Explosive performance! Pinduoduo, not the "Coupon King", is the true behind-the-scenes king.

On the evening of August 29th Beijing time, PDD (PDD.US) released its Q2 2022 financial report before the US stock market opened. Overall, the revenue and profit performance can only be described as "explosive," even amazing people about how the company can achieve such outstanding performance. The key points are as follows:

1. Users have peaked? Pinduoduo's revenue still explodes

a. In the context of the overall peak of Internet users, as Alibaba stopped disclosing user data, and the total number of JD.com users in Q2 increased by only 300,000 MoM. Pinduoduo, which has 880 million annual active buyers, also chose not to disclose user data.

b. Although user growth may stagnate, Pinduoduo's revenue growth this quarter can only be described as violent. The core e-commerce advertising business achieved revenue of 25.2 billion yuan this quarter, a year-on-year increase of 39%, and the contra-trend growth rate increased by 10 percentage points MoM. Even optimistic buyers expected growth of less than 20%.

c. This quarter's commission income (including payment handling fees, Duoduomai Cai, and e-commerce commission income) was 6.2 billion yuan, a year-on-year increase of 107%, which is also accelerating growth. It can be seen that with Alibaba, Meituan, and other second- and third-tier players shrinking their community group-buying business, Duoduomai Cai has also grown beyond expectations.

d. Combining with previous predictions from research institutions that Pinduoduo's GMV growth during the 6.18 period is around 25% (but not necessarily accurate), such high revenue growth rate means that the monetization rate of e-commerce advertising this quarter has significantly increased, and the preference of businesses for putting ads on Pinduoduo has also increased.

e. Since it is likely that the growth of users this quarter did not increase, whether the per capita consumption amount has a breakthrough growth is worth paying attention to.

2. Gross profit skyrocketed, expenses slightly increased, and Pinduoduo's profitability is amazing

a. While the revenue skyrocketed, Pinduoduo's gross margin this quarter also rose from a steady state of 70% to 74.7%, close to the 76% level in the fourth quarter of last year under the favorable return of server expenses. Although management once again claimed that there is a one-time optimization, and the gross margin is not sustainable, considering that Pinduoduo should have increased its monetization rate this quarter, and the epidemic is conducive to raising prices to reduce subsidies (JD.com's gross margin has also significantly improved), even without the impact claimed by the management, the company's gross margin this quarter should also improve significantly.

b. In addition to the significant improvement in gross margin, under the scale effect of the company's explosive revenue growth, the proportion of expenses to revenue has also decreased. Although different from JD.com and Alibaba's restraint on expenditure, Pinduoduo, which is "more able to toss," this quarter, marketing, management, and R&D expenses increased by 9%, 90%, and 12% YoY, respectively (reflecting the company's strategy of grabbing market share against the trend). But under the greatly increased scale effect, the overall operating expenses-to-revenue ratio dropped from 60.9% to 47% MoM.

c. As a result, the company achieved an operating profit of RMB 8.7 billion this quarter, with an operating profit margin of 27.7%, far exceeding buyers' expected RMB 3 billion. After deducting equity incentive expenses, the adjusted operating profit even reached RMB 10.5 billion, with a single-quarter profit of more than RMB 10 billion, which is truly amazing.

Analysis from Dolphin:

First of all, the performance of this quarter is impeccable, with explosive growth in revenue and profits. From a logical perspective, against the backdrop of macroeconomic pressure and weak consumption, Pinduoduo's advantages are: 1) its cost-effective positioning benefits from "consumption downgrading," 2) the main categories on the platform are daily necessities such as food and groceries, which have more resilient demand, and 3) the grocery business leverages the group's advantages in agricultural product supply and channels, and can reduce losses faster and achieve UE economic recovery compared to its peers.

From a larger competitive perspective: Rewind to the first half of 2021. At that time, major Internet giants were still aggressively expanding, and among them, the basic market of Pinduoduo's core: the sinking market (JD's Jixi, Alibaba's Taote), and selling vegetables such as community group buying, were the most fiercely competitive sectors with the highest growth potential.

However, today, major cold retail Internet companies are all contracting under the "coldness," no longer exchanging growth for money (corresponding to a decrease in marketing expenses), and are aggressively penetrating each other's businesses. Instead, they focus on core businesses and efficiency rather than marginal business scale growth. Therefore, the profits of each player have improved significantly in the second quarter. As the industry stops its internal competition, Pinduoduo's competition in the aforementioned two sectors will also be significantly alleviated, and the competitive landscape will improve.

