Temu parent PDD Holdings’ shares are impending growth due to geopolitical dangers and intense competition in China’s e-commerce industry.
TakeAway Points:
- Geopolitical dangers and tough rivalry in China’s e-commerce sector are impeding the growth of Temu parent PDD Holdings’ shares.
- PDD is now offering the largest discount on record, at half the valuation of the Nasdaq 100.
PDD Holdings’ shares Struggle
The US-listed company is still only selling at 13 times its estimated earnings for the upcoming year, despite a 43% increase from a March low. PDD is now offering the largest discount on record, at half the valuation of the Nasdaq 100.
For a firm whose sales more than doubled in the most recent quarter—growing at a pace second only to Nvidia’s on the tech-focused index—that would sound like a fantastic deal. With Beijing’s aggressive rhetoric on the trade war and the two contenders in the next US presidential election, some people believe the disparity to be warranted.
“People are worried about election risks and potential tariffs coming for PDD, leading many to attach zero or even negative value to Temu,” said Shuyan Feng, deputy general manager for investment management at Huatai Asset Management.
PDD’S earning Tripled
In the quarter that ended in March, PDD’s earnings more than tripled as the business effectively introduced its low-cost e-commerce strategy to international markets. Key Western markets have expressed concern about Temu’s rapid growth, with Europeans claiming that the Chinese online marketplace does not adequately safeguard its customers.
Deeper issues exist in the US, where legislators have claimed Temu and rival Shein take advantage of legal gaps to hurt American rivals. More pressure has been placed on other Chinese Internet companies by the US government’s recent decision for ByteDance to divest TikTok.
Concerns for Intense Rivalry
Within China, fierce rivalry is another cause for concern. PDD’s bitter rival Alibaba Group Holding reported double-digit growth in gross merchandise value in the most recent quarter, regaining market share after years of losses. JD.com, which has reduced costs and increased benefits to entice customers, has also seen a quickening of sales growth.
Though PDD has gained 43% since March, ten times more than the Nasdaq 100, it is not as though investors have been ignoring it. However, the roughly 60% increase in forward earnings expectations over the same period of time has greatly surpassed that.
On Friday, May 24, Goldman Sachs raised PDD from neutral to buy, highlighting the company’s robust revenue growth and adtech capabilities. According to expert Ronald Keung, the primary drawbacks of intense local competitiveness and tensions with the US are “more than priced in.”
“China e-commerce is emerging as one of the more undervalued sub-sectors within China internet. We note there still appears to be limited investor appetite in valuing the Temu full business potential given geopolitical uncertainties.” Keung wrote in a note.
PDD’s lack of shareholder return activities, in contrast to companies like Alibaba and Tencent Holdings that are repurchasing stock worth billions of US dollars, may also be contributing to the company’s value discount. With the exception of PDD, the top 15 companies in the exchange-traded Kraneshares CSI China Internet Fund all have a regular dividend payout policy or a repurchase programme in place.
Another factor that might be impeding PDD’s growth is its ambiguous investor information. PDD’s business categories might be challenging to understand, and the company does not disclose sales by location.
“The main thing holding back on PDD’s valuation is the lack of disclosures. It’s very difficult to value domestic PDD and Temu separately, and that’s important because there’s definitely a big geopolitical discount on the stock due to Temu.” said Xin-Yao Ng, investment director at Abrdn.
