PDD Holdings Earnings: Incorporation of Temu Into Our Valuation Leads to 82% Rise in Our Fair Value

PDD Holdings' third-quarter results beat Refinitiv revenue consensus as of Nov. 27 by 24% and non-GAAP operating profit by 81%, leading to an 18% jump in the share price on Nov. 28. PDD delivered 94% year-on-year growth in revenue and a 47% jump in non-GAAP operating income. Management observed a consumption upgrade in their platform in the quarter, which should help increase gross merchandise volume and revenue in our view. We increased our fair value estimate to USD 213 per ADS from USD 117 due to our incorporation of the overseas platform Temu in our valuation. We raised our 5-year revenue CAGR to 36% from our previous 21% estimate and non-GAAP operating income CAGR to 21% from 16% forecast previously. We forecast Temu’s revenue to grow at a CAGR of 55% from 2023-28 and operating profit to turn positive in 2028, later than management’s internal expectation of 2025-26 as reported by 36Kr. By 2032, Temu’s operating margin will reach 28% versus negative 73% in 2023, similar to the current operating margin of domestic e-commerce business Pinduoduo in our estimate. We anticipate over 60% of GMV at Temu is generated from the U.S. A ban on Temu in the U.S. due to national security and introduction of a custom tax on goods under USD 800 shipped directly to the U.S. will substantially reduce Temu’s valuation. Increasing competition with Shein, AliExpress, and other e-commerce companies could also harm Temu’s growth. Hence, we maintain our Very High Morningstar Uncertainty Rating for PDD. We find PDD’s shares undervalued. In our opinion, PDD is the best positioned amid value-for-money consumption trends in China and will benefit from strong long-term growth at Temu. Our order of preference is PDD, JD.com, and Alibaba.