5 July 2024

Contents

• Contents
• Business Overview
• Business Quality & Cost of Capital
• Why do we like the business?
• Key Risks
• Does this mean we don’t like Alibaba anymore?
• Valuation

Business Overview

Pinduoduo was founded in 2015 by Colin Huang (see here for more on Huang and the history). Today, it is one of the largest eCommerce platforms in China with US$35b in revenue, US$553B in gross merchandise value “GMV” (circa 20% domestic online market share), and 700m+ monthly active users (”MAUs”).

The business was first introduced to us in 2018 by a large Chinese asset management firm, who was an influential shareholder while the business was still private. We have been following the company since then, not least because of our position in Alibaba.

Like most eCommerce platforms, it is a two-sided network of consumers and merchants. The core value proposition for consumers is “value for money”, which usually means lower price but also lower quality. The business has been ruthless, both culturally and operationally, in its focus on meeting consumer needs. Increasingly, the “merchants” have included manufacturers as the company seeks to backward-integrate supply and lower prices for consumers.

“People living in the five rings of Beijing wouldn’t understand our purpose. The new consumer economy isn’t about giving Shanghainese the life of Parisians. It’s about providing paper towels and good fruit to people in Anhui province.” — Colin Huang

Pinduoduo has maintained a very capital light model (e.g. only US$0.5b in invested capital for 2024 and limited capex). This is because the primary business outsources the more capital-intensive areas. The newer business lines are slightly more capital intensive given Pinduoduo manages parts of the delivery and warehousing. Huang in his 2021 resignation letter said, “Pinduoduo has transformed from a pure asset-light third-party model to becoming more asset-heavy, with new investments in warehouses, agriculture-focused logistics, and upstream sources of agriculture products.” However, this has had a limited impact overall for the business to date.

Historically, we were sceptical of Pinduoduo’s market entry with a negative view on the sustainability of its lower prices and aggressive marketing spend to buy growth. We were wrong. As it turns out, the company had exceptional execution and it is now a fully scaled business with similar incumbent advantages to Taobao. It is a remarkable feat as prior to its rise, the strength of the incumbent platforms should have enabled them to rebuff Pinduoduo’s entry. Huang and the management team saw an under-served segment of the Chinese population and a value proposition that wasn’t being offered adequately by the incumbents. Pinduoduo also pioneered the team-purchase model, which enabled greater discounts for group orders and incentivised word-of-mouth customer acquisition, enhanced by smart use of social acquisition channels such as WeChat (at the time unavailable to Alibaba given competitive exclusion from Tencent). Meanwhile, Alibaba had poor execution but was also less able to compete directly without destroying its own margins and cash flow (discussed more below). China’s economic hardship over the last 3 years also had a role to play, as it meant a shift towards lower-priced items just as Pinduoduo came to scale.

Pinduoduo has expanded its grocery business with Duo Duo Maicai (Duo Duo Grocery in English) and globally with it’s cross-border Temu business. Duo Duo Grocery and Temu have entrusted models where merchants are charged a higher fee with varying elements of logistics and warehousing being handled by Pinduoduo. Duo Duo Grocery is often talked about by the investment community as a distinct business. However, despite the obvious supply chain differences and perishable nature of the product, management considers it very much part of the core platform, just an extension in product categories. While the team-purchase model has a role to play for Duo Duo Grocery, according to the company, local distribution points are already economically feasible without team-purchases, given the scale of the platform. A key advantage of grocery is the purchase frequency of the category; it brings consumers back to the platform more often.

4Q 2020 Earnings Call:“[Duo Duo Grocery] is not a typical community group purchase because unlike group purchases, where neighbors or group leaders or store owners actually aggregate a group and earn a commission for organizing that purchase, with an active buyer base of 788 million users, Duo Duo Grocery does not actually rely on community leaders to attract users, and users can just place order independently by themselves through our app. So this is the reason why we are approaching Duo Duo Grocery as an integrated extension of our e-commerce platform. So the economics accordingly and the type of roles that these group leaders play are quite different. Second thing I would say is we introduced Duo Duo Grocery to cater to that rising demand that consumers have for convenient, affordable grocery, and it is now available in 300 cities across China. A key part of this offering is really the agriculture-focused logistics infrastructure that we are working to build. And the idea here is to really reduce waste to lower costs and to speed up delivery of agricultural products. To that end, we are leaning on technology to achieve better quality control, better sourcing, better forecasting the demand, which can all reduce wastage and improve supply chain efficiency. We are working with third-party providers now to make strategic investment where needed to accelerate the build-out of the necessary infrastructure so we can achieve less than 24-hour turnaround time for the orders. We believe that has proven out in the last 5.5 years as long as we remain laser-focused on anticipating and meeting the users' needs, users, they will continue to vote for us with their wallets.”

