Wolfpack Research, a short-selling research firm, recently reported that Aichi had been cheating long before its 2018 IPO and has been doing so ever since. Aichi responded by vehemently denying all doubts that third-party agencies were shorting. The following is the full report of Wolfpack Research.
Our research shows that Aichi had committed fraud before the 2018 IPO, and has continued to do so ever since. Like other Chinese companies that falsified data at the time of the IPO, Aichi was unable to support its financial statements by properly developing its own business. We estimate that the company has increased its 2019 revenue by about Rmb8-13bn, a tally increase of 27 per cent to 44 per cent.
To do this, Aichi has exaggerated the number of users by 42 to 60 per cent. Since then, Aichi has also exaggerated expenses, paid prices for content and other assets and acquisitions, and concealed its fraud from auditors and investors by consuming false cash.
In October and November 2019, we conducted a personal survey of 1,563 people in the Chinese target population of Ai Qiyi and found that 31.9% of Aichi Art users viewed the VIP content of Aichi Art through memberships of apartners such as JD.com or Xiaomi TV. Our research shows that about half of these VIP users get alove content, such as “buy one, give one” or “member benefit redemption” through free or near-free, and that users receive these benefits through partners rather than Aichi. Edge counts this dual membership in full, which means that it takes the user’s membership fee into full revenue and the partner’s share. This allows Aichi to inflate revenue while falsifying cash consumption.
We have also received all of aichi’s VIE and WFOE China credit reports since 2015. Compared with the prospectus, we found that deferred income reported to the SEC by Aichi increased by 261.7%, 165.5% and 86.2%, respectively, in 2015, 2016 and 2017. Deferred revenue is an account in the balance sheet that refers to the down payment made by the customer for future services. Since a subscriber of Aichi Art pays an advance payment, most of its income is converted from deferred income. These pre-IPO inflators essentially lead to a further inflated revenue from the IPO.
The inflated rise in abarter’s revenue is arguably one of the company’s most shocking accounting frauds. Barter Relicensing revenue depends on the value of its transaction content within Aichi. In other words, Aichi’s management can allocate any value to these transactions as they wish, providing an opportunity for them to inflate their revenues. Based on the valuation cap per episode of non-exclusive content provided by former AiQi art employees involved in content acquisition, the number of copyright barter transactions at AiQi art needs to reach 3.9 times and 3.2 times the number of TV series of all Chinese production companies in 2018 and 2019, respectively, in order to reasonably realize its reported barter revenue.
Aichi is a mature company that has been in existence for 10 years by this month and has been losing money for 10 years in a row. Unlike growth, Aichi’s losses are accelerating rapidly. The company lost Rmb10.3bn in 2019, an increase of Rmb1.2bn over 2018. Meanwhile, the company recorded the lowest paid subscriber growth of just 0.7 per cent in the fourth quarter of 2019. Aichi’s advertising revenue fell 15 percent in 2019, and gross margin remained negative. In our view, even such a large loss is meaningless because of the huge fraud mentioned above. However, if you remain indifferent to what we are saying, we can only wish you good luck.
1. AiQi Art increases user numbers:
We found from data from three independent sources that Aichi’s DAU virtual growth was between 42% and 60%.
Data in the Aiqi Art Backstage System contradicts DAU
Data provided to us by two Chinese advertising agencies for the back-office system show that, starting in September 2019, Aichi’s actual mobile DAU was 60.3 percent lower than the company’s october 2019 average of 175 million mobile DAus.
Advertising agencies can access Aichi Back stage DAU data in 19 “first-tier” cities in China. Aichi reports on the state of the online film industry in January 2019 and January 2020 provide a breakdown of the geographic distribution of users. In 2018, 36% of its users are located in China’s 19 first-tier cities, the report said. The 2019 report only reveals the growth rate of each of China’s five tier cities between 2018 and 2019. Applying these growth rates to the distribution in 2018, it is possible to calculate that 19 first-tier cities accounted for 35.6% of the total number of aichi al-Yi art users in 2019.
Based on back-office data from two advertising agencies, we collected DAU data for four days in the same week in September 2019 in 19 first-tier cities in China, including three weekdays and one weekend. The average moving DAU we collect from the back office of Aichi Art is 24.7 million. The lowest day was 23.36 million, and the highest day was 25.88 million. A detailed summary can be found in the table below:
Based on the 175 million average mobile DAU data disclosed by Aichi in October 2019, and the 35.6% dAU for first-tier cities mentioned in the aforementioned report released in 2019, we calculated that the DAU in China’s first-tier cities was 62.29 million (175 million x 35.6%). But the back-office data we provided by advertising agencies saw only 24.7 million DAus in first-tier cities, 60.3 percent less than the aichi reporting figures.
AiQi’s ‘heat’ chart proves brush flow behavior
Aichi has created its own content monitoring and ranking metrics to show the popularity of its shows. It is called the Content Heat Index and is publicly available on the Aichi website.
