PDD(PDD) - 2024 Q4 - Annual Report

Company Overview and Corporate Structure PDD Holdings is a multinational commerce group operating Pinduoduo in China and Temu globally, with primary revenue from online marketing and transaction services Company Profile and Business Model PDD Holdings operates the Pinduoduo and Temu platforms, generating revenue primarily from online marketing and transaction services for third-party merchants - PDD Holdings is a multinational commerce group that owns and operates a portfolio of businesses, including the Pinduoduo and Temu platforms[24] - The Pinduoduo platform, known for its "team purchase" model, offers a wide range of merchandise and focuses on digital inclusion for agriculture[25][26] - Temu, launched in September 2022, is a global online platform serving consumers in numerous countries by providing quality products at attractive prices[27] - Revenues primarily consist of transaction services and online marketing services provided to third-party merchants. For FY2024, substantially all revenues were derived from merchants in China[29] VIE Corporate Structure PDD Holdings operates parts of its business in mainland China through a Variable Interest Entity (VIE), Hangzhou Aimi, due to PRC restrictions on foreign investment in value-added telecommunications services - The company uses a VIE structure to operate in mainland China's restricted sectors. ADS holders do not have direct equity in the VIE, Hangzhou Aimi, but in the Cayman Islands holding company[33][34] - Control over the VIE is established through contractual arrangements, including a shareholders' voting rights proxy, equity pledge, and exclusive option agreements[36][37][40] VIE Revenue Contribution Trend | Year | Revenue Contribution from VIE | | :--- | :--- | | 2022 | 56.2% | | 2023 | 45.7% | | 2024 | 22.5% | Condensed Financial Data for VIE and Subsidiaries (FY 2024) | Metric (FY 2024) | Amount (RMB in thousands) | | :--- | :--- | | Revenues | 121,108,780 | | Net Income | 22,921,391 | | Total Assets (as of Dec 31, 2024) | 217,009,461 | | Total Liabilities (as of Dec 31, 2024) | 124,142,846 | | Net Cash from Operating Activities | 15,819,139 | Risk Factors The company faces significant risks across its business, corporate structure, multi-jurisdictional operations, and doing business in China, alongside specific risks related to its ADSs Risks Related to Business and Industry The company faces intense competition, reliance on third-party logistics, brand reputation challenges due to counterfeit products, and complex, evolving global data privacy and consumer protection laws - The company faces intense competition from major e-commerce operators, traditional retailers, and other internet companies which may have greater resources[86] - The business is subject to complex and evolving data privacy and protection laws in all regions of operation, including China's PIPL, the EU's GDPR, and U.S. state laws like CCPA, which can result in significant compliance costs and penalties[87][93][95] - The company may incur liability for counterfeit, unauthorized, or illegal products sold on its platforms. The U.S. Trade Representative (USTR) has identified the Pinduoduo platform as a "notorious market" since 2019, which could damage its reputation[80][100][102] - The company is subject to consumer protection laws and has faced regulatory scrutiny. In March 2021, the operator of the Pinduoduo platform was fined RMB1.5 million by the SAMR for unfair pricing conduct[110][113] Risks Related to Corporate Structure The company's reliance on a VIE structure for its China operations presents significant risks due to uncertain enforceability of contractual arrangements and potential government non-compliance penalties - If the PRC government finds the VIE structure non-compliant with regulations, the company could be subject to severe penalties, be forced to relinquish its interests in its China operations, and its ADSs could decline in value or become worthless[207][211][215] - The VIE and its subsidiaries contributed 22.5% of consolidated total revenues in 2024. Control is based on contractual arrangements, which may not be as effective as direct ownership and face enforcement uncertainties in PRC courts[209][221][222] - The legal shareholders of the VIE, Mr. Lei Chen and Mr. Jiazhen Zhao, are company employees, which may lead to potential conflicts of interest that could adversely affect the business[226] Risks Related to Multi-jurisdictional Operations Global expansion through Temu exposes the company to geopolitical tensions, varied local laws, trade policy changes, and increased regulatory scrutiny, including potential elimination of the U.S. de minimis import exemption - Global