derive a FV of USD131 for PDD. HOLD.
• Largest e-commerce platform by active buyers in China with a strong value-for-money consumer base
• Good 1Q21 results which we believe reflects synergy between Duo Duo Grocery and the core e-commerce platform; MAU level bears watching
• Not without its challenges (e.g. CGP, brands penetration, regulation), thus keeping us in the side; initiate with FV of USD131
Impressive entry into the market
Despite its relatively shorter operating history in comparison to its major peers, Pinduoduo (PDD) has made big strides in China’s e-commerce market, especially in lower-tier cities, and is the largest e-commerce platform by active buyers in China (as at 1Q21). PDD adopts a team-purchase model, which helps to aggregate consumer orders and increases bargaining power, while helping merchants manage inventory more efficiently and clear backlogs when necessary. This model also enables PDD to generate a large user base at minimum cost, which provides valuable data about users’ social networks and helps to also increase user purchase frequency. This model’s success can also be attributed to its unique social features, which relies on Weixin and QQ, its own social network (Pin Xiao Quan) and gamification features (e.g. Duo Duo Orchard). Within the Community Group Purchase (CGP) market, we believe that PDD’s Duo Duo Maicai (DDMC) has proven to be a nimble innovator; one of its key differentiating factors is its integrated back-end system that allow suppliers on its main app to become DDMC’s suppliers through a one-click process. We note that DDMC is placing more entry points on the main app, while more group leaders are being recruited to generate additional traffic.
Not without its challenges
Despite these positives, we do highlight a number of factors that keep us on the sidelines. In CGP, we believe PDD’s relative weakness is in offline execution, which in our view could make its supply-chain and logistics development weaker than Meituan’s. Another source of near-term uncertainty also relates to founder Colin Huang’s departure from the board. In branded GMV, management notes that it has made steady progress with brands, but the challenge remains on educating brands on the incremental value that the PDD platform can bring. We also highlight that PDD and 3 other CGP companies were also fined RMB1.5m in March 2021 for breaching the country’s price law.
FV of USD131
PDD delivered a good set of 1Q21 results, with a clean beat across key lines. Marketing service revenue grew 157% YoY while that of transaction services increased 180% YoY; the latter was due to increase in GMV as well as the service revenues recognized in connection with Duo Duo Grocery. Non-GAAP net loss came in at RMB1.9b, which was significantly better than consensus estimates of a loss of RMB3b. We believe this in part reflects some synergy between Duo Duo Grocery and the core e-commerce platform, but we also opine that PDD is likely still ramping up investments as it optimizes its distribution infrastructure, and hence losses could grow bigger over time. We are encouraged by PDD’s efforts at monetization, with the company now starting to charge commissions for its ‘RMB10b subsidy’ channel. However, we will still need to keep watch on the MAU levels, given that this has only increased 5m QoQ in 1Q21 despite the ramp-up of Duo Duo Grocery. We adopt a DCF approach and based on a WACC of 14% and a perpetual growth rate of 2%, we derive a FV of USD131 for PDD. HOLD. (Research Team)