TIP831: Pinduoduo (PDD): Is PDD the Best Buy in China? w/ Daniel Mahncke and Shawn O'Malley

18:34Shawn O’Malley:It's kind of out of your range. It's over your pay grade.

18:37Daniel Mahncke:But you'd think it would be the management team's responsibility to provide information about the business, right? I mean, that's sort of the whole point of their job in some ways, at least for shareholders from their perspective.

18:50Shawn O’Malley:I guess that's fair. And as an investor, I would obviously say that's exactly their job. But I think if you actually think about it as managing the business, that's sort of what they do. They're not there to inform investors about their expectations for next quarter. But obviously, I agree, to some extent, you became a public company, and that also comes with certain duties. And I do certainly get skeptical when I look at company filings, and they just don't break down any important details. I mean, it's not so much that I believe there's fraud going on or anything like that, but it's just close to impossible for me to actually get what I need to make an informed investment decision.

19:25Shawn O’Malley:And obviously, you know, there are alternative data points that you can look at, but especially sitting in the US or Europe, you won't be the first one to find those alternative data points on a Chinese company, right? I mean, a lot of these sources I looked at were actually in Chinese or Mandarin. And while AI makes things a lot easier today in terms of translation, it's still a suboptimal way to research a business.

19:46Daniel Mahncke:What I'd like to know a bit more about is what the strategy at the beginning of Pinduoduo looked like. And so, you know, what was the target customer? How are they able to just really come out of nowhere into the Chinese market and level the playing field with Alibaba and JD?

20:02Shawn O’Malley:Huang noticed that there was a customer who basically wasn't served to by Alibaba and JD. It's kind of similar to how Nubank realized that legacy banks don't serve all customers. Alibaba and JD spent about 15 years basically building infrastructure and their website to mostly target tier one and tier two cities. So you're talking cities like Beijing, Shanghai, and sort of the more affluent coastal consumer with disposable income and high-tech literacy. And what they basically ignored was the lower tier cities, tier three and below. And I should say that lower tier city in China in 2026 is certainly not a village.

20:38Shawn O’Malley:I mean, I had to show a plan to two of these cities with a friend who is Chinese. And unfortunately, we couldn't make it happen. But the point is, the low tier city that he was from had about 10 to 12 million citizens and certainly a decent standard of living by what I could judge from the pictures that he showed me. So while there's a huge divide between the people who live in tier one and tier three or tier four cities, it's still a market that I would say is worth building for. And if you look at it from really just a numbers perspective, lower tier China is something like 70 % of the population and well over half of the GDP.

21:13Shawn O’Malley:So it's an enormous market that Alibaba and JD weren't actually solving.

21:18Daniel Mahncke:After covering so many of these companies on the show, there are definitely patterns and connections that we get used to seeing. One of them is being that you mentioned WeChat in the beginning here. And so I imagine there was a big tailwind from mobile adoption and this wave of super apps in China that helped Pinduoduo.

21:39Shawn O’Malley:It's similar to what we saw with Slimedit. Yeah. You know, smartphones were basically a thing only for rich people. But then between 2010 and roughly 2014, you had these cheaper Android phones basically flooding those tier three and lower tier cities. And they came obviously, you know, with new payment options like Alipay or WeChat Pay. So then all of a sudden you had really hundreds of millions of people who had never shopped online able to do it for the first time. And given China's incredible size, that's probably the single biggest pool of brand new e-commerce users in history. And it wasn't just that Alibaba and JD didn't focus on that market.

22:16Shawn O’Malley:The users also had a very different idea of what they actually wanted. So it was just a completely different target audience. they were intensely value conscious and much more willing to put an effort to actually save money. And they had fewer entertainment options where they live. So they basically spent more time on their phones and were sort of open to shopping as a way to pass time. It's similar to what we talked with, you know, C limited and the gaming business that they basically use their mobile gaming business to expand into markets. And why did that work out so well? Well, because people just like to be on their phones to spend time.

22:49Shawn O’Malley:And that could be a mobile game, but it could also simply be shopping on the app directly. So this sort of goes back to this ladder of e-commerce companies that I talked about in one of our calls in the mastermind community, where PDD was, to my extent, clearly a level one company at this stage, value-conscious buyers, generating traction through gaming and discounts, customers with a clear purchase intent, and also, and that's important, no ecosystem beyond the marketplace. So you have no payment arm, you have no logistics network, and so on. I would actually say by now, and after talking to a lot of Chinese analysts, I do have a bit of a different picture of how it works out, but I think we'll get to that later in the episode.

23:48Daniel Mahncke:job credit at indeed.com slash podcast. That's indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs.

23:58Shawn O’Malley:Let's take a quick break and hear from today's sponsors.

24:01Daniel Mahncke:This summer, Prime Video takes you back before Legally Blonde,

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25:14Daniel Mahncke:Tell your doctor your medical history, muscle or nerve conditions, including ALS Lou Gehrig's disease, myasthenia gravis or Lambert-Eaton syndrome, and medications, including botulinum toxins, as these may increase the risk of serious side effects. Why wait? Ask your doctor, visit BotoxChronicMigraine.com, or call 1-800-44-BOTOX to learn more. I heard an analogy once that I think is funny and appropriate here, right? A search platform like Alibaba, JD, or Amazon is basically a store, and you walk in because you already want something. You go to a specific aisle, you compare a few options, and then you buy the thing that you came for and then you leave.

25:51Daniel Mahncke:And so it's very, very intentional. And the shelves are sort of the same every day. Panduoduo, by contrast, is much less like a physical storefront. It's way more like maybe like a sushi conveyor belt. You don't sit down because you want one specific piece of sushi. you sit down because maybe you're bored and you want to see what comes around. And heavily discounted deals float past like an ahi tuna roll, and you scroll until something catches your eye, and it's just different every day. So there's sort of a treasure hunt feeling to using the app where you never know what you'll find.

26:28Shawn O’Malley:I like that analogy because that's sort of the heart of PDD, that you don't really know what they offer to you today, which goes back to this idea of you also go on the app, and it's a sort of gamified experience and you want to go on this treasure hunt that you just mentioned. It's not like Amazon. I would hate if Amazon has, you know, completely different products every single day because I want to get the same stuff that I happened to get last time. And that simply wouldn't be, would be possible to the same extent. And now that you mentioned sort of the gamification part, they actually have a game that I read about where you basically plant and grow a little virtual tree and they actually mail you real food when it's done.

27:03Shawn O’Malley:So obviously the whole thing is engineered to be a habit and a sort of entertainment loop, but they really go all the way. I mean, that's, I've never heard of that. And I didn't think I would ever have the idea to actually do that. Huang himself said that PDD is sort of a mix of Costco and Disneyland. And, you know, he basically meant Costco for the value hunt and then Disneyland for the sort of gamified experience. And I don't know. I mean, the mix of those two also brings us back to the sort of team buying model of PDD. So one thing, I didn't mention it before, the name PinDuoDuo actually means something like team up, save more.

27:38Shawn O’Malley:So this is really key to the entire business model and philosophy of the company.

