NRC and the question of going concern

According to the recently published semi-annual financial review for 2024, Danh Khôi Group JSC (HNX: NRC) recorded a sharp 78% decrease in net revenue compared to the previously self-prepared financial statements, dropping to just VND 2.6 billion. After deducting the cost of goods sold, NRC's gross profit for the half-year period reached only VND 2.3 billion, down 73% compared to the pre-audit figures.

Following the audit, the majority of NRC's expenses, such as finance costs and loan interest, remained constant. However, business administration costs rose by 152% compared to the self-prepared financial statements, totaling roughly VND 26 billion.

As a consequence, after deducting expenses, NRC's half-year net profit after tax fell from a gain of more than VND 7 billion to a loss of VND 10.4 billion. According to NRC officials, the key cause for the shift from profit to loss following the audit was the decision to reduce revenue from consulting contract services.

Specifically, revenue from completed consulting service contracts will be recorded when value-added invoices are issued.

The reason NRC has not yet issued value-added tax invoices for the completed consulting contracts is that the company is currently under administrative enforcement by the HCMC Tax Department, which includes a suspension of invoice usage from November 13, 2023, to November 13, 2024 (1 year) due to a tax debt of nearly VND 100 billion.

The second reason for the loss is the adjustment to increase corporate management costs, with provisions for doubtful debts made at the auditor's request.

Not only did NRC's semi-annual profit turn from a gain to a loss post-review, but the company also received a qualified opinion from the auditors regarding income from contract violations. Additionally, the auditors expressed doubts about NRC's ability to continue as a going concern.

Specifically, according to the auditor, in the first six months of 2024, NRC recorded income from contract breach penalties with Danh Khôi Holdings JSC (a related party) with an amount recorded at VND 66 billion. This sum was used by the company for a business cooperation agreement under Contract No. 02/2024/HĐHT/DKG-ABF dated June 27, 2024.

At the same time, HNX's Announcement 4071/TB-SGDHN dated September 6, 2024 states that the NRC stock is not eligible for margin trading.

"However, as of the date of this financial report, we did not collect enough acceptable audit data to assess the short-term performance of the business cooperation based on the cash flow generated by this income. As a result, we cannot determine whether an adjustment to these figures is required or what effect, if any, this may have on other items in the NRC's interim financial report," the auditors stated.

Responding to the auditor's qualified opinion, NRC's leadership explained that the nature of the business cooperation under Contract No. 02/2024/HĐHT/DKG-ABF is long-term. The company will recognize revenue towards the end of the cooperation cycle, and thus the current evidence provided to the auditor may not yet convincingly demonstrate short-term effectiveness.

They also affirmed that the company continues to work with its project partners to realize potential cooperation profits in the near future according to the project's schedule.

NRC's rather bleak business performance in the first half of 2024 runs counter to the developments in the real estate market in general, and in HCMC specifically. According to the HCMC Real Estate Association (HoREA), the most challenging phase of the real estate market has passed, related policies are taking effect, lending interest rates are declining, and access to capital for both residents and businesses has improved. Overall, transactions in the market are trending positively.

HoREA noted that clear signs of recovery have been evident since August 1, when the Land Law, Housing Law, and Real Estate Business Law simultaneously took effect, with the expectation of resolving legal issues for around 1,000 projects nationwide, facilitating better access to capital and credit.

Data from HCMC's Statistics Office also show that in the first eight months of the year, revenue from the real estate business in HCMC grew positively, with an estimated total value reaching VND 173,004 billion, equivalent to nearly USD 7 billion. From a growth rate of 2.51% in Q1/2024, real estate business in HCMC rose to 2.94% in Q2/2024 and reached 6.1% in the first eight months of the year.

Experts attribute the growth in real estate business revenue in HCMC to the legal framework, as laws related to real estate officially came into effect on August 1, 2024. Projects facing legal obstacles have gradually been resolved, restoring confidence among homebuyers.

In addition, HCMC's focus on accelerating public investment disbursement in the remaining months of the year is also seen as a supporting force driving the real estate market.