We Study Billionaires - The Investor’s Podcast Network - TIP831: Pinduoduo (PDD): Is PDD the Best Buy in China? w/ Daniel Mahncke and Shawn O'Malley

Episode Date: July 16, 2026

Daniel Mahncke and Shawn O'Malley take a deep dive into Pinduoduo (NASDAQ: PDD), the Chinese retail giant that has overtaken local competitors like Alibaba and JD.com and expanded internationally with Temu, which has become the most-downloaded e-commerce app in the world. They discuss how to think about the lack of disclosures and what the margin decline and growth deceleration mean for the business going forward. But also whether this presents an exceptional buying opportunity at a single-digit earnings multiple and about 60% of the company’s market capitalization in cash. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:10:59) How PDD became one of China’s leading marketplaces (00:19:17) What makes PDD’s business model stand out (00:22:58) How PDD compares to Chinese competition (00:31:56) What makes China’s e-commerce market different (00:33:24) What happened to margins and growth (00:47:13) How Temu revolutionized international e-commerce (01:19:31) Valuation discussion of PDD (01:24:59) Whether PDD is valued attractively (01:27:25) Whether Shawn and Daniel add PDD to the Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about how to join us in NYC for our ⁠⁠Intrinsic Value Conference⁠⁠. Portfolio Review ⁠Submit Tool⁠. Value Investors Club Pitch on PDD. Hayden Capital Investment Memo on PDD. Check out our previous Intrinsic Value breakdowns:⁠⁠⁠ ⁠Amazon⁠⁠⁠, ⁠Sea Limited⁠, ⁠Mercado Libre⁠, ⁠Shopify⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠sponsors⁠⁠: ⁠Plus500⁠ ⁠Netsuite⁠ ⁠Shopify⁠ ⁠Vanta⁠ References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. So imagine two companies. One is Chinese and the other one is American. And the connection between them is pretty surprising. And I'm actually pretty sure you'll get a kick out of it. All right. I'm intrigued. Go on.

So for context, one is worth approximately a trillion dollars. And the other is worth approximately a trillion yuan. And both of those companies have about half a billion of cash in their respective currencies on their balance sheet. both offer no guidance and both offer limited inside into the business generally. So do you have any idea which companies I could be talking about here? I know you're pitching Fendoo Do a Duo today. So I'll take the wild guess that that's one of them. But I don't know.

What's the American one? Is it you talking about one of the tech giants? Not quite. I would say, quite the opposite, actually. I'm talking about Berkshire Hathaway. Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing and uncovered many compelling investment opportunities.

We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley, and Daniel Manker. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales,

using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at a lot. Center.com slash Spotify. I got to say, I don't know much about the company, Pinduoduo, except for that it seems to be ridiculously cheaply valued and is also one of the biggest retailers in the world.

And now you're telling me that there's some connection to Berkshire, or at least some parallels. There certainly are, but we will get to those Berkshire connections later on. I can already say, though, it involves Buffett, which is always the story that we are quite interesting in. And when I first started my research, I expected this to be a similar story to Shopify, you know, the marketplace of C-Limited, a company that we looked at a couple of weeks ago, at least closer to Shopify then, for example, Melly or Amazon, which are also companies that we looked at and both own in our intrinsic value portfolio.

So, you know, the connection to Shopify is that they beat Lazada, which is also owned by Alibaba by actually being, you know, mobile first, gamified, and sort of a social platform, to some extent, build around, instead of search. And PDD did basically the same thing to Alibaba and also JD in China, in the home market. So you open PDD because you're bought, then you know, you scroll a bit through everything they offer and there are these flash deals and these little games and something that is called team buying. And team buying allows users to basically unlock deep discounts on products by forming temporary shopping teams to purchase items in bulk. And it's actually quite a smart

system. So what you would see is that sellers offer two different prices for the same product, a high price for individual shoppers, and then a lower price for these team buyers. And the idea behind that is basically that Pinduoduo saves money on these bulk orders because obviously it can get a better price from the manufacturer if they order a higher quantity of those items. And then you can team up as the consumer with, you know, for example, friends or family, but you can also just join a random group formed around the product that you're looking for. And the links are often shared on, you know, platforms like WeChat, but also Facebook and some other social media platforms. And there's typically a 24-hour window in which the group has to be formed and basically go through

with the order. And the main idea is really just to, you know, benefit from scale economics yet, even though, you know, the scale can be quite small, you know, talking about your family, only four to five people, for example. I got to say, there's a lot of ways to do capitalism. I had never heard of team buying before it. It sounds like maybe this is more of a phenomenon in China. And I don't know, you have a, I guess a network effect there that some of these other marketplace companies like Amazon and Melly don't have. And so I wouldn't directly benefit from other people ordering on Amazon, for example. But if I used Pindu a Duo, then in theory, I could, right? That's sort of the logic. So I obviously have an incentive to recommend it to other people and

integrate them into my group so we can all save money on team buys. And then obviously, this is really just a volume game for Pendoo Duo. So that's really sort of a brilliant incentive system, I think. I think it's just one of those things that you see happening when there's so much competition in your market. They just need to think about new business models to differentiate yourself from the competition. I also find quite interesting that social apps like WeChat are used because obviously, most of the time, we see these dominant e-commerce companies try to be as vertically

integrated as possible. So being independent of other companies. and PDD through basically WeChat is highly dependent on traffic from, you know, Tencent and just the ability to share links, for example. In fact, despite its huge success in recent years and running past all other marketplaces in China,

it's not as dominant as, for example, Melly is in Brazil or as Shoppy as in Southeast Asia or even Caspi, which is a company we also looked at recently in Kazakhstan. And, you know, obviously it is in what has to be considered the most competitive e-commerce market in the world. I mean, you've got Alibaba, you've got J.D.

you obviously got PDD. And now you also got Doyin, which is Biddance's short video commerce platform. And all of them are huge. All of them are well funded. By the way, we know Doyin under the name of TikTok, obviously.

And it's also something that we talked about, especially in our Shopify episode. So PDD has, you know, winning the incremental growth. But it's also competing every single day in a way that, you know, Shoppy, Melly, all of those companies simply doesn't have to,

at least not in their home market. Which is funny because that is the exact thing we kept worrying about when we looked at C-limited. We looked at a lot of marketplace companies, whether you can ever earn a real margin in a competitive e-commerce market. That was the question we had. And I think the answer we landed on was that,

you know, look at China, look at PDD, and that is proof that you can't. I think PDD is the proof that you can have just brutal press competition and still print incredible margins. But also part of the truth is, and we mentioned that in other episodes, that the Chinese government stepped in

in order to stop the subsidies on all of the products and basically for the companies to stop losing money. So, you know, I think it took some intervention to actually get there and for those companies to earn margin. Another factor is also that, you know, the Chinese e-commerce market is much more what I would call scenario-based. So that's the only way so many competitors can actually coexist. So Chinese consumers, for example, that you would use JD to order high-quality electronics, but PDD to order everyday goods. And that's basically how they differentiate. PDD, for example, you know, focuses a lot on optimizing for what's called conversion,

whereas most other players focus on user value or UV. So they would basically optimize for the expected value of a purchase. So let's say their data suggests there's, you know, a 10% chance that you would buy a new iPhone on JD next time they recommend it to you. If that iPhone costs, you know, a thousand bucks, the expected value of that recommendation is about $100. PDD cares about conversion. So they would rather recommend you, I don't know, let's say toilet paper, which you buy with, you know, a high likelihood, for example, 50%, but it only costs $2. So the expected value is only $1, but the volume is obviously much higher.

And you sort of build this, this habit of buying daily goods on PDD. And that worked obviously quite well. I mean, for years, PDD was the most profitable, the most efficient and also the most cash generative company in the entire space, at least in China. But in the last year, it sort of voluntarily, we'll kind of get to whether that was actually voluntarily, take those margins and then spend them back down. And that's not the most intuitive thing to do for a company, you know, have high margins and then spend so much money or invest so much money that your margins are coming down. The net income margin has actually been falling year over year for a few quarters now, while obviously sales or revenue, you know, kept growing. I think when you told me that I'd be

interested in a PDD pitch. You said that you had thought about it for some time, but it's a tough pitch because management gives so little insight into what's actually happening with the business, especially around these declining margins, right? That's the big question mark. One thing that you notice over time is that the market is usually, at least directionally, right? And I know I shouldn't say that because of my value investor and we don't believe in an efficient markets, but obviously it's true to some extent. You know, what the market is not good at is finding the right balance. So it gets the direction right, but then it sort of over-exaggerates into one direction. And that sort of reminds me, always comes to my mind when I think about this, is the

market pendulum, you know, by hard marks that he often discusses in his memos, but also in his books. And I think in this case, the market is also directionally right in terms of, you know, the question of where PDD is going or what they're doing. We're sort of trying to figure out today whether the market is sort of overdoing it. And to give listeners an idea of what I mean, when I say there's, yes, we have minimal insight, you know, PDD didn't have a CFO for years. They don't give you guidance and they don't even break out, you know, their business units like Timo and their grocery business, which makes it just significantly more difficult to figure out how the business units are doing behind the headline numbers. And you might be okay with that, you know,

as long as sales and margins and profits go up and to the right. But when that stops and has stopped in the last couple of quarters, you sort of want to know and kind of get more insights into what's going on. So we have this Chinese company that doesn't give us much to work with, and that's the one that called your attention, and you made me pitch here today. Daniel's teasing me, but I mean, if we're going to do it, I say we want the full experience, right? We haven't. So our first Chinese company, you know, let's really get in the weeds here. But, you know, honestly, you are being compensated for this by paying what seems to be like a ludicrously low price. You got a company here that makes $60 billion in revenue,

