PDD Holdings Inc’s shares dived as much as 18% after Temu’s owner warned that revenue growth will inevitably dwindle, highlighting the challenges of sustaining its pace of expansion against aggressive rivals like ByteDance Ltd.

Co-founder Chen Lei repeatedly stressed that PDD’s current trajectory wasn’t sustainable, at a time competitors such as ByteDance’s TikTok and Alibaba Group Holding Ltd are vying for budget-conscious shoppers. The company’s stock slid during pre-market trading in New York.

PDD has spent big on e-commerce business Temu to drive its global presence and escape an ailing Chinese economy. But executives have kept a lid on the overseas unit’s performance as competition turns cutthroat. On Monday, Chen said PDD needed to invest more in supporting merchants - at a time rivals are trying to woo them away.

“Competition is here to stay and is expected to intensify in our industry,” Chen told analysts during a post-results briefing. “High revenue growth is not sustainable, and a downward trend in profitability is inevitable.”

The Chinese-owned e-commerce platform reported revenue of 97.1 billion yuan for the June quarter, missing the average estimate of 100 billion yuan. Net income came to 32 billion yuan, compared to a projected 27.5 billion yuan.

In China, PDD has gained ground in recent years against traditional retailers like Alibaba and JD.com Inc with its low-pricing strategy, while adopting aggressive promotional campaigns to fend off upstarts such as Kuaishou Technology. As of last week, founder Colin Huang was China’s richest person with a US$49.3 billion fortune, according to the Bloomberg Billionaires Index.

But PDD faced a backlash in July when hundreds of merchants staged a rally outside its offices in southern China. They protested what they called unfair penalties that Temu’s owner was increasingly levying. 

“Going forward, PDD will face fierce competition in China, with merchants going through a hard time,” said Wang Xiaoyan, a Shanghai-based analyst with 86Research. “PDD will likely invest more in China, and that means we’ll see downside for the group in the Chinese market.”

Temu is also encountering growing regulatory scrutiny following its meteoric rise. The European Union is working on a proposal to close an import tax loophole for cheap goods bought online, a move that would primarily target Chinese retailers including Temu, Bloomberg News has reported. 

Still, PDD’s global expansion strategy has started to pay off in some ways. Temu has quickly become one of the most downloaded US apps after a splashy debut in 2022. It’s since begun to challenge fellow Chinese online shopping giant Shein, and even Amazon.com Inc in certain segments. 

"PDD’s indication on Aug 26 of lower profitability as the company boosts spending to tackle increased global competition suggests downside to 2H earnings consensus, which was projecting higher margins into 2025. This, along with PDD’s first revenue miss in 10 quarters for the three months ended June, looks set to dampen the growth outlook for the next 12 months," said Bloomberg Intelligence.

  - Bloomberg