Fall in Pinduoduo shares adds to $100bn drop since February

Shares in China’s fastest-growing ecommerce company Pinduoduo fell again on Wednesday, adding to a rout that has knocked $100bn off its market value since February.

The company reported first-quarter revenues of Rmb22.2bn ($3.47bn), up 239 per cent year on year and above analysts’ expectations, but also booked a net loss of Rmb2.9bn ($454m). The $160bn shopping app has not turned a profit since its 2018 listing.

Pinduoduo’s Nasdaq-listed shares fell as much as 7.1 per cent, extending a sell-off that began in February, in common with other Chinese tech stocks. The stock ended the session down 5.5 per cent.

The shares continued to fall after the unexpected departure of founder Colin Huang, who stepped down in March to “focus on his passion for life sciences”.

Analysts at Macquarie downgraded the company’s outlook after Huang’s departure. “Our downgrade is focused on sudden changes to management and its possible implications, as well as uncertainty in the business model shift,” they wrote.

China’s tech sector has also come under scrutiny from authorities, and a government-affiliated consumer group in Shanghai criticised Pinduoduo’s business practices earlier this month. 

Pinduoduo was keen on Wednesday to stress its positive impact on society. Chen Lei, chief executive, said it had “catalysed the creation of millions of jobs” through its business delivering groceries. David Liu, vice-president of strategy, said Pinduoduo was “creating many social benefits”.

Robin Zhu, of Bernstein, said Pinduoduo had surpassed analysts’ expectations on both the top and bottom line. “They lost less money than people were expecting,” he said.

The company’s push into direct online sales — meaning the site now holds inventory and earns revenue on goods sales to shoppers — has puzzled some analysts. Since listing in 2018, the company has primarily brought in revenue from selling advertising slots to merchants on its marketplace who vie for the attention of shoppers. 

Direct sales accounted for 23 per cent of Pinduoduo’s revenue in the first quarter, up from 20 per cent in the fourth quarter. 

The company has 8.6m merchants on its platform but said it had to step in to buy and sell goods to “temporarily meet the demand of our users [for] products which our merchants cannot obtain”. Pinduoduo has said it sells a “diverse” range of products but has told investors little else about the budding business that lost roughly Rmb1.4bn last year.

“The commencement of direct sales does appear odd,” said Mark Webb at GMT Research. “I don’t understand the rationale — what products were third-party merchants unable to supply which PDD could?”

Pinduoduo’s rapid growth has been powered by cheap deals and its sales and marketing expenses rose to Rmb13bn in the quarter, or 92 per cent of its revenues from advert sales. Pinduoduo said the first quarter’s seasonally weaker sales was one reason the expenses had risen proportionally from previous quarters. 

Pinduoduo raised $8bn in debt and equity financing last year as it capitalised on its soaring share price to roll out a plan to transport farm goods direct to shoppers’ doors.

While a costly undertaking, Zhu said the grocery business would increase customer “usage frequency and engagement” and should eventually bring in profits.

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