4Q21 revenue missed, non-GAAP net profit beat
　　Pinduoduo Inc. announced that total revenue rose 2.6% YoY in 4Q21 to Rmb27.2bn, missing consensus by a 9.2% decline in merchandise sales （1P） business revenue and lower user growth. Non-GAAP net income stayed positive at Rmb8.4bn with margin of 31% vs. a loss of 0.7% in 4Q20. This beat the consensus non-GAAP net income estimate of Rmb3.0bn thanks to the lower server cost due to a one-off rebate from one of the service providers and better operating leverage of sales and marketing expenses.
　　Trends to watch
　　4Q21 revenue （excluding 1P business） rose 28% YoY; user growth slowed further. GMV in 2021 was Rmn2.4trn, rising 46% from Rmb1.67trn in 2020. The firm had 868.7mn active buyers in the 12-month period ended December 31, 2021, an increase of 10.2% vs. 788.4mn in the same period 2020. 4Q21 revenue （excluding 1P business） rose 28% YoY. Marketing services revenue rose 19% to Rmb22.4bn due to slowing user growth and high base effect, while transaction services rose 108% YoY to Rmb4.7bn, on the expansion of Duoduo Grocery.
　　4Q21 profit beats, on spending control and a one-off rebate from service providers. Sales and marketing expenses declined 23% YoY to Rmb11.4bn, and non-GAAP sales and marketing expenses as a percentage of revenue declined to 40%, as Pinduoduo focuses on meeting demands of existing consumers and cautious investment given the macroeconomy uncertainty. The one-off rebate from the service provider in 4Q21 affects costs of revenue and R&D expenses, and this impact on profit margin is not sustainable.
　　Agriculture remains strategic focus, driving frequency growth but affecting the near-term monetization rate. In 2021, annual spending per active buyer rose 33%YoY to Rmb2,810, as the frequency of user shopping rose 45% YoY to 70 orders per user. Agricultural products contributed major part of increases frequency, but this led to the drop of average order value （AOV）。 Excluding Duoduo Grocery （a Pinduoduo business）， user shopping frequency of the main app is still healthy, and its AOV increased slightly. The company continues to promote the “10 Billion Agriculture Initiative,” investing in digitalization of production and sales assistance for agriculture, agricultural technology, and training human capital in the agricultural industry. We believe that investment in agriculture will consolidate Pinduoduo's advantages in agricultural products, boost shopping frequency, and continue attracting users over the long term. However, given commission reductions and support policies in agricultural products, the monetization rate may be under pressure.
　　Financials and valuation
　　Pinduoduo is trading at 20.4x 2022e non-GAAP P/E. We lower our 2022 revenue forecast 20% to Rmb109.8bn, on lowered 1P sales and the effect on monetization rate. We raise our 2022 non-GAAP net profit forecasts 49% to Rmb19.9bn to reflect the operating leverage. We introduce our 2023 revenue and non-GAAP net profit forecasts at Rmb151.9bn and Rmb36.1bn. We expect that Pinduoduo to continue generating investment in Duoduo Grocery and “10 Billion Agriculture Initiative”， which we believe will weigh on company profits in the near term. From the conservative perspective, we only consider the core business valuation （exclude the new business）， which is based on the theoretical profitability of the company. We maintain OUTPERFORM and cut our TP 26% to US$72.5 based on our assumptions （2022e GMV at Rmb2.8trn, take rate at 3.3% （previously 3.8%）， net profit margin at 30%, and 2022e P/E at 25x （previously 30x））， with 70% upside.
　　Risks
　　Uncertainty of COVID-19; fiercer competition; Uncertainty in macroeconomic conditions.
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