27:43Daniel Mahncke:That's a cool ethos to have. And some time ago, I came across a study that sort of showed how some people in society are like these connectors. And it sort of sounds weird, but the idea is that most people in your friend circle maybe have a limited number of other friends. So maybe they each have 10. But one of those 10 friends is a super connector who has a lot of friend groups and maybe closer to 100 friends in total. And that's sort of how you always know someone who knows someone.

28:14Shawn O’Malley:Do we today consider a friend group of 10 people to be a small friend group? Because that's not good news for me. But I actually think that's a concept that was mentioned by, I think it was Malcolm Gladwell in The Tipping Point, which is a book that I read a couple of years back by now.

28:28Daniel Mahncke:No, that's right. That's right. Right. It sounds like we both had Malcolm Gladwell phases. Anyways, I only bring it up because this teaming up approach, I think is so genius and a great way to benefit from this dynamic. And so even the most introverted people will still send it to close friends and family. And then these super connectors are really the ones who are bringing hundreds of people into the ecosystem.

28:51Shawn O’Malley:And when you aggregate a big group order inside a 24 hour window, you've just created something that a manufacturer has basically never gotten from consumer channel before, which is, you know, this large and also confirmed. So it's safe that you will actually have this order pre-committed bulk order. And that makes, you know, planning way easier for both the merchant, but also PDD is basically giving the contract. So PDD then goes straight to these factories and they're actually millions, you know, I actually thought about could this be, but I Google it. It's millions of factories in China that spent decades making goods for Western and domestic brands.

29:25Shawn O’Malley:And then PDD basically says, you know, run the line for us, white label, no brand on it. And then the factory knows exactly how many units it has to make because the orders are already in. So there's almost no wasted inventory. And because the deals rotate day to day, which is also something that we talked about, the factory doesn't have to commit always to, you know, being on shelf of PDD. So they can basically run a PDD batch only when they have spare capacity and time to do so. And that's basically a model that is now called C2M, so consumer to manufacturer. That's a very efficient way of doing business.

29:59Shawn O’Malley:I mean, you have no specific brand, which means you don't have to do any brand marketing. You have no distributor, you have no wholesaler, and obviously, which is a huge money saver, you have no middleman. And, you know, compared to the first party model that, you know, a company like Coupang, which is sort of the Amazon of South Korea, and you covered, you know, by now almost two years ago, you don't hold any inventory and you don't touch the fulfillment. So you save a lot of costs and a lot of headaches whenever it comes to that. And then the merchant just ships straight to the buyer with a third-party career.

30:29Daniel Mahncke:That does mean though that you lose control over the delivery process. But again, people don't pay PDD for fast delivery. That's what Amazon is for or in China, Alibaba. And because of that model, PDD had huge structural price advantages over these other companies because they didn't have to focus on next day shipping, for example, the massive logistics support that goes into pulling something like that off.

30:57Shawn O’Malley:This was part of the overall strategy that was just an incredible success, both in China, but also globally. And because of that success, PDD went public on the NASDAQ in 2018, just three years after its founding. And by around 2020, so two years later, they passed Alibaba in annual active buyers, which I mean, just think about how insane that is. It's a five-year-old company passing the most dominant e-commerce company in the world on user count. I still remember back in 2022, when I did my investment in Alibaba, that I was looking at PDD and I sort of felt like I would have never thought there's a company able to overcome them in terms of consumers, especially at that pace.

31:36Shawn O’Malley:So that basically meant that at that point, they were responsible for about a quarter of the Chinese e-commerce market.

31:42Daniel Mahncke:It's absurd. I mean, it really is breathtaking what they've been able to do on such a short time period. And then the disconnect between that and the market's valuation of the business today, which we'll get more to, but how about for now, we talk about the economics of the business. I want to understand how this company can generate these extraordinary margins and cashflow despite operating in what is considered to be really the most brutal e-commerce competitive environment in the world. We are taught in business school that competition leads to diminished returns. And that isn't exactly what we've seen with Penduo Duo for such a fiercely competitive industry that they operate in.

32:25Daniel Mahncke:And beyond that, there are more than just a few people who don't think the modern e-commerce business model is really going to be sustainably profitable. And for companies like Amazon and Caspi and also Mellie and C-Limited, Fortunately, that doesn't matter as much to investors in those businesses because they built all these additional business units around them to generate high margin revenue, whether that's cloud computing or credit cards and banking services. And so the e-commerce business plays a role in that ecosystem, but it's not the profit center.

32:59Shawn O’Malley:It's funny because you just look at their reported earnings and their margins and all of that, and you think it's certainly a model that works. But then you look at the stock price, and I think if you do that, it's pretty much up for the bait, whether these ecosystem-like models like, for example, Melly will actually work out. Amazon is sort of in a leak of its own, so I don't really count them to that anymore. But it's sort of interesting. I obviously think they will, as long as every part strengthens the overall flywheel of that company. But looking at the stock charts again, there are a lot of these companies where investors apparently don't seem to think that they can actually go through that, especially when the higher margin business is supposed to be a payment company.

33:35Shawn O’Malley:PDD, though, that's the good news, maybe also for you, doesn't want to go there anyway. PDD is a pure retailer and advertising business. So it reports two revenue lines, and that's online marketing services and transaction services. And they're about 50-50 in terms of revenue breakdown. So this online marketing services is this classical third-party marketplace part of the business. So the way it makes money is by a transaction fee and by merchant advertising. And it's nothing new. We know that from all the marketplaces that we looked at, and also as with all the other marketplaces, the majority of revenue and especially operating profits is the segment of advertising with merchants.

34:13Shawn O’Malley:Which should mean that the take rate is quite high. It is. And just for context, the take rate is the slice of GMV, gross merchandise value, or the total value of everything sold on the platform that basically PDD keeps as revenue. So GMV is just average order value times order frequency times the number of buyers. And I just want to say this because we covered so many e-commerce companies by now that I sort of expect most people to know, but we always have new listeners. So this is sort of the key metric that you look at for these marketplaces. So the advertising take credit alone is estimated to be around four to four and a half percent.

34:49Shawn O’Malley:And I should say here again, we need to make quite a lot of estimates today because again, PDD just doesn't give us much to work with. So pretty much all the numbers of the detailed business units that I give you are the estimates that I work with. What's important to see here, more than the numbers actually, is just the trend. So in 2019, the advertising take rate was closer to two to two and a half percent. So it has almost doubled since then in the last six to seven years. And that's mostly because PDD onboarded way more merchants, which obviously changes the supply and demand dynamic on the merchant side.

35:20Shawn O’Malley:So think about the ratio of orders to merchants inside a given product category, for example. So for years, PDD acquired users so insanely efficiently that, you know, the WeChat loop, the stickiness and the user side of the marketplace grew significantly faster than the merchant side. It's also obviously easier to onboard just, you know, one new consumer compared to one new merchant. So you basically have this wall of demand on the marketplace. All these orders chasing a relatively thin set of existing merchants on the marketplace. And in that world, a merchant doesn't really need to advertise a lot because a lot of that demand immediately comes to them.