55% gross margins, low to mid-20s operating margins, very solid, and you got $15 billion in free cash flow. So it's just really hard for me to argue that any business and geopolitical risks aren't more than priced in with the stock already down by a third this year

from what was a very reasonable valuation already. And we shouldn't forget about these $60 billion of cash and equivalents laying on its balance sheet. So that's obviously a huge factor. I mean, it's about 60% of the market cap. So if you look at the enterprise value of the company, so the market cap minus cash plus debt,

that would be only $45 billion. So you basically got $15 billion in cash flow compared to an enterprise value of $45 billion. So that's an EV to free cash flow of three. And even if you look at the operating profits, that's an EV to EBIT of 6. So yeah, considering PD's growth, that valuation is just sort of borderline insane.

That is maybe, yeah, as low of any valuation I think I've ever seen for a large cap company like this. But, you know, we'll get into the valuation over the course of the episode. And so before we go too deep into the numbers, we always like to take a step back and start with the history. So it's kind of set the stage. What is Pinduoduo, and where did it come from? So it was launched in 2015, which by Chinese economy stands, I would say it's absurdly late. I mean, Alabama had been around since 1999, Taubao, since 2003. And even JD was way earlier, I think was founded in 1998. So pretty much about the dot-com boom when all of those companies came around. And the interesting thing about this is that PDD, just like S Limited, honestly, doesn't

fit the e-commerce narrative at all. So for a long time, investors believe that new entrants had basically no shot at breaking into the e-commerce market once there are at least one or two entrenched players, especially with logistic scale. And that's probably a case for that to make in markets like the US and also in Europe, to some extent, mainly because the majority of customers are willing to pay up for comfort and quality. So there's not really this wet gap in the market that, you know, a marketplace like Amazon doesn't fill.

And you don't have the same scenario-based buying dynamic either. And that's obviously different in China. So China still is one of the highest levels of wealth and income inequality in the world. I mean, the genie coefficient, which is this international measure of mostly social, inequality, basically ranging from zero, which would mean perfect equality to one, which would be perfect, although it sounds a bit weird, inequality. And that is at 0.47 for China. And just for comparison, it is at about 0.41 for the US and 0.29 for Germany. So just looking at those numbers, there is actually a case to make that there should be room for an even cheaper player than

Amazon in the US, because they're not so far from China. Don't get me started on that. I mean, trust me, I have definitely learned that Amazon is not the cheapest option for certain things. And I was actually looking to buy some vinegar to help me kill weeds around the yard. I always tell Daniel about my yard work. And I got to tell you, I pulled up Amazon to see if I could get delivered. And it was like $15 per gallon, which is absurd because, you know, I think for the same size and concentration, it was like four or five bucks at Walmart. So, you know, that's my Amazon pricing rant.

Daniel, I'm sure you're surprised to hear me say literally anything critical of Amazon, though. I am surprised, and I don't like it because it's a 10% position of our portfolio. But then again, it sort of makes sense. I mean, there is a reason for why Timu has been so successful in the US when it launched. That's right. Yeah. And anyways, my understanding is that in China, there is a big gap between living standards in urban and rural areas.

And, you know, I think that's an observation that's generally true around the world. But in China, it is sort of extreme, right? You've got these mega cities like Shanghai or Beijing, where the standard of living is just dramatically, dramatically higher and different from these smaller cities and obviously from more rural areas too. That's actually one of the key points, you know, that the PDD founder and also CEO wanted the company to focus on. So the CEO is Colin Huang or Wang Zhang, this Chinese name.

And he was one of the early Google China engineers, actually. So he did well financially, even before he founded Pinduoduo. I think he made about $2 or $3 million. That's sort of the ballpark that he made from being one of those early Google engineers. And he also already started a couple of other businesses. So he had this electronics, e-commerce site called Oku, and also a gaming and marketing service companies. He sort of had experience in all of the important fields that, you know, mattered for PDD later on.

So he isn't one of those college dorm room founders. I mean, he actually had some valuable experience as a fact. in the e-commerce and the gaming and also in the online advertising space. And as we know, by now, most of these e-commerce companies, you know, are advertising businesses if you would just look at the details and where the margin is. So I think there's also a good time for us to actually talk about the Berkshire connection that I mentioned earlier because he had not only the right entrepreneurial experience, he also had some valuable investor experience because he actually had lunch in 2006 with no

other than Warren Buffett. Okay. why am I not getting invited to these meals? I got to figure out how to get these invites. You know, it's not that easy because it was one of those Chodi lunches that Guy Speer and Monish Prabra have won as well. And Juan was only 26 back then. So, you know, you're asking how do you get invited?

Well, usually you have to pay a few million dollars to be invited to such a lunch. And obviously, despite being quite successful early on, he didn't have that money to spend it on lunch, right? So Duan, John Ping is a guy who actually brought him as a sort of plus one. And Duan is a pretty famous. founder in China and he had these quite successful and big electronic companies. So for example, one of them is BBK Electronics, which is actually the world's largest smartphone manufacturer.

That's a pretty good mentor to have. I mean, it's sort of crazy to think that he was a year younger than I am when he met Buffett. And you're two years younger than me. So at least you have another year to go and meet Buffett. So the clock is ticking for you. Maybe I'll find a mentor who is willing to pay millions of dollars for lunch with Buffett, although I also wouldn't be sure that Buffett is still offering those. But I'm just glad I've made my way to Omaha twice now. And, you know, at least came as close as possible to seeing and meeting Buffett. But the point here really is that Huang is both an entrepreneurial background and this

sort of value investing, long-term, low ego school of thought, what I, you know, always like when I look at founders. And when I talk to our mastermind members in preparation for this episode, that was the first time we actually made the connection between this meeting and the culture of PDD. Before that, I always thought about, you know, their secrecy and all of that stuff with more of a negative feeling, actually. And you would never think about Berkshire as a secretive company. But I kind of think it is. I mean, for the longest time, you placed your trust in Buffett and Munger.

And they don't give any sort of guidance. And, you know, despite their shareholder meetings, which obviously happened every single year, they never really talked about Berkshire as a business. You know, you got very little insight into the actual investing in business process. I mean, just last year, you know, when we've been there actually. this year. And you saw this shift that is now happening where you actually go to the meeting and you learn a lot more about the operational businesses of Berkshire. We sort of like that, but it was a completely different picture and, you know, something new, which never happened when you talk to Buffett and Munger. So PDD is certainly taking this secrecy approach to the next level. It's, you know,

not like Berkshire at all. But I think that's where, you know, you might get the roots. I think Colin Juan got that from his mentor Duang, who manages his business in quite a similar way. And I was told from a Chinese hedge fund analyst that I talk to, that there's actually a cultural aspect about this as well. And it's called Bon Fun. And it basically means doing one's part. So basically, if you know, you're an engineer, then you only care about the engineering work and you don't get involved in any other departments or tasks. It's kind of, you know, out of your range. It's over your pay grade. But you think it would be the management team's responsibility to provide information about the business, right? I mean, that's sort of the whole point of their job.

in some ways, at least for shareholders from their perspective. I guess that's fair. And as an investor, I would obviously say that's exactly their job. But I think, you know, if you actually think about it as managing the business, that's sort of what they do. You know, they're not there to inform investors about their expectations for next quarter. But obviously, I agree. To some extent, you became a public company and that also comes, you know, with certain duties. And I do certainly get skeptical when I look at company filings and they just don't break down any important details.

