Executive Summary / Key Takeaways

• Long-Term Vision Over Short-Term Profit: PDD Holdings is deliberately sacrificing immediate profitability for sustained, high-quality ecosystem development, evidenced by a 21% year-over-year decline in Q2 2025 operating profit despite a 7% revenue increase. This strategy, backed by the RMB 100 billion support program, aims to fortify its merchant base and supply chain.
• Global Headwinds and Strategic Adaptation: Temu, PDD's global platform, faces significant pressure from the expiration of the U.S. "de minimis" exemption and new tariffs, leading to a 58% drop in daily U.S. users in May 2025. PDD is responding by shifting to localized fulfillment and recruiting U.S. sellers, while boosting ad spending in Europe.
• Differentiated Technology and Ecosystem Strength: PDD leverages digital capabilities for social commerce, efficient supply chain management (e.g., Duo Duo Grocery covering 70% of villages), and agritech innovation. These technological differentiators enhance user engagement and merchant efficiency, creating a competitive moat in value-driven segments.
• Robust Liquidity for Sustained Investment: Despite profit fluctuations, PDD maintains a strong financial position with RMB 387.1 billion in cash, cash equivalents, and short-term investments as of June 30, 2025, providing ample capital for its ambitious long-term investment programs.

• Intensified Competition and Market Positioning: PDD operates in a fiercely competitive e-commerce landscape, contending with giants like Alibaba (BABA), JD.com (JD), and Amazon (AMZN). Its third-party marketplace model presents unique challenges in policy incentive pass-through, necessitating strategic investments to maintain merchant competitiveness and market share.

The Genesis of a Commerce Giant and its Evolving Strategy

PDD Holdings, incorporated in 2015, began its journey with the Pinduoduo platform, pioneering a social commerce model that quickly resonated with value-conscious consumers. Its roots in agriculture were deepened with the 2020 launch of Duo Duo Grocery, an initiative designed to overcome traditional e-commerce hurdles in fresh produce delivery and minimize spoilage. This business has since expanded significantly, now covering 70% of villages nationwide, effectively addressing last-mile delivery challenges and connecting local farmers with a broader consumer base. The company's global ambitions materialized with the 2022 launch of Temu in the U.S., a platform that rapidly gained traction. In February 2023, Pinduoduo Inc. rebranded to PDD Holdings Inc., signaling its broader vision as a multinational commerce group.

The latter half of 2024 marked a pivotal strategic shift towards "high-quality development." This strategy, which continues to define PDD's trajectory, involves extending efforts from platform operations to a broader ecosystem, encompassing both supply and demand sides. It prioritizes long-term value creation over short-term financial gains, a commitment that has become increasingly evident in recent financial outcomes.

Technological Edge and Supply Chain Innovation

PDD's competitive advantage is deeply rooted in its technological differentiation, which underpins its unique business model and operational efficiency. The company leverages advanced digital capabilities to foster its social commerce ecosystem, enabling group buying and interactive shopping experiences that drive user engagement and stickiness. This platform intelligence allows for a more direct and efficient connection between manufacturers and consumers, effectively reducing layers in the supply chain and fostering cost leadership.

In the agricultural sector, PDD's commitment to agritech is particularly notable. Its digital system for agriculture product operations enables automation across harvesting, listing, pricing, logistics, after-sales services, and traceability. This addresses critical industry pain points such as unclear pricing and high spoilage rates, driving the transition from experience-based to data-driven operations. The Smart Agriculture Competition, now in its fifth iteration, showcases cutting-edge technologies in AI farming and hydroponics, with past competitions yielding breakthroughs in crop yield, efficiency, and energy consumption. For investors, these technological advancements contribute to PDD's competitive moat by enhancing operational efficiency, reducing costs, and improving product quality, which in turn supports its value proposition and long-term growth strategy. The ability to streamline agricultural supply chains and empower farmers, as seen in Zhaotong, Yunnan, where local potatoes were transformed into nationally popular flavored chips, directly translates into higher margins for producers and a richer, more diverse product selection for consumers.

Strategic Initiatives and Operational Impact

At the core of PDD's high-quality development strategy is the "RMB 100 billion support program," launched in early 2025. This ambitious initiative commits substantial resources to bolster the merchant ecosystem, encompassing fee reductions, logistics support, and comprehensive assistance for new quality merchants. The "RMB 10 billion fee reduction initiative" has already delivered significant savings to millions of merchants, freeing up capital for product innovation and technology upgrades. The logistics support initiative, for instance, eliminated transshipment fees for orders to remote regions in Western China, resulting in a remarkable 40% growth in order numbers from these areas in Q2 2025 alone. This not only expands market reach for merchants but also enriches product offerings for underserved communities.

The "Duo Duo Premium Produce Program" exemplifies PDD's deep engagement with the supply side, helping farmers improve quality control and move into higher-value food processing. In Zhaotong, Yunnan, this program directly increased income for 11,000 local farmers by transforming raw produce into branded products. Furthermore, the "New Quality Merchant Support Program" empowers businesses with strong product and technology innovation capabilities, guiding them from traditional OEM models to user-oriented, brand-driven approaches. To ensure merchant welfare, PDD established the Merchant Rights Protection Committee in January 2025, formalizing communication channels and introducing measures like abnormal order alerts and low-price risk warnings. On the demand side, PDD has rolled out "RMB 10 billion consumer coupon" programs and "Super Double Discount" events, driving record sales across various categories during shopping festivals, with the June 18 festival alone seeing over 3.76 million orders in a single day. These initiatives underscore PDD's commitment to fostering a robust, mutually beneficial ecosystem.