According to the heat index notes, these indices are based on data from the last three months. The typical trend for new shows is to go first and down. A few months after the content peaked, we found that the top 10 provinces and regions with audiences would always include less populated areas such as Macau, Hainan, Tibet or Inner Mongolia.
China’s National Bureau of Statistics publishes population data for each region one by one. Of the 32 provincial administrative units, Tibet’s total population has always been the last. In 2018, China’s National Bureau of Statistics reported that there were only 1.478 million residents, only a small proportion of whom were Han immigrants. Tibet has its own unique local language and culture. The logic suggests that Tibet should not be in the top 10 in any of the show’s shows.
However, we looked at recent data on such a-game shows as The Old Boy, Idol Practice Student and Hot Blood Street Dance Company and found that Tibet, Hainan, Ningxia or Inner Mongolia also ranked in the top 10:
It is almost impossible for an area with such a small population to generate enough organic flow to top the Aichi’s heat index. On the contrary, we believe that these highly unusual circumstances indicate that Aichi has used fraudulent methods to inflate the viewing data of its content.
QuestMobile published a special report in February 2020 entitled “China Mobile Internet under the New Crown Outbreak” that showed that Aichi had increased dAU by at least 42%.
According to the report, the average mobile DAU in the 10 days before the Chinese New Year was only 126.2 million, while the average mobile DAU reported by Aichi Art was 180 million. In addition, QuestMobile reports that Aiqi’s DAU did not grow between the 2019 and 2020 Spring Festivals:
2. Ai Qi art inflated income:
Our analysis found that Aichi art had inflated its 2019 revenue from about Rmb16bn to Rmb29bn.
Barter Trading: Black Box
Aichi’s barter re-licensing revenue has grown so much that even if the company is bartering every episode of China’s TV series over the past three years, it’s not enough to convince people of those numbers.
According to Aichi’s reported barter re-licensing revenue, it needs to trade each episode of China’s TV series in 2018 and 2019 at a unit price of 79,000 yuan and 64,000 yuan, respectively. A former Aichi employee (hereafter referred to as “former employees”) who worked in content-acquisition told us that non-solo licenses typically cost between RMB1,000 and RMB5,000 per episode, with the most popular shows likely to be as high as Rmb20,000.
In a way that’s good for Aichi, we’re calculated as the average of Aichi’s barter transactions based on the maximum of Rmb20,000 per episode disclosed by the former employee. Even so, Aichi would need to trade 3.9 times and 3.2 times the total number of TV shows by all Chinese studios, respectively, to reach its reported barter revenue in 2018 and 2019.
Barter re-licensing revenue depends on the internal valuation of Aichi. In other words, Aichi’s management can essentially allocate any value to these transactions as they wish, giving management the opportunity to easily inflate revenue, and they clearly haven’t let it go.” Large-scale non-currency barter trading is a serious red flag. In September 2019, the SEC filed a lawsuit against Comscore and its chief executive, alleging fraud in the non-monetary revenue of data barter transactions, which involved much less than The Imaginary’s inflated amount.
Former employees also highlighted the huge difference between solo and non-solo values. The solo license for popular shows could be worth between Rmb3m and Rmb5m – almost 1,000 times the non-solo license for the same show. According to Aichi’s own disclosures, the company only barters for non-exclusive content:
“The Group also regularly exchanges online broadcast rights with other online broadcasters through non-monetary transactions. The exchange of copyright gives both parties the right to play copyrighted content that is only authorized to be broadcast on their own websites. Each transferor reserves the right to continue to broadcast the solo content on its own website and/or to license the content it delivers in the transaction. “
In a stand-alone transaction, the seller transfers the streaming and re-licensing rights of the content to the purchaser. In non-exclusive transactions, Seller reserves the right to play streaming content on its own website and to relicense the content to others, as described in the above disclosure. The following table shows the absurdity of Aichi’s so-called barter re-licensing revenue:
Deferred revenue variance
The significant inflated income reported by Aichi Art is further evidence of its inflated income. Deferred revenue is a balance sheet account that occurs when a customer makes an advance payment for future services. Since most of Aichi’s users use prepayments, revenue is converted from deferred revenue.
We have obtained all OF amy’s China credit reports since 2015 for all VIE and WFOE. The onshore operating entities listed below:
Beijing Ai Qi Yi Technology Co., Ltd. (also known as “Beijing Ai QiYi”)
Shanghai Ai Qi Yi Culture And Media Co., Ltd. (also known as “Shanghai Ai Qi Yi”)
Shanghai Zhongyuan Network Co., Ltd. (also known as “Shanghai Zhongyuan”)
Aichi Art Pictures (Beijing) Co., Ltd. (also known as “Aichi Art Pictures”)
Beijing Ai Qiyi Cinema Management Co., Ltd. (also known as “Beijing Ai Qiart Cinema”)
We aggregated this information and compared it with Aichi’s F-1 prospectus and found that deferred revenue reported to the SEC increased by 261.7%, 165.5% and 86.2%, respectively, in 2015, 2016 and 2017.
