Your analysis makes sense, thanks for sharing. Government intervention seems very probable and the main cause of this attitude shift. I don't think its a coincidence that PDD management showed this attitude after just last week all the major ecommerce platforms signed the joint self-regulation agreement. Lei Chen's blatant self-criticism fits with this.
The question is then how much did the regulators erode their business model? Can their algorithm still weigh by lowest price? Do they have to purge all the ultra cheap merchants that other platforms refuse to allow? Many things aren't clear yet.
It's funny that this time to avoid spooking the markets, the regulators stepped in privately and had the news come out as self-regulation. However, PDD purposefully blew up in public, spooking the markets anyway.
Good analysis. Fully agree. But I also have to point out there will always be a "investor-unfriendliness" discount hanging over this stock, and it will take at least years of patience for the investors of this company to see the light. And only when the macro situation becomes brighter can PDD "rise up" again comfortably without becoming the 出头鸟. I count myself as a patient investor in this regard, but I fully anticipate the pains will not be that "short-term".
Your analysis seems highly plausible .. but if so, the "hindrance" towards investing in these chinese companies become even higher? Which company then dare to become the one with highest profitability? the highest mkt cap? the unassailable leader? Any company in china that reach a "pinnacle" would have to bring itself down to its knees, like what PDD supposedly did here?
I broadly agree with your analysis. Firstly, the situation looks similar to SEA in Aug'23. PDD however will start the high reinvestment phase from the position of strength, they are flush with cash and they have successfully reset growth expectations. Secondly, optics matters here - they most surely were directed by the CCP to sort out the supplier mess that was causing unrest in China. The company is still early in its development cycle, there will be time to obsess about NI and FCF yields.
As the challenger against incumbents in many market, it's wise to stay unnoticed and not appear to be a threat until it is too late. The temu playbook is the same as the pdd one. Gain scale with low priced, and then transform suddenly. These guys are wise
I do not understand the selloff in the slightest, other than it being a crowded trade and everybody got scared of the rhetoric of management. For example from Q4 2021 to Q3 2022 they gave a profit warning every quarter
Q4 2021 - "To conclude, profitability in the past quarter was mainly attributed to: first, control spending in the face of slow growth; and second, reduction of coals and expenses due one-off rebate. ... As we mentioned in previous quarters, we are also facing more competition. Therefore, we do not expect profitability in Q4 to serve as a benchmark for the following quarters."
"Second, as competition intensifies and user demand becomes more diversified, we do expect on continued investment in agriculture and a core technology, which will result in higher expense line items, hence, impacting profitability"
Q1 2022
"And under current intensified competition, we also see we still have many of our room to improve in terms of certifying users. The reasons is pandemic also shows that. So we need to step-up our investments. And it may cause our quarterly profit to fluctuate in the future."
Q2 2022
"Profitability in the past quarter was mainly attributable to a few short-term factors that may not repeat in the future. But we saw good user engagement during the past quarter. As competition remains intense, we're not sure whether such engagement momentum will continue... we do not expect profitability in the first quarter to serve as a benchmark for future quarters. "
"This quarter’s profitability is due to short-term factors combined. So it is not a good benchmark for future preference, and this is our view on profitability."
Q3 2022 - "In summary with think the current level of profitability in Q3 is temporary and unlikely to maintain"
"This shows that our financial and business cycles which are not always in sync. We plan to increase our investment to further drive innovations on our platform and strengthen our core capabilities. As such, we think is unlikely that profit level of the past quarter can be maintained"
"Therefore, profitability is partially due to such time lapse. And this shows that our business cycle and financial reporting cycle are not always in sync. We think such profitability level may not be sustainable. In addition, we are still in the development stage and profitability is not our current priority."
During that same time period net profits marched up from 9% to 24%. I have no idea why this management team likes to give profit warnings so often.
it's rumor that the sellers on Temu actually didn't make $ thus Temu model may not sustain. So if it's true, even Temo decided to invest further, is it a real risk to lose sellers?
I believe they are not deliberately trying to keep the stock price low. Their tone seems consistent, and they may simply be speaking frankly without much concern for price volatility.
