HONG KONG (Reuters Breakingviews) - The boss of a leading Chinese e-commerce group was asked recently what job other than the current one, would be most interesting to consider. The answer: receptionist at rival Pinduoduo, “because I’d like to know how they do it.” Investors may have a similar response following a report from an American fund betting against the $19 billion three-year-old firm, once dubbed the world’s fastest-growing internet seller, that claims it has been fiddling with its numbers.
Founded by former Google employee Huang Zheng, PDD, as it is known, may have some perfectly good explanations for the questions raised by Blue Orca Capital on Wednesday. Calls to the company from Breakingviews went unanswered. The hedge fund argues that PDD inflated its top line and understated costs using accounting tricks and a related-party service provider. By its calculations, PDD is worth $7.10 a share, nearly two-thirds below where the stock closed in New York on Wednesday.
The Shanghai-based company knows it needs to do better at explaining itself. Its model is not as straightforward as, say, Amazon or JD.com; it combines straightforward online shopping with a Groupon-like buying model where customers recruit other buyers and by doing so drive prices down. It’s not a bad idea, and it seems popular in smaller Chinese cities with less affluent customers. The question is whether it justifies giving the company a higher sales multiple than market leader Alibaba.
Blue Orca says that while the company has two subsidiaries that contributed 100 percent of PDD’s revenue in 2017, per its U.S. regulatory filings, those same subsidiaries reported 36 percent lower revenue figures to China’s State Administration of Industry and Commerce. Nor do the net loss figures match up; the two subsidiaries reported a combined net loss of nearly 700 million yuan in 2017, 65 percent greater than the figure given in its American public offering documents.
There can be valid reasons for such discrepancies, and investors shouldn’t assume the Chinese figure is always accurate: lower revenue implies lower tax. But it’s hardly reassuring. Additionally worrying are screenshots showing a related company advertising for what look like PDD jobs, and claims by Blue Orca that Zheng is using this third party to keep employee costs off-book. To remain the envy of its rivals – and retain investor interest – PDD will need to explain itself PDQ.
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