Pinduoduo and Bilibili share prices rise on the back of earnings

Many e-commerce stocks have struggled this year, especially in China, where stringent Covid-19 lockdowns have hampered growth. Despite the continued global growth slowdown, Bilibili and Pinduoduo’s results are bucking the trend with a beat on their top and bottom lines.

- Pinduoduo experienced strong sales in its core business, and Bilibili has increased its DAUs by 25%

- Sales growth is expected to be strong for both companies in 2023

- Both companies are among the top 10 holdings of the Invesco China Technology ETF

Chinese ecommerce companies Pinduoduo [PDD] and Bilibili [BILI] impressed investors with their third quarter earnings this week. Pinduoduo grew revenue to 35.5bn Chinese yuan, up 65% year-over-year and 14% above the consensus among analysts according to the Financial Times. Alongside that, operating profit was up 388%.

Lei Chen, chairman and CEO of Pinduoduo, confirmed an increase in R&D and enhancement of supply chain efficiencies, as the firm focuses on creating long-term value through innovations.

Similar positivity can be drawn from Bilibili’s report, with sales rising 11% year-over-year to $814.5m, and average daily active users (DAUs) up 25% over the same period to 90.3 million. Although the company is making a loss, Bilibili is rationalising headcount planning and cutting sales and marketing expenses in order to contain costs and reach profitability.

Pinduoduo’s share price has gained 34.5% year-to-date, and 5.9% in the day after announcing its recent earnings. In contrast, Bilibili is down 66.8% year-to-date, but shot up 22.3% on 29 November, the day it released earnings this week.

Advertising spend is key

The headline figures look great for both companies, but under the hood it’s evident that the global slowdown in growth and consumer spending is hurting these businesses. For Pinduoduo, revenue from merchandise sales was down 31% year-on-year to 56.4m yuan. Thankfully the revenue shortfall in its merchandise segment was mitigated by a rise of 58% in online marketing services, where it obtains ￥28.4bn of its revenue. Transaction services gained 102% year-over-year to ￥7bn, further helping Pinduoduo’s top line.

Pinduoduo is China’s largest online agriculture platform with over 16 million farmers on board. It also has the highest DAU ratio of all China ecommerce platforms. Increased investments into agricultural supply chains and technology will be a key growth driver for the business in the future.

For Bilibili, net losses narrowed by 36% compared to Q3 2021. The company has been able to improve the attraction of its video platform, with daily time spent on it rising to a new record high of 96 minutes. The growth in time spent on its platform means more revenue for the company as it will target more ads to each user. Mobile and online ad spend is being cut by many companies, as we have seen with Snap and Meta’s recent earnings.

Looking ahead at sales and profit

According to the Financial Times, the consensus among 17 analysts is that Pinduoduo will reach full-year revenue of 129bn yuan, up 37.3% year-over-year from 94bn yuan in 2021. Following this week’s earnings statement, Goldman Sachs analysts raised the 12-month price target for Pinduoduo stock from $95 to $107.

For Bilibili, analysts expect revenue to come in at 21.94bn yuan, up 13.2% year-over-year. The median price target for the company’s stock among 33 analysts polled by the Financial Times was $23.99, a 55.8% upside over its recent closing price of $15.40.

According to research by Ethan Cramer-Flood of Insider Intelligence, 20.8% of total global purchases will be made online in 2023, with retail sales reaching $6.5trn. By 2025, he expects online sales to account for 23% of total global purchases.

Funds in focus: Invesco China Technology ETF

Invesco’s China Technology ETF [CQQQ] has been on a bumpy ride this year, initially down to the Chinese government’s crackdown on tech companies, and now the recent bear market. Pinduoduo and Bilibili are both in the fund’s top 10 holdings, with respective allocations of 8.61% and 2.80% as of 28 November. The ETF is down 37.1% year-to-date, but up 22.2% over the past month.

On the other hand, investors may be seeking even higher exposure to the profitable Pinduoduo, and lower exposure to Bilibili. The Invesco Golden Dragon China ETF [PGJ] has a 10.88% weighting towards the former, and only 1.08% in Bilibili. The fund has had an overall downward trajectory in the year so far, with a loss of 32.2%. Nevertheless, it has gained 28.5% in the past month.