Pinduoduo vs. Vipshop: Is your 'poor day' their 'good day'?
Continuing our analysis from our previous article on the e-commerce industry, as various internet companies have ceased competition and returned to their core businesses, in the current cycle we are seeing natural growth for each company as they approach "the first curve" (the previous cycle saw their defenses and defensive capabilities deepen). So, which companies' core businesses will have relative growth advantages in the current environment?
The Dolphin Analyst believes that Pinduoduo and Vipshop are both pointing towards downgrading consumer preferences and preference for cost-effective goods, as well as difficulty in selling inventory, which indicate a contrarian logic.
Therefore, in this stock analysis, the Dolphin Analyst puts the two of them together and examines which companies will benefit relatively during the consumption downturn. However, there are still significant differences in the investment logic between the two.
1) For Pinduoduo, on the first curve, Taote and Jingxi's attack on Pinduoduo's sinking market is stagnant, allowing Pinduoduo to better benefit from consumers' "downgraded" shopping needs; meanwhile, DD Maicai on the second curve has temporarily outperformed, defensively holding onto the high-frequency and DD-characteristic agricultural products product category, while also being able to enjoy the influx brought by the increase in the online rate of fresh product categories. Therefore, when peers are sacrificing growth for profit, Pinduoduo is one of the few that has a growth advantage and also has excellent profit release, making it a rare and valuable target.
2) Vipshop is more of a "stub stock" logic: After the company's Q3 financial report, it is about to pass the bottom of the cycle and enter the relatively prosperous season of the winter fashion clearance sale in Q4. The certainty of revenue recovery is stronger. Meanwhile, under the current selection strategy, Vipshop focuses on gross margin management, and there is also an expectation of profit recovery; the company has enough cash reserves to allow it to have relatively good certainty of returns at low valuations, and coupled with its tangible investment in repurchasing large amounts of company stock, the three factors resonate to allow Vipshop to achieve good returns when prices are low.
In summary, these are the Dolphin Analyst's views on Pinduoduo and Vipshop:
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I. How did the "Roll King" Pinduoduo "win by lying down"?
1. The biggest winner in the downgrading consumption and going-inventory cycle?
Looking back at Pinduoduo's surprising Q2 financial performance, in addition to its "terrible" profit performance of around RMB 8.9 billion, the Dolphin Analyst believes that the real reason for the surprising and market-changing point of view on Pinduoduo lies in the company's unexpected acceleration of revenue growth.
To look at Pinduoduo's most critical e-commerce advertising revenue (while excluding the impact of DD Maicai and self-operated revenue changes), after hitting a low point in 4Q21, it has continued to accelerate for two consecutive quarters. The most astonishing thing is that in Q2, when the domestic epidemic affected the market, DD doubled down to achieve a 39% increase in advertising revenue (while Alibaba saw negative growth of 11% during the same period). According to the formula "E-commerce advertising revenue = GMV * monetization rate", Dolphin Analyst believes that the reason behind Pinduoduo's amazing growth is due to two factors. First, during the cycle of consumption downgrade, consumers prefer high quality cost-effective products, which drives Pinduoduo's GMV growth higher than its peers. However, according to research, Pinduoduo's GMV growth during the 618 period was only about 25% (not necessarily accurate), and its GMV growth in April and May was even worse. Therefore, its GMV growth in the second quarter will not exceed 30% at the highest. The 10-20% gap between revenue growth and GMV growth indicates that Pinduoduo's advertising monetization rate has greatly increased in the second quarter. In other words, the willingness and preference of merchants to advertise on Pinduoduo's platform have clearly increased for two reasons:
(1) After consumers migrate to cost-effective platforms such as Pinduoduo, merchants' advertising spending naturally migrates to Pinduoduo's platform as well;
(2) Due to the sluggish consumption and retail sales in China, merchants have a considerable demand to reduce inventory. Pinduoduo, which is characterized by low-price, large quantities, is one of the preferred choices for merchants to reduce inventory.
As the cost of advertising business is relatively fixed (server and personnel costs), the additional income brought by the increase in monetization rate can almost directly convert into profit, which is also one of the fundamental reasons why Pinduoduo's profit release in the second quarter is so amazing.
Since the second half of 2021, it can be seen that the inventory amount of clothing, furniture, electronic equipment, and liquor and beverage products are all in a growing trend, while domestic social retail remains weak. Therefore, it can be seen that Pinduoduo will continue to benefit from this cycle of consumption downgrade and inventory reduction in the next three to four quarters, thereby continuing to maintain a higher level of GMV growth and advertising monetization rate than the industry.
