In the face, pinduoduo is a "ruthless" money-making machine.

On the evening of August 29th, Beijing time, before the US stock market opened, Pinduoduo once again delivered astonishing results with revenue exceeding expectations at 9 billion and profits exceeding expectations at around 3 billion. However, behind the impressive data, the real performance can be seen from the following points:

1. Explosive revenue, with uncertain revenue caliber of Temu business as the "amplifier"

Due to the low base of China's online retail market in the second quarter of last year, the year-on-year growth rate was only 14%, which was not impressive. After JD.com and Taotian also implemented cost-effective strategies, their second-quarter revenue growth also exceeded expectations, causing concerns in the market about whether Pinduoduo's growth advantage can be maintained.

However, in reality, Pinduoduo's core e-commerce advertising revenue this quarter reached 37.9 billion yuan, nearly 6 billion yuan higher than the market's expected 32.1 billion yuan. The year-on-year growth rate also reached 51%, showing an increasing growth rate and shattering the market's concerns about growth slowdown.

On the other hand, commission income (including payment and commission income from the main platform, as well as income from Duoduo Mai Cai and Temu business) reached 14.35 billion yuan this quarter, exceeding expectations by more than 3.2 billion yuan. On one hand, both Pinduoduo's main platform and Duoduo Mai Cai are expected to have impressive growth (Meituan's Youxuan revenue declined this quarter). However, the astonishing expansion speed of overseas Temu should be the main reason for exceeding expectations. According to estimates from different channels, Temu's GMV scale in the second quarter has reached around 2-2.5 billion US dollars, doubling or even tripling compared to the first quarter, so Temu's revenue will also grow exponentially.

Combining with Pinduoduo's gross profit of 33.6 billion this quarter, which is also strong and exceeds expectations by about 2.2 billion, but the magnitude of beating revenue is more reasonable. Therefore, Dolphin Research believes that in addition to the strong performance of Duoduo's main platform, the market underestimated the significant difference in revenue expectations mainly due to the revenue caliber of Temu.

Due to the disclosure caliber of Pinduoduo's "shared meal," we cannot accurately determine how much incremental revenue is contributed by Temu and the grocery business. However, combining with ①revenue increased by 14.6 billion compared to the previous quarter, while gross profit only increased by 7.1 billion, ②the incremental advertising revenue of Pinduoduo's main platform can be fully converted into gross profit, ③due to the high fulfillment costs of Temu, the gross profit can be roughly estimated as zero (or even negative), we believe that a considerable portion of the unexpected 9 billion revenue comes from Temu's contribution.

In terms of specific operations, Dolphin Research found that sellers previously generally assumed that the net income confirmed as Temu's revenue is the product price minus the product cost, accounting for about 20%-30% of GMV. However, according to our rough estimate, the actual confirmed income proportion is much higher. Dolphin Research believes that in addition to the net income derived from the product price minus the cost, Temu may also confirm a portion (most likely not the full amount) of the fulfillment fees as revenue, while the corresponding full amount of fulfillment fees is recorded as costs. But at the same time, the 6 billion yuan in advertising revenue that exceeded expectations will not all come from the Temu business. The strong growth in GMV and monetization of the Pinduoduo main site indicates that Pinduoduo has not been significantly affected by the counterattacks from JD.com and Taotian.

Are there "no pressures" on expenses, whether it's domestic competition or overseas expansion?

Although it is currently difficult for us to determine the contributions of the main site and Temu to the explosive revenue performance, what is clear is that - in the case of Alibaba and JD.com experiencing significant expansion in marketing expenses and poor profit performance, there are no signs of deterioration in Pinduoduo's expense spending.

In this quarter, Pinduoduo's marketing expenses were 17.54 billion yuan. Although it seems higher than expected, the actual increase is less than 1.3 billion yuan (in contrast, JD.com's marketing investment in 2Q increased by nearly 4.4 billion yuan). Considering the seasonal differences in the 618 promotion season in the second quarter and the significant marketing investment required for the exponential growth of Temu, Dolphin Research believes that this indicates that competition has not forced Pinduoduo to increase promotion or subsidies for its main business.

In addition, despite the 66% surge in revenue in the second quarter and the expansion of the Temu business, the company's R&D and management expenses for this quarter were only 3.33 billion yuan, with almost zero growth compared to the previous quarter, far below the expected 3.98 billion yuan. This once again proves the company's "terrifying" operational efficiency and cost control. It also indicates that although the scale of Temu is growing exponentially, it has not significantly dragged down the company's growth as the market feared.

Taken together, due to the unexpected increase of 2.2 billion yuan in gross profit and the fact that expense spending is actually lower than expected, the company's confirmed operating profit for this quarter reached 12.7 billion yuan, far exceeding the market's expectation of about 9 billion yuan, setting a new historical high. Unlike the revenue part, which may be misjudged due to accounting standards, the unexpected performance in terms of gross profit and operating profit accurately reflects Pinduoduo's actual growth this quarter.

