Dada Nexus: Spotlight On 2023 Outlook And New Partnership

Elevator Pitch

I rate Dada Nexus Limited (NASDAQ:DADA) shares as a Hold.

My earlier write-up for Dada Nexus published on November 21, 2022, touched on the company's profitability expectations and its forward Enterprise Value-to-Revenue valuations.

I decide to keep my Hold rating for DADA unchanged. Dada Nexus Limited's partnership with Douyin could possibly translate into a significant increase in delivery orders for the intermediate term, but there is the risk of Douyin exiting the Chinese food delivery market if it fails to gain meaningful traction. DADA's 2023 outlook is also mixed, considering expectations of both revenue growth moderation and profitability improvement.

DADA's 2023 Financial Outlook

In the company's Q4 2022 financial results press release, Dada Nexus outlined its expectations for the current fiscal year, noting that it is "confident in further improving profitability while sustaining revenue growth momentum" in 2023. DADA also guided specifically for a +31.8% YoY increase in its topline to RMB2.67 billion in Q1 2023 based on the mid-point of its management guidance.

The company's revenue growth guidance for the first quarter of this year was a disappointment. Dada Nexus' expected Q1 2023 topline expansion (in RMB terms) of +31.8% YoY is roughly on par with DADA's Q4 2022 revenue increase of +31.9% YoY. This is also much slower than its Q2 2022 and Q3 2022 sales growth rates (in local currency terms) of +54.7% YoY and +41.1% YoY, respectively.

It is noteworthy that Dada Nexus mentioned about "sustaining revenue growth momentum" as part of its guidance for full-year FY 2023, rather than targeting a faster pace of topline expansion.

DADA is unlike certain Chinese companies, which are anticipated to experience substantial revenue growth acceleration in tandem with China's reopening. Dada Nexus disclosed at the company's Q4 2022 results call in early March that "offline spending for goods and services (in China) have somewhat recovered" since the country's shift away from its COVID-zero stance in late-2022.

In other words, the tailwinds relating to Work-From-Home trends brought about by COVID-19 are receding, and e-commerce demand in China going forward isn't likely to be as strong as it was during the peak of the pandemic. This explains why DADA's Q1 2023 revenue growth guidance wasn't as good as what one would have hoped for. As such, it is reasonable that the analysts are forecasting that Dada Nexus' topline expansion in RMB terms will slow from +36.4% in FY 2022 to +35.5% for FY 2023 as per S&P Capital IQ's consensus data.

On the other hand, the sell-side is predicting that Dada Nexus will reverse from a normalized net loss of -RMB1,326 million for FY 2022 to register a non-GAAP adjusted net income of +RMB138 million (Source: S&P Capital IQ) in FY 2023. This is aligned with the company's guidance of "improving profitability" for this year.

DADA's recent quarterly financial metrics provide support for the thesis that the company has been making good progress with its cost management initiatives, which paves the way for eventual profitability. Dada Nexus' gross profit margin widened by +880 basis points YoY and +290 basis points QoQ to 41.3% for Q4 2022. The selling, general & administrative (SG&A) costs-to-revenue ratio for DADA decreased by -3.8 percentage points from 56.6% in Q2 2022 to 52.8% in Q3 2022, before declining by another -0.8 percentage points to 52.0% for the most recent quarter.

New Partnership For Dada Nexus

A recent March 8, 2023 Nikkei Asia article highlighted that "ByteDance's (BDNCE) Douyin" (China's equivalent of TikTok) has entered into "China's e-commerce and local services" market. In this article, Dada Nexus was named as one of the companies handling deliveries for Douyin.

This new partnership with Douyin could potentially become a major growth driver for DADA in the mid to long term. At its most recent quarterly results briefing, Dada Nexus noted that "there will be meaningful incremental revenue for (the company's) Dada Now (business segment) in the coming years", assuming that "Douyin's food delivery service experience has significant growth."

Douyin will be primarily competing with Meituan (OTCPK:MPNGF, OTCPK:MPNGY) in the Chinese food delivery market. Meituan executed on around 5 billion delivery orders in Q3 2022, and this works out to an annualized order volume of approximately 20 billion. If Douyin can eventually grow to achieve 5% of Meituan's delivery order volume and DADA grabs a quarter of Douyin's deliveries, Dada Now might potentially add roughly 250 million delivery orders every year in the future with the Douyin partnership. As a comparison, Dada Now did 1.12 billion delivery orders in 2021, so the additional growth contributed by the Douyin partnership might be pretty significant.

But if history is anything to go by, there is a possibility of Douyin choosing to exit China's e-commerce and food delivery markets in time to come. Back in 2021, Douyin's parent company, ByteDance, had tried to compete with Chinese OTAs (Online Travel Agents) with its own mobile app offering travel agent services known as "Mangosteen Travel." The end result was that BDNCE took the "Mangosteen Travel" app off the market in less than one month. It is never easy to compete against entrenched incumbents (Meituan boasts a 70% market share), and there is no knowing whether Douyin will survive and thrive in China's food delivery market.

In summary, Dada Nexus' new partnership with Douyin holds great promise, but the success (or failure) of Douyin's venture into the food delivery space in China is not within DADA's control. Therefore, it won't be prudent to consider potential revenue contribution from Douyin as part of the company's medium- to long-term growth outlook.

Concluding Thoughts

I continue to award a Hold rating to Dada Nexus Limited. There are both positives and negatives associated with Dada Nexus' 2023 guidance, while there is uncertainty regarding the potential success of Douyin's foray into the Chinese food delivery and e-commerce markets.

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