Temu is different to the core business in that the consumers are international. In fact, given the geopolitical perceptions of a large Chinese company operating within the US, Temu tries to distance its association with its parent company, and even advertises itself as a Boston-based company. The international element creates complexity because the company needs to achieve positive contribution margins despite the higher logistics costs on low average order values (”AOVs”). To help merchants, Pinduoduo manages logistics from its Chinese warehouses to the end consumer. Despite these differences, the playbook is the same. They are spending aggressively to acquire customers (both brand and direct response advertising…to our recent benefit in our Meta position) and are subsidising certain products to maintain a significant price gap to Amazon and other competitors. Deliveries take longer than Amazon but, if the customer is willing to wait, the value is significant. Many items fit into the lower price but lower quality bucket but this is also the case for many of the items on Amazon. In a similar vein to our scepticism of Pinduoduo back in 2018, Temu faces criticism over the sustainability of this strategy. However, if the acquired customers become repeat customers, then the high customer acquisition spending is reasonable. We discuss Temu more below.

Pinduoduo’s main revenue stream is from auction-based performance advertising that merchants purchase to compete for traffic on the platform. Increasingly, the automation of managing this process means that merchants can reduce operational costs elsewhere, which enhances overall merchant ROI. A smaller piece of revenue is transaction services. These comprise merchant commission revenue (effectively a pass through of payment network costs with a mark-up) as well as other fulfilment services that Pinduoduo provides (e.g. delivery and warehousing), particularly for Duo Duo Grocery and Temu.

Business Quality & Cost of Capital

Why do we like the business?

Our strategy isn’t to predict the future with great accuracy…an impossible task. Rather, we focus on identifying characteristics of companies that give them a better chance of success no matter what the future holds. This doesn’t mean we don’t consider how the future may unfold, only that we believe it is hard for us (or anyone for that matter) to predict the future with great precision. In the context of Chinese eCommerce, this is certainly the case. There are several dominant platforms including those coming from the social media and short-form entertainment space like Douyin (domestic TikTok) and Kuaishou. The macro-economy is hurting from a cyclical perspective and the population is expected to marginally decline over the next decade. There are several paths that could unfold. So what do we see in Pinduoduo that gives it an advantage in this uncertain future?

Dominant platform offering the “low price, value for money” customer value proposition

Pinduoduo is now a scale incumbent with 700m+ MAUs and ~20% share of domestic online GMV. This is a difficult-to-replicate two-sided network (consumers and merchants/manufacturers) with economies of scale in S&M and R&D spending, as well as a data advantage to drive things like product recommendations (to consumers but also to manufacturers) and merchant advertising tools. There is strong brand recognition among consumers that Pinduoduo is the “low price, value for money” platform. Pinduoduo has also worked to integrate manufacturers into the platform, which helps sustain price competitiveness. This makes it very hard for new entrants to compete “head on” with a similar value proposition.

We also need to consider whether the status quo provides for a healthy platform ecosystem. On the consumer side, it seems clear there is real consumer surplus. There are real discounts versus similar product categories. This can also be seen in the data such as time spent on the platform, growing annual spend per user, and increasing order frequency (see below).

The sustainability of the merchant ecosystem is less obvious. We know from the longer-term experience of Alibaba and Amazon that the leading platforms are highly attractive for merchants. They help them reach a large number of end consumers with a superior ROI to inferior platforms and other offline channels. We can also see this in the merchant unit economics (see below). Despite the low pricing, merchants have acceptable margins.

Pinduoduo has also executed well in providing automated platform tools to help merchants manage the selling and advertising process, which reduces back-end operational costs. While this is an enduring advantage against new entrants, we do not think this is true relative to the other large platforms. They are all investing heavily in automated merchant tools. Examples include automated allocation of marketing budget for a targeted ROI, automated selection of keywords, and automated content generation with gen-AI. The latter is better suited to lower value products (at least while the AI quality is limited). The higher-value branded merchants we spoke with were not interested in automated gen-AI content generation — their brand image is so important that they would not trust gen-AI…yet.

