Pinduoduo earning and analysis

On Friday, May 26, before the market, PDD reported its first quarter 2023 results, with strong growth and revenue and adjusted net income well above expectations, and the stock price jumped 18.99%. The financial statement from PDD gives just a few pages, but is a major breakthrough in performance.

First, financial analysis: strong growth, revenue and net profit far exceeded expectations

Compared to the weak performance of Jingdong and Ali, PDD's performance this time can only be described as explosive, with revenue and adjusted net profit far exceeding expectations, properly beating the first two big brothers. $Pinduoduo Inc.(PDD)$ 

In terms of revenue, PDD achieved revenue of 37,637.1 million yuan in the first quarter, up 58% year-on-year, far exceeding previous expectations of 32.32 billion yuan. After several quarters of sluggish growth at the end of 2021, PDD's revenue growth picked up for several quarters in a row, and this quarter PDD's revenue growth returned to close to 60%, PDD's business model is really very successful.

According to the past disclosed results, it is mainly divided into three major businesses, such as online marketing and other revenues, transaction service revenues and merchandising revenues, the last one is PDD's self-operated business, which is smaller in scale and is not formally disclosed in this quarter.

Specifically in terms of business segmentation, online marketing and other revenue contributed the majority of PDD's revenue, with first quarter revenue of 27.24 billion yuan, up 50% year-over-year and accounting for 72% of total revenue. This area is mainly PDD for merchants to provide traffic support, such as the purchase of keywords, bidding platform search ranking fees paid, including advertising, referrals and the like. a large part of PDD is different from Jingdong, Ali is not only tens of billions of subsidies to bring the low price strategy, more PDD is more focused on earning advertising and marketing costs for merchants, and commission income for delivery services is smaller, for the main agricultural services is not charging commissions.

Transaction services revenue was $10.39 billion in the first quarter, up 86% year-over-year and accounting for 28% of total revenue. The performance of transaction services this quarter is also very bright, the growth rate significantly outperformed the network marketing. From this growth rate, we can see that the consumers who choose to shop on pdd and the merchants that are stationed there are both growing rapidly, although the volume is not as large as Ali and Jingdong, but this growth rate is far behind the two big brothers.

PDD not only had good performance in revenue in the first quarter, but also achieved significant growth in profit, with operating profit of 6,929.0 million yuan in the first quarter, up 222% year-over-year. Net income for the first quarter was $8.1 billion, up 212% year-over-year. Adjusted net income for the first quarter was 10,126.4 million yuan, up 141% year-over-year, far exceeding the previous estimate of 5,966 million yuan.

On the earnings side, we can see that while PDD had a significant and large increase in cost expense growth this quarter, the overall overhead growth was much smaller than the revenue growth, contributing to the significant improvement in operating profit and net income in the first quarter. The specific cost breakdowns will be explained in detail in PDD's first quarter operating analysis.

In terms of gross profit, due to the optimization of PDD's overall operations in the first quarter, the cost of revenue in the first quarter was $11,125.3 million, up 55% year-over-year, which is close to the overall revenue growth, and reflected in a relatively small change in gross margin, which was $26.5 billion in the first quarter, with a gross margin of 70.4%, compared to 69.9% in the same period last year. However, compared with the previous quarters, the gross profit margin was generally 78% or more, but this quarter there was a significant decline in gross profit.

Operation analysis: cost control improves profit significantly, the second growth curve is ready for development

1. Cost control improves profit

Compared with the revenue growth, the net profit growth is more obvious, mainly due to PDD's cost control in the first quarter. PDD's overall operating expenses in the first quarter were NT$19,582.7 million, up 35% year-over-year.

Specifically

Selling and marketing expenses were $16,259.7 million, an increase of 45% compared to $11,219.1 million for the same period in 2022.

General and administrative expenses were $816.4 million, an increase of 38% compared to $592.1 million in the same period in 2022.

Research and development expenses were $2,506.7 million, down 6 percent from $2,668.5 million in the same period in 2022.

In terms of overall operating expenses, the growth in cost expenses was significantly lower than revenue growth, contributing to the improvement in PDD's profit. the maturity of PDD's domestic profitability model has been able to fully cover the transfusion of overseas business, and the company's operating fundamentals are solid.

In terms of specific expenses, except for R&D expenses which are decreasing year-on-year, PDD still has a large increase in sales and marketing and administrative expenses. Mainly because the overall operation of PDD has not changed much, reducing the pressure on research and development. While Duo Buy and the overseas version of TEMU are in the early stage of business growth, the cost brought by the overwhelming influence and manpower investment is not a small amount. Of course, for PDD, which wants to create a second growth curve, these investments are matters within the plan.

Even after taking into account the large overseas spend, the boost to operating profit from the significant revenue growth was evident, with PDD's operating profit up 222% to $6,929.0 million in Q1. Adjusted operating profit for NO-GAAP was $8,462.4 million, up 130% year-over-year.

2. New businesses such as community group purchase and overseas TEMU are progressing well

PDD's big weapon in the community group purchase field is DuoDuoBuy, especially during the epidemic these years, the community group purchase industry ushered in unprecedented development opportunities, DuoDuoBuy naturally will not miss this rare opportunity. And PDD focus on the field of agricultural products for many years of research and development, has long formed an abundant brand reserves, talent advantages and logistics and warehousing resources, coupled with the core e-commerce business mature blood transfusion ability, are more buy vegetables in the community group purchase field of the biggest helper.