Overestimating the data in the years before the IPO poses a serious problem for Aichi: it must publish increasingly exaggerated results to compensate for pre-existing frauds, while still showing signs of growth, which is the only basis for Aichi’s valuation. Aichi’s financial position contains evidence of its inflated income, many of which can be traced back to deferred income accounts.
AiQi’s membership growth statement contradicts the decline in actual deferred revenue
In our view, It is also possible that the management of Aichi certainly made a false statement about the number of paid subscribers or the average membership period, and that it is possible to do both.
From the third quarter of 2018 to the first quarter of 2019, Aichi reported an increase of 16.1 million subscribers, with the average subscription period increasing from 6 months to 8 months. But a17 per cent drop in deferred revenue over the same period – a paradoxical figure that suggests at least one figure is fake.
If net membership increases steadily and average revenue per user (ARPU) remains stable, the deferred revenue curve should be ahead of the realized revenue curve. In addition, an extension of the average subscription period should result in a larger front-end deferred revenue build-up. By drawing the curve from this, the deferred revenue trend line should produce a greater slope.
If what management says is true, you should see a curve similar to the following image. The deferred revenue curve in the figure is always ahead of the realized revenue curve because subscribers pay up front for future services delivered.
The following chart shows the actual deferred revenue and realized income curve of Aichi, the actual result of which is contrary to our expectations – the realized income curve is always ahead of the deferred revenue curve and the gap between the two is widening.
The chart strongly suggests that management is lying about the extension of the average subscription period, the stability of ARPU, and the growth of paid subscribers, and that there is a case in point.
Because Edge management claims that the company added 16.1 million net paid subscribers between the third quarter of 2018 and the first quarter of 2019, and that the average subscription period was extended from approximately 6 months to 8 months, we expect deferred revenue to increase significantly as a result of the accumulation of prepaid room rates. But the opposite is true. The following image shows how Aiqi’s reported paid subscribers compare their reported deferred income balances:
Edge’s deferred revenue from 23.3% at the end of the third quarter of 2018. Rmb56.3bn fell to Rmb1,960.7bn in the first quarter of 2019, down 17 per cent in the six months. This is directly at odds with management’s claims that the number of paid subscribers has increased and the average subscription period has been extended , and that these two statements are mathematically impossible to be true at the same time because of the decline in deferred revenue.
Aichi art exaggerates income and burns “fake cash ” through dual membership program
Our field due diligence in China found that approximately 31.9% of Aichi users can access Aichi’s VIP exclusive content through their membership on the platforms of Aichi Partners (including JD.com, Xiaomi TV and Ctrip). Our survey shows that about half of Aichi’s VIP users get free or nearly free VIP status through “buy one, one” or “membership deals”, and that this VIP benefit comes from the platform of its partners rather than aichi itself. Aichi has double accounted for these users in calculating gross income, which means that Aichi art takes into account the full revenue on the one hand and records its partner’s share as an expense on the other. Because most of the dual members pay membership fees to Aichi’s partners (not a chic) partners, we don’t think this accounting method of dual membership is correct, it increases Aichi’s revenue and burns fake cash. (Gross basic accounting should be used only if the company is the subject of the transaction.) For dual members who pay to their partners, Aichi should conduct net-based accounting. )
Aichi’s management does not disclose the number of dual members, or the percentage of total membership sedited through these partnerships, or the actual revenue share of Aichi.com in these partnerships. Dahlia Wang, IR’s director of IR, told investors that the company’s revenue share with JD.com was half that, but did not disclose the economic benefits of doing business with other partners. She also dismissed the impact of JD.com’s dual membership and other partnerships on Aichi Income/ARPU, which she said was “negligible” or even “irrelevant.”
We conducted field surveys in three of China’s richest cities (Beijing, Shanghai and Guangzhou). Our investigators matched a target audience of Aichi Art: urban residents aged 18-40, at least college-educated (based on the demographics of the Aichi audience provided by the Chinese advertising agency). We identified 1,563 people who met the Aichi Art target group, 613 of whom had access to viewing exclusive content by Aichi’s VIP members (dual membership refers to having become a VIP member of Aichi Art and activating a free JD plus membership, or becoming a JD plus member and activating a free Aichi VIP membership). We investigated the way it obtained VIP rights and the results were as follows:
According to an analysis by a statistician, our findings on the dual membership of Aichi-Jingdong are consistent and statistically significant. Data from 548 active Aiqi pay users, an average of 21.9% of respondents said their AiQi VIP membership is a dual member of JD.com. In addition, our survey found that about 10% of respondents with Aichi VIP members said they received a VIP membership through another dual membership program. In this survey, beijing, Shanghai and Guangzhou through the dual membership program to obtain a total of 31.9% of the respondents to the Aichi Arts VIP members.
