PDD (Trans): Net income down 12%, will not pursue on-demand retail

Dolphin Research recap of $PDD(PDD.US) FY26Q2 earnings call

I. Key takeaways

1. No revenue or profit guidance.

Mgmt gave no outlook when asked about full-year consumption or whether platform revenue could outgrow broader consumer spending. They reiterated confidence in China's long-term consumption potential and noted faster growth in rural retail vs. the overall market in 1H.

Targets for mix between private labels and 3P goods, and pricing frameworks, were also not disclosed.

2. Net income to shareholders -12% YoY, tied to platform and ecosystem investments.

Attributable net income was RMB 27.2 bn vs. RMB 30.8 bn a year ago. Non-GAAP attributable net income was RMB 28.5 bn vs. RMB 32.7 bn.

Mgmt said it stepped up governance, fee reductions, and merchant support in parallel, which weighed on results this quarter.

3. Opex mix: R&D +40% YoY; G&A more than doubled.

Non-GAAP R&D was RMB 4.3 bn (+40% YoY), mainly into tech risk control for platform governance and expanding trust & safety teams. Non-GAAP G&A was RMB 1.7 bn vs. RMB 0.7 bn a year ago.

Non-GAAP S&M was RMB 29.3 bn (+10% YoY), at 26% of revenue, flat vs. last year. Non-GAAP total opex was RMB 35.3 bn vs. RMB 30.4 bn, with the opex ratio at 31% vs. 29% a year ago.

4. Key financial metrics

a) Aggregate: revenue RMB 112.4 bn (+8% YoY); COGS RMB 48.0 bn (+5% YoY). GAAP OP RMB 27.8 bn (+8% YoY); Non-GAAP OP RMB 29.1 bn with OPM of 26% vs. 27% a year ago.

b) Segments: online marketing & others RMB 57.6 bn vs. RMB 55.7 bn. Transaction services RMB 54.7 bn (+13% YoY), the main driver of revenue growth this quarter.

c) EPS: basic per ADS RMB 19.32 and diluted RMB 18.45 vs. RMB 22.01 and RMB 20.75 a year ago. Non-GAAP diluted EPS per ADS was RMB 19.33 vs. RMB 22.07.

d) Cash flow: operating cash flow RMB 25.7 bn vs. RMB 21.6 bn a year ago. Cash and ST investments at period-end were RMB 456.4 bn.

II. Earnings call details

2.1 Mgmt remarks

1) Strategy

a) Q2 marked a move from initial rollout to deeper execution of the 'new decade of high-quality growth', with the RMB 100 bn support program entering a phase where investments start to bear fruit. b) The 'rebuild another PDD in three years' initiative is progressing, while the early rollout of private labels has lagged due to external factors.

c) A dedicated company and office building were set up in Xiong'an to focus on intelligent tech opportunities. Additional data-processing and integrated service centers for traditional industries aim to move manufacturers up the value chain.

d) Focus remains on core e-comm. This quarter, PDD engaged earlier with category clusters and top suppliers, setting product, production, and QC standards, and helping merchants develop higher-margin products.

2) Platform governance

a) Over 150 trust & safety measures have been launched to date, with 50+ special actions in Jun alone. These cover listing controls, food and pharma safety, credential checks, ad compliance, IP, misleading marketing, and live-commerce standards.

b) Food safety: banned ready-to-eat meals and beverages, tightened credential review and disclosures, and refined rules for what foods can be sold via livestream, presenter conduct, and product descriptions.

c) A governance-themed video curriculum went live in early Jun. The module on common issues with business licenses drew 340k views within 24 hours.

3) RMB 100 bn support and supply chain upgrades

a) Agricultural regions: the 2026 'Duoduo Specialty' program now spans dozens of specialty zones, including Jiangsu aquaculture, Chongqing plums, Hainan pineapples and lychees, Hunan cured duck, and Hubei crayfish. b) The Hainan 'golden diamond' pineapple took off via limited-time flash sales and mass group-buy programs.

Local planting has expanded from scattered trials to over 1,000 km² under cultivation. c) Industrial belts: the 'new quality supply' team visited clusters in Nantong home textiles, Shenzhen tents, Guangzhou cosmetics, and Xinjiang textiles, offering traffic, data, market expansion, cost-down, smart manufacturing, and warehousing upgrades.

Manufacturers cut production cycles by half. d) Xinjiang textile case: over 200k locals once worked in textile factories in Jiangsu/Zhejiang, and a younger generation has now returned to set up plants selling nationwide via PDD.

Annual sales have risen 4–5x on avg., and categories such as mosquito nets see seasonal exports to SE Asia and Europe.

4) Free shipping to villages and global compliance

a) Six months into launch, free shipping to villages has built last-mile networks in 10+ provinces, including county hubs and village pick-up points. Pilot regions such as Xinjiang saw order volumes multiply.

b) On IP, PDD combines screening tech with expert review to monitor listings in real time across categories. It recently received favorable rulings in IP litigation with industry peers.

