HONG KONG (Reuters Breakingviews) - Pinduoduo has a long last mile ahead of it. The unprofitable Chinese shopping app wants a valuation of some $20 billion in its upcoming initial public offering in New York. Sales are surging, but its social-networking e-commerce business model targeting consumers in far-flung areas of the People’s Republic could befuddle overseas investors.
In three short years, former Google engineer Huang Zheng has turned Pinduoduo into one of China’s hottest startups. He attracted web giant Tencent as a backer with the idea of creating an online retailer where customers unite to share their shopping experiences and push for bulk discounts from merchants on everything from yams to cameras. Huang says it’s time to “close your eyes and visualize” the company being a hybrid of U.S. mega-retailer Costco and Disneyland.
Business is booming. The Shanghai-based startup, valued privately at $15 billion in April, reported some $220 million of revenue in just the first quarter after generating $278 million all last year. Tencent’s super-app WeChat directs many of its approximately 1 billion users to Pinduoduo. This app-within-an-app, messaging-to-shopping system is unique to China, and can be hard to understand or appreciate without being a regular user.
Analogs familiar to Western investors will not be especially helpful frames of reference for Pinduoduo’s fundraising efforts. First, there is Zynga, the online game developer whose $10 billion valuation soon after its 2011 IPO was heavily dependent on Facebook traffic, in much the same way Pinduoduo depends on WeChat. Zynga’s market capitalisation has not recovered since the relationship fractured.
Similarly, the whole concept of mass e-commerce bargains sounds a lot like Groupon, a company that trades at less than one times sales as compared to Alibaba’s multiple of 13 times. Adding to the investor education job ahead of Pinduoduo, it targets China’s smaller and lesser known cities.
Huang also will have to sell his bizarre and shoddy corporate governance, which includes a partnership structure akin to a law firm’s, that keeps a tight grip on most big decisions, including who is chief executive. Pinduoduo may successfully part fund managers from their money, but it will involve a degree of groupthink.
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