Earning billions in a single quarter from financial management! Is Pinduoduo aiming to be the next 'Buffett' by 'refusing to distribute dividends'?

Dolphin Research previously mentioned that although $PDD(PDD.US) has always emphasized no dividends or buybacks, any company that has passed its growth phase and entered maturity must address a core question: how to utilize the accumulated cash assets?

This quarter, Pinduoduo's interest and investment income reached a staggering level of 10 billion yuan in a single quarter (mainly from interest and stock investment income), which is a significant presence compared to the 25.8 billion yuan operating profit from its main business for the same period.

Of course, from the perspective of quarterly volatility, the average single-quarter level is still around 5.3 billion yuan, which is not much different from last year's quarterly levels.

In this article, Dolphin Research takes this opportunity to thoroughly examine Pinduoduo, which does not pay dividends or buy back shares, and despite the need for investment in TEMU and the main site, still has a large amount of remaining profits. How has Pinduoduo utilized the accumulated cash assets over the years to achieve returns?

Based on this, we will also explore the possible directions for Pinduoduo's future capital allocation.

1. How much surplus does the landlord have?

In the second quarter, the company had four main types of funds classified as cash or idle funds, with a total balance of assets that can earn interest or be invested reaching 538.8 billion yuan, approximately 75 billion USD.

a. Money market funds are used to maintain daily operations, and restricted cash is the shopping funds paid by users when placing orders on Pinduoduo, which are held in Pinduoduo's regulatory bank accounts and paid to merchants after users confirm receipt.

b. The most critical idle funds here (which basically do not participate in the value creation of the main business) are mainly short-term investments and other non-current funds. These two items are actually divided by term, with short-term investments being those within one year and other non-current funds being those exceeding one year.

2. Short-term investments: Stock trading to increase yield flexibility?

Using 2024 as an example, let's first look at the composition of short-term investments, which account for 60%:

In the allocation of short-term investment funds, the company mainly purchases fixed deposits and hold-to-maturity bonds, with a small portion being available-for-sale bonds, and other investments mainly being convertible bonds, loans, and other bond investments.

Interestingly, due to the rapid accumulation of the company's cash reserves, Pinduoduo started trading stocks in 2023, with a balance of 17.2 billion yuan in 2023, which increased to 44.5 billion yuan in 2024.

The returns from stock trading are basically calculated based on book gains and losses. As the proportion of stock trading funds increases, this part will significantly amplify the volatility of the company's interest and investment income. The significant fluctuations in interest and investment income in the first two quarters of this year are likely related to the floating gains and losses from stock trading.

Additionally, the other bond investments in 2024, mainly convertible bonds or miscellaneous loans, are similar to stocks, with gains and losses calculated based on market value.

(PS: Hold-to-maturity bonds can be understood as lending to earn interest, with the principal to be repaid at maturity; available-for-sale bonds may earn interest income, with gains and losses calculated using the amortized cost method, which will not be elaborated here; they may also benefit from bond price changes, with the resulting income appearing in different positions on the profit statement, with the former in interest and investment income and the latter in other comprehensive income.)

3. Other non-current assets: Equity investments are negligible, mainly fixed deposits and bond purchases

Unlike other companies that throw a bunch of miscellaneous items into non-current assets, Pinduoduo's non-current assets are actually very simple, mostly idle funds: long-term fixed deposits and hold-to-maturity bonds are the main components, with available-for-sale bonds accounting for barely 30%.

Equity investments under the equity method are almost negligible in the thousands of billions of idle funds available for use.

It is clear from this:

a. Besides internal investments in the main business, Pinduoduo has almost no external equity investments or cross-industry mergers and acquisitions, so the financial statements are very clean;

b. E-commerce focuses on the main business seriously and efficiently, and if funds are not misused or wasted, even with subsidies to maintain the lowest prices across the network, the remaining profits can still accumulate into a large cash reserve.

4. As a disciple of Duan Yongping, what is the overall investment yield?

a. First, let's talk about stock trading in short-term investments. Although the proportion is relatively small, the yield has been quite good in the past two years, with 8.7 billion yuan in 2024, achieving a yield of 24%.

b. The highest proportion of the allocation is fixed deposits and hold-to-maturity bonds (principal-protected interest-bearing investments), with yields basically around 4%, which is consistent with the corresponding term yields of US Treasury bonds in the past two years.

Overall, the yield on the company's cash and investment assets has been maintained at around 4-5% in the past two years, which means the yield on idle funds and cash is basically at the level of the overall risk-free yield of US Treasury bonds. However, with the accumulation of too much money, the company has started trading stocks to try to increase yield flexibility.

5: The soul question: How to optimize capital allocation?

Pinduoduo's return on equity (ROE), even though the net profit margin declined in the first half of this year, and the accumulated cash not invested in the main business dragged down the asset turnover rate and equity multiplier, still reached 13.5% in the first half of this year (lower than 27% in the same period last year), far higher than the company's overall idle funds yield of 4-5%.

13.5% vs 4-5% yield gap, the investment priority in capital allocation is very clear for Pinduoduo:

a. Should the moat of the main business be strengthened? The answer is YES, the way is to subsidize and maintain the lowest prices across the network.

b. Expand more markets along the main business, and try to maintain the current ROE of the main business after the new market business takes shape? The answer is YES, and it is still being invested in. TEMU is constantly adjusting, and the international business has not been abandoned, turning into a semi-managed and local goods, local sales model.

c. Even with these two main businesses still being invested in, there is still so much cash accumulated on the books every year, what to do next?

In Dolphin Research's view, there are actually only two options—either further increase investment in the first two businesses, reducing profit margins, resulting in lower performance; or, after growth slows down, moderately pay dividends and buy back shares.

If neither option is chosen and the current situation continues, with growth slowing down and no buybacks, it is highly likely that cash will accumulate rapidly, the company's overall ROE will continue to decline, and the result will be a lower valuation.

Of course, this company currently appears to have zero market value management, or even negative market value management. Whether the company can find a true second growth curve, Dolphin Research is watching closely.

(PS: Given Pinduoduo's style, it is unlikely to turn into a corporate venture capital (CVC) investment company, starting to invest everywhere, engage in industrial mergers and acquisitions, and cross-industry derivatives.

Most of the companies Dolphin Research has seen that develop through mergers and acquisitions end up in a mess, from Intel in the past to Alibaba recently, and even Broadcom, which has developed through mergers and acquisitions, is now almost unique.)