iQiyi, Netflix of China, Allegedly Committed Securities Fraud

News Analysis

China streaming video leader iQiyi, the “Netflix of China,” is accused by a research firm and a short seller of committing a similar securities fraud exposed at Luckin Coffee, the “Starbucks of China.”

Global financial research firm Wolfpack Research issued a public report stating that iQiyi, Inc. has “massively [inflated] its user numbers and revenue while at the same time hiding the fraud from auditors and investors by overpaying for content, acquisitions, and other assets” prior to its high-profile March 2018 initial public offering in the United States that raised over $2.25 billion.

Beijing-based iQiyi was founded in 2010 as part of Chinas multinational internet-related services and artificial intelligence giant Baidu, Inc. The company has generated over 30 original production series. In 2015, it bought the streaming rights to eight of Chinas top shows, and several entertainment series from Taiwan and South Korea.

With 455 million monthly average users (MAUs), compared to 167 million MAUs for Netflix, iQiyis market capitalization almost doubled in its first month of trading to over $23.3 billion. Wall Street analysts attributed the turmoil from the Sino-U.S. trade war and the COVID-19 pandemic for pushing the stock valuation down to $12.7 billion.

Wolfpack Research was launched last year by activist short seller Dan David. Its mission is to expose U.S. and foreign publicly listed companies that engage in fraud and other wrongdoings.

The due diligence firm received support from short sheller Muddy Waters Capital in exposing iQiyi. Muddy Waters shorted iQiyi by betting that its stock price will decline.

Investment firm Muddy Waters exposed Luckin Coffees fraudulent activities in January. The stock of Luckin Coffee plunged by over $5.5 billion after the company admitted on April 2 that its chief operating officer and other insiders may have fabricated $310 million in sales in 2019. The Luckin stock crash has also endangered the balance sheets of Haitong Securities, Morgan Stanley, and Credit Suisse that loaned Luckins CEO $340 million based on the value of his stock.

Wolfpacks highly-footnoted 37-page report alleges that iQiyis 2019 revenues in China were inflated by 8 to 13 billion yuan, or $1.15 to $1.85 billion, by “misrepresenting its number of paying subscribers, the average membership period, or both.”

Users have to pay for iQiyis VIP membership either directly or through partners like e-commerce site and Xiaomi. Wolfpack alleged that around half of iQiyis VIP users got the membership for free or through a cheap deal from these partners. iQiyi accounts for dual memberships on a “gross basis,” which means “it records the full amount of revenue and records its partners share as expenses.”

“This allows IQ to inflate its revenues and burn off fake cash at the same time,” Wolfpack Research claimed.

The alleged accounting misstatements are similar to the Read More – Source

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