On the evening of November 21, Beijing time, before the US stock market opened, "performance black box" $PDD(PDD.US) released its third-quarter financial report. At first glance, both revenue and profit significantly missed expectations, resulting in a substantial "explosion" and a sharp drop before the market opened. What is the specific situation?

1. Fortunately, advertising revenue did not explode

This quarter, Pinduoduo total revenue was approximately 94.4 billion RMB, compared to Bloomberg's consensus expectation of 102.8 billion, which is a full 3 billion lower than expected. However, in the midst of misfortune, the most critical indicator -- advertising revenue for this quarter was 49.4 billion, a year-on-year increase of 24%. In comparison, the consensus expectation from sell-side analysts for growth was 24%; we understand that the median growth expectation from buy-side analysts is also around 25%. Therefore, the most core advertising revenue met expectations and did not "explode," which is very crucial.

However, although it did not fall below expectations, it is not as terrifying as the halved advertising growth rate in the second quarter. This quarter, the advertising revenue growth rate continued to decline from the previous quarter's 29% to 24%, the trend of slowing down remains. This reflects that Pinduoduo's previous rapid increase in monetization rate has come to an end, and advertising revenue growth is quickly aligning with GMV growth.

2. Reducing commissions and rebates to soothe merchants

The overall revenue falling short of expectations is entirely due to the drag from commission income. This quarter, commission income was 50 billion, which is a full 3 billion less than expected, and is the biggest and most fundamental issue with this performance.

In the first reaction, Dolphin Investment Research instinctively believes that the miss in commission income is due to the fluctuating impact of Temu's entry metrics. However, combined with the gross profit also being about 3 billion lower than expected, and the magnitude of the revenue miss being almost completely consistent, we believe the problem is more likely to be in the commission income from the main site (for specific deductions, please see the main text).

Combined with Pinduoduo's recent subsidies to merchants, such as partially reducing technical service fee rates, refunding commissions under certain circumstances, and lowering merchant deposits, these measures may indeed lead the market to underestimate the impact of these reductions and refunds on commission income.

3. Gross margin plummets, which is the "blame" of reduced commissions

As mentioned earlier, the decrease in commission income leading to a corresponding decline in gross profit means that this quarter, Pinduoduo's gross margin was 60%, a drop of 5.3 percentage points from the previous quarter. Originally, in the first two quarters, the improvement in Temu's gross profit structure had begun to restore the gross margin, and with the continued increase in Temu's semi-managed proportion this quarter, logically, it would continue to benefit the gross margin. However, partly due to Pinduoduo's previous "over-exploitation" of merchants, the current reversal of subsidies to merchants has led to the plummet in gross margin

4. Internal efficiency remains, but external pressure is "like a mountain pressing down"

In terms of expenses, this quarter's marketing expenditure was 30.5 billion, a year-on-year increase of 40%. In the context of a weak consumer environment, and with JD and Alibaba significantly increasing their marketing expenditures, the "indifference to competition" can no longer be sustained. Whether actively or passively, Pinduoduo must also increase marketing subsidies to retain users and merchants in an increasingly competitive environment. However, the rise in marketing expenses was largely anticipated by the market (expected to be 30.2 billion) and did not exceed expectations.

Meanwhile, management and R&D expenses remained basically flat compared to the previous quarter, slightly lower than expected, indicating that in terms of internal cost control and employee efficiency, Pinduoduo is still one of the most outstanding among internet companies.

5. Profit decline, is it truly not deceiving me?

Due to commission income being 3 billion lower than expected, this was directly reflected in the gross profit. The expense outlay was consistent with expectations and did not exceed the anticipated cost control to offset the decline in revenue and gross profit. Therefore, the adjusted (adding back SBC) operating profit was 26.8 billion, nearly 4 billion lower than the expected 30.6 billion. It can be said that one mistake leads to another.

Assuming Temu's loss this quarter was slightly lower by 3 billion, we estimate that Pinduoduo's main site operating profit this quarter is around 27 billion, below the buyer's expected median of over 30 billion.

In terms of trends, compared to our estimate of about 26 billion in operating profit for the main site in the same period last year, there has been virtually no growth. The operating profit margin of the main site dropped from over 65% last quarter to just around 50%. Compared to the 57% profit margin of the main site in the same period last year, this is also a decline. The management's guidance on profit decline during last quarter's conference call was indeed not deceiving.

Dolphin Investment Research Perspective:

Overall, Pinduoduo's revenue and profit this time were lower than expected by several billion, which can clearly be termed as "poor." However, structurally, the most important advertising revenue did not miss expectations, while the relatively less important commission income encountered issues, which can be considered "fortunate."

In terms of market shock, last quarter, the market generally had confidence in Pinduoduo's ability to transcend the industry environment, showing no preparation for the potential turning points in monetization rates, growth, and profits. Currently, the market's valuation and judgment on Pinduoduo's mid-term growth prospects have nearly aligned with those of Alibaba and JD. The "mysterious confidence" no longer exists. This can be seen from the more reliable revenue expectations of both buyers and sellers during the earnings period. In other words, while this performance is undoubtedly poor, the market has somewhat prepared for it.

