PDD Holdings (PDD)

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12 September 2023 | 9:16PM HKT
PDD Holdings (PDD)

Addressing key investor debates post upgrade; domestic ad growth outlook
Buy
& Temu risks the key focuses; Buy
PDD 12m Price Target: $129.00 Price: $97.40 Upside: 32.4%

Ronald Keung, CFA
+852-2978-0856 | ronald.keung@gs.com
Goldman Sachs (Asia) L.L.C.
We have spoken extensively with various global and local investors David Ma
+852-2978-0822 | david.ma@gs.com
following our PDD upgrade on Aug 30 where we lifted domestic Goldman Sachs (Asia) L.L.C.
ads/domestic platform profit outlook (GSe main platform FY23E Weiting Tang
+852-3966-4006 | weiting.tang@gs.com
EBIT of Rmb79.5bn) on the back of its 2Q results beat. In this note Goldman Sachs (Asia) L.L.C.
we address five key investor questions/debates surrounding

For the exclusive use of KECHENG.JIN@BITMAIN.COM
PDD’s domestic and cross-border operations based on our

investor discussions: Key Data __________________________________
Market cap: $134.7bn
n Is there still room for further take rate expansion? Still room Enterprise value: $108.8bn
3m ADTV: $829.8mn
for expansion given continued step-up in merchants’ site-wide China
China Ecommerce & Logistics
marketing ads adoption; M&A Rank: 3
Leases incl. in net debt & EV?: No
n What is Pinduoduo’s domestic platform’s margin outlook? GS Forecast ________________________________
We forecast Pinduoduo domestic main platform adj. EBIT 12/22 12/23E 12/24E 12/25E
Revenue (Rmb mn) 130,557.6 200,052.6 246,121.9 286,136.9
margin staying flat at 52% over FY23-25E (from GSe of 45% in EBITDA (Rmb mn) 40,344.5 49,954.5 67,941.1 88,895.3
EPS (Rmb) 27.51 33.49 42.23 52.89
FY22) as Pinduoduo reinvests incremental profit margins for P/E (X) 13.9 21.2 16.8 13.4
growth; P/B (X) 4.7 6.3 4.6 3.5
Dividend yield (%) 0.0 0.0 0.0 0.0
N debt/EBITDA (ex lease,X) (3.3) (3.8) (3.8) (3.8)
n What are the drivers of domestic GMV growth from here? CROCI (%) 355.8 2,849.3 (333.5) (285.2)
1fc9fa9cf8844a388c506688498547c5
Further ARPU/frequency increase and share gain in electronics FCF yield (%) 9.9 7.7 8.0 8.6
& appliance/cosmetics categories; 3/23 6/23 9/23E 12/23E

EPS (Rmb) 6.92 10.47 8.16 7.94
n What are the key risks for Temu’s global expansion and
GS Factor Profile ____________________________
implications for valuation? Sensitive personal Growth
data/country-specific ban risks remains, yet Temu has reduced

Financial Returns
single-country risk over the past quarter (followed by some
Multiple
sequential slowdown in Aug) and Temu is not reflected (still a
free option) in current share price; Integrated
n Temu’s path to profitability and how it can achieve it? We Percentile 20th 40th 60th 80th 100th
estimate Temu can achieve mid-single-digit GMV margin PDD relative to Asia ex. Japan Coverage
longer-term on lifting mark-up and optimizing PDD relative to China Ecommerce & Logistics
fulfillment/marketing costs. Source: Company data, Goldman Sachs Research estimates.

See disclosures for details.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research
analysts with FINRA in the U.S.
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Goldman Sachs PDD Holdings (PDD)
PDD Holdings (PDD) Income Statement (Rmb mn) _______________________________

