Pinduoduo: Sky's Limit, Only Stock Surge Can Pay Tribute!

On the evening of November 28th, before the US stock market opened,$PDD(PDD.US)'s third-quarter report once again proved to its peers what it means to be a "shining star" among Chinese concept stocks. Let's take a closer look at how the global e-commerce giant has achieved great success:

1) .TEMU: Rebuild a Global PDD

If there were doubts about how much incremental value TEMU could bring to PDD before, those doubts have been completely dispelled this time.

From 14.4 billion in the second quarter to 29.2 billion in the third quarter, PDD's commission revenue (TEMU) has doubled in a single quarter, loudly proclaiming TEMU's potential to transform PDD.

This potential lies in the fact that the cross-border e-commerce track is a wide-open field, and the established players are already accustomed to a laid-back approach. When PDD, a "hardcore force for change," disrupts the market with products made by blue-collar workers and an app and operations made by white-collar workers, it ultimately leads to a remarkable chemical reaction.

Starting from this quarter, the market needs to seriously consider TEMU's valuation in PDD's overall valuation.

2. White-label Products + Price-sensitive Users = PDD's Stronger Profitability

In addition to the robust TEMU business, PDD's main platform business has also performed exceptionally well this quarter, building on the explosive growth in the second quarter. Roughly estimated by Dolphin Research, PDD's GMV (Gross Merchandise Volume) is close to one trillion RMB in a single quarter (possibly only half of Alibaba's GMV), and advertising and commission revenue amount to around 45 billion RMB, approximately 65% of Alibaba's Taotian customer management revenue during the same period, which was 68.7 billion RMB.

With similar transaction volumes, PDD, with its numerous small and white-label merchants, has achieved higher monetization efficiency and earned more money than Taobao and JD.com, which focus on big brand merchants. This phenomenon deserves serious reflection from industry peers.

3. Maximizing the Value of Human Resources

In terms of efficiency, PDD is even more impressive than early-stage Alibaba. Despite a YoY increase in revenue of 30 billion RMB, internal R&D and administrative expenses have remained relativelystill. In PDD's case, personnel expenses are a valuable resource with strong reuse capabilities.

As for external expenditures:

By comparing the additional revenue and additional costs in the third quarter, we can roughly determine that TEMU's gross margin (revenue - cost - fulfillment) may have turned positive, which is significantly better than market expectations. Moreover, as competitors gradually exit the market, the economic situation of Duoduo Maicai (PDD's grocery delivery service) has further improved, and it may have achieved an overall balance between profit and loss.

Looking at the expense ratio, we can clearly see TEMU's control over the input-output ratio. Despite revenue being 14 billion RMB higher than market expectations, marketing expenses have only increased by 1.7 billion RMB, and the marketing expense ratio is 5 percentage points lower than market expectations.

4. A Ruthless Money-making Machine

Under its fierce execution efficiency, PDD's operating profit for this quarter has reached 16.7 billion RMB, which is 4 billion more than the still explosive second quarter.

The market's expectation was that with the strong growth of TEMU, combined with the fact that the third quarter is not as seasonally favorable as the second quarter, PDD's operating profit would decline on a MoM basis. However, PDD once again significantly exceeded market expectations.

(For more details, Dolphin Research's analysis in the main text is very detailed, and I strongly recommend everyone to read the full article.)

Dolphin Research's View:

If the market was concerned about the sustainability of the growth of the main platform after the release of the explosive financial report last quarter, the real incremental value of this quarter lies in:

The extent to which TEMU has driven PDD's growth and the consequent serious revaluation of PDD's value.

The awe-inspiring operational efficiency and execution capability of PDD, which leads to the unquestioning "bias and faith" in the PDD team. It is likely that future capital doubts about PDD's execution quality will disappear.

From this quarter's financial report, we can clearly see:

Through investment in Duo Duo Mai Cai, PDD has maintained its traffic base, successfully defending against the erosion of its traffic by the higher-frequency fresh food business, and consolidating its moat in the main platform business.

By venturing into cross-border e-commerce, PDD has definitively opened up a second growth curve overseas.

From a valuation perspective, based on this quarter's tax rate, Dolphin Research roughly estimates that the pre-tax net profit of the main platform should be around 23-24 billion RMB, equivalent to a post-tax net profit of approximately 80 billion RMB on an annual basis. Even assuming a weakening of future growth, Dolphin Research calculates the value of the main platform business at close to 170 billion US dollars based on a valuation multiple of 15.

