China's Biggest Winner in Singles Day Bonanza May Be PDD, Say Market Experts

2023-11-08 18:16

As China’s e-commerce giants hunker down for battle this month in the world’s biggest shopping event, market pros

As China’s e-commerce giants hunker down for battle this month in the world’s biggest shopping event, market pros are betting that Temu-owner PDD Holdings Inc. will continue beating them all.

PDD’s US-listed shares have soared 22% since July while key rivals Alibaba Group Holding Ltd and JD.com Inc. have tumbled. The outperformance reflects PDD’s stronger sales as it steals market share at home and continues to win fans among US consumers as well.

The next big catalyst for the sector is Singles’ Day, the weeks-long online shopping festival centered around Nov. 11, a date seen celebrating Chinese singlehood. Quarterly results for the sector are also due over the next few weeks.

While fierce competition and high promotional spending raise profitability concerns, the market sees further upside for PDD. The stock’s put-to-call ratio has declined from a September high, showing increasing bullishness among options traders, and short interest has dropped to a record low as bears retreat.

Price Battle

PDD’s Temu is increasingly being seen as a disruptive force in global e-commerce since its high-profile ads during the Super Bowl in the US earlier this year. The site — which follows the same strategy of cut-rate pricing employed by the company’s domestic app Pinduoduo — has posted strong sales gains and expanded operations into 47 countries.

At home, the aggressive promotions of Singles’ Day bring normally higher-end Alibaba and JD.com into PDD’s discount space. PDD is offering special cashback programs for Singles’ Day in addition to other new initiatives aimed at wooing more users.

“While PDD usually deemphasizes its participation in Singles’ Day, we believe more buzz around its ‘Billion Dollar Subsidy’ and ‘Annual Price Reduction Lists’ and the consumption trade-down trend are likely to support higher growth,” Citigroup Inc. analyst Alicia Yap wrote in a note.

Citi expects PDD’s Singles’ Day gross merchandise value to see a percentage increase of “around mid-to-high 20s” compared with less than 10% for Alibaba and JD.com. The brokerage opened a 30-day “upside catalyst watch” on PDD on Oct. 26.

Earnings Outlook

Investors are also looking toward PDD’s third-quarter results, which are expected to be released later this month. Losses at Temu will be under the spotlight as analysts debate the sustainability of its cash-burning business model, regulatory headwinds and how to value its potential.

Temu’s Win Over Shein in the US Is Hurting Its Bottom Line

The surge in its share price has PDD trading at 19 times forward earnings estimates, more than double the multiples for Alibaba and JD.com. Some see the differential as justified, with PDD’s sales estimated to grow 57% this year, more than five times the gains expected for its rivals.

“If PDD is able to beat consensus estimates and deliver a narrower-than-expected margin drop while delivering strong 2H growth of more than 50%, the stock could re-rate further,” said Bloomberg Intelligence analyst Catherine Lim.

Goldman Sachs Group Inc. sees a “strong top-line beat” in the third quarter while warning that Temu could post a bigger-than-expected loss. But investors are “gradually willing to ascribe some valuation for the Temu business” on the back of faster-than-expected GMV expansion, analyst Ronald Keung wrote in a note.

Lack of access to PDD management can be “a stumbling block in terms of getting up to date information on the company and their strategy,” said Xin-Yao Ng, an investment director for Asian equities at abrdn. Still, the company should continue to gain share in China, Temu has good momentum and the stock is “very cheap” if PDD can keep offsetting losses overseas to maintain overall earnings growth.

Tech Chart of the Day

Nasdaq 100 futures were edging lower on Wednesday, putting the tech-heavy index on track to snap its longest streak of gains in about two years. The index has risen for the last eight consecutive sessions amid optimism that central-bank interest rates are near their peak.