Key e-grocery player with huge user base

Investment Thesis

Monetisation potential from 700m+ user base. Pinduouo’s MAU of 700m+ surpassed Alibaba in 2020. This should continuously attract 3P merchants and expand product categories and SKUs, which will drive advertising revenue. We expect higher earnings thanks to improving operating efficiency and more focus on high-margin marketplace business.

E-grocery a key growth driver. Duouo grocery is a leading player in Community Group BUY (CGB) with focus on fresh grocery. The online fresh grocery market size is expected to grow at a CAGR of 38% over FY20-23, from its currently low penetration of 12%.

Stronger revenue growth than leading players. We expect Pinduoduo’s revenue to grow at c.41% CAGR during FY20-FY23F, faster than leading competitors, driven by its steady user growth in lower-tier cities and rising purchase frequency in new categories.

Valuation:

We have a BUY rating on the counter. We set our TP at US$96, based on a 6x FY22F price-to-sales (P/S), largely in line with the historical average of leading players.

Where we differ:

Higher than consensus GMV growth. We forecast Pinduoduo’s GMV growth at 46% and 34% for FY21F and FY22F, slightly higher than market consensus. We believe its e-grocery expansion is faster than expected, supported by the first-mover advantage and wide user base in lower-tier cities.

Key Risks to Our View:

(1) Changes in government regulations; (2) Intensifying market competition in e-commerce and CGB; (3) Failure to retain existing users.