PDD: Near-Term Correction Doesn't Deter Our Bullish Bargain Hunt

seekingalpha11-25 11:44

We remain bullish on PDD despite a 15% share price pullback, viewing it as an attractive entry point for growth-focused investors.PDD's cost leadership and Temu's global growth potential position it ...

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Huitai
11-25 12:32
Huitai
Well researched and analysis

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Although the company does not historically offer guidance, management commentary during the quarter implicitly guided that competition in China e-commerce is intensifying and that topline growth is expected to decelerate with margin contraction due to elevated investment in merchant and user retention.The share price corrected by ~15% post-print over the past two days, which is less severe than last quarter when it corrected by 30% back in August under a similar narrative.We believe that the pullback presents an attractive entry point for investors who are looking for one of the few growth stocks within China’s internet sector with the additional optionality of global growth potential.A few reasons drive our view:First, PDD remains the cost leader with significant downward pricing power compared with the other Chinese e-commerce peers and is likely to maintain or even expand its market share amid the competitive environment.Second, Temu remains an attractive optionality within PDD and a structural growth driver as Temu is one of few e-commerce platforms that has the potential to meet the demand for discount e-commerce on a global level.Third, investors are concerned about the potential tariff impact on Chinese imports during the Trump presidency. We believe this is a lower perceived risk given an extreme tariff on Chinese goods would not only hurt the Chinese companies but also the US consumers. In addition, the semi-managed model by PDD within the US could partially address the import risk.Finally, the current valuation of 8.1x 2025E consensus earnings values PDD similarly to JD (JD) and a discount to Alibaba (BABA), which we believe to be an injustice given PDD has been taking shares from BABA (see: Alibaba: The 'Value Play' That Keeps On Disappointing) and is better positioned globally than both JD (see: JD.com: A Value Trap Boxed In By Housing Slump And Weak Consumer Sentiment) and BABA. The only thing we concur with the current valuation level is that PDD should be trading at a premium vs. Vipshop (VIPS) which we view to have questionable long-term value (see: Vipshop: A Paradox Of Attractive Valuations And Deteriorating Fundamentals).forward P/E chartCapital IQ, Astrada AdvisorsWith 56 buys, 3 holds, and 1 sell, per Bloomberg, PDD is a consensus buy given its unique position to expand both domestic and international e-commerce share within a sector that is facing limited topline growth given the soft macro backdrop.The Q3 miss will likely result in near-term de-rating of the stock and we believe that this is an attractive opportunity for investors to accumulate a position on PDD given its superior competitive standing relative to the other Chinese e-commerce players.A near-term hiccup with no shift in narrativeThe key messages from PDD’s (PDD) 3Q24 can be summarized as 1) domestic competition in China is becoming increasingly intensive in which platforms are vying for a larger share of a shrinking consumer wallet share, and a larger investment cycle is needed to retain merchant and attract consumers, 2) Temu’s growth is decelerating faster than many expected given the diminishing low base effect and penetration in key markets such as the US and Europe are starting to show signs of fatigue.The surprising aspect of this quarter’s call is that management appears to be more focused on the relevant topics (ie. competitive dynamic within e-commerce) compared with the prior call mostly focused on agriculture, an area that is largely irrelevant to investor focus.Management acknowledged that competition in e-commerce is intensifying with PDD investing in various programs such as the RMB 10bn subsidy to merchants and subsidized logistics and fulfilment support for orders in western China in an effort to retain quality merchants onto the platform. This in turn allows PDD to maintain user stickiness and GMV growth in an environment of constrained consumer and soft macro.Worth reminding investors that although competition in China is intensifying and PDD is adapting to the shift in competitive dynamic, PDD continues to have the cost advantage