Core Thesis - PDD Holdings Inc. is viewed positively due to strong Q2 2025 earnings, cost efficiency, and management's strategic agility, despite some caution regarding future margins [2][3][5] Financial Performance - In Q2 2025, PDD Holdings reported revenues of RMB 104 billion, meeting expectations, and earnings per share of RMB 22.1, which was 50% above consensus [2] - The earnings beat was attributed to a near doubling of interest income and lower-than-expected operating costs, following a significant margin collapse in Q1 [2] - Revenue from China's marketing services grew by 13%, while Transaction Services remained flat; however, Temu's GMV increased over 30% year-over-year [2] Market Response - Following the earnings report, PDD's stock initially surged by 10% but ended the day down 3%, reflecting a pattern of cautious management guidance impacting investor sentiment [3] - Management indicated that Q2 margins are not sustainable due to ongoing investments and subsidies, which may affect future profitability [3] Strategic Positioning - PDD's unconventional communication style has historically led to superior results compared to competitors, with a long-term focus and an EV/FCF below 10, making it attractively priced [4] - The company is perceived as agile in navigating a competitive e-commerce landscape, with investors viewing current pullbacks as opportunities to accumulate shares [4] Historical Context - Previous bullish coverage highlighted PDD's rapid growth and strong financials, with the stock appreciating approximately 33.84% since May 2025 [5] - The current analysis aligns with earlier perspectives, emphasizing the company's robust growth and strategic positioning in the e-commerce sector [5]

Investment Rating - The report maintains a "Buy" rating for PDD Holdings Inc with a 12-month price target of US$165.00, down from a previous target of US$193.00 [8][13]. Core Insights - The report highlights a 10% year-over-year revenue growth to Rmb96 billion in 1Q25, which missed expectations by 8%, primarily due to transaction services linked to Temu [2][4]. - Adjusted net profit for 1Q25 was Rmb16.9 billion, missing by Rmb11 billion or 39%, attributed to increased sales and marketing spending and lower investment income [2][4]. - The management's cautious tone reflects macroeconomic uncertainties and significant investments impacting profitability, leading to expectations of street downgrades [12]. Revenue and Earnings Analysis - Online market services (OMS) revenue grew by 14.5%, slightly below the consensus of 18%, due to targeted subsidies affecting ad income [3]. - Transaction service revenue missed by Rmb6 billion, primarily due to Temu's challenges in the US market, including tariff impacts and logistical disruptions [4]. - Sales and marketing expenses increased by 44% year-over-year, indicating a shift in customer acquisition strategies [5]. - Investment income decreased significantly, with a net miss of Rmb2 billion, likely due to mark-to-market or impairment losses [6]. Financial Projections - Revenue projections for 2025-2027 have been cut by 28-43%, reflecting increased domestic investments and widening losses for Temu [13]. - The report provides a detailed financial forecast, estimating total revenues of Rmb406.1 billion for 2025, down from a prior estimate of Rmb456.5 billion [15]. - Non-GAAP net income for 2025 is projected at Rmb79.7 billion, a reduction of 43% from previous estimates [15]. Valuation Metrics - The report indicates a significant drop in the price-to-earnings (P/E) ratio, with estimates for 2025 at 13.2x, down from 11.0x previously [15]. - The equity free cash flow yield is projected to be 11.7% for 2025, indicating strong cash generation potential despite current challenges [7]. - The valuation methodology is based on a sum-of-the-parts (SOTP) approach, with core e-commerce operations valued at Rmb137.9 billion [16]. Market Context - PDD Holdings operates in a competitive e-commerce landscape, focusing on value-for-money products and expanding into international markets through Temu [18]. - The report notes that domestic operations are currently profitable, contrasting with Temu's ongoing losses, which are impacting overall profitability [11].