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I came across a company PDD, that has perfect financial metrics. The only issue is it is a Chinese company. Thought?

Personally, I think it's uninvestable for two reasons.

First, its share returns are not a function of its business results, as both of those are at the whims of a rather capricious government. Further, neither that government nor management cares at all about returns to minority foreign shareholders, except during brief moments that there is an advantage to be had from being perceived that way.

And second, unless you are in China you can't buy shares in Pinduoduo, you can only buy paper in a third jurisdiction which claims to have contracts to track the fortunes of actual Pinduoduo shares. PDD is a VIE, like BABA. (not to be confused with the actual businesses Pinduoduo and Alibaba)

None of that means that the price won't go up. But I think it's a "Rule #1" situation.

Jim

I was going to buy some, as like you I was attracted by the metrics, my broker doesn't allow me to invest in them however!

Alibaba, Tencent, JD.com and Baidu I do have though. JD and Bidu I've recently bought back in and happy to take a view and see where they are in 5 years. All attractive on value metrics.

This is also my diversify away from the US play becuase of Trump. So I'm about 65% US 35% China.

Happy with what I have and will just leave for 5 years now.

Is that true about any Chinese stocks?

I looked into the VIE issue, it was a big discussion point 3 years ago. I spoke to my broker and they'd just transfer my ADR listing to HK shares if it's delisted.

I have Tencent in HKD, Alibaba both HK and ADR and Baidu and JD ADR.

For tencent there's a TCEHY ADR but I cannot trade this so that's why I purchased the HK.

If they're delisted I'm personally comfortable holding the HK shares.

And my view on the Chinese large caps esp with US ADRs is that I believe the numbers esp after so much scrutiny.

I will need to do some further research.

I have Tencent in HKD, Alibaba both HK and ADR and Baidu and JD ADR.

It is important to understand the difference between an ADR and a VIE.

An ADR can be thought of as a share in a trust which owns actual shares in the underlying company. In extremis, the underlying shares could theoretically be distributed to ADR holders. They may or may not be listed on a convenient exchange, but there are actual shares backing up your ADR.

This is emphatically NOT the case with a Chinese VIE. In certain business sectors (in practice, most of the interesting ones), it is flatly prohibited under Chinese law for a non Chinese person to own the shares, and that includes indirectly. A buyer of BABA, for example, is not a shareholder, directly or indirectly, in the well known Chinese operating company of that name, period. Nor does the BABA holder own shares in a company that owns shares in that Alibaba. Rather, one merely owns shares in a Caribbean company that has a contract with the "real" Alibaba to share profits. This is a creative workaround, but it is of extremely tenuous enforceability, and its legality under Chinese law has never been tested. (not that a precedent would mean anything).

So delisting is not the risk here. The risk of the VIE is that you have no ownership in the company at all, directly or indirectly, and that "share the wealth" contract is good only so long as someone's whim wishes it to be good.

This is not a problem for all Chinese firms trading outside China, as it depends on the sector...whether the CCP considers it strategic. For example, I think BYD shares trading in Hong Kong are real shares of BYD, not VIE units.

That is just a discussion of risks related to the VIE structure. There are many other jurisdiction and governance risks. BABA holders have already been screwed out of (say) 20-40% of the company's value three times by my count. But people still buy the BABA paper. Fool me thrice?

Jim

Sure, I've been reading Howard Marks over the last few years and reviewing the Oaktree Portfolio. They currently have JD and PDD (ADRs) and also BABA up until recently.

His pro China stance, views on seeking diversification away from the US and obsession with risk management, convinced me China exposure and attractive valuations are worth it, bot for everyone but worth it for me.

Whilst the discussion on this forum is looking at diversification away from the US into UK equities like Greggs l, my preference is China.

I often discuss ideas with Grok 3 Deep Search. I had an old chat on Tepper, Munger and Marks on China.

It summarised Marks as follows.

Key Points

Howard Marks acknowledges the risks of Variable Interest Entities (VIEs) in Chinese companies but views them as part of the broader opportunity in undervalued markets.

He sees VIE structures as a necessary trade-off for accessing China's growth, emphasizing long-term value over short-term regulatory concerns.

Oaktree's investments in Chinese ADRs like JD.com and PDD reflect cautious optimism, despite VIE-related legal and regulatory risks.

