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l  We downgrade PDD to HOLD because its traffic, ARPU, and take rate are seeing increasing challenges.

l  Several external issues, including the weak macro environment, increasing competitive pressure, and regulatory environment will also pose an impact to PDD.

l  We estimate that PDD’s 3Q rev. misses cons by 3%, while non-GAAP NI is RMB 550mn vs cons (735)mn. PDD’s rev. growth(excluding merchandise sales) will decelerate from 2Q21’s 73% YoY to 3Q/4Q’s 63%/42% YoY.


Traffic is about to hit the ceiling

We cut our forecast of PDD’s annual active buyer number in 3Q21/4Q21 from previously 875mn/903mn to 867mn/890mn because: 1) the new regulation over digital ads poses negative impact to PDD’s user acquisition strategy. Our channel check suggests that PDD’s spending in traffic acquisition on Bytedance and Tencent dropped about 30% in September because new regulations impact the ROI; 2) PDD remains 2nd place in download ranking throughout 3Q21, falling behind Taobao Deal. Taobao Deal cannibalizes PDD’s users as it offers lower ASP products and more subsidy; 3) PDD’s former user acquisition methods, like social sharing and social games, are showing less satisfying result as PDD users reached to a large number, and users are less interested in those techniques.


ARPU growth also sees challenge

We estimate that PDD’s GMV (excluding community group buying) will reach RMB 2.45tn in 2021, representing annual per-user spending of RMB 2750, which could further break down to ASP RMB 50 and 55 placed order per user. PDD made some progress in introducing certain brand products in FMCG, food, and 3C products, but shows limited achievement in attracting high-tier brands. Therefore, the ASP remains to be flattish throughout 2021. Meanwhile, PDD’s user purchasing frequency is about 80-90% of Taobao and Tmall’s, so there is also limited incremental space.


Take rate has limited incremental potential

We estimate that PDD’s 3Q21 take rate to be 3.9%, slightly higher than 2Q21’s 3.8%. PDD is launching a series of new ads products, like automatic  (TBC)

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