From a trend perspective, Pinduoduo's revenue growth rate (excluding the impact of Temu) is rapidly converging with GMV growth rate, continuing to slow down. This reflects that the penetration rate of the tools promoted across the entire site is gradually reaching its peak. In terms of competition, Pinduoduo's comprehensive advertising monetization rate has surpassed that of Taobao and JD. Given that the latter two occasionally implement subsidy policies and reduce merchant costs, Pinduoduo's window and space for significantly increasing monetization rates are likely minimal, and there is even a possibility of some retraction In fact, the current company's support policies for merchants, such as reducing commissions, are essentially a disguised way of returning the monetization rate. Looking ahead, pressure still exists.

Moreover, as growth slows down, Pinduoduo is also feeling competitive pressure, forcing it to increase marketing expenses to retain consumers and merchants, which in turn puts pressure on profits. It is not an exaggeration to say that Pinduoduo is becoming increasingly similar to JD and Alibaba, both of which are experiencing stagnant revenue and profit growth. Dolphin Investment Research's judgment on the increasing homogeneity among e-commerce platforms seems to be unfortunately coming true.

However, the market has already reflected a uniform "pessimism" towards the three domestic e-commerce companies with a flattened low valuation. From a mid-term perspective, Dolphin Investment Research holds a cautious attitude towards the entire e-commerce industry. But from a long-term perspective, Pinduoduo still has undeniable advantages in terms of management decisiveness, overall execution capability, and operational efficiency.

Detailed Interpretation of This Quarter's Financial Report:

I. Revenue "Big Thunder", Fortunately, Advertising Revenue Did Not Collapse

This quarter, Pinduoduo's total revenue was approximately 94.4 billion RMB, missing Bloomberg's consensus estimate of 102.8 billion by a full 3 billion, which at first glance can be considered a significant miss, severely shocking the market and causing the pre-market stock price to drop by 15%.

However, upon closer inspection, the most critical indicator—the advertising revenue reflecting the main site business—was 49.4 billion this season, a year-on-year increase of 24%. In comparison, the seller consensus expected growth rate was 24%, and according to our understanding, the buyer's expected growth rate median was also around 25%. Therefore, the core advertising revenue was completely in-line and did not "collapse," which is very crucial.

As for transactional revenue, Bloomberg's consensus estimate was about 53 billion, and the buyer's expectation was also around 52-53 billion. However, the actual transactional revenue this season was 50 billion, which was 3 billion less than expected, marking the biggest and most fundamental "thunder point" of this performance.

Thus, the key advertising revenue meeting expectations indicates that the problem lies in the relatively secondary commission revenue, which can be considered a fortunate misfortune.

Setting aside the expectation gap, the growth rate of advertising revenue this season decreased from 29% in the previous season to 24%. Although it is still slowing down, it was at least anticipated, and compared to the direct halving of the growth rate when the second-quarter report was released, it is not considered "shocking."

However, the continued slowdown in the growth trend of advertising revenue reflects that the penetration rate of tools promoted across the entire site is nearing completion, and from a competitive perspective, Pinduoduo's overall advertising monetization rate is already higher than that of Taobao and JD. Moreover, the latter two occasionally adopt some subsidy policies to reduce merchant costs. In this context, the window and space for Pinduoduo to significantly enhance its monetization rate are likely very limited (unless competition eases in the future, and platforms work together to improve monetization) Due to the growth rate of advertising revenue continuing to align with GMV growth, this is also a trend that Dolphin Investment Research has repeatedly emphasized over the past few quarters.

II. The one "taking the blame" may not be Temu, but rather the commission refunds/reductions

As mentioned above, the issue with Pinduoduo's revenue miss this quarter mainly lies in commission income. Dolphin Investment Research's first reaction was that "it is likely another issue with Temu, where revenue metrics are difficult to grasp," but considering that gross profit is also about 3 billion lower than expected, which is almost entirely consistent with the revenue miss, we believe the problem is more likely with the commission income from the main site.

(Since the company does not disclose specific breakdowns, the following is a logical deduction based solely on disclosed financial figures, for reference only): Logically, since Temu's fulfillment costs are recorded in the cost items, a decline in revenue (business) will, to some extent, also lead to a reduction in costs. That is, if the revenue is 3 billion lower than expected solely due to low business volume from Temu, it would not necessarily lead to a proportional decline in gross profit.

In contrast, marginal changes in commission income from the main site will not lead to changes in marginal costs. (For example, for an internet platform, whether it processes 1.1 million orders or 1 million orders over a period, the costs for servers, electricity, and operations remain largely unchanged). Therefore, the marginal decrease in commission income from the main site will almost fully translate into a decrease in gross profit.

