Written by Eastland
Header image Visual China.
On November 28, 2023, Pinduoduo (NASDAQ: PDD) announced its third-quarter financial results - revenue of 688400 million, a year-on-year increase of 94%;Operating profit 166600 million, a year-on-year increase of 60%.
In Q2 2021, Pinduoduo's single-quarter net profit returned to positive for the first time, and it has been profitable for 10 consecutive quarters by Q3 2023In September 2022, the cross-border e-commerce platform Temu was launched, which became the "second growth curve". The "fully managed model" has been learned and emulated by peers.
At present, the market capitalization of Pinduoduo is comparable to that of Alibaba, but the price-to-earnings ratio (TTM) of the two is 30 times and 11 times respectively. What's more, in addition to e-commerce, Ali also has rookies, Freshippo, cloud computing, big entertainment, and local life ......
Compared to Ali, Pinduoduo is overrated, what is the logic behind it?
Drivers of revenue growth.
1) The revenue structure is different from that of Alibaba and JD.com.
Pinduoduo's revenue is divided into advertising, commissions, and product sales. The first two belong to e-commerce platform services, and the third belongs to online retail.
In 2019, advertising revenue was 26.8 billion, accounting for 89% of revenue;Commission income was 3.3 billion, accounting for 11% of revenue.
In 2020, the merchandise sales business was born, with a sales revenue of 57500 million, the same as commission income, accounting for 97% (19 in total.)4%）；Advertising revenue increased to 48 billion, but the proportion of revenue fell to 806%。
In 2021, the revenue from merchandise sales peaked at 72500 million, accounting for 10% of revenue;Advertising revenue 725600 million, accounting for 77 percent of revenue2%；Commission income was 14.1 billion, accounting for 151%。
In 2022, the revenue from merchandise sales will be only 2100 million, almost zero;Advertising revenue exceeded 100 billion, accounting for 78% of revenue7%；Commission income was 40 billion, accounting for 21 percent of revenue2%。
JD.com started as a self-operated business and gradually launched platform services. In 2022, the proportion of merchandise sales revenue will still be as high as 827%；
Ali started from platform services, and its income is mainly composed of marketing services (advertising) and transaction commissions, and gradually develops direct business. In fiscal year 2023 (ending March 31, 2023), the direct sales and other revenues of China's retail businesses reached 275 billion.
Pinduoduo's "commodity sales" business has risen and fallen several times, and has returned to zero again, but it cannot be asserted that it will be completely abandoned.
2) Commissions become the main driver.
The advertising business, which was once the main driver of Pinduoduo's revenue growth, has changed in 2023:
In 2020, advertising revenue grew by 79% year-on-year, contributing 72% to revenue growthCommission income increased 74% year-over-year, contributing only 8% to revenue growth due to a small base.
In 2021, the growth rate of advertising revenue decreased to 51%, and the commission income increased by 144%, increasing the contribution rate to revenue growth to 24%.
In 2022, due to the decline in product sales revenue, advertising and commissions contributed more than 100% to revenue growth.
In the first three quarters of 2023, advertising revenue increased by 46% year-on-year, and its contribution to revenue growth fell below 50% for the first timeCommission income increased 186% year-over-year and contributed 52% to revenue growth.
In the first three quarters of 2023, the volume of commission business has reached 51% of advertising, and the growth rate is 4 times that of advertising, becoming the first driving force for Pinduoduo's revenue growth.
In the past six months (April to September 2023), Taotian Group's customer management revenue (mainly advertising and commissions) in China's retail segment was 148.3 billion. During the same period, the total revenue of Pinduoduo's e-commerce platform services was 121.1 billion, which was about 81% of Taotian Group's such revenue7%, equivalent to 57% of Taotian Group's total revenue.
The road to a turnaround. 1) "Price for quantity" is in place.
In 2019, Pinduoduo's advertising revenue accounted for 89% of revenue, and the overall gross profit margin was 79%.
In 2020, merchandise sales accounted for 97%, with a gross profit margin of about 10%. Excluding the retail business, the gross profit margin of platform services was approximately 74%, a decrease of 5 percentage points from 2019. The ratio of commissions to advertising revenue is almost the same as in 2019. This shows that Pinduoduo adopted a "price for volume" strategy in 2020, and the result was a 97% increase in revenue and a 69% increase in gross profit.
