Pinduoduo: The Mother of All Frauds?

Analyzing Pinduoduo’s Valuation, Fraud Concerns, and What It Means for Investing in China. Fraud or opportunity?

Introduction

Invest in Pinduoduo PDD 0.00%↑? Sure, why not! A Chinese ADR, registered in the Cayman Islands (because that’s reassuring), with an “Irish headquarters,” a Shanghai office, and a founder who’s already stepped down but still floats around like a ghostly advisor. Add in a management team that treats transparency like a state secret, responds to investor questions by repeating scripted lines, and openly declares, “No dividends, no buybacks, no care.” So, are you in? Or does this smell a bit too much like trouble brewing? Let’s have a closer look.

Fraud allegations against Pinduoduo aren’t exactly new—the Financial Times raised concerns about 10 months ago. But why revisit this now? Here’s the thing: when you look at Pinduoduo’s numbers—their explosive growth and the fear they strike in rivals like Amazon and Alibaba—and then see the stock trading at a PE ratio (adjusted for cash) of under 5, while a rudimentary reverse discounted cash flow model suggests the market is pricing in earnings shrinking by 7% annually for the next decade, it really makes you wonder: what’s going on here?

Sure, I’ve covered some challenges in my review of their last quarterly earnings—tough competition, China’s unforgiving market dynamics, and let’s not forget, they’re going up against giants like Amazon, a company that practically wrote the playbook on e-commerce dominance—but even with all that, this valuation feels…off.

That got me thinking about some research by Richard Zeckhauser, a Harvard professor and good friend of Buffett and Munger. He found that when people suspect fraud, they often slap irrationally steep discounts on a company’s value, whether the fear is justified or not. And honestly, that seems to be what’s happening here.

I wanted to see what is all about these fraud allegations, so I rolled up my sleeves and went through all of Pinduoduo’s investor letters—there are only four anyway. I even dug into Colin Huang’s pre-IPO personal essays. Fortunately,

Praya Value

has conveniently compiled them on his Substack (check it out here). It’s worth a read, but if you’d rather not, don’t worry—I’ve done the heavy lifting for you. I also followed the breadcrumbs, checking what competitors and partners say about Pinduoduo, and I’m throwing in some personal insights and thoughts from friends within China. Now, let me share my takeaways.

So red light or green light?

Colin Huang on the core principles of Pinduoduo

There’s a now-famous photo floating around: a young Colin Huang looking shyly at the camera while Warren Buffett, ever the friendly grandfather figure, has his arm around him. The occasion? The legendary $620,000 lunch that Duan Yongping, a Chinese entrepreneurial icon, splurged on to meet Buffett back in 2006. Duan didn’t just want a solo buffet with Buffett; he brought along Colin Huang, then a fresh-faced Google engineer. Little did anyone know, that quiet guy in the photo would go on to build one of the most disruptive e-commerce platforms in the world.

A lot of Colin Huang’s early thinking as both an investor and entrepreneur was heavily influenced by Warren Buffett, whom he frequently cites in his early letters and writings.

Here are a few quotes of Collin Huang about business models and finding the right business partner 2016:

• You have to pay attention to the business model - pick the right model (not all models work); and spend a lot of time to understand the minutiae of the model.

• If a business is easy, and cheap to enter, it won’t be a good business that brings in lots of cashflow over the long term. Good decisions are often difficult, and require painful sacrifices. A good company should spend its time attacking the hard problems, rather than chasing every little thing.

Reading Colin Huang’s 2016 writings feels like uncovering the blueprint of a master strategist—he meticulously analyzed dominant players like Alibaba, pinpointed their blind spots, and exploited them with precision.

When it comes to tackling hard problems, take fresh produce e-commerce: Amazon couldn’t crack it in the US, and nobody else in the world could either. In China, the battle was even fiercer, with giants like JD, Alibaba, and Didi all diving headfirst into the community group-buying frenzy. Yet, when the dust settled, Pinduoduo emerged as the clear winner, with Duoduo Maicai becoming a functional and scalable business—leaving Meituan as the only other serious survivor in the space.