35:56Shawn O’Malley:So, you know, the monetization of the advertising part stays relatively low. But over time, as you know, the marketplace grows, the merchant side or the merchant base actually naturally expands, which is another way of saying more competition is fighting over the demand now. And once you've got lots of merchants competing in the same category for the same users, obviously bidding each other up for the limited ad space. And that's basically what pushes up the advertising tailgate. So it's not PDD dictating a price. It's actually merchant versus merchant competition for this sort of finite amount of user attraction or attention.

36:33Daniel Mahncke:We discussed that dynamic before where you don't want to increase commission or transaction fees because that feels like squeezing the merchant. Whereas monetizing advertising or logistics is a much fairer transaction and more sustainable way to expand margins, right? Because PDD is delivering value to the merchant in terms of being able to provide more eyeballs. And then the merchant is basically paying for that.

36:59Shawn O’Malley:One thing that I do want to bring up here is because it just shows how PDD works. And also just find it quite fascinating is that PDD has no shopping cart feature. So it might very well be that I'm the only person who finds that interesting. But I sort of just love understanding why businesses make certain small decisions, especially when they certainly go against industry wisdom and then they work out. So the reason why PDD has no shopping cart is that obviously a shopping cart doesn't make a lot of sense when you want to provoke impulse purchases. So most people, including me, honestly, the shopping cart tends to pile up with things.

37:36Shawn O’Malley:And then maybe at some point I get back and I actually order some of those things. But even then, most of the time, that means half the cart gets deleted again anyway. So it's not actually money. For example, Amazon is earning through me. PDD wants a different dynamic. Again, they're focused on customer conversion. So PDD's average order value is only about six to seven bucks, which is about half of Alibaba's and a fraction of JD. So we're talking low ticket stuff like daily household goods, groceries, basic apparel, and just these high repeat but low price categories. And customers can only buy one thing.

38:11Shawn O’Malley:and that's basically how you not only immediately have higher conversion, but also you get them back and you make them or you turn them into frequent buyers. You want to buy toilet paper today, but maybe also you want to buy groceries. And since you couldn't do it today, or at least not in one purchase, you either come back 10 minutes later or you come back the next day.

38:31Daniel Mahncke:Maybe not immediately the next day, but I mean, frequency has also increased massively over the years, it seems. In the early days, users ordered something like 15 to 20 times per year from Penduo Duo. But from what I've seen, it looks like they order more than 70 times per year, which is great. That's a huge incremental per user growth. But it is still behind some of these peers like Alibaba, where the figure is people are ordering 90 times from the platform in a single year. And I think that's a good sign because it does mean that there's room for plausible potential growth. And speaking of growth, how about we go to another of PDD's business units, the grocery and agricultural supply chain business.

39:15Daniel Mahncke:Let's dig into that.

39:17Shawn O’Malley:It's also an interesting one. And actually, one thing that I should mention, I wanted to bring up how often people buy on PDD to sort of impress you. But then I thought about our Caspi episode where I tried to do the same. And apparently you order on Amazon so frequently that all of those numbers couldn't impress you. So I didn't do it. And, you know, I'm glad you brought up the numbers anyway. But yeah, talking about the grocery part of the business, it's quite important, you know, first because it's PDD's original C2M DNA. So, you know, cut out the middleman and the cheapest price wins. And also it's a category, which is basically the most important in consumer spending, which is food, because obviously you just have a customer that comes back again and again.

39:56Shawn O’Malley:And the second reason we should talk about this is that it's one of those places where management is investing money right now, especially in the supply chains. And unsurprisingly, the model works much differently than what we know or perhaps sort of imagine from a grocery business, because it's not delivery, which is what we sort of used to whenever we talk about grocery businesses in the West. So the product is called Duo Duo Grocery. The model is what's called group buying and sort of similar to the team buying dynamic and approach. The way it works is that in a local city or town, often a little convenience store owner, or, you know, maybe just a stay-at-home parent becomes the so-called community leader.

40:35Shawn O’Malley:And they essentially run a group or a group chat for the neighborhood. And then people can order their groceries through that chat the night before they will actually order. So those orders get aggregated, similar to the team buying. And the next day, everything gets struck to a single pickup point, which usually tends to be the community leader's shop. And then people walk over and sort of collect their order. So it's next day, pickup based, not delivery.

41:00Daniel Mahncke:And so to emphasize, it's pickup intentionally and not delivery. And the reason for that is so they can provide the service at a lower cost. Is that basically the right way to think about it?

41:11Shawn O’Malley:That's the whole trick. You know, fresh groceries are, as we know, and especially, you know, after looking at Uber, one of the hardest things in all of e-commerce to make money on because it's low price and, And last mile home delivery of a$5 bag of vegetables is basically a guaranteed money loser. So the group buy dynamic eliminates the two major risks that you have this cost structure. There's no individual home delivery because everyone picks up from one point. You have basically collapsed a thousand deliveries into one truck to one location. And because orders are aggregated the night before, and that's why the timing is sort of important, and only then sent to suppliers, there's just very little spoilage and almost There's no inventory that the shop owner, for example, is sitting on.

41:53Daniel Mahncke:The space has been a pretty wild fight for a while. I know from researching Uber, as you said, that grocery delivery in China is a very, very tough market to be in. And around 2020, 2021, everybody really piled into the space. So you had PDD with Duoduo Grocery, Meituan with its grocery arm, and then Alibaba, plus a whole wave of startups like Jingxian. And they all subsidized like crazy to grab market share, trying to sell eggs and vegetables below cost so they could win over neighborhoods and grab that market share. And that's how billions of dollars though were burned over time. But since last year, the market has, from what I understand, consolidated fairly considerably.

42:40Daniel Mahncke:And so most of the startups blew up a while ago. It was not sustainable business models. And then you actually had Alibaba pull back and then eventually even Mechuan pulled back too. And they were the market share leader. So it's particularly consequential to see them step back and sort of strategically retreat. And so PDD outlasted all of them. PDD became the largest player in community group buying for groceries. And at one point, Duo Duo Grocery GMV was running ahead of even the biggest traditional supermarkets in China. So they were, by some measures, selling more groceries than Walmart China.

43:18Shawn O’Malley:So they mostly outlast them mainly due to their superior supply chain network, which is also where most of their invested money went into. And one of the advantages of just being a pure play retailer from the get go. So PDD is not distracted by investments into cloud businesses, AI or whatever peers and especially Alibaba invests in. So they just want to be the best retailer. And if you just focus on that, there's a high likelihood of actually succeeding. And that means you either have the most efficient supply chains or distribution, you have the best quality, or you have the best prices on the most innovative products.

43:54Shawn O’Malley:And PDD is doubling down on supply chains and price. And it's actually quite interesting because usually you would look at this and say, well, why don't you want to be the best at everything? But then you look at competitive retail markets and you figure out that generally there's only one company being the best at any one of them. So in the US, for example, you could look at Walmart if it's about pricing, you could look at Costco if it's about quality, and then you could look at Amazon if it's about distribution. So usually one retailer is dominating one niche, and that's sort of how you split the market.

