Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<ul>
<li>It was reported yesterday that the Chinese venture capitalist, Neil Shen who heads Sequoia Capital China has decided to trim his personal investments in <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> and <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a>, two of the most successful investments that propelled his personal net worth to over $4.0bn.</li>
<li>We think the exit of high profile Chinese investors who has on the ground knowledge of Chinese politics (amidst the regulatory scrutiny and Xi’s push for common prosperity) could rattle both domestic and overseas investors. Meanwhile, Pinduoduo’s valuation multiples have significant further downside risk, possibly prolonging the weakness that lasted since March 2021.</li>
</ul>


It was reported yesterday that the Chinese venture capitalist, Neil Shen who heads Sequoia Capital China has decided to trim his personal investments in Pinduoduo (PDD US) and Meituan (3690 HK), two of the most successful investments that propelled his personal net worth to over $4.0bn.
We think the exit of high profile Chinese investors who has on the ground knowledge of Chinese politics (amidst the regulatory scrutiny and Xi’s push for common prosperity) could rattle both domestic and overseas investors. Meanwhile, Pinduoduo’s valuation multiples have significant further downside risk, possibly prolonging the weakness that lasted since March 2021.


Pinduoduo: Foreign Investors Could Panic as VC Chief Trims His Holdings

Forensic Analyst

Jason Yap, CFA

Forensic Accounting

The State Administration for Market Regulation, China's antitrust regulator, imposed a fine of RMB3.4 billion (USD530 million) on food delivery group <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> for abusing its market position and ordered the company to rectify its operations.Amongst other required remedial actions, Meituan was ordered to return deposit money to merchants. Merchant had reportedly used deposits, algorithms, and data to ensure that its restaurant merchants remained loyal to the platform, according to an <a href="https://www.ft.com/content/8862b118-75ad-45b1-85df-b3fa09d26ac3" target="_blank" rel="noopener">FT article</a>. This begs the question. Why are merchant deposits required by e-commerce companies like Meituan, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> and <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a>? After all, most of the merchant transactions are 3P, which means the platforms do not carry any inventory risk and therefore do not need merchant deposits to offset risks. Could it be to increase switching costs or even to hold merchants ransom as the FT article suggests. In this Insight, we discuss how merchant deposits and merchant payables have been used as a means to pad operating cashflows (even though they are not strictly free cashflows), particularly for fast growing e-commerce platforms.Further, we have seen the "walled gardens" of China's tech giants <a href="https://www.scmp.com/tech/big-tech/article/3148572/big-techs-walled-gardens-start-crack-tencent-vows-follow-beijings" target="_blank" rel="noopener">start to crack</a> - in other words, merchants can freely switch platforms taking away merchant deposits with them, which could potentially affect cashflows.

The State Administration for Market Regulation, China's antitrust regulator, imposed a fine of RMB3.4 billion (USD530 million) on food delivery group Meituan (3690 HK) for abusing its market position and ordered the company to rectify its operations.Amongst other required remedial actions, Meituan was ordered to return deposit money to merchants. Merchant had reportedly used deposits, algorithms, and data to ensure that its restaurant merchants remained loyal to the platform, according to an FT article. This begs the question. Why are merchant deposits required by e-commerce companies like Meituan, Alibaba Group (9988 HK) and Pinduoduo (PDD US)? After all, most of the merchant transactions are 3P, which means the platforms do not carry any inventory risk and therefore do not need merchant deposits to offset risks. Could it be to increase switching costs or even to hold merchants ransom as the FT article suggests. In this Insight, we discuss how merchant deposits and merchant payables have been used as a means to pad operating cashflows (even though they are not strictly free cashflows), particularly for fast growing e-commerce platforms.Further, we have seen the "walled gardens" of China's tech giants start to crack - in other words, merchants can freely switch platforms taking away merchant deposits with them, which could potentially affect cashflows.  

Merchant Deposits and Payables to Pad Cashflows - Who's Culpable?

Blue Lotus Non US Internet research, Blue Lotus Research Institute

Ying Pan

Blue Lotus Non US Internet research

China growth and global non-US Internet equities

Blue Lotus Research Institute

Blue Lotus Research is a Hong Kong Type 4 Licensed investment advisory firm focusing on Chinese growth equities and global non-US Internet equities

Thematic (Sector/Industry)

<ul>
<li>JD US/1810 HK/BABA US:NRDC announces positive results for “old-for-new” trade-in during September (+)</li>
<li>BILI US:Bilibili's &lt;Three Kingdoms: MDTX&gt; Shows Robust Gross Billings Performance After Season 3 Update (+)</li>
<li>PDD US/BABA US/JD US: PDD reduces the minimum withdrawal threshold for funds (/)</li>
</ul>


JD US/1810 HK/BABA US:NRDC announces positive results for “old-for-new” trade-in during September (+)
BILI US:Bilibili's &lt;Three Kingdoms: MDTX&gt; Shows Robust Gross Billings Performance After Season 3 Update (+)
PDD US/BABA US/JD US: PDD reduces the minimum withdrawal threshold for funds (/)


[Blue Lotus Daily-TMT Update]:JD US/1810 HK/BABA/BILI/PDD/1519HK/ZTO /SE/700HK/BIDU/20HK/3690HK

