Shares of Temu’s parent company, PDD, are near an all-time low due to geopolitical risks

It’s true that the US-listed company’s shares are up 43% from their March low, but they’re still trading at just 13 times next year’s expected earnings. This is half the valuation of the Nasdaq 100, marking the largest PDD decline in history.

This may seem like a golden opportunity for a company that more than doubled its sales in the last quarter, with a growth rate second only to Nvidia Corp. in a technology-focused index. Some see the difference as justified given the harsh rhetoric from Beijing and both candidates about the trade war in the upcoming U.S. presidential poll.

“People are concerned about election risks and potential tariffs on PDD, leading many to assign zero or even negative value to it,” said Shuyan Feng, deputy general manager of investment management at Huatai Asset Management.

Read more: The new trade war offers no easy return to the old global order

PDD’s profits more than tripled in the quarter ended in March as the company managed to bring its budget e-commerce model to overseas markets. Strong growth Temu has attracted interest in key Western markets, with Europeans complaining that China’s online market fails to protect consumers.

The problems run deeper in the US, where lawmakers accuse Temu and rival Shein of exploiting legal loopholes to the detriment of American competitors. The U.S. government’s recent order for ByteDance Ltd. to divest from TikTok has put further pressure on other Chinese internet companies.

Another source of worry is intense competition in China. After years of losing market share, PDD’s biggest rival, Alibaba Group Holding Ltd., reported double-digit growth in gross merchandise value in the last quarter. Sales growth also accelerated at JD.com Inc., which lowered prices and increased benefits to attract customers.

That’s not to say investors have been shying away from PDD – its 43% gain since March is ten times greater than the gain in the Nasdaq 100. However, this performance has been significantly outpaced by a nearly 60% rise in forward earnings estimates over the same period.

On Friday, Goldman Sachs Group Inc. upgraded PDD to buy from neutral, citing the company’s strong revenue growth and ad tech opportunities. According to analyst Ronald Keung, the main negative factors, such as strong internal competition and tensions with the US, are “more than priced in”.

“Chinese e-commerce is emerging as one of the more undervalued subsectors of the Chinese Internet,” Keung wrote in the note. “We note that there still appears to be limited investor appetite to assess Temu’s full business potential given geopolitical uncertainty.”

Another reason for PDD’s valuation cut could be the lack of shareholder return initiatives as companies like Alibaba and Tencent Holdings Ltd. buy back billions of dollars worth of shares. With the exception of PDD, all 15 largest members of the listed Kraneshares CSI China Internet Fund have a share buyback program or a regular dividend policy.

Another thing that may be holding PDD back is unclear information for investors. PDD does not report revenue by region, and business segment analysis can be difficult.

“The main obstacle holding back PDD valuation is the lack of disclosure,” said Xin-Yao Ng, chief investment officer at Abrdn. “It’s very difficult to value domestic PDD and Temu separately, and that’s important because there’s definitely a big geopolitical discount to the stock because of Temu.”

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Posted: May 28, 2024 06:59 EST