IPO Launch: Dada Nexus Proposes Terms For $264 Million IPO

IPOStreet

Dada Nexus (DADA) has filed to raise $264 million from the sale of ADSs representing underlying ordinary shares, per an amended F-1/A registration statement.

The company provides grocery and food delivery services across several regions in China.

DADA is heavily focused on delivery, the IPO is not cheap and the firm is still generating significant operating losses and cash burn.

My opinion on the IPO is NEUTRAL.

NEUTRAL

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 and mobile app.

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 (Walmart), 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 (WMT), JD.com (JD), 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 (delivery providers).

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 market is expected to more than double by 2021, with the effects of the Covid19 pandemic likely to increase that effect substantially due to the increases desire of consumers to receive their food and groceries via delivery.

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, at an accelerating growth rate
  • Negative operating margin, but reduced operating losses
  • Decreased cash used in operations

Below are relevant financial metrics derived from the firm’s registration statement:

dadapl2
Source: Dada Nexus F-1/A

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 sell 16.5 million ADSs at a midpoint price of $16.00 per share for gross proceeds of approximately $264 million, not including the sale of customary underwriter options.

Existing shareholders JD.com and retailer Walmart (WMT) have indicated an interest to purchase shares of up to an aggregate of $90 million ($60 million and $30 million, respectively) at the IPO price. This is a positive signal to public investors as to valuation.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $3.2 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 7.54%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

  • approximately 40% to implement our marketing initiatives and grow our user base;
  • approximately 35% to invest in technology and research and development; and
  • the balance for general corporate purposes, which may include funding working capital needs and potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Goldman Sachs, BofA Securities and Jefferies.

Commentary

DADA is seeking U.S. public market capital for its expansion plans within China into less densely populated areas, i.e., lower tier cities.

The firm’s financials indicate accelerating topline revenue growth but continued operating losses, though at a reduced level. Operating cash burn has been reduced in Q1 2020.

Sales and marketing expenses as a percentage of total revenue have varied significantly, with high growth in the most recent quarter, suggesting management has dramatically increased sales and marketing spend either in response to the pandemic to take advantage of the opportunity or to bump sales in a ‘window dressing’ effort in advance of the IPO.

The market opportunities for the firm’s services, both within city and intra-city, are large within China, but undergoing interesting cross currents.

While demand has soared as a result of large lockdowns for much of China during the worst of the Covid19 pandemic, a question is whether the habits begun during that time will continue in force or wane over time as the effects of the pandemic recede.

Conversely, management has gone to some length in the F-1 to highlight the expansion possibilities within the context of the JD and Walmart relationships.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 91.6% since their IPO. This is a top-tier performance for all major underwriters during the period.

Using Uber as an admittedly inexact comparable-based valuation, DADA management is asking U.S. investors to pay a premium to Uber on Price/Sales, EV/Revenue and EV/EBITDA multiples.

In its favor, DADA is growing revenue at a much higher rate of growth, although its revenue base is a fraction of Uber’s by comparison.

Other industry observers have indicated that the business models of last mile delivery firms need to incorporate other sector activities since food delivery is still highly unprofitable.

For example, Meituan has added travel services in its app where it receives commission income by introducing its customer base to hotel deals or flights.

Being a pure play delivery company may be admirable in terms of focus for DADA, but presents a higher risk, especially as the firm is still not close to operational breakeven.

Given the pricey IPO, its focus on delivery only and its operating losses and high cash burn, my opinion on the IPO is NEUTRAL.

NEUTRAL

Expected IPO Pricing Date: June 4, 2020.

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 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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