PDD Holdings: A Combination of Costco and Disneyland
China is one of the world’s largest agricultural producers. The agricultural sector in China differs from those in the United States and Europe, where large-scale farms dominate, and the production and transportation of produce are highly industrialized. In contrast, Chinese agriculture consists of millions of small, family-owned farms, with limited cooperatives, and an average farm size of .65 hectares. Due to their scale, farmers are reliant on a series of distributors to sell their produce, leaving them with razor-thin margins.
In 2015, Colin Huang, a former Google engineer born to middle-class factory workers in Hangzhou, China, founded Pinhaohuo—an online platform connecting farmers directly with consumers. Pinhaohuo aggregated consumer demand, allowing farmers to sell in bulk, reducing their reliance on middlemen—and leaving them with higher margins and consumers with fresher, more affordable produce.
After early success, Huang founded another company, Pinduoduo (now PDD Holdings), in 2015. The company merged with Pinhaohuo in 2016 and expanded its direct-to-consumer model to manufacturers—providing everything from household essentials to electronics, fashion, and more. PDD has a unique approach to e-commerce, describing itself as a mix of Costco and Disneyland—offering both value-for-money and an entertaining shopping experience.
By aggregating its large online demand, manufacturers can sell in bulk at lower prices, eliminating middlemen. The platform’s consumer base of over 900 million users attracts merchants who then offer even more competitive prices, which in turn draws in more consumers—creating a self-reinforcing cycle and a strong network advantage.
PDD has pioneered an innovative e-commerce experience with its ‘team purchase’ option, which encourages users to team up with friends, family, or other shoppers within a specified timeframe to unlock further discounts. This model drives organic growth through social proof, increases user engagement, and gamifies the shopping experience.
But how does an e-commerce platform resemble Disneyland? PDD has turned online shopping into a social and interactive experience—and gamification is central to the model. Through in-app games and rewards, users can earn discounts or receive products for free, incentivizing daily engagement. Unlike traditional search-based e-commerce platforms, PDD has a discovery-based model that recommends products to users—encouraging impulse purchases. Another advantage of this approach is that consumers are less time-sensitive about delivery speed, as purchases are often spontaneous rather than out of necessity.
PDD generates revenue through its take rate, which has expanded from .3% in 2018 to an estimated 2% of total transaction value today. Additionally, the majority of PDD’s revenue (62% in 2023) comes from marketing services, where merchants pay fees for better placement in search results and browsing recommendations.
But does the model actually work? Absolutely. PDD has achieved extraordinary revenue growth, with a compounded annual growth rate of 80% since 2018. Its revenue is projected to reach almost 400 billion RMB (about $55 billion) in 2024—an impressive achievement for a nine-year-old company. Moreover, PDD achieved a $100 billion market valuation just five years after its founding—faster than Alphabet (Google) and Meta Platforms (Facebook), which took seven and eight years, respectively, to reach the same milestone.
PDD’s ability to offer the lowest possible price has set it apart from other Chinese e-commerce platforms, especially among value-conscious consumers in lower-tier cities (less-economically developed cities). As a result, PDD has become China’s second-largest e-commerce platform, after Alibaba—and its market share is increasing. Given that lower-tier cities account for over 70% of China’s population, their consumption growth is likely to surpass that of higher-tier cities.
Similar to Pinhaohuo (the platform connecting farmers with consumers), PDD launched Duo Duo Grocery in 2020. Duo Duo Grocery leverages the scale of individual consumers to purchase fresh produce from farmers, with next-day deliveries to local pick-up points.
Unlike competitors such as Alibaba Grocery, which focuses on higher-tier cities and offers immediate deliveries from local stores, Duo Duo Grocery eliminates middlemen—enabling it to provide the same products at lower prices. As a result, Duo Duo Grocery has emerged as an industry leader.
In September 2022, PDD launched its international business unit, Temu, which has since gained significant traction. Temu, with its slogan “shop like a billionaire”, mirrors PDD’s domestic business model and has flooded social media feeds. The platform has (by some estimates) even surpassed Amazon in global user count, although its scale is still smaller than the domestic business.
PDD’s financials are equally impressive. The company operates an asset-light business model, with no inventories, storage facilities, or logistics infrastructure—allowing it to earn a return with no capital invested.
When merchants join the platform, a sizable cash deposit is paid to guard against fraud. If a customer files a complaint, the merchant is penalized ten times the transaction value, with the penalty deducted from the deposit. Due to the size of PDD, these deposits have accumulated to a substantial cash reserve, which functions as a float. PDD is then able to invest this float, and generate a return exceeding 10 billion RMB in 2023. Additionally, PDD benefits from a net working capital benefit of 73 billion RMB—equivalent to almost 30% of its sales.
PDD is truly an impressive business, with an innovative and proven business model, and with future growth prospects. However, surprisingly, its shares trade at a 16.7% free cash flow yield based on 2025 consensus estimates. How is this possible?
One major factor is PDD’s secretive nature. Unlike other publicly traded companies, PDD is reluctant to share detailed financial information. For example, the company stopped disclosing its Gross Merchandise Value (the total value of transactions on its platform) after 2020, and it does not provide segmented financial reporting of its business units, Duo Duo Grocery and Temu, which instead are obscured in the economics of its domestic e-commerce business. As a result, investors are relying on guesses to estimate their size—and the profitability of these is largely unknown.
Additionally, although listed in the United States, PDD is a Chinese company—entailing significant political risk. In fact, Chinese law prohibits foreign nationals from owning shares in sensitive sectors, such as internet companies. Owning shares in PDD does not equate to an ownership of the Chinese operating business, but in a Cayman Islands-based entity with no operations, which instead relies on contractual agreements with the Chinese operating business, securing them control of business decisions and rights to its profits. However, these agreements have not been tested in Chinese courts, which raises questions about their enforceability.
There’s no doubt that PDD is a phenomenal business. While the concerns are valid, its innovative business model, strong financials, and growth opportunities raise the question of whether its shares are too discounted by the market. The management has described PDD’s core value as “本分” (Ben Fen)—loosely translated to adhering to one’s own duties and principles. Among other things, it means never taking advantage of others, even when in a position to do so. Time will tell whether they stay true to this philosophy.
