Chinese equities have experienced a rough 2021 as tensions between the U.S. and China persist. Popular names like Nio (NYSE:NIO) and JD.com (NASDAQ:JD) have all experienced volatile and unpredictable price movements. Today, another name is in the spotlight, and not for good reason.
Activist short seller Muddy Waters Research released a 77-page short report concerning KE Holdings (NYSE:BEKE) this morning. KE Holdings operates as a digital real estate platform for housing transactions and other related services.
Muddy Waters’ short thesis lies around inflated new home sales gross transaction value (GTV), revenue, stores and agent count. The group worked to back up its claim by writing a program to collect data on KE’s platform, conducting field interviews and visiting physical sites and stores.
Should investors be concerned about Muddy Waters’ latest short report? Let’s dive right in.
BEKE Stock: 7 Things to Know About Muddy Waters’ Report
- Muddy Waters stated that it wrote a program to collect GTV data on KE’s platform. The group then spot-checked the results by visiting physical sites and conducting field interviews. After finding discrepancies, Muddy Waters concluded that KE is inflating its new and existing home sales GTV. The group claims that KE’s GTV for Q2 and Q3 was inflated by as much as 65%.
- Importantly, transactions for new home sales are the primary driver of KE’s revenue. Muddy Waters alleges that GTV for new home sales for Q2 and Q3 was overstated by 126%.
- KE’s commission revenue is directly correlated with new home sales GTV. Because of this, Muddy Waters also claims revenue for Q2 and Q3 was inflated by 77%-96%.
- Additionally, physical site and store visits led Muddy Waters to conclude that KE operates several ghost stores, inflating its reported store count by at least 23% during Q2. For example, the group sent investigators to visit the Zhonghuan brokerage at Nanchang Ershishanzhong. KE’s platform stated that this brokerage was active and had more than 100 properties listed for sale. Upon the visit, the investigator found an abandoned and run-down store.
- Muddy Waters also claims that KE operates “clone stores,” which means that multiple stores appear on KE’s platform with the same or similar location. This supports the claim that KE is overstating its store count.
- Furthermore, the group alleges that KE overstated the number of agents employed in its initial public offering (IPO) prospectus, secondary offering and other financial reports. In Shanghai, which is KE’s primary market, the real estate firm claims to have 21,000 agents. However, according to data from the State Administration for Industry and Commerce (SAIC), KE’s three Shanghai brokerages only employ 9,998 people. Muddy Waters also believes that KE is overstating agents in its Beijing market.
- Shares of BEKE stock are down 2% for the day. KE Holdings has not yet responded to the short report.
On the date of publication, Eddie Pan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.