Dada Nexus: An Overlooked Middleman In China’s Digital Retail Revolution (NASDAQ:DADA)

Dada Nexus (NASDAQ:DADA) is a Chinese small cap capitalizing on the digitalization of retailers. It owns two segments: Dada Now, a cost-efficient crowdsourcing delivery platform, and JD Now’s ecosystem, which allows retailers to better manage their warehouses and customers. They work together closely with the JD Group and are backed by Walmart.

Recently, a potential fraud case was brought to light by an audit, depressing the share price by another 50%, bringing the total down to 90% since its IPO. I believe the record negative sentiment makes it a strong buy.

Company History

Dada Nexus Limited was founded by launching Dada Now in July 2014. In 2016, they established a cooperative relationship with JD.com (NASDAQ:JD) and with Walmart Group (NYSE:WMT). These invested US$380 million and US$370 million respectively. In 2016, in addition to Dada now, it acquired on-demand retail marketplace JDDJ from JD.com.

In 2020, Dada’s founder & CEO, Philip Kuai mysteriously resigned like many other tech founders in China and Dada Nexus is now exclusively led by all JD.com logistics veterans. In June 2020, they listed their ADSs on the NASDAQ under the symbol DADA. Since then, Dada has received US$546 million in cash for JD’s partnership resources and customer traffic aid for issuing a total of 125 million ordinary shares (Form 20-F, 2023).

According to the 2023 annual report (Form 20-F, page 125), its principal shareholders are JD.com and Walmart Entities with 53.1% and 9.0% of shares outstanding respectively. Since its inception a decade ago, Dada Nexus has consistently been adopting new technologies to further add value to its partnered retailers.

Business Strategy

Dada Nexus operates two major complementary business platforms: JD Now (previously JDDJ) and Dada Now. It’s the third largest of China’s local on-demand delivery platforms with 20% market share. They sit behind Meituan with 42% (OTCPK:MPNGF) and Alibaba-owned Ele.me with 24% (NYSE:BABA). According to Statista, “In 2023, China’s online-to-offline market surpassed 4.3 trillion yuan (US$592B), of which the home delivery service contributed around three trillion yuan.

JD Now

JDDJ (now also known as JD now) represents 56% of Dada’s total revenue. JDDJ is embedded into the JD mobile app, JD.com and JD’s Weixin (WeChat) mini-program (Form 20-F, 2023). They operate with all categories of retailers from fresh produce marketplaces to pharmacies, flower shops, bakeries and fashion stores. It mainly operates with leading supermarkets. As per their press release, “Through adoption of JDDJ’s Haibo system, labor efficiencies for product management and promotion management increased by 10x and 12x, respectively.”

Customers get access to instant gratification with the desired products quickly in their hands combined with Dada Now’s fast delivery. JDDJ offers value-for-money deals, which they follow up with coupons, promotional events and membership programs. Through data analytics, JDDJ can make personalized recommendations and tailored search results.

Retailers benefit from JDDJ’s entire ecosystem by bringing online traffic and increasing sales per square foot, which keeps them relevant in the digitalization of retail. JDDJ’s CRM services allow retailers to adapt swiftly to changing customer preferences and targeted marketing campaigns through data analytics. When the inventory of a SKU is running low, JDDJ’s warehouse managing software sends out instructions to store staff to replenish its inventory to a level calculated based on its sales record.

Dada Now

Dada Now is 44% of total revenue. It offers both intra-city delivery and last-mile delivery, mostly in tier 1 and tier 2 cities. Merchants use Dada Now for JDDJ orders or place delivery orders directly. Dada Now uses a crowdsourcing system where rates are set by city/region, distance, weight/volume, with surge pricing for rider shortages. Such a crowdsourcing system is less costly compared to competitors who employ their own drivers, but comes with slower delivery time.

Dada Now offers last-mile delivery services to logistics service providers, mainly to JD Logistics (Form F-20, 2023). JD’s logistics supply chain and continued cooperation with segments like JD retail could bring significant growth for Dada. Especially knowing that less than 15% of JD’s users are currently engaged with JDDJ’s services. Profitability will always a difficult topic in logistics, because there rarely is enough margin to warrant another part of the cut for Dada.

Profitability

As per 2023Q4 and 2024Q1 Earnings Call:

Dada operates in a market with low barriers to entry where one needs to act fast and think about profitability later to gain market share. Now that excessive funding has largely dried for the sector, Dada claims to have entered an era of increasing margins and healthy growth. In the sluggish Chinese environment of 2023, Dada was still able to grow 12.2% in comparison to 2022.

