This article comes from the official account "Research Notes of Yang Renwen" on Wechat, by Han Xiaochen.

Core viewpoints

Events:Pinduoduo (PDD.US)The Q4 quarterly results report for 2020 will be released on March 17, 2021. As of 2020Q4 company's annual GMV reached 1.6676 trillion yuan (YoY + 66%, QoQ + 14%). The number of annual active buyers reaches 788 million (YoY + 35% QoQ + 8%). The company's 20Q4 realized operating income of 26.55 billion yuan (YoY + 146% QoQ + 87%), gross profit of 15.02 billion yuan (YoY + 72%, QoQ + 37%), operating profit and loss of-2.05 billion yuan (YoY-4%, QoQ + 58%), and net profit and loss belonging to ordinary shareholders of-1.38 billion yuan (YoY-21% QoQ + 75%). Huang Zheng, chairman of Pinduoduo, issued a letter to shareholders in 2021, announcing his resignation as chairman and locking his shares not to be sold for three years. Chen Lei, co-founder of Pinduoduo and now CEO, took over as chairman.

Our view:

1.1 Analysis of main financial indicators2020Q4's revenue exceeded expectations. The company's 20Q4 achieved operating income of 26.55 billion yuan (YoY + 146% QoQ + 87%), and the monetization rate increased significantly, from 3.0% of 2019Q4 to 3.6%. The increase in monetization is mainly due to the new 1P merchandise sales business and the income from buying more vegetables. 2020Q4 realized gross profit of 15.02 billion yuan (YoY + 72%, QoQ + 37%), operating profit and loss of-2.05 billion yuan (YoY-4%, QoQ + 58%), and net profit and loss belonging to ordinary shareholders was-1.38 billion yuan (YoY-21% QoQ + 75%). The expansion of the loss is mainly due to the large amount of investment in the early stage of community group buying.

(1)Revenue by business:The income structure of 2020Q4 Company has changed: (1) add 1P commodity sales business, (2) more vegetable business income is included in commission income. The income of online marketing services is 18.92 billion yuan (YoY + 95%, QoQ + 47%), and the commission income is growing rapidly, mainly due to the combined income of buying vegetables, with an income of 2.27 billion yuan (YoY + 105% QoQ + 70%). The newly added 1P commodity sales business achieves income of 5.36 billion yuan, accounting for only 1% of the total income, accounting for only 1% of the total income, and the monetization rate is 32%. The sale of 1P goods only serves as a supplement to the platform business to meet some of the shopping needs that have not yet found suitable goods.

(2)Cost situation:2020Q4's rates have narrowed, thanks to strong revenue growth of 7 per cent for R & D (QoQ-6 pct), 55 per cent for sales and marketing (QoQ-16 pct), and 2 per cent for general and administrative rates (- 1 pct). The company continues to invest in agricultural science and technology, committed to the development of digital agricultural supply chain, online and offline integration, in warehousing, logistics and agricultural goods source for a new round of investment. As of 2020Q4, Pinduoduo has helped more than 12 million agricultural producers connect consumers, including million-level filing and credit card households, to achieve a win-win situation.

(3)Profit margin:2020Q4 achieves a gross profit margin of 57 per cent (QoQ-20 pct), an operating margin of-8 per cent (QoQ + 1 pct) and a net profit and loss rate of-5 per cent (QoQ + 1 pct). The decline in gross profit margin is mainly due to the increase in the statistical caliber of 1P commodity sales business.

1.2 Analysis of operating data:

(1)Number of users:2020Q4's annual active buyers reached a record high of 788 million (YoY + 35% YoY QoQ + 8%) and increased by 57 million in a single quarter, surpassing for the first time.AliIt has become the largest e-commerce platform in China. The number of buyers with monthly active users reached 720 million (YoY + 50%, QoQ + 12%), with an increase of 80 million in a single quarter, further narrowing the gap with BABA's users.

(2)User stickiness:As of February 2021, the company's DAU/MAU 52% (YoY + 10 pct), monthly average daily use time of 20 minutes (YoY + 19%), an average of 6 times a day. In 2020, the company has a total order volume of 38.3 billion, with an average annual purchase frequency of 48.6 (YoY + 44%). In the increase of tens of billions of subsidies and the implementation of small circles, user stickiness has been further improved.

(3) GMV：GMV was slightly lower than expected, and 2020Q4 achieved 1,667.6 billion yuan in annual GMV (YoY + 66%, expected to be 1.7011 trillion yuan, with a difference of-2%). Affected by the epidemic, agricultural products and agricultural and sideline products have become Pinduoduo's fastest growing category. In 2020, Pinduoduo's turnover from agricultural and sideline products was 270 billion yuan, double that of the same period last year, accounting for 16.2% of the annual turnover.