operations are subject to risks from international geopolitical tensions, diverse local laws (trade, data privacy, consumer protection), currency fluctuations, and challenges in managing a global business[233][234] - Changes in international trade policies, such as increased tariffs, could adversely impact business. Notably, the U.S. government adopted a new tariff structure in April 2025, and the de minimis exemption for imports from China and Hong Kong will be eliminated effective May 2, 2025[237][239] - The company faces heightened regulatory scrutiny in multiple jurisdictions. The European Commission initiated a formal investigation into Temu under the Digital Services Act in October 2024, and the platform faces inquiries related to the UFLPA in the U.S.[240][250] - Operations of the Temu platform were temporarily suspended in Vietnam (December 2024) and Uzbekistan (March 2025) pending completion of local registrations[197][251] Risks Related to Doing Business in China Operating in China exposes the company to significant political, economic, and social uncertainties, evolving regulatory oversight, and restrictions on currency conversion and capital flows - The business is subject to significant oversight and discretion from the PRC government, which could result in material changes to operations and ADS value[273] - PRC regulations on currency conversion and capital flows may limit the ability of China subsidiaries to pay dividends or make other payments to the holding company, affecting overall liquidity[277][283][285] - Future offerings are subject to filing with the CSRC under the Filing Measures effective March 31, 2023. Failure to comply could result in penalties and restrictions[302][474] - The PCAOB's ability to inspect the company's China-based auditor is crucial. While access was restored in late 2022, any future inability to inspect for two consecutive years could lead to a trading prohibition of the ADSs in the U.S. under the HFCA Act[304][305][307] Risks Related to ADSs Investing in the company's ADSs involves risks such as high price volatility, potential dilution, lack of expected dividends, and less shareholder protection due to Cayman Islands incorporation and specific deposit agreement provisions - The trading price of the ADSs may be highly volatile due to market and industry factors, as well as company-specific announcements and performance[309] - The company does not expect to pay dividends in the foreseeable future, so investors must rely on price appreciation of the ADSs for a return on investment[319][689] - As a Cayman Islands company, PDD is permitted to follow home country corporate governance practices, which may differ from Nasdaq standards and offer less protection to shareholders[335][799] - The deposit agreements for the ADSs include a provision where holders waive the right to a jury trial for claims arising from the agreements, which could limit legal recourse[326] Business and Operations PDD Holdings operates Pinduoduo and Temu, focusing on a virtuous cycle of buyers and merchants, with revenue from online marketing and transaction services, emphasizing trust, technology, and social responsibility Business Overview PDD Holdings operates Pinduoduo, a social commerce platform in China, and Temu, a global e-commerce marketplace, generating revenue from online marketing and transaction services while prioritizing trust, technology, and agricultural initiatives - The Pinduoduo platform pioneered an innovative "team purchase" model, encouraging social sharing to achieve more attractive prices, fostering a highly engaged user base[354] - The Temu platform, launched in September 2022, has expanded globally to major economies including the U.S., Japan, and Germany, aiming to provide quality products at attractive prices[358] - The company implements strict trust and safety measures, including merchant identity verification and an AI-based screening system to identify and review questionable merchandise[364][365] - A key corporate social responsibility focus is agriculture. The "10 Billion Agriculture Initiative" was launched in August 2021 to facilitate agri-tech advancement and promote digital inclusion for farmers[372] - As of December 31, 2024, the company had a technology team of more than 8,900 engineers, reflecting a strong investment in R&D[376] Regulatory Environment The company's global operations are subject to a complex and evolving regulatory landscape, including strict PRC laws on foreign investment, data security, anti-monopoly, and overseas listings, as well as international consumer protection and data privacy regulations - In China, foreign investment in value-added telecommunications services is restricted, necessitating