In addition, due to the retail scale of nearly 2 trillion yuan and the broad online penetration space, the fresh food e-commerce sector (mainly in the form of community group buying) is one of the second growth curves that e-commerce companies are most eager for in recent years and was once the most fiercely competed battlefields. Dolphin believes that Pinduoduo, which started with agricultural products and obtained a large amount of growth dividend, was the company that was most impacted by the competition in this battle. From the business logic perspective, once other platforms become better choices for consumers to buy fresh food frequently, inexpensively, and conveniently, a large number of Pinduoduo's users who buy large amounts of fresh food in the main station may migrate to other platforms, or even affect the habit of buying other products on Pinduoduo. Therefore, unlike other platforms that treat fresh food e-commerce as an incremental market, Pinduoduo is fighting for a "life-and-death battle" to retain its core user group in the fresh food market. Winning means strengthening core user stickiness and barriers, while losing may mean the disintegration of its customer base. However, in recent quarters, with the cooling of the capital market and the exit of small platforms that have difficulty in financing directly (such as Every Day Fresh and Shi Hui Tuan), and large Internet companies are also shrinking unprofitable businesses under the strategy of reducing costs and increasing efficiency, the fresh e-commerce war has therefore ushered in a stage of "ceasefire" and turning point. Specifically: The third-tier Xinxi pinpin and Orange Heart have shrunk significantly and have fallen behind, and the second-tier Xingshang Youxuan and Taocai Cai have stopped expanding and are sticking to their existing markets. Even the first-tier Meituan Youxuan has withdrawn from four provinces including Beijing, Qinghai, Ningxia and Xinjiang, leaving only the "Coupon King" Pinduoduo has not shrunk.
With the slowdown of peers, according to the latest research, Duoduomai has successfully run to the leading position in the community group buying war:
(1) In terms of single quantity and GMV scale, Duoduomai's average daily single quantity has surpassed Meituan Youxuan and firmly sits in the top position, and the leading margin has continued to expand in the medium term.
(2) In terms of profit margin, under the government's supervision and Internet companies' self-reduction of costs and increasing efficiency, the loss rate of each community group buying platform has generally been greatly reduced, and Duoduomai's performance is the best. According to the survey, Duoduomai's current operating loss rate (calculated by profit/GMV) has narrowed to a single digit percentage, and it is expected to achieve a balance of income and expenditure between 2023 and 2024.
However, in addition to the external factors of slowed industry competition, the reason why Duoduomai depends on stage victories is still its consistent strategy of extreme cost-effectiveness and a rough but highly flexible management mode, specifically:
(1) While providing the most affordable prices to upstream consumers, Duoduomai also has a greater bargaining power over suppliers, using a bidding strategy where the supplier with the lowest bid can get the order. Therefore, although Duoduomai has the lowest unit price, its gross profit margin is higher in the industry.
(2) Duoduomai has relatively loose requirements on delivery time and product quality (cold chain transportation), and the cost of fulfilling one order is also the lowest in the industry.
(3) Pinduoduo's main site users have a high degree of overlap with Duoduomai, and they already have a consumption habit of fresh food, so Duoduomai has more natural traffic, and the drainage cost and commission rate for group leaders are lower.
(4) Duoduomai's local companies have a higher degree of flexibility, and have a greater autonomy in purchasing goods and promoting activities, facilitating quicker expansion into new cities.
Overall, Duoduomai has won the fresh e-commerce war, successfully retaining the hearts of fresh food consumers, stabilizing the core user group of the main site, and continuing to enjoy the incremental increase in online penetration of fresh food and user stickiness brought by high-frequency consumption.
However, the hidden worry is that Duoduomai's current rough strategy, although bringing the largest scale and highest economic benefits, has the hidden dangers of poor product quality and insufficient investment in contracted capabilities. In the medium and long term, Duoduomai will also face the problem of difficulty in breaking through the user group upward.
Translated to financial models, considering that Duoduomai is already at the forefront of the community group buying market, we have raised our forecast for Duoduomai. It is expected to achieve a GMV scale of approximately 400 billion yuan by 2026 and contribute approximately 13 billion yuan in operating profit. The operating profit margin (compared to GMV) of the grocery business will be optimized from -7.5% in 2022 to 3.1% in 2026, corresponding to a single item profit of 45 cents (compared horizontally). JD's self-operated supermarket's stable operating profit rate should be around 4%.
The core assumption of the above forecast is:
(1) After 21-23 years of rapid growth and full user penetration, the growth rate of the grocery business's sales volume will quickly slow down. Long-term growth will be driven by an increase in per customer transaction value after category expansion.
