A Chinese Netflix Faces SEC Probe After Short-Seller Report
By Chong Koh Ping
China's iQiyi Inc., a Netflix-like video-streaming company, said
it was under investigation by the U.S. Securities and Exchange
Commission, sending its shares plunging 12% in after-hours
The admission comes amid heightened scrutiny of accounting at
U.S.-listed Chinese companies, and four months after an
investment-research firm Wolfpack Research queried iQiyi's user
numbers, sales, expenses and a sizable 2018 takeover.
News of the SEC investigation also pressured shares of iQiyi's
majority shareholder, Chinese search-engine giant Baidu Inc., which
fell 7% in after-hours trading Thursday in New York.
On Thursday, iQiyi said the U.S. regulator had asked for
financial and operating records from January 2018 onward, and
documents tied to acquisitions and investments cited by Wolfpack.
iQiyi said it had also hired professional advisers to conduct an
internal review, and they were examining the report's key
Wang Xiaodong, the company's chief financial officer, told
investors on an earnings call Thursday evening U.S. time that it
had gotten an inquiry from U.S. authorities a "couple of weeks"
after the Wolfpack report.
Mr. Wang said while the SEC investigation is confidential, the
company voluntarily disclosed it to be transparent with investors.
A previous earnings report in May didn't mention the probe.
In April, iQiyi said the Wolfpack report contained "numerous
errors, unsubstantiated statements and misleading conclusions and
interpretations," and it was committed to high standards of
governance and internal controls.
The White House is seeking to step up regulatory oversight of
Chinese companies with shares traded on U.S. stock exchanges, after
a series of accounting scandals in recent years. Under a plan
recommended last week by the Trump administration, these Chinese
firms would have to comply with U.S. audit requirements by 2022 or
give up their American listings.
In April, Luckin Coffee Inc., an upstart Chinese rival to
Starbucks Corp., said employees had fabricated more than $300
million in sales. The admission came less than a year after it went
public on Nasdaq, and the company has since been delisted.
Luckin's finances had been questioned in research published by
short sellers. Short-selling investors seek to profit from a
declining stock. They do this by selling borrowed shares, hoping to
buy them back at a lower price later and to pocket the
David Dai, senior research analyst at Sanford C. Bernstein, said
he didn't think there was any basis to the Wolfpack report, given
iQiyi reported similar subscriber and sales figures to rival
Tencent Video, which is backed by Tencent Holdings Ltd.
"If iQiyi clears the allegations and the SEC investigation, it
would help the reputation of Chinese ADRs and help investor
confidence," he said. Many foreign companies that have U.S.
listings do so using ADRs, or American depositary receipts.
However, Mr. Dai said a reported potential deal with Tencent, or
a secondary listing in Hong Kong, were both unlikely while the
investigation continued. Several U.S.-listed Chinese firms, such as
JD.com Inc. and NetEase Inc., have secured secondary listings in
Hong Kong in recent months, and analysts and investors expected
more companies, including iQiyi, to follow suit.
Baidu Chief Financial Officer Herman Yu said in a separate
earnings call Thursday evening U.S. time that Baidu has zero
tolerance for fraud. "When there is a short seller or issue against
our subsidiary, especially one that's quite autonomous, it is
important to get an independent opinion," he said, referring to the
hiring of an independent external adviser to scrutinize iQiyi's
Jing Yang contributed to this article.
Write to Chong Koh Ping at email@example.com
(END) Dow Jones Newswires
August 14, 2020 04:52 ET (08:52 GMT)
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