Pinduoduo slumps in China price war
HONG KONG: One of China’s most popular stock bets of the past year is unravelling fast, weighed by an intensifying e-commerce price war and weaker economic growth.
Short interest in budget shopping app PDD Holdings Inc has returned to levels not seen since mid-March, with bearish positions accounting for about 8% of total shares outstanding, IHS Markit Ltd data show. That’s higher than its larger peers JD.com Inc and Alibaba Group Holdings Ltd, which are offering new discounts to gain market share.
Pessimism has returned to China’s markets after the reopening rally fizzled, with concerns that the post-Covid economy is on fragile ground. PDD — whose shares more than tripled from a March 2022 low to its January high — has been hit particularly hard in recent months on rising competition as evidence grows that the consumption sector is sputtering.
“We continue to be sector-relative neutral on PDD with the step-up in e-commerce competition,” Goldman Sachs Group Inc analysts including Ronald Keung wrote in a recent note, adding that increased competition and higher overseas investments in its online shopping app Temu pose risks to its margins.
Since hitting more than a one-year high in January thanks to its low-priced sales strategy, shares of PDD have tumbled 30%, outpacing the Nasdaq Golden Dragon China Index’s 20% loss.
Investors worry that PDD’s aggressive campaign — now a sector-wide phenomenon — is becoming more and more detrimental to bottom line growth. Eager to expand market share, almost every e-commerce platform in China has started boosting discounts to lure buyers. And it’s not just for Chinese buyers: Alibaba plans to accelerate expansion offshore via Southeast Asia online platform Lazada and AliExpress, popular in parts of Europe and Latin America, following its restructuring. That’s forcing PDD to spend more to retain its own customers.
Bloomberg Intelligence analyst Trini Tan expects PDD to cede some profit to competitors into the upcoming 618 shopping festival this month, the second-largest in China.
Still, PDD has held some ground. The firm’s revenue rose a strongerthan-expected 58% in the first quarter, beating estimates and alleviating some concern about growth prospects in China’s internet sector.
The company said in its recent earnings call that it plans to speed up shipping times and take a more proactive approach to customer service as a result of increased competition.
Some investors say PDD’s outlook is more worrying than Alibaba’s after the latter’s restructuring would allow for better efficiencies so it can offer increased discounts and defend market share.
Rival JD, which had been the worst China bet earlier this year driven in part by higher competition and the lacklustre economy, has seen some recovery thanks to a strong first-quarter earnings beat and growth outlook.
While JD and Alibaba shares have both slumped this year amid a broader market decline, their cheaper valuations show that much of the macro weakness has been priced in with some now betting on future prospects. PDD trades at 16.1 times forward earnings, compared with 12.4 times for JD.com’s ADRs and 10.3 times for Alibaba’s ADRs, Bloomberg-compiled data shows.
JD and Alibaba are both in strong positions given the former’s logistics support and the latter’s growth strategy, according to Ian Chun, a New York-based portfolio manager at Vontobel Asset Management. That makes them “winners within the space,” he said.