In its earnings conference call, management disclosed specific partners, such as JD.com, Ctrip and Xiaomi, as well as some other types of partners, such as financial institutions and mobile network companies, but did not disclose the total number of these partners or their financial status. However, it is easy to find detailed information about the “two-in-one” dual membership offer on the web. In the spring of 2019, JD.com launched a special “three-in-one” VIP program: JD plus, Aichi, Know, 149 yuan a year to enjoy three members.
Our survey shows that, in addition to JD.com, the most common partners are financial institutions that offer credit cards and mobile phone network providers:
By exchanging advertising purchases, other services, and member income commissions with related parties and other partners, Aichi can easily inflate membership revenue while providing a channel to burn fake cash. The partnership between Aichi and Xiaomi is a stark example of how complex it is economically.
By the end of 2017, Xiaomi had reportedly become an associate of Aichi, whose prospectus provided details of the aiqi and Xiaomi deal. Then, while Xiaomi continued to disclose amyetic as an affiliate, Aichi didn’t (we found it problematic for Aichi to stop disclosing these details because Xiaomi’s co-founders are members of the Aichi Board of Directors, and the growth trend over the past three years suggests that their collaboration sits by several orders of magnitude each year). The following table is an excerpt from Aichi’s 2018 2018 20-F, detailing these historical transactions:
小米-爱奇艺报告关联方交易（注：来源爱奇艺2018年20-F，p. F-50；F-1A p. F-60）
Details of the agreement between AiQiyi and Xiaomi have not been disclosed. However, financial data show that Aichi paid a large “commission” for Xiaomi’s membership and bought advertising and other services from Xiaomi. From 2015 to 2017, the net impact of the transactions disclosed led to a loss for Aichi, but generated Rmb110.3m in membership revenue. Details from the Xiaomi Partnership suggest that this opaque collaboration could be abused by management.
When we compare Aiqi’s ARPU with its gross margin since its listing, it is clear to us the extent to which Aichi uses a dual membership program. Since Aichi calculates these dual members on a gross basis, its ARPU is relatively stable, while gross margin slowers:
New Love Sports: Revenue swells by $110 million
Aichi has generated approximately $110 million in deferred revenue by exaggerating its contribution to the New Love Sports joint venture.
Ai Qiyi said it had acquired a 32 per cent stake in Beijing Xinai Sports Media Technology Co., Ltd. This is a joint venture controlled by Wuhan DDMC, a Chinese-listed company. Aichi said 32 per cent of their stake came from a Rmb796m ($115.773m) investment. However, when we compared the equity and investment disclosed by Wuhan Contemporary Mingcheng, we found that Aichi’s equity record was only 38.25 million yuan ($5.6 million) in cash investments, and there was no record of any other capital contributions due.
Aichi has simply exaggerated its investment, claiming to have received an additional non-cash contribution in the form of “content delivery”, which it has valued at about 757.75 million yuan ($110.21 million). As of December 31, 2018, this non-cash contribution was recorded as a “deferred income” of RMB726.2 million for the provision of services to related parties.
By comparing the public filingdocuments of Ai Qiyi and Wuhan Contemporary Mingcheng (the parent company of New Love Sports), we conclude that the deferred income recorded by Aichi Art is fraudulent and does not have a real non-cash contribution. The remaining RMB7261.5 5 million was “primarily deferred revenue related to content distribution, intellectual property licensing and traffic support services to one of the Group’s equity investors,” aiqi said in its 2018 20-F report. “
1. The balance is mainly for Baidu Group to pay for advertising and other services
2. The balance is mainly a loan to the Group’s equity investors at a 5% interest rate and will expire in 2019
3. The balance is mainly the amount of equity investment payable or prepaid for content distribution services
4. Interest-free loans with a total outstanding balance of RMB 50,000 due as at 31 December 2017 and 31 December 2018 are due upon request; In April 2017, Aichi Group borrowed RMB 2.22 million from Baidu Group at an interest rate of 3.92%, which was fully paid off in December 2017
5. The balance as at 31 December 2017 and 31 December 2018 is the bandwidth and accrual saccrual spending provided by Baidu Group
6. The balance as at 31 December 2018 is primarily deferred income related to content distribution, intellectual property licensing and traffic support services to one of the Group’s equity investors
According to a cash flow statement of 2018, Aichi Art’s investment includes RMB763.75 million in non-cash contributions. After deducting the total amount of the total claimed investment amount of RMB796 million, the remaining cash contribution was RMB32.25 million. This is very close to the total investment of RMB38.25 million received by The New Love Sports from Aichi Art, as disclosed in the documents disclosed by Wuhan Contemporary Mingcheng. In our view, the difference of RMB 6 million is the result of other non-cash investments that Aichi management calls “minor” (Aichi management also explained that while the group holds additional equity investments, other companies have not invested much, see Aichi 2018 20-F, p.F-33).
Deferred revenue to be provided at the end of 2018 was Rmb726,155 m, 37.6 million yuan ($5.5 million) less than the non-cash consideration of Rmb757.75 million claimed by Aichi.
