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Briefing Sep 16, 2020 10:42 am EqualOcean

Pinduoduo: Orders from 'Duoduo Harvest Hall' Exceed 2 Million a Week

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Analysis EO
Sep 6, 2020 02:17 pm ·

Growth and Challenges of Pinduoduo, the Chinese eBay – Initiate with Hold [1/2]

Pinduoduo (PDD: NASDAQ) released its 20Q2 earnings on August 21, 2020. The slower GMV growth in Q2 caused its share price to drop more than 10%. GMV refers to the total value of all orders placed on PDD – it is also an important metric that PDD emphasizes to represent its performance. In this article, EqualOcean takes a more in-depth look at Pinduoduo’s 20Q2 financials, explaining both PDD’s upsides and downsides. We recommend initiate with hold. PDD is a US-listed e-commerce company and now the third-largest e-commerce player in China, just behind Alibaba (BABA: NYSE) and JD.com (JD: NASDAQ). It focuses on group buying – i.e. products and services offered at a lower price on the condition that a minimum number of people make the purchase collectively. The model has driven PDD's valuation to > USD100 billion within 5 years, a feat that Alibaba and JD took more than 10 years to achieve respectively. Its revenue comes from the commission fee it takes from sales on its platform and advertisements.  What makes PDD soar? Upstream - PDD successfully balances the benefit between suppliers and consumers and adds value to both parties. It builds up the channel that directly connects suppliers and consumers, without traditional midstream parties like distributors & channels, retail outlets, etc. Without a middle-man, consumers can enjoy lower prices without hurting manufacturers' profit, and the boosted transaction volume can then help manufacturers to earn more. Besides, the most successful part of PDD’s business model is how it supports small-to middle-size factories in China. Many of these factories in China are outsourcers of larger brands. They produce high-quality products and earn low profits because they cannot gain access to customers on their own. PDD cures this pain by providing platforms for these factories to access more than 500 million active users directly. Customers’ positive experiences lead to repurchases of the products, thus factories’ brandings are incubated. Downstream - PDD has enjoyed a low customer acquisition cost as a result of support from Tencent. As a move to pressure Alibaba, Tencent integrated PDD into WeChat, meaning over one billion monthly WeChat users can get access to PDD and make payments through the app. Bringing e-commerce into lower-tier cities was another factor that kept PDD's customer acquisition cost low – as Alibaba and JD were not accessing this market, PDD was able to grow quickly without intense competition. In addition, PDD is tapping into its customers in three ways: 1. Through its big data base and emphasis on AI, PDD can accurately tailor suggested items to increase its customers' purchases. Its recommendation algorithms change traditional ways of searching for purchases. 2. PDD's group purchasing model leads to sharing and recommending purchasing items and experiences. 3. PDD also develops small games that award players with purchasing credits to increase the stickiness of customers. New Vertical - In the most recent earnings call, the new CEO of PDD, Lei Chen, revealed the latest plan of PDD: "Our aim is to further consolidate our position as China's number one online agricultural platform and to build a worldwide presence in agriculture." Agriculture is still a blue ocean in China – on average, agricultural products have to go through five layers before reaching customers, adding 105% in costs and leading to 37% spoilage for vegetables. Furthermore, he expressed PDD's willingness to incubate new brands within the platform to build up brands for consistently high-quality products and recognize a premium on those products. PDD's agricultural product sales increased by more than 136% in this year's shopping festival, a good sign for its plan. If this plan is successful, it can bring transformation in the area and be able to build a more stick customer base from first and second-tier cities, who demand high-quality food. Also, expanding from the current saturated e-commerce market into this untapped market can be a way to maintain PDD's high growth. This article is part I of our analysis on Pinduoduo. Please continue to part II.

