Is Pinduoduo's good fortune coming to an end due to its inflated mindset?

On the evening of March 20, Beijing time, before the US stock market opened, PDD (PDD.US) released its Q4 2022 financial report. Overall, compared to market expectations, Pinduoduo fell short of both revenue and profit. The key points are as follows:

1. Revenue growth: expectations are high, reality is harsh

Due to the bleak e-commerce revenue of Alibaba and JD.com (-9% and +1%, respectively), which do not match the industry's adjusted growth rate of 6.4%, the market had high expectations for Pinduoduo, which has consistently exceeded expectations in past quarters and is expected to be the winning company that increases market share. Therefore, the market's expectations for the company's revenue growth were very high, with sellers' expectations for revenue growth above 50%, and buyers' expectations possibly even higher than 50%.

However, Pinduoduo's total revenue for the quarter was only 39.8 billion, significantly lower than the expected 41.6 billion, with a year-on-year growth rate of 46%, even lower than the 50% integer threshold. Although the company's performance in absolute growth rate is still far better than its peers, compared to the market's high expectations, it can be described as "a bucket of cold water."

The key problem is that the core e-commerce advertising business generated revenue of 31 billion this quarter, with a year-on-year growth rate of 38%, which is down 20% from the previous quarter and far lower than the seller's expected 46%, not to mention the higher buyers' expectations. The Dolphin has speculated that the likely reasons for falling short of expectations include:

1. The impact of contractual issues caused by the epidemic may be greater than expected. As delivery is difficult to complete, the confirmed revenue will differ greatly from the actual order amount (i.e. GMV).

2. The red-hot consumer "downgrading" dividend has passed the base period, and the willingness of merchants to place ads on Pinduoduo may have decreased, resulting in a decline in take rate. If the situation is like this then the problem is even more serious.

In addition, the commission income (excluding Duo Duo Buy Vegetables), which is more consistent with GMV's growth trend and has a relatively stable realization rate, also declined by 16% from the previous quarter. Therefore, the Dolphin speculates that Pinduoduo's GMV growth may indeed have slowed down.

1. Costs/mentality expansion resulted in a decline in growth and profit

On the gross profit level, the gross profit for this quarter was 30.9 billion, which is lower than the expected 31.9 billion. However, the actual gross profit margin was 77.6%, which is nearly 1% higher than expected. Therefore, gross profit was not a problem this quarter, and the difference with expectations was mainly due to lower revenue.

Although gross profit was not a problem, the cost expenditure this quarter was significantly inflated. The management may have overlooked cost control due to the rapid development of the cross-border platform Temu, which also led to increased expenses. The specific problems are as follows:

1. Marketing expenses this quarter were 17.7 billion, an increase of 56% YoY, which is higher than the revenue growth rate. The high customer acquisition costs generated by the rapidly expanding Temu are likely the main reason for this.
2. As a representative of Duoduo's efficiency, the management fees for a single season prior to 2021 were insufficient at less than 500 million, but increased significantly to 1.64 billion this season, even though 1.28 billion of that figure was for equity incentive costs. This is not good news for shareholders considering the company's own revenue and profit are not looking good either.

Due to lower revenue and expanding costs, Pinduoduo's operating profit for the quarter was only 9.12 billion, significantly lower than the expected 10.4 billion. The profit margin also declined to 22.9%, even lower than last year's 25.4%.

Dolphin's opinion: Overall, although Pinduoduo's 46% revenue growth and over 9 billion operating profit for this quarter seem impressive in absolute numbers, considering the company's market cap of over $120 billion before announcing the results (compared to JD.com's slightly above $60 billion), and the fact that the two companies have similar GMVs, it is clear that the market's valuation of Pinduoduo and its expectations are quite high.

Therefore, for buyers who invested a significant amount of money, the results being significantly lower than anticipated, even to the point of becoming a bombshell for performance, will naturally trigger an immediate and major sell-off.

Previously, Pinduoduo's logic of being bought by the market was the continuous revenue growth outperforming its peers and beating expectations over the past few quarters, while profit levels continued to rise. However, this financial report shows that revenue growth is beginning to slow down, and investment in cross-border platform TEMU (whose current scale is rapidly expanding) indicates a likely continued decline in revenue growth within the company by 2023, and profits will also decline due to the impact of TEMU. This is entirely opposite to the previous market buying logic.

