PDD Holdings is channeling greater resources toward supply chain enhancement and its private label initiative. During the second-quarter 2026 earnings call, management indicated that the "Billion-Dollar Ecosystem" support program has transitioned from initial scale-building into a deeper execution phase, extending further into agricultural production areas, industrial clusters, and logistics infrastructure. Concurrently, the private label business has been fully launched, though its pace of progress has fallen short of earlier projections.

The private label initiative forms a cornerstone of the company's strategy to build another PDD within three years. Management stated that private label efforts will prioritize core product categories where the platform and supply chain possess distinct competitive advantages, collaborating with manufacturers on long-term initiatives spanning product planning, R&D, quality standards, and market testing. However, this business remains in its early stages, requiring substantial time for supply chain coordination and market validation, and the company will not pursue short-term scale at the expense of these fundamentals.

Supply chain investment continues to accelerate. The company is currently advancing programs such as "New Quality Supply" and "Free Delivery to Villages." The former involves deep engagement with industrial belts to help manufacturers enhance product development and production efficiency, while the latter establishes county-level transfer hubs and village-level pickup points to complete last-mile logistics networks in remote regions. Management believes these investments may not translate directly into immediate financial results but will solidify supply chain capabilities and strengthen the platform's long-term competitiveness.

Meanwhile, external operating conditions remain challenging. The European Union has imposed provisional tariffs on low-value cross-border parcels since July, which management expects will have a "considerable impact" on order fulfillment efficiency and costs in affected markets. In response, the company plans to expand local merchant supply and develop local warehousing and fulfillment infrastructure to increase the localization and resilience of its overseas supply chain.

On the financial front, the company reported second-quarter revenue of RMB 112.36 billion, up 8% year-over-year, with net profit attributable to shareholders of RMB 27.2 billion, down 12%. Adjusted net profit of RMB 28.5 billion exceeded market expectations, while non-GAAP R&D expenses rose 40% year-over-year to RMB 4.3 billion, reflecting continued heavy investment in technology and operational capabilities.

From Fee Reductions to Supply Chain Transformation

Management's description of the "Billion-Dollar Ecosystem" program has become notably more concrete. Over the past year, merchant support has expanded from fee reductions to encompass platform governance, product development, industrial belt upgrades, and agricultural supply chains. Co-CEO Zhao Jiazhen indicated that these investments are beginning to yield tangible results, with support extending beyond merchants to include agricultural production areas and upstream and downstream participants in manufacturing clusters.

On the manufacturing side, the "New Quality Supply" team works within industrial belts, providing manufacturers with support in traffic, data, market expansion, smart manufacturing, and warehousing upgrades. Management cited examples where manufacturers shortened production cycles by half while improving their ability to fulfill both large-scale and customized orders. This approach aligns with the company's long-term strategy of moving beyond simply helping merchants sell products to engaging earlier in the value chain, including product development, production efficiency, and brand building. On the agricultural side, programs like "Premium Agricultural Products" continue to intervene across the supply chain, aiming to increase the value of agricultural products through new product development, improved cultivation standards, and enhanced cold-chain logistics.

Based on management's statements, the "Billion-Dollar Ecosystem" is evolving from a merchant support program into a long-term investment vehicle for transforming the supply side and strengthening supply chain capabilities.

Private Label Behind Schedule but Remains a Long-Term Priority

Compared to the "Billion-Dollar Ecosystem," investors are more focused on the "build another PDD in three years" strategy. Management did not shy away from acknowledging the slower-than-expected progress. Zhao Jiazhen noted that the initial rollout of the private label model over the past six months has proceeded more slowly than anticipated, as the business requires additional time for product development and collaboration.

However, the company has not altered its course. Zhao stated that the company will prioritize core categories where the platform and supply chain hold unique advantages, engaging manufacturers in long-term partnerships spanning product planning, R&D, quality standard formulation, and market testing. This indicates the company is not simply launching a batch of private label products but is attempting to participate in product development from the supply chain source. Importantly, management clarified that private label products will not replace third-party merchants but will complement them, serving different consumption scenarios and market segments.

Consequently, the near-term contribution of this business to revenue and profits remains limited. Its greater significance lies in whether the company can leverage this initiative to gain greater control over upstream supply chain capabilities and drive manufacturers to transition from OEM and traditional production toward product development and brand management.