vs. JD and BABA given its direct-to-manufacturer model while the other platforms are largely middlemen between brands and consumers. This allows PDD to secure relevant products at a lower price point for the consumers, thereby maintaining their consumer mindshare and wallet share.We believe that our bullish on PDD holds as long as the Chinese consumers are willing to trade down and this view is central to our prior thesis on PDD (see: PDD: Shop Until You Drop). However, the risk to our thesis is that if the consumers are pulling back on spending rather than trading down, then PDD’s domestic GMV growth could be pressured. Although the growing competitive dynamic in China amongst the e-commerce players and the decelerating growth in PDD’s China business implies that there is a certain level of consumption pullback, we think it is still too early to tell whether this trend is structural.The key risk to our thesis on PDD would be a scenario of a prolonged consumption pullback due to a lack of consumption-oriented stimulus, rising pessimism towards income growth and youth unemployment. Under such a scenario, we would be more cautious about PDD’s near-term prospects and would review our thesis and estimates.Temu growth remains intact.A critical component of our bullish view on PDD lies in our view on Temu, which we believe has the potential to become a global discount online retailer and propel PDD to become a global Chinese company similar to that of Byedance and Haier.Temu has been expanding its scale in both product categories and geographic coverage, both of which have seen ongoing success.We note that while Temu has historically focused on apparel and household goods, fast-growth categories in beauty and cosmetics are also becoming relevant and consumers are starting to appreciate the product quality and value for money that Temu is offering.In the US, Temu has opened its platform to US sellers through its semi-managed model, which we believe has the potential to take on Amazon (AMZN) (See: Amazon 3Q24: Strong Beat Overshadows Rising Temu Risk). Although AMZN has rolled out its discount platform Haul, we believe AMZN is facing an uphill battle given its suppliers are all China-based and the cost of ramping up the platform would put further pressure on its margins given the elevated cost of merchant and user acquisition as well as logistics cost. (See: Amazon: Keeping Up With Temu For The Long Haul)In France, Temu has become one of the leading discount online platforms, a position that was previously held by Shein. Elsewhere in Africa, Temu’s expansion is making local e-commerce leader Jumia rethink its strategy.All these indicators suggest positive momentum for Temu and underscores our bullish view that Temu is an underappreciated asset by many investors.Valuing PDD on SoTPAt the current valuation, PDD investors are essentially getting Temu for free when valuing PDD based on SoTP.We estimate that PDD China’s e-commerce business uses a P/E multiple with a low end at 10x P/E and a high end at 15x P/E. Our revenue estimate assumes a low double-digit revenue growth which we view to be on the conservative side. Assuming a 40% net margin, we derive PDD China’s value per share to be between $78/share and $117/share, the midpoint of which implies $97/share vs. the current value of $99/share.For the DDG grocery delivery arm, we value this asset using the EV/EBITDA method, applying a comparable multiple to that of global food delivery and grocery delivery peers. We derive an implied value of $10/share.Finally, we assume Temu to deliver 60% revenue growth for 2025E and value this asset at 2x – 5x EV/Revenue. Worth flagging that PDD’s domestic peers trade at 1x EV/Revenue while AMZN and EBAY trade between 2x – 3x EV/Revenue. Given that Temu has a faster growth rate than AMZN and EBAY, a higher revenue multiple is warranted in our view.Factoring in all the assumptions, we value PDD at $144/share on the low end and $231/share on the high end. The midpoint of $188/share implies an 89% upside from the current level.Capital IQ, Astrada Advisors","kind":"highlight","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":374784629006496,"gmtCreate":1732509164371,"gmtModify":1732509168442,"author":{"id":"3576401458285275","authorId":"3576401458285275","name":"Huitai","avatar":"https://static.tigerbbs.com/be4eb3604e496ba474ae6df683a3ed25","vip":1,"crmLevel":6,"crmLevelSwitch":0,"idStr":"3576401458285275","authorIdStr":"3576401458285275"},"htmlText":"Well researched and analysis&nbsp;","listText":"Well