Longbridge Dolphin Research's viewpoint:

Based on the analysis above, it can be seen that although the misjudgment of Temu's revenue may be the main disturbing factor that actually exceeds expectations, and Pinduoduo's "black box" disclosure standards prevent us from accurately separating the performance of the Pinduoduo main site, the key conclusions that can still be drawn from this financial report are:

Even with the disturbance from Temu, the performance of advertising revenue exceeding expectations by 6 billion yuan proves that the growth advantage and monetization capability of the Pinduoduo main site have not been significantly affected by the counterattacks from JD.com and Taotian, and the growth advantage remains solid.
In addition, compared to the detailed expansion of marketing expenses by JD.com and Taotian, and the poor release of profits, Pinduoduo's only slight increase in marketing investment and the significantly higher-than-expected profit release also indicate that Pinduoduo has not felt the pressure from its competitors. 3) In addition to the domestic main site, while Temu's growth rate has far exceeded expectations, it does not seem to have significantly affected the overall profitability of the group. Moreover, apart from the United States, Temu is also gradually considering expanding into markets such as Canada, South Korea, and Southeast Asia. While not dragging down the company's short-term performance, the potential for future growth is also expanding.

Overall, based on this quarter's earnings report, Pinduoduo's dominant position in the domestic e-commerce industry has not been broken, and Temu's overseas development is also thriving. Therefore, in the medium term (at least until the next earnings report), Pinduoduo's stock price is highly likely to continue leading the domestic e-commerce industry.

Detailed analysis of this quarter's earnings report:

1. Explosive revenue, with uncertain Temu revenue accounting as the main reason

Due to the mediocre growth of the domestic retail market in the second quarter on a low base, JD.com and Taotian's profits announced earlier exceeded expectations. The market was not uniformly optimistic about Pinduoduo's revenue growth this quarter. However, Pinduoduo's actual performance far exceeded market expectations, shattering market concerns.

Specifically, the core e-commerce advertising revenue this quarter reached 37.9 billion yuan, far exceeding the market's expected 32.07 billion yuan, with a year-on-year growth rate of 51%, showing no signs of slowing down and even accelerating by 1% compared to the previous quarter.

The commission income (including the payment income and commission income of the mall, the income of Duoduo Buying Vegetables, and the income of Temu) this quarter reached 14.3 billion yuan, also far exceeding the market's expected 11.1 billion yuan. The main reason should be the rapid expansion of Temu's scale, which has led to a misjudgment of Temu's revenue accounting by the market, as explained in the opening part.

Due to the advertising revenue and transaction revenue exceeding market expectations by approximately 6 billion yuan and 3 billion yuan respectively, Pinduoduo's total revenue this quarter reached 52.3 billion yuan, which is close to a staggering 10 billion yuan difference from the market's expected 43.28 billion yuan. However, this is mainly due to the misjudgment of Temu's revenue accounting, with the domestic e-commerce business exceeding expectations as a secondary factor.

Corresponding to the market's underestimation of Temu's revenue scale, Pinduoduo's gross profit this quarter was 33.6 billion yuan, which, although also exceeding the market's expected 31.4 billion yuan, did not show as exaggerated a magnitude as the revenue. Upon investigation, the main reason for the extremely low (even negative) gross profit margin of Temu's business, after taking into account the fulfillment costs, is that it contributed a significant amount of "unexpected" revenue this quarter, resulting in an expansion of costs and a decline in gross profit margin to 64.3%. Therefore, skipping the explosive revenue and significant decline in gross profit margin, a more accurate reflection of Pinduoduo's "real performance growth" this quarter is the 43% year-on-year increase in gross profit.

Secondly, an absolute anomaly: skyrocketing revenue while internal expenses are decreasing!

Considering that the second quarter is a peak season for promotions, and Temu's expansion requires a large amount of marketing investment, sales and marketing expenses increased by 1.2 billion to 17.5 billion compared to the previous quarter. Although it seems to exceed market expectations by more than 1 billion, compared to the degree of unexpected revenue, Dolphin Research believes that Pinduoduo's growth in marketing expenses is relatively low.

Similarly, while experiencing explosive revenue growth, the company estimates zero growth in headcount, and both year-on-year and quarter-on-quarter administrative expenses have decreased, amounting to only 600 million yuan.

Research and development expenses are also unique: this quarter's R&D expenses amounted to only 2.7 billion yuan, with a difference of only 100-200 million yuan compared to the same period last year and the previous quarter. Perhaps this is the true magic of the 3P platform model, where revenue growth and backend expenses are almost unrelated. Pinduoduo has perfectly demonstrated the scale effect of the increasingly transformed 3P light-asset model pioneered by Alibaba.

From the following data, we can further appreciate Pinduoduo's unparalleled operational efficiency, both internally and in the world. Behind the release of profit margins, in addition to the growth of revenue itself, Pinduoduo's formidable operational efficiency must also be considered. If we compare, when Pinduoduo's advertising revenue reaches nearly 48% of Alibaba's:

Pinduoduo's management expenses are only 600 million yuan, which is only 8% of Alibaba's;
R&D expenses amount to 2.7 billion yuan, which is only 25% of Alibaba's during the same period;

Even if Taotian's share of management and R&D expenses within Alibaba is only half of the group's, the visible difference in operational efficiency between Pinduoduo and Alibaba, as 3P e-commerce platforms, is still significant.

Three, Pinduoduo has become an unrelenting money-making machine

Although the investment in TEMU has slightly reduced the visibility of Pinduoduo's main site profit release, the fierce and incremental advertising revenue (as a business that sells traffic and exposure) has surged. This quarter, Pinduoduo's advertising revenue, with roughly the same number of DAUs, has reached 48% of Taotian's advertising revenue. This also means that the operating profit for this quarter has reached a new high, with a single-quarter operating profit of 12.7 billion yuan and a profit margin as high as 24%, far exceeding the market's expected 8.9 billion yuan and the operating profit margin of less than 21%. The current Pinduoduo has become an unstoppable money-making machine that dominates the competition!