Governance improvements support healthier growth at PDD, but EU tariffs and a potential Tencent stake sale weigh on near-term performance

Overview

The report focuses on PDD's 2Q26 results, platform governance, the tariff impact facing Temu's European business, and the risk of a potential stake sale by Tencent. Nomura believes stronger governance and higher margins can drive healthier, more sustainable growth, but normalizing revenue growth, deteriorating European traffic, and shareholder selling pressure limit near-term upside. It therefore maintains its Neutral rating.

Core views

PDD's 2Q26 results were mixed. Revenue increased 8% YoY, 2% below Bloomberg consensus, mainly because transaction services revenue, despite rising 13% YoY, was still 6% below consensus. Online marketing revenue increased 3% YoY, 2% above consensus. Non-GAAP earnings per ADS declined 12% YoY but remained 4% above consensus, benefiting from higher margins. This indicates that current performance is primarily supported by profitability rather than stronger-than-expected revenue expansion. Management emphasized that it is strengthening platform governance during the year to better protect intellectual property and consumer interests and comply with local regulations across global markets. Nomura believes stricter self-governance will help mitigate the regulatory risks PDD faces in China and overseas, but it may also cause the domestic and international businesses to return to a more normal and slower pace of growth. Based on higher margin assumptions, Nomura raised its FY26 and FY27 adjusted net profit forecasts by 1% and 4%, respectively. Segment forecasts also reflect a “slower but healthier” trajectory: Temu's revenue is expected to increase from CNY186,266mn in FY26 to CNY201,656mn in FY27 and CNY213,322mn in FY28, with growth slowing from 13.6% to 8.3% and 5.8%. Its operating margin is projected to improve from -0.7% in FY26 to 0.9% in FY27 and 1.9% in FY28, with operating results shifting from a CNY1,250mn loss to profits of CNY1,852mn and CNY4,104mn. Revenue from PDD's China business is forecast at CNY278,096mn, CNY303,993mn, and CNY323,503mn from FY26 to FY28, respectively, with operating margins of 39.8%, 39.9%, and 40.6%. Temu's European business is the most evident source of recent operating pressure. Over the past year, EU markets provided a buffer for Temu while the US business was affected by the removal of the duty-free exemption for low-value parcels and tariff uncertainty. However, effective July 1, 2026, the EU imposed a temporary fixed tariff of EUR3 per product category on inbound B2C parcels valued at no more than EUR150. Nomura believes this could create near-term operating pressure for Chinese cross-border e-commerce platforms, including Temu, similar to the earlier US policy change. Sensor Tower data show that Temu's MAU in Germany, Spain, France, and Italy declined 37%, 33%, 36%, and 29% YoY, respectively, in July 2026, whereas major European markets still recorded YoY growth of 30% to 60% in 1Q26. Although the US business appears to have recovered from the previous year's trough, global MAU has continued to deteriorate since June, declining 11% YoY in July. The EU accounts for approximately 26% of Temu's global MAU, and Nomura estimates that its GMV share could be substantially higher than its user share due to higher per-capita spending. Therefore, European weakness may have a greater impact on commercial performance. To address the tariffs, Chinese cross-border e-commerce platforms may shift to a semi-managed model or select higher-ticket products under the existing fully managed model to dilute the impact of the EUR3 tariff per product category. Nomura believes both approaches will increase costs for Chinese sellers and further raise end-market prices. Consequently, European cross-border e-commerce growth may slow, but the growth model will become more sustainable. Another source of near-term pressure is a potential stake sale by Tencent. Nomura estimates that Tencent owns approximately 14% of PDD, worth more than USD17bn at the latest share price, making it the most valuable holding in Tencent's investment portfolio. Tencent also owns approximately 17% of Sea, worth around USD12bn, its second-largest holding. Tencent's 1H26 capital expenditure was CNY84bn, or USD12.6bn, and Nomura estimates it could invest another USD18bn in 2H26. Meanwhile, Tencent recorded USD2bn of negative free cash flow in 2Q26, had less than USD9bn of net cash, and raised USD4.6bn through four debt financing tranches during the quarter. Given that substantial bond issuance by global hyperscale technology companies during the year has reduced the attractiveness of additional debt financing, and that Nomura views Tencent's own shares as undervalued, selling investment portfolio assets may be more reasonable than an equity placement or further borrowing. As Tencent's most valuable holding, PDD therefore faces potential supply pressure from a sale. For valuation, Nomura uses a sum-of-the-parts approach, valuing PDD's domestic business at USD74bn based on 5x FY27F P/E and Temu at USD42bn based on 1.4x FY27F P/S, resulting in a USD97 target price. This target price corresponds to approximately 8x FY27F P/E, using adjusted earnings per ADS of CNY82.11. The report states that the stock currently trades at 7.2x FY27F P/E. Relative to the USD88.38 closing price on August 21, 2026, the target price implies +9.8% upside. Balancing the earnings forecast upgrades against near-term policy, traffic, and shareholder selling pressure, Nomura maintains its Neutral rating and unchanged USD97 target price.