5) Governance and CSR: independent director Prof. Ivonne Rietjens passed away; she was former head of Toxicology at Wageningen Univ. and joined the board in Aug-2023. The company will continue to increase agri research investment and donated RMB 10 mn to areas hit by typhoon flooding.

2.2 Q&A

Q: The EU began imposing temporary tariffs on low-value cross-border parcels in Jul. What is the impact on order volume, and how will global biz grow against this headwind?

A: Fulfillment efficiency fell and costs rose for cross-border orders in affected markets in the near term, which materially impacted that portion of the biz. The team is assessing and adapting, having adjusted supply chains and optimized fulfillment processes to balance consumer experience, merchant operations, and long-term development with compliance as the baseline.

No quantified order impact was provided. Medium to long term, PDD will accelerate two things: onboard and support more quality local merchants to expand local supply, and speed up local warehousing and fulfillment infrastructure to broaden local coverage, aiming to embed deeper in each market.

Compliance capabilities and platform governance are set as equally important long-term investment areas. Mgmt emphasized that short-term volatility does not alter the long-term direction of the global biz.

Q: Update on the private-label initiative announced last quarter. How are you thinking about mix, positioning, and pricing between 1P and 3P?

A: The initial rollout is slower than planned, and no targets were given for the 1P/3P mix or pricing frameworks. Private labels are framed as an extension of long-term supply chain investment, working closely with manufacturers that have the capability and willingness to invest in product development.

PDD aims to provide certainty in brand building through market insights and global reach. Execution will selectively focus first on core categories where the platform and supply chain have unique strengths, collaborating end-to-end from product planning and R&D to quality standards and market testing.

Mgmt acknowledged the longer development and collaboration cycle, with rollout taking longer than expected, but it remains a clear long-term strategic priority. Private labels and 3P goods will be complementary across scenarios and sub-segments, while maintaining an open and fair marketplace.

Q: How do you prioritize investment in self-built warehousing and delivery over the long term?

A: Investments are bottleneck-driven: last mile domestically and cross-dock hubs overseas, with priorities varying by market. The goal is to improve consumer experience and solve real merchant pain points, investing prudently and surgically where value is created.

Most domestic e-comm logistics networks are well developed, but last-mile delivery remains a significant bottleneck in remote western regions and many rural areas. Under the RMB 100 bn support program, PDD is advancing free shipping to villages and logistics support for remote areas.

Progress: since late last year, free shipping to villages established local service stations in all 177 villages in a county in Hunan. In Shandong, daily village parcel volume has exceeded 100k, improving access to farm inputs such as fertilizer and boosting merchant order conversion.

Overseas, point-to-point shipments by dispersed merchants struggle to achieve scale and face higher fulfillment costs. In those markets, PDD is investing in cross-dock hubs and their operations.

Q: Peers are investing heavily in on-demand retail. How do you view the impact on industry structure and your core biz, and how will you defend user mindshare and share?

A: PDD will not invest in on-demand retail, citing limited synergy with core e-comm and Duoduo Grocery. Demand and use-cases differ from core e-comm and Duoduo Grocery, and current supply chain requirements and operating models diverge with limited synergy, so resources will be focused on areas of existing strength.

The path forward is to keep strengthening supply chains, with two complementary priorities: ensure quality supply by helping traditional manufacturers upgrade product development and brand capability via new-quality supply and Duoduo Specialty. Build efficient delivery infrastructure by filling last-mile gaps in remote areas via free shipping to villages.

Mgmt cautioned these supply chain investments may not deliver immediate results.

Q: Nearly a year into the RMB 100 bn support program, how healthy and active is the merchant ecosystem? Has ad spend intent improved as the ecosystem improves?

A: No direct answer on ad spend intent; mgmt said the program will drive organic value creation over time. From the RMB 10 bn fee cuts in 2024 to the RMB 100 bn program early last year, support and supply chain initiatives have reached major agricultural regions and industrial clusters, with tangible improvements in merchant quality and efficiency.

Two cases: a Guangdong cosmetics company sharply cut CAC and operating costs with platform support, reinvesting profits into two years of R&D to become a national brand with patents. A lighting-belt merchant leveraged fast product testing to launch a bestseller, generating several million RMB in sales within months.

Monetization was framed as a mechanism: the priority is lifting product quality, strengthening the supply chain, and supporting the merchant ecosystem so SMEs reinvest efficiency gains into product upgrades. Mgmt acknowledged that building a healthier merchant ecosystem takes time.

Q: Based on 1H trends, what's the consumption outlook for the year? Can platform revenue outgrow the broader consumption market?

A: No full-year revenue guidance and no direct answer on outgrowing the market; mgmt only noted rural retail grew faster than the overall market in 1H. Consumption-support policies continued to take effect in 1H, with steady expansion in China's consumer market and rising online retail penetration.

Mgmt believes e-comm has entered a new phase where platforms must proactively unlock growth by addressing fundamental supply chain bottlenecks. Free shipping to villages is expanding last-mile networks, including cross-dock hubs and managed pick-up points.

The monetization stance is unchanged: focus on strengthening the platform ecosystem and helping merchants grow. Over the long run, getting the fundamentals right should translate into intrinsic value growth.

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