Insights into PDD Holdings: A Comprehensive Analysis

Date of Report: Friday, 22 November 2024

Broker Name: UOB Kay Hian Private Limited

Introduction

PDD Holdings has garnered significant attention in the financial markets, particularly after its recent 3Q24 results. This comprehensive analysis delves into the company’s performance, challenges, and outlook as presented in the latest report by UOB Kay Hian. PDD Holdings, a global e-commerce platform, continues to navigate a complex market environment characterized by both opportunities and hurdles.

Company Overview

PDD Holdings operates a vast e-commerce platform offering a broad spectrum of merchandise, including groceries, fashion, beauty products, and electronics, catering to a global customer base. Despite the current volatility in the market, PDD maintains its position as a significant player in the consumer discretionary sector.

Stock Performance and Shareholder Structure

The company’s shares were traded at US\$116.49, with a target price of US\$160.00, indicating an upside potential of 37.4%. Major shareholders include Baillie Gifford & Co, Vanguard Group Inc, and BlackRock Inc. The stock has experienced fluctuations, with a 52-week high of US\$164.69 and a low of US\$88.01.

3Q24 Financial Performance

PDD Holdings reported a revenue increase of 44% year-on-year to Rmb99.4 billion, although this was slightly below consensus estimates by 3%. The non-GAAP net profit was Rmb27.5 billion, 6% below expectations, yet the non-GAAP net margin expanded by 3 percentage points to 27.6%. These figures underscore the challenges faced by PDD due to soft commission revenue growth and increased competitive pressures.

Revenue and Profitability Analysis

The company’s revenue growth was moderated by intense competition and a challenging macroeconomic backdrop. Online marketing services revenue rose by 24% year-on-year, while transaction commission revenue grew by 72% to Rmb50 billion, driven by solid gross merchandise value growth. However, the gross margin dipped sequentially by 3 percentage points due to rising fulfilment and payment processing fees.

Operational Challenges and Strategic Initiatives

PDD’s management highlighted several strategic initiatives aimed at countering competitive pressures and fostering a sustainable platform ecosystem. The company has been actively investing in merchant support through its “Rmb10b Fee Reduction” program and other measures like rebalancing service fees and enhancing after-sales support. These efforts are expected to have a long-term positive impact on PDD’s revenue from online marketing and transaction services.

Future Outlook and Risks

Looking ahead, PDD anticipates a continuation of top-line growth challenges due to its merchant support strategy. While profitability is expected to remain under pressure, the company is optimistic about its long-term growth trajectory. Key risks identified include potential heavy investments that may weigh on margins and policy risks such as a potential ban of Temu by the US and Southeast Asian countries.

Valuation and Recommendation

UOB Kay Hian maintains a “BUY” recommendation for PDD Holdings, albeit with a lowered target price of US\$160.00. This valuation takes into account the lower valuation for Temu and core commerce PE. PDD is currently trading at 8.3x 2025F PE, against an 18% EPS CAGR over 2025-28.

Conclusion

PDD Holdings continues to demonstrate resilience in a dynamic market environment, with strategic initiatives aimed at sustaining growth and enhancing profitability. Despite the current challenges, the company’s robust support for high-quality merchants and innovations in its operational model position it well for future growth, making it a notable stock for investors to watch.

As the company navigates through these challenges, stakeholders remain keenly focused on its ability to leverage its strategic initiatives to capitalize on market opportunities and drive long-term value.