Pinduoduo's share price made a breakthrough after months of high consolidation, reaching an all-time high with a market capitalization of nearly $120 billion, very close to JD.com 's market capitalization. Before the US stock market opened on the 4th, Pinduoduo continued to rise by more than 4%, setting another all-time high.

Pinduoduo's valuation has been boosted by strong user growth and performance this year, with Pinduoduo's share price tripling from $30 to about $90 between April and July 20.

At this new high, let's review the rise of Pandor and find the potential for continued growth in the future.

Scale change: BABA and JD.com form the pattern of "one super and two strong"

Pinduoduo officially launched in September 2015, focused on C2B group buying, merged with fruit proprietary e-commerce platform "good goods" in September 2016, comprehensively transformed the platform e-commerce model in 2017, and successfully landed on Nasdaq in July 2018.

For GMV:

From 2017 to 2019, the company's GMV increased from 141 billion yuan to 1.0066 trillion yuan (CAGR is 167.0%), and its market share increased from 2.0% to 9.5%. Among them, the total CR3 of the e-commerce industry in 2019 is 88.0%, the market concentration continues to improve, the strong are always strong, the competition barriers are stable, and the threshold for new entrants is extremely high.

In terms of user size:

The number of users increased from 100 million to 700 million, making it the second largest platform for e-commerce. 2017Q1-2020Q2, the number of annual active users of the company has increased from 70 million to 680 million, and CAGR is 103.7%. The company relies on Wechat, relying on strong traffic distribution logic, the number of users is constantly approaching BABA (2020Q2 is 740 million), and is expected to catch up with and surpass in the next four quarters.

Start-up period (100 million-400 million): start at the low line, socially active, and extremely convenient

1. On the user side: Wechat fission, various ways of playing, and advertising catalysis helped Pinduoduo to collect visitors extremely in his early days.

Rely on Wechat, low-cost fission to get customers. The company relies on Wechat's strong social traffic, achieves social fission through Wechat friends, and quickly gets customers with a very low cost (the per capita cost of 2017Q2 is less than 3 yuan, while that of BABA / JD.com is 404 yuan / 204 yuan, respectively). As of 2018Q4, the company's annual active users have reached 420 million yuan, and the per capita cost of getting customers is 183 yuan, which is still far lower than BABA and JD.com.

On the other hand, Wechat has issued the Wechat external Link Management Standard for external links since April 2016. it has issued corresponding bans or other penalties for inducing sharing content, and blocked links to shopping information such as group shopping and sharing lucky draw, but Pinduoduo Wechat links are rarely suppressed. Wechat's support played a key role in Pinduoduo's early rise.

There are various ways of social play, and the psychology of "taking advantage" spreads rapidly. Pinduoduo has been based on WeChat Mini Programs's group-buying model since its inception. The 2017 "618" Shopping Festival began to launch "group cash removal" activities, that is, by inviting friends to help, get free cash red packets, the amount of red envelopes is proportional to the number of friends invited.

Since then, the company continues to introduce a variety of games, "one penny lottery", "bargain free" and other classic social games continue to emerge. The higher-than-expected low price stimulates the user's psychology of taking advantage, and this psychology is very easy to spread, thus realizing the extremely fast fission of the user.

Advertising marketing heavy investment, full contact, strong impression. Pinduoduo stepped up advertising efforts in 2017, including variety titles, prime-time advertising, subway / bus stop signs, etc., reaching consumers at all points. From 2017 to 2018, Pinduoduo had a total of 17 naming festivals, all of which are high-interest projects such as exclusive naming, special appointment or chief cooperation.

At the same time, Pinduoduo simultaneously launched the brainwashing divine song-"Pinduoduo", which is adapted from the network divine song "miss you so much", with a special rhythm such as "magic sound around the ear", which quickly detonated the Internet.

2. Merchant side: zero entry threshold, low cost of opening shop

Adopted by PinduoduoAttracting investment by means of "0 commission", "0 residence fee" and "0 deduction point"The basic fee only needs to pay a deposit of RMB 2000, 000 and 10000 yuan according to the corresponding type of store. Merchants only need to pay a 0.6 per cent commission from a third party to open a shop on Pinduoduo, which has greatly reduced the cost of opening a store.

At the same time, because the platform has the advantages of huge flow and extremely low cost, it attracts a large number of quality merchants to provide more cost-effective products and quickly divert customers, thus forming a positive value feedback mechanism of "supply-side concession-high cost-effective goods attract customers on the demand side-scale effect promotes the reduction of supply-side costs", thus promoting the value of the platform.

