Beaten down PDD ends 2024 with Southeast Asian setbacks

The e-commerce giant’s Temu overseas arm, along with fast-fashion sensation Shein, have been ordered to suspend their operations in Vietnam

Key Takeaways:

• After being blocked in Indonesia, PDD’s overseas Temu arm has reportedly been ordered to halt service in Vietnam as well
• Downside risk to the e-commerce giant’s stock looks limited, based on its forward price-to-earnings (P/E) ratio of less than 8 times

By Bai Xinrui

Chinese goods are famous for their relatively solid value at low costs – a reputation that turbocharged the rise of some e-commerce platforms during the pandemic. But now one of the highest flyers in that group, PDD Holdings Inc. (PDD.US), is coming back to earth as a growing number of foreign governments say “no” to its ultra bargain-basement goods.

PDD brings low-cost Chinese goods to global e-commerce buyers through its Temu marketplace, which has become a major growth engine for the company since its launch in 2022. But after making strong progress in its first two years, 2024 has become a year that Temu and PDD might rather forget. In addition to the usual competition as names like Amazon (AMZN.US) fight back, the company is also facing the potential of having to pay tariffs on its goods shipped to markets like the U.S. And in the latest string of bad news, Temu has been ordered to suspend its operations in Vietnam.

According to a Reuters report earlier this month, Temu was ordered to suspend its operations in the Southeast Asian country after being told it had failed to complete necessary business registrations by a Nov. 30 deadline. The authorities did not say how long the suspension might last, nor what steps Temu could take to have it lifted.

Temu said that it was in communication with Vietnamese regulators but stressed that it had submitted all documents required for the registration. A Vietnamese language option has been removed from the company’s website. Temu isn’t alone in its Vietnamese setback. Chinese fast-fashion e-commerce sensation Shein suffered a similar setback in the country, where its website is currently unavailable. Like Temu, Shein has said it is in discussions with Vietnamese authorities to try to settle the matter.

Before hitting the Vietnamese roadblock, Temu was also ordered by Indonesia to suspend the operation of its app in Southeast Asia’s most populous country. Indonesia’s Communications Minister Budi Arie Setiadi said in a statement in early October that Temu’s business model that allows foreign manufacturers to sell directly to Indonesian consumers would crush the country’s own micro, small- and medium-sized enterprises. Thus, the authority decided to block Temu in the local market to protect such companies from being harmed by unfair competition from foreign companies.

Despite the setbacks, banking giant Citi is rather optimistic on PDD’s outlook. In a recent report, it pointed out the Vietnamese setback will have limited impact on the company’s overall business since it only started to enter the market in October. It added that the suspension was probably due to the company’s hastiness in entering the market and failure to obtain all the necessary documents to register the business.

Citi went on to say that PDD’s entry to Vietnam is also a significant move for the company. In addition to expanding the company’s Southeast Asian footprint, Vietnam can also play an important strategic role for PDD if the U.S. imposes new tariffs on Chinese goods. Once the company lays a strategic foundation in the market, it could start to source more products there to offset the impact of any U.S. tariffs specifically targeting Chinese-made goods.

Potential for U.S. tariffs

The U.S. market is, without a doubt, important to PDD. U.S. consumers have downloaded the Temu app more than 200 million times, accounting for nearly 30% of its total downloads. And the number of times U.S. consumers have used Temu is five times that for their European counterparts.

But following his election as the next U.S. president, Donald Trump has been busy flexing his muscle as the “tariff president” even before his inauguration. Writing from his account on his Truth Social platform, he said that China allowed huge inflows of illegal drugs, especially ones used to make fentanyl, into the U.S. and that he would impose additional 10% tariffs on Chinese goods until China took action to stop such flows.

In addition, the U.S. might also tighten or eliminate the “de minimis exemption,” which will deal a big blow to PDD and Temu. That exemption allows small packages valued at less than $800 to enter the U.S. tariff-free and with near-zero scrutiny, allowing imported goods to be mailed to U.S. consumers directly.

The administration of current President Joe Biden announced that it would close the loophole, saying the rule was being overused and abused. As Biden’s term draws to an end, it remains to be seen whether Trump would take similar actions, to the detriment of Chinese e-commerce companies.

Meantime, challenges are also mounting for PDD in its home China market, where it is known as Pinduoduo. That market is already quite mature and has come under threat from products sold over livestreaming platforms. And despite several rounds of stimulus measures by Beijing, severe deflationary pressure, coupled with the slumping real estate and stock markets, continue to weigh on consumer buying. PDD management said in a recent meeting with investment bankers that it stepped up discounts and promotions during this year’s “Double Eleven” shopping festival on Nov. 11, hinting at ongoing weakness in domestic sales.

Undervalued shares

PDD’s third-quarter results also point to mounting difficulties in its business. Despite reporting a 61% surge in its net profit, its net profit margin for the quarter was just 25.1%, down 7.8 percentage points from the second quarter. And its sales and promotion expenses jumped by 40% to 30.5 billion yuan ($4.2 billion), which the company ascribed to more spending on advertising and promotions.

In such challenging environments both at home and abroad, the good news for PDD is that its valuation is still modest. Even after profit downgrades by major investment banks after the release of its results, Bloomberg still projects the company’s earnings will rise 76.9% this year and 16.1% in 2025, implying price-to-earnings (P/E) ratios of 8.7 times and 7.5 times, respectively, for those two years. That’s lower than forward P/E ratios for Alibaba (BABA.US; 9988.HK) and JD.com (JD.US; 9618.HK), which range between 9 and 10 times.

Broadly speaking, there doesn’t appear to be much downside to PDD’s valuation, barring more negative surprises from the U.S. or Southeast Asia. But significant upside could also be difficult in the face of headwinds from potential tariffs and restrictive policies that other countries might target at China. That means PDD’s stock could stay largely in a holding pattern, at least for now.

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