PDD put all attention on price efficiency and have undercut Alibaba and have been eating their lunch. However PDD have relied on Tencent, with a stake in PDD, doing most of their marketing - which isn't exactly reliable; Alibaba has only grown about 30% sales in the last 3 years (and on declining margins), whilst PDD is still growing around 30% per year, dramatically faster.

Alibaba is also running into margin pressure, and part of this is the far greater R&D expenses. Alibaba’s downfall the last 3 years wasn’t so much the regulations as always cited, but rather good old fashioned business conpstition (what we cheer as capitalism), with other firms undercutting them and eating into their, perhaps more vigilant than us, Chinese local market, possibly better at shopping and so migrating purchases from the then larger brand Alibaba to the PDD which offered mass purchasing amongst customers organising themselves into groups.

Forward PE:
PDD - 9
Alibaba - 12

Net cash as a percent of market cap:
PDD - 30%
Alibaba - 10%

The net cash for PDD is just enormous, noting that if the two above issued a dividend for 30% and 10% respectively of their entire market cap, their forward PEs would then read as 6 and 11 respectively. So PDD’s value to a private buyer is very attractive right now, in the Ben Graham territory.

Alibaba has risen nearly 50% just year to date, but PDD has missed this. Part of the reason will certainly be PDD's higher sensitivity to tarifs, with most of Alibaba's business local and with excellent South-East Asian trading relations, but another part may be Alibaba’s flagship AI “Qwen” being deemed world-class, and PDD having no AI offering. However PDD continues to eat Alibaba’s marketshare rapidly, and in the end what will count are their relative earnings. Casting speculations and emotions aside, PDD looks more formidable - unless Alibaba’s future with AI and cloud is more lucrative than I’m able to fathom.

The trick with cloud business is to identify the various software moats, and true switching costs, within them rather than the leasable hardware itself. Alibaba lost a third of its cloud revenue a couple of years back as the largest customer - TikTok - just switched elsewhere, so much for moat).

- Manlobbi

Hi Manlobbi

Does PDD meet the Steadfastness criteria you have described elsewhere in your Manlobbi method of selecting investments?

If so, have you calculated its IV10 multiple and how does it compare with other investment opportunities such as MELI you discussed in another thread?

Thanks.

Does PDD meet the Steadfastness criteria you have described elsewhere in your Manlobbi method of selecting investments?

PDD doesn’t meet my own Steadfastness apparaisal, though that is likely owing to my ignorance rather than the firm (and jurisdiction) itself. The 4th pilar of steadfastness in the Manlobbi Method, subtle but crucial, is that you have to be able to appraise it oneself rather than infer it from someone’s else’s conclusion.

They seem to be really financially disceplinned though, not succumbing to speculative research and super focussed on getting stuff to the Chinese public at the lowest conceivable cost - requiring bulk sending to groups to achieve the goal.

Their overseas business (Temu) is about 25% of their sales, so less important than their local ludicrously-low-cost business model, despite the attention it gets here.

30% of the present market cap in net cash! If the low price continues that will just rise and eventually they could purchase nearly all their shares back.

But a non-Steadfast (having a chance of the company not being around in 40 years, or the *lower bound* for the 10th year of trend-earnings being simply not forecastsble) can *still* have a place in a portfolio in (1) small allocation such as 2%, and (2) thinking of the investment from a central estimate perspectice rather than lower bound perspective.*

- Manlobbi

* If you have lots of non-correlated bets each with a 10% chance of catastrophic failure but the average return over all of them (including the failures) expected to be 18% per year, then it is effective (though this approach is the antithesis to the Manlobbi Method which emphasizes very large, highly understood, positions) to buy all of them but strictly only when each is in small quantities.

I came across this analysis of PDD which describes discontent among merchants about PDD’s practices in trying to be the provider of cheapest goods. Margins maybe lower in future as they change their policies on returns and fines.


In mid-2024, PDD’s merchants staged rare public protests against what they saw as extractive practices by the platform. PDD allowed shoppers to abuse its return policy and often imposed harsh fines on merchants, they claimed. Regulatory pressure mounted following the events and the company had to start cutting fees, fines and spend more on merchant support.

The issue of merchant treatment is intertwined with PDD’s core strategy of providing the cheapest goods in China. The company’s reputation as a discount platform is so entrenched that Chinese consumers expect to find the lowest prices there for almost anything. With its cost leadership also come consumer complaints about shoddy goods and even counterfeits.

