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Is iQIYI China's Netflix or Another Luckin?

摘要: iQIYI denied all accusations from Wolfpack Research in relation to accounting and operating data fraud, saying it reserved the legal right to sue the U.S. firm

NEW YOR/BEIJING, April 8 (TMTPOST) China-based Nasdaq-listed iQIYI, Inc. (IQ) has been under attack since Tuesday when short seller Wolfpack Research accused it of concocting “fraudulent” financials, just days after Chinese coffee chain admitted fraud.

It closed at $16.51 on Wednesday, down 4.57% from Tuesday. 

IQ “inflated its 2019 revenue by approximately RMB 8-13 billion, or 27%-44%,” and overstated “its user numbers by about 42%-60%”, alleged the self-styled global financial research & due diligence firm in a 37-page report released on its official website.

In the report titled “iQIYI: The Next Netflix of China? Good luckin”, Wolfpack Research argued that the online video streaming platform was “committing fraud well before its IPO in 2018 and has continued to do so ever since”.

The research firm said "iQIYI inflates its expenses, the prices it pays for content, other assets, and acquisitions” in order to burn off fake cash to hide the fraud from its investors and auditors.

Wolfpack Research, which describes itself as "dedicated to exposing corporate fraud", said it conducted a survey of 1,563 persons within IQ’s target demographic in China in October and November 2019 and found about 31.9% of IQ users have access to its VIP-only content through their memberships with IQ’s partners, including JD.com or Xiaomi TV.

“IQ accounts for dual memberships on a gross basis, meaning it records the full amount of revenue and records its partners’ share as expenses. This allows IQ to inflate its revenues and burn off fake cash at the same time,” claimed the report.

The U.S.-based firm revealed it also obtained Chinese credit reports for all of IQ’s VIEs and WFOEs since 2015. “When compared to IQ’s prospectus, we found that the deferred revenues reported to the SEC were inflated by 261.7%, 165.5% and 86.2% in 2015, 2016 and 2017, respectively,” aruged the report.

Deferred revenue is a balance sheet account that arises when customers prepay for a service to be delivered in the future.

“Because IQ’s subscription customers prepay, most of its revenues are a function of deferred revenue. These pre-IPO overstatements inherently cause IQ’s post-IPO revenues to continue to be overstated,” Wolfpack Research added.

Wolfpack Research also suspected that iQIYI may have committed accounting fraud by inflating its barter transaction revenues as the management could assign any value they liked to these transactions.

Wolfpack Research quoted TMTPOST’s past coverage of IQ’s financial results in its report that sent IQ’s shares plunging hours after the publication of the report on Tuesday morning. 

Also on Tuesday, Muddy Water, which exposed the financial scandal of Chinese coffee chain store Luckin days earlier, also accused IQ on Twitter of “fraudulently and materially” overstating its users, revenues, acquisition consideration, and value of its “barter” content.

Muddy Water also assisted Wolfpack Research in its investigation into iQIYI.

iQIYI firmly denied all the accusations from Wolfpack Research in response to TMTPOST’s inquiry.

“Regarding a third-party report that questioned iQIYI (‘s financials), the data it cited and corresponding conclusion are absolutely false and in conflict with the truth. As a responsible listed company, all financials and operational data we've released are true, and have met the SEC requirements,” said the firm, adding that they reserve their legal right to sue the U.S. firm.

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