Temu-owner PDD tops revenue estimates, competition squeezes margins

By Deborah Mary Sophia and Casey Hall

Aug 25 (Reuters) - E-commerce company PDD Holdings PDD.O, which operates low-cost platforms Pinduoduo in China and Temu internationally, beat quarterly revenue estimates on Monday, although net profit fell due to investments to ward off growing competition.

U.S.-listed shares of the company were up 1%, after having jumped more than 11% in premarket trading, following executive comments that increased investments will cause choppiness in near-term financials.

The Chinese government has been seeking to boost domestic consumption to revive a sluggish economy that is navigating several pressures, including a weak property sector and U.S. President Donald Trump's trade policies.

To help prop up demand, e-commerce majors, including Pinduoduo, JD.com 9618.HK and Alibaba 9988.HK, have resorted to steep discounts and promotional offers. But that has sparked a price war.

Along with the need to keep prices low in China, PDD's margins came under pressure in recent quarters due to a multibillion-dollar investment in merchant support programs and as U.S. tariffs drove up costs tied to international shipping.

The second-quarter earnings showed PDD has increased spending across the board on everything from server costs to sales and marketing expenses as part of its drive to improve the ecosystem for merchants and consumers alike.

INTENSIFIED COMPETITION

"In the past quarter, industry competition has intensified further ... against this backdrop our revenue growth slowed and operating profit declined meaningfully for the second quarter," Jiazhen Zhao, co-chief executive of PDD, said during a call with analysts.

"We do not believe this quarter's profit levels are sustainable and expect fluctuations in profits in future quarters," he said.

To cushion pressures, PDD's Temu has been promoting products already in U.S. warehouses and trying to tap more local sellers. Still, it is facing competition from global e-commerce giant Amazon AMZN.O, which has used its scale to negotiate favourable pricing with suppliers.

Temu has also been pivoting to a "fully-managed" model where the company has more control over product selection, pricing and logistics, with hopes of leveraging its vast supply-chain network to keep prices low.

Even so, a survey released this month by online marketing firm Omnisend found 30% of American shoppers have noticed price hikes on Temu.

PDD's revenue rose 7% to 103.98 billion yuan ($14.53 billion) during the quarter ended June, beating analysts' estimate of 103.34 billion yuan, according to data compiled by LSEG.

Its operating profit fell 21%. Adjusted earnings per American depository shares stood at 22.07 yuan, exceeding the estimate of 15.74 yuan.

"With earnings already on a declining trend, the market may adopt a 'wait-and-see' approach to gauge the extent of further potential erosion ... Compared to peers, we think PDD's heavier exposure to the U.S. through Temu will dampen its revenue growth," CFRA analyst Jian Xiong Lim said.

($1 = 7.1561 Chinese yuan renminbi)