Pinduoduo: too cheap to ignore?

A little about Pinduoduo:

Pinduoduo Inc. is a major e-commerce platform in China. It is well known for its rapid growth and innovative approach to online shopping. Founded in 2015 by Colin Huang, the company differentiates itself from traditional e-commerce giants through its focus on interactive shopping experiences, particularly its "team purchase" model. This model allows users to form groups with friends and family to buy items at discounted prices, leveraging social interactions to drive sales and user engagement. Pinduoduo initially gained popularity by focusing on agricultural products, connecting farmers directly with consumers. This reduced costs and improved efficiency in the supply chain. In the West we know it more for their Temu Platform.

The business of Pinduoduo (PDD) has key several key areas:

• Core E-commerce Platform: This is the central part of PDD's business. Offers a wide range of products ranging from groceries and fresh produce to electronics, apparel, and household items. The platform's success is built on the social group buying model, gamification, and particularly appeals to price-sensitive consumers and those in lower-tier cities in China. Revenue is primarily generated through online marketing services for merchants and transaction fees.

• Duoduo Grocery: This is PDD's community group buying service for groceries and daily essentials. Launched in 2020, it allows users to place orders online and pick them up from designated collection points in their communities the next day. This service has rapidly expanded PDD's reach into the fresh produce and grocery market, competing with established players in the space by focusing on affordability and convenience.

• Temu: Temu is an international e-commerce platform launched in 2022. The Temu platform extends the group's business model to markets outside of Chin, targeting a global customer base. As above, Temu adopts a similar approach of offering a vast selection of goods directly sourced from manufacturers at highly competitive prices, often utilising a model where goods are shipped directly from China to international consumers. a global customer base.

What do the Financials/Valuation look like:

The stock price is pretty much flat since July 2020 levels despite revenues increasing more than 6-fold in that time and achieving a FCF CAGR over the last 5 years of 52.24%. It trades at 2x EV/S and at 9x forward earnings. EV/EBITDA Multiple has compressed to 6.8x NTM EV/EBITDA. They do have a Net cash position with $45B in cash and only $1.45B Debt Top line growth expected to be in the 20% range next 2 years and then 10% year after. With continued bottom line growth ensuring a PEG of <1. Clearly there is a big delta between the underlying financial performance and the stock price for the last few years, one would suspect the chasm between the two has to close at some point.

Technical Analysis:

Stock has been trading in the 90-160 trading range for last 18 months. At the time of writing, stock is trading at $109. Recently 90 level was re-tested where I did add. I am watching for 200SMA (~$115) to flip to support plus nearer term Moving Averages to flip above Longer term moving averages. RSI is only 55 (not overbought)

Risks:

It is an ADR (although domiciled in Ireland), so the risk of delisting is always there.

There are concerns about whether their cash is real. Of course, their financial statements are audited. This is done by Ernst and Young but given many investors have had issues with China ADR’s in the past there is real Angst/Apprehension. Personally, I would like to see them return capital to shareholders which would go a long way towards addressing this.

Temu is likely to be significantly impacted by tariffs especially if they end up being higher than the current 30%. Alongside this, the removal of the de minimis exemption for shipments under $800 is very negative for $PDD. This will impact margins and the bottom line.

Summary: A major e-commerce platform operating in China and Worldwide, showing growth that is divorced from its valuation. These two must converge at some point. Their founder is a Buffett/Munger disciple and plays Long-Term games. I would like to see them return some capital to shareholders via buyback or dividend as that will increase confidence in the stock. I own in my PA at an average of ~$115, initiated at around 120 and added more recently. I think PDD stock is too cheap for the achieved and projected growth. A re-rating is probable. Would not surprise me if this trades at $160-180 in next 12 Month. Earnings are being reported on the 27th of May. I will post a summary of these.

Thanks for reading.