Dada Nexus (DADA.OQ) – Leading Chinese on-demand retail platform accelerates on significant runway
A JD.com subsidiary with growing economies of scale, unlocking growth potential at distressed valuations
Dada Nexus Limited (DADA.OQ) (“Dada”), with a market cap of USD 869.9 million, is one of China’s leading on-demand retail platforms holding around 20% market share behind Meituan (42%, 3690.HK) and Ele.me (24%, Alibaba-owned). Dada, a 54% subsidiary of JD.com (JD.OQ; 9618.HK) and 9% owned by Walmart Inc. (WMT.N) operates two core businesses, namely:
JD Daojia (JDDJ), which is a local non-restaurant online to offline (“O2O”) retail marketplace; and
DADA Now, a crowd-sourced last mile delivery platform which services JDDJ and JD.com orders, as well as logistics companies, merchants, and individual users.
While it can be described as two separate business lines, JDDJ and DADA Now are effectively inter-connected platforms, with the former providing on-demand retail fulfilment for Chinese consumers, and the latter, leveraging the crowdsourcing model to address the challenge of frequent fluctuations brought forward by the nature of on-demand orders.
JDDJ – crowd-sourced delivery offering a vast array of consumer products with rapid delivery times
JDDJ, which constitutes 66% of Dada’s overall revenues, has over 78.6 million active users and facilitated RMB 63.27 billion (USD 8.94 billion) in GMV in 2022, an increase of 26.2% and 46.9% yoy respectively. It is the largest local on-demand retail platform in the China supermarket category with 27% market share in 2021, as per iResearch. With 93 of China's top 100 supermarket chains listed on its platform, including Walmart and Yonghui, JDDJ provides local consumers access to deep inventories.
Other leading categories include consumer electronics and home appliances, leveraging JD.com's extensive product catalogue and supply chain. This hybrid online-offline model benefits both merchants and consumers. JDDJ provides value to both merchants and consumers:
For consumers, delivery is faster than traditional e-commerce since orders are fulfilled from nearby physical stores and inventories. Consumers value the rapid delivery of fresh groceries. Through the network effect of Dada Now, the platform achieves impressive efficiency, with 85% of intra-city delivery orders matched with riders within one minute. As a result, Dada maintains an average delivery time of approximately 30 minutes for all intra-city orders, providing a seamless and efficient delivery experience for customers.
For merchants, it offers an easy-to-use system and additional online sales channels. This hybrid online-offline model is key for retailers to cut costs and compete with pure e-commerce players.
Compared to competitors like Meituan and Ele.me, JDDJ excels in specific categories due to its strengths:
It dominates supermarkets by partnering with top chains and providing deep inventory selections online.
Consumer electronics and appliances benefit from JD.com's supply chain backing and product listings.
While JDDJ's crowd-sourced fulfilment model is more cost-efficient, it can be less timely than competitors who operate their own fleets. However, JDDJ manages this weakness by focusing on faster-moving supermarket and local inventory-based orders that still meet consumer delivery expectations.
In FY22A, JDDJ monetized around 10% of GMV to generate revenues of CNY 6.21 billion (USD 870 million), serving an active consumer base of 78.6 million users. Commission fees from merchants range from 1-3% for supermarkets to 5-10% for other categories. Online marketing and fulfilment services also provide around 3.5-4% of GMV.
JDDJ's business has significant runway for further expansion. It’s noteworthy that only 14% of parent company JD.com's massive 569 million users are currently engaged with JDDJ. Mirroring JD's partnership to integrate its e-commerce with Tencent’s WeChat in 2014, even greater synergies can be realized by further integrating across JD.com's vast ecosystem. Improving economics from leveraging JD.com's industry-leading logistics network (and DADA Now) and long-term merchant relationships form strong tailwinds. On 19 December 2023, Dada announced the appointment of two JD Logistics (2618.HK) (“JDL”) veterans as its new Chairman and CFO, hinting at closer integration between the two companies.