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Analysis EO
Sep 6, 2020 02:09 pm ·

Growth and Challenges of Pinduoduo, the Chinese eBay – Initiate with Hold [2/2]

This article is part II of our analysis on Pinduoduo– check out part I before you read.  What are the concerns of PDD moving forward? In 20Q2, PDD managed to narrow its losses: the company reported a net loss of CNY 899 million, a YoY decrease. Its sales and marketing fees also fell to 75% of revenue from >100% in Q1. However, its GMV fell below analysts’ expectations of 80% – the latest financials indicating the implied GMV only grew roughly 48%. Concerns about its GMV – GMV has always been an ambiguous term in e-commerce, as it does not take account of returned items. The resulting blur has been a concern for many analysts for the past several years. PDD's group purchasing model gave rise to some over-ordering activities from customers, which then resulted in items being returned. This GMV of PDD has been steadily growing for the past few quarters, but it dropped in Q2. "We always have reservations about what the GMV figure means," said Mark Webb of GMT Research. "But no matter how they calculate it, it's slowing." PDD's ‘CNY 10b subsidy’ in Q1 brought in a lot of attention from the capital market. As the e-commerce market in lower-tier cities became saturated, PDD was hoping to use the 10b subsidies on expensive and luxury products such as Dyson and Maotai to break into major cities. But this effort was ineffective, as people still knew PDD for selling cheap items. In Q2, people were not buying expensive products on the platform, and they went back to purchasing necessities and cheap items. This phenomenon can be explained by the core of PDD's business model. Like many successful retail brands, PDD has found its success through establishing customer additivity – and, in this particular case,  the additivity of buying on the cheap, including things they would not buy otherwise. This customer mindset that PDD relies upon could also be the reason why the 10b subsidy failed. PDD directed the subsidies to luxury items, as opposed to smaller items that it usually sold, and it could not give the same percentage of discount, which was the very satisfaction that kept customers on this platform. Public Image – people often get to know PDD through its significant low price but low quality. Even though lack of quality is no longer the case for PDD nowadays, it is hard to remove the ‘cheap’ label. Under this label, it is very difficult for PDD's per-customer's purchasing price to match up with Taobao and JD, because consumers are still only shopping small and cheap items on this platform. For 2019, the average purchasing price of PDD customers was only CNY 1200, about ⅙ to 1/7 of Taobao. Now, the only way for PDD to grow its customer base is to penetrate the first and second-tier market, but so far, its brand image does not resonate with the preference from buyers in these markets. "They have a low-price image, a cheap stuff image, and also this image won't change, they don't have any way to change that because that's what has made them successful," said Steven Zhu of research firm Pacific Epoch. This quote is a great way to summarize how little room is for PDD to have its customers increase their spending. Macro-Economic Cycle – When the economy is not doing so well, people become more sensitive towards prices and more willing to use PDD for purchase. It is proved by COVID 19 crisis period: people who used to perceive PDD as ‘low-end’ before no longer saw it the same way, and they started enjoying the discount offered in PDD. However, as China develops rapidly, it is possible that the general trend will turn to high price, high quality and well-branded products. Besides, PDD's current success heavily depends on its upstream - which are small suppliers and factories in China. Recent policies have been shifting to encourage tech driven instead of labor-driven economies. Will PDD still have an advantage in its current low-cost to access products? It is hard for anyone to accurately predict the future economy, but the risk and exposure PDD has to the economy will only increase in the future due to the sector it is in and the size it grows into. Burning cash, but can it turn out sustainable? – Suppliers have reflected on PDD's low request for commission fees. Without paying for any advertisements, suppliers can still get the free traffic on PDD platform. For these several years, PDD never made any profit for these years with low revenue from advertising as well as its extremely low price for products. Quite the opposite, it has been burning cash on its advertisement which incurs a significant loss on its financials. For 20Q2, PDD’s loss was mainly driven by the drop in its marketing fees, but the management team has warned investors that this does not mean they will stick to the same marketing budget in the future. However, as we already can see from its GMV, at least its last CNY 10bn subsidy does not make a significant change as PDD expected. It is valid to concern if this constant burning of cash can really turn into a return in the future, as PDD's growth potential still faces a lot of obstacles to break. What’s Next? - Our financial analysis and projections Considering the positives and negatives discussed above, we initiate coverage on Pinduoduo with a Hold recommendation and December 2020 Price Target of USD 95.2 per share. We drive our price target of USD 95.2 from a DCF methodology, assuming a WACC of 8.9%. Our price target implies a 7% upside – therefore, Initiate with a Hold rating. The revenue growth forecasts for 2020/21/2022 are 50%/40%/22% reflecting PDD's ramping up customer base in first and second tier cities and expanding into more product categories. We expect short-term gross profit margin will turn to positive due to the adaptable strategies PDD applied to increase monetization rate as well as compressing marketing fees to gain more efficient return. Still, the increasing branding quality and boosting efficiency in C2M may pose challenges here. We apply a 2.5% perpetual growth rate. Our bull case and bear case scenario valuations suggest a 33% upside and 26% downside, respectively. In the long term, from EqualOcean’s perspective, there are two essential parts to identifying PDD’s future performance: 1) its ability to remove its low-price & low-quality public image to increase branding 2) implementing C2M and new branding incubation plan. For point one, PDD is in partnership with appliance giant GOME and hotel giant Huazhu starting this year. It is a sign that PDD is actively increasing its product categories to best meet clients’ needs. For the second point, PDD’s unique supply chain and high transaction volume give PDD the advantage of achieving its goal. However, both are still the biggest challenges awaiting PDD, as it approaches a change from its current status to recognizing a high margin or turning around its loss within this competitive e-commerce market. 

