Saturday, 13 February 2021

Will Pinduoduo Inc (PDD) Keep on Growing?

PINDUODUO (PDD. NASDAQ) – Together, More Savings, More Fun! 

Source: https://investor.pinduoduo.com  


Pinduoduo returns more than 500 per cent in the last one year. 

Despite only started in 2015, Pinduoduo is now the second-largest e-commerce platform in China, only behind Alibaba. Pinduoduo has been enjoying strong growth, with 3Q20 revenue jumping by 89% yoy to RMB 14.209 Billions. The company now has 731 million active buyers on its platform. 

Pinduoduo emphasize on team purchase model to promote interactions between users to increase volume of sales while giving more savings to the users.  Many of Pinduoduo current crop of sellers were originally on Alibaba's Taobao platform. 

By continuously expanding the range of products available, the online platform attracts new merchants and brands selling everything from toothbrushes to Rolls-Royce cars!


SMART AGRICULTURE “DuoDuo Maicai” 

PDD operates China's largest online marketplace for agricultural products, and is the only major tech company in China to make improving agriculture a stated strategic priority. 

In my opinion, this is definitely one of the biggest potentials of PDD. 

In China, most farmers due to their lack of direct access to consumers, rely on middlemen who rip them off and reduce their profits. PDD helps farmers by teaching them how to sell to consumers directly on its platform eliminating the needs of multiple middlemen. PDD also educate farmers and offers them smart AI-generated farming suggestions to raise agricultural productivity and quality.  

Pinduoduo “DuoDuo Mai offers next-day, self-pickup grocery service. Buyers can place an order for groceries before 11 pm and pick up their orders from 4 pm onwards the following day. There are designated pick-up points for convenient access. As China’s largest agricultural e-commerce platform, Pinduoduo works with millions of farmers, merchants and logistics providers. The platform first gathers information on the types and availability of local agricultural produce, then curates a list of items to be offered to shoppers each day.


FINANCIALS

Refer to PDD's 3rd quarter unaudited results here

While all good things are being aforesaid about Pinduoduo, the company is still loss making. 3Q20 operating loss was RMB 1,296.7 million (USD 190.8 million). However, this is a much-improved figure compared operating loss of RMB 2,792.0 million in the same quarter in 2019. 

Despite its loss-making status now, Pinduoduo has been increasing its revenue qoq and yoy with close to 90% increase in revenue in the latest quarter. 

What is more remarkable is Pinduoduo’s strong gross margin profile. In an article from seeking alpha in Jan 2021, it states:

“Over the past ten quarters, Pinduoduo's gross margin has fluctuated between 72% (Q1 '20, where the pandemic heavily impacted operations) and 85.7% (Q2 '18). Alibaba's gross margin sits at about 44%, while JD's hovers at 8.7%. As long as Pinduoduo can maintain a >70% gross margin over the course of the next eight to twelve quarters, as revenues could be set to nearly triple, its earnings picture will dramatically improve. Even if expenses rise, it's likely that the total expenses' growth rate will lag gross profit's rate with these margins.”

That said, cash position is strong. Net cash provided by operating activities was RMB 8,321.8 million (US$1,225.7 million), compared with RMB2,618.2 million in the same quarter of 2019, primarily due to an increase in online marketing services revenues. 

TTM cash flow from continuing operation is RMB 22.8 billion (USD 3.4 billion). 

Cash, cash equivalents and short-term investments were RMB 45.6 billion (USD 6.7 billion) as of September 30, 2020, compared with RMB 41.1 billion as of December 31, 2019.


LATEST NEWS

Dec. 21, 2020,  Pinduoduo Inc announced that a global institutional investor will purchase close to US$500 million of new shares through a private placement as the agriculture-focused technology platform pursues its strategic priority of raising farm productivity and improving food security and quality.

Pinduoduo expects to use the proceeds to strengthen its balance sheet and make strategic investments. The share issue follows an oversubscribed convertible note-and-equity offer last month, in which the company raised a total of US$6.1 billion, including overallotment.


SUMMARY

The shares of Pinduoduo is not cheap. PDD’s market cap is close to USD 240 Billion valuing a whopping of more than 55x the equity value in the most recent quarter. Price to TTM Sales is ~38x. 

For comparison and information sake, 

- Singapore’s Sea Limited (PB ~182x, PS~40x)

- Alibaba (PB~11x, PS~7x)

- JD.com (PB~15x, PS~1.8x)

- Tesla’s (PB ~35x, PS~25x)

- Zoom (PB ~83x, PS~65x). 

As grocery shopping shifts rapidly online, Pinduoduo is investing in creating a low-cost, next day logistics infrastructure suited to handle perishables. 

Farmers now have increase knowledge of smart agriculture technology and  direct access to consumers, thereby earning better margins while consumers pay lower prices! 

Pinduoduo future in agriculture e-commerce is huge in China’s billions population. 


PS: I am invested in PDD.