Social commerce giant Pinduoduo posts maiden net loss on expenses surge as it aims to maintain rapid growth

Pinduoduo has been battling a storm over the listing of counterfeit and inferior quality products on its platform

PUBLISHED : Friday, 31 August, 2018, 10:29am
UPDATED : Friday, 31 August, 2018, 10:07pm

Chinese social commerce firm Pinduoduo revealed a heavy net loss in its first result as a publicly-listed company, with expenses soaring 74 times from the same period last year as the company seeks to maintain a rapid pace of growth.

The three year-old company went public on Nasdaq in July after rapidly ascending China’s e-commerce landscape to become the third-largest e-commerce company in the country by market share, after Alibaba and Pinduoduo pioneered the “team buying” model, where users can buy items at a discounted rate if they find another friend to make the same purchase.

Revenue for the company jumped 26 times to 2.7 billion yuan in the quarter ended June 30, up from 104.6 million yuan in the same period a year ago. Compared to the quarter ended March 31 this year, revenue nearly doubled.

However, the company posted 8.96 billion yuan in operating expenses, up 74 times from a year ago. The surge in expenses came from increased sales and marketing costs due to branding campaigns, online and offline adverts and promotions, as well as employee share-based compensation expenses.

Pinduoduo posted a net loss of 6.5 billion yuan, compared with a loss of 109.5 million yuan a year ago.

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“The net loss was in line with our expectations as we continue to generate strong positive cash flow,” said Xu Tian, vice-president of finance of Pinduoduo, in a statement.

“We launched a number of marketing campaigns to strengthen our brand and facilitate greater user engagement, and we will continue to invest in developing new and innovative technologies and in hiring the best talent for our long-term sustainable growth.”

On Thursday prior to its earnings result, Pinduoduo’s stock price closed down 15 per cent at US$17.99, the lowest since it went public on July 26. The company’s initial offering price was US$19 a share, and the stock surged to as high as US$26.70 on its debut.

Pinduoduo’s stock price started to decline after the company received a spate of bad press around counterfeit and inferior quality products listed on its platform. The company was also hit with a class-action lawsuit in the US, which alleged that it made false and misleading statements, including a failure to tell investors that it was unable to effectively deter merchants from selling fake products.

China’s State Administration for Market Regulation (SAMR) also called for a probe into Pinduoduo following the negative press reports and consumer complaints, requesting relevant authorities to investigate the company for counterfeit products and goods that infringe intellectual property rights.

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Pinduoduo pledged to step up its anti-counterfeiting efforts, and in the week spanning August 2 to 9, the company said it shut down 1,128 stores, took down 4.3 million listings, and blocked 450,000 suspected counterfeit good listings from going up on the platform.

“I would like to … reiterate that we have and will always have zero tolerance for counterfeit products,” said chairman and chief executive Colin Huang Zheng in an earnings call with analysts and media. “[Pinduoduo is] the first and one of the few platforms in China that have insisted on a 10-times penalty on counterfeit products and we will not compromise on it. We still have a lot to do to eliminate infringement offences on our platform.”

Huang added that Pinduoduo proactively removed 10.7 million problematic products and blocked 40 million links that raised counterfeit issues in 2017. The firm is also working with over 400 brands to combat counterfeits, he said.

“Every crisis could have been an opportunity. What happened is a good reminder for us to help more merchants establish their own brands with the support of our data and platform, so that many merchants and manufacturers don’t infringe.”

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The Shanghai-based firm also reported gross merchandise volume (GMV) – the total sales value of merchandise sold on its e-commerce platforms – of 262.1 billion yuan, growth of 583 per cent, and a jump in its active buyers to 343.6 million, up 245 per cent from 99.7 million yuan a year ago.

Huang said in a statement that the company’s operational and financial results were “strong”, and pointed towards GMV and active buyer growth as a demonstration of “our differentiated ‘new e-commerce’ business model and our ability to serve China’s strong domestic consumption demand.”