PDD Holdings' International Expansion: Can Temu Replicate Domestic Success Abroad?

With a $204.04 billion market cap, PDD Holdings Inc. (PDD) is a leading Chinese e-commerce company. It surpassed revenue and earnings consensus estimates for the first quarter of fiscal 2024, powered by its international marketplace, Temu, and increasing consumer interest in its flagship discount e-commerce platform, Pinduoduo.

For the first quarter that ended March 31, 2024, PDD’s revenues increased 130.7% year-over-year to $12 billion. That surpassed analyst estimates of $10.58 billion. Revenues from online marketing services and others were $5.88 billion, up 56% from the prior year’s quarter, and revenues from transaction services rose 327% year-over-year to $6.14 billion.

The discount e-commerce giant’s non-GAAP operating profit grew 237.4% from the prior year’s period to $3.95 billion. Further, PDD’s non-GAAP net income attributable to ordinary shares rose 202% from the year-ago value to $4.24 billion. It posted non-GAAP earnings per ADS of $2.86, compared to the consensus estimate of $1.43, and up year-over-year.

“In the first quarter, we continued our investment in key areas critical to our high-quality development strategy,” said Ms. Jun Liu, VP of Finance of PDD. “Rather than focusing on short-term results, we prioritize long-term value creation and remain committed to further deepening our investments in the future.”

During the quarter, PDD’s cash inflows from operating activities came in at $2.02 billion, an increase of 1,474% year-over-year, primarily due to a surge in net income. As of March 31, 2024, the company’s cash, cash equivalents and short-term investments stood at $33.50 billion.

“We are committed to offering a trustworthy shopping environment for our users around the world,” commented Mr. Lei Chen, PDD’s Chairman and Co-Chief Executive Officer. “We will keep focusing on growing our long-term intrinsic value through investing in initiatives that bring sustainable impacts to our communities.”

PDD has gained market share with highly competitive prices at home and abroad. Shares of PDD have surged more than 115% over the past year.

PDD Holdings’ exceptional financial performance in the first quarter is mainly fueled by solid user growth and sales at its global marketplace, Temu. Let’s analyze Temu’s potential to drive the company’s growth in international markets by examining the competitive landscape, regulatory hurdles, and strategic moves.

Strategic Initiatives

Temu, an online marketplace operated by PDD Holdings, sells a variety of products from fashion to household, primarily made in China, for rock-bottom prices. Temu’s business strategy focuses on attracting customers via competitive pricing, social buying, heavy advertising, and an immersive technological design. Its business model has allowed it to gain immense popularity since its launch in 2022 in China and overseas.

Temu platform went live in the U.S. in September 2022, offering products across more than 15 categories. It was the first major overseas push of PDD Holdings and expanded in several countries, including Australia, New Zealand, France, Italy, Germany, the Netherlands, Spain, and the United Kingdom.

On January 17, 2024, Temu officially launched in South Africa, marking the 49th country the e-commerce marketplace had entered since 2022.

To drive robust growth in international markets, Temu has implemented several strategic initiatives. The cross-border e-commerce marketplace tailors its product selections to meet the preferences of local markets. It also collaborates with local suppliers, manufacturers, and logistics providers to ensure efficient operations, enhancing its market presence.

Moreover, Temu invests heavily in marketing to build brand awareness and attract customers, including digital advertising, social media campaigns, and localized promotional events. As per J.P. Morgan analysts, Temu invested around $1.7 billion in advertising in the past year, a figure anticipated to climb to $3 billion this year.

The international marketplace also utilizes advanced technologies to personalize shopping experiences, optimize product recommendations, and enhance customer service. Further, AI-driven insights help Temu in understanding evolving consumer preferences and trends.

Competitive Landscape

Temu faces fierce competition from established e-commerce rivals, including Shein, eBay, Alibaba Group’s (BABA) AliExpress, and Amazon.com, Inc. (AMZN) in the U.S. and other markets.

Moreover, PDD’s value-for-money positioning and the remarkable growth of its Temu marketplace have enabled the company to maintain its leadership position in China’s e-commerce market. PDD Holdings’ outstanding first-quarter results sparked a significant surge in its stock price, propelling its market capitalization past that of its competitor, Alibaba.