(4) ARPUAnd ASPB:2020Q4 company annual active buyers spend 2115 yuan (YoY + 23%), annual ARPU75.5 yuan (YoY + 47%), single-quarter ARPU 36.9 yuan (YoY + 65%).

1.3 Management change analysis:

Huang Zheng, founder of Pinduoduo, issued a letter to shareholders in 2021, announcing his resignation as chairman of Pinduoduo and being replaced by Chen Lei, the current CEO. Huang Zheng's 1:10 super vote expires and the board of directors makes decisions by voting. Huang Zheng said he would focus on food science and life science after his resignation. Huang Zheng gradually step down as CEO and chairman in his plan, last year began to gradually step down from the administrative position of Pinduoduo, internal efforts to build a partnership system. We believe that Huang Zheng has completed the formulation of Pinduoduo's blueprint and development strategy, and his resignation has a limited impact on Pinduoduo's business development. Pinduoduo's values and vision have been formed, and will continue the established goals and path of healthy development.

Profit Forecast:We continue to be optimistic about the long-term development of the company and the growth of its subsequent performance. We forecast that the operating income from 2021 to 2024 is 806.8 / 998.0 / 1182.0 / 127.71 billion yuan, the net profit is (68.1) / 31.7 / 31.1 billion yuan, and the EPS is 26.9 yuan. The 12-month target price is $210, maintaining the "recommended" rating.

Risk Tips:Macroeconomic growth is declining, market competition is intensified, industry growth is less than expected, policy risks, the impact of founder changes on the stage of business, GMV growth is not expected after the decline in subsidies, new business expansion is lower than expected, business over-diversification, lack of coordination, insufficient operating funds, profitability is not up to expectations, and so on.

Report body

1 event

1.1 Financial Summary

The company's 20Q4 realized operating income of 26.55 billion yuan (YoY + 146% QoQ + 87%), gross profit of 15.02 billion yuan (YoY + 72%, QoQ + 37%), operating profit and loss of-2.05 billion yuan (YoY-4%, QoQ + 58%), and net profit and loss belonging to ordinary shareholders of-1.38 billion yuan (YoY-21% QoQ + 75%).

1.2 Business Summary

As of 2020Q4 company's annual GMV reached 1.6676 trillion yuan (YoY + 66%, QoQ + 14%). The number of annual active buyers reaches 788 million (YoY + 35% QoQ + 8%). 2020Q4's annual active buyers spend 2115 yuan (YoY + 23%) and annual ARPU 75.5 yuan (YoY + 47%).

1.3 Management change

Huang Zheng, chairman of Pinduoduo, issued a letter to shareholders in 2021, announcing his resignation as chairman and locking his shares not to be sold for three years. Chen Lei, co-founder of Pinduoduo and now CEO, took over as chairman.

2 our view

2.1 Analysis of main financial indicators

2.1.1 performance overview

2020Q4's revenue exceeded expectations. The company's 20Q4 achieved operating income of 26.55 billion yuan (YoY + 146% QoQ + 87%), and the monetization rate increased significantly, from 3.0% of 2019Q4 to 3.6%. The increase in monetization is mainly due to the new 1P merchandise sales business and the income from buying more vegetables. 2020Q4 realized gross profit of 15.02 billion yuan (YoY + 72%, QoQ + 37%), operating profit and loss of-2.05 billion yuan (YoY-4%, QoQ + 58%), and net profit and loss belonging to ordinary shareholders was-1.38 billion yuan (YoY-21% QoQ + 75%). The expansion of the loss is mainly due to the large amount of investment in the early stage of community group buying.

2.1.2 points of business income

The income structure of 2020Q4 Company has changed: (1) add 1P commodity sales business, (2) more vegetable business income is included in commission income. The income of online marketing services is 18.92 billion yuan (YoY + 95%, QoQ + 47%), and the commission income is growing rapidly, mainly due to the combined income of buying vegetables, with an income of 2.27 billion yuan (YoY + 105% QoQ + 70%). The newly added 1P commodity sales business achieves income of 5.36 billion yuan, accounting for only 1% of the total income, accounting for only 1% of the total income, and the monetization rate is 32%. The sale of 1P goods only serves as a supplement to the platform business to meet some of the shopping needs that have not yet found suitable goods.

