PDD Holdings Earnings: Lifting Valuation by 11% After Strong Earnings Beat; Shares Cheap

PDD Holdings’ PDD 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.

We lifted our five-year revenue CAGR to 21% from our previous estimate of 17%. Our take-rate assumption for 2023 is now 4.8%, versus 4.0% assumed previously, and is expected to increase to 5.2% in 2027, versus our previous estimate of 4.3%. Our five-year non-GAAP operating income CAGR is maintained at 17% as operating leverage at Pinduoduo is offset by the investment in the Temu business. Our new 2023 revenue and non-GAAP operating profit are both 13% higher than Refinitiv consensus as of Aug. 30.