Governance Improvements Make PDD's Growth Healthier, but EU Tariffs and Tencent Stake-Reduction Risk Weigh on Near-Term Performance

Overview

The report reviews PDD's 2Q26 results and explains its growth and valuation outlook from three perspectives: platform governance, EU cross-border e-commerce tariffs, and a potential stake reduction by Tencent. Nomura believes stricter self-governance will help reduce domestic and overseas regulatory risks and improve the quality of growth, but revenue growth may normalize amid pressure on Temu's European business and potential shareholder selling. It therefore maintains its Neutral rating.

Core views

PDD's 2Q26 results featured a combination of weak revenue and strong margins. Revenue increased 8% YoY, 2% below Bloomberg consensus; non-GAAP adjusted earnings per share declined 12% YoY but still exceeded consensus by 4% due to a better-than-expected margin. The revenue shortfall primarily came from transaction services, whose revenue increased 13% YoY but was 6% below the latest consensus. Online marketing revenue increased 3% YoY, 2% above expectations. This indicates diverging performance among the platform's principal revenue sources, with profitability outperforming the growth strength reflected on the revenue side. Management has focused this year on strengthening platform governance, including protecting intellectual property and consumer interests and complying with local regulations in markets worldwide. Nomura believes stronger self-governance can alleviate the regulatory risks PDD faces in China and overseas, creating a healthier foundation for growth. The trade-off is that growth in both domestic and overseas businesses may gradually normalize rather than continue at a more aggressive pace. Based on higher margin assumptions, Nomura raised its FY26 and FY27 adjusted net profit forecasts by 1% and 4%, respectively. Temu's European business faces a new policy shock. Over the past year, Europe became an important buffer for Temu after the United States eliminated the de minimis exemption for low-value parcels amid tariff uncertainty. However, effective July 1, 2026, the EU temporarily imposed a fixed EUR 3 tariff per product category on inbound B2C parcels valued at no more than EUR 150. Nomura believes this change is similar to the US elimination of the de minimis exemption and could create near-term operating pressure for Chinese cross-border e-commerce platforms such as Temu. Sensor Tower data show that Temu's user trends in Europe have weakened significantly: July MAU declined 37% YoY in Germany, 33% in Spain, 36% in France, and 29% in Italy, in sharp contrast with 30% to 60% YoY growth in major EU markets in 1Q26. Although the US business appears to have recovered from the prior year's low, Temu's global MAU trend has continued to deteriorate since June, falling 11% YoY in July. Nomura primarily attributes this to weakness in Europe. Europe accounts for approximately 26% of Temu's global MAU, while its GMV share may be materially higher than its user share given higher per-capita spending in the region. In response to the new EUR 3 tariff, Nomura expects Chinese cross-border e-commerce platforms may shift toward a semi-managed model or select higher-priced products under the existing fully managed model to dilute the impact of the fixed tariff. Under either approach, costs for Chinese sellers may rise and further increase final selling prices. The report therefore expects Chinese cross-border e-commerce platforms in Europe to shift toward slower but more sustainable growth. Nomura's segment model shows Temu's revenue growth declining from 13.6% in 2026 to 8.3% in 2027 and 5.8% in 2028. Its operating margin is expected to improve from -0.7% in 2026 to 0.9% in 2027 and 1.9% in 2028, implying that profitability will gradually turn positive as growth slows. Revenue growth for PDD's China business is forecast at 3.8% in 2026, 9.3% in 2027, and 6.4% in 2028, with operating margins of 39.8%, 39.9%, and 40.6%, respectively. A potential stake reduction by Tencent is another near-term pressure. Based on Tencent's approximately 14% stake in PDD and the latest share price used in the report, the holding is worth more than USD 17bn and may be Tencent's most valuable individual portfolio holding. By comparison, Tencent owns approximately 17% of SEA, worth about USD 12bn. Meanwhile, Tencent's capital expenditure totaled CNY 84bn (USD 12.6bn) in 1H26, and Nomura estimates it may invest another USD 18bn in 2H26F. Tencent recorded USD 2bn of negative free cash flow in 2Q26, had net cash of less than USD 9bn, and raised a total of USD 4.6bn through four bond issuances during the quarter. Nomura believes the large volume of corporate bond issuance by major global cloud-computing companies during the year has made incremental debt financing less attractive. Between an equity placement similar to Alibaba's recent transaction and the sale of portfolio assets, Nomura views selling portfolio holdings as the more reasonable financing option because it considers Tencent's own shares currently undervalued. Consequently, as one of Tencent's more valuable holdings, PDD faces potential supply and sentiment pressure from a possible stake reduction. For valuation, Nomura uses a sum-of-the-parts approach: it values PDD's domestic business at USD 74bn, corresponding to 5x FY27F P/E, and Temu at USD 42bn, corresponding to 1.4x FY27F P/S, resulting in a USD 97 target price. The target price implies 8x FY27F P/E based on adjusted EPADS of CNY 82.11; PDD was trading at 7.2x FY27F P/E at the time. Based on the August 21, 2026 closing price of USD 88.38, the target price implies 9.8% upside, but Nomura maintains its Neutral rating. Regarding ESG, the report believes e-commerce operations do not directly cause pollution or greenhouse gas emissions, although packaging materials used for parcels may indirectly increase paper waste.

