Dingtone grocery shopping: Why is the market still unwelcome after making money?

Yesterday Monday night (February 13, Beijing time) US stocks pre-market, $ dingdong to buy vegetables. The US released its fourth quarter 2022 earnings. Earnings turned positive for the first time and significantly exceeded market expectations. Dingtone was able to make money last year in a poor economic environment, mainly due to the improvement of operational efficiency, including the closure of front-end warehouses with low order density, and its own promotion and marketing restraint. In addition, the proportion of GMV of self-developed products with high gross profit has increased, optimizing the overall gross margin level.

However, Dolphin Jun also noticed that after the overall good earnings report was announced, Dingtone's stock price opened high and went low. Our guess is that the market may still have some concerns:

1) Whether the profit in the fourth quarter of last year has an epidemic dividend is not necessarily sustainable (for example, there may be contingency in high gross profit margin and low sales expenses);

2) Is the future strategy to further trade "contraction" for "profit", or to seek growth again? (When will the number of front positions return to growth)

3) After the growth rhythm is disrupted and the short-term growth story is broken, first-level institutional shareholders may have the demand for early exit. (There is selling pressure on the rise)

Dolphin Jun believes that as a retail company, especially an e-commerce platform based on fresh food, the requirements for supply chain operation efficiency are very high. Either scale is used to dilute fixed costs to achieve profits, or it is necessary to firmly capture people with high purchasing power and absorb supply chain costs (fulfillment costs) through high gross margins. At present, Dingtone mainly adopts the latter, that is, by sacrificing scale, using high-priced and high-quality products to obtain higher gross margins, while striving to optimize its own operating efficiency (sales expenses, management expenses, R&D expenses) to achieve profitability.

But the problem is that this target population is too small, and the current TAM is not large enough. Coupled with the disruption of the epidemic, the general trend of consumption upgrading has been affected somewhat, which further limits the pace of growth of Dingtone to expand its scale with a limited loss rate.

From the withdrawal of Hema to the bankruptcy restructuring of Daily Youxian, after the epidemic dividend faded, the market has not stopped questioning whether the business model of the front-end warehouse model can prove itself. Although it took Dingtone almost a year to prove to the market, the fourth quarter, which was truly profitable for the first time, still failed to fully convince the market because of factors that may be wrapped in epidemic dividends.

However, in a conference call after the earnings release, Dingtone's management gave guidance on the 2023 non-GAAP to ensure breakeven. This year should belong to a normal business environment without the epidemic lockdown dividend, if it can still achieve self-financing, then the market will greatly improve the business model of the front position.

Regarding the scale space, the management also gave a relatively quantitative figure with confidence this time: "At present, Shanghai has 12 billion GMV, and the target is expected to rush to 20 billion." From the perspective of overall consumption scale, among the cities currently covered by Dingtone, the total consumption potential of cities outside Shanghai is 5 times that of Shanghai. “

Of course, due to the requirements of product gross margin, we cannot simply regard the consumption power of users in other cities as the level of Shanghai, if it is still predicted according to the current structure of 50% of Shanghai's GMV, it means that Dingtone can achieve the level of 40-50 billion GMV in the medium and long term.

According to the current mature single-warehouse model in Shanghai (20% fulfillment expense ratio), it means that the pre-tax profit margin in the long-term state is expected to increase by more than 4 points compared with 0.8% in the fourth quarter, and the net profit margin after tax deduction is about 3%-4%. Then the long-term profit is expected to reach the scale of 1.5-2 billion, according to 12x PE, 5-year WACC 12% discount rate, valuation also has 1.6 billion US dollars.

However, as of last night (2.13), Dingtone's market value is only $1.16 billion, in addition to some funds still doubtful about the front-end position model, some markets temporarily choose to ignore Dingtone's long-term growth, and only give valuations according to the current revenue scale and long-term net interest rate level (2022 revenue 240* net interest rate 3% * PE 12x). All in all, the market is still biased against the front-loading model, and lacks confidence in Dingtone's long-term growth.

Detailed interpretation of this quarter's financial report

First, the epidemic dividend faded, and the core members rushed back down

In the fourth quarter, Dingtone's total revenue was 6.2 billion yuan, a year-on-year increase of 13%. In the fourth quarter of last year, because a large-scale closing contraction began, the base was low.

In itemized income:

1. Product sales revenue was 6.138 billion yuan, down 13.4% year-on-year. GMV for the quarter was 6.8 billion, up 4% sequentially.

From the perspective of "GMV-income", the proportion of VAT and subsidies only decreased slightly in the fourth quarter, and the amount of subsidized red envelopes did not change significantly, which can represent a slight increase in the unit price of customers behind the fourth quarter compared with the third quarter.

In addition to the decrease in the proportion of subsidies due to the increase in the unit price of customers, or due to the increase in unit price and the increase in the GMV contribution of self-developed brands in non-fresh products, the real gross profit margin of goods was also significantly optimized in the fourth quarter. From the source of the improvement of the final gross margin, because the improvement of the real gross profit margin of the commodity brings a significantly greater degree of optimization.

2. Service revenue (mainly membership fees) fell by 10% year-on-year, and the sharp decline in this figure represents the month-on-month loss of core member users, and Dingtone as a whole is still in a cycle of closing and dragging down performance. In addition, such loss is also caused by non-core users who choose to go to offline supermarkets/vegetable markets or other cost-effective online counterparts because of the pursuit of low prices. The latter is more problematic and represents a shrinking long-term target user base.

Second, marketing expenses continue to tighten, and performance efficiency improvement brings real first profits

In the fourth quarter, the main expenses were marketing expenses and fulfillment expenses that continued to be optimized. In addition to layoffs, the number of front-end positions is still decreasing from the perspective of the scale of fixed assets. The decline in fulfillment costs is related to the decline in front-end positions and supply chain optimization, and the fulfillment expense ratio has reached 24%, which is getting smaller and smaller than the 20% gap in the mature stage of Shanghai. It may be difficult to further optimize by improving the efficiency of its own supply chain. Therefore, it is still necessary to rely on the recovery of user consumption and drive more GMV to achieve.

Finally, the net profit under non-GAAP was 50 million yuan, and the net profit margin was 0.8%, which was on the trend of gradual optimization. The company will still achieve positive non-GAAP net profit in the first quarter of this year (due to the return of users in first-tier cities during the Spring Festival), and will break even throughout 2023.

Third, the cash flow after profit is correspondingly improved

As of the end of the fourth quarter, Dingtone's cash-like assets on its books were RMB6.5 billion, and net cash after deducting short-term debt was RMB2.3 billion, a significant improvement sequentially. Mainly due to the fact that after the main business really made money, the net operating cash flow in the fourth quarter was 680 million, and the scale of short-term debt was stable.