China’s iQiyi Inc. (IQ), a Netflix-like video-streaming company, said it was under investigation by the U.S. Securities and Exchange Commission, sending its shares plunging 11.6% in after-hours trading.
Investors are getting nervous about the online streaming provider, often referred to as the “Netflix of China,” as regulators examine allegations of inflated earnings.
Shares of the Nasdaq-listed company fell 11.6% in pre-market trading Friday after iQiyi revealed that the US Securities and Exchange Commission had opened an investigation into its practices following a scandalous report alleging massive fraud at the firm. The company said it had already begun its own internal review of the claims, and expected a “positive” outcome.
The report, released in April by activist short seller Wolfpack Research, accused iQiyi of “committing fraud well before its IPO in 2018,” and continuing to do so since then. It alleged that the company had vastly inflated its revenue and user numbers, by margins of up to 44% and 60% respectively.
iQiyi pushed back on the allegations at the time, stressing in a statement that “the report contains numerous errors, unsubstantiated statements and misleading conclusions and interpretations.”
Since then, scrutiny of Chinese companies trading on US stock exchanges has increased because of a major scandal at Luckin Coffee, another upstart from China that admitted to fabricating some of its sales numbers. The company was ultimately delisted from the Nasdaq, and its chairman and CEO were both fired.
Wolfpack referred back to the Luckin saga in its report in April, concluding its research by stating: “If what we’ve said thus far doesn’t concern you, all we can say is ‘good Luckin’.”
iQiyi is owned by Chinese search giant Baidu (BIDU), and boasts hundreds of millions of users, mainly in China. The company is known for its deep collection of content, including movies and popular TV dramas and reality shows.
iQiyi said the U.S. regulator had asked for financial and operating records from January 2018 onward, and documents tied to acquisitions and investments cited by Wolfpack. It added that, it had also hired professional advisers to conduct an internal review, and they were examining the report’s key allegations. Management disclosed the probe during an earnings presentation, noting that the company had been “cooperating” with US regulators.
It said in a statement, “We cannot predict the timing, outcome or consequences of the SEC investigation.”
On a call with analysts, chief financial officer Xiaodong Wang added that the company had started an “internal, independent” review into Wolfpack’s allegations shortly after the report came out.
He moved to reassure investors, saying that the company had built up strong “corporate governance” over the last 10 years.
“We don’t know exactly the result and the status right now,” he said. “What I can tell you is the voluntary disclosure of this investigation itself actually shows the confidence of the management on the potential results of this internal review.”
The U.S. senate passed a bill in May that would increase auditing scrutiny on Chinese firms listed on Wall Street, with the threat of delisting if they don’t comply.
