China’s leading online grocer earned a fourth-quarter profit on both a net and adjusted basis, as its marketing spending tumbled 75%

Key Takeaways:

  • Dingdong posted its first-ever profit in the fourth quarter, reversing years of big losses, as it reined in spending and focused on higher-margin products
  • China’s leading online grocer will continue its upmarket march this year by focusing on products for health-conscious customers

By Doug Young

There’s nothing like the loss of a major competitor and a pandemic to lift your bottom line.

Okay, so maybe leading online grocer Dingdong (Cayman) Ltd. didn’t mention the recent demise of former archrival Missfresh (MF.US) in its latest quarterly results, which show it recorded its first-ever profit on both an adjusted and net basis in last year’s fourth quarter. But the fall of such a major rival was almost certainly a major factor that allowed Dingdong to reach that milestone.

China’s strict pandemic controls in October and November also helped Dingdong achieve its profit milestone, since many consumers were forced to stay at home and thus did a lot more home cooking during that time. Dingdong downplayed the pandemic as an element behind its newfound profits, responding to an analyst’s question on the topic during its investor call by stressing its profits were built on greater efficiency.

That may be true, based on Dingdong CFO Yu Le’s forecast that the company would continue being profitable in this year’s first quarter and for the whole year on a non-GAAP basis, which typically excludes costs related to share-based compensation.

Regardless of what the company says, the bottom line for Dingdong’s stock after announcing its landmark profit was a lack of investor excitement. After initially surging 24% when markets opened on Monday, Dingdong’s shares moved steadily downward and actually closed down by a slight 0.6% for the day. Talk about raining on your profit parade.

Still, Dingdong’s stock has nearly doubled from a low late last October, amid a broader rally for U.S.-listed Chinese stocks. Even after that, its shares now trade at a price-to-sales (P/S) ratio of just 0.32, well behind rivals Dada Nexus (DADA.US) and Meituan (3690.HK), whose ratios stand at 3 and 4, respectively. But Dingdong is still light years ahead of Missfresh, whose market value now stands at just $13 million, giving it a P/S ratio of 0.01, as it fights to simply survive.

The demise of Missfresh has left Dingdong with a near-monopoly in China’s vast premium online grocery market serving the nation’s wealthiest cities. That should be worth a lot in a country as large as China, and leads us to believe Dingdong’s shares are quite undervalued right now.

Here, we should step back quickly and point out the differences between the major players in China’s online grocery market. Dingdong and Missfresh are focused on China’s largest and wealthiest cities, operating their own delivery networks to provide the most-efficient service with the best quality control, often completing deliveries with 30 minutes of an order being placed.

Alibaba (BABA.US; 9988.HK) operates a similar but much smaller service focused on its Freshippo supermarkets, while Dada is essentially a delivery company that works with local supermarkets in large markets like Shanghai. Pinduoduo (PDD.US) and Meituan focus on smaller markets that are more cost-sensitive, and act mostly as middlemen by connecting consumers with independent delivery networks and warehouse operators.

Going upscale

Dingdong is achieving its first-ever profits by going upscale, focusing more on value-added products like prepared meals and private-label foods that typically carry much higher margins than other grocery items. At the same time, the company is slashing expenses, most notably fulfillment expenses as well as sales and marketing costs. Sales and marketing expenses tumbled 75% in last year’s fourth quarter to just 91 million yuan, down from 358 million yuan a year earlier.

The combination of its higher-end focus and slashed spending helped Dingdong boost its gross margin to 32.9% in the fourth quarter, up from 30% in the previous quarter and 27.7% a year earlier. As a result, the company posted non-GAAP net income of 115.8 million yuan for the quarter and GAAP net income of 49.9 million yuan, both reversing losses of about 1 billion yuan a year earlier.

The slashed spending on marketing and fulfillment alone saved the company about 500 million yuan combined, making them one of the major drivers behind the move to profitability.

The big drawback to the focus on cost controls and higher-end products was a slowdown in revenue growth. Dingdong said its revenue grew 13.1% during the latest quarter to 6.8 billion yuan year-on-year, returning to a growth track after the company reported its first-ever revenue decline in the previous quarter. Reflecting the newer focus on the higher end of the market, the company said much of the fourth-quarter revenue gains were driven by higher spending per customer, rather than the addition of new customers.

Analysts expect the company to continue growing at a similar rate of about 13% this year, according to the average of seven polled by Yahoo Finance, reflecting the new focus on quality growth over growth at any costs.

Dingdong CEO Liang Changling said the company will continue going upmarket in the new year, with a special focus on health-conscious consumers. “Specifically speaking, we’ll first develop healthier prepared food that is not only delicious, but cooked with little or no oil and are low in calories, salt and sodium,” Liang said. “We’ll take a lead in promoting products with clean labels.”

At their latest close of $4.89, Dingdong’s shares are still down about 80% from the $23.50 they sold for in the company’s IPO in June 2021, just before the start of a prolonged downturn for U.S.- and Hong Kong-listed Chinese stocks. Even after that decline the company has a market value just over $1 billion, putting it back in the “unicorn” category following its recent rebound.

At the end of the day, the company’s new focus on cost controls and “quality over quantity” both look like the right moves to put it on a more sustainable track. That’s also reflected in its cash flow, which is now squarely positive, and its cash pile, which is growing after steady declines in previous years. Now, the company just needs to convince investors that it will stay focused on its new direction.

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