In intraday trading on the 14th, the well-known institution Blue Orca issued a short report on Pinduoduo. However, Pinduoduo's share price quickly rose to more than 10 per cent after only a symbolic dive, closing up 11.66 per cent. Before the 15th session, Pinduoduo fell slightly by 2.82%.

According to the latest SEC filings, Hillhouse Capital cleared its positions in the third quarter of 2018, including Baidu, Inc., NetEase, Inc, TripAdvisor and EA.New entrant Pinduoduo, Nike Inc, Apple Inc, Bilibili Inc., Alphabet Inc-CL C, Amazon.Com Inc; greatly reduced more than 90% of BABA's positions, reduced nearly 80% of positions in the JOYY Inc era, and iQIYI, Inc., Facebook and 58.com cut positions by 40% and 50% respectively. The shareholdings of JD.com, Snap Inc, Moody's Corporation and other companies remain unchanged. In addition, Temasek Holdings reduced his holdings of BABA and JD.com in the third quarter.

Source: Futu Securities, Pinduoduo's trend on November 14th

The author believes that a good short report has several key points:1. Detailed data description; 2. Meticulous field investigation; 3. A convincing logical argument; 4. A conclusion that stands up to scrutiny.

So the core of this short report can be divided into the following four points:

-questioning Pinduoduo's submission to the State Administration for Industry and Commerce and SEC documents for exaggeration on the revenue side

-GMV/The number of employees is abnormal. Through the backtracking of the website, it is judged that Pinduoduo conceals the staff cost and the amount of loss.

—Undisclosed related party transactions (involving personnel employment)

—Exaggerate the scale of GMV.

This paper makes a detailed exposition of the above four allegations and tries to interpret them. Welcome to comment and leave a message.

First, the income figures disclosed in the documents submitted to the State Administration for Industry and Commerce (SAIC) and the prospectus do not match.

Before we talk about this issue, we should first look at the ownership structure of the company. The main body of the listing Pinduoduo is the Cayman offshore company, which is wholly owned and controlled by the domestic company through the VIE structure. Blue Orca pointed out that in 2017, Pinduoduo's only Hangzhou Aimi (Hangzhou Amy, good goods) and Shanghai Xunmeng (Shanghai Xunmeng, founder's early-rising game company, later Pinduoduo) had real income, both of which made up 100 per cent of the main income of the listing.

In 2017, there were two companies with actual income, and the figures disclosed in the prospectus for the State Administration for Industry and Commerce (SAIC) and the SEC were quite different.

In some way, Blue Orca looked up the annual enterprise report of the State Administration for Industry and Commerce (SAIC) and found that the total revenue of the two domestic companies (Xunmeng, Amy) was 1.246 billion yuan in 2017 (figure), while the total revenue of the VIE architecture company disclosed in the prospectus was 1.951 billion yuan (figure). Under the premise that other Pinduoduo's other companies have no income, the difference in income between the two is 705 million yuan, a difference of 36 per cent.

Blue Orca wrote in the report: "the documents submitted by enterprises to the SAIC are intended to be subject to state supervision and supervision, and these financial statements are required by law to be accurate. Of course, filing documents will not be used to determine the tax base of the enterprise. At the same time, Blue Orca strongly said:To say nothing of the ludicrous position that a company is worthy of investment if it submits false tax returns to cheat the taxman.

For this accusation, investors who have knowledge of past cases of shorting Chinese stocks should be no stranger. Around 2010, Chinese stocks suffered a wave of crazy short selling, and most institutions used SAIC documents and SEC documents to compare and look for differences and opportunities.

The short selling of Blue Orca is based on the difference between the two documents, and there are two issues involved:

1. The purpose of industrial and commercial registration is the annual inspection of enterprises, which depends on the situation of registered capital, not on the actual examination of financial figures, and the audit conditions are loose. That is, because the audit report submitted is not directed at the public, so its level of importance is very low, compare an unimportant report with the SEC report, the basis itself is not the same.

two。 Differences in norms. Prior to this, there have been a number of air stock case, based on industrial and commercial data and USGAAP differences have been rejected, because the rules are not the same. Blue Orca does not unify the two accounting standards, the degree of confidence will be reduced.

In 2011, in the case of Shengshi Dragon, which was shorted in the United States, SEC rejected the prosecution's request, arguing that the discrepancy between the two documents did not prove that the data submitted by the company to SEC was false.

In addition, it is illegal to obtain the company's financial data from the SAIC, but it does not affect the authenticity of the documents. Personally, since the two documents (SEC and SAIC) are based on different accounting standards, to prove that the SEC document is false, Blue Orca must convert to the premise of consistent standards and find out exactly which subject has significant differences. at the same time, it must prove that SAIC's data are true and SEC's data are false, and Blue Orca needs to do more to improve its credibility on this project.

Second, hide labor costs and reduce losses

The entry point for Blue Orca is the numerical exception of GMV/ employees. Based on the 1159 employees disclosed in the prospectus by the end of 2017, the per capita GMV reached 167 million yuan, while the industry average was 53 million yuan, far exceeding BABA and JD.com. The abnormal figure indicates that there are hidden employees off the balance sheet.