3. Product side: no shopping cart, the purchase process is extremely convenient

The product design process of Pinduoduo is very convenient, and users can pay completely in WeChat Mini Programs and complete the purchase without downloading APP. At the same time, since more than 70% of Pinduoduo's orders come from Wechat sharing and APP recommendations, it takes as little as 3 steps to complete the purchase. Compared with BABA's 5-6-step purchase process, Pinduoduo's minimalist shopping experience has great advantages in gaining customers and retaining customers in early low-line cities.

Supply-side upgrade (400-600 million): upgrading quality, expanding capacity and infiltrating to high-speed lines

1. It is imperative to join in the fight against counterfeiting

Although the initial low-threshold entry mode has brought a large number of merchants to Pinduoduo and achieved the rapid growth of SKU, in this process, a large number of "shoddy" merchants and fake and shoddy goods suspected of violating the law and regulations have begun to appear, such as "super bear" laundry detergent, "ViVi" mobile phones, "XIAOMI new" televisions and other "touch porcelain" well-known brands of counterfeit products. For a time, negative comments such as "too many fakes", "copycat" and "evening" have seriously damaged the image and reputation of the platform.

The "fake goods incident" not only has a negative impact on Pinduoduo, but also sounded the alarm for Pinduoduo's standardized operation. In 2017, Pinduoduo actively carried out a joint campaign to collect evidence with more than 400 brands, took the initiative to remove 10.7 million suspected infringing goods, blocked 40 million infringing links, set up a 150 million consumer protection fund, and wrote "fake one for ten" into the platform agreement.

Fakes have always been a difficult problem for China's e-commerce industry. Cracking down on fakes is not only an imperative measure taken by Pinduoduo to rebuild trust in the platform, but also a "duty" that must be won, while Pinduoduo, who has solved the problem of fakes, is bound to usher in more steady growth.

2. marketing linkage production, customer direct manufacturing, realizing the supply-side reform of digitalization and branding.

The long-term success of Pinduoduo model is mainly due to the improvement of efficiency. Based on certain user data and user scale, Pinduoduo supply-side transformation is getting better and better, continuously promoting new brand plans, agricultural goods and other projects.

(1) New Brand Plan

All factories that join the plan will upload all information, including raw material purchase records, monitoring reports, production logs, etc., and synchronize them to Pinduoduo data system for filing, so as to achieve full-link traceability of goods. At the same time, Pinduoduo also launched a series of assistance programs, such as big data support, expert diagnosis, R & D suggestions, and tilted the flow and recommended resources within a certain range, in order to increase commodity exposure and support its brand construction.

(2) fighting for agricultural goods: starting a fresh e-commerce business, the upstream road of agricultural products

Pinduoduo started by relying on the B2C self-operated fruit platform and has been committed to the transformation of the agricultural product industry chain since its establishment for 5 years. From 2017 to 2019, Pinduoduo issued annual reports on agricultural aid for three consecutive years. The turnover of agricultural products increased from 19.6 billion yuan to 136.4 billion yuan, the CAGE was 163.8%, and the proportion of online sales of agricultural products rose from 8.0% to 34.3%, making it the largest uplink platform for agricultural products in China. At the same time, the company expects the trading volume of agricultural products to exceed 250 billion yuan this year, accounting for a further increase.

(3) Classic War: tens of billions of subsidies

In June 2019, Pinduoduo officially launched a 10 billion yuan subsidy campaign, jointly with brands to provide tens of billions of cash subsidies to the hottest high-end goods in the network, such as iphone and Dyson hair dryers, to further profit on the basis of the lowest price in the whole network, aiming to infiltrate high-line users and increase the unit price per capita.

Pinduoduo's 10 billion subsidies are mainly subsidized to brands in the form of cash or flow, and consumers can get cost-effective products at a discount of 20% of the average market price.

Under the subsidy of 10 billion yuan, AAC, user stickiness and ARPU have all been effectively improved.

1) the number of new users of AAC:2019Q1 Pinduoduo in the quarter was only 2480w. Since 2019Q2 launched the "10 billion subsidy" program, the number of new users of 2019Q2-2019Q3 has returned to a high growth, which is 3990w/5310w, mainly due to the growth of users driven by 10 billion subsidies from first-and second-tier cities.

2) user stickiness: we use the ratio of monthly active users to annual active users of APP as an effective indicator to measure user penetration. The ratio of 2019Q2MAUmax AAC rebounded to 75.7% and continued to grow at Q3, and the ratio increased to 80.1%. Under the "10 billion subsidy", the user penetration rate increased effectively.

