PDD posted RMB 37m total revenue in Q1 2017 which grew by about 37 times to RMB 1.38bn by Q1 2018, during this period the company posted a net loss of RMB 0.2 bn. PDD still has a way to go but if the top line growth accelerates on the same trend along with the rapid acquisition of new users then the potential is there.
Chinese e-commerce sales in 2016 amassed to $750bn from 460m online shoppers according to Goldman Sachs. This market is expected to grow 23% annually through to 2020 as rural and lower tier cities experience logistic and infrastructure upgrades. PDD is poised to take advantage of this growing market along with China’s rapidly growing middle class. Between 2009 and 2030, China will add 850 million people to its middle class, according to Organisation for Economic Co-operation and Development projections. This means the Chinese middle class will grow from 12% of its population in 2009 to 73% in 2030, boosting purchasing power.
Estimating that revenue could grow to $830mn this year and PDD is targeting a valuation of $19.4bn, then tthe company is valuing itself at 24x FY18 revenues. If sales up to 2020 grew at the same pace this pricing is around 4x 2020 sales.
Given how quickly PDD is growing the near-term valuation multiple is of limited use. The transaction volume has risen around 10 times in the past year, along with increasing monthly active users 8x throughout 2017 which proves the business model is popular and generates sustainable revenues.
To drive eventual and long term profitability PDD must use the IPO capital to grow user numbers with the same rapid pace and sustain growth.
Also of note, Colin Huang, PDD CEO, will amass a fortune of $8.3bn even at the low end of the IPO pricing range. Huang will control more than 40% of PDD and the majority voting rights. Even at the low end of the IPO pricing the $8.3bn fortune will put Huang among the 25 richest people in China, in front of Richard Liu the founder of JD.com. Huang’s executive compensation, the IPO bonus stock award, like Xiaomi, is not linked to any performance metrics. This could highlight potential corporate governance concerns for investors as the executive compensation and incentive to create value for shareholders are misaligned.