44:22Shawn O’Malley:I should say, though, that the grocery business is not a huge part of the financials and also the growth story for PDD. It mostly benefits, you know, with ecosystem, because again, those are the important goods that you want to sell because they build the stickiness for the customer base and the marketplace in general.

44:38Daniel Mahncke:Well, so it's interesting to me, though, we're seeing PTD really dramatically shift their investment habits at the moment. So how about we talk more about that, right? We basically have this company that was asset light by every definition across all of its business units, now becoming increasingly asset heavy or more capital intensive.

44:59Shawn O’Malley:If you go through just the latest Onyx calls, you will hear them say pretty clearly that the next decade will be devoted to investing money in the first party brand business, also in infrastructure and especially in supply chains. And actually they said, quote, they want to invest in healthy long-term growth. And they also said that they kind of reflected carefully on their shortcomings and have taken decisive steps to rectify operations and restructure internal management. And there might be some political reason for that massive shift. I mean, the entire business model that we described before and the success of it was founded on the asset light nature of the business.

45:36Shawn O’Malley:And yes, there's a quality argument to make for more first party products and physical infrastructure. But why do you act like the model before was sort of a mistake? I just didn't fully understand that when I looked at the earnings calls. Although I would say that the more likely reason, not being politics, but probably simply being that they have reached a ceiling with their target audience. I mean, growth has come down enormously in recent years and quarters. So So before talking to some local analysts and fund managers, I would have said that this might be the natural step from a level one marketplace to go to level two and maybe even level three.

46:09Shawn O’Malley:So building an ecosystem, prioritizing comfort and quality over price and so on. I kind of gave you this spiel before, but it seems that's not really the game for PDD. So of course, I want to go into some of these higher quality products. I even heard that they sold most of the iPhones sold in China a couple of years ago. So they have these high quality products on their marketplace as well, but they still want to be this retail company that's mostly focused on these lower tier cities and that does not do payments, that does not do lending, cloud, AI, or any of these things. So it's really just about investing to defend where they are currently.

46:47Daniel Mahncke:That's pretty interesting. And I guess the evolution of Timu probably plays a role here as well, right? I mean, Timu has been a huge success in many international markets, and it was based on these incredibly cheap Chinese products. But the regulatory environment, as we've talked about in past episodes, has become more challenging, to say the least. And so you had foreign governments tax and tariff those cheap, unbranded Chinese products, which would more or less kill any cost advantages they had. And then in the home Chinese market, you have Doyen, the Chinese name for TikTok coming for sort of the middle market of e-commerce.

47:26Shawn O’Malley:Do you include very well be a major part of why PDD is now changing its strategy? I would say the difficult thing for me is that without any segment data, which again, you know, they don't give to us, we don't really know what's going on. Is PDD investing because the business model is deteriorating, but they actually believe they can turn it around? Or is it just investing to have an excuse for falling margins and falling profits while the business model is disrupted without having any real chance for replacing it. And that would, you know, to some extent be the case if you are attacked on the lower end of the market by Doyin, but then you're also attacked on the higher end market because it's incredibly difficult to get into these level two, level three market players like Alibaba and JD and actually steal market share from them.

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50:10Daniel Mahncke:affiliate products not available in every state perhaps we can zoom in more on timu and international business just for a minute here and see whether there are any answers to be found i mean how exactly is timu standing internationally and what change that has made it harder for timu to compete

50:29Shawn O’Malley:so timo launched in september 2022 into the us first and the simplest way to describe it is that you basically take the you know pdd factory model aimed at the rest of the world again first in the us and you take those millions of chinese factories making white label goods and instead of selling to a chinese consumer in a lower tier city you just you know sell straight to a consumer in either the us or in europe and i actually still remember when timo first launched in germany and it came pretty much out of nowhere and suddenly it was this huge hit. I think it was mostly something or a place where women shopped, but you could buy a ton of other things next to cheap clothing.

51:09Shawn O’Malley:So I wouldn't be surprised if a lot of people that I know also shopped on Timo. I actually never did it myself, which I, to some extent, now regret because I don't have this immediate consumer insight into how the app or the marketplace actually worked. I think it still exist. So I should check it out. But I think the main reason that was possible was the so-called de minimis exemptions, which essentially mean that any imported parcel below a certain value, and I think in the US it was about$800, could come in with no tariff and basically no customs paperwork. So it's not worth the government's time to inspect a tax of a$15 package, but Timo's average parcel was only worth something like 50 bucks.

51:50Shawn O’Malley:So every single Timo order flew into the US duty-free, no tariff, and minimal inspection. And that obviously saves a lot of costs when you bring the goods to your country.

52:01Daniel Mahncke:For me, it first came on my radar when it felt like Timu ran like eight Super Bowl ads and won Super Bowl. And normally with the Super Bowl, the ads are so expensive, right? I mean, you don't see too many brands running the exact same commercial multiple times. And the production value is typically very, very high because you want to get this viral moment. But for Timu, it was like just spamming these really low quality ads during the Super Bowl on your TV. And they just kept running these same low budget ads over and over. And I found it really annoying. But evidently, it worked and sprung a massive amount of downloads because the prices were so unbelievably cheap.

52:43Daniel Mahncke:And then I think there are a lot of people like me being like, what is this Chinese company that is spamming these ads? Let me go check it out. Anyways, within a couple of years, as you know, I mean, Timu was the most downloaded shopping app in the world in something like 90 plus countries with hundreds of millions of users. And so even as of late 2025, by the download and active user numbers, Timu is still the biggest e-commerce app globally, based on cumulative downloads of more than 1.2 billion, and monthly active users of around 530 million. So these are incomprehensible numbers that we're talking about.

53:21Daniel Mahncke:And even when we look at tech giants in the US, this is not typically, maybe besides meta, the type of scale that we see.

53:30Shawn O’Malley:I merely thought of meta. And there are apparently 3 billion users where if I just do the math of people with actually access to the internet. It sort of baffles me how that, you know, number is supposed to work out, but it's sort of, you know, the same for every one of these companies. Whenever we look at China, South America, and all of the markets that are not, you know, immediately visible for us, it's always incredible if you just look at the scale. But, you know, part of the truth is also that the momentum already took a massive hit in 2025. Around the time of the tariffs, obviously, you know, the US eliminated also all the de minimis exemptions for especially China-origin goods, but also later for basically goods globally.

54:07Shawn O’Malley:Then Timo's US GMV reportedly fell under 30 % of its level at the start of 2025 after those changes and daily active users in the US halved, which also kind of shows you that there are a lot of users, but it's not that sticky of a platform and ultimately just compete on price. So to their credit, you got to say that they did react quite fast and they basically switched to this semi-managed local fulfillment model. So what that means is they now have sellers who already have product in the US and then those sellers sell it on Timo. So they basically started bulk shipping inventory into US warehouses themselves, which helped users and GMV to rebound quite significantly after the massive drop.

54:47Shawn O’Malley:But the big problem, obviously, with this change in the business model is that you also have significantly different economics. It's not like I don't like the physical part of the e-commerce business model generally. I mean, again, I'm bullish on Mali and Amazon, and that's sort of what they do. But the difference is that this has been their game plan all along. And their customers are attracted to these level three marketplace dynamics, which means comfort, fast delivery, high quality. And that's totally different for a company like PDD. And I don't know, I mean, just think about, for example, this little anecdote that I gave you about the shopping cart.