Analysis framework

Nomura first compares 2Q26 revenue and non-GAAP earnings per ADS with Bloomberg consensus and breaks down transaction services and online marketing revenue to identify the sources of the revenue miss and earnings beat. It then adjusts its FY26/FY27 earnings forecasts based on changes in margins. The report subsequently uses regional MAU data from Sensor Tower to analyze how EU tariffs may transmit to Temu's traffic and GMV and assesses responses such as adopting a semi-managed model and increasing average order value. To evaluate the risk of a Tencent stake sale, the report considers the value of its holdings, capital expenditure, free cash flow, net cash, and financing conditions to assess its potential funding options. Finally, it derives the target price using a sum-of-the-parts valuation of the domestic business and Temu.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-parts valuation of PDD's domestic business and Temu

  The report separately assesses the value of PDD's domestic business and Temu and then combines the two to derive a USD97 target price, reflecting the businesses' different earnings stages and valuation bases.

• Valuation MethodPE/PEG valuation

  P/E valuation of the domestic business and the overall company

  PDD's domestic business is valued at USD74bn based on 5x FY27F P/E. The final target price corresponds to approximately 8x FY27F P/E, while the report lists the current trading valuation at 7.2x.

• Valuation MethodPS valuation

  Temu forward P/S valuation

  Because Temu is still transitioning from operating losses to profitability, the report values it at USD42bn based on 1.4x FY27F P/S rather than relying solely on current-period profit.

• Event Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of actual results with Bloomberg consensus

  By comparing revenue, transaction services revenue, online marketing revenue, and non-GAAP earnings per ADS against consensus, the report distinguishes weakness on the revenue side from improvement on the margin side.

• Event Strategy and Behavioral FinanceEvent-driven analysis

  Scenario analysis of EU tariffs and a potential Tencent stake sale

  The report analyzes how the EU tariffs effective in July 2026 affect Temu's costs, pricing, and traffic and assesses the likelihood and market pressure of Tencent selling its PDD stake based on Tencent's funding needs.

• (Out-of-vocabulary Method)

  Regional MAU trends and GMV impact analysis

  The report uses Sensor Tower data to compare changes in Temu's monthly active users across Germany, Spain, France, Italy, the United States, and the global market, and assesses the potential GMV impact based on the EU's share of users and per-capita spending.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• PDD Holdings (PDD.US)

  The report's core research subject; governance improvements and higher margins support healthier growth, but overseas policy risks and a potential shareholder stake sale create pressure.

  Strengths

  Online marketing revenue exceeded expectations, margins were higher than assumed, and platform governance should help mitigate regulatory risks in China and overseas.

  Weaknesses

  2Q26 revenue and transaction services revenue missed consensus, and growth in the domestic and international businesses may normalize.

  Comparison

  PDD is estimated to be the most valuable holding in Tencent's investment portfolio, worth more than its Sea stake.

  Risks

  Slower GMV growth, intensified e-commerce competition, tighter regulation in China and overseas, and a potential Tencent stake sale.

• Temu (owned by PDD, unlisted)

  A key component of PDD's overseas business and segment valuation; the report values it at USD42bn based on 1.4x FY27F P/S.

  Strengths

  The US business appears to have recovered from the previous year's trough, and the operating margin is expected to improve from -0.7% in FY26 to 0.9% in FY27.

  Weaknesses

  MAU declined sharply in major European markets in July 2026, global MAU fell 11% YoY, and revenue growth is expected to continue slowing.

  Comparison

  The EU accounts for approximately 26% of Temu's global MAU, but the report believes its GMV share may be higher due to greater per-capita spending.

  Risks

  The EU's EUR3 tariff may increase seller costs and end-market prices and pressure traffic, GMV, and overseas expansion.

