PDD Holdings: Short-Term Headwinds Persist

Core Viewpoint - PDD Holdings is facing short-term headwinds but maintains long-term competitive advantages, leading to a "buy" rating despite current challenges [1][11]. Financial Performance - PDD's Q1 earnings call raised concerns about the quality of earnings, particularly regarding profitability growth amid increased competition [2]. - Operating leverage improved, with sales and marketing expenses dropping to 27% of revenue from 43.2% in Q1 FY2023, and R&D expenses decreasing to 3.4% from 6.7% [2]. - Non-GAAP net margin increased to 35.3% from 26.9% in Q1 FY2023 [2]. - Interest and investment income surged to RMB50.5 billion, a 245% increase from RMB14.6 billion in Q1 FY2023, while total cash and short-term investments rose only 49.5% [2]. Competitive Landscape - PDD is experiencing intensified competition in China's e-commerce market, particularly from Alibaba and JD.com, which are attempting to curb PDD's growth [3]. - PDD's GMV growth of 18% during the 618 event is narrowing the gap with Alibaba's estimated growth of 12% [3]. - Alibaba's GMV growth is pressuring its margins, with adjusted EBTA margins declining despite growth [4]. Political and Regulatory Environment - PDD's Temu faces increased political scrutiny in the U.S., with potential legislative impacts that could negatively affect PDD's valuation [5]. - Two significant bills could harm PDD's valuation if passed: one eliminating capital gains tax breaks for investments in Chinese companies and another excluding Chinese companies from index funds [6]. Long-term Competitive Advantages - PDD's long-term competitive advantages include a focus on "white label" products, a differentiated merchant ecosystem, superior algorithms, and efficient operations [7]. - Continuous margin improvement is driven by higher monetization rates and operational efficiency [7]. Financial Projections and Valuation - Updated financial projections assume PDD can maintain its current monetization rate and operating margin for FY2024 and FY2025 [8]. - Valuation estimates indicate a total valuation of PDD Holdings at approximately USD 362.25 billion, with a current market cap of USD 191.64 billion, suggesting an upside of nearly 90% [10].