Short seller’s report takes a toll on iQIYI (IQ) stock

Shares of Chinese firm iQIYI Inc. (NASDAQ: IQ), which often called as “The Netflix of China”, dropped 4.57% at the end of today’s regular session as the due diligence firm Wolfpack Research, which focuses mainly on US-listed Chinese companies, accused iQIYI that it magnified 2019 revenue by approximately RMB 8 billion to RMB 13 billion, or 27-44%. Wolfpack also added in its research report that the Chinese streaming platform, which claimed that it has got 107 million subscribers as of December 2019, has overstated its subscriber numbers by about 42-60%.

Wolfpack is short $IQ. Our research shows that $IQ was committing fraud well before its 2018 IPO and has continued to do so since. We est IQ inflated its 2019 revenue by approx RMB 8-13 billion, or 27%-44% and overstates its user numbers by approx 42%-60% https://t.co/W8YkYaNLI0

— Wolfpack Research (@WolfpackReports) April 7, 2020

Allegations

The research firm commented that iQIYI has bloated its costs, the amount it pays for the content, other assets, and buyouts to wipe off the cash. iQIYI, which became a stand-alone company by spinning off from its parent Baidu Inc. (BIDU) in March 2018, has been facing difficult times since its IPO. During the last five years, iQIYI reported a loss in four years, while it reported net income attributable to ordinary shareholders of RMB0.97 billion in 2017. The financials for the years 2015, 2016 and 2017 are in accordance with the legacy revenue accounting standard.

In response to the allegations made by Wolfpack Research (WPR), iQIYI stated that the short seller’s report contains numerous errors, unsubstantiated statements and misleading conclusions and interpretations regarding the information relating to the company.

iQIYI Revenue and Expenses

During the last five years, even though iQIYI’s revenue has been increasing consistently, we can also note that its expenses are more than the revenues in each year. For the recently ended fiscal year, the increase in sales and marketing expenses was related to iQIYI apps and its gaming business. While higher share-based and personnel-related expenses increased the total expenses, the continued investment in the R&D staff also raised the company’s total expenses in 2019.

COVID-19 Outlook

During the fourth-quarter earnings call, iQIYI stated that it expects a hike in its membership in Q1 as lots of people are staying at home due to coronavirus outbreak. However, the company cautioned that this will be a temporary trend and in Q2, Q3, and Q4 of 2020, this trend might slow down and even a setback can happen.

In its annual filing, iQIYI had warned that due to the COVID-19 crisis, its business, financial condition and results of operations for the fiscal year of 2020, especially its first quarter, may be adversely affected. The company estimates that online advertising revenue to decline in the first quarter of 2020 and the outbreak may continue to negatively impact online advertising revenues. The other headwinds including, growing the paying subscriber base and retaining them as well as producing fresh content are estimated to dampen the company’s performance in the current fiscal year.

Other Recent Short-Sellings

Last December, WPR accused that Qutoutiao (NASDAQ: QTT) has reported fake revenue for 2018 and fake cash balance. WPR claimed that the Chinese mobile content aggregator’s 74% of revenue in 2018 is fake and more than three-quarters of its cash balance at that time was non-existent.

During the end of September 2019, Wolfpack shorted semiconductor firm SMART Global Holdings (NASDAQ: SGH) saying that SMART Global management hasn’t disclosed the risks from the firm’s business in Brazil and stated that SGH’s strategy and acquisitions in Brazil and India will not yield profit for the company.

TAL Education Group

Tutoring services provider TAL Education Group (NYSE: TAL), a Chinese-based US-listed company, reported yesterday that it has found out about the irregularities and violations of its employee in its Light Class business. The company’s internal auditors suspect that this employee had inflated Light Class business sales by forging contracts and documentation for the fiscal year of 2020 period, which ended February 29, 2020. He has been handed over to the local police. TAL stock, which hit a 52-week high on February 14 this year, slumped 6.74% today on NYSE.

Luckin Coffee

Last Thursday, Luckin Coffee (NASDAQ: LK) reported that its COO Jian LIU and his several subordinates had fabricated certain transactions from the second quarter of 2019. The internal investigation done by the company has found that the fabricated transactions amount to about RMB 2.2 billion from the second quarter to the fourth quarter of 2019. Luckin had suspended COO Jian Liu and other employees involved in this misconduct. Shares of the Starbucks (NASDAQ: SBUX) rival have nosedived 83% in the last five trading days.

Year-to-date, IQ stock had retreated 22% and its parent Baidu, which dropped 4.38% today, had lost 23% of its stock value.