Thursday, July 30, 2020

iQiyi, ‘Netflix of China,’ Allegedly Committed Securities Fraud

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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 China’s 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 China’s 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, iQiyi’s 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 Coffee’s 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 Luckin’s…

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