Navigating Regulatory Shifts with Localized Supply Chains

The overseas business faces more direct external pressures. In response to the EU's provisional tariffs on low-value cross-border parcels effective July, Co-CEO Chen Lei stated that cross-border orders in affected markets will face lower fulfillment efficiency and higher costs in the short term, resulting in a "considerable impact" on related operations.

Despite these challenges, the company has not altered its globalization direction. Instead, it plans to reduce dependence on the cross-border model through localized supply chains. On one front, the platform will continue to onboard more local merchants to broaden local product offerings. On another, it is accelerating the construction of local warehousing and fulfillment infrastructure while expanding local fulfillment coverage.

Chen also emphasized that compliance and platform governance will serve as foundational capabilities for long-term global business development. The company is strengthening intellectual property protection through a combination of technical screening and manual review, while further enhancing product quality and consumer protection measures. In essence, rather than contracting its overseas operations in response to changing global regulatory conditions, PDD is attempting to increase the localization of its international business through local merchants, local warehousing, and local fulfillment.

The following is the full transcript of the earnings call:

Ladies and gentlemen, thank you for waiting, and welcome to PDD Holdings Inc's second-quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. The meeting will begin with a presentation followed by a question-and-answer session. Please note that today's meeting is being recorded.

I will now hand the call over to today's host. Please go ahead, sir.

Joining us on the call today are our Co-Chairman and Co-CEO, Mr. Chen Lei; our Co-Chairman and Co-CEO, Mr. Zhao Jiazhen; and our CFO, Mr. Liu Jun. Chen Lei and Jiazhen will provide general remarks on our performance and strategic priorities for the past quarter. Following that, Liu Jun will walk us through our second-quarter financial results for the period ended June 30, 2026.

During today's call, some of management's remarks will be delivered in Chinese and translation will be provided for convenience. Please note that the English translation is for reference only, and in case of any discrepancy, the statements made in the original language shall prevail. I am now pleased to introduce our Co-Chairman and Co-CEO, Mr. Zhao Jiazhen.

Zhao Jiazhen, Co-Chairman and Co-CEO:

Hello everyone, this is Zhao Jiazhen. Thank you for joining our second-quarter 2026 earnings call. Before we officially begin, we would like to take this opportunity to express our deepest condolences on the passing of Professor Ivonne Rietjens, our independent director, and to pay our highest respects to her significant contributions and dedicated service to the company during her tenure.

Professor Rietjens served as the head of the Department of Toxicology at Wageningen University in the Netherlands for many years and held international renown in the fields of food research and drug effects. Since joining the company as an independent director in August 2023, Professor Rietjens provided valuable professional advice for the company's governance and development. Additionally, as a long-term partner of our "Duo Duo Agricultural Research and Technology Competition," Wageningen University has consistently brought international perspective and expert guidance to the event, helping it become an important global platform for agricultural technology innovation and talent development.

We will carry forward her passion for agricultural research and continue to increase our investment in agriculture and agricultural research. Through these long-term commitments, we honor her professional legacy and contribute to global agricultural and food safety research. Now, let us return to this quarter's results.

This year's second quarter marks a new phase and new decade of our high-quality development, transitioning from initial launch into deeper execution. Our "Billion-Dollar Ecosystem" program has entered a stage where sustained investment is beginning to generate tangible results. Positive effects across the platform and industry are being released at a faster pace, with improvements in quality and efficiency on both the supply and demand sides.

At the same time, we continue to make steady progress toward our strategic goal of "building another PDD within three years." Although the initial rollout of our private label model has been slower than expected over the past six months due to certain external factors, overall momentum remains positive. Related operations are now fully underway and progressing smoothly. We are fully committed to supply chain transformation to achieve higher-quality growth, drive upgrades in traditional industries, and continue to unlock new growth potential within the supply chain. To accelerate supply chain transformation and upgrading, we have established a dedicated company in Xiong'an New Area and purchased office buildings to focus on opportunities created by smart technology. To support the upgrading and high-quality development of traditional manufacturing, we have also established data processing service centers and comprehensive service centers for traditional industries, helping traditional manufacturers move up the value chain and pursue high-quality development.