As the investment was made in the third quarter of 2018, Aichi may recognize the difference of RMB37.6 million as revenue in the second half of 2018, with the remaining RMB726,155 million available to management to artificially improve its top performance as needed.
Wuhan Contemporary Mingcheng Culture Co., Ltd. issued several announcements detailing the ownership of Xinai Sports Media Technology Co., Ltd., which was broken down by the total shareholders and their total contributions. In a response to the Shanghai Stock Exchange’s inquiry letter, Mazers, Wuhan Contemporary Mingcheng’s auditor, explained the positions of shareholders before and after each capital increase, including additional capital contributions to the joint venture in each capital increase announcement (see the inquiry letter on the equity and capital increase of the controlled subsidiary and the sale of assets of Wuhan Contemporary Mingcheng Culture Co., Ltd.).
Importantly, the auditors noted that after investing RMB38.25 million in August 2018, the auditors did not contribute any additional capital. In fact, Aichi was diluted in the next two rounds.
The following excerpts and tables show the shareholders and their respective shares at the time of the establishment of New Love Sports. The red box is Beijing Aichi Art Technology Co., Ltd., which has a capital contribution of Rmb38.25m, initially accounting for 38.25 per cent of the shares.
Excerpted from the response to the Inquiry Letter concerning the transfer of the controlling subsidiary and the sale of assets by Wuhan Contemporary Mingcheng Culture Co., Ltd.
1) When New Love Sports is established, the shareholding of the company and the concerted action person and the seat of the board of directors
On August 6, 2018, Beijing New Love Sports Media Co., Ltd. (“New Love Media”), Beijing Ai QiYi Technology Co., Ltd. (“Ai Qiyi”), Yu Lingxiao, Beijing Xinying Huizhi Media Technology Enterprise (Limited Partnership) (hereinafter referred to as “New Yinghuizhi”) signed the Joint Venture Agreement to jointly establish Beijing New Love Sports Media Technology Co., Ltd. (hereinafter referred to as “New Love Sports”) (see company announcement No. The proportion of equity and the amount of capital contribution of each party are as follows:
The new Love Sports documents do not mention additional non-cash investments or record what Aichi art company calls an additional RMB757.75 million in non-cash contributions. In 2018, New Love Sports received two more rounds of financing and increased its registered capital twice, with additional investments sold at a premium to the starting shareholder stake. As a result, the total capital contribution exceeds the registered capital and the excess is reported as capital reserve (“additional capital paid in capital” or “APIC”) and is described in detail in the audit letter.
The following are relevant excerpts from the audit letter:
1) Round A’s first capital increase
On August 7, 2018, the Company held the 48th meeting of the 8th Board of Directors, which considered and approved the Bill on the Signing of Capital Increase Agreements and Related Transactions, and agreed to sign the Capital Increase Agreement with Xinai Sports, Xinying Media, Aichi, Yu Lingxuan, Xinying Huizhi, Harmony Anlang, Zhixing, Huiying Borun. According to the Capital Increase Agreement, Harmony Anlang will subscribe for 10.00% of the new love sports 10.00% of the shares, corresponding to the new love sports new registered capital of 12 million yuan, more than part of 288 million yuan into the new love sports capital reserve; Subscription of 3.33% of the new love sports equity, corresponding to the new love sports new registered capital of 4 million yuan, more than part of 96 million yuan into the new love sports capital reserve; Corresponding to the new love sports new registered capital of 4 million yuan, the excess of 96 million yuan into the new love sports capital reserve.
2) A round secondary capital increase
On September 4, 2018, the Company held the 50th meeting of the 8th Board of Directors, which considered and approved the “Proposal on the Introduction of External Investors to Increase The Capital of New Love Sports”, and agreed to the Signing of the Capital Increase Agreement by the Company, New Love Sports, Aichi, Yu Lingxuan, Xinying Huizhi, Harmony Anlang, Zhixing, Huiying Borun, Jian Teng Pei pei, And Yin Sheng, And Yan Wei Investment. According to the Capital Increase Agreement, Jian Teng Peisheng will subscribe for 8.96 percent of new love sports with 300 million yuan, corresponding to the new love sports new registered capital of 12 million yuan, an excess of 288 million yuan into the new love sports capital reserve; After the completion of the capital increase, the registered capital of Xinai Sports was changed to 134 million yuan, and the details of the shareholdings of each shareholder are as follows:
According to the company’s shareholder list, Aichi art invested only Rmb38.25m in the joint venture. In the two subsequent rounds of financing, the total contribution of Aichi art has not changed, aichi has never recorded additional paid capital (APIC). AiQiyi’s investment is listed as follows in the name of its subsidiary, BJ Iqiyi, Beijing:
When New Love Sports’ year-end financial data are consistent with the APIC reported in the audit letter, total assets are equal to total equity and total liabilities. The following table shows the Beijing Xinai balance sheet information from Wuhan Contemporary Mingcheng’s 2018 Annual Report.