“We think Temu’s profitability will improve faster than previously estimated due to its introduction of the half consignment model, under which logistics costs will be borne by merchants,” Morningstar said in a note.

“We also believe PDD’s domestic platform will be able to defend its position given the strong consumer perception of its value-for-money positioning,” said Morningstar analyst Chelsey Tam, adding that PDD Holdings comes up top in their preferences, while JD.com and Alibaba are in second and third spots, respectively.

In line, Goldman Sachs increased PDD’s rating to “buy” from “neutral,” citing the company’s continued growth momentum in advertising revenue in the first quarter and Temu’s potential.

This stock upgrade comes “on the back of its adtech capabilities combined with China’s cost-competitive suppliers/merchants /supply chains alongside favorable risk-reward, with the current market cap implying no valuation ascribed to Temu,” stated Goldman Sachs analyst Ronald Keung.

According to Earnest Analytics, Temu had acquired approximately 17% of the U.S. online discount store market as of last November.

In addition to leading the Chinese e-commerce arena and successfully expanding into Western markets, Temu has overtaken Shein by staying at the top of shopping app rankings in Japan and South Korea for a longer period. The emerging e-commerce app is focused on selling cheap goods to international customers.

Regulatory Issues

Chinese e-commerce retailers have faced rising scrutiny on handling content on their platforms. On May 31, 2024, the European Union (EU) announced adding Temu to its list of platforms facing the bloc’s highest level of digital scrutiny. By September this year, the online marketplace must adhere to the DSA’s most strict rules and obligations, including assessing and mitigating “systemic risks.”

“Temu must put in place mitigation measures to address risks, such as the listing and sale of counterfeit goods, unsafe products, and items that infringe on intellectual property rights,” the EU, the 27-nation bloc’s executive arm, said in a press release.

The company acknowledges the European Commission’s decision. “We are fully committed to adhering to the rules and regulations outlined by the DSA to ensure the safety, transparency, and protection of our users within the European Union,” PDD Holdings added.

Bottom Line

Established in 2022, Temu is PDD’s e-commerce marketplace aimed at expanding the company’s footprint beyond China. It has started entering international markets just in the past two years. And it has since grown in immense popularity by offering affordable products, ranging from apparel to home products, shipped down from China.

Since its initial launch in the U.S., Temu has rapidly expanded its operations to 49 countries, with South Africa being the latest. PDD’s value-for-money positioning and outstanding growth of its Temu platform have helped the company lead China’s e-commerce market.

The marketplace aims to replicate the company’s success in China by offering attractive deals and localized products to international customers. Temu’s unique business model focuses on attracting customers by offering products at prices below the industry norms, aggressive marketing, and technological innovation.

Although Temu faces stiff competition from established e-commerce rivals across America and other markets, it leverages strengths in PDD’s social commerce, cost-effective, efficient supply chain management, and competitive pricing to gain market and expand its global footprint.

PDD beat first-quarter 2024 revenue and earnings analyst estimates, primarily driven by significant growth of its international marketplace, Temu, and surging consumer interest in its flagship discount e-commerce platform, Pinduoduo.

This year, the company aims to deepen the execution of its high-quality development strategy, where it will put efforts into improving the overall consumer experience, strengthening supply chain capabilities, and fostering a healthy platform ecosystem.

Analysts expect PDD’s revenue and EPS for the second quarter (ending June 2024) to increase 93.1% and 92.9% year-over-year to $13.86 billion and $2.77, respectively. For the fiscal year 2024, the company’s revenue and EPS are expected to grow 66.3% and 82.5% year-over-year to $57.19 billion and $11.79, respectively.

Given PDD’s robust financial performance, accelerating profitability, and bright growth outlook primarily attributed to Temu’s successful international expansion, investors could consider buying this stock now.

Top China Stock Picks to Buy Amid Economic Boom

China's economy surged beyond projections at the start of 2024, with the Gross Domestic Product (GDP) escalating by 5.3% in the first quarter, an increase from the previous quarter's 5.2%, as the National Bureau of Statistics reported. The world's second-largest economy embraced a familiar strategy: significant investment in its manufacturing domain to invigorate growth.

