PDD Holdings Inc. revenue rose a stronger-than-expected 66%. The company behind hit shopping app Temu spent to boost sales growth at home and abroad, countering a bumpy post-pandemic recovery.

The ecommerce platform reported revenue of 52.3 billion yuan ($7.2 billion) in its fiscal second quarter. It beat the average analyst’s estimate of 43.3 billion yuan. Net income increased a faster-than-projected 47%.

Growth among peers

PDD’s growth surpassed its Chinese peers and underscored how the company that once trailed far behind Alibaba Group Holding Ltd. and JD.com Inc. has in recent years used promotions and inroads into lower-tier cities to grab market share from more established rivals. It created Temu, featured with much fanfare during this year’s Super Bowl, to try to replicate that sales success abroad. Executives declined on Aug. 29 to get into specifics about Temu sales progress or financials, except to say the focus now was to fine-tune its strategy.

At home, Chinese consumer sentiment was improving, executives said. That defies warning signs of financial stress and a broad downturn across the world’s No. 2 economy.

“Our business is closely tied to the overall consumption market,” co-CEO Zhao Jiazhen said. “We noticed continued improvement in the macro trends and also consumers’ increasing willingness to shop.”

Mixed financial results from the country’s online commerce and media leaders have cast doubt over a recovery for the world’s biggest internet arena. This month, Alibaba and JD.com both reported faster-than-anticipated growth for the second quarter. Meanwhile, social media giant Tencent Holdings Ltd. recorded sales and net income that missed analysts’ estimates.

In PDD’s case, increasingly fierce competition in China and aggressive strides overseas may pressure profitability.

PDD soars as results show strength, resilience

JD.com rolled out a $1.4 billion discount spree in March to capture new users, igniting a price war. Alibaba also launched a “value-for-money battle” to lure buyers and merchants. Investors worry that PDD’s aggressive spending — now a sector-wide phenomenon — will further hurt bottom-line growth.

Amid intensifying rivalry at home, PDD is turning outward for growth, following the playbook employed by ByteDance Ltd.’s TikTok and fast-fashion phenom Shein. In September, PDD debuted its Temu bargains platform for U.S. sales, then quickly rolled it out to other places like Canada and Europe.

The results were “more resilient than expected considering the softening macro environment in China,” Citigroup analysts wrote after the report.

Morgan Stanley says PDD is “the only ecommerce play that can deliver alpha” in China, as the company outgrows peers because the monthly use of its app is increasing while Temu expands to more countries. Temu was ranked the top shopping app by downloads in the U.S., Australia and Germany over the past three months, according to market research firm Sensor Tower.

But so far, the fledgling platform has been a drag on margins. PDD acknowledged in its annual report last year that Temu requires “substantial” resources to grow. While traffic on the app has risen, it probably accounted for less than 1% of PDD’s sales in the second quarter, Bloomberg Intelligence analysts estimated.

Biggest players in the Asia ecommerce game

Shein Group Ltd. ranks No. 2 in the Asia Database. That’s Digital Commerce 360’s rankings of the largest online retailers in Asia by web sales. Shein is behind only JD.com Inc. in the Asia Database.

Pinduoduo offers an app-only marketplace to Chinese consumers. But because it doesn’t operate an ecommerce website, it is not included in Digital Commerce 360’s Asia Database rankings. Temu, which launched in September 2022, did not have a significant impact on Pinduoduo that year. Moreover, Temu didn’t have a high enough gross merchandise value (GMV) or sales to make the global online marketplace rankings this year.

What Bloomberg Intelligence says about Temu sales

PDD’s non-GAAP operating margin in the second quarter likely narrowed from 34% a year ago as cost increases exceeded revenue growth. Marketing expenses surged 45% in Q1 amid increasing competition in China’s ecommerce market. And the increase probably continued in Q2, countering profit gains from economies of scale gained with the expansion in operations. PDD might also have incurred higher personnel costs in Q2 to support the enlarged domestic and overseas operations, which would have cramped profitability.

“PDD likely raised investment in Temu, its overseas ecommerce platform, as it enters new markets in Europe and Asia including Germany, France, Japan and South Korea. Yet Temu probably contributed less than 1% of the sales in Q2, we estimate,” said Bloomberg analysts Catherine Lim and Tiffany Tam.

Temu is now locked in a lawsuit with Shein, alleging the rival violated antitrust laws by using threats and intimidation to block clothing manufacturers from working with the fast-rising upstart. Shein has also sued Temu in the U.S., alleging trademark and copyright infringement as well as “false and deceptive business practices.”

PDD has also drawn scrutiny over potential data security risks, after Google’s Android app store suspended downloads of its Chinese shopping app Pinduoduo while it investigates alleged malware in unsanctioned versions. Google didn’t mention Temu, which remains available to download.

Check back for more earnings reports.

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