Evolving Thoughts on Pinduoduo

Unpacking the Earnings Call- what might really be going on behind the scenes

As I discussed yesterday (here), I still believe that Pinduoduo’s earnings numbers were solid—nothing shocking, just in line with expectations. Everything I said yesterday still holds true. However, what continued to puzzle me was the surprising negativity in management’s tone during the earnings call.

Reading the earnings call again, I feel management did all they could to shoot down the stock—this was a masterclass in how to kill the stock on an earnings call. Even if I wanted to do it, I couldn’t have done it better.

Clearly, management knows what they are doing—they are no beginners. In fact, I consider them to be among the top management teams in China.

What is the rationale behind this earnings call?

They emphasized that current margins were not sustainable, that growth would slow down, and that heavy investments would be necessary to transition to higher-quality margins. But honestly, these concerns aren’t all that alarming. For a company of Pinduoduo’s size, maintaining triple-digit growth rates is inherently unsustainable.

Quite the opposite, there has been positive news for Pinduoduo recently. Pinduoduo has successfully outmaneuvered its rivals, who have recently abandoned their low-cost strategies. These competitors couldn’t match Pinduoduo’s low prices, as I mentioned in a previous article. This victory in the low-end market, coupled with a shift toward higher-quality margins and branded goods, positions Pinduoduo to challenge Alibaba and JD on their own turf. On the surface, this appears to be a positive development.

They also view the Chinese consumer market and the current macro environment as favorable, which contrasts sharply with the outlook of their competitors.

This quarter, we benefited from the improving macro environment and achieved robust financial results.

and

Looking ahead to the second quarter of this year and beyond, we're very confident in the future of the Chinese consumer market.

Compare that perspective to Tencent’s comments about consumption in their last call:

FinTech Services revenue growth decelerated to a low single-digit percentage rate, impacted by further moderation in commercial payment revenue growth that reflected slow consumption spending.

So, they are winning on the low-price end, entering the higher-quality and branded goods territory of Alibaba and JD, and they have a positive outlook on the macro environment.

But the question that lingered with me was: why was the management so negative in their messaging? After revisiting the earnings call and reports, I started to sense that there might be some government involvement. Now, this is purely speculative, but the situation feels off.

Was There Government Involvement?

There have been public protests from merchants accusing Pinduoduo of squeezing them too hard. The Chinese government is very sensitive to such protests, particularly in the current economic climate where many are struggling to make ends meet. Public dissent, coupled with record earnings and triple-digit growth, could be seen as problematic. Historically, we’ve seen the government respond to public pressure, such as the end of the zero-COVID strategy following the white paper protests in late 2022 and the shift in environmental policies driven by public outcry over air pollution.

They made similar comments in the past, but these two comments from the last earnings call stood out to me.

We fully recognize that simply measuring our company's performance by certain capital returns no longer aligns with where we are today. As a global company in this area, we are committed to drive innovation, adapting to change and taking on greater social responsibilities in the region across the globe.

In this process, we feel a strong sense of responsibility as a platform. On one side, we must ensure strict oversight of product quality to prevent substandard goods and protect consumer rights. On the other side, we must ensure fairness so that dedicated, high-quality merchants can earn meaningful rewards, which is essential for the healthy development of the ecosystem. To achieve balance in the ecosystem, we have no choice but to firmly transition toward high-quality development. Therefore, we will adopt the necessary policies to provide strong support to high-quality merchants while phasing out low-quality ones. Our management has reached a consensus to firmly commit to long-term investments and create a healthy, sustainable platform ecosystem.

Moreover, the fact that Pinduoduo’s founder, Huang Zheng, briefly became the richest person in China (for 18 days) is not a comfortable position to be in. (China is insanely competitive. I just saw that Nongfu Spring is down 10%. This seems like the counter move in the race to avoid being the richest person in China.) It’s possible that the company decided to move out of the government’s spotlight by intentionally deflating their stock price—a move that was clearly the objective of the earnings call. But perhaps there’s more to it than just lowering the stock price.

So what is their response?

Deflating the stock price is not enough. I think management actually took this opportunity to go on the offensive and start investing aggressively. Some reports suggest that Temu, their overseas business, is nearing or has already reached break-even. Additionally, their grocery business is already breaking even.

There have been reports that after making profits in their community group-buy business, Pinduoduo decided not just to reap the rewards but to continue pursuing their last remaining competitor, Meituan. Reports suggest Meituan was caught off guard by Pinduoduo’s decision to go on the offensive once again, spending or sacrificing all their gains and reinvesting them for further growth. This complicates things for Meituan, as they are trying to reduce losses in this business segment. With Meituan reporting today, it will be interesting to see how this business unit has performed and if they could further reduce losses.

This aggressive investment strategy might also be applied to Temu now that they are close to breaking even. The growing export volumes could benefit local factories and merchants, which should be welcomed by the government. Even if margins remain low, increased revenue could still lead to higher profits.

The rationale behind this earnings call might have been to lower the company’s profile, reduce the founder’s visibility as the richest person in China, and invest heavily now. They’ve been saying in the past that they still see significant growth potential and many high-return investment opportunities. So, they probably took the initiative here, temporarily lowering profits to move out of the spotlight.

With substantial cash reserves, Pinduoduo has the resources to make these investments. They could even buy JD outright if they wanted to and still have cash left over. By choosing to reinvest profits now, they not only avoid government scrutiny but also set the stage for future growth. While this may cause some short-term pain, the long-term benefits could be significant.

So, these are my current thoughts on this very unusual earnings call from Pinduoduo. I’m happy to hear your opinions, and I would greatly appreciate any pushback or insights you might have in the comments. You can also DM me.