Bottom line: A new IPO by e-commerce company Pingduoduo could do reasonably well due to its rapid growth and unusual business model, but could suffer from a “flavor of the day” element over the longer term.
After years of basically having just two choices to invest in China’s e-commerce market, investors will soon have another new and interesting option with the upcoming listing of a company called Pinduoduo. I’ll admit that I was unfamiliar with Pinduoduo before reading about this upcoming listing. But that said, the numbers do point to a potential high-flyer in the making, including a business model that combines elements of Groupon (Nasdaq: GRPN) and Facebook (Nasdaq: FB) to let people recruit their friends to get good deals on merchandise.
The company is also noteworthy for its ties to social networking giant Tencent (HKEx: 700), whose wildly popular WeChat platform is apparently the main venue where friends can get together to get their deals. This particular deal comes as China’s own homegrown Groupon, Meituan-Dianping, prepares for its own Hong Kong listing in a deal expected to raise up to $6 billion, amid a broader bumper IPO season for China new economy offerings.
I’m slightly suspicious of the group buying model in general, since it certainly had a flavor-of-the-day feel to it, at least here in China, quite a few years back. In my view consumers are somewhat solitary creatures on the whole, and prefer to make their purchases privately and not be tied to a group, at least not on a regular basis. But that said, Meituan and Groupon still seem to do adequate business in the space, so there is clearly some kind of market for this style of e-commerce.
All that said, let’s zoom in on the details for Pinduoduo, which is planning to raise up to $1 billion with its listing in New York, according to its prospectus filed at the end of last week. (English article) One of the most notable things is the speed with which Pinduoduo has made it to market, since the company was only founded three years ago. Its revenue tripled to $278 million last year, while its losses grew by a more modest 55 percent to $80 million, according to the prospectus.
During its last fund-raising in April the company was valued at about $15 billion, which would equate to around 7 percent of the company going into the new float. That float size seems a bit low, since most floats are typically at least 10 percent, which leads me to believe that perhaps the company’s actual valuation after the listing might be closer to $10 billion. That’s still not bad for such a young company.
Pinduoduo’s product works by allowing people to spot deals on particular products, and then recruiting their friends for group buys that allow them to save up to 20 percent by purchasing directly from manufacturers and bypassing middlemen. The model sounds vaguely intriguing, though again, I’ll add my suspicion that it also sounds quite trendy and prone to a rapid boom, followed by a decline similar to other group buying sites.
That said, there’s certainly a social element to this model that perhaps could have some longer-term legs. Notable comparisons would be something like low-cost grocer Costco (Nasdaq: COST), which has become a social phenomenon in Taiwan where friends often organize entire day trips just to go shopping together. A similar though not completely comparable example would come from Tencent’s popular game “Arena of Valor”, also known as “Honor of Kings”, which enjoyed its large success partly due to a strong social element.
At the end of the day, this particular offering does seem to have a slightly rushed feel to it, which would make me just a tad suspicious that this company is trying to strike while the iron is hot. But that said, the fact that we’re also seeing a newcomer in e-commerce after years of domination by Alibaba (NYSE; BABA) and JD.com (Nasdaq: JD) is also slightly refreshing, and could attract some investors for that reason. When all is said and done, I wouldn’t expect this offering to be as hot as some of the others we seen over the last 12 months, but it could still do reasonably well.