China's Pinduoduo invests $200m in electronics retailer Gome

Pinduoduo has subscribed to convertible bonds with a conversion price of HK$1.21 per share. This will give the company 1.28 billion of Gome shares, or a 5.6% stake on a fully diluted basis, according to a filing. The bonds have a 5% annual coupon rate and a tenor of three years with the option of a two-year extension.

Hong Kong-listed Gome saw its stock spike to HK$0.97 in response to the announcement on April 20. It fell back to close at HK$0.87, up 16.4%. 

The companies have also entered into a partnership that will see Pinduoduo offer Gome's entire product range - including top domestic and international brands such as Siemens, Sony, Haier, Gree and Midea - on its platform at competitive prices. At the same time, Pinduoduo users will be able to experience products first-hand before placing orders through Gome's offline network. 

As of 2019, the company had more 2,600 stores across 776 cities in China. To support this operation, Gome's logistics, delivery and assembly services operations will be integrated with the Pinduoduo platform. 

Another goal of the partnership is to promote Pinduoduo's consumer-to-manufacturer (C2M) strategy, whereby the company aggregates user demand and tries to connect this demand directly to manufacturers and merchants with strong supply chain capabilities. This reduces production costs as well as cutting down the layers of intermediaries.

The investment in Gome comes amid the fierce competition between Alibaba Group and Pinduoduo. Earlier this year, Alibaba’s Tmall B2C platform told sellers they must immediately shut down their Pinduoduo accounts if they wanted to continue to operate on Tmall. Last month, employees of Pinduoduo posted an open letter on Weibo accusing Alibaba of blocking their personal Taobao C2C accounts as well as those belonging to family members.

Pinduoduo, which was founded as recently as 2015, raised $1.63 billion through a US IPO in July 2018. The company is currently trading at a 163% premium to its IPO price. Gross merchandise value and revenue reached RMB1 trillion ($144.6 billion) and RMB30.1 billion last year, while the net loss narrowed to RMB6.9 billion. Active buyers and annual spending per buyer rose 40% and 53%, respectively.

As of year-end 2019, Tencent Holdings held a 16.9% stake in Pinduoduo, while Garong Capital had 8.4% and Sequoia Capital had 7.2%. Last month, the company raised $1.1 billion through a private share placement. Tencent contributed $50 million but its holding was still diluted slightly to 16.5%.

Gome is also going through a period of transition. The company wants to evolve from a home appliance retailer into "an integrated provider of 'home living' solutions, service solutions and supply chain" by bringing together its social e-commerce platform, physical stores, and app. Sales came to RMB59.5 billion last year, down 7.57% on 2018. Its net loss narrowed from RMB5.49 billion to RMB2.97 billion.

The Gome-Pinduoduo alliance bears similarities to that struck between Suning Commerce - Gome's direct competitor - and Alibaba five years ago. Alibaba invested RMB28.3 billion in Suning for a 19.99% stake, while Suning committed RMB14 billion for 1.1% of Alibaba. Suning opened a flagship store on Tmall and its logistics network was integrated with that of Alibaba-backed Cainiao.

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• Topics
• Greater China
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• Tencent
• Sequoia Capital
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• Banyan Capital