Short selling

Short-seller Blue Orca puts Pinduoduo in its sights, betting on a 59 per cent plunge in stock price

  • The shares of China’s third-largest e-commerce platform could plunge 59 per cent as Pinduoduo’s business model is “faddish”, short-seller Blue Orca said
PUBLISHED : Thursday, 15 November, 2018, 8:33pm
UPDATED : Friday, 16 November, 2018, 5:30pm

The share prices of Pinduoduo, a Chinese e-commerce platform that lets shoppers use social networks for group discounts, are poised for a 59 per cent fall because the company inflated its 2017 revenue, according to a short-selling firm.

The Shanghai-based retailer, backed by China’s dominant social network operator Tencent Holdings, inflated its gross merchandise volume (GMV) figure – a measure of goods sold over its platform – for five quarters until the three months that ended in March 2018, and inflated its 2017 revenue by 40 per cent, said Blue Orca in a report.

“Pinduoduo notes that the Blue Orca report contains a series of incorrect suppositions,” the e-commerce platform said in a statement through its publicist, adding that it would address the issues raised by the report when it announces its quarterly results on November 20.

The meteoric rise of Pinduoduo, which grew from Colin Huang’s idea in 2015 into a US$21 billion company this week, is a “hype” backed by a “faddish business model,” Blue Orca said, adding that the company’s stock is poised to fall.

Blue Orca is a short-selling firm, which typically sells stocks before buying them back at lower prices, pocketing the difference as profit. Its typical targets are stocks whose prices are deemed too high, and usually releases damning reports - usually by exposing questionable accounting - to bring stock prices down. Its attack on Pinduoduo follows its successful takedown in May of Samsonite International’s chief executive Ramesh Tainwala after an attack on the CEO’s credentials and the corporate governance of the world’s biggest luggage maker. Tainwala resigned a month after Blue Orca’s report, and its stock took a 22-per cent beating in Hong Kong over three trading days.

Pinduoduo’s shares jumped 11.7 per cent in New York trading on Wednesday to US$19.15, compared to its initial offer price of US$19 in July. The stock is really worth US$7.1, Blue Orca said.

“The crux of our investment thesis is that this business is not nearly as lucrative, impressive, fast-growing nor as scalable as Pinduoduo would have investors believe,” Blue Orca said.

In its 40-page report released on Wednesday, Texas-based Blue Orca claimed that Pinduoduo’s GMV is significantly inflated, citing its own research.

“Pinduoduo is not the business it pretends to be,” Blue Orca said. “The Wall Street hype machine touts it as the world’s fastest-growing internet company. This hype has pushed Pinduoduo’s stock to nosebleed prices benefiting its faddish business model.”

Pinduoduo’s business model, which gives users discounts if they can find friends to make the same purchase – thereby “socialising” their shopping experience – is the cause of the GMV inflation, the short seller said. That is because the reported GMV also includes “billions of orders” that were phantom orders representing either failed “team purchases” or products that never got checked-out.

Using Pinduoduo’s disclosed transaction costs as an input, Blue Orca calculated that the GMV should be 43 per cent less than its 2017 reported figure of 207 billion yuan (US$29.8 billion) in the five quarters that ended in March 2018.

The Shanghai e-commerce company has also been using an undisclosed related party controlled by its founder Huang to hide staff costs that Pinduoduo had incurred for its own business, and hence understating its overheads by 489 million yuan in its filings to the US Securities & Exchange Commission, Blue Orca said.

Pinduoduo, which isn’t profitable even with its US$21 billion market value as of Wednesday’s close of trade – about the same as 112-year-old Kellogg Company – is already facing a series of US class-action lawsuits, on claims of misleading investors with its sales of counterfeit products.