the use of the VIE structure to operate platforms like Pinduoduo[387][388] - The company is subject to extensive PRC laws on data security and privacy, including the Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law (PIPL), which impose strict obligations on data handling and cross-border transfers[414][417][424] - The company is subject to anti-monopoly and anti-unfair competition laws in China, with guidelines specifically targeting the platform economy, prohibiting practices like coercive exclusivity and discriminatory pricing[437] - For overseas listings and offerings, the company must comply with the CSRC's Filing Measures, which took effect on March 31, 2023, requiring filing for any follow-on offerings[474] - Internationally, the company must adhere to regulations like the EU's Digital Services Act (DSA), under which Temu was designated a Very Large Online Platform, and various U.S. consumer protection and data privacy laws[478][479] Organizational and VIE Structure Details PDD Holdings Inc., a Cayman Islands holding company, conducts its China business through a VIE, Hangzhou Aimi, legally owned by two PRC individuals who are company employees, with control maintained via contractual arrangements deemed valid by PRC legal counsel - The company's VIE, Hangzhou Aimi, is legally owned by Mr. Lei Chen (86.6%) and Mr. Jiazhen Zhao (13.4%), who are employees of the company[484] - A series of contractual arrangements, including a Shareholders' Voting Rights Proxy Agreement, Equity Pledge Agreement, and Exclusive Option Agreement, grant the company effective control over the VIE[486][487][488][491] - The company's PRC legal counsel, King & Wood Mallesons, is of the opinion that the VIE structure and contractual arrangements are valid and enforceable under current PRC law, but acknowledges that uncertainties remain regarding interpretation and application[492][493] Operating and Financial Review The company achieved significant revenue and net income growth in FY2024, driven by strong performance in online marketing and transaction services, despite substantial increases in operating expenses Results of Operations The company experienced substantial growth in FY2024, with total revenues increasing by 59.0% to RMB 393.8 billion and net income surging by 87.3% to RMB 112.4 billion, primarily driven by transaction services and increased user engagement Consolidated Statements of Comprehensive Income (2022-2024) | (RMB in thousands) | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Total revenues | 130,557,589 | 247,639,205 | 393,836,097 | | Online marketing services and others | 102,931,095 | 153,540,553 | 197,934,192 | | Transaction services | 27,626,494 | 94,098,652 | 195,901,905 | | Operating profit | 30,401,921 | 58,698,762 | 108,422,862 | | Net income | 31,538,062 | 60,026,544 | 112,434,512 | - In 2024, revenues from transaction services grew significantly to RMB 195.9 billion from RMB 94.1 billion in 2023, primarily due to an increase in the number of active merchants (from 14.2 million to 15.8 million) and higher average transaction services revenue per merchant[528] - Sales and marketing expenses increased to RMB 111.3 billion in 2024 from RMB 82.2 billion in 2023, mainly due to a RMB 27.9 billion increase in advertising, promotion, and coupon expenses to drive user growth and engagement[531] Liquidity and Capital Resources The company maintains a strong liquidity position with RMB 121.9 billion in operating cash flow in 2024 and RMB 331.6 billion in cash and short-term investments, though a significant portion of cash is held in China subject to currency controls Summary Consolidated Cash Flow Data (2022-2024) | (RMB in thousands) | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Net cash generated from operating activities | 48,507,860 | 94,162,531 | 121,929,292 | | Net cash used in investing activities | (22,361,670) | (55,431,278) | (118,356,036) | | Net cash generated from/(used in) financing activities | 10,079 | (8,960,626) | 1,164 | - As of December 31, 2024, the company held RMB 57.8 billion in cash and cash equivalents and RMB 273.8 billion in short-term investments[566][924] - A total of RMB 172.2 billion in cash, cash equivalents, restricted cash, and short-term investments is held in China. Access to these funds is subject to PRC regulations on currency conversion and capital flows[569] - Material cash requirements as of Dec 31, 2024 include RMB 5.3 billion for convertible bonds, RMB 5.6 billion for operating lease commitments, and RMB 967.1 million in capital expenditures for 2024[578][579][580][581] Critical Accounting Policies and Estimates The company's financial reporting relies on critical accounting estimates, particularly