Lead Equity Research Analyst

Sameer Merchant, CFA

Equity Bottom-Up

PDD Holdings Inc. is a multinational commerce group that owns and operates a portfolio of businesses. The Company focuses on digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities. PDD Holdings has built a network of sourcing, logistics, and fulfillment capabilities for its underlying businesses.

Pinduoduo (PDD) has fast become the quintessential disruptor, pioneering a new social form of e-commerce, now imitated by incumbents. Fronted by its pioneering team purchase model and supported by WeChat app integration, Pinduoduo has recorded impressive revenue CAGR of 217% (excl. merchandise) over the past three years to become the largest e-commerce player in China by number of users (788m in 2020 vs Alibaba’s 779m) and third largest by GMV. However, the recent departure of Chairman and founder, Colin Huan pushed share prices down 12%, overshadowing its Q4 2020 earnings beat.We see PDD as one of the best-in-class tech companies in China benefitting from its strong industry positioning, best-in-class growth prospects, a pioneering business model and exceptional management, spearheaded by CEO, Lei Chen, who given his long track-record of working with Colin Huang is a plug and play substitute for the departing Chairman.      The avant-garde turns disruptor: Much of the success of PDD can be attributed to its pioneering team purchase platform, built to thrive on the WeChat app. In the same vein, it was also the first of its kind to build the Customer to Merchants business model, allowing manufacturers to cut out the middlemen and sell directly to customers. It has also brought to market several products to drive customer engagement such as gaming. PDD dominates the e-commerce space in rural China given its roots in agricultural e-commerce and is investing heavily to roll out its in-house agricultural logistics network, which if done well will be its key differentiator.Multitude of drivers lends us confidence in its growth trajectory: We expect PDD's number of users to grow @14% CAGR over the next three years driven primarily by the ongoing penetration of WeChat users. Even though the diffusion rate of PDD into WeChat users has increased from 14% in 2017 to 59% in 2020, we see significant room for growth over the next three years. Moreover, PDDs ARPU is significantly lower than peers and one we see as a significant driver of growth for the young tech company. Management is focused on increasing both higher Average Selling Prices and increasing order frequency to drive revenue growth.New regulations heighten competitive intensity: New anti-trust regulations published in February and aimed to tackle monopolistic behaviours have already fined multiple internet players including PDD. Whilst some regulations such as exclusivity of merchants will benefit PDD, others such as curtailing price incentives will likely impinge future growth prospects. Also, the new regulations bars social media platforms and live video streaming websites to block third party e-commerce sellers which we understand will allow PDD to launch its app on rival’s apps such as Douyin (TikTok) but will also increase competition on native apps such as WeChat.Departing Chairman adds to PDD’s risk profile: In its FY 2020 earnings release, PDD announced that its Founder and Chairman, Colin Huang will be stepping down from the Board. Current CEO, Chen Lei, who replaced Colin as CEO last July, will now also become Chairman. We see the fundamentals of the business unchanged and continue to monitor the performance of the new CEO who worked on a number of start-ups with Colin before setting up PDD. Even though Colin Huang has stepped down from the business he will continue to work with PDD in agricultural research.

Pinduoduo (PDD) has fast become the quintessential disruptor, pioneering a new social form of e-commerce, now imitated by incumbents. Fronted by its pioneering team purchase model and supported by WeChat app integration, Pinduoduo has recorded impressive revenue CAGR of 217% (excl. merchandise) over the past three years to become the largest e-commerce player in China by number of users (788m in 2020 vs Alibaba’s 779m) and third largest by GMV. However, the recent departure of Chairman and founder, Colin Huan pushed share prices down 12%, overshadowing its Q4 2020 earnings beat.We see PDD as one of the best-in-class tech companies in China benefitting from its strong industry positioning, best-in-class growth prospects, a pioneering business model and exceptional management, spearheaded by CEO, Lei Chen, who given his long track-record of working with Colin Huang is a plug and play substitute for the departing Chairman.      The avant-garde turns disruptor: Much of the success of PDD can be attributed to its pioneering team purchase platform, built to thrive on the WeChat app. In the same vein, it was also the first of its kind to build the Customer to Merchants business model, allowing manufacturers to cut out the middlemen and sell directly to customers. It has also brought to market several products to drive customer engagement such as gaming. PDD dominates the e-commerce space in rural China given its roots in agricultural e-commerce and is investing heavily to roll out its in-house agricultural logistics network, which if done well will be its key differentiator.Multitude of drivers lends us confidence in its growth trajectory: We expect PDD's number of users to grow @14% CAGR over the next three years driven primarily by the ongoing penetration of WeChat users. Even though the diffusion rate of PDD into WeChat users has increased from 14% in 2017 to 59% in 2020, we see significant room for growth over the next three years. Moreover, PDDs ARPU is significantly lower than peers and one we see as a significant driver of growth for the young tech company. Management is focused on increasing both higher Average Selling Prices and increasing order frequency to drive revenue growth.New regulations heighten competitive intensity: New anti-trust regulations published in February and aimed to tackle monopolistic behaviours have already fined multiple internet players including PDD. Whilst some regulations such as exclusivity of merchants will benefit PDD, others such as curtailing price incentives will likely impinge future growth prospects. Also, the new regulations bars social media platforms and live video streaming websites to block third party e-commerce sellers which we understand will allow PDD to launch its app on rival’s apps such as Douyin (TikTok) but will also increase competition on native apps such as WeChat.Departing Chairman adds to PDD’s risk profile: In its FY 2020 earnings release, PDD announced that its Founder and Chairman, Colin Huang will be stepping down from the Board. Current CEO, Chen Lei, who replaced Colin as CEO last July, will now also become Chairman. We see the fundamentals of the business unchanged and continue to monitor the performance of the new CEO who worked on a number of start-ups with Colin before setting up PDD. Even though Colin Huang has stepped down from the business he will continue to work with PDD in agricultural research.

Pinduoduo (PDD US): Time to Shine for the Sorcerer’s Apprentice: Initiating Coverage

Trained and bred in the bulge bracket milieu, Sameer Merchant CFA has a very thorough but a nebulous approach to investing. He prefers to build detailed quarterly financial models, reads profusely on the companies under coverage and informs his investing decisions using methodical valuation techniques including Comparables, DCF and Sum of the Parts.

Sameer has almost a decade’s experience in Equity Research, working for bulge bracket names ranging from Goldman Sachs to Barclays. He has covered stocks across a broad range of sectors, including Chemicals, Fintech and Real Estate, with market cap ranging from $50m to >$100bn. Sameer is the CEO and Lead Equity Research Analyst of AlphaStone Equities.

Sameer Merchant, CFA
Lead Equity Research Analyst

Pinduoduo (PDD US): Time to Shine for the Sorcerer’s Apprentice: Initiating Coverage

Pinduoduo - Recent departure of Chairman has weighed on shares. We see the growth story fundamentally intact and Chen Lei as an ideal plug and play...

Sameer Merchant, CFA