SMITH BRAIN TRUST – In early 2020, short-selling hedge fund Muddy Waters accused Luckin Coffee of accounting fraud. The stock of the once-touted “Starbucks of China” plunged more than 80%. Similarly, the short seller accused another China firm of fraud: YY Live, owned by the social media firm JOYY. Muddy Waters alleged that a majority of the live-streaming service’s followers are bots and that “continuous sham transactions” comprise much of the activity on its site.
That second Muddy Waters report followed Chinese search engine giant Baidu on Nov. 16 announcing its $3.6 billion acquisition of YY Live from JOYY. Nonetheless, a Dec. 1 report at Seeking Alpha stated: “Baidu is a strong buy at its current price” and that the “market already wrote off 80% [of the] JOYY acquisition value in less than 10 days, not to mention Baidu actually had an excellent quarterly report, beating analyst estimates both top and bottom lines…”
In a Q&A, Assistant Professor of Marketing Bo “Bobby” Zhou at the University of Maryland’s Robert H. Smith School of Business, expands on why YY Live is better positioned, compared to Luckin, against Muddy Waters’ allegations and why Baidu made its move to acquire YY Live.
Will YY Live be the next Luckin?
Zhou: It is natural for investors to compare YY Live with Luckin in [the Muddy Waters allegations] context. However, we need to be aware of the critical differences between the two companies. While Luckin relies on the sales of physical products (coffee), YY Live is a platform that builds the bridge between manufacturers and end-consumers through internet celebrities. YY Live depends on commissions from the transactions on its platform, and as a result, there are more ways to "audit" its performance. For example, analysts could contact (or at least analyze their performance) the top performing products' manufacturers and verify their sales through this platform. In addition, analysts can randomly check in to see how prevalent the phenomena of bots are. With a higher level of public scrutiny and multiple creative ways to audit/evaluate firms' performance, it is unlikely for YY Live to be the next Luckin.
Will Muddy Waters' allegations call into question and change the business model of the video streaming industry?
Zhou: Quite the contrary, Muddy Waters' allegations might further raise investors' interest levels in the video streaming industry. It is important to point out that sales through recommendations by Internet celebrities is still a relatively new format. On this front, platforms in China are leading other markets by illustrating how this new retailing channel can complement traditional retail channels. Muddy Waters' focus on YY Live can be a healthy catalyst on more investment into this field.
How can investors' confidence in US-listed Chinese tech companies be restored?
Zhou: One way to restore confidence is to require more transparency in these tech companies' financial reporting. Admittedly, it will be challenging to implement this idea. Another way to go about it is to disclose the identities of U.S. or other well-known international institutional investors behind these tech companies. At the end of the day, investors will feel much more comfortable if Berkshire Hathaway is behind certain Chinese tech firms.
Why hasn’t the Muddy Waters allegation deterred Baidu’s move for YY Live?
Zhou: Baidu truly needs to attract younger consumers, considering its path has trailed significantly behind Alibaba, Tencent, and more recently, even Meituan and ByteDance. Given the high engagement levels amongst the younger users of the video-streaming platforms, Baidu is very incentivized to seize this opportunity.
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