Chinese video streaming giant iQIYI becomes the target of the short seller Wolfpack Research after Luckin Coffee's fraud scandal

After the Luckin Coffee fraud scandal, the short-selling trend of Chinese stocks also follows. On the evening of April 7, with the support of Muddy Water, foreign market research organization Wolfpack Research released a short report called "The Netflix Of China? Good Luckin". It claimed that China's well-known video stock iQIYI was committing fraud well before its IPO in 2018 and has continued to do so ever since. And it even significantly exaggerated its revenue and user scale.
As soon as the report came out, iQIYI's shares quickly plunged by more than 10 points, and once fell below $ 15 per share, becoming the most popular stock on the evening of April 7. In the early hours of April 8th, iQIYI dispelled the report: "we believe that the report contains numerous errors, unsubstantiated statements and misleading conclusions and interpretations regarding information relating to the company. All financial and operational data we disclose are true and meet SEC requirements. We firmly deny all false accusations and reserve the right to pursue legal actions."
At the same time, Gong Yu, founder and CEO of iQIYI, expressed that "Good will triumph over evil." And even Wang Xiaochuan, the CEO of Sogou, also supported iQIYI on Weibo. It is worth noting that as of the close of April 7, iQIYI's shares rose to 17.30 U.S. dollars, up 3.22% over the previous trading day, up 13% from the lowest point of the day.
After TAL Education Group, GSX Techedu Inc., Luckin Coffee's accounting fraud, the shares of these Chinese stocks fell all the way. However, shares of iQIYI's has shown an upward trend after the short report is released, which is indeed rare. Why don't investors pay much attention to this short report by Wolfpack Research? What is the difference between iQIYI's short report and Luckin Coffee's? The market has actually given the answer.

