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Where next for Pinduoduo’s share price following Colin Huang’s departure?

Pinduoduo’s [PDD] share price took a hit when founder and chairman Colin Huang unexpectedly quit on 17 March. Having established the Chinese e-commerce giant in September 2015, Huang said he was stepping down so “a new generation could continue its growth”. Taking his place will be Pinduoduo’s CEO Lei Chen.

As the mastermind behind Pinduoduo, Huang has become the seventh richest person in the world, with a net worth of more than $50bn. The former IBM and Yahoo intern led Pinduoduo’s listing on the New York Stock Exchange in 2018 and leaves a company that is now challenging Alibaba [BABA] for market dominance in China. Despite having a 29% stake in the company, Huang has promised not to sell any stock for three years.

“Although Pinduoduo is still a young company with a long runway for growth, it is about the right time to explore what’s next if we want the same quality and pace of growth in 10 years. As the founder of this company, I am probably the most suitable person to take on this task by stepping out of the business and the comfort zone to embark on a journey of exploration,” Huang wrote in Pinduoduo’s 2021 letter to shareholders.

“As the founder of this company, I am probably the most suitable person to take on this task by stepping out of the business and the comfort zone to embark on a journey of exploration” - founder and chairman Colin Huang

 

In the letter, Huang reflected on how the pandemic had transformed Pinduoduo into an asset-heavy business that had invested in its own warehouses and logistical capabilities. Huang added that this shift had “groomed a new generation of leaders and managers. It is time to let them shape the Pinduoduo they aspire to build.”  

 

How has Pinduoduo’s share price reacted?

Looking at Pinduoduo’s share price, investor sentiment has clearly been shaken. On the day of the announcement, Pinduoduo’s share price dropped 8% and wiped $4bn off its market cap. Since the resignation, Pinduoduo’s share price has slipped 8.97% (as of 23 March close). Over the same period, rival Alibaba’s share price has climbed 3.32%. Over a month timeframe, both stocks have seen a decline, with Pinduoduo’s share price down 24.1% and Alibaba’s 5.51%.

8%

Pinduoduo’s share price drop after Colin Huang's resignation

  

What makes Huang’s departure even more unexpected is that it comes when Pinduoduo is challenging Alibaba for dominance in China’s huge online shopping market. In 2020, the number of active shoppers on the Pinduoduo platform overtook Alibaba’s for the first time, coming in at 788 million compared to Alibaba’s 779 million. The challenge for Huang’s successors will be to keep the momentum going. Should they manage it, Pinduoduo’s share price could bounce back following the resignation.

 

Where next for Pinduoduo’s share price?

Pinduoduo’s growth has been powered by cheap deals, but that has come at a cost. In the fourth quarter, Pinduoduo posted a loss of RMB1.4bn, despite revenues climbing 146% year-on-year to RMB26.5bn. While the losses were better than previous quarters, Pinduoduo has repeatedly sought more funding and has raised $9bn from investors since its IPO in 2018.

Macquarie analyst Han Joon Kim downgraded Pinduoduo from outperform to neutral the day after Huang's resignation. In his analysis, Kim cited changes to management structure and Pinduoduo’s business model. The analyst also revised his price target from $171 to $151, which would see an 11% upside on the current price. Pinduoduo’s share price has an average $174 target from analysts tracking the stock on Yahoo Finance.

RMB26.5billion

Pinduoduo’s Q4 revenue - a 146% YoY rise

  

While Huang’s resignation hasn’t helped investor sentiment, Pinduoduo’s recent share price performance is indicative of what’s happening in the wider China tech investment theme. On our thematic ETF screener, China tech is down 8.06% this past month (as of 23 March’s close).

Headwinds for China tech include the ongoing frosty relationship between the US and China, which shows no signs of thawing under Biden’s administration following a testy meeting between the two superpowers in Alaska. Then there are growing concerns over tougher measures from China’s regulator to curb the influence of domestic tech companies.

Investors will not only look at the performance of Huang’s successors, but also how much of a risk increased regulatory scrutiny will play. Should the benefits outweigh the risks, the current suppressed share prices in China tech could represent an opportunity.

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