Additionally, considering the recent subsidies promoted by Pinduoduo for merchants, such as partially reducing the technical service fee rate, refunding commissions under certain circumstances, and lowering merchant deposits, these measures may indeed lead the market to underestimate the impact of these reductions and refunds on commission income. Financial figures and the actual measures taken by the company can, to some extent, cross-verify that the commission income from the main site is likely the main reason for the miss this quarter.

Regarding Temu, due to the increased proportion and impact of semi-managed operations this quarter, the previously stable commission income from the main site has also experienced significant fluctuations, making it difficult to isolate Temu's performance this quarter. According to our current estimates, the revenue growth rate for Temu may not exceed 10%, and the GMV growth rate may not exceed 15% (for rough reference only).

Recent research indicates that the promotion of Temu's semi-managed model has not been smooth (which is not unexpected for us), and after the U.S. elections, the policy risks faced by Temu have also clearly increased. Dolphin Investment Research continues to maintain a cautious view on Temu's prospects. However, the company's valuation has not significantly accounted for Temu, so there is no substantial impact.

III. The significant drop in gross margin is also due to the decline in commissions From the perspective of gross profit, Pinduoduo's gross profit margin this season is 60%, a decrease of 5.3 percentage points compared to the previous quarter. Initially, in the first two quarters, the gross profit margin had begun to recover due to the improvement in Temu's gross profit structure, and this season, with the continued increase in Temu's semi-managed ratio, it logically should have continued to benefit the gross profit margin. However, the significant decline in gross profit margin is mainly due to the aforementioned reduction and refund of commission fees, which have almost entirely been passed on to the decline in gross profit.

IV. Internal efficiency remains, but external pressure is "like a mountain pressing down"

In terms of revenue and gross profit, there was a significant miss mainly due to measures such as commission refunds. On the expense side, this season's marketing expenses amounted to 30.5 billion, a year-on-year increase of 40%. It is evident that facing a weak overall environment, and with JD and Alibaba significantly increasing their marketing expenditures, Pinduoduo is indeed feeling competitive pressure. Whether actively or passively, there is a need to significantly increase investment to maintain attractiveness to merchants and consumers.

However, the market's expectations for the rise in marketing expenses are relatively sufficient, with expected expenditures at 30.2 billion. The 40% year-on-year growth rate in marketing expenses this season is roughly comparable to the first two quarters of this year and does not show a significant increase. Therefore, while the trend shows a slowdown in growth, the increase in expenditures is clearly not good news, but it is not an unexpected bad news either.

As for management and R&D expenses, they are basically on par with the previous quarter and slightly lower than expected. Pinduoduo's internal cost control and efficiency remain extremely outstanding.

However, although the actual expense expenditures are basically the same as the expected expenditures, the lower-than-expected revenue leads to a passive expansion of the expense ratio.

V. Is the profit decline truly deceiving me?

Due to commission income being 3 billion lower than expected, this has been equally passed on to the gross profit. Meanwhile, the expense expenditures are generally consistent with expectations, which have been passively amplified under the revenue miss. Ultimately, after adjustments (adding back SBC), the operating profit is 26.8 billion, nearly 4 billion lower than the expected 30.6 billion. One misstep leads to further missteps.

According to preliminary estimates from Dolphin Investment Research (data cannot be verified and is for rough reference only), based on the assumption that Temu's loss this season is slightly lower by 3 billion, we estimate that Pinduoduo's main station operating profit this season is around 27 billion, while the buyer's expected median is above 30 billion. ** Compared to our estimate of approximately 26 billion in main site profits during the same period last year, it has indeed approached zero growth.

The operating profit margin of the main site has dropped from over 65% last quarter to just around 50%. Due to the expansion of the revenue base, the profit margin of the main site compared to the same period last year, which was 57%, has also decreased. Is the management's guidance on profit decline not misleading?

Dolphin Investment Research [Pinduoduo] Past Research:

Earnings Season

Earnings report commentary on August 26, 2024 《 "Myth" instantly turns into "Ghost Story," has Pinduoduo really collapsed?! 》

Conference call on August 26, 2024 《 Pinduoduo: Don't expect dividends or buybacks in the next few years, profit decline is also inevitable》**

Conference call on May 22, 2024 《 Pinduoduo: Don't try to predict my profits, you can't grasp it》**

Earnings report commentary on May 22, 2024 《 Pinduoduo "Laughs Proudly in the Jianghu"!》**

Conference call on March 20, 2024 《 Pinduoduo: Performance is confident, not considering dividends yet》**

Earnings report commentary on March 20, 2024 《 Pinduoduo: How lonely it is to be invincible!》**

Conference call on November 28, 2023 《 How to talk nonsense with capital gracefully? Just look at Pinduoduo (Minutes)》**

Earnings report commentary on November 28, 2023 《 Pinduoduo: "Hall-level" Pinduoduo spirit, only a surge can pay tribute!》**

Earnings report conference call on August 29, 2023 《 Not looking at competitors, focusing on user needs》

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

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