55:21Shawn O’Malley:To me, that sort of shows how much detail they spent on optimizing the strategy to speak to their target audience. And now they have to do this quite significant shift where Timu is becoming a more normal, localized marketplace, holding or coordinating inventory in-country. And that's a fundamentally lower margin business. And you sort of still need to figure out whether that's something that's worth the investment for Timu.

55:47Daniel Mahncke:And from what you told me, Timu's situation in Europe is sort of similar. Europe is something like 40 % of Timu's GMV. So it's actually by far their biggest market. But the EU is pulling forward its own de minimis removal. Plus, you've got the EU's Digital Services Act breathing down Teemu's neck over product safety and illegal goods, and the FTC and various US regulators poking at it too. So the regulatory overhang is very much a global problem for Teemu. We're not talking about just one specific market where they're having hiccups. And so I think I I slowly understand why PDD is trading at the valuation that it does.

56:26Daniel Mahncke:And although TEMU has always been more of sort of upside optionality, where it wasn't necessarily something that people were banking on in the thesis a few years ago, that model had worked out really well. And now though PDD has likely lost a lot of money on that operation. And so the difference is that there was a plausible case to make that Timu would eventually become profitable and that they were taking market share. And that was sort of a viable competitive strategy. And now based on these regulatory changes, it just seems not really realistic for them to achieve profit with the current structure of Timu's business.

57:06Shawn O’Malley:It's certainly a headwind. I should say though that many still estimate that Timu should become profitable in a few years. So they don't know if it could happen in 2028 or 2029, but they do still see a realistic case for an inflection point, which to be completely honest, when I first started looking at it, I was kind of surprised because you do see the loss rate per region of Timo, even in years where the business model was still in place. Now they sort of have to change how they do it. But again, they did a good job. And if you would look at, you know, analyst estimates, they still believe this will be a profitable business unit for them in a couple of years.

57:40Shawn O’Malley:And if that's the case, I think that's already enough to get sort of excited about. First of all, because you don't have the cash burn anymore. And second of all, because Timo still has incredible scale. So as soon as you make just a tiny margin on that, you do add quite a lot to the bottom line.

57:54Daniel Mahncke:Let's turn our focus to the Chinese domestic market, which I know has been a bit of a rocky place post-COVID. There's been some ups and downs. I mean, is the regulatory environment friendlier here? And what do you think about competition and the strategic shift that Penduo Duo has made?

58:13Shawn O’Malley:So for the longest time, the e-commerce fight was basically between what you could call the big three. So you had Alibaba, you had JD, and then you had PDD. Combined, the three of them actually make up something like 70 % of Chinese e-commerce GMV. And a lot of PDD's share actually came from Alibaba, which, you know, I mentioned earlier when I invested in them in 2022. I was kind of scared that, you know, this local competitor in China is gaining so much share from them. mostly because Alibaba, again, didn't really care about losing market share in the lower tier cities, which you could sort of argue is not the best strategy to have.

58:45Shawn O’Malley:I mean, Mali, for example, in Brazil is defending the lower end of the market in their sort of competitive fight with Sharpie. What has changed in the past few quarters, though, is that Douyin has come into the market and PDD is now basically facing the problem that every level one e-commerce player will face eventually. There's little customer loyalty and you compete almost entirely on price. And then the second, perhaps even bigger problem is who buys on Douyin and also why. I think you remember, you know, that I told you about 20, 30 minutes ago, we basically talked about these lower tier city shoppers kind of having, you know, a motivation for going on PDD because of the factor of just being bought.

59:23Shawn O’Malley:Well, now, where would you go? Would you go on PDD or would you open Douyin for entertainment purposes? I mean, Douyin is sort of, again, it's like the TikTok, right? arguably the most powerful discovery and impulse engine ever built. And you sort of have this algorithmic feed, which is incredibly good at putting something in front of you that you didn't know you wanted, and then letting you buy it in two tabs through the live stream and shopping in a shoppable video. It's kind of like Meadow or Instagram on steroids. I already told you that, but now their algorithm is so good that they know exactly what I want.

59:56Shawn O’Malley:And I sort of just go on Instagram to see the ads, to figure out what I want to buy. But now you've got to imagine that you not only see the app, but you can also buy directly on the app, something that Meta never has really, never really figured out. So if you combine, you know, the competitive picture, PDD, in my opinion, is threatened pretty much everywhere. Alibaba competes with PDD on the search and selection, and then JD competes on logistics and authenticity to some extent, just because of the high quality goods on the marketplace. And then Douyin basically has the traditional PDD target audience in their scope.

1:00:30Daniel Mahncke:it was a pretty foreign concept to me, literally, to think about opening a social media app as a way to tell me what I want to buy. But I mean, actually, I get it, sort of, right? Like, I do that with TV shows and movies, right? Like, we've talked before about how I go to Netflix, and, you know, the Netflix algorithm knows pretty accurately what I'm interested in and watching next, typically. And I don't use TikTok, but I can see how it happens. But what really I'm hearing from you is that internationally there's competition, but also really one of the main challenges is regulatory pressure. Whereas domestically, the shift in investments that they're making and change in strategy is not necessarily because of Chinese regulators, but more just simply because of the realities of very intense competition in their domestic market.

1:01:21Yeah.

1:01:22Shawn O’Malley:I think if you are, you know, PDD and Dugin is coming for your target customer, you sort of want to make sure that you're still unambiguously the cheapest with the best supply chain, because that's basically how you lock in merchants. And that's also how you get more and more consumers on the platform that don't choose to change, which seems to be going on right now. And because of that, you have these lower takeaways on merchants because you want to keep them in the ecosystem and you have the investments in the supply chain to also get better experience for your customers. And you might remember that I didn't consider TikTok Sharp, the international version of what we talk about with DuYin, a deadly threat to SuLimited, just as I don't see Timu as a long-term competitor for Melly in Brazil.

1:02:04Shawn O’Malley:But for both of those companies, or in those cases, I sort of gave you the reason that those two are higher up on the e-commerce ladder and they face significantly less competition in their home markets than PDD does. However, I should say that China is a bit special after all. Again, I talked to a lot of people who are actually on the ground and understand the company quite well. And Douyin actually tried to transition from this content e-commerce machine to a more search-driven marketplace before, and it didn't work out that well. So despite trying to do that, they still have about 60 to 70 % of its GMV still coming from live streaming.

1:02:40Shawn O’Malley:And due to this scenario-based nature of what I described in the Chinese e-commerce market, there might never actually become a search-driven marketplace. And that obviously would be good news for BDD, but I would still say, if we want to basically put a summary on what the competitive picture looks like, PDD faces competition internationally and nationally on basically all ends.

1:03:01Daniel Mahncke:One thing that we can do when management is not giving us a lot to work with is to see how they're acting and how they're incentivized. And so do they own a lot of stock? Have they been buying recently? What are their incentive metrics and so on? And so how does that look for Panduoduo?

