ANALYSIS: Dada Nexus Seeks IPO But Posts High Operating Losses

Dada Nexus has filed for a U.S. IPO, but high operational losses may turn off some investors.

Donovan Jones
    May 25, 2020 9:00 AM  PT
ANALYSIS: Dada Nexus Seeks IPO But Posts High Operating Losses
author: Donovan Jones   

Dada Nexus (Nasdaq: DADA) has filed to raise $100 million in an IPO of its ADSs, according to an F-1 registration statement.

The firm operates one of the largest local on-demand delivery services in China.

DADA has made little meaningful progress toward operational breakeven and generates significant losses which may be a hurdle for U.S. investors with a fresh memory of the disappointing Uber (UBER) IPO.

Shanghai, China-based Dada was founded to provide consumers with food and grocery goods delivered to their home or place of business via their on-demand online system.

Management is headed by founder, chairman and CEO Philip Kuai, who was previously vice president of Anjuke.com, an online real estate platform in China.

The company's primary offerings include:

  • Dada Now - Delivery from merchants and individual senders

  • JDDJ - Delivery & marketing between brand owners, retailers & consumers

Dada has received at least $1.5 billion from investors including JD Sunflower Investment, Sequoia Capital China, Azure Holdings, DST, and Pleasant Lake.

The firm provides its intra-city services to more than 700 cities and counties in China and its last mile services to more than 2,400 cities and counties.

DADA sells its services to retailers and brands and provides a range of related services including integrated e-commerce websites to enhance delivery efficiency.

The company has deep relationships with large retailers Walmart, JD Power, Yonghui, and CR Vanguard.

The firm also recruits riders to provide delivery services. As of March 31, 2020, its network counted more than 634,000 active riders.

Selling & Marketing expenses as a percentage of total revenue have been highly variable as revenues have increased.

The Selling & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling & Marketing spend, was 2.1x in the most recent reporting period.

According to a 2019 market research report referenced by China Daily, the market for food delivery services reached nearly $66 billion in 2018.

This represents a 112% increase from the previous year.

The main drivers for this expected growth are The market is expected to more than double by 2021, with the consequences of the Covid-19 pandemic likely to increase that outcome substantially.

The largest players in the industry also include Meituan and Ele.me and China's ride-hailing firm Didi also entered the market in 2018.

Dada's recent financial results can be summarized as follows:

  • Sharply growing topline revenue

  • Negative operating margin

  • Decreased cash used in operations

As of March 31, 2020, Dada had $277.7 million in cash and $155.0 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was a negative ($185.5 million).

Dada intends to raise $100 million in gross proceeds from an IPO of its ADSs, although the final amount may be as high as $500 million.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO to invest in technology and research and development, to implement its various marketing initiatives and the balance for general corporate purposes, which may include funding working capital needs and potential strategic investments and acquisitions.

Management's presentation of the company roadshow is not yet available.

Listed bookrunners of the IPO are Goldman Sachs (Asia), BofA Securities and Jefferies.

Commentary

Dada is seeking U.S. capital market investment capital to continue its expansion efforts within China.

The company's financials indicate the firm is losing enormous amounts of money on an operational and net basis while burning through cash in operations.

Selling & Marketing expenses as a percentage of total revenue have been highly variable; its Selling & Marketing efficiency rate has dropped to 2.1x in the most recent reporting period.

The market opportunity for intra-city and last-mile delivery in China is large and likely received a boost from the current Covid19 pandemic, as delivery services everywhere have.

Goldman Sachs (Asia) is the lead left underwriter and IPOs led by Goldman over the last 12-month period have generated an average return of 67.4% since their IPO. This is a top-tier performance for all major underwriters during the period.

The challenge for Dada gaining sufficient investor interest in the U.S. will be the firm's heavy operating losses, which will no doubt remind investors of Uber's disappointing IPO and subsequent post-IPO stock swoon.

While management has made some progress in the direction of operational breakeven, the firm is still very far away from that milestone and there is no hint from management that it will seek to focus on operational breakeven to the detriment of growth.

When we learn more IPO details, I'll provide a final opinion.

Expected IPO Pricing Date:  To be announced.

(The analyst has no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 72 hours, and no 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.)


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