2.1.3 cost situation

2020Q4's rates have narrowed, thanks to strong revenue growth of 7 per cent for R & D (QoQ-6 pct), 55 per cent for sales and marketing (QoQ-16 pct), and 2 per cent for general and administrative rates (- 1 pct). The company continues to invest in agricultural science and technology, committed to the development of digital agricultural supply chain, online and offline integration, in warehousing, logistics and agricultural goods source for a new round of investment. As of 2020Q4, Pinduoduo has helped more than 12 million agricultural producers connect consumers, including million-level filing and credit card households, to achieve a win-win situation.

2.1.4 profit margin

2020Q4 achieves a gross profit margin of 57 per cent (QoQ-20 pct), an operating margin of-8 per cent (QoQ + 1 pct) and a net profit and loss rate of-5 per cent (QoQ + 1 pct). The decline in gross profit margin is mainly due to the increase in the statistical caliber of 1P commodity sales business.

2.2 Analysis of main operating data

2.2.1 number of users

2020Q4's annual active buyers reached a record high of 788 million (YoY + 35% YoY QoQ + 8%) and increased by 57 million in a single quarter, surpassing BABA to become the largest e-commerce platform in China for the first time. The number of buyers with monthly active users reached 720 million (YoY + 50%, QoQ + 12%), with an increase of 80 million in a single quarter, further narrowing the gap with BABA's users.

2.2.2 user stickiness

As of February 2021, the company's DAU/MAU 52% (YoY + 10 pct), monthly average daily use time of 20 minutes (YoY + 19%), an average of 6 times a day. In 2020, the company has a total order volume of 38.3 billion, with an average annual purchase frequency of 48.6 (YoY + 44%). In the increase of tens of billions of subsidies and the implementation of small circles, user stickiness has been further improved.

2.2.3GMV

GMV was slightly lower than expected, and 2020Q4 achieved 1,667.6 billion yuan in annual GMV (YoY + 66%, expected to be 1.7011 trillion yuan, with a difference of-2%). Affected by the epidemic, agricultural products and agricultural and sideline products have become Pinduoduo's fastest growing category. In 2020, Pinduoduo's turnover from agricultural and sideline products was 270 billion yuan, double that of the same period last year, accounting for 16.2% of the annual turnover.

2.2.4ARPU

2020Q4 company annual active buyers spend 2115 yuan (YoY + 23%), annual ARPU75.5 yuan (YoY + 47%), single-quarter ARPU 36.9 yuan (YoY + 65%).

2.3 Analysis of management change

Huang Zheng, founder of Pinduoduo, issued a letter to shareholders in 2021, announcing his resignation as chairman of Pinduoduo. Chen Lei will now take over as chairman and continue to serve as CEO. Huang Zheng's 1:10 super vote expires and entrusts the board of directors to make decisions by voting. Huang Zheng said he would focus on food science and life sciences after his resignation. Huang Zheng gradually step down as CEO and chairman in his plan, last year began to gradually step down from the administrative position of Pinduoduo, internal efforts to build a partnership system. We believe that Huang Zheng has completed the formulation of Pinduoduo's blueprint and development strategy, and his resignation has a limited impact on Pinduoduo's business development. Pinduoduo's values and vision have been formed, and will continue the established goals and path of healthy development.

3Profit forecast

We continue to be optimistic about the long-term development of the company and the growth of its subsequent performance. We forecast that the operating income from 2021 to 2024 is 806.8 / 998.0 / 1182.0 / 127.71 billion yuan, the net profit is (68.1) / 31.7 / 31.1 billion yuan, and the EPS is 26.9 yuan. The 12-month target price is $210, maintaining the "recommended" rating.

Risk tips: declining macroeconomic growth, intensified market competition, lower-than-expected industry growth, policy risks, the impact of founder changes on the business, lower-than-expected GMV growth after the decline in subsidies, lower-than-expected new business expansion, over-diversification of business, lack of coordination, insufficient operating funds, lower-than-expected profits, and so on.

Appendix: Pinduoduo Quarterly results Exchange meeting at the end of December 2020

Disclaimer:

This discipline is subject toFounder SecuritiesIf the translation / arrangement of the overseas team may be inconsistent or inaccurate with the original minutes / recordings officially released by the company, investors are requested to take the original minutes / recordings released by the listed company as standard; the minutes of the meeting are for investors' reference only and do not contain any investment opinions and suggestions of founder Securities Research Institute, and investors need to bear the risk of investment decisions.

Q1.Pinduoduo now has 788 million users, which has surpassed your peers (BABA). What is the user growth strategy? What do you think of current user engagement? The "Buy more vegetables" you mentioned in the community group purchase is the 3P mode. What is its accounting calculation and operation mode? For example, how to pay the commission of the colonel? In addition, what is the current level of profitability? What is the gross profit margin? Can you get a general idea of your investment? how should we consider the investment needed in 2021, including infrastructure, logistics, etc.?