3) ARPU: after the launch of the "10 billion subsidy", the growth rate of ARPU rebounded by 16.7% to 1468 yuan in that quarter, and the per capita purchase amount was effectively driven by high-priced brand goods.

Chassis battle (600 million-800 million +): tamp the basic plate, strong stickiness, stable repurchase

Pinduoduo entered the third stage, in order to further consolidate the barriers to competitionFrom the thinking of getting customers in the early stage to the deep operation of users。

From the specific e-commerce income formula: business income = GMV*take-rate (monetization), GMV=AAC (number of annual active buyers) * ARPU (per capita annual purchase amount), ARPU= per capita passenger unit price * per capita annual order number, business income = AAC* per capita customer unit price * per capita annual order number * take-rate.

As of 2020Q2, the platform AAC has reached 680 million, and its customers mainly rely on Wechat, Wechat MAU is basically stable, the long-term ceiling is relatively clear; the per capita unit price is still affected by the platform's "cost-effective" positioning still has a large gap with BABA.The key to increasing income in the short and medium term is to increase the repurchase rate of users.。

1. User side:

With the help of Mini Program (Mini Program users account for about 20% of Pinduoduo's total users in June 2020) and the first-level entrance to the payment page, Wechat is still a strong support for Pinduoduo. At present, 40% of the traffic still comes from Wechat, but with the peak of Wechat traffic, Pinduoduo at the same time uses APP Mini Game to enhance user stickiness, enhance repurchase, and deepen user basic disk.

(1) small circle: a "sharp weapon" to deepen social construction in accordance with the trend.

The launch of the small circle in February 2020 is mainly due to the uneven quality of epidemic prevention goods under the epidemic and consumers' lack of necessary decision-making reference. In order to facilitate consumers to understand the "true evaluation information" of goods and crack down on false comments, Pinduoduo's launch is similar to the function of Wechat moments. Users can share their purchase content and purchase evaluation independently in "spelling small circles". Friend endorsement effectively removes consumer misleading behaviors such as brushing orders and brushing praise.

After the launch of "small circle", the demand for guaranteed authentic masks has aroused consumers' attention to Pinduoduo. The daily search volume of the Baidu, Inc. search engine on the "Pinduoduo" field has climbed from a periodic low of 32022 times to 41.95% in two weeks.

At the same time, in terms of the number of downloads by ios users, this feature has been favored by "users within the five rings" since it was released. Pinduoduo's APP downloads in APP Store soared, topping the free shopping list two weeks later for nearly 20 days, and breaking into the top 10 in the free app list within a month.

(2) strengthen Mini Game's "nurturance" function and cultivate users' APP usage habits.

Pinduoduo enhances the fun of APP, upgrades the basic functions of Mini Game, such as Duoduo Orchard, Duoduo Ranch, and Duoduoai Elimination, so as to improve the duration of user use, mainly based on:

1) New features are constantly emerging, such as constantly updating more small animals, setting animal feeding time and feeding schedule for different users, and launching product links that are highly related to users to enhance user motivation and timely implementation, and enhance user retention.

2) deepen the personalized incentives of target users: as Pinduoduo users are mainly users of the third and fourth lines or below, they have plenty of leisure time and are price-sensitive. Mini Game's simple play and the strengthening of personalized reward mechanism (getting high coupons or cash incentives after deep participation) are more in line with the psychology of target users of "taking advantage", and enhance users' stickiness through group buying and physical gifts to improve repurchase rate. Cultivate users' habit of using APP.

2. Marketing side:

Pinduoduo launched a money-saving monthly card "1 yuan to taste fresh" function, users can enjoy monthly card rights and interests when they pay 1 yuan: daily coupons, grab large coupons, order-free privileges, free trial, monthly card selection, etc., through non-threshold coupons to increase the repurchase frequency of users, strengthen users' impression of the platform "cost-effective", and then improve user retention.

Pinduoduo launched the LVB feature in January 2020, and Pinduoduo APP was revised in October 2020, changing the second Tab at the bottom from "follow" to LVB with priority ahead. Different from Taobao's mode of taking goods with KOL, Pinduoduo Live location is a tool for merchants to operate private domain traffic, as a form of display and service for stores, to improve the credibility of goods, and then improve the purchase and transformation of products.

