CMB Securities: Amazon launches low-price store, expected to have limited impact on Temu

On June 26th, Amazon announced at a closed-door seller conference in Shenzhen that it will soon launch a "low-price store" similar to Temu in terms of operation mode, product selection, and target merchants, aiming to compete with cross-border low-price platforms such as Temu and Shein. We believe that Temu's strong supply chain capabilities, better price control, more efficient operational management, clearer positioning in terms of value for money, and brand recognition have solidified its competitive barriers. We expect that Amazon's low-price store will have limited impact on Temu, and we are optimistic about Temu's long-term growth potential and profit improvement, maintaining a "strong buy" investment rating for Pinduoduo.

Amazon is set to launch a low-price store business with a model and product categories similar to Temu. On June 26th, Amazon announced at a closed-door seller conference in Shenzhen that it will soon launch a "low-price store." The expected model is somewhat similar to Temu's full-service model, where Amazon is responsible for logistics (sellers send goods to Amazon's domestic transit warehouse, which are then delivered to customers via small packet air transport) and marketing promotion. The difference lies in sellers having the autonomy to set prices, and the platform will charge sellers commissions and fees consistent with the main site. In terms of interface design, Amazon will add an "low-price store" entrance on the main site homepage, with the initial categories including fashion, home, and lifestyle, popular categories on Temu, with prices required to be below $20. In addition, in terms of product selection, the low-price store mainly sells white-label products, mainly targeting factory businesses in industrial belts. Currently, the platform is recruiting merchants through internal invitations in the initial stage of the project.

From multiple dimensions such as supply chain, management efficiency, and low-price capabilities, we expect Amazon's low-price store to have limited impact on Temu. The overlap between Amazon's low-price store and Temu in terms of model, product selection, target merchants, and customer base is high, aimed at addressing competition from cross-border low-price platforms such as Temu and Shein. We believe that from the perspectives of supply chain, management efficiency, and low-price capabilities, Amazon's low-price store will have limited impact on Temu:

1. In terms of low prices, Temu's full-service price control is more extreme. On one hand, Temu autonomously controls pricing, and on the other hand, the platform does not charge commissions, allowing for greater reduction in operating costs for merchants and more consumer benefits, giving it a price advantage compared to Amazon.

2. In terms of supply chain, Temu relies on a strong domestic supply chain foundation, combined with Pinduoduo's rich resources in merchant recruitment and factory industrial belts, giving it a stronger advantage in the supply of low-price goods.

3. In terms of the implementation of the business model, Amazon has always had a core customer base and product positioning leaning towards the mid to high-end, which differs significantly from Temu. There is uncertainty regarding the platform's traffic and resource allocation for the low-price store, as well as its impact on the original mainstream customers and merchants. In comparison, Temu's value for money positioning and brand recognition are clearer, with a clear first-mover advantage.

4. In terms of management efficiency, Temu leverages the efficient management team from Pinduoduo's main site and grocery shopping, with its strong execution being key to the success and efficiency of the full-service model. Temu's strong operational management capabilities have also built a solid barrier for it.

Investment recommendation: Optimistic about Temu's growth potential and profit improvement. It is expected that Pinduoduo's Non-GAAP net profit attributable to shareholders will be 138.3/195.8/251.7 billion RMB from 2024 to 2026, with domestic net profit being 160.1/195.3/223.2 billion RMB, and cross-border business net profit being -21.7/5/28.2 billion RMB. We are optimistic about the company's long-term growth potential Using the segmented valuation method, a 12x PE ratio is applied to the 2024 domestic Non-GAAP net profit, considering US policy risks. For Temu's non-US market in 2024 (assuming it accounts for 60% of total GMV), a 1x PGMV ratio is used, corresponding to a target price of $212 per share, maintaining a "strong buy" rating.

Risk factors: macroeconomic risks; intensified industry competition; overseas policy risks