for revenue recognition, classification of consumer incentives, valuation of share-based compensation, and income tax judgments - Revenue Recognition: The company recognizes revenue from online marketing services based on impressions or clicks, and from transaction services when the service obligation to merchants is completed[557][558][560] - Incentives to Consumers: The company exercises judgment in classifying incentives like coupons and credits. If they are not considered payments to merchant-customers, they are recorded as "sales and marketing expenses"[561][562][898] - Share-Based Compensation: The company uses a binomial-lattice model to value options and considers a three-year post-vesting lock-up period as an implicit service period, extending the total vesting term to seven years for certain grants[907][967] - Income Taxes: The company must make judgments regarding the realization of deferred tax assets and potential unrecognized tax benefits[563][905] Corporate Governance and Management The company's leadership includes co-CEOs Lei Chen and Jiazhen Zhao, supported by a six-member board with independent directors, and a growing employee base, all operating under established governance practices Directors and Senior Management The company is led by Chairman and Co-CEO Lei Chen and Director and Co-CEO Jiazhen Zhao, with a six-member board including three independent directors bringing diverse expertise Board of Directors and Executive Officers | Name | Age | Position/Title | | :--- | :--- | :--- | | Lei Chen | 45 | Chairman of the Board of Directors and Co-Chief Executive Officer | | Jiazhen Zhao | 41 | Director and Co-Chief Executive Officer | | Anthony Kam Ping Leung | 64 | Independent Director | | Haifeng Lin | 48 | Director | | Ivonne M.C.M. Rietjens | 66 | Independent Director | | George Yong-Boon Yeo | 70 | Independent Director | | Jun Liu | 42 | Vice President of Finance | | Junyun Xiao | 45 | Senior Vice President of Operation | | Zhenwei Zheng | 41 | Senior Vice President of Product Development | Compensation and Share Incentive Plans In fiscal year 2024, the company paid US$2.3 million in cash compensation to directors and executive officers and utilizes two share incentive plans with a significant number of outstanding equity awards - In the year ended December 31, 2024, the company paid an aggregate of US$2.3 million in cash to its directors and executive officers[611] - The company has two main equity incentive schemes: the 2015 Global Share Plan and the 2018 Share Incentive Plan[187][625] Outstanding Equity Awards as of Dec 31, 2024 | Plan | Award Type | Outstanding | | :--- | :--- | :--- | | 2015 Plan | Options | 149,720,108 | | 2018 Plan | Options | 240,702,416 | | 2018 Plan | RSUs | 67,741,348 | Board Practices and PDD Partnership The Board of Directors, comprising six members, operates through three independent committees, while the PDD Partnership, once established, will gain the right to nominate executive directors and the CEO, ensuring long-term governance stability - The board has three committees: Audit, Compensation, and Nominating and Corporate Governance. Each committee has independent directors as members, with Mr. Anthony Kam Ping Leung chairing the Audit and Compensation committees, and Mr. George Yong-Boon Yeo chairing the Nominating committee[638][639][640][641] - The PDD Partnership, once it consists of at least five partners, will have the right to nominate executive directors and the company's CEO candidate, a key governance feature[590][594][595][596] - Directors owe fiduciary duties to the company under Cayman Islands law, which includes acting honestly and in good faith in the company's best interests[646] Employees As of December 31, 2024, the company had 23,465 employees, a significant increase from the previous year, with the largest functions being Sales, marketing and fulfillment, and Product development Employee Headcount by Function (as of Dec 31, 2024) | Function | Number of Employees | | :--- | :--- | | Sales, marketing and fulfillment | 11,206 | | Product development | 8,980 | | Platform operation | 1,278 | | Management and administration | 2,001 | | Total | 23,465 | - Total employee count grew from 17,403 at the end of 2023 to 23,465 at the end of 2024[650] Shareholder and Related Party Information The company's major shareholders include entities affiliated with its founder and Tencent, with a significant portion of shares held by its ADS depositary, and it engages in material related party transactions, notably with Tencent and a payment service provider Major Shareholders As of March 31, 2025, major shareholders include entities affiliated with founder Mr. Zheng Huang (24.8%), Tencent (13.8%), and the