Greater China Equity Long/Short Analyst

Eric Chen

<ul>
<li>We see further upside to our previous above-consensus 4Q23 results estimates on low base, enhanced monetization, and faster TEMU expansion.</li>
<li>That said, we believe market focus already shifted to outlook for 2024, in particular an imminent slowdown in 1Q24 and renewed concern around US curb on TEMU.</li>
<li>30% share price correction is pricing in the above scenario and valuation should gradually improve as PDD delivers back-loaded bottom line growth in 2024.</li>
</ul>


We see further upside to our previous above-consensus 4Q23 results estimates on low base, enhanced monetization, and faster TEMU expansion.
That said, we believe market focus already shifted to outlook for 2024, in particular an imminent slowdown in 1Q24 and renewed concern around US curb on TEMU.
30% share price correction is pricing in the above scenario and valuation should gradually improve as PDD delivers back-loaded bottom line growth in 2024.


Pinduoduo (PDD US): Pricing in an Imminent Slowdown

<ul>
<li>We expect PDD to report CY4Q23 top-line and non-GAAP net income 14.3% and 21.2% vs. consensus. Main model changes are increased Temu revenue per order and PDD take-rate;</li>
<li>Temu continued increasing prices despite the holiday shopping season, and merchants reported that Temu began charging service fees. PDD upgraded its ads tools, which we expect boosted China take rate.</li>
<li>We maintain our BUY rating and raise our TP to US$ 178.</li>
</ul>


We expect PDD to report CY4Q23 top-line and non-GAAP net income 14.3% and 21.2% vs. consensus. Main model changes are increased Temu revenue per order and PDD take-rate;
Temu continued increasing prices despite the holiday shopping season, and merchants reported that Temu began charging service fees. PDD upgraded its ads tools, which we expect boosted China take rate.
We maintain our BUY rating and raise our TP to US$ 178.


[PDD Holdings Inc. (PDD US, BUY, TP US$178) TP Change]: Fine-Tuned Extraction of Merchant Profits

China

PDD Holdings Inc. is a multinational commerce group that owns and operates a portfolio of businesses. The Company focuses on digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities. PDD Holdings has built a network of sourcing, logistics, and fulfillment capabilities for its underlying businesses.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

PDD Holdings (PDD US)

Pinduoduo: Foreign Investors Could Panic as VC Chief Trims His Holdings

We think the exit of high profile Chinese investors who has on the ground knowledge of Chinese politics could rattle both domestic and overseas...

Oshadhi Kumarasiri

Merchant Deposits and Payables to Pad Cashflows - Who's Culpable?

Merchant deposits and merchant payables have been used to pad operating cashflows (even though they are not free cashflows), particularly for fast...

Jason Yap, CFA

[Blue Lotus Daily-TMT Update]:JD US/1810 HK/BABA/BILI/PDD/1519HK/ZTO /SE/700HK/BIDU/20HK/3690HK

NRDC reports successful "old-for-new" trade-in results, Bilibili's sees strong gross billings post update, PDD lowers minimum withdrawal...

Blue Lotus Research Institute

Pinduoduo (PDD US): Pricing in an Imminent Slowdown

The market is looking beyond strong 4Q23 and pricing in an imminent slowdown in 1Q24 and renewed concern over potential US curb on TEMU. 30% share...

Eric Chen

[PDD Holdings Inc. (PDD US, BUY, TP US$178) TP Change]: Fine-Tuned Extraction of Merchant Profits

PDD expected to report strong earnings with increased revenue and net income, driven by higher Temu revenue and improved take-rate. Analysts...

Blue Lotus Research Institute

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Pinduoduo: Foreign Investors Could Panic as VC Chief Trims His Holdings

We think the exit of high profile Chinese investors who has on the ground knowledge of Chinese politics could rattle both domestic and overseas...

Oshadhi Kumarasiri

Merchant Deposits and Payables to Pad Cashflows - Who's Culpable?

Merchant deposits and merchant payables have been used to pad operating cashflows (even though they are not free cashflows), particularly for fast...

Jason Yap, CFA

[Blue Lotus Daily-TMT Update]:JD US/1810 HK/BABA/BILI/PDD/1519HK/ZTO /SE/700HK/BIDU/20HK/3690HK

​NRDC reports successful "old-for-new" trade-in results, Bilibili's sees strong gross billings post update, PDD lowers minimum withdrawal...

Blue Lotus Research Institute

Pinduoduo (PDD US): Pricing in an Imminent Slowdown

The market is looking beyond strong 4Q23 and pricing in an imminent slowdown in 1Q24 and renewed concern over potential US curb on TEMU. 30% share...

Eric Chen

[PDD Holdings Inc. (PDD US, BUY, TP US$178) TP Change]: Fine-Tuned Extraction of Merchant Profits

​PDD expected to report strong earnings with increased revenue and net income, driven by higher Temu revenue and improved take-rate. Analysts...

Blue Lotus Research Institute

NRDC reports successful "old-for-new" trade-in results, Bilibili's sees strong gross billings post update, PDD lowers minimum withdrawal...

PDD expected to report strong earnings with increased revenue and net income, driven by higher Temu revenue and improved take-rate. Analysts...