I mean, it's not so much that I believe there's fraud going on or anything like that, but it's just close to impossible for me to actually get what I need to make an informed investment decision. And obviously, you know, there are alternative data points that you can look at, but especially sitting in the US or Europe, you won't be the first one to find those alternative data points on a Chinese company, right? I mean, a lot of these sources I looked at were actually in Chinese or Mandarin. And while AI makes things a lot easier today in terms of translation, it's still a suboptimal way to research a business. What I'd like to know a bit more about is what the strategy at the beginning of Pindu Duo look like. And so, you know, what was the target customer? How are they able to just

really come out of nowhere into the Chinese market and level the playing field with Alibaba and J.D? Huang noticed that there was a customer who basically wasn't served to by Alibaba and J.D. It's kind of similar to how New Bank realized that legacy banks don't serve all customers. Alibaba and J.D. spend about 15 years, basically building infrastructure and their website to mostly target, you know, tier one and tier two cities. So you're talking cities like Beijing, Shanghai and, you know, sort of the more affluent coastal consumer with, you know, disposable income and high tech literacy. And what they basically ignore was, you know, the lower tier cities, tier three and below. And I should say that, you know, lower tier city in China, in 2026,

is certainly not a village. I mean, I had to show a plan to two of the. these cities with a friend who is Chinese. And unfortunately, we couldn't make it happen. But the point is the lower tier city that he was from had about 10 to 12 million citizens and certainly a decent standard of living by what I could judge from the picture that he showed me. So while there's a huge divide between the people who live in tier one and tier three or tier four cities, it's still a market that I would say is worth building for. And if you look at it from really just a number's perspective, Lower tier China is something like 70% of the population and well over half of the GDP. So it's an enormous market that Alibaba and J.D weren't actually serving.

After covering so many of these companies on the show, there are definitely patterns and connections that we get used to saying. One of them is being that you mentioned WeChat in the beginning here. And so I imagine there was a big tailwind from mobile adoption and this wave of super apps in China that helped Pinduoduo. It's similar to what we saw with limited. Yeah. You know, smartphones were basically a thing only for rich people.

But then between 2010 and roughly 2014, you had these cheaper Android phones basically flooding those tier three and lower tier cities. And they came obviously, you know, with new payment options like Ali pay or WeChat pay. So then all of a sudden, you had really hundreds of millions of people who had never shopped online able to do it for the first time. And given China's incredible size, and that's probably the single biggest pool of brand new e-commerce users in history.

And it wasn't just that, you know, Alibaba and J.D didn't focus on that market. The users also had a very different idea of what they actually wanted. So it was just a completely different target audience. They were intensely value conscious and much more willing to put an effort to actually save money. And they had fewer entertainment options where they lived. So they basically spent more time on their phones and were sort of open. into shopping as a way to pass time. It's similar to what we talked with C.

Limited and the gaming business, that they basically use their mobile gaming business to expand into markets. And why did that work out so well? Well, because people just like to be on their phones to spend time. And that could be a mobile game, but it could also simply be shopping on the app directly. So this sort of goes back to this

ladder of e-commerce companies that I talked about in one of our calls in the mastermind community, where PDD was, you know, to my extent, clearly a level one company at this stage. Value you conscious buyers, generating traction through gaming and discounts, customers with a clear purchase intent, and also, and that's important, no ecosystem beyond the marketplace. So you have no payment arm, you have no logistics network and so on.

I would actually say by now, and after talking to a lot of Chinese analysts, I do have a bit of a different picture of how it works out, but I think we'll get to that later in the episode. Curious about online trading, but haven't taken the first step yet. You're not alone. and Plus 500 Futures is a great place to start. The futures markets are moving fast, and with plus 500, you can explore popular assets like oil, gold, S&P 500, Bitcoin, and more. From crypto to commodities, there's always something happening. The platform is super easy to use, so you can trade on the go right from your phone.

You can get started with just $100 and jump into the action. See something interesting? Once your account is open, you can trade it in just a couple of clicks. And if you're not quite ready yet, you can practice with a free demo account. No risk, no pressure. With 20 years of experience, Plus 500 makes trading more accessible than ever. Check it out at Plus500.com. Trading and futures involves risks of loss and is not suitable for everyone.

Not all applicants will qualify. Plus 500. It's trading with a plus. They say every day your business is late to AI. You fall two days behind. The competition is only moving faster, so how? How do you keep up? Fortunately, there's NetSuite Next.

You probably know NetSuite, the AI-powered business management suite that securely connects all of your data, financials, inventory, commerce, HR, and CRM in a single source of truth, trusted by over 43,000 customers. NetSuite Next is the next huge leap in how business gets done because AI is built into everything you do. It surfaces custom insights throughout your day. AI agents work alongside you to handle the business. routine work, and anytime you have a question about anything, just ask like you're talking to

a colleague. I use this and you should too. For the first time ever, you can try NetSuite Next for free. If your revenues are at least in the seven figures, go to netsuite. com. Built for every industry, ready for every boardroom. NetSuite. a.i slash TIP.

I heard an analogy once that I think it's funny and appropriate here, right? A search platform like Alibaba, JD, or Amazon is basically a store. And you walk in because you already want something. You go to a specific aisle. You compare a few options and then you buy the thing that you came for and then you leave. And so it's very, very intentional. And the shelves are sort of the same every day. Pendu-Duo Duo, by contrast, is much less.

like a physical storefront. It's way more like maybe like a sushi conveyor belt. You don't sit down because you want one specific piece of sushi. You sit down because maybe you're bored and you want to see what comes around and heavily discounted deals float past like an ahie tuna roll and you scroll until something catches your eye and it's just different every day. So there's sort of a treasure hunt feeling to using the app where you never know what you'll find. I like that analogy because that's of the heart of PDD that you don't really know what they offer to you today, which goes back to this idea of, you know, you also go on the app and it's a sort of gamified experience and you want to go on this treasure hunt that you just mentioned. It's not like Amazon. I would hate if Amazon has,

you know, completely different products every single day because I want to get the same stuff that I happened to get last time. And that simply wouldn't be, would be possible to the same extent. Now that you mention sort of the gamification part, they actually have a game that I read about where you basically planned and grow a little virtual tree. And they, actually mail you real food when it's done. So obviously the whole thing is engineered to be a habit and a sort of entertainment loop, but they really go all the way. I mean, that's, I've never heard of that. And I didn't think of whatever I have the idea to actually do that. Huang himself said that PDD is sort of a mix of Costco and Disneyland. And, you know,

he basically meant Costco for the value hunt and then Disneyland for the sort of gamified experience. And I don't know, I mean, the mix of those two also brings us back to the sort of team buying model. of PDD. So one thing, you know, I didn't mention it before, the name Pin Duo Duo actually means something like team up, save more. So this is really key to the entire business model and philosophy of the company. That's a cool, it's cool ethos to have. And some time ago I came across a study that sort of showed how some people in society

are like these, you know, connectors. And it sort of sounds weird. But the idea is that most people in your friend circle maybe have a limited number of other friends. So maybe they each have 10. But one of those 10 friends is a super connector who has a lot of friend groups and maybe closer to 100 friends in total. And that's sort of how you always know someone who knows someone.

Do we today consider a friend group of 10 people to be a small friend group? Because that's not good news for me. But I actually think that's a concept that was mentioned by, I think was Malcolm Gladwell in The Tipping Point, which is a book that I read a couple of years back by now. No, it's right. That's right. It sounds like we both had Malcolm Gladwell phases. You know, anyways, I only bring it up because this teaming up approach, I think is so genius and a great way to benefit from this dynamic.

So even the most introverted people will still send it to close friends and family. And then these super connectors are really the ones who are bringing hundreds of people into the ecosystem. And when you aggregate, you know, a big group order inside a 24-hour window, you've just created something that a manufacturer has basically never gotten from consumer. channel before, which is, you know, this large and also confirmed. So it's safe that you will actually have this order pre-committed bulk order. And that makes, you know, planning way easier for both the merchant, but also PDD is basically giving the contract. So PDD then go straight to these factories and they're actually millions. You know, I actually thought about could this be, but I Google it. It's millions of factories in China that spend decades making goods for Western

and domestic brands. And then PDD basically says, you know, run the line for us, white label, no brand on it. And then the factory knows exactly how many units it has to make because the orders are already in. So there's almost no wasted inventory. And because the deals rotate day to day, which is also something that we talked about, the factory doesn't have to commit always to, you know, being on shelf of PDD. So they can basically run a PDD badge only when they have spare capacity and time to do so. And that's basically a model that is now called C2M, so consumer to manufacturer. and it's a very efficient way of doing business. I mean, you have no specific brand,

which means you don't have to do any brand marketing. You have no distributor. You have no wholesaler. And obviously, which is a huge money saver, you have no middleman. And, you know, compared to the first party model that, you know, a company like coupang, which is sort of the Amazon of South Korea

and you cover, you know, by now almost two years ago, you don't hold any inventory on you don't touch the fulfillment. So you save a lot of costs and a lot of headaches whenever it comes to that. And then the merchant just ships straight to the buyer, with a third-party career. That does mean, though, that you lose control over the delivery process. But again, people don't pay PDD for fast delivery. That's what Amazon is for or in China, you know, Alibaba.

And because of that model, PDD had huge structural price advantages over these other companies because they didn't have to focus on next day shipping. For example, the massive logistics support that goes into pulling something like that off. This was part of the overall strategy that was just an incredible success, both in China but also globally. And because of that success, PDD went public on the NASDAQ in 2018 and just three years after its founding. And by around 2020, so two years later, they passed Alibaba in annual active buyers, which, I mean, just think about how insane that is. It's a five-year-old company passing the most dominant e-commerce company in the world on user account.

