Pinduoduo: How Lonely It Is to Be Unbeatable!

On the evening of March 20th, Beijing time, before the US stock market opened, the spotlight of Chinese concept stocks Pinduoduo (PDD) released another remarkable performance that will go down in the history of Chinese concept stocks:

1. PDD's Main Site Ad Revenue Surges!

In the fourth quarter, PDD's advertising revenue reached 48.7 billion RMB, with a year-on-year acceleration to 57%. Despite the chaotic period near the same period last year due to the suspension of e-commerce activities leading to a low base, the market had anticipated an increase in advertising revenue growth rate compared to the previous quarter. In fact, due to the full-scale promotion of such advertisements across the platform, PDD's monetization rate has been continuously increasing, resulting in an actual growth rate that exceeded market expectations by a full 10 percentage points.

2. Temu Continues to Perform Strongly

Although at first glance, this quarter's transactional revenue significantly exceeded market expectations by about 6 billion RMB, it appears that Temu's growth far surpassed expectations. However, in reality, this revenue is essentially in line with Dolphin's estimates, validating Dolphin's logic in calculating Temu's revenue.

According to Dolphin's calculations, Temu's revenue this quarter should have increased from almost zero in the same period last year to around 26 billion RMB, with a growth rate of around 40% quarter-on-quarter, consistent with the research findings on Temu's GMV growth.

Despite the current lack of valuation by the market for TEMU due to uncertainties in Chinese apps going global under overseas regulations, Dolphin emphasizes not to overlook TEMU's organizational soft power in the process of business volume growth; in the absence of willingness to value TEMU, at least calculate the losses brought by TEMU's investment and value it based on the main site's own profits.

3. Still the Ultimate "People-Mining" Business

With total revenue increasing by a staggering 50 billion RMB year-on-year, and with TEMU achieving a single-quarter revenue of 26 billion RMB from scratch, the company's marketing expenses only increased by 9 billion RMB, while research and administrative expenses combined increased by only 700 million RMB, with research investment being slightly more rigid.

Especially astonishing is that for a super e-commerce company with an annual GMV of 4.2 trillion RMB, the company's administrative expenses for a single quarter are only 300 million RMB, with the 1.9 billion RMB in administrative expenses this quarter seeming relatively high in absolute terms, mainly due to year-end bonuses and stock options, with stock option grants amounting to 1.2 billion RMB.

Therefore, in a company like PDD, only the users and shareholders of PDD are truly benefiting. Treating users well is the company's original intention, while treating shareholders well is the ruthless result of being tough on oneself. After all, the white-collar workers in research, administration, and other back-office functions are all being used as "people-mines," and absolute control over management expenses means that senior management may be even tougher on themselves.

4. Only by Being Ruthless to Oneself, E-commerce is as Profitable as Playing

In recent years, when traditional e-commerce players couldn't find growth, they each focused on strengthening their assets, and PDD once again demonstrated that asset-light e-commerce is the unbeatable money-making machine.

With fierce execution efficiency, this quarter, despite Temu's losses, PDD achieved an operating profit of 22.4 billion RMB, an increase of 5.7 billion RMB compared to the third quarter5. Is the main site's profit over 30 billion?

According to Dolphin's simple estimate, the main site's advertising and commission revenue in the fourth quarter is roughly 21 billion more than the same period last year (excluding TEMU business).

During this period, the company's administrative and R&D expenses increased by 700 million. With the addition of new businesses, this increase can be basically ignored. Based on Dolphin's understanding, the group's marketing expenses for Pinduoduo's main site in 2023 remained basically unchanged. Almost 100% of this 21 billion revenue is converted into profit. Therefore, the profit for the main site in the fourth quarter of 2023 is approximately 30 billion.

6. TEMU losses are basically under control

However, the actual profit of the group in the fourth quarter is 22.4 billion. Assuming that the grocery shopping business is basically breaking even, the actual operating loss of TEMU business should be around 7.5 billion, with an operating loss rate of nearly 30%.

Dolphin Research Viewpoint:

The explosive financial report of Pinduoduo last time directly changed the market's valuation method for Pinduoduo—from looking at the comprehensive PE ratio to separately valuing TEMU and the main site business. Another effect is that funds will start to blindly believe in an organization with such "devil-like execution capabilities".

