PDD(US:PDD) Hua Er Jie Jian Wen·2025-11-19 12:08Core Insights - Pinduoduo's Q3 operating profit has shown a year-on-year growth of 1%, reaching RMB 27.1 billion, marking a turning point in profitability after several quarters of decline [1][3] - Net profit increased by 14% year-on-year to RMB 31.4 billion, exceeding market expectations [3] - However, online marketing service revenue growth has dropped to 8%, significantly below market expectations for low double-digit growth, indicating weaker-than-expected growth in gross merchandise volume and monetization rates [1][2][7] - Following the earnings report, Pinduoduo's stock price fell by 6%, reflecting investor concerns over slowing growth [1][2] Financial Performance - The improvement in operating profit is attributed to a lower comparative base and stable sales and marketing expenses [3] - Morgan Stanley projects that operating profit will increase by 15% year-on-year to RMB 124 billion in 2026, with operating profit margin rising from 23.6% in 2025 to 25.8% [3] - Goldman Sachs noted a slight 5% decrease in income tax, suggesting improvements in unit economics and profit margins for gross merchandise volume [3] Temu Business Outlook - Analysts believe that the profitability turning point for Temu has been established, which is crucial for Pinduoduo's long-term value [4][5] - Management has emphasized trust, safety, and product compliance as core components of their high-quality development strategy for Temu [4] - Goldman Sachs forecasts that Temu's EBIT will be RMB 17 billion and RMB 24 billion for the fiscal years 2026 and 2027, respectively, although these estimates have been revised downwards due to compliance and infrastructure investments [5] Market Position and Valuation - Despite Pinduoduo's valuation being at a discount relative to the industry, analysts find the risk-reward profile attractive given the company's profit growth prospects [6] - Morgan Stanley maintains a target price of $148, implying a 13x P/E ratio for 2026 non-GAAP earnings, which aligns with a 14% annual profit growth expectation [6] - Goldman Sachs highlights Pinduoduo's current valuation at an 11x P/E ratio for 2026, which is appealing compared to the median of 17x for Chinese internet stocks [6] Growth Challenges - The decline in online marketing service revenue growth to 8% raises concerns about the growth of gross merchandise volume and monetization rates [7] - Goldman Sachs estimates that domestic gross merchandise volume grew by 9% in Q3, only slightly above the industry growth rate, indicating a narrowing competitive advantage [7] - Morgan Stanley has revised down its gross merchandise volume forecasts for 2025-2027, while simultaneously raising profitability expectations [7] Strategic Shift - The changes in revenue dynamics suggest that Pinduoduo is shifting from a growth model reliant on high subsidies to a more sustainable focus on profitability quality [8]