Strong margin expansion drove earnings growth
- PDD reported that total revenue grew by 36% yoy to Rmb31.4bn in 2Q22, above our expectation, due to consumption recovery since May and strong Jun 18 online sales.
- Non-GAAP net profit jumped by 161% yoy to Rmb10.8bn, stronger than we expected, driven by higher GPM expansion and a lower selling and marketing expenses ratio.
- PDD announced that it would expand in overseas markets, targeting the US first.
- We expect PDD to reach 18% in revenue and 15% in non-GAAP NP growth in 3Q22F.
- Reiterate Add with a higher DCF-based TP of US$120.
2Q22 results above our expectations
Total revenue grew by 36% yoy to Rmb31.4bn, above our expectation, due to a consumption recovery since late May, various measures adopted by the company to improve user engagement, and strong revenue growth during the Jun 18 online shopping festival. Online marketing service revenue grew by 39% yoy to Rmb25.2bn, and transaction services revenue was up by 106.7% yoy to Rmb6.2bn. Non-GAAP net profit jumped by 161% yoy to Rmb10.8bn, stronger than we expected, driven mainly by a higher GPM and a lower selling and marketing expenses ratio. Its GPM expanded by 8.9ppts yoy to 74.7% in 2Q22, due mainly to higher average order value and a lower revenue contribution from the direct sales business, which has lower margins. The selling and marketing expenses ratio fell to 36% in 2Q22, from 45% in 2Q21, since PDD delayed some marketing activities and cut travel expenses during the lockdown period. Management expects margins to fall qoq, since PDD will increase its marketing investment in 2H22F to boost sales.
Strong growth in the June 18 online shopping festival
Management said in the conference that merchants were well-motivated to participate in this year’s Jun 18 online shopping festival. PDD achieved strong growth in its traditional agriculture and household products during the festival. The company also doubled its sales of mobile phones, home appliances and cosmetics products. PDD has adopted various measures to boost consumption sentiment. In late Apr, the company launched a daily necessities package with 300 SKUs and a 48-hour delivery period in Shanghai, which has improved PDD’s user engagement and frequency. PDD also continued its agriculture investment in 2Q22 to boost sales growth, which is part of the company’s long-term strategy. For example, Duoduo Grocery helped farmers in distant areas sell millions of tons of agriculture products in 2Q22. PDD also launched the “Super Agriculture Festival” in 2Q22, covering 200k SKUs in 2,000 agricultural areas.
Expanding in overseas markets
PDD has decided to expand into overseas markets, targeting the US market first. PDD is now recruiting suppliers in the domestic market. Management said that PDD’s overseas expansion is still in the early stage and that it is exploring a unique way. Management added that the company’s investment in the community group purchase business will continue and that PDD will further improve its supply chain and fulfillment capability. Currently, Meituan Select and Duoduo Grocery has become the top two community group purchase players, each with around a 40% market share in terms of sales.
Reiterate Add with a new DCF-based TP of US$120
We raised our FY22–24F EPS forecasts by 16.3–52.5% to reflect stronger margins. We reiterate Add, since we believe PDD has huge room to develop its agriculture business and improve margins. A positive catalyst would be stronger-than-expected margin expansion. A risk is weaker top-line growth due to the sluggish macro economy. Our TP is derived from a DCF valuation method with 9.1% WACC and a 5% terminal growth rate (details on P2).