答：The first problem is in terms of user growth, we have observed very good momentum. In each of the past four quarters, we have increased our annual active buyers by an average of more than 50 million. But as we approach the milestone of 800 million users, it is inevitable that our user growth will slow. We pay less attention to the number of users, but focus more on building user satisfaction and trust by providing users with the best shopping experience and value for money. And we believe that as long as we can continue to provide good service to our users, the number of our users will continue to grow. Our first task is in the field of agriculture. Agriculture is not only the place with the lowest degree of digitization of mobile Internet, but also we, as the largest agricultural platform in China, can create the widest range of benefits. So in the future, we will be committed to doing more for the agricultural sector and rural communities. The other thing I talked about earlier is our goal of achieving online and offline integration in the future. The total retail sales of consumer goods in China has reached 39 trillion US dollars in 2020. China's retail sales are expected to grow at an annual rate of 5% in the next five years. Our GMV accounts for only 4% of that. Therefore, I believe that with the continuous integration of online and offline consumer behavior, our opportunities will certainly continue to expand.

The second question is about buying more vegetables. From an accounting point of view, we provide services to merchants and farmers to generate transaction service income. The contribution of total agricultural products in the fourth quarter and fiscal year 2020 is not important. Most of the operation-related expenses (such as warehouse rent and delivery logistics) of Duoduo vegetables are recorded as revenue costs. Buy a lot of vegetables is a very early business, we only started a few months, and is still growing. But we are very confident in this business model, which brings great value to our consumers and other participants in the value chain. We can consider some key drivers on the UE side, such as reducing unnecessary links, thus reducing the loss in the supply chain. Taken together, all these factors will undoubtedly bring greater value to all participants and stakeholders. But it will take some time to develop the infrastructure throughout the process. Therefore, at present, profitability is not our goal of buying more vegetables.

I would also like to add that by the end of 2020, Pinduoduo has become the e-commerce platform with the most users. Focusing on user engagement is indeed at the core of our strategy, and we are now confident that we will further expand the base and maintain good momentum. Buy more vegetables is the expansion of the platform, with the development of the business model, we think that buy more vegetables will form an ecosystem and different components will play a role. Therefore, please continue to pay attention, we think this may be a huge opportunity. We need to try iteration to find the right business model.

Q2The merchandise sales business is a 1P trial business, which is not important to GMV. When will the proportion of this business become larger, and will the absolute value of commodity sales decline in the next few quarters? 1P what is the gross profit of the trial business and the gross profit of buying vegetables? With regard to the growth of GMV, management talked about the focus on monetization. How should we view the GMV of each buyer in the future?

答:First of all, I would like to make it clear that the commodity business has nothing to do with buying more vegetables. 1P business is because we notice that there is consumer demand on the platform, we can't find the right merchant for it, and we have to step in temporarily to ensure that our users can find the products they want at the price they want. Therefore, since this is an interim measure, we have no intention of developing it into a larger business. In the fourth quarter, 1P business accounted for less than 1% of our total transaction volume. Moreover, it maintains a very small proportion in future GMV.

Buy more vegetables is a very new business plan, and the business model is constantly developing. The Duoduo vegetable purchase business itself is not a community group buying business. Because different from community group buying, the mode of community group buying is that neighbors, leaders or merchants gather a group and earn commission to organize purchases. Pinduoduo has 788 million active users. Duoduo does not actually rely on the leader to attract users. Users can place orders independently through the application. Therefore, this is why we use Buy more as the integration and expansion of our e-commerce platform.

We have launched a lot of buying vegetables to meet the growing demand of consumers for cheap and affordable ingredients. Now Buy more vegetables can be used in 300 cities in China. A key part of the business is actually the agriculture-centric logistics infrastructure that we are trying to build. Want to really reduce waste in order to reduce costs and speed up the delivery of agricultural products. To this end, we rely on technology to achieve better quality control, better procurement and better forecast of demand, which can reduce waste and improve the efficiency of the supply chain. We are now working with third-party suppliers to make strategic investments where needed to accelerate the construction of the necessary infrastructure so that the order turnaround time is less than 24 hours. We believe that this has been proved in the last five years.

With regard to the trend of gross margin, I do not comment on individual businesses. But it can be said that excluding the impact of 1P commodity business, the business is at a loss, excluding the impact of 1P business, the net interest rate in the fourth quarter is actually very similar to the Non GAAP net profit margin in the third quarter. About the expenses of ARPU or per user. We focus on participation, and we are confident that as user activity grows, so will the availability of products on the platform. Because with the establishment of the trust level, the repurchase rate of users will also increase, so that the market share or transaction volume will also increase. Therefore, we are full of confidence in the future of ARPU. The monetization rate of 3.2% of LTM is actually a recognition for businesses to see a good transformation of advertising spending.

