Temu parent PDD trades at lowest level on record as geopolitical risks take hold

(Bloomberg) — Shares of Temu's parent company, PDD Holdings Inc., are being held back by geopolitical risks and fierce competition in China's e-commerce sector.

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Sure, U.S.-listed stocks have jumped 43% from March lows, but they still trade at just 13 times next year's expected earnings. That's half the valuation of the Nasdaq 100, representing PDD's largest discount ever.

That may seem like a good deal for a company that more than doubled its sales in the last quarter, a growth rate second only to that of Nvidia Corp. on the technology-focused index. Some see the gap as justified given the harsh trade war rhetoric from Beijing and the two candidates in the upcoming US presidential elections.

“People are worried about election risks and potential upcoming tariffs for the DDP, leading many to attach zero or even negative value to Temu,” said Shuyan Feng, deputy general manager of investment management at Huatai Asset Management.

Read more: A new trade war offers no easy way back to the old world order

PDD's profits more than tripled in the quarter ended March as the company successfully expanded its cost-effective e-commerce model into overseas markets. Temu's strong growth has attracted the attention of major Western markets, with Europeans complaining that China's online market is failing to protect consumers.

The problems run deeper in the United States, where lawmakers have accused Temu and rival Shein of exploiting loopholes to the detriment of American competitors. The recent US government order against ByteDance Ltd. to divest TikTok has increased pressure on other Chinese internet companies.

Another source of concern is the intense rivalry within China. After losing market share for years, PDD's main rival, Alibaba Group Holding Ltd., reported double-digit growth in gross merchandise value in the most recent quarter. Sales growth also accelerated at JD.com Inc., which cut prices and increased benefits to woo buyers.

Not that investors have avoided PDD – its 43% gain since March is ten times that of the Nasdaq 100. But that has been far outweighed by the nearly 60% rise in forward earnings estimates over the past year. same period.

Goldman Sachs Group Inc. upgraded PDD to neutral on Friday, citing strong revenue growth and the company's adtech capabilities. The main negative factors, which are strong domestic competition and tensions with the United States, are “more than taken into account”, according to analyst Ronald Keung.

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“Chinese e-commerce is becoming one of the most undervalued sub-sectors of the Chinese Internet,” Keung wrote in a note. “We note that there still appears to be limited investor appetite to value the full commercial potential of Temu, given the geopolitical uncertainties.”

Another reason for PDD's valuation discount could be its lack of shareholder return initiatives as companies like Alibaba and Tencent Holdings Ltd. buy back shares worth billions of dollars. Except for PDD, the top 15 members of the exchange-traded Kraneshares CSI China Internet Fund have implemented either a repurchase program or a regular dividend payment policy.

Another thing that could hold back PDD is the lack of clarity of its information for investors. PDD does not report revenue by region and its business segments can be difficult to analyze.

“The main drag on PDD’s valuation is the lack of disclosure,” said Xin-Yao Ng, chief investment officer at Abrdn. “It is very difficult to evaluate the National PDD and Temu separately, and this is important because there is certainly a large geopolitical discount on the stock due to Temu.”

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