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Briefing Oct 15, 2020 11:15 am EqualOcean

Pinduoduo: Agricultural Products' GMV to Exceed CNY 250 Billion in 2020

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News EO
Oct 22, 2020 06:10 pm ·

Pinduoduo to Focus on Supporting New Brands in the Next Five Years

On October 22, Pinduoduo announced that its 2018 'New Brand Plan' had entered the second phase. Specifically, this plan will cultivate new brands in four ways. First, it will support 100 industrial centers from 2021 to 2025 and release 100,000 new brand products, which is expected to drive CNY 1 trillion in sales. Second, expand from serving top foundry companies to serving high-quality manufacturing companies in China, with the number increased from 1,000 to 5,000. Third, Pinduoduo's resources, such as its tens of billions in subsidies, will provide enterprises with customized brand promotion programs. Fourth, upgrade the cooperation model that helps foundry companies incubate their own brands into four new models, including OEM companies' own brand cultivation, well-known brand's sub-brand building, new brand support, and old domestic brands rebuilding. The new brand plan's upgrade aims to form a combination of 'products + new brands + 700 million users.' Chen Qiu, vice president of Pinduoduo, claimed that Pinduoduo pays particular attention to foundries when launching new brand plans as a latecomer in the industry. The reason is that, compared with traditional e-commerce platforms such as Alibaba, Pinduoduo’s philosophy and model are very different. Unlike Taobao’s search-based shopping, Pinduoduo’s core play has always been the 'goods looking for people' model. To grasp Chinese consumers from the demand side, foundries and new brands are particularly important.

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News EO
Oct 20, 2020 06:00 pm ·

Pinduoduo's Home Appliances Brand GMV Pulls Ahead in 3Q 2020

Data Burning has released its 3Q 2020 report of the Pinduoduo platform. Here we find the distinction between 'explosive' or super-popular products and slower, steadier sellers being an important one among growing e-commerce companies in China.   A product that reaches a cumulative purchase amount of more than 100,000 is termed as an 'explosive' one. The number of explosive products hit 77,000, five times that of the same period last year. In terms of category structure, fast-moving consumer goods such as apparel, food and beverages and household goods are still the categories that have been purchased in large numbers and are growing rapidly. In terms of pricing, the proportion of goods costing below CNY 20 fell to 72%, a decrease of 8% from the same period last year. High-growth products: the top three categories are beauty and skincare, personal care and apparel. Among them, Bloomage Biotech's GMV saw the highest growth rate, reaching 267% in 3Q 2020. And the average commodity price is still CNY 10-40. The GMV of non-explosive products increased by 110% year-on-year. Affected by the epidemic, household appliances and 3C products' GMV accounted for 42% of the total, surpassing the apparel category and ranking first. In July, products above CNY 500 contributed nearly 50% of GMV. Pinduoduo’s subsidies support mobile phones and electrical products, and those commodities contribute 65% of non-explosive products' GMV. The GMV of products costing CNY 1000-5000 accounted for more than 50%.

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Analysis EO
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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.

Analysis EO
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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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