PDD Partnership (6.5%), with 54.5% of shares held by the U.S. ADS depositary Principal Shareholders (as of March 31, 2025) | Shareholder | Ownership Percentage | | :--- | :--- | | Entities affiliated with Zheng Huang | 24.8% | | Entities affiliated with Tencent | 13.8% | | Entities affiliated with PDD Partnership | 6.5% | - As of March 31, 2025, Deutsche Bank Trust Company Americas, the ADS depositary, held 54.5% of the company's total outstanding shares on behalf of ADS holders[659] Related Party Transactions The company engages in significant related party transactions, including a strategic cooperation agreement with Tencent for services totaling RMB 6.8 billion in 2024, and facilitated the acquisition of a payment service provider by executive officers through an interest-free loan - The company has a strategic cooperation agreement with Tencent, a principal shareholder, for services including payment solutions, cloud services, and user engagement. In 2024, purchases from Tencent totaled RMB 6.8 billion[665][666] - The company provided an interest-free loan of RMB 710.6 million to an entity controlled by executive officers Mr. Lei Chen and Mr. Zhenwei Zheng to acquire a controlling interest in Shanghai Fufeitong, a licensed payment service provider[668][669] - Shanghai Xunmeng (a VIE subsidiary) has a business cooperation agreement with Shanghai Fufeitong for payment services and technical resources[671] Legal Proceedings and Dividend Policy The company is involved in numerous global legal and regulatory proceedings, including investigations into Temu's compliance and a securities class action, and currently has no plans to pay cash dividends, intending to retain earnings for business expansion Legal Proceedings The company is involved in various legal and regulatory proceedings globally, including a lawsuit by the Arkansas Attorney General, investigations by the European Commission and CPC Network regarding Temu's compliance, temporary operational suspensions in Vietnam and Uzbekistan, a consolidated securities class action, and litigation with competitor SHEIN - In October 2024, the European Commission initiated a formal investigation into the Temu platform for potential violations of the Digital Services Act (DSA)[678][197] - A consolidated putative securities class action was filed against the company and several officers in 2024, alleging false and misleading statements concerning data security and compliance with the Uyghur Forced Labor Prevention Act (UFLPA)[683][199] - The Temu platform's operations were temporarily suspended in Vietnam (Dec 2024) and Uzbekistan (Mar 2025) due to local registration and tax compliance matters[680][197] - The company is engaged in mutual lawsuits with competitor SHEIN in U.S. court, with claims including intellectual property infringement and unfair competition[684][199] Dividend Policy The company has no present plan to pay cash dividends, intending to retain all available funds and future earnings for business operations and expansion, with any future distributions subject to board discretion and PRC regulations on fund transfers - The company does not have any present plan to pay cash dividends and intends to retain earnings for business operations and expansion[689] - As a holding company, its ability to pay dividends depends on distributions from its subsidiaries, which are subject to PRC regulations restricting the payment of dividends[690] Additional Information The company's corporate structure includes a dual-class share system with anti-takeover provisions, and its taxation is influenced by its Cayman Islands incorporation and the potential for PRC resident enterprise classification, which could impact U.S. tax implications Memorandum and Articles of Association The company operates with a dual-class share structure, where Class B shares carry ten votes and convert to Class A upon transfer, and its articles include anti-takeover provisions, while as a Cayman Islands company, it is not obligated to hold annual general meetings - The company has a dual-class share structure: Class A ordinary shares (1 vote each) and Class B ordinary shares (10 votes each)[699] - Class B shares are convertible into Class A shares at any time by the holder. They automatically convert to Class A shares if transferred to a person not affiliated with Mr. Zheng Huang[700] - The articles include anti-takeover provisions, allowing the board to issue preference shares without further shareholder vote[321][721] Taxation The company, incorporated in the Cayman Islands, is not subject to local income tax, but its PRC subsidiaries face a 25% enterprise income tax (with some at a preferential 15% rate), and there is a risk of being classified