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China tech

Billionaire founder's reduced role puts Pinduoduo into new era

Shares shoot up despite Huang's exit as CEO at US-listed Chinese e-commerce group

Founder Colin Huang is giving up executive roles at Pinduoduo.   © Reuters

HONG KONG -- Pinduoduo founder Colin Huang has wielded huge power at the company that made him one of Asia's wealthiest men, so his surprise decision to take more of a back-seat role has prompted plenty of questions about a new era at one of China's biggest online retailers.

Huang, a former Google employee and a factory worker's son, is not just the chairman and largest shareholder at Pinduoduo, a company seen by investors as one of the successes amid the coronavirus crisis. The 40-year-old was also CEO and the de facto chief financial officer, an unusual concentration of influence at the Nasdaq-listed company with a market capitalization of $102 billion.

Huang is leaving those executive posts and cut his personal stake in Pinduoduo, saying he will focus as chairman on determining the long-term strategy of the money-guzzling company.

Pinduoduo's share price shot up in the first minutes of trading on the Nasdaq on Thursday, rising about 3% from the previous day's close.

Pinduoduo's strategy of heavily subsidizing online shopping in a drive for customers has been rewarded so far. The company's share price has more than doubled since March as its monthly users and volumes surge, allowing Huang to overtake rival Alibaba Group Holding's founder Jack Ma as the second-richest person in China.

Yet the company known as PDD has failed to turn a profit since going public and regularly taps capital markets for new funding, suggesting the need for a different long-term plan.

"I'm unconvinced that PDD's business model is stable or sustainable, and I see the company's shares as overvalued," said Brock Silvers, an executive with Adamas Asset Management in Hong Kong. "JD.com or Alibaba seem like better long-term investments." Silvers named Pinduoduo's two larger rivals, which no longer have to rely on subsidies to attract customers.

Pinduoduo shoulders subsidies on deals from iPhones to surgical masks. The company, which has almost 630 million annual shoppers, spent 7.3 billion yuan ($1.03 billion) on sales and marketing fees including subsidies in the first quarter -- or more than its revenue of 6.5 billion yuan.

That sent the company's net loss surging to 4.1 billion yuan for the three months ended March 31, compared with a loss of 1.9 billion yuan in the year-earlier quarter.

The retailer continues to attract funds, raising $1.1 billion in a private share placement in March from investors including Tencent Holdings. That came just six months after a $1 billion convertible bond offering and a $1 billion follow-on offering in February 2019. Pinduoduo raised $1.6 billion from its initial public offering in July 2018.

Shaun Rein, managing director of China Market Research Group in Shanghai, said he also was concerned about Pinduoduo's sustainability.

"Consumers in tier 1 cities tell us they are worried about low quality and fake products sold on the platform," he said. "Consumers in third-tier cities, as they get wealthier and more sophisticated, also get worried."

Pinduoduo's management reshuffle "raises a lot of red flags about the long-term viability of the company," Rein said. "Why would the founder leave his company [as the CEO] when he is so young and the company is just starting?"

As part of the overhaul, Huang is reducing his personal stake by about $14.3 billion, cutting his holding to 29.4% from 43.3%. But he retains firm control, holding 80.7% of voting shares, down from 88.4%.

Co-founder and chief technology officer Chen Lei will take over as CEO, and Ma Jing, previously with Chanel's China business, will join as vice president of finance, Huang said in a statement.

"I will take a step back from day-to-day management of the company's operations and work with the relevant teams and the board on our long-term strategy and corporate structure," Huang said.

"I hope that through the management changes, we can gradually hand over more managerial duties and responsibilities to our younger colleagues, give space and opportunities for the team to grow, and drive Pinduoduo to become a more mature company with a continuous entrepreneurial spirit," he said in a letter to employees.

Citigroup analyst Alicia Yap said that though Huang's decision to step down was surprising, she understood the rationale behind spending time on long-term strategy.

Huang "could spend more time on establishing and building relationships with brands, merchants, farmers and relevant authorities to support the future growth of Pinduoduo," Yap said.

Noting that Chen also is a founder, Yap said that "we believe the transition will be smooth. In summary, we believe the management changes will not represent a major shift of the company's strategy."

Huang said that about 2.4% of Pinduoduo shares from the stake he is relinquishing will go into a charity to support employees with emergency needs and for corporate social responsibility.

Another 7.7% will be transferred to the Pinduoduo Partnership, a structure within the company that wields influence over executive appointments and is managed by Huang and Lei. The partnership will advance long-term scientific research and use a portion to incentivize the future management team, Huang said.

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