We achieved solid results this quarter. Total group revenue was RMB 112.4 billion, up 8% year-over-year, while group net profit was RMB 27.2 billion, down 12% year-over-year. This primarily reflects our continued investment in the platform and broader industry ecosystem, which partially impacted this quarter's performance. In the first half of this year, competition in the e-commerce industry remained intense. The complex and rapidly changing market environment has placed higher demands on platform governance and industry development, presenting new challenges. We continue to increase investment in the platform and industry ecosystem through a coordinated set of measures encompassing governance, fee reductions, and merchant support, aiming to build a platform ecosystem that creates value for all participants.

We have significantly increased R&D investment in platform governance. In addition to upgrading our technology-driven risk prevention and control systems, we have substantially expanded our dedicated trust and safety teams and strengthened oversight across all categories. By considering the specific characteristics of different categories and conducting targeted governance actions, we are making ecosystem governance more normalized, refined, and rule-based.

To date, the platform has launched more than 150 comprehensive trust and safety measures. In June alone, we introduced more than 50 targeted initiatives addressing key areas such as product listing controls, food and drug safety, qualification review, advertising compliance, intellectual property protection, misleading marketing, livestream e-commerce standards, and prevention of technology misuse. We are committed to upholding high compliance standards and strict rules, adopting a systematic approach to reshape our governance framework and foster a safer, more regulated, and more trustworthy shopping environment.

In food safety, we launched a dedicated governance initiative prohibiting the sale of freshly prepared food and beverage products. We have further tightened merchant qualification reviews and information disclosure requirements to prevent and mitigate food safety risks early. Meanwhile, the platform has introduced more detailed requirements for the permitted scope of food sold via livestream, host behavior, and product description and display methods. From product evaluation to livestream presentation, we guide merchants to operate with integrity and present products truthfully throughout the entire food process, enabling consumers to purchase and consume food with confidence. In early June, we also produced and released a series of video courses addressing common challenges and pain points in platform governance. These courses encourage merchants to familiarize themselves with rules relevant to their industries, avoid violations, and protect their legitimate rights in accordance with platform rules. For example, a video on common issues with store business licenses received 340,000 views within 24 hours of release.

Building on the systematic upgrade of platform governance, we continue to increase investment in the "Billion-Dollar Ecosystem" program. Our support now extends beyond our broad merchant base to include upstream and downstream participants in agricultural production areas and industrial clusters, helping drive comprehensive upgrades across the entire supply chain. In agricultural production areas, the "2026 Duo Duo Premium Agricultural Products" initiative has covered dozens of specialty agricultural regions, including aquatic products in Jiangsu, plums in Chongqing, pineapples in Hainan, cured duck in Hunan, and crayfish in Hubei. Through this initiative, we help these regions develop new products, raise cultivation standards, and improve cold-chain logistics, thereby unlocking greater value for their agricultural products.

Take the Thai pineapple growing region as an example. In recent years, local merchants began introducing a new variety called "Golden Diamond Pineapple." Unlike traditional varieties, it has a distinctive sweetness and requires neither coring nor saltwater soaking before consumption. Supported by the platform's high-traffic programs, including flash sales and group buying, this variety quickly gained market attention and became one of the most popular food items of the season. The greater certainty brought by e-commerce orders has also given growers confidence to expand production. To date, the local cultivation area for Golden Diamond Pineapple has grown from scattered trial plantings to over 100,000 mu.

Across industrial belts, our dedicated "New Quality Supply" team has visited manufacturers in different regions and industries, including home textiles in Nantong, Jiangsu; tent manufacturers in Shenzhen; outdoor products in Xing'an; cosmetics in Guangzhou; and textiles in Xing'an. These merchants receive a range of support measures such as traffic support, data empowerment, market expansion, cost reduction, smart manufacturing, and warehousing upgrades. As a result, manufacturers have shortened production cycles by half and significantly improved fulfillment capabilities. They can now quickly process large volumes of orders on our platform while meeting consumers' customization needs. This enables manufacturers to make the transformation leap from traditional manufacturing to building their own brands, while accelerating the shift of these industrial belts from traditional growth drivers to new ones.

