Temu has a strong momentum, with PDD leading the e-commerce industry. How much room is there for further growth?

Last week, PDD released a financial report that exceeded expectations, driving the stock price up 19% to $71.42.

PDD has gradually shifted its focus from pursuing development speed to pursuing quality. As the company's market share and revenue rapidly expand, various cost rates have gradually decreased under the driving force of scale effect, and profit margins continue to rise.

Looking ahead, many institutions are optimistic about PDD's potential, with target prices mostly above $100.

Q1 Performance Review

In Q1 2023, PDD achieved revenue of RMB 37.64 billion, a year-on-year increase of 58.2%, and adjusted net profit of RMB 10.13 billion, a year-on-year increase of 141%. Both revenue and profit exceeded Bloomberg's consensus expectations.

PDD has increased its market share at a rate higher than the industry average, and this quarter's revenue exceeded expectations due to the low base last year.

Excluding the losses from TEMU and grocery business, CICC estimates that the core operating profit of the main site is RMB 13 billion, corresponding to a profit margin of 41%, driven by the operating leverage effect, cost rate reduction, and profit margin optimization.

In addition, in April 2023, PDD's co-founder Zhao Jiazheng was appointed as executive director and co-CEO, mainly responsible for the supply chain and domestic business, to cope with the more intense competition in the domestic market. The original CEO Chen Lei is mainly responsible for developing overseas business.

About Cross-border E-commerce TEMU

According to Sensor Tower statistics, TEMU's dual-platform (Google Play and App Store) MAU exceeded 37.4 million in May, and DAU continued to grow rapidly, with the highest reaching over 6 million in early May.

According to Jiuyan Consulting statistics, TEMU's sales in Q1 2023 have exceeded USD 810 million. Based on the current development trend, the target of USD 3 billion GMV for the whole year 2023 is highly likely to be exceeded.

CICC estimates that TEMU's loss in Q1 is RMB 3.3 billion, with logistics and marketing costs each at the level of RMB 2 billion.

TEMU is accelerating its coverage in Europe to reduce geopolitical risks. The main site's profitability can continue to cover TEMU's incremental investment, and in the medium and long term, TEMU can reduce losses by increasing the markup rate and optimizing logistics costs.

Full-year Forecast

CITIC Securities expects PDD's revenue for 2023-2024 to be RMB 166.753 billion and RMB 204.003 billion, respectively, and non-GAAP net profit to be RMB 42.554 billion and RMB 55.431 billion, respectively.

CICC predicts that PDD's overall profit will increase by 12% to RMB 44 billion in 2023, of which the combined losses of TEMU/grocery business are RMB 25 billion, and the main site's profit release can make up for the increase in new business investment.

Considering that PDD is the fastest-growing shelf e-commerce platform on the mainland, with a strong execution capability, it is still gaining user mindshare and increasing customer investment in the fierce market competition. China CITIC Securities said that the impact of Temu on PDD's apparent profit should not be overly pessimistic. PDD's Non-GAAP net profit is expected to maintain a reasonable growth level this year.

Investment Recommendation

China CITIC Securities maintains a "buy" rating on PDD with a target price of $113.53 per ADS.

CICC raised its target price from $100 to $107. The current price corresponds to a P/E ratio of 17 times/13 times for the company's overall/core main business in 2023.

Guosen Securities maintains a target price of $136-143 for the company, with an upward space of 91%-100% from the current level, and continues to maintain a "buy" rating.

Huachuang Securities expects to give a 18XPE for 23 years, referring to the mature e-commerce business of Alibaba and JD.com, corresponding to a target market value of 970.4 billion yuan, approximately $137.1 billion. This means that there is still 44% upside potential, and maintains a "strong recommendation" rating.