Shares of Chinese social media and entertainment site Joyy Inc. plunged more than 26% after a research firm accused it of being a “multibillion-dollar fraud”.
“It was clear to us from early on that YY Live was almost entirely fake,” Muddy Waters Research reported following a year-long investigation, adding that Joyy’s live-streaming service is an “ecosystem of mirages”.
The report, published on Wednesday, came just two days after Baidu Inc. agreed to buy Joyy’s YY business for US$3.6 billion in an all-cash deal.
Titled “YY: You Can’t Make This Stuff Up. Well…Actually You Can”, the report described issues with Joyy’s reported user metrics, revenues and cash balances, saying that the company is “guilty of bot forming, creating fake transactions and having fake users.”
The firm alleged that the platform’s high-earning performers actually take home a fraction of the reported pay, and “purportedly independent channel owners” are in reality largely controlled by YY to facilitate “sham transactions”.
It added that the legions of benefactor fans are almost entirely bots operating from YY’s internal network (~50% of YY Live gift volume), bots operating from external bot farms, and performers roundtripping gifts to themselves.
The company noted that the findings were discovered through a two-prong approach. The first prong was macro data collection and analysis through automated means of 115.6 million transactions. The second prong consisted in reviewing filings and accounts, undercover fieldwork, and human sourcing.
“YY Live is about 90% fraudulent,” the firm concluded. The report added YY’s international live-streaming service, Bigo, “seems barely more real.”
Joyy’s (NASDAQ: YY) U.S.-traded shares fell as much as 30% to US$70.30 in New York on Wednesday. It closed at US$73.66, or 26.48%, its biggest-ever decline.
Calls to Joyy’s Guangzhou headquarters went unanswered.
Baidu had hoped to diversify beyond its core search business and venture into video streaming through the purchase of YY. The closing of the transaction is subject to conditions and is currently expected to occur in the first half of 2021, the company announced on Tuesday.
The Chinese search giant has yet to release a statement regarding the deal following Muddy Water’s report.
“What will Baidu do?” Muddy Waters asked. “Will Baidu really try to buy ‘growth’ in the form of an almost completely fake business?”