Dada Nexus a Gainer in Covid-stricken China

The food delivery industry remains among the few that benefit from the zero-Covid policy.
Nov. 24, 2022 21:52
Dada Nexus a Gainer in Covid-stricken China

(CapitalWatch, Nov. 24, New York) As the U.S. stock exchanges are closed in observance of the Thanksgiving holiday, let's turn our sights to a Chinese stock that's been surging lately. While many stocks took a hit this week due to the surging Covid infections in China, there were some that benefited. One of these was Dada Nexus (Nasdaq: DADA), the grocery delivery business majority-owned by the online retail giant JD.com (Nasdaq: JD; HKEX: 9618).

Shares in Dada closed up 7% Tuesday, at $4.65 apiece, and inched slightly higher in after-hours. Over the past month, the company gained 38% overall as the continued Covid restrictions were paired with Dada's strong results during the traditional Singles' Day shopping spree earlier this month.

Struggling Competitors

On Thursday, China logged 31,444 locally transmitted daily Covid infections, which surpassed the mid-April peak of 29,317 recorded during the lockdown in Shanghai. The outbreaks, witnessed in several cities, came shortly after the regulators somewhat eased strict zero-Covid policy testing and restrictions earlier this month in response to the public unrest.

Considering the mounting new cases, however, the lockdowns are bound to continue. So far, in some cities, schools have moved their classes online and restaurants and gyms are shuttered. Extended lockdowns mean extended reliance on delivery providers.

The local delivery market in China is highly competitive, with several top players and a slew of smaller ones struggling against the giants. In July, CW covered the downfall of grocery delivery provider Missfresh (Nasdaq: MF). At the time, the company's executives said its brand name and listing position were valuable in themselves; to this day, MF stock is hanging on, trading just above the required minimum.

A rival of Missfresh has been Dingdong (NYSE: DDL), which has survived and like Dada saw its stock surge significantly over the past month. On Tuesday, DDL shares closed at $4.22 apiece, up 48% over the past 30 days.

However, its business has also suffered. In its latest financial report, released Nov. 11, Dingdong reported a 4% year-over-year revenue decline and a 7% drop in GMV. It was able to narrow its losses to $48.5 million in the third quarter. Earlier, the company scaled back its business and focused on first-tier cities despite a boost in demand from lockdowns.

Meituan (OTC: MPNGY; HKEX: 3690) remains China's top meal delivery company, while it also offers entertainment and other delivery services. Recently, Meituan saw its stock price drop on the news that the conglomerate Tencent Holdings (OTC: TCEHY; HKEX: 0700) plans to distribute $20 billion of Meituan shares as dividend. The Chinese tech giant has been divesting its holdings across various industries following China's antitrust crackdown of 2021.

Dada Strengthens Market Position

But while the aforementioned three delivery providers have struggled, online retailer JD.com is attempting to grab the openings in the market. Earlier this year, the e-commerce giant increased its stake in Dada Nexus – and the company's latest financials demonstrate strong growth in the segment.

In a statement last week, Dada reported 41% revenue increase for the third quarter, at $332.8 million. In the 12 months ended September, Dada's platform JDDJ logged 58% GMV growth, while the number of active customers increased to 75.4 million compared with 57.1 million in preceding year.

Still, the company continues to rack up losses. In the third quarter, Dada posted a $63.5 million net loss, that's 16% lower compared with a year ago.

Dada said that it's been working "to coordinate merchants' offerings and delivery capacity to ensure the supply of daily necessities to the affected communities" in the areas where Covid restrictions continue. The company also added some perks like zero deposit and usage fees for new stores joining the platform to aid businesses.

Earlier, Dada shares record numbers for the Singles' Day festival, also called "Double 11", which is a multi-day sales event that occurs every Nov. 11 in China. While major online retailers held back their sales data this year amid declined consumer demand, Dada was happy to announce its record sales growth.

The company said its sales soared 80% year-over-year. In some categories, the jump was even higher – sales of electronics jumped 170%, according to Dada. More than 200,000 brick-and-mortar shops have participated in the sales spree through JDDJ throughout China.

Dada stock today trades at a bargain compared with the same time a year ago. Its stock rose significantly during 2020, the year that Covid-19 lockdowns forced families to stay inside. Throughout 2021, shares in the company slid as the restrictions were eased and the authorities' crackdown weighed on investor sentiment. Today, DADA stock is trading well below its 52-week high of $24 per share.

Considering JD's increased involvement and backing of the company, struggling competitors, and continued Covid restrictions, DADA shares are a "buy" for long-term growth.

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The opinions expressed by analysts do not reflect the position of CapitalWatch. The analyst does not have a business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.