Before the US stock market opened on the evening of August 26th Beijing time, Chinese concept stock Pinduoduo finally released its financial results. However, this time hope turned into disappointment, and even the light of Chinese concept stocks dimmed!

1. Fierce competition, heading towards "ghost stories"?

In the second quarter, Pinduoduo's advertising revenue was 49.1 billion yuan, a year-on-year growth of only 29%! Sellers provided an average growth rate of 33%, while many buyers expected a much higher number.

The market's thoughts are simple: a. Pinduoduo's GMV still shows relatively high growth, especially when compared to the weaker growth of JD, Alibaba, Kuaishou, and Vipshop. Pinduoduo may have higher growth certainty; b. Despite facing a high base from last year, Pinduoduo is still in a period of strong monetization. A 20% GMV growth rate coupled with a 30-40% revenue growth is a reasonable range of delivery, and exceeding it has always been Pinduoduo's consistent ability.

However, with actual growth at only 29%, the market must consider:

a. Has Pinduoduo's GMV growth dropped to the range of 10%+? The monetization phase has reached its final stage, and the effects are quickly depleting. If GMV growth further slows down, will Pinduoduo in China only have stable growth of around 10%+ left?

b. In the competition among the three giants of Douyin, Pinduoduo, and Alibaba, if Pinduoduo's growth slows down, how can we expect future stable profit growth? Will it fluctuate around 10%?

The growth story is hindered, and the smooth release of profits naturally becomes difficult. If this is the case, the first thing that Pinduoduo will lose is its growth imagination space in China.

2. If there is no growth domestically, how big can the overseas market be?

In the second quarter, Pinduoduo's commission income increased by 234% year-on-year, mainly driven by the revenue from its overseas business Temu, which also includes commission income from the main site based on transaction volume and from Duoduo Mai Cai.

Assuming that after the GMV growth gradually stabilizes, the commission income from the main site and Duoduo Mai Cai will grow at a similar pace to advertising revenue, Dolphin estimates that the high-growth business Temu may have already seen a single-digit growth rate, or even no growth.

However, the real problem with the overseas business at the moment is the uncertainty of the business under the backdrop of poor trade relations. The market is not willing to give any valuation to Temu, and may even consider it as an asset with valuation losses.

Considering that marketing expenses were also well controlled this quarter, the significant slowdown may still be largely due to the decline in revenue caused by the decrease in monetization rates under the semi-managed Temu.

Nevertheless, regardless of assumptions, the core issue here is still the overall slowdown in revenue from advertising to transaction commission income at the main site.

3. Revenue slowdown, fortunately marketing expenses are under control

Pinduoduo's gross profit increased by 89%, almost in line with the overall 86% revenue growth. With Dolphin raising Temu's business gross profit margin to above 30%, there was no significant improvement in Pinduoduo's main site gross profit margin compared to the previous quarter, mainly due to insufficient elasticity in revenue growth this quarter.

Ultimately, Pinduoduo was able to release decent profits, mainly due to external expenses - marketing expenses were relatively restrained, with revenue growing by over 85% and marketing expenses by 48%, further shrinking the expense ratio Combining the financial reports of Google and Meta, the advertising efforts of Chinese e-commerce platforms such as Temu have clearly slowed down. Dolphin estimates that Temu's advertising spending should have slowed down, and the loss rate should have improved.

In other words, although the sales expenses were compressed more than expected this time, the reduction in the sales expense rate on the main site should still be slightly weakened.

4. Is the Growth Slowing Down? The Profit of the Efficiency Machine is Still Releasing Wildly

Due to more restrained overseas spending, the overall efficiency of the company is still extremely high. A company with over a trillion GMV in a quarter, with administrative expenses of less than 2 billion in a quarter, and R&D expenses of less than 3 billion, especially with R&D expenses growing by only 6%.

Because pure profit income can still increase, coupled with restrained sales expenses, profit release is still in full swing. In the second quarter, Pinduoduo's operating profit, including Temu's losses, has stabilized at over 30 billion US dollars, reaching 32.6 billion US dollars this quarter, a staggering year-on-year increase of 156%.

Dolphin Research Viewpoint:

This financial report season is particularly shocking, especially for Chinese concept stocks. Originally, Dolphin had some fantasies about Pinduoduo. However, in reality, the collapse of consumption still falls on everyone's heads.

First of all, it seems that the reduction in losses for Temu may not be as expected (some people think Temu is close to breaking even). As the current market does not give Temu any valuation, regardless of whether Temu is doing well or not, what is truly worrying in this financial report is the domestic main site business.

After all, the previous glory of the main site's advertising has been questioned by the market for some time:

a. With such poor online consumption in the second quarter, how much alpha can Pinduoduo still have?

b. In 2024, the entire industry benchmarking against Pinduoduo is pushing for lower prices. How long can Pinduoduo lead the pack?

c. With the slowdown in GMV growth, aggressive monetization, how much room does Pinduoduo have left?