This included a spree of new factories, propelling global sales of solar panels, electric vehicles, and various other products. Industrial production saw a 6.1% leap in the first quarter compared to the previous year, driven by robust expansion in high-tech manufacturing.

Notably, the production of 3D printing equipment, electric vehicle charging stations, and electronic components surged by approximately 40% year-on-year. Moreover, last month, the manufacturing purchasing managers' index (PMI) expanded for the first time in six months, while the Caixin/S&P PMI reached its highest level in over a year, buoyed by increased overseas demand.

That said, China has established an annual growth target of approximately 5% for 2024. Additionally, authorities have implemented interest rate cuts to stimulate bank lending and expedited central government spending to bolster infrastructure investment.

Given this backdrop, investors can leverage the economy's solid momentum by considering buying fundamentally robust Chinese stocks poised to deliver substantial returns.

PDD Holdings Inc. (PDD)

PDD Holdings Inc. (PDD), the e-commerce operator behind Pinduoduo and Temu, has rocked both the Chinese and U.S. e-commerce sectors with outstanding earnings and upbeat long-term prospects. The company primarily focuses on bringing businesses and people into the digital economy. Its market capitalization stands at $164.93 billion.

For the fourth quarter that ended December 31, 2023, PDD’s total revenues increased 123.2% year-over-year to $12.52 billion. Its non-GAAP operating profit rose 146% from the year-ago value to $3.46 billion. Its non-GAAP net income attributable to ordinary shareholders and non-GAAP earnings per ADS were $3.59 billion and $2.40, up 110.4% and 71.7% year-over-year, respectively.

Furthermore, cash inflows from operating activities for the quarter came in at $5.20 billion, an increase of 38.9% from the prior year’s quarter, primarily due to the surge in net income. Such financial prowess solidifies the company’s position in the market and sets a high bar for competitors.

Lei Chen, co-CEO of PDD, hailed 2023 as a “pivotal chapter,” attributing Pinduoduo's resilience in a sluggish Chinese economy and Temu’s burgeoning popularity in the U.S. to the company's strategic prowess. As Pinduoduo's affordable offerings resonate with value-conscious consumers amid economic uncertainties, the company's trajectory is becoming even more compelling.

Looking ahead, analysts expect PDD’s revenue to increase 97.8% year-over-year to $10.54 billion for the first quarter ended March 2024, and its EPS is expected to grow 47.8% year-over-year to $1.45. Moreover, the company has an impressive earnings surprise history as it surpassed consensus revenue and EPS estimates in all four trailing quarters.

Furthermore, for the fiscal year 2024, Street expects PDD’s revenue and EPS to increase 49.4% and 30.9% from the prior year to $51.37 billion and $8.45, respectively.

Baidu, Inc. (BIDU)

Baidu, Inc. (BIDU), a Chinese tech company specializing in Internet-related services, products, and artificial intelligence (AI), recently unveiled an array of cutting-edge AI models and toolkits. These advancements democratize AI development, empowering individuals of all skill levels to create transformative applications, a move poised to elevate BIDU's standing in the AI arena significantly.

One standout is ERNIE, BIDU's flagship AI model, renowned for its versatility across various applications. ERNIE Bot, a conversational AI bot built on this framework, has swiftly garnered 200 million users since its launch in March 2023, handling a staggering 200 million daily queries.

Baidu Comate, another innovation powered by ERNIE, has catalyzed innovation by contributing to 27% of new code within BIDU, serving over 10,000 companies, with an impressive 46% adoption rate. Additionally, Qianfan, BIDU AI Cloud's FM platform, has enabled over 85,000 enterprises to develop 190,000 AI applications, showcasing BIDU's wide-reaching impact in the industry.

BIDU's financial performance mirrors these technological triumphs. In the fourth quarter of fiscal 2023, the company’s revenue grew 5.7% year-over-year to $4.92 billion. Its non-GAAP operating income surged by 8.9% from the year-ago value to $996 million, and its non-GAAP net income experienced a 44.4% year-over-year growth, reaching $1.09 billion.