Buy Rating since Aug 30, 2023 Total revenue
12/22
130,557.6
12/23E
200,052.6
12/24E
246,121.9
12/25E
286,136.9
Cost of goods sold (31,428.5) (68,987.3) (83,151.8) (91,760.1)
SG&A (53,145.7) (72,398.0) (85,110.6) (93,393.1)
Ratios & Valuation _______________________________________ R&D (7,863.1) (9,910.4) (11,441.8) (13,576.7)
12/22 12/23E 12/24E 12/25E Other operating inc./(exp.) -- -- -- --
P/E (X) 13.9 21.2 16.8 13.4 EBITDA 40,344.5 49,954.5 67,941.1 88,895.3
P/B (X) 4.7 6.3 4.6 3.5 Depreciation & amortization (2,224.2) (1,197.6) (1,523.5) (1,488.3)
FCF yield (%) 9.9 7.7 8.0 8.6 EBIT 38,120.3 48,756.9 66,417.7 87,407.0
EV/EBITDAR (X) 8.7 15.6 10.7 7.5 Net interest inc./(exp.) 3,945.4 5,921.2 5,556.2 5,212.9
EV/EBITDA (excl. leases) (X) 8.7 15.6 10.7 7.5 Income/(loss) from associates -- -- -- --
CROCI (%) 355.8 2,849.3 (333.5) (285.2) Pre-tax profit 44,255.4 58,030.6 74,307.8 94,953.9
ROE (%) 41.0 34.6 32.0 29.9 Provision for taxes (4,725.7) (8,938.0) (11,146.2) (14,243.1)
Net debt/equity (%) (113.8) (113.5) (111.4) (108.8) Minority interest -- -- -- --
Net debt/equity (excl. leases) (%) (113.8) (113.5) (111.4) (108.8) Preferred dividends -- -- -- --
Interest cover (X) -- -- -- -- Net inc. (pre-exceptionals) 39,529.7 49,092.5 63,161.7 80,710.8
Days inventory outst, sales -- -- -- -- Post-tax exceptionals (7,718.4) (9,507.6) (10,277.6) (10,639.0)
Receivable days 1.8 1.4 1.5 1.5 Net inc. (post-exceptionals) 31,811.4 39,584.9 52,884.1 70,071.9
Days payable outstanding 751.8 385.1 380.7 378.7 EPS (basic, pre-except) (Rmb) 31.26 36.09 45.52 57.01
DuPont ROE (%) 33.6 29.6 27.5 26.0 EPS (diluted, pre-except) (Rmb) 27.51 33.49 42.23 52.89
Turnover (X) 0.6 0.6 0.6 0.6 EPS (basic, post-except) (Rmb) 24.94 28.54 38.11 49.50
Leverage (X) 2.0 1.9 1.7 1.6 EPS (diluted, post-except) (Rmb) 21.95 26.48 35.36 45.92
Gross cash invested (ex cash) (Rmb) 13,932.5 (10,806.7) (25,152.3) (29,387.0) DPS (Rmb) -- -- -- --
Average capital employed (Rmb) 17,270.5 12,502.1 (8,400.8) (19,196.8) Div. payout ratio (%) 0.0 0.0 0.0 0.0
BVPS (Rmb) 81.96 113.30 153.29 203.14
Balance Sheet (Rmb mn) __________________________________
Growth & Margins (%) ____________________________________ 12/22 12/23E 12/24E 12/25E
12/22 12/23E 12/24E 12/25E Cash & cash equivalents 92,300.4 166,567.1 245,597.8 332,031.7
Total revenue growth 39.0 53.2 23.0 16.3 Accounts receivable 587.7 900.5 1,107.9 1,288.0
EBITDA growth 206.4 23.8 36.0 30.8 Inventory -- -- -- --
EPS growth 175.4 21.7 26.1 25.3 Other current assets 123,729.8 126,865.5 127,393.5 128,357.3
DPS growth NM NM NM NM Total current assets 216,617.9 294,333.1 374,099.3 461,677.0
EBIT margin 29.2 24.4 27.0 30.5 Net PP&E 1,044.8 1,042.3 1,165.8 1,534.1
EBITDA margin 30.9 25.0 27.6 31.1 Net intangibles 134.0 73.1 18.4 12.9
Net income margin 30.3 24.5 25.7 28.2 Total investments 0.0 0.0 0.0 0.0
Other long-term assets 19,323.2 19,323.2 19,323.2 19,323.2
Price Performance _______________________________________ Total assets 237,120.0 314,771.7 394,606.7 482,547.2
PDD ($) NASDAQ Composite Accounts payable 64,993.1 80,574.1 92,860.4 97,522.9
Short-term debt -- -- -- --
140 15,000
Short-term lease liabilities -- -- -- --
120 14,000 Other current liabilities 51,896.4 65,637.2 70,024.3 72,591.4
Total current liabilities 116,889.5 146,211.3 162,884.6 170,114.3
100 13,000
Long-term debt -- -- -- --
80 12,000 Long-term lease liabilities -- -- -- --
60 11,000 Other long-term liabilities 2,459.6 2,459.6 2,459.6 2,459.6
Total long-term liabilities 2,459.6 2,459.6 2,459.6 2,459.6
40 10,000 Total liabilities 119,349.0 148,670.9 165,344.2 172,573.9
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Preferred shares -- -- -- --
Oct-22 Jan-23 Apr-23 Jul-23
Total common equity 117,770.9 166,100.8 229,262.5 309,973.3
3m 6m 12m Minority interest -- -- -- --
Absolute 28.0% 13.6% 39.6% Total liabilities & equity 237,120.0 314,771.7 394,606.7 482,547.2
Rel. to the NASDAQ Composite 21.9% (9.1)% 21.5% Net debt, adjusted (92,300.4) (166,567.1) (245,597.8) (332,031.7)
Source: FactSet. Price as of 11 Sep 2023 close.
Cash Flow (Rmb mn) ______________________________________
12/22 12/23E 12/24E 12/25E
Net income 31,811.4 39,584.9 52,884.1 70,071.9
D&A add-back 2,224.2 1,197.6 1,523.5 1,488.3
Minority interest add-back -- -- -- --
Net (inc)/dec working capital 7,423.4 25,873.3 15,937.8 6,085.8
Other operating cash flow 7,048.9 8,745.0 10,277.6 10,639.0
Cash flow from operations 48,507.9 75,400.8 80,623.0 88,284.9
Capital expenditures (635.7) (1,134.1) (1,592.2) (1,851.1)

Acquisitions -- -- -- --
Divestitures -- -- -- --
Others (21,726.0) -- -- --
Cash flow from investing (22,361.7) (1,134.1) (1,592.2) (1,851.1)
Repayment of lease liabilities -- -- -- --

Dividends paid (common & pref) -- -- -- --
Inc/(dec) in debt -- -- -- --
Other financing cash flows 110.2 0.0 0.0 0.0
Cash flow from financing 110.2 0.0 0.0 0.0
Total cash flow 26,256.4 74,266.7 79,030.7 86,433.8
Free cash flow 47,872.2 74,266.7 79,030.7 86,433.8
Source: Company data, Goldman Sachs Research estimates.
12 September 2023 2
We continue to be positive on PDD’s longer-term outlook, as we note (1) Pinduoduo

