PDD Holdings (Temu)PDD

Key highlights

• Transaction service growth: Revenue from transaction services, which covers the fees from processing sales on the platform, rose 20% to 56.3 billion RMB. This growth helped total revenue reach 106.2 billion RMB, although the 11% overall increase is a significant slowdown from earlier periods.
• Shrinking profit margins: Net income fell 15% to 12.5 billion RMB as the company spent more to run its business. Costs of revenues rose 15% to 46.9 billion RMB because of higher fulfillment and payment processing fees, meaning it is becoming more expensive to deliver each order.
• Supply chain spending boost: Research and development spending grew 23% to 4.4 billion RMB this quarter. Management says this is part of a plan to build out their own brand business and improve supply chains, which they identified as their core strategic priority for the next decade.
• Strong cash position: The company ended the quarter with 436.1 billion RMB in cash and short term investments, which is about 63.2 billion US dollars. This gives them a massive cushion to fund their expansion even as they face higher operating costs.
• Strategic spending outlook: Management stated they are prepared to invest resolutely over the long term in their supply chain capabilities. While they did not give a specific dollar range for next quarter, they confirmed they will commit significant resources to shift their business model toward first-party brands.

Our take: This was a soft quarter because the company is intentionally trading profit for a long-term shift in its business model. While growth is slowing and costs are rising, the pivot to building a first-party supply chain is a heavy lift that chips away at the immediate investment case until those new bets prove they can generate better returns.