What is the impact of the internal audit storm on DADA, and how much is the liquidation value of Dada Group
On the evening of January 8, JD.O announced that Dada Group (DADA.O), a consolidated subsidiary of the company, revealed during its routine internal audit process some questionable behaviors that may cast doubts on certain online marketing service revenues and operating support costs of Dada for the first three quarters of 2023. The Audit Committee under Dada's Board of Directors decided to conduct an independent review, assisted by independent professional advisors, subsequently leading to a collapse in Dada's stock price.
Firstly, this event will directly impact the company's valuation in three aspects:
(1) The authenticity of revenue data is doubted by the market;
(2) The market is concerned about whether there is a long-term audit risk;
The company has decided to entrust a third party to re-audit, which may reveal financial issues requiring significant adjustments. Such audit results could necessitate amendments to financial reports or even restatements of historical data. For example, Groupon had to revise its financial reports after an audit in 2012 due to previous overestimation of revenue.
(3) Internal control and governance issues;
Clearly, the issues exposed by Dada are related to internal controls. As Warren Buffett once said, when you find one cockroach in the room, there are likely many more. Therefore, although it is a relatively positive phenomenon that JD.com proactively disclosed the issue, it inevitably causes concern in the market.
(1) The authenticity of revenue data is doubted by the market;
(2) The market is concerned about whether there is a long-term audit risk;
The company has decided to entrust a third party to re-audit, which may reveal financial issues requiring significant adjustments. Such audit results could necessitate amendments to financial reports or even restatements of historical data. For example, Groupon had to revise its financial reports after an audit in 2012 due to previous overestimation of revenue.
(3) Internal control and governance issues;
Clearly, the issues exposed by Dada are related to internal controls. As Warren Buffett once said, when you find one cockroach in the room, there are likely many more. Therefore, although it is a relatively positive phenomenon that JD.com proactively disclosed the issue, it inevitably causes concern in the market.
For investors in Dada Group, the company currently faces reputation issues, but after a deep decline in stock price, one cannot help but ponder the remaining investment value of the company. So, what is the liquidation value of Dada?
Before considering how much liquidation value there is, one point that cannot be ignored is "whether the company is likely to be involved in serious fines."
1. Whether it is individual or corporate behavior is important
According to the announcement disclosed by Dada, this incident was actively discovered during an audit and may be caused by suspected fraud committed by individuals. If it remains a case of individual crime, then according to the Sarbanes-Oxley Act of 2002 (SOX):
• Section 802: For deliberate acts of destruction, alteration, concealment, manipulation, or falsification of accounting records, individuals may face fines of up to $10 million and/or imprisonment of up to 20 years.
• Section 906: Requires CEOs and CFOs to certify the company's financial reports, with individuals violating this provision facing fines of up to $5 million and/or imprisonment of up to 20 years. Thus, if the event is ultimately confirmed as individual behavior, the penalties will be at the CEO and CFO level, making the impact on the company manageable. If it is a corporate act of proactive income falsification, a recent case to observe is "Luckin Coffee": At the end of 2020, accused of financial fraud, Luckin agreed to pay a fine of $180 million to settle with the SEC. Therefore, the final characterization will determine the scale of the penalty, and the current trend suggests that it is more likely to be individual behavior.
1. How much money is left in Dada's accounts for liquidation
The current total assets amount to RMB 8.714 billion, with debts of RMB 1.888 billion, and shareholder's equity of RMB 6.825 billion.
Assets that can be directly realized include:
Cash and cash equivalents: RMB 1.887 billion;
Restricted funds: RMB 652 million;
Short-term investments: RMB 1.87 billion;
Assets with uncertain realization include:
Accounts receivable: RMB 432 million
Accounts receivable from related parties: RMB 999 million;
Accounts receivable are mainly brought in by a small number of large customers. If we take half of the accounts receivable, (432 + 999) / 2 = RMB 716 million
The total realizable assets amount to: 1.887 + 0.652 + 1.87 + 0.716 = RMB 5.125 billion
The bulk of fixed assets lies in intangible assets, which are basically not directly usable, and the total debt is approximately RMB 1.888 billion. After repaying debts with realizable assets, there is a remaining RMB 3.237 billion.
If fixed assets are not counted, and realizable assets are liquidated after a certain discount, the cash that can be obtained is approximately RMB 3.237 billion. The current market capitalization of Dada is RMB 3.198 billion. Overall, as a business owner, the value after liquidation is not significant. From a financial perspective, Dada has been losing money for many years and has not yet turned profitable. Considering the current comparison between liquidation value and market capitalization, the significance of investing in its liquidation is small. There are also uncertainties such as potential fines and whether the business can turn profitable.For Dada investors, it is more about the game value of stock prices at present, and the investment value is lower before the business is turned around.
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