Deutsche Bank cuts PDD Holdings rating following 45% earnings decline

Published 28/05/2025, 14:36
© Reuters

Investing.com -- Temu owner PDD Holdings (NASDAQ:PDD) received a rating cut to Hold from Buy at Deutsche Bank (ETR:DBKGn) after the Chinese e-commerce firm reported a steep 45% year-on-year drop in non-GAAP net income for the first quarter, significantly missing expectations.

The results marked PDD’s first earnings decline in 16 quarters and triggered an 18% drop in the stock at the open on Tuesday, before closing down 13.6%.

The bank also slashed its price target on the stock from $166 to $112, citing a combination of competitive pressure, reduced profitability, and a strategic pivot toward supporting merchants.

“The market has underestimated the magnitude of the so-called ‘decline in profitability’,” Deutsche Bank analysts wrote, adding that its own projections are now well below consensus.

PDD’s 1Q25 revenue rose 10% year-on-year to RMB95.7 billion but missed the Bloomberg consensus by 6%. The 45% earnings drop brought net profit down to RMB16.9 billion, falling 39% short of analyst forecasts.

Operating margin fell by 13.1 percentage points to 16.8%, while sales and marketing expenses surged 43%.

Deutsche’s report pointed to “unfavorable” positioning in China’s evolving e-commerce landscape.

Rivals like JD.com and Tmall have been the primary beneficiaries of Beijing’s consumption stimulus, while tighter regulatory scrutiny has also reversed what Deutsche Bank described as a “low-price, low-quality” competitive dynamic—pressuring PDD’s core model.

The analysts also flagged structural challenges, including an unsustainable 35% net margin and signs that profitability is now being redistributed toward merchants.

The report noted PDD’s own merchant support initiatives, including a RMB100 billion program and fee reductions, as signs that “over-earning” is being unwound.

“We now project the non-GAAP operating margin to gradually reduce to around 20% in three years (from the peak of 30% in 2024),” analysts Jessie Xu and Leo Chiang wrote. They also cut their long-term EBIT margin estimate to 15% from 23%.

Moreover, earnings estimates for 2025–27 were cut by 26–29% and 6–9% for revenue. “2025 will likely see a double-digit earnings decline,” Deutsche Bank said, projecting RMB100 billion in non-GAAP net profit for the year, down 18%.

Despite PDD’s strong cash position, the bank sees limited upside near term due to muted earnings per share (EPS) growth and a lack of catalysts.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers
© 2007-2025 - Fusion Media Limited. All Rights Reserved.