(2) As the product structure expands from low-margin fresh food to high-margin packaged food and daily goods, and at the same time, the platform reduces user subsidies, the platform's net realization rate (equal to per customer transaction value - purchase price - user subsidy) is expected to increase from the current 11.5% to 15.5%, which is the most significant driving factor for the profitability of the grocery business.
(3) In addition, with further cultivation of user habits, there is further room for the reduction of customer acquisition costs and leader commissions.
After these improvements, the average profit per order of Duoduo Maicai business is expected to reach 0.45 yuan per order and correspond to an operating profit rate of 3.3%. Please refer to the table below for specific calculations:
In short, as the profitability of the grocery business continues to improve, it is expected to become profitable from the burden of annual losses of more than 10 billion yuan, turning around in 2023 or 2024, and contributing to a stable and sustained operating profit rate of more than ten billion yuan, further strengthening Pinduoduo's outstanding profit release capability.
- If domestic e-commerce adheres to 'lying flat', we just need to 'roll over' to overseas.
Due to the improvement of domestic e-commerce competition, a reduction in expenses, and a significant improvement in Pinduoduo's earning ability, the imbalance between spending and profit provides a great external investment window for the company's overseas platform, Temu.
According to the company's communication at the press conference, currently, Temu has adopted a buyer consignment model similar to Shein. Temu's buyers select products from various suppliers. After the products are chosen, the suppliers deliver the products to Temu's central warehouse in China (with transportation costs borne by the platform). Moreover, all the promotion, pricing, sales, and distribution services for C-end customers are provided by the platform. At the same time, Temu does not acquire the ownership of goods from suppliers and will return unsold products to them.
In terms of product positioning, Temu continues the successful positioning of Shein and Shopee with the ultimate cost-effective positioning. Currently, it mainl focuses on clothing, accessories, and other products with a unit price below $20. However, according to the company's communication, Temu is positioned as a full-category platform. In the initial customer acquisition stage, Temu provides new users with a 30% discount on the entire platform and temporarily waives shipping fees for orders over $49.
However, Pinduoduo's GMV in China is about 3 trillion RMB (over 400 billion USD), which means that Temu must achieve a scale of at least several tens of billions of US dollars in GMV in order to bring meaningful revenue growth to the company as a whole (such as accounting for 5% of total revenue). However, Shein, a cross-border e-commerce platform that has developed overseas for many years, only achieved a GMV scale of 16 billion USD in the first half of 2022. Therefore, Temu is still far from contributing significant incremental revenue to the company, and at the stage of business investment, it will also drag down the overall profitability of the company. Therefore, although Temu provides more imagination space, in the current environment, the market will not consider Temu's impact on Pinduoduo's valuation.
4. Valuation Judgment
In summary, under the conditions of 1) the slowing down of e-commerce competition and the reduction of marketing investment demand, and Pinduoduo's basic plate in the sinking market and agricultural product category becoming more stable, 2) the balance between profit and loss of Duoduo Maicai approaching the company’s turning point, resulting in a significant reduction in overall drag on the company, and 3) the demand for destocking from businesses, the realization rate of Pinduoduo is expected to remain high. Pinduoduo is the most benefiting target in the current cycle of e-commerce stocks.
So, the remaining question is, how long will the stage of the e-commerce company's collective truce and focusing on their own operational efficiency last? In other words, how long can the competitive landscape that is favorable to Pinduoduo last? In response to this question, Dolphin Analyst will give financial predictions and valuation judgments for Pinduoduo in different scenarios:
(1) Neutral scenario: Pinduoduo's penetration into the upstream market fails, but it remains the cost-effective e-commerce leader:
Under the following core assumptions:
① In the future, various e-commerce platforms will continue to cultivate their respective advantageous fields, that is, JD and Alibaba will not vigorously attack Pinduoduo's basic plate, the sinking market and price-sensitive user groups, so Pinduoduo can continue to dominate this segmented sector. Therefore, Pinduoduo's marketing investment will continue to decrease, from accounting for about 38% of revenue in 2022 to about 34%;
② The monetization rate of e-commerce advertisements will only decrease slightly from the high point in 2022 and then remain at a high level of about 3.4%;
③ However, considering that Pinduoduo's user penetration has reached its peak and that the average order value is difficult to increase due to the inability to surpass brand and quality e-commerce, assuming that price growth is the same as the CPI, it is expected that Pinduoduo's total revenue growth rate from 2023 to 2026 will drop rapidly from 19% to 10%.