I still remember back in 2022 when I did my investment. in Alibaba, that I was looking at PDD, and I sort of felt like I would have never thought there's a company able to overcome them in terms of consumers, especially at that pace. So, you know, that basically meant that at that point, they were responsible for about a quarter of the Chinese e-commerce market. It's absurd. I mean, it really is breathtaking what they've been able to do on such a short time period. And then the disconnect between that and the markets valuation of the business today, which

we'll get more to. but, you know, how about for now we talk about the economics of the business? You know, I want to understand how this company can generate these extraordinary margins and cash flow despite operating in what is considered to be really the most brutal e-commerce competitive environment in the world, right? I mean, we are taught in business school that, you know, competition leads to diminish returns. And that isn't exactly what we've seen with Pinduo Duo for such a fiercely competitive industry that they operate in. And beyond that, there are more than just a few people who don't think

the modern e-commerce business model is really going to be sustainably profitable. And, you know, for companies like Amazon and Caspian and also Mellee and C-Limited, fortunately, that doesn't matter as much to investors in those businesses because they've built all these additional business units around them to generate high margin revenue, whether that's cloud computing or credit cards and banking services. And so the e-commerce business, business plays a role in that ecosystem, but it's not the profit center. It's funny because you just look at, you know, their reported earnings and their margins and all of that.

And you think it's certainly a model that works. But then you look at their stock price and I think, you know, if you do that, it's pretty much up for the bait, whether these ecosystem-like models, like, for example, Melly will actually work out. Amazon is sort of in a leak of its own. So I don't really count them to that anymore. But it's sort of interesting. I obviously think they will as long as every part strengthens the overall flywood

of that company. But looking at the stock charts, again, you know, there are a lot of these companies where investors apparently don't seem to think that they can actually go through with that, especially when, you know, the higher margin business is supposed to be a payment company. PDD, though, you know, that's the good news. Maybe also for you, doesn't want to go there anyway. PDD is a pure retailer and advertising business. So, you know, it reports two revenue lines. And that's online marketing services and transaction services. And they're about 50-50 in terms of revenue breakdown.

So this online marketing services is, the online marketing services is. this classical third-party marketplace part of the business. So the way it makes money is by a transaction fee and by merchant advertising. And it's nothing new. We know that from all the marketplace that we looked at, and also, as with all the other marketplaces, the majority of revenue and especially operating profits is the segment of advertising with merchants. Which should mean that the take rate is quite high. It is. And just for context, the take rate is the slice of GMV gross merchandise value or the total value of everything sold on the platform that basically PDD keeps as revenue. So

GMV is just average order value times order frequency times the number of buyers. And I just want to say this because we covered so many e-commerce companies by now that I sort of expect most people to know, but we always have new listeners. So this is sort of the key metric that you look at for these marketplaces. So the advertising tape credit alone is estimated to be around 4 to 4.5%. And I should say, here again, we need to make quite a lot of estimates today because, again, PDD just doesn't give us much to work with. So pretty much all the numbers of the detailed business units that I give you are the estimates that I work with. What's important to see here more than the numbers, actually, is just the trend. So in 2019, the advertising take rate was closer to 2 to 2.2%. So it has

almost doubled since then in the last 6 to 70 years. And that's mostly because PDD on boarded way more merchants, which obviously changes the supply and demand dynamic on the merchant side. So think about the ratio of orders to merchants inside a given product category, for example. So for years, PDD acquired users so insanely efficiently that, you know, the WeChat loop, the stickiness, and the user side of the marketplace grew significantly faster than the merchant side. It's also obviously easier to onboard just, you know, one new consumer compared to one new merchant.

So you basically have this wall of demand on the marketplace. all these orders chasing a relatively thin set of existing merchants on the marketplace. And in that world, a merchant doesn't really need to advertise a lot because a lot of that demand immediately comes to them. So, you know, the monetization of the advertising part stays relatively low. But over time, as you know, the marketplace grows, the merchant side or the merchant base actually naturally expands, which is another way of saying more competition is fighting over the demand now.

And once you've got lots of merchants competing in the same category, for the same users, obviously bidding each other up for the limited ad space. And that's basically what pushes up the advertising tag rate. So it's not PDD dictating a price. It's actually merchant versus merchant competition for this sort of finite amount of user attraction or attention. We discussed that dynamic before where you don't want to increase commission or transaction fees because that feels like squeezing the merchant, whereas monetizing, advertising,

or logistics is a much fairer transaction and more sustainable way to expand margins, right? Because PDD is delivering value to the merchant in terms of being able to provide more eyeballs, and then the merchant is basically paying for that. One thing that I do want to bring up here is because it just shows how PDD works. And also just find it quite fascinating is that PDD has no shopping cart feature. So it might very well be that I'm the only person who finds that interesting. but I sort of just love understanding why businesses make certain small decisions, especially when they certainly go against industry wisdom and then they work out.

So the reason why PDD has no shopping card is that, obviously, a shopping cart doesn't make a lot of sense when you want to provoke impulse purchases. So most people, including me, honestly, the shopping card, you know, tends to pile up with things and then maybe at some point I get back and I actually order some of those things. But even then, most of the time, that means half the card gets deleted again anyway. So it's not actually money, you know, for example, Amazon is earning through me. PDD wants a different dynamic. Again, they're, you know, focus on customer conversion.

So PDD's average order value is only about six to seven bucks, which is about half of Alibaba's and a fraction of JD. So we're talking low-ticket stuff like, you know, daily household goods, groceries, basic apparel, and just these high-repeat but low-price categories. And customers can only buy one. thing. And that's basically how you not only immediately have higher conversion, but also you get them back and you make them or you turn them into frequent buyers. You know, you want to buy a toilet paper today, but maybe also you want to buy groceries. And since you couldn't do it today,

or at least not in one purchase, you either come back 10 months later or you come back the next day. Maybe not immediately the next day. But I mean, frequency has also increased massively over the years at the same chat. In the early days, users ordered something like 15 to 20 times per year from Pendoo Duo. But from what I've seen, it looks like they order more than 70 times per year, which is great. That's a huge incremental per user growth. But it is still behind some of these peers like Alibaba where the figure is, you know, people are ordering 90 times from the platform in a single year. And I think that's a good sign because it does mean that there's room for, you know, plausible potential growth. And speaking of

growth. How about we go to another of PDD's business units, the grocery and agricultural supply chain business. Let's dig into that. It's also an interesting one. And actually, one thing that I should mention, I wanted to bring up how often people buy on PDD to sort of impress you. But then I thought about our Casper episode where I tried you do the same. And apparently you order on Amazon so frequently that all of those numbers couldn't impress you. So I didn't do it. And, you know, I'm glad you brought up the numbers anyway. But yeah, talking about the global. to be part of the business, it's quite important. First, because it's PDD's original C2M DNA, so you know, cut out the middleman and the cheapest price wins. And also, it's a category,

which is basically the most important in consumer spending, which is food, because obviously you just have a customer that comes back again and again. And the second reason we should talk about this is that it's one of those places where management is investing money right now, especially in the supply chains. And unsurprisingly, the model works much differently. than what we know or perhaps sort of imagine from a grocery business because it's not delivery, which is what we sort of used to whenever we talk about grocery businesses in the West. So the product is called Duo Duo Grocery. The model is what's called group buying and sort of similar to the team buying dynamic and approach.

The way it works is that in a local city or town, often a little convenience store owner or, you know, maybe just a stay-at-home parent, becomes the so-called community leader. and they essentially run a group or a group chat for the neighborhood. And then people can order their groceries through that chat the night before they will actually order. So those orders get aggregated, similar to the team buying. And the next day, everything gets struck to a single pickup point, which usually tends to be the community leader's shop.

And then people walk over and sort of collect their order. So it's next day, pickup based, not delivery. And so to emphasize, it's pickup intentionally and not delivery. And the reason for that is so they can provide the service at a lower cost. Is that basically the right way to think about it? That's the whole trick. You know, fresh groceries are, as we know, and especially you know, after looking at Uber, one of the hardest things in all of e-commerce to make money on

because it's low price and, you know, last mile home delivery of a $5 bag of vegetables is basically a guaranteed money loser. So the group buy dynamic eliminates the two major risks that you have this cost structure. there's no individual home delivery because everyone picks up from one point. You have basically collapsed a thousand deliveries into one track to one location. And because orders are aggregated the night before and that's why the timing is sort of important and only then sent to suppliers, there's just very little spoilage and almost no inventory that, you know, the shop owner, for example, is sitting on.