China’s fragmented offline retail offers growth opportunities. JDDJ’s seamless platform is an attractive alternative for retailers, with room to increase commission rates, particularly for supermarkets and home appliances businesses which typically operate at 15-20% gross profit margins. Minimal extra costs are involved for these businesses to fulfill sales via JDDJ. With a growing customer base and per-order spend, we foresee this Dada segment doubling its FY23e revenues of CNY 7.6 billion (USD 1.07 billion) in four years.
DADA Now – Last mile logistics with baked-in customer base with strong presence across tier 1 and tier 2 cities
As for DADA Now, which contributes the other 34% of Dada’s overall business, is among the largest crowd-sourced last-mile delivery service in China, catering directly to JDDJ, as well as JDL, retail chains, and SMEs. As per iResearch, DADA Now holds approximately 10% market share in the third-party on-demand delivery sector, behind key player SF Intra-city at 11% market share. The top five platforms collectively account for around 30% market share, indicating the fragmented nature of the industry.
DADA Now's last-mile delivery volume accounted for approximately 20% of JD.com's total order volume in 2022. Their intra-city delivery service covers about 2,200 cities and counties, while their last-mile delivery service reaches around 2,600 cities and counties across China. Both services have a strong presence in tier 1 and tier 2 cities and are expanding into lower-tier cities.
DADA Now experiences substantial order volume from Key Account (KA) merchants serviced through JDDJ orders, which covers about 78% of its service delivery, holds prominent contributions from well-known supermarket chains such as Walmart and Yonghui. There are plenty of synergies with Walmart acting as a shareholder of the Dada, given that Walmart is the second largest source of orders to DADA Now (through JDDJ orders). Supermarkets alone account for more than 60% of the total order volume generated by KA merchants. Additionally, DADA Now has also engaged in order fulfilment from restaurants and beverage stores, which is witnessing rapid growth as well. The platform also plays a crucial role in assisting Douyin by fulfilling online supermarket and food delivery orders.
DADA Now’s fortunes are very much tied to total order volume growth and average order size, which we anticipate growing at a stable 10% yoy and 5-6% yoy respectively over the next couple of years. We also expect the platform’s penetration of JD.com’s total order volume to remain stable and growing above the 20% mark as further access points are embedded through JD’s platforms to boost traffic support. Much of the segment’s upside should come from KA merchants, which saw order volume grow at a 3-year CAGR of 28% in FY22A to 279 million. We expect volume growth to deliver at around 20% over the next few years as continued category expansion and additional contributions from Douyin channels coming online to drive future service revenues.
Dada’s Q3 results in-line with expectations with no big short-term surprises into the year-end
Dada reported Q323A revenues of CNY 2.9 billion, up 20.4% yoy and in-line with expectations. The Company also delivered a non-GAAP net loss of CNY 9 million for the quarter, with a loss margin of -0.3% matching sell-side estimates. JDDJ saw some weakness in the quarter with revenues coming in at CNY 1.79 billion (USD 253 million), -2% qoq, owing to soft O2O demand and increased travel/offline activities, but was well offset by DADA Now’s KA delivery growing at 15% qoq to CNY 866.1 million (USD 121 million).
However, a key highlight was 24% annualized growth in JDDJ's GMV to CNY 73.1 billion (USD 10.2 billion) for the latest twelve months. Reassuringly, JDDJ is making progress enriching its supply through partnerships with over 90 leading supermarket chains as well as vertical retailers in categories like liquor and maternity.
Dada management guided Q423e revenue in the range of CNY 3.0-3.3 billion (USD 420-460 million), representing between 12-23% yoy growth, as the company leverages initiatives such as JD Ecosystem's Xiaoshigou (“Shop Now”, on-demand retailing service) to further penetrate users and drive its strategic expansion.
