https://www.barrons.com/articles/short-seller-muddy-waters-luckin-coffee-chinas-iqiyi-51586294898 By Evie Liu April 7, 2020 5:30 pm ET Gong Yu, founder and chief executive officer of iQIYI. Photograph by Anthony Kwan/Bloomberg Stock in the video-streaming platform iQIYI, often called the Netflix of China, dropped sharply, but then recovered on Tuesday, following allegations by a research firm—backed by the short seller Muddy Waters Capital—that it inflated 2019 revenue and user numbers. In a report released Tuesday morning, the firm Wolfpack Research claims that iQIYI (ticker: IQ)was committing fraud well before its initial public offering in 2018 and has continued to do so. “Like so many other China-based companies who IPO with inflated numbers, [iQIYI] is unable to legitimately grow their business enough to true up their financial statements,” the firm wrote. iQIYI said in a statement released Tuesday afternoon that Wolfpack Research’s report contains “numerous errors, unsubstantiated statements and misleading conclusions and interpretations.” The company said it remains committed to high standards of corporate governance and internal controls. The report came as China’s Luckin Coffee (LK) recently announced an internal probe into alleged fraud by one of its executives, news that caused the stock to shed nearly 80% of its value last Thursday. Trading in Luckin shares was halted on Tuesday. Wolfpack Research was launched last year by veteran activist short seller Dan David, mainly focusing on exposing fraud and corporate wrongdoing at public companies around the globe. Muddy Waters Capital, the activist investment firm that exposed the alleged fraud at Luckin in January, has made an initial investment in Wolfpack. Muddy Waters said on Tuesday that it helped Wolfpack prepare the report and that it has taken a short position in iQIYI—a bet that the price will decline. Shares of iQIYI tumbled 11.2% Tuesday morning before bouncing back to gain 3.2% as of the close. The Chinese tech giant Baidu (BIDU), which owns roughly half of iQIYI, saw its stock dip 1.1%. Wolfpack estimates that iQIYI inflated its 2019 revenue by approximately 8 billion to 13 billion Chinese yuan ($1.14 billion to $1.85 billion), or 27% to 44%, relative to the actual levels. iQIYI is overstating its user numbers by approximately 42% to 60%, says Wolfpack, and also has inflated its expenses—the prices it pays for content, other assets, and acquisitions—in order to “burn off fake cash to hide the fraud from its auditor and investors.” In a 37-page report, Wolfpack Research said it conducted in-person surveys of 1,563 people within iQIYI’s target demographic in China and that 548 of them were effective paying subscribers to the company’s VIP memberships. Among those, approximately one third obtained their VIP memberships through iQIYI partners such as JD.com, Xiaomi TV, and Ctrip—often nearly free through “buy one, get one” or “membership benefit” deals, as a result of using the other services, it said. IQIYI records the full revenue for those memberships, but lists its partners’ share of that claimed income as an expense, according to the Wolfpack report. The result is that it can simultaneously inflate its revenues and burn off fake cash, the report said. Wolfpack said iQIYI’s deferred revenues—prepaid by subscription customers for membership services—reported to the Securities and Exchange Commission in its IPO prospectus were inflated by 261.7%, 165.5%, and 86.2% for 2015, 2016, and 2017, respectively. The post-IPO revenues continue to be overstated as well, Wolfpack said. The report also accused iQIYI of inflating the value of the content it provides through its streaming service, a figure that is usually determined internally. “In other words, [iQIYI]’s management can effectively assign any value they want to these transactions, providing an easy opportunity to inflate its revenues,” Wolfpack wrote. iQIYI hasn’t made a profit since its foundation 10 years ago, according to Wolfpack. The company lost 10.3 billion yuan in 2019, 9.1 billion yuan in 2018, and 3.7 billion yuan in 2017, according to FactSet data. Write to Evie Liu at evie.liu@barrons.com
What is with all these 7 post wonders who have popped up in the last few days making either stupid or meaningless comments? Is it a bot experiment of some kind?