researched and analysis&nbsp;","text":"Well researched and analysis","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/374784629006496","repostId":2485201958,"repostType":4,"repost":{"id":"2485201958","kind":"highlight","pubTimestamp":1732506268,"share":"https://ttm.financial/m/news/2485201958?lang=&edition=fundamental","pubTime":"2024-11-25 11:44","market":"nz","language":"en","title":"PDD: Near-Term Correction Doesn't Deter Our Bullish Bargain Hunt","url":"https://stock-news.laohu8.com/highlight/detail?id=2485201958","media":"seekingalpha","summary":"We remain bullish on PDD despite a 15% share price pullback, viewing it as an attractive entry point for growth-focused investors.PDD's cost leadership and Temu's global growth potential position it favorably against competitors like JD and Alibaba.Current valuation undervalues PDD, especially considering Temu's expansion and the company's strong domestic and international market positioning.Key risks include potential prolonged consumption pullback in China, but Temu's growth remains a critical component of our bullish outlook.TommL  We remain bullish on PDD  after the 15% pullback in share price following the 3Q24 print in which revenue slightly missed consensus. Although the company does not historically offer guidance, management commentary during the quarter implicitly guided that competition","content":"<html><head></head><body><ul style=\"\"><li><p>We remain bullish on PDD despite a 15% share price pullback, viewing it as an attractive entry point for growth-focused investors.</p></li><li><p>PDD&#39;s cost leadership and Temu&#39;s global growth potential position it favorably against competitors like JD and Alibaba.</p></li><li><p>Current valuation undervalues PDD, especially considering Temu&#39;s expansion and the company&#39;s strong domestic and international market positioning.</p></li><li><p>Key risks include potential prolonged consumption pullback in China, but Temu&#39;s growth remains a critical component of our bullish outlook.</p></li></ul><p></p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/3490f3a9373a26405e9d116d3a813efc\" tg-width=\"750\" tg-height=\"308\"/></p><p></p><p>We remain bullish on  <a href=\"https://laohu8.com/S/PDD\">PDD Holdings Inc</a>  after the 15% pullback in share price following the 3Q24 print in which revenue slightly missed consensus. Although the company does not historically offer guidance, management commentary during the quarter implicitly guided that competition in China e-commerce is intensifying and that topline growth is expected to decelerate with margin contraction due to elevated investment in merchant and user retention.</p><p style=\"text-align: left;\">The share price corrected by ~15% post-print over the past two days, which is less severe than last quarter when it corrected by 30% back in August under a similar narrative.</p><p style=\"text-align: left;\">We believe that the pullback presents an attractive entry point for investors who are looking for one of the few growth stocks within China’s internet sector with the additional optionality of global growth potential.</p><p style=\"text-align: left;\">A few reasons drive our view:</p><p style=\"text-align: left;\">First, PDD remains the cost leader with significant downward pricing power compared with the other Chinese e-commerce peers and is likely to maintain or even expand its market share amid the competitive environment.</p><p style=\"text-align: left;\">Second, Temu remains an attractive optionality within PDD and a structural growth driver as Temu is one of few e-commerce platforms that has the potential to meet the demand for discount e-commerce on a global level.</p><p style=\"text-align: left;\">Third, investors are concerned about the potential tariff impact on Chinese imports during the Trump presidency. We believe this is a lower perceived risk given an extreme tariff on Chinese goods would not only hurt the Chinese companies but also the US consumers. In addition, the semi-managed model by PDD within the US could partially address the import risk.</p><p style=\"text-align: left;\">Finally, the current valuation of 8.1x 2025E consensus earnings values PDD similarly to JD (JD) and a discount to Alibaba (BABA), which we believe to be an injustice given PDD has been taking shares from BABA (see: Alibaba: The &#39;Value Play&#39; That Keeps On Disappointing) and is better positioned globally than both JD (see: JD.com: A Value Trap Boxed In By Housing Slump And Weak Consumer Sentiment) and BABA. The only thing we concur with the current valuation level is that PDD should be trading at a premium vs. Vipshop (VIPS) which we view to have questionable long-term value (see: Vipshop: A Paradox Of Attractive Valuations And Deteriorating Fundamentals).