China's PDD suffers $55 billion market cap wipeout after flagging an uncertain market

By Sophie Yu and Deborah Mary Sophia

(Reuters) -China's PDD Holdings missed market estimates for quarterly revenue on Monday, and downbeat comments from executives about China's domestic e-commerce competition and the firm's global outlook sent its shares down more than 28%.

The biggest one-day share fall for PDD since it listed in the U.S. in 2018 wiped out nearly $55 billion in market capitalisation. The e-commerce retailer operates discount-focused platforms Pinduoduo in China and Temu for the international market.

"(We) are seeing many new challenges ahead, from changing consumer demand, intensifying competition and uncertainties in the global environment," Co-Chief Executive Chen Lei said on an earnings call with analysts after the results.

"We will enter a new phase of high-quality development that calls for increased investments and our profitability will be affected as a result," he added.

China's fragile economy, persistent weakness in the property sector and high youth unemployment rates, have led consumers to cut back on purchases, weighing on the country's retail and e-commerce sectors and prompting cut-throat competition for market share among e-commerce giants.

While Pinduoduo's low prices and steep discounts on everything from cleaning products to earphones have attracted cost-conscious shoppers, major rivals such as Alibaba and JD.com have also offered heavy promotions on their own platforms, piling competitive pressure on PDD.

"Looking ahead, revenue growth will inevitably face pressure due to intensified competition and external challenges," said PDD's Vice President of Finance Jun Liu.

Analysts from Huatai Securities said in a note that PDD executives' talk of competition pointed directly to Alibaba gaining momentum in recent quarters with its low-price strategy.

UBS analyst Kenneth Fong said that while Pinduoduo was performing well, with good growth and profitability in spite of the highly competitive domestic e-commerce environment, management's tone was confusing for investors.

"Investors aren't sure if Pinduoduo sees what we don't see or if it's overly conservative in an uncertain macro environment," Fong said, adding that international platform Temu's margin's were looking more positive and it would likely break even in the fourth quarter.

M Science analyst Vinci Zhang agreed that PDD management's outlook sounded "very bearish".

"We know there's a consumer spending slowdown, but there was hope that maybe PDD having the budget product platform with cheaper offerings can capture this slowdown, but it turns out that they are also losing," Zhang said.

Co-CEO Chen said consumers are increasingly choosing to spend on experiences rather than material goods and there is a "growing emphasis on rational consumption".

Chinese e-commerce giant Alibaba missed market estimates for revenue earlier this month, pinched by weaker domestic e-commerce sales, while JD.com's quarterly revenue grew only 1.2%.

Both firm's U.S.-listed shares also fell in the wake of PDD's earnings miss.

PDD reported revenue of 97.06 billion yuan ($13.64 billion) in the second quarter, compared with analysts' average estimate of 100 billion yuan, according to LSEG data.

Operating expenses rose by 48% in the three months ended June 30, as the company invested in marketing, advertising and promotions to attract shoppers.

General and administrative costs more than tripled in the quarter to 1.84 billion yuan, because of staff-related expenses.

($1 = 7.1173 Chinese yuan)

(Reporting by Deborah Sophia in Bengaluru, Sophie Yu in Beijing and Casey Hall in Shanghai; Editing by Pooja Desai, Himani Sarkar, Barbara Lewis and Jacqueline Wong)