Financial Performance and Liquidity: A Deliberate Trade-off

PDD's financial performance in Q2 2025 reflects the direct impact of its strategic reinvestment. Total revenues increased by 7% year-over-year to RMB 103,984.80 million (US$14,515.70 million), a moderation from previous quarters attributed to intensified competition and efforts to enhance merchant efficiencies. This growth was primarily driven by a 13% increase in online marketing services revenue to RMB 55,703.20 million and a modest 1% rise in transaction services revenue to RMB 48,281.60 million.

However, profitability saw a notable decline, a conscious outcome of the company's long-term strategy. Operating profit in Q2 2025 decreased by 21% year-over-year to RMB 25,792.90 million (US$3,600.60 million), while non-GAAP operating profit also fell by 21%. Net income attributable to ordinary shareholders decreased by 4% to RMB 30,753.50 million (US$4,293.00 million). This profit contraction is directly linked to a 36% increase in total costs of revenues, driven by higher fulfillment fees, bandwidth, server costs, and payment processing fees, as well as a 5% rise in total operating expenses, primarily from increased sales and marketing. The company's TTM Gross Profit Margin stands at 57.45%, with a Net Profit Margin of 23.91%, indicating underlying operational efficiency despite the current investment phase.

Despite these short-term profit pressures, PDD maintains a formidable liquidity position. Net cash generated from operating activities in Q2 2025 was RMB 21,641.70 million (US$3,021.10 million). As of June 30, 2025, the company held RMB 387.1 billion (US$54.0 billion) in cash, cash equivalents, and short-term investments, a substantial increase from RMB 331.6 billion at the end of 2024. This robust cash reserve provides PDD with significant financial flexibility to continue its long-term strategic investments and weather market uncertainties.

Competitive Landscape and Global Challenges

PDD operates in a fiercely competitive global e-commerce market, contending with established giants like Alibaba Group, JD.com Inc., and Amazon.com Inc. PDD's core strength lies in its cost leadership and agile, social commerce model, which allows it to penetrate value-driven segments effectively. Its TTM P/E ratio of 12.66 compares favorably to Amazon's 34.62 and Alibaba's 18.39, suggesting a potentially undervalued position relative to its growth prospects, though it is higher than JD.com's 8.32. PDD's ability to leverage network effects through community-driven shopping enhances customer loyalty and viral growth, a differentiator against Alibaba's broader ecosystem and JD.com's direct sales model.

However, PDD's third-party marketplace model presents inherent limitations in benefiting from certain macro policy incentives, such as national subsidy programs, compared to first-party platforms. This can place its merchants at a disadvantage in price competitiveness, forcing PDD to incur higher costs to maintain parity. The global business, particularly Temu, faces significant external policy headwinds. The expiration of the U.S. "de minimis" exemption in May 2025, which previously allowed tariff-free shipments under $800, has profoundly impacted Temu's operations. This "radical change in external policy environment" has led to a 58% reduction in Temu's daily U.S. users in May 2025 and a 77% drop in its paid ad traffic in the U.S.

In response, Temu has strategically adapted by ceasing direct shipments from China to the U.S., promoting "local" products from U.S. warehouses, and actively recruiting U.S.-based sellers. This shift, while necessary, may erode its previous advantage of offering products at "a third of the prices on Amazon for comparable goods." Concurrently, PDD has increased ad spending in Europe, with Temu's spending up 40% in France and 20% in the UK in April, signaling a geographic pivot. While these challenges are substantial, PDD's agility and commitment to localized operations are critical for its global resilience.

Outlook and Risks

PDD's management consistently emphasizes a long-term outlook, explicitly stating that current profit levels are not sustainable and that profitability will likely fluctuate in the coming quarters due to sustained investments. This is a deliberate trade-off, prioritizing ecosystem strengthening and high-quality growth over immediate financial gains. The company's strategic roadmap includes continued investment in supply chain, service, and compliance capabilities for its global business, alongside deepening the RMB 100 billion support program domestically. Analyst consensus estimates for full-year 2025 project an EPS decline of 23.14% to $8.7, with revenue growing 8.28% to $59.22 billion, followed by an anticipated EPS rebound of 30% in fiscal year 2026 to $11.42.

Key risks to this outlook include the intensifying competition across all e-commerce segments, which could further pressure revenue growth and margins. The evolving external policy environment, particularly tariffs and trade relations, poses a significant and ongoing challenge for Temu's global expansion. Furthermore, management has acknowledged internal limitations in capabilities and operational experience, which could hinder their ability to fully capitalize on macroeconomic opportunities and lead to higher operational costs. However, PDD's substantial cash reserves and its unwavering commitment to its high-quality development strategy, underpinned by its technological advantages in social commerce and supply chain optimization, position it to weather these challenges and potentially emerge stronger.

Conclusion

PDD Holdings stands at a pivotal juncture, deliberately trading short-term financial gains for the long-term health and resilience of its e-commerce ecosystem. The company's Q2 2025 results, characterized by moderated revenue growth and a significant decline in operating profit, are a direct consequence of its substantial investments in the RMB 100 billion support program and other strategic initiatives. This commitment to merchants, supply chain innovation, and consumer experience, particularly through its differentiated digital capabilities and agritech advancements, forms the bedrock of its competitive strategy.

While global headwinds, notably the impact of U.S. tariffs on Temu, present considerable challenges, PDD's strategic adaptation and robust liquidity position provide a strong foundation. The company's long-term vision, focused on high-quality development and ecosystem strength, suggests that current profit fluctuations are part of a calculated strategy to build a more sustainable and dominant e-commerce presence. For discerning investors, PDD represents a compelling, albeit patient, investment thesis in a company strategically reinvesting its considerable resources to solidify its market position and drive future growth, leveraging its technological leadership to create enduring value amidst a dynamic competitive landscape.