If Aichi actually committed to contribute 796 million yuan, then the new love’s liquid assets should be increased by about 757.75 million yuan, and recorded as APIC, but it did not (note that the 816 million yuan APIC balance in the table above does not include Apic, which matches APIC in the table below);
The data disclosed on page 128 of Wuhan Contemporary’s 2018 annual report is further evidence of the false contribution of Aichi’s non-cash contribution. Wuhan Contemporary Mingcheng’s “other receivables” balance is only 21088.6 million yuan. In addition, the largest counterparty is only Rmb700m, far less than the Rmb7577.5m non-cash commitment that Aichi has claimed:
According to Wuhan Contemporary Mingcheng’s report, the total equity investment of New Love Sports did not show any non-cash contribution. Even if acash in the non-cash contribution declared by Aichi Art is Rmb757.75m, its corresponding liabilities should be recorded as payable contributions, not deferred income, and New Love Sports should show the same amount of accounts receivable.
None of these entries appear in the financial statements of Ai Qiyi or Wuhan Contemporary Mingcheng/New Love Sports. As a result, we have come to the conclusion that Aichi simply made up for this non-cash contribution, increasing the fraudulent deferred income of Rmb757.75m that management used to exaggerate revenues.
The company’s 2019 2019 2019 2019 2019 report shows that the company’s reserve income from New Love Sports is 146.3 million yuan. Disclosures in 2019 are divided into mobile and non-current parts, but by simply adding the two, we can see that the deferred income account for New Love Sports has decreased from RMB726.2 million in 2018 to RMB579.9 million in 2019:
Exaggerated advertising revenue
The Shanghai government’s report lists the largest advertising companies in years. The ranking is based on advertising revenue reported to the Shanghai Administration for Industry and Commerce. According to the 2015-2018 report, we believe that aichi has overstated advertising revenue by 5.155 billion yuan in documents filed with the U.S. Securities and Exchange Commission. Since we used the most favorable estimates for Aichi in the absence of data, we believe that the actual overstatement is much larger than our estimate.
The main advertising company is Shanghai Ai Qiyi Culture Media Co., Ltd. (Shanghai Ai Qiyi). Ai Qiyi’s second largest advertising company, Shanghai Crowdsource Network Co., Ltd., operates a separate live advertising business. The company’s revenue was announced in the 2015 report of the Shanghai Administration for Industry and Commerce’ top 10 online media companies.
The following calculations show the extent to which Aichi’s advertising revenue has been exaggerated. While Aichi appears to have reduced the inflated advertising revenue for IPOs in 2017, the company’s advertising revenue is inflated at Rmb1,537m in 2018, nearly three times the year before.
In its prospectus to the U.S. Securities and Exchange Commission, Aichi said it had revenue of Rmb3.4billion in advertising in 2015. According to the table below, Aichi reported only Rmb1.95bn in advertising revenue to the Administration for Industry and Commerce in 2015, an exaggeration of 74 per cent.
The 2016 report did not publish the top 10 online media companies, so we directly applied the year-on-year growth rate of Aichi Art in Shanghai in the most favorable way, resulting in a revenue of RMB488 million for 2016. The 2016 Shanghai Administration for Industry and Commerce Advertising Industry Report, excerpted from the table below, shows that aiqi culture’s advertising revenue was RMB3.358 billion. Meanwhile, Aichi reported ad revenue to the Securities and Exchange Commission at Rmb5.65bn, an exaggeration of 38.6 per cent.
The 2017 and 2018 Shanghai Administration for Industry and Commerce’s advertising industry report includes a list of the top 10 online media companies. However, the crowd did not make the top 10 in both years. In 2017 and 2018, the 10th-ranked company’s advertising revenue was RMB87 million and RMB455 million, respectively. Therefore, based on the most favorable estimates for Aichi, we assume that crowd source data is slightly lower than 10th place, with 86.9 million yuan in advertising revenue in 2017 and 454.7 million yuan in 2018.
Overall, Ai Qiyi reported advertising revenue to the Shanghai Administration for Industry and Commerce of RMB7,566 million in 2017 and RMB7,791 million in 2018. At the same time, Aichi reported advertising revenue to the Securities and Exchange Commission in the past two years of 8.16 billion yuan and 9.328 billion yuan, respectively, overstatement of 7.9% and 19.7%. The following is an excerpt from the 2017 and 2018 Shanghai Administration for Industry and Commerce’s advertising industry report.
We strongly believe that aiqi ad revenue for the whole of 2019 is still being inflated, as the inflated portion of Aichi’s advertising revenue in 2018 is almost three times as high as it was in 2017. As of the date of this report, the Shanghai Administration for Industry and Commerce has not released the 2019 advertising industry report.
3. Exaggerated costs and asset prices mask the inflated income
Our research shows that Aichi exaggerates costs and the purchase price of assets, thus pretending that it is burning cash and masking an exaggeration of revenue.