The Xinjiang textile industry is a good example. Xinjiang was once a major source of labor export, with over 200,000 local residents working in the textile industries of Jiangsu and Zhejiang alone. In recent years, the younger generation has begun establishing factories locally and selling textile products nationwide through PDD. Their annual sales have grown by an average of 4 to 5 times, and they have built leading brands in niche categories such as mosquito nets, exporting to Southeast Asia and Europe in the summer. Today, the local economy has moved away from its traditional dependence on labor export, establishing an integrated industrial development path encompassing capital, technology, talent, and sales channels.

Additionally, our "Free Delivery to Villages" program has continued to achieve positive results since its launch six months ago. We have now established last-mile delivery networks in more than 10 provinces and cities nationwide, including county-level transfer hubs and village-level pickup points. These networks have brought significant employment opportunities to county and rural communities while accelerating the delivery of consumer goods, home appliances, agricultural supplies, and farming equipment to rural markets. In doing so, we help merchants unlock new growth opportunities and enable consumers in remote villages to improve their quality of life. Taking Shandong as an example, as one of China's leading agricultural provinces, it is a key region for PDD's "Free Delivery to Villages" program. Previous pilots in Xinjiang have already produced significant results, with order volumes in villages growing several-fold. Meanwhile, Xinjiang is one of the country's major production bases for water-soluble and innovative fertilizers, and many local agricultural supply companies are leveraging this momentum to deliver products to more villages nationwide.

As a platform serving the public, we are always committed to fulfilling social responsibilities and giving back to society. Recently, typhoons and heavy rainfall have caused severe flooding in multiple regions. To support frontline disaster relief efforts, we made a cash donation of RMB 10 million to affected areas. These funds are being used to procure relief supplies and equipment, provide assistance and temporary shelter for affected residents, and support post-disaster recovery and reconstruction.

As we embark on the next decade, we believe more than ever that high-quality development requires both the intensity of a sprint and the endurance of a marathon. We will adhere to long-termism, executing our new decade strategy of high-quality development with patience and results, achieving solid and tangible progress at every step. We will continue to invest steadfastly in our supply chain, empower merchants and industries, and provide consumers with better products and services. Through concrete actions, we aim to create greater positive value for users, merchants, and society as a whole.

Next, I will hand over to Chen Lei, who will provide more details.

Chen Lei, Co-Chairman and Co-CEO:

Hello everyone, this is Chen Lei. Thank you for joining our second-quarter 2026 earnings call. In the first half of this year, we made tangible progress under our new decade strategy of high-quality development and laid a solid foundation for long-term growth. As Jiazhen just mentioned, we focused on two key areas. First, through the "Billion-Dollar Ecosystem" program, we continue to give back to consumers and merchants. At the same time, we comprehensively upgraded our platform governance framework.

These initiatives help cultivate a healthier environment across our platform and the broader industrial ecosystem. Second, we continue to advance toward our goal of "building another PDD within three years." We have increased supply chain investment and helped supply chain partners build and develop their own brands. During this quarter, our long-term investments in the "Billion-Dollar Ecosystem" program began to translate into results within a healthier platform ecosystem.

On the supply side, our merchants benefit from a combination of fee reductions, merchant support initiatives, and stronger platform governance. These measures have unleashed greater innovation vitality among merchants, facilitating the launch of new products and brands, which in turn drives incremental demand and new sources of growth. Many manufacturers are adopting digital and intelligent technologies to achieve customized production, which drives improvements in supply chain quality and efficiency and enables manufacturers to transition to new development models.

On the demand side, we continue to meet consumers' evolving needs across different product categories and diverse consumption scenarios. This is particularly evident in rural areas, where our "Free Delivery to Villages" program provides consumers with a wider selection of products, helping them improve their quality of life. Combining the supply chain capabilities and brand development experience gained through the "Billion-Dollar Ecosystem" program, we took steps this quarter to further integrate the supply chain.

Our teams conducted in-depth research on the industry chains of different product categories and initiated early collaborations with high-quality suppliers. By setting clear standards for products, production processes, and quality control, we help merchants and manufacturers align their operations and develop a range of higher-quality, higher-margin products. Through these efforts, we continue to unlock advantages and potential within the supply chain, driving our manufacturing sector to move up the value chain.