TEMU also has independent valuation value, with a rough outline of valuation elasticity for PDD, with reference to SHEIN's valuation of around 60 billion US dollars.

Detailed Interpretation of this Quarter's Financial Report:

I. TEMU Remaking PDD!

First, let's see how PDD slapped the market's expectations in the face: The third quarter's revenue was 68.8 billion RMB, a whopping 15 billion RMB higher than the market's expectations!

Of course, it's not to say that the market's expectations are completely unreliable. The reason for this "Pacific" level of expectation gap is mainly because PDD's information disclosure is almost a black box.

When Dolphin Research roughly estimated that TEMU's revenue had reached around 18 billion RMB, accounting for 30% of the total revenue, the market was completely puzzled about how this business was calculated and how much TEMU's GMV was.Because the revenue contribution brought by TEMU is so significant, Dolphin Research will first analyze this issue before analyzing the main site business.

Based on market research, expert interviews, and company communication, Dolphin Research has summarized the following key information:

1) .The revenue calculation method of TEMU is similar to that of Pinduoduo: Currently, there are no advertisements in TEMU, and all revenue comes from commissions. These commissions should include: a) basic markup on goods to cover basic expenses such as payment, bandwidth, IT, and app maintenance, based on the domestic model; b) the cost of the entire logistics fulfillment process, from warehousing, cross-border, trunk line to delivery.

In other words, in the fully managed business model of TEMU, although it is a third-party merchant selling goods, Pinduoduo actually handles fulfillment and marketing of goods on the app. Currently, the commission is only based on the transaction value and fulfillment value in the basic commercial flow. Dolphin Research roughly estimates that the commission rate for these two parts is approximately 40%-50%.

2). The subsidy for overseas users in TEMU is included in the marketing expenses.

3). Based on some information in the market, TEMU's monthly GMV has reached nearly $3 billion. Combining some models seen by Dolphin Research, the market may have greatly underestimated its current GMV level. Dolphin Research roughly estimates that its overseas GMV in the third quarter may already be over $6 billion.

Putting together the above information about TEMU 1)-3), a rough answer is clear: 60 * 45% * 7.2 = 19.4 billion RMB. TEMU's revenue for a single quarter may already be close to 20 billion RMB.

Of course, this is only a rough estimate of the revenue level and does not represent the exact number. But being able to achieve nearly 20 billion RMB in revenue in a single quarter within a year is undoubtedly a "shocking" level of achievement.

What's even more amazing is that Pinduoduo has gained an additional 20 billion RMB in revenue through TEMU, while its internal expenditure is decreasing!

Logically speaking, Pinduoduo, which is a light-asset platform with minimal capital expenditure, should have external investments in user subsidies, customer acquisition marketing expenses, and procurement services for logistics service providers, which are fulfillment costs.

On the other hand, internal investment corresponds to app development, research and development expenses, administrative and logistical support, and executive support and management expenses.

In the third quarter, research and development expenses increased by 150 million RMB compared to the same period last year, while administrative and management expenses decreased by 150 million RMB, which means there was no additional internal investment and personnel were reused. Based on news reports, Dolphin Research believes a reasonable explanation is:

Research and development personnel may have been reassigned from previous app development for the main site of Pinduoduo or for community group buying and fast group buying apps. After these businesses matured, they were reassigned to the new business, without adding new personnel.

The financial, administrative, and executive expenses on the back-end are also handled by the original business team without any additional personnel.

What's even more surprising is that if it is believed that the cost of stock options for these individuals has increased and the cost has been hidden, that is an unnecessary concern because the stock option expenses have actually decreased.

In other words, PDD has gained an additional 20 billion in revenue through the development of new businesses, but the investment internally has not increased. The blue-collar "human mine" has produced goods (factory products), and the white-collar "human mine" has used their expertise to maximize the business model!

Of course, some people may think that TEMU's revenue contains a large amount of water and that the significance is not great just by looking at the volume. Dolphin Research's view on this is that indeed there is a reason for the revenue calculation method, but the real core information revealed here is that this globally dominant team with extreme efficiency and the ability to conquer all has the capability to completely reshape a new cross-border e-commerce landscape.

