Pinduoduo "The Smiling, Proud Wanderer"!

On the evening of May 22nd, before the US stock market opened, Pinduoduo, the shining star of Chinese concept stocks, once again released a remarkable performance:

1. Pinduoduo Main Site: Call me the one with endless potential!

In the first quarter, Pinduoduo's advertising revenue surged to 42.5 billion yuan, a year-on-year increase of as high as 56%! Market expectations were only around 40%+ as they considered last year's advertising revenue to be on a high base.

Moreover, due to Pinduoduo's continuous efforts in promoting branded products and offering billions in subsidies, the commission income growth rate should be higher than the advertising revenue growth rate, as last year's commission income was affected by high returns.

Based on Dolphin's estimation, Pinduoduo's first-quarter Customer Management Revenue (CMR) comparable to advertising marketing and existing revenue has reached 76% of Taobao's.

For every transaction, charging tolls and not giving merchants much room for free traffic, Pinduoduo has clearly paved the way for predecessors with its 3P model, where competitors only need to Copy&Paste!

2. Is Temu close to breaking even?

Commission income has exceeded advertising revenue for the first time, reaching 44.4 billion, exceeding market expectations by over 6 billion. However, due to varying levels of income techniques on Bloomberg, the actual significance of this excess is not clear. Dolphin estimates that Temu's income is still growing rapidly, but at the same time, the platform's commission business is also growing strongly. Currently, Temu's business has been thoroughly researched by various domestic and foreign investment banks and experts, and the actual income level delivered is not significantly different from the expectations of top international investment banks.

What is truly impressive about Temu's business this quarter is its ability to control losses: despite the high growth in Temu's income, the cost on a month-on-month basis is decreasing. Assuming that domestic business costs have increased slightly compared to the same period last year, the remaining costs are mostly Temu's logistics costs. At the same time, assuming that Temu's marketing expenses are roughly the same as the previous quarter (Temu should have reduced its advertising spending in the US starting from March).

Calculating this way, while Temu's income has increased by around 6 billion this quarter, the absolute value of losses is narrowing. The total loss for Temu's business in the first quarter may be around 5 billion, with an operating loss rate of around 10%.

At this rate, unless the expansion into non-US regions is too aggressive, diluting the logistics scale effect of a single region, Temu's path to profitability does not seem too far off.

3. In terms of operational efficiency, Pinduoduo claims second place, and no one dares to claim first

Firstly, in terms of external costs, despite the increase in the proportion of low-margin businesses like Temu compared to the fourth quarter (intensified asset-heavy operations), Pinduoduo's gross profit margin has surprisingly increased by two percentage points compared to the fourth quarter! This should be related to the increase in merchant markups in Temu.

But the most remarkable aspect is the internal costs—research and development costs only increased by 400 million compared to last year, with little change on a month-on-month basis. This means that when Pinduoduo opened up a completely new business and generated over 30 billion through Temu, the headcount did not increase significantly, only some additional salary incentivesManagement expenses are actually a similar situation: although the management expenses have increased from less than 1 billion to 1.8 billion since the previous quarter due to the increase in equity incentives for senior executives, excluding the impact of option incentives, administrative expenses only increased by 200 million year-on-year, from less than 400 million to less than 600 million.

Among the many companies that Dolphin has observed for so long, there has never been a situation where existing employees can handle everything, with only a sharp increase in revenue but not a significant increase in headcount.

How to turn employees and code into money-making machines has been vividly interpreted here at Pinduoduo!

4. As long as you can let go, making money is a piece of cake

The main site is trying not to miss any opportunity to charge for any order, and the new business Temu is increasing revenue and reducing losses. Pinduoduo's ability to make money is almost "smoking"!

Especially, it seems that Duo Duo Mai Cai has strengthened Pinduoduo's traffic base. Pinduoduo's domestic main site has basically come to an end of the era where it used to spend marketing expenses out of its own pocket to retain users. From high-frequency grocery shopping to daily necessities on the main site, to digital 3C and other miscellaneous goods, the traffic flywheel is spinning on its own.

In this way, under a series of resonances that turn impossibilities into possibilities, Pinduoduo's operating profit for the first quarter has reached 26 billion yuan, exceeding the record of 22.4 billion yuan set in the fourth quarter of last year's e-commerce peak season. Moreover, this is not considering the commercial empire formed by Pinduoduo's transaction turnover, which also gives it a lying profit of around 5 billion yuan in interest income each quarter.

5. The main site's profit has stabilized at over 30 billion, heading towards 35 billion?

According to Dolphin's estimation logic for Temu, that is, with Temu's 5 billion operating loss, in the relatively off-season of the first quarter, Pinduoduo's main site's operating profit is almost the same as the new high set in the e-commerce peak season of the fourth quarter of last year, or even slightly higher, probably between 31-33 billion.

Dolphin Research View:

As an undisputed star of Chinese concept stocks, in the past quarter, Pinduoduo has gone from market recognition of Temu, to valuing Temu, and then returning the valuation of Temu. Even with the sustained high growth of the main site, the market's premium valuation for Pinduoduo's growth is not high.