These three questions are like time bombs, and the market is worried that they could explode at any time. The performance in the second quarter is almost like the feeling of a hanging sword finally falling.

The good thing is that due to Pinduoduo's reluctance to communicate with investors and the high opacity of its performance, the market is not willing to give it too much valuation premium. Even if the performance this time implies that after it matures completely, the growth rate of domestic GMV and profits will be around 10%-15% from Dolphin's current estimate for 2024 after-tax main site profit, the market has only given it just over 10 times PE, without giving it a growth premium.

However, looking at the current competitive environment, although it looks like learning from Pinduoduo but not like it, since 2024, the two giants, Douyin and Alibaba, have indeed been besieging Pinduoduo's stronghold with low prices, and Pinduoduo's ability to monetize is indeed at risk of reaching its limit. If this performance indeed confirms the turning point of Pinduoduo's main site growth, then when the stage of high monetization is over and GMV growth slows down, the future growth prospects will truly be gone. So Pinduoduo probably still needs to answer why funds should buy it:

a. With domestic growth gone, can profits from overseas business be realized?

b. With no growth, can dividends and buybacks be arranged? How much? Can at least the buybacks offset the natural dilution of shares due to annual option grants?

If these questions cannot be explained clearly, its stock price, even if undervalued, is likely to experience a pullback before rebounding. After all, the valuation logic has changed, the story of shareholder returns is unclear, and the company's performance will also take a hit:

"We are prepared to make short-term sacrifices and face the possibility of declining profitability... Looking ahead, due to intensified competition and external challenges, we will inevitably face pressure, but we remain committed to investing, and profitability will also be affected."

Detailed interpretation of this quarter's financial report:

I. Can't even the strongest alpha beat beta?

This quarter, Pinduoduo achieved total revenue of approximately 97.1 billion RMB, which is not about beating expectations by how much as seen in the past two years, but rather missing expectations compared to Bloomberg's consensus of 100 billion.

The key indicator that Dolphin Research focuses on, and also the most critical factor affecting the company's market value, is the advertising revenue this quarter at 49.1 billion, a 29% year-on-year growth. Sellers consistently expected growth of 33%, while based on our understanding, buyers' expectations were around 40% growth, so Pinduoduo's core indicator—advertising revenue growth this quarter is significantly lower than expected.

For transactional revenue (transaction service), Bloomberg's consensus was around 50 billion, but Temu's revenue volume is difficult to grasp, so sellers' expectations are only for reference. Actual transactional revenue this quarter was 47.9 billion, slightly lower than expected. Therefore, Temu's confirmed revenue is also somewhat lower.

In other words, this quarter, Pinduoduo showed lower-than-expected performance in the growth of its key businesses, the main site in China and overseas business Temu, which raises concerns in the market about whether the company can maintain its previous industry-leading growth and performance delivery.

Even without considering the expectation gap, the growth rate of advertising revenue this quarter dropped from 56% in the previous quarter to 29%, showing a very significant slowdown. How should we understand this sharp slowdown?

Firstly, at a macro level, the growth rate of the online physical retail market this quarter dropped significantly to only 6.4%, nearly halving compared to the previous quarter, indicating a quite weak overall industry growth rate.

At the company level, the growth rates of the two leading live e-commerce platforms in the industry have significantly slowed down this quarter (Kuaishou's GMV growth rate is only 15%, and it is rumored that Douyin's growth rate has also declined significantly in the past two months). Although the company does not disclose GMV growth rate, we believe that Pinduoduo's GMV growth rate this quarter is most likely at most high-teens, showing a considerable slowdown from the over 20% growth rate in the previous quarter.

In terms of monetization, according to our calculations, the comprehensive monetization rate of advertising + commissions for Pinduoduo's main business this quarter is slightly higher than 4.5%, with the rate of monetization increasing year-on-year showing a significant narrowing compared to the previous quarter. Combined with management's clear statement that "future revenue growth will inevitably be increasingly affected by fierce competition and the overall environment."

Our previous concerns have been expressed multiple times - when Pinduoduo's growth (whether due to industry or competitive factors) no longer significantly outpaces its peers, the sustainability of continuously increasing the monetization rate is a question that cannot be taken for granted.

II. Temu's revenue is also not as strong as expected.

Before analyzing Temu's performance, let's review the financial recognition rules for Temu's business that we have compiled:

1) Currently, under Temu's main full/half-hosted model, the revenue recognition should be based on the "front-end selling price - cost of goods supplied" portion, meaning that the gross profit from sales is recognized as Temu's revenue.

2) The cost recognition for Temu is mainly based on fulfillment logistics costs, including some costs such as servers and manpower that are recognized as costs rather than expenses.