Alibaba aided Pinduoduo by degrading the Taobao merchant value proposition over time. As higher-value products were sold through Tmall, with higher associated platform marketing spend, Alibaba was able to boost its profits by directing more traffic from Taobao to Tmall. That is, they did not create an even playing field for traffic acquisition spending between the two. Our channel checks indicated that this left merchants frustrated. Alibaba has (far too late) realised that this undermines the health of the whole ecosystem and is working to rectify this with its “Return to Taobao” strategy. Pinduoduo also plays this game but with a difference — they offer branded merchants free traffic but only if they discount their prices.

Pinduoduo’s manufacturer-to-consumer element of the platform provides greater potential for increased consumer and supplier surplus. It also provides factories with an avenue to sell incremental product by utilising excess line capacity, enhancing their overall asset utilisation. The added volume may also create further scale efficiencies in production. For example, one of our issues when we first invested in Alibaba was that while Taobao has great scale, the merchants themselves do not and so there is no optimisation in production. The manufacturer-to-consumer model makes sense in some categories but less so in others.

Longer-term, producers and distributors of commodity-like products (like those sold on Pinduoduo) should only earn cost-of-capital level returns. Competition among merchants/manufacturers, whether offline or online will always be fierce. As such, with think any value surplus created in the value-chain will eventually flow to the end consumer and the platform itself through rising advertising spending. Pinduoduo’s marketing pitch is that they are helping the suppliers/farmers but our view is that without product differentiation or brand recognition, competition will erode any shorter-term gains made by the manufacturers. In contrast, branded products should be able to sustainably capture some of the value surplus.

Pinduoduo also has some negative parts to their merchant value proposition. Their ruthless focus on the consumer experience means that they have very harsh policies for returns as well as fines for order mistakes. Further, the ranking algorithm isn’t just driven by the level of advertising spend. Lower prices and consumer reviews are critical. This incentivizes strong price competition between suppliers and will therefore limits merchant economics.

Does Pinduoduo, as a now dominant incumbent, face the same new-entrant risk that Alibaba did? Pinduoduo’s rise has naturally called into question the business quality of the eCommerce platform business model. It also begs the question, if Pinduoduo was able to establish market entry with powerful incumbents, then what is stopping a new entrant from doing the same to Pinduoduo?

The reality is that no business is infallible, no matter the quality. As we discuss in our business quality framework, network effect business models have some key vulnerabilities. First, business models that don’t require the network could compete (e.g. a first party retailer…think Amazon vs eBay). Second, an alternate network may emerge more easily if there are users or a value proposition not being served adequately by the incumbents. Third, the incumbents could just be mismanaged. The first did not apply for Pinduoduo but the second and third did. A new entrant would likely need to find another under-served part of the market.

Business model advantage vis-a-vis other incumbent platforms

Alibaba’s response to Pinduoduo’s rise was disappointing. While there may have been some poor management decisions, Alibaba was stuck with its existing business model and management structure. First, the higher order values (particularly on Tmall) sustained higher advertising spending, and Alibaba supported this with favourable traffic allocation. Adjusting the algorithm to increase the weight on price competitiveness (a la Pinduoduo) would reduce demand for ad spending and hurt the revenue and margin on Alibaba’s core business. Second, we think Alibaba was slower to adopt the manufacturer-to-consumer model in its domestic business because of the disruptive impact this would have on 1688.com, its domestic wholesale marketplace. This was confirmed by former employees of Alibaba. However, Alibaba is addressing this with its “Return to Taobao” strategy. These first two issues are examples of counter-positioning[1]. Finally, Alibaba has become a bloated organisation. Various former employees complained of too many mid-level managers, too much competition for shared tech resources, and too many hoops to jump through to execute on new things. In contrast, Pinduoduo is much leaner and has an aggressively entrepreneurial culture. This makes Alibaba much slower to adapt and change. Alibaba has been responding by reducing headcount, which may help but we think this advantage is a hard-to-replicate cultural edge for Pinduoduo.

Attractive growth profile with optionality

China already has a high eCommerce penetration rate (circa 35% in 2023) with various categories having reached a mature penetration rate (e.g. apparel at circa 50% in 2023). Other categories, such as grocery, have a lower penetration rate (circa 20% in 2023). Based on its relative value proposition, we still think eCommerce can outgrow broader retail sales by a small margin. Given Pinduoduo’s positioning as the “low price, value for money” platform, and its exposure to categories like grocery, it should have a continued growth premium to other online platforms. Our base case has Pinduoduo’s domestic GMV (ex Temu and ex Duo Duo Grocery) growing at a low-teens CAGR over the next 5 years versus mid-single digits for broader eCommerce. This is an implied share gain from approximately 20% of online today to 30% (taken mostly from Alibaba).

