How do you view today's PDD? Huang Zheng has thought it through before going public.

Pinduoduo's market value surpasses Alibaba, becoming the second largest Chinese concept stock in the US stock market.

In the overnight US stock market closing, Pinduoduo rose 4.03% to $147.44, reaching a new closing high since March 2021. After a 18.08% increase on November 28th, Pinduoduo has continued to rise for two consecutive days, with a market value of $195.887 billion, officially surpassing Alibaba. At the close, Alibaba's market value was $190.703 billion.

Since September this year, Pinduoduo has surged 42%, and has accumulated a 76% increase since the beginning of the year.

On November 28th, Pinduoduo released its Q3 performance, with revenue of RMB 68.84 billion, a year-on-year increase of 94%, reaching a new historical high; adjusted net profit exceeded expectations, reaching RMB 17.027 billion, a year-on-year increase of 37%.

In terms of revenue composition, transaction service revenue was RMB 29.153 billion, a year-on-year increase of 315%. Among them, TEMU performed very well, and analysts believe that the market can gradually price TEMU's valuation into Pinduoduo's valuation.

Sales and marketing expenses increased by 55% year-on-year, and R&D expenses reached a new high of RMB 2.85 billion, but labor and R&D costs continued to decline year-on-year. Therefore, some analysts pointed out that Pinduoduo's high cost-effectiveness is being strengthened, and there is a trend of spreading to the middle and high-end consumer groups. Products with higher unit prices such as mobile phones, home appliances, and cosmetics are gradually entering the vision of more middle and high-end consumers with the support of billions of subsidies.

On July 26, 2018, on the eve of Pinduoduo's listing, Wall Street News had a conversation with Pinduoduo's founder Huang Zheng, he once said that in the future, Pinduoduo may not compete with "Tmall", but develop new innovative scenarios that are suitable for itself.

In other words, Pinduoduo was not originally benchmarking Alibaba. In the interview, Huang Zheng revealed that "there is no competition with Taobao". Because the user positioning is different, but no matter what the business model is, the ultimate focus is still on user experience and cost-effectiveness.

When talking about Pinduoduo's business model, Huang Zheng likened Pinduoduo to "selling fruits". Some of them may be bad when they arrive, but the individual prices are much cheaper. Ordinary people may complain, but they will still buy it next time. He believes that everyone wants to remember the substance and also pay attention to appearance, but when the two cannot be achieved at the same time, most ordinary people will prioritize substance.This may be an important reason why PDD can stand firm in the red sea of e-commerce. Looking back at the conversation, it can be seen that PDD today, Huang Zheng has already thought it through before going public.

Here is the full text of the 2018 Wall Street interview with Huang Zheng:

Going public for better communication, not concerned about stock price

Q: Why choose to go public in the United States?

Huang Zheng: The first reason is that the time is relatively short, and the listing conditions for A-shares vary in each region. Currently, overseas listing is the most smooth, and the top 5 global market value companies are all listed on Nasdaq. At the beginning, PDD, like other internet companies, was funded by foreign institutions in the A, B, and C rounds. Almost all of them are foreign institutions.

Q: Why go public now? Is it related to the current capital environment?

Huang Zheng: Among the 1,000 startups we have seen, PDD is still very special. What makes it special? First, its business form itself has a strong social attribute and is more public-oriented. Its scale has rapidly reached a large quantity. In fact, the phenomenon of PDD has become a social phenomenon, which is caused by its scale. It can be called social influence or social responsibility. We also have heavier responsibilities on our shoulders and hope to put ourselves under stronger supervision.

Another reason is that I have a background in science and engineering, and I never knew how to communicate with liberal arts students before. So in the two or three years of PDD's operation, there were very few communication meetings. Because when you have less communication, there is a lack of mutual understanding, and the credibility of many things you say is actually low. So I think going public is a good way to bring out everything at home and expose it to the sunlight. Through credible institutions and recognized processes, it is more credible and to some extent reduces our burden, which is conducive to everyone's understanding. I think this is the most important thing.

As a company of this form, if there is no significant difference in three or five years, it is better to put this company under regulation.

The cold and hot of the capital market are relative. Even in the coldest times, there are still people investing, and even in the hottest times, there are still people not investing. I didn't feel any major changes in the capital environment myself.

Q: During the roadshow, what were the institutional investors most concerned about regarding PDD? What was the most difficult for them to understand about PDD?

Huang Zheng: I think sometimes it is like this. For companies like us, the most prone to mistakes are the "waist" part, which is neither the front line nor the macro level. On one hand, PDD is a new thing that has risen rapidly and has broken some interest patterns. In this case, there will inevitably be a process of acceptance for quite a few people, whether they are competitors or others. They also have certain biases, not malicious biases subjectively, but because their position and status are not suitable, they will have this state. So the frontline consumers of PDD are the ones who understand it the most. They can see whether 10 mangoes are good or bad every day, and whether they are getting better or worse. They are very clear about it.

