Jean Pierre Verster of Protea Capital Management presented his thesis on PDD Holdings (US: PDD) at Best Ideas 2025, held from January 9-24.
Thesis Summary
PDD is a holding company that operates two mega online marketplaces: Pinduoduo (China) and Temu (ex China in 86 countries), following a “consumer-to-merchant” business model. The company has a recent market cap of USD 135 billion, is quite secretive, and has strong valuation metrics.
PDD Holdings is registered in the Cayman Islands, headquartered in Ireland, functionally operates mainly from Shanghai, and has depository shares listed on the Nasdaq. It was founded by Colin Huang (ex Google engineer) in 2015 as Pinduoduo, a China social buying platform focusing on agricultural products. The company grew very strongly and launched Temu in 2022.
PDD has exhibited strong revenue and profit growth over the past few years, and is an asset-light business. PDD has a high net cash position (~33% of market cap) and high cash generation, with ROCE and ROE of 30+%. Management has proven its ability with Pinduoduo and is repeating this success with Temu. PDD operates an attractive two-sided marketplace with “scale economies shared” model. The company is continuing to gain share from incumbent online marketplaces (e.g. BABA, AMZN). The founder still owns ~25% of the company (now one of China’s richest persons).
Based on an analysis that considers an earnings-based valuation and an EVA valuation, Jean Pierre projects fair value of USD ~240 per share in January 2029, a four-year CAGR of ~25%.
Slides
Let’s listen to the full session and look over the transcript.
(MOI members, access all features, including ways to contact Jean Pierre.)
Transcript
Jean Pierre Verster: Our 2025 idea is PDD Holdings, which is perhaps a bit contentious. What does it do? It is a holding company that operates two online mega marketplaces. Pinduoduo is the marketplace in China. Internationally, it operates through Temu – an online marketplace platform available in 86 countries outside of China. They follow a consumer-to-merchant business model. A traditional online marketplace sells to consumers, which means it charges consumers. The revenue comes primarily from consumers. In the case of Pinduoduo, that model is flipped on its head; it effectively charges the manufacturers, the suppliers, and the merchants advertising and listing fees. That is where the majority of the revenue comes from. Historically, that is where almost all of Pinduoduo’s revenue came from.
More recently, it has become a two-sided marketplace. It’s still making money from merchants, as in the past with the consumer-to-merchant model, but now also through Temu by charging actual platform users transaction fees and other fees. It makes money from both sides, but it started with a consumer-to-merchant business model.
PDD Holdings has a market cap of $135 billion, so it’s not a small company. That’s why a lot of investors might have heard of it before. It has a December year-end. It is quite secretive, which has likely scared a lot of investors away. It is difficult to come to grips with this company and say authoritatively that you understand what it does and where it makes its money.
It has very strong valuation metrics. On the face of it, it does look like a great opportunity, but as usual, we need to dig a bit deeper. PDD Holdings is registered in the Cayman Islands, which is common for Chinese-listed stocks. A lot of what Western investors might call Chinese stocks are actually Cayman Island stocks, if you think about the domicile. PDD Holdings is headquartered in Ireland, which is also not that strange. Many companies have headquarters in Ireland for tax reasons, with only a handful of employees operating in Ireland.
PDD Holdings functionally operates from Shanghai in China. That’s where the vast majority of its employees work. The company has depository shares listed on NASDAQ. It’s quite complicated, and this complexity might have scared away some investors.
PDD Holdings was founded by ex-Google engineer Colin Huang in 2015 as Pinduoduo – a Chinese social buying platform that initially focused on agricultural products. What it brought to the market was different because, at the time, you had big incumbents like Alibaba and JD.com. Pinduoduo brought group buying, which led to hugely attractive prices, with a few consumers banding together by creating a Weixin (WeChat) group.
This was combined with Disney-like features, gamification, making it fun to purchase on the Pinduoduo platform. Colin Huang has said it’s like Costco plus Disney – great prices, great value for consumers, the Costco-type model, but combining it with Disney-type entertainment. The platform very rapidly took market share from the likes of Alibaba and JD.com. It meant that Pinduoduo grew very strongly with this agricultural product focus.
From there, it branched into other products, starting with the lower-tier cities in China – tier-four and tier-five cities. Slowly but surely – and it’s still continuing on this path – it has been moving towards third-, second-, and first-tier cities and from agricultural products to various cheap products and even branded products more recently. There’s no official data on this, but I’ve read a few transcripts with ex-employees and some other websites claiming that Pinduoduo could be the biggest seller of Apple iPhones in China. That gives you some idea of its evolution from an agricultural products platform to a seller of higher-value and branded products.