And Temu? Sure, there was Shein, but cross-border e-commerce from China to the U.S. was barely a thing before Pinduoduo took it on. They didn’t just dip a toe into the market; they cannonballed in and achieved in two years what Alibaba hasn’t managed in over a decade. Pinduoduo is making everyone else look like they weren’t even trying.

But I’m digressing a bit—let’s circle back to what Colin Huang says about finding the right partners for business.

• You have to pick the right ‘partner’ - treating the founder/CEO as your

  prospective future partner. If their character or the culture would make you reluctant to work with them for the long term, then you’re better off passing on the stock. (This was when he was talking about what you can learn as an investor from being an entrepreneur.)

• Buffett and Gates once gave a talk to some MBA students, and asked them a question: “If you had to ‘invest’ all your money in one of your classmates, who would it be?”. Time and time again, the choice wasn’t the smartest, or the most capable classmate – it was the most trustworthy and reliable person. This is a great allegory for choosing a cofounder. You need a trustworthy long term partner more than a brilliant maverick that might stab you in the back at any time.

It’s ironic that he places so much value on trust, while, at least to my understanding, this is the very quality people most often accuse him—and by extension, Pinduoduo—of lacking.

This is from their first letter to shareholders 2018:

• Pinduoduo's survival depends on the value it creates for its users; I hope our

  team wakes up feeling anxious every day, never because of share price

  volatilities, but because of their constant fear of users departing if we are unable

  to anticipate and meet users' changing needs;

• Pinduoduo is dedicated to investing in the future and will always focus on the

  long term. It might appear too aggressive or too conservative at times. However,

  it always follows the basic and simple principle—growing its long term intrinsic

  value. (This, in essence, is what they say in every single earnings release ever published—nothing more, just the occasional tweak or new buzzword thrown in for variety.)

• Pinduoduo's core value is "本分" (Ben Fen). It is difficult to express it perfectly in English, but it essentially means to adhere firmly to one's own duties and principles. There are several layers of meaning here:

  • Be honest and trustworthy;

  • Discharge our own duties and responsibilities regardless of others' conduct;

  • Insulate our minds from outside pressures so that we can focus on the very simple basics of what we should be doing;

  • Never take advantage of others even when we are in a position to do so;

  • Self-reflect and take responsibilities when problems arise instead of blaming others.

  Specifically for Pinduoduo, the management's (Ben Fen) is to relentlessly focus on

  value creation for our consumers. We may not always be understood, but we always do things out of goodwill and do no evil.

Pinduoduo’s inaugural letter to shareholders in 2018 shares a striking resemblance to Amazon’s famed 1997 letter. Both outline a steadfast commitment to long-term growth and relentless investment. However, there’s a subtle yet important difference in tone. While Jeff Bezos consistently speaks to shareholders, emphasizing long-term shareholder value, Pinduoduo frames its vision around “intrinsic value.”

This choice of words is far from accidental. By focusing on intrinsic value, Pinduoduo signals that its priority lies solely with building the business itself. Unlike Amazon, which aims to align its strategy with shareholder interests, Pinduoduo’s message is clear: they aren’t here to cater to investors or analysts. In their very first letter, they openly state that they don’t want distractions—they want to focus on executing their business strategy without external pressures.

This subtle distinction helps explain why Pinduoduo provides so little information compared to other public companies. It’s not negligence; it’s deliberate. They set the tone from day one: “We’ll build this business as we see fit, and you’re welcome to come along for the ride.” It’s a bold approach, one that prioritizes operational focus over investor appeasement.

Remarkable Consistency: Sticking to the Script Since Day One

A few months ago, Pinduoduo’s earnings call sent shockwaves through the investment community.

No dividends. No buybacks. And an almost defiant message: they couldn’t give a flying flamingo about what investors want to know or hear. At the time, I suspected there might be some behind-the-scenes nudging from the Chinese government—a theory later confirmed.

