Andy Feng
Elevator Pitch
I have a Hold investment rating for Dingdong (Cayman) Limited (DDL) shares.
My prior February 5, 2024 write-up was focused on the preview of Dingdong’s financial performance for the final quarter of 2023. In my early-February article, I had outlined my expectations that DDL’s “fourth quarter financial performance is likely to be weak.” I turned out to be right, as the company’s normalized net profit fell by -86% YoY to RMB16.3 million in Q4 2023.
In the current update, I turn my attention to Dingdong’s expected top line performance and cash flow generation for 2024. DDL’s financial health is likely to turn for the better this year, taking into account the company’s cash flow outlook. But it is highly probable that Dingdong’s 2024 top line growth will be modest. As such, a Hold rating for DDL is maintained following my assessment of the company’s revenue and cash flow.
Cash Flow Outlook
The company’s operating cash flow decreased by -82% from RMB682 million in Q4 2022 to RMB120 million for Q4 2023 as indicated in its Q4 2023 earnings release. It is reasonable to say that Dingdong’s cash flow generation was poor last year.
But there are signs pointing to a potential improvement in DDL’s cash flow generation this year.
Firstly, Dingdong is confident that it can generate sufficient cash flow to fund share repurchases for the current year, judging by its recent management comments.
DDL stressed at the company’s earlier Q4 2023 results briefing in end-February that it is “in an ideal situation and position to carry out a share buyback” in 2024 as there is “zero concern about cash flow.” Previously, Seeking Alpha News reported on January 29, 2024 that the company has initiated a new one-year “$20M buyback program” that is in effect until late-January next year.
Secondly, DDL has cost optimization levers to boost its future cash flow.
Dingdong’s fulfillment costs-to-sales ratio decreased by -50 basis points YoY to 23.6% for Q4 2023. Looking forward, there is room for DDL to reduce its fulfillment expenses. At its fourth quarter earnings call, Dingdong shared that it has plans to “increase the efficiency of frontline fulfillment stations through further operational refinement such as optimizing transportation capacity.”
The company’s general and administrative costs-to-sales metric also declined by -0.5 percentage points YoY to 1.9% in the last quarter of the previous year. Reducing general and administrative expenses is typically a low-hanging fruit for most companies which want to improve their cash flow by becoming leaner and more efficient, and this should be the case with Dingdong as well.
Thirdly, the market thinks that Dingdong can generate positive free cash flow beginning in 2024.
The company has been free cash flow negative for the past few years between 2019 and 2023. Moving ahead, the sell side analysts forecast that DDL can achieve positive free cash amounting to RMB60 million and RMB291 million for FY 2024 and FY 2025, respectively, as per S&P Capital IQ consensus data.
In summary, Dingdong is likely to be in better financial health this year, as evidenced by the favorable expectations regarding the company’s 2024 cash flow generation.
Revenue Growth Prospects
In contrast with its cash flow outlook, DDL’s top line expansion prospects for the current year are less encouraging.
The consensus fiscal 2024 revenue estimate for Dingdong was revised downwards by -6% from RMB21,885 million as of end-February this year (when it reported Q4 results) to RMB20,607 million (source: S&P Capital IQ) now. DDL’s top line is projected to increase by just +3% in local currency or RMB terms this year, based on the updated consensus top line forecast.
A recent April 16, 2024 Seeking Alpha News article highlighted that “China’s Q1 GDP expands 5.3% Y/Y” which was above the consensus projection of 5.0%. However, an improvement in the Chinese economic environment might not be sufficient to boost DDL’s top line growth for the short term, as the company is still in the process of restructuring its business operations.
At the company’s Q4 earnings briefing in February 2024, Dingdong emphasized that “we aim to speed up the operational adjustments” this year. DDL acknowledged that the “operational adjustments we undertook” last year had played a part in the -16% decline in the company’s overall GMV (Gross Merchandise Value) for 2023. As such, it is reasonable to think that DDL’s revenue growth this year might also be affected by its business restructuring efforts.
DDL indicated at its most recent quarterly earnings call that it will “focus on strengthening our strongest markets, particularly in Jiangsu, Zhejiang and Shanghai” by “improving our market penetration in these regions to further expand our reach.” In the near-term, a greater emphasis on the company’s core geographical areas is likely to come at the expense of slower revenue growth or even top line contraction for its operations in other non-core Chinese cities.
Dingdong is expected to announce the company’s Q1 2024 financial results on May 16. Taking into account DDL’s ongoing business restructuring plans, my view is that the company’s actual first quarter top line will be in line or lower than the consensus estimate.
Final Thoughts
The market currently values Dingdong at a consensus next twelve months’ normalized P/E ratio of 11.4 times (source: S&P Capital IQ) which I deem to be reasonably fair as it is close to a low-to-mid teens broader market earnings multiple range. Buybacks supported by an improvement in cash flow generation should limit the downside for DDL’s shares. But a lackluster revenue growth outlook suggests that a meaningful re-rating of the stock’s valuations is unlikely.
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