China’s e-commerce companies: The challenges ahead

Having announced their 3Q21 earnings, both Alibaba and Pinduoduo saw their stock prices plummet. Upon thorough analysis of their quarterly reports and of’s, as well as their senior management’s earnings calls for analysts, we would like to share with you the latest development of China’s e-commerce industry.

As the Chinese government bolstered enforcement of its antitrust law, precipitating an upheaval that reverberated across the domestic e-commerce industry, multiple companies moved to ride on the opportunity to broaden their business into each other’s territory: Alibaba ramped up investments in Juhuasuan and Taote, while launched the new app Jingxi, with the objective to compete with Pinduoduo.

Pinduoduo, being part of the Tencent camp, used to have its competitive advantage sheltered by the tech giant, who restricted Alibaba to operate within its ecosystem before the antitrust crackdown, making it difficult for Alibaba to promote its products on WeChat. But with the anti-monopoly regulations coming into effect, Pinduoduo practically lost its unique position on the WeChat platform.

While Pinduoduo has grown rapidly over the past few years, where it surpassed Taobao in monthly active users, the e-commerce platform is nowhere as profitable as Alibaba. Whether Alibaba can take advantage of the antitrust law to overtake Pinduoduo is still yet to be seen, but the battle for the e-commerce space is set to intensify.

In addition to moves against Pinduoduo, Alibaba and have also stepped up their investments in live broadcasting. Short video platform newcomers, such as Kuaishou and Tiktok, have achieved tremendous success over the past two years. In addition to advertising revenue, the growth potential in live commerce cannot be ignored.

Short video platforms generally command a degree of stickiness among users that is comparable with that of WeChat. So if business models such as live commerce prove to be successful, it will also brighten the growth prospects for Alibaba and – no doubt live commerce will become a heated battlefield for market players. Having said that, the Chinese government has announced plans to tighten scrutiny over live commerce, so it is difficult for now to predict where the industry is headed.

This, however, is also an obstacle many investors in the internet industry encounter. Given that both competition and regulations have intensified, it leaves little visibility for investors over just how profitable the industry will be. But what is confirmed at present is that the costs of running e-commerce platforms have indeed gone up.

Rising cost concerns

While Alibaba is a highly diversified conglomerate – encompassing cloud computing, media, and entertainment businesses – all of these arms except for its e-commerce platform are still making a loss.

The cost of Alibaba’s e-commerce business soared significantly since the beginning of 2021, which the company attributed mainly to investments in new growth areas, including Juhuasuan, Taocaicai, AliExpress, the Southeast Asian arm Lazada, transportation business Cainiao, and subsidies for merchant users.

New expenditures like these reduced the EBITA Margin of its e-commerce business from 31% to 19% in 3Q21[1]. But it is not clear how much of it was allocated to support business growth and to actual subsidies for small- and micro-enterprises, given that the company did not elaborate on what merchant subsidies entailed.

As for Pinduoduo, marketing and sales costs have always made up the bulk of its operating costs, which at its peak stood above the company’s sales revenue. In Pinduoduo’s earnings call, the company indicated plans to reduce marketing and sales expenses, and will step up investments in technology research.

Strong marketing and sales expenses were believed to contribute sizeably to Pinduoduo’s expansion, so when its 3Q21 sales growth missed market expectations, it sowed seeds of concerns among investors that the drop in such expenses had started to hit Pinduoduo. 4Q usually is the strongest quarter of the year, we think investors should stay put and see how the company performs in the last quarter of 2021.

The board of Pinduoduo has also just given the green light to allocate RMB10 billion to the development of agricultural science and technology in China, and made clear that it is not a commercial decision. If Pinduoduo makes approximately RMB2 billion in each coming quarter, which we extrapolated from its average quarterly net profit in 2Q and 3Q of 2021, we estimate that it will likely only break even over the next three to five quarters[2].’s business can be divided into retail, logistics and transportation, and newly added businesses, with the retail segment making the biggest contribution to its pool of profits. The other two arms were, however, still in the red[3]. While the retail division’s 3Q21 non-GAAP operating profit margin was relatively stable compared with the same period 2020, investors have to be aware that its increased equity incentive expenses under such accounting standards also led’s operating profit margin in 3Q21 to fall quarter-on-quarter to 1.2% from 2.5%3.

[1] Source: Alibaba Group, as of Nov 2021

[2] Source: Pinduoduo, as of Nov 2021

[3] Source:, as of Nov 2021


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

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