Short-term pressure but long-term potential
? PDD’s 1Q22 revenue was Rmb23.8bn, up 7% yoy, slightly below our expectation,
mainly because it largely reduced its 1P business. PDD achieved a non-GAAP net profit
of Rmb4.2bn for the quarter, in line with our expectation.
? Given its already very large user base, PDD will focus on improving its services to
existing customers to improve user frequency and ARPU.
? Reiterate Add with a new DCF-based TP of US$106
Robust 1Q22 results
Excluding the 1P business impact, PDD’s revenue grew 39% yoy in 1Q22 with 29% yoy
growth in online marketing services revenue and 91% yoy growth in transaction services
revenue. This was the fourth consecutive profitable quarter for PDD. The gross margin for
the quarter was 69.9%, up 18% pts yoy, owing mainly to a reduction in 1P sales, partially
offset by higher fulfillment expenses. The sales and marketing expenses ratio was 47.2%
(1Q21: 58.6%, 4Q21: 41.7%), as PDD continued to shift its investment focus from selling
and marketing to R&D and technology investment. PDD will continue to invest in agriculture
technology and infrastructure to improve the overall digitalization of the agriculture industry,
so the R&D expenses ratio will continue to increase. But the R&D and agriculture-related
investment will take time to bear fruit. We expect PDD’s 2Q22F revenue to grow by 6%
yoy and non-GAAP net profit to grow by 6.9% yoy.
Focus change from AAU growth to ARPU growth
At the end of 1Q22, PDD had 881.9m annual active users (AAU), up by 7.1% yoy and 1.5%
qoq; and 751.3m monthly active users (MAU), up by 3.7% yoy and 2.4% qoq. Given the
already very large user base, management expects AAU growth to slow down in the future
and some short-term fluctuation in user numbers to be unavoidable. PDD will focus on
improving its services to existing customers to improve user frequency and ARPU. Overall
ARPU continued to improve by 18.9% yoy to Rmb108.4 in 1Q22.
Learning from the pandemic
We believe PDD’s revenue was negatively impacted by Omicron and the lockdown policy
in Apr due to the logistics and delivery capacity restrictions. But in May, PDD launched
various group purchase packaged products in Shanghai, which can be delivered to
residential communities within 48 hours through aggregated product sorting and delivery.
Therefore, we expect a mom recovery in revenue in May. As one of the supply guarantee
companies, PDD participated in providing essential supplies to frontline workers and
people in difficulty, in cooperation with local governments, and built a good relationship
with the governments. The Shanghai lockdown provided PDD’s young mid-level
management with an opportunity to take charge in an emergency situation and mature
quickly into responsible leaders, who will support PDD’s future growth. The importance of
the digitalization of the agriculture industry was highlighted during the pandemic, which
strengthened PDD’s determination to invest in agriculture technology and the agriculture
supply chain. PDD’s “10 Billion Agriculture Initiative” is still in the project assessment stage,
as there are many aspects of the agriculture industry that need to be digitalized, and PDD
is being prudent about where to begin.
Reiterate Add with a new DCF-based TP of US$106
We cut our EPS forecasts for FY22–24F by 1.7%, 3.6% and 1.1%, respectively, as we
expect top-line growth to slow down due to pandemic fluctuations and its agricultural
investment to take time to develop. We still like PDD, as we believe it has great long-term
potential to improve its margins. The key risks are 1) the Alibaba and JD threat in lowertier markets, 2) competition from live-broadcasting platforms, and 3) regulatory risks.