Dada Nexus: Emerging Platform but Mired in Heavy Competition; Initiating With $4 Fair Value Estimate

We initiate Dada Nexus with a fair value estimate of $4, reflecting the potential growth of its last-mile delivery and on-demand retail businesses, but also the company's profitability uncertainty in the long term. Dada Nexus competes in a commoditized industry for its delivery business, Dada Now, and in a burgeoning but also competitive industry for its on-demand retail platform, JDDJ. We estimate the company should see about 20% revenue growth per year for the next three years as its volume is still considerably smaller than that of its peers, but our main concern is whether it can generate lasting profitability, as sales and marketing expenses account for more than 40% of sales, and the company has yet to generate a positive operating margin. Given that the last-mile delivery industry is commoditized, Dada is forced to compete on a low-cost basis by incentivizing consumers, which is likely to pressure margins in the long term. We estimate delivery revenue to grow annually in the mid-20% for the next three years, similar to its competitor. Dada still trails larger competitors such as SF Intra-City in both delivery revenue and volume, which could mean that the company may spend more on incentives to catch up on market share.