Temu's strong recovery, is it time to re-examine PDD?

Despite the turmoil caused by tariff policies, Temu has demonstrated strong resilience through its successful transformation of business model and robust operations.

According to news from the Chasing Wind Trading Desk, UBS analysts Kenneth Fong and Sardonna Fong stated in a recent research report that, against the backdrop of turbulent trade conditions earlier this year, the market was once concerned about Temu's growth prospects. However, Temu stabilized its position through a series of strategic adjustments.

This resilience is primarily attributed to Temu's rapid shift from a "fully managed" model to a "semi-managed" model in the U.S. market. The report pointed out that the new model shifts more responsibility for logistics and tax compliance to merchants, effectively addressing tariff pressures. At the same time, Temu's active expansion in non-U.S. markets has also hedged some of the impacts.

Based on the recovery growth momentum of Temu, UBS raised the target price for PDD from $176 to $198 and reiterated its "Buy" rating. The firm believes that the market has not fully digested Temu's long-term growth potential.

"Semi-managed" model mitigates tariff impact

In the face of a challenging external environment since 2025, Temu's core response strategy has been to decisively adjust its business model.

The report noted that Temu quickly shifted its focus in the U.S. market from a "fully managed" to a "semi-managed" model, where merchants are responsible for logistics and warehousing, while Temu retains responsibility for operations and pricing.

The key to this move lies in its alteration of the basis for tariff calculations. Tariffs will be levied based on the merchant's product cost rather than the retail price, effectively reducing the impact of tariffs on the final price from 54% to a level of 13-18%. According to UBS estimates, by the second quarter of 2025, Temu's GMV composition in the U.S. has reversed from 70% fully managed in the second half of 2024 to 70% semi-managed.

In addition to the model transformation, Temu has also taken several measures to mitigate risks, including expanding overseas warehouses and exploring new markets.

The report shows that by mid-2025, Temu had established 110 warehouses in the U.S. and 10 in Europe, ensuring timely delivery by pre-stocking popular products. Furthermore, while stabilizing the U.S. market, Temu has accelerated its expansion into non-U.S. markets such as Europe and Latin America to diversify geopolitical risks.

Long-term value stems from supply chain efficiency

UBS believes that the market may have overemphasized geopolitical risks while overlooking the long-term value created by Temu through enhanced supply chain efficiency.

The report emphasizes that Temu's price advantage does not solely rely on platform subsidies or temporary tax incentives, but is built on sustainable efficiency improvements, allowing it to maintain a price discount of 10-15% compared to its peers.

This efficiency stems from its unique business model, which effectively captures and reallocates value from the following aspects:

• Logistics and platform efficiency: By integrating orders and centralizing procurement logistics services, Temu can fulfill orders at a lower unit cost

• Product Procurement Efficiency: The platform holds pricing power and traffic allocation, selecting the lowest-cost merchants through an internal bidding mechanism and eliminating intermediaries.

• Squeezing Intermediary Profits: Temu's model compresses the profit margins of traditional trading companies and distributors, passing this value on to consumers.

The report analysis points out that Temu's semi-managed model is expected to achieve a high single-digit operating profit margin (as a percentage of GMV) by 2029, significantly higher than PDD's domestic e-commerce business profit margin of about 3%.

PDD's Stock Price Does Not Fully Reflect Temu's Potential

Despite effective strategic adjustments, Temu will still face financial pressure in the short term.

Due to expansion into new markets with relatively low profit margins, lower monetization rates under the semi-managed model, and marketing investments in new markets, UBS expects Temu's operating losses to widen from CNY 32 billion in 2024 to CNY 50 billion in 2025.

However, the long-term outlook remains optimistic. As Temu gradually matures in various markets, accelerates monetization methods such as advertising, and improves operational efficiency, the report predicts that Temu is expected to achieve quarterly breakeven by the end of 2026.

UBS expects that by 2029, Temu's operating profit margin (as a percentage of GMV) will rise to 6%, higher than the market's general expectation of 4%. In terms of GMV, the bank predicts that Temu will reach USD 75 billion and USD 90 billion in 2025 and 2026, respectively.

UBS believes that PDD's current stock price does not fully reflect its intrinsic value, especially Temu's growth potential. The report analysis states that excluding Temu, PDD's expected price-to-earnings ratio for its core domestic business in 2026 is only 9 times, comparable to its competitors Alibaba and JD's 8-11 times, but its domestic business is growing at a faster rate