Pinduoduo 2024Q2 earnings report interpretation - The secret behind Temu's high growth

01

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Pinduoduo's Revenue Composition

Business Segments:

1. Domestic Main Platform: C2C e-commerce, primarily generating revenue from advertising and transaction service fees.

2. Duoduo Grocery: Community group buying business, mainly earning from transaction service fees and buy-sell spreads.

3. TEMU: Overseas managed e-commerce, with primary revenue from buy-sell spreads and transaction service fees.

Key Point: Duoduo Grocery and TEMU not only earn transaction service fees but likely also include buy-sell spreads in their transaction service revenue. This significantly differs from the common perception that Pinduoduo's main revenue comes from advertising and transaction fees.

With this explanation, many might now understand why Pinduoduo's transaction service revenue is growing so rapidly. For instance, this quarter's transaction service revenue was approximately 47.94 billion yuan. At a 1% transaction fee rate, even if the combined GMV of the domestic main platform and Duoduo Grocery reached 1.5 trillion yuan in a single quarter, the transaction service revenue would only be around 15 billion yuan. If the remaining 33 billion yuan in transaction service fees were entirely from TEMU, given TEMU's current quarterly GMV of $12 billion, TEMU would need to charge a 38% service fee per order to generate 33 billion yuan in revenue—clearly impossible. A nearly 40% GMV-to-revenue conversion rate suggests that the buy-sell spread is likely being counted as revenue.

With this understanding, the financial data becomes clearer; otherwise, the accounts would be impossible to reconcile.
 

02

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Revenue

Quarterly Data:

Revenue: 97.06 billion yuan, up 85.7% YoY; Online marketing: 49.12 billion yuan, up 29.5% YoY; Transaction service fees: 47.94 billion yuan, up 234.2% YoY.

The YoY revenue growth rate was lower than the triple-digit growth of the previous two quarters, mainly due to declines in both online marketing and transaction service fees compared to the prior three quarters.

Breaking it down, online marketing primarily represents the domestic main platform business, with growth slowing to 29.5%, indicating a GMV growth rate of around 30% for the domestic platform. Personally, I believe the domestic GMV growth is likely below 30%. Compared to Alibaba's ~10% GMV growth this quarter, it's evident that as price wars intensify among competitors, Pinduoduo's growth advantage over rivals is gradually narrowing.

Even so, if the domestic platform maintains a GMV growth rate above 20%, it remains highly impressive.

As for transaction service fees, since they include revenue from the domestic platform, Duoduo Grocery, and TEMU, it's challenging to break down the specifics. Moreover, TEMU's buy-sell spread revenue makes it difficult to determine the exact monetization rate, so only TEMU's approximate growth can be observed, not precise figures.

H1 Data:

Revenue: 183.87 billion yuan, up 104.5% YoY; Online marketing revenue: 91.57 billion yuan, up 40.5% YoY; Transaction service revenue: 92.3 billion yuan, up 273.1% YoY.

03

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Revenue Breakdown

Quarterly Data:

Online marketing revenue accounted for 50.6%, while transaction service fees accounted for 49.4%.

H1 Data:

Online marketing revenue: 49.8%; Transaction service revenue: 50.2%.

04

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Gross Profit & Gross Margin

Quarterly Data:

Gross profit: 63.36 billion yuan, up 88.6% YoY, roughly in line with revenue growth.

Gross margin: 65.3%, slightly higher than previous quarters.

H1 Data:

Gross profit: 117.48 billion yuan, up 95.5% YoY, below the 104.5% revenue growth; Gross margin: 63.9%.

05

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Expenses & Expense Ratios

Quarterly Data:

Total expenses: 30.8 billion yuan, expense ratio: 32%, down from 40% last year and flat with Q1.

Sales and marketing expenses: 26.05 billion yuan, expense ratio: 26.8%, down from 33.6% last year and flat with Q1.

R&D expenses remained stable at around 3 billion yuan per quarter.

General and administrative expenses have stayed at ~1.8 billion yuan for the last three quarters, with an expense ratio of ~2%.

H1 Data:

Total expenses: 58.94 billion yuan, expense ratio: 32%; R&D expenses: 5.82 billion yuan, expense ratio: 3.2%; General and administrative expenses: 3.66 billion yuan, expense ratio: 2%.

06

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Profit & Profit Margins

Quarterly Data:

Operating profit: 32.56 billion yuan, margin: 33.6% (core business profit).

Net profit: 32.01 billion yuan, margin: 33% (after interest income and taxes; interest income largely offsets tax expenses due to substantial cash reserves).

H1 Data:

Operating profit: 58.54 billion yuan, margin: 31.8%; Net profit: 60.01 billion yuan, margin: 32.6%.

Based on H1 net profit, full-year net profit is conservatively estimated to exceed 120 billion yuan (~$17 billion).
 

07

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Other

Overall, Pinduoduo's performance this quarter remains strong. However, after several quarters of triple-digit growth, market expectations were extremely high. For example, a group member who had accurately predicted Pinduoduo's performance in previous quarters this time forecasted 110 billion yuan in revenue—clearly an illogical linear extrapolation.

Breaking it down, for the two main businesses: (1) The domestic platform, as competitors narrow the price gap and improve user experience, faces increasingly homogenized competition. While Pinduoduo excels, it’s unlikely to sustain a significant growth lead. The domestic market may stabilize, but even 15% GMV growth would be impressive, though investors must accept slower growth. (2) For overseas (TEMU), growth appears to have slowed based on marketing and transaction fee trends. Growth depends on balancing speed and profitability, alongside geopolitical risks. With limited data disclosure, TEMU's ceiling remains uncertain.

Regardless, a quick look at the financials and stock price confirms Pinduoduo is undervalued—no doubt about it.$PDD(PDD.US) $Alibaba(BABA.US) $JD.com(JD.US)