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PDD Holdings (PDD), the China-based operator of Temu and Pinduoduo, delivered a top and bottom-line beat in Q2, but the company faces mounting challenges with non-GAAP net income declining 21% to RMB 27.75 bln. The sharp decline in profits reflects shrinking margins amid a sluggish Chinese economy, intense competition from Alibaba (BABA), JD.com (JD), and Amazon (AMZN), and tariff-related pressures. These headwinds, coupled with a 36% surge in costs of revenues to RMB 45.86 bln, driven by higher fulfillment, bandwidth, and payment processing fees, underscore the strain on profitability despite revenue outperformance.

• Furthermore, total operating expenses rose 5% to RMB 32.33 bln, primarily due to a 4.5% increase in sales and marketing expenses to RMB 27.21 bln. This uptick reflects PDD’s aggressive promotional efforts to enhance user experience and bolster merchant services, a strategic push to maintain market share in a fiercely competitive landscape. Ms. Jun Liu, VP of Finance, acknowledged that these sustained investments, while critical for long-term ecosystem health, are likely to continue pressuring short-term profitability as the company prioritizes growth and platform improvements over immediate margin recovery.
• Revenue growth decelerated to 7% from 10% in the prior quarter, with Ms. Jun Liu attributing the slowdown to intense competition in both domestic and international markets. Revenue from online marketing services, which includes advertising and promotional fees charged to merchants for visibility on Pinduoduo and Temu platforms, grew 13% to RMB 55.70 bln, down from 15% in Q1, signaling a moderation in this key revenue stream. These services are central to PDD’s monetization strategy, leveraging its vast user base and data-driven ad targeting to drive merchant sales, but the softening growth highlights competitive pressures and potential saturation in ad spend efficiency.
• To counter these challenges, PDD has shifted toward a fully-managed model, assuming greater control over product selection, pricing, and logistics to optimize its supply chain and maintain low prices. This strategy aims to sustain demand in a price-sensitive market by enhancing operational efficiency and leveraging PDD’s extensive supply chain network to streamline costs and delivery.
• While this pivot may help mitigate competitive and tariff-related pressures, it requires significant upfront investment, further straining margins in the near term as the company balances growth ambitions with cost discipline.

PDD faces a complex mix of headwinds -- macroeconomic sluggishness in China, fierce competition, and tariff uncertainties -- that are weighing heavily on both revenue growth and profitability. Despite these challenges, PDD’s robust supply chain network and the extended U.S.-China tariff truce provide some resilience, particularly for Temu’s international expansion. However, with ongoing investments likely to pressure margins and competitive dynamics showing no signs of easing, the near-term outlook remains cautious, tempering optimism for a swift recovery.