Shares Of Nasdaq-listed IQIYI, Dubbed China's Netflix, Plunge As SEC Probes Alleged Inflation Of Revenues, Subscriber Numbers

The Xiamen-based video streaming firm's shares plunged 18 per cent after hours, as it revealed the US financial regulator has launched a probe into allegations made by a short-seller iQIYI predicts net income in the third quarter will drop as much as 6 per cent year over year
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Shares Of Nasdaq-listed IQIYI, Dubbed China's Netflix, Plunge As SEC Probes Alleged Inflation Of Revenues, Subscriber Numbers

Chinese video streaming company iQIYI, sometimes dubbed China's Netflix, saw its shares plunge after hours in New York as it revealed it was being probed by US financial watchdogs and that its third-quarter revenue is likely to drop.

The Securities and Exchange Commission (SEC) is seeking financial and operating records dating back to the start of 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," iQIYI said on Thursday as it disclosed its second-quarter financial results.

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The Beijing-based company, which claims to have over 100 million users, was accused by activist short sellers Wolfpack Research and Muddy Waters in April of inflating its 2019 revenue by up to 44 per cent, and its user numbers by 60 per cent.

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The allegations come hot on the heels of the Luckin Coffee scandal. Seen as the Chinese rival to Starbucks, the coffee chain in April fabricated sales of 2.25 billion yuan (US$323.9 million) and revenue of 2.12 billion yuan, which led to tighter scrutiny from Washington of Chinese companies listed in the US.

The Xiamen-based firm was struck off from the Nasdaq exchange in June, and is now entangled in a restructuring process.

iQIYI said it has hired professional advisers to conduct an internal review into some of the main allegations in the Wolfpack Report. It is trying to determine if manufacturing orders, revenue or expenses had been inflated, iQIYI said.

Shares of the Nasdaq-listed company plunged 18 per cent on Thursday in the extended trading session, after it closed 2.4 per cent lower at US$21.68.

The company predicted net revenue in the third quarter will come in somewhere between flat and a 6 per cent decline year over year, in a range between 6.96 billion yuan and 7.4 billion yuan.

In the second quarter, ended June 30, operating losses narrowed by 600 million yuan to 1.3 billion yuan from a year earlier, while total revenue rose 4 per cent to 7.4 billion yuan.

The number of subscribers increased 4 per cent on the year to 104.9 million. But online advertising services revenue plummeted 28 per cent to 1.6 billion yuan because of the challenging macroeconomic environment in China.

iQIYI is considering a secondary listing in Hong Kong, according to media reports, and is in early-stage discussions with Credit Suisse. It adds to the growing number of Chinese companies that are eyeing a listing closer to home, including the online payment unicorn Ant Group which chose to go public concurrently in Shanghai and Hong Kong.

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