DADA Nexus Take-Under

Highway Robbery

I predicted recently that Dada Nexus (DADA) would either be bought out or become very profitable in the medium term. This was one of the few stocks where I would be disappointed with a buyout as it would likely happen at a lowball price. However I did not expect it to be this low at $2/share, which is barely above net cash. I was expecting at least $3-4/share.

A special committee will evaluate the order and I expect it to close sooner than the average Chinese ADR buyout.

I rarely get angry at these types of takeunder situations, but this one actually pisses me off. I have seen quite a few lowball offers. But most lowball offers at least have the decency to throw minority investors a bone or two. Here we get nothing. This was my largest position and JD management (who effectively control DADA) is committing highway robbery here.

I also suspect management have depressed revenue by reducing ad spending:

I thought this was a bit suspicious when I saw it and made me think they were going to attempt a takeunder. Just didn’t expect it to be this audacious.

Last Q, DADA’s JD NOW ad revenue was only 7% of total JD NOW revenue (which was already depressed by its delivery voucher program). As a comparison Meituan (3690) a direct competitor generates 14% of revenue from marketing (or 21%, depending on what those other revenues are made of):

Maplebear (CART), which operates in the US generates 29% of revenue on advertising:

Awfully suspicious that while user engagement was rapidly growing well in the double digits, ad revenue for JD NOW fell off a -86% cliff right before this lowball offer? Especially since higher ad revenue would have likely meant DADA becoming non-gaap profitable in Q3 2024 which would have sent the stock much higher. But I suppose DADA and JD management have some plausible deniability as they can claim they are doing this to make their JD Now platform as attractive as possible to JD users.

This is from their Q3 2024 call:

“Henry Jun Mao

JD NOW continued its strong growth momentum in average monthly transacting users on the JD App growing by more than 100% year-over-year, with high-frequency users growing even faster. The number of high-frequency users through the JD App more than doubled in this quarter.

…

It is worth noting that during the Double 11 shopping festival, JD NOW's peak day online order volume reached a new high.”

So how profitable would DADA be in a few years?

Meituan is expected to generate 16% EBITDA margins in 2025, and Maplebear will likely generate 27% EBITDA margins.

DADA will likely generate around $1.5 billion of artificially depressed revenue in 2024, and I expect when JD owns the other ~35%, will generate $2bn+ in revenue in a few years with 10%+ EBITDA margins.

So the situation here is that they collected nearly half a billion $ from Western investors, and right before we get to see a profit from it, we are rug pulled, forced out for the paltry sum of around $100 million (which is likely the Enterprise Value (EV) right now at $2/share). A revenue multiple of ~0.07x or at a likely <1x EV/EBITDA a year or two from now. Depending on what metric you prefer to use to describe how hard DADA shareholders are getting screwed here.

CART trades at 3.5x sales and Meituan at 2x sales. Both trade at 11-12x EV/EBITDA. Let’s say that JD would take out DADA for 0.5x revenue + cash of $350m then that would imply a “fair” value of $4+/share. Still robbery, but at least above its 12 month high.

A special committee has been made, which will consist of DADA’s three independent directors Baohong Sun, Jian Han and Laura Butler. These three seem like faceless nameless nobodies so they will probably rubber stamp this takeunder. Two days ago it was announced that Kroll will be the financial advisor.

So I feel like doing a bit of naming and shaming Richard Qiangdong Liu (JD Chairman and founder), Sandy Ran Xu (JD CEO) and Ian Su Shan (JD CFO) in particular for insulting DADA minority shareholders with such a lowball offer:

It might be worth sticking around for a higher offer, but I don’t hold my hopes up. This once again shows why you have to be really careful investing in Chinese stocks (at least in the US traded ones, Hong Kong somehow has much better protections against take-unders).