Since the beginning of this year, the global regulatory and compliance landscape has undergone significant changes. These changes bring both challenges and opportunities, accompanied by greater responsibility. We find ourselves at a unique intersection of global trade, continuously navigating diverse international regulatory frameworks. At the same time, our position is unique. Our business touches the daily lives of billions of people globally. While the growth potential is enormous, it also comes with higher expectations and higher standards of accountability. We will stay true to our mission and continue to do every job with dedication and discipline. First, we will continue to strengthen compliance capabilities and fine-tune platform governance. To protect intellectual property, we combine screening technology with expert review to monitor and evaluate product listings across all categories in real time. This allows us to address intellectual property risks early in the process and has led to systematic improvements in platform protection.

Second, we continue to invest resolutely in the supply chain. By executing these structural upgrades, our ultimate goal is to build a highly resilient e-commerce platform that global consumers can trust for competitive prices and superior quality. As we enter the next decade, we remain focused on our core e-commerce business. Through deepening supply chain investment, we will continue to empower our merchants and the broader industry, providing consumers with a wider range of high-quality products and services.

We are confident in translating the "building another PDD within three years" initiative into concrete, verifiable results. In doing so, we will strive to help traditional supply chains seize the opportunities of this new intelligent era, empowering them to transform, move up the value chain, and build brands with global influence.

I will now hand over to Liu Jun, who will present the financial results for the second quarter of 2026.

Liu Jun, CFO:

Thank you, Chen Lei. Hello everyone, this is Liu Jun. Let me now walk you through our financial performance for the second quarter ended June 30, 2026.

First, regarding the income statement. In the second quarter, our total revenue grew 8% year-over-year to RMB 112.4 billion. This was primarily driven by growth in transaction services revenue. Online marketing services and other revenue for the quarter was RMB 57.6 billion, compared to RMB 55.7 billion in the same period of 2025. Transaction services revenue was RMB 54.7 billion, up 13% year-over-year.

Now turning to costs and expenses. Our total cost of revenue increased 5% from RMB 45.9 billion in the second quarter of 2025 to RMB 48.0 billion in this quarter. On a GAAP basis, total operating expenses for the quarter increased 13% from RMB 32.3 billion in the same period of 2025 to RMB 36.6 billion. On a non-GAAP basis, total operating expenses increased from RMB 30.4 billion in the second quarter of 2025 to RMB 35.3 billion in this quarter.

Our non-GAAP total operating expenses as a percentage of revenue was 31% for this quarter, compared to 29% in the same period last year. Breaking down the specific expense items, our non-GAAP sales and marketing expenses for this quarter were RMB 29.3 billion, up 10% year-over-year.

On a non-GAAP basis, our sales and marketing expenses as a percentage of revenue for this quarter was 26%, consistent with the same period last year. Our non-GAAP general and administrative expenses were RMB 1.7 billion, compared to RMB 0.7 billion in the same period of 2025. Our non-GAAP R&D expenses for this quarter were RMB 4.3 billion, up 40% year-over-year.

On a GAAP basis, operating profit for this quarter was RMB 27.8 billion, compared to RMB 25.8 billion in the same period last year, up 8% year-over-year. Non-GAAP operating profit was RMB 29.1 billion, compared to RMB 27.7 billion in the same period last year. Non-GAAP operating margin for this quarter was 26%, compared to 27% in the same period last year. Net profit attributable to ordinary shareholders for this quarter was RMB 27.2 billion, compared to RMB 30.8 billion in the same period last year.

Basic earnings per ADS were RMB 19.32, and diluted earnings per ADS were RMB 18.45, compared to basic earnings per ADS of RMB 22.01 and diluted earnings per ADS of RMB 20.75 in the same period of 2025. Non-GAAP net profit attributable to ordinary shareholders was RMB 28.5 billion, compared to RMB 32.7 billion in the same period last year. Non-GAAP diluted earnings per ADS were RMB 19.33, compared to RMB 22.07 in the same period of 2025. This concludes the income statement section. Now let me introduce the cash flow. Our net cash generated from operating activities was RMB 25.7 billion, compared to RMB 21.6 billion in the same period last year. As of June 30, 2026, we held RMB 456.4 billion in cash, cash equivalents, and short-term investments. Thank you. That concludes my remarks.