maintains the strongest value-for-money mind share amongst Chinese consumers on
eCommerce platforms, despite more aggressive strategies from Alibaba/Douyin, and
Pinduoduo’s strong presence in relatively under-penetrated fresh/groceries categories;
(2) undemanding valuation of 13x 2023E domestic main platform adj. NOPAT with
faster-than-peers growth outlook; and (3) free option value in Temu, tapping into
overseas TAM with strong traction despite global regulatory risks/our estimate of
Rmb29bn loss drag this year. Maintain Buy with an unchanged DCF-based 12-m TP
of US$129.
We note the key risks to our Buy thesis include:
(1) Domestic GMV/online marketing revenue moderation in growth, partly on macro and
competition from Taobao/Douyin’s more aggressive moves in value-for-money products.
(2) Engagement weakness on lower engagement at its Duo Duo Grocery business and
following its app version update in Mar 2023 which potentially contributed to Mar DAU
yoy declines for the first time (as per Questmobile) following the company’s revised data
collection settings.
(3) Lack of disclosures of Temu thus far and rising Temu losses where equity markets
may not price in the long-term value today, on the back of substantial near-term losses
that could expand into 2H with our estimated turnaround not until 2025-26. Meanwhile,
policies/regulatory/user retention risks that could be specific to Temu include policy risks
of any potential SME/retailer protection regulations, any changes to import duties e.g.
current US de minimis benefits that cross-border players enjoy, Temu’s exposure to
sensitive personal data including contact/household address details of users; and user
retention post-normalization of Temu marketing spending.
(4) Any further rise in cross-border eCommerce competition in the US, with potential
TikTok US eCommerce launch before end-2023. We also note newer markets have not
1fc9fa9cf8844a388c506688498547c5
been as easy/fast in ramping up, e.g. Japan, Korea, Philippines.
Summary
n Is there still room for further take rate expansion post the 1-year anniversary of
the site-wide marketing feature launch where Pinduoduo take rates are already
higher than Alibaba? GS view: We believe there is still room for yoy take rate
expansion as we see continued step-up in the proportion of merchants adopting the
site-wide marketing feature, which has shown limited cannibalization of its
traditional ads revenue, implying further room to increase traffic monetization. We
also see positive read-across for Alibaba take rates into the Sep quarter on the back
of Taobao’s similar ad-tech upgrades since July 2023; see our 2Q23 earnings recap
where we lifted our preference for eCommerce to our most-preferred sub-sector
into end of year.
n What is Pinduoduo domestic platform’s margin outlook in the midst of the
current eCommerce competitive landscape? GS view: We believe the strong 2Q23
12 September 2023 3
domestic margin on accretive domestic ad revenue is indicative of underlying main

platform profit potential and is a result of increased subsidy efficiency on the
company’s strategic focus on high-quality growth. We forecast Pinduoduo domestic
main platform adj. EBIT margin maintaining flat at 52% over FY23-25E (from GSe of
45% in FY22) as Pinduoduo reinvests incremental profit margins for growth.
n What are the drivers of domestic GMV growth from here where Pinduoduo and
Alibaba have already tapped nearly all addressable domestic consumers? GS view:
We believe Pinduoduo can further increase ARPU and purchase frequency as it
executes its quality growth development strategy (expanding into more branded
products), as well as further increase market share in electronics & appliance and
cosmetics categories (as highlighted by management as its fast growing categories
over 618), though we anticipate its GMV growth rate will gradually converge with
the industry given its substantially larger scale over the next few years and Douyin’s
share gains from the industry via the shelf-based shopping channel.
n What are the key risks for Temu global expansion and implications for
valuation around global regulatory risks? GS view: While we acknowledge some
investors’ concerns on Temu regulatory risks such as collecting sensitive personal

address data and risks of country-specific bans (see our earlier Temu deep dive and
below discussions on risk factors), yet Temu has reduced single-country risk over the
past quarter (followed by some sequential slowdown in Aug) and we believe PDD’s
current market cap of c.US$130bn is only valuing its main platform without pricing in
any valuation for Temu (i.e. still a free option).
n Temu’s path to profitability and how it can achieve it, noting PDD’s group 2Q23
gross margin reached a 2-year low of 64% potentially on fulfillment investment into
Temu. GS view: We continue to believe Temu has a number of levers to pull to
achieve positive UE (Unit Economics) and has the potential to reach mid-single-digit
GMV margin longer-term given the large room for price mark-up (given Temu is
effectively acting as the largest single merchant for cross-border eCommerce with
1fc9fa9cf8844a388c506688498547c5
its entrusted service model) and room for optimization in fulfillment/marketing costs.
12 September 2023 4
Exhibit 1: Addressing key investor questions/debates on users, domestic online marketing revenues, margins and Temu
Numbers in Rmb bn unless otherwise specified; Total ads revenue refers to internal+external ads revenue
1fc9fa9cf8844a388c506688498547c5
Source: Company data, Goldman Sachs Global Investment Research
The authors would like to thank Joy Yu for her contribution to this report.
Further take rate expansion headroom
With 2Q23 marking the 1-year anniversary of Pinduoduo’s site-wide marketing ad-tech
upgrade launch that has boosted take rate for the past four quarters where Pinduoduo
has exceeded Taobao-Tmall in main platform take rate, some investors have raised
questions on how much further Pinduoduo can increase take rate. GS view: We believe
there is still room for yoy take rate expansion as merchants gradually adopt the
site-wide marketing feature with good ROI for merchants, thus implying further
room to increase traffic monetization. We also see positive read-across for Alibaba
take rates into the Sep quarter on the back of Taobao’s similar ad-tech upgrades
since July 2023; see our 2Q23 earnings recap where we lifted our preference for
eCommerce to our most-preferred sub-sector into end of year.
12 September 2023 5
n Still further room for yoy take rate expansion on merchants’ further adoption
of site-wide marketing feature: With the site-wide marketing feature launched in
2Q22, we note merchants’ adoption has continued to increase, as evident in the
steady sequential uplift in site-wide marketing advertisement revenue (see Exhibit 2
for our estimate of online marketing revenue mix breakdown based on various
merchant channels/cross-checks). We therefore believe the normalized higher comp
for online marketing into 2H23 would still be manageable for Pinduoduo to further
expand take rates yoy.
n Limited cannibalization of traditional CPC/CPM ads revenue from site-wide
marketing with our estimate of over half of app traffic still un-monetized: As
the site-wide marketing feature mainly targets SME merchants where they can set a
predetermined ROI target and the ads system will automatically market the
merchandise across search and feed scenarios to achieve the ROI target, more
sophisticated branded KA merchants can still invest in CPC (Cost-Per-Click) or CPM
(Cost-Per-Mille) ads to have better control over advertisement ROI. While the
site-wide marketing feature monetizes some previously free organic traffic for
merchants, we believe over half (GSe) of total Pinduoduo app traffic remains
un-monetized, implying room for advertisement penetration.
Given Pinduoduo’s traffic focus on pushing blockbuster SKUs (where merchants offering
the lowest price for each specific SKU will get outsized traffic support, particularly when
combined with ad dollars), the large volumes sold by paid merchants allow for
Pinduoduo’s higher take rates, already exceeding that of Alibaba’s blended platform take
rate (sub-4%). We note traditionally Alibaba’s Taobao platform has limited monetization
(GSe: <2%), cross-funded by a more highly monetized Tmall platform (GSe: >5-6%)
where brands are more experienced in using marketing tools. We see ad-tech tool
upgrades across eCommerce players potentially lifting blended take rates for the
eCommerce industry, given SME merchants’ rise in willingness to spend on ads to drive
sales growth in a broadly soft consumption environment.
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Exhibit 2: We estimate continued increase in site-wide marketing Exhibit 3: Pinduoduo take rate has already exceeded Taobao-Tmall
revenue mix
eCommerce take rate

