Last week, good news came from overseas for Chinese internet stocks: first, on May 26, Alibaba and Baidu rose over 14%, then on Friday, Pinduoduo surged over 15%, leading the sector to a strong finish on the last trading day. In those two days, these Chinese internet companies released their first-quarter earnings, each with highlights. For example, Alibaba's international commerce and cloud services drove overall growth, while Baidu performed well in cloud and autonomous driving. Pinduoduo's most notable achievement: it made money. Normalization Phase As '618' approaches, Pinduoduo's 'hundred billion subsidy' campaign is back. This campaign has been running continuously since its inception during the 2019 '618' festival, now in its third year. For an e-commerce platform with annual revenue of 30.1 billion yuan in 2019, the 'hundred billion subsidy' accounted for at least one-third of revenue. Before 2021, Pinduoduo was still losing billions; this doesn't mean 2021 was profitable, as in Q1 2021, Pinduoduo still lost 2.9 billion yuan. Against this backdrop, the 2.6 billion yuan net profit in Q1 this year looks inspiring. After its stock price fell from over $200 to below $50 over the past year, Pinduoduo finally rebounded 15% last Friday. Looking back, Pinduoduo first achieved profitability in Q4 2017, with a net profit of 13.59 million yuan, and then had to wait three years for the next profitable quarter. In Q2 2021, Pinduoduo finally turned profitable again, with a net profit of $2.4 billion. The news was explosive, causing the stock to surge 22% that day, embarrassing many skeptics. How could a platform known for 9.9-yuan free shipping make money? Even outsiders, and perhaps even Pinduoduo's CFO at the time, Ma Jing, didn't expect it. In the earnings call, he said the profit had 'not much reference value' and that 'profitability is not sustainable,' publicly, responsibly, and rationally 'talking down' Pinduoduo. In response, Pinduoduo posted profits for four consecutive quarters, and this year's 2.6 billion yuan net profit no longer has the same shock value. Now, Pinduoduo has entered a phase of normalized profitability, driven not by 'increasing revenue' but by 'cutting costs and reducing expenses.' This quarter, Pinduoduo's revenue was 23.8 billion yuan, up 7%. Slowing growth is an industry-wide trend; during the same period, Alibaba's revenue was 204 billion yuan, up 8.9%, also single-digit. According to the earnings report, Pinduoduo's monthly active users in Q1 were 750 million, up 4%; annual active buyers as of the end of March were 880 million, up 7%. As CFO Liu Jun said, at this scale, 'low growth is unavoidable' and 'Pinduoduo needs to continue investing in technology to optimize user experience.' The phase of chasing growth is over; now it's about 'cutting costs.' Specifically, Pinduoduo's costs include operating costs (payment service fees, fulfillment fees, merchant support services) and the 'three fees': marketing, R&D, and administrative expenses. Among the 'three fees,' marketing is the largest, having been reduced by 3.5 billion yuan from its peak of 14.7 billion in Q4 2020 to 11.2 billion in this quarter. However, the most obvious cost-cutting trend is in operating costs, which dropped from a peak of 11.5 billion in Q4 2020 to 7.2 billion this quarter, a reduction of 4.3 billion. It turns out that when Pinduoduo stops seeking growth and cuts a large amount of expenses, it proves its profitability. If it continues like this, it can save billions each year and live comfortably. But then Pinduoduo's market value would stay at around $60 billion, having lost three-quarters of its value over the past year. Finding New Opponents As the third-largest e-commerce platform in China, Pinduoduo's past opponents were Alibaba and JD.com. But as e-commerce growth has peaked in recent years, the giants are shifting to new tracks. JD Logistics and JD Health, under JD Group, have developed independent business capabilities and completed IPOs; now JD Technology, integrating AI, cloud computing, and financial attributes, is preparing for an IPO to seek greater development, which will become a new growth point for JD in the future. Alibaba's international station, established 23 years ago, has become a cornerstone of Alibaba's overseas strategy. Additionally, after 13 years of development, Alibaba's cloud business achieved annual profitability for the first time in fiscal year 2022. Barring surprises, these two businesses are most likely to drive Alibaba's new growth in the near future. Unlike these two group companies founded in the late 20th century, which have businesses developed over many years and at scale, Pinduoduo, less than 7 years old, has a much simpler business. To build new businesses, Pinduoduo must start from scratch. In May, when Shanghai announced it had reached the stage of 'social zero-COVID,' a group-buying notice for 'chartered flights from Shanghai to all over the country' attracted many Shanghai residents' views and comments. (Image source: Internet) The mini-program behind this group-buying activity is 'Kuaituantuan,' a group-buying business Pinduoduo started in 2020, even earlier than 'Duoduo Maicai.' Moreover, due to the Shanghai outbreak, Kuaituantuan directly spawned 800,000 temporary group leaders, developing rapidly. Community group buying has entered a reshuffling