Competition in community group buying has further intensified, with Daily Best on the verge of bankruptcy, Meituan Buy Vegetable and Dingdong Buy Vegetable choosing to pull out of some areas, while PDD is still growing steadily under the resonance of multiple advantages.

In addition, PDD's overseas business TEMU was officially launched in September 2022, and PDD's proven marketing model is spreading overseas, with the much-criticized "chop one off" tactic still working very well and excellent social fission ability helping TEMU to have super high download volume in a short period of time. Temu continues to be the number one download in all categories in the US in the first quarter. With abundant capital investment, TEMU's overseas giant ship further accelerated and continued to expand its territory to Europe.

However, at the end of March, Google temporarily removed PDD from its GooglePlay store because it might contain malware that tracks user information. A good example of TEMU's explosive growth is Tik Tok, which has been targeted by the U.S. government on many fronts for its short growth to threaten the U.S. Internet giant. This is why some people expect that this downfall may accelerate the split between PDD and TEMU.

3. Old and new forces, peer comparison

After Jingdong and Ali released their results one after another, everyone focused on PDD's quarterly results, and PDD did not disappoint, rewarding investors with results that far exceeded expectations.

Compared to Jingdong, Ali and other traditional forces of e-commerce, from the first quarter of revenue growth, Jingdong, Ali only 1-2% single-digit growth, Ali's core e-commerce is even negative growth, and Jingdong is only 8%, only a fraction of the growth rate of PDD, although this is also related to the two big brothers up to 200 billion yuan revenue scale, but the recession has been facing is obvious, which is also Why Ali and Jingdong in this year, have been seeking change, both Ali's split, go to the center and Jingdong's change of command, tens of billions of subsidies are the needs of this area.

From the first quarter of adjusted net profit, compared to Ali and Jingdong, PDD also on the adjusted net profit of 10.1 billion yuan is less than Ali's profit scale outside (already higher than Jingdong), the growth rate is far ahead of these two big brothers. This is why Jingdong in the tens of billions of subsidies strategy release, deliberately have to mention PDD tens of billions of subsidies brought pressure. From the performance, it is obvious to find that PDD has taken away a lot of market share from Ali and Jingdong.

Even when comparing short video leaders like Racer, PDD growth rate is also keeping ahead. For Racer, other services (including e-commerce) revenue in the first quarter was 2.8 billion yuan, up 51.3% year-on-year. In the face of the rapid growth of short video live with e-commerce, PDD has resisted the pressure from the front, and is considered the only one inside the traditional e-commerce forces.

4. PDD active merchants continue to grow

At the end of 2019 and 2020, the number of PDD active merchants was 5.1 million and 8.6 million respectively. On May 20, PDD officially revealed that there are nearly 900 million active users and 13 million active merchants per year, showing that the growth of PDD active merchants is still stable.

However, just a few months ago, the PDD "store bombing" controversy is also a furore, mainly caused by PDD between merchants and users will tend to be more users. In fact, similar to this kind of event, is also long heard of, I heard that there is also the kind of special refund not returned bad consumer groups, with the help of the platform operation governance rules, the implementation of bad extortion behavior. All in all, in order to meet the needs of users, PDD will have a lot of policies tilted in terms of merchant operations, which often exacerbates the bad mood of merchants, similar to the "store bombing" incident is also difficult to prohibit, how to grasp the right balance, to ensure the continued growth of active merchants. Merchants and users are not always on opposite sides after all, more merchants can bring more users.

Third, the technical side

PDD's performance after the release of the earnings report can be described as a sun to change the three views, the volume of a big rise, breaking through a number of averages, a wave of force to save the day, renewed a wave of upward channel bottom position, this wave of support is all on the strong performance, to a large extent to redeem the stock price trend.

However, in terms of long-term trends, the general environmental pressure on mid-cap technology stocks has improved over the previous year, but the overall improvement seems to be limited at the moment. It is difficult to confirm whether PDD can have a period of sustained independent trend, but personally I think the price/performance ratio of this position is still relatively good, there is value to hold.

Fourth, personal summary

1. PDD first quarter performance explosion, completely crushed the peer Ali and Jingdong, the growth rate can also barely run faster than the electric business. The main thing is that the profit improvement far exceeds expectations, which once again proves the correctness of the low-price strategy and tens of billions of subsidies strategy, after the basic disk contribution to stable cash flow, these tens of billions of subsidies are really spent too worth it.

2. PDD local business to maintain high growth at the same time, such as more buy food, overseas e-commerce and other new business is also growing rapidly under the strong blood transfusion, the second growth curve has begun to emerge, the road to replicate the domestic PDD legend is not a dream, look forward to the future tripod situation.

3. PDD stock price trend has improved significantly under this earnings report after the surge, the market sentiment is high, is a typical performance-driven, I think you can properly allocate some, as now the brightest performance of Chinese stocks, PDD's future deserves recognition.

4. In the initial period after the recovery of the epidemic, is the most critical period, the old and new e-commerce forces have entered a white-hot extreme, Ali, Jingdong launched a series of changes after the decline in performance, PDD performance growth rate return, shake fast e-commerce strategic development blueprint, we are more optimistic about which one it is. Personally inclined to PDD, shake and fast, Ali and Jingdong's share may further decline.

This article is a personal quarterly report interpretation analysis, are personal in the ability to think about the experience, but also hope that you criticism correction. In addition, this article does not constitute an investment reference advice, I hope you readers think independently.

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