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Aug 26, 2020 09:57 am ·

Pinduoduo is Included in the Nasdaq 100 Index

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Aug 24, 2020 03:01 pm ·

More Than 30 Korean Companies Settle in Pinduoduo

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Aug 21, 2020 06:35 pm ·

Pinduoduo Stacks Up CNY 12.19 in Revenues for 2Q 2020

Pinduoduo released its 2020 second-quarter financial report. Other than the increase in revenue compared to the same period last year, the average number of monthly active users this quarter 568.8 million, a year-on-year increase of 55%. The number of active buyers for the year ended June 30 was 683.2 million, up 41% year-on-year. Revenues from online marketing services were CNY 11.05 billion, an increase of 71% from CNY 6.46 billion in the same quarter of 2019. Revenues from transaction services were CNY 1.13 billion, up of 38% from CNY 822.9 million in the same quarter of 2019. Total costs of revenues were CNY 2.66 billion, an increase of 67% compared to the same quarter of 2019. The increase was mainly due to higher costs for cloud services, call center and merchant support services. Total operating expenses were RMB11.17 billion compared with CNY 7.18 billion in the same quarter of 2019. Sales and marketing expenses were CNY 9.11 billion, up 49% compared to the same quarter of 2019, mainly due to an increase in advertising expenses and promotion and coupon expenses.   Research and development expenses were CNY 1.66 billion, an increase of 107% from CNY 803.7 million in the same quarter of 2019. The increase was primarily due to an increase in headcount and the recruitment of more experienced R&D personnel, and an increase in R&D-related cloud services expenses. It is also worth noting that GMV in the twelve-month period ended June 30, 2020 was CNY 1,268.7 billion, an increase of 79% from CNY 709.1 billion in the twelve-month period ended June 30, 2019.   Active buyers in the twelve-month period ended June 30, 2020 were 683.2 million, an increase of 41% from 483.2 million in the twelve-month period ended June 30, 2019.   Annual spending per active buyer in the twelve-month period ended June 30, 2020 was CNY 1,857, an increase of 27% from CNY 1,467.5 in the twelve-month period ended June 30, 2019.

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Analysis EO
Aug 16, 2020 05:21 pm ·

Pinduoduo: A Rising Star Challenging Alibaba and JD.com [2/2]