The space has been a pretty wild fight for a while. I know from researching Uber, as you said, that grocery delivery in China is like a very, very tough market to be in. And around 2020, 2021, everybody really piled into the space. So you had PDD with Duo Duo Grocery, Maito with its grocery arm, and then Alibaba, plus a whole wave of startups like Jingshang. And they all subsidized like crazy to grab market share, trying to sell eggs and vegetables below costs so they could win over neighborhoods and, you know, grab that market share. And that's how billions of dollars, though, were burned over time. But since last year, the market has, from what I understand, consolidated fairly considerably. And so, you know, most of the startups

blew up a while ago. It was not sustainable business models. And then you actually had Alibaba pulled back and then eventually even Maituan pulled back too. And they were the market share leader. So it's particularly consequential to see them step back and sort of strategically retreat. And so PDD outlasts at all of them. PDD became the largest player in community group buying for groceries. And at one point, Duo Duo Grocery GMV was running ahead of even the biggest traditional supermarkets in China. So, you know, they were, by some measures, selling more groceries than Walmart China.

So they mostly outlasts them mainly due to their superior supply chain network, which is also where most of their invested money went into. and it's one of the advantages of just being a pure play retailer from the get-go. So PDD is not distracted by investments into cloud businesses, AI, or whatever peers, and especially Alibaba invests in. So they just want to be the best retailer. And if you just focus on that, there's a high likelihood of actually succeeding. And that means you either have the most efficient supply chains or distribution.

You have the best quality or you have the best prices on, you know, the most innovative products. And PDD is doubling down on supply chains. chains and price. And it's actually quite interesting because usually you would look at this and say, well, why don't you want to be the best at everything? But then you look at, you know, competitive retail markets and you figure out that generally there's only one company being the best at any one of them. So in the US, for example, you could look at Walmart if it's about pricing. You could look at Costco if it's about quality. And then you could look at Amazon if it's about distribution. So usually run retailer is dominating one niche. And that's sort of how you

split the market. I should say, though, that the grocery business is not a huge part of the financials and also the growth story for PDD. It mostly benefits, you know, with ecosystem because, again, those are the important goods that you want to sell because they build the stickiness for the customer base and the marketplace in general. So it was interesting to me, though, we were seeing PDD really dramatically shift their investment habits at the moment. So how about we talking about that, right? We basically have this company that was asset light by every, you know, definition across all of his business units, now becoming increasingly asset heavy or more capital intensive.

If you go through just the latest earnings calls, you will hear them say pretty clearly that the next decade will be devoted to investing money in the first party brand business, also in infrastructure and especially in supply chains. And actually they said, quote, they want to invest in healthy long-term growth. And they also said that they kind of reflected carefully on their shortcomings and have taken decisive steps to rectify operations and restructure internal management. And there might be some political reason for that massive shift. I mean, the entire business model that we described before and the success of it was founded on the asset light nature of the business. And yes, there's a quality

argument to make for more first-party products and physical infrastructure. But why do you act like the model before was sort of a mistake? I just didn't fully understand that when I looked at the earnings calls. Although I would say that the more likely reason, you know, not being politics, but probably simply being that, you know, they have reached the ceiling with their target audience. I mean, growth has come down enormously in recent years and quarters. So before talking to some local analysts and fund managers, I would have said that this might be the natural step from, you know, a level one marketplace to go to level two and maybe even level three.

So, you know, building an ecosystem, prioritizing comfort and quality over price, and so on. I kind of gave you this field before. But it seems that's not really the game for PDD. So, of course, I want to go into, you know, some of these. these higher quality products. I even heard that. They sold most of the iPhones sold in China a couple of years ago. So they have these high quality products on their marketplace as well, but they still want to be this retail company that's mostly focused on these lower tier cities

and that does not do payments, that does not do lending, cloud, AI, or any of these things. So it's really just about investing to defend where they are currently. That's pretty interesting. And I guess the evolution of Timu probably plays a role here. as well, right? I mean, TEMU has been a huge success in many international markets, and it was based on these incredibly cheap Chinese products, but the regulatory environment, as we've talked about in past episodes, has become more challenging to say the least. And so you had, you know, foreign governments tax and tariff those cheap, unbranded Chinese

products, which, you know, would more or less kill any cost advantages they had. And then in the home Chinese market, you have doyin, the Chinese name for TikTok, coming for sort of the middle market of e-commerce. Do you include very well be a major part of why PDD is now changing its strategy? I would say the difficult thing for me is that without any segment data, which again, they don't give to us, we don't really know what's going on. I mean, is PDD investing because the business model is deteriorating, but they actually believe they can turn it around?

Or is it just investing to have an excuse for falling margins and falling profits, while the business model is disrupted without having any real chance for replacing it. And that would, you know, to some extent, be the case if you are attacked on the lower end of the market by doyin. But then you're also attacked on the higher end market because it's incredibly difficult to get into these, you know, level two, level three market players like Alibaba and J.D. And actually steal market share from them. All right. Back to the show. The Hulu original series Furious is coming to Disney Plus, starring Emmy Rossum,

Furious follows FBI agent Alice Black on the hunt for a mysterious and calculating serial killer. Both walk their own paths toward justice. And as their lives start to intertwine, the line between right and wrong begins to blur. Don't miss the three-episode premiere of the Hulu original series Furious on July 27th, only on Hulu on Disney Plus. Perhaps we can zoom in more on Timo and international business just for a minute here and see whether they're are any answers to be found. I mean, how exactly is Timu standing internationally and what change that has made it harder for Timu to compete?

So Timu launched in September 2022 into the US first. And the simplest way to describe it is that you basically take the PDD factory model aimed at the rest of the world. Again, first in the US. And you take those millions of Chinese factories making white label goods. And instead of selling to a Chinese consumer in a lower. to your city, you just, you know, sell straight to a consumer in either the US or in Europe. And I actually still remember when TEMO first launched in Germany.

And it came pretty much out of nowhere. And suddenly it was this huge hit, you know, I think it was mostly something or a place where woman shopped. But you could buy, you know, a ton of other things next to cheap clothing. So I wouldn't be surprised of a lot of people that I know also shopped on Timu. I actually never did it myself, which I, to some extent, I regret because I don't have this immediate consumer insight into how the app or the marketplace actually worked. But, you know, I think it still exists.

So I should check it out. But I think the main reason that was possible was the so-called de minimis exemptions, which essentially mean that any important parcel below a certain value. And I think in the US, it was about $800 could come in with no tariff and basically no customs paperwork. So, you know, it's not worth the government's time to inspect, you know, a tax of a $15 package. but Timo's average parcel was only worth something like 50 bucks. So every single Timo order flew into the US duty-free, no tariff, and minimal inspection.

And that obviously saves a lot of costs when you bring the goods to your country. For me, it first came on my radar when it felt like Timo ran like eight Super Bowl ads and, you know, one Super Bowl. Normally with the Super Bowl, so the ads are so expensive, right? I mean, you don't see too many brands running the exact same commercial multiple times. And, you know, the production value is typically very, very high because you want to get this viral moment for TEMU. It was like just spamming these really low quality ads during the Super Bowl on your TV. And, you know, they just kept running these same low budget ads over and over.

And I thought it really annoying. But evidently, it worked in inspiring a massive amount of downloads because the prices were so unbelievably cheap. And then I think there are a lot of people like me being like, what is this Chinese company that is spamming these ads? You know, let me go check it out. Anyways, within a couple of years, as you know, I mean, Timo was the most downloaded shopping app in the world. And something like 90 plus countries with hundreds of millions of users. And so even as of late 2025 by the download and active user numbers, Timo is still the biggest e-commerce app globally, based on, you know, cumulative downloads of more than 1.2 billion

and monthly active users of around 530 million. So these are incomprehensible numbers that we're talking about. And, you know, even when we look at tech giants in the U.S., this is not typically, maybe besides meta, the type of scale that we see. I merely thought of meta. And, you know, they're apparent 3 billion users where, you know, if I just do the math of people with actually access to the internet. It sort of baffles me how that, you know, number is supposed to work out, but it's sort of, you know, the same for every one of these

companies. Whenever we look at China, South America and all of the markets that are not, you know, immediately visible for us, it's always incredible if you just look at the scale. But, you know, part of the truth is also that the momentum already took a massive hit in 2025. Around the time of the tariffs, obviously, you know, the US eliminated also all the de minimis exemptions for especially China origin goods, but also later for basically. basically goods globally. And then Timo's US GMV reportedly fell under 30% of its level at the start of 2025 after those changes and daily active users in the US hoft,

which also kind of shows you that there are a lot of users, but it's not that sticky of a platform and ultimately just compete on price. So to their credit, you've got to say that they did react quite fast and they basically switched to this semi-managed local fulfillment model. So what that means is they now have sellers who already have product in the US, and then those sellers settled on Timu. So they basically started bulk shipping inventory into U.S. warehouses themselves, which helped users and GMV to rebound quite significantly after the massive drop.

But the big problem, obviously, you know, with this change in the business model, is that you also have significantly different economics. It's not like, you know, I don't like the physical part of the e-commerce business model generally. I mean, again, I'm bullish on Melly and Amazon, and that's sort of what they do. But the difference is that this has been their game plan. all along and their customers are attracted to these level three marketplace dynamics, which means comfort, fast delivery, high quality. That's totally different for a company like PDD.