In 2021, the revenue from merchandise sales was 72500 million, assuming a gross profit margin of 10%, the gross profit margin of platform services is about 71%, and then a decrease of 2 percentage points. The annual revenue and gross profit increased respectively, and the effect of exchanging price for volume was still considerable.
In 2022, the merchandising business went to zero, and the overall gross profit margin improved to 76%.
In the first three quarters of 2023, the gross profit margin decreased by 11 percentage points to 64%, while commission income skyrocketed by 186%, and the "price for volume" strategy was "launched" again, resulting in a 75% increase in revenue and a 50% increase in gross profit to 102.1 billion.
2) Turn losses into profits.
Operating profit
The blue line in the chart below represents the gross profit (rate), the colored stacked column represents the expense (rate), and the operating profit will only be recorded when the blue submerges the color.
In recent years, Pinduoduo's gross profit margin has oscillated downward, falling to 64% in the first three quarters of 2023, 13 lower than in 20185 percentage points. Pinduoduo's turnaround was due to the dilution of the expense ratio due to the expansion of scale.
For example, in 2018, 13.4 billion market expenses are equivalent to 102 percent of revenue5%, with a gross profit margin of up to 779% is also doomed to a huge loss.
In 2020, market expenses soared to 41.2 billion, but the proportion of revenue fell to 692%。
In 2021, the total expenses of marketing, administration, and R&D will be 55.3 billion, with a total expense ratio of 589%。This is despite the fact that the gross profit margin has fallen to 662%, Pinduoduo is still the first time to obtain operating profits.
In 2022, the total expense will reach 68.7 billion, of which the market expense will be 54.3 billion, and the total expense ratio will be further reduced to 526%。
In the first three quarters of 2023, the total expense will be 65.8 billion, and the total expense ratio will only be 414%, which is 23 percentage points lower than the gross profit margin!
In 2018, Pinduoduo had an operating loss of 10.8 billion yuan, with a loss rate of 823%；
In 2020, the operating loss still reached 93800 million, the loss rate fell to 158%；
In 2021, Pinduoduo turned losses into profits, with an operating profit of 6.9 billion yuan and a profit margin of 73%；
In 2022, the operating profit will climb to 30.4 billion yuan, with a profit margin of 233%；
In the first three quarters of 2023, the operating profit was 36.3 billion, a year-on-year increase of 707%。
Cash flow from operating activities
Pinduoduo's net cash flow from operating activities has been positive: August 2016800 million, 96 in 2017900 million, 77 in 2018700 million.
In 2020, the company has not yet turned around, and the net cash flow from operating activities has reached 28.2 billion
In 2022, net cash flow from operating activities reached 48.5 billion, 54.5 billion higher than net profit1%。
In the first three quarters of 2023, Pinduoduo's operating profit, net profit, and net cash flow from operating activities were 36.3 billion and 36.7 billion, respectively400 million and 572700 million.
Net cash flow from operating activities is significantly higher than net profit, indicating that the company has strong control over cash flow.
temu - the watershed of Pinduoduo.
1) Before temu goes online.
Before the launch of Temu, the growth rate of Pinduoduo's total transaction value (GMV) and average monthly active users (at least 1 order) slowed down significantly
In 2018, GMV reached 471.6 billion, a year-on-year increase of 234%, with an average of 4200 million, a year-on-year increase of 71%;
In 2019, GMV exceeded 1 trillion, a year-on-year increase of 113%, and the average monthly active users were 5900 million, a year-on-year increase of 40%;
In 2020, the GMV increased to 17 trillion, a year-on-year increase of 66%, with an average of 7900 million, a year-on-year increase of 35%;
In 2021, the GMV reached 24 trillion, a year-on-year increase of 46%, with an average monthly active user of 8700 million, a year-on-year growth rate of only 10%;
2) After temu goes live.
In September 2022, Pinduoduo launched Temu in the United States. The slogan of the cross-border e-commerce platform is "Team Up, Price Down", which meets the needs of Americans for "consumption downgrade".
Temu is the first to adopt the "full custody model" - the seller ships the goods to the domestic warehouse, and the marketing and fulfillment are responsible for the platform, and the platform has the final pricing power.
Half a year after Temu was launched, Pinduoduo's commission income began to skyrocket.
In Q2 2023, commission income is 143500 million, a year-on-year increase of 131%;
In Q3 2023, the commission income will be 291500 million, year-on-year and month-on-month growth rates were %.
