May 28, 2026 ·12 min
Pinduoduo, Q1-26
An interesting buying opportunity, if the cash ever moves.
Contents 6 sections
Pinduoduo is down 14.1% over the last two trading days since earnings, to $83 per ADS. I do not feel earnings warranted a more negative picture vs. pre-earnings.
At 1.483B diluted ADS, this gives a market cap of $123B.
Total net cash, deposits, and investments stand at RMB 480B (~$70B). This includes equity securities reported at RMB 66B in Q4-25. We are effectively at <3.8x EV/earnings.
The EV figure is only relevant if the cash can either 1) be deployed, or 2) leave the company. PDD simply cannot deploy all its capital. If the company will truly return capital to shareholders — like buying back stock at low valuations now — I suggest we materially grow our stake. It’s a big if.
Q1-2026
| As % of Sales | Growth Rates (YoY) | ||||
|---|---|---|---|---|---|
| PDD GAAP Figures | Q1-24 | Q1-25 | Q1-26 | Q1-25 YoY | Q1-26 YoY |
| Revenues (RMB MM) | 86,812 | 95,672 | 106,229 | 10.2% | 11.0% |
| Costs of revenues | –37.7% | –42.8% | –44.1% | 25.2% | 14.5% |
| Gross profit | 62.3% | 57.2% | 55.9% | 1.1% | 8.4% |
| S&M expenses | –27.0% | –34.9% | –31.8% | 42.7% | 1.1% |
| G&A expenses | –2.1% | –1.7% | –1.5% | –9.0% | –4.8% |
| R&D expenses | –3.4% | –3.7% | –4.2% | 23.0% | 23.5% |
| Total operating expenses | –32.4% | –40.4% | –37.4% | 37.3% | 2.9% |
| Operating profit | 29.9% | 16.8% | 18.4% | –38.1% | 21.6% |
| Interest and investment income | 5.8% | 0.2% | –0.6% | –95.6% | –383.2% |
| Foreign exchange gain / (loss) | 0.2% | –0.3% | –0.1% | –212.9% | –40.1% |
| Other income, net | 2.2% | 3.4% | –1.9% | 73.4% | –162.3% |
| EBT | 38.1% | 20.2% | 15.8% | –41.6% | –13.3% |
| Share of equity investees results | –0.1% | –0.1% | –0.1% | 100.6% | –8.7% |
| Income tax | –5.8% | –4.7% | –3.9% | –11.6% | –8.2% |
| Net income | 32.3% | 15.4% | 11.8% | –47.3% | –14.9% |
Overall operations actually improved. Revenue was +RMB 10.6B YoY. Net cash from operating activities was RMB 16.4B (+6% YoY). Non-GAAP operating profit grew +15% to RMB 21.1B (margin +77bps to 19.9%). GAAP operating profit rose +21.6% to RMB 19.6B. The difference is SBC.
This GAAP operating margin expansion was driven by S&M leverage: S&M as % of revenue fell 312bps to 31.8%. It only went up +1.1% YoY to RMB 33.77B. The S&M leverage offset the +135bps of COGS pressure and +42bps of R&D investment.
I believe Temu’s S&M spend as a % of its revenue has now peaked and is inflecting. Most markets have been launched in, with local-to-local models up-and-running in 32+ countries.
The increase in COGS (RMB 5.9B / +14.5% YoY) outpaced revenue growth. This is a function of fulfillment + payment processing + tech cost growth. Fulfillment specifically involves margin-dilutive supply-chain investments — e.g. the rollout of free shipping to rural Chinese villages, which builds on the Duo Duo agricultural-produce program (more processing + cold-chain facilities).
Reported SBC declined ~30% YoY (from RMB 2.17B to 1.52B). This was a ~RMB 650MM tailwind to their GAAP profit. SBC decline flatters GAAP: this is why GAAP operating profit grew +22% while non-GAAP grew +15%.
The SBC reduction is broadly spread: COGS SBC –51%, S&M SBC –43%, G&A SBC –23%, R&D SBC –23%.
Net income fell 15% to RMB 12.5B and non-GAAP net income fell 17% (from RMB 16.9B to RMB 14.1B). The decline is non-operating, and likely non-recurring: net interest + investment income was down –RMB 0.86B YoY; “Other net income” fell –RMB 5.29B YoY. This was a combined –RMB 6.15B pre-tax headwind that more than offset the ~RMB 2.8B improvement in non-GAAP operating profit.