But honestly, should any of us have been surprised? Pinduoduo practically spelled this out in their very first shareholder letter. They explicitly stated their intention to shield themselves from outside pressures, ignore short-term stock market volatility, and focus solely on building the business.

This unwavering focus on the business—while admirable in its clarity—naturally fuels suspicion. After all, when a company cares so little about appeasing investors, the skeptics start whispering about fraud.

What they have done is stick religiously to the playbook they published on day one, for better or worse. Of course, this laser focus on the business—coupled with a lack of the transparency we investors and analysts crave—naturally raises suspicions.

The Art of Saying Little: A Common Strategic Trade-off

As far as I understand, this is the main reason why some people label Pinduoduo (or “Pindudo,” as the fine connoisseurs and experts on the topic sometimes like to call them) a fraud. But let’s flip the script for a moment: from their perspective, it makes perfect sense. Pinduoduo has always been a latecomer in its markets, going up against entrenched giants. By saying as little as possible and disclosing only the bare minimum, they gained a competitive edge. And let’s be honest, that’s exactly what anyone in their position should do.

I’d be lying if I said I didn’t use the same playbook. My business has no outside investors, so I don’t have to disclose anything. And frankly, I’d be thrilled if my competitors were listed companies—they’d be forced to answer all the nosy questions I’d love to hear answers to. Transparency is great when it’s your rivals who have to do the disclosing.

Even Warren Buffett, the investor everyone reveres, is not exactly a beacon of openness. He routinely applies for exemptions to avoid disclosing his stock moves in 13F filings. And let’s not forget—Buffett doesn’t even hold quarterly earnings calls. How untransparent is that? Does anyone accuse him of fraud? Of course not.

What Pinduoduo is doing isn’t unnatural—it’s just rare. Almost no company dares to pull it off quite like they do. And when you think about it, secrecy isn’t always suspicious—it’s often strategic. Look at Amazon with AWS. They didn’t announce to the world they were building a cloud business. Instead, they worked quietly, and by the time competitors realized what was happening, Amazon had already built an unassailable lead. Pinduoduo is playing the same game: focused on building, not broadcasting.

Consistency in Their Business Development

Reading through Pinduoduo’s earnings releases since 2018 feels a bit like flipping through a minimalist’s diary: sparse on detail but unwavering in theme. The company has made it abundantly clear—repeatedly, in fact—that they’re playing the long game, completely indifferent to external opinions. Phrases like “prepared to make short-term sacrifices,” “investing in ecosystem vibrancy,” and “building a healthy and sustainable ecosystem” pop up so often, you’d think they’re copy-pasting from a company mantra. Sure, the buzzwords occasionally shift—one quarter it’s all about R&D, the next it’s agriculture, then high-quality development—but the message stays the same: we focus long-term, don’t bother us.

Take Notice When They Finally Speak

So Pinduoduo is essentially a masterclass in saying very little—but when they do speak, it’s worth paying attention. Take their core value of “self-reflect and take responsibility when problems arise instead of blaming others.” It sounds like corporate fluff, but something remarkable happened in their last earnings call.

While the call was wrapping up in their usual minimalist style, out of nowhere—and without being asked—they publicly criticized themselves. Management admitted they had messed up the government subsidies for electronics, a mistake they acknowledged would cost them both now and in the future.

Since Q3, the release of additional macroeconomic support policies has opened up new opportunities, while also presenting challenges. The Chinese domestic market is highly dynamic, which is characterized by constant changes, diverse business models and intensifying competition. However, our team's gradual aging and lack of capabilities might cause us to miss out on some macro opportunities, especially when facing new or evolving situations.

For instance, multiple macro policies introduced this year have brought significant support to industries and field consumer demand. However, our team was unable to fully leverage this macroeconomic shift due to the limitations in our operation experience solely as a third-party platform. Consequently, to stay competitive with similar products, we had to incur much higher cost than peers, which inevitably affects our profitability now and in the near future.

