Yalla's short sellers are barking up the wrong tree
- Yalla dropped 7% to its lowest price in 2021 after two damning reports from short sellers yesterday
- Gotham City Research and Swan Street Research have both accused Yalla of inflating its user numbers
- These allegations do not seem substantial. Yalla seems to be an excellent proxy for a boom in voice-based social network
Yalla Group, the MENA-focused social network company, faced two damning reports from short sellers on the same day, and the stock fell 7% to its lowest level since 19 January 2021. Year-to-date, the stock is up 19%.
Short sellers' accusations
Swan Street Research issued a 31-page report on Wednesday. Its accusations are as follows:
Yalla's usage numbers are "irreconcilable with channel checks".
The management and auditors have a dubious history.
Yalla has not had a CFO for most of its history. The present CFO is inexperienced.
One-third of its cash is lodged in Singapore, where Yalla does not have operations.
Yalla's structure is designed to defraud investors like Wirecard, the German fintech that collapsed last year.
Yalla responded to the accusations today, saying that the "short attack reports contain numerous errors and distorted, misleading and unsubstantiated claims" and that the company firmly denies any allegation or claim suggesting that it did not provide true and accurate public disclosure about its business and financial performance.
Yalla was founded in 2016 by a Chinese group that has operations in the UAE and China. The company’s platform has 14mn users in the UAE, Saudi Arabia, Qatar and other MENA countries. We view the company as the "Facebook of Arabia".
YALA US listed on the NYSE on 29 September, raising US$149mn in the issue. The company makes money from the sale of virtual items and premium membership on its platform. It is the largest voice chat operator in MENA in terms of revenue, according to consultants, Frost & Sullivan.
What is our take?
We have covered YALA US without a formal recommendation since November. We have interviewed the management and have surveyed its market.
The Swan Street accusations fall into four categories:
The co-founder has a dubious background. Swan Street accuses Yalla's co-founder Xuecai Feng of being a participant in the US$1bn ZTE US sanctions fraud and that Feng has tried to conceal his 14% stake in Yalla.
Feng's stake has been in the public domain since the IPO prospectus was issued. As for his involvement in the sanctions fraud, this has no bearing on Yalla's operations.
Yalla's audit partner is inexperienced and has a history of auditing companies embroiled in scandals. Yalla is audited by Yiping Yang from KPMG Huazhen. According to Swan Street, Yang has only audited four companies – two microcaps, Yalla and Danke, which is under investigation.
Our view is that the personal track record of the audit partner should not guide our assessment of the company. KPMG is one of the most prominent auditors in the world and Yang would have to adhere to his firm's audit standards. It would be excessive to dismiss a company merely because of the auditor.
The most serious allegation that Swan Street makes is that Yalla has exaggerated its user base. Yalla's claim of 7mn monthly active users (MAU) spending 4.5 hours a day is a fabrication, according to Swan Street, which says that the actual figure is around 1-1.5mn.
Swan Street alleges that 30% of Yalla's users are bots and also quoted unnamed former employees who claim that most of Yalla's users are "not real/fake /illegitimate bot accounts".
Our view is that there is no substance to these allegations. There is no way to verify these unnamed sources except by Swan Street itself and the report does not provide concrete evidence that most of its users are bots.
Swan Street alleges that the proportion of cash lodged in Singapore is suspicious. This seems like a frivolous claim. Singapore is one of the world's leading financial centres. It is perfectly acceptable for international companies to avail of its financial services, even if it does not operate in that jurisdiction.
The Gotham City Research tweet, meanwhile, does not cite any evidence.
We continue to be bullish on voice-based social networks in emerging markets including YALA US
The reasons for our optimism are as follows:
Yalla exposes investors to the rise of emerging market tech through a US-listed entity. Its NYSE listing is also potentially positive for the stock’s liquidity.
Yalla’s success as a voice chat network operator is dependent on certain unique features in the MENA region. International VOIP platforms (such as WhatsApp calling) are banned in the UAE and Yalla's voice chat network is a legitimate means of circumventing that.
While social media platforms like Facebook, Instagram and Twitter have large user bases in MENA (eg Facebook has 180mn users in the Middle East; and Saudi Arabia has a social media penetration rate of 75%), they remain under threat from government regulation and very few social media players have localised their user interfaces to the MENA region. Arabic social media and entertainment apps are relatively rare. This is where Yalla’s unique niche comes into play — it can provide an alternative to the VOIP restrictions as well as become a home-grown alternative (voice-centric social networking and entertainment platform) to the global social network giants.
But risks cannot be ignored
We see major risks in Yalla, including corporate governance issues:
YALA US was founded by Chinese investors and operates out of China, but has listed an address in Dubai's Internet City. Founder and CEO Tao Yang was the manager of ZICT Technology Co., and its original investors were China's YooYoo Limited, Orchid Asia, WindBell, and SIG Global China Fund. It may be viewed as a Chinese entity and could be vulnerable if the US-China tech war intensifies.
Voice-based social networks are rare. Yalla's revenue model is untested compared with the established social network models. We cannot yet be assured of the long-term sustainability of a model based on voice chat, entertainment and gift exchange.
Yalla now needs to satisfy the vast expectations that its extravagant valuation implies.
YALA US's investors have filed investor rights legal challenges, accusing Yalla of misleading investors about the impact of stock options.
If regulations banning VOIP in the UAE were to be lifted, competition from global rivals such as WhatsApp would intensify.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...