Alibaba (Taobao-Tmall)
PDD (main platform online marketing + payment processing commission)
JD (3P)
4.50% 4.25% 4.26% 4.26%

4.00% 4.05% 3.95%
3.89% 3.95% 3.93% 3.91%
4.00%
3.39%
3.50% 3.22%
3.00%
2.50%
2.00%
2020 2021 2022 2023E 2024E 2025E
Total ads revenue refers to internal+external ads revenue Source: Company data, Goldman Sachs Global Investment Research
12 September 2023 6
Exhibit 4: eCommerce platform MAU and DAU trend by company
Taobao's monthly active users (MAU, 'mn) Taobao's daily active users (DAU, 'mn) Taobao DAU/MAU
2018 2019 2020 2021 2022 2023 2018 2019 2020 2021 2022 2023 50% 46% 45% 45% 43%
43% 43% 42% 43% 43% 44% 45%
1,000 5%
4% 5% 3% 450
7% 41% 42% 41% 42% 41% 41% 41% 43% 42% 43% 43% 40% 41% 42% 42% 41% 43%
2% 4% 2% 0% 8% 38% 39%
900 400 5% 3% 7% 4% 40% 37% 37%
4%
-6%
800 350
700 30%
300
600
250
500 20%
200
400
150 10%
300
200 100
100 50 0%
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
PDD's monthly active users (MAU, 'mn) PDD's daily active users (DAU, 'mn) PDD DAU/MAU
2018 2019 2020 2021 2022 2023 70% 65% 65% 64%
2018 2019 2020 2021 2022 2023 62% 61% 62% 62% 62% 62% 61% 60%
800 500 59% 60% 60% 60% 59%
23% 21% 56% 55% 56%
12% 10% 8% 6% 1% 450 60% 54% 52% 55% 54% 56% 53%
55% 55%
700 9% 50% 50% 50% 50% 50%
400 4% -1%
-5% 50%
600 -13% -14% -17% -19%
350 -11%
40%
500 300
400 250 30%
200
300 20%
150
200 10%
100
100 50 0%
0 0
JD's monthly active users (MAU, 'mn) JD's daily active users (DAU, 'mn) JD DAU/MAU
30%
600 2018 2019 2020 2021 2022 2023 2018 2019 2020 2021 2022 2023 26% 26% 26% 26%
140 24% 25% 24% 25% 25% 24% 25%
16% 5% 24% 23% 24% 24% 24% 24% 24%
25% 22% 22% 23% 22% 21% 22%
22% 22% 23%
500
13% 21% 20%
13% 120 10% 21% 21% 22% 21%
16% 17% 13% 0% 9% 19%
7% 3% 4% 20%
100
400 1%
15%
80
300
60 10%
200
40 5%
100
20 0%
0 0
Vipshop monthly active users (MAU, 'mn) Vipshop daily active users (DAU, 'mn) Vipshop DAU/MAU
120 2018 2019 2020 2021 2022 2023 2018 2019 2020 2021 2022 2023 25%
25
21% 20% 20% 21% 22% 22% 21% 21% 22%
22% 21%
20% 21%
19% 19% 19% 19% 20% 20% 20% 19% 20% 20% 19% 20%
20% 20%
100 7% 19%
-3% 1% 0% -1% 14% 8% 9% 8%
4%
20% 18% 18% 18% 18%
-3% 20
-3% -8%
80 4% -5%
-2% 15%
15
60
10%
40 10
5%
20 5
0%
-
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
we note QuestMobile restated DAU and MAU data from March to July 2023, where MAU is lifted by 1-3% and DAU is lifted by 3-10%
Source: QuestMobile
Domestic platform margin outlook
As eCommerce competitors step up their effort to increase white-labeled merchandise

supply (e.g. Douyin via A/B operation teams focusing on branded/white-labeled
1fc9fa9cf8844a388c506688498547c5
merchants; JD’s Spring Dawn project (“春晓计划”) emphasizing on-boarding industry
belt merchants), some investors have expressed concern over whether the domestic
margin strength in 2Q23 is sustainable. GS view: We believe the strong 2Q23
domestic margin is indicative of underlying main platform profit potential and is a
result of increased subsidy efficiency as a result of the company’s strategic focus
on high-quality growth. We forecast Pinduoduo domestic main platform adj. EBIT
margin to remain flat at 52% over FY23-25E (from GSe of 45% in FY22) as
Pinduoduo reinvests incremental profit margins for growth.
n Strong 2Q23 domestic margin despite one of the industry’s most intense 618
campaigns is indicative of underlying main platform profit potential: Our prior
Neutral view on PDD in part centered upon our forward-looking concerns over
potential growth moderation/increase in subsidy due to step-up in domestic
eCommerce. However, the strong 2Q beat, despite one of the industry’s most
intense 618 campaigns, led us to upwardly reset our Pinduoduo main platform take
rate/margin expectations on its success in blockbuster SKUs/SME merchant focus
(where platforms have higher bargaining power in this macro environment).
Meanwhile, effective cost controls and the eCommerce sector’s broadly rational
12 September 2023 7
margin outlook (from BABA/JD/Kuaishou beats) led us to lift our PDD FY23E main
platform EBIT forecasts in our recent upgrade report.
n Strategy of high-quality development shifts subsidy from user engagement to
merchandise/service quality, leading to increased subsidy efficiency: Since the
company’s strategic focus turned to high-quality development, management has
been promoting the development of high-quality consumption, merchandise supply
and platform ecosystem. Management has therefore shifted subsidy from giving
cash coupons to SFV/livestreaming/in-app games users to better support
high-quality merchants and products through favorable resource allocation, which
has led to an increase in subsidy efficiency and decrease in DAU (where its app
version update is also a contributing factor). We note the decrease in DAU as per
Questmobile (as in our Top 400 tracker) may not be the best reference due to
Pinduoduo app’s setting changes, and the strong 2Q underlying performance
indicated Pinduoduo’s consistent GMV growth, potentially due to limited GMV
contribution from non-GMV contributing DAU in the past.
Exhibit 5: 2Q23 was a model-proving quarter for high-quality Exhibit 6: Upward reset of domestic platform margin outlook in our
development strategy, leading to an upward reset of our margin recent upgrade to Buy (Aug 30) vs. previous forecasts
expectation. S&M seasonally ramps up sequentially into 2H23, but
we still expect a lower ratio yoy
main platform EBIT (new) main platform EBIT (old)

