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Short seller Muddy Waters attacks entertainment firm JOYY, calls it ‘near-total fraud’

Written by Wency Chen Published on 

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Baidu’s purchase of YY Live is unlikely to go ahead, says Kaiyuan’s Brock Silvers.

Research firm Muddy Waters on Wednesday released a “short report” targeting Chinese livestreaming and entertainment company JOYY Inc, calling it fraudulent for faking 90% of traffic on livestreaming service YY Live, which was just acquired by Baidu for USD 3.6 billion.

Shares of JOYY (NASDAQ: YY) plunged 26.48% to USD 73.66 at the close on Wednesday, but climbed back to USD 84.51 in the after-hours trading. Baidu (NASDAQ: BIDU) fell 1.29% to USD 142.07.

“It was clear to us from early on that YY Live was almost entirely fake,” said Muddy Waters, which investigated the company over a year. The report exposed that YY’s high-earning performers only take home a fraction of their reported totals, that independent channel owners are largely controlled by YY in order to facilitate continuous sham transactions, and that around half of the virtual gifts are sent out by the network’s bots.

“We conclude that YY Live is around 90% fraudulent,” reads the report. “YY’s international livestreaming business, Bigo, seems barely more real.”

“We know Muddy Waters’ CEO Carson Block for many years, and his work is generally quite reliable,” Brock Silvers, chief investment officer of Kaiyuan Capital told KrASIA. “Where Muddy Waters sees smoke, there’s usually some degree of fire. The YY report moreover alleges wholesale fraud, not merely minor misstatements of revenues or tax liabilities.”

JOYY, a global video-based social media platform, was founded in 2005 and went public in 2012 on Nasdaq. It currently operates services including livestreaming, short video, social networking, and e-commerce. The main products include Chinese livestreaming platform YY Live, casual game-based social networking application Hago, the livestreaming app Bigo Live, which targets overseas markets, and short-video editing and sharing app Likee.

For the third quarter, JOYY reported net revenues that increased by 36.1% year-on-year (YoY) to RMB 6.3 billion (USD 925.9 million). However, its average mobile monthly users decreased by 4.0% YoY to 390.1 million. The decline in user growth is mainly due to a crackdown on Chinese apps by the Indian government, which has hurt Bigo Live, Likee, and Hago.

JOYY’s big sale

The company seems to be on a selling spree in recent months. Baidu announced on Monday that it would acquire JOYY’s YY Live, the domestic livestreaming service including a mobile app and titular website, for USD 3.6 billion in cash, or nearly 7% of Baidu’s total market cap. The closing of the transaction is subject to certain conditions and is currently expected to occur in the first half of 2021, Baidu said.

JOYY also sold its shares in Huya (NYSE: HUYA), the Chinese gaming-centric livestreaming platform that was spun off from JOYY, to Tencent, which brokered a merger between Huya and Douyu. Earlier this week, market rumors circulated that TikTok-owner ByteDance has been in talks with JOYY to buy the latter’s overseas units, in a bid to entrench its dominance in the field. Both parties denied.

What will Baidu do?

JOYY is not the first US-list Chinese company facing headwinds from short sellers against the backdrop of tightening regulations in the US. Baidu-backed streaming company iQiyi (NASDAQ: IQ), online education platform GSX Techedu (NYSE: GSX), and coffee chain Luckin have been under attack earlier.

“What will Baidu do?” asked Muddy Waters in its report. “It’s no secret that Baidu is struggling to grow. But will Baidu really try to buy “growth” in the form of an almost completely fake business?”

“The deal originally seemed to make strategic sense for Baidu despite the rich price, but now seems unlikely to be consummated,” said Silvers. “Robin Li may owe Carson Block a USD 3.6 billion debt of gratitude.”

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