Q: Do you think the current stock price has exceeded expectations? Any thoughts on the opening?Huang Zheng: Regarding the stock price, I haven't really thought about it or had any specific expectations. First of all, PDD is still in its early stages, but the overall scale of the IPO is not small. Secondly, I firmly believe that prices fluctuate around value, and if we focus on delivering our own value, the fluctuations will be minimal and won't have any actual impact. So the more we care, the more it will affect our mental state.

I was tempted to raise the price, but I don't want to take advantage of others

Question: The subscription for PDD's stock was quite popular, and PDD has the right to increase the price by 20%, but why did you insist on keeping it at $19?

Huang Zheng: Actually, I was tempted as well, and it's already a substantial amount of money. This is also a good opportunity to demonstrate our values to everyone. I wrote several points in the prospectus, and one of them is that I don't want to take advantage of others, even if I can purchase the stocks. Because we have already announced a price range of $16 to $19, normally when investors place their orders, they don't expect the price to increase. If suddenly there is an oversubscription of tens of times, they have no choice but to accept it. To some extent, it would be taking advantage of them because I am in a favorable position. But before they placed their orders, they were in a favorable position because they gave me the money, and I even charged them a handling fee. It would be maximizing my own self-interest.

Question: Why was the subscription so popular this time? Did you have any expectations?

Huang Zheng: I wouldn't say it was unexpected. Sometimes, when you stand at a distance, your mindset tends to be better. On one hand, the capital market is relatively mature and more rational, with less influence from emotional factors. And being away from China, I tend to think about this issue from a relatively macro perspective and rational standpoint. Of course, as an investor, I am also excited. PDD has achieved a significant scale in a very short period of time. This scale and growth cannot be achieved solely by the capabilities of one team. There is indeed a significant element of luck involved. So I believe PDD is still in its early stages and has a lot of room for growth.

Where is PDD's future growth potential?

Question: The user base has reached 300 million, and the cost of acquiring users has increased from 11 yuan per person to nearly 49 yuan per person in the first quarter of this year. The cost of traffic is becoming more expensive, and the cost for merchants will also increase. Where is PDD's future growth potential?

Huang Zheng: If you look at the so-called cost of traffic, our marketing expenses in the financial report suddenly surged. Assuming the ability to acquire users has weakened, the cost should have gradually increased, not suddenly jumped. The main reason for the jump is that our advertising revenue has increased. After the increase in advertising revenue, during the growth period, we still need to use this money wisely. We can't start distributing dividends right now. We need to find something that will help the company's intrinsic value in the long term. Currently, brand advertising may be beneficial for PDD. Compared to traditional e-commerce platforms, PDD has relatively lower trust and brand recognition among users. Hearing about PDD from friends and seeing it on CCTV is somewhat different.So we spend a lot of money on brand advertising, and the management believes that this is a long-term investment.

If we continue to spend this money for two or three years, PDD will become a brand with high credibility in the minds of consumers. It's like buying intangible assets, but in the financial statements, it can only be recorded as marketing expenses. If you think about it calmly, for example, when you see an advertisement for the World Cup, the scene is drinking beer and eating chicken wings in front of a big screen. There is no spare time to download an app, which is unlikely. But PDD appears in this scene, it leaves an impression in the consumer's mind, and they will associate you with the World Cup, which increases their trust in you. This is a long-term and subtle process.

Q: Currently, PDD's main sources of revenue are advertising and commissions. Will this model continue in the future? Or are there any new sources of revenue growth?

Huang Zheng: Alibaba has already proven that this model can be used without making any new changes. We haven't seriously studied how to make more money at the moment. This business model is mature enough and has a large scale.

How will user growth continue?

Q: PDD has reached 300 million users. Is it already in a period of growth or relatively stable?

Huang Zheng: It's still growing rapidly because Taobao is very famous in China, and everyone knows about it. So if these 300 million people already know or have used Taobao, why wouldn't American users use PDD?

Q: There are only 700 million internet users in total, and we already have 300 million. At the current growth rate, we may hit a ceiling in the second half of this year.

Huang Zheng: When there is a shortage of users, you definitely prioritize user development. When you reach a certain level of users, your business will go through an iterative process. User growth is exponential, but the hard work in the supply chain grows linearly. So you will see that the growth rate of users is greater than the growth rate of individual user consumption. Although both are increasing, one is exponential and the other is linear. So usually, you first need enough users, then iterate the business, and then the average consumption per person will increase. There should be a sequence.

Q: Why are most of PDD's users in lower-tier cities?

Huang Zheng: We have about 340 million users, which is about half of Alibaba's user base. I guess most of these users are aware of and have used Taobao. In my mind, I don't think there is any Chinese person who doesn't know about Taobao. Today, most of our users are actually converted from Taobao. It's not that they don't use Taobao 100%, but because PDD has created a new scenario where there was no good platform or tool to meet their needs, and in this new scenario, PDD has become the number one company.

PDD's development has an element of luck.

