On January 21, KeyBanc Capital Markets (“KeyBanc” for short), a well-known Wall Street investment bank, released a report stating that the “10 billion subsidy” campaign of Pinduoduo (PDD.US) has advantages such as “unlimited direct subsidies, simple rules, complete categories, and the largest number of subsidized products,” which has effectively promoted the increase in the repurchase rate and GMV growth.

According to the report, since Q4 2019, both Ali and JD have adopted follow-up strategies for the “10 billion subsidy” campaign launched by Pinduoduo, which has further intensified competition in the Chinese e-commerce industry. Through research and comparison of similar activities on the three major e-commerce platforms, the report concluded that “Ali and JD both have system incompatibility in terms of subsidy experience and subsidy scale.” Therefore, other e-commerce platforms' follow-up strategies have failed to have an impact on Pinduoduo's growth momentum.

At the same time, KeyBanc believes that Pinduoduo's profitability in 2020 is expected to decrease due to more and more brand/subsidized GMV combinations, but as the customer base continues to increase and settle, it is expected that medium- to long-term profitability will be high, so it maintains a “buy” rating and raised the target price from 45 US dollars to 50 US dollars.

KeyBanc is a famous boutique investment bank on Wall Street. It focuses on capital market business and industry analysis in the technology industry. It covers companies including leading Chinese Internet companies such as Alibaba, JD, Vipshop, and Pinduoduo. KeyBanc's parent company, KeyCorp, is a US regional commercial bank ranked among the top 500 in the world, with total assets of nearly 150 billion US dollars.

Pinduoduo's $10 billion subsidy is “unlimited for no time, no limit, simple and clear”

The report systematically compared the three platforms of Pinduoduo, Alibaba, and JD from five dimensions, including “subsidy price, coupon, time limit, search function, and number of categories.”

The results show that in terms of subsidized prices, Pinduoduo's advantage is that it is “unlimited direct subsidy, simple and clear”. Subsidized prices for popular products such as iPhones and high-end cosmetics are attractive, while Alibaba's subsidized prices for some products are lower than Pinduoduo, it is necessary to use coupons and packages within a specified period of time to enjoy the subsidized price, while JD's subsidized products are concentrated on “previously very cheap low-priced products, so the absolute subsidy amount for most products is lower than Pinduoduo and Alibaba.”

The three companies are also different in terms of subsidy policies such as coupons and time limits. The special feature of Pinduoduo is that it is “unlimited for no time and no amount”, and consumers can “enjoy” the subsidy at any time. Alibaba, on the other hand, has designed coupons that are limited in time and quantity, and users must participate through frequent social sharing and gaming activities to participate in the event.

This is roughly the same as previously published data. According to previous media statistics, since June 2019, the Pinduoduo platform alone has sold more than 2 million subsidized Apple phones. The average subsidy amount for each phone is nearly 600 yuan, while the latest Apple phone has been subsidized more than 1,600 yuan. At the same time, at the three major promotion festivals, including 618, Double 11, and Double 12, the cumulative number of discounted Apple phones offered by other e-commerce platforms was only 2,000 units, and the subsidy scale was only 0.1% of the Pinduoduo platform.

Zong Hui, head of Pinduoduo's “10 billion subsidy”, said that the “10 billion subsidy” has now become one of the independent entrances to the Pinduoduo platform. It has built a fully subsidized ecosystem for 32 main categories and over 23,000 popular products. The active buyers of the “10 billion subsidy” portal exceeded 100 million within three months of the launch of the campaign.

According to the report, Pinduoduo has specially designed a search function for the “10 billion subsidy”. Users can search for the subsidized products they need on the “10 billion subsidy” page, yet neither Alibaba nor JD have designed a similar function.

Zong Hui explained that the reason for designing an independent search portal is that Pinduoduo has a large number of subsidized products, covering all categories, and the independent search function makes it easy for users to enjoy the subsidy at any time.