The recent TikTok incident has squeezed the valuation of TEMU, providing the market with an opportunity to judge based on the core value of the main site business, less affected by the fluctuations in TEMU valuation.

In the current geopolitical environment, in order to have enough safety margin, it is indeed possible not to consider the valuation of TEMU (from Dolphin's experience in cross-border business models, the valuation elasticity of cross-border e-commerce is only in the range of several hundred billion US dollars).

However, Dolphin believes that the market's premium for the growth potential of the main site business is clearly insufficient. According to the above logic, Dolphin estimates that the operating profit of the main site is around 30 billion RMB, and the after-tax annualized profit of the main site is already in the hundreds of billions of RMB.

Even if after 2024, the main site's revenue ends its super high growth and enters a range of 10-15% growth in GMV, giving it a 15-20 PE ratio is also reasonable.

Calculating based on the lowest 15 PE ratio, Pinduoduo's main site is already a business with a valuation of 220 billion RMB, corresponding to a market value of nearly 200 billion US dollars pre-market, and still has some room for growth. In short, undefeated in the world, the future of Chinese concept stocks lies in Pinduoduo.

Detailed interpretation of this quarter's financial report:

I. The main site is the real winner

As always, in the fourth quarter, Pinduoduo announced a total revenue of approximately 88.9 billion RMB, significantly exceeding expectations by about 9 billion. Once again, it delivered a significantly explosive performance beyond expectations. At first glance, transaction service revenue exceeded by nearly 6 billion, in other words, the significant overperformance of total revenue is mainly due to the transaction service revenue in the TEMU businessHowever, Dolphin Research believes that this is mainly because the market's expectation of Temu's revenue caliber is still uncertain. Dolphin Research's own expectation for trading income before the performance is also above 40 billion, which is in precise alignment with the actual financial report.

Therefore, we believe that the revenue delivered by Temu this quarter actually roughly matches the operating conditions reflected in the research data.

On the other hand, the advertising revenue reflecting the operating conditions of the main site this quarter is 48.7 billion, a year-on-year increase of 57%, which is also significantly higher than the market's expectation of 46 billion and a year-on-year growth rate of about 49%. And since advertising revenue should currently not be affected by Temu, Dolphin Research believes that the main site's advertising revenue exceeding expectations is the true highlight of this quarter's revenue end.

In addition, combined with the confirmed trading income, the main site's payment processing fee income and the commission income contributed by the main site's billion subsidy channel (with the increase in the proportion of brand product GMV, the proportion of main site commission income is also increasing), our preliminary estimate of PDD's overall revenue (including advertising and commission) is close to 57 billion, a year-on-year growth of nearly 60%. Horizontally comparing with another leading platform-based e-commerce platform - Taotian's 92.1 billion customer management revenue during the same period, it can be seen that PDD's main site revenue is approximately 62% of Taotian's CMR. Once again, it verifies the reality that PDD can obtain stronger advertising revenue from unit GMV than Taotian.

From the perspective of monetization rate, according to our calculations, the comprehensive monetization rate of PDD's main site business advertising + commission this quarter may have reached around 4.4%, an increase of approximately 0.6 percentage points year-on-year. While PDD is selling the lowest-priced products among domestic leading e-commerce platforms, it also has the strongest monetization capability among current domestic e-commerce platforms. The reasons behind this seemingly contradictory reality include:

1. PDD's merchants are more white-label manufacturers, and PDD has stronger bargaining power relative to these merchants. In the context of demand deflation, product surplus, scarce demand, whoever holds the traffic and users holds the real discourse power;

2. Reflected in the product, PDD's full-site promotion essentially takes away the merchants' right to flow, turning originally free traffic such as search into paid traffic, further monetizing the merchants. The reason why merchants endure this is the previous point, white-label merchants themselves have no users and channels, and relatively weak bargaining powerHowever, looking ahead, can Pinduoduo continue to significantly increase its monetization rate (especially after 2024), thereby maintaining the high-speed growth cycle of its mall revenue without being disrupted? The key may lie in whether Pinduoduo can continue to maintain a GMV growth significantly higher than the industry average after 2025 (15%~20% or even higher). We believe that if Pinduoduo fails to provide a significant increment above the industry from 2025 onwards, continuing to forcefully increase the monetization rate in this scenario may lead to strong resistance from merchants. Therefore, whether Pinduoduo's GMV growth can continue to lead the industry is basically the deciding factor for the company's mid-term performance and valuation after 2025, whether it resonates upwards or downwards.

