【英文】德银报告：中国电子商务报告China E-commerce：A tale of two camps - and we favor the（72页）

We would note that offline retailer margins in China have progressively been  reduced as offline retailers focus on defending market share by offering discounted  pricing. Our latest check on key products shows that JD no longer enjoys a meaningful price advantage over products across 3C and home appliances, a gap we had  seen several years ago.

PDD is the poster child of the latest social commerce phenomenon in China, leveraging social media platforms, such as Tencent's WeChat platform, to offer discounted group buying activity for consumers. The company helps distribute substantially discounted products, which we liken to the white-label fast product model that the likes of Uniqlo or Muji have pioneered over the past several decades.  While the company will need to deal with the challenges that arise from distributing  goods that lie between counterfeit and white label goods, we believe PDD is in a  strong position to leverage: 1) China as a manufacturing hub of many consumer  products where production capabilities of non-branded manufacturers in China rise to match the quality of branded goods, and 2) demand from more price-sensitive consumers, whether they be the higher-tier-city consumer looking for price  conscious alternatives or the lower-tier-city consumer with a tighter discretionary  spending budget. As discussed in the industry section, PDD has been and continues to scale its users  rapidly, becoming the second largest e-commerce platform by user size. Numerous  merchant interviews all indicate that the user behavior is meaningfully different  from those on other platforms, indicating that PDD does indeed cater to a specific  consumer psychology or demand profile. Surprisingly, the company has been able  to achieve user scale with higher marketing efficiency than shown by other peers. 

As a result, the number of merchants willing to sell their products on PDD has been  scaling significantly, reaching 2m merchants on average in 2018, but 3.6m by  4Q18. Given that merchants are required to deposit funds and keep an open  account with PDD at all times, to protect against potential claims or fraudulent  activity, PDD operates as a marketplace model with negative working capital. As  such, its balance sheet and cash flow are stronger than its P&L would indicate. To  illustrate, we estimate PDD will have a net loss of -RMB5.1bn in 2019. However, we  expect at least RMB33bn in payables to merchants and merchant deposits in 2019,  up from RMB21.5bn in 2018, even if the average deposit or payables to merchant  drops from RMB10,344 to RMB6,751 in 2019. The incremental cash held by PDD provides the business buffer on cashflow and to weather P&L losses. Thus, we are less worried about PDD's long-term sustainability on its operating loss  in the P&L, but more on whether it can justify a sufficient level of ROI for merchants  to be able to provide a robust set of products on its website, and continue to convert  users to higher frequency and ticket size of purchase over time. The metrics have  been improving over the past two years, but we do not believe the level is yet high  enough for higher quality merchants.