Therefore, although from the recent trend of Pinduoduo's stock price, short-term funds have already entered the market to bet on performance exceeding expectations and may profit-taking after the performance. With revenue accelerating growth for two consecutive quarters, profit also significantly improving, combined with the improvement of the competitive landscape, Pinduoduo may regain the favor of long-term funds and become an investment target in the medium term.

Dolphin Analyst will subsequently share the phone conference summary with the dolphin user group through the Longbridge App, and interested users are welcome to add the WeChat number "dolphinR123" to join the Dolphin investment research group to get the phone conference summary as soon as possible.

Detailed interpretation of this quarter's financial report:

1. Approaching the ceiling, group stops disclosing user data

Since 2021, the total number of domestic Internet users has approached the ceiling. Against the backdrop of the impact of the pandemic in the second quarter and the sustained weakness of consumption, Alibaba and JD both chose to strategically withdraw, no longer focusing on user growth, but instead focusing on improving the "wallet share" of existing users. Under this strategy, Alibaba directly stopped disclosing user data, while JD's total number of buyers for the quarter only increased by 300,000 people due to a substantial shrinkage in its Jixi business.

As the second-largest e-commerce platform in the country with 880 million annual active users and 750 million monthly active users (as of the end of last quarter), Pinduoduo also undoubtedly felt the user ceiling and chose not to disclose its user data anymore.

2. Explosive revenue growth, a growth myth returns Although Pinduoduo seems to have encountered the problem of reaching a user ceiling, unlike the dismal revenue growth of Alibaba and JD.com this quarter, Pinduoduo's growth this quarter can be described as explosive. The core e-commerce advertising business achieved revenue of RMB 25.2 billion this quarter, a year-on-year increase of 39%. Despite the impact of the epidemic, the growth rate increased by 10pct on a month-on-month basis, and the actual performance also far exceeded the seller's expected RMB 18.6 billion. Although the seller's expectations were not updated in time, according to research institutions, the GMV growth rate of Pinduoduo during the 618 period has recovered to around 25%. But even considering the recovery after June, as Dolphin Analyst understands, the optimistic expected e-commerce advertising growth rate of the buyers is only between 10% and 20%, so the 39% growth rate is greatly beyond the expected funding.

Dolphin Analyst believes that the possible reasons for the large revenue exceeding expectations are: 1) food and daily necessities are the main categories on the Pinduoduo platform, and even during the epidemic, demand is strong; 2) Pinduoduo occupies a relatively high proportion in lower-tier cities and counties, so it was less impacted during the epidemic; 3) cost-effective products benefited relatively under the trend of "consumer downgrading".

In addition, as the expected GMV growth rate of the statistical agency is only about 25% (not necessarily very accurate), the revenue growth rate far exceeds this, which also shows that the proportion of the company's advertising business revenue to GMV should have been increased significantly.

In addition, the company's commission income (including payment service fee income, Duoduo Maicai income, and e-commerce commission income) for this quarter was RMB 6.2 billion, a year-on-year growth rate of 107%, also accelerating from the previous quarter. Although the amplitude is not as exaggerated as the advertising business, it still surpasses the seller's expected RMB 5.23 billion by a large margin.

Dolphin Analyst believes that the source of exceeding expectations should be the strong performance of Duoduo Maicai. Combining with the financial reports of other companies, whether it is Alibaba, Meituan, or other second- and third-tier players, they have generally shrunk the scale and investment intensity of community group buying business in the second quarter. Under the background of easing competition, Pinduoduo that started with selling agricultural products has grown beyond expectations in group buying business.

Due to the fact that the core 3P business has exceeded expectations, Pinduoduo's total revenue for this quarter was RMB 31.44 billion, even under the drag of 1P business basically returning to zero (decreasing by about RMB 1.9 billion), the total revenue still increased by 36% year-on-year. The expected RMB 23.62 billion by the seller is no longer the same with a different first number, which shows the magnitude of exceeding expectations.

