- Immediate Stock Pressure: PDD Holdings’ stock is expected to face short-term pressure as US sales amount on its Temu platform may decrease.
- Strategic Adjustments: The company has largely promoted a semi-custody model and asked its suppliers to rent warehouses in US.
- Long-term Prospects: PDD Holdings has accelerated expansion in European and Middle Eastern markets.
PDD Holdings (NASDAQ: PDD) faces a challenge following the US cancellation of the de minimis tariff exemption policy, which previously allowed small parcels valued under US$800 to be imported tax-free from China, Canada, and Mexico. This policy change, effective February 4, 2025, imposes additional tariffs of 10% on Chinese goods and 25% on Canadian and Mexican goods, with 10% for some energy products.
PDD Holdings is a multinational commerce group that owns and operates a portfolio of businesses, including the popular e-commerce platforms Pinduoduo and Temu. The company focuses on bringing businesses and people into the digital economy, offering a wide range of products from agricultural produce to electronics.
Impact on PDD Holdings
- Short-term Pressure: PDD Holdings’ stock has already seen a decline on February 5, 2025. The removal of the de minimis exemption means higher costs for importing goods, which could reduce Temu’s competitive edge and profitability. It’s worth noting that PDD’s major US competitor, Amazon (NASDAQ:AMZN), which also uses Chinese suppliers, will be similarly affected by the new tax policy.
- Revenue and Margin Outlook: In recent quarters, PDD’s revenue growth has been strong, but the company faces challenges with increased costs like subsidies to merchants and high industry competition. Management has indicated that margins will be under pressure due to these factors. However, we expect the real impact from the new tax policy should be manageable by PDD in the medium term.
PDD Holdings’ Coping Strategies
- Strategic Adjustments: PDD has promoted a semi-custody model, asking suppliers to rent their own warehouses in the US to avoid the de minimis tax issue in early 2024. This strategy aims to mitigate the impact of the new tariffs by reducing reliance on direct imports.
- Global Expansion: PDD is accelerating its expansion in European and Middle Eastern markets to diversify its revenue streams and reduce dependence on the US market.
Outlook on PDD Holdings
- Management’s View: Management remains positive on PDD’s global business. Despite facing external challenges, PDD is committed to improving its international service standards and compliance levels. The company will continue to strengthen its supply chain capabilities and optimize its service levels to meet the needs of the global market.
- Our View: Given Temu’s meaningful gross merchandise value (GMV) contribution from the US, we expect PDD will lower its US contribution to its global GMV to 30-35% in FY2024, down from over 50% in FY2023. We forecast Temu’s GMV to exceed US$40-45 billion this year, achieving revenue of RMB 93.7-105.4 billion. Therefore, we expect Temu’s US business should contribute circa 9-10% of PDD’s total revenue in FY2024.
Investor Recommendations
- Hold: Investors may consider holding PDD Holdings stock if they believe in the company’s long-term growth prospects and its ability to adapt to the new tariff environment.
- Monitor: Keep a close eye on PDD’s performance in the coming quarters. The company is projected to release its 4Q 2024 earnings on March 11, 2025. Look for signs of how effectively the company is implementing its coping strategies.
- Diversify: E-commerce companies that rely heavily on imports from China, Canada, and Mexico may be impacted. If investors are worried, spread your investments across different sectors and regions to reduce risk.
Conclusion
The cancellation of the de minimis tariff exemption policy is a change that will impact PDD Holdings. However, by following the company’s adaptation strategies, considering its long-term prospects, and diversifying your portfolio, you can navigate these changes and make informed investment decisions.
Disclaimer: ProsperUs Manager of Content, Hailey Chung, does not own shares of the company.
