PDD
🚀 Pinduoduo showcased explosive annual growth, with revenues surging 59% and operating profit jumping 85%, highlighting its rapid expansion in the e-commerce space.
💰 The company operates a highly efficient, capital-light model, generating substantial cash flow with minimal inventory and receivables, resulting in a massive cash position ($56.5 billion in liquidity).
📊 Despite potential risks associated with operating in China and regulatory uncertainties, the stock trades at an attractive valuation (around 11 times earnings), which appears low given its strong financial performance and growth trajectory.
@invertirdesdecasa:
“Pinduoduo. We are going to focus on Pinduoduo’s business, on its explosive sales growth. In what I analyzed, in the businesses I studied, I haven’t seen in the last 3 years, and even in the last year, an e-commerce platform—this is a pure play on e-commerce—that has grown as fast as this company. It’s an action with a lot, a lot of volatility in the last year, even the last few years, given that it’s a company based in China that mainly sells in the United States. How about that? Yes, with quite strong volatility, as you can see. Every now and then, the market here gets very greedy, very fearful. This was an earnings report that wasn’t liked because the company had said it would start growing a bit slower, meaning it was growing triple digits; it’s not that it isn’t growing now, but definitely quite strong volatility. $116 closing last Friday, March 21st, practically the same price it had a year ago, and as you’ll see, with quite, quite strong drops and rises. But don’t forget that a company, beyond what the market price does, is a good investment or not based on the price it has versus tomorrow’s earnings, and that’s what we’re going to analyze. Revenues grew, as you see here, by 124%—sales growth up to a bit more than 15,000 million in the Christmas holiday quarter. Operating profit grew a bit slower at 114%, still with a good operating margin, as you’re seeing here, of 3,500 million dollars, a bit more than 20% operating profit margin. Mainly, why did it grow a bit slower? Due to fulfillment expenses—it’s not cheap to send products to the other half of the world—and payment processing, of course, it’s having higher costs there. Net profit grew by 118%, as you’re seeing here, up to 3,700 million, because besides its operating income, it has a lot of interest income; it has, you’ll see, a monumental cash position, and that, of course, also ends up reinforcing the bottom line of its income statement. In the year, which I think is always more interesting to see the complete picture, look what it did: sales growth of 59% versus the previous year. Again, 59% versus the previous year. I’ve studied several e-commerce companies, surely not all because I can’t cover everything; I didn’t find such strong growth, let alone in previous years which were even more exponential, up to almost 54,000 million dollars, with two main sources of income: marketing—it’s very interesting to appear in the first searches of Pinduoduo, right? In the top spots, given that many people use it—and the benefits from transaction commissions, meaning this commission it charges for intermediating in commerce. This was, in fact, the area that had more interesting growth last year. Regarding the operating profit, the annual operating profit grew by 85% on an annualized basis. Are you reading this right? These are already audited results, the annual ones, right? 85% on an annualized basis, up to 18,800 million dollars. Look across the entire S&P 500; there aren’t many companies generating these numbers. Yes, look carefully because you won’t find them so easily. Annual net profit growth of 87%, again due to what we just mentioned, up to a bit more than 15,400 million. Taxes must be paid too, logically. And due to good management, or rather, not good management, excellent management of its working capital—it’s a very, very low capital intensity company—the operating cash flows ended up being higher than its net profits due to this good management of its working capital. And here it will become clearer why it’s really a good business and quite low in capital intensity, as I mentioned. 45.4 billion they have in cash, 45,400 million. In other current assets, it has other investments, time deposits, which would be like certificates of deposit and such, of course, among others, of 11.4 billion, 11,400 million dollars. Meaning it has 56,500 million in liquidity, in cash. Yes, and not only that, all its assets are 69,189 million. That is, practically its entire asset balance sheet is cash. It works with very, very low property, plant, and equipment for production, nothing, 120 million dollars, and invoices almost 54,000 million. So really, and that’s why it generates so much cash, it works with practically no inventory. Brilliant business, Pinduoduo. Of course, it’s worth clarifying, this is generated by—it must be Gemini, I don’t know if it’s called that, by Google’s chatbot—it has benefited