Q: The letter to shareholders in the prospectus mentions "本分" (modesty), but PDD is going public before its third anniversary. How do you define "本分" and ambition? Recently, many Chinese concept stocks have experienced a decline after going public. What is your view on this?

Huang Zheng: I haven't thought about this specifically because it doesn't have much impact on me whether others perceive me as ambitious or not. Secondly, I always think from the perspective of PDD and what is beneficial for its long-term development. I have started more than one company, and PDD is definitely the fastest-growing one. There is a significant element of luck involved, which not everyone or every team has. Even if you work hard and are talented, it may not work out if the timing is not right. This feeling is not due to our team's factors but more driven by the market.

PDD may not become "Tmall"

Q: In the future, will PDD become a platform for categorized products, similar to how Taobao incubated Tmall, which is relatively better and more stable in terms of quality?

Huang Zheng: We may not become Tmall because Taobao operates on a search model.

Q: Will PDD have a better product for the middle-class users, like Taobao and Tmall?

Huang Zheng: Eventually, you will get what you want, but our presentation and upgrade methods are not the same as theirs.

Q: Is PDD downgrading consumption?

Huang Zheng: I don't like this term. I don't know who came up with it and from what perspective they are looking at this issue. On the contrary, I mentioned earlier about upgrading consumption, and I don't fully agree with the current understanding of many people.

First, in cities like Shanghai, there is no need to upgrade to using French soap every day. I think the daily life information is already at a world-class level. How much more can you upgrade?

Second, everyone's upgrade is different. Some people may think that buying a few sheets of kitchen paper is an upgrade, while others consider natural and pure colors as an upgrade. Different people have different definitions of upgrading.

Agree with Liu Qiangdong's statement: Ultimately, it's about user experience

Q: How do you view Liu Qiangdong's statement that he doesn't care about business models but cares about user experience, and that in China, after buying three times, you will know the difference between PDD and JD.com? Are you friends privately? Do you have any business cooperation?

Huang Zheng: I fundamentally agree with Liu Qiangdong's statement. Ultimately, it's about user experience and comprehensive cost-effectiveness. I don't know the specific context of Liu Qiangdong's interview. The growth of PDD is a typical example. For example, when we sell fruit, there will inevitably be some bad ones because China's express delivery is not designed for fruit. In this situation, customers will naturally be unhappy and may complain and request partial refunds, but at the same time, they do receive relatively fresh mangoes. Secondly, the price of individual mangoes is much cheaper.

For ordinary people, they may complain about the products they buy and request refunds, but they will still buy again next time. Everyone hopes to focus on both substance and appearance. When the two cannot be achieved simultaneously, most ordinary people prioritize substance. They first consider whether the product is good or not, and then consider whether they can afford to buy it. If their material needs are not met, it is impossible to have a spiritual life.In the current situation in China, I think the main issue is the imbalance. Therefore, the first thing to pursue is personalized, differentiated, and fair consumption. I remember in an interview, Liu Qiangdong mentioned a phenomenon mentioned in "The Wealth of Nations," which is that in poorer areas, things are more expensive, while in wealthier areas, they are cheaper. This phenomenon is widely prevalent. I think PDD has a dream of leveling the playing field in consumption.

Relationship with Alibaba and Tencent

Q: Can you talk about the differentiated competition with Taobao? How will PDD upgrade?

Huang Zheng: There is no competition with Taobao. We have different users.

There are two aspects to future upgrades. One is the interaction mode on the front end. Can it be more interesting? Can we gain greater benefits from small innovations? Or there should be more different scenarios. "Group buying" is a common scenario, which can also appear in various forms and consumption scenarios.

For example, we have launched "Duoduo Orchard" now, which is quite interesting. It combines gaming, entertainment, and shopping. You can water trees and even steal water from your friends.

Q: What role does Tencent play in PDD's development? How would you describe the relationship between Tencent and PDD?

Huang Zheng: Tencent did not invest in us in the first year and a half, so at that time, we relied more on WeChat for our development. This shows that Tencent's brand is influential. At that time, Tencent had invested in many e-commerce companies, not just PDD. We did not receive unfair treatment at that time. After Tencent's investment, we also do not seek more favorable terms for ourselves, which may not be good for the entire ecosystem. However, of course, PDD's current scale is large, and it plays an increasingly important role in WeChat Pay and the entire commercialization process. The scope of business cooperation will continue to expand, and mutual dependence will increase.

Not regretting not ringing the bell in the US

Q: Why did you choose to ring the bell in two locations?

Huang Zheng: We haven't done it before. On the other hand, it's not convenient for many people to go to the US. For me, if there is an opportunity for consumers, employees, including the media and those who have helped us in the past, to be together, it feels better than going there alone. It feels like this thing belongs to all of us.

Q: Will you feel regretful?

Huang Zheng: Why would I feel regretful?

Q: Because for many entrepreneurs, it is considered a sacred and important moment.

Huang Zheng: I don't feel that way.

Q: Does ringing the bell have any special meaning for you?

Huang Zheng: It's just a process, a formality. It doesn't affect the substance. It's not like anything will change if I ring it.