Thank you, Liu Jun. We will now move to the Q&A session. During today's Q&A, Chen Lei, Jiazhen, and Liu Jun will answer questions from analysts on the line. Each analyst may ask up to two questions. Chen Lei and Jiazhen will answer in Chinese and will assist with translation for convenience.

Operator, let's begin the Q&A session.

Q&A Session

Operator:

Thank you. Ladies and gentlemen, we will now begin the Q&A session. Your first question comes from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong, Analyst:

My first question is about the company's global business. We note that the EU has imposed provisional tariffs on low-value cross-border parcels starting this July. Can management help us understand the expected impact of this change on the company's overall order volume? Given these policy headwinds, what is the company's growth strategy for its global business going forward? My second question is about the private label business announced last quarter. Can management provide an update on its launch and progress? More broadly, how should investors evaluate the potential impact of these initiatives on the company? How do you view the mix and positioning of private label products versus third-party products? And what will guide your pricing strategy for private label products? Thank you.

Chen Lei, Co-Chairman and Co-CEO:

Hello Thomas, this is Chen Lei. Let me address your first question regarding our global business. During this period, the regulatory and compliance landscape facing our global business has undergone significant changes. These changes bring challenges and opportunities to our business, accompanied by significant responsibilities.

We believe we are at a unique intersection of the global economy and global trade. We face pressure from diverse regulatory policies while also occupying a unique position. Currently, our business touches the daily lives of billions of people worldwide. While the growth potential is enormous, it also comes with higher expectations and higher standards of accountability.

Regarding the EU tariff changes you mentioned, our team is actively evaluating and adapting. Drawing on the experience we have accumulated over the years, we have adjusted our supply chain and optimized our fulfillment processes. With compliance as the bottom line, we are working to balance consumer experience, merchant operations, and the long-term development of the business. In the short term, cross-border orders in affected markets will face lower fulfillment efficiency and higher costs, which will have a considerable impact on that portion of our business.

However, from a medium to long-term perspective, changes in the external environment further highlight the importance of our supply chain and prompt us to accelerate the development of related capabilities. First, the platform will continue to introduce and support more high-quality local merchants to broaden the supply of local products. Second, we are accelerating the construction of local warehousing and fulfillment infrastructure and expanding the coverage of local fulfillment. Through these investments, we hope to integrate more deeply into each market we serve, strengthen the foundation and resilience of our supply chain, and better respond to changes and fluctuations in the environment. In addition to supply chain capabilities, compliance capabilities and platform governance are also key foundational capabilities for our long-term investment. We will continue to strengthen platform governance, further improve product quality, and enhance consumer protection, aiming to provide a platform that global consumers can trust.

At the same time, we have done significant work on intellectual property compliance, providing a healthy business environment and fair competitive environment for global merchants. Building on technology-driven monitoring and manual review, the platform has developed systematic intellectual property protection capabilities. Our recent favorable rulings in intellectual property litigation with industry peers further demonstrate the effectiveness of our intellectual property protection mechanisms. We will continue to protect the legitimate rights and interests of our ecosystem partners and foster a fair and reliable business environment.

Regulatory and policy changes are issues that the entire industry must face. We are confident in our execution capabilities and organizational resilience. Short-term fluctuations will not change the long-term direction of our global business. Looking ahead, we will continue to steadily advance our work in supply chain, fulfillment, compliance, and customer service. We will strive to provide global consumers with a long-term stable shopping platform that offers competitive prices, reliable quality, and is one they can trust, rely on, and enjoy using. Thank you.

Zhao Jiazhen, Co-Chairman and Co-CEO:

Hello, this is Zhao Jiazhen. Regarding your second question, our private label business is an important extension of our long-term investment in supply chain capabilities. Our goal is to work closely with manufacturers who have strong capabilities and the willingness to engage in long-term product development. By leveraging the platform's market insights and global reach, we seek to bring greater certainty to brand development and value creation across the industry value chain, thereby converting incremental value into tangible benefits for all participants.