And I don't know, I mean, just think about, for example, this little anecdote that I gave you about the shopping cart. To me, that sort of shows how much detail they spent on optimizing the strategy to speak to their target audience. And now they have to do this quite significant shift where Timu is becoming a more normal, localized marketplace, holding or coordinating inventory in-country. And that's a fundamentally lower margin business. And you sort of still need to figure out whether that's something that's worth,

you know, the investment for TEMU. And from what you told me, TEMU's situation in Europe is sort of similar. Europe is, so like 40% of TEMV. So it's actually by far their biggest market. But the EU is pulling forward its own de minimis removal. Plus, you've got the EU's digital services. Act, breathing down Timu's neck over product safety and illegal goods. And the FTC and various US regulators poking at it too. So the regulatory overhang is very much a global problem

for TEMM. We're not talking about just one specific market where they're having hiccups. And so I think I slowly understand why PDD is trading at the valuation that it does. And although TEMU has always been more of sort of upside optionality, where it wasn't necessarily, is something that people were banking on. And the thesis a few years ago, you know, that model had worked out really well. And now, though, PDD has likely lost a lot of money on that operation. And so the difference is that there was a plausible case to make that TEMU would eventually become profitable and that they were taking market share.

And that was sort of a viable competitive strategy. And now, based on these regulatory changes, it just seems not really realistic for them to achieve profit with the current structure of TEMU's business. It's certainly a headwin. I should say, though, that many still estimate that TEMUS should become profitable in a few years. So they don't know if it could happen in 2028 or 29, but they do still see a realistic case for an inflection point, which, to be completely honest, when I first started

looking at it, I was kind of surprised because you do see the loss rate per region of Timo, even in years where the business model was still in place. Now, they sort of have to change how they do it. But again, they did a good job. And if you would look at, you know, analyst estimates, they still believe this will be a profitable business unit for them in a couple of years. And if that's the case, I think that's already enough to get sort of excited about it. First of all, because you don't have the cashburn anymore.

And second of all, because Timor still has incredible scale. So as soon as you make just a tiny margin on that, you do add quite a lot to the bottom line. Let's turn our focus to the Chinese domestic market, which I, know has been, you know, a bit of a rocky place post-COVID. It's been some ups and downs. I mean, is the regulatory environment friendlier here? And what do you think about competition and the strategic shift that Pinduoduo has made? So for the longest time, the e-commerce fight was basically between what you could call the big three. So you had Alibaba, you had J.D, and then you had PDD. Combined, the three of them actually make up something like 70% of Chinese e-commerce,

GMV and a lot of PDD's share actually came from Alibaba, which you know I mentioned earlier when I invested in them in 22 I was kind of scared that you know this local competitor in China is gaining so much share from them. Mostly because Alibaba again didn't really care about losing market share in the lower tier cities which

you could sort of argue is not the best strategy to have. I mean Mali for example in Brazil is defending the lower end of the market in their sort of you know competitive fight with Shopify. What has changed in the past few quarters though is that doyin has kind of into the market and PDD is now basically facing the problem that, you know, every level one e-commerce

player will face eventually. You know, there's little customer loyalty and you compete almost entirely on price. And then the second, perhaps even bigger problem, is who buys Undoian and also why. I think you remember, you know, that I told you about 20, 30 minutes ago. We basically talked about these lower tier city shoppers kind of having, you know, a motivation for going on PDD because of the factor of just being bought. Well, now, where would you go? Would you go on PDD or would you open doyin for entertainment purposes. I mean, do yin is sort of if again, it's like the TikTok, right? Arguably the most powerful discovery and impulse engine ever built.

And you sort of have this, you know, algorithmic feed, which is incredibly good at putting something in front of you that you didn't know you wanted and then letting you buy it in, you know, two tabs through live stream and shopping in a shoppable video. It's kind of like Meadow or, you know, Instagram on storage. I already told you that, but now their algorithm is so good that they know exactly what I want, and I sort of just go on Instagram to see the ads to figure out what I want to buy, but now you've got to imagine that you're not only see the ad, but you can also buy directly on the app, something that matter never has really, never really figured out. So if you combine,

you know, the competitive picture, PDD, in my opinion, is threatened pretty much everywhere. Alibaba competes with PDD on the search and selection, and then JD competes on logistics and authenticity to some extent just because of the high-quality goods on the marketplace. and then Du Yin basically has the traditional PDD target audience in their scope. It was a pretty foreign concept to me literally to think about opening a social media app as a way to tell me what I want to buy. But I mean, actually, I get it sort of, right? Like I do that with TV shows and movies, right? Like we've talked before about how I go to Netflix and, you know, the Netflix algorithm knows pretty accurately what I'm interested in and watching next typically.

And I don't use TikTok, but I can see how it happens. But what really I'm hearing from you is that internationally, there's competition, but also really one of the main challenges is regulatory pressure, whereas domestically, the shift in investments that they're making and change in strategy is not necessarily because of Jenny's regulators, but more just simply because of the realities of very intense competition in their domestic market. I think if you are, you know, PDADE and Dugin is coming for your target customer, you sort of want to make sure that you're still unambiguously the cheapest with the best supply chain because that's basically how you lock in merchants. And that's also how you get more and more consumers on the platform that don't choose to change, which, you know, seems to be going on right now. And, you know, because of that, you have these lower takeaways on merchants because you want to keep them in the ecosystem. And you have the investments in the supply chain to also get, you know, better experience. for your customers.

And you might remember that I didn't consider TikTok sharp, the international version of what we talk about with DuYin, a deadly threat to C-limited. Just as I don't see Timo as a long-term competitor formally in Brazil, but for both of those companies or in those cases, I sort of gave you the reason that those two are higher up on the e-commerce letter and they face significantly less competition in their home markets than PDD does. However, I should say that China is a bit special after all.

Again, I talked to a lot of people who are actually on the ground and understand the company quite well. And Do Yin actually tried to transition from, you know, this content e-commerce machine to a more search-driven marketplace before. And it didn't work out that well. So despite trying to do that, they still have about 60 to 70% of its GMV still coming from live streaming. And due to this scenario-based nature of what I described in the Chinese e-commerce market, there might never actually become a search-driven marketplace. And that obviously would be good news for PDD, but it would still say if we want to basically put a summary on what the competitive picture looks like, PDD faces competition internationally and nationally on basically all ends.

One thing that we can do when management is not giving us a lot to work with is to see how they're acting and how they're incentivized. And so do they own a lot of stock? Have they been buying recently? What are their incentive metrics and so on? And so how does that look for Panduoduo? I guess I should first talk about the culture. So, PDD is famous for being one of the most secret of large companies in the world,

which is what we talked about quite often today. So at least, I would say that's a positive for them. They didn't start doing that when growth was slowing down and the margins were going down. That has always been the case. So that's, you know, not making the current situation better, but at least I don't get the feeling that, you know, they want to hide something, which has kind of broken in the business. And they also generally, you know, never had executives that give interviews to also they're not, you know, doing the podcasting thing, which, for example, Mali, is pretty good at.

Obviously, that's, I hope, not an offense to us and what we're doing, but you will just not get a lot of information from them. And as I mentioned in the beginning, for years, the company didn't even have a CFO. I mean, the finance function of the company was run on the VP level. And they just won, you know, this extremely lean, almost Spartan-like operation where the whole ethos is operational speed over public relations. And to some extent that it's good. You know, if you would say the same thing about, for example, Berkshire Hathaway, everybody would applaud. But this is a Chinese company that is not giving you any breakdowns on what the business is doing.

So even this low ego, head down, sort of let the results talk school is only good to some extent because the results, I'm no longer actually saying anything good about the company. So at that point, you do want to see a bit more insight. And I don't know, I think Colin Huang, the CEO sort of modeled the company on that philosophy. and I don't see that changing, but I'm also not quite confident and comfortable with investing in such a company. One of the other weird things is that Huang stepped down as CEO in 2020 and then as chairman just one year later.

And so the timing seems to have had something to do with this general crackdown of tech founders in China at the time. And as we all know, Jack Ma essentially vanished from public life back then. So Huang stepping back can probably be seen in a way as like a derelict. risking move to sort of pull the famous founder out of the cross-airs and lower the company's political profile. And then when he stepped down as chairman, I guess, you know, basically he formally entrusted the voting rights of his shares to the board rather than voting them himself. It's actually a pretty good, you know, chance that I called Huang, still the CEO of the

company, one or two times in this, in this podcast, because it really feels like that's still the case. But again, he did step back from the company, both as a CEO and a chairman. But he is still by far the biggest shareholder. So he owns a bit more than 30% of the company. So he certainly is still aligned with shareholders. And he's been at various points, even the richest person in China to their state, simply because of a stake in PDD. So you've got this, I don't know, I would say somewhat weird setup where the founder has

no title. He has also no public role. And it's supposedly off pursuing especially food science and agricultural tech. and life science research, all of the stuff that basically matters for the agricultural part of PDD, where also the company sort of came from. And yet, he is still the dominant owner with a huge share. And I'm actually quite confident that the long-term vision for the company is still coming from him. It's still sort of his vision where the company is supposed to go. And I was actually told by one of our mastermind members that there is a series of letters in Chinese or in Menorin that he has

written that I certainly still want to get my hands on and sort of translate to just get a better idea of who he is and how he thinks about the business. I will do that. I didn't have the chance due to it yet. So I hopefully have done that when the newsletter is coming out, which you can sign up for free. And if there is anything important on him, I will certainly include it there.