As a rough reference, it is highly likely that TEMU's GMV will surpass SHEIN, and it is only a matter of time. Currently, SHEIN's valuation is over 60 billion USD. Starting from this quarter, the market will seriously and earnestly consider one question: TEMU may recreate PDD and incorporate the results of this consideration into its valuation.

2. PDD's Legacy Business is also Impressive

After discussing PDD's dominance, let's take a look at the underlying value of PDD's main platform business. The narrow definition of PDD's main platform revenue refers to online advertising revenue, which reached 39.7 billion RMB this quarter, a YoY growth of 40%, nearly 1 billion RMB higher than the market's consensus expectations.

Of course, it may not be as stunning as TEMU's business, but this underlying value is still impressive. If we also consider the brand subsidy channel on the main platform (similar to Tmall) and the commission income from brands and large merchants, it means that the overall revenue growth of PDD's main platform may have exceeded 40%.

Comparing it with its peers, Dolphin Research roughly estimates that with PDD's GMV approaching one trillion RMB in a single quarter (possibly only half of Alibaba's GMV), the advertising and commission income is already around 45 billion RMB, accounting for approximately 65% of Alibaba's 68.7 billion RMB Taobao customer management revenue during the same period.

Under the same revenue situation, PDD, with a group of small and medium-sized merchants and white-label merchants, has achieved higher profitability than Taobao and JD.com, which focus on large brand merchants. This phenomenon is worth serious reflection for industry peers.

Dolphin Research roughly estimates that the comprehensive monetization rate of PDD's main platform business, including advertising and commission, may have reached around 4.7%, surpassing Taobao's monetization level. How should we understand this? A reasonable explanation is:

1. PDD has more white-label manufacturers as merchants, giving PDD stronger bargaining power over these merchants. In the context of demand deflation, surplus goods, and scarce demand, whoever holds the traffic and users holds the real power of discourse.
2. In terms of products, PDD's overall promotion essentially takes away the merchants' control over traffic and converts the previously free natural traffic, such as search, into paid traffic. This is a further monetization for the merchants, and the reason they tolerate it is because of the previous point - white-label merchants themselves have no users or channels, and therefore have weaker bargaining power.

However, the increase in monetization rate has underestimated PDD's bargaining power. Looking ahead, after the monetization rate has been boosted by the upgrade of the overall promotion tool, the growth of the main site's revenue will still return to the growth of GMV. The growth rate may drop to around 20% next year.

3. Is the gross profit margin a bit low? It's all because of TEMU distorting the revenue.

In the third quarter, PDD's gross profit was 42 billion yuan, with a gross profit margin of 61%, which seems to be less than market expectations. But the main issue here is mainly due to the large volume of TEMU revenue, which distorts the gross profit margin structure.

Therefore, the key focus for this quarter's gross profit is the absolute amount. Here, Dolphin Research provides a perspective:

If the revenue from main site advertising and commissions is all converted into gross profit under the scale effect of the Internet, it would contribute 3.5 billion yuan to the QoQ increase in gross profit in the third quarter (main site advertising revenue increased by 1.8 billion yuan compared to the previous quarter, and Dolphin Research estimates that main site commission revenue should have increased by 1.5 billion yuan).

However, the actual increase in gross profit compared to the previous quarter is 8.4 billion yuan, which means that there is nearly 5 billion yuan of incremental gross profit, either from the marginal improvement of the Duoduo Maicai business or from the possibility that the TEMU fulfillment gross profit margin (revenue - cost - fulfillment) may have turned positive, offsetting some of the marketing expenses. This additional gross profit is likely to come from a combination of both factors.

Therefore, the performance of the gross profit is also a reflection of PDD's extreme operational efficiency from the inside out.

4. Demonstrating the essence of internet "human mining" business

Through PDD's accounting of revenue from Duoduo Maicai and TEMU, as well as how the main site has evolved, it is now clear that all of PDD's capital investments have been reflected in the income statement, and its core assets are actually the active users on the APP and the APP itself. Other logistics, merchants, and products are all external assets. PDD has taken the traffic business of the Internet to the extreme.

Through the analysis of TEMU above, we can already appreciate that if PDD maximizes the reuse of human resources (note: resources, not expenses!)

