Pinduoduo Went Public Three Years After Its Founding, With a Market Cap Two-Thirds of JD.com's. 40 Charts to Understand What Kind of Company This Is

The problems Taobao once went through, Pinduoduo is about to go through again.

On the night of July 26, Pinduoduo rang the opening bell in Shanghai and New York at the same time, listing on Nasdaq under the ticker "PDD."

But Pinduoduo founder Colin Huang did not go to New York to ring it.

The person who rang the bell in New York on Pinduoduo's behalf was a Pinduoduo user who had just won an iPhone X on the platform in a one-cent lottery.

At the same moment, inside Shanghai Tower, a family of five from Beijing pressed the bell button for Pinduoduo. All five are Pinduoduo users.

Huang, who is also Pinduoduo's CEO, watched from the audience at the Shanghai Tower venue. At a media briefing held in the office of Pinduoduo's Party branch before the ceremony, he said he had skipped New York because ringing the bell carries no special meaning. "It's a process, a formality. It doesn't change the substance of anything. Whether I ring it or not makes no difference."

A few hours earlier, he and Nasdaq's Asia-Pacific chairman Robert McCooey had met Zhou Bo, Shanghai's executive vice mayor. According to Pinduoduo, ringing the bell in Shanghai and New York at the same time was Nasdaq's idea, and a first in Nasdaq's history.

After the button went down, Pinduoduo's shares jumped 40% and held there all day, closing at $26.70 per ADS (+40.53%). They kept climbing after hours, ending the first day with a market cap of $35.1 billion — about two-thirds of JD.com's.

JD.com makes money, and its users spend several times what Pinduoduo's do. That is a measure of how excited the capital markets were.

For the 12 months ending June 30, 2018, gross merchandise volume reached 262.1 billion yuan, with 344 million annual active buyers — an average of 762 yuan spent on Pinduoduo per person per year.

Pinduoduo is barely three years old.

Even as the founder of China's third-largest e-commerce company, Huang was not a household name before the IPO the way Jack Ma and Richard Liu were. Before Pinduoduo, he was best known for having lunch with Warren Buffett alongside Duan Yongping, and for returning to China with Kai-Fu Lee to help found Google China.

As Huang put it at the press conference: "Pinduoduo isn't the first company I've built. Some of the earlier ones went public too." He left Google China a year after it was set up and became a serial founder — an online phone store, then an e-commerce operations company, then a gaming company, and only after that, Pinduoduo.

In an interview on the day of the listing, Huang said: "More than half of Pinduoduo comes down to luck. It isn't something a team can pull off on effort and experience alone. What you're seeing is growth that beggars belief — explosive growth in users, explosive growth in merchants, even explosive growth in ad revenue — and all of it was pushed along by broader forces. No individual, no small team, could have done this alone."

One side of Pinduoduo is that unbelievable growth rate, a low-profile founder, and sponsorship of every hit variety show, with ads stuffed into every screen you can think of.

The other side is a stream of doubt that has never let up. "Counterfeits," "knockoffs," "consumption downgrade," "lower-tier cities" — one label after another has followed Pinduoduo as it grew. Its fights with the merchants on its platform once reached the point where merchants blockaded its Shanghai office and employees took off their badges before walking out of the building.

Just a week ago, the diaper maker Daddy's Choice filed a trademark infringement suit in a federal court in New York. The Beijing company alleged in its complaint that Pinduoduo had knowingly allowed counterfeit products carrying its trademark to be sold on the platform.

Few other internet services have made users and non-users label each other quite the way this one has.

As a public company, Pinduoduo has already disclosed a great deal in its prospectus, and it has been picked over by countless brokerages and data firms.

We pulled out 39 sets of numbers from all of it, to see what kind of company China's third-largest e-commerce player really is, and what going public in the US at this particular moment means for it.

