Production | Tiger Sniffing Investment Research
Author | Ding Ping
Head Picture | Visual China
On November 12, 2020, Pinduoduo (NASDAQ: PDD) released its third quarter financial report. The report shows that in the third quarter, revenue was 14.21 billion yuan, an increase of 89.11% year-on-year; under non-GAAP (NON-GAAP), it achieved a net profit of 466.4 million yuan, the first quarterly profit. As of the end of September, Pinduoduo’s annual active buyers reached 731.3 million, a net increase of 48.1 million in a single quarter, which is almost the same as Alibaba’s 757 million. Affected by this news, as of the close of trading, Pinduoduo’s share price rose 20.41%, with a total market value of 160.7 billion US dollars.
But in fact, under the GAAP standard, Pinduoduo had a net loss of 785 million yuan attributable to its parent in the third quarter, compared with 2.335 billion yuan in the same period last year. Compared with Non-GAAP, GAAP can truly reflect the performance of a company, because many non-operating-related and incidental gains and losses will be eliminated under the Non-GAAP standard, which is suspected of “modifying” the statement.
Therefore, the third-quarter financial report once again shows that Pinduoduo’s high growth trend is about to end, and it is still at a loss. So, should the controversy over its “subsidy for growth” operating model end? We analyze from the three dimensions of “growth, profitability and cash flow”.
First, we interpret the growth of Pinduoduo from three aspects: active users, GMV, and revenue.
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The high growth trend is about to end
(1) User growth did not drive GMV growth
In the third quarter of 2020, Pinduoduo’s annual active users increased by 48.1 million month-on-month, much higher than Alibaba’s 15 million in the same period. The annual active buyers reached 731.3 million, which is almost the same as Alibaba’s 757 million. However, the eye-catching user growth did not drive the high growth of Pinduoduo’s GMV, which was mainly affected by the limited increase in ARPU.
Data source: Company announcement
According to the financial report, the annual GMV of Pinduoduo in the third quarter was 1,457.6 billion yuan, a year-on-year increase of 73.48%, which is in a slowdown trend and is significantly lower than the growth rate of 143.68% in the same period last year.
Data source: Company announcement
Based on the analysis of the GMV=User*ARPU formula, Pinduoduo’s annual users reached 731.3 million during the reporting period, an increase of 38.38% year-on-year; the ARPU value was RMB 1993, an increase of 27.19% year-on-year. Obviously, the small increase in ARPU restricts the growth of GMV. This is mainly due to the change of Pinduoduo’s subsidy strategy from the second quarter. The direction of subsidies has changed from high-customer electronic products to low-customer agricultural products.
Data source: company announcement
Pinduoduo intends to use “high frequency” to hit “low frequency”. For example, the new business of “Duo Duo Buying Grocery” has been launched to increase customer stickiness to increase customer unit prices. However, the change in subsidy strategy did not work. The year-on-year growth rate of ARPU has not increased significantly and is still at a historical low point.
(2) Limited room for income growth
In the third quarter of 2020, Pinduoduo achieved operating income of 14.21 billion yuan, a year-on-year increase of 89.11%. With the improvement of the domestic epidemic, the growth rate also rebounded from the previous month, but compared with last year’s 122.84%, the decline was obvious. The reasons are as follows: First, the inevitable result brought about by the gradual increase in revenue base; Second, the growth of active users, which drives revenue growth, has gradually entered a bottleneck period, and the increase in ARPU value is not obvious as the focus of subsidies shifts to agricultural products.
Data source: Company announcement
no hope for profit
Subsidies are a double-edged sword. They are not only the driving force for user growth, but also the biggest drag on platform losses. Pinduoduo gains users by investing a large amount of market expenses (ie subsidies) to promote GMV and revenue. But high market expenses eroded Pinduoduo’s profit margins.
In Q3 of 2020, Pinduoduo had an operating loss of 1.296 billion yuan and a net loss of 785 million yuan attributable to its parent. The loss trend continued. Since 2018, Pinduoduo has accumulated a net loss of 22.285 billion yuan attributable to its parent. However, compared with the same period last year, the operating loss rate narrowed sharply in this quarter, mainly due to the decrease in market expense ratio.
Data source: Company announcement
In this quarter, Pinduoduo invested 10.72 billion yuan in market expenses, and the market expense ratio was 70.88%, which was still high, but it was 21.07 percentage points lower than the same period last year. This freed up a certain amount of profit space and made the operating loss rate from 2019 Q3’s 37.16% narrowed to the current 9.12%.
As for the significant reduction in market expense ratios, Pinduoduo said that the main reason is that the subsidy strategy has changed, and the direction of subsidies has changed from electronic products with high unit prices to agricultural products.