Acquisition of Sky Interactive
In July 2018, Aichi art acquired Chengdu Sky Interactive Games For about $300 million. We believe the deal was a scam designed to burn falsely reported earnings and withdraw cash from the NASDAQ listing just completed by Aichi. We can’t believe that someone would pay $300 million for such a company. Celestial interaction does not demonstrate the ability to develop the game on its own. In the months leading up to the acquisition, a Chinese court ruled that Sky Interactive’s only successful game IP and game design were plagiarized. In addition, Aichi art acquired only part of the business of Skyinteractive Interactive, and did not even acquire the domain name of the company Skymoons.com.
Sky Interactive, a video game company, has teamed up with a video game to match the 2015 TV series “Flower Bones.” The only “success” of The Sky Interactive can only be attributed to the marketing investment of Aichi Art, as well as the original author’s creative and production talent. The contribution of celestial interaction to cooperation lies in game design. But three months before the acquisition, a Chinese court ruled that Sky Interactive had illegally plagiarized game design and rules in the game ” Flower Bone.” Before being acquired by Aichi, Tianxiang Interactive had twice tried unsuccessfully to be acquired by two Chinese listed companies, Jinya Technology and Ningbo Fubang. Both companies were subsequently charged with illegal and fraudulent market practices.
Even before the “Flower Bone” game went live, Sky interactive began to seek to sell. In February 2015, Tianxiang Interactive announced that Jinya Technology will buy the company for 2.2 billion yuan in cash plus shares, driving a surge in Jinya Technology’s share price.
On June 4 and 5, 2015, Jinya Technology received two “investigation notices” from the China Securities Regulatory Commission prohibiting Jinya Technology from initiating asset restructuring for the deal. In July 2015, the deal was declared unsuccessful. A subsequent investigation by the China Securities Regulatory Commission found that Jinya Technology had committed fraud after a large loss in 2013, which the company had hidden for years, which could have triggered the company’s de-listing.
On June 25, 2015, shortly after the release of the game “Flower Bone”, Suzhou Snail Digital Technology Co., Ltd. filed a lawsuit against Sky interactive and Aichi Art, alleging that the two companies infringed the copyright of the company’s game Tai Chi Panda by stealing game design and operating rules. The plaintiff’s indictment states:
“In June 2015, After Sky Interactive and AiQi’s Mobile game “Flower Bone” went live, Snail Digital received a player’s report about the game. After comparison, the company staff found that the “Flower Bone” game has many copies of the “Tai Chi Panda” content. In addition, in the “Computer Software Copyright Registration Certificate” filed by the State Copyright Administration of China, the functional module structure diagram, function flow chart and detailed function design are related to the ‘Wushen System’ in the structural analysis of Taiji Panda, and all of the screenshots of the latter are used. “
After the failure of Jinya Technology’s acquisition, Sky Interactive needs to find a buyer. At the time, analysts observed that since the launch of Flower Bone, the company’s business appears to have gone into hibernation, is unlikely to produce explosive news, and is still affected by intellectual property theft lawsuits.
In July 2016, however, Ningbo Fubang announced that it would buy a 100% stake in Tianxiang Interactive for Rmb3.9bn in cash plus shares. Regulators are not optimistic about such a backdoor listing, so trading is blocked. The two companies are trying to restructure the deal and reduce their stake to 70 per cent in exchange for regulatory approval. However, the deal was eventually abandoned. The CHINA Securities Regulatory Commission also launched an investigation into Ningbo Fubang, which announced at the end of 2017 that the chairman and another executive of Ningbo Fubang were trying to conspire to obtain personal gain through insider trading during the acquisition of Tianxiang. The proceeds were confiscated and fined.
We do not believe that the two companies were willing to buy Sky interactive at such a high valuation, but then found fraud, which is a coincidence. We don’t think it’s possible for the company to get such a high valuation, based on The Interactive’s own situation. Our research shows that the company has no value.
March 30, 2018, is only three and a half months away from the July aichi art acquisition of Sky interactive. The Suzhou Intermediate People’s Court ruled that there was plagiarism in the interaction of the IP, which is the basis and structure of the “Flower Bone” game. Sky Interactive and Aichi were asked to stop the infringement and pay 30 million yuan in compensation to Snail Digital (a very large sum for intellectual property litigation between domestic companies in China). For this only successful game, Sky interactive is not really the designer, just with the help of other people’s creativity and talent, as well as the investment and marketing ability of Aichi Art, so the valuation of AiQi yi to celestial interaction is very absurd.
Our review of copyright records in China shows that since its acquisition in July 2018, Tianxiang Interactive has not registered any new publication copyrights. We found that the company had only four games in its name that came from licenses obtained from other gaming companies.