3. Supply side:

(1) escalation of price war and expansion of the border of "10 billion subsidies"

In 2019, BABA resumed reunion, and the competition with Pinduoduo showed a white-hot trend; at the same time, due to increased subsidies, the prices of some 10 billion subsidized products were lower than Pinduoduo's 10 billion subsidy prices, which had a certain impact on the number of customers and GMV growth in the short term, while the proportion of first-and second-tier users showed a month-on-month decline.

In March 2020, Pinduoduo officially announced the implementation of the "10 billion subsidy 2.0" program, transforming the past cash subsidy into flow subsidy, and starting with the middle-waist brand to further expand the brand richness. According to the data of supersymmetric tracking, the number and brands of Pinduoduo's 10 billion subsidized SKU increased sharply in July 2020, of which the number of SKU increased from 8183 to 23700, and the number of brands increased from 1128 to 4022, deepening the platform price-to-performance tag.

(2) the "New Brand Program" is upgraded, and C2M goes further.

In October 2020, Pinduoduo plans to upgrade the "New Brand Plan" by increasing investment in terms of supporting goals, partners, resource inputs and cooperation models. In the future, with the deepening of the "new brand plan" and the increase in the number of users, more consumers with similar needs will be gathered together to feed back to the supply side, thus forming a spiral cycle of growth, and the advantage of C2M products is constantly stable. the proportion is expected to reach 20% and 30% in 2022.

(3) join the community group purchase and consolidate the advantageous category.

Pinduoduo in the future does not change the performance-to-price ratio of the platform on the basis of improving GMV and tamping the basic disk of users, the key is to improve the repurchase rate. The rigid demand of fresh high frequency and the attribute of drainage sharp weapon are in line with the strategic development of the company. at the same time, because Pinduoduo has innate advantages in fresh agricultural products, tamping and expanding the fresh market is the strategic focus for some time in the future.

In August, 2020, "buy more vegetables" first stop in Wuhan, Pinduoduo joined the community group buying, quickly horse racing enclosure to open the ground net competition mode. By October 2020, Duoduo has spread over 23 provinces and 116cities, of which the daily order volume in Wuhan exceeded 300000 and hovered at 400000, with monthly sales exceeding 100 million.

Due to the advantages of platform positioning, data and supply chain, Pinduoduo will drain each other with the e-commerce platform through the community group purchase model in the future to improve the repurchase rate and strengthen the category and user moat.

Look to the future: how does Pinduoduo make money?

The current profit model is mainly advertising, supplemented by commission.

Pinduoduo's revenue is mainly based on advertising, and the monetization rate of advertising continues to rise. In 2017 / 2019, the proportion of advertising revenue in total revenue is 65.9%, 87.8% and 89.0%, respectively. Among them, the monetization rate of advertising is 0.9%, 2.4%, 2.7%, respectively, which continues to rise.

At present, Pinduoduo's strategy focuses on the retention of users, and the future is still based on performance-to-price ratio, with commissions and advertisements to benefit merchants and then consumers. It is expected that the commission will still be less than 5% for a long time in the future, relying on GMV growth to increase commission income, while introducing fee items such as membership fees to increase revenue.

Future direction: medium-and long-term GMV improvement is still the core driver of income

Operating income = GMV*take-rate, the strategic direction of revenue improvement can be divided into two directions:

1) GMV is the main promotion.

2) the promotion of take-rate is the main.

The former mainly depends on scale to win, while the latter is the route of brand upgrading. From Pinduoduo's low-line gene and business vision, its future is committed to providing users with cost-effective products, the focus of short-term improvement of its future income is still the improvement of GMV, scale is the key to success; long-term need to rely on its "Costco+ Disney" business model, constantly strengthen the "fun" and "cost-effective" double-wheel structure, rely on its advanced business model to achieve efficiency.

Can you continue to make money?

The key to Pinduoduo's long-term GMV promotion lies in whether the virtuous circle of "platform transaction scale improvement-cash flow accumulation-investment brand, user construction R & D-advantage (category + user) is constantly tamped and magnified" is sustainable. The sustainability of virtuous circle is mainly based on the guarantee of two conditions:

(1) whether the value of users can be improved continuously, including the quality and quantity of users

(2) whether the dominant category can tamp and expand the boundary continuously.

1. Look at users in the short term

The period mainly focuses on user value: mainly two aspects: the number of users and the quality of users (per capita purchase amount, repurchase rate).

Number of users: Wechat is still the main support in the short term, and social construction within APP will continue.

User quality:

1) with the expansion of the scope of "10 billion subsidy", it will attract more users from high-line cities to spend on the platform, thus driving the improvement of per capita ARPU.

