February 12, 2019 / 2:36 AM / in 2 months

Breakingviews - Pinduoduo's bid for calm has its limits

The Pinduoduo logo is seen in this illustration photo taken July 17, 2018. REUTERS/Thomas White/Illustration

HONG KONG (Reuters Breakingviews) - Pinduoduo’s search for calm will go on. Even by Chinese tech company standards, the $31 billion e-commerce outfit, which pushes group discounts on everything from fresh produce to clothes, has had a volatile start since it went public in July. A further $1 billion equity, raised on Friday, is a welcome step towards easing wild price swings. But ballooning losses, competition with Alibaba, and legal woes will continue to create a stir.

The four-year-old company led by former Google engineer and billionaire Colin Huang has emerged as an unlikely challenger to Jack Ma’s $434 billion e-commerce titan. Pinduoduo’s services, matching “teams” of online shoppers with sellers, has racked up over 400 million active users across the People’s Republic. Revenue is forecast to hit 12.2 billion yuan ($1.8 billion) in 2018, analysts at China Renaissance estimate, up an impressive seven-fold from the previous year.

Yet the shares have ricocheted wildly since they started trading, dipping below the issue price on multiple occasions, as Pinduoduo has grappled with allegations of counterfeit products, an investigation from Chinese regulators, as well as a U.S. lawsuit from a disgruntled diaper maker. It’s also caught the eye of short-sellers, with hedge fund Blue Orca accusing Pinduoduo of overstating revenue, among other things. The company said it had complied with the relevant U.S. rules. In January, hackers stole tens of millions of yuan worth of discount vouchers.

One thing in its favour, however, is timing. Pinduoduo managed to sell the additional new and existing shares at a 32 percent premium to their initial value marker, though at an 18 percent discount to the undisturbed price. Now the company’s public float will significantly increase to over 13 percent, which should, in turn, help to reduce sharp impact of a few buyers and sellers. 

Other headaches still need to be addressed. Even as Huang has promised to cooperate with regulators and vet the app’s sellers and products, competition with Alibaba is pushing Pinduoduo further into the red: operating losses in the nine months to September soared more than tenfold from a year earlier, and are on track to hit $1.7 billion for the full year, according to the average analyst forecast on Refinitiv. Pinduoduo’s moment of calm may be short-lived.

Breakingviews

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