④ However, after the loss of the grocery business, the company's profits can be further released. It is predicted that the total operating profit in 2025 will reach 56.3 billion, of which the main website will contribute 49.2 billion in profit, corresponding to a profit margin of 33%, and the grocery business will contribute 7.1 billion in profit, corresponding to a profit margin of 2% (compared to GMV). Based on the above financial forecasts and Dolphin Analyst's DCF model, we estimate that in a neutral scenario, Pinduoduo's fair value is $102.7 billion, corresponding to a stock price of $80 per share. In terms of relative valuation, this is equivalent to a 23x P/E based on a net profit of $30.3 billion in 2022 and a 19x P/E based on a net profit of $36.7 billion in 2023.
(2) Conservative scenario: after passing through the industry's trough, "internal competition" will strike again
In a more conservative scenario, Dolphin Analyst assumes that after passing through this round of industry downturn, various e-commerce platforms will quickly return to a competitive state, and Pinduoduo's competitive landscape will also deteriorate relatively.
① Therefore, Dolphin Analyst slightly lowered the revenue growth rate for 2023-2026 (12%-7%).
② Due to the return of competition, it is expected that the sales expense ratio in 2023 will increase compared to this year, and it will not significantly decrease in the long term; the advertising monetization rate will fall slightly above the level in 2021 due to competition.
In this scenario, it is expected that Pinduoduo will achieve approximately $45.4 billion in operating profit in 2025, of which the main site can contribute $38.3 billion in profit, corresponding to a profit margin of 30%, and the profit forecast for Duoduo Maicai is the same as before.
Based on the above conservative scenario financial forecast, we estimate Pinduoduo's fair value is $77 billion, corresponding to a stock price of $60.9 per share based on the DCF model. From a relative valuation perspective, this corresponds to a 17.7x P/E in 2022, and a 16.8x P/E based on a net profit of $33.7 billion in 2023.
In summary, based on different answers to whether the e-commerce competitive landscape will deteriorate again after the industry passes the trough, Dolphin Analyst calculates a range of Pinduoduo's stock price between $60.9 and $80, corresponding to a potential increase of around 0%-32% from the current price. Short-Term Risks:
Pinduoduo's current valuation has dropped into the pessimistic range, providing a certain safety margin. However, if the company benefits from the standard scenarios of consumer downgrading, merchant inventory clearance, and grocery business monitoring, its valuation also has considerable upward elasticity. Therefore, the current price level is a relatively comfortable entry point.
However, please note that Pinduoduo has not yet returned to the Hong Kong stock market, and the risk of delisting among Chinese concept stocks has not been completely eliminated. We cannot ignore the valuation discount brought by policy factors.
Secondly, Vipshop's unexpected success may stem from its low-key approach.
Assuming that we do not look at the company name, there is a company that generates a net profit of 4-5 billion yuan annually in a specific field, and due to its good business accounts, cash flow from operations is always higher than profit. The company also has nearly 19 billion yuan in net cash assets, while its market value is only 38 billion yuan.
This means that the company's net cash already accounts for 50%. Once the remaining 19 billion market value is removed, the company can buy itself back in four years of hard work.
Of course, if it were just the investors using their imagination to dream about buying themselves back, it would be fine. The company itself is actively working on it and spending money to buy back its own shares with real gold and silver: the latest buyback plan consists of RMB 7 billion, which will be completed within 24 months. From a static perspective, it is equivalent to increasing the stock price by 20%.
However, if we reveal the company name, namely Vipshop, many people may look down on it: no matter how we look at it, it seems like a neglected e-commerce platform, surrounded by fierce competitors. What is the appeal?
For the short-term Q3, Vipshop does have some obvious problems:
(1) As a platform primarily promoting clothing and other fashion categories, the items sold in Q3 are mostly summer clothing. However, summer clothing has lower unit prices and lower profit margins, especially this year when the summer is exceptionally hot and lengthy. Therefore, Q3 is not a favorable period for Vipshop to achieve revenue growth.
(2) The company expressed during the conference call that it plans to restart customer acquisition through pre-installation and application stores, in order to drive user purchases during the peak season in Q4.
(3) The combination of these two factors indicates that it is not an ideal situation to restart customer acquisition while facing unfavorable weather conditions from a cyclical or seasonal perspective. Under such circumstances, users may be attracted, but marketing costs may be high while revenue is low, leading to poor performance.
(4) However, from the perspective of Dolphin Analyst, as a financially conservative company, Vipshop should adjust its customer acquisition plan for such weather conditions. If revenues cannot be achieved, customer acquisition will likely slow down, but revenue may fall in the lower end of the company's original conservative revenue guidance based on pessimistic weather conditions.