2) Community group buying shortens the distribution path, and its main categories fresh and daily will lead to a continuous increase in the repurchase rate.

3) the upgrading of C2M factory and new brand will provide users with more valuable products and increase the repurchase rate.

4) Mini Game, small circles, etc., increase the interaction and interest of shopping, improve the per capita length of stay, and then cultivate and strengthen users' habits of using APP.

2. Mid-term category

Mainly focus on two points: consolidate the dominant categories (fresh, Ribai, etc.); expand the boundaries of categories, introduce and develop new categories.

Consolidate advantageous categories:

Pinduoduo started as a fresh e-commerce business. after five years of construction, the proportion of online sales of agricultural products rose to 34.3% in 2019, with outstanding advantages in fresh flow, data and supply chain. In the face of the market space of more than 5 trillion yuan of fresh e-commerce, the giants have increased the size of community group buying. Pinduoduo, because his user group is more suitable to the community group buying user group, the company accounts for more than 61.0% in the third-tier and below cities (VS Taobao, Tmall, JD.com, SUNING are 56.5%, 54.2%, 51.8%, 50.3% respectively). At the same time, with the help of the existing first-mover advantage, the company is expected to break through quickly.

Category extension boundary:

Through the C2M factory and new brand plan to foster some new brands, we can rely on scale to win quickly through platform flow and data empowerment in the early stage, and later, with the increase of scale and market share, the new brand will have more advantages in terms of bargaining power and pricing power, and then continue to optimize the supply chain, reduce costs and improve efficiency, and develop into new advantage categories.

3. Take a long look at efficiency

The advanced nature of Pinduoduo model lies in that it can quickly get customers by virtue of efficient flow distribution mode, and change the uncertainty of supply-side production under the traditional mode through the deterministic demand of social group purchase, so as to reduce the cost of supply-side and upgrade the efficiency of supply-side.

Growth space calculation: GMV aims at 3 trillion yuan in 2022

As of 2020Q2, the number of Wechat active users is 1.206 billion, and the penetration rate of Pinduo's multi-year active users to Wechat is 56.6%. In the future, with the growth of Wechat users and the activity of WeChat Mini Programs, such as "Buy more vegetables", Pinduoduo's penetration into Wechat has not stopped. It is estimated that in 2022, the number of Wechat + Wechat users will reach 1.35 billion, and Pinduoduo's penetration space into Wechat will reach 70.9%. The corresponding number of multi-year active users is 960 million.

According to grass-roots research, Pinduoduo's per capita purchase amount of 2020Q3 is about 1950 yuan, and the number of annual active users is still growing rapidly, with a net increase of about 4300w in a single quarter, while the number of annual active users of 2020Q3 is about 726 million. Similarly, it is assumed that because of community group buying + 10 billion subsidy drainage, the net increase of Q4 in a single quarter is still about 4000w, while the number of Q4 annual active users is about 766 million. At this time, Pinduoduo's penetration to Wechat is about 62.2%. Even if Pinduoduo AAC's penetration of Wechat is maintained at 65.0% by 2022 (the most conservative estimate), the number of active users for many years will be 880 million.

With the increase in the repurchase rate brought about by the high-frequency attribute of community group buying and the increase in the price of customers with subsidies of 10 billion yuan (which currently accounts for 10% of the total GMV), the company's annual per capita purchase amount (ARPU) is expected to accelerate. We expect the compound growth rate of per capita purchase amount to maintain a level of 18% per capita 23% by 2022, corresponding to an ARPU range of 2966-3222 yuan.

GMV= AAC*ARPU. According to the above prediction, the AAC in 2020 is about 8.8-960 million, and the ARPU is about 2966-3222 yuan. Excluding the most conservative estimate, the GMV is about 2.8-3.1 trillion.

Profit Forecast:

The profit forecast is based on the following assumptions:

1) Pinduoduo's social construction has achieved initial results and the number of annual active users has maintained a steady growth, and the company's C2M new brand plan and 10 billion subsidies have been steadily advanced.

2) affected by the epidemic, China's parity market demand is strong, and consumers' demand for "cost-effective" products is strong.

3) with its own flow, data and supply chain advantages, it will break through in the community group purchase model in the next 2-3 years, and the high-frequency demand in the fresh market will lead to a steady increase in the per capita repurchase frequency.

Under the above assumptions, Pinduoduo's income from 2020 to 2022 is expected to be 510.5 million 757.5 / 106.12 billion yuan respectively, and the net profit vested in the parent company under GAAP is-38.6 million 44.8 / 14 billion yuan.