Analysis framework

Nomura first compares 2Q26 revenue and non-GAAP earnings per share with Bloomberg consensus, then breaks down transaction services and online marketing revenue to identify the source of the revenue miss. The report subsequently assesses the impact of platform governance on regulatory risks, growth, and margins, and uses regional MAU data from Sensor Tower to analyze the impact of EU tariffs on Temu. To assess Tencent's stake-reduction risk, the report considers the value of Tencent's holding, capital expenditure, free cash flow, net cash, and bond issuance to evaluate its financing options. Finally, the report applies earnings and revenue multiples to PDD's domestic business and Temu, respectively, and derives the target price through a sum-of-the-parts approach.

Methodology notes

• Event-Driven Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of Results with Bloomberg Consensus

  The report compares actual revenue, non-GAAP earnings per share, and individual revenue components with market consensus to identify performance deviations and their sources.

• Industry/Sector Analysis Framework

  Regional MAU Trend Analysis

  The report compares the YoY change in Temu's monthly active users across the United States, major European countries, and the global market, and combines this with Europe's user share and potential GMV share to determine the regional source and business impact of the tariff shock.

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts Valuation of PDD's Domestic Business and Temu

  The report estimates the values of PDD's domestic business and Temu separately and combines them to derive a USD 97 target price, reflecting the businesses' different profitability stages and applicable valuation metrics.

• Valuation MethodPE/PEG valuation

  FY27F P/E Valuation of the Domestic Business

  PDD's domestic business is valued at USD 74bn based on 5x FY27F P/E. The overall target price implies 8x FY27F P/E, while the stock was trading at 7.2x at the time.

• Valuation MethodPS valuation

  Temu FY27F P/S Valuation

  Because Temu is still transitioning from a negative to a positive margin, the report applies 1.4x FY27F P/S to value it at USD 42bn.

Asset mapping & comparison

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

• PDD Holdings (PDD.US)

  The primary company covered by the report; its domestic e-commerce business and Temu jointly determine its growth, profitability, and sum-of-the-parts valuation.

  Strengths

  The 2Q26 margin exceeded expectations, and non-GAAP EPADS beat consensus by 4%. Stronger platform governance helps protect intellectual property and consumer interests while mitigating domestic and overseas regulatory risks.

  Weaknesses

  2Q26 revenue was 2% below consensus, while transaction services revenue missed expectations by 6%. Stronger governance may cause growth in domestic and overseas businesses to normalize.

  Comparison

  The target price implies 8x FY27F P/E, while the stock was trading at 7.2x FY27F P/E at the time.

  Risks

  Lower-than-expected GMV growth, intense industry competition, tighter domestic and overseas regulation, and near-term pressure from a potential stake reduction by Tencent.

• Temu (Unlisted, Owned by PDD)

  PDD's overseas cross-border e-commerce business and an important component of the report's sum-of-the-parts valuation and overseas growth analysis.