1:03:20Shawn O’Malley:I guess I should first talk about the culture. So PDD is famous for being one of the most secretive large companies in the world, which is what we talked about quite often today. So at least I would say that's a positive for them. They didn't start doing that when growth was slowing down and the margins were going down. That has always been the case. So that's not making the current situation better, but at least I don't get the feeling that they want to hide something, which has kind of broken in the business. And they also generally never had executives to give interviews too. Also, they're not doing the podcasting thing, which for example, is pretty good at.

1:03:53Shawn O’Malley:Obviously that's, I hope not an offense to us and what we're doing, but you will just not get a lot of information from them. And as I mentioned in the beginning, for years, the company didn't even have a CFO. I mean, the finance function of the company was run on the VP level and they just won this extremely lean, almost Spartan-like operation where the whole ethos is operational speed over public relations. And to some extent that is good. If you would say the same thing about, for example, Berkshire Hathaway, everybody would applaud. But this is a Chinese company that is not giving you any breakdowns on what the business is doing.

1:04:25Shawn O’Malley:So even this low ego, head down, sort of let the results talk school is only good to some extent because the results are no longer actually saying anything good about the company. So at that point, you do want to see a bit more insight. And I don't know, I think Colin Huang, the CEO, sort of modeled the company on that philosophy. And I don't see that changing. but I'm also not quite confident and comfortable with investing in such a company.

1:04:49Daniel Mahncke:One of the other weird things is that Huang stepped down as CEO in 2020, and then as chairman just one year later. And so the timing seems to have had something to do with this general crackdown on tech founders in China at the time. And as we all know, Jack Ma essentially vanished from public life back then. So Huang stepping back can probably be seen in a way as like a de-risking move to sort of pull the famous founder out of the crosshairs and lower the company's political profile. And then when he stepped down as chairman, I guess, basically, he formally entrusted the voting rights of his shares to the board rather than voting them himself.

1:05:31Shawn O’Malley:It's actually a pretty good chance that I called Huang still the CEO of the company one or two times in this podcast, because it really feels like that's still the case. But again, he did step back from the company, both as a CEO and a chairman, but he is still by far the biggest shareholder. So he owns a bit more than 30 % of the company. So he certainly is still aligned with shareholders. And he's been at various points, even the richest person in China to this day, it's simply because of a stake in PDD. So you've got this, I don't know, I would say somewhat weird setup where the founder has no title.

1:06:03Shawn O’Malley:He has also no public role and is supposedly off pursuing especially food science and agricultural tech and life science research, all of the stuff that basically matters for the agricultural part of PDD, where also the company sort of came from. And yet he is still the dominant owner with a huge share. And I'm actually quite confident that the long-term vision for the company is still coming from him. It's still sort of his vision where the company is supposed to go. And I was actually told by one of our Mastermind members that there is a series of letters in Chinese or in Mandarin that he has written that I certainly still want to get my hands on and sort of translate to just get a better idea of who he is and how he thinks about the business.

1:06:42Shawn O’Malley:I will do that. I didn't have the chance to do it yet. So I hopefully have done that when the newsletter is coming out, which, you know, you can sign up for free. And if there is anything important on him, I will certainly include it there. So getting back to sort of the corporate structure right now, officially, the day-to-day business is now run by two co-CEOs, Suga Leitrun, who you can think of as, sort of the global architect of the company. So he came on the technology and architectural side, pretty similar to the founder. And he's focused now on Tmoo, the international expansion, also sort of the technical guts of the platforms, navigating the international AI data, and also to some extent, all the regulatory mess that we discussed.

1:07:23Shawn O’Malley:And then you've got the co-CEO, Jian Jun Zhao, who started and built Duo Duo Grocery and ran the agricultural categories, and also the supply chain expansion, which again is this huge investment part right now for PDD.

1:07:38Daniel Mahncke:Just to pull the thread a little further, I mean, how about we come back to that point on incentives and how they look? Is there anything that we can really use as signals here to help us better trust management despite this significant lack of information that they disclose to shareholders?

1:07:53Shawn O’Malley:Maybe a first tell of just how they treat shareholders is the fact that they've actually significantly reduced stock-based compensation over the last couple of years, they actually went from 8 % of revenue in 2019, which is to some extent the level that we normally see with US companies, at least high-tech companies, to just 2 % of revenue today. So I think that's a pretty positive fact because I feel like stock-based comp is a difficult one. Usually we praise companies like Melly, for example, if they have a low level of stock-based comp, simply because it just shows that management doesn't sort of try to take advantage of shareholders more or less behind their backs.

1:08:28Shawn O’Malley:Because obviously you could see it in the filings, but I still know many investors who don't pay attention to that. Then it sort of feels like you're getting diluted without actually showing it to shareholders in the, for example, free cash flow or profit numbers. And even the fact they don't give out quarterly guidance could also be viewed as a positive since it, to some extent at least, shows that they are focused on the long-term and don't care about short-term results. I think there are a lot of companies, especially also going to Berkshire, we don't do that where I feel like that's a good sign for how the management thinks about business.

1:08:58Shawn O’Malley:I'm just not quite sure that I'm willing to give PDD that point because I don't know, I would at least like some longer term guidance or sort of idea of how the business economics actually look like. And you're just completely in the dark with PDD right now. So I would say that's not too great for investors. And I certainly think it's one of those points where it's just hard for me to get comfortable with it.

1:09:19Daniel Mahncke:The other elephant in the room we need to talk about is this huge cash pile, which again is sort of like Berkshire Hathaway. And you got more than $60 billion of cash on a market cap of about$110 billion for the company. So the actual, the enterprise value, which is where you would normally factor in the value of the debt net of cash for a company to kind of see what really the entire operation, the value of it. And in this case, it's actually dramatically smaller. It's about half the size of the market capitalization of the equity of the company. Because in that enterprise value calculation, you're netting out debt and cash as a negative.

1:10:05Daniel Mahncke:And so anyways, the point being, this is almost an unprecedented amount of cash to have, to have half your enterprise value just consumed by this negative net debt. And so what are the plans for that money? I obviously think of this as a major margin of safety, and we could potentially see massive buybacks at what is probably a more than reasonable valuation, as we've talked about. And so the thing, though, I do fear is that PDD will just keep spending this money on restructuring the company over the next few years. And then suddenly your margin of safety is just being wiped out by relatively low return investments into this hyper-competitive environment?

1:10:48Shawn O’Malley:I certainly invested in some smaller caps in my value investing career where I thought that I have a huge margin of safety just because of the cash pile. And the cash burn turned out to be more significant than I initially thought, but I don't think that will be the case for PDD here. I also got to say that I don't believe it will be a buyback or a dividend machine because historically for them, it only mattered that they spent money and invested into the business units they already have or basically reinvesting into new opportunities. So it was not about paying dividends or paying back shareholders via buybacks.

