US regulator investigates fraud-accused Chinese streaming company iQiyi

Business | 14 Aug 2020 2:34 pm

Shares of Chinese streaming service iQiyi plunged in after-hours trade in the U.S. after it announced the Securities and Exchange Commission has launched an investigation of the company, CNBC reports.

The SEC investigation was prompted by a report in April from Wolfpack Research, which describes itself as an “activist research and due-diligence firm.” In that report, Wolfpack accused iQiyi of fraud and inflating its numbers. 

iQiyi said the SEC is “seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020.”

The Netflix-style streaming giant also said it has “engaged professional advisers to conduct an internal review into certain of the key allegations” in Wolfpack’s report.

Wolfpack Research alleged iQiyi inflated its 2019 revenue by about 8 billion yuan (US$1.13 billion) to 13 billion yuan (US$1.98 billion) — or between 27 percent and 44 percent. Wolfpack also claimed the streaming company overstated user numbers and expenses. 

Shares of Nasdaq-listed iQiyi fell by more than 18 percent in extended trade but pared some of those losses. The company was down by 12.36 percent at the end of the after-hours trade period.

The SEC investigation of iQiyi comes amid rising scrutiny on U.S.-listed Chinese companies following the Luckin Coffee scandal earlier this year. 

China’s Luckin Coffee admitted fabricating sales numbers for 2019. The company was subsequently delisted from the Nasdaq in June. 

In May, the U.S. senate passed a bill that would increase auditing scrutiny on Chinese firms listed on Wall Street, with the threat of delisting if they don’t comply. 

In 2018, iQiyi was spun off from Chinese search giant Baidu in a U.S. IPO that raised over US$2.2 billion. Baidu, which is also listed in the U.S., has a majority stake in iQiyi. As Baidu faced increased competition in China — in key products like search and advertising — iQiyi became an important part of its growth prospects.

In the second quarter, iQiyi membership revenue grew by 19 percent year-over-year, while online advertising revenue declining by 28 percent year-over-year, according to Baidu’s earnings report. 

Baidu shares were down by 7 percent in extended hours trade on Thursday as a result of the SEC probe into iQiyi.

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