Shares of Dada Nexus (DADA 0.50%) were taking a dive this week after the Chinese grocer and online delivery platform said in an SEC filing that an audit revealed certain suspicious practices that "may cast doubt" on revenues from the company's online advertising and marketing services.
It also said that its revenue from online advertising and marketing services was overstated by roughly $70 million in the first three quarters of 2023, and that its revenue guidance for the fourth quarter was no longer valid.
As a result, the stock was down 56% for the week as of Thursday at 12:50 p.m. ET, according to data from S&P Global Market Intelligence, and JD.com (JD 6.12%) was also down 4.7% on the news, as JD.com is the majority shareholder in Dada Nexus.
Image source: Getty Images.
Is there something worse going on here?
Dada said that the audit committee will conduct an independent review of the matter, and it will hire independent professional advisors, including an outside forensic accounting firm.
That revenue total is only about 5% of Dada's revenue, but revelations of bad accounting are always problematic and could lead to more numbers needing to be restated. Investors also tend to be suspicious about Chinese companies and fraud, as there are a number of previous examples, including Luckin Coffee, of Chinese companies that have gone bankrupt after revelations of accounting inconsistencies.
Citigroup also double-downgraded the stock from buy to sell on the news and gave it a price target of $1.80. The bank also noted that the departure of Dada's CFO in December could be related to the news. It was also double-downgraded to underperform at CLSA, and downgraded to neutral at Bocom
What's next for Dada and JD.com?
Chinese stocks are already struggling on a number of fronts, as the economy in that country is weak, Beijing has imposed new regulations on the tech sectors, and the U.S. is restricting chip exports to China.
Today's news may only be minor for JD.com, and appears to be something Dada should be able to overcome if it's only limited to these details. However, this type of news is familiar to China stock investors, and it will take time to fade.
We should learn more by February, when Dada and JD.com reported their next quarterly earnings reports. If the inaccuracies are contained to just these categories, the stocks could recover these losses.