main platform margin (new) main platform margin (old)
140 0.6
52% 52% 52%
120 0.5
98bn
100
89bn 0.4
79bn
80
0.3
60
0.2
40
20 0.1
- 0
1fc9fa9cf8844a388c506688498547c5
2023E 2024E 2025E
numbers in Rmb bn numbers in Rmb bn
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
Domestic GMV growth drivers
As Pinduoduo’s annual active customers surpassed c.900mn, reaching near China’s

ceiling of total domestic Internet users, some investors have questioned what levers
Pinduoduo can further pull to sustain above-industry GMV growth rate. GS view: We
believe Pinduoduo can further increase ARPU and purchase frequency as it
executes its quality growth development strategy (expanding into more branded
products), as well as further increase market share in electronics & appliance and
cosmetics categories (as highlighted by management as its fast growing
categories over 618), though we anticipate its GMV growth rate will gradually
converge with industry given its substantially larger scale over the next few years
and Douyin’s share gains from industry via the shelf-based shopping channel.
12 September 2023 8
n Pinduoduo’s ARPU remains well below Taobao-Tmall, where it can further

improve via category expansion/increasing high-quality merchandise supply:
We note Pinduoduo’s current ARPU remains at c.40% of Taobao-Tmall (see Exhibit
7), mainly due to the company’s focus on value-for-money merchandise as well as
higher exposure to the lower ticket size fresh food category. As the company
continues to execute on its high-quality development strategy to keep up with the
long-term trend of consumption, we believe the company can further increase
ARPU and shopping frequency, as more high-quality merchants come on-board to
provide more value-for-money merchandise.
n Pinduoduo can further increase market share in electronics & appliance and
cosmetics category, though its GMV growth rate will gradually converge with
industry on larger scale: We note Pinduoduo has been taking share in the E&A and
cosmetics category, where management noted that home appliance sales during
618 more than doubled yoy, while the cosmetics category gained good traction, with
certain sub-categories growing +800% yoy. However, we expect the GMV growth
gap of Pinduoduo will gradually converge with the industry, given the step-up in
domestic eCommerce competition for value-for-money products/SME merchants

from Alibaba and Douyin.
Exhibit 7: PDD has differentiated customer monthly spending profile

vs. Taobao-Tmall and JD
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Exhibit 8: Category mix across eCommerce competitors
Market share snapshot of Kuaishou, Douyin, and other incumbents (by category, 2022)
Electronics & Appliances Apparel and home goods Fresh food
FMCG (excl. Cosmetics) Cosmetics Pharmaceuticals and healthcare products
Jewelery Others
100%
22% 12% 16%
24% 29% 27% 3% 27%
80% 35% 9% 6%
3% 2%
3% 2% 5% 9% 5% 16%
9% 7% 3% 10%
60% 12% 5% 14% 15% 8%
3% 21% 3%
6% 15% 13% 16% 6%
40% 3% 2% 8%
4% 4%
25% 24% 28% 18% 32% 45%
20% 44% 33%
19% 16% 14% 18% 13%
0% 3% 6%
Overall BABA (Taobao & Taobao Tmall JD PDD Kuaishou Douyin
Tmall)
12 September 2023 9
Exhibit 9: GMV growth comparison across players

GMV growth % 2020 2021 2022 2023E 2024E 2025E 1Q22 2Q22 3Q22 4Q22 1Q23 2Q23 3Q23E 4Q23E
Alibaba 10% 8% -4% 4% 5% 4% -3% -5% -4% -5% -5% 7% 2% 7%
Gap vs. industry (ppts) -4% -4% -11% -7% -4% -3% -12% -8% -11% -11% -12% -7% -6% -6%
JD 25% 26% 6% 7% 9% 9% 15% 3% 4% 3% 0% 9% 6% 10%
Gap vs. industry (ppts) 10% 14% -1% -4% 0% 2% 6% 0% -3% -3% -7% -5% -2% -3%
-Amongst which JD direct sales (1P) 28% 25% 6% 2% 5% 9% 17% 3% 6% 1% -4% 3% 1% 6%
Gap vs. industry (ppts) 13% 13% 0% -9% -4% 2% 8% 0% -1% -5% -12% -10% -7% -8%
Pinduoduo 66% 46% 22% 26% 13% 10% 20% 22% 24% 23% 26% 37% 21% 24%
Gap vs. industry (ppts) 51% 34% 16% 15% 4% 3% 11% 19% 17% 17% 19% 23% 13% 10%
Douyin 73% 80% 54% 24% 16% 120% 103% 100% 45% 72% 70% 35% 48%
Gap vs. industry (ppts) 61% 74% 43% 15% 9% 111% 100% 93% 39% 65% 56% 27% 35%
Kuaishou 539% 78% 33% 31% 26% 20% 48% 31% 27% 30% 28% 39% 29% 29%
Gap vs. industry (ppts) 524% 66% 26% 20% 17% 13% 39% 29% 19% 24% 21% 25% 21% 16%
WeChat Video Account 260% 45% 33% 150% 140% 122%
NBS Industry online goods GMV 249% 36% 26% 136% 132% 108%
Vipshop 11% 16% -8% 13% -8% -10% -8% -16% -6% -5% 14% 21% 10% 8%
NBS Industry online goods GMV 15% 12% 6% 11% 9% 7% 9% 3% 7% 6% 7% 14% 8% 14%
Parcel volume yoy 31% 30% 2% 17% 10% 8% 10% -2% 5% -3% 11% 21% 14% 22%
We calculate Bytedance/Douyin’s (Not Covered) relevant operating metrics (GMV, revenue, mix, etc) by analyzing the industry and companies that we cover, and then extrapolating them to
Bytedance/Douyin.
Regulatory risks and implications for Temu valuation