We anticipate JDDJ to reach around 85 million active users by FY23e, driving revenues upwards of CNY 7.6 billion (USD 1.06 billion), 22% yoy growth, at a 10% monetization level for the segment. As for DADA Now, we should see the segment finish strong with CNY 3.9 billion (USD 550 million) in revenues, in-line with overall revenue consensus (around CNY 11.4 billion, or USD 1.6 billion).
Cheap valuation with compounding factors offers a unique trading and investment opportunity
It is noteworthy that Dada was profitable on a non-GAAP level in Q223A, before slipping into slight loss in Q323A. Dada is anticipated to end the year on a slight loss/breakeven, with average market consensus forecast of CNY 34 billion (USD 4.76 billion) net loss.
We see Dada’s FY24e as the ultimate litmus test given that the Company has reached an inflection point in its business cycle, with the market anticipating positive earnings next year. Given the asset-light nature of Dada’s business and capex to remain under 1%, we expect to see positive free cash flow generation in FY24e and beyond owing to fast growing topline, coupled with margin expansion and operational cost savings from both JDDJ and DADA Now. Key financial metrics such as its ROA, ROE and ROIC should also turn positive by FY25e.
iResearch projects China’s on-demand delivery order volumes to grow to 16.3 billion by FY25e. Just looking at Dada’s low penetration of its captive traffic pool vis-à-vis JD.com gives us plenty of confidence of its short to medium-term scalability. We are only expecting 18% penetration of JD.com users by FY27e, reflecting 5-6% yoy growth in our forecasts – what’s not to say it could reach 25-30% instead from maximizing its economies of scale? This could be achievable should Dada be able to provide users with a deep and expanding product suite with better customer service and at lower unit costs, and demonstrate to offline retailers that it is an increasingly important sales channel for them. There is plenty of upside to its current growth trajectory that can be easily self-financed through Dada’s existing war chest. Management in Q323A earnings call mentioned of its confidence in penetrating 50% of the JD.com user base in the long run given that JD.com users are “inherently purposeful shoppers, who demand higher merchandise quality and delivery speed…it’s more efficient to convert them into on-demand retail consumers”. Management is also of the view that head-on competition among other platforms is limited as Internet companies are focusing on cultivating the mindset for on-demand retail among their own user bases. As at end of Q323A, Dada sat on a net cash of CNY 3.74 billion.
Dada remains depressed, which we feel is largely a product of generally negative sentiment around Chinese tech rather than strictly a fundamentals issue. Taking consensus estimates, the stock trades at a discount to peers (Meituan, Dingdong, SF Intra-City) and looks cheap both on an absolute and relative basis, with a FY24e P/E and EV/EBIT of 10x and 4x respectively. It’s worth mentioning that Dada’s valuation is also somewhat tied to JD.com given its inherent relationship, so should the latter de-rate on a forward P/E basis, it could also impact the former’s stock performance.
While we don’t expect to see any big surprises in the short term, as is well covered by the market, Dada’s longer-term potential with inherent compounding growth factors remains significant as we continue to see more consumer spending shifts to on-demand e-commerce platforms like JDDJ.
The stock has a high beta of 1.48 relative to other Chinese tech peers, thus a resulting volatile share price. We’ll be keeping a close eye on year-end results, guidance, and business initiatives, which will be a few catalysts that could lead to a positive re-rating.
Currently, we have established a trading position in Dada with average in-price of USD 3.12. Our target for the stock is to double to above USD 6.00. However, our view is that the stock could trade higher, on par with its peers as it demonstrates sustainable profitability structure. Should JDDJ and DADA Now achieve mid-teens and high single-digit EBIT margins, Dada’s overall business should be able to generate low to mid-teens and high-single digit EBIT and net profit margins respectively.
We do see a number of risks in the business, such as a slower adoption rate and sector growth, intensified competition, and any negative changes to its framework agreement with its parent company JD.com, though unlikely.
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