• Tencent Holdings (700.HK)

  Owns approximately 14% of PDD; Nomura believes Tencent may sell investment portfolio assets to fund capital expenditure, thereby creating selling pressure on PDD.

  Strengths

  Its PDD stake is worth more than USD17bn, providing it with a sizable monetizable asset.

  Weaknesses

  It recorded USD2bn of negative free cash flow in 2Q26, had less than USD9bn of net cash, and faces high capital expenditure.

  Comparison

  The PDD stake is worth more than USD17bn, exceeding the USD12bn value of Tencent's approximately 17% stake in Sea.

  Risks

  Reduced attractiveness of debt financing and persistently high capital expenditure may increase the likelihood of Tencent selling its PDD stake.

Key data

• 2Q26 Revenue+8% YoY, 2% below Bloomberg consensusRevenue was below market expectations
• 2Q26 Transaction Services Revenue+13% YoY, 6% below Bloomberg consensusThe primary reason for the revenue miss
• 2Q26 Online Marketing Revenue+3% YoY, 2% above Bloomberg consensusOutperformed consensus
• 2Q26 Non-GAAP Earnings per ADS-12% YoY, 4% above consensusHigher margins drove the earnings beat
• Adjusted Net Profit Forecast RevisionsFY26 raised by 1%, FY27 raised by 4%Based on higher margin assumptions
• Temporary EU TariffEUR3 per product categoryApplicable from July 1, 2026, to inbound B2C parcels valued at no more than EUR150
• Temu MAU in Major European Markets in July 2026Germany -37%, Spain -33%, France -36%, Italy -29%All figures are YoY changes, representing a substantial deterioration from YoY growth of 30% to 60% in major markets in 1Q26
• Temu Global MAU-11% YoY in July 2026Continued to deteriorate since June, mainly due to European weakness
• EU Share of Temu's Global MAUApproximately 26%Nomura believes the EU's GMV share may be substantially higher due to greater per-capita spending
• Temu Revenue Growth from FY26 to FY2813.6%, 8.3%, 5.8%Reflects a gradual slowdown in growth
• Temu Operating Margin from FY26 to FY28-0.7%, 0.9%, 1.9%Expected to become operating-profitable in FY27
• Tencent's PDD StakeApproximately 14%, worth more than USD17bnNomura estimates that PDD is the most valuable holding in Tencent's investment portfolio
• Tencent Capital Expenditure1H26 CNY84bn (USD12.6bn); approximately another USD18bn in 2H26FHigh capital expenditure increases potential funding needs
• Tencent 2Q26 Liquidity and FinancingNegative free cash flow of USD2bn; net cash below USD9bn; USD4.6bn of debt issuanceBased on this, the report concludes that selling investment portfolio assets may be a more reasonable funding option
• PDD Segment ValuationDomestic business USD74bn; Temu USD42bnBased on 5x FY27F P/E and 1.4x FY27F P/S, respectively
• Rating and Target PriceNeutral; USD97.00Both the rating and target price are maintained, implying +9.8% upside

Impact & implications

The report believes that stronger governance at PDD will trade slower revenue growth for lower regulatory risks, more stable margins, and a more sustainable operating model. Temu's European business may remain under pressure due to tariffs, rising costs, and higher selling prices. If Tencent sells investment portfolio assets to fund substantial capital expenditure, this could create additional supply pressure on PDD shares. These factors offset the positive impact of the earnings forecast upgrades.

Risks

• Stronger-than-expected GMV growth represents upside risk to the target price.
• Easing competition among major e-commerce platforms represents upside risk to the target price.
• Faster-than-expected overseas business expansion represents upside risk to the target price.
• Slower-than-expected GMV growth represents downside risk to the target price.
• Intense competition among major e-commerce platforms represents downside risk.
• Stricter regulation of e-commerce businesses in China and overseas markets represents downside risk.

What to watch

• Monitor Temu's MAU in major European markets, global MAU, and GMV following the implementation of EU tariffs.
• Monitor whether Temu shifts to a semi-managed model or raises the average order value of products under its fully managed model, as well as the resulting changes in seller costs and end-market prices.
• Monitor the actual impact of PDD's platform governance on regulatory risks, revenue growth, and margins.
• Monitor Tencent's 2H26 capital expenditure, free cash flow, net cash, and investment portfolio disposals, particularly whether its PDD stake is sold.
• Monitor PDD's GMV growth, industry competition intensity, and pace of overseas business expansion.