China’s largest streaming service, iQiyi, hit with fraud allegations

Just days after short-seller Muddy Waters’ allegations of malfeasance at Luckin Coffee were vindicated, with Luckin admitting it fabricated sales worth over US$310 million, the equity research firm announced its short position in Chinese online streaming service iQiyi via Twitter.

Muddy Waters alleged Tuesday morning that iQiyi, the largest streaming service in China in terms of users, fabricated its revenue and number of users.

Photo credit: Tech in Asia

Iqiyi stocks tumbled 11.2% following the announcement, but bounced back 3.2% at US$17.30 as of market close on Tuesday. Shares of its parent company, Chinese search engine Baidu, also dropped by 1.1% to US$101.79.

Muddy Waters said it assisted financial research and due diligence firm Wolfpack Research with an investigation into iQiyi, which involved surveys of 1,563 people within iQiyi’s target demographic in China between October and November 2019.

The 37-page report concluded that iQiyi inflated its 2019 revenue by approximately 8 billion yuan to 13 billion (US$1.1 billion to US$1.8 billion), or 27% to 44%. According to the research, iQiyi also overstated its user numbers by 42% to 60%.

According to iQiyi’s annual report for 2019, the company had total revenues of US$4.2 billion, indicating a 16% increase from the prior year. Additionally, as of December 2019, the number of total subscribers reached 106.9 million, up 22% year on year, with 98.9% of them being paying users.

“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,” reads the Wolfpack Research report.

It also questioned iQiyi’s pre-IPO performances. “When compared to IQ’s prospectus, we found that the deferred revenues reported to the SEC were inflated by 261.7%, 165.5%, and 86.2% in 2015, 2016, and 2017, respectively.”

Beijing-based iQiyi replied to the allegations, saying that the report contains numerous errors, unsubstantiated statements, and misleading conclusions and interpretations.

“[Iqiyi] has always been and will remain committed to maintaining high standards of corporate governance and internal control, as well as transparent and timely disclosure in compliance with the applicable rules and regulations of the Securities and Exchange Commission and the Nasdaq Global Select Market,” the firm said in the press release.

Yesterday, Holzer & Holzer, an investment and security fraud law firm, announced it has started to investigate whether iQiyi complied with federal securities laws.

The allegation comes soon after Chinese coffee chain Luckin was hit with a sales fraud scandal, which sent the latter’s stock plunging by 83% to US$4.39 within days, KrAsia reported. In January, Muddy Waters was short Luckin, citing an 89-page anonymous investigative report supported by 11,260 hours of store traffic video footage. The once rising stock is now facing lawsuits from several US-based law firms on behalf of investors, including Hagens Berman and Kahn Swick & Foti.

Luckin submitted a filing to SEC last Thursday announcing an internal investigation into the conduct of former chief operating officer Jian Liu, who is believed to have inflated revenues by 2.2 billion yuan (US$310.5 million).