Pinduoduo's users look a lot like Taobao's — but they spend very differently

Many people used Pinduoduo for the first time inside a WeChat group, when a relative or a friend sent over a "help me knock a slice off the price" link. Get enough people to click the link and knock the price down within 24 hours, and whoever started the campaign gets the item free — a suitcase, projector or drone worth several hundred yuan, or tableware, cosmetics and dolls worth a dozen-odd yuan. By helping knock the price down, everyone who clicks through also completes Pinduoduo's sign-up flow and becomes a Pinduoduo user.

This is Pinduoduo's latest way of selling through a social network. In three years it has cycled through many sharing gimmicks, all with the same two traits: easy to join, easy to spread. Huang says that before the first half of 2017, Pinduoduo's cost of acquiring a customer was very low: "We spent a small fraction of what everyone else did."

As of March 30, 2018, the average Pinduoduo buyer had spent 673.9 yuan over the previous 12 months. Over the same period, an Alibaba user spent 8,696 yuan and a JD.com user 4,426 yuan — several times, in one case more than ten times, Pinduoduo's figure.

Pinduoduo users buy more often than JD.com users, but each purchase costs far less.

On time spent, the gap between Pinduoduo and Taobao is no longer large. Each active user spends an average of 4 hours 20 minutes a month browsing Pinduoduo — close to Taobao, and more than any other e-commerce platform in China.

Pinduoduo's users are mostly women — in Huang's own words, women aged 20 to 40. Its 67.9% share of female users is level with Taobao's.

Some have said Pinduoduo captured the middle-aged and older end of the e-commerce market. But on the share of shoppers under 30, Pinduoduo is the highest of the major platforms.

At the start, Pinduoduo told a story about lower-tier consumers. Huang once floated the idea of "the people outside Beijing's Fifth Ring Road" in an interview. But the data shows shoppers from first- and second-tier cities make up 30-40% of Pinduoduo's users, and the geographic gap with Taobao's user base is not that wide.

By the press conference on listing day, Huang's line had changed: "Our users have always been fairly evenly spread." "Sorting cities into tier one, tier two, tier three and tier four is the old marketing logic of a previous generation of companies like Procter & Gamble."

"Take a young mother in some city earning 6,000 yuan a month. Locally that's neither a lot nor a little. As a mother she might buy the most expensive diapers for her baby, and the cheapest cereal for her husband. So what is she? You can't freeze someone in place and say this person lives in a tier-three city, so they're a tier-three consumer," Huang said.

No shopping cart, free shipping by default, rock-bottom prices — the different habits come from a set of designs that lower the barrier to buying

"Every earlier e-commerce model tried to carve a piece out of Taobao and build a small Taobao. Pinduoduo is doing e-commerce on another dimension. There's no small Taobao here; we're serving different situations," Huang said, explaining what separates Pinduoduo from other platforms: it is not a "small Taobao." And indeed, Pinduoduo has introduced a set of new designs on both the shopper side and the merchant side.

At the listing press conference, Pinduoduo said it had 1.7 million merchants. The bar for those merchants to get in is very low, and so, correspondingly, is their say over the platform.

On Pinduoduo you can barely find an item that isn't shipped free. That shortens both the time a user spends deciding and the steps it takes: the shopping cart that JD.com and Taobao both have does not exist on Pinduoduo. Users don't need to think about bundling items to save on postage, because merchants ship almost every item free.

In fact, when a merchant lists a product, the backend defaults to free shipping nationwide. This past March, Pinduoduo took reporters around two tissue factories in Jiujiang, Jiangxi, mainly to show how the two brands can sell 10 packs of facial tissue for 9.9 yuan with free shipping and still make money — each pack costs only a few jiao to produce.

Twenty packs of facial tissue for 14.9 yuan, suitcases for a few dozen yuan, five jin (2.5 kilos) of fruit for 19.9 yuan: these are the most common goods on Pinduoduo. Prices across the whole platform are extremely low.

We compared the average price of the five best sellers in ten categories — T-shirts, sneakers, facial tissue, phones and so on — across the three platforms. In every category, Pinduoduo's hot sellers cost far less than JD.com's or Taobao's. In phones, Pinduoduo's best sellers are all basic handsets for the elderly, averaging 36.5 yuan — a 121-fold gap with JD.com, where the top seller is the iPhone 8.