</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/8db48422d3bac9029c79ec22340902e9\" alt=\"forward P/E chart\" title=\"forward P/E chart\" tg-width=\"640\" tg-height=\"358\"/><span>forward P/E chart</span></p><p style=\"text-align: left;\"><strong>Capital IQ, Astrada Advisors</strong></p><p style=\"text-align: left;\">With 56 buys, 3 holds, and 1 sell, per Bloomberg, PDD is a consensus buy given its unique position to expand both domestic and international e-commerce share within a sector that is facing limited topline growth given the soft macro backdrop.</p><p style=\"text-align: left;\">The Q3 miss will likely result in near-term de-rating of the stock and we believe that this is an attractive opportunity for investors to accumulate a position on PDD given its superior competitive standing relative to the other Chinese e-commerce players.</p><p style=\"text-align: left;\"><strong>A near-term hiccup with no shift in narrative</strong></p><p style=\"text-align: left;\">The key messages from PDD’s (PDD) 3Q24 can be summarized as 1) domestic competition in China is becoming increasingly intensive in which platforms are vying for a larger share of a shrinking consumer wallet share, and a larger investment cycle is needed to retain merchant and attract consumers, 2) Temu’s growth is decelerating faster than many expected given the diminishing low base effect and penetration in key markets such as the US and Europe are starting to show signs of fatigue.</p><p style=\"text-align: left;\">The surprising aspect of this quarter’s call is that management appears to be more focused on the relevant topics (ie. competitive dynamic within e-commerce) compared with the prior call mostly focused on agriculture, an area that is largely irrelevant to investor focus.</p><p style=\"text-align: left;\">Management acknowledged that competition in e-commerce is intensifying with PDD investing in various programs such as the RMB 10bn subsidy to merchants and subsidized logistics and fulfilment support for orders in western China in an effort to retain quality merchants onto the platform. This in turn allows PDD to maintain user stickiness and GMV growth in an environment of constrained consumer and soft macro.</p><p style=\"text-align: left;\">Worth reminding investors that although competition in China is intensifying and PDD is adapting to the shift in competitive dynamic, PDD continues to have the cost advantage vs. JD and BABA given its direct-to-manufacturer model while the other platforms are largely middlemen between brands and consumers. This allows PDD to secure relevant products at a lower price point for the consumers, thereby maintaining their consumer mindshare and wallet share.</p><p style=\"text-align: left;\">We believe that our bullish on PDD holds as long as the Chinese consumers are willing to trade down and this view is central to our prior thesis on PDD (see: PDD: Shop Until You Drop). However, the risk to our thesis is that if the consumers are <em>pulling back on spending rather than trading down</em>, then PDD’s domestic GMV growth could be pressured. Although the growing competitive dynamic in China amongst the e-commerce players and the decelerating growth in PDD’s China business implies that there is a certain level of consumption pullback, we think it is still too early to tell whether this trend is structural.</p><p style=\"text-align: left;\">The key risk to our thesis on PDD would be a scenario of a prolonged consumption pullback due to a lack of consumption-oriented stimulus, rising pessimism towards income growth and youth unemployment. Under such a scenario, we would be more cautious about PDD’s near-term prospects and would review our thesis and estimates.</p><p style=\"text-align: left;\"><strong>Temu growth remains intact.</strong></p><p style=\"text-align: left;\">A critical component of our bullish view on PDD lies in our view on Temu, which we believe has the potential to become a global discount online retailer and propel PDD to become a global Chinese company similar to that of Byedance and Haier.</p><p style=\"text-align: left;\">Temu has been expanding its scale in both product categories and geographic coverage, both of which have seen ongoing success.