PDD Holdings Admits First-Party Brand Rollout Is Lagging as EU Duties Hit Temu Fulfillment and Net Income Falls 12%
Second quarter 2026 earnings call, August 24, 2026
First-party brand push is behind schedule, and management is saying so
The most notable disclosure from PDD Holdings' second quarter call was an unusually direct admission on the "building another PDD" initiative. Co-Chairman and Co-CEO Zhao Jiazhen said the initial rollout of the first-party brand model over the past six months "was slower than expected due to certain external factors," and later added that "the business requires an extended period of development and collaboration, and the initial rollout has taken longer than we originally expected." Management did not quantify the delay, name the external factors, or offer revised milestones. Operations are described as "fully underway and progressing smoothly," but there is no financial evidence yet that the three-year initiative is contributing to results.
Responding to a question from Jefferies' Thomas Chong on how to frame the initiative, Zhao said the company will start with a selective set of core categories where its platform and supply chain give it an advantage. It will work with manufacturers from product planning and R&D through quality standards and market testing. He also sought to reassure merchants that the "commitment to maintaining an open and fair marketplace will not change," and that first-party and third-party products will "complement each other." Chong also asked about the mix between the two and how first-party pricing would be set. Neither question was answered with specifics. For investors, the model remains a strategic intention rather than a measurable business, and the timeline for evidence has slipped.
EU customs duty puts a "considerable" dent in the cross-border business
On the global business, Co-Chairman and Co-CEO Chen Lei was more candid than usual about near-term damage from the EU's temporary customs duty on low-value consignments, which took effect in July. He said "cross-border orders in the affected markets will face lower fulfillment efficiency and higher costs, which will have a considerable impact on those parts of our business." Management gave no order volume figures or quantified estimates, which leaves the size of the hit unclear. Because the duty took effect only in July, its effect is not visible in second quarter results and will first show up in the third quarter.
The strategic response is a shift away from direct-from-China shipping toward local supply and infrastructure. PDD will onboard more local merchants in the affected markets and accelerate the build-out of local warehousing and fulfillment. Zhao described the logic of the transit warehouse investments: "fragmented point-to-point shipping by individual merchants oftentimes makes it very difficult to achieve the economies of scale that is made possible through the consolidation of shipments." This points to higher capital intensity and operating complexity in the international business, which has been built on an asset-light model. Chen also cited a recent favorable ruling in IP litigation involving an industry peer as evidence that the company's intellectual property protection mechanisms work. He described regulation as an issue "the entire industry must address" and said short-term volatility "will not change the long-term direction of our global business."
Revenue grows 8%, but profit falls as reinvestment bites
Group revenue rose 8% year over year to RMB 112.4 billion. Transaction services revenue grew 13% to RMB 54.7 billion, while online marketing services and others revenue reached RMB 57.6 billion, up from RMB 55.7 billion, or roughly 3%. Transaction services is now growing materially faster than advertising. This is consistent with a platform that is prioritizing merchant economics and consumer pricing over monetization, and it is a notable split in a business historically driven by ad load.
Profitability weakened. Net income attributable to ordinary shareholders fell 12% to RMB 27.2 billion from RMB 30.8 billion. Non-GAAP net income was RMB 28.5 billion versus RMB 32.7 billion, a decline of about 13%. Non-GAAP diluted earnings per ADS were RMB 19.33 against RMB 22.07 a year earlier. Non-GAAP operating profit rose to RMB 29.1 billion from RMB 27.7 billion, but non-GAAP operating margin slipped to 26% from 27%. GAAP operating profit rose 8% to RMB 27.8 billion. The larger decline in net income than in operating profit implies weaker non-operating contributions, though management did not break these out on the call.
Non-GAAP operating expenses rose to RMB 35.3 billion from RMB 30.4 billion and reached 31% of revenue versus 29% a year ago. Sales and marketing expense was RMB 29.3 billion, up 10% but stable at 26% of revenue. The two items driving deleverage were general and administrative expense, which rose to RMB 1.7 billion from RMB 0.7 billion, and R&D, which climbed 40% to RMB 4.3 billion. Management attributed the R&D increase mainly to platform governance and trust and safety investment. The G&A jump was not explained on the call and may reflect compliance and legal costs tied to the regulatory pressures discussed in the global business remarks. Cost of revenues rose 5% to RMB 48 billion.