So getting back to sort of the corporate structure right now, officially the day-to-day business is now run by two co-CEOs, Suga Leitron, who you can think of as sort of the global architect of the company. So he came on the technology and architectural side, pretty similar to the founder. And he's focused now on TEMU, the international expansion, also sort of the technical guts of the platforms. You know, navigating the international AI data

and also to some extent or the regulatory mess that we discussed. And then you've got the co-CEO Gian Jujan Jujan, who started and built Duo Duo Grocery and ran the agricultural categories and also the supply chain expansion, which again is this huge investment part right now for PDD. Just to pull the thread a little further, I mean, how about we come back to that point on incentives and how they look? Is there anything that we can really use as signals here to help us better trust management, despite the significant lack of information that they disclose to shareholders?

Maybe a first tell of just how they treat shareholders is the fact that they have actually significantly reduced stock-based compensation over the last couple of years. They actually went from 8% of revenue in 2019, which is to some extent the level that we normally see with the US. companies, at least high-tech companies, to just 2% of revenue today. So I think that's a pretty positive fact because I feel like stock-based comp is a difficult one. Usually we place companies like Melly, for example, if they have a low level of stock-based comp, simply because it just shows that management doesn't sort of try to take advantage of shareholders, more or less behind their backs, because obviously you could see it in the filings, but as still know many investors who don't pay attention to that, then it sort of feels like you're getting diluted

without actually showing it to shelters in the, for example, free cash flow or profit numbers. And even the fact they don't give out quarterly guidance could also be viewed as a positive, since to some extent at least, shows that they are focused on the long term and don't care about short-term results. I think there are a lot of companies,

especially also going to Berkshire, who don't do that, where I feel like that's a good sign for how the management thinks about business. I'm just not quite sure that I'm willing to give PDD that point because I don't know, I would at least like some longer. term guidance or sort of idea of how the business economics actually look like and you're just completely in the dark with PDD right now. So I would say that's not too great for investors.

And I certainly think it's one of those points where it's just hard for me to get comfortable with it. The other elephant in the room that we need to talk about is this huge cash pile, which again is sort of like Bershire Hathaway. And you got more than $60 billion of cash on a market cap of about $110 billion for the company. So the actual the enterprise value, which is, you know, where you would normally factor in the value of the debt, net of cash, you know, for a company to kind of see what really the entire operation, you know, the value of it. And in this case, you know, it's actually dramatically smaller.

It's about half the size of the market capitalization of that equity of the company. Because, you know, in that enterprise value calculation, you're netting out debt and cash as negative. And so anyways, you know, the point being, this is almost an unprecedented amount of cash to have, to have, you know, half your enterprise value is consumed by this negative net debt. And so, you know, what are the plans for that money? I obviously think of this as a major margin of safety. And we could potentially see massive buybacks at what is probably a more than reasonable valuation, as we've talked about. And so the thing, though, I do fear is that PDD will just keep spending this money on restructuring the company over the next few years. And then suddenly your

margin of safety is just being wiped out by, you know, relatively low return investments into this hyper competitive environment. I certainly invested in some smaller caps in my value investing career where I thought that I have a huge margin of safety just because of the cash pile. And the cash burn turned out to be more significant than I initially thought. But I don't think that will be the case for PDD here. I also got to say that I don't believe. it will be a buyback or a dividend machine because historically for them it only mattered, you know, that they spent money and invested into the business units they already have or basically reinvesting into new opportunities. So it was not about paying dividends or paying

back shareholders via buybacks. It was mostly, you know, stage one building the core marketplace and the high margin advertising engine in China. Stage two was, you know, more taking cash and investing it into, for example, do a doer grocery, which also to some extent worked out as they won the community and this sort of team buying or group buying market. And then stage three was about Timu and the global expansion, which I guess you can say, all of that worked out quite successful. Even though, you know, we kind of talked about it, Timu is now under pressure and we didn't really know when and even if that will change in the future.

But based on this pattern of taking the profits from the mature business and then reinvesting them sort of aggressively into the next one, I don't see how PDD will become, you know, either buy-back or a dividend machine anytime soon. And as you said, based on their track record, they probably shouldn't pay shareholders. If they can invest that money and achieve anything close to the returns and capital that they have in the past, right? We're talking about anything from 30 to 60% in the last few years, then you should actually want them to keep the cash and invest it where they see fit, you know, especially when the

founder owns 30% of the company and has so much skin in the game that, you know, he will very much lose just like any other shareholder if things don't work out. Usually I would say I disagree with that without any problem. I guess what makes me pause with PDD a little bit is that you have to do a shift that is not really coming from position of strength. So they basically, you know, we talked about it, have a lot of these outside forces, kind of forcing them to go into this new direction. And there might be a reason to be a bit more skeptical of this investment cycle compared to

the prior ones. where, as you just said, the returns to investor capital, the returns in equity was just fantastic. And speaking of risks, you know, it's not only about the risk that the balance sheet has or anything else, which all look good for PDD, I also, you know, need to bring up the China situation, the ADR situation, because otherwise I already see the comments

about how we ignore that. And just as with all other Chinese names, as international investors, which the both of us would be, we can't invest in the actual Chinese listing. So what you're buying is a so-called ADR, an American depository receipt. And it's basically a certificate issued by US Depository Bank that represents a specific number of shares in a foreign company stock, which obviously in this case would be PDD.

So it's not the exact same as, you know, owning an actual share of the company. And beyond that, PDD's official address is in Dublin, Ireland. And I can sort of imagine that, you know, that's something that China isn't too fond of either. So there's been this long-running risk that U.S. listed Chinese companies could be forced to delist over, you know, for example, audit inspection disputes between Washington and Beijing. And while that's been somewhat diffused recently, I just wouldn't be surprised at all if you wake up one day. And, you know, the topic on the first page of the Wall Street Journal would be that something happened between the U.S. and China and all of those talks are on the table again. So this is the argument I've always made as to why I have, you know, for better or worse, had caution with owning Chinese equities with emphasis here on being in American, right? I do think there matters where in the world you're investing from. And so, you know, it's one thing to determine that a company is objectively attractive to invest in. So I don't think there are zero Chinese companies worth owning.

It's just that where you live and the regulatory regime you live under are reality. that you have to consider. And so, you know, I have to think about buying shares in Alibaba as an American and using ADRs instead of actual shares. And you're actually, you know, really getting shares in a VIE shell company, right? For anybody listening at home, you might want to read about the VIE structure and what that means to invest in Chinese companies where you're often getting sort of a shell company, you know, based in places like the Cayman Islands.

And then as you alluded to, disputes between these two countries create real problems for investors. And so you could have certain Chinese companies be forced to delist from exchanges or worse. We could see sanctions that make it very difficult to own Chinese assets if there were ever, you know, God forbid a conflict between the U.S. and China more directly with military forces. And even without something that extreme, closing the de minimis exemption is another example of how political tensions can materially hurt the business prospects of Chinese companies operating in the U.S. So for all these risks, you've got a company with more cash as percentage of its market cap than

for any large cap I've ever seen, trading out less than eight times earnings with two of the best investors of all time holding significant bets on the company in Lee Lou and Norbert Liu. And that's where I started to think that, you know, maybe this could be interesting. So my question for you is, how about we tried giving this valuation a shot? I can imagine it won't be easy to do, given, you know, the lack of information that we've talked about, some of the uncertainty of the business going forward. I take that as a disclaimer. So, you know, I don't say it because, again, I mean, I definitely had to be a bit more

creative with this one. So I already say, you know, if you don't agree with any of the assumptions that I made, and you want to make your own assumptions, feel free to download the model from, you know, the newsletter. I will also link to it in the show notes. And if you want to do that, you can basically come up with whatever you want to I do. So what I did is I split PDD's revenues into the three major segments. So we got the core marketplace. We got Timu and then we got the grocery business. And because we don't have the actual

numbers, I obviously had to estimate the revenue for the last couple of years based on my margin estimates and also how those three could combine to then fit the actual headline numbers in terms of revenue and margin in the last couple of years. So I assume about half the revenue comes from the core marketplace. And then you have about 35 to 40 percent. from Timu and the remaining 10 to 15% from the grocery part of the business. And from there, I've made all my growth and marginal assumptions. And obviously, I could throw a lot of numbers at you, but I don't think that would be the most interesting valuation section.

