I have a Hold investment rating for Dingdong (Cayman) Limited’s (New York Stock Exchange:DDL) Share.
DDL shares have fallen -89% since their public listing in mid-2021, and are currently trading at 0.15x the forward consensus Enterprise value to income for the next twelve months. But Dingdong shares do not warrant a buy rating, as I believe its poor share price performance and low valuation multiples are justified by profitability concerns and delisting risks. As such, I think a hold rating for Dingdong is more appropriate.
Dingdong calls itself “the leading fresh food e-commerce company in China” in the company’s press releases.
As stated in its tax year 2021 20-F filing, DDL derived substantially all of its revenues (or 98.9% to be specific) from “product sales primarily of fresh groceries, prepared foods, and other food products through ‘Dingdong Fresh’ app and mini program”. last year. Membership fees accounted for the remaining 1.1% of Dingdong’s fiscal year 2021 top line.
The company was first established in May 2017and its shares have been listed on the New York Stock Exchange since June 2021.
China’s approach to the pandemic has been a tailwind for DDL
China has chosen to stick with its zero COVID policy, unlike many other countries around the world that have gone ahead with easing pandemic restrictions. In general, this is a negative for companies operating in mainland China, but Dingdong is an outlier in that regard.
The zero COVID stance adopted by China implies that there is a higher probability of lockdowns occurring when there is a spike in pandemic cases from time to time. This, in turn, is leading to a greater proportion of people in the country reducing their social activities and spending more time at home, regardless of whether actual lockdowns have been initiated. As such, demand for groceries in mainland China has remained strong despite difficult economic conditions.
Therefore, it should come as no surprise that Dingdong still managed to achieve strong revenue growth in the first half of the year. according to S&P Capital IQ financial data, DDL’s revenue expanded by +43.2% YoY and +42.7% YoY to RMB 5.4 billion and RMB 6.6 billion for the first quarter of 2022 and the second quarter of 2022, respectively. Remember that the second quarter of 2022 represented the peak of COVID-19 lockdowns in mainland China, even with key cities like Shanghai and Beijing experiencing blockages in that quarter.
More significantly, DDL generated a non-GAAP positive net profit of RMB20.6 billion in the second quarter of 2022, as highlighted in its second quarter financial results press release. This was the first time Dingdong had turned profitable since its listing on the New York Stock Exchange in the middle of last year. In its Q2 2022 earnings report dated August 11, 2022, Dingdong acknowledged that “the historic profit we achieved in Q2 was partly a result of the lockdown” in mainland China.
Dingdong’s weak share price performance is justified by multiple factors
On the surface, there appears to be a significant misalignment between DDL’s H1 2022 financial results and post-IPO stock price performance.
Dingdong’s latest stock price was $2.63 as of Oct 31, 2022, which is -89% lower than DDL’s June 2021 IPO price of $23.50. Over the same period, the S&P 500 has fallen just -9%.
However, if one digs deeper, there are actually good reasons why DDL shares have not performed well since their public listing.
A key reason is that Dingdong’s positive earnings for the second quarter of 2022 appear to be unique.
DDL noted in its second quarter earnings report that “going into the third quarter, we can expect a slight loss.” S&P Capital IQ Consensus financial estimates suggest that analysts still expect Dingdong to post a normalized net loss of -RMB23 million for the full fiscal year 2023. An August 17, 2022 Asian Nikkei Article He mentioned that “about 90% of online grocery delivery services are operating at a loss.” This statistic serves as an indication of how competitive the market is and the difficulty of achieving profitability in this industry.
In the current environment, the market continues to penalize fast-growing companies that are struggling to achieve profitability. This helps explain why the DDL consensus forward 12-month enterprise value-to-revenue multiple has dropped from 2.4 times at its peak in early November 2021 to 0.15 times at the end of October. of 2022.
Another key reason is that Dingdong faces the risk of being delisted in the US, and has yet to officially apply for a listing in Hong Kong (or any other stock exchange for that matter) to mitigate delisting risks. .
On May 10, 2022, DDL filed a 6-K filing revealing that it “was provisionally named by” the SEC “as a Commission Identified Issuer” following the release of its 20-F filing for fiscal year 2021. Dingdong specifically noted that you could be prohibited from “trading on a national stock exchange or over-the-counter in the United States,” assuming you “have been identified by the SEC for three consecutive years” under the Foreign Business Responsibility Act or HFCA.
In end of july 2022, Reuters they quoted anonymous sources as noting that DDL “has started preparations on its dual primary listing in Hong Kong.” Unfortunately, the company has not provided any official update on this matter in recent months. If he inspection in progress of the audit trails of US-listed Chinese companies does not go as smoothly as expected, delisting risks could once again be in the spotlight. All things being equal, Dingdong has a higher risk profile than its other US-listed Chinese peers that have already secured a secondary or primary listing on another foreign stock exchange.
Dingdong shares are rated Hold as I have a mixed view on the stock. On the bright side of things, DDL has delivered solid revenue growth in the first half of 2022 on the back of strong grocery demand. On the downside of things, Dingdong deserves a valuation discount considering the risks of delisting and the competitive nature of the Chinese online grocery market.