Pinduoduo has abandoned its most profitable business.

I just finished listening to Pinduoduo's earnings call.

01

The management threw out a bunch of buzzwords, including ecosystem, governance, supply chain, as well as the new office building in Xiongan. Chen Lei talked about the intersection of global trade, Zhao Jiazhen mentioned "ten years of sharpening a sword", and the vice president of finance talked about supporting merchants' development.

After sitting through the entire earnings call, the only figure I remembered is this one: advertising revenue, with a growth rate of 3.4%.

Three years ago, this figure stood at 56%.

Pinduoduo's most profitable business, the model of selling traffic to collect advertising fees, has reached its ceiling.

This downward trend has lasted for three years. The growth rate was still in double digits in 2024, slipped to single digits little by little last year, hit 2.5% in the first quarter of this year, and reached 3.4% this quarter, which has almost stagnated.

The rise from 2.5% to 3.4% means a slight rebound, but it is far from a reversal, and the growth rate remains at a low level.

The revenue growth rate of this quarter is 8%, which missed market expectations. The gap is entirely caused by the advertising business; the transaction service business performed steadily, while the advertising business almost stopped growing, dragging down the overall performance.

Why did the advertising business stall? We need to present the formula of this business.

Advertising Revenue = Traffic × Monetization Rate

Traffic has peaked, and Pinduoduo itself has lowered the monetization rate. When both factors hit the ceiling, the advertising business is doomed to stagnate. This is a result that has gradually taken shape over the past three years.

There is no need to elaborate on the traffic side: with a user base of 900 million, all potential users that could be acquired have already joined the platform. The remaining competition is only for existing stock users, where one party gains more at the expense of others.

The monthly active users of Douyin Mall, a direct competitor, has nearly tripled in the past year, and the revenue from selling traffic is visibly diverting.

On the monetization rate side, the slowdown is driven by Pinduoduo's own downward adjustment, which is the most noteworthy point.

In 2024, the platform launched a ten-billion-yuan reduction program, cutting the technical service fee from 1% to 0.6%. What does that mean? For a 100-yuan transaction, the platform used to take 1 yuan as commission, but now it only takes 0.6 yuan, returning 0.4 yuan to the merchant.

Promotion fees are refunded, and the store deposit is reduced from 10,000 yuan to 500 yuan.

On August 1 this year, even the "refund-only" rule was revised: if a buyer wants a refund after signing for the goods, the platform will no longer issue a one-click ruling, and will give merchants 36 hours to negotiate with the buyer on their own.

This series of measures is officially called the "100-Billion-Yuan Support Program".

Put it in plain terms: Pinduoduo no longer intends to extract advertising fees and commissions from merchants; it would rather leave that money in merchants' pockets to help them survive and operate sustainably.

Of course, the concessions are not free: litchi merchants in Guangdong applied traceability codes, and their repurchase rate rose from 15% to 30%. Only when merchants survive can the platform continue to earn revenue from transactions.

What evidence do you need to prove this? I think the answer lies in the earnings call.

This quarter, an analyst from Bank of America asked if the improvement of the merchant ecosystem would boost merchants' willingness to invest in advertising.

Zhao Jiazhen went back to the topic of merchant ecosystem and talked about a lot of long-term accumulation, without answering this question directly.

Looking back at the first quarter earnings call, when someone asked why the advertising growth rate dropped so sharply, the management barely mentioned the word "advertising" in their response.

The marketing expenditure this quarter accounts for 26% of total revenue, the same proportion as last year. A company with a high-margin cash cow business would never react in this way.

The market regards this as a temporary failure, and keeps asking from time to time: when will the cash cow resume its high growth? Pinduoduo's answer is: we will not fix it anymore.

To put it bluntly, the market is waiting for the old business to recover, while Pinduoduo is preparing to switch to a new growth path. This is the core logic behind all its actions over the past three years, including giving concessions to merchants, cutting commissions, and revising rules.

02

However, even though the advertising business has stalled, Pinduoduo's total profit has not decreased.

Its net profit reached 27.2 billion yuan, cash flow hit 25.7 billion yuan, up 19%. While the book profit declined, the actual cash inflow increased. The two financial statements do not contradict each other, as they reflect two different things.

Net profit is the amount earned on the book, while cash flow is the actual money in hand. The book profit is interfered by many non-operational factors, but the cash in hand is real and solid.

