Feeling Lucky, Punk?

Pinduoduo (PDD-US ADR, $196B MCAP)

You know that saying, “take this with a grain of salt”?

Well I want you to take this pick with a whole bag of salt.

In case you’ve missed it, the Chinese stock market has been going absolutely haywire in both directions lately from fits and starts around the prospects of liquidity getting injected into the system.

Any time you have extremely stimulative government policy that is directly related to an asset class, you’re going to see that asset class do well.

Sometimes this just props up short-term effects, other times the liquidity injection can have enduring advantages.

This week’s pick is right in the mix of it, and while you might not recognize the parent company’s name, you’ve certainly heard of their flagship brand.

Buckle up, it’s time to dive into a pick that is right in the mix of macro trends.

• Why now?👉 Aggressive Stimulus in China

• Overview 👉 What Does Pinduoduo Do?

• Business Segments 👉 Breakdown

• How Do They Make Money? 👉 Marketing + Transaction Fees

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

Why now? 👉 Aggressive Stimulus in China

KWEB has been going haywire. What is it?

KraneShares CSI China Internet Fund (KWEB) is an ETF that tracks the CSI Overseas China Internet Index. It invests in a universe of publicly traded China-based companies whose primary business is in the Internet and Internet-related sectors. It attempts to offer exposure to companies that benefit from increasing consumption by China's growing middle class.

This is all a result of recent government actions to inject liquidity into the Chinese economy. A little background…

The market has built up higher and higher expectations on fiscal stimulus in the past 1-2 weeks. Reuters recently reported news of a 2-trillion yuan fiscal package on September 26, including 1-trillion support for local governments and 1-trillion support for consumption (including cash allowance of 800 yuan per month for second-child families), was perceived as a minimum benchmark. Since then, larger numbers have kept popping up — from 3-5 trillion yuan, to 5-7 trillion yuan, or even 10 trillion yuan.

These rumors sent the stock market straight up and to the right.

However, the governing body (NDRC) held a press conference on Tuesday about “implementing a package of incremental policies to promote economic growth, improve economic structure and maintain positive momentum”.

Market expectations were raised for additional concrete stimulus measures, especially details of the fiscal package. But it didn’t happen. Officials mainly reiterated the existing policy stance, rather than laying out new, concrete measures.

But it’s not over yet. It’s still early in October and there remain several windows for catalysts like data releases in mid-October and a Politburo meeting toward the end of the month.

Uncertainty everywhere.

That’s what makes China such a gamble right now. Stimulative policy needs to line up with expectations in order for equities to work here. Anything short could provide a buying opportunity, while anything constructive is going to cause another leg up.

Choose your fighter.

Keeping all this in mind, let’s pick a stock in this space that can play this theme — PDD.

Overview 👉 What Does Pinduoduo Do?

Pinduoduo Inc. (NASDAQ: PDD) is a rapidly growing Chinese e-commerce platform that uniquely combines social networking with online shopping. Founded in 2015 by Colin Huang, a former Google engineer, the company has quickly become a major competitor to Alibaba and JD.com by pioneering a group buying model. This approach encourages users to team up via social media platforms like WeChat to purchase products in groups, unlocking significant discounts and creating an engaging shopping experience.

Focusing on price-sensitive consumers in China's lower-tier cities and rural areas, Pinduoduo offers a wide array of affordable products, including a strong emphasis on agricultural goods. By connecting farmers directly with consumers, the platform reduces intermediaries, ensuring fresher produce at lower costs. This strategy has expanded its user base to over 800 million active buyers and driven robust revenue growth, with the company reporting its first quarterly profit in 2021.

Despite its success, Pinduoduo faces challenges such as intense competition from established giants enhancing their own social commerce features, regulatory scrutiny from Chinese authorities focusing on anti-competitive practices, and issues related to counterfeit goods and product quality. PDD also launched its cross-border e-commerce platform, Temu, in North America which marked a significant step in its global expansion efforts, aiming to replicate its domestic success on an international scale.