The new management team is currently weeding out inefficiencies. In the meanwhile, the AUM and GMV through the JD app has significantly accelerated. Both result in relatively stable year-on-year performance. By working closely with JD, JD Now’s app has undergone a complete redesign, increasing conversion rate, click-through rate and total exposure.

Dada Now experienced record revenue growth in the first quarter, continuously gaining market share. While the consumer trend seem to slowly be recovering, consumers seem to be increasingly seeking value for money. Pinduoduo (NASDAQ:PDD) was able to significantly capitalize this as more consumers starting opting for cheaper unbranded alternatives. This caused weaker demand for JDDJ, nevertheless profitability continued to improve YoY.

Consumer recovery?

China is currently dealing with two major problems, the first of which is its debt problem. As China grew to the world’s second-largest economy in the world, its growth was accompanied by racking up a ton of debt. Currently, the total debt to GDP in China is at record highs of 286%. This goes coupled with its property sector bubble which popped in 2021 with Evergrande’s default, which the Hong Kong court has now issued to be liquidated.

Given the enormous savings Chinese consumers have accumulated over the last few years, once they regain their confidence, they’ll likely increase their spending. –McKinsey

China announced “historic” steps on [May 17] “to stabilise its crisis-hit property sector, with the central bank facilitating 1 trillion yuan ($138 billion) in extra funding and easing mortgage rules, and local governments set to buy ‘some’ apartments.” While there are some signs of recovery, it likely won’t be a strong V-shaped one. Retail sales however, do show a healthy year-on-year increase of 5.5 percent in the first two months of 2024.

China’s economy is now in a painful transition from its reliance on lower-cost manufacturing and property to the “new three” industries of electric vehicles, solar cells, and lithium batteries. -Business Insider

A saving Chinese population indicates that consumer confidence is still low. In the meanwhile, there is an increasing internal wealth gap, which the CCP doesn’t like. This may explain the many crackdowns on big tech over the past years. Chinese leadership fears China may be getting too capitalistic, resulting in increased inequality.

While China’s aging population is causing some headwinds, its middle class will continue to grow. The Boston Consulting Group estimates that China will add an additional 80 million people to the middle and upper classes in the period from 2022 to 2030.

China-U.S. tensions

The second big problem is a potential escalation between the United States and China. As both stand on the brink of some sort of war, investors are justifiably afraid to invest in China at the moment. Obviously, a military war as a result of China attacking Taiwan would be detrimental, but other forms of war may be more likely.

Ray Dalio still estimates a 35% chance of a military war in the next 10 years. But even mutual economic sanctions would have great inflationary consequences as both economies are so intertwined. The first required step before investing in Dada is deciding if you’re willing to take this risk. However, any potential conflict will likely have global consequences and U.S. equities would also be heavily affected.

Valuation

A business like Dada Nexus is inherently very difficult to value, partially explaining the high volatility of the stock. There is clear value for JD in its ecosystem which may be hard to quantify. We can look at a P/S of 0.28 and a P/B of 0.58, clearly quite cheap. It’s trading equal to JD logistics P/S of 0.29 and significantly under Meituan’s 2.18 P/S. Analysts estimate the earnings to turn positive by 2025, but I’m not a huge fan of making valuations based of forward estimates in such a sector.

Fraud Case

Now, Dada is cheaply valued not only because of China fear, but also because of a potential fraud case. A routine internal audit revealed 1 billion yuan (US$140 million) worth of questionable revenue and costs in its books for the first three quarters of 2023 (South China Morning Post). This is only 5% of its total revenue, but investors clearly didn’t like this as the stock is still about 50% down from before the announcement. I believe the market overreacted and that this brings a great opportunity to buy.

Conclusion

I believe now – ideally at technical support level of $1.36 per share – is an ideal time to buy Dada Nexus shares as sentiment for the stock is hitting new bottoms. Additionally, its US$40 million buyback program still has 30 million left to push the shares higher. Because Dada Nexus is now an essential part of the JD ecosystem, Dada won’t be disappearing anytime soon. Through continued innovation of its integrated JD now and Dada now platforms, Dada Nexus will continue to have a place in the digitalization of the Chinese retail market. Additionally, its cost-efficient crowdsourcing model will secure its spot in the competitive industry.