Short seller Muddy Waters Research has labelled Nasdaq-listed Chinese social media company Joyy “a multibillion-dollar fraud” just days after China’s search giant Baidu announced its intention to buy Joyy’s live-streaming business YY Live.
The US-based investment firm claims that up to 90 per cent of YY Live’s live-streaming revenue is fraudulent. “Users” who paid for virtual gifts were “almost entirely bots” from YY’s internal network or from external bot farms, as well as performers “roundtripping” their own gifts, according to a Muddy Waters report published on Wednesday.
Bots with links to YY’s own servers, but disguised as paying users, accounted for about half the value of all virtual gifts, according to Muddy Waters, which said it has been researching YY’s businesses for more than a year.
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The short seller also called out YY’s online dating business and Bigo Live, claiming up to 80 per cent of their respective revenues were fake
“We conclude that YY’s component businesses are a fraction of the size it reports, and that the company’s reported user metrics, revenues, and cash balances are predominantly fraudulent,” said the report.
Nasdaq-listed shares of Joyy tumbled 26 per cent to close at US$73.7 on Wednesday after the report was released.
In a statement issued on Wednesday afternoon, Joyy said Muddy Waters was ignorant about the live streaming industry and its ecosystem. “The report contains a large number of errors with unclear logic, muddling figures and hasty generalisations,” a Joyy spokesman said.
On Monday Baidu, also listed on Nasdaq, announced plans to buy YY for about US$3.6 billion to “gain platform and operating experience in large-scale video social media.” The purchase also includes the YY mobile app and YY.com website.
Muddy Waters said Baidu’s intended acquisition of YY will be “the test of whether China Inc. is really just a few bad apples; or, whether the incessant cheating, lying, and indifference to US law permeate the highest echelons of China’s public companies”.
A Baidu spokesperson said the company had no immediate comment on the Muddy Waters claims.
Prior to the fraud claims some analysts had been saying the Baidu deal, set to be completed in the first half of 2021, would help Joyy pivot to overseas growth.
“Joyy may transform into a fast-growing global video-social company with the sale of its China live-streaming operations YY Live to Baidu,” Bloomberg Intelligence analyst Vey-Sern Ling said in a note on Tuesday.
Others were less optimistic. “I think this is destined to be a failed acquisition,” Zhang Dingding, an independent internet industry commentator, said on Tuesday. “Baidu is already doing e-commerce live-streaming and has its own system set up [but] ... now it acquires Joyy’s live-streaming business [in China], which is a product on a declining road.”
Founded in 2005, Guangzhou-based Joyy offers products that enable internet users to interact with each other online in real-time, offering an “immersive entertainment experience”, according to information on its website. Joyy’s products include YY Live, Bigo Live, Likee, imo and Hago.
On Monday Joyy reported US$925.9 million revenue for the third quarter of 2020, up 36 per cent year on year, driven by growth in the overseas live-streaming business of Bigo. Profit was US$339.2 million, up from US$9.42 million in the same period last year due to an investment gain from selling 30 million shares of its game live-streaming business Huya to Chinese tech giant Tencent Holdings for US$810 million.
Joyy said the total number of paying users declined 4.7 per cent year on year to 4.1 million due to the impact of the coronavirus pandemic. The number of global mobile monthly active users was 390 million during the quarter.
Joyy is also reportedly considering a secondary listing in Hong Kong next year, aiming to raise between US$500 million to US$1 billion, IFR reported on Monday.
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