PDD, owner of Temu and Pinduoduo, sees sales surge despite China gloom

PDD Holdings revenue rose a stronger-than-expected 66 per cent after the company behind hit shopping app Temu spent to boost growth at home and abroad to counter a bumpy post-pandemic recovery.

Its shares climbed more than 13 per cent in pre-market trading in New York. The e-commerce platform reported revenue of 52.3 billion yuan (US$7.2 billion) in the June quarter, beating the average estimate of 43.3 billion yuan. Net income increased 47 per cent to 13.1 billion yuan.

PDD’s growth surpassed many of its major Chinese peers and underscores how the company that once trailed far behind Alibaba Group Holding and JD.com has in recent years used promotions and inroads into lower-tier cities to grab market share from more established rivals. It created Temu, featured with much fanfare during this year’s Super Bowl, to try and replicate that success abroad.

Mixed financial results from the country’s online commerce and media leaders have cast doubt over a recovery for the world’s biggest internet arena. This month, Alibaba and JD.com both reported faster-than-anticipated growth for the second quarter while social media giant Tencent Holdings recorded sales and net income that missed analysts’ estimates.

The headquarters of Pinduoduo in Shanghai, China. Photo: Reuters

In PDD’s case, increasingly fierce competition in China and aggressive strides overseas may pressure profitability.

JD.com rolled out a US$1.4 billion discount spree in March to capture new users, igniting a price war. Alibaba also launched a “value-for-money battle” to lure buyers and merchants. Investors worry that PDD’s aggressive spending – now a sector-wide phenomenon – will further hurt bottom line growth.

As the price war heats up and Chinese consumption weakens, investors may find it increasingly hard to justify PDD’s valuation. The stock is trading at more than 19 times forward earnings, compared with nearly 11 times for Alibaba and over 12 for JD.com, according to data compiled by Bloomberg.

Amid intensifying rivalry at home, PDD is turning outward for growth, following the playbook employed by ByteDance’s TikTok and fast-fashion phenom Shein. In September, PDD debuted its Temu bargains platform in the US, then quickly rolled it out to other places like Canada and Europe.

Morgan Stanley says PDD is “the only e-commerce play that can deliver alpha” in China, as the company will outgrow peers because the monthly use of its app is increasing while Temu is expanding to more countries. Temu was ranked the top shopping app by downloads in the US, Australia and Germany over the past three months, according to market research firm Sensor Tower.

But so far, the fledgling platform has been a drag on margins. PDD acknowledged in its annual report last year that Temu requires “substantial” resources to grow. While traffic on the app has risen, it probably accounted for less than 1 per cent of PDD’s sales in the second quarter, Bloomberg Intelligence analysts estimated.

Temu is now locked in a lawsuit with Shein, alleging the rival violated antitrust laws by using threats and intimidation to block clothing manufacturers from working with the fast-rising upstart. Shein has also sued Temu in the US, alleging trademark and copyright infringement as well as “false and deceptive business practices.”

PDD has also drawn scrutiny over potential data security risks, after Google’s Android app store suspended downloads of its Chinese shopping app Pinduoduo while it investigates alleged malware in unsanctioned versions. Google did not mention Temu, which remains available to download.

South China Morning Post