Segment by segment
| RMB MM | Q1-25 | Q2-25 | Q3-25 | Q4-25 | Q1-26 | Q1-26 YoY |
|---|---|---|---|---|---|---|
| Total revenue | 95,672 | 103,985 | 108,276 | 123,912 | 106,229 | 11.0% |
| Online marketing services & other | 48,722 | 55,703 | 53,348 | 60,010 | 49,936 | 2.5% |
| Transaction services | 46,950 | 48,282 | 54,929 | 63,902 | 56,293 | 19.9% |
| As % of revenue | ||||||
| OMS | 50.9% | 53.6% | 49.3% | 48.4% | 47.0% | –392 bps |
| Transaction services | 49.1% | 46.4% | 50.7% | 51.6% | 53.0% | +392 bps |
Q1-26 is the third straight quarter where transaction services > online marketing services. The growth trajectories diverged over the last five quarters since Q1-25: OMS went +15% → +13% → +8% → +5% → +2.5%; transaction services went +6% → +1% → +10% → +19% → +20%. This is a structural shift.
OMS, worryingly, is a five-quarter deceleration in the higher-margin category. OMS revenue grew only RMB 1.2B YoY to RMB 49.9B. That’s +2.5% YoY vs +15% YoY one year ago and +5% in Q4 2025.
Of the two segments reported by PDD, OMS (advertising) is the higher-margin one. Transaction services blends domestic commissions with — currently — lower-margin Temu.
I am seeing this as a red flag if management is unable to resume growth in the OMS segment. Douyin, Alibaba, and JD have all intensified local ad-product competition. They’re all fighting for the same ad-budget pies.
I can give this a partial pass due to overall soft Chinese consumer spending growth.
I cannot, however, lean on the 2025 RMB 100B merchant/farmer support program as an excuse. It was designed to “lower fees and drive sales”. It lowers transaction and technical-service fees, which land in transaction services (+20% YoY). If anything, fee relief should free up merchant cash, which could flow into advertising — but this doesn’t seem to be translating. The important question is whether ad monetization per GMV has peaked.
Balance sheet development
| RMB MM | Q4-25 end | Q1-26 end | Δ | QoQ |
|---|---|---|---|---|
| Receivables from online payment platforms | 5,109 | 5,758 | +649 | +12.7% |
| Payable to merchants | 107,407 | 109,151 | +1,744 | +1.6% |
| Customer advances & deferred revenues | 3,379 | 3,521 | +142 | +4.2% |
| Accrued expenses & other liabilities | 81,658 | 77,309 | –4,349 | –5.3% |
| Merchant deposits | 17,708 | 17,905 | +197 | +1.1% |
| Restricted cash | 73,831 | 76,213 | +2,382 | +3.2% |
Working capital stands at RMB 324.9B (+19.67B QoQ). Free cash + short-term investments (RMB 436B, +13.8B QoQ) represent 81% of current assets. The gain was partly funded by drawing down longer-dated non-current deposits.
Net liquid investments position is now ~RMB 480B ($71B, +RMB 6.9B QoQ). Breakdown below:
| RMB MM | Q4-2025 | Q1-2026 |
|---|---|---|
| Cash and cash equivalents | 108,901 | 123,041 |
| Restricted cash | 73,831 | 76,213 |
| Short-term investments (incl. ~RMB 66B equities) | 313,408 | 313,030 |
| LT time deposits + debt securities (non-current) | 70,296 | 95,179 |
| Long-term AFS debt securities (non-current) | 32,150 | |
| Total gross cash, deposits & investments | 598,585 | 607,460 |
| Less: Merchant payables | 107,407 | 109,151 |
| Less: Merchant deposits | 17,708 | 17,905 |
| Total net cash, deposits & investments | 473,470 | 480,404 |
Within the RMB 313B short-term investments: RMB 239B are time deposits + debt securities, RMB 66B are equities, RMB 7B are other debt investments.
Even without the legacy cash, merchant payables and customer advances finance the business and keep the WC needs low.
Merchant payables grew (+RMB 1.7B sequentially). This comes under the umbrella of “supply chain investments” management has talked about. It is not just a result of increased commerce.
The own-brand development (and the EU fine)
On May 28th 2026, the EU announced a €200MM ($232MM) fine against Temu under the Digital Services Act (official release).