In terms of execution, we will first selectively focus on core product categories where our platform and supply chain capabilities hold certain unique advantages. We will engage in long-term cooperation with manufacturers, from product planning and R&D, to establishing quality standards, to market testing.

This business requires a longer period of development and collaboration, and the initial rollout has taken longer than we originally expected. Nevertheless, it remains a clear long-term strategic priority for the platform, and we will maintain patience and focus on doing each step well. We are confident in the long-term prospects of the private label model.

In terms of operational strategy, our commitment to maintaining an open and fair market environment will not change. We have always believed that continuously providing consumers with quality products and services requires a healthy, fair, and diversified supply chain ecosystem. Looking ahead, our private label products and products offered by third-party merchants will complement each other, meeting consumers' diverse needs across different usage scenarios and market segments, ultimately creating an ecosystem that benefits all participants. Thank you.

Thank you, Thomas. Operator, we can take the next analyst's question.

Operator:

Your next question comes from Alicia Yap of Citigroup. Please go ahead.

Alicia Yap, Analyst:

Thank you for the opportunity to ask questions. So two questions. First, we note that many global e-commerce companies invest in their own warehousing and delivery capabilities as they scale. For example, by building their own warehouse networks and delivery capabilities. How should we view the company's long-term investment priorities in this area?

The second question is about instant retail. Many global peers have already invested heavily in this area. How does management assess the potential impact of changes in consumer behavior on the industry competitive landscape and the company's core business? As the industry increases investment in same-day delivery, what strategy is the company adopting to strengthen user mindshare and defend market share? Thank you.

Zhao Jiazhen, Co-Chairman and Co-CEO:

Hello, this is Zhao Jiazhen. Like our other investments, our investments in logistics and fulfillment are oriented toward improving consumer experience and addressing the practical challenges merchants face in their operations. We make prudent and targeted investments in areas where we believe we can create tangible value. Therefore, our investment priorities vary by market and business model. In the domestic market, the e-commerce logistics network is already fairly well-developed in most regions. However, in the far west and many rural communities, "last-mile" delivery remains a significant bottleneck. To address this issue, we have invested substantial resources in strengthening the logistics network and, under the "Billion-Dollar Ecosystem" program, are firmly advancing the "Free Delivery to Villages" initiative and logistics support for remote areas.

Since late last year, under the "Free Delivery to Villages" initiative, we have established local service stations covering all 177 villages in Hunan and other locations. In Shandong, we have increased the number of packages delivered to villages to more than 100,000 per day. This infrastructure not only helps agricultural supplies such as fertilizer reach farmers more directly but also enables a wider range of quality products to reach rural consumers more efficiently. In doing so, we are helping unlock the enormous consumer demand in underserved areas and significantly improving order conversion rates for merchants serving these communities.

In certain overseas markets, fragmented point-to-point transportation often makes it very difficult to achieve economies of scale through centralized freight. This results in higher overall fulfillment costs and leaves some consumer demand unmet. In markets facing these challenges, we have made targeted investments in the development and operation of transfer warehouses. These investments help local merchants streamline their fulfillment processes and lower logistics barriers, while providing local consumers with more reliable delivery experiences.

Returning to your question, we will continue to adopt a pragmatic and problem-solving orientation in fulfillment-related investments. By building stronger supply chain capabilities and improving the efficiency and reliability of services, our goal is to enhance consumer experience, create a virtuous cycle between supply and demand, and strengthen the platform's ability to achieve long-term sustainable organic growth.

Regarding your second question, retail and e-commerce business models are constantly evolving, and we see an increasing number of innovative business models emerging in the market. Instant retail serves different consumer needs and use cases from our core e-commerce and grocery business. Given the current stage of our business, these are quite different in terms of supply chain requirements and operating models, with limited synergies. Therefore, we choose to concentrate our resources and energy on areas where we have established advantages and are best positioned to create differentiated value.

As the industry matures, platforms will adopt different approaches to serving consumers based on their respective capabilities and experience. Our path has always been clear: we will continue to strengthen our supply chain capabilities. Our current supply chain investments have two complementary focuses: first, ensuring an adequate supply of quality products; second, building infrastructure for efficient delivery.

