The most valuable company in the world never to have made a single quarter of operating profit is on a stock market run. 

Pinduoduo, which claims to have reinvented online shopping in China, has seen its share price rise by more than 130 per cent in the past three months, giving it a market value of $101bn, above that of Uber or Sony and twice that of Baidu or Foxconn. 

Its founder and chief executive, Colin Zheng Huang, who earned his master’s from the University of Wisconsin-Madison and later worked at Google, is now China’s third-richest man, behind Jack Ma, the founder of Alibaba.

He attributes Pinduoduo’s success to a magic formula of bargains and entertainment — he has said he wants his company to be both “Costco and Disneyland”. 

The result is a heady marketplace where hundreds of millions of shoppers pick up heavily discounted big-ticket items such as iPhones, play games, and even order their fruit and vegetables directly from farmers. 

Pinduoduo does not hold stock in warehouses, it simply connects buyers and sellers, takes a small commission on sales and charges merchants to boost the visibility of their products on its app.

Line chart of Share price more than doubles since crisis showing Pinduoduo soars

Just five years old, Pinduoduo says more than Rmb1.16tn ($163bn) of goods flowed across its platform in the year to the end of March, meaning that it handles more business than eBay and that it has achieved what it took both Alibaba, China’s largest ecommerce company, and JD.com, another large online retailer, about 14 years to realise.

But its rapid ascent has been accompanied by persistent questions over how it reports its order volumes, its corporate governance and in particular whether it will be able to move from burning huge amounts of cash to buy growth to a more sustainable business model. 

The analysts that cover the company are divided, with many believing it has established itself as a key player in China’s still nascent ecommerce industry, but others warning that it is already showing signs of stress. 

“The current Pinduoduo is the biggest bubble in Chinese internet history,” commented Wu Fan, at local broker Guosheng Securities in a recent report, even before the company’s net losses more than doubled in the first quarter of this year to Rmb4.1bn.

Behind the losses lie lavish subsidies and promotions from Pinduoduo to attract customers. Some Apple iPhones and computers are notably cheaper on Pinduoduo than in Apple’s own stores, with the company last May launching its Rmb10bn subsidies marketing campaign, eventually prompting a similar promise from its biggest rival, Alibaba. 

Since 2017, its sales and marketing expenses, which include these subsidies, have been either close to, or higher than, its revenues. In the first quarter of 2020, sales and marketing cost Rmb7.3bn on revenues of just Rmb6.5bn. As well as subsidies on orders, Pinduoduo also offers users cash rewards for playing a game that involves bringing others to its platform. 

Pinduoduo high sales and marketing spend

As it spends freely, Pinduoduo has regularly tapped the capital markets, raising a total of $3.3bn in three fundraising rounds since its IPO on Nasdaq in July 2018, which raised $1.7bn. 

By attracting huge numbers of shoppers, Pinduoduo hopes also to attract huge numbers of sellers, which it can charge for advertising and promotion. Advertising is the core of its business model, accounting for 89 per cent of last year’s revenues, well ahead of sales fees.

On average, Pinduoduo’s 5.1m sellers spent Rmb5,258 ($744) on advertisements last year, a rise of 64 per cent.

But it is unclear whether this pace of growth will continue. Pinduoduo is an emporium of low-priced bargains and margins are already razor-thin for merchants, who also have to absorb the cost of shipping, which is almost always free for customers.

Last year, the average order was worth just Rmb51. “They have a low-price image, a cheap stuff image, and also this image won’t change, they don’t have any way to change that because that’s what has made them successful,” said Steven Zhu of research firm Pacific Epoch.

Annual spending per user (Rmb) of Alibaba, JD.com, and Pinduoduo

Ding Tingting, also at Guosheng Securities, suggested that merchants have little room to increase their spending on marketing. “We think that the merchants on the Pinduoduo platform will face declining profits or even no profits and the impact of this will gradually show,” she wrote in a report. 

