Company Reports

We maintain our fair value estimate of $2.00 per share for Dada Nexus after it reported second-quarter 2024 revenue of CNY 2.45 billion, which represented a 9.5% decline year on year, but was better than our forecast of a 14% decline. After questions were raised about its accounting practices—where the revenue and cost of goods were inflated and forced the company to restate its previous financial statements—the company decided to lower its incentives and change its strategy to address its heavy cash burn. Questions remain as to whether the new strategy will eventually pan out, but Dada Nexus was able to narrow its net loss margin by about 100 basis points sequentially this quarter to 12%.

We are lowering our fair value estimate to $2.00 from $3.00 for Dada Nexus after its first-quarter 2024 revenue of CNY 2.45 billion missed badly and was 12% below our CNY 2.77 billion estimate. This marks the second quarter in a row that it missed revenue since questions were raised about its accounting practice that resulted in the company restating its revenue and cost of goods line items in previous financial statements. The revenue miss was due to the strategic decision to dial back incentives that led to lower demand for JDDJ on-demand deliveries, which is now branded as JD Now. As a result, segment revenue declined 28% year on year. Advertising revenue on the platform also declined, which may signal problems with user retention, as well. On the bright side, sales and marketing expenses for the quarter declined 38% year on year, and operating loss margin narrowed to 15% from 17% due to lower incentives. Its intracity and last-mile delivery unit, Dada Now, also continued to penetrate larger-brand clients, seeing revenue growth of 57% year on year, which cushioned the loss of market share and revenue decline from JD Now. Dada Nexus is currently implementing a new strategy by focusing on users from JD.com, its parent company, and offering free delivery to customers at a lower minimum order threshold (CNY 29 from CNY 59).

We believe Dada Nexus should see steady growth in the medium term on the back of its relationships with Walmart and JD.com, which should eventually provide it a pipeline of steady orders and allow the firm to maintain stability in a competitive industry. Dada competes in a very saturated industry that doesn’t have much differentiation among competitors, which means that consumers are likely to base their preferences on cost. Currently, it still incurs operating losses, but we believe that its relationships with Walmart and JD.com should provide Dada with steady growth and a positive operating margin, given the larger merchants’ reach across China. Sales and marketing expenses and incentives remain about 40% of sales, which highlights Dada’s high operating leverage and underscores how the firm should eventually expand its operating margin as it scales. Dada Nexus is optimistic that it can reach its long-term forecast target of 10%-15% operating margin as orders grow. However, the main concern is that growth could be an issue, given the abundance of other options if not for its partners. It trails its larger competitors in volume and revenue terms, which suggests that Dada’s laggard position within the industry is unlikely to change in the short term for its delivery business. This is unless it incurs heavy spending on incentives to get consumers to use its delivery business.

We believe Dada Nexus should see steady growth in the medium term on the back of its relationships with Walmart and JD.com, which should eventually provide it a pipeline of steady orders and allow the firm to maintain stability in a competitive industry. Dada competes in a very saturated industry that doesn’t have much differentiation among competitors, which means that consumers are likely to base their preferences on cost. Currently, it still incurs operating losses, but we believe that its relationships with Walmart and JD.com should provide Dada with steady growth and a positive operating margin, given the larger merchants’ reach across China. Sales and marketing expenses and incentives remain about 40% of sales, which highlights Dada’s high operating leverage and underscores how the firm should eventually expand its operating margin as it scales. Dada Nexus is optimistic that it can reach its long-term forecast target of 10%-15% operating margin as orders grow. However, the main concern is that growth could be an issue, given the abundance of other options if not for its partners. It trails its larger competitors in volume and revenue terms, which suggests that Dada’s laggard position within the industry is unlikely to change in the short term for its delivery business. This is unless it incurs heavy spending on incentives to get consumers to use its delivery business.

We maintain our fair value estimate for Dada Group at $3 after the company reported revenue of CNY 2.75 billion for the fourth quarter of 2023, representing only a 3% increase year on year. Dada addressed the key issue of overstating its revenue from online advertising services for the first three quarters of 2023 and restated its previous income statement, by removing CNY 500 million in offsetting revenue and costs. The result of the rectification revises revenue growth down to 12% year on year for 2023, which suggests that the monetization rate was much lower than previously indicated, given that gross merchandise volume, or GMV, was not overstated. Dada declined to provide details on the monetization rate and stopped disclosing GMV data. As such, we lower our monetization rate by 150 basis points, and we reduce GMV growth to only midteens in the next three to five years, down from high teens, to account for the uncertainty. Given the lack of transaction data and the recent irregularity in its income statement, we believe Dada carries plenty of corporate governance risks until it can provide better transparency.