II. Temu is strong, but not a game changer

Before analyzing Temu's performance, let's first review the financial confirmation rules of Temu's business compiled by Dolphin Research based on financial data and expert research:

1. Since Temu is currently mainly in a fully managed mode, the revenue recognition basis should be the portion of "front-end selling price - product supply price", that is, the gross profit from sales is fully recognized as Temu's revenue, including a small amount of logistics fees paid by consumers. Combining research, Dolphin Research roughly estimates that Temu's recognized revenue accounts for about 40%~50% of GMV.

2. The cost recognition basis of Temu should mainly be fulfillment logistics costs, and may also include some costs such as servers and manpower that are recognized as costs rather than expenses.

3. Marketing and promotion expenses generated by Temu, operating management personnel expenses, platform development, etc., are recorded in the corresponding expense items.

Based on the above financial confirmation rules, combined with third-party claims that Temu's GMV in the fourth quarter is around $8-9 billion, calculating based on 85 (GMV) * 7.1 (exchange rate) * 45% (revenue share), it is estimated that Temu's revenue for this quarter is approximately $26 billion. Excluding Temu's incremental revenue, the transactional revenue of the main site and Duoduo Maicai increased by about 58% year-on-year, which is basically in line with the growth rate of advertising revenue. It can be seen that according to our calculations, Pinduoduo's transactional revenue of 40.2 billion this quarter is not as impressive as it may seem at first glance, and it broadly aligns with the operating conditions shown in the research.

As for the assessment of Temu's value, it cannot be denied that Temu has indeed contributed a considerable amount of revenue. However, we are not optimistic about the scale ceiling of a purely cross-border e-commerce model, and overseas regulations also seem to be an unavoidable issue. Roughly speaking, we believe that the upper limit of Temu's value in the mid-term will not exceed a few hundred million US dollars. Compared to the main site's nearly $200 billion in value, it is more of an "addition" than a "main course"3. Temu's Gross Margin May Decline Due to New Market Expansion

In the fourth quarter, Pinduoduo's gross profit was 53.8 billion, with a gross margin of 60.5%, a significant year-on-year decrease of over 17 percentage points, but only a slight decrease of 0.5 percentage points quarter-on-quarter. As we pointed out in the last performance report, the fluctuation in gross margin is mainly influenced by the expanding revenue and costs of the Temu business, so it is more appropriate to look at the absolute change in gross profit.

If the incremental revenue from main site advertising and commission income can all be converted into incremental gross profit, according to our calculations, the main site revenue increased by about 11 billion quarter-on-quarter, while the gross profit increased by 11.7 billion. In other words, the gross profit of the Temu business has increased by at least 700 million (likely more).

However, compared to the revenue growth of about 8 to 9 billion for Temu, the increase in gross profit is significantly less. We believe that this is likely due to Temu aggressively expanding into unexpected markets in the United States, and as the market expands, the difficulty of fulfillment for Temu increases, while economies of scale may actually decrease. This results in a situation where although Temu's revenue surges, the gross profit does not increase proportionally.

4. Exceptional Operational Efficiency Continues

On the expense side, the market expected sales expenses to be 27.6 billion RMB, while the actual amount was 26.6 billion RMB. Despite revenue significantly exceeding expectations, especially with the substantial increase in the scale of the Temu business and considerable customer acquisition marketing efforts, the fact that marketing expenses are lower than expected is quite commendable. Importantly, this implies that the marketing expenses for Pinduoduo's domestic main site should not increase, and may even decrease, indicating that the main site's operating profit margin should continue to significantly improve.

Regarding administrative expenses, although the actual expenditure was 1.9 billion, higher than market expectations and a significant increase quarter-on-quarter, historically, the fourth quarter has always been the point where the company distributes annual performance bonuses. This quarter, equity incentive expenses amounted to 2.19 billion, an increase of over 500 million compared to the first three quarters. Therefore, this is generally in line with the company's past practices and not an unexpected expense inflation.

Similarly, research and development expenses this quarter were 2.86 billion, almost unchanged from the previous quarter and lower than expected. Despite the rapid growth of Temu and a revenue increase of over 20 billion, expenses not only did not increase but were significantly diluted.

