Short Seller Warns of Illegal Activity, Regulatory Pain at DouYu Chinese Live Streamer

Fund manager and investment research firm Grizzly Reports has issued a warning about DouYu, a Chinese live streaming company that is listed on New York’s NASDAQ stock exchange.

The report alleges that the site has benefited from and encouraged its users to host online lottery operations that are illegal in mainland China. Chinese regulators are already tackling the problem from multiple angles, which Grizzly says will push the company further into loss. The crackdown could also reduce the attraction of the merger of DouYu and another live streamer Huya, proposed in September by tech giant Tencent.

In China, live streaming has expanded far beyond the realm of eSports or fans watching the live play of video games. It has become an industry in its own right. It also juices up mainstream e-commerce businesses, such as those of Alibaba and

Leading figures can become celebrities and earn millions of dollars from financial gifts and endorsements, though analysts contend that a large proportion of the gifts are recycled by users to create the artificial impression of greater popularity, and by the site operators’ bots in order to inflate activity.

The sector is already being targeted by multiple mainland Chinese regulators. On November 13, 2020, the Cyberspace Administration of China asked for feedback on regulating Internet Live-Streaming Marketing Information Content Services Management. Later the same month, the National Radio and Television Administration issued new regulations about content monitoring and real-name registration by site users.

Short selling investment companies such as Grizzly, Blue Orca Capital and Muddy Waters identify companies that they believe are over-valued. They take short positions and aim to be able to cover their (negative) investment positions by buying the underlying shares after their research has caused the target company’s shares to fall.

Short sellers have recently alleged fraud at several Chinese companies including conventional streaming firm iQIYI and at another live streamer Joyy. At Luckin Coffee, following allegations by Muddy Waters, management admitted to having artificially inflated revenue figures and paid $180 million in fines and damages.

DouYu has not yet made an official response in the form of a regulatory filing in response to Grizzly’s allegations. And on Friday its ADR-form shares dropped only 3.3% to $12.14, leaving the stock up since the beginning of the year, when it opened at $11.46.

“We believe DouYu has been involved with illegal online gambling on their platform. Our research indicates that not only is DouYu hosting these illegal activities, but they are actively encouraging their users to gamble on their platform to boost revenue,” said Grizzly. “Recent policy announcements indicate a more stringent regulatory environment that is cracking down on online gambling, order brushing and faking operating numbers. We believe the full scale of the policy reform will be massive.” One of the platform’s most prominent streaming users was recently arrested, according to mainland sources.

If either Grizzly’s specific allegations of illegal activity or the wider government crackdown on tech firms turns out correct, DouYu may find itself with lower revenues, higher costs (as it increases monitoring of its users), and exposure to regulatory penalties.

And if the live-streaming sector loses some of its froth, the logic of the DouYu-Huya merger would be weakened. That could point to Tencent either abandoning the proposed deal or reducing the price that Huya is offering. On Dec. 14, 2020, the General Administration of Market Regulation revealed that it had an ongoing investigation into the proposed merger.

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