Data source: Company announcement
Therefore, even if the focus of Pinduoduo’s later strategy shifts to user retention, it will be difficult to significantly reduce market expenses, and its profits will be hopeless in a short time.
Why does the net cash flow from operating activities continue to be positive when Pinduoduo continues to lose money?
cash flow trap
According to the net cash flow from operating activities in the cash flow statement, the autogenous hematopoietic ability is evaluated, and net profit and net cash flow from operating activities are positively correlated. If the net cash ratio (net cash flow from operating activities/net profit) is a reasonable standard of 1, the net profit of the enterprise is consistent with the net cash flow from operating activities. Therefore, to generate profits, the cash flow generated by operating activities is generally positive.
From 2016 to 2019, Pinduoduo’s net losses attributable to its parent were 292 million yuan, 525 million yuan, 10.22 billion yuan, and 6.968 billion yuan, respectively. The net cash flow from operating activities is positive as shown in the table below.
Data source: Company announcement
Why is Pinduoduo able to obtain positive net cash flow from operating activities despite continuous losses?
The reason is that Pinduoduo has a cash flow trap. Pinduoduo’s net cash flow from operating activities is mainly derived from accounts payable and merchant deposits. The accounts payable/restricted funds (merchant deposits) from 2016 to 2019 were 1.312 billion yuan, 10.281 billion yuan, 9.847 billion yuan and 16.303 billion yuan. Excluding the effects of accounts payable and merchant deposits, Pinduoduo’s net operating cash flow is basically outflow.
In contrast, Ali, Ali’s net cash flow from operating activities for fiscal year 2020 (March 31, 2019-March 31, 2020) is 180.6 billion yuan, of which net profit contributed 140.4 billion yuan, accounts payable and The merchant margin is only 2.878 billion yuan.
So, Pinduoduo does not rely on self-management but instead relies on the capital of upstream businesses to obtain operating cash flow, which is extremely unhealthy.
GenerateThe main reason for the problem is that Pinduoduo did not make its own payment, and the accounts received by the merchant were credited to the Pinduoduo account. As long as the merchant did not withdraw cash, these accounts would lie on the Pinduoduo platform and constitute accounts payable. And Ali puts the accounts that the merchant can receive into the merchant’s Alipay account. Regardless of whether the merchant withdraws cash or not, these accounts belong to the merchant.
But for Pinduoduo, this is not a long-term solution. Because the platform has a lot of hidden worries about funds, merchants’ unwithdrawn accounts cannot be effectively protected. Moreover, once the funds are disconnected on the platform, the merchant’s accounts may suffer losses. Therefore, in our view, with the gradual standardization and maturity of the e-commerce market, legal supervision will become stricter, and the phenomenon of platform mortgages will no longer exist. At that time, Pinduoduo will lose the “advantage” of accounting for funds, which can also reflect the lack of actual “hematopoiesis” ability.
Pingduoduo’s cash and cash equivalents continued to expand at the end of the period, mainly generated by financing activities. Pinduoduo raised US$1.369 billion in Series D in April 2018, raised US$1.578 billion in IPO in July, and completed follow-on financing (FPO) in February 2019, successfully raising US$1.2 billion.
However, too much dependence on capital is prone to the risk of capital disconnection. On October 15, 2019, Taojiji CEO Zhang Zhengping officially issued an apology letter to the merchants, explaining the situation that Taojiji suffered from arrears with merchants, malicious attacks by hackers, and disruption of capital flow. Among them, he said that entering September 2019, due to the delay in financing confirmation, the company’s cash flow began to decline, and there was a run risk.
When the platform’s share of funds was resisted and profitability was hopeless, the cash flow created by Pinduoduo through operating activities was even more stretched. If there is a downturn in the capital market and there is no capital drive, Pinduoduo will inevitably face great pressure on cash flow.
Since its establishment, Pinduoduo has maintained a high growth in user and revenue scale, and has been favored by investors. However, as the WeChat dividend subsided, user acquisition entered a bottleneck period and the platform’s revenue base continued to expand, resulting in a gradual slowdown in Pinduoduo’s user and revenue growth. If growth is frustrated, it will be difficult to cater to the capital market’s emphasis on high growth, and Pinduoduo’s financing channels will be tightened.
But Pinduoduo needs to invest in high subsidies to acquire and retain users, and it lacks hematopoietic function and can only rely on external financing. If Pinduoduo loses its external funding drive, there may be a break in the funding chain. Is it possible that it will become the next Taojiji? Not yet known, but the new financial report once again shows that the dispute over Pinduoduo’s operating model is over.