</p><p style=\"text-align: left;\">We note that while Temu has historically focused on apparel and household goods, fast-growth categories in beauty and cosmetics are also becoming relevant and consumers are starting to appreciate the product quality and value for money that Temu is offering.</p><p style=\"text-align: left;\">In the US, Temu has opened its platform to US sellers through its semi-managed model, which we believe has the potential to take on Amazon (AMZN) (See: Amazon 3Q24: Strong Beat Overshadows Rising Temu Risk). Although AMZN has rolled out its discount platform Haul, we believe AMZN is facing an uphill battle given its suppliers are all China-based and the cost of ramping up the platform would put further pressure on its margins given the elevated cost of merchant and user acquisition as well as logistics cost. (See: Amazon: Keeping Up With Temu For The Long Haul)</p><p style=\"text-align: left;\">In France, Temu has become one of the leading discount online platforms, a position that was previously held by Shein. Elsewhere in Africa, Temu’s expansion is making local e-commerce leader Jumia rethink its strategy.</p><p style=\"text-align: left;\">All these indicators suggest positive momentum for Temu and underscores our bullish view that Temu is an underappreciated asset by many investors.</p><p style=\"text-align: left;\"><strong>Valuing PDD on SoTP</strong></p><p style=\"text-align: left;\">At the current valuation, PDD investors are essentially getting Temu for free when valuing PDD based on SoTP.</p><p style=\"text-align: left;\">We estimate that PDD China’s e-commerce business uses a P/E multiple with a low end at 10x P/E and a high end at 15x P/E. Our revenue estimate assumes a low double-digit revenue growth which we view to be on the conservative side. Assuming a 40% net margin, we derive PDD China’s value per share to be between $78/share and $117/share, the midpoint of which implies $97/share vs. the current value of $99/share.</p><p style=\"text-align: left;\">For the DDG grocery delivery arm, we value this asset using the EV/EBITDA method, applying a comparable multiple to that of global food delivery and grocery delivery peers. We derive an implied value of $10/share.</p><p style=\"text-align: left;\">Finally, we assume Temu to deliver 60% revenue growth for 2025E and value this asset at 2x – 5x EV/Revenue. Worth flagging that PDD’s domestic peers trade at 1x EV/Revenue while AMZN and EBAY trade between 2x – 3x EV/Revenue. Given that Temu has a faster growth rate than AMZN and EBAY, a higher revenue multiple is warranted in our view.</p><p style=\"text-align: left;\">Factoring in all the assumptions, we value PDD at $144/share on the low end and $231/share on the high end. The midpoint of $188/share implies an 89% upside from the current level.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/a5ebbb082fdfc00541d293142fb501f5\" alt=\"Capital IQ, Astrada Advisors\" title=\"Capital IQ, Astrada Advisors\" tg-width=\"640\" tg-height=\"252\"/><span>Capital IQ, Astrada Advisors</span></p><p></p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>PDD: Near-Term Correction Doesn't Deter Our Bullish Bargain Hunt</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPDD: Near-Term Correction Doesn't Deter Our Bullish Bargain Hunt\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-25 11:44 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739828-pdd-near-term-correction-doesnt-deter-our-bullish-bargain-hunt><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>We remain bullish on PDD despite a 15% share price pullback, viewing it as an attractive entry point for growth-focused investors.PDD's cost leadership and Temu's global growth potential position it ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739828-pdd-near-term-correction-doesnt-deter-our-bullish-bargain-hunt\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"LU0979878070.USD":"FULLERTON LUX FUNDS - 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China Equity Fund AS SGD","LU2264538146.SGD":"Fullerton Lux Funds - Global Absolute Alpha A Acc SGD","PDD":"拼多多","LU1794554557.SGD":"Allianz All China Equity AT Acc H2-SGD","LU0633140560.USD":"AB EMERGING MARKET MULTI ASSET PORTFOLIO \"A\" (USD) ACC","LU0823426308.USD":"法巴中国股票基金","LU1242518931.SGD":"Fullerton Lux Funds - Asia Absolute Alpha A Acc SGD","LU1048596156.SGD":"Blackrock Asian Growth Leaders A2 SGD-H","LU0878005551.USD":"UBS (LUX) KEY SELEC ASIA ALLOCATION OPPORTUNITY (USD) \"P\" (USD) ACC"},"source_url":"https://seekingalpha.com/article/4739828-pdd-near-term-correction-doesnt-deter-our-bullish-bargain-hunt","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2485201958","content_text":"We