3) Marketing and promotional expenses generated by Temu, operating management expenses, platform development costs, etc., are recorded in the corresponding expense categories.

As seen from the above, the revenue recognized by Temu this quarter is also somewhat below expectations. What are the reasons for this? According to third-party research, Dolphin Research understands that Temu's GMV this quarter is approximately around $11-12 billion, with a month-on-month growth rate of around 20%, while our calculations show that Temu's revenue recognition month-on-month growth rate is only around 10%.

With revenue growth lagging behind GMV, we believe that one of the reasons is that under the semi-hosted model introduced by Temu, the proportion of platform-recognized revenue to GMV will be significantly lower than that of the fully hosted model (because fulfillment costs are borne by merchants, leaving more profit margin for merchants). In other words, this quarter, Temu's revenue/GMV take rate will experience a certain decrease compared to the previous quarter, and using the previous quarter's take rate would lead to an overestimation of Temu's revenue

III. Gross margin year-on-year decline stopped, is it also the credit of semi-outsourcing?

From a gross margin perspective, Pinduoduo's gross margin for this quarter is 65.3%. In the past few quarters, due to the drag of Temu's fulfillment costs, the gross margin has been declining year-on-year. This quarter, after the volume increase of Temu, Pinduoduo's gross margin stopped declining year-on-year for the first time, increasing by about 1 percentage point.

We believe that semi-outsourcing business may also be one of the main reasons for the increase in gross margin. Under this model, the cross-border transportation costs are borne by merchants rather than the platform, so they will not be included in Pinduoduo's cost items in the financial report.

IV. Growth slows down, but operational efficiency remains

Major growth indicators are not as expected, the main highlight of this performance lies in the cost aspect. Among them, actual marketing expenses amounted to 26 billion, a negative year-on-year growth, and about 1.9 billion less than market expectations. According to our analysis, the marketing investment of Temu did not increase much on a month-on-month basis, and the marketing investment of the main site showed a slight increase or remained flat year-on-year.

As for administrative expenses and research and development expenses, with revenue increasing by over 10 billion, these two expenses remained almost the same as the previous quarter. With continuous revenue growth and unchanged expenses, passive dilution is still maintaining Pinduoduo's high efficiency.

V. Pinduoduo still profitable, but no longer breaking through the celing?

Pinduoduo's operating profit for this quarter is close to 32.6 billion, although revenue fell short of expectations, profit exceeded expectations by about 3.5 billion, still showing a high growth rate of 156% year-on-year. However, the additional profit this time mainly came from cost control, rather than unexpected incremental revenue, significantly reducing the significance of the beat.

According to our preliminary estimation (please note that the data cannot be verified and is only for rough reference), it seems that Temu's loss for this quarter did not significantly narrow on a month-on-month basis. According to our estimation, although Temu's loss rate did decrease slightly compared to the previous quarter due to the growth in GMV volume, the actual loss did not decrease much. This is quite different from the rumors that Temu was close to breaking even this quarter. We can only assume that the rapid increase in the proportion of Temu's non-U.S. business, continuous expansion into new markets, and the scale effect of operations and fulfillment have delayed Temu's breakeven point 而This will obviously impact the market's willingness to give Temu a separate valuation.**

Excluding the impact of Temu and grocery business, the operating profit of Pinduoduo's main site this quarter is around 38-39 billion. Compared to the previous quarter, it increased by 6.7 billion, which is close to the nearly 8 billion increase in main site revenue.

The operating profit margin of the main site continues to slightly increase to nearly 67%, it needs to be acknowledged that with room for further improvement in monetization rate on the main site, there is still room for the profit margin of Pinduoduo's main site to continue to grow. However, compared to the previous quarter where the profit margin increased by about 9 percentage points, the increase this quarter has significantly narrowed to around 3 percentage points.

The management also explicitly stated that due to competitive pressure, the current high profit growth is not sustainable in the long term. Therefore, after this performance, the vision and profit forecast of Pinduoduo being able to continuously and significantly increase profit margins may be shattered, and have been revised downwards.

Dolphin Research on Pinduoduo:

Earnings Season

May 22, 2024 Conference Call " Pinduoduo: Don't try to predict my profits, you can't grasp them"

May 22, 2024 Earnings Review " Pinduoduo "Proudly Stand Alone"!"

March 20, 2024 Conference Call " Pinduoduo: Confident in performance, dividends not yet considered"

March 20, 2024 Earnings Review " Pinduoduo: Invincibility is so lonely!"

November 28, 2023 Conference Call " How to talk nonsense decently with capital? Just look at Pinduoduo (minutes)"

November 28, 2023 Earnings Review " Pinduoduo: "Hall-level" fighting spirit, only soaring can pay tribute!"

August 29, 2023 Earnings Conference Call " Don't look at competitors, focus 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"