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One Theme Is Popping Up Among These Chinese Companies: Fraud

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Three months after Muddy Waters Research sounded the alarm on Luckin Coffee Inc - ADR (NASDAQ: LK), the firm is now accusing popular Chinese online video platform IQIYI Inc (NASDAQ: IQ) of overstating 2019 revenue numbers.

If the allegations prove true, it would be the third high-profile Chinese stock that Muddy Waters has helped expose in 2020.

The Latest Short Seller Allegations

iQiyi is often compared to Netflix, Inc. (NASDAQ: NFLX). Parent company Baidu Inc (NASDAQ: BIDU) holds a 56% stake in iQiyi.

In a Tuesday report, short sellers Muddy Waters and Wolfpack Research said iQiyi’s 2019 revenue numbers are inflated by at least $1.13 billion.

In a statement, iQiyi said the short report is filled with errors and misleading conclusions. 

The allegations against iQiyi came on the same day that Chinese company TAL Education Group (NYSE: TAL) admitted its employees may have inflated sales by millions of dollars.

Muddy Waters initially accused TAL of having “fake financials” back in July 2018.

Muddy Waters Vs. China

Following the string of allegations related to Chinese stocks, U.S. investors are becoming increasingly concerned about the safety of investing in the country. 

Muddy Waters has targeted other Chinese stocks through the years as well. In December 2017, the firm called China Internet Nationwide Fncl Srvcs Inc (NASDAQ: CIFS) “another worthless Chinese fraud.” The stock is down 98.8% since the allegations surfaced.

In October 2013, Muddy Waters called NQ Mobile a “massive fraud.” In January 2018, NQ Mobile changed its name to Link Motion Inc. (NYSE: LKM). Since the report came out, the stock price has dropped from above $10 to around 15 cents.

In March 2011, Muddy Waters reported “irrefutable evidence of fraud” at China MediaExpress Holdings. The Nasdaq delisted the stock just two months later, and the SEC charged the CEO with fraud in June 2013.

Chinese Stock Scrutiny

There are currently about 200 Chinese stocks listed on major U.S. exchanges, and 84 of them are down at least 50% in the past year, according to Finviz.

Muddy Waters isn’t the only short seller that has been active in the Chinese market of late. Here are the four U.S.-listed Chinese stocks with the highest short percentage of float, according to S3 Partners:

  • Luckin Coffee, 37.9% of float.

  • Baozun Inc (NASDAQ: BZUN), 28.7% of float.

  • JinkoSolar Holding Co., Ltd (NYSE: JKS), 26.4% of float.

  • Nio Inc (NYSE: NIO), 16.3% of float.

Benzinga’s Take

The fact that most Chinese stocks trade at a valuation discount to their U.S. competitors is partly due to the fact that American investors don’t fully trust Chinese numbers. If China continues to allow its companies to deceive American investors, it will have an increasingly difficult time tapping the U.S. equity market.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

Luckin Coffee Crashes After Company Admits COO 'Fabricated Transactions'

Luckin Coffee's Stock Hit By Short Report Alleging Fraud

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