Generally in line with market expectations. PDD reported mixed 2Q26 results, with revenue up 8.1% yoy to Rmb112.4bn, 3% below Bloomberg consensus, mainly due to a 6% miss in transaction services revenue, which we attribute to more prudent revenue growth strategy in the TEMU business. Operating profit increased 7.6% YoY to RMB27.8bn, 2% above Bloomberg consensus, driven by a 1.8ppt GPM beat and better-than-expected sales and marketing expense control. Adj. net income declined 13% yoy to Rmb28.5bn, but came in 2% above Bloomberg consensus, reflecting a combination of higher G&A expenses, partly associated with organizational and operational investments. By segments: (1) online marketing services and others revenue increased 3.5% YoY to RMB57.6bn (2Q25: +13.4% YoY; 1Q26: +2.5% YoY), 2% above consensus. This marked the first consensus beat in five quarters. Domestic e-commerce GMV remained under pressure amid a soft macro backdrop in 2Q26; the quarterly segment revenue beat was mainly driven by a gradual stabilization in take rate. (2) Transaction services revenue grew 13.3% YoY to RMB54.7bn, 6% below consensus, mainly due to increasing regulatory uncertainties on Temu.

Stepping up supply chain investments with the rollout of “Xin Pin Mu”. Gross profit growth in 2Q26 came in ahead of market expectation at +11% yoy, with adj. operating profit up +5% yoy, demonstrating resilient profitability despite continued investments into platform governance, Rmb100bn merchant ecosystem support and supply chain development amid a more challenging global regulatory environment. Management reiterated that deepening supply chain capabilities remains the core long-term strategic priority, with “Xin Pin Mu” serving as an extension of this effort through selective incorporation of 1P brands in categories where PDD possesses differentiated supply chain/global channel advantages. While management acknowledged the initial rollout of “Xin Pin Mu” (with first brand “Bemuvo” launched in June) has taken longer than originally expected, the company remained committed and continued to view broader supply chain inputs as a meaningful growth driver, despite potential near-term drags.

Domestic GMV resilience & OMS Outlook. PDD online marketing revenue growth remained healthy at +3%, ahead of Taobao-Tmall of +1% yoy on a like-for-like basis (-7% yoy under new merchant rebate terms) and Kuaishou e-Commerce ad at +1%, suggesting relatively resilient domestic GMV trends and merchant advertising demand and merchant advertising demand despite tighter merchant tax/intensifying competition/soft overall consumption (we estimate Pinduoduo GMV grew ~5% yoy in 2Q26, versus ~2% for the broader industry). Looking ahead, management expects future growth to increasingly come from addressing supply chain bottlenecks (across product development/manufacturing/fulfillment), while unlocking consumption potential in lower-tier cities/rural areas through continued investments in logistics infrastructure. The company remained committed to its core eCommerce business and supply chain buildout, rather than expansion into on-demand retail, where management saw limited synergies given distinction in business models/supply chain requirements.

Transaction services revenue outlook into 2H26, with Temu’s localization strategy given evolving tariff/regulatory environments. Temu navigates evolving global tariff/regulatory policies, with pressure to persist following the EU’s removal of the €150 customs-duty exemption and introduction of a temporary €3 customs duty on low-value imports from July (Europe accounts for roughly 1/3 of Temu GMV). Transaction services revenue came in at +13% yoy, moderating from +20% in 1Q26, which we believe might reflect Temu’s proactive adjustment to evolving tariff/regulatory policies (notably in Europe, where we note media report of a sharp GMV decline in 2Q). Management acknowledged that recent changes have resulted in lower fulfillment efficiency and pressure on near-term growth in selected regions. Through onboarding more local merchants to broaden product mix, expanding local warehousing and fulfillment capabilities, and increasing local sourcing/local fulfillment penetration, the company aims to improve business resilience and regulatory compliance while further expanding its global addressable market. We now estimate transaction commission revenue growth of +10% yoy for FY26E (from +20% yoy). We believe pressure from European regulatory changes (the implementation of the EU’s temporary €3 customs duty on low-value imports since July) is likely to persist into 2H26, although partially offset by continued recovery of the U.S. business under a more favorable tariff backdrop. We now expect Temu EBIT losses of Rmb11.8bn/Rmb2.8bn in FY26E/FY27E, versus our prior estimates of an Rmb9.4bn loss/Rmb2.7bn profit, respectively, reflecting a more gradual path toward profitability as Temu continues to invest in localization.

Valuation: Despite a challenging operating environment, we see signs of stabilization in PDD’s domestic business, with online marketing revenue outperforming expectations and domestic GMV remaining relatively resilient. The company continues to step up investments in Temu localization, 1P initiatives and supply chain capabilities to strengthen its long-term competitive moat. Key considerations include: (1) continued supply chain investment through the rollout of “Xin Pin Mu”; (2) resilient domestic GMV and an improving OMS outlook; and (3) near-term pressure on transaction services revenue as Temu adapts to evolving global tariff and regulatory environments. We believe these investments, together with continued merchant ecosystem development and globalization initiatives, should strengthen PDD’s long-term competitive positioning, although they may weigh on near-term earnings growth. PDD trades at 8.5x/7.0x FY26E/FY27E consensus P/E, versus peer-group median multiples of 19x/23x and mean multiples of 29x/26x, respectively.