Your analysis makes sense, thanks for sharing. Government intervention seems very probable and the main cause of this attitude shift. I don't think its a coincidence that PDD management showed this attitude after just last week all the major ecommerce platforms signed the joint self-regulation agreement. Lei Chen's blatant self-criticism fits with this.
The question is then how much did the regulators erode their business model? Can their algorithm still weigh by lowest price? Do they have to purge all the ultra cheap merchants that other platforms refuse to allow? Many things aren't clear yet.
It's funny that this time to avoid spooking the markets, the regulators stepped in privately and had the news come out as self-regulation. However, PDD purposefully blew up in public, spooking the markets anyway.
Good analysis. Fully agree. But I also have to point out there will always be a "investor-unfriendliness" discount hanging over this stock, and it will take at least years of patience for the investors of this company to see the light. And only when the macro situation becomes brighter can PDD "rise up" again comfortably without becoming the 出头鸟. I count myself as a patient investor in this regard, but I fully anticipate the pains will not be that "short-term".
Your analysis seems highly plausible .. but if so, the "hindrance" towards investing in these chinese companies become even higher? Which company then dare to become the one with highest profitability? the highest mkt cap? the unassailable leader? Any company in china that reach a "pinnacle" would have to bring itself down to its knees, like what PDD supposedly did here?
I broadly agree with your analysis. Firstly, the situation looks similar to SEA in Aug'23. PDD however will start the high reinvestment phase from the position of strength, they are flush with cash and they have successfully reset growth expectations. Secondly, optics matters here - they most surely were directed by the CCP to sort out the supplier mess that was causing unrest in China. The company is still early in its development cycle, there will be time to obsess about NI and FCF yields.
As the challenger against incumbents in many market, it's wise to stay unnoticed and not appear to be a threat until it is too late. The temu playbook is the same as the pdd one. Gain scale with low priced, and then transform suddenly. These guys are wise
I do not understand the selloff in the slightest, other than it being a crowded trade and everybody got scared of the rhetoric of management. For example from Q4 2021 to Q3 2022 they gave a profit warning every quarter
Q4 2021 - "To conclude, profitability in the past quarter was mainly attributed to: first, control spending in the face of slow growth; and second, reduction of coals and expenses due one-off rebate. ... As we mentioned in previous quarters, we are also facing more competition. Therefore, we do not expect profitability in Q4 to serve as a benchmark for the following quarters."
"Second, as competition intensifies and user demand becomes more diversified, we do expect on continued investment in agriculture and a core technology, which will result in higher expense line items, hence, impacting profitability"
Q1 2022
"And under current intensified competition, we also see we still have many of our room to improve in terms of certifying users. The reasons is pandemic also shows that. So we need to step-up our investments. And it may cause our quarterly profit to fluctuate in the future."
Q2 2022
"Profitability in the past quarter was mainly attributable to a few short-term factors that may not repeat in the future. But we saw good user engagement during the past quarter. As competition remains intense, we're not sure whether such engagement momentum will continue... we do not expect profitability in the first quarter to serve as a benchmark for future quarters. "
"This quarter’s profitability is due to short-term factors combined. So it is not a good benchmark for future preference, and this is our view on profitability."
Q3 2022 - "In summary with think the current level of profitability in Q3 is temporary and unlikely to maintain"
"This shows that our financial and business cycles which are not always in sync. We plan to increase our investment to further drive innovations on our platform and strengthen our core capabilities. As such, we think is unlikely that profit level of the past quarter can be maintained"
"Therefore, profitability is partially due to such time lapse. And this shows that our business cycle and financial reporting cycle are not always in sync. We think such profitability level may not be sustainable. In addition, we are still in the development stage and profitability is not our current priority."
During that same time period net profits marched up from 9% to 24%. I have no idea why this management team likes to give profit warnings so often.
it's rumor that the sellers on Temu actually didn't make $ thus Temu model may not sustain. So if it's true, even Temo decided to invest further, is it a real risk to lose sellers?
I don't think governments anywhere really want to allow this business model to thrive long term.
Great read!
I believe they are not deliberately trying to keep the stock price low. Their tone seems consistent, and they may simply be speaking frankly without much concern for price volatility.
solid analysis