from this which is still in effect, and I dare say, I have no idea what will happen, needless to say, I don’t talk on the phone with Donald Trump or with anyone’s secretary over there in the United States. They will maintain this; the quantity of products entering cannot be controlled. The de minimis exemption, meaning this exception that allows products under $800 that people, of course, bring in for a value like that, to pass free of taxes and free of tariffs, and basically pass quickly through US customs. Of course, Temu, which is Pinduoduo’s platform, sells jeans for $1 or $10, so imagine how they pass. So here is the key to this company’s success. Of course, you never know what will happen with politics, but removing this, which many users and final consumers use, is inflating the economy; it’s a disastrous inflation that I don’t know if they are willing to assume. Some quick numbers to keep in mind: the profits it generates and what it works with. Return on equity for investors and return on invested capital, which also considers debt, is approximately 35%. Why is it practically the same? Very simple, because it doesn’t work with debt; it has practically no debt on its balance sheets, nothing, nothing, some small leases, but nothing. So it’s pure cash, pure cash generation. It’s a truly spectacular business wherever you look at it. So it generates a lot for investors, earns a lot with investors’ money. And if you want to see some numbers you should look at in retail businesses, I have to tell you that it generates those 54,000 million dollars we talked about, 53,955 million, and generates that amount of sales—I repeat, it’s a retailer, a retail seller, actually a marketplace, but works within retail consumption—generates those sales with zero inventory on its balance sheet and practically zero accounts receivable, practically collecting everything in cash or settling credit card payments within a few days. Tell me if it surprises you that it has a lot of cash on its balance sheets. Obvious, it doesn’t have to pay for inventory in advance, it doesn’t have to chase customers to collect from them; it’s obvious that it generates so much cash this way. And at the same time, it generates that amount of sales you’re seeing there with, as we saw, 814 million in property, plant, and equipment, considering also, besides owned plants, operating or financial leases. Yes, meaning in what’s called fixed asset turnover, 66 times. That is, a very high number; with very little fixed assets, it earns a lot of money. Valuation as of today, yes, 175,000 million, as we saw in the first slide—I don’t know if I mentioned it to you, but it’s always there in the little part below the first slide we see of the price—175,000 million, and it has 56,000 million in net cash. Meaning if you buy the company, it comes with a pretty big safety deposit box. 119,000 million in enterprise value, that would be it. And versus 2024, which were record earnings, and competition in China is very strong, don’t forget that. When you have a profitable business, the worst place in the world to be is China because there will be many people who do it much better than you, work harder, work better. So surely, I don’t know if it will grow at the same rates it was growing, but undoubtedly, well, they were record earnings that will be harder to surpass. It trades at 9.6 times its pretax earnings, something quite similar to what we’ve seen from several companies based in China doing business worldwide, because it’s not like they only sell in China. 9.6 times its pretax earnings and 11 times its PER earnings. This company, among the e-commerce platforms, I repeat, has been the one that has grown the most in the last 3 years thanks to the internal consumption of the United States, let’s agree, right? Because it’s selling a lot there. It doesn’t say how much is from the United States or how much is internal consumption in China; it doesn’t mention it in its earnings report, but it’s probably a quite, quite large part. That will continue, it will keep happening. I think it will continue to be there. I don’t think they will remove it; I think it would be very inflationary for the United States if they remove it. Surely, Amazon is competing by doing the same, and surely they will have to adapt because consumers want low prices. And as I tell you, the market price it has is extremely interesting, extremely interesting from a numerical point of view. Of course, you’ll see if you want to or not, if it fits your risk profile, right? I already told you there are a lot of things I don’t know because I don’t know you personally, but in numbers, the returns on capital, the financial solidity and solvency, the cash generation it has, the very low capital needs it has, are all ingredients for a good business. And the price, you’ll see, is not high compared to e-commerce rivals worldwide.”
Watch the exact part of the video where @invertirdesdecasa talks about Pinduoduo here:
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