Get ready for Pinduoduo — a cross between Costco and Disneyland that’s rapidly established itself on the Chinese e-commerce scene.
The company, which in just three years has risen to become the third-largest e-commerce platform in the country, is set to start trading on the Nasdaq Global Select Market Thursday and investor interest is rising.
The plan was to sell 85.6 million shares of American depositary shares, with each ADS representing four class A ordinary shares, at a range of $16 to $19 a share. But reports started circulating Wednesday that the offering was oversubscribed and that stock would be priced at $22.80, which would give it a market value of $28.8 billion.
That’s a huge valuation that would mark a big win for former Google engineer Colin Zheng Huang, who founded the company.
According to eMarketer, Pinduoduo accounts for 5.2 percent of the Chinese online market — behind JD.com, which has a 16.3 percent share of the market, and the leader Alibaba, which has a commanding 58.2 percent share.
Pinduoduo made its gains against such giants by bringing a new shopping experience to an overlooked segment.
First, it appealed to thrifty shoppers in tier-three cities and beyond, a demographic whose spending power growth overall is outpacing that of shoppers in more developed cities. Second, it used its tie in with WeChat to invite their friends to help unlock deals, making the online shopping experience much more dynamic and game-like.
While discount bulk-buying isn’t new, Pinduoduo lowers the price of the product for every person that buys – to the point where products are sometimes given away for free. As users share a deal among friends to unlock a bargain via WeChat, the company is able to acquire new users with minimal cost. Pinduoduo has also ramped up the ante on flash sales. On other sites they may last a day or two. On Pinduoduo’s platform, they live for two hours at a time.
According to WalktheChat, a China digital consultancy, about 90 percent of Pinduoduo users are aged 30 and above, making them older than the customer base for other online platforms. The majority of them are also female.
“These users are extremely price-sensitive, but they make frequent purchases and they are often in control of purchasing for the whole family,” WalktheChat said in a report. “These users might not have much experience with e-commerce purchase, but once they learn how, and bring all their friends into the platform, they can bring long-term profits to Pinduoduo; they have high purchasing power, and are continuously using the app.”
While Pinduoduo has managed to corner a chunk of the market outside the major cities to the tune of 300 million users, whether they can retain them is up for debate. The platform sells shoes for 5 renminbi and shirts for even less, garnering it a reputation for low-quality products, and the risk that consumers could eventually graduate to its more premium competitors.
WalktheChat found that users who change phones are more likely to install Taobao or JD than Pinduoduo.
As the platform expands its service offering, that poor perception could change, said eMarketer senior forecasting director Monica Peart. “We’ve looked at much the same scenario when Alibaba was introduced in the types of products [first offered]. The early buyer was a different kind of buyer, the platform has changed and has become an attraction for brands.”
Indeed, in the last year, Alibaba and JD, which have built themselves up as mass-market retailers, are now attempting to carve out a piece of online luxury sales, too.
Jeffrey Towson, an expert at Peking University on the topic of Chinese consumers, said Pinduoduo’s focus is on general merchandise, but one possible strategy could be to offer a more mass-market version to Vipshop.com, a high-end flash-deal site.
“Not luxury, but women’s fashion for midtier brands, [using] Pinduoduo as a way to dispose of merchandise,” he said. “This is [similar to] a lot of what Vipshop does. Once you get 300 million users on your platform, you get a lot of possibilities.”
Towson said the e-commerce base is “incredibly dynamic….There are new people entering, new services, people rise and fall. This company Pinduoduo has opened a new frontier in this game. How this looks in two years will be very different than today. But it’s fun if you’re a consumer.”
Following the public offering, through which shares of Pinduoduo, a Cayman Islands holding company, will trade under the symbol “PDD,” Huang — who is chairman and chief executive officer — will beneficially own all of the issued class B ordinary shares, representing 89 percent of the voting power. Tencent Holdings Ltd. and Sequoia Capital, two principal shareholders, were expected to purchase up to $250 million each of the ADS.
The regulatory filing with the Securities and Exchange Commission said total annual orders for 2017 were 4.3 billion, with the gross merchandise value at 262.1 billion renminbi, or $41.8 billion. There are 343.6 million active buyers and more than one million active merchants.
Huang’s Letter to Shareholders compares the Pinduoduo platform to a cross between club retailer Costco and vacation destination Disneyland, a combination of a value-for-money and entertainment models.
The prospectus also said the dynamic social shopping experience “leverages social networks as an effective and efficient tool for buyer acquisition and engagement.” The sharing of the shopping experience in turn generates low-cost organic traffic that adds to Pinduoduo’s buyer base. The filing also noted that instead of using a search-based model where consumers type in keywords to find products they want, big data analytics and machine learning enable the company to directly display products recommended to the user, which supposedly results in higher buyer engagement.
For the year ended Dec. 31, the net loss was $79.5 million on total revenues of $278 million, which includes just $540,000 in merchandise sales. That meant the balance of revenues came from online marketplace services, essentially advertising revenue of $277.5 million.
Matthew Kennedy, senior IPO market strategist for Renaissance Capital, a provider of IPO exchange-traded funds, said of the interest in PInduoduo, “We haven’t had an online retailer go public in 2018, and nothing out of China since Roku in September 2017….We have to go way back to Alibaba (September 2014, raising $21.8 billion at $68 a share) for size and growth. It’s the nature of Pinduoduo’s size and growth that really make it a standout.”
Kennedy pointed out that while the team-selling model has been a differentiating factor, it’s really been “monetizing advertising services that has switched on the money machine” for the company.
Kennedy added that it probably made more sense to list in the U.S., given past initial public offerings from Alibaba and JD.com on the Nasdaq exchange.
“For a company (Pinduoduo) of this size, it benefits from having the world’s largest and most robust capital market….The Nasdaq is a tried-and-true method for a company having [at least, from the prospectus, a $22.6 billion] market capitalization,” Kennedy said.
Global online fashion platform Farfetch, Chinese online fashion retailer Meili that’s backed by Tencent and online fashion retailer Revolve are part of the robust backlog in the IPO pipeline slated to test the public markets later this year.
Rumored to be considering the public market is Rent the Runway, although Kennedy speculated that an IPO might be a possibility for 2019. Another one to keep an eye on is fashion subscription service firm TechStyle Fashion Group, formerly known as Just Fab.