Blue Orca found through the history page of the website that in January this year, the page showed that the company had more than 5000 employees, and then through the third-party company review website, Pinduoduo's average salary was about 24000 / month. Using the time-sharing plus total method, Pinduoduo calculated that the hidden labor cost in 2017 was 489 million yuan, resulting in a total labor cost of 716 million yuan in 2017.

Comment: if the data of 5000 people published on Pinduoduo's official website is reliable, then Blue Orca's allegations of human costs are more credible. Many companies will reduce costs through off-balance-sheet adjustment, so as to increase profits or reduce losses, which investors and enterprises understand each other in the new economy industry. Take Tencent China News as an example, the annual per capita cost of the enterprise is more than 800000 yuan, which includes a lot of outsourcing costs, and outsourcing personnel are not included in the company's employees' statistics. But in this case, Pinduoduo did not disclose the cost record, which will become a hidden danger for the company.

III. Undisclosed related party transactions

This part of the accusation is consistent with the manpower cost of the second point. Pinduoduo did not mention these companies that may be involved in related party transactions in the prospectus. But BlueOrca found that human resources services between these companies and Pinduoduo are still continuing.

They believe that the company bears part of the labor costs, which should have appeared on the SEC financial statements, but it is not, which will whitewash the operating leverage and operational efficiency of the statements and reduce its losses.

There is nothing to add, the same as the second point, there are pigtails to catch.

Fourth, exaggerate the GMV

1. Double accident (Double Contingency) leads to false height of GMV

To put it simply, when a user makes a purchase but has not made a payment, the order expires within 24 hours, and the platform will GMV the transaction, which is the first accident that BO believes. The second is the user initiated the order, if not successful within 24 hours, the order will also be invalid, the recorded GMV is also accidental, the two accidental together, making GMV "inflated". If you have a shopping experience, this piece will be easier to understand.

In fact, the general definition of GMV is the amount of an order issued, regardless of whether the order is finally closed or not, some orders issued without payment or cancellation are counted as GMV. Compared with BABA and JD.com, after placing an order and before completing the confirmation of receipt, the process includes snapping unpaid, canceling the order, returning goods and other behaviors, and the amount involved is included in the GMV.BO mentioned the double accident of spelling many things, which is not substantially different from the definition of GMV understood by many investors. There is no argument for specific comparable figures. This "accident" also exists for other e-commerce companies, which is somewhat untenable.

2 and 3 points can be combined. BO deduces that the actual GMV is 43% and 34% lower than the disclosed GMV by charging 0.6% transaction fees and commission disposal costs for the third payment platform.

The formula is simple. BO calculates that within 15 months ending 18Q1, GMV is 117.4 billion yuan, while Pinduoduo announces it is 207.3 billion yuan.

Here, I think that the result obtained by BO by paying commission to be collected and disposal fee can be considered to be close to Pinduoduo's actual transaction amount, while equating the actual transaction amount with GMV, whether investors or e-commerce employees, has not reached a consensus in this article for a long time. GMV as an important platform e-commerce evaluation index, the concept and definition is not like this, there are differences and moisture can be understood, because a close look at BABA, JD.com, far Amazon.Com Inc, Ebay are based on this as a reference value, there is nothing wrong.As a result, the accusation does not seem to exceed any market expectations.

The last point questions the 0.6 per cent commission charge for merchants, and BO believes that according to US GAAP, revenue should not be recognized if it is charged only on behalf of a third party without acting as the principal. Pinduoduo's approach can increase the scale of his revenue, although it does not create profits, but can achieve beautiful statements and raise the stock price. The accounting attitude appears to be very "aggressive".

E-commerce brushing behavior is no longer an industry secret. Compared with self-owned e-commerce, platform brushing has less motivation and temptation, and pays more attention to the service to merchants and the construction of a level playing field. Puduo GMV must have moisture, but consumers, investors and analysts all have their own understanding of moisture. BO wants to prove that Pinduoduo GMV moisture exceeds market common sense, and the argument appears to be insufficient.

The last part of the short report is about the valuation of Pinduoduo. There are not too many personal comments here, because everyone can have their own views on the valuation and can be logical.Based on the previous discussion, BO adopts the valuation evaluation system for Pamp S and P/GMV.

BO decided that the documents submitted to the State Administration for Industry and Commerce by Pinduoduo in 2017 were accurate, so it reduced its income by 36% to 40%. According to BABA's 7.5x (18e) Pmax S multiple, Pinduoduo's current share price is $7.10.

P/GMV 's method is the same, according to the previous assumption, cut the current GMV in half, press 18e P/GMV=0.29x, the valuation is $10.06, and then because of the 20% discount at the corporate governance level, the price is $8.05.

On the whole, the short report of Blue Orca has few bright spots, and it is not even as good as case, which has previously shorted Samsonite, it is not an excellent short report, and lacks convincing arguments and deliberative logic on key points. The article did not touch the essence of Pinduoduo's business model and main business, but launched its own guess in several aspects. As described in this paper, the hiding of labor costs and related transactions are more likely to go wrong, while the more important first and fourth points are not strong enough.

For Pinduoduo, a quick response is a very positive attitude, but the release of Q3 financial results next week, the company is in a quiet period to respond immediately. Companies that have been established for more than three years will face more problems and challenges, and more standardized corporate governance is very important.

(the charts in the article are all from the above short report)

By Phil Newell / Chalie