Investors and market analysts are beginning to grow wary of the financial underpinnings of PDD Holdings, the US-listed Chinese corporate behind discount e-commerce flea market Temu.
In less than two weeks, Temu’s share price has plummeted by more than a third, with a second-quarter earnings statement last Monday failing to galvanise the market.
A report published by the Financial Times this morning highlighted that despite holding around $39 billion in cash and short-term securities (these are typically Treasury bonds that can easily be redeemed for cash), PDD has ruled out offering dividends and share buybacks.
This makes the Temu parent one of only five constituents of the MSCI’s Investable Market Index holding more than $5 billion in cash to not share their considerable cash position with investors.
Numerous hedge fund investors called this a “red flag”, per the FT report. They’re not alone.
JPMorgan Chase & Co (NYSE:JPM, ETR:CMC) recently called out PDD’s opaque reporting standard, saying the “disclosures by the company remained too limited to understand the drivers behind the financial numbers”.
JPM added that “investors are confused by PDD’s unclear guidance and investment strategy”.
Following PDD’s second-quarter earnings release, AJ Bell investment director Russ Mould said the group’s “stellar run has come to a crashing halt”.
Mould continued: “There is a perfect storm of uncertain economic conditions, cautious consumers and competitive pressures. It suggests that even bargain basement operators can struggle if consumers are thinking hard about where they spend money.
“The sharp fall in PDD’s share price will prompt the market to reappraise the business. The latest results are a reminder that even the most successful companies cannot maintain very high levels of growth forever.”
‘Not sustainable’
While PDD is undeniably still in growth mode (group-wide revenues flew 86% higher year on year in the second quarter), this was below market expectations.
“Revenue growth will inevitably face pressure,” management told investors, citing heightened competition in China and the pressure on margins.
Co-founder Chen Lei said: “Competition is here to stay and is expected to intensify in our industry. High revenue growth is not sustainable, and a downward trend in profitability is inevitable.”
To make matters worse, Temu is facing a simmering legal battle with rival e-commerce giant Shein.
No stranger to legal scrutiny itself, Shein has accused PDD of masquerading as a legitimate marketplace while allegedly controlling what products sellers can list and encouraging them to infringe intellectual property rights.
"Temu has used the same illegal business model to build a massive counterfeiting and infringement machine in the US," Shein’s legal entity Roadget alleged in a court filing in the District of Columbia in August.
Whether those accusations hold any weight is a matter for the courts to decide.
In the here and now, PDD’s investor base will be more preoccupied with its discounted valuation and tepid growth outlook.