China’s online group discounter Pinduoduo (PDD) yesterday saw its shares surge from the top of its marketed range at $19 apiece by as much as 44 per cent on its first trading at the Nasdaq. By the end of the trading day, PDD’s shares closed at $26.70 per share (41 per cent above its offer price), an equivalent of a market valuation of nearly $30b.
This Shanghai-based e-commerce company raised $1.63b via the issue of 85.6 million shares at Nasdaq, effectively becoming the fourth-largest US IPO this year. According to details in a report by Bloomberg, Axa SA’s US unit ($3.2b), Pagseguro Digital Ltd ($2.6b), and iQiyi Inc. ($2.4b) were the only listings that exceeded PDD’s IPO thus far in 2018.
Colin Huang, the founder of PDD, maintains a 46.8 per cent stake in the company, while other major backers include the likes of Tencent & Sequoia Capital. PDD’s IPO was underwritten by Credit Suisse Group AG, Goldman Sachs, China International Corp, and China Renaissance.
Founded in 2015, the 3-year-old firm carved out its own position in China’s huge e-commerce market by offering a platform for users to collaborate with friends – mainly via Tencent’s WeChat app – after spotting potential value-for-money deals on daily necessities like fruits, clothing, tissues and other goods.
These low prices, as opposed to the more expensive platforms of Alibaba’s Taobao and JD.com, and its gamification features that make shopping fun, enabled it to emerge as an appealing marketplace amongst Chinese living in the rural areas.
According to the company, it mainly attracts married and middle-aged Chinese women in lower-tiered Chinese cities, with more than half of its users – 60 per cent of them – living in third-tier or lower Chinese cities and towns. In 2017, PDD posted $278 m in annual revenue over 4.3 billion orders for the year and has reportedly accumulated up to more than 300 million active buyers and in excess of a million active merchants over the past three years.
Additionally, PDD has shifted away from the direct sales business model – such transaction only accounted for 2 per cent of its total revenue in 2017 – with key revenue drivers for 2017 mainly being online marketing services charged for merchants on-boarding and commission fees. These composed 68 per cent and 30 per cent of its total revenue respectively.
In Q1 2018, PDD reported a significant boost in its revenue by 37X to $220.7m, but this revenue growth coincided with burgeoning losses that amounted to $80m, reflecting the increased marketing outlay behind its rapid growth, even as China’s rural cities see increasingly wealth on a per capita basis.
The overwhelming support from investors has given a new pool of funds for PDD, which are necessary to deal with China’s e-commerce majors such as Alibaba & JD.com. The firm will also need to address issues such as the rampant listings of fake goods and inappropriate content on its platform, as well as its continued overreliance on Tencent’s ecosystem.