It is the largest DSA penalty to date and only the second non-compliance decision, after the €120MM against X in Dec-2025.
Proceedings opened on Oct 31st 2024. The EU decided Temu had failed to identify, analyze, and assess the systemic risks of illegal goods sold on it.
Before coming to its decision, the EU took information from Temu, third parties, and “a mystery shopping exercise carried out by an independent testing organisation on behalf of the Commission”.
Temu said it disagreed with the EU’s decision and considered the fine “disproportionate.” It has until Aug 28, 2026 to submit an action plan to remedy the issue.
The introduction of the Pinduoduo own-brand is a great idea for Temu. It solves a variety of QC + compliance issues.
PDD launched a dedicated Shanghai-based entity in March, with an initial RMB 15B cash injection, and committed to RMB 100B in investments over three years (this is another new 100B plan). Its focus is on Chinese industry hubs — including Zhangzhou and Zhongshan — to accelerate consolidation of supply and co-create with key suppliers to incubate new brands.
We will commit significant resources to building the first-party brand business… We are investing resolutely in our supply chain capabilities. These investments are the cornerstone of a resilient and thriving platform ecosystem, and we are prepared to invest over the long term.
Co-CEO Zhao Jiazhen’s response on the earnings call gave the reason behind the move: “We have been driving a deep restructuring of our organization and internal management. And these efforts are centered on safety, compliance and social responsibility.”
The shift to a 1P brand business will generate organic traffic with lower paid-acquisition needs. It will mean PDD taking on more inventory risk. I agree with management’s belief that this will empower factories to invest more confidently in product development, forming a positive cycle.
Brand building involves capabilities including product design, standard setting, coordinated manufacturing, quality control, warehousing, fulfillment, compliance, and customer service. PDD will have to invest across all of these.
I’d accept if PDD forgoes a few basis points of gross margin in exchange for improved QC and improved packaging quality. You want your brand to be associated with cheap, but not with terrible quality. Once your name is on the item, it’s a different ballgame.
If done right, in the longer term, the margin sacrifice will be worth it. It lifts repeat purchase and cuts paid-acquisition dependence.
I am not sure whether they’ll park the majority of brand-building expenses in R&D or S&M. Q1-26 R&D grew +23.5% YoY from RMB 3.58B to RMB 4.42B.
On international logistics: as I have mentioned, I do not believe Temu is pushing into 1P warehousing. It is offering logistics management (mini-Cainiao-esque). It is leaning on 3P carriers, freight-forwarders, and a fulfilled-by-merchant model. There is no Q1-26 capex line showing evidence of physical capex — PPE actually declined RMB 153MM QoQ.
Cash — management is not good at deploying it
PDD’s net liquidity is ~$70B. It holds ~$63B of cash and short-term investments. There is essentially no debt.
Effectively zero buyback this quarter: basic share count rose +0.9% YoY (+48MM) from SBC issuance.
At the current valuation, if the management is not repurchasing stock, I consider it a fiduciary sin.
The return on the sitting cash is going down. Net interest income was down –RMB 855MM YoY, from RMB +223MM to –632MM. The negative figure is likely a fair-value / realized loss on the investment book. But PBOC easing has reduced RMB deposit rates, which also partially accounts for it.
Parking cash in deposits and debt securities earns ~2% RMB yields. The Chinese 10Y bond is yielding 1.72% as I write this.
Saying that at least management hasn’t blown the cash stops being enough at some point.
Addendum note
At the Berkshire meeting this year, Greg Abel mentioned that a good operating manager can become a good investor. I disagree with this point.
Managers are trained with an institutional imperative: an environment with relatively short-term KPIs. This causes short-term behavioral “nudges”, as behavioral economist Richard Thaler would put it. This incessant training has a structural effect on an individual. Successful managers have reached their position through successfully managing these short-term KPIs. They are optimized for it. Expecting them to let go of 100% of their subconscious training when given a capital allocation role as a CEO would be delusion.
Sources
- Pinduoduo (PDD) — Q1-2026 earnings release, financial statements, and earnings-call remarks; SBC and segment disclosures.
- EU Commission — Digital Services Act decision and €200MM penalty against Temu (ec.europa.eu/commission/presscorner).
- PBOC — RMB deposit rates; Chinese 10-year government bond yield.
Moiz Saeed · Himalaya Capital · 1301 2nd Ave, Suite 2100, Seattle, WA 98101