Company Reports

Independent media WeChat account Wai Mao Jia reported on May 28 that a substantial amount of Temu's (PDD's overseas e-commerce platform) and Shein’s merchandise were stuck at US customs, as 15 US customs brokers that Temu and Shein cooperated with were suspended due to compliance issues. Assuming Temu could rectify the customs reporting of the merchandise to clear the customs or cooperate with other customs brokers in a short time, we expect an immaterial impact on our 2024 earnings forecast and fair value estimate. However, assuming Temu takes a quarter to solve this issue, we estimate a negative 4% impact on PDD’s 2024 non-GAAP EBIT. That said, we still expect a limited impact on both our long-term estimates and valuation, as Temu should be able to rectify the customs reporting issue eventually. PDD’s share price closed 1% higher on May 29 after this news and we think the market is expecting a negligible impact from this incident. We maintain narrow-moat PDD’s fair value estimate of $230 per ADS and think the shares are undervalued.

Narrow-moat PDD beat LSEG revenue and non-GAAP operating profit consensus by 15% and 89%, respectively, in the first quarter. PDD’s transaction services revenue and non-GAAP operating profit also track well ahead of our full-year estimate, thanks to substantially stronger Temu revenue and lower selling and marketing expenses. We raised our total revenue estimate by 8% for each of the next three years. We lifted our fair value estimate by 8% to USD 230 per ADS as we raised our non-GAAP operating profit estimates by 50%-59% for 2024-26 primarily to reflect stronger performance for Temu, partially offset by higher working capital. In our view, the shares are currently undervalued. We think Temu’s profitability will improve faster than previously estimated due to its introduction of the half consignment model, under which logistics costs will be borne by merchants. We also believe PDD’s domestic platform will be able to defend its position given the strong consumer perception of its value-for-money positioning. Our order of preference in the traditional Chinese e-commerce platforms is PDD, then JD.com, and then Alibaba.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network leads to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 billion program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March 2022 were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

PDD Holdings’ fourth-quarter revenue and non-GAAP operating profit beat LSEG consensus estimates as of March 20 by 12% and 41%, respectively. Revenue surged 123% year on year, mainly driven by the 357% jump in transaction services revenue thanks to overseas e-commerce platform Temu. Online marketing services revenue registered strong year-on-year growth of 57%, boosted by an estimated nearly 30% surge in gross merchandise volume and a higher monetization rate. We were surprised by the cost-control measures amid Temu’s expansion. Total non-GAAP operating expense as a percentage of total revenue was 33% in the fourth quarter, compared with 48% a year ago. We believe this is mainly driven by the 1,300-basis-point year-on-year reduction in non-GAAP sales and marketing expenses. This might explain the 12.5% month-on-month drop in observed sales for Temu in December 2023 published by Bloomberg Second Measure, which tracks a subset of US credit and debit card transactions.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network leads to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 billion program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March 2022 were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network lead to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 Billion Program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, or ARPU, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in March 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network lead to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 Billion Program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, or ARPU, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in March 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

PDD Holdings' third-quarter results beat Refinitiv revenue consensus as of Nov. 27 by 24% and non-GAAP operating profit by 81%, leading to an 18% jump in the share price on Nov. 28. PDD delivered 94% year-on-year growth in revenue and a 47% jump in non-GAAP operating income. Management observed a consumption upgrade in their platform in the quarter, which should help increase gross merchandise volume and revenue in our view. We increased our fair value estimate to USD 213 per ADS from USD 117 due to our incorporation of the overseas platform Temu in our valuation. We raised our 5-year revenue CAGR to 36% from our previous 21% estimate and non-GAAP operating income CAGR to 21% from 16% forecast previously. We forecast Temu’s revenue to grow at a CAGR of 55% from 2023-28 and operating profit to turn positive in 2028, later than management’s internal expectation of 2025-26 as reported by 36Kr. By 2032, Temu’s operating margin will reach 28% versus negative 73% in 2023, similar to the current operating margin of domestic e-commerce business Pinduoduo in our estimate. We anticipate over 60% of GMV at Temu is generated from the U.S. A ban on Temu in the U.S. due to national security and introduction of a custom tax on goods under USD 800 shipped directly to the U.S. will substantially reduce Temu’s valuation. Increasing competition with Shein, AliExpress, and other e-commerce companies could also harm Temu’s growth. Hence, we maintain our Very High Morningstar Uncertainty Rating for PDD. We find PDD’s shares undervalued. In our opinion, PDD is the best positioned amid value-for-money consumption trends in China and will benefit from strong long-term growth at Temu. Our order of preference is PDD, JD.com, and Alibaba.

