To The Moon

Pinduoduo$Pinduoduo Inc.(PDD)$ posted third-quarter results showing a 546% jump in net income, and its shares rose more than 15%.

As we all know, the third quarter results of listed companies were mostly poor due to the impact of the pandemic, the macroeconomic downturn and consumer austerity.

At Alibaba$Alibaba(BABA)$ $Alibaba(09988)$ , for example, China commerce (mainly e-commerce) revenue fell 1% year on year in the third quarter, no improvement from the -1% growth in the second quarter.

Pinduoduo's revenue growth in the third quarter was as high as 65.1%, far exceeding market expectations:

In terms of net income growth, Pinduoduo's net profit skyrocketed 546%. 546% is the growth rate under GAAP without adjustment. If the impact of one-time gains is removed, the year-on-year growth rate has also reached 388% as measured by operating profit.

In any case, Puduo's third-quarter report was much faster than expected in terms of revenue and profit growth. Compared with other companies, which the three-quarter reports were bleak, and the performance of Pinduoduo is very extraordinary.

Pinduoduo claims to help users save money, but why did profits soar in the economic downturn?

Revenue: RMB 35.5 billion, far exceeding the consensus forecast of RMB 30.9 billion by Bloomberg analysts:

Revenue structure mainly includes online marketing services, commission and merchandise sales.

Pinduoduo temporarily launched merchandise sales in the fourth quarter of 2020. Just two quarters later, pinduoduo began to shrink the business vigorously. The revenue in the third quarter is only RMB 56 million, which is almost negligible.

Therefore, pinduoduo is a pure third-party e-commerce trading platform.

Revenue from online marketing services reached RMB 28.4 billion, a year-on-year increase of 58.4%.

The commission income is RMB 7 billion, up year-on-year 102%:

Profit

1) Gross profit margin is 79.1%, the highest since 2020:

2) Net income was RMB 10.6 billion, up 546% from the same period last year, making a profit for six consecutive quarters.

The net profit margin is 29.8% and the profitability is amazing:

Net income included RMB 1.64 billion in interest and other income, up RMB 1.06 billion from a year earlier. But in terms of operating profit, Pinduoduo still surged 388% in the third quarter.

As a result, Pinduoduo's profits soared.

How did pinduoduo achieve a sharp increase in profits?

1) Income

Revenue grew by 65.1% in the third quarter, but costs increased by only 13%, and the growth of operating costs was much lower than revenue.

As a third-party e-commerce platform, users have one more transaction, and the cost paid by Pinduoduo is far lower than income, reflecting the characteristics of economies of scale of the Internet.

2)Expenses 

Sales expenses were RMB 14.05 billion, up 39.8% from a year earlier, but lower than the 65% revenue growth rate. The rate of sales expenses also dropped to 39.6% from 46.7% in the same period last year:

Administrative expenses totaled RMB 900 million, a year-on-year increase of 171%. However, because the amount of expenses is small, it has little impact on profits.

The R&D expenses are RMB 2.7 billion, with a growth rate of only 11.4% in this quarter.

In the economic downturn, many Internet companies are reducing costs to increase efficiency by controlling costs, increase profits. Although the effect is good, the revenue has not increased.

However, Pinduoduo not only controlled the cost, but also increased the revenue growth and the net profit rate.

Because the quarterly report does not release data such as the number of users and GMV, there is less mention of the reasons for the growth. Therefore, there is still no accurate basis for why Pinduoduo's performance has exceeded expectations.

Pinduoduo has indeed greatly increased consumers' trust in the platform through RMB 10 billion subsidies and other operating means, but the reason for the earnings beat may be better explained by a consumer downgrade.

Management repeatedly stressed on the conference call, the RMB 10.6 billion net profit and 29.8% net profit rate were difficult to maintain due to delays in some investment projects. In the second quarterly report, the management also had this "warning", but it was still a huge profit in the third quarter.

Pinduoduo's expenditure will increase in the future, such as the launch the overseas version of "Pinduoduo" of Temu in September. Temu is in its infancy and will increase investment and overseas operating expenses.