The report analysis also pointed out that Alibaba and JD have fewer subsidy categories and number of subsidized products than Pinduoduo. “There is incompatibility between Alibaba and JD's internal products in terms of subsidy experience and subsidy scale, so the addition of the two has not had an impact on Pinduoduo's growth momentum.”

Earlier, the domestic third-party data team “Supersymmetric Technology” pointed out in a report that Alibaba's GMV is 6 to 7 times that of Pinduoduo, and that the cost of the 10 billion subsidy is far greater than that of Pinduoduo. Also, according to industry analysis, Alibaba's size is nearly ten times that of Pinduoduo. Therefore, if Alibaba wants to actually block Pinduoduo through subsidy activities, it should theoretically carry out a “100 billion subsidy” to achieve the expected results. Instead of just announcing on its own group buying platform, it is also providing a “10 billion subsidy.”

It is expected that Pinduoduo will not lower the level of subsidies in the short term

The “10 billion subsidy” pioneered by Pinduoduo has already been imitated by the entire industry. Beginning in November 2019, e-commerce platforms including JD, Alibaba, and Suning joined the army one after another.

Based on the above analysis, the report argues that this proves that “competitors' follow-up activities have not had an impact on Pinduoduo, and it is expected that Pinduoduo will not reduce the subsidy level in the short term (as a percentage of GMV).”

The reason Pinduoduo continues to subsidize is the continuous increase in the repurchase rate of Pinduoduo users and the continuous increase in GMV of branded products.

According to the report data, Pinduoduo's total order volume increased by 45-50% month-on-month in the fourth quarter, and AOV (average order value) also increased by a high single-digit percentage.

According to the report's analysis, with the help of leading platform subsidies and new e-commerce models such as social e-commerce, the online penetration rate in underdeveloped regions and vertical fields such as smartphones, FMCG, and agri-food is constantly increasing. “The new e-commerce model highlights a high conversion rate. We believe this will be the long-term driving force for the e-commerce sector.”

In June 2019, Pinduoduo launched the “10 billion subsidy”. Joint brands provided direct price subsidies for the most popular products on the entire network, such as Apple phones, Dyson series products, the mystery of sea blue, and agricultural products characteristic of various regions, etc., effectively achieving the convection of “industrial products declining” and “agricultural products rising”. At the end of 2019, Pinduoduo also joined with 300,000 merchants to launch the “New Year's Festival” to include local specialty agricultural products in the scope of platform subsidies, so that farmers are no longer e-commerce spectators.

Therefore, the report predicts that with the support of the “10 billion subsidy” campaign, Pinduoduo's growth momentum is strong, there is still room for GMV/revenue to rise, and Pinduoduo's total GMV may exceed 400 billion yuan in the fourth quarter.

Up to now, Pinduoduo's “10 billion subsidy” campaign has continued for more than 200 days. According to media statistics, this has set a record for the longest continuous promotion campaign initiated by a platform in the e-commerce industry. Earlier, Pinduoduo founder Huang Zheng stated at the financial conference that the 10 billion subsidy has now been upgraded to a long-term strategy for the platform.

The report points out that although the “10 billion subsidy” has generated heavy subsidy expenses, Pinduoduo's operating cash flow (OCF) continues to rise, ensuring the robustness and sustainability of the current business model, which is conducive to increasing the user retention rate.

The report acknowledged the value of Pinduoduo's “10 billion subsidy” as a long-term strategy. “The '10 billion subsidy' will continue to bring about growth in platform GMV. Due to the increasing number of brand/subsidy GMV combinations, Pinduoduo's profitability is expected to decrease in 2020, but as the customer base continues to increase and settle, it is expected that medium- to long-term profitability will be high.”

“Discounted retail is countercyclical. In the face of a weak macroeconomic economy, consumers prefer good-quality, inexpensive, and value-for-money products, or it may make Pinduoduo one of the most competitive e-commerce platforms,” the report said.