There are concerns that Temu may be "squeezed" in the election year following TikTok, fears that the effect of new advertising tools will pull the valuation to catch the last train of growth, and disdain for Pinduoduo's refusal to distribute dividends despite having so much profit.

But in fact, Pinduoduo once again proved to the market with a sharp increase in performance that in the face of such a "devil-level" execution company, nothing is impossible!

According to Dolphin's estimation, based on Pinduoduo's post-tax operating profit of 120 billion this year and a 15x PE ratio, Pinduoduo's main site should also have a valuation of 250 billion US dollars, but the market has not yet given it enough growth premiumAnd if Temu can reach breakeven at a faster pace, the market capital will clearly see the faster release of Pinduoduo's profits when valuing it with the group's comprehensive profit.

Therefore, for a company with devil-level execution that no one dares to predict its performance, and where market expectations are just jokes, what Dolphin can do is not to easily short sell, because we don't know what surprises it will deliver!

Detailed interpretation of this quarter's financial report:

I. One mountain is higher than the other, is there no end to the monetization of Pinduoduo's main site?

This quarter, Pinduoduo achieved total revenue of approximately 86.8 billion RMB, nearly 10 billion higher than Bloomberg's consensus expectations, and about 5 billion higher than the more referenceable expectations of foreign banks, still living up to the word "amazing."

First and foremost, the most critical indicator that affects the company's market value -- advertising revenue reflecting the growth of the main site this quarter is 42.5 billion, a 56% year-on-year increase. Although the general expectations of major banks are generally above 40% which is not considered low, the more optimistic ones see it as above 45%, the actual growth still significantly outperformed expectations.

For transaction service revenue, Bloomberg's consistent expectations for Temu's revenue caliber are still inaccurate and basically have no reference value. As we understand it, Goldman Sachs' expectation for Temu's revenue this quarter is about 31.8 billion, with a total expected transaction service revenue of 44.8 billion. Based on this, Pinduoduo's actual transaction service revenue this quarter is 44.4 billion, which is roughly in line with expectations.

In other words, top foreign banks and buyers already have a fairly accurate grasp of Temu's revenue, while the main site continues to surprise the market, continuously telling the market: "Pinduoduo's limits have not been reached yet".

Adding up the main site's payment processing fee income, commission income contributed by channels such as Baibu (with the increase in the proportion of branded goods, the growth of commission income should also be considerable), and advertising revenue, our preliminary estimate of Pinduoduo's overall revenue from the main site (including advertising and commission) is close to 48 billion, an increase of about 16.7 billion compared to the same period last year.

In comparison, Taotian's 63.6 billion customer management revenue this quarter, Pinduoduo's main site revenue is close to 76% of Taotian's CMR, an increase of 14 percentage points from the previous quarter. At this rate, Pinduoduo's platform revenue surpassing Alibaba in the future is not far offOn the monetization rate front, according to our calculations, the comprehensive monetization rate of advertising + commissions for the main site of Pinduoduo this quarter may have already exceeded 5%, showing a sequential increase of about 0.4 percentage points. With the further penetration of tools such as full-site promotion in reality, and the vision of "eliminating free traffic" as rumored, Pinduoduo's monetization space has not been fully exploited yet.

As we have emphasized many times before, while Pinduoduo has relatively low product prices among e-commerce platforms, it also has the strongest monetization capabilities in domestic e-commerce platforms. The main reasons behind this are:

Pinduoduo's merchants are mostly OEM manufacturers, giving Pinduoduo stronger bargaining power over these merchants. Against the backdrop of demand deflation, product surplus, and scarce demand, whoever holds the traffic and users holds the real bargaining power.

In terms of products, Pinduoduo's full-site promotion essentially takes away the merchants' right to invest in traffic, converting originally free traffic such as search into paid traffic. This further monetizes for merchants, and the reason why merchants tolerate this is the same as the previous point - OEM merchants themselves lack users and channels, resulting in weaker bargaining power.

II. Temu's revenue is finally under control

Before analyzing Temu's performance, let's first review the financial recognition rules for Temu's business compiled by Dolphin Research:

Currently, under Temu's main full/half hosting model, the revenue recognition should be the part of "front-end selling price - product supply price", meaning the gross profit from sales is recognized as Temu's revenue. Based on research, Dolphin Research roughly estimates that Temu's recognized revenue accounts for 45-50% of GMV.

The cost recognition for Temu is mainly based on fulfillment logistics costs, and may also include some costs such as servers and manpower that are recognized as costs rather than expenses.

Marketing and promotion expenses generated by Temu, operating management personnel expenses, platform development, etc., are recorded as corresponding expense outlays.

According to third-party research, Dolphin Research understands that Temu's GMV for this quarter is approximately between $9 to 10 billion, with Temu's commission rate showing a certain increase compared to the previous quarter. Based on our forecasting model, estimating around $9.7 billion (GMV) * 7.2 (exchange rate) * 47% (revenue ratio), the preliminary estimate for Temu's revenue this quarter is about $32.4 billion. Considering that this calculation involves multiple forecasts, there will inevitably be a significant margin of error, and it can be considered consistent with the estimate of $31.8 billion from a certain overseas institution.