In summary, the company's three major expenses, except for the increase in administrative expenses due to equity performance rewards, have been continuously diluted under the growing revenue scale, once again demonstrating Pinduoduo's strong ability to efficiently utilize human resources and assetsFive, Pinduoduo remains a ruthless money-making machine

When the main Pinduoduo site can operate independently without subsidies, and with Pinduoduo's extreme cost control from employees to executives, in the fourth quarter, Pinduoduo achieved an operating profit of 22.4 billion yuan, showing explosive performance in terms of both profit margin and profit amount compared to the previous quarter.

However, due to concerns about heavy losses in Temu, the market's expected operating profit is only 16.7 billion yuan, the same as the third quarter.

Due to Temu's current heavy revenue contribution and its high-risk factor in valuation, it is crucial to reasonably estimate Temu's losses.

The estimation logic is actually very simple: based on the trend of each quarter over the past year, the main focus of Pinduoduo is on platform scale effects, requiring no additional subsidies or personnel input, just maintaining the business.

Correspondingly, research and development expenses remain unchanged, administrative expenses remain unchanged, and the increase in marketing expenses mostly serves Temu (according to research information from Dolphin, the main site's marketing expenses did not increase in 2023, leading to a slight impact from the increase), and the fourth quarter of 2022 happened to be a period with almost no Temu business.

The implicit meaning here is that the increased revenue from advertising and commissions in the fourth quarter of 2023 for the main site is actually increased profit, as the additional costs are almost zero.

Based on Dolphin's rough estimate, the combined increase in advertising and commission revenue in the fourth quarter of this year compared to last year is around 21 billion yuan. If all the increased revenue is converted into profit, the operating profit for the main site in the fourth quarter should be around 30 billion, adding to the base of 9.1 billion from last year. This corresponds to the main site's 56.7 billion in commission + advertising revenue, with an operating profit margin as high as 50%. Marketing expenses have fallen back to a completely controllable range of 30%, making it a solid money-making machine.

The real core behind this is the formation of Pinduoduo's user mindset, where users will continue to shop without the need for additional marketing expenses. Ultimately, those who benefit from the system are still "fleeced".

In estimating the profit for the main site, the corresponding operating loss for Temu in the fourth quarter should be around 7.5 billion, with a loss rate of around 30%, which is consistent with the research information Dolphin has obtained.

At the current valuation, Temu has become an upward option in terms of valuation. Even if it fails, as a purely incremental business in the long term, it should not be a business that continues to incur losses, and punitive valuation should not be applied to Pinduoduo due to Temu's losses.

Dolphin Research on Pinduoduo:

Financial Report SeasonTelephone conference on November 28, 2023: "How to talk nonsense decently with capital? Just look at PDD (minutes)"

Financial report review on November 28, 2023: "PDD: 'Hall-level' fighting spirit, only soaring can pay tribute!"

Financial report telephone conference on August 29, 2023: "Ignore competitors, focus on user needs"

Financial report review on August 29, 2023: "Facing doubts, PDD has become a ruthless money-making machine"

Telephone conference on May 26, 2023: "PDD: Confident in recovery, sticking to 'good prices' & 'good service'"

Financial report review on May 26, 2023: "Facing short sellers, PDD speaks with strength"

Telephone conference on March 20, 2023: "Continued investment, PDD insists on stirring up trouble"

Financial report review on March 20, 2023: "Inflated mindset, is PDD's good days coming to an end?"

Telephone conference on November 28, 2022: "Denying the triple, PDD claims again that high profitability is unsustainable (telephone conference minutes)"

Financial report review on November 28, 2022: "Another explosion in performance, is PDD limitless in its strength?"August 29, 2022 Conference Call "Future Increase in Investment, PDD Firmly Continues to Tinker (Conference Call Summary)"

August 29, 2022 Financial Report Review "Explosive Performance! "Roll King" PDD is the Real King Behind"

In-depth

April 12, 2023 "Battle of Cost-effectiveness, When Will the Internal Competition of Alibaba, JD, and PDD End?"

September 30, 2022 "PDD vs. Vipshop: Your 'Hard Times' Are Their 'Good Times'?"

April 27, 2022 "Alibaba vs. PDD: After the Bloodbath, Only Coexistence Remains?"

September 22, 2021 "The Crazy Competition of Alibaba, Meituan, and PDD, Is There a Real Barrier After the E-commerce Traffic Battle?"

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