Even now, most of what Pinduoduo does is built around WeChat. Someone who has never linked a bank card to WeChat Pay may still have ten yuan or so in their wallet from red envelopes grabbed in group chats — and that is already enough for a first order on Pinduoduo.

Rock-bottom prices, no need to compare prices, no comparing items in a cart, and search that isn't even on the home screen the way it is in other shopping apps: these features drastically lower the barrier to shopping on a phone.

All of it is meant to get users to buy the moment they see a low price, squeezing the time they spend deciding. It resembles what Amazon has pushed for years with Prime and one-click ordering: low prices, free shipping, no need to think much, see something you like and tap. The result is Pinduoduo's pattern of frequent purchases at low order values.

The difference is that on Pinduoduo, the cost of free shipping and low prices sits with the merchants.

Pinduoduo's relationship with its 1.7 million merchants resembles Taobao's — but it is far more one-sided

Pinduoduo now has 1.7 million merchants; JD.com has 160,000; Alibaba's corporate social responsibility report says its platforms carry more than ten million third-party merchants.

Every big e-commerce platform holds the upper hand over its merchants. Pinduoduo's grip on its merchants goes further than any other platform's.

Pinduoduo used to take a cut of merchant sales. From 2017 it switched entirely to charging merchants marketing fees, the way Taobao does.

Pinduoduo is a new platform, and merchants who can't compete on Taobao or JD.com will not pass up a platform at this stage of its growth. Set against Alibaba and JD.com, where marketing spending is enormous, the cost of selling on Pinduoduo is still much lower.

The bar for opening a store on Pinduoduo is low. For most categories the deposit is 1,000 yuan for a company and 2,000 yuan for an individual; only cross-border shopping, fresh fruit and produce, and beauty require a 10,000-yuan deposit.

Merchants who sell fakes, ship late or fail to update logistics information on time are fined by the platform. For fake orders or fake shipments, it freezes the merchant's money for 400 hours.

Free shipping matters.

For a long stretch JD.com chose to subsidize it itself, until April 2017, three years after its IPO, when it split logistics off into a separate unit. Logistics is hugely expensive and barely profitable, and to make its numbers look better JD.com eventually carved it out and listed it separately on the books, leaving a spin-off listing on the table.

Pinduoduo instead pushed the cost of logistics onto its merchants.

At the same time, Pinduoduo has used "low prices" to filter for brands with no bargaining power. To make money, those merchants have no choice but to accept how one-sided the platform is.

Pinduoduo also holds more restricted merchant money — deposits, plus payments owed to merchants but not yet handed over because of settlement cycles and the like — than Alibaba and JD.com combined. Work it out and, for every 1 million yuan of sales, a merchant has 65,000 yuan tied up at Pinduoduo, against 3,100 yuan at JD.com and just 700 yuan at Alibaba. Measured against transaction volume, what Pinduoduo owes its merchants is more than 90 times what Alibaba owes.

Thanks to the fast growth in merchant numbers, merchant prepayments and deposits brought Pinduoduo cash flow of 8.722 billion yuan and 1.559 billion yuan respectively in 2017. The money counts as restricted: Pinduoduo can neither spend it nor earn interest on it. But it is not in the merchants' hands either.

Like Taobao, Pinduoduo's revenue comes out of fierce competition among merchants

Pinduoduo has grown fast in under three years on a model of low prices and group buying. Tencent is a big reason for that speed. It is Pinduoduo's second-largest shareholder, with 18.5%.

The prospectus discloses that the two have struck a strategic partnership: Tencent gives Pinduoduo traffic, technology and payment resources, and an entry point inside WeChat — which is the most direct help Tencent provides, sending users.

But subsidies and the cost of acquiring customers are climbing fast too.

In 2017 Pinduoduo dropped its own first-party sales entirely and copied Taobao, charging merchants marketing fees instead.

That was the biggest change in how Pinduoduo makes money. Over the past year, its revenue rose 36-fold.