Some investors have expressed concern over a number of regulatory risks associated
with Temu, specifically data security and country-specific SME/retailer protection
policies, and have therefore been less willing to assign any valuation to Temu thus far.
GS view: while we acknowledge some investors’ concerns on Temu regulatory
risks such as collecting sensitive personal address data and risks of
country-specific bans (see our earlier Temu deep dive and below discussions on
risk factors), yet Temu has reduced single-country risk over the past quarter
(followed by some sequential slowdown in Aug) and we believe PDD’s current
market cap of c.US$130bn is only valuing its main platform without pricing in any
valuation for Temu (i.e. still a free option).
n In response to potential regulatory scrutiny, we note the company has taken
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proactive measures: (1) formation of PDD Holdings this year, with full separation of
its onshore Pinduoduo business and its non-China Temu businesses, (2) expanding
beyond the US to the rest of the world, including Europe, Southeast Asia, and most
recently the Middle East, to alleviate concentration risk, where we note Temu now
has operations in almost 40 countries as of Sep 2023 and less than half of MAUs
are from the US (vs. 100% of MAUs from the US at end-2022).
n Temu, AliExpress and other China cross-border eCommerce platforms have
faced intensified regulatory scrutiny, yet the key risk to Temu’s business model
remains more country-specific SME/retailer protection policies as seen in
Indonesia, in our view: We note Temu collects sensitive personal address data as
an eCommerce platform, and has been under regulatory scrutiny lately regarding its
use of the de minimis tax exemption rule of registering individual customers as the
importer and also its involvement in selling Xinjiang district products (see congress
report issue brief). However, for Temu, we believe it will continue to maintain its
price competitiveness, even if taxes are included, as its cost advantage of direct
procurement from manufacturers (reducing the number of B2B players involved
before a product typically reaches a US consumer) should more than offset any
12 September 2023 10
incremental import tax.
n Specifically for Temu, further security scrutiny regarding allegations that the
Pinduoduo app exploited an android OS loophole: Temu could face further
security risks stemming from allegations that the Pinduoduo app exploited a system
loophole in android phones to track user behavior and access other information
without user consent (see link), particularly given its access to sensitive personal
data e.g. contact details and addresses of global consumers. We believe the
formation of PDD Holdings this year, and full separation of its onshore Pinduoduo
business and its non-China Temu businesses, have been proactive measures by
PDD to minimize/reduce global regulatory risk.
n Risk of platform bans in other countries as a result of SME/local retail
protection policies, using Indonesia as a case study which further tightened
eCommerce regulations in 3 areas: (1) the sale of imported goods under US$100
is prohibited on eCommerce sites; (2) imported goods distributed in Indonesia
through digital platforms are subject to the same tax and licensing requirements as
local SMEs; and (3) platforms are prohibited from selling self-produced goods
(players like TikTok have decided not to pursue cross-border eCommerce business in
India and Indonesia). And most recently Indonesia reportedly is looking to further
regulate TikTok Shop’s operations in Indonesia, mainly separating social media and
eCommerce operations (according to various local media; see our ASEAN TMT
analyst Pang Vittayaamnuaykoon’s latest note). Furthermore, as the cross-border
eCommerce platforms process a large amount of personal data, there remains
policy overhang risk of a potential ban for Temu and other China cross-border
eCommerce platforms should the earlier proposed RESTRICT Act be approved. We
note the RESTRICT Act specifically calls out applications that “use, process, or
retain sensitive personal data with respect to greater than 1,000,000 persons in the
United States” where Temu processes sensitive personal phone number and
resident address information with 40mn+/10mn+ MAUs (as of June-23).
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Exhibit 10: Lower per capital income states/rust belt states have Exhibit 11: Temu launch timeline
been the most popular regions for Temu in the US
Country Launch time
110
Mississippi North America
Interest in Temu (index, Google Trends)
100 West Virginia United States Sep-22

90 Louisiana
Arkansas Canada Feb-23
Alabama
80 Kentucky Mexico May-23
Oceania
70
Australia Mar-23
60
New Zealand Mar-23
50 North Asia
40 Japan Jul-23
0 5 10 15 20 25 30 35 40 45 50 55 60 South Korea Jul-23
Ranking # as in per capita income
South America
Chile Aug-23
Middle East
Israel Aug-23
ASEAN
Philippines Aug-23
Source: Google Trends Source: SensorTower, Data compiled by Goldman Sachs Global Investment Research
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Exhibit 12: Temu launch timeline (continued) Exhibit 13: More than half of Temu/s MAUs now come from
countries/regions outside the US
Country Launch time US Europe (first 6 countries)

North America ex. US Oceania
Europe 120.0 Europe (others) North Asia
ASEAN Middle East
First 6 countries: South America
100.0
France Apr-23
Germany Apr-23 80.0
Italy Apr-23
60.0
Netherlands Apr-23
Spain Apr-23 40.0
United Kingdom Apr-23 20.0