Therefore, there is still a likelihood that the risk of Vipshop's Q3 results will be further released. But after Q3, its situation will improve considerably: under the background of the overall inventory clearance in the clothing industry, Vipshop currently has plenty of supply of goods. Once the winter arrives, it will be Vipshop's peak season for selling expensive winter clothes. For Vipshop, the profit margin is higher, and the income certainty in the fourth quarter will be higher as well.
Moreover, with the overall competition slowing down, the competition pressure on Vipshop will also be alleviated to a certain extent, which can slightly help its profit repair. As mentioned in communications with analysts, "the gross profit margin will further improve in the second half of the year".
One basic premise of improving the basic fundamentals in the fourth quarter is that Vipshop's valuation is safe enough or is already safe to the point where it no longer needs to be calculated using complex valuations, and a simple logical judgment like that of Dolphin Analyst's is sufficient.
If based on the trend of consumption in the normal environment of the clearance market, according to iResearch's estimate, the clearance market is still a mid-single-digit growth vertical retail platform, and Vipshop's penetration rate in the clearance market has always been slightly increasing.
Therefore, in Dolphin Analyst's long-term forecast, after the epidemic, its compounded annual revenue growth is above the range of 10%-5%.
When it comes to operating profit margins, Dolphin Analyst's forward estimates are still much more conservative than Vipshop's own estimates. Vipshop's main goal is to maintain its operating profit margin at above 5% through gross margin management after the epidemic.
However, based on the operating profit margin during the epidemic, Dolphin Analyst made conservative assumptions, believing that Vipshop would find it difficult to substantially improve its gross profit margin in a strong competitive environment and still basically maintain its gross profit margin in its assessment. By 2026, its operating profit will reach 5 billion.
Under this conservative expectation, with a perpetual growth rate of 3% and a discount rate of 12.5%, its DCF valuation still has a premium space of $11 per ADS compared to its current value of $8.
However, if we look at recent PE ratios, based on Dolphin Analyst's conservative profit estimation of 2.8 billion RMB for 2022, and assuming a 10x PE ratio, in addition to its net cash of 18.6 billion RMB after excluding interest-bearing debt, the combined PE value is 6.5 billion U.S. dollars, equivalent to a single share value of 10.2 U.S. dollars, which is not much different from the DCF price.
Under the super-low valuation, after the negative risk of the third quarter financial report, the basic fundamentals have entered a marginal repair state, plus the remaining repurchase amount of 15% of the company's market value to protect it, Vipshop has a very high certainty of undervalued repair. **
**Dolphin Analyst's Past Related Research:
E-commerce Industry
September 22, 2022, "[Alibaba, Meituan, JD.com, Pinduoduo: all have accepted fate? Still need to compete for the "big luck"] (https://longbridgeapp.com/topics/3457950)"
April 27, 2022, "Alibaba vs Pinduoduo: After the bloodshed, only coexistence remains? "
April 22, 2022, "Why can Meituan and JD.com perform better in the stock fight?"
April 13, 2022, "As the cycle declines, how much value is left for Alibaba, Tencent, etc.?"
Pinduoduo
August 29, 2022, Telephone Conference: "Increase investment in the future, Pinduoduo is determined to continue to "toss" (telephone conference summary)"
August 29, 2022, Earnings Report Review: "Performance explosion! "Rolling King" Pinduoduo is actually the king behind the scenes"
May 27, 2022, Telephone Conference: "R&D investment will increase, future profits may fluctuate (Pinduoduo 1Q22 telephone conference minutes)"
May 27, 2022, Earnings Report Review: "Chop the magic sword again, Pinduoduo "kills" back"
March 21, 2022, Telephone Conference: "The "lying flat strategy" is only temporary, will Pinduoduo return to the investment and growth track? (Telephone conference summary)"
March 21, 2022, Earnings Report Review: ""Half paradise, half hell", Pinduoduo is "splitting" again"
Vipshop
August 19, 2022, Telephone Conference: "Increase investment, strive for user growth in Q3 and revenue growth in Q4 (Vipshop telephone summary)"
August 19, 2022, Earnings Report Review: "Give up! Vipshop's countercyclical story is just a story without ability" 2022-05-19 Phone Meeting "Can Non-Apparel Categories Breakthrough Save Vipshop?"
2022-05-19 Financial Report Review "Performance Plunge, Vipshop's Dawn is Hard to Find"
2022-02-23 Financial Report Review "Performance "Deep Dive," No Survival Space for Vipshop Under the Internal Competition of Giants?"
Risk Disclosure and Statement of this article: Dolphin Analyst Research Disclaimer and General Disclosure.
