AsianFin -- The American depositary receipts (ADRs) of PDD Holdings Inc. dived 13.6% on Tuesday, underperforming the U.S. stock market as the benchmark S&P 500 index rose more than 2%. Sell-off came after Temu parent posted widely-missing profit during the first quarter of this year, highlighting the mounting challenges, ranging from intense competition to the new round of trade war initiated by the Trump administration.
Credit：China Daily
PDD recorded revenue of RMB95.67 billion ($13.18 billion) for the quarter ended March 31, less than analysts projected RMB103.06 billion polled by FactSet. The top line further slowed down with a 10% year-over-year (YoY) increase. That was the slowest growth rate since the first quarter of 2022, compared with a 24.4% YoY rise three months earlier.
PDD’s two segments saw continuing sales slowdown for the March quarter despite deep discounts and Chinese government’s fiscal stimulus to boost consumption. Revenue from online marketing services and others gained 15% YoY to RMB48.72 billion after a 17% YoY gain for the previous quarter. Transaction services, the charges the company collected from merchants for transactions on its platform, hauled RMB46.95 billion with a 6% YoY increase, down from a 33% YoY surge from October to December.
PDD’s bottom line also fell short of Wall Street expectation. Net income crashed 47% YoY to RMB14.74 billion following a rise of 18% from the December quarter. On non-GAAP basis, adjusted net income fell 45% YoY to RMB16.92 billion, whereas analysts expected net income to be RMB27.88 billion. Adjusted diluted earnings per American depositary share (ADS) shed 44.9% YoY to RMB11.41 after climbing 16.3% YoY for the preceding quarter, while analysts estimated the Chinese e-commerce heavyweight would earn RMB18.89 per ADS.
PDD Vice President of Finance Liu Jun said the slowdown in growth rate is expected as the company communicated previously when its business scales and changeless emerge. “This trend has been further accelerated by the changes in the external environment in the first quarter,” said Liu in a statement on Tuesday. “Our financial results may continue to reflect the impact of sustained investments in the ecosystem as we support merchants and consumers through uncertain times.”
Analysts believed the pressure on bottom line partially reflected the trade war shocking the worldwide commerce. "[PDD's] massive bottom line miss is due to much weaker than expected operating margin, likely impacted by U.S. tariffs," said Mscience analyst Vinci Zhang.
"Slower domestic consumption, intensified competition, and global trade frictions are weighing on growth," said U.S. Tiger Securities analyst Bo Pei. “Elevated costs reflect strategic promotional activities and advertising spend to support merchant sales, it's aimed at supporting the platform's long-term ecosystem health but sacrifices near-term profitability.”
PDD Chairman and Co-CEO Chen Lei acknowledged impact of tariffs and vowed to support merchants even though that efforts would certainly weigh the profitability. As PDD management has communicated in the past few quarters, a slowdown in growth rates is inevitable as its business competition intensifies and external uncertainties arise, and the trend accelerated in March due to changes in the external environment, thus further dragging the revenue to slow down, Chen told analysts on an earnings call.
Chen said such revenue slowdown and PDD’s ongoing ecosystem investment led to a significant decline in profits for the first quarter, primarily owing to the mismatch between business investment and return cycles.
Radical change in external policy environments such as tariffs has created significant pressure for our merchants, Chen said. He reiterated Temu’s desirte not to raise prices to confront with tariffs. “Our global business is working with merchants across regions to bring stable prices and abundant supply to strengthen our operations in the markets we serve,” he said.
PDD in April announced it would invest RMB100 billion in capital, traffic and other resources to reinforce its e-commerce ecosystem in the fact of the price war launched by domestic rivals like Alibaba Group and DJ.com.
On the call with analysts, PDD Co-CEO Zhao Jiazhen said the company will expand its subsidies to daily necessities and other categories on top of the national subsidy scheme and trade-ins operated by the Chinese government.
Although these investments will affect the platform's short-term profits, they can activate the inventory and production capacity of Chinese small and medium-sized merchants, and create a window period for high-quality and differentiated development, Zhao said.
Consumers can enjoy better products and services only if merchants develop in a long-term and stable manner, therefore, when facing changes in the environment and policies and merchants are unable to cope with them, the platform will provide support to merchants and work together with them to cope with the uncertainty, said Chen Lei. In the meantime, Liu Jun suggested pressure on PDD’s bottom line would not soon fade. “our profitability is likely to face challenges in the near term and potentially in the longer term,” said Liu.