Why did net profit decline? In the final analysis, it is the cost of transformation, which can be broken down into three parts.

The first part is investment.

Administrative expenses rose by 53%. The compliance team, the rule management department, and the large number of employees in Xiongan all require capital investment.

R&D expenditure also increased by 40%. The money is not spent in vain: Pinduoduo is transforming from a pure platform operator to an ecosystem builder, and all the profits it earns are reinvested in merchants and the supply chain.

The platform claims that its support program has gone beyond the investment period and entered the return period.

My understanding is:

Only when merchants have stable operations can they have the confidence to continue investing on the platform. Pinduoduo uses this logic as its response to the market's doubts.

The second part is off-balance-sheet items.

There is an item in the income statement called net other income/loss, which recorded a loss of 7.4 billion yuan this quarter, while it was still profitable in the same period last year.

The financial report did not explain what this 7.4 billion yuan loss refers to. The market speculates that it may be the decline in the fair value of its investment portfolio, or the reserve for potential regulatory fines, and other similar items.

In fact, the most disturbing part of this item is that no one knows whether it is a one-time accident or a normal recurring cost.

Purchasing office buildings will not be recorded as a one-time loss, and even if there are regulatory fines, the amount will only be at the level of several billion yuan. The rest of the loss is more likely to come from the fluctuation of financial assets.

No one knows whether this kind of loss will appear every quarter, and since the financial report does not give an explanation, the market can only make guesses.

Fortunately, the company has sufficient cash on hand, and it earned 13.5 billion yuan purely from interest income and wealth management products, which hedged part of the loss. Excessive cash holdings have become the source of profit fluctuations, which is an old point of criticism from the market.

The third part is tax. Income tax reached 6.1 billion yuan, a significant increase compared to last year.

After accounting for these three items, you will find that the operating profit actually increased by 8%. The book net profit is eroded by investment, asset value fluctuations and tax. The data mentioned here refers to the GAAP caliber.

If one-time items such as stock-based compensation are excluded, the Non-GAAP caliber net profit is 28.5 billion yuan, which is also down 13% but slightly higher than the market expectation of 28 billion yuan. Both calibers show a decline, but the decline is caused by investment and value fluctuations, not the deterioration of the core business.

To evaluate whether a company is in good condition, you should look at its operating profit and cash flow.

So where did the growth momentum come from?

Back to the formula: the advertising business has no room for further growth. The transaction service business is rising rapidly, with transaction volume multiplied by service fee rate increasing by 13%.

In the first half of the year, the cumulative transaction service revenue reached 111 billion yuan, surpassing the advertising revenue of 107.6 billion yuan for the first time.

Pinduoduo's profit logic has quietly changed: it no longer makes money by selling traffic, but by providing services for transactions.

This new growth driver is completely different from the advertising business: advertising brings easy passive income, while transaction service requires active operation. The platform takes charge of payment, fulfillment and cross-border logistics for merchants, and collects service fees while bearing corresponding costs.

The gross margin of transaction services is not as high as that of advertising, but it grows in line with transaction volume, and the platform earns service fees proportional to the total transaction value.

This revenue also includes several components: domestic commissions, Duoduo Grocery, and Temu cross-border business. The company does not break down the specific figures, but the vast majority of the incremental revenue comes from cross-border business.

Switching the core growth driver has a price, which is the short-term fluctuation of book profit, but the underlying support is cash flow, which is extremely solid. The operating cash flow reached 25.7 billion yuan, almost equal to the net profit, which means every yuan of income is real cash inflow, and the account is very clean.

Pinduoduo's cash flow also has a unique mechanism that other platforms cannot replicate:

Collect payment first, then deliver the goods. After the buyer places an order, the money goes into the platform's account first, and the money will be transferred to the merchant only after the buyer confirms the receipt of the goods.

With this mechanism, there are tens of billions of yuan of transit funds from merchants lying on the platform's account every day, so the cash flow is naturally very abundant.

Then what did Pinduoduo do with the money it earned?

It launched PinMu, a self-operated brand, with a first-phase capital injection of 15 billion yuan, and plans to invest 100 billion yuan in the next three years.

In Xiongan, it purchased office properties and set up two industrial service centers, with 4,000 full-time employees. Two 100-billion-yuan level investments: one is to give concessions to merchants, the other is to develop its own self-operated brands.