Why is the report released by the short-selling institutions a bit unreliable?
Although there is also a figure of Muddy Water Company in this short-selling of iQIYI, it is not the lead of this report, which only provides some data and reporting. Judging from the data adopted by Wolfpack Research and the situation after the report was released, this report is not professional enough as always. And it also adds a few points for the impression that the Wolfpack Research report is not reliable.
On the one hand, unlike Muddy Water Company, Wolfpack Research is a repeatedly defeated short-selling institution.
In June 2019, Wolfpack Research shorted GTT, but after the short report was released, GTT's shares rose by 2.27%; on December 10, 2019, Wolfpack Research shorted Qutoutiao, thinking that the sales of Qutoutiao were fraudulent. Qutoutiao's shares plunged by 10% after the report, but eventually closed up 4.56% by the close of a single day.
Looking back at the short-selling history of Wolfpack Research, the core reason for each failure may be that its professionalism is really unsatisfactory. This time the short-selling of iQIYI is another case. For example, Wolfpack Research's short-selling of iQIYI actually relied heavily on data from QuestMobile and other media.
On the other hand, from Wolfpack Research's short-selling of iQIYI, perhaps iQIYI itself still has some controversies and problems in the normal development. However, Wolfpack Research exaggerates the hidden dangers of iQIYI development, which does not make investors take the report they provided as an important investment reference.
For example, in the report, Wolfpack Research believes that iQIYI does this by overstating its user numbers by 42%-60%. Wolfpack Research shows that in the first ten days of the Chinese New Year, its mobile DAU was only 126 million, while it claimed an average DAU of 180 million. At the same time, two Chinese advertising companies provided iQIYI back-end system data, which shows that the actual mobile DAU from September 2019 is 60.3%. It is lower than the average 175 million mobile DAU claimed by iQIYI on October 2019.
In fact, whether it is an advertising display system or its own DAU, MAU, it's very normal in the industry to have statistical differences in statistical methods. Relying solely on the data reports of a single data agency is also quite un-precise. For the same product, the data results given by QuestMobile, iResearch, Analysys International, and iMedia may all be different. What's even more incredible is that the two advertising companies, which may have nothing to do with iQIYI, can even directly enter iQIYI's back-end system?
Wolfpack Research alleged that iQIYI inflated its 2019 revenue by approximately 8 billion yuan ($1.13 billion) to 13 billion yuan ($1.98 billion), or 27% to 44%. Among them, in regards to iQIYI's VIP membership service, Wolfpack Research pointed out that about 31.9% of iQIYI's users have to pay for iQIYI's VIP membership either directly or through partners like e-commerce site , Xiaomi and This allows iQIYI to inflate its revenues and burn off fake cash at the same time.
The data for these conclusions comes from Wolfpack Research's survey of 1,548 effective iQIYI paying users in three cities: Beijing, Shanghai and Guangzhou. These data show that the total proportion of iQIYI's VIP dual memberships programs in Beijing, Shanghai and Guangzhou is about 31.9%.
If such a small data sample is used as a general market research, it may be suitable, but as a short report, it is really shabby.
In response to this allegation, iQIYI's investor relations department publicly stated that the revenue share with is 50/50. According to industry sources and the author, it is a common phenomenon in the industry that the joint membership mode of mutual accounts, and there is nothing wrong with the way iQIYI's membership. But so far, iQIYI has not disclosed relevant information.
Further, Wolfpack alleges that iQIYI engaged in the deceptive acquisition of games company Skymoons with $ 300 million. And it believed that Skymoons did not have the ability to develop games. Among them, the report believes that Skymoons' self-researched game "The Croods" in 2018 is actually an update to the "The Croods" released by Shanghai Oriental-Pearl Culture Development Co. , Ltd. in 2016.
According to the media person Leidichuwang(雷帝触网), Skymoons has no relevance to the products of Shanghai Oriental-Pearl Culture Development Co. , Ltd., which are two games. Shanghai Oriental-Pearl Culture Development Co. , Ltd.'s "The Croods" is a real-time strategy game (RTS), while Skymoons' self-developed game is a multi-player online interactive role-playing game (MMORPG), but both have been licensed by DreamWorks SKG. According to data from App Annie, an independent three-party organization, iQIYI Games has entered the top 20 Chinese game companies list for the first time in the overseas market in 2019.
In the Pan-entertainment strategy, games are an important part of realizing the commercial value of IP. As China's long video advantage platform, iQIYI acquired game companies to enhance its game business opportunities. This is actually in line with its Pan-entertainment strategy, and other Chinese rivals including Tencent and Alibaba have adopted similar strategies. So, Wolfpack Research's understanding of Chinese games may need to be improved.
From multiple details, Wolfpack Research's report of iQIYI seems to be not convincing. There is a gap in professionalism between Wolfpack Research and Muddy Water Company, which may determine the gap between the impact of their short-selling reports.
Why does investors choose to ignore the report?
It is normal for investors to not recognize the short institutions and short reports that are not professional enough in the market. However, after Wolfpack Research released the report, shares of iQIYI does not fall but rise, which is behind a deeper reason.
Shares of Luckin Coffee plunged after being short-selling and self-explosive financial fraud, but the situation of iQIYI is different, which has little effect after the report. This is because Muddy Water's report of Luckin Coffee is totally different from Wolfpack Research's.
First of all, the long video field where iQIYI is located is a mature industry, and Luckin Coffee is a new concept. Whether iQIYI's model or market, there are already many top companies including Netflix which have proved its feasibility, but the model of Luckin Coffee has not been verified at home and abroad. The situations of Luckin Coffee and iQIYI are totally different.
Secondly, there is a difference from Luckin Coffee's model of constantly opening offline stores, iQIYI is a relatively light asset model, especially its pure online advantage of the Internet. Therefore, its scale effect will be more obvious than Luckin Coffee's, and its ability to make profits is also stronger than Luckin Coffee's. That is to say, when iQIYI's income increases, its profit will also grow faster, but the increase of Luckin Coffee's income may result in large losses.
Therefore, it is precisely when the fundamentals of iQIYI are far better than Luckin Coffee, Ma Ziming, CEO of Snow Lake Capital, a hedge fund with a management scale of 2 billion US dollars, said: "Last night we significantly increased the position of iQIYI. At the same time, TAL Education Group is also a very good company! As a long-term investor, we will continue to believe in and support it. After the market yesterday, we have already bought nearly 100 million US dollars." According to Ma Ziming, most of the basic stocks in China is no problem. "These high-quality companies and excellent management, as long as they are focused and honest, do their main business well. There is no need to bother with short-term and unreasonable harassment. What they need to do is to believe that this is a fair market."
From this, it can be seen that aside from the models and enterprises that affect the image of Chinese companies such as Luckin Coffee, many Chinese stock companies including iQIYI have good fundamentals. However, it becomes the harassment target of some unprofessional short institutions only in the process of the so-called short trend of Chinese stock company.
Judging from iQIYI's 2019 financial report, its full-year content cost growth has slowed significantly in 2019. And its total revenue reached 29 billion yuan (approximately $ 4.2 billion), with a year-on-year increase of 16%. It means that iQIYI, which already has a dominant position in the Chinese video industry, will have greater opportunities with the future development of the Chinese market.
This kind of company with scale effect has also attracted the continuous increase holdings of institutions such as Hillhouse Capital. Based on the market response after Wolfpack Research's short report, iQIYI still needs work to be optimized in the future development, but it is still a very worthy company that can stand the test.

This is an article from WeChat official accounts MeiGuyanjiushe (ID:meigushe), translated by Chris Yuan.