phase since last year. Tongcheng Life, without backing, went bankrupt owing wages; those with backing, like Alibaba's Shihui Tuan, have also shut down. Additionally, in April this year, Meituan Youxuan closed its business in four northwestern provinces, also cutting costs. In contrast, Pinduoduo's 'Duoduo Maicai' has developed relatively steadily. The Q1 earnings report shows that Pinduoduo's transaction services business (including Duoduo Maicai and commission income) grew 91% to 5.6 billion yuan. Other data shows that in 2021, Duoduo Maicai ranked second in community group buying with 80 billion yuan in GMV, behind Meituan Youxuan's 120 billion yuan. Besides community group buying, Pinduoduo is also laying out same-city delivery. In April this year, Pinduoduo secretly tested 'Pinduoduo Same-City Delivery' in first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen, recruiting fruit merchants with 24-hour same-city delivery capabilities, such as fruit chains, front warehouses, and wholesale vendors. On one hand, this means Pinduoduo is entering the 'within the Fifth Ring Road' market to attract customers; on the other hand, Pinduoduo will compete with Meituan Flash Purchase, Taoxianda, and JD Daojia in the last mile. (Image source: Internet) But whether it's same-city delivery or community group buying, neither is likely to become Pinduoduo's second growth curve. Especially same-city delivery, which is completely outside Pinduoduo's capabilities. So why, with a single revenue source and limited profit scale, is Pinduoduo suddenly engaging in so many 'side businesses'? E-commerce One-Way Support If we view same-city delivery and community group buying as side businesses, these moves are clearly untimely. Not only untimely, but in the short term, they may drain Pinduoduo's profits. Because currently, whether it's same-city delivery or community group buying, the industry norm is losses: in 2021, SF Same-City lost 900 million yuan, and Meituan Youxuan (under 'new businesses and others' in Meituan's earnings) lost 38.4 billion yuan. However, if these businesses are seen as part of Pinduoduo's agricultural strategy, the losses can be understood and accepted. Pinduoduo's agriculture emphasizes supply chain capabilities, such as 'cloud farming' and 'direct from origin' models, which are upstream in the agricultural supply chain. But for agricultural products to complete a transaction, demand must be found and logistics delivery completed. Community group buying (Duoduo Maicai) is about discovering demand, and same-city delivery is part of logistics. These are necessary steps for Pinduoduo to do agriculture, bringing farm products to urban residents' tables. But we know that Pinduoduo's traffic comes from WeChat, its products are provided by factories and merchants it finds, and its logistics is served by courier companies like J&T. Pinduoduo has strong online resource integration capabilities, but agriculture now requires offline capabilities. In August 2021, Pinduoduo announced the establishment of a '100 Billion Agricultural Research Special Project,' saying it would invest all its profits into this until reaching 10 billion yuan. Based on net profit, Pinduoduo accumulated 10.6 billion yuan in the last three quarters of last year. But it's clear that this investment cannot stop until agriculture is truly operational, and building the agricultural supply chain will be a long process. According to logistics insiders told to Ebang Power, Pinduoduo currently invests in central warehouses, but other shared warehouses, processing warehouses, and grid warehouses use third-party services. Even the most mature Duoduo Maicai cooperates with third parties for front-end processing and grid warehouses. To close the loop on the agricultural supply chain, Pinduoduo must go in itself, first building agricultural infrastructure, and during this period, e-commerce must provide one-way support to agriculture, a cycle that will be very long. Compared to Alibaba's massive scale and JD's physical foundation, Pinduoduo has a lot of homework to catch up on in warehousing, logistics, and other areas, and the billions in profit are clearly insufficient. The best strategy is, in the absence of funds, to first build the agricultural supply chain, generate cash flow, and then reinforce and upgrade later. Just like the approach to developing e-commerce: develop well, then do 'Qunmamai' and gradually transition to high-end brands—of course, this is what Pinduoduo is currently doing: not easily taking on heavy assets. In March 2021, in his letter to shareholders upon stepping down as chairman, Huang Zheng mentioned that Pinduoduo started with agricultural products; in this Q1 earnings call, CEO Chen Lei reiterated that Pinduoduo will make long-term investments in agriculture. For other giants, agriculture means a virgin land with huge commercial opportunities, a new growth line, but for Pinduoduo, it's its foundation, its advantage, a territory it must occupy. Without agriculture, Pinduoduo has no imagination. *The cover image and accompanying images in the article are copyrighted by their respective owners. If the copyright owner believes their work is not suitable for public viewing or should not be used for free, please contact us promptly, and this platform will correct it immediately. Source: Bohu Finance (ID: bohuFN) -END-