1:11:20Shawn O’Malley:It was mostly, you know, stage one, building the core marketplace and the high margin advertising engine in China. Stage two was, you know, more taking cash and investing it into, for example, Duo Duo Grocery, which also to some extent worked out as they won the community and this sort of team buying or group buying market. And then stage three was about Timu and the global expansion, which I guess you can say all of that worked out quite successful, even though we kind of talked about it. Timu is now under pressure, and we didn't really know when and even if that will change in the future. But based on this pattern of taking the profits from the mature business and then reinvesting them sort of aggressively into the next one, I don't see how PDD will become either a buyback or a dividend machine anytime soon.

1:12:05Daniel Mahncke:And as you said, based on their track record, they probably shouldn't pay shareholders. If they can invest that money and achieve anything close to the returns on capital that they have in the past, right? We're talking about anything from 30 to 60 % in the last few years, then you should actually want them to keep the cash and invest it where they see fit. Especially when the founder owns 30 % of the company and has so much skin in the game that he will very much lose just like any other shareholder if things don't work out.

1:12:34Shawn O’Malley:Usually I would say I disagree with that without any problem. I guess what makes me pause with PDD a little bit is that you have to do a shift that is not really coming from position of strength. So they basically, you know, we talked about it, have a lot of these outside forces kind of forcing them to go into this new direction. And there might be a reason to be a bit more skeptical of this investment cycle compared to the prior ones, where, as you just said, the returns on invested capital, the returns on equity was just fantastic. And speaking of risks, you know, it's not only about the reset, the balance sheet has or anything else, which all look good for PDD.

1:13:07Shawn O’Malley:I also need to bring up the China situation, the ADR situation, because otherwise I already see the comments about how we ignore that. And just as with all other Chinese names, as international investors, which the both of us would be, we can't invest in the actual Chinese listing. So what you're buying is a so-called ADR, an American Depository Receipt. And it's basically a certificate issued by US Depository Bank that represents a specific number of shares in a foreign company stock, which obviously in this case would be PDD. So it's not the exact same as owning an actual share of the company.

1:13:44Shawn O’Malley:And beyond that, PDD's official address is in Dublin, Ireland. And I can sort of imagine that that's something that China isn't too fond of either. So there's been this long running risk that US-listed Chinese companies could be forced to delist over, for example, audit inspection disputes between Washington and Beijing. And while that's been somewhat diffused recently, I just wouldn't be surprised at all if you wake up one day and the topic on the first page of the Wall Street Journal would be that something happened between the US and China, and all of those talks are on the table again.

1:14:19Daniel Mahncke:So this is the argument I've always made as to why I have, for better or worse, had caution with owning Chinese equities with emphasis here on being an American. I do think it matters where in the world you're investing from. And so it's one thing to determine that a company is objectively attractive to invest in. So I don't think there are zero Chinese companies worth owning. It's just that where you live and the regulatory regime you live under are realities that you have to consider. And so I have to think about buying shares in Alibaba as an American and using ADRs instead of actual shares.

1:14:57Daniel Mahncke:And you're actually really getting shares in a VIE shell company, right? For anybody listening at home, you might want to read about the VIE structure and what that means to invest in Chinese companies, where you're often getting sort of a shell company based in places like the Cayman Islands. And then as you alluded to, disputes between these two countries create real problems for investors. And so you could have certain Chinese companies be forced to delist from exchanges or worse, we could see sanctions that make it very difficult to own Chinese assets if there were ever, God forbid, a conflict between the US and China more directly with military forces.

1:15:35Daniel Mahncke:And even without something that extreme, closing the de minimis exemption is another example of how political tensions can materially hurt the business prospects of Chinese companies operating in the US. So for all these risks, you've got a company with more cash as a percentage of its market cap than for any large cap I've ever seen, trading at less than eight times earnings with two of the best investors of all time holding significant bets on the company and Li Lu and Norbert Lu. And that's where I started to think that maybe this could be interesting. So my question for you is, how about we try giving this valuation a shot?

1:16:12Daniel Mahncke:I can imagine it won't be easy to do given the lack of information that we've talked about, some of the uncertainty of the business going forward.

1:16:20Shawn O’Malley:I take that as a disclaimer. So, you know, I don't say it because again, I mean, I definitely had to be a bit more creative with this one. So I already say, you know, if you don't agree with any of the assumptions that I made, and you want to make your own assumptions, feel free to download the model from, you know, the newsletter. I will also link to it in the show notes. And if you want to do that, you can basically come up with whatever you want to do. So what I did is I split PDD's revenues into the three major segments. So we got the core marketplace, we had Timu, and then we got the grocery business.

1:16:51Shawn O’Malley:And because we don't have the actual numbers, I obviously had to estimate the revenue for the last couple of years based on my margin estimates and also how those three could combine to then fit the actual headline numbers in terms of revenue and margin in the last couple of years. So I assume about half the revenue comes from the core marketplace, and then you have about 35 to 40 % from Timu and the remaining 10 to 15 % and from the grocery part of the business. And from there, I've made all my growth and margin assumptions. And obviously, I could throw a lot of numbers at you, but I don't think that would be the most interesting valuation section.

1:17:25Shawn O’Malley:So I won't do that. Let me just give you basically my base case, assuming a quite material slowdown in growth of basically all three segments. So that would then, if you combine that, result in a CAGR for the sales of about 7 % to 8 % over the next five years. And if you want to look at any of the assumptions in detail, Again, you can download the evaluation model, you can look at it, but I think this is the most important part of it.

1:17:50Daniel Mahncke:The point here is that Daniel is not making very aggressive assumptions in this valuation, right? When you're already sort of cautious about a business and the market is cautious about it, you probably want to bias toward the more conservative side, which it seems like you have. And really what matters here or what you think happens with margins is obviously that ripples down the entire income statement. you can have revenue growth. And if it's unprofitable growth, that doesn't create any value for shareholders.

1:18:17Shawn O’Malley:I'm probably conservative if you compare to, for example, Morningstar, which we sometimes look at, and I keep being amazed at their price targets and how they come up with them. Because they apparently always come out lower than them. Although I would say that I always try to be conservative, but also realistic, because it doesn't make any sense. Just haircut every single number, just to be conservative, and then your intrinsic value at the end doesn't really have any meaning anymore. One thing that I did, which I think is quite important here, is trying to figure out what margin you should look at.

1:18:45Shawn O’Malley:So when you look at fiscal AI, for example, which by the way, we use for all of our graphs and research, you would see a free cash flow margin of about 40%, at least in the latest quarter. And it's important that that includes all of the working capital tailwinds, since PDD does not immediately pay merchants after a sale that's similar to the Amazon business model. So a better proxy for sustainable margin, in my opinion, is to just look at the operating margin. So that's what I use as a proxy for a normalized free cash flow margin. Again, just to sort of, you know, cut out working capital changes, get a bit less volatility in the margin.

1:19:18Shawn O’Malley:Due to investments that we will see in the next few quarters, I see that margin going from about 22 % right now to as low as 15 % before rebounding to about 19 % at the end of the decade. Again, we kind of use the word often and it's not always perfect, but I think of this as conservative because again, you wouldn't even reach five years from now, the same margin level that we currently see, already including some of the investments that are happening in the last couple of quarters. The one other special thing I now did is that I broke down the cash position into a per share metric for the ADR and then sort of subtracted it.