https://www.bloomberg.com/opinion/a...on-chinese-inc-u-s-listings?srnd=premium-asia Luckin May Put Lasting Stain on China Inc. Listings Nisha Gopalan April 08, 2020 Investors have been scalded by Luckin Coffee Inc.’s news this month that it inflated revenue numbers, a revelation that came less than a year after the chain went public on the Nasdaq exchange. Shares in the company — whose $645 million IPO was the second largest in the U.S. by a Chinese firm in the last 12 months — have swooned 74%. Suddenly, Chinese companies’ opaque numbers are dinner-table conversation again, with the scandal sending other listings from the nation into a tailspin and threatening to close off the overseas market for new issuers. We have been here before. After short sellers such as Muddy Waters, which bet against Luckin, spotted Toronto-listed Sino-Forest’s overstated timber assets in 2011, Chinese listings in the U.S. evaporated. But they eventually came back as tighter standards were put in place. By 2014, Chinese company IPOs in the U.S. hit an all-time high of $29 billion, buoyed by Alibaba Group Holding Ltd.’s record-breaking $25 billion deal — and reached its second-highest level in 2018 with $9 billion in listings, including that of Netflix-like video service iQiyi Inc. Should we expect a repeat of that comeback? Don’t count on it. This time, a deeper freeze beckons for Chinese firms, one that will be hard to thaw even when the coronavirus outbreak opens up the U.S. IPO market again. Here’s why. First, Chinese IPOs aren’t the winning tickets they once were. China-based companies that listed in the U.S. this year are trading at 12% below their IPO price on average, while other new issues are down 7.5%, according to Bloomberg data earlier this week. That underperformance makes it harder for investors to ignore the low accounting bar set on these listings in the U.S. that has been tolerated for so long. That underperformance, which predated the Luckin scandal, makes it harder for investors to ignore the low accounting bar set on these listings in the U.S. The U.S. Public Company Accounting Oversight Board, which was set up as a watchdog for audit firms in the wake of Enron Corp.’s collapse, can’t access the books of Chinese companies because Beijing deems that data to involve sensitive state secrets. That hadn’t been a problem for shareholders as long as they were being compensated for taking on the extra risk of accepting the lack of transparency. Now, though, investors will be less likely to take companies on faith. That’s especially the case in light of Luckin’s situation. Luckin’s rapid expansion, which allowed the three-year old company to reach 4,500 outlets and overtake Starbucks Inc. — a presence in the country since 1999 — had captured the imagination of not just retail investors in the U.S. but a slew of big names including Singapore’s sovereign wealth fund, GIC Pte, and crop-trading giant Louis Dreyfus Co. Its inflated numbers are going to lead investors to question all unprofitable Chinese firms with unsustainable models. Second, Chinese listing hopefuls have alternative funding routes now: In 2018, Hong Kong eased profitability requirements for new-economy listings, while Shanghai did so for candidates on its fledgling Star Market last year. Meanwhile, index provider MSCI Inc.’s inclusion last year of mainland Chinese shares in its emerging-markets index means domestically listed firms no longer have to go to Hong Kong or the U.S. to access American money. By staying close to home, Chinese listing hopefuls also are shielded from both the class-action lawsuits Luckin now faces as well as the risk of getting caught in any trade war or other cross fire between Beijing and Washington, especially now with the virus outbreak escalating tensions. In November, New York-traded Alibaba began what many are expecting to be the start of a wave with a $11.3 billion secondary listing in Hong Kong. Lastly, the gatekeepers of IPO due diligence — the big audit firms and the Wall Street banks and others — are under pressure like never before. Luckin’s unreliable revenue numbers for the nine months to Sept. 30 last year include those presented to investors during the May IPO. Few will be assuaged by Ernst & Young’s statement that it tipped off the board to the fraudulent numbers while auditing the coffee chain’s 2019 figures. Banks, too, will be ramping up their due diligence as the reputational risk they incur from advising Chinese company listings comes into focus. Many of them face lawsuits, and underwriters will be keen to distance themselves from the Luckin fiasco. Credit Suisse Group AG dropped off the $500 million-to-$1 billion IPO slated for later this year of WeDoctor — one of China’s top online health-care startups, backed by Tencent Holdings Ltd. — after the Swiss bank was sued for its role on Luckin’s U.S. share sale, Bloomberg News reported Monday. Investment banks that dole out loans in the hopes of winning more IPO business will also think twice. Six banks, including Goldman Sachs Group Inc. and Morgan Stanley, extended a $518 million margin loan to Luckin Chairman Lu Zhengyao and are now seizing and selling the stock after shares collapsed in the past week. The banks stand to lose more than $100 million from that loan, according to the Wall Street Journal. Beijing is also taking notice. The China Securities Regulatory Commission has said it will investigate Luckin “regardless of listing location,” a rare move by the regulator, which tends to stick to its shores. About 400 Chinese companies are listed in the U.S. with a total market value of $1 trillion, led by Alibaba, JD.com Inc. and Pinduoduo Inc. Luckin’s fake sales could easily cause that number to shrink. This column does not necessarily reflect the opinion of Bloomberg LP and its owners. To contact the author of this story: Nisha Gopalan at ngopalan3@bloomberg.net To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net