Elevator Pitch
I rate Dingdong (Cayman) Limited (DDL) as a Hold. I previously reviewed Dingdong’s third quarter results with my earlier article published on November 17, 2023.
My latest write-up previews DDL’s Q4 2023 financial results and touches on the company’s medium-to-long term value drivers. For the near term, Dingdong’s fourth quarter results release is unlikely to offer any positive surprises for investors. On the flip side, DDL boasts long-term drivers such as a more consistent shareholder capital return approach, and new growth drivers like private label and pre-made food. I stick with a Hold rating for DDL after considering the short-term outlook, and value drivers for the long run.
Dingdong’s Fourth Quarter Financial Performance Is Likely To Be Weak
The expected Q4 2023 earnings disclosure date for Dingdong is next Tuesday, February 13, 2024.
DDL’s financial performance for the fourth quarter of last year is projected to be worse than what the company achieved in Q3 2023 as per consensus estimates sourced from S&P Capital IQ.
In specific terms, the analysts see Dingdong’s revenue (in RMB terms) decline worsening from -13.5% YoY for the third quarter of 2023 to -18.0% YoY in the final quarter of the previous year. The sell side also forecasts that DDL’s operating loss will widen from -RMB8.6 million in Q3 2023 to -RMB9.0 million for Q4 2023; it is also worth noting that Dingdong generated a positive operating income of RMB52 million in Q4 2022. The market’s consensus projections suggest that the company’s non-GAAP earnings per share will decrease by -75% QoQ from RMB0.04 in Q3 2023 to RMB0.01 in Q4 2023.
It is relevant to note that Dingdong only guided for positive normalized earnings in Q4 2023 when it reported its third quarter results in mid-November last year. DDL didn’t guide for a specific earnings growth rate, and it also refrained from offering any top line or operating loss guidance. The lack of management guidance for revenue, EBIT loss, and bottom line growth might potentially suggest that the company is less likely to perform well on these key metrics.
The recent economic data coming out from China seem to suggest that Chinese companies like Dingdong will likely have struggled in the fourth quarter of 2023. Seeking Alpha News highlighted on January 12, 2024, that “China’s consumer prices” suffered from “the third straight month of decline” in December last year. Another January 17, 2024, Seeking Alpha News article indicated that the actual Q4 2023 GDP growth for China was 0.1 percentage points below the consensus estimate. Dingdong describes itself as a “fresh grocery e-commerce company in China” in its press releases.
It also doesn’t help that Dingdong faces a high base for comparison in Q4 2022. A November 25, 2022, Los Angeles Times news report mentioned that “residents of some parts of China’s capital were emptying supermarket shelves and overwhelming delivery apps” due to a sharp increase in COVID-19 confirmed cases in the country. It was no surprise that DDL’s top line jumped by +13.1% YoY in Q4 2022, and it achieved an exceptionally high non-GAAP EPS of RMB0.35 for that quarter (versus a normalized EPS of RMB0.04 in Q3 2023).
In my opinion, there is a low probability of DDL surprising investors in a positive manner when the company announces its Q4 2023 results next week, taking into consideration the factors that I have highlighted in the section of the article.
But DDL’s Mid-To-Long Term Positives Shouldn’t Be Ignored
Looking beyond Dingdong’s Q4 2023 earnings release, there are certain positive factors for DDL that could possibly translate into better results and share price appreciation in the intermediate to long term.
One factor to consider is DDL’s recently disclosed share repurchase plan.
Dingdong revealed a new $20 million share buyback program on January 29, 2024, which allows for the company to conduct share repurchases in the one-year period between January 29 this year and January 28 next year. If DDL does spend the full $20 million on buybacks within a year, this is equivalent to an appealing share buyback yield (repurchases divided by market capitalization) of 6.5%.
Also, the new $20 million share repurchase plan sends favorable signals about the company’s expectations of continued profitability and the stock’s undervaluation. If DDL is less likely to deliver positive normalized earnings in the current year, the company shouldn’t be considering buybacks. On the other hand, the market is now valuing Dingdong at an attractive consensus next twelve months’ Enterprise Value-to-Revenue and EV/EBITDA multiples of 0.07 times and 3.4 times, respectively (source: S&P Capital IQ), which supports the case for value-accretive share repurchases.
Assuming that Dingdong can consistently return excess capital to its shareholders going forward, this has positive read-throughs for DDL’s future EPS growth and its potential valuation re-rating. Sustained share buybacks will contribute to Dingdong’s bottom line expansion due to a decrease in the number of shares outstanding. Separately, a stock which has established a track record of strong shareholder capital return is most likely going to command a higher valuation in the market.
The other factor to note is that DDL has been venturing into new growth areas with lots of promise in recent years, which should eventually pay off.
According to an April 18, 2023, China Daily article, Dingdong revealed plans to “recruit partners across all links of the industrial chain to improve its pre-made food products” in February last year, having first set up “a pre-made food department in June 2020.” DDL’s pre-made food business has solid growth prospects, considering the reasonably low penetration rate of pre-made food in China. As per a November 14, 2023, article (translated using Google Translate) published on Chinese news portal SINA, China Cuisine Association projects that the pre-made food penetration rate in China has the potential to grow from between 10% and 15% now to the 15%-20% range by the end of the current decade.
Another area of growth for DDL is private-label products. Dingdong highlighted at its Q3 2023 earnings briefing that it “develops and produces private-label products in 12 self-operated factories.” The company also stressed at its most recent quarterly results call that consumers are “increasingly buying Dingdong branded products” and noted that it also “increased the proportion of private label products and in-house production to boost our gross profit” margin. It is worth mentioning that DDL opened a physical grocery store branded “Dingdong Aocai” in Shanghai, China in late 2023 as reported in a December 1, 2023, Sohu.com Limited (SOHU) news article (translated using Google Translate). I believe that establishing an offline presence could be a good way of expanding private label penetration for Dingdong, as it is easier for consumers to gain trust in DDL’s private label brands in a physical setting where they can “see and touch” the products.
Concluding Thoughts
My Hold rating for Dingdong stays unchanged. I have already considered various factors that affect DDL’s short-term financial results and long-term business performance in my assessment of the stock.