  Strengths

  The US business appears to have recovered from the prior year's low. The model forecasts that its operating margin will improve from -0.7% in 2026 to 0.9% in 2027 and 1.9% in 2028.

  Weaknesses

  July MAU declined sharply YoY in major European markets, while global MAU fell 11% YoY. Measures taken in response to the tariff may increase seller costs and final selling prices.

  Comparison

  Europe previously served as a growth buffer when the US business was affected by trade policy, but it now faces its first severe policy test.

  Risks

  The EU's fixed EUR 3 tariff, tighter overseas regulation, slowing GMV growth, and cross-border e-commerce competition.

Key data

• 2Q26 Revenue Growth+8% YoY2% below Bloomberg consensus
• 2Q26 Non-GAAP EPADS-12% YoY4% above consensus, supported by a higher margin
• Transaction Services Revenue+13% YoY6% below the latest Bloomberg consensus
• Online Marketing Revenue+3% YoY2% above consensus
• Earnings Forecast RevisionsFY26/27F raised by 1%/4%, respectivelyBased on higher margin assumptions
• New EU TariffEUR 3 per product categoryEffective July 1, 2026, applicable to inbound B2C parcels valued at no more than EUR 150
• Temu Europe July MAUGermany -37%, Spain -33%, France -36%, Italy -29%All figures are YoY changes; major EU markets had grown 30% to 60% YoY in 1Q26
• Temu Global July MAU-11% YoYThe trend has continued to deteriorate since June, primarily attributed by the report to weakness in Europe
• Europe's Share of Temu Global MAUApproximately 26%The report believes Europe's GMV share may be materially higher than its MAU share due to higher per-capita spending
• Temu Revenue Growth Forecast2026F 13.6%, 2027F 8.3%, 2028F 5.8%Growth is expected to slow gradually
• Temu Operating Margin Forecast2026F -0.7%, 2027F 0.9%, 2028F 1.9%Expected to turn positive in 2027
• Value of Tencent's PDD StakeMore than USD 17bnEstimated based on an approximately 14% stake and the latest PDD share price used in the report
• Tencent Capital Expenditure1H26 CNY 84bn (USD 12.6bn); potentially another USD 18bn in 2H26FThe report uses this to assess Tencent's external financing and asset-sale needs
• Tencent Liquidity and Financing2Q26 free cash flow -USD 2bn; net cash below USD 9bn; bond issuance USD 4.6bnFour tranches of bonds were issued in 2Q26
• Segment ValuationDomestic business USD 74bn; Temu USD 42bnBased on 5x FY27F P/E and 1.4x FY27F P/S, respectively
• Target Price and ValuationUSD 97; implies 8x FY27F P/EAdjusted EPADS is CNY 82.11; the stock was trading at 7.2x FY27F P/E at the time

Impact & implications

The report believes PDD is sacrificing some growth in exchange for more robust governance and lower regulatory risk, while higher margins also support upward revisions to FY26/27 earnings forecasts. However, the EU's fixed tariff may increase seller costs and final selling prices, shifting Temu's European business toward slower growth. The possibility that Tencent may sell portfolio assets to support high capital expenditure could create additional near-term pressure on PDD. Balancing earnings improvement, policy risks, and potential share supply, Nomura maintains its Neutral rating and USD 97 target price.

Risks

• The fixed EUR 3 tariff imposed by the EU effective July 1, 2026 may increase costs for Temu and Chinese sellers and create near-term operating pressure on the European business.
• Tencent may sell portfolio assets to support high capital expenditure, potentially placing stake-reduction pressure on its PDD holding worth more than USD 17bn.
• PDD's GMV growth may fall below expectations.
• Intense competition among major e-commerce platforms may prevent the target price from being achieved.
• Tighter regulation of e-commerce operations in China and overseas markets may constrain growth and valuation.
• Conversely, stronger-than-expected GMV growth, easing competition among major e-commerce platforms, or faster-than-expected overseas expansion could create positive deviation risks.
• Packaging materials used for e-commerce parcels may indirectly increase paper waste.