China’s Joyy Accuses Muddy Waters Report of ‘Ignorance’

Chinese livestreaming video giant Joyy Inc. dismissed Muddy Waters’s allegations of fraud Thursday, saying the short-seller’s report was replete with errors and demonstrated an ignorance of the red-hot industry.

Joyy, which is in the process of selling its YY Chinese business to search giant Baidu Inc., said the 71-page report issued Wednesday was confusing and full of generalizations about a format it helped pioneer, now one of the fastest-growing segments of the world’s largest internet arena.

Its stock was up more than 14% in pre-market trading Thursday, recouping some of the 26% selloff of the previous session that marked its biggest single-day decline. Muddy Waters had called YY a “fraud tech company,” casting doubt over its sale to Baidu for $3.6 billion. The allegations now overshadow an acquisition intended to help Baidu catch up in the competitive arena of online entertainment after a late start in live-streaming video. Representatives for the company had no immediate comment.

“Muddy Waters’s report is full of ignorance about the live-streaming industry and the live-streaming ecosystem,” Joyy said in a texted statement. “The report contains a large number of errors with unclear logic, confusing data, and hasty generalizations.”

China’s Joyy Accuses Muddy Waters Report of ‘Ignorance’

Joyy stopped short of directly refuting the firm’s allegations in its brief messaged statement.

Muddy Waters Research founder Carson Block earlier said Joyy’s livestreaming service YY is “guilty of bot forming, creating fake transactions and having fake users.” After a year-long investigation, the firm alleged in the report evidence of revenue inflation: livestreamers who got paid during long periods of absence or inactivity; mis-matches with local credit reports it obtained; and payments originating from company servers. Muddy Waters also said it holds a short position in Joyy, meaning the firm will benefit financially when the shares drop.

The tactics outlined in Muddy Waters’s report aren’t intended to inflate revenue but to juice popularity among users, said Ke Yan, a Singapore-based analyst with DZT Research. And the research firm may be mis-judging how common the practice was of initially using bots to generate interest, said Chen Da, executive director at Anlan Capital. It’s customary to try and goose numbers for livestreams in the hope they draw in real users who then contribute actual money, he said.

Livestreaming peers Momo Inc. and Douyu International Holdings Ltd., who operate similar business models, slid more than 4%. Baidu also finished 1.3% lower amid a broader U.S. market decline.

“You can’t really apply the research methods used to collect fraudulent evidence against real-economy or manufacturing firms to internet firms,” Chen said. Their “business model does pay off and there is real cash flow brought in after the fakes ‘get the ball rolling’.”

What Bloomberg Intelligence Says

Joyy may have to spend significant time and resources to refute research firm Muddy Waters’ allegations of fraud, which may be difficult to disprove quickly. This may involve internal reviews with independent committees and external advisors. In the meantime, the doubt cast into investors’ minds could be an overhang and there may be uncertainty about the completion of the pending deal to sell YY Live to Baidu.

- Vey-Sern Ling and Tiffany Tam, analysts

Click here for the research.

With YY, Baidu was supposed to get a $1.8 billion business with 4 million paying users who splurge on virtual gifts to tip their favorite performers. The acquisition marked the search engine giant’s biggest effort to diversify revenue streams beyond advertising and tap consumer spending. Once the runaway leader in desktop search, Baidu is trying to adapt its business to the mobile era but losing ground piecemeal to up-and-comers such as ByteDance and Kuaishou.

To compete for users and advertisers, Baidu’s core search app is morphing into a platform hosting a wide array of content from articles to videos, not unlike Tencent Holdings Ltd.’s WeChat. Its Netflix-style iQiyi Inc. -- - whose shares plunged in April after another short seller’s report -- is also going head-to-head with services run by Tencent and Alibaba Group Holding Ltd.

Even before Muddy Waters questioned YY’s revenue model, analysts had flagged its declining growth and market share losses to rivals like ByteDance Ltd.’s Douyin and Tencent-backed Bilibili Inc.

Started in 2005 as a chat tool for gamers, YY was among the pioneers of a way to monetize livestreaming by taking a cut of virtual gifts bestowed by fans. In 2014, its parent launched Twitch-style Huya Inc. using the same model. That unit was later spun off and is now in the middle of merging with DouYu International Holdings Ltd. to create a $10 billion game-streaming giant controlled by Tencent.

YY itself is now losing appeal to hotter formats like video-streaming platform Bilibili, the TikTok-like Kuaishou and TikTok’s Chinese twin Douyin -- a problem also faced by Baidu’s own iQiyi. YY’s paying users actually declined 4.7% in the September quarter.

©2020 Bloomberg L.P.

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