To minimize prices, PDD had for years been allocating user traffic among merchants mainly based on how cheap their goods are, rather than quality or customer reviews. An ultra-easy refund policy helped appease shoppers who received poor-quality products, but it also made life difficult for many merchants.

By comparison, PDD’s bigger rival Alibaba (BABA) (OTCPK:BABAF) gives more weight to brand names and merchant reputation when allocating user traffic. Another key rival, JD.com (JD) controls quality through so-called self-operated stores, with the e-commerce platform taking part in procurement, storage, logistics and marketing.

The focus on minimizing prices, which helped drive PDD’s miraculous growth over the last decade, is increasingly running into trouble and needs modification.

https://seekingalpha.com/article/4774279-pdd-growi...

For anyone commenting that Chinese stocks don't perform have you seen the chart for BYD!?

Up 847% over 5 years. How much does BRK have presently?

For anyone commenting that Chinese stocks don't perform have you seen the chart for BYD!?

Yes BYD has been continuing to execute profoundly well and is an ideal example of the extent of innovation happening in China, not regarding only the higher quality product, but also the vastly high tech manufacturing. Firms in USA and Europe simply can't compete with BYD, fair and square.

I want to add some comments about PDD though. How have PDD been able to take so much market share from Alibaba within China over the last 6 years? It surprised me very much how successful PDD has been, and it has been the primary cause of harm for Alibaba' business in recent years.

After studying this in more detail, it appears that Tencent might be a big part of the problem for Alibaba, but by this very indirect means - propping up PDD which has eaten into Alibaba's sales and required Alibaba to greatly lower its margins - in all, crushing its expected EPS today, versus how it was projected say 5 years ago.

Tencent has likely (greatly) supported PDD's market share growth through its advertising platforms, particularly WeChat and QQ, by enabling targeted ad campaigns and leveraging its massive user base (for exapml, WeChat has 1.4 billion monthly active users).

Advertising is a huge expense for Alibaba, and perhaps their interest in getting into the not very profitable movie/media business is, for a large part, related to advertising opportunities given how expensive it is. Tencent had an incentive to help PDD so much because they have a stake in PDD.

This detracts from the hope that some may have of PDD having an inherent moat, as good as its business model of bulk-buying is, for it is difficult to qualify the strength of a company when it depends on a larger entity having a stake in the firm and supporting their growth. Most likely the very positive relationship between Tencent and PDD will continue, but also, it isn't something that you can reliably depend on.

That is may in part explain why PDD has a PE of 9, whilst Alibaba trades at a PE of 12, despite PDD growing much faster than Alibaba - the market may be discounting PDD for its dependence on (rock solid, or capricious) advertising via Tencent's massive social media reach. Alibaba, by contrast, is much more diversified, so I think has the stronger moat, even it isn't a great one given how PDD has managed to crush Alibaba's EPS.

- Manlobbi

Yes, tencent is the second largest holder of PDD with c16% holding from 2018 and they have a strategic collaboration.

BABA was (past tense) so much more at one point with ANT financial and cloud services growth. Now it's more legacy retail with declining margins. The valuation reflects this. Perhaps hard to see how they'll recover and may continue to flat line and a c15-17 PE max is reasonable.

American depository shares of PDD Holdings (NASDAQ:PDD) are unraveling in Tuesday’s premarket trading after first quarter results from the parent company of Temu and Pinduoduo underscored challenges faced by its Chinese marketplace and the impact on the business from U.S. trade policy, including the elimination of the de minimis exemption.

“As communicated previously, a slowdown in growth rate is expected as our business scales and challenges emerge. This trend has been further accelerated by the changes in the external environment in the first quarter,” said Jun Liu, VP of Finance. “Our financial results may continue to reflect the impact of sustained investments in the ecosystem as we support merchants and consumers through uncertain times.”

While sales were up 10% from the same quarter last year, the increase was largely attributed to revenue from online marketing services, which was up 15% from a year earlier. Transaction revenue increased by a more modest 6% to $6.5B, less than $7.53B estimates.

Increased spending on the e-commerce platform cut the company’s adjusted profit by 45% to $1.56 and more than a dollar below expectations. Net cash generated from operating activities was also down from last year, declining 26% to $2.14B.


https://seekingalpha.com/news/4452486-pdd-faces-to...

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