PDD Q3 2024 earnings call

What’s striking is that they could’ve easily skipped over this, ended the call, and no one would’ve been the wiser. But they didn’t. It’s rare to see management openly admit mistakes, especially when it’s not dragged out of them.

Summary first part:

Pinduoduo is, without a doubt, a paradox wrapped in an enigma, sealed with a “none of your business” stamp. You have a company that operates with a level of secrecy that could make even the CIA blush. They disclose just enough to meet legal requirements, shrug off investor questions like they’re irrelevant, and stick to a “you’ll get what you get” communication style—fueling inevitable suspicions of fraud.

From the very beginning, Pinduoduo has stuck to a consistent narrative: “We don’t care about stock prices, and we don’t care what you think.” It’s like they handed investors a roadmap in their very first shareholder letter and said, “Here’s how we’ll ignore you for years to come.” Instead, their focus has been singular—building the business and tackling problems everyone else deemed impossible. If their communication is to be believed, they’ve done exactly what they promised.

Yet, the same traits that make them fascinating also stoke doubts. Their secrecy, combined with their apparent indifference to external validation, naturally leaves a lingering question: could it all still be a fraud?

Is the revenue real? What do the competitors say?

Let’s not just focus on what Pinduoduo is saying. Believe them or not—it’s your call. Honestly, none of us knows if they’re telling the truth. I even invited them over for coffee at my place to get the inside scoop. I promised German cookies with it, but oddly, they never returned my calls. So instead of trying to stare directly into the black hole of their disclosures, let’s try something different: reflected light. Indirectly illuminate their business operations by looking at what their competitors and partners are saying or doing. After all, if this whole operation were a fraud, you’d expect their rivals to roll their eyes, chuckle, and move on. Spoiler: they’re not.

Remember Colin Huang’s philosophy? He talked about carefully studying business models, identifying gaps, and then methodically exploiting them. That’s how he managed to poke holes in the seemingly bulletproof moats of giants like Amazon, Alibaba, and JD.com. If Pinduoduo were all smoke and mirrors, competitors would have shrugged them off like a bad PowerPoint presentation—oh, wait, what am I saying? Amazon is famous for not using PowerPoints! But that’s not what happened.

Instead, Pinduoduo has grown so big it’s scared the life out of the competition. Not long ago, they overtook Alibaba to become the biggest Chinese e-commerce company by market cap. They’re sitting on so much cash, they could buy JD.com outright. Meanwhile, Alibaba and JD.com have been caught with their pants down, scrambling to adapt Pinduoduo’s low-price model while helplessly watching their market shares vanish into thin air.

Remember when Colin Huang said a company should focus on solving the hardest problems? Pinduoduo took that advice and ran with it—straight into the heart of Amazon’s territory. While others were cautiously rolling out cross-border e-commerce in places like Southeast Asia, Pinduoduo decided to bypass the warm-ups and take on Amazon directly in its own backyard. Pinduoduo achieved in just 2-3 years what Alibaba couldn’t pull off in over a decade.

And guess what? The same Amazon once thought to have an “unbreachable moat” is now feeling the heat. Pinduoduo’s bold approach has forced Amazon to scramble, rolling out their own low-cost initiative Amazon Haul just to compete. If Pinduoduo were faking it, Amazon wouldn’t have even blinked. But the reality is clear—big players are scrambling, market shares are shifting, and Pinduoduo is selling goods in jaw-dropping quantities.

Say what you will about their transparency, but at least the business itself is undeniably real. You can’t fake scaring the pants off Amazon, Alibaba, and the likes. Pinduoduo is doing real business, selling real products, and giving a serious headache to giants that once seemed untouchable. That much is clear.

But here’s the lingering question: could they still be faking the books? After all, it’s entirely possible to run a massive operation while burning cash faster than a rocket launch. Dressing up huge losses as profitability isn’t exactly a new trick. So, how do we figure out if the earnings are real? And what are others close to Colin Huang and Pinduoduo saying?