Considering the hundred-billion subsidy war initiated by JD.com, there were already concerns about the deterioration of the competition pattern among domestic e-commerce companies. The beta layer has already shown poor performance, and if Pinduoduo's alpha logic weakens as well, the current obviously higher-than-average valuation of the company for its peers will naturally have room for a downturn.

Considering the company's future performance prospects, which have deteriorated, and the considerable rise in valuation, the Dolphin team will withdraw the company from the Alpha Dolphin Portfolio for profit-taking purposes.

For interested users or those who wish to obtain company performance summaries, please add the WeChat account "dolphinR123" to join the Dolphin Investment Research Exchange Group to come together and discuss investing.

Detailed analysis of this quarter's financial report:

I. Revenue: Expectations were too high, reality is disappointing.

Among the three domestic e-commerce giants, the revenue growth rates for the e-commerce sectors of Alibaba and JD.com in the fourth quarter have already been revealed and can be described as miserable, with negative year-on-year growth of over 9% for the former's core CMR, and a self-operated revenue growth rate exceeding 1% for the latter. Although the fourth quarter was impacted by the pandemic, the growth rate of the national online retail market at over 10% (even after adjusting historical data according to the National Bureau of Statistics, the growth rate still stands at 6.4%) clearly outperforms the performance of Alibaba and JD.com. The market naturally assumes that other platforms are continuing to grab market share during the fourth quarter, thus affecting the performance of other platforms. Previously, Pinduoduo and Douyin, which have consistently led the industry, were considered the most likely winners. Therefore, the market originally had fairly high expectations for Pinduoduo's growth this quarter, and buyers even expected revenue growth to only slightly slow down or remain the same compared to the third quarter.

However, in reality, the core e-commerce advertising business achieved revenue of RMB 31 billion this quarter, with a year-on-year growth rate that slipped 20% to 38% compared to the previous quarter, while the market consensus growth rate was 46% and buyers' expectations were even above 50%. Although in absolute terms, Pinduoduo still has a high double-digit growth rate, its performance is far stronger than that of its peers, even shrinking. Unfortunately, the market's expectations were too high, and its final performance should be classified as "poor" or even "disastrous."

During the fourth quarter of the pandemic, Pinduoduo's advantage in daily necessities and food categories was relatively beneficial. Dolphin Jun speculated that the possible reasons for the lower than expected revenue growth are:

1. The affect of the delivery problem caused by the epidemic may have been larger than expected. Due to difficulties in completing delivery, the revenue recognized by the company would be much less than the actual order amount.

2. The “downgrading of consumption” dividends enjoyed by consumers have passed the base period. At the same time, the excess ROI that merchants can obtain on Pinduoduo's platform has decreased, so the willingness to advertise has decreased and the take rate has also declined.

In addition, the company’s commission income (including e-commerce platform payment income, commission income, and Duoduomai's income) this quarter was RMB 8.8 billion. Due to the base volume increment impact of Duoduomai, the year-on-year growth rate was still as high as 86%, but the growth rate narrowed by 16% compared to the previous quarter.

Since the realization rate of commission income (excluding Duoduomai) is relatively stable, it can better reflect the trend of GMV growth rate. The growth rate of commission income is also declining, indicating that the growth of Duoduo's GMV may indeed be slowing down.

However, from the perspective of the expectation gap, the actual commission income exceeded the market's expectation of RMB 8.18 billion, which indicates that the revenue of Duoduomai may be good.

Due to the slow growth of core advertising revenue, Pinduoduo's total revenue was only RMB 39.8 billion, which is significantly lower than the market's expected RMB 41.6 billion, let alone the buyers' expectations of RMB 43 billion plus.

2. Declining revenue, expanding costs

Aside from revenue growth falling significantly short of expectations, Pinduoduo's profit release this quarter was also lower than anticipated, resulting in poor performance for both topline and bottomline.

Firstly, from a gross margin perspective, the company achieved a gross profit of 30.9 billion yuan this quarter, which is slightly lower than the market's expectation of 31.9 billion yuan. However, the gross margin for this quarter was 77.6%, which is actually higher than the market's expectation of 76.6%. Therefore, Pinduoduo's gross profit this quarter was not actually a problem, and the reason for the lower-than-expected figure is simply due to the decrease in revenue.