On the back of this growth, PDD Holdings launched Temu in 2022. In a very short amount of time, Temu moved into 86 countries, and it has taken the world by storm. In the US, it had ads at the Super Bowl. At one time, it accounted for at least 1% of all Facebook ad spend. It’s a significant spender on Google AdWords and Google advertisements. Pinduoduo and Temu were loss-making platforms in their early days because they spent so much on marketing.
More recently, these platforms have become highly profitable as they scale down the marketing and generate more profits from the merchants through the consumer-to-merchant model. Temu is still growing strongly. In some of the countries it entered early in 2022, I have definitely seen a tapering off of new users, but it’s still one of the top downloaded apps in the markets where it operates – in the top five at least in terms of app popularity in the 86 countries it has entered. It is growing very strongly, with very quick adoption by consumers.
Everything I’ve said so far is very positive, but it must be said that there is some controversy surrounding PDD Holdings. One needs to consider reasons not to invest rather than just the reasons to invest.
Let’s start with the reasons to invest. This is a company with robust revenue and profit growth over the last few years. It is an asset-light business with high returns and a high net cash position – a third of the market cap is in cash at the moment, which is unbelievable. Given its $130 billion-odd market cap, it’s got roughly $40 billion in cash on the balance sheet. The question is whether that cash is in China or outside of China. The company doesn’t disclose this, and it’s quite important to consider it because China has foreign exchange restrictions, which is something we as South Africans are also aware of. That means one needs to keep in mind that just because you see a big amount of cash on the balance sheet doesn’t mean it’s distributable. A large part of that is probably restricted.
The company does say in the SEC filings what the restricted portion is. It is roughly half of the cash at the moment. We are due the latest filings for the 2024 financial year in April 2025. That will give us the latest figures, but probably around half the cash – maybe even a little more – is restricted, so keep that in mind. This might have scared off investors because, on the face of it, having a third of your market cap in cash looks highly attractive.
PDD Holdings has high cash generation, high ROCE, and high ROE – in the last few years, it’s been above 30%. The financials are very strong. With Pinduoduo, the company has proven that it can come out of nowhere, take on the incumbent online marketplaces, win market share, and deeply resonate with users. It’s repeating the success with Temu, using a ‘scale economies shared’ business model. It gets scale and then reinvests that scale back into the business to offer an even better product to both the users (through lower pricing) and the merchants (through helping them find users who want their products and stimulating demand for the product so the merchant can benefit from increased volume and production planning). This is an excellent example of the concept of scale economies shared.
PDD Holdings continues to gain market share from the incumbent online marketplaces, from Alibaba in China with Taobao and Tmall and from JD.com. The same thing I happening in the US, where it’s gaining market share from Amazon.com. Amazon recently launched a new app called Haul to take on Temu with low-value items shipped directly from China. That’s an interesting fight.
What helps PDD keep the prices so low is cutting out all the middlemen. It links the merchant in China directly to the consumer. The removal of the middlemen means lower pricing but still very good customer service. The items are shipped individually by the merchants to the users in whichever country they are in, with PDD assisting with the logistics.
Colin Huang still owns roughly a quarter of the company. At one point last year, media outlets announced that he was China’s richest person. However, soon thereafter, PDD had a shockingly negative third-quarter earnings call. The share price fell almost 30% in the two days following that call, and Colin was not the richest Chinese person anymore.
Looking at the reasons to invest, on the face of it, PDD seems like a no-brainer, but why does the opportunity exist? There are numerous reasons for this and why investors have decided not to get on board despite this apparent opportunity. I’m going to invert the question and investigate to see if we can gain comfort that the reasons not to invest in PDD are not sufficiently persuasive. If we can persuade ourselves that the reasons not to invest are not strong enough, the only alternative left is, “Well, why not invest?” That’s the approach I am taking.
Before we get to the reasons not to invest, let’s look at the valuation. As I said, we use a quantamental process. We do some number-crunching, then we show the output as a graph where we superimpose the share price. We have different earnings-based valuation models. There’s an ROE-based valuation model and a ROCE-based valuation model as well. We do an EVA (economic value-added) valuation as well and also put the tangible NAV per share on our graphs. The visualization allows us to quickly see gaps between price and value and identify companies increasing their intrinsic value by either maintaining or expanding their moat, thus becoming more valuable as time goes by.
With PDD, we see a company growing in value and enhancing its moat. The share price was in bubble territory in 2021 but has since come down. While the company has increased in value, the share price has come down even further in the last year. It’s trading below our earnings-based valuation. It’s trading in line with the EVA valuation, but now, very importantly, according to our assumptions, this EVA-based valuation and the earnings-based valuation are going to increase year after year into the future.
By plugging these assumptions into our quant models, we get a projected fair value of $240 per share in four years’ time (we have a default four-year forecast period). It’s trading at roughly $100 per share at the moment. That gives us a four-year compound annual growth rate of 25% per annum, which is quite attractive.
How about EPS growth?
