PDD Holdings Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Pinduoduo (PDD) is a multinational e-commerce company operating primarily in China, focusing on connecting merchants and buyers through a platform that emphasizes value-for-money and social engagement.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

PDD Holdings Inc. operates a unique e-commerce platform with a strong emphasis on value-for-money and social aspects of shopping primarily in China, with a small presence in North America. This contrasts with traditional e-commerce, which often focuses on individual purchasing. PDD has historically leveraged a “team purchase” concept, where users can purchase goods at discounts by forming teams with friends or family and where buyers purchase direct from manufacturers. This strategy creates a “group buying” environment, offering reduced prices. PDD recently started a new “Temu” platform outside of China in North America that serves a global market with similar characteristics (low prices).

  • Revenues Distribution:
    • PDD’s revenue streams are primarily from online marketing services and transaction services, which are offered on the platforms operated by the group. Online marketing services are those used for the display of ads, promotions, and search results in connection with goods offered on the platform while transaction revenues represent the handling of the transactions on the marketplace and its services. In 2021, online marketing services were RMB75.2 billion and transaction services were RMB24.6 billion. In 2022, online marketing services were RMB103.9 billion and transaction services were RMB28.8 billion. As of 2023, this revenue is split into online marketing services which comprised 156 billion RMB in 2022 versus 224 billion in 2023, while transaction services increased from 40.9 billion in 2022 to 57 billion in 2023.
  • Industry Trends:
    • The Chinese ecommerce market is known for its competitive intensity, with companies constantly vying for market share and customers.
    • There is a growing trend of consumers gravitating to value focused options.
    • Consumers are increasingly interacting with companies through social networks and platforms.
    • There is growing regulation of foreign companies, including the U.S.
  • Profitability:
    • PDD has shown strong positive profit margins in the latest reports. In 2023 PDD was able to create 60.2 billion RMB in net income on total revenue of 247 billion RMB.
    • The net profit margins have improved from 15.7% in 2022 to 24.4% in 2023.
  • Despite the positive increase in net profit, operating expenses also rose to 146.2 billion RMB from 112.2 billion RMB in 2022.

Competitive Landscape While PDD dominates the agricultural goods space in China, the market is incredibly competitive overall, especially with the growth of other large players, such as Alibaba and JD, that are trying to break into this growing market. This poses a threat to PDD, as these companies may steal some market share away. In international markets PDD is competing with well-established giants such as Amazon.

What Makes PDD Different

  • Emphasis on Value: PDD’s core strategy revolves around offering low prices, utilizing a group buying concept to attract price-sensitive consumers. This makes PDD attractive to a huge section of the population that is looking for deals and discounts, and hence generates large amounts of sales and revenue.
  • Social e-commerce: The platform emphasizes social sharing and team buying as core parts of the shopping experience, enhancing user engagement. Users are encouraged to form buying teams, hence, they need to bring friends to the platform to be able to get the best prices. The unique concept is a way to pull in more users to the platform and ensure engagement of the users.
  • Temu: While PDD is focused on China, Temu gives PDD a global growth engine by entering into markets in the west, such as America, with similar characteristics of low cost and direct from manufacturer purchasing experience. Temu also has unique features of its own which has led to high user growth, allowing the platform to become the leading app in the US in very short period of time.
  • Focus on Agriculture: While the platform sells a wide variety of items, it is the largest online platform for agriculture in China, thus creating a niche for the company and establishing trust with the Chinese farmer community, which in return produces a steady stream of users.

Financial Analysis:

  • Revenue Growth: PDD has shown strong revenue growth in the recent past, as a result of their growing user base and sales. Revenue has increased 18.98% annually for the 2018-2023 period. In just the year 2023 they increased revenue by 90%, from 146 billion RMB to 274 billion RMB.
  • Profitability:
  • PDD has become increasingly profitable, reversing the unprofitable times in the early years. The net income has steadily increased, going from 1.64 billion RMB in 2019 to 60.2 billion in 2023.
  • Cash flow: PDD had positive 2023 cash flows from operation amounting to 64 billion RMB, a jump from 30 billion RMB in 2022 and 11 billion RMB in 2021, showing increasing efficiency and profitability for the company.
  • Balance Sheet: PDD has an excellent balance sheet. It has 195.8 RMB billion in cash and cash equivalents as of December 2023 against debt of 12.2 billion RMB. The company also has total current assets of 131 billion RMB against total current liabilities of 71.7 billion RMB, implying the company has a high level of liquidity and stability. This high cash position is a great sign for investors, and also leaves the company open for future buybacks and growth. PDD has managed to stay clear from bankruptcy even through hard periods of lock-down and recession.

Controversies and Risks to the Moat:

  • Regulatory Risks: As a Chinese company, PDD is inherently subject to changes in Chinese regulations, in addition to international regulations, which can often change quickly and impact the business. This has been a serious concern for many investors in the past years due to increasing trade tensions and political uncertainty, especially with the recent trade war between the US and China and increasing US scrutiny on Chinese based companies.
  • Competition: Intense competition with other Chinese E-commerce giants like Alibaba and JD poses a challenge to PDD. These competitors have the capability to steal market share away, even if PDD is able to retain its existing users. A strong economic moat is also dependent on low market share, as any new large player has the potential to upset the company’s growth prospects.
  • Counterfeit Goods: As a result of PDDs focus on low prices, many reports of counterfeit items on the platforms have emerged, causing reputational damage and potentially a loss of trust and hence users.
  • Macroeconomic Issues: The Chinese economic growth rate has fluctuated recently and there may be slowdown in the overall growth of the market, reducing the consumer base of PDD and its growth rate.
  • International Expansion: PDDs recent international expansion into North America under its Temu platform is a gamble, as these areas are completely new for the company with increased operating costs. The growth of the platform outside of China also faces headwinds such as new supply chain challenges, different customer preferences, and regulations. The success of Temu is a major determinant on the future price and valuation of the company.

Moat Analysis: PDD has a narrow moat based on the strength of its brand, its high-volume business, and the network effects the platform generates. It can maintain its market position by offering the lowest prices and bringing in more buyers via referrals. However, this moat is not too strong because competitors are not that far behind, the competitive environment is cutthroat, and new players may emerge at any moment.

  • Rating: 3 / 5. While the company is performing better than most of its competitors and generating high returns, the moat is not particularly durable.

Understandability Rating: 4 / 5. Though there are some specifics of the marketplace that might be difficult to understand, the overall business of PDD as an online seller is easily understood. The overall idea of how PDD creates value through its platform is also easily understood. The business operations are relatively straightforward, although a proper understanding of financials will require some expertise.

Balance Sheet Health Rating: 4 / 5. PDD is in a healthy state in its balance sheet. The company has a lot of cash in hand, a relatively low level of debt, and is able to generate positive cash flows from its operations. PDD is also profitable, and so can pay all of its existing liabilities and still generate more returns. The company is also growing at a high rate and this growth looks to continue in the future. Although the company is reliant on foreign customers and is dependent on its China-based operations, its overall health and potential is very high.