November 20, 2019 / 10:29 AM / 2 months ago

UPDATE 3-China's Pinduoduo posts bigger loss as costs surge; shares tumble

(Updates with earnings call, first cities spending)

By Akanksha Rana and Sophie Yu

Nov 20 (Reuters) - China's Pinduoduo Inc reported a bigger-than-expected quarterly loss on Wednesday due to higher operating expenses, sending the e-commerce company's shares down 13% before the opening bell.

The company was started just four years ago but has been described by analysts as a disruptor to the dominance of Alibaba Group Holding Ltd's Taobao and Inc over China's retail sector thanks to its popularity among the country's rural residents.

Net loss attributable to ordinary shareholders widened to 2.34 billion yuan in the quarter ended Sept. 30, from 1.1 billion yuan a year earlier. Revenue rose 123% to 7.51 billion yuan. Analysts had expected 7.49 billion yuan, according to IBES data from Refinitiv.

Operating expenses of Pinduoduo more than doubled to 8.47 billion yuan ($1.20 billion) in the quarter as sales and marketing costs surged 114%. Excluding items, the company lost 1.44 yuan per American depository share. Analysts on average had expected a loss of 0.53 yuan per ADS.

"We continued to invest in our users throughout the third quarter, and stepped our marketing up a notch from the second half of September," Chief Executive Officer Huang Zheng said in a statement.

The company, which gained a following in China by strategies such as offering consumers deeper discounts on mostly generic products if they buy in groups, also blamed the larger-than-expected loss on the so-called "choose one from two" practices.

China's market regulator earlier this month told Pinduoduo, Alibaba, and others to stop the practice which requires merchants to sign exclusive cooperation agreements preventing them from selling products on rival platforms.

Pinduoduo said the practice had intensified in the last 12 months, affecting over 1,000 brands' flagship stores. It added that over 10,000 small and micro merchants were forced to choose between platforms.

"Forced exclusivity has a material impact on Pinduoduo, we had to row upstream against the pressure," the company said.

The company did not name the party that forces merchants to choose sides, but Alibaba's Tmall marketplace has in recent weeks been accused by a number of competitors and merchants of adopting such a practice.

Annual spending per active buyer by September was 1,566.7 yuan, up 75% from 894.4 yuan of the same period last year.

Though the company's fast growth is attributed by many to bargain hunters in rural areas and smaller cities, Pinduoduo has seen a rapid increase of users in first and second-tier cities.

"Our tier one users are already spending well over 5,000 yuan based on annualized 2019 Q3 spending," said Huang Zheng on the earnings call.

To woo middle class consumers, it has started selling pricier products such as Dyson hair dryers and La Mer facial creams. From Nov. 1-11 when Chinese e-commerce platforms competed for a larger gross merchandise volume (GMV) during the country's annual online shopping spree, 400,000 new Apple iPhones were sold, the company said.

Pinduoduo also said earlier this month it aims to host 10,000 international brands on its platform in three years.

Meanwhile, annual active buyers by the end of September reached 536.3 million, up 39% from a year ago. Alibaba's latest earnings report put its active users at 693 million. ($1 = 7.03 Chinese yuan renminbi) (Reporting by Akanksha Rana in Bengaluru and Sophie Yu in Beijing; Editing by Rashmi Aich, Maju Samuel and David Evans)

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