeting[1302](index=1302&type=chunk)[1265](index=1265&type=chunk) - The company does not believe it was a **Passive Foreign Investment Company (PFIC)** for the 2022 taxable year but notes that the determination is factual and made annually, so no assurance can be given for future years[459](index=459&type=chunk)[1316](index=1316&type=chunk) [Item 11. Quantitative and Qualitative Disclosures about Market Risk](index=212&type=section&id=Item%2011.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discusses the company's exposure to various market risks, primarily foreign exchange and interest rate fluctuations - The primary market risk is **foreign exchange risk**, as the company's business is valued in RMB while its ADSs are traded in U.S. dollars, and appreciation of the RMB against the USD would adversely affect the RMB amount received from converting USD[1366](index=1366&type=chunk)[1367](index=1367&type=chunk) - The company is exposed to **interest rate risk** on its cash, restricted cash, and short-term investments, but has not used derivatives to manage this risk[1392](index=1392&type=chunk) PART II [Item 15. Controls and Procedures](index=217&type=section&id=Item%2015.%20Controls%20and%20Procedures) This section reports on the effectiveness of the company's internal controls, including disclosure controls and internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[1415](index=1415&type=chunk) - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, an assessment audited by Ernst & Young Hua Ming LLP, which provided an unqualified opinion[1416](index=1416&type=chunk)[1418](index=1418&type=chunk) [Item 16. Other Information](index=217&type=section&id=Item%2016.%20Other%20Information) This section covers various governance and compliance topics, including the audit committee's financial expert, code of ethics, and principal accountant fees - The board has determined that Mr. Anthony Kam Ping Leung is an **audit committee financial expert**[1421](index=1421&type=chunk) Principal Accountant Fees (in thousands US$) | Fee Category | 2021 | 2022 | | :--- | :--- | :--- | | Audit fees | $3,099 | $3,042 | | All other fees | $71 | $74 | - In December 2022, the PCAOB removed mainland China and Hong Kong from its list of jurisdictions where it cannot inspect or investigate auditors, consequently, the company does not expect to be identified as a **Commission-Identified Issuer** under the HFCA Act after filing this report[987](index=987&type=chunk) PART III [Item 18. Financial Statements](index=220&type=section&id=Item%2018.%20Financial%20Statements) This section contains the complete audited consolidated financial statements for PDD Holdings Inc. for fiscal years 2020-2022, prepared in conformity with U.S. GAAP - The financial statements were audited by Ernst & Young Hua Ming LLP, which issued an **unqualified opinion** on the financial statements and the company's internal control over financial reporting as of December 31, 2022[1012](index=1012&type=chunk)[1013](index=1013&type=chunk) - A critical audit matter identified was the classification of incentives provided to consumers, which involves significant judgment in determining whether they represent payments to merchant-customers (a reduction of revenue) or marketing expenses[1019](index=1019&type=chunk) [Notes to the Consolidated Financial Statements](index=238&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the company's significant accounting policies and financial statement disclosures - The company consolidates its VIE and its subsidiaries because, through contractual agreements, it has the power to direct their activities and the right to receive their economic benefits, despite not having equity ownership[1055](index=1055&type=chunk) - Revenue from online marketing services is recognized primarily on a **cost-per-click basis** when consumers click on product listings, while transaction service fees are recognized when a sales transaction is completed[1104](index=1104&type=chunk)[1106](index=1106&type=chunk) - The company adopted **ASU 2020-06** in 2022, simplifying the accounting for its convertible bonds by no longer separating them into liability and equity components, which resulted in an adjustment to retained earnings[1239](index=1239&type=chunk)[1241](index=1241&type=chunk) - As of December 31, 2022, the company had **RMB 8.6 billion in unrecognized share-based compensation expense** related to unvested options, expected to be recognized over a weighted-average period of **2.44 years**[1291](index=1291&type=chunk) [Item 19. Exhibits](index=220&type=section&id=Item%2019.%20Exhibits) This section lists all the exhibits filed as part of the annual report, including key corporate documents and certifications - Lists key legal and corporate documents filed with the report, including the company's articles of association, indentures for its convertible notes, and share incentive plans[994](index=994&type=chunk)[998](index=998&type=chunk) - Includes English translations of the contractual agreements that form the basis of the VIE structure, such as the **Equity Pledge Agreement** and **Exclusive Option Agreement**[998](index=998&type=chunk)

PDD Holdings is a multinational commerce group that owns and operates a portfolio of businesses, including Pinduoduo and Temu. PDD Holdings aims to bring more businesses and people into the digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities. PDD HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands of RMB and US$) | --- | --- | --- | --- | --- | --- | --- | |----------------------------------------------- ...

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Exhibit 99.1 Pinduoduo Announces First Quarter 2022 Unaudited Financial Results SHANGHAI, CHINA, May 27, 2022 (GLOBE NEWSWIRE) – Pinduoduo Inc. ("Pinduoduo" or the "Company") (NASDAQ: PDD), China's largest agriculture platform, today announced its unaudited financial results for the first quarter ended March 31, 2022. First Quarter 2022 Highlights · Total revenues in the quarter were RMB23,793.7 million (US$3,753.4 million), an increase of 7% from RMB22,167.1 million in the same quarter of 2021. · Average m ...

Pinduoduo Inc. (NASDAQ:PDD) Q1 2022 Earnings Conference Call May 27, 2022 7:30 AM ET Company Participants Chen Lei - Chairman & Chief Executive Officer Liu Jun - Vice President, Finance Conference Call Participants Thomas Chong - Jefferies Eddy Wang - Morgan Stanley Kenneth Fong - Credit Suisse Natalie Wu - Haitong International Operator Ladies and gentlemen, thank you for standing by, and welcome to Pinduoduo’s First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only ...