In these licensing games, management has only publicly discussed Crazy Primitives. In a prepared presentation on the first-quarter 2019 earnings conference call, Aichi CEO Yu Yu stressed that the game demonstrates the ability to interact with celestial images. The note is carefully worded, suggesting that celestial interaction slots an important role in the development process. However, Aichi only attributes the game’s “launch” and “adaptation” to celestial interaction, without mentioning the design of the game:
“Another recent case is our gaming business. Our subsidiary Sky Interactive has launched a 3D-turned Mobile game, Crazy Raw Man. The game, based on DreamWorks’ 2013 hit “Crazy Raw People,” has fared more than we expected since its launch in February. This is yet another good demonstration of our ability to adapt IP into an online game. “
A further investigation of the “Crazy Primitives” IP shows that in 2016 Shanghai Oriental Pearl Cultural Development Co., Ltd. has produced and released “Crazy Primitive” Mobile game. As a result, Sky Interactive seems to have just released an updated version of the two-year-old Mobile game. This seems to reflect the degree of technical capability of celestial interaction. If the company is really worth more than 2 billion yuan, then we can only say that the world is too rich.
He Yunpeng, founder of Sky Interactive, is a technology entrepreneur who served as vice president of 91 Wireless, an application distribution platform. The company was bought by Baidu for $1.9 billion in 2013, but the acquisition was seen as a failure.
91 Wireless has proved to be a disastrous acquisition. After Baidu merged it with Docool games to set up its gaming business, the company was embroiled in scandals and investigations, unable to compete in the market, and was eventually sold in March 2017, resulting in more than $1.7 billion in losses. Although He Yunpeng left shortly after the 91-year acquisition and set up Sky Interactive, we believe Baidu’s willingness to work with him again in another acquisition is highly questionable.
During our due diligence on Sky interactive, we found that Aichi did not acquire the entire business of Sky interactive at all. Previously, Jinya Technology and Ningbo Fubang have both tried to buy Chengdu Sky Interactive Digital Entertainment Co., Ltd. and its sister company Chengdu Tianxiang Interactive Technology Co., Ltd. However, Aichi art has only acquired the previous company, Chengdu Tianxiang Interactive Digital Entertainment Co., Ltd. The sister company, Chengdu Tianxiang Interactive Technology Co., Ltd., still owns 99% of yunpeng, and retains its www.skymoons.com website and related website.
On the other hand, The Sky interactive acquired by Aichi Art can only be used to other domain names. Obviously, the best idea the company’s creative team can come up with is www.crimon.net.
Although neither site is well known, the www.crimoon.net site feels too simple, even a little perfunctory, and has little content. Given the fact that Aichi had bought the so-called “game development company” for RMB2.4 billion, we think it is particularly absurd on the face of it, and we believe that, on the other hand, it shows that Aichi’s management is incompetent, and at worst, this is a thoroughly fraudulent transaction, in order to cash in from the listed company and put the money into management’s pocket. Readers are welcome to visit the two websites mentioned above:
Skymoons.com (not acquired by Aichi)
Crimoons.com (registered by Aichi Art)
Then think about it: “Which looks more like the website of a nasdaq-listed technology company with a market capitalisation of more than $12 billion?” “
Since both companies use the same icon and the term Skymoons/Skyimage Interaction, we wonder if It’s more convenient for Aichi’s management to find He Yunpeng’s Skymoons.com site.
Since Aichi has obviousno intention of expanding the celestial interaction, they are more likely to be more than happy to have the company’s former sister company retain a more decent website, and display the names and icons of the celestial interaction, published to curious visitors to browse, and then these visitors will probably think that this is the sky interactive site of Aichi.
The many questions about the interaction raise questions about how Ai Yiqi’s management came up with a valuation of RMB2.4bn and how the acquisition was booked. In fact, Aichi did not provide a reconciliation of Sky Interactive Finance in previous years of acquisitions under U.S. accounting accounting finances, which the company claimed would incur “excessive costs” as a result of previous restructurings:
“Due to the restructuring of the acquired party prior to the acquisition, the unaudited usual income and net loss as at 31 December 2017 and 31 December 2018 was not provided as a result of the restructuring of the acquired party and the excessive cost of compiling historical financial information for the acquired company Skyimage Interaction in accordance with US accounting standards.” (IQ 2018 20-F)
In our view, the above statement is a naked lie concocted by the management of Aichi. The following transaction completion conditions are included in the Agreement (IQ 2018 20-F, Exhibit 4.66, Section 4.1.1):
“Target Company has delivered to the Acquirer: (1) From the date of the establishment of the Target Company, all capital verification reports of The Group members and all relevant notes and schedules issued by the Company’s accountants are listed in Appendix VIII: Financial Report Ingress List;
Clearly, converting historical financial information from Sky Interactive to u.S. accounting standards not only doesn’t require “excessive costs” and doesn’t cost Aichi, which has delivered the financial statements under U.S. accounting standards to Edge yingyi long before the transaction is completed. This contradicts the already flimsy arguments offered by the aichi management, and exposes their naked lies.