Is there a "mole" in JD Dada?

Author | Liu Baodan

Just at the beginning of 2024, Dada Nexus (Nasdaq: DADA), a subsidiary of JD and the "number one instant retail stock," exposed financial issues.

On the evening of January 8th, Dada Nexus announced through a statement that during its routine internal audit process, certain suspicious practices were discovered, which may cast doubt on the company's revenue from online advertising and marketing services in 2023. After the news was announced, Dada Nexus's stock price plummeted nearly 30% in pre-market trading.

According to the announcement by Dada Nexus, the company currently estimates that the revenue from online advertising and marketing services in the first three quarters of 2023, totaling approximately 500 million yuan, as well as the operating and support costs of 500 million yuan, may have been overstated. Subsequently, the parent company JD also announced this news through a statement.

Insiders at Dada Nexus told Wall Street News that this incident was voluntarily discovered by Dada Nexus during the audit, possibly due to individual involvement in fraudulent activities. "We have reported the case to the public security authorities. In addition, this matter does not involve Dada Nexus's core business and has a very limited impact."

Regarding the specific financial issues, Dada Nexus stated that it is hiring and will receive assistance from independent professional consultants, and will provide the latest information on independent reviews in a timely manner.

Shen Meng, a director at Shengsong Capital, believes that internal audits are a self-examination mechanism for companies' business compliance. As a well-regulated U.S. stock market, failure to proactively disclose such situations may lead to more rigorous external investigations. However, at present, the issues are only suspicions, and whether there are violations needs to be verified by the investigation results.

In fact, this is not the first time that Chinese concept stocks have exposed problems themselves. In April 2020, Luckin Coffee and TAL Education successively issued announcements. The former admitted to a 2.2 billion yuan financial fraud, causing a sharp drop in stock prices and a nearly 80% decrease in market value. The latter discovered illegal behavior by employees during routine internal audits and immediately reported it to the police.

Different problems lead to different outcomes. Luckin admitted to financial fraud and was eventually delisted from Nasdaq. On the other hand, due to its stable financial performance over the years and a relatively healthy business model, TAL Education quickly recovered and its market value increased by 28% from April 7th to the end of that year.

In the past year, Dada Nexus has just turned losses into profits. However, this incident undoubtedly raises doubts about the authenticity of Dada Nexus's profitability.

On August 16th, Dada Nexus released its second-quarter financial report, achieving revenue of 2.8 billion yuan, a year-on-year growth of 23%. The adjusted net profit improved by more than 17 percentage points compared to the previous quarter's net loss of 350 million yuan, turning losses into profits.

Since its listing in the U.S. in 2020, Dada Nexus has been in a loss-making state and finally achieved profitability after three years of development. This was also seen as a milestone event for Dada Nexus in establishing a sustainable profitable business model. Now, this achievement is being questioned. Dada Nexus' performance outlook has also lost its reference basis. Dada Nexus stated that, until further notice, the company's previously provided revenue guidance for the fourth quarter and full year of 2023 should no longer be relied upon.

Dada Nexus is a subsidiary of JD, and as of March 31, 2023, JD holds a 53% stake in Dada Nexus. This incident indicates that JD has certain issues in corporate governance and internal controls.

Bai Wenxi, Vice Chairman of the China Enterprise Capital Alliance, believes that if the problem with Dada Nexus is serious, it may require a large amount of provisions or losses, which could cause fluctuations in JD's performance. Mishandling the situation may raise questions from investors about JD's governance structure and subsequently affect confidence in its capital market.

JD has recognized this issue and stated in the announcement that it will strive to maintain high standards of governance and internal controls, as well as transparent and timely information disclosure in compliance with relevant rules and regulations.

Bai Wenxi believes that JD can strengthen internal audits of Dada Nexus to promptly identify and rectify any existing issues, ensuring the accuracy of financial reports. Shen Meng also suggested, "In the future, JD can utilize its major shareholder and actual control rights to drive Dada Nexus to strengthen internal management."

In the past year, JD has been preoccupied with the price war in the e-commerce market. Going forward, JD must carefully examine its internal management issues.