We believe Dada Nexus should see steady growth in the medium term on the back of its relationships with Walmart and JD.com, which should eventually provide it a pipeline of steady orders and allow the firm to maintain stability in a competitive industry. Dada competes in a very saturated industry that doesn’t have much differentiation among competitors, which means that consumers are likely to base their preferences on cost. Currently, it still incurs operating losses, but we believe that its relationships with Walmart and JD.com should provide Dada with steady growth and a positive operating margin, given the larger merchants’ reach across China. Sales and marketing expenses and incentives remain about 40% of sales, which highlights Dada’s high operating leverage and underscores how the firm should eventually expand its operating margin as it scales. Dada Nexus is optimistic that it can reach its long-term forecast target of 10%-15% operating margin as orders grow. However, the main concern is that growth could be an issue, given the abundance of other options if not for its partners. It trails its larger competitors in volume and revenue terms, which suggests that Dada’s laggard position within the industry is unlikely to change in the short term for its delivery business. This is unless it incurs heavy spending on incentives to get consumers to use its delivery business.

We lower our fair value estimate for Dada Nexus to $3 from $4 after the company reported irregularities in its income statement in an SEC filing on Jan 8. Based on its preliminary assessment, the company currently estimates that approximately CNY 500 million of revenue from online advertising and marketing services and CNY 500 million of operations and support costs may have been overstated for the first three quarters of 2023. The CNY 500 million represents only 6.1% of Dada Nexus' revenue, and we have removed CNY 500 million from both revenue and the cost of goods and services in the first three quarters in our model accordingly, based on the filing. The company indicated that the overstatement is from its advertising side, which implies that the monetization rate for that business is likely overestimated by about 150 basis points so far in 2023. Subsequently, we adjusted our model to reflect the overestimation and lowered the monetization rate assumptions in the advertising business by 200-250 basis points in the outer years, which is the main contributing factor to our reduced valuation.

We initiate Dada Nexus with a fair value estimate of $4, reflecting the potential growth of its last-mile delivery and on-demand retail businesses, but also the company's profitability uncertainty in the long term. Dada Nexus competes in a commoditized industry for its delivery business, Dada Now, and in a burgeoning but also competitive industry for its on-demand retail platform, JDDJ. We estimate the company should see about 20% revenue growth per year for the next three years as its volume is still considerably smaller than that of its peers, but our main concern is whether it can generate lasting profitability, as sales and marketing expenses account for more than 40% of sales, and the company has yet to generate a positive operating margin. Given that the last-mile delivery industry is commoditized, Dada is forced to compete on a low-cost basis by incentivizing consumers, which is likely to pressure margins in the long term. We estimate delivery revenue to grow annually in the mid-20% for the next three years, similar to its competitor. Dada still trails larger competitors such as SF Intra-City in both delivery revenue and volume, which could mean that the company may spend more on incentives to catch up on market share.

We believe Dada Nexus should see steady growth in the medium term on the back of its relationships with Walmart and JD.com, which should eventually provide it a pipeline of steady orders and allow the firm to maintain stability in a competitive industry. Dada competes in a very saturated industry that doesn’t have much differentiation among competitors, which means that consumers are likely to base their preferences on cost. Currently, it still incurs operating losses, but we believe that its relationships with Walmart and JD.com should provide Dada with steady growth and a positive operating margin, given the larger merchants’ reach across China. Sales and marketing expenses and incentives remain about 40% of sales, which highlights Dada’s high operating leverage and underscores how the firm should eventually expand its operating margin as it scales. Dada Nexus is optimistic that it can reach its long-term forecast target of 10%-15% operating margin as orders grow. However, the main concern is that growth could be an issue, given the abundance of other options if not for its partners. It trails its larger competitors in volume and revenue terms, which suggests that Dada’s laggard position within the industry is unlikely to change in the short term for its delivery business. This is unless it incurs heavy spending on incentives to get consumers to use its delivery business.