As a cross-check, excluding Temu's revenue, the year-on-year growth rate of main site transactional revenue is approximately 67%. Due to the increase in the proportion of Bai Bu, we believe that the main site commission growth outpacing the advertising growth rate is a reasonable forecast

3. Increase in Gross Margin, Temu's Distribution Costs Decrease Unexpectedly?

From a gross profit perspective, Pinduoduo achieved a gross profit of 54.1 billion this quarter, with a gross margin of 62.3%. Since Temu's fulfillment costs are recognized in the cost in the financial report, the fluctuation in gross margin mainly reflects the changes in Temu's fulfillment costs.

Therefore, the gross margin increased by about 1.8 percentage points compared to the previous quarter, indicating that Temu's fulfillment costs as a percentage of GMV are likely to have decreased. Originally, after the Tiktok incident, Temu was expected to accelerate the development in non-U.S. markets, which should have increased fulfillment costs. However, based on this quarter's performance, the actual situation seems to be the opposite, so Temu's progress in reducing losses is likely faster than expected.

4. Continued Ultimate Operational Efficiency

On the cost side, the biggest highlight of this quarter - marketing expenses were significantly lower than expected. Bloomberg's consensus was 25 billion, while a major bank's expectation was close to 29 billion, but the actual expenditure was only 23.4 billion.

As Temu's investment in the U.S. should have decreased, expanding into other markets may lead to increased spending. Therefore, the market's judgment on this quarter's marketing expenses was way off!

According to preliminary estimates by Dolphin, with a nearly 6 billion increase in revenue for Temu this quarter, the marketing expenses in this segment are likely to remain stable or slightly decrease compared to the previous quarter. In other words, this quarter's marketing expenses for the main site may have dropped below 9 billion, with a possible year-on-year decrease of up to 5 billion.

In other aspects, this quarter's operating expenses were 1.82 billion, significantly higher than the expected 1.28 billion. This is mainly because the equity incentives in this quarter's operating expenses still reached 1.25 billion, which is almost the same as the previous quarter. Normally, equity incentives in the first quarter should be significantly less than at the end of the year.

5. Pinduoduo Remains a Ruthless Money-Making Machine

Pinduoduo's operating profit this quarter is close to 26 billion, although overseas major banks' expectations reached 18 billion, and buyer expectations may be even higher, above 20 billion, Pinduoduo's actual delivered profit is still so explosiveDue to the substantial income volume of Temu, it is necessary to evaluate the profitability and loss of the main site and Temu separately.

As seen from the previous content, an increase in gross profit margin implies a decrease in the proportion of fulfillment costs for Temu, and the lower-than-expected marketing expenses suggest that Temu, which has entered new markets in large quantities, has at least not seen a significant increase in marketing expenses, but more likely a stabilization or slight decrease.

Therefore, according to our calculations, Temu's operating loss this quarter is likely to have decreased to 5 to 6 billion, and it is not ruled out that it is below 5 billion. Despite the growth in GMV volume and the number of operating countries, there has been a considerable narrowing compared to the over 8 billion loss we predicted for the previous quarter.

As a result, it can be inferred that the operating profit of Pinduoduo's main site this quarter has reached a scale of 31 to 33 billion, or even more. The operating profit margin has exceeded 65%. Correspondingly, the marketing expenses of the main site may have decreased to below 20%, making Pinduoduo truly a "money-making machine".

Dolphin Research on Pinduoduo:

Financial Report Season

March 20, 2024 Conference Call "Pinduoduo: Confident Performance, Yet to Consider Dividends"

March 20, 2024 Financial Report Review "Pinduoduo: Loneliness of the Invincible!"

November 28, 2023 Conference Call "How to Decently Talk Nonsense with Capital? Just Look at Pinduoduo (Summary)"

November 28, 2023 Financial Report Review "Pinduoduo: 'Hall-level' Fighting Spirit, Only Soaring Can Pay Tribute!"

August 29, 2023 Financial Report Conference Call "Focus on User Needs Without Looking at Competitors"August 29, 2023 Financial Report Review "Facing Doubts, Pinduoduo Has Become a Ruthless Money-Making Machine"

May 26, 2023 Conference Call "Pinduoduo: Confident in Recovery, Committed to 'Good Prices' & 'Good Service'"

May 26, 2023 Financial Report Review "Facing Short Sellers, Pinduoduo Speaks with Strength"

March 20, 2023 Conference Call "Continued Investment, Pinduoduo Insists on Stirring Things Up"

March 20, 2023 Financial Report Review "Inflated Ego, Is Pinduoduo's Good Days Coming to an End?"

In-depth

April 12, 2023 "Fighting for 'Cost-Effectiveness', When Will the Internal Competition Among Alibaba, JD, and Pinduoduo End?"

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

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

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

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