Merchants compete for traffic and Pinduoduo charges for the traffic. After the switch to the Taobao model, revenue shot up — 36-fold in a single year.

The advantage of this model is that however low merchants push prices, the pressure of running the business stays with them, while Pinduoduo goes on collecting marketing fees. That is the same as Taobao. But Pinduoduo has taken low prices to an extreme.

Huang says Pinduoduo was carried by broader forces, and he is right

In an interview before the listing, Huang said: "More than half of Pinduoduo comes down to luck. It isn't something a team can pull off on effort and experience alone. What you're seeing is growth that beggars belief — explosive growth in users, explosive growth in merchants, even explosive growth in ad revenue — and all of it was pushed along by broader forces. No individual, no small team, could have done this alone."

That is exactly right.

Pinduoduo is an oddity among e-commerce platforms. The odds of another one appearing — founded three years ago, worth $30 billion — are now slim.

With Tencent's help and low prices, Pinduoduo's cost of acquiring a customer stays low

Pinduoduo's cost of acquiring a customer rose fivefold in a year, and it is still low next to Alibaba's and JD.com's.

Tencent is not all-powerful. Even with a full integration in place, the new-user growth Tencent brought JD.com ran out of momentum within six months of the "JD-Tencent Plan."

On the relationship with Tencent, Huang recalled that Tencent had not taken a stake in Pinduoduo before its Series C. "Things were harder for us then, and we depended on WeChat and Tencent even more. Tencent had already invested in a lot of e-commerce companies by that point, and even so, we weren't treated unfairly."

Pinduoduo is much bigger now, and it plays a growing part in WeChat Pay and in WeChat's commercial business as a whole. Today Pinduoduo says most of its transactions are completed inside its own app.

Pinduoduo isn't short of cash — the timing of the IPO has more to do with the changing weather

Many internet companies go public for the money they need to keep operating or keep competing. Pinduoduo does not look like it is in a hurry for cash.

At the end of 2016, at the end of 2017 and in the first quarter of 2018, Pinduoduo had 1.3 billion, 3.1 billion and 8.6 billion yuan of cash on the books.

It is not as comfortable as that looks. Strip out the money it can't touch, such as deposits, and Pinduoduo's free cash flow is negative, at -1.2 billion yuan. But it has already raised an enormous round.

This past March, Tencent led a $3 billion pre-IPO round ahead of the listing.

Richard Liu has described the years when nobody believed in JD.com and he ran into a wall everywhere he went for money. Pinduoduo clearly never had that experience, or at least not for long.

Compare the pre-IPO years of JD.com and Pinduoduo: in less than half the time, Pinduoduo raised more than JD.com did.

Huang still holds 50.7% of Pinduoduo. If he opened the door to more funding, the company would plainly still have plenty of room to raise.

Across 2017, Pinduoduo's losses widened from 286 million yuan to 595 million yuan. But the losses are widening more slowly.

In this IPO Pinduoduo raised only $1 billion, unlike Meituan or Xiaomi with their huge fundraising plans. The shares were priced at $19 and the offering was oversubscribed dozens of times over before trading even began. We can go so far as to conclude that raising money was not the main reason Pinduoduo chose this moment to go public.

"Whether we go public in three years, five years or later than that, there's no real difference. Under public scrutiny we can grow better and stronger," Huang wrote in his shareholder letter.

The more direct reason is what Pinduoduo faces right now: slowing user growth and sharper competition.

Asked about that in an interview, Huang said: "We still have a lot of users who don't have the app, and we haven't seen our growth rate change at all."

But the growth WeChat alone can supply probably no longer counts as a broader force.

Taobao launched a discount edition this past March, read as a response to Pinduoduo. Alibaba CEO Daniel Zhang told China Entrepreneur that one-yuan and two-yuan free-shipping deals don't follow any sound logic: "I can tell you, huge numbers of users are flowing to Taobao right now. Three bad experiences in a row and users will come to Taobao for sure. Just think of it as them opening up the rural market and educating users on my behalf." JD.com rolled out a discount group-buying section at around the same time.

