Why these investment firms are backing Joyy despite Muddy Waters’ report

“Muddy Waters made two fatal logic mistakes in the Joyy report,” Zhuang Minghao, vice president at Matrix Partners China, said in a livestream interview with 36kr.

The investor was referring to the short-selling firm’s recent 71-page report, which called Joyy – the parent of China-focused service YY Live – a “fraud tech company.”

Muddy Waters’ first mistake was being “naive” enough to believe that all users of livestreaming platforms donate gifts spontaneously, he said.

The second one is how it treats “turnover” as “revenue” generated by guilds or channel owners. In fact, the “turnover” can be considered as the platform’s revenue rather than the guild’s. That’s because users top up their account by giving their money directly to the platform, explained Zhuang, who had a stint as vice president at game-streaming site Panda TV.

He also noted that livestreaming platforms will first take their cut from the donations given by benefactor fans. The remaining portion is then given to “guilders,” who manage the streamer. Finally, streamers will get the rest of the donations.

Photo credit: Joyy

Zhuang isn’t only head of an investment firm that has come out in support of Joyy. The company also received backing from Sean Ma, founder and chief investment officer of hedge fund Snow Lake Capital. In an interview, Ma said that he thinks that YY Live’s business is 100% real and that the Muddy Waters report is another unprovoked assault on Chinese-listed companies.

According to Ma, the short-selling firm’s output has been “very poor” in the past few years, referring to previous reports that targeted businesses such as Anta Sports, TAL Education Group, and iQiyi. He said that facts have proven that these are good companies that can withstand the test of the market, and that Muddy Waters has been repeatedly “slapped in the face.”

Ma claimed that Snow Lake Capital has increased his stake in Joyy by US$100 million and will continue to buy more shares if the company’s stock drops further.

Similarly, when Muddy Waters accused iQiyi of fraud earlier this year, Snow Lake Capital also boosted its stake in the online video platform.

One of the main points of contention in the Muddy Waters report is the difference between what YY Live claims its leading channel owners earn and what the short-selling firm said it found out through its research of local credit reports.

According to the report, YY “purports” that the top five channel owners – Yujia, Huashe, Wudi, Chinablue, and IR – generated over 1.1 billion yuan in 2018. But Muddy Waters says that the actual number is 156.3 million yuan instead. The two figures show a shortfall of 85.9%.

To this end, Matrix Partners’ Zhuang pointed out that Huashe is owned by Happy Entertainment, which filed for an initial public offering in Hong Kong in June. In its prospectus, the company revealed that it earned over 1 billion yuan in turnover in 2019, while it generated 80 million yuan in revenue.

From the perspective of the guild, Huashe did earn a revenue that was less than 10% of the total turnover, and that explains the 85.9% discrepancy, Zhang said.