Dada Nexus rides to profits, but tamps down high expectations

The provider of intracity delivery services recorded its first-ever profit on a non-GAAP basis in the second quarter, as its revenue grew 23%

Key Takeaways:

• Dada Nexus recorded its first ever non-GAAP profit in the second quarter, but continued to lose money on a net and operating basis
• The company could benefit from its strong focus on grocery delivery as Chinese consumers eat more at home in the current environment of economic uncertainty

By Doug Young

Intracity delivery specialist Dada Nexus Ltd. (DADA.US) has wowed investors with its first-ever profit on an adjusted basis, posting strong second-quarter growth even as China’s economy faces growing economic headwinds. But the company, which is majority owned by e-commerce giant JD.com (JD.US; 9618.HK), cautioned in its call after the release of its latest quarterly report that the road to significant profits could be bumpy due to current economic uncertainties.

“Of course, we don’t expect to grow the bottom line profitability and margin very quickly in a very short term, especially under the current macroeconomic outlook,” CFO Chen Zhaoming told analysts on its earnings call, even as they were full of praise for the company’s profit milestone.

Investors didn’t seem to mind the cautionary words, nor did the large group of analysts that cover this relatively small company with a market value just under $1.5 billion. All 18 analysts who follow the company currently rate it a “buy” or “strong buy,” with 10 in the latter category, according to Yahoo Finance. And despite the company’s cautionary words, that same group expects Dada Nexus’ profit to leap from about $31 million this year to $408 million in 2024.

Dada Nexus’ stock also rallied 5.2% on Wednesday, the day after it published its second-quarter results after markets closed, and continued to rise the next day. The stock has been on a roller coaster ride over the last 52 weeks, soaring nearly five-fold from a low last October to a high in late January, only to give back most of those gains. After all the ups-and-downs, the stock now trades down slightly from where it was 52 weeks ago.

So, why are the analysts and investors turning bullish on this company even as Dada Nexus itself is quite cautious? That kind of dichotomy isn’t that uncommon, as companies always try to keep investors from becoming too bullish.

In this case, investors seem to be betting that Dada Nexus can take advantage of its growing ties to JD.com to boost its business. They also appear to believe it can harness its position as the main delivery partner for most of China’s top brick-and-mortar grocery chains to tap into growing demand from increasingly budget-conscious shoppers.

The company operates two main services. Dada Now provides intracity delivery services in more than 2,000 Chinese cities. The other service, JDDJ, is more closely tied with JD.com, and lets people order goods from local merchants for delivery to their homes. A big part of JDDJ’s business comes from big grocery chains, which use its drivers to deliver goods locally, allowing those stores to compete with online-only grocers like Dingdong (DDL.US) and Meituan (3690.HK).

Of that pair of services, JDDJ has gained more momentum over the last two years, especially since JD.com boosted its stake in Dada Nexus to its current 53% last year to give it majority control. The service is now featured on most of JD.com’s consumer interfaces, and JDDJ contributed about two-thirds of the company’s total revenue in the latest quarter, up from just 40% in 2020.

Strong revenue growth

We’ll spend the second half of our review taking a closer look at Dada Nexus’ latest financials, including the big drivers behind its growth and movement into the profit column.

The company’s revenue rose 23% year-on-year to 2.81 billion yuan ($368 million) in the second quarter. Management pointed out that the year-ago figure was relatively high due to greater demand for home delivery services during lockdowns that pervaded China during last year’s second quarter, including a two-month lockdown in the company’s hometown of Shanghai. Accordingly, the latest growth figure could have been even higher if last year’s revenue was at more normal levels.

Within the total figure, JDDJ’s revenue rose by the stronger 25% year-on-year to 1.83 billion yuan, while Dada Now also rose by a respectable 20% to 980 million yuan.

One of the big drivers of JDDJ’s strong growth was a trial promotion providing free delivery with some of its supermarket partners. Given the trial program’s strong early results, Dada Nexus said it is expanding it to other major supermarket chains.

That’s significant because the grocery delivery business already accounts for nearly half of the gross merchandise volume (GMV) that passes through JDDJ. And in the current climate of economic uncertainty, consumers are likely to eat more at home and less at restaurants. Most of those will undoubtedly welcome the extra savings from free delivery, positioning JDDJ for some potentially strong growth in the coming quarters.

The company said it expects revenue to keep increasing at current levels into the third quarter, forecasting year-on-year growth of 18% to 26% for the period.

While business was booming, Dada Nexus managed to control costs by making sharp reductions in its promotional, general and administrative and R&D spending. As a result, its total costs and expenses rose just 3.8% during the quarter. It still reported operating and net losses for the period, though both figures narrowed sharply from a year ago.

But the company was clearly most pleased to announce its first-ever non-GAAP profit, which typically excludes some non-operational items like employee stock-based compensation. Its non-GAAP profit totaled a relatively modest 8.4 million yuan, reversing a 396 million yuan loss a year earlier. Now it just needs to become profitable on a net basis, which analysts expect to occur in the third or fourth quarter.

As we’ve previously noted, the company also cautioned several times on its call for investors and analysts not to get too excited due to increasingly strong economic headwinds in China. Those include a recent drop into deflation, plunging exports, record youth unemployment and growing concerns about the health of the nation’s property market.

“In terms of macro, the economy and consumption was a modest recovery in the first half of this year, and we expect uncertainties in consumption recovery in the second half,” Caroline Dong, the company’s head of investor relations, said on the call.

Such cautionary words certainly seem prudent in the current economic climate, and could ultimately put a damper on some of the latest enthusiasm surrounding Dada Nexus and other companies in general. Still, the company deserves a pat on the back, at least for now, for finally moving into the black, even if that includes the asterisk of being on a non-GAAP basis.

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