One trend that has come up again and again over the past year also clouds Pinduoduo's growth: the number of Chinese internet users is growing far more slowly than it did. The burst that came from several hundred million people picking up mobile internet and e-commerce all at once is unlikely to happen again.

Judged by who its users are, the market Pinduoduo has captured is one that comes after JD.com and Taobao.

Pinduoduo's direct competitor is Taobao. "We have 340 million active users, about half of Alibaba's, and my guess is the vast majority of them know Taobao and have used it," Huang himself said.

Can WeChat bring Pinduoduo more users? Not necessarily.

"Taking WeChat's users, subtracting Taobao's users and calling what's left Pinduoduo's users — that doesn't exist." Huang is clear-eyed enough about this: using Pinduoduo requires at least a wallet, and when it comes to being able to pay, Alipay's reach is about the same as WeChat's, while Taobao's penetration in China is already very high. "So how could there possibly be 300 million users who don't know Taobao and have never used it? Impossible."

What Pinduoduo is really in is the conversion business.

With the growth outlook unclear and US stocks near a high, waiting to go public would only have raised the uncertainty ahead.

This is not only Pinduoduo's reason for listing now. Two other Chinese internet companies went public on Nasdaq at the same time, and a week earlier the Hong Kong Stock Exchange staged the "spectacle" of eight companies ringing the bell together.

Last night, Pinduoduo listed on Nasdaq on the same day as Aurora Mobile.

Going public makes the counterfeit problem more urgent

Next to Tmall and JD.com, Pinduoduo's bar for getting in is low: individual sellers can join with essentially no requirements, and the bar for companies is low too (1,000 to 10,000 yuan). That drew in a large number of merchants in a short time. It also brought counterfeits, which will now raise the cost of compliance for a public company.

Since the day it was founded, complaints about fake, shoddy and borderline-legal goods sold on Pinduoduo have never stopped. Nor have disputes between the platform and its merchants over fines and counterfeit sales. This past June, a group of merchants blockaded Pinduoduo's headquarters. Pinduoduo says it has fought counterfeits since its first day, enforcing what may be the strictest "ten times your money back on a fake" rule in Chinese e-commerce, and requiring the merchants it works with to ship goods that match the listing and to ship on time.

In the "Risks" section of its prospectus, Pinduoduo also wrote: "We may be subject to liability for counterfeit, unauthorized, illegal or infringing products, or misleading information, on our platform."

But the borderline "fakes" have not gone away. In fact, an e-commerce platform built on "low prices" will find knockoffs hard to avoid unless it changes what it is.

Insist on rock-bottom prices and free shipping at the same time, and a "Xiaomi New Product"-brand TV turning up on the platform is no surprise.

Huang says Pinduoduo began pouring money into advertising in the second half of 2017 to persuade users it wasn't a scam.

Whether during the World Cup that has just ended or the latest batch of new variety shows, viewers on video sites and television have found Pinduoduo hard to avoid. On one Tencent Video show billed as "exclusively sponsored online by Pinduoduo," the production company even blurred the logo of the show's other sponsor, Momo — also at Pinduoduo's request, though the two companies don't compete at all.

Alibaba went through much the same thing.

For two or three years after Alibaba went public, counterfeits were the problem that drew fire from overseas investors, brands and industry associations. The stock stayed depressed for a long time because of it.

Earlier still, when Taobao adjusted its strategy and prepared to launch Taobao Mall, merchants blockaded Alibaba's Hangzhou headquarters.

Alibaba has largely put the days of being dogged by fakes behind it, and it has built a brand. But that took years of adjustment.

Pinduoduo has been around less than three years, and every problem Alibaba faced has arrived at once. Going public means stricter disclosure, tighter regulation, and a higher price for infringement.

Can this company solve its own problems as fast as it has grown?

Charts by Xiuxia Feng, Kaiman Wang and Junjie Huang

Cover image from Pinduoduo, Carnicula on Visual hunt / CC BY-NC-ND