Business Segments 👉 Breakdown

PDD has two key divisions:

Pinduoduo Platform (Domestic E-commerce in China)

• Overview: The Pinduoduo platform is PDD Holdings' flagship e-commerce marketplace in China. It is renowned for its innovative social commerce model that integrates social networking with online shopping.

• Business Model: Pinduoduo utilizes a group-buying approach, encouraging users to share product information on social media platforms like WeChat to form purchasing teams. This model allows consumers to access significant discounts by buying in groups, enhancing user engagement and leveraging social networks for viral growth.

• Product Offerings: The platform offers a wide array of products, including electronics, apparel, household items, and a strong emphasis on agricultural produce. By connecting farmers directly with consumers, it reduces intermediaries and offers fresh products at competitive prices.

• Target Market: Pinduoduo primarily targets price-sensitive consumers in China's lower-tier cities and rural areas, tapping into a vast and previously underserved market.

Temu (International E-commerce Platform)

• Overview: Temu is PDD Holdings' cross-border e-commerce platform launched in 2022 to serve international markets, starting with North America and expanding to other regions like Europe and Australia.

• Business Model: Temu aims to offer a wide range of affordable products to global consumers by leveraging PDD Holdings' extensive supply chain and merchant relationships in China. It focuses on providing value-for-money offerings across various categories, including fashion, electronics, and home goods.

• Global Expansion: Temu represents PDD Holdings' strategic move to replicate its domestic success on an international scale, competing with global e-commerce giants by emphasizing low prices and a vast product selection.

How Do They Make Money? 👉 Marketing + Transaction Fees

PDD Holdings Inc. generates revenue primarily through its e-commerce platforms by offering online marketing services and transaction-based fees. Merchants pay for advertising and promotional tools to enhance their visibility on platforms like Pinduoduo and Temu, contributing significantly to PDD's income. The company also earns commission fees on sales made through its platforms and may receive payment processing fees in partnership with third-party payment providers.

In addition to these, PDD provides value-added services such as logistics support, data analytics, and merchant support services, charging fees for these offerings. Through initiatives like Duoduo Maicai, PDD connects farmers directly with consumers for the sale of fresh produce, earning revenue from transaction fees and capturing margins by streamlining the supply chain. The international expansion with Temu extends these revenue models globally, adding cross-border commissions and fees associated with international shipping and transactions.

Overall, PDD Holdings makes money by providing platforms that connect a vast consumer base with merchants, offering services that enhance visibility and sales. Advertising, transaction fees, and value-added services are the primary revenue drivers, and by expanding into new markets, PDD aims to diversify and increase its income streams globally.

By The Numbers 👉 Key Metrics

PDD went through massive growth that was accelerated through the Covid period when everything was bought online.

It followed up years of cash-burning rapid expansion by showing one of my favorite things in the world…operating leverage. EBITDA and Net Income both showed very strong inflection points, proving that the company can scale responsibly.

They’re also doing this at a much faster-improving rate than their competitors, and are well on pace to surpass Alibaba in profitability:

Risks 👉 Potential Pitfalls

Regulatory Scrutiny in China: PDD Holdings operates primarily in China, where the government has been increasing regulatory oversight of technology and e-commerce companies. Enhanced scrutiny on issues such as antitrust practices, data privacy, and consumer protection can lead to fines, operational restrictions, or mandatory changes in business practices.

Intense Competition: The e-commerce sector is highly competitive, both within China and globally. PDD faces strong competition from well-established players like Alibaba and JD.com, as well as emerging platforms. This intense competition can lead to increased marketing expenses, pressure to lower prices, and challenges in retaining users and merchants.

Product Quality and Counterfeit Goods: Pinduoduo has faced criticism and legal challenges related to counterfeit and substandard products sold on its platform. Issues with product quality can erode consumer trust, damage the company's brand reputation, and result in regulatory penalties.

Wrapping Up

This is by no means a lay-up. There is still lots of uncertainty surrounding government stimulus plans.

However, for the longer-term investor, volatility provides strategic entry points where you can add to positions down lower and trade this name around a bit.

At the same time, this company has been incredibly innovative in breaking onto the scene and has a strong underlying business to support it.

This could be a good name to be patient on, and pick your entry points.

Cheers,

The GRIT Alpha Team

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