remain bullish on PDD despite a 15% share price pullback, viewing it as an attractive entry point for growth-focused investors.PDD's cost leadership and Temu's global growth potential position it favorably against competitors like JD and Alibaba.Current valuation undervalues PDD, especially considering Temu's expansion and the company's strong domestic and international market positioning.Key risks include potential prolonged consumption pullback in China, but Temu's growth remains a critical component of our bullish outlook.We remain bullish on  PDD Holdings Inc  after the 15% pullback in share price following the 3Q24 print in which revenue slightly missed consensus. Although the company does not historically offer guidance, management commentary during the quarter implicitly guided that competition in China e-commerce is intensifying and that topline growth is expected to decelerate with margin contraction due to elevated investment in merchant and user retention.The share price corrected by ~15% post-print over the past two days, which is less severe than last quarter when it corrected by 30% back in August under a similar narrative.We believe that the pullback presents an attractive entry point for investors who are looking for one of the few growth stocks within China’s internet sector with the additional optionality of global growth potential.A few reasons drive our view:First, PDD remains the cost leader with significant downward pricing power compared with the other Chinese e-commerce peers and is likely to maintain or even expand its market share amid the competitive environment.Second, Temu remains an attractive optionality within PDD and a structural growth driver as Temu is one of few e-commerce platforms that has the potential to meet the demand for discount e-commerce on a global level.Third, investors are concerned about the potential tariff impact on Chinese imports during the Trump presidency. We believe this is a lower perceived risk given an extreme tariff on Chinese goods would not only hurt the Chinese companies but also the US consumers. In addition, the semi-managed model by PDD within the US could partially address the import risk.Finally, the current valuation of 8.1x 2025E consensus earnings values PDD similarly to JD (JD) and a discount to Alibaba (BABA), which we believe to be an injustice given PDD has been taking shares from BABA (see: Alibaba: The 'Value Play' That Keeps On Disappointing) and is better positioned globally than both JD (see: JD.com: A Value Trap Boxed In By Housing Slump And Weak Consumer Sentiment) and BABA. The only thing we concur with the current valuation level is that PDD should be trading at a premium vs. Vipshop (VIPS) which we view to have questionable long-term value (see: Vipshop: A Paradox Of Attractive Valuations And Deteriorating Fundamentals).forward P/E chartCapital IQ, Astrada AdvisorsWith 56 buys, 3 holds, and 1 sell, per Bloomberg, PDD is a consensus buy given its unique position to expand both domestic and international e-commerce share within a sector that is facing limited topline growth given the soft macro backdrop.The Q3 miss will likely result in near-term de-rating of the stock and we believe that this is an attractive opportunity for investors to accumulate a position on PDD given its superior competitive standing relative to the other Chinese e-commerce players.A near-term hiccup with no shift in narrativeThe key messages from PDD’s (PDD) 3Q24 can be summarized as 1) domestic competition in China is becoming increasingly intensive in which platforms are vying for a larger share of a shrinking consumer wallet share, and a larger investment cycle is needed to retain merchant and attract consumers, 2) Temu’s growth is decelerating faster than many expected given the diminishing low base effect and penetration in key markets such as the US and Europe are starting to show signs of fatigue.The surprising aspect of this quarter’s call is that management appears to be more focused on the relevant topics (ie. competitive dynamic within e-commerce) compared with the prior call mostly focused on agriculture, an area that is largely irrelevant to investor focus.Management acknowledged that competition in e-commerce is intensifying with PDD investing in various programs such as the RMB 10bn subsidy to merchants and subsidized logistics and fulfilment support for orders in western China in an effort to retain quality