► Pinduoduo’s net profit and net profit margin are improving. ► Pinduoduo's unique model of 'C2M' is grabbing small merchants from Taobao. ► The brand has a focus on consumer operations, aiming to provide consumers with a more fun user experience, Pinduoduo is speeding up to become next Disney. In the previous article, we overviewed the development of the Chinese e-commerce market and how Pinduoduo performed compared with Alibaba and JD.com. Here, we will focus on the company's profitability and its potential opportunities. Not profitable but improving Pinduoduo has not turned the loss into profits yet but had a narrowed loss in 2019. First, the cost of revenue is significantly lower than expected. The financial report shows that Pinduoduo's revenue cost was CNY 2 billion in 4Q2019, an increase of 11% month-on-month and a year-on-year increase of 43%, which was significantly lower than the total revenue growth of 44% and 91% year-on-year. Second, the cost is better than expected. Since 3Q2019 and 4Q2019, Pinduoduo has been subsidizing to the tune of ten billion. 3Q2019 sales expenses were CNY 6.9 billion, and 4Q2019 sales expenses were CNY 9.3 billion, accounting for 86% of revenue, which was lower than 107% in 4Q2018 and 92% in 3Q2019. It can be seen that although sales expenses increased by CNY 2.4 billion, the revenue growth rate was faster, which means that Pinduoduo's 'ten billion in subsidies' are valid. This policy not only brought rapid revenue growth but also brought more users. Statistics show that after Pinduoduo's '10 billion subsidies' last June, the annual growth rate of active buyers rose rapidly from 6% in 1Q2019 to more than 9%. At the same time, the retention rate of Pinduoduo users continues to increase, which means that most users continue to consume on Pinduoduo. When the stickiness of users and merchants is high enough, the subsidy intensity can be reduced and the profitability can be improved. However, the current amount of CNY 33.3 billion in cash on Pinduoduo's financial account can still be subsidized for a long time. Data shows that the average annual consumption of active buyers has reached CNY 1,720, a year-on-year increase of 53% in 2019, which exceeds the annual growth rate of active buyers of 40%. There is a lot of room for improvement from the ARPU perspective. It is approximately only one-eighth or one-seventh of the leading competitors, such as asJD.com and Alibaba. In 4Q2019, Pinduoduo continued to make a profit in terms of merchant monetization. In terms of take rate, the company continued to provide preferential policies for high-quality merchants. In a single quarter, the take-rate continued to decline by 0.1% to 2.9% from the previous month, and the annual monetization rate reached 3.0%. Compared with the 3.62% of Taobao and Tmall monetization rate in 2019, Pinduoduo still has room for improvement. Why long PDD?  1. Pinduoduo is grabbing market share from Alibaba and JD.com from 2.5% in 2017 to 12.8% in 2019. Since 2012, Tmall has always occupied more than 50% of the market share, which peaked in 2014, and then showed a slight decline year by year. JD's market share is between 20%-30%, showing steady growth, while Pinduoduo's market share is showing a strong momentum of 'leaping growth,' may pulling Alibaba's market share below 50% for the first time in 2020. 2. Penetration rate can be much higher in lower-tier cities in the future, revealing a substantial potential market. With the popularization and upgrading of mobile Internet in lower-tier cities and towns, and the strengthening of necessary social capabilities such as township logistics, the penetration rate of China's online retail continues to increase. 3. Pinduoduo's unique model of 'C2M' is grabbing small merchants from Taobao. The retail model has gradually evolved from the original 'people looking for goods' which used by Taobao to the 'products looking for people' applied by Pinduoduo. The former model helped squeeze out small merchants on Taobao as this platform use the centralization model to top big merchants. Therefore, small merchants will seek new platforms such as Pinduoduo to settle in. 4. Use WeChat as traffic entry. The platform directly invokes China's current most effective consumer link network, WeChat, to transplant users to the leading site instead of placing users in the position of independent buyers. Besides, merchants provide fast store launches and traffic bonuses, as well as a perfect de-stocking model of purchase. 5. The agricultural products sector can use consumers' empathy for the concept of poverty alleviation to significantly increase the conversion rate. In 1Q2020, the number of farming product orders from rural online stores exceeded 1 billion. Users in the higher-tier cities of the platform consume more than 70% of agricultural products and agricultural and sideline products, indicating a good start to compete with other giants in Tier-1 and Tier-2 cities. Besides, as a sector that national policies support, agricultural products are highly probably to improve Pinduoduo's market share. In total, it has connected 586,000 agricultural product merchants with 240 million active users, and users have purchased agrarian products with a repurchase rate of over 70%. 6. Focus on consumer operations, aiming to provide consumers with a more fun user experience. Users can play games on the platform such as 'Duoduonongchang' to get free products, increasing consumer's stickiness and one step closer to Disneyland, which Pinduoduo aims to become in the future. By transplanting social networks and cultivating the use of entertainment functions, Pinduoduo has data from social connections and from entertainment features that highly reflect user preference characteristics, which will bring considerable data support for Pinduoduo to explore the future C2M model.

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Sep 22, 2020 10:24 am ·

Yonghui Superstores Opens Four New Stores

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Sep 22, 2020 10:19 am ·

JD.com Confirms JD Health's Listing Plan

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