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A Chinese Netflix Faces SEC Probe After Short-Seller Report

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08/14/2020 | 05:53am EDT

By Chong Koh Ping

China's iQiyi Inc., a Netflix-like video-streaming company, said it was under investigation by the U.S. Securities and Exchange Commission, sending its shares plunging 12% in after-hours trading.

The admission comes amid heightened scrutiny of accounting at U.S.-listed Chinese companies, and four months after an investment-research firm Wolfpack Research queried iQiyi's user numbers, sales, expenses and a sizable 2018 takeover.

News of the SEC investigation also pressured shares of iQiyi's majority shareholder, Chinese search-engine giant Baidu Inc., which fell 7% in after-hours trading Thursday in New York.

On Thursday, 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. iQiyi said it had also hired professional advisers to conduct an internal review, and they were examining the report's key allegations.

Wang Xiaodong, the company's chief financial officer, told investors on an earnings call Thursday evening U.S. time that it had gotten an inquiry from U.S. authorities a "couple of weeks" after the Wolfpack report.

Mr. Wang said while the SEC investigation is confidential, the company voluntarily disclosed it to be transparent with investors. A previous earnings report in May didn't mention the probe.

In April, iQiyi said the Wolfpack report contained "numerous errors, unsubstantiated statements and misleading conclusions and interpretations," and it was committed to high standards of governance and internal controls.

The White House is seeking to step up regulatory oversight of Chinese companies with shares traded on U.S. stock exchanges, after a series of accounting scandals in recent years. Under a plan recommended last week by the Trump administration, these Chinese firms would have to comply with U.S. audit requirements by 2022 or give up their American listings.

In April, Luckin Coffee Inc., an upstart Chinese rival to Starbucks Corp., said employees had fabricated more than $300 million in sales. The admission came less than a year after it went public on Nasdaq, and the company has since been delisted.

Luckin's finances had been questioned in research published by short sellers. Short-selling investors seek to profit from a declining stock. They do this by selling borrowed shares, hoping to buy them back at a lower price later and to pocket the difference.

David Dai, senior research analyst at Sanford C. Bernstein, said he didn't think there was any basis to the Wolfpack report, given iQiyi reported similar subscriber and sales figures to rival Tencent Video, which is backed by Tencent Holdings Ltd.

"If iQiyi clears the allegations and the SEC investigation, it would help the reputation of Chinese ADRs and help investor confidence," he said. Many foreign companies that have U.S. listings do so using ADRs, or American depositary receipts.

However, Mr. Dai said a reported potential deal with Tencent, or a secondary listing in Hong Kong, were both unlikely while the investigation continued. Several U.S.-listed Chinese firms, such as JD.com Inc. and NetEase Inc., have secured secondary listings in Hong Kong in recent months, and analysts and investors expected more companies, including iQiyi, to follow suit.

Baidu Chief Financial Officer Herman Yu said in a separate earnings call Thursday evening U.S. time that Baidu has zero tolerance for fraud. "When there is a short seller or issue against our subsidiary, especially one that's quite autonomous, it is important to get an independent opinion," he said, referring to the hiring of an independent external adviser to scrutinize iQiyi's books.

Jing Yang contributed to this article.

Write to Chong Koh Ping at chong.kohping@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
BAIDU, INC. 0.83% 133.05 Delayed Quote.5.26%
IQIYI, INC. -1.36% 24.7 Delayed Quote.17.01%
NETEASE, INC., -1.61% 86.79 Delayed Quote.41.52%
SANFORD LIMITED 1.83% 5.55 End-of-day quote.-30.19%
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