Now let's take a look at its sales expenses. The market expects its sales expenses to be 20.2 billion yuan, but the actual sales expenses are 21.7 billion yuan. In the case of revenue exceeding market expectations by more than 14 billion yuan, the corresponding marketing expenses are only 1.5 billion yuan higher than expected, and the increase compared to the previous quarter is less than 5 billion yuan.Combining the increase in gross profit and the marketing expenses, which have a growth rate significantly lower than the revenue growth rate, it is evident that through investment in Duoduo Maicai, PDD has successfully defended its traffic base and prevented the higher-frequency fresh food business from eroding its traffic, achieving resonance with its main business.

Through investment in TEMU, PDD has achieved a much higher GMV and revenue than market expectations, while the market investment is much lower than expected. PDD has opened up a truly second-curve business.

Next, perhaps PDD's strong performance will prove that the cross-border track is a vast business where anyone can succeed, and it will ignite the cross-border e-commerce market again, with all players fiercely investing.

However, PDD's global dominance may lead to the capital market's "blind favoritism and belief" in PDD in the future, as retail business ultimately comes down to extreme efficiency.

5. PDD: a ruthless money-making machine

With its fierce execution efficiency, PDD's operating profit this quarter has reached 16.7 billion RMB, which is 4 billion more than the still explosive second quarter.

The market's expectation was that with the rapid growth of TEMU's transaction volume and the lack of the same seasonality as the second quarter, PDD's operating profit would decline on a MoM basis. However, PDD once again significantly exceeded market expectations.

Even with TEMU's low-profit business driving revenue growth, the operating profit margin has reached a level similar to the second quarter.

The net profit has reached 15.5 billion RMB. Considering that TEMU is currently operating at a loss, Dolphin Research estimates that the pre-tax net profit of the main business should be around 23-24 billion RMB. Taking into account the post-tax net profit, it is already 80 billion RMB. Even if we assume a decline in future growth, Dolphin Research estimates the value of the main business to be close to 170 billion US dollars based on a valuation multiple of 15 times.

TEMU also has its own independent valuation. Referring to SHEIN's valuation of around 60 billion US dollars, there is already a rough outline of the valuation elasticity for TEMU within PDD.

Previous Research:

Earnings Season

August 29, 2023, Earnings Conference Call: Focus on User Demand, Not CompetitorsAugust 29, 2023 Earnings Report Review: "PDD has become an unrelenting money-making machine, debunking doubts" (source: Longbridge)

May 26, 2023 Conference Call: "PDD: Confident in Recovery, Committed to 'Good Prices' and 'Good Service'" (source: Longbridge)

May 26, 2023 Earnings Report Review: "PDD proves doubters wrong with its strength" (source: Longbridge)

March 20, 2023 Conference Call: "Continued Investment, PDD Persists in Innovations" (source: Longbridge)

March 20, 2023 Earnings Report Review: "Is PDD's good fortune coming to an end due to inflated confidence?" (source: Longbridge)

November 28, 2022 Conference Call: "Denying the Triple, PDD Claims High Profitability is Unsustainable" (source: Longbridge)

November 28, 2022 Earnings Report Review: "PDD's explosive performance, is there no limit to its success?" (source: Longbridge)

August 29, 2022 Conference Call: "Increasing Future Investment, PDD Remains Committed to Innovations" (source: Longbridge)

August 29, 2022 Earnings Report Review: "Performance Explosion! PDD, the 'King of Sales'" (source: Longbridge)

May 27, 2022 Conference Call: "R&D Investment to Increase, Future Profitability May Fluctuate" (source: Longbridge)

May 27, 2022 Earnings Report Review: "The Magic of Slashing Returns, PDD Strikes Back" (source: Longbridge) Telephone Meeting on March 21, 2022: "Is the 'lying flat' strategy just temporary? Will PDD return to investment and growth track? (Summary of the telephone meeting)"

Financial Report Review on March 21, 2022: "Half paradise, half hell, PDD is 'splitting' again"

In-depth Analysis

April 12, 2023: "Fierce Battle of 'Cost-effectiveness': When will Alibaba, JD, and PDD stop internal competition?"

September 30, 2022: "PDD vs Vipshop: Your 'hard times' are their 'good times'?"

April 27, 2022: "Alibaba vs PDD: After the bloodshed, only coexistence remains?"

September 22, 2021: "Alibaba, Meituan, and PDD going crazy: Are there any real barriers after the e-commerce traffic battle?"

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure