(Bloomberg) — Chinese livestreaming video giant Joyy Inc. dismissed allegations of fraud by Muddy Waters’ Thursday, saying the short seller’s report was replete with errors and demonstrated an ignorance of the red-hot industry.

Joyy, which is selling its YY Chinese business to search giant Baidu Inc., said the 71-page Muddy Waters report issued Wednesday was confusing and full of generalizations about a format Joyy helped pioneer, now one of the fastest-growing segments of the world’s largest internet arena.

The stock was up more than 14% in pre-market trading Thursday, recouping some of the 26% selloff of the previous session that marked its biggest single-day decline. Muddy Waters called YY a “fraud tech company,” casting doubt over its sale to Baidu for $3.6 billion. The allegations now overshadow an acquisition intended to help Baidu catch up in the competitive arena of online entertainment after a late start in livestreaming video. Representatives of the company had no immediate comment.

Short Seller Stocks

Casino slumped 10 percent to close at 27.31 euros in Paris, valuing the company at 3 billion euros ($3.5 billion). The stock has plunged 46 percent this year. Muddy Waters, the firm run by short.

1. Short-selling firm Muddy Waters on Thursday rejected the preliminary findings of a probe by France's AMF financial regulator into its criticism of retailer Casino.
2. French regulator ends probe into supermarket Casino and short-seller Muddy Waters Published: Dec. 17, 2019 at 12:27 p.m. ET By., -1.26% as well as the short-selling firm Muddy Waters.
3. Short-selling firm Muddy Waters on Thursday rejected the preliminary findings of a probe by France's AMF financial regulator into its criticism of retailer Casino. 'We vehemently disagree.

Short sellers like Muddy Waters often conduct research on companies they suspect of being overvalued. They then sell borrowed stock in the target companies — known as “selling short” — expecting share values to fall when they publish their findings. Short sellers then buy target-company shares at lower prices to replace the borrowed stock and pocket the difference.

“Muddy Waters’ report is full of ignorance about the livestreaming industry and the livestreaming ecosystem,” Joyy said in a texted statement. “The report contains a large number of errors with unclear logic, confusing data and hasty generalizations.”

Joyy stopped short of directly rebutting the allegations in its brief statement.

Shares of livestreaming peers Momo Inc. and Douyu International Holdings Ltd., which operate similar business models, slid more than 4%. Baidu finished 1.3% lower amid a broader U.S. market decline.

Muddy Waters Research founder Carson Block earlier said Joyy’s livestreaming service YY is “guilty of bot forming, creating fake transactions and having fake users.” After a year-long investigation, Muddy Waters alleged evidence of revenue inflation: livestreamers who got paid during long periods of absence or inactivity; mismatches with local credit reports it obtained; and payments originating from company servers. Muddy Waters also disclosed it holds a short position in Joyy.

The tactics outlined in the Muddy Waters report aren’t intended to inflate revenue but to juice popularity among users, said Ke Yan, a Singapore-based analyst with DZT Research. The research company may be misjudging how common the practice was of initially using bots to generate interest, said Chen Da, executive director at Anlan Capital. It’s customary to try to goose numbers for livestreams in the hope they will draw in real users who would then contribute actual money, he said.

“You can’t really apply the research methods used to collect fraudulent evidence against real-economy or manufacturing firms to internet firms,” Chen said. Their “business model does pay off, and there is real cash flow brought in after the fakes ‘get the ball rolling.’”

Joyy may have to spend significant time and resources to dispute Muddy Waters’ allegations of fraud, which may be difficult to disprove quickly. This may involve internal reviews with independent committees and external advisers. In the meantime, the doubt cast into investors’ minds could be an overhang, and there may be uncertainty about the completion of the pending deal to sell YY Live to Baidu, said Vey-Sern Ling and Tiffany Tam, analysts at Bloomberg Intelligence.

With YY, Baidu was supposed to get a $1.8 billion business with 4 million paying users who splurge on virtual gifts to tip their favorite performers. The acquisition marked the search engine giant’s biggest effort to diversify revenue streams beyond advertising and tap consumer spending. Once the runaway leader in desktop search, Baidu is trying to adapt its business to the mobile era but is losing ground piecemeal to up-and-comers such as ByteDance and Kuaishou.

To compete for users and advertisers, Baidu’s core search app is morphing into a platform hosting a wide array of content from articles to videos, not unlike Tencent Holdings Ltd.’s WeChat. Its Netflix-style iQiyi Inc. — whose shares plunged in April after another short seller’s report — is also going head-to-head with services run by Tencent and Alibaba Group Holding Ltd.

Even before Muddy Waters questioned YY’s revenue model, analysts flagged its declining growth and market share losses to rivals like ByteDance Ltd.’s Douyin and Tencent-backed Bilibili Inc.

Started in 2005 as a chat tool for gamers, YY was among the pioneers of a way to monetize livestreaming by taking a cut of virtual gifts bestowed by fans. In 2014, its parent launched Twitch-style Huya Inc. using the same model. That unit was later spun off and is now in the midst of merging with DouYu International Holdings Ltd. to create a $10 billion game-streaming giant controlled by Tencent.

YY itself is now losing appeal to hotter formats like video-streaming platform Bilibili, the TikTok-like Kuaishou and TikTok’s Chinese twin Douyin — a problem also faced by Baidu’s own iQiyi. YY’s paying users actually declined 4.7% in the September quarter.

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(Bloomberg) -- Short seller Carson Block has had mixed results in 2019, but he’s ending the year with a bang.

Shares of NMC Health Plc, the Middle Eastern hospital operator that’s Block’s latest target, have slumped 33% since his Muddy Waters Capital LLC said Dec. 17 that the company is understating its debt and overstating its cash. NMC Health denied wrongdoing, said it would hire an accounting firm for a review and would pursue regulatory action against third parties that have tried to manipulate the share price.

The bet has been one of his most successful this year. Block, who made his name shorting Chinese shares, has targeted seven companies in 2019. That’s the most in the almost 10 years he’s been in the business, based on his publicly disclosed positions. While four of the stocks are down, two targets in Asia and one in Germany recovered from initial losses.

With equity markets at records, Muddy Waters is finding “more large, liquid problematic companies than before, but at the same time, increasing levels of investor apathy,” Block said by email.

“If you look at all the Muddy Waters stuff, no matter what you think of them, when they start their work on things there is something which triggers their work and that raises questions,” said Ian Ormiston, a fund manager at Merian Global Investors in London. “There are still hundreds of companies out there that probably merit attention.”

Here’s a round-up of Muddy Waters’ short targets in 2019 and how the shares fared:

NMC Health (report on Dec. 17)

In a sign of how seriously investors are taking his critique of London-listed NMC Health, trading in the stock has surged to an average of almost 4 million shares a day since the report, compared with 563,000 daily in the preceding three months. The company said the report is “false and misleading,” adding that it has a “track record of significant, open and increasingly detailed disclosure to the market.” NMC Health bought back shares the day after the report was published.

PeptiDream (report on Nov. 6)

Shares in Tokyo-listed PeptiDream Inc. fell 4% on Nov. 7 but have recovered and are up 5.8% since the short seller questioned the level of activity at the company’s drug development partnerships with pharmaceutical companies. PeptiDream disputed the contents of the report, saying it holds a “completely different view.” The company said its 101 programs are all active programs, with no dead or dormant ones.

Corestate (position disclosed on Oct. 16)

Corestate Capital Holding SA fell 19% in Frankfurt the day Muddy Waters revealed in a filing that it’s shorting the real estate company. It’s erased the losses and now is up 2.9% since the disclosure. The firm didn’t publish a report outlining its case, a new approach Muddy Waters has taken in France and Germany. Regulators in those countries have responded to short sellers’ reports of corporate misdeeds by investigating the short sellers for possible market manipulation. Corestate routinely declines to comment on investor motives, a spokesman said at the time.

Burford Capital (report on Aug. 7)

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London-listed Burford Capital Ltd. slid 46% on Aug. 7 after Muddy Waters said the litigation-finance company overstates the returns on its investments and has questionable financial reporting and governance. The stock is still down 36% since the report. Burford said the short seller’s critique was “false and misleading.” Chief Executive Officer Christopher Bogart and Chief Investment Officer Jonathan Molot bought shares in the days after the report was published, and named a new chief financial officer to replace Elizabeth O’Connell, who is married to Bogart.

Anta Sports (report on July 7)

Anta Sports Products Ltd. has surged 28% in Hong Kong since Muddy Waters said it’s shorting the stock because of concerns over its financial reporting and relationship with distributors. Anta said the report contained “untrue and misleading information.” Other short sellers also have failed in efforts to deflate the stock.

Solutions 30 (position disclosed on May 18)

Solutions 30 SE dropped 25% on the first day after a filing showed Muddy Waters was shorting shares in the Paris-listed technology-services company, and it’s still down 18%. It’s another case in which the short seller didn’t publicly discuss its investment thesis. France’s market regulator investigated Muddy Waters for a 2015 report detailing its bearish investment thesis on Casino Guichard-Perrachon SA; the watchdog closed the probe this month with a warning to both Muddy Waters and Casino. Solutions 30 said it remains confident in its business model.

Inogen (report on Feb. 8)

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Inogen Inc. ended the day down 2.2% in New York after the short seller’s report, but it’s now fallen 51%. Muddy Waters said the health-care product supplier will likely hit peak sales this year if not in 2020. The company subsequently cut its 2019 revenue forecast twice, each time below the lowest analyst estimate.

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Phil Serafino, Namitha Jagadeesh

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