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The Chinese e-commerce giant Pinduoduo Inc. has entered the American market, the first overseas push by the company. The Tencent-backed Chinese e-platform Pinduoduo Inc. (Nasdaq ADR: PDD) was founded in 2015 by ex-Googler Colin Huang. It is one of the biggest online marketplaces for agricultural products in China. They enable direct sales between small-scale farmers and consumers by eliminating middlemen, improving the efficiency of the entire supply chain. Pinduoduo’s core value is “本分” (Ben Fen) which in essence translates to adherence to one’s duties and principles. Nowadays, Pinduoduo offers more than agricultural products.
Temu, the first international expansion of Pinduoduo, went live for American users in the last week of August 2022. The Temu site is similar to Shein in terms of layout and would be selling a range of products from apparel to electronics. “The overseas business is one of the opportunities we see… (we) see many peers in the industry achieving good results, so we believe it’s a direction worth trying out,” CEO Lei Chen said in a post-earnings call with analysts in August 2022. “The company will not just “simply repeat what others have done in this field. What is important to us is that we will start from the needs of consumers and strive to create our own unique value” and that the company is “sufficiently aware that overseas business will be challenging and the process would not just happen overnight,” Chen added.
Pinduoduo’s business model
The Shanghai-based company reported a revenue of 31.44 bn yuan ($4.55 bn), up by 36% year on year (YOY), for the second quarter that ended June 30, 2022. The earnings were better than what was projected for the company due to a rise in sales of agricultural products, fast-moving consumer goods (FMCG), consumer electronics and beauty products.
The company’s capacity to support group shopping, a growingly popular trend in China where networks of friends or neighbours buy goods together to receive deeper discounts contributes to its success. The company has been trimming costs while seeking out new areas of growth and inclusive of coupon campaigns which have resulted in its net income more than tripling in Q2 of 2022. The US-traded firm roughly holds a 13% share in China’s e-commerce market despite its late arrival in 2015.
The social e-commerce practices of Pinduoduo by mashing up WhatsApp-Groupon-like techniques have made the company acquire an active user base of more than 880 million where consumers can spot deals and then club together with friends to get deeper discounts. “We saw a recovery in consumer sentiment in the second quarter, especially during the shopping festival,” said CEO Chen Lei during the post-earnings call.
Stock price of Pinduoduo
Although the Nasdaq Golden Dragon China Index has plunged in the past year, the shares of Pinduoduo Inc. have posted a rapid recovery, rallying 167% from its March 2022 lows ahead of its competitors Alibaba and JD.com. The outperformance highlighted the price sensitiveness of the Chinese consumers, especially under strict China’s Zero Covid Policies and real estate woes.
“Pinduoduo benefits because the Chinese don’t want to spend much on luxury goods. They want to find bargains, so that’s a platform where they will go to,” said Paul Pong, managing director at Pegasus Fund Managers Ltd. told Bloomberg. The PE Ratio of the stock stood at 34.56, while the forward PE ratio is expected to be 33.22.
Pinduoduo stocks traded at 32x trailing 12-month adjusted profit post the Q2 earnings call. “The company has the highest DAU/MAU ratio amongst all China eCommerce platforms (indication of stickiness & high purchase frequency of its users),” a Goldman Sachs analyst wrote in a client note.
Troubles in the US and other struggles
The Securities and Exchange Commission (SEC), the US markets watchdog, added more than 80 companies, including Pinduoduo Inc., to its list of companies that may be barred from trading on American exchanges. This came as a result of Beijing’s unwillingness to grant access to the companies’ financial audits. The list also included major Chinese companies like NIO Inc., China Petroleum & Chemical Corp. and JD.Com. While the audit issue reached an intitial agreement, valuations of several US-listed Chinese firms, including Pinduoduo, have emerged from the slump riding high on rising consumption back home.
Like most e-commerce firms, fake goods are a big issue for Pinduoduo Inc., which accounted for 13.2% of total consumer complaints filed against China’s top 25 online shopping platforms, according to a 2016 survey from China E-commerce Research Center. The users reported issues such as bad products and difficulties in the refund process. However, even with the challenges, the company has delivered great numbers so far. “We remain focused on building long-term intrinsic value and investing for the future,” said CEO Chen Lei.