The money is also invested in building infrastructure that other companies are unwilling to develop.

The "free shipping to villages" project has been carried out for half a year, and 177 villages in You County, Hunan have built village-level service stations. The "E-commerce Westward" project reduced the logistics cost from Zhongshan to Gansu from 40-50 yuan to 10 yuan. Pinduoduo is investing in these unprofitable businesses one by one.

As you can see, this company spends all its available capital on exploring this new development path.

03

The question is: after all this money is spent, will the market recognize this new logic? It depends on how the market prices this company. The answer came out on the night the financial report was released.

I checked specifically: on the evening of August 24, Pinduoduo's US stock once fell nearly 5% in pre-market trading, then rebounded, and rose as much as 5% to $92.91 per share.

It fell first because revenue missed expectations, then rose because profit exceeded expectations. In the same night, the market gave two completely different judgments on this company.

On the morning of the same day, Chinese concept stocks in the Hong Kong market generally fell, with the Hang Seng Tech Index down 3.61%, but Pinduoduo stood out against the downward trend.

This reversal is partly due to the sharp fall last quarter.

In the first quarter, profit dropped sharply, with EPS at 9.51 yuan, far below the market expectation of 16.56 yuan, and the stock price fell 10% on the day the financial report was released.

Since then, analysts have been continuously lowering their expectations. The expected EPS for this quarter was cut from 20.85 yuan three months ago to 18.35 yuan before the earnings release; the actual figure is 19.32 yuan, which exceeded expectations but is still 12% lower than the same period last year.

The market is not suddenly bullish on it. It is a typical scenario where expectations are first hit to the bottom, and then slightly exceeded by the actual performance. The market does not dare to give it a high valuation, but also does not want to underestimate it, which is the market's real attitude towards Pinduoduo.

This measurement standard is still the old formula.

Advertising Revenue = Traffic × Monetization Rate. According to this formula, a single-digit growth rate is a failure, so the stock price was hit first when revenue missed expectations.

But the fact that profit exceeded expectations shows that the company is still highly profitable, so the stock price rebounded. The market's pricing has never been separated from the old cash cow business.

Pinduoduo's stock price is priced based on this old standard.

The price-earnings ratio, which refers to how many times the annual profit the stock price represents, is now less than 10 for Pinduoduo. The cash and short-term investment on its account totals 456.4 billion yuan, almost half of its market value.

When you buy its shares, half of your money pays for the e-commerce platform business, and the other half pays for its cash deposits in the bank. Measured by the old standard, this price is not expensive.

Among its peers, Alibaba, JD and Amazon all have higher P/E ratios than Pinduoduo. For a still highly profitable company, the market has given it the lowest valuation among all large e-commerce platforms.

Leaving aside whether it is cheap or not, this at least shows one thing: the market has not priced in Pinduoduo's future growth, only its current performance. The market does not dare to give it a high valuation, because this company cannot provide clear certainty.

It does not provide performance guidance, does not pay dividends, and does not carry out share repurchases. It meets all three points.

During the earnings call, someone asked about the revenue outlook, the vice president of finance talked a lot of empty platitudes, such as the growth rate of rural retail is faster than the overall market, but did not give a specific figure.

In the past eight quarters of financial reports, the stock price fell five times and rose three times, the probability of making the right prediction is less than 50%.

In August 2024, its profit missed expectations, the stock price fell 28% in a single day, and the market value evaporated by 55 billion US dollars.

The market's conditioned reflex to its financial report is to sell first. The market hates unclear accounts, but Pinduoduo's accounts are deliberately kept unclear. This company never intends to play by the rules of the capital market.

Its founder Huang Zheng holds 24.8% of the shares. In 2021, he gave up the super voting right that one share represents ten votes, and the company changed back to the one-share-one-vote structure.

Some investors revealed recently that Huang Zheng went to the United States to pursue a doctorate degree in life science. Since the company's IPO, he has never sold a single share. The major shareholder does not cash out, the company does not repurchase shares, and the management is even unwilling to explain the slowdown of advertising growth.

This combination of operations is unique among Chinese concept stocks. The market accuses it of being arrogant, and it does not even bother to respond to those accusations.

The market prices it with the old formula, but Pinduoduo is operating according to the new formula.

The new formula includes supply chain construction, self-operated brands, and overseas markets, none of which have produced convincing performance figures yet.

PinMu has just started, and the management itself admits that its