1:19:53Daniel Mahncke:And so it looks like you didn't subtract the entire value of cash and cash equivalents, right? You effectively discounted it. Yeah.

1:20:01Shawn O’Malley:In theory, PDD has about$50 in cash per share. Well, you know, by the way, a share is itself about$76 right now, but I don't pull the full$50 in because as we talked about a dollar of PDDs offshore cash might not be worth a full dollar for you as a foreign minority shareholder in the company. So some of it might be spent, you know, on low turnover investment opportunities. Some of it is simply hard to ever get to because you know, that money is sitting in China and the market is clearly discounting it because of those factors. So in the base case, I just haircut it down to$42 share of cash. That's roughly 17 % of a discount.

1:20:38Shawn O’Malley:Obviously in the bear case, I take it down a bit further. And in the bull case, I give it basically the full value.

1:20:44Daniel Mahncke:And just to close the loop from earlier, isn't some of that cash actually really just the same merchant float that you've stripped out of the margin?

1:20:52Shawn O’Malley:It is partly. So that is a fair point, but some of that cash balance is funded by the merchant payables. The way I would defend it, counting it gross anyway, is that the cash still exists today. It is on the balance sheet today. And when the float unwinds, it unwinds by basically paying down the merchant in the future. So it is a future cash outflow, but it's not necessarily a sort of hole in today's balance sheet, but you are right. And sort of that depends on how comfortable you are with the haircut. I'm quite comfortable giving it$42 per share, but you could obviously also back it out even more or give it even more of a discount rate, you know, and basically take into account the fact that some of that capital is only merchant float.

1:21:33Daniel Mahncke:All right. So where does that leave us?

1:21:36Shawn O’Malley:Well, it won't surprise you that, you know, the model says PDD is significantly undervalued. I mean, even with a discount rate of 12%, which is pretty high, higher than we usually go, even for some South American companies and a 20 % margin of safety discount and a multiple of 12, which also, you know, for a business of this quality is not very high, the intrinsic fair value would be around$100. I got to say though that in a bear case, you could very plausibly come up with a fair value of only 50 bucks. It takes a bit to get there. I mean, you would have flat revenue, you had margins decreasing to about 13 % by the end of the decade, and you would give it an exit multiple of about eight times, which to be fair, that's where we currently are if you subtract the cash position.

1:22:16Shawn O’Malley:And also again, in the bear case, I give an even higher discount to the cash per share. So I'm only accounting for about$28 per share at that point. So I would say do with that information, whatever you want to do. As always, I think these models are great to just figure out how things can look, but there's also the old analyst wisdom, garbage in, garbage out. So you could make the model say whatever you want. You just got to tweak the right numbers a bit.

1:22:41Daniel Mahncke:I feel like this ultimately very much comes down to just trusting the management team and their ability to repeat the successes of previous investment cycles. And it seems that one of PDD's strengths has been to come into a very competitive market environment, wait for others' mistakes, and then try and disrupt the incumbents. And so it's a very opportunistic approach. And my issue here, though, in terms of adding Penduo Duo to our intrinsic value portfolio, is that I'm just not sure I totally understand the business with there being so little disclosure. And also, given the reality that I've never used Teemu, and I don't think I have a target demographic for it, but I've always been a little turned off by it and I just don't see ads for it anymore.

1:23:22Daniel Mahncke:So it does feel like it has fallen off dramatically in popularity. And actually, I looked up the Google trend search history for Teemu as a keyword in the US, and it looks like it's down by about half from its peak in 2023. Unfortunately, the drop-off globally isn't quite as bad, but still the point remains. And so it's not a very inspiring setup, honestly, in terms of having them trying to pivot their business from sort of a place of weakness, honestly. But it does seem like they have ample resources and management talent to reinvent themselves. And so I could go either way on this, really, Daniel.

1:24:00Daniel Mahncke:I feel like I want to defer to your judgment, because at 30 ,000 feet, this thing just looks absurdly cheap. I mean, three times forward operating profits is not a multiple you see for any company out there. And it has some truly world-class investors in it, some investors who I've really looked up to for a long time. And if you were really excited about buying it, I could probably be on board with continuing to dive deeper and making a starter position. But if you're not really excited about it, I'm just happy to pass because it is such a huge leap outside of my comfort zone.

1:24:37Shawn O’Malley:I would have been very surprised if your conclusion would have been anything else. I mean, I was actually surprised that you just wanted this company to be covered. One thing I got to say on the Tmoo data point, I kind of wonder that if you already have a billion customers, how many people still need to Google for the app? I assume most people actually already have the app. So probably it's sort of about what's the habit of people actually spending there and how much more ads do you actually need to get new people onto the website. But that's sort of just some speculation on my end. I generally feel that, especially between the two of us, but maybe even in our community, I sort of have the reputation of enjoying investing in China because of my Alibaba investment in 2022.

1:25:16Shawn O’Malley:And obviously also like the business model of companies like Mercado Libre, for example, but PDD is a fundamentally different company. And it feels like the world is also a different place in 2026. So I don't know there's much more conflict than half a decade ago, both militarily, but also economically. But even if we just stick to the business side of things, I don't like retail, as you know, and I don't view Amazon or Malley actually as retail businesses, but PDD is a retail business. And it is one with a declining growth rate, pretty much no information about why exactly that is. And when I combine all of that, and the fact that I consider it to be unlikely that investors will see the cash on the balance sheet anytime soon, I can, you know, with a good conscience, at least say that this is in my circle of competence.

1:26:03Shawn O’Malley:I have to say, though, that I really enjoyed discussing this one with especially our Mastermind members, because for this episode, I sort of always thought about these e-commerce companies with, you know, this letter framework that I mentioned in a lot of these episodes. But when it comes to Chinese companies or the Chinese market in general, they're just different. I mean, the better framework here is to actually think of e-commerce in niches. So, you know, there's content e-commerce like Douyin, there's lower tier city e-commerce like PDD, and then there's high quality e-commerce with, you know, Alibaba and JD as the major players.

1:26:35Shawn O’Malley:And it's just a much more fragmented place. And it's sort of interesting to see how that dynamic totally shifts in a different market and especially just how far that business model has come due to the competition in that market. But that's a long way of saying, I enjoy doing the research, but I don't feel comfortable adding it to our portfolio here. And I could certainly see, and this is our usual cop-out, this is much higher in a couple of years because it's so extremely cheap, but it's just not the sort of business that I want to own, especially basically not knowing a lot about the company's actual financials beyond what the headline numbers tell us.

1:27:10Shawn O’Malley:All right, quite a long episode today. And I think it's appropriate to close today's episode with a quote by PDD's founder, Colin Huang. On PDD's mission, he once said, PDD is not about letting people in Shanghai feel like they are living a Parisian life, but making sure that people in Anhoy have kitchen paper and fresh fruits. And I think that's saying a lot about him and also about the company that he built. And for whatever reason, I mean, there's not much publicly available for him. I do sort of believe that he means this and actually has the sort of vision for his company. And with that, have a great day and see you all in the next episode.

1:28:11Daniel Mahncke:mintmobile.com slash switch.

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