“Here I don’t pay for any ads, I play with the free traffic the platform gives me,” said one shoe vendor surnamed Gao, who said he sold a couple of thousand pairs a month. He said Pinduoduo’s lower marketing costs had convinced him to focus on the platform after years of selling on Alibaba’s Taobao marketplace.

Pinduoduo has also bet on scale, and often underlines the size of its marketplace to investors, shoppers and merchants, quoting the rapid growth of its gross merchandise value (GMV).

Like its rivals, it defines this as the total value of all orders placed, regardless of whether they are later cancelled or returned. Shipping costs are also often included, since sellers embed them in their listed prices. 

China ecommerce market share

But analysts have asked if GMV is the best metric to judge success.

Charlie Chen, an analyst at China Renaissance, pointed out in a recent note the difference between the company’s 99 per cent on-year quarterly GMV growth in the first quarter, its 44 per cent growth in revenues, and China’s total growth in posted parcels of just 3 per cent. 

“Given the uncertainties in GMV data, we believe it is not a reliable metric to consider when we assess [Pinduoduo’s] current operations,” said Mr Chen, who downgraded the company to “hold” last month because of its unclear timeline to breaking even.

A spokesperson for Pinduoduo said it reported GMV “on the same basis as other industry players”.

Alibaba and JD.com have stopped publishing a GMV figure every quarter, opting to report it once a year. Jack Ma said the metric could be “misleading” when Alibaba changed its reporting in 2016.

Pinduoduo marketplace; Apple Airpods are part of its 10bn subsidy programme

GMV is also flattered by sellers who inflate their sales numbers, in the hope of rising up the search rankings. This practice, known as “brushing”, involves hiring third party users willing to place fake orders and write glowing reviews for money. 

One of several “brushing” platforms, Carlobo.com, even lets merchants customise the fake reviews they get. The cost for a fake Pinduoduo order through the platform runs Rmb4 per order — well below the Rmb9 needed to buy a fake Taobao order.

A spokesperson for Pinduoduo said it was meaningless to compare the per order cost for brushing and that “Pinduoduo has a zero-tolerance policy toward the illicit practice of brushing, which afflicts the global internet industry.”

Nevertheless, Pinduoduo warned investors in its listing prospectus that brushers may be able to evade its detection measures and inflate GMV and other metrics.

So far, Pinduoduo’s investors have preferred to focus on its remarkable growth and have been encouraged by its blue-chip partners, most notably Tencent, which directs traffic to Pinduoduo from the 1.2bn users of its WeChat superapp. Tencent is Pinduoduo’s second-largest shareholder behind Mr Huang, with 16.5 per cent of the company. 

Mr Huang, meanwhile, owns 43.3 per cent of the shares and controls 88.4 per cent of the voting power. He also certifies the company’s results as its principal financial officer, as well as its chief executive and is chairman of the board. 

Pinduoduo has never had a formal chief financial officer despite its US listing. The company’s previous “vice-president of finance”, Tian Xu, resigned for personal reasons in April last year after just 10 months in the job.

“Concentrating almost all corporate power in the hands of a single individual should raise a red flag, as it creates substantial corporate governance risk,” said Jesse Fried, a corporate governance expert at Harvard Law School. “That’s true even if a corporate controller serves as board chair and CEO, but not CFO. But what’s unusual and particularly worrisome here is that the controller is also effectively the CFO.” 

A company spokesperson said Pinduoduo was looking for a CFO. “The CFO position is an important role and we are actively searching for the right person,” the spokesperson said, noting the company has a strong finance and accounting team in place and that its vice-president of strategy performs some functions of a CFO.

Meanwhile, Jessica Wu, a university student, has taken to Pinduoduo not to shop but to earn pocket money through its “Earn Cash Everyday” in-app game. Ms Wu said she had earned Rmb500 by convincing others to download the app. “I told them they could delete it afterwards, they didn’t buy anything,” she said.

“I’ve only bought once, a one yuan paper napkin packet,” said Ms Wu. Delivery was free.

Nian Liu contributed reporting from Beijing

This article has been amended since publication to clarify that Pinduoduo has not made a quarterly operating profit.


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