Operating cash flow improved to RMB 25.7 billion from RMB 21.6 billion, and cash, cash equivalents and short-term investments stood at RMB 456.4 billion at quarter-end. The balance sheet leaves ample room to fund the reinvestment agenda, and the shares trade at roughly 7x forward earnings, which indicates that the market is pricing in sustained margin pressure rather than a recovery.
Governance spending is rising, and it is now a cost line
Management framed platform governance as a core investment theme. It said it has introduced more than 150 trust and safety measures, including over 50 targeted initiatives in June alone. These cover product listing controls, food and drug safety, advertising compliance, intellectual property, misleading marketing, live-stream standards and technology misuse. The company has banned the sale of freshly prepared food and beverage products, tightened merchant qualification reviews, and expanded specialist trust and safety teams. Chen said IP screening now combines technology with expert review "in real time."
The financial implication is visible in the 40% rise in R&D and the higher G&A. Management presented this as building a "safer, better regulated, and more trustworthy shopping environment," but the pattern also suggests a structurally higher compliance cost base, both domestically and abroad. The company did not offer a view on when this spending would normalize.
RMB 100 billion support program: anecdotes rather than metrics
Management said the RMB 100 billion program has entered a phase where "sustained investment is beginning to yield tangible results." Evidence consisted of case studies rather than platform-level metrics. A Guangdong cosmetics company cut customer acquisition costs and reinvested in a two-year R&D effort to build patented brands. Merchants in the Zhongshan lighting belt used fast product testing to launch a best-seller with several million in sales within months. Hainan's Golden Diamond pineapple acreage has grown to more than 100,000 mu, and Xinjiang textile producers report average annual sales growth of 4x to 5x. Manufacturers in supported industrial belts reportedly halved production cycles.
Bank of America's Joyce Ju asked whether a healthier merchant ecosystem would translate into higher advertising spend. Management declined to give a timeline. Zhao said "building a healthier merchant ecosystem takes time," and finance chief Jun Liu said that by "getting these fundamentals right, we believe the sustainable growth in the platform's intrinsic value will naturally follow." The ad revenue growth of roughly 3% against 13% for transaction services indicates that monetization is not yet the priority. Management also gave no full-year consumer or revenue outlook beyond noting that rural retail sales grew faster than the overall market in the first half.
Free shipping to villages scales, while quick commerce is explicitly rejected
The free shipping to villages program, launched six months ago, now has last-mile networks across more than 10 provinces and municipalities, including county-level transit hubs and village pickup points. Zhao cited local service stations covering all 177 villages in Youxian, Hunan, and parcel volumes to villages in Shandong exceeding 100,000 per day. Order volumes in pilot Shandong villages are up "several fold," albeit from a low base. The program targets last-mile gaps in remote Western regions and rural areas, and management positions it as an infrastructure investment with long payback.
In response to Citigroup's Alicia Yap, management drew a clear line on quick commerce. Zhao said it "serves different consumer needs and use cases" and, at PDD's current stage, differs in both supply chain requirements and operating model "with limited scope for synergies." The company will not chase same-day delivery. This avoids the heavy subsidy burn seen among peers, but it also leaves PDD without a direct response if instant retail shifts consumer habits and mindshare in categories such as grocery. Management's defense is its supply chain emphasis through the new quality supply and Pinduoduo Premium produce programs.
New Xiong'an entity points toward intelligent technology and manufacturing services
Zhao also disclosed that PDD has established a dedicated company in the Xiong'an New Area and bought an office building there to pursue opportunities tied to "intelligent technologies." The company has also set up a data processing service center for traditional industries and an integrated service center to help manufacturers move up the value chain. No investment amounts, headcount or revenue model were provided, so this reads as an early signal about the direction of the supply chain strategy rather than a quantifiable initiative. Management also paid tribute to independent director Professor Ivonne Rietjens, who died recently, and noted a RMB 10 million donation for flood relief in Guangxi.