Others:
Austria May-23 0.0
Belgium May-23/June-23
Sweden May-23/June-23
Switzerland May-23/June-23
Poland May-23/June-23
Portugal May-23/June-23
Estonia Jul-23
Finland Jul-23
Greece Jul-23
Ireland Jul-23
Luxembourg Jul-23
Slovakia Jul-23
Slovenia Jul-23
Cyprus Jul-23
Czech Republic Jul-23
Latvia Jul-23
Romania Jul-23
Croatia Aug-23
Denmark Aug-23
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Hungary Aug-23
Lithuania Aug-23
Norway Aug-23
Bulgaria Aug-23
Source: SensorTower, Data compiled by Goldman Sachs Global Investment Research numbers in mn
Source: SensorTower, Data compiled by Goldman Sachs Global Investment Research
Exhibit 14: Valuation scenario analysis for PDD
Pinduoduo Bull case Base case Bear case

Scenarios for valuation
Valuation methodology 2023-24E avg SOTP 2023/24E-30E DCF 2023E core business P/E
Core platform eCommerce business Growth Core platform eCommerce business
GMV 25-30E CAGR of 4%, with slight

18X P/E multiple on core business 12X P/E multiple on core business
improvement in take rate, revenue 25-30E
2023/24E NOPAT (52% EBIT margin) 2023/24E NOPAT
CAGR 7%
US$124 US$83
Temu & DDG & Cash & 15% holdco Margin No valuation for Duoduo Grocery/Temu
Valuation breakdown Temu: incorporating bull case Temu and cash
valuation at US$46 per share, assuming
Group operating margin stabilizes at 30%+
1.5mn daily orders in 2025E and US$6.2
level
EBIT per order, on 28X P/E, discounted
back to 2023/24E average
DDG: Assuming 53mn daily pieces in
2023/24E and Rmb0.2 per order non-
GAAP EBIT (normalized EBIT), 15% tax

rate, and 15X P/E, in-line with our valuation
for Meituan Select
US$69
Valuation per share (US$) 164 129 83
Our bull case factors in our bull case valuation for Temu
Source: Goldman Sachs Global Investment Research
See more details in our China eCommerce: From local to global: Temu deep dive:
Framing the debates; implications for PDD, AliExpress
Temu’s path to profitability
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Some investors have expressed concern about Temu’s path to profitability, where 2Q23
GPM reached a 2-year low of 64% potentially on fulfillment investment into Temu. GS
view: Learning from PDD’s 2Q23 results (despite continued lack of disclosure on
Temu), we estimate the company invested Rmb7.7bn (EBIT level) into Temu in
2Q23, or US$-13 EBIT loss per order, of which we estimate a mid-20% mark-up
ratio on AOV (average order value) of US$32, and US$13/6 fulfillment/marketing
cost per order respectively (as evident by the 135%/55% yoy growth of
COGS/sales & marketing expenses vs. revenue growth of 66%). We continue to
believe Temu has a number of levers to pull to achieve positive UE (Unit
Economics) and has the potential to reach mid-single-digit GMV margin in the
long run given the large room for price mark-up (given Temu is effectively acting as
the largest single merchant for cross-border eCommerce with its entrusted service
model) and room for optimization in fulfillment/marketing costs.
n We believe Temu has a number of levers to pull to achieve positive UE (Unit

Economics) and has the potential to reach mid-single-digit GMV margin in the
long run, driven by: (1) an improved mark-up ratio from the current level of c.20%;
(2) further reducing fulfillment costs via destination warehouses and switching from
air to sea freight; and (3) increasing customer purchase frequency/basket size to
further scale up order volume and spread out fixed costs such as warehouse
investments/customer acquisition costs, where Temu can borrow from Pinduoduo’s
successful playbook of cross-selling different categories and subsidizing branded,
higher-AOV products. However, we also note Temu’s path to UE break-even hinges
upon its ability to retain acquired customers and whether customer behavior will
change if Temu lowers subsidies in the future to achieve profitability (where PDD
main platform has proved its strong user stickiness and profitability after significantly
pulling back user subsidies).
Exhibit 15: Temu unit economics

Exhibit 16: PDD EBIT breakdown by business

Assumptions 2019 2020 2021 2022 2023E 2024E 2025E 1Q22 2Q22 3Q22 4Q22 1Q23 2Q23 3Q23E 4Q23E
Main platform EBIT (4,273) 31,200 50,394 79,496 88,932 98,224 6,830 13,514 15,764 14,286 13,151 22,858 21,671 21,815
margin -7% 36% 45% 52% 52% 52% 34% 50% 51% 43% 44% 56% 55% 50%
Drag/benefit from CGP & International (1,494) (19,529) (12,274) (30,739) (22,515) (10,817) (3,153) (2,973) (3,463) (2,686) (4,689) (8,249) (8,664) (9,137)
as % of main platform EBIT 35% -63% -24% -39% -25% -11% -46% -22% -22% -19% -36% -36% -40% -42%
- drag: Loss from DDG (1,494) (19,529) (9,356) (1,686) 1,242 4,130 (3,153) (2,973) (2,363) (868) (1,233) (594) (46) 188
as % of main platform EBIT 35% -63% -19% -2% 1% 4% -46% -22% -15% -6% -9% -3% 0% 1%
- drag: Loss from Temu (2,918) (29,053) (23,756) (14,947) (1,100) (1,818) (3,455) (7,655) (8,618) (9,325)
as % of main platform EBIT -6% -37% -27% -15% -13% -26% -33% -40% -43%
Group adj. EBIT (5,767) 11,671 38,120 48,757 66,418 87,407 3,677 10,542 12,301 11,600 8,462 14,609 13,007 12,679
margin -10% 12% 29% 24% 27% 31% 15% 34% 35% 29% 22% 28% 25% 22%
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Investment thesis - PDD

