PDD Earnings: Managed Finances Well Despite Temu’s Expansion; China Outlook Upbeat This Year

Narrow-moat PDD Holdings’ PDD 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.

In our view, the frequent festivals (for a category or a specific city or a specific Chinese festival for example) held at PDD help to drive traffic. The increase in consumer protection has led to higher consumer loyalty, which translates to higher stickiness and advertising activities of its merchants. While such consumer satisfaction could come at the expense of merchants at times—for instance, refund without return of the merchandise to merchants—merchants continued to stay due to the powerful network effect. We continue to like the firm’s focus on agricultural products to drive user traffic and cross-selling opportunities to other categories at Pinduoduo.