Q3 1PWhat types of goods are there in the business? Can management comment on the performance of shopping? Does this meet, above or below your internal expectations?

答：1P product categories are diverse. Our approach is to look at the projects we implement on the platform, which we know have clear consumer needs, but we can't find the right merchants for them. As a result, product categories are very diverse, and the strategy itself is not specific to a particular category.

Buying more food is a long-term commitment for us because we think the opportunity is huge and we think we can really create some value for our users here. So I think we are moving forward and the service is now available nationwide in more than 300 cities. Therefore, I think we are very satisfied with the progress of Kaesong. However, it is easy to drive user growth, and what is more interesting is to build and develop the corresponding infrastructure network. From a traffic point of view, especially for platforms like ours, we naturally have a very inherent advantage. We are more concerned about what investment we need and how we can provide the right type of user experience to address the opportunities we see. Because I think one of the several elements of the success of Buy more is purchasing and forecasting. The second point is the appropriate tuning of the infrastructure so that we can schedule implementation and delivery in less than a 24-hour cycle. We are still in the early stages and we think this is a way for us to do agricultural business in China. I am satisfied with the progress made so far, but we can still do more.

Q4What kind of synergy will occur in the supply chain between Buy more and Pinduoduo's marketing business in the future? What's the progress now? What is the key competitive advantage of selling more vegetables?

答：Buying more vegetables is an integral part of the market. It is an extension that can meet the needs and use of more consumers. Both businesses will continue to make full use of the existing express infrastructure network and the less than 24-hour compliance infrastructure developed for Buy more. If we can organize these two delivery logistics very effectively, and can actually predict and recommend the appropriate SKU to consumers according to their expected proportion and performance, then we will find many opportunities. Most of today's suppliers are local. At present, 12 million farmers are purchasing on PDD and are supplying goods to our users nationwide. As long as there is sufficient support in logistics and BI coordination, these farmers may become potential sellers or suppliers in Buy more scenarios. I think the infrastructure can not only support locally driven suppliers, but also really take advantage of the supply chain available in the PDD market nationwide, but also expand beyond pure agricultural products. This is our vision: to become China's largest agricultural producer.

Q5Huang Zheng mentioned in a letter to shareholders that the traditional method of competition-competition through scale and efficiency has its inevitable limitations. Can you elaborate on it? Can you talk about the impact of buying more vegetables on the company's overall business? If you strip out sales of goods and just look at marketing services, this is one of the lowest expenditures we have ever seen, at 77.8%. Can you explain this point? And can you explain the impact of buying more vegetables on gross profit margin?

答：The impact of buying more vegetables on the entire business model is highly collaborative, and we certainly hope that the overall participation on the platform will increase. As more and more users become more familiar with our platform, we also hope that their expenses will continue to increase. Therefore, from the perspective of average order value, this year is a decrease compared with the same period last year. However, you need to consider the large number of new users and the increase in the number of orders. Therefore, with the continuous development of the business, with the increase of participation, the operational efficiency will be improved.

Q6Buy more vegetables is not a community group buying business, but it is competing with other community group buying platform participants. Will the next step be to participate in and invest in asset-heavy warehouses and agriculture-centric logistics? Will the next focus now be on infrastructure investment and user engagement, rather than gaining customers over the past six months? What do you think of this year's fresh e-commerce platform competition?

答：The growing user base has never been our top priority, and we have focused on participation for a whole year. But with better participation and better trust building on the platform, the number of users has increased. We have seen very strong growth momentum. As Lei said, given the size of our users today, user growth will inevitably begin to decline. And more importantly, we focus on participation and on meeting the needs of users on the platform. Then buying more vegetables provides us with an opportunity to meet the demand for food materials in a more timely manner.

We are involved in warehousing and delivery logistics. Therefore, investment in offline operations will be an important factor in success. When thinking about competition, don't ignore the strategic advantage of a platform with nearly 800 million users. We will continue to focus on understanding the needs of consumers and recommend the most suitable products to them according to their needs. Now, instead of relying solely on express delivery, there is an additional compliance mechanism that can shorten the delivery cycle of specific categories of products that are more time-sensitive. Therefore, we are fully committed to ensuring that we have the right infrastructure to win this business, because we believe that as long as this is done, the opportunities for the market business are huge and highly coordinated, and we will continue to see a long way to go.

(Zhitong Financial Editor: Zhang Jinliang)