Short sellers are helping to fight a “China hustle 2.0,” experts said at a TechNode webinar held on Zoom the evening of April 23.
The recent admission that Luckin Coffee fabricated approximately half of its sales revenue reflects a wider problem, said TechNode contributor Michael Norris. Information asymmetries between tech-focused Chinese companies and US investors makes it easy for dishonest managers to lie to investors, said Norris, who is also Research and Strategy lead at AgencyChina.
Norris spoke alongside other TechNode reporters and contributors on “Thin Ice for US-listed Chinese Tech Companies,” the first speaker event in TechNode’s new monthly “Tech After Hours” webinar series.
We’ve been here before
Language barriers and sheer distance make it difficult for American investors to check “gravity-defying” corporate reports, Norris said. The original “China hustle” worked because few investors were willing to travel to remote northeast China towns to check on claimed production facilities, Norris said, and bought into stories about the fast-growing economy driving mammoth demand for primary resources.
In the updated version, the ingredients are a little different: the narrative is about the scale of China’s online population, and the companies are online, or online-adjacent. Digital content and advertising figures are especially hard to check for some Chinese players, Norris said—unlike traditional products, obtaining confirmation of content views and ad inventory can be like peering into a black box.
But compared to 2011, Chinese regulators are taking a greater interest in holding Luckin to account, while lawsuits by Chinese investors could set a precedent for domestic accountability for defrauding overseas markets. Key to the change is that Chinese mom-and-pop investors increasingly have skin in the game in US capital markets.
In this murky environment, short sellers can be the only actors able to reveal serious problems at listed companies. But James Hull, analyst and portfolio manager at Hullx Capital and co-host of the China Tech Investor Podcast, recommended broad skepticism over a focus on fraud scares.
Hull took the example of another recent short report, targeting Baidu-backed online video platform iQiyi, which accused the platform of inflating subscriber revenue. Hull said he had not been able to confirm the allegations through his own sources, but was bearish on the company owing to broader concerns about its business model, calling content production a “cash incinerator.”
“When someone yells fire in a crowded theater,” Hull said,”you have two options: you can get out the door first, or you can look around and check if there’s a real fire.”
But serious problems at Chinese companies are often revealed first in Chinese-language reporting, Norris said. At Luckin, the most important red flag was the tightly networked group of insiders who drove the company to unicorn status without vetting, a story Norris first wrote in English for TechNode before the company’s IPO, based on Chinese media reports.
Tight networks also mean that more companies, including China-listed A shares, will be hurt by Luckin’s fall from grace, said TechNode reporter Emma Lee. Shares of Luckin advertising partner Focus Media have already slid on reports that Luckin overstated ad spend with Focus, renewing negative attention on a company which moved from US to China listing after a Muddy Waters report. Luckin logistics partner SF Logistics and cheesemaker Milk Ground could also be affected, Lee said.
Updated April 24.