Source: Yaya Hong Kong Stock Exchange

Author: kyle

1. Pinduoduo of the Self-Destructing Ghost Story

inasmuch $PDD Holdings (PDD.US)$ Previous performance has continuously exceeded expectations. The market's expectations for Pinduoduo's performance have always been very high, but the valuation is very low, especially in the first quarter, and the recent trend where stock prices tend to fluctuate, the market is betting even more heavily on this performance.

In terms of positions, according to the 13F document, a total of 147 institutions with a size of more than 0.1 billion US dollars or more opened positions in Pinduoduo in the second quarter, an increase of 50% over the previous month, and 20% more chose to increase their holdings, reaching 269. In other words, more than 400 institutions bought Pinduoduo in the second quarter.

Some Chinese institutions that have already taken heavy positions in Pinduoduo have also placed larger bets. Jing Lin increased its holdings by about 1.57 million shares, and the increase was more than 0.2 billion US dollars. Tairen Capital bought nearly 0.25 billion US dollars, and Gao Yi Asset increased its holdings by about 0.06 billion US dollars. Sequoia China added nearly 14.9 million shares in the second quarter, worth 2 billion US dollars of Pinduoduo shares.

Why did so many institutions choose to buy in the second quarter $PDD Holdings (PDD.US)$ what?

First, the market expects domestic websites to continue to encroach on Taobao and JD's shares. Especially when the market sees that Taobao and JD's revenue have stagnated, it is naturally thought that Pinduoduo's performance may not be bad, because Pinduoduo is mainly stealing these two businesses.

Although Temu's political risk has always been there, the Temu portion has not been valued, and the market usually sees this part as an option surprise. In addition, with the major trend of shareholder returns starting this year, everyone speculates that even if Pinduoduo has no shareholder returns this year, then after the competitive landscape stabilizes in the next year or two, there should be corresponding shareholder returns?

However, at this performance meeting, Pinduoduo's management's self-destructive statement suppressed stock prices, completely ignited market concerns, and turned Pinduoduo from a good story into a ghost story.

The management first vaguely stated that profits would decline, and did not clearly explain whether profit growth would decline or whether profit amounts would directly decline. This left the market feeling confused, but more importantly, that profits would decline in the third quarter.

Another is that as of the second quarter, Pinduoduo held 284.9 billion in cash and cash equivalents. Among US stock companies without shareholder return plans, Pinduoduo's cash reserves were almost the largest, yet management said that there will be no shareholder returns for the next few years, which is also very contrary to market expectations. It can be said that Pinduoduo's management has broken through all the points where the market had high expectations.

There are two potential reasons why Pinduoduo's management said this.

First, domestic competition is intensifying, Pinduoduo, Taobao, $JD.com (JD.US)$ They are all increasing subsidies to merchants. Investors are worried about whether the alpha of Pinduoduo's domestic website has come to an end? Another point, without dividends, will the capital expenses of domestic main sites and overseas Temu be increased, how large is the capital expenditure, and how long will it take to maintain the expenses?

The first concern stemmed from revenue from the second quarterly report. Pinduoduo's advertising revenue in the second quarter was 49.1 billion yuan, up 29% year on year, and 56% in the previous quarter. Sellers generally predicted a 33% increase in the second quarter, and the expectations given by some believing buyers were higher. The transactional revenue for the second quarter was 47.9 billion. Previously, the market expected to be around 50 billion. In other words, both Pinduoduo's main site and Temu's revenue performance fell short of expectations.

Do you have to say how bad this financial report is? Not at all, but under the pessimistic guidance of management, the market amplified concerns that the growth of the main site and Temu peaked and fell back.

On the one hand, the growth rate of the online retail market fell short in the second quarter. The year-on-year growth rate in the first quarter was between 11-12%, and the year-on-year growth rate in the second quarter fell to between 5-6%. The weakening of the macro market is increasing its impact on the e-commerce market. Although Pinduoduo still outperforms Taobao and JD, it is rumored that Douyin's growth rate has also clearly slowed in the past two months, and the overall market performance is not optimistic.

Under increased macroeconomic pressure, Pinduoduo in the second quarter was no longer the same as in previous quarters. Even though the macro was poor, it still performed well. Now Pinduoduo's alpha is at an inflection point affected by the macro.

On the other hand, the overall monetization rate of Pinduoduo's main website business advertising+commission was higher than 4.5%, but the year-on-year increase in the monetization rate was significantly narrower than in the previous quarter. At a time when revenue growth and monetization rate increases are slowing down, this causes the market to doubt the high growth capacity of Pinduoduo's main site.

Another reason for the decline in profits is the fear of increased capital expenditure. Although Pinduoduo's cost control in the second quarter was still handled very well. It can be said that pressure brought human efficiency to the extreme, but in the face of increased macroeconomic pressure+competition, it also had to face the problem of increased capital expenditure.

Recently, domestic main website rivals Taobao, JD, and Douyin have all increased their subsidies to merchants, and Pinduoduo is also increasing. Overseas Temu is not only competing with Amazon. According to social media DeeeepValue users, competition between Temu and Shein is also gradually increasing. Temu and Shein both increased ad purchases and mutual lawsuits in August.

Perhaps based on these two potential concerns, Pinduoduo shorted itself, directly unraveled the high expectations but undervalued special pricing, and also started its own ghost story.

