Dada Nexus plunges 45%, could it be the next 40-fold Luckin Coffee?

Last night, a notice from JD.com caused a collapse in Dada Nexus' stock price, which fell by 50% at one point during trading and closed down 45.8%.

Afterwards, Dada Nexus announced that the revenue guidance for the first three quarters of 2023, which was estimated to be around 500 million yuan from online advertising and marketing services, as well as operating and support costs of 500 million yuan, may have been exaggerated. "In addition, the revenue guidance for the fourth quarter and full year of 2023 previously provided by the company should no longer be relied upon."

Longbridge has learned that internal sources at Dada Nexus have stated that the company voluntarily discovered this incident during an audit, which may have been caused by individual individuals suspected of fraudulent activities, and a report has been filed. Furthermore, this matter does not involve Dada Nexus' core business and has a very limited impact.

In short, this is a case of executive fraud, discovered through self-examination.

The impact on the business is not significant, but the impact on the company's reputation is quite substantial, especially considering the wave of fraud scandals in Chinese concept stocks during the bear market.

In addition to this drastic drop, Dada Nexus' stock price has fallen by 98.8% from its peak of $61.2, making it one of the Chinese concept stocks with the largest decline.

Comparison with the Luckin Coffee scandal

First, let's look at the scale of the fraudulent financial figures.

The announcement mentioned that Dada Nexus' revenue of 500 million yuan and expenses of 500 million yuan were both exaggerated.

Some analysts believe that this can be understood as partially offsetting each other. In contrast, Luckin Coffee falsified 22 billion yuan in transaction volume and was fined 1.2 billion yuan by the SEC.

Secondly, the nature of the incidents is different.

Dada Nexus voluntarily disclosed the fraud, which may result in more lenient treatment;

Luckin Coffee resisted and only confessed when they couldn't hide it anymore, which is why they were fined 1.2 billion yuan.

On January 31, 2020, short-selling firm Muddy Waters released an anonymous 89-page report accusing Luckin Coffee of fraud. On February 3, 2020, Luckin Coffee denied all of Muddy Waters' allegations. However, on April 2, 2020, they couldn't bear it anymore and admitted to serious data fraud.

But the same thing is that it is likely to trigger class action lawsuits and fines, and the damage to reputation is inevitable.

After the Luckin Coffee scandal broke out, the stock price plummeted by 96% in the short term.

However, after delisting, the stock price in the OTC market has been rising steadily, from a low of $0.95 to a high of $38.88, an increase of nearly 40 times, even surpassing the pre-crash level.Of course, the soaring stock price of Luckin Coffee is not only due to the bull market in the US stock market in 2020 and 2021, but also due to the soaring performance.

Dada Nexus currently does not have these favorable conditions.

Possible outcomes for Dada Nexus:

First, it can maintain its listing status, bear the losses it should bear, and be penalized accordingly. As a company consolidated by JD.com, JD.com still cares about its reputation, as evidenced by its proactive disclosure.

Second, it may be delisted, just like Luckin Coffee, and then traded in the pink sheet market.

Third, it may go private, but if it goes private at the current price, the market may have objections.

The future of Dada Nexus is the most concerning issue for everyone, and there are different views in the market.

Below are the long and short views of the market from Long Port.

Bullish views from investors:

1. The major shareholder's self-exposure of fraudulent auditing caused the stock price to plummet by 45%, which may be an overreaction.

2. On December 19, 2023, the former CEO and CFO resigned, and the major shareholder JD.com parachuted in JD Logistics veterans as the new CEO and CFO. From then on, JD.com has complete control over Dada Nexus, rather than just a financial investment.

3. It is beneficial for the integration of Dada Nexus and JD Logistics, with a significant reduction in marketing costs and a significant improvement in performance. This is conducive to achieving positive free cash flow in 2024. The key is that the company has become a complete subsidiary of JD.com, avoiding the risk of bankruptcy.

4. The probability of merging into JD Logistics and JD.com privatizing Dada Nexus has greatly increased. Currently, JD.com holds 53% of the shares, Walmart holds 9% of the shares, and the remaining market float is only 38%, with a market value of only 200 million.

5. The falsification disclosed by the company is an exaggeration of advertising revenue and marketing costs. It can be regarded as embezzlement by former executives. This self-exposure is actually beneficial to the financial health of the company.

6. Unfortunately, the market is very fragile during the period when Chinese concept stocks are being targeted.

7. Give JD.com one year, with a target price of $5, a market-to-sales ratio of 1x, by the end of 2024.

8. It is considered occupational fraud, and the impact will not be significant. The compensation amount may be in the range of several million to tens of millions. It is recommended to increase holdings.

9. The negative impact is exaggerated, and it may be appropriate to buy some.

10. After the exposure, JD.com will take full control of Dada Nexus, and with the experience of JD Logistics, costs will quickly decrease, and there will be fewer cases of fraud in the future. This is actually good for the company's development.

11. The last company to have this kind of problem was Luckin Coffee, but it managed to climb out of the pit. Looking at the business of Dada Nexus, it shouldn't die either.

Bearish views from investors:

1. Citigroup: Downgraded Dada Nexus to "sell" and lowered the target price from $6 to $1.8.

2. This year, delisting due to financial fraud will not spare anyone in the US stock market.

3. A company like Dada Nexus, just like the former Luckin Coffee, which has a history of management fraud, is basically not worth considering. They do not have the qualifications for long-term investment, even if their products are excellent.

4. Compared to Shunfeng Same City, the difference is not only in performance but also in integrity.

5. Dada Nexus may fall to the market value of Dingdong Maicai. (Note: The current market value of Dingdong Maicai is only $300 million, while Dada Nexus is $450 million.)

6. It is possible that they will be delisted. Financial fraud is taken very seriously in the US stock market, and US stock investors are not easily fooled.

None of the above content constitutes investment advice.