Dada Nexus: Fair Value Cut by 25% Due to Increased Governance Risks, but Concern May Be Overblown

We lower our fair value estimate for Dada Nexus to $3 from $4 after the company reported irregularities in its income statement in an SEC filing on Jan 8. Based on its preliminary assessment, the company currently estimates that approximately CNY 500 million of revenue from online advertising and marketing services and CNY 500 million of operations and support costs may have been overstated for the first three quarters of 2023. The CNY 500 million represents only 6.1% of Dada Nexus' revenue, and we have removed CNY 500 million from both revenue and the cost of goods and services in the first three quarters in our model accordingly, based on the filing. The company indicated that the overstatement is from its advertising side, which implies that the monetization rate for that business is likely overestimated by about 150 basis points so far in 2023. Subsequently, we adjusted our model to reflect the overestimation and lowered the monetization rate assumptions in the advertising business by 200-250 basis points in the outer years, which is the main contributing factor to our reduced valuation.