As for how Pinduoduo should be assessed next, the capital may choose to wait and see the third quarter's performance. It is necessary to see whether the actual performance is actually pessimistic as stated by management, and doubts about rising rates, so that investors' concerns can be answered. However, looking at this quarter, it can be confirmed that the macroeconomic weakening has begun to affect Pinduoduo's alpha.

2. There are ghost stories every year, but I can't beat Meituan

After the Pinduoduo ghost story began, the second quarterly report was handed over $MEITUAN-W (03690.HK)$ It can be said that it successfully defended Douyin, stopped Douyin, and got rid of concerns that it would be overthrown by Douyin.

Meituan can be said to be one of the most haunted stories in internet stocks. For example, the social security issue in '21 scared the stock price plummeted; Douyin had a strong local lifestyle in '22; Douyin made takeout in '23, and rumored to be hungry to buy? Meituan has had bigger ghost stories every year.

There are two main ones this year. One is that competition in local life is increasing. In July, it was reported that Douyin would increase subsidies and was worried about Meituan's profit margins; second, since Douyin introduced takeout last year, it was rumored that Douyin is hungry for takeout this year. The usual argument is that Douyin is giving more subsidies to merchants, and they have to burn money and grab shares with Meituan.

We have discussed in the previous article. First, let's not forget how Hungry lost to Meituan. The takeout business does not have more Douyin traffic interfaces to reverse Meituan's existing scale effect and compliance rate; in the current macro environment, it is unlikely that it is possible to burn money to grab share. Therefore, not many people have mentioned Douyin takeout recently. The scale of Douyin takeout is still difficult, and it also proves from the side that the delivery side is Meituan's biggest moat, which is not that easy to shake.

This year, with Meituan, $Alibaba (BABA.US)$ , JD is making efforts for instant delivery, and the takeout ghost story has turned into Douyin and Meituan robbing the local instant retail business.

However, it is worth noting that since Douyin does not have delivery capabilities, it chose third-party delivery. In the instant delivery business, it is more of a trading commission, and the biggest cakes are Meituan, Are You Hungry, Dada, etc. that have the ability to deliver. Seen from this perspective, Meituan has a higher limit on the instant delivery business and can receive more orders.

After that, the share of immediate delivery was mainly divided between Meituan and Hungry. According to the current pattern where Meituan accounts for 70% of takeout shares and Hungry accounts for 30%, it is not difficult for Meituan to eat 6-70%. In particular, Ali is being overwhelmed by Pinduoduo. If profits are being prioritized, it is unlikely that Meituan will struggle with Meituan for immediate delivery. Therefore, Meituan will also have many potential points to increase profit margins in the future, such as instant delivery, which does not have a high penetration rate, as well as reducing losses in new businesses and shopping for groceries.

The year-on-year growth rate of Meituan's instant distribution revenue in the second quarter was 13%. Although it is still slightly lower than the order volume growth rate, it can be seen that the difference between the growth rates between the two has narrowed drastically to only 1.2 pct. In particular, the average order delivery revenue is stopping falling, and the profit margin of this business is improving.

It can be said that Meituan has successfully prevented Douyin's attack on takeout and instant delivery. However, in terms of competition in local life, Meituan was indeed threatened quite a bit. This also caused Meituan to drop to more than 300 billion dollars in market capitalization at the beginning of the year, because local life was the main source of Meituan's profit; what exactly is the “profit bottom line” of Douyin and Meituan in terms of business? This is something the market hasn't figured out before, and there are always concerns about local life.

Judging from the second quarter report, the year-on-year growth rates of commission and advertising revenue were 19.7% and 20.1%, respectively. Order volume increased by more than 60% year over year in the second quarter. If we consider the decline in unit prices, the actual growth rate may be between 35-40%, or even higher, which is far higher than the 25% expected by the market.

The operating profit margin of the in-store business has returned to 35%, and the number of active merchants per year has also reached a record high. This proves that Meituan's in-store business has not been impacted, but it cannot be said that Meituan counterattacked Douyin. More so, Meituan and Douyin chose to make money first, rather than simply pressurize prices to grab market share. In other words, when competitors find they can't burn money to grab shares, everyone prioritizes making money.

Of course, we can't judge the end of the competition between Meituan and Douyin just by looking at a quarterly report, but at least now we can see that business profit margins are picking up, and the possibility of further decline is decreasing.

epilogue

Next, Meituan's competitive landscape will be better than before. First, when the core is successful, profit margins are picking up; second, the distribution industry is increasing. Currently, the penetration rate is not high. Ali's Hungry prioritizes profit, and Pinduoduo's main business is still haunted by Pinduoduo. Everyone is inclined to make money first rather than expand violently; and third, whether the new business can reduce losses.

In the second quarterly report, Meituan approved a new repurchase of 1 billion US dollars. Before the second quarter, the repurchase exceeded 2 billion US dollars. The full year's repurchases accounted for about 4% of the total share capital. With such growth+shareholder returns, it was basically the company with the best internet stocks in the second quarter. However, considering that Meituan may go overseas later and increase investment in new businesses, it is less likely that shareholder returns will be increased. At this stage, it is more about growth.

However, Pinduoduo, which is also growing at a high rate, chose to self-destruct investors, and there was no return to shareholders. This is a huge gap in expectations. But don't ignore it either. Pinduoduo's management rarely says anything good, and the growth potential is sufficient, depending on how long it takes for this ghost story to be solved.

Edit/Rocky