Since the platform is responsible for marketing and drainage under the full custody mode, the main income of the Temu platform comes from commissions.
In Q2 and Q3 of 2023, the reason for the surge in Pinduoduo's commission income is obviously Temu. The Q3 gross profit margin** should be due to the relatively low gross profit margin of Temu's commission business.
The temu pattern is all about it.
Peer follow-up is the most professional recognition.
From the perspective of e-commerce platforms, Pinduoduo's launch of Temu is a stroke of genius, and AliExpress, Lazada, Shein, Shopee, and TikTok Shop have all launched or will launch similar services. Even Jack Ma said "congratulations to Pinduoduo for its decision-making, implementation and efforts in the past few years".
Consumers are most sincere with their banknotes.
The stereotypical American consumer spends lavishly and spends money. They buy "cheap" textile products from China in dozens, and they are not sensitive to **.
The U.S. retail industry is highly developed, and the services provided by Walmart and Amazon are professional, efficient and impeccable. American consumers cheered for temu that popped up out of nowhere, indicating that they are "short on money".
Sellers stand in line with the most rational.
Temu's typical partners are not stock players of cross-border e-commerce, but manufacturing companies that make a living from overseas orders. They are struggling to move forward due to the impact of the pandemic.
These manufacturing companies may be not small, but they don't understand e-commerce, can't put them, and can't grasp the amount of stock. Let them go to Amazon to "put on the shelves" and ship the products overseas, what if they are unsalable?Do you want to do marketing and drainage on cross-border e-commerce platforms, how much money is invested, and what should I do?How to timely and accurately grasp the mentality of "non-my race" consumers on the other side of the ocean, and set and change it at any time
Under the full custody model, sellers only need to send the products to Temu's warehouse in Guangzhou, and the export, marketing, fulfillment, after-sales, and pricing are all entrusted to the platform. Due to the low threshold and low cost of trial and error, it is a rational choice for traditional manufacturing enterprises to accept the full custody model.
There are also many criticisms of the full custody model, mainly because the seller is too ruthless in reducing the price and depriving the pricing power.
Let's start with pricing power. Since ancient times, the profits of China's foreign trade enterprises have been very meager. For example, in the production of high-grade copper faucets, the bid of foreign buyers is the "processing fee" of international copper ** plus a few percentage points, and it is bought by ton. Go back and pack it separately, and according to the degree of exquisite packaging, it will be sold to European and American consumers several times or more than ten times, and Chinese manufacturers have no pricing power. Cross-border e-commerce assesses the situation and flexibly adjusts products and policies, which is the same as "will be outside, and the king's life will not be affected".
Let's talk about "price reduction". The general situation of the market economy is in one sentence: the relationship between supply and demand changes with the first - * demand decreases and supply increases.
The purchasing power of consumers in developed countries has declined, and the demand curve has shifted downward as a whole. In the past, a certain product could be sold for 10,000 pieces at a unit price of $10, and 1 piece at a unit price of $850,000 pieces. Now you can only sell 6,000 pieces at a unit price of $10, and you can sell 10,000 pieces at a unit price of $8. Southeast Asian and Latin American manufacturers can offer products priced at $8, but the quality has decreased slightly. Insist on selling $10 per piece, and Chinese companies will lose this market share. The consumption downgrade that swept the world was not made by Pinduoduo, and Temu was only a transmitter of changes in the demand curve.
For export-oriented manufacturing enterprises, Temu has compressed gross profit margins, but it is not completely without gains.
The advantages of the traditional export model are large batches, good reputation, no kickbacks, and the biggest problem is the long account period. An important reason for the development of private borrowing in coastal areas is the lack of liquidity of export-oriented production enterprises.
The fully managed model brings three benefits to traditional manufacturing enterprises:
The first is to provide a display platform for overseas consumers to face unfamiliar Chinese brands (and Chinese people are also unfamiliar). It's like "dragon set" playing a role with a name and surname, not necessarily being famous, but having the hope of becoming famous;
The second is to let Chinese manufacturers directly feel the needs of overseas consumers, optimize products, arrange production, and no longer "run blindfolded";
The third is the quick return of small orders to reduce the pressure of capital turnover.
Temu is a pioneer in the fully managed model, but it is not a monopoly. AliExpress and SHEIN have joined the "involution" to compete with Temu for consumers and merchantsThe decisive battle has not yet begun.
The above analysis is for reference only and does not constitute any investment advice!
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