There has been a consistent narrative from the investment community about the potential for Chinese eCommerce platforms to increase their take rate on GMV (commissions + advertising) given Amazon has a much higher overall take rate. This depends on the merchant’s willingness to spend higher amounts on advertising, and the platform’s ability to charge higher commissions. This is ultimately a function of the competition between platforms and their relative value propositions to merchants. Chinese eCommerce has a very different market structure to the U.S. with greater competition. Because of this, we do not think it prudent to underwrite significant take-rate expansion in our base case.

Given the capital-light business model, and the favourable payment terms from merchants and to suppliers, Pinduoduo is highly cash generative. We note that we must exclude payments from customers owed to merchants. This component is held on escrow and is not part of Pinduoduo’s operating cash flow, despite being recorded that way on its cash flow statement. To date, Pinduoduo used this high cash generation to invest aggressively in S&M to generate their growth. With the benefit of hindsight, this investment has had a good return. Going forward, there is less need to be so aggressive in the core business (at least on a % of revenue or GMV basis) given the scale and market position achieved already. The company has used its free cash flow to build Duo Duo Grocery and Temu, and potentially other ventures in the future. Duo Duo Grocery and Temu have the same playbook as the core platform…invest aggressively to acquire repeat customers while scaling the business toward positive contribution profits.

Duo Duo Grocery

As mentioned above, this really isn’t a separate business. Rather, it is an extension of the product categories. There are also benefits to the broader platform due to the frequency of purchase involved in groceries (i.e. it brings customers back to Pinduoduo more often). That said, there are some differences as Pinduoduo handles various elements of the logistics and warehousing and so it has different economics.

We think this business has a roughly 10% operating margin today (2% on a % of GMV basis), with the potential to expand profitability with further scale. We have a higher view on current profitability than the investment community on account of differences in views on how Pinduoduo records revenue for Duo Duo Grocery. The most common view is that it is fully recorded in Transaction Services, but we think it is split between Transaction Services and Marketing Services. The company is intentionally unclear on this and even former employees have different views. That is, the business earns additional revenue from marketing spend on the platform in the same manner as the core business. As a result, we have a slightly lower view on profitability of the core business.

In our base case view, we think GMV can double over the next 5 years from about RMB175b in 2023. We base this view on the value proposition, the competitive positioning Pinduoduo has in this market (which has improved as other competitors have backed away), the relative under-penetration of online in this category, and the overall large market size. We don’t think the merchant economics (see below) can support a much higher take rate so top-line growth is driven mostly by GMV growth.

The two potential areas for margin expansion are improved logistics efficiency with further scale and a reduced marketing spend as a % of revenue. We saw the latter in the broader platform over time as S&M transitioned from new customer acquisition to repeat customer marketing. For example, we think the core platform S&M spend declined as a percent of GMV by over 50% in the last 5 years. We think the operating profit can grow to RMB23b over 5-years. This represents a 29% operating margin to Pinduoduo (or ~6% on a retail equivalent basis).

Temu

There is a lot of hype around Temu — some industry experts are of the view that it will be bigger than Amazon in 5 years. We don’t think so, and certainly not on a risk-adjusted basis. Our base case has Temu growing to ~US$142b of GMV over 5 years (~51% CAGR and 2.4% global online eCommerce market share). There are a wide range of outcomes in this estimate.

Temu’s path to profitability is likely to be longer than Duo Duo Grocery given higher logistics costs and strong competition, especially if Temu wants to maintain lower pricing for consumers. Amazon has the benefit of witnessing Alibaba’s missteps and is responding with reduced commission rates in Temu’s key categories. In addition, Pinduoduo has been much more aggressive in its customer acquisition spending than it ever was for the core business. We think 25% of the S&M spending in 2023 went to Temu (15% of Temu GMV). Although aggressive, this equates to a customer acquisition cost of about US$17 (assuming 100% allocation to new customers), which compared to an expected contribution profit of around $12 per customer per year in 2024 does not seem too bad (1.4 years payback before churn). In our base case, Temu reaches a positive contribution profit per order this year but does not reach fully loaded profitability until 2027. This is driven by various things — increasing order value, lower subsidies, and scale in logistics and S&M spending. We think this requires a “ballpark” spend of US$100b gross ($12b net of revenue) including investment to date.

