Pinduoduo Q2 Earnings Overview

Pinduoduo (PDD US) reported Q2 financial results before the US market opened this morning. The company is historically not overly communicative with shareholders nor defends itself publicly, driven by the founder’s focus on the business and long-term view. For instance, the company has never broken out non-China E-Commerce-focused Temu business revenues. Hypergrowth companies that miss analyst expectations tend to take an elevator down, as exhibited by PDD’s stock in pre-market trading.

While the revenue miss was a clear negative, so were the company’s conservative comments on the “many challenges ahead” that will weigh on future growth driven by “intensified competition and external challenges.” As if that wasn’t problematic, management stated the company’s future intentions to invest in the company, which would affect future profitability. Because the company is still in a growth stage, the company has no plans to buy back stock or issue a dividend. The company’s decision to focus on “high-quality merchants” likely explains the pre-market weakness in Alibaba and JD.com as it infers further competition. While one can appreciate the candor of management, it was unlike any call I’ve experienced due to management’s negative tone despite the company growing revenue by +86% year over year (YoY).

• Revenue increased by +86% YoY to RMB 97.06 billion ($13.36 billion) from RMB 52.28 billion versus expectations of RMB 99.98 billion.
• Adjusted net income increased by 125% YoY to RMB 34.43 billion ($4.74 billion) from RMB 15.27 billion versus expectations of RMB 30.10 billion.
• Adjusted EPS increased to RMB 23.24 ($3.20) from RMB 10.47 versus expectations of RMB 20.52.

Key News

Asian equities rose despite rising Middle East tensions. Powell’s Friday press conference, confirming a September rate cut, sent the US dollar lower. Hong Kong outperformed as the Hang Seng Index closed just below the 18,000 level, South Korea underperformed, and the Philippines was closed for National Heroes Day. 

Last week’s release from the Ministry of Commerce on auto and home appliance subsidies mentioned E-Commerce companies JD.com and Alibaba’s Taobao, stating, “China’s E-Commerce platforms like JD.com and Taobao are also providing diverse trade-in schemes for customers.” Combined with Alibaba’s conversion to a dual primary listing in both Hong Kong and the US, there is a clear change in the government's tone toward internet companies.

Hong Kong’s most heavily traded stocks by value were Tencent, up +1.7%, Alibaba, up +0.79%, JD.com, down -0.28%, Meituan, up +1.4%, and Ping An, up +1.83%. Energy stocks benefited from Sinopec's financial results, internet stocks were up as Bilibili gained +7% on an analyst upgrade, and insurance, metals, and real estate outperformed. XPeng gained +7% after CEO He Xiaopeng bought 1 million shares in Hong Kong and 1.4 million shares in its ADR, raising his stake to 18.8%.

US National Security Advisor Jake Sullivan’s trip to China is garnering attention, with the Financial Times providing an insight to back-channel US and China diplomatic efforts. Premier Li and the State Council released a statement on “Implementing the national strategy of actively responding to population aging and promoting the coordinated development of the elderly care industry,” which may have been a factor in healthcare’s strong performance in Hong Kong, though oddly not in Mainland China.

Words of support from both the People's Bank of China (PBOC) and China Securities Regulatory Commission (CSRC) had no effect on the Mainland markets, which posted a small gain on light volume as the lack of action weighed on sentiment.

As expected, the PBOC kept the 1-year Medium-term lending facility rate at 2.3%. The National Team was active in afternoon trading, buying Mainland-listed China ETFs that lifted the market. Trip.com reports after the US market close today.

The Hang Seng and Hang Seng Tech indexes gained +1.06% and +0.98%, respectively, on volume up +6.11% from Friday, which is 82% of the 1-year average. 345 stocks advanced, while 123 declined. Main Board short turnover increased by +6.43% from Friday, which is 89% of the 1-year average, as 19% of turnover was short turnover (Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). Growth and small capitalization stocks outperformed value and large capitalization stocks. The top sectors were materials, up +2.58%, healthcare, up +2.23%, and real estate, up +2.09%, while industrials fell -0.43% and utilities fell -0.28%. The top sub-sectors were pharmaceuticals, food/beverage, and real estate, while food/staples, business/professional services, and diversified financials were the worst. Southbound Stock Connect volumes were light as Mainland investors sold -$5 million of Hong Kong stocks and ETFs while Tencent was a small net sell.

Shanghai, Shenzhen, and the STAR Board diverged to close +0.04%, +0.42%, and -0.48%, respectively, on volume up +3.03% from Friday, which is 66% of the 1-year average. 3,487 stocks advanced, while 1,443 declined. Growth and small capitalization stocks outpaced value and large capitalization stocks. The top sectors were real estate, up +1.59%, materials, up +0.74%, and energy, up +0.65%, while healthcare fell-1.2%, consumer staples fell -0.36%, and technology fell -0.34%. The top sub-sectors were power generation equipment, fine chemicals, and base metals, while soft drinks, water, and healthcare were the worst. Northbound Stock Connect volumes were light. CNY and the Asia dollar index gained on the US dollar. The Treasury curve flattened. Copper and steel rose.

Last Night's Performance

Last Night's Exchange Rates, Prices, & Yields

• CNY per USD 7.11 versus 7.14 Friday
• CNY per EUR 7.95 versus 7.93 Friday
• Yield on 10-Year Government Bond 2.16% versus 2.16% Friday
• Yield on 10-Year China Development Bank Bond 2.25% versus 2.24% Friday
• Copper Price: +1.03%
• Steel Price: +1.04%