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Investors Reward PDD for Winning Crown in China Online Price War

(Bloomberg) -- Budget shopping app Pinduoduo has emerged as a clear winner in an intensifying price war in China as e-commerce companies fight for market share amid a pullback in consumer spending.

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Investors have noticed: Shares of parent PDD Holdings Inc. are trading at a record high compared to rivals Alibaba Group Holding Ltd. and JD.com Inc. The gap has widened recently even after JD.com announced a $1.4 billion subsidy program to compete with Pinduoduo. PDD’s American depositary receipts have gained 12% this year, compared with a 7.9% drop in Alibaba and a 30% slump in JD.com.

If China’s market was defined last year by strict Covid lockdowns and a subsequent reopening rally, then 2023 has been marked by too many companies chasing a still cautious economic recovery. Some of the biggest e-commerce platforms have started to offer subsidies or other rebates as a way to lure back consumers. PDD, though, has found more success than others thanks to its low pricing strategy, which investors say differentiates the company.

“We expect PDD to sustain faster-than-industry growth even under a backdrop of intensified competition in the near term” given that it’s the “go-to e-commerce platform for most consumers,” Morgan Stanley analysts including Eddy Wang wrote in a recent note. The brokerage boosted its price target on the stock by 47% this month.

Positioned as a shopping platform that offers a greater mix of high-end and lower-tier brands, PDD made successful inroads into a market dominated by Alibaba and JD.com. During 2020, its active users briefly surpassed Alibaba. Its shopping app Temu has been the most downloaded app on Apple’s US store for much of the past few months. It also has gained from steady sales in its Pinduoduo app.

All that’s helped PDD gain some 234% over the last 12 months. A pair trade of being long PDD and short JD.com over the past year would have returned more than 200% despite a volatile macro background when China consumption and US rate concerns weighed on Chinese technology companies.

There are reasons for concern, though. E-commerce is already so popular in China that analysts fret there’s a dwindling number of untapped potential customers. Revenue growth for some of the bigger companies has stalled due to a broader consumption sentiment hit, with JD.com the most recent firm to report a sharp drop in year-end revenue growth on lackluster spending.

Meanwhile, the marketing expense to keep Temu growing offshore might also take a chunk out of profits, said Vey-Sern Ling, managing director at Union Bancaire Privee. Valuations have also jumped, with PDD trading at 20 times forward earnings compared to 9.3 for Alibaba and 13.4 for JD.com.

Still, the flexibility of smaller firms may ultimately help them in the longer fight against traditional e-commerce companies.

“The on-going price wars will not stop Pinduoduo’s momentum in market share expansion,” said Sophie Huang, an analyst at CMB International Capital Corp., in a note last week. “JD’s subsidy campaign might have limited impact on PDD, given the latter’s favorable product mix, low-end pricing strategy and strong execution.”

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Over the last decade, Apple Inc. has embarked on the biggest share repurchase program on Wall Street — resulting in a steady decline in its outstanding shares. The company has bought back $88 billion in stock over the last 12 months. That’s the most by any US company and almost more than the combined repurchases of its two closest competitors, Alphabet Inc. and Meta Platforms Inc., according to data compiled by Bloomberg.

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--With assistance from Subrat Patnaik.

(Updates stock move at open.)

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