The offensive of Chinese shopping malls is becoming an issue every day. Until just two years ago, direct purchase was the stage for some users who were well-versed in information. Numerous direct shopping malls and smart stores prove this. However, before we knew it, commercials of Chinese shopping malls began to appear, and as of April 2024, Ali and Temu ended up taking the 2nd and 3rd places in Korea's market share. And the center of the storm seems to be Temu, who was relatively out of the spotlight, rather than Ali.
In this article, we will learn about Pinduoduo, the operator of Temu.
Pinduoduo performance growth background
Price competitiveness based on C2M model
Temu's competitiveness, which turns even Ali into an expensive shopping mall, is based on the C2M model (Consumer-to-Manufacturer). Rather than engaging in overall distribution by having an intermediary seller (smart store) like Naver Shopping or holding its own inventory like Coupang or Ali, it focuses on minimizing the distribution process and aims for price advantage. Temu's strategy can be said to have been effective because direct purchasing itself means that when there is a price advantage or a product that is not available in the domestic shopping mall, the customer takes advantage of the delivery period and uses it.
Gamification strategy for shopping
Gamification elements played a significant role in Temu's rapid growth and market dominance. Pinduoduo goes beyond simply selling products and has introduced creative methods to encourage customer participation and promote group purchasing. Through this, Pinduoduo has established itself as the third largest company in the e-commerce industry in China in a short period of time.
Pinduoduo encourages customers to run a virtual farm and grow fruits and vegetables through a game called ‘Duoduo Orchard.’ In Korea, this is the same method that Always'sAll Farmattempted.
Shopping-linked social game introduced by Always, (left) All Farm, (right) Onion Game
If you achieve certain achievements in this game, you will be provided with incentives that can be used to purchase real agricultural products. Taking Korea'sAll Farmas an example, if you successfully grow onions in the game, real onions will be sent to you. Since users must perform missions at regular intervals to successfully grow crops, the length of time they spend on the shopping application naturally increases, leading to a pattern of purchasing products.
Leverage social networks
Meanwhile, Pinduoduo adopted a clever strategy of actively utilizing popular mobile messengers rather than focusing only on developing its own app. By allowing users to suggest group purchases in WeChat chat rooms and invite friends and family to gather the number of buyers, a natural viral marketing effect was achieved. Similar to the integration with games, this strategy encouraged customers to voluntarily promote Pinduoduo to their friends, contributing to a rapid expansion of the user base.
Comparison between peer groups
Pinduoduo’s competitiveness is clearly evident just by comparing the company’s size and profits. By comparing the number of employees and net profit relative to sales volume with peer groups in the same industry, you can see how efficiently the company is operating.
Company Name Pinduoduo Alibaba Amazon Mercado Libre Coupang Market capitalization 204.05B188.38B1.95T80.10B39.55B Number of employees 17,403204,8911,525,00 058,31378,000Sales41.11B130.35B590.74B15.62B25.70BNet profit11.07B11.08B37.68B1.13B1.27BPeer Comparison of profits compared to group size (Source: Seeking Alpha)
Of course, the quality of service received by customers may be inversely proportional to profits, but it is true that Pinduoduo is overwhelmingly attractive as an investment destination. As acknowledged, this company has surpassed Alibaba's market cap in the same country.
Company NamePinduoduoAlibabaAmazonMercadoLibreCoupangPER(FWD)12.469.5341.2646.61183.84Sales growth (FWD)56.61%7.19%11.37%29.55%19.14%EPS growth (FWD)54.57%5.94%-69.16%-ROE46.30%6.38%20.30%41.62%36.84%Comparison of key peer group indices (Source: Seeking Alpha)
It surpasses its peer group in terms of indicators such as growth potential, profitability, and value.
Risk
China Risk
Even in 2020, when Alibaba surpassed Walmart's market cap, many experts predicted that Alibaba would take first place in global market cap.
In 2019, it was No. 1 in Asian market cap, surpassing Samsung Electronics and TSMC.
However, after Jack Ma's series of political remarks, he was forced to step down from management, and unfortunately, Alibaba's stock price continued to fall to about a quarter of its peak.
This may be the reason why many investors are reluctant to buy Chinese stocks. Regardless of the soundness of the company, when it comes to Chinese stocks, the risk of not knowing where the stock price will go depending on the government's stance must be assumed.
International Sanctions Risk
In the United States and Europe, concerns are being raised about the fact that the Chinese government is mobilizing Uyghurs for forced labor in the Xinjiang Uyghur Autonomous Region.
Low-cost fashion platform Xuyin and Temu, which specializes in low-cost goods, are at the center of allegations that the Chinese government used forced labor to produce cotton, textiles and related goods from the Xinjiang region.
According to the U.S. 'Uyghur Forced Labor Prevention Act (UFLPA)', the import of products made by forced labor must be prohibited Temu and Shein deny this, and are avoiding regulations by not imposing tariffs on small imports worth less than $800. Temu is currently increasing its market share in the U.S. very quickly, so we need to pay attention to whether additional sanctions will follow.
So how far will the stock price go?
In the end, if you overcome the risk of Chinese stocks, it is an attractive company in terms of growth potential, growth strategy, and stock price momentum.
Although the current rapid growth may be difficult due to the realization of sanctions, the stock price is judged to be attractive considering the current growth, price, and high profitability.