Summary. PDD delivered eye-catching 2Q19 results, with surprising topline and narrowing net loss. We think this strong quarter will alleviate its market concern on fierce competition and S&M efficiency. We raised its revenue by 4%/3%/3% in FY19/20/21E, and lifted TP to US$35. Tier-one/two cities penetration, merchants recovery and solid user metrics could be further catalysts.
- 2Q19 all-round beat. 2Q19 revenue surged 169% YoY, 19%/24% above consensus/ our estimates. Non-GAAP net loss came in at RMB411mn (vs. consensus at RMB1.9bn; our estimate at RMB1.5bn). We turn more positive on its topline growth and margin trend, mainly on its ramp up of users and ARPU, even in such intensified competitive landscape.
- Topline beat on already-high expectation. 2Q19 revenue grew 169% YoY, driven by increasing active buyers (483mn, +41% YoY, +40mn QoQ), ARPU (RMB1,467, +92% YoY) and rising take rate (3.11%, vs. 2.99% in 1Q19). Topline beat already-high expectation, and this strong momentum has been partly priced in recent share price. 2Q19 GMV accelerated (+184% YoY, vs +130% YoY in 1Q19), thanks to its successful 618 promotion, enhanced subsidies strategy and enriched offerings. Looking ahead, we are bullish on its secular growth, mainly on: 1) ample ASP upside, which largely lagged behind peers with only ~12% to that of BABA; 2) enhanced monetization rate with algorithm optimization (still at early stage), after R&D team expansion; and 3) penetration into tier-one/two cities (48% of its GMV in Jun came from tier-one/two cities, vs. 37% in Jan).
- Margin surprise on ROI-driven marketing and targeted subsidies. 2Q19 adj. net loss came in at RMB411mn, much better than consensus. S&M expenses was RMB6.1bn (84% of total revenue), in line with our estimates but better than street consensus. Although mgmt restated dynamic and ROI-driven marketing efforts to continue, we see high visibility for its branding expenses/rev ratio to decline, and higher efficiency from targeted subsidies.
- Maintain BUY with new TP at US$35. Given its strong 2Q19, we raised its revenue by 4%/3%/3% in FY19/20/21E, and adjusted earnings to –RMB3.8bn/ +RMB5.0bn/+RMB11bn. We lifted our TP to US$35 from US$28. Our new TP is equivalent to 5.9x FY20E P/S. Further catalysts: 1) user growth from Agriculture Festival (农货节) in 3Q19; 2) merchants recovery; and 3) C2M initiatives.
