Is it really reasonable for PDD's market value to surpass Alibaba?

Source: J.P. Morgan

After PDD's performance continued to rise for two days, the gap between its performance and the overall market trend has been widening. We have also seen many investors go through the process of questioning PDD, understanding PDD, and becoming PDD supporters.

Looking solely at PDD's performance, there are indeed many highlights. The key points worth noting are as follows:

1. Transaction revenue has doubled, even after subtracting the most optimistic growth scenario for Temu in our model. This indicates that the monetization of domestic business is gradually improving. It further confirms that PDD's business logic is still valid in China and there is room for continued growth. We believe that the current monetization rate is still relatively low and will continue to improve in the future.

2. For Temu's overseas business, based on the reverse calculation of performance, the markup rate may be around 30-40%. This suggests that Temu's competition in markets such as Europe is not very intense, and the markup rate has started to increase. Combined with the company's efforts to control losses, this indicates that the cross-border e-commerce market is in a healthy state.

3. In terms of profitability, both domestic and overseas businesses have achieved sustained growth. Compared to the doubling of GMV, we estimate that the amount of losses for Temu is basically flat or slightly increased, which means that the user experience has significantly improved and the path to profitability is clearer.

In summary, PDD's performance not only exceeds expectations, but more importantly, it reflects a healthy growth trajectory and improved profitability.

In addition, there is still room for sustained growth in the domestic business, which is attributed to the underlying business model. This is also why overseas Long-Only investors are paying increasing attention. We also recommend that long-term investors continue to hold their positions at the current level (although there may be short-term price fluctuations due to profit-taking).

During our recent discussions with investors, many doubts and differences of opinion about PDD have been raised. These factors are likely to determine whether incremental funds will buy in and the longer-term stock price trend. Today, we would like to share our analysts' judgments and responses to these concerns:

Concern 1: The market space for extreme cost-effectiveness.

We tend to believe that affordable and good products have always existed in both domestic and overseas markets. However, the distribution models in the past have limited the exposure of white-label and low-priced merchants. Currently, the global e-commerce market space is worth $60 trillion, with $40 trillion being overseas. This part of the market space is likely to be the corresponding market space for cross-border e-commerce, in addition to the growth of consumer spending and the increasing penetration rate of e-commerce.

Concern 2: The competitive landscape of cross-border e-commerce.

We believe that due to the large market space, the four Chinese cross-border e-commerce players each have their own positioning and competitive advantages. In terms of competition with overseas markets and Amazon, the advantage lies in capturing the market share of Chinese sellers in the 3P business. This is supported by the gradual shift of merchants and supply chains, as well as the low manufacturing costs in China.

Question 3: Geopolitical Risks

Regarding the impact on cross-border e-commerce, we believe the biggest risk lies in the Indonesian market. On the contrary, the United States can achieve export through re-export, and there will inevitably be some markup in the middle, but the final price may still be competitive in the market.

Question 4: Is PDD's valuation surpassing Alibaba reasonable?

The core issue lies in the different valuation frameworks. We tend to view Alibaba as a value stock, focusing on the expected returns of around 10% brought by annual repurchases and basic profit growth. Therefore, a valuation of around 8x is relatively reasonable.

However, looking at PDD, it is currently trading at around 20x. If we only consider the growth rate and market share of its Chinese business, a valuation of around 15x, which is in line with the overall valuation of the Chinese internet industry, can already be justified.

Compared to the valuation of 25x for Boss Zhipin, we can also see some room for valuation adjustment. The key is whether the company's upward momentum can be maintained. At the same time, many investors give a valuation of 0 or negative valuation for the overseas business, which is basically a free option.

Question 5: Lack of transparency in company information disclosure and communication.

This is a headache for everyone, but compared to investment decisions, many people are still concerned about how to break down the numbers. More focus on data breakdown is also from English-speaking overseas investors who are still in the process of understanding the company, which represents future incremental funds. Some investors also understand that the company may not want to disclose more data about Temu, which may affect the competition with other overseas e-commerce platforms.

Question 6: Long-term funds are not buying in, and there are more hedge funds as trading counterparts. The valuation is uncertain, and the stock price is volatile.

Regarding this, the subjective perception of our analysts and investors has changed recently. Many LongOnly investors have started to discuss this company, and some long-term funds have increased their positions.

In the past few weeks, with the increasing popularity of Temu, we have received inquiries from investors around the world. The possible reason behind this is that after comparing and selecting stocks horizontally in the internet industry, PDD's scale and momentum are indeed the best.

Question 7: If Shein makes new moves, will investors switch from PDD to Shein?

We acknowledge that this is a certain pressure because Shein is a more pure cross-border e-commerce theme. However, PDD's business is still strong. If the numbers continue to be strong, Shein may attract additional incremental funds.