In terms of product supply, through initiatives such as "New Quality Supply" and "Premium Agricultural Products," we continue to help capable traditional manufacturers strengthen their product development and brand-building capabilities, enabling them to move up the value chain and allowing consumers to access more high-quality products at attractive prices. In terms of infrastructure, through programs such as "Free Delivery to Villages," we are improving our distribution networks, addressing the "last-mile" delivery gap in remote areas, and enabling more consumers in more regions to benefit from the convenience and affordability of e-commerce.

The supply chain investments we choose to make may not produce immediate results, but we believe that in the long run, they will create tangible value for the industry, consumers, and our merchant ecosystem. We will continue to focus on this foundational but very important work and continuously create differentiated value for consumers and merchants. Thank you.

Operator, I believe we have time for one more analyst.

Thank you. Your final question comes from Joyce Ju of Bank of America. Please go ahead.

Joyce Ju, Analyst:

My first question is about long-term monetization potential. It has been nearly a year since the company launched the "Billion-Dollar Ecosystem" program. Can management provide an update on the health and activity of the merchant ecosystem after the investment? As the ecosystem improves, have you seen or do you expect to see a corresponding increase in merchants' willingness to spend on advertising? My second question is about revenue growth outlook. Based on the trends observed in the first half of the year, how do you view the consumer spending outlook for the full year? Looking ahead, does the platform have the potential to outpace broader consumer market growth? Thank you very much.

Zhao Jiazhen, Co-Chairman and Co-CEO:

Hello, this is Zhao Jiazhen. As previously mentioned, the "Billion-Dollar Ecosystem" program is beginning to show results. From the "Billion-Dollar Fee Reduction" program launched in 2024 to the "Billion-Dollar Ecosystem" program initiated early last year, the resources and supply chain support we provide have covered major agricultural production areas and manufacturing clusters.

We are pleased to see that these efforts have helped merchants in many industrial belts make meaningful progress in quality and efficiency. For example, with the platform's support, a local cosmetics company in Guangdong significantly reduced its customer acquisition and operating costs. The company reinvested its profits into a two-year R&D effort and successfully transformed into a patented local brand. Merchants in the lighting manufacturing belt have also leveraged the platform's rapid product testing capabilities to increase investment in high-quality lighting components and smart product features, resulting in a best-selling product that generated millions in sales within just a few months.

These tangible results demonstrate that our efforts to reinvest in the supply chain ecosystem are working. Of course, building a healthier merchant ecosystem takes time, and we will remain committed to these investments to help more merchants achieve healthier, more sustainable growth.

E-commerce platforms are two-sided networks. Merchants' growth prospects are closely tied to high-quality consumer experience and a healthy platform ecosystem. Therefore, our "Billion-Dollar Ecosystem" program first focuses on improving product quality, strengthening the supply chain, and supporting the merchant ecosystem, so that small and medium merchants can reinvest the gains from efficiency improvements into product upgrades. In the long run, lower operating costs, stronger profitability, and greater business confidence will ultimately drive sustainable organic value creation for the platform. Thank you.

Liu Jun, CFO:

Hello, this is Liu Jun. Let me address your second question. In the first half of this year, as consumer support policies continued to take effect, China's consumer market expanded steadily, and online retail penetration continued to grow. We remain confident in the long-term potential of China's consumer market and the e-commerce industry. As e-commerce enters a new development stage, platforms need to play a more active role in unlocking new growth by addressing fundamental supply chain bottlenecks. For example, through the "Free Delivery to Villages" program, we are investing in building a more comprehensive "last-mile" delivery network, including transfer warehouses and managed pickup points.

These efforts help strengthen rural commerce and distribution networks and stimulate consumer demand in these regions. In the first half of this year, retail sales growth in rural areas outpaced the overall market, demonstrating significant potential. Regarding monetization, as Jiazhen mentioned, we remain focused on strengthening the platform ecosystem and helping our merchants grow. Over time, by doing these foundational tasks well, we believe the sustainable growth of the platform's intrinsic value will naturally follow. Thank you.

Unnamed Spokesperson:

Thank you, Liu Jun, and thank you all for participating in today's meeting. We are nearly out of time, and we look forward to seeing you next quarter.

Operator:

Ladies and gentlemen, this concludes today's meeting. Thank you for participating. You may all disconnect now.