IQIYI: Blunting Wolfpack's Fangs

Summary

• It's a jungle out there and inevitably we encounter some ferocious wild animals who take a bite of our pockets or even eat us alive figuratively.
• Hot on the heels of Luckin Coffee's confession, famed short-seller Muddy Waters declared he's short iQIYI and has helped Wolfpack Research with a short-selling report on iQIYI.
• While Wolfpack Research raised some interesting points, the report generally felt like a rushed work to capitalize on the negative sentiment towards Chinese stocks.
• Many of the arguments relied on generalizations, misrepresentations, and selective interpretations.
• Baidu, the Chinese search engine giant who is the majority shareholder of iQIYI, has been dragged down by the short-seller report as well.

My Chinese associates like to quote this saying "上得山多，终遇虎" which literally means those who go to the hills often would eventually 'meet' a tiger. In the context of COVID-19, if one chooses to ignore the warnings for social distancing and continue to gather in groups in close proximity, the person could eventually be infected by a spreader. In the context of investments, it's a jungle out there and inevitably we encounter some ferocious wild animals who take a bite of our pockets or even eat us alive figuratively.

For us who choose to own the stocks of Chinese companies, there's the perennial concern whether their financials are authentic and doubts fly whenever there are reports from short-sellers that appear highly convincing at first glance. To make the matter worse, once in a blue moon, we have some management having to admit to fraudulent practices in their companies.

Coincidentally or otherwise, we have the confluence of both short-seller reports and self-admissions within a week and three at that. Starbucks (SBUX) challenger in China Luckin Coffee (LK) was the first to drop a bombshell on April 2. A special committee brought to the attention of the company's board of directors that COO Jian Liu and several employees reporting to him had "engaged in certain misconduct, including fabricating certain transactions" from the second quarter of 2019 to the fourth quarter of 2019 amounting to around RMB2.2 billion ($310 million).

Short-selling outfit Wolfpack Research locked its fangs on iQIYI

Hot on the heels of Luckin Coffee's confession, famed short-seller Muddy Waters declared he's short iQIYI (NASDAQ:IQ) in a Tweet on Tuesday, claiming that the video-streaming company "fraudulently and materially overstates its users, revenues, acquisition consideration, and value of its 'barter' content." The accusation was ostensibly based on a critical report prepared

Analyst’s Disclosure:I am/we are long BIDU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.