In addition, since user growth this quarter should have already stagnated, besides the overall increase in monetization for merchants, it is even more critical to look forward to whether there is a breakthrough in per capita consumption amount that also contributed greatly to such great performance beyond expectations. III. Costs are not inflating, profits are skyrocketing

What's even more exciting is that while revenue is growing explosively, Pinduoduo's profits are not only not declining, but are instead skyrocketing. First of all, from a gross profit perspective, the company achieved a gross profit of RMB 23.4 billion for the quarter, far exceeding the expected RMB 16.4 billion from sellers. This quarter's gross profit margin also increased significantly to 74.7%, significantly exceeding the steady-state level of around 70% in the previous quarters. At the same time last year, due to a one-time benefit from Tencent returning server costs, a gross profit margin of 76% was achieved.

Although management stated that the deferral of some costs pushed up this quarter's profit, considering that Pinduoduo should have improved its monetization rate this quarter, and JD's gross profit also significantly improved in Q2, even without the impact claimed by management, the company's gross profit margin this quarter should have also shown significant improvement.

In addition to the significant improvement in gross profit margin, the ratio of expenses to revenue also decreased under the scale effect of the company's explosive revenue growth.

1. First of all, unlike Alibaba and JD, whose marketing expenses decreased by more than 10% YoY in Q2, Pinduoduo, which is "the most able to cause a commotion," chose to increase its investment to seize market share in adverse conditions. This quarter's marketing expenses increased by 9% YoY. However, because the growth rate of expenses was far lower than the 36% growth in revenue, the ratio of marketing expenses to revenue significantly narrowed from 47% in the previous quarter to 36%.

2. Research and development expenses investment remained relatively stable, with a YoY growth of 12%, but under the scale effect of revenue growth, the ratio of expenses also decreased.

3. However, administrative expenses significantly expanded this quarter, growing by 90% YoY. The main reason is that the equity incentive expenses increased significantly from RMB 220 million in the same period last year to RMB 660 million this quarter. It can be seen that under the background of the company's explosive performance and significant increase in profits, the company gave considerable equity incentives to management and employees.

Overall, the company's total operating expenses were RMB 14.7 billion, slightly higher than the expected RMB 13.78 billion from sellers. However, under the situation of revenue significantly exceeding expectations, the slight increase in expenses has basically no impact on the overall performance.

Therefore, under the background of revenue and gross profit margin greatly exceeding expectations, and operating expenses only slightly increasing, the company's operating profit margin this quarter reached 27.6%, even exceeding the 25.4% in the fourth quarter of last year. According to Dolphin Analyst, the optimistic expectation from buyers was only to match or slightly exceed the fourth quarter level. In the end, the company achieved an operating profit of RMB 8.7 billion this quarter, far exceeding the expected RMB 3 billion in profits from sellers, and even surpassing the RMB 6.9 billion operating profit achieved by Pinduoduo in 2021.

And after eliminating the equity incentive expenses, the company's adjusted quarterly operating profit even exceeded 10 billion, reaching 10.5 billion. Such a "terrifying" profit release capability is truly amazing.

Dolphin PDD Research Reports:

Earnings Season

May 27, 2022 Conference call on R&D Investment and Earnings Fluctuation：《 Research Report on Investment in R&D and Expected Earnings Fluctuations in the Future (PDD 1Q22 Conference Call Summary)》

May 27, 2022 Earnings review：《 The Magic of Cutting Again, Pinduoduo Comes Back with A "Curtain Call"》

March 21, 2022 Conference call on "Laying Flat" Strategy and Future Investment and Growth:《 Is Laying Flat Strategy Just Temporary? Will PDD Return to Track of Investment and Growth? (Conference Call Summary)》

March 21, 2022 Earnings review:《 Half Heaven and Half Hell, PDD Is "Re-Fractionalizing"》

Nov. 26, 2021 Conference call on the Earnings Shock and Management Response：《 How Does PDD Management See the Earnings Shock? (Conference Call Summary)》

Nov. 26, 2021 Earnings review：《 The Growth Myth Is Broken, And Pinduoduo Has Been Beaten by Alibaba's Taotie》

In-depth analysis

Apr. 27, 2022：《 Alibaba vs. Pinduoduo: Survival After Bloodbath?》

Sept. 22, 2021：《 Is there a Real Wall After the E-commerce Traffic's Battle Among Alibaba, Meituan, and Pinduoduo?》 Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure