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Shares Joyy (YY) It closed more than 26% in New York on Wednesday after Muddy Waters released its report accusing the company of recovering revenue and labeling the business “a multi-billion dollar fraud.” Shares recovered many of those losses on Thursday, closing nearly 17%.
The fraud allegations come a few days later Baidu (START)China’s dominant search engine announced that it was buying Joyy’s domestic streaming business, YY Live, for $ 3.6 billion.
Baidu did not respond to requests for comment. The United States Securities and Exchange Commission (SEC) declined to comment.
“Muddy Waters’ report shows his lack of basic knowledge of the live streaming industry in China,” Joyy said in a statement.
Like other live streaming platforms in China, YY Live makes money from users who purchase virtual gifts for artists. Artists can then cash out those virtual gifts with real money.
Muddy Waters argues that many of those paying users are actually bot computers that can connect to Joyy’s Internet servers.
“Joyy is almost entirely fraudulent,” Muddy Waters founder Carson Block said on his online video platform Zeroes TV. “Almost everything in terms of revenue, profits and paying users is fake.”
The short seller estimates “90% of the revenue Joyy reported from YY Live is fraudulent.” According to Block, the revenues of Bigo, the company’s international live streaming platform, are 80% fraudulent. Bigo operates in Southeast Asia, Europe, the Middle East and the United States.
“The operational metrics that Joyy disclosed are commonly used and advertised by her industry peers,” Joyy said. “Live streaming has become a key revenue engine for Internet companies, including numerous publicly listed companies in the US and Hong Kong.”
Joyy reported domestic and international live streaming revenue of around 6 billion yuan ($ 914 million) for the three months ending in September an increase of 40% compared to the same period last year. The company says live streaming accounts for over 95% of its total revenue.
In her statement on Thursday, Joyy said Bigo’s revenue grew to $ 490 million in Q3 2020 from $ 181 million in Q2 2019. Joyy also said it will continue with a $ 300 million buyback program. of its actions “to demonstrate the company’s confidence in its long-term prospects”.
The allegations against Joyy, which is listed on the Nasdaq, come as Chinese companies face growing scrutiny on Wall Street.
Chinese companies with shares that are traded in the US may soon be forced to use auditors supervised by US regulators or will face trading under a plan being drawn up by the SEC, the Wall Street Journal reported earlier this week, citing people familiar with the matter.
Control of Chinese companies intensified following the
Luckin Coffee (PAGE) scandal. Luckin was expelled from Nasdaq
in June following the disclosure of massive accounting irregularities. (Muddy Waters
revealed in January that he had bet against Luckin shares after an anonymous “credible” report was sent to him accusing the Chinese coffee chain of fraudulent accounting).
Since then, US lawmakers, government agencies, and stock exchanges have taken steps to restrict Beijing’s access to vast US capital markets.
In May, the US Senate unanimously passed a bill that would prevent companies that refuse to open their books from going public on Wall Street. The two-party co-sponsors of the bill said the goal is “to kick deceptive Chinese companies off American stock exchanges.” The bill has yet to pass in the US House of Representatives.
In August, iQiyi (IQ), a Chinese streaming platform similar to Netflix (NFLX), revealed that the SEC had opened an investigation into his practices later short seller Wolfpack Research reported massive fraud at the company. Last month, iQiyi said an internal review conducted by the company’s independent review committee “did not reveal any evidence to support the allegations.” SEC investigations continue.
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