Longriver Partners Fund: Pinduoduo ($PDD) Investment Case – Q2 2024
Investment Highlight: Pinduoduo ($PDD)
Longriver Capital Management provides an in-depth analysis of Pinduoduo, a recent addition to their portfolio, trading at 11x current year earnings.
Business Overview
- Chinese e-commerce company with nearly a billion users in China
- Described as a “combination of Costco and Disneyland” – value-for-money and entertainment combined
- Operates Temu for international markets
Market Position
- Entrenched in daily lives of Chinese consumers
- Expanded from selling cheap goods to offering leading brands like Apple, L’Oreal, and Dyson
- Gaining market share from incumbents Alibaba and J.D. in China
- Temu rapidly expanding in international markets, despite controversies
Competitive Advantages
- Consumer-to-Manufacturer (C2M) Model:
- Aggregates consumer demand into limited SKUs
- Direct factory orders secure lowest prices
- Scale and Data Advantage:
- Operates at extreme scale online
- Uses algorithms to power product feed
- Low-Cost Structure:
- Asset-light model similar to eBay
- Relies on third parties for fulfillment
- Consumer Trust:
- Rewards good quality products with more traffic
- Penalizes poor quality with ‘no questions’ refunds and fines
Growth Runway
- Domestic Market:
- Continued market share gains in China
- Urban consumers trading down, rural consumers trading up
- International Expansion:
- Temu expanding rapidly in overseas markets
- Potential to replicate success in new markets like Europe and Japan
- Product Category Expansion:
- Potential to attract more established brands as scale increases
Market Dynamics and Opportunities
- Leveraging China’s industrial overcapacity to offer low prices
- Keeping a tight lid on global inflation post-COVID
- Potential to improve quality while maintaining low costs through innovations
Valuation and Expected Returns
- Trading at 11x current year earnings
- High growth and improving profitability despite heavy investments
- Operating margins widened from 9% in Q2 2021 to 30% in Q1 2024
- Asset-light model: operating assets increased by just 21% while revenue and operating income grew 4 and 13 times, respectively (Q2 2021 to Q1 2024)
Other Key Points
- Polarizing company: entrenched in China, controversial overseas
- Secretive nature and unconventional reporting raise some concerns
- Geopolitical risks, especially for international expansion
- Potential for merchants to struggle with profitability due to platform constraints
- Investment thesis based on mispriced prospects rather than certainty of success
Management Philosophy
- Ruthlessly lean and performance-oriented
- Heavily reinvesting in growth initiatives (e.g., Duoduo Maicai, Temu)
- Plays cards close to the chest due to hyper-competition in China
Click here for the full pro investor letter.
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