At the same time, while there was no significant deterioration in gross margin, year-on-year gross profit margin increased by 1.5 percentage points, leading Dolphin to speculate that the advertising monetization rate for Pinduoduo's e-commerce platform may not have declined significantly after the seasonal effects of Q4's big promotion were removed.

However, while there was no issue with gross profit, Pinduoduo's expenses this quarter were clearly "inflated", and the sustained outperformance relative to the industry may have made the management team less concerned with cost control. In addition, Temu, a rapidly-developing cross-border e-commerce platform, must have incurred substantial expenses. Specifically:

1. Firstly, marketing expenses have been Pinduoduo's biggest expense item, with 17.7 billion yuan spent this quarter, a YoY increase of 56%, which is even higher than the increase in revenue. Q4's push for Temu is likely the main factor in the significant increase in marketing expenses.

2. In addition, Pinduoduo's management expenses this quarter were also significantly inflated, with a total of 1.64 billion yuan, which is historically below 1 billion yuan per quarter before 2021, and under 500 million yuan before 2021. However, equity incentive expenses accounted for 1.28 billion yuan, a historic high. Dolphin believes that Pinduoduo, as the most outstanding domestic e-commerce platform currently, offering attractive incentives to management and employees is not excessive, but in the context of the company's poor revenue and profit performance, this may not be liked by shareholders.

3. Research and development investment remained steady, with expenses of 2.4 billion yuan this quarter, which was stable both on a quarter-on-quarter and year-on-year basis, with only a small impact on the company's overall profits.

Overall, mainly due to the unexpectedly high increase in marketing expenses, all three major expenses for the company amounted to 21.8 billion yuan this quarter, which is higher than the market's expected 20.8 billion yuan.

In the end, due to the fact that Pinduoduo's revenue was about 1.8 billion less than the expected amount, and Temu caused marketing expenses to expand, while the management was "generous" in issuing stock incentives, the result is that both revenue and profit are not good-looking.

In the end, Pinduoduo achieved an operating profit of 9.12 billion yuan this quarter, which is also significantly lower than the consensus expectation of 10.4 billion yuan. The profit margin also fell to 22.9%, even lower than the same period last year of 25.4%. The company's profit has not continued to increase compared to the previous quarter and has instead declined significantly. And it's highly probable that Temu's investment will continue to increase until 2023, making the market concerned about Pinduoduo's future profit prospects.

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Previous Research:

Earnings Season

November 28th, 2022 Telephone Conference Call "Pinduoduo Claims High Profitability is not Sustainable Again (Call Summary)"

November 28th, 2022 Earnings Review "Pinduoduo's Performance Explodes Again, Is There No Limit to Its Bull Market?"

August 29th, 2022 Telephone Conference Call "Pinduoduo is Determined to Continue Worrying about the Future (Call Summary)"

August 29th, 2022 Earnings Review "Performance burst! "Roll King" Pinduoduo is the King Behind the Scenes"

May 27, 2022 Telephone Conference Call "Research and Development Investment Will Increase, Future Earnings May Fluctuate (Pinduoduo 1Q22 Conference Call Summary)"

May 27th, 2022 Earnings Review "Reappearing the Magic of Slashing, Pinduoduo "Kills" It Back"

March 21, 2022 Telephone Conference Call "The "Laying Flat Strategy" is Only Temporary, Pinduoduo Wants to Return to Investment & Growth Track? (Call Summary)"

March 21st, 2022 Earnings Review "Half Paradise and Half Hell, Pinduoduo is "Splitting"" Depth

September 30, 2022 "[Pinduoduo vs. Vipshop: Is Your 'Poor Day' Their 'Good Day'?"(https://longbridgeapp.com/topics/3486500)"

April 27, 2022 "[Alibaba vs. Pinduoduo: After Bloody Battle, Only Coexistence Remains?"(https://longbridgeapp.com/topics/2435389)"

September 22, 2021 "[Has the Fierce Battle for Traffic Among the Crazy Alibaba, Meituan, and Pinduoduo Created Real Barricades?"(https://longbridgeapp.com/topics/1159514?invite-code=032064)"

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