Moreover, BIDU’s adjusted EBITDA showed significant improvement, increasing by 10% year-over-year to $1.28 billion.

Analysts foresee a promising growth trajectory for BIDU. Wall Street expects the company’s revenue to increase 6.3% year-over-year to $19.87 billion for the fiscal year ending in December 2024, accompanied by an estimated EPS of $10.74. Furthermore, BIDU surpassed consensus EPS estimates in all four trailing quarters, which is remarkable.

For the fiscal year 2025, the company’s revenue and EPS are anticipated to grow 7.9% and 10% year-over-year to $21.43 billion and $11.82, respectively. These optimistic projections underscore BIDU's unwavering commitment to innovation and its potential for sustained success in the dynamic landscape of AI technology.

Baozun Inc. (BZUN)

Baozun Inc. (BZUN), a premier brand e-commerce solution provider and digital commerce enabler, has fortified omnichannel capabilities and expanded core product categories through high-level engagements. Collaborating with brand partners and key marketplaces, the company has crafted effective go-to-market strategies, acquiring over 50 new brands in 2023.

Implementing a new store concept transitioning from large-scale to boutique formats, BZUN enhances brand DNA and fosters immersive brand experiences beyond mere commercial transactions. In-store pop-ups and campaigns are further amplifying social engagement, enriching consumer experiences.

In addition, in January, the company authorized a new share repurchase program, allowing the repurchase of up to $20 million worth of outstanding American depositary shares (ADSs) and Class A ordinary shares over the ensuing 12 months, starting January 24, 2024.

During the fiscal 2023 fourth-quarter earnings call, BZUN unveiled the inauguration of 10 new stores, including a flagship in Guangzhou, alongside expansions in Shantou, Shenzhen, and Beijing. Notably, square meter efficiency surged 50% for newly opened stores, with existing ones witnessing a remarkable 19% spike in same-store sales.

For the fourth quarter that ended December 31, 2023, BZUN reported an 8.9% year-over-year surge in total net revenues to $391.61 million, marking a significant turnaround from the previous year's loss. The company posted an adjusted operating profit for E-Commerce of $16.60 million for the quarter.

Mr. Vincent Qiu, BZUN’s Chairman and CEO, said, “In 2023, we started our transformation journey, expanding into three business divisions. Throughout the year, we solidified our leadership in the digital commerce industry, and further enhanced operational efficiency. I am grateful for the resilience and adaptability demonstrated by the Baozun team amid the ever-changing market environment.”

“Looking ahead to 2024, despite macro uncertainties, we remain committed to sustainably executing our plans with diligence and patience. The improved health of our business fundamentals gives us confidence to enhance value proposition to our brand partners,” he added.

For the fiscal year ending December 2024, Street expects BZUN’s revenue to increase 3.2% year-over-year to $1.26 billion. Similarly, the company’s revenue for the fiscal year 2025 is estimated to grow 6.9% from the previous year to $1.35 billion.

Bottom Line

While U.S. stocks may offer stability in tumultuous times, diversifying into international stocks can yield significant benefits, especially in terms of portfolio risk management and solid returns. Financial advisors often advocate for familiarity with American companies, yet venturing into global markets, particularly China, can broaden investment horizons and unlock new opportunities.

This is because China is poised to reclaim its global significance, as per Bloomberg's analysis of IMF forecasts. Projections suggest China's economic resurgence will surpass the combined growth of the G-7 nations. China is anticipated to lead with an estimated 21% contribution to global economic growth from now through 2029.

In comparison, the G-7 nations are expected to contribute approximately 20%, while the U.S. falls short with 12%, nearly half of China's projected growth. Remarkably, 75% of global growth will originate from only 20 countries, with China, India, the U.S., and Indonesia accounting for over half of this expansion.

Investors can capitalize on this dynamic economic landscape by exploring fundamentally strong Chinese stocks poised for substantial returns. Among these, PDD, with its meteoric rise in e-commerce, BIDU, leveraging cutting-edge AI innovations, and BZUN, a leading brand e-commerce solution provider, stand out.

These stocks’ impressive financial performances, strategic initiatives, and optimistic growth projections make them compelling investment options for investors seeking exposure to the thriving Chinese economy.