Comprehensive Analysis of Pinduoduo and Alibaba Amid Changing Tariff Policies

Broker: UOB Kay Hian

Date of Report: 13 February 2025

Overview of the Report

The latest report from UOB Kay Hian provides an in-depth analysis of two major Chinese e-commerce companies, Pinduoduo (PDD) and Alibaba Group (9988 HK), in the context of evolving US-China trade policies. The report examines the impact of recent tariff developments, market dynamics, and strategic responses by these companies. It also offers actionable recommendations for investors based on detailed sensitivity and valuation analyses.

Sector Update

The report highlights the significant implications of the US government’s evolving stance on the de minimis tax exemption for Chinese imports. Key developments include a temporary suspension of parcels from China by the US Postal Service and the introduction of a 10% tariff on Chinese goods. Despite these challenges, a new executive order signed on 7 February 2025 reinstated the de minimis tax exemption, providing temporary relief to Chinese e-commerce retailers like Pinduoduo’s Temu platform.

Pinduoduo (PDD): Strategic Resilience Amid Tariff Challenges

Current Position and Market Dynamics

Pinduoduo continues to navigate geopolitical uncertainties with strategic adjustments to its business model. The report acknowledges the potential tariff pressures on Temu, Pinduoduo’s fast-growing cross-border e-commerce platform. The company is mitigating these challenges through shifts in supply chain strategies and geographical diversification.

Sensitivity Analysis

The introduction of a 10% tariff, along with the removal of the de minimis exemption, results in an aggregate 36% cost increase for Temu’s fully entrusted products. This cost is expected to be partially absorbed by merchants and the company, with end consumers shouldering 60-70% of the gross merchandise value (GMV). The report estimates that this could lead to a 15% increase in average order value (AOV). However, the demand elasticity of -8% to 8% implies manageable impacts, with a projected 0.3-5.7% decline in 2025 earnings per share (EPS) and a 0.1-1.5% dip in 2025 revenue.

Price Competitiveness

Despite narrowing price advantages due to additional tariffs, Temu remains competitive at 58% of US offline retail pricing, compared to 44% previously. This is attributed to structurally lower operating costs and fewer intermediaries between manufacturers and end consumers. The report also highlights Temu’s ongoing efforts to diversify its merchant base beyond China.

Strategic Initiatives

• Shift to Semi-Entrusted Model: Temu is transitioning from a fully entrusted model to a semi-entrusted model, which relies more on sea freight and traditional trade channels. By September 2024, this model accounted for 25% of Temu’s US GMV.
• Geographical Diversification: Temu has significantly reduced its reliance on the US market, with its share of global monthly active users (MAU) dropping from 100% at launch to 15% by December 2024. The company has expanded its semi-entrusted model to 19 countries and is gaining traction in South America and the Middle East.
• South Korea Expansion: Temu recently entered the South Korean market, amassing 8.23 million active users by January 2025, placing it third after Coupang and AliExpress. The company is also establishing an integrated logistics system to support its growth in this market.

Valuation and Recommendation

UOB Kay Hian maintains a BUY rating for Pinduoduo with a revised target price of US\$155.00, down from a previous valuation. The target price implies a 12x 2025 price-to-earnings (PE) ratio, supported by an 18% EPS compound annual growth rate (CAGR) from 2025 to 2028. Pinduoduo is currently trading at 8.4x 2025F PE, reflecting its strong domestic business profit base and manageable risks from tariff pressures.

Alibaba Group (9988 HK): Stable Growth with Minimal US Exposure

Current Market Position

Alibaba’s international business exhibits minimal exposure to the US market, insulating it from direct impacts of recent tariff changes. The company’s diversified operations and strong domestic presence provide a stable growth trajectory, even amid geopolitical uncertainties.

Valuation and Recommendation

The report reiterates a BUY rating for Alibaba with a target price of HK\$135.00 (US\$135.00), based on a sum-of-the-parts (SOTP) valuation rolled forward to FY26. This valuation implies a 13.5x FY26F PE, supported by an 11% EPS CAGR from FY26 to FY29. Alibaba currently trades at 11x FY26F PE, which is one standard deviation below its historical mean of 24x.

Key Catalysts

• Fast overseas expansion.
• Increased consumer mindshare due to higher purchase frequency and value-for-money products.
• Strong sales growth in agricultural products, driven by the online grocery category.
• Improved monetization rates.

Risks

• Geopolitical risks from local retailer protection regulations.
• Potential increases in logistics costs and heavy investments impacting margins.
• Intensified competition in the e-commerce sector.
• Heightened regulatory scrutiny by the US government.

Conclusion

Both Pinduoduo and Alibaba demonstrate resilience and strategic adaptability amid evolving regulatory and geopolitical landscapes. While Pinduoduo faces more direct challenges due to its reliance on the US market through Temu, its robust domestic business and strategic initiatives provide a buffer. Meanwhile, Alibaba’s minimal exposure to US risks and strong fundamentals make it a compelling investment option.

For investors seeking opportunities in the Chinese e-commerce sector, UOB Kay Hian’s recommendations of BUY ratings for both Pinduoduo and Alibaba present attractive prospects, supported by detailed valuation analyses and growth forecasts.