The local delivery company’s shares have nearly doubled this week, joining a small but growing group of U.S.-listed China stocks that are regaining investor favor

Key Takeaways:

  • Dada Group’s shares nearly doubled in the first three trading days of the New Year, becoming the latest in a small group of U.S.-listed Chinese stocks posting major gains
  • The gains, which have come on high trading volume, most likely reflect smaller institutional investors taking up new positions as sentiment improves towards such companies

By Doug Young

A press release at the start of this week from Dada Group (DADA.US) looks just a tad self-congratulatory, recounting the intracity delivery company’s “Impressive 2022 Year in Review.” But a much better headline might be “Dada Group’s Impressive Stock Performance in the First Week of 2023.”

The company’s shares have rocketed 89% in the space of just three trading days since the New Year, including a 29% jump on Thursday. The huge gains came on trading volume that was roughly triple the normal level, with about 7.6% of the company’s stock changing hands over that period.

While Dada would probably like to believe that its “Impressive Year in Review” announcement touched off the rally, the real reason is probably a factor we discussed last month. Specifically, we suspect that similar impressive gains for a small but growing number of U.S.-listed China stocks in the last month are being driven by mid-sized institutional investors starting to rediscover the group and take up significant positions.

When we wrote about this phenomenon last month, education companies 17 Education (YQ.US), Gaotu Techedu (GOTU.US) and iHuman (IH.US) had also posted big gains over just a few days on equally heavy volume. All of those gains have held since then, indicating the change probably wasn’t driven by short-term speculators. Another company to post similar big gains this week was online grocer Dingdong (DDL.US), whose shares have also risen 46% in the last two trading days.

We’ll take a closer look at Dada shortly, and examine why one or more major investors appears to be taking a position in the company.

But first we’ll quickly recap the rocky road that U.S.-listed Chinese stocks have traveled over the last two years, and why sentiment finally seems to be turning positive towards the group. Many of these companies reached all-time highs two years ago when new economy Chinese companies were all the rage due to their big growth potential.

But then they got hammered one painful blow at a time, driving most to all-time lows that were a tiny fraction of their IPO prices. One of two main factors behind those blows was a dispute between the U.S. and Chinese securities regulators that now looks largely resolved. The other factor was a wave of regulatory crackdowns, which now also appears to be largely finished, covering a wide range of sectors in China from education to online gaming.

With both of those issues now largely in the rear-view mirror, U.S.-listed Chinese stocks have finally begun to rebound from their all-time lows. The iShares MSCI China index is up 46% from a low at the end of October. Following the New Year rally, Dada’s American depositary shares (ADSs) are actually up fourfold from their late October low. But we should also note that even after the New Year rally, they are still only at their levels from about a year ago. And at their latest close of $13.19, the shares are still below their $16 IPO price from 2020, and well below their all-time high of $58 from late 2020.

So, clearly, even the strongest picks like Dada, Dingdong and 17 Education have quite a lot of potential upside if they can start to approach their former pre-crash trading levels.

Growing JD ties

In Dada’s case, investors may like the company for its relatively unique positioning as an intracity delivery specialist, which has far-lower costs than more-traditional delivery companies that offer both intracity and intercity services. That difference is reflected in Dada’s forward price-to-earnings (P/E) ratio, which stands at a lofty 55 following this week’s rally. By comparison, more traditional parcel delivery companies ZTO (ZTO.US; 2057.HK) and JD Logistics (2618.HK) trade at forward P/E ratios of 19 and 25, respectively.

Investors probably also like Dada for its close ties with JD.com (JD.US; 9618.HK), China’s second-largest e-commerce company that is also the parent of JD Logistics. JD.com received its stake when it merged its JDDJ local delivery unit with another similar company to form the current Dada Group. It raised that stake to 52.2% last year, giving it majority control of the company. Dada also counts U.S. retailing giant Walmart (WMT.US) as its other major stakeholder with 9% of its stock.

We once speculated that JD.com could even try to acquire Dada outright and merge it with JD Logistics. But that looks less likely now since most of China’s internet majors are more likely to divest non-core assets rather than buy new ones as the market regulator cracks down on anti-competitive behavior.

Nonetheless, JD.com is clearly pulling Dada closer into its orbit following the stake increase. JDDJ, one of Dada’s two main units that still gets most of its business from JD.com, accounted for about two-thirds of Dada’s 1.7 billion yuan ($247 million) in revenue in the third quarter. That’s a big shift from just two years ago, when JDDJ accounted for less than half of total revenue.

It’s also worth pointing out that Dada’s overall revenue is growing strongly, up 41% in the third quarter and expected to rise another 30% to 35% in the fourth. That’s far better than most Chinese companies can say for those two periods, largely because Dada’s services were in huge demand when many people were forced to stay at home during lengthy Covid-related lockdowns last year. Dada lost 454.3 million yuan in the third quarter, though it’s expected to return to profitability next year.

Then there’s the “Impressive 2022 Year in Review” press release that we mentioned at the start of this article, which really contains very little impressive information and is why we’re only returning to it now. The release points to Dada’s partnerships with local supermarkets as one major feat, saying it now delivers groceries for 90 of China’s top 100 chains. It also notes that its delivery service using autonomous vehicles is taking off, fulfilling 60,000 orders to date.

While such factoids may look nice on paper, they are hardly likely to fuel a rally like the one we saw this week, which added $1.6 billion to Dada’s market value.

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