PDD expands to South America as regulatory headwinds grow – Bamboo Works

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The company’s Temu low-cost shopping app has launched in Brazil, aiming to extend its overseas drive

By UOB-Kay Hian

PDD Holdings Inc. (PDD.US) has made significant strides expanding overseas through its Temu low-cost shopping app. Most recently it set up a website in Brazil, which will become its bulkhead in South America. Temu’s establishment of networks in Asia, Europe, North America, South America, Africa and Australia come as it faces growing competition, as well as regulatory challenges in Europe and Southeast Asia.

Temu’s Brazilian website came online on June 6, marking an important milestone in its expansion into South America, and representing its 70th website for a national market. This follows its move last May into Mexico where it quickly asserted itself to become the most popular e-commerce app in terms of monthly active users (MAU). It had 19 million users by the end of this May, more than the 15.3 million for MercadoLibre (MELI.US) and 4.8 million for Amazon (AMZN.US).

The Brazilian website touts generous discounts and free delivery on its homepage. For every 160 reals ($29.60) in purchases, consumers get a discount of 16 reals. If the purchase reaches 240 reals, the discount rises to 60 reals. Temu was already revving up to enter Brazil in mid-May and got the regulatory green light. Under the government’s tax incentive policy, imports worth less than $50 are exempt from tariffs.

Why is Temu so eager to enter more overseas markets? The biggest factor is regulatory updates that are on the way. The EU plans to levy tariffs on low-priced goods sold into the single market by Chinese online retailers, including Temu, Shein and AliExpress. Later this month the European Commission will propose scrapping the current 150 euro ($162) duty-free threshold. That move was part of a customs reform package introduced last May, with adoption likely to be expedited to stem the recent flow of cheap imported goods.

Temu is also running into regulatory hurdles in Indonesia, where its model of facilitating the sale of goods directly from manufacturers to consumers violates a law requiring e-commerce companies to sell through local “intermediaries” or “distributors.” That lack of regulatory compliance is likely to hold back its expansion in Southeast Asia.

Taking on Amazon

Temu is winning over more and more consumers through its low prices. It’s even posing a challenge to U.S. giant Amazon. Less than two years after launching its U.S. operation, Temu has already captured more repeat customers than eBay (EBAY.US). A survey in April showed 34% of respondents shopped at least once a month on Temu, more than the 29% for eBay. That said, Amazon is still the undisputed market leader, with 75% of respondents shopping there at least once a month.

PDD is expected to continue growing its market share globally with its strategy of “offering good value to consumers for their money.” We estimate that the company’s gross merchandise value (GMV) can grow 21% year-on-year this year to 4.6 trillion yuan ($632 billion). Thus, we maintain a “buy” rating for the stock, with a 12-month target price of $200, representing 45% upside to the current price, based on our projected a price-to-earnings (P/E) ratio of around 21.3 times in 2024. The main catalysts include an acceleration of its overseas expansion, accelerating frequency of purchases by consumers, strong acceptance of its products, as well as robust sales for its online groceries and agro-food products.

Given Temu’s positive growth prospects, supported by its overseas expansion, we remain bullish on PDD.

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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