There are various options that could accelerate this path, such as building a warehouse network in countries where scale is achieved. This would allow Temu to utilise shipping instead of air freight to lower logistics costs (albeit with higher customs costs). Further, the required S&M spending may fall more than our base case as the platform becomes better recognised. Complicating the picture is the geopolitical risk involved. There is a very real risk that Temu is unsuccessful. We discuss this below.

Key Risks

Risk Summary

Financial & management transparency

Pinduoduo is a secretive business. While there are competitive reasons for secrecy, the level of obfuscation to investors goes beyond this rationale.

1. There is no CFO and there has been turnover in the finance function leads. A former finance lead at the company explained this as being a historic practice as the company grew more quickly than the finance and control functions, with less import placed on finance than operations. Further, the concept of budgeting was very hard given the aggressive S&M spending required to catch up with Alibaba. This individual felt strongly that the financial reporting was as accurate as possible but admitted it was very tough to forecast given the rapidly changing business. The rationale given for obscuring some metrics was that Pinduoduo was following Alibaba’s lead (e.g. no longer reporting GMV and user numbers). Overall, while we appreciate the need for competitive secrecy (e.g. the reporting of Temu revenue etc), the financial governance is not ideal.
2. The company confuses the market as to who is running the business. While there are many things to like about the still influential founder’s background and journey (see here), various news articles and other investors have raised the question of who is actually running the business. We tried to verify this ourselves, and our interviews with former employees agreed with prior accounts that Gu Pingping is indeed the effective CEO of the business today, and that co-CEO Chen Lei has more of an external facing role with a focus on Temu. Co-CEO Jiazhen Zhao is credited by the company with significant involvement in the success of Duo Duo Grocery and is more involved on domestic operations. Gu Pingping (”Abu”) was (according to one former employee) a classmate of Huang and is credited by former employees in having created Temu. The rationale we have heard is that Abu would prefer to remain in the background given some of the government issues previously faced by the Alibaba leadership.

In the company’s own words: “Jiazhen concentrates more on supply chain management and China operations. While my [Chen Lei’s] focus is more on globalization. Jiazhen is a founding member of our company. He led the team to launch and expand our total grocery business and also led our supply chain efforts. Jiazhen and I have been working closely together for over a decade. We have established deep trust in each other. His new leadership role shows that our team is full of vitality and our next generation of leaders are ready to take on more changes.”

We have conflicting reports about Huang. Some have indicated that he is still heavily involved, while others have pointed to him being focused on a PhD in Colorado. When Huang first left the business, an influential shareholder indicated that it was because Huang recognised he was no longer the right person to lead the business. This view at least fits with Huang’s public statement in his 2021 investor letter. We are impressed with management’s execution over the last 5 years but this makes it harder to evaluate specific individuals.

Alignment is also hard to evaluate post the departure of Huang. The remaining management combined have 1.2% direct ownership and 7% via the PDD Partnership. Exactly who benefits from the PDD partnership is unclear.

Extreme elements to culture

Our interviews with former employees confirmed some of the news reports we had read about the “secrecy” culture within the company. They corroborated that it is common not to know the names of those outside one’s immediate team, that only the top management have visibility across the full business, and that the company pursues former employees aggressively with non-compete agreements.

Domestic competition

Incumbent firms, in particular Alibaba, are responding aggressively to Pinduoduo. Some of Pinduoduo’s advantages will be competed away relatively quickly (e.g. Pinduoduo’s automation in advertising tools). Others, like Pinduoduo’s counter-positioning advantages may take time, but we do think the Alibaba management team is pivoting, so this too has a limited lifespan. In addition, the strong competitive environment leads us to be less optimistic than others about the prospect for expanding take rates.