merchants onto the platform. This in turn allows PDD to maintain user stickiness and GMV growth in an environment of constrained consumer and soft macro.Worth reminding investors that although competition in China is intensifying and PDD is adapting to the shift in competitive dynamic, PDD continues to have the cost advantage vs. JD and BABA given its direct-to-manufacturer model while the other platforms are largely middlemen between brands and consumers. This allows PDD to secure relevant products at a lower price point for the consumers, thereby maintaining their consumer mindshare and wallet share.We believe that our bullish on PDD holds as long as the Chinese consumers are willing to trade down and this view is central to our prior thesis on PDD (see: PDD: Shop Until You Drop). However, the risk to our thesis is that if the consumers are pulling back on spending rather than trading down, then PDD’s domestic GMV growth could be pressured. Although the growing competitive dynamic in China amongst the e-commerce players and the decelerating growth in PDD’s China business implies that there is a certain level of consumption pullback, we think it is still too early to tell whether this trend is structural.The key risk to our thesis on PDD would be a scenario of a prolonged consumption pullback due to a lack of consumption-oriented stimulus, rising pessimism towards income growth and youth unemployment. Under such a scenario, we would be more cautious about PDD’s near-term prospects and would review our thesis and estimates.Temu growth remains intact.A critical component of our bullish view on PDD lies in our view on Temu, which we believe has the potential to become a global discount online retailer and propel PDD to become a global Chinese company similar to that of Byedance and Haier.Temu has been expanding its scale in both product categories and geographic coverage, both of which have seen ongoing success.We note that while Temu has historically focused on apparel and household goods, fast-growth categories in beauty and cosmetics are also becoming relevant and consumers are starting to appreciate the product quality and value for money that Temu is offering.In the US, Temu has opened its platform to US sellers through its semi-managed model, which we believe has the potential to take on Amazon (AMZN) (See: Amazon 3Q24: Strong Beat Overshadows Rising Temu Risk). Although AMZN has rolled out its discount platform Haul, we believe AMZN is facing an uphill battle given its suppliers are all China-based and the cost of ramping up the platform would put further pressure on its margins given the elevated cost of merchant and user acquisition as well as logistics cost. (See: Amazon: Keeping Up With Temu For The Long Haul)In France, Temu has become one of the leading discount online platforms, a position that was previously held by Shein. Elsewhere in Africa, Temu’s expansion is making local e-commerce leader Jumia rethink its strategy.All these indicators suggest positive momentum for Temu and underscores our bullish view that Temu is an underappreciated asset by many investors.Valuing PDD on SoTPAt the current valuation, PDD investors are essentially getting Temu for free when valuing PDD based on SoTP.We estimate that PDD China’s e-commerce business uses a P/E multiple with a low end at 10x P/E and a high end at 15x P/E. Our revenue estimate assumes a low double-digit revenue growth which we view to be on the conservative side. Assuming a 40% net margin, we derive PDD China’s value per share to be between $78/share and $117/share, the midpoint of which implies $97/share vs. the current value of $99/share.For the DDG grocery delivery arm, we value this asset using the EV/EBITDA method, applying a comparable multiple to that of global food delivery and grocery delivery peers. We derive an implied value of $10/share.Finally, we assume Temu to deliver 60% revenue growth for 2025E and value this asset at 2x – 5x EV/Revenue. Worth flagging that PDD’s domestic peers trade at 1x EV/Revenue while AMZN and EBAY trade between 2x – 3x EV/Revenue. Given that Temu has a faster growth rate than AMZN and EBAY, a higher revenue multiple is warranted in our view.Factoring in all the assumptions, we value PDD at $144/share on the low end and $231/share on the high end. The midpoint of $188/share implies an 89% upside from the current level.Capital IQ, Astrada Advisors","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":6,"commentSize":1,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485201958"}