as a PRC resident enterprise or a U.S. Passive Foreign Investment Company (PFIC) - The company is a Cayman Islands exempted company and is not subject to Cayman Islands income or capital gains tax[728] - PRC subsidiaries are generally subject to a 25% enterprise income tax. Certain subsidiaries, like Shanghai Xunmeng, are recognized as "high and new technology enterprises" and are eligible for a reduced 15% rate until 2026[519][979] - There is a risk of being classified as a PRC resident enterprise if the "de facto management body" is deemed to be in China, which would subject the company's global income to a 25% PRC tax[295][731] - For U.S. federal income tax purposes, the company does not believe it was a Passive Foreign Investment Company (PFIC) for 2024, but its status is a factual determination made annually and could change, which would have adverse tax consequences for U.S. holders[336][741] Market Risk Disclosures The company is exposed to significant foreign exchange risk due to its RMB-denominated operations and USD-denominated ADSs, as well as interest rate risk from its cash and debt investments, without the use of derivative instruments for hedging Market Risk Analysis The company faces substantial foreign exchange risk from RMB fluctuations against other currencies, impacting financial results, and interest rate risk primarily from its cash and debt investments, without employing derivatives for hedging - The company faces significant foreign exchange risk as a majority of its revenues and expenses are denominated in RMB, while its ADSs are traded in USD. Fluctuations in the RMB against the USD and other currencies can materially affect financial results[766][769] - Interest rate risk primarily relates to interest income generated from cash, cash equivalents, and debt securities. The company has not used derivatives to manage this exposure[770] Controls and Procedures As of December 31, 2024, management concluded that the company's disclosure controls and internal control over financial reporting were effective, a conclusion affirmed by the independent auditor Internal Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2024, a finding corroborated by an unqualified opinion from the independent registered public accounting firm - Management concluded that as of December 31, 2024, the company's disclosure controls and procedures were effective[785] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2024[786] - The independent auditor, Ernst & Young Hua Ming LLP, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2024[788][833] Financial Statements and Auditor's Report The company's consolidated financial statements for the three years ended December 31, 2024, received an unqualified opinion from Ernst & Young Hua Ming LLP, with a critical audit matter identified regarding the classification of consumer incentives Auditor's Report and Critical Audit Matters Ernst & Young Hua Ming LLP issued an unqualified opinion on the company's consolidated financial statements and internal control over financial reporting, highlighting the classification of consumer incentives as a critical audit matter due to significant management judgment - Ernst & Young Hua Ming LLP issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting as of December 31, 2024[823][833] - A Critical Audit Matter was identified relating to the classification of incentives provided to consumers. Auditing this area was complex due to the judgment required to determine if incentives represent implicit obligations to consumers on behalf of merchants, which affects whether they are treated as a reduction of revenue or as marketing expenses[827][828] Consolidated Financial Statements As of December 31, 2024, PDD Holdings reported total assets of RMB 505.0 billion, total liabilities of RMB 191.7 billion, and shareholders' equity of RMB 313.3 billion, with RMB 393.8 billion in total revenues and RMB 112.4 billion in net income for the year Consolidated Balance Sheet Highlights (as of Dec 31, 2024) | (RMB in thousands) | Amount | | :--- | :--- | | Total Assets | 505,034,316 | | Current Assets | 415,648,232 | | Total Liabilities | 191,721,192 | | Current Liabilities | 188,422,853 | | Total Shareholders' Equity | 313,313,124 | Consolidated Income Statement Highlights (Year ended Dec 31, 2024) | (RMB in thousands) | Amount | | :--- | :--- | | Total Revenues | 393,836,097 | | Operating Profit | 108,422,862 | | Net Income | 112,434,512 | Consolidated Cash Flow Highlights (Year ended Dec 31, 2024) | (RMB in thousands) | Amount | | :--- | :--- | | Net cash from operating activities | 121,929,292 | | Net cash used in investing activities | (118,356,036) | | Net cash from financing activities | 1,164 |