We are Buy-rated on Pinduoduo (PDD) due to: (1) Pinduoduo maintains the strongest
value-for-money mind share amongst Chinese consumers on eCommerce platforms,
despite more aggressive strategies from Alibaba/Douyin, and Pinduoduo’s strong
presence in relatively under-penetrated fresh/groceries categories, (2) undemanding
valuation of its domestic main platform with faster-than-peers growth outlook; and (3)
free option value in Temu, tapping into overseas TAM with strong traction despite global
regulatory risks/our estimate of c.Rmb29bn loss drag this year.
Key risks: (1) Domestic GMV/online marketing revenue growth moderation, partly on
macro and competition from Taobao/Douyin’s more aggressive moves in value-for-money
products; (2) Engagement weakness on lower engagement at its Duo Duo Grocery
business and following its app version update in Mar 2023 which has potentially
contributed to Mar DAU yoy declines for the first time (as per Questmobile) following
the company’s revised data collection settings; (3) Lack of disclosures of Temu thus far
and rising Temu losses where equity markets may not price in the long-term value today,
on the back of substantial near-term losses that could expand into 2H with our
estimated turnaround not until 2025-26. Meanwhile, policies/regulatory/user retention
risks that could be specific to Temu include policy risks of any potential SME/retailer
protection regulations, any changes to import duties e.g. current US de minimis benefits
that cross-border players enjoy, Temu’s exposure to sensitive personal data including
contact/household address details of users; and user retention post-normalization Temu
marketing spending; (4) Any further rise in cross-border eCommerce competition in the
US, with potential TikTok US eCommerce launch before end-2023. We also note newer
markets have not been as easy/fast in ramping up, such as Japan, Korea, Philippines.
Price Target Risks and Methodology - Pinduoduo Inc.

Valuation methodology: We are Buy rated on Pinduoduo. Our 12-month DCF-based
target price is US$129, with a WACC of 12% and terminal growth rate of 3%,
cross-checked with SOTP.
Key risks: domestic GMV/online marketing growth moderation; engagement weakness;

risk of Temu losses despite lack of disclosures; rise in cross-border eCommerce
competition.
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Disclosure Appendix
Reg AC
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Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
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The rating(s) for PDD Holdings is/are relative to the other companies in its/their coverage universe: Alibaba Group (ADR), Alibaba Group (H),
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Dada Nexus Ltd., Full Truck Alliance Co., JD Logistics, JD.com Inc. (ADR), JD.com Inc. (H), Kerry Logistics Network Ltd., Meituan, PDD Holdings, S.F.
Holding, STO Express, Sinotrans Ltd. (A), Sinotrans Ltd. (H), Smart Share Global Ltd., Tencent Holdings, Vipshop Holdings, YTO Express Group, Yunda
Holding, ZTO Express (Cayman) Inc. (ADR), ZTO Express (Cayman) Inc. (H)
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aggregated under US securities law) as of the month end preceding this report: PDD Holdings ($97.40)
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PDD Holdings (PDD) - Addressing Key Investor Debates Post Upgrade Domestic Ad Growth Outlook & Temu Risks The Key Focuses Buy

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12 September 2023 | 9:16PM HKT

& Temu risks the key focuses; Buy

PDD 12m Price Target: $129.00 Price: $97.40 Upside: 32.4%

we address ﬁve key investor questions/debates surrounding

PDD’s domestic and cross-border operations based on our

& appliance/cosmetics categories; 3/23 6/23 9/23E 12/23E

data/country-speciﬁc ban risks remains, yet Temu has reduced

fulﬁllment/marketing costs. Source: Company data, Goldman Sachs Research estimates.

PDD Holdings (PDD) Income Statement (Rmb mn) _______________________________

Capital expenditures (635.7) (1,134.1) (1,592.2) (1,851.1)

Repayment of lease liabilities -- -- -- --

Source: Company data, Goldman Sachs Research estimates.

We continue to be positive on PDD’s longer-term outlook, as we note (1) Pinduoduo

We note the key risks to our Buy thesis include:

domestic margin on accretive domestic ad revenue is indicative of underlying main

investors’ concerns on Temu regulatory risks such as collecting sensitive personal

Further take rate expansion headroom

eCommerce take rate

4.50% 4.25% 4.26% 4.26%

Exhibit 4: eCommerce platform MAU and DAU trend by company

Domestic platform margin outlook

As eCommerce competitors step up their effort to increase white-labeled merchandise

main platform EBIT (new) main platform EBIT (old)

numbers in Rmb bn numbers in Rmb bn

Domestic GMV growth drivers

As Pinduoduo’s annual active customers surpassed c.900mn, reaching near China’s

n Pinduoduo’s ARPU remains well below Taobao-Tmall, where it can further

domestic eCommerce competition for value-for-money products/SME merchants

Exhibit 7: PDD has differentiated customer monthly spending proﬁle

Source: Company data, Goldman Sachs Global Investment Research

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 9: GMV growth comparison across players

Source: Company data, Goldman Sachs Global Investment Research

Regulatory risks and implications for Temu valuation

n In response to potential regulatory scrutiny, we note the company has taken

incremental import tax.

100 West Virginia United States Sep-22

Country Launch time US Europe (first 6 countries)

United Kingdom Apr-23 20.0

Source: SensorTower, Data compiled by Goldman Sachs Global Investment Research

Exhibit 14: Valuation scenario analysis for PDD

Pinduoduo Bull case Base case Bear case

Core platform eCommerce business Growth Core platform eCommerce business

GMV 25-30E CAGR of 4%, with slight

GAAP EBIT (normalized EBIT), 15% tax

Valuation per share (US$) 164 129 83

Source: Goldman Sachs Global Investment Research

Temu’s path to proﬁtability

n We believe Temu has a number of levers to pull to achieve positive UE (Unit

Exhibit 15: Temu unit economics

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 16: PDD EBIT breakdown by business

Investment thesis - PDD

Price Target Risks and Methodology - Pinduoduo Inc.

Key risks: domestic GMV/online marketing growth moderation; engagement weakness;

Company-speciﬁc regulatory disclosures

Distribution of ratings/investment banking relationships

Rating Distribution Investment Banking Relationships

Price target and rating history chart(s)

Ratings, coverage universe and related deﬁnitions

Global product; distributing entities

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