To The Moon

PDD fell more than 14% in a trading day following its Q4 earnings report. Investors seem disappointed, but how is the $Invesco QQQ Trust(QQQ)$ component perform in Q4, has been controversial.

Q4 Earnings Review

Revenue: 39.82 billion yuan, compared with 27.231 billion yuan last year, YoY+46%,  miss market consensus of 41.95B,

• online marketing services and other services 30.965B, YOY+38%, miss consensus of 33.20B;
• Transaction service 8.80B, YOY+86%, beat consensus of 8.31B;
• Merchandise sales 58.2M, YOY-29%, miss consensus of 63.9M

Cost: COGS 89.27B, YoY+37%; operating expenses 21.780B, it's13.80B in 2021

• Marketing 17.73B,YOY+56%;
• G&A 1.64B, YOY+291%;
• R&D 2.40B, YoY+19%.

Profit: Gross margin 77.6%, higher than 75.9% in the same period last year, and higher than market expectations of 76.4%;operating profit 9.11B, YOY+32%; net profit attributable to ordinary shareholders 9.45B, YOY+43%. Non-GAAP net income 12.1B, YOY+43%.

Investment Highlights

The revenue missed, Q4 is last quarter of Covid-19. Since Pinduoduo has shifted its focus from self-operated sales to platform merchants, the proportion of revenue from merchandise sales is low, and this part of revenue is not important. The miss mainly due to online marketing services and other services, including advertising. Q4 logistics and online sales are still affected to a certain extent, and Q4 shopping season is unpreferred for PDD, but the recovery of demand has begun and showed a good momentum. In addition to doubling the sales of agricultural products, 3C and cosmetics are all categories with good growth.

The company does not publish GMV and active users now, because the company believes that the value of merchants and users is more important. The last time the company announced that the number of active domestic users (22Q1) was 750 million, and it has not yet announced that it has reached 800 million. It is expected to be around 780 million, and the number of buyers should also be around 900 million. At the same time, the company still maintains a user-oriented strategy, because more users are the key to attracting merchants to settle in.

In terms of profit, Q4 actually exceeded expectations. Changes in the revenue structure, more and more brands have settled in and increased advertising revenue, all contribute to the improvement of gross profit margin. The marketing expenses in Q4 exceeded expectations. The company generously admitted that the increase in marketing expenses was due to the recovery of consumption trends, and hoped to allocate resources to projects that can bring long-term high-quality development. The overseas brand Temu is an important project that burns money. , but may not be fully reflected in Q4. As for the increase in management costs, on the one hand, normal recruitment, including overseas localization, and on the other hand, one-time costs brought about by domestic layoffs.

The uncertainty of Pinduoduo mainly comes from Temu, but Q4 is just the beginning. The cost of attracting new users and overseas logistics will be higher, which will have the marginal effect as users increases.

Slightly different from big companies like $Baidu(BIDU)$ $Alibaba(BABA)$ $TENCENT(00700)$ , Pinduoduo has a higher growth rate, and overseas Temu has only started for half a year. Therefore, while "cost reduction and efficiency increase", profit will not be the primary consideration. The company pays more attention to the standard of "high return on investment". Since the overseas business Temu will be consolidated in the next few quarters, Pinduoduo may not necessarily climb according to the previous upward profit margin.

Estimates & Valuations

If we look at the level of falling to $80, the basic EPS in 2022 will be $3.62, which is 22x price-earnings ratio, which is lower than the current price-earnings ratio of Alibaba at 23 times and lower than JD.com's 40 times.

The most direct way for e-commerce is to use profit indicators for valuation. A reasonable valuation for Pinduoduo should be to calculate Temu separately from domestic ones, but since the company has not yet differentiated the two businesses, there may be fluctuations in profit indicators in the end.

According to the profit of 10 billion yuan in a single quarter, that is, the level of 2023 should exceed 40 billion yuan, that is, the profit per share is 30 yuan, that is, at the current price of 82 US dollars, the forward price-earnings ratio in 2023 is only 17.8X.

Not expensive.

This also includes the potential loss of Temu.

Why market worried?

1. Benefits of pandemic has ended, so this year’s expectations of domestic GMV is chanllenging. But at the same time, there will be inertia in the formation of consumption habits, and it will be promoted after the recovery of logistics;

2. The uncertainty of international r e-commerce. In Q4, marketing expenses have only just begun to increase by 56%. In 23Q1, there will be large expenditures such as the "Super Bowl", which may further hurt profit margins.