Temu related risks

• Customs charges. The risk most discussed (which usually means the risk most priced in) is that Temu loses the customs advantage on small value packages. Tariffs vary by product category (typical range is 5-40% of product cost…not end price). For personal items under US$800, tariffs are avoided. The reason for the de minimis value exemption is a trade-off between the revenue generated by the government versus the administrative burden. Under the status quo, the removal of the exemption should be manageable because there is room to raise prices and cover the additional cost (e.g. a 20% tariff equates to about 15-18% of price which is less than the typical discount). That said, it would have two critical impacts. First, a reduced discount could cause growth to slow. Second, given a narrowing of the discount is already an important part of reaching unit economic profitability, the enduring discount level is reduced unless Pinduoduo can establish a lower cost supply chain (e.g. shipping instead of air freight with domestic warehousing etc).
• Outright ban. A more severe outcome would be an outright ban on foreign eCommerce platforms. This is not likely but not impossible given the current geopolitical situation. A key mitigant is that a lot of the competing products sold through Amazon are in any case from China. To understand the impact on value, we look at our base case and consider the impact if Temu was banned. This isn’t simply a matter of deducting Temu from the sum of the parts, we also must consider the capital wasted. In the success case, Temu adds about $72 per ADS but detracts $4 per ADS in the case it is banned. This might seem surprisingly low in the downside. Going forward we estimate ~US$95b ($62 per ADS) in required investment but only ~US$7b ($4 per ADS) net of revenue received and the associated tax offset. Given the potential value-add, we see this as a positive use of capital relative to the risks. For valuation purposes, we consider both. Even with a 50% chance of a ban, the expected value added is about $34 per ADS.

What if the revenue received is much lower so the net investment required is much higher? First, much of the spending is variable in nature. If things are not going as planned, the company can scale back investment. If the required net investment tripled, then the expected value add would reduce to about $29 per ADS.

• Competition. Amazon has the benefit of hindsight, having watched the impact Pinduoduo had on Alibaba, and is already responding with deep commission discounts within Temu’s key categories (e.g. in apparel the commission was lowered from 15% to 5%). This kind of competitive response may slow growth or increase the cost of entry for Temu. Mitigating this is the fact that market share being taken isn’t only from Amazon. As the “dollar store” of the online world, the physical discount retail stores in the US are also losing share to Temu.

Does this mean we don’t like Alibaba anymore?

Alibaba has made some critical strategic mistakes in response to Pinduoduo and, as mentioned above, Pinduoduo has a counter-positioning advantage. We think Pinduoduo, and others like Douyin, will continue to steal share from Taobao/Tmall. However, we do not think this is the end of Taobao/Tmall. They too serve a strong value proposition and continue to maintain strong user engagement. We have spoken with various merchants who sell through the platform. Most of the brands we spoke with were very negative about selling through Pinduoduo as they did not want their brand associated with a discount platform. Some had indicated that they are closely watching the space and may consider offering only clearance items through Pinduoduo. When asked why Tmall’s growth was struggling, their view was that it was more likely due to the macro-economy and some impact from Douyin, where the brands are allocating marketing budget. They maintained that Tmall is “the” platform for branded goods. While the macro-economy suffers in China, higher-priced branded retail is likely to remain depressed, but we do not see this as permanent. We underwrite a market share loss and margin reduction in Alibaba’s core business due to the impact but the price decline to date has far exceeded the value destruction.

Valuation

Our valuation summary is shown below. As of 5 July 2024 ($136), our IRRs going forward in our downside, base, and upside case are -4%, +23%, and +44% respectively [2]. If Temu has an outright ban, our IRR drops to 16% in the base case (accounting for wasted Temu investment). We compare this range to our cost of capital for a business of this quality [3] and assign a valuation score of 2 out of 3.

We discussed many of our assumptions above so won’t repeat it all here. Across our downside, base, and upside cases, we assume varying degrees of growth premium to the broader eCommerce market in China. We assume limited take rate expansion in our base case given the strong competitive environment in China and greater expansion in our upside case. This equates to mid-teens GMV growth for the Core business and high-teens growth for Duo Duo Grocery. Given the early nature of Temu, we treat it differently by giving it credit in our base case for its high expected growth and we then consider the valuation implications of failure (see above discussion). Overall, there is declining gross margin and modest operating margin expansion — Duo Duo Grocery and Temu have expanding gross margins but, they are lower margin businesses and so a greater allocation offsets the margin expansion overall. We think our assumed exit multiples are conservative at 14x NOPAT / 7%-8% FCF yields (ex interest on excess cash), given overall business quality and growth. However, we are reluctant to price in a broader recovery in China market-multiples.

Footnotes

[1] Helmer, “7 Powers: The Foundations of Business Strategy”

[2] Refer to our disclaimers, we make no guarantees of future performance, and our projections should not be relied upon

[3] Our cost of capital is the Longer-Term Cash Rate + 10% for a business quality score of 2. We also add 2% as a country risk premium. This gives us a cost of capital of 15%.