As Omicron Subsides, Dada Nexus Could Be Riding Into E-Commerce Gilded Era

Key takeaways:

•      Dada Nexus’ revenue grew strongly in the first quarter, after excluding the impact of a change to the way it pays riders for certain delivery services

•      Omicron outbreaks are accelerating drive to online shopping, which should help companies like Dada even as lockdowns and other restrictions start to ease

By Warren Yang

There’s no shortage of downbeat headlines about the Chinese economy nowadays. You don’t know where to look? The arrival of the Covid-19 Omicron variant in major cities and resultant measures to contain its spread – including a lockdown of the entire of city of Shanghai now in its second month – are a good place to start.

At times like this, it’s a no-brainer that consumer-oriented businesses are bound to suffer. But Dada Nexus Ltd.DADA, a Shanghai-based provider of local intracity delivery services, is in a unique sweet spot to prosper. Even for Dada, the latest quarterly results released on Monday look pretty grim at first glance. The company’s revenue declined about 21% year-on-year in the first quarter to about 2 billion yuan ($296 million).

But the sales decline actually owes to a tweak in how the company recognizes revenue from part of its services. In April last year, Dada started to pay its riders through third-party companies for short-distance deliveries made by Dada Now, one of its two core services that is open to individuals and merchants wishing to have items delivered locally. As a result, the company has stopped booking both costs and revenue associated with such services. 

That change aside, business at Dada actually boomed. Excluding the impact of the new rider arrangement, revenue from Dada Now jumped more than 60% year-on-year. Revenue from JDDC, the company’s other main service that Dada acquired from its majority shareholder JD.com JD, jumped an even more impressive 80% to account for nearly 70% of the company’s total revenue. JDDC accounted for less than half of Dada Nexus’ revenue just a year earlier, and has seen big gains in active users and order sizes thanks in part to strong support from JD.com.

Dada’s first-quarter results also show its net loss narrowed, bringing it closer to elusive profitability. The company may make its first annual profit next year, with its net loss expected to shrink more for the rest of this year, according to analyst estimates compiled by Yahoo Finance.

The results look impressive, given that times are rough for retail-related businesses in China. The world’s second-largest economy was already on a shaky path to recovery from the Covid-19 pandemic of the past two years when it was hit afresh by the emergence of Omicron infections in financial hub Shanghai in late February. Cases in Dada’s hometown later snowballed, leading to a months-long lockdown that halted all aspects of normal life starting in March. Worse yet, outbreaks have spread to other places, including Beijing.

As a result, China’s retail sales declined some 3.5% year-on-year in March, and the slump deepened to more than 10% in April.

Even e-commerce titan JD.com, which was cleared to take a majority stake in Dada in February, suffered a large loss in the first quarter. Like most companies with national footprints, JD was hit by disruptions to logistics and a drop in consumer spending as Covid-19 cases resurfaced, leading to widespread travel restrictions, even before the lockdown in Shanghai began.

Omicron outbreaks

While China’s economy has taken a beating, it’s been a different story for Dada. As Omicron outbreaks grew, people stuck at home needed their daily necessities delivered more than ever. And Dada had government approval to deliver them “in almost every city,” CEO Philip Kuai said on a conference call to discuss the company’s first-quarter earnings.

Now, as the worst phase of the pandemic recedes, things can only go up from here for Dada.

As Omicron outbreaks come under control, things will go back to normal, with ordinary shoppers opening their wallets for more things. That should bring more business for companies like Dada in general, which deliver groceries, meals and any number other goods that are mostly ordered online.

Dada differs from other big logistics names like JD Logistics (2618.HK) and ZTO ZTO in its exclusive focus on intracity deliveries, giving it a significantly lower cost structure than the bigger companies. Its services compete both with the big couriers, as well as more locally focused delivery services operated by the likes of takeout dining specialist Meituan (3690.HK) and online grocer Dingdong DDL.  

That entire group of companies stands to benefit as people who had no choice but to have groceries and other basic items delivered to their doorsteps during lockdowns find they like such convenience. Accordingly, many people who were previously accustomed to buying such items in shops may not want to go back to the hassle of making trips to stores unless they really need to.

“I think in the long-term, this kind of Covid situation is helping us for customer education,” said CEO Kuai. “So now I think literally in most of the cities, customers are familiar with on-demand delivery and home delivery business and e-commerce business. But I think in the long-term, it will have a positive impact, given this kind of customer education.”

In addition, recent signals indicate Beijing may be easing its wave of new regulation on domestic technology companies, as it tries to steer an even course between reining in bad practices and supporting the stumbling economy. Such an easing, along with pledges to keep capital markets stable and support overseas listings by Chinese companies, should all work to the benefit of companies like Dada and its much larger parent JD.com.

At least for now, that should remove the risk that JD.com might feel pressure to dispose of Dada, which has grown increasingly reliant on its parent to generate revenue. Particularly, JD.com and Dada have developed a nicely symbiotic relationship that drives business from the former to the latter through JDDJ, which was initially owned by JD.com and later sold to Dada in a transaction that created the current company.

In a vote of confidence for Dada, JPMorgan upgraded its rating for the company’s shares to “overweight” from “neutral” and raise its target price for the stock to $10 from $7.50 following the release of the company’s first-quarter results.

Dada shares dipped the day after its earnings report, but have climbed since then and closed up nearly 8% at $7.14 on Thursday in New York. Still, the stock is worth less than half of its value from its 2020 IPO. Also, it trades at a modest price-to-sale (P/S) ratio of 1.5, compared to 2.4 for e-commerce bellwether Alibaba BABA and an even higher 4.6 for ZTO.

As Omicron outbreaks ease, it looks like Dada may have already weathered what could be its worst time. The company will stand to reap benefits when the Chinese economy is back in full swing, meaning the stock’s current valuation may not do Dada justice.