On Thursday, Muddy Waters Research released a report on its latest short-selling target: a U.S.-listed, China-based real estate trading platform, KE Holdings, pushing its shares down as much as 10% in premarket trading.
The report said, “The reason why we are short KE Holdings is that we concluded that the company is suspected of systematic fraud, which we believe is a huge scam. We estimate that its revenue data in the second and third quarters are exaggerated by 77%-96%, and the total turnover of new houses (GTV) is exaggerated by 126%, and the turnover of stock houses is exaggerated by 33%.”
Muddy Waters also said on company earnings calls, one sentence constantly repeated was that “do the right thing, even when it’s difficult”. This is not the case. In short, they uncovered massive fraud, including a bogus takeover that appeared to be designed to cover up fraudulent income. Their field research uncovered ghost shops, clone shops and secret schemes to return cash through affiliated brokerage firms to increase revenue. Like Luckin Coffee before, this is a real enterprise with a lot of real fraud.
KE Holdings responded on Thursday night that the company has always ensured the authenticity and standardization of the data in its financial reports. They welcomed investigation into their numbers, but resolutely resist malicious short selling by any institution. The company said that Muddy Waters lacks the basic cognition of the business and the correct interpretation of the three reports because they don’t understand the Chinese real estate market. In order to ensure the rights and interests of investors and not be guided by wrong information, KE Holdings will disassemble and reply to the contents of the report one by one within 24 hours.
The third quarterly report of KE Holdings shows that in the third quarter, KE Holdings achieved an operating income of 18.1 billion yuan ($2.84billion), down 11.9% year-on-year. After the adjustment, net losses were 888 million yuan. Turnover was 830.7 billion yuan, down 20.9% year-on-year. Among them, the turnover of the stock house business was 378.2 billion yuan, down 34.3% year-on-year. The turnover of the new housing business was 410.1 billion yuan, down 2.5% year-on-year. The turnover of emerging and other services was 42.3 billion yuan, down 20.4% year-on-year.
KE Holdings issues following statement in response to allegations made by Muddy Waters Capital LLC.
GTV and revenues of new home transactions — Muddy Waters’ methodology to capture the number of transactions is wrong and the calculation of Gross Transaction Value (GTV) and revenues is incomplete. For example, it ignores the company’s other sources of revenues. As previously disclosed by the company, it offers new home transaction services not only through the Lianjia stores that it directly owns and operates and through connected stores with which it does business, but also through its dedicated new home sales team and other new home sales channels—additional sources of revenues that the Muddy Waters report does not appear to have taken into account. The company reaffirms the accuracy of its previously disclosed GTVs for new home transactions in the second quarter and the third quarter of 2021, which were RMB 498 billion and RMB 410 billion, respectively.
GTV and revenues from existing home transactions — The number of transactions included by Muddy Waters is incomplete and inaccurate. Also, calculations relating to GTV and revenues from existing home transactions are wrong because Muddy Waters does not purport to rely on the company’s actual data for existing home transactions. Rather, it uses the average sales prices found in the China Real Estate Associate platform for so-called comparable properties to derive the GTVs for Beike’s existing home sales. Simulation of the incorrect data collected for the period 76 days from May 25 to August 8 for the entire second quarter period, involves a subjective and manipulative approach. For example, Muddy Waters applied an upward adjustment of 9.66% in calculating the GTV for the second quarter, if one assumes a factoring in market movement. In fact, GTV for the company’s existing home transactions actually decreased by 42.0% from the second quarter to third quarter, primarily due to the general downturn in the Chinese real estate market. As previously disclosed by the Company, GTV of existing home transactions in the second quarter and the third quarter of 2021 were RMB 652 billion and RMB 378 billion, respectively. Revenues from existing home transactions in the second quarter and the third quarter of 2021 were RMB 9.6 billion and RMB 6.1 billion, respectively.
Store and agent count — Muddy Waters’ methodology to attempt to verify the numbers disclosed by the company concerning its agents and stores is also defective and incomplete because it again relies on incomplete information. Contrary to Muddy Waters’ mistaken assumption, the “Find Agent” function on the Company’s home page does not include sales agents responsible solely for new home sales. Instead, these agents are listed separately on another page on the Company’s website—the “New Home” subpage—and who, in their discretion, can opt out from the search results page. In calculating the total number of stores, the methodology used by Muddy Waters to capture stores through the “Find Agent” function is deficient.
Other allegations, including those related to acquisitions, R&D expenses, are also unfounded because they rely on incomplete data, erroneous estimation methodologies, unsupported speculations, and a mistaken understanding of industry practice.
KE Holding’s Board of Directors has authorized an independent audit committee to conduct an internal review of the key allegations contained in the Muddy Waters’ report, with assistance and advice from independent third-party advisors to be engaged by the audit committee. The company will provide updates on the internal review when appropriate.