So I won't do that. Let me just give you basically my base case, assuming a quite material slowdown in growth of basically all three segments. So that would then, if you combine that, result in a kegger for the sales of about 7 to 8% over the next five years. And if you want to look at any of the assumptions in detail, again, you can download the evaluation model. You can look at it.

But I think this is, you know, the most important part of it. Yeah, the point here is that Daniel is not making very aggressive assumptions in this valuation, right? You know, when you're already sort of cautious about a business and the market is cautious about it, you probably want to bias toward the more conservative side, which it seems like you have. And really what matters here or what you think happens with margins. So obviously that ripples down the entire income statement. You can have revenue growth.

And if it's unprofitable growth, that doesn't create any value for shareholders. I'm probably conservative if you compare to, for example, Morningstar, which we sometimes look at and I keep being amazed at their price targets and how they come up with them. Because I apparently always come out lower than them, although I would say that I always try to be conservative, but also realistic because it doesn't make any sense, you know, just haircut every single number, you know, just to be conservative and then your intrinsic value at the end doesn't really have any meaning anymore. One thing that I did, which I think is quite important here, is trying to figure out what

margin you should look at. So when you look at Fiscal AI, for example, which, by the way, we use for all of our graphs and research, you would see a free cash flow margin of about 40%, at least in the latest quarter. And it's important that that includes all of the working capital tailwinds, since PDD does not immediately pay merchants after a sale that's similar to the Amazon business model. So a better proxy for sustainable margin, in my opinion, is to just look at the operating margin.

So that's what I use as a proxy for a normalized free cash flow margin. Again, just to sort of cut out working capital changes, get a bit less volatility in the margin. Due to investments that we will see in the next few quarters, I see that margin going from about 22% right now to as low as 15% before rebounding to about 19% at the end of the decade. Again, we kind of use it word often, and it's not always perfect, but I think of this as conservative, because again, you wouldn't even reach five years from now the same. margin level that we currently see already including some of the investments that are happening in the last couple of quarters.

The one other special thing I now did is that I broke down the cash position into a per share metric for the ADR and then sort of subtracted it. And so it looks like you didn't subtract the entire value of cash and cash equivalence, right? You effectively discounted it. Yeah, in theory, PDD has about $50 in cash per share. Well, you know, by the way, a share is itself about $70. $26 right now. But I don't pull the full $50 in because as we talked about, a dollar of

PDD's offshore cash might not be worth a full dollar for you as a foreign minority shareholder in the company. So some of it might be spent, you know, on low turn investment opportunities. Some of it is simply hard to ever get to because, you know, that money is sitting in China and the market is clearly discounting it because of those factors. So in the base case, I just haircuted it down to, you know, $42 share of cash. That's roughly 17% of it. discount. Obviously, in the bare case, I take it down a bit further. And in the bull case, I give it basically the full value. And just to close the loop from earlier, isn't some of that cash actually really just the same merchant float that you've stripped out of the margin? It is partly. So,

you know, that is a fair point. But some of that cash balance is funded by the merchant payables. The way I would defend it counting it gross anyway is that the cash still exists today. You know, it is on the balance sheet today. And when the float unwinds, it unwinds, it unwinds by basically paying down the merchant in the future. So it is a future cash outflow, but it's not necessarily, I know, a sort of whole in today's balance sheet. But you are right. And, you know, sort of that depends on how comfortable you are with the haircut. I'm quite comfortable giving it, you know, $42 per share, but you could obviously also back it out even more or give it even more of a discount rate, you know, and basically take into account the fact that some of that capital

is only merchant flowed. All right. So where does that leave us? Well, it won't surprise you that, you know, the model says PDD is significantly undervalued. I mean, even with a discount rate of 12%, which is pretty high, higher than we usually go, even for some South American companies, and a 20% margin of safety discount, and a multiple of 12, which also, you know, for business of this quality is not very high, the intrinsic fair value would be around $100. I got to say, though, that, you know, in a bare case,

you could very plausibly come up with a fair value of only $50. It takes a bit to get there. I mean, you would have flat revenue. You had margins decreasing to about 13%. by the end of the decade, and you would give it an exit multiple of about eight times, which, to be fair, that's where we currently are if you subtract the cash position. And also, again, in the bare case, I give an even higher discount to the cash per share. So I'm only accounting for about $28 per share in that point. So I would say, do with that information, whatever you want

to do. As always, I think these models are great to just, you know, figure out how things can look, but there's also, you know, the old analyst wisdom, garbage in, garbage out. So you could make the model say whatever you want. You just got to tweak the right numbers a bit. I feel like this ultimately very much comes down to just trusting the management team and their ability to repeat the successes of previous investment cycles. It seems that one of PDD's strengths has been to come into a very competitive market environment, wait for others' mistakes, and then try and disrupt the incumbents. And so it was a very opportunistic approach. And my issue here, though, in terms of adding Pinduoduo to our intrinsic value portfolio,

is that I'm just not sure I totally understand the business, but they're being so little disclosure. And also, you know, given the reality that I've never used TEMU, and I don't think I've the target demographic for it, but I've always been a little turned off by it. And I just don't see ads for it anymore. So it does feel like it has fallen off dramatically in popularity. And actually, I looked up the Google Trend search history for TEMO as a keyword in the U.S. and it looks like it's down by about half from its peak in 2023.

And unfortunately, the drop off globally isn't quite as bad, but still the point remains. And so it's not a very inspiring setup, honestly, in terms of having them trying to pivot their business from sort of a place of weakness, honestly. But it does seem like they have ample resources and management talent to reinvent themselves. And so I could go either way on this, really, Daniel. I feel like I want to defer to your judgment because at 30,000 feet, this thing just looks absurdly cheap. I mean, three times forward operating profits is not a multiple you see for any company out there. And it has some truly world-class investors in it. You know, some investors

who I've really looked up to for a long time. And if you were really excited about buying it, I could probably be on board with continuing to dive deeper and making a starter position. But if you're not really excited about it, that I'm just happy to pass because it is such a huge leap outside of my comfort zone. I would have been very surprised if your conclusion would have been anything else. I mean, I was actually surprised that you just wanted this company to be covered. One thing I got to say on the Timo data point, I kind of wonder that if you already have a billion customers, how many people still need to Google for the app?

If, you know, I assume most people actually already have the app. So probably it's sort of about what's the habit of people actually spending there? and how much more ads do you actually need to get new people onto the website. But that's sort of just some speculation on my end. I generally feel that, especially between the two of us, but maybe even in our community, I sort of have the reputation of enjoying investing in China because of my Alibaba investment in 2022. And obviously, also like the business model of companies like MacArthur Libre, for example.

But PDD is a fundamentally different company. And it feels like the world is also a different place in 2026. So I don't know, there's much more conflict. than half a decade ago, both militarily, but also economically. But even if we just stick to the business side of things, I don't like retail, as you know, and I don't view Amazon or merely actually as retail businesses, but PDD is a retail business. And it is one with a declining growth rate, pretty much no information about why exactly that is.

And when I combine all of that and the fact that I consider it to be unlikely that investors will see the cash on the balance sheet anytime soon, I can, you know, with a good conscience at least, say that this is in my circle of competence. I have to say, though, they really enjoyed discussing this one with especially our maximum members, because for this episode, I sort of always thought about these e-commerce companies with, you know, this latter framework that I, you know, mentioned in a lot of these episodes. But when it comes to Chinese companies or the Chinese market in general, they're just different. I mean, the better framework here is to actually think of e-commerce in niches. So, you know, there's content e-commerce like Doyne. There's lower-tier

city e-commerce like PDD. And then there's high-quality e-commerce with, you know, Alibaba and J-D as the major players. And it's just a much more fragmented place. And it's sort of interesting to see how that dynamic totally shifts in a different market. And especially just how far that business model has come due to the competition in that market. But that's a long way of saying, I enjoyed doing the research, but I don't feel comfortable adding it to our portfolio here. And I could certainly see, and this is our usual cop-out, this is much higher in a couple of years because it's so extremely cheap, but it's just not the sort of business that I want to own, especially basically not knowing a lot about the company's actual financials beyond what, you know,

the headline numbers tell us. All right, quite a long episode today. And I think it's appropriate to close today's episode with a quote by PDD's founder, Colin in Huang. On PD's mission, on PDD's mission, he once said, PDD is not about letting people in Shanghai feel like they are living a Parisian life, but making sure that people in Ann Hoy have kitchen paper and fresh fruits. And I think that's saying a lot about him and also about the company that he built. And for whatever reason, I mean there's not much publicly available for him.

I do sort of believe that he means to this and actually has the sort of vision for his company. And with that, have a great day and see you all in the next episode. of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors' podcast network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services or advertisers do not constitute endorsements and the Investors' Podcast Network is not responsible for any

claims made by them. Copyright by the Investors Podcast Network. All rights reserved. Thank you.