China’s August online and offline retail sales of consumer goods growth improved to 4.6% year on year in the month versus 2.5% in the prior month, thanks to the rollout of supportive policies by the government, in our view. Online sales of goods in the month were up 8% year on year, slightly better than the 7% in the previous month. We maintain our forecasts and fair value estimates for Alibaba Group at USD 128 per ADS and HKD 124 per share; JD.com at USD 88 per ADS and HKD 341 per share; and PDD Holdings at USD 117 per ADS. This is because we think China’s online consumption trend is in line with our expectations. In our view, PDD Holdings is fairly valued. While both Alibaba Group and JD.com are undervalued for long-term investors, we don’t see near-term catalysts for these shares. The physical goods e-commerce penetration in the month reached 26.3%, compared with 25.5% in August 2022. So far after the phasing out of the lockdown measures, we don’t see the offline segment taking market share, although people are going out more. Year-to-date physical goods e-commerce penetration was up 80 basis points year on year, supporting our forecasts of long-term e-commerce penetration increasing to 42.2% in a decade.

Grizzly Research, or Grizzly, released a short-selling report on narrow-moat PDD Holdings, or PDD, leading to a 5% stock price drop on Sept. 7. We think the conclusion that PDD is a dying company lacks merit. PDD continued to outperform Alibaba and JD.com in its second-quarter revenue and bottom line by a wide margin. We keep our fair value estimate at USD 117. We believe PDD is the best positioned amid value-for-money consumption trends given its strong network of merchants providing such products and consumers’ identification with PDD as such a platform. That said, we think the short report may negatively affect sentiment and share price in the near term. We recommend waiting for a pullback to buy the shares.

PDD Holdings' second-quarter results beat Refinitiv revenue consensus as of Aug. 29 by 18% and non-GAAP operating profit by 36%, leading to a 15% jump in share price on Aug. 29. PDD delivered 66% year-on-year growth in revenue and a 42% jump in non-GAAP net income. Management observed solid recovery in consumption on Pinduoduo, the Chinese e-commerce platform, in the quarter. Encouragingly, categories such as electronics and handsets, which are JD.com’s stronghold categories, and cosmetics, which is Douyin and Alibaba’s strong category, grew well in the quarter at Pinduoduo. Additionally, there was a growing number of brands in multiple categories at Pinduoduo in the quarter. We revised our fair value estimate from USD 105 per ADS to USD 117. It is due to faster-than-expected expansion of the take rate, which is revenue/gross merchandise volume, and better-than-expected earnings, despite expenses associated with the expansion of Temu, the overseas e-commerce platform. Temu operated in over 37 countries as reported by 163.com on Aug. 29. We find the shares undervalued, and we think PDD is the best positioned amid value-for-money consumption trends. Our order of preference remains PDD, Alibaba Holdings, and JD.com.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network lead to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 Billion Program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, or ARPU, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in March 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network lead to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 Billion Program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, or ARPU, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in March 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

Narrow-moat PDD Holdings' first-quarter results beat revenue consensus (Refinitiv) by 18% and non-GAAP net profit by 87%, leading to a 19% jump in share price on May 26. PDD delivered 58% year-on-year growth in revenue and a 130% jump in non-GAAP operating income, despite expenses associated with the expansion of Temu, the overseas e-commerce platform, which gained good traction overseas in the quarter. From April 26 to May 26, according to our check on data provider Sensor Tower, Temu was the most downloaded shopping app most of the time of the period in all its reported operating countries. Management is very upbeat on the recovery in consumption on Pinduoduo, the Chinese e-commerce platform, so far and this year. Categories across the board grew well in the quarter at Pinduoduo. Our fair value estimate stays at USD 105 per ADS. We find the shares attractive.

The readthrough from Vipshop’s (VIPS, not covered by Morningstar) first-quarter earnings for our e-commerce coverage is generally positive, with continual recovery in consumption. This is especially the case for Alibaba Group, whose core category is apparel; and PDD Holdings, which is a value-for-money platform. Vipshop is a leading online discount retailer for brands in China that focus on the apparel category. We make no changes to our fair value estimates for Alibaba, PDD and JD.com.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network lead to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 Billion Program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in March 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network lead to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 Billion Program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in March 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

Narrow-moat PDD Holdings’ (previously known as Pinduoduo Inc) shares sold off 14% after reporting fourth-quarter results, as revenue missed Refinitiv consensus as of March 20 by 3% and our estimate by 14%, and non-GAAP operating income missed consensus by 5% and our estimate by 6%. We estimate that gross merchandise volume year-on-year growth in the quarter decelerated and the take rate (transaction services and online marketing services revenue/GMV) declined sequentially. We think PDD’s long-term market share gain, take-rate increase, and margin expansion trend has not changed.

Pinduoduo is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network lead to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 Billion Program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in March 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

Pinduoduo is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network lead to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 Billion Program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in March 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.