China-based Middle East ‘Clubhouse’ Yalla: Unicorn or Just Empty Talk?

Company’s shares have gyrated wildly since its 2020 IPO, soaring on comparisons to popular U.S. voice chat app before plunging last week after short-seller attack

•      Yalla lost nearly all gains for 2021 following short seller attack, even after it refuted the allegations and announced a stock repurchase program

•      Analysts general upbeat on Dubai-based company as it posted triple-digit revenue and profit growth in its latest quarter      

By Alice Leung

Chinese-founded Yalla Group Ltd. (NYSE:YALA), often likened to a Middle East version of U.S. voice-centric social networking sensation Clubhouse, isn’t quite so thrilled with all the chatter swirling around it lately.

Its shares are down more than 12% over the past week following a classic short seller attack, even after the United Arab Emirates-based company quickly refuted allegations of accounting tricks and announced a $150 million share buyback.

As the first UAE-based tech unicorn listed on the New York Stock Exchange, Yalla shares tapped Clubhouse fever to soar to a high of $41.35 in February, or 5.5 times its IPO price of $7.50 per American depository share (ADS) from last September.

But the old saying “What goes up, must come down” applies well here, as hungry short sellers eyed the company’s inflated shares even after a broader correction for Chinese internet stocks hit Yalla after its February run-up. Now the bigger question looms: Is Yalla worthy of its unicorn status, or is it mostly a chatroom full of hot air?  

Short seller Gotham City Research described the company as an ugly duck in a tweet on May 19, following Swan Street Research’s issue of a 31-page report accusing the company of inflating its metrics, including revenues and cash. 

Gotham City likened Yalla to Luckin Coffee, a formerly New York-listed Chinese Starbucks wannabe that filed for bankruptcy in the U.S. in February after being exposed for fraud by another famous short seller, Muddy Waters. Luckin admitted to fabricating hundreds of millions of dollars in sales and paid a $180 million fine to the U.S. securities regulator last December.

In a typical pattern for this kind of attack, Yalla immediately denied the allegations, saying the reports “contain numerous errors and distorted, misleading and unsubstantiated claims regarding the company.” Two days later it announced a plan to buy back up to $150 million worth of its ADSs.   

The news lifted Yalla ADSs by as much as 22% at one point after the announcement last Friday before the stock ultimately closed up a more modest 5.9%.

The wild gyrations have seen Yalla’s stock tumble from pre-attack levels by nearly 20%, before rebounding somewhat in the following days. As of Wednesday’s close, the stock had lost 12.4% of its value from pre-attack levels, giving it a market value of $2.3 billion – still well above the $1 billion threshold for unicorn status.

Overseas-listed Chinese companies are particularly attractive targets for short sellers due to a perception of lax accounting standards. Beijing has contributed to the problem by refusing to allow the U.S. securities regulator to review audit papers of such firms when fraud is suspected.

Yalla is hardly the first Chinese company to fall victim to short sellers. Over the last decade, others including Citron Research and Muddy Waters have launched many similar attacks accusing a wide range of Chinese companies of fraud, often sending their U.S.- and Hong Kong-listed shares tumbling.

Jury Still Out

As the dust continues to settle in this latest attack, it’s still too early to say who will ultimately win the battle. Yalla’s quick rebuttal may have softened the blow, and its share price is still nearly double from its IPO when it raised $144.8 million.

Short seller attacks also often backfire, which was the case last year for Chinese education technology firm GSX Techedu and solar panel maker JinkoSolar, whose shares both rallied following brief sell-offs after reports were first posted.

Founded in 2016 in China by its Chairman Yang Tao, Yalla carved out a niche in the fast-growing voice chat space by focusing on the Middle East while keeping its technology and product development functions in the Chinese city of Hangzhou. That allowed it to side-step China’s strict requirements for platform operators to police their user-generated content for sensitive topics. Yalla is continuing to steer clear of operating a service in China, with North Africa and North America as the next stops on its road map.  

“For the next two to three years, (the Middle East and North Africa) will certainly be our main focus. And with Yalla Parchis’ launch, we will keep our eye on the South American market and see if there are any other potential opportunities,” said Yang on a May 10 call to discuss the company’s latest quarterly results. Before starting his company, Yang worked at Chinese telecoms equipment giant ZTE Corp. for more than 10 years, including as general manager of its Abu Dhabi branch.

Yalla engages in two main businesses: Yalla, a voice social network, and Yalla Ludo, a gaming platform. The majority of its 5.8 million paying users, or 79% of its total, were casual gamers in this year’s first quarter, with the rest coming from the main Clubhouse-like app. Revenue from Yalla Ludo surpassed Yalla in last year’s fourth quarter.

The Clubhouse-like app Yalla offers public chatrooms on thousands of topics as well as private, one-on-one text and voice chat capabilities. Yalla Ludo is a platform with mobile games that incorporates audio chat and other social networking features. It also allows people to buy animated gifts and virtual currencies.

Earlier this month before the attack, the company reported its first quarter revenue more than tripled year-on-year to $67.6 million. Its net income doubled to $19.8 million and non-GAAP net income more than tripled to $33.6 million, as paying users surged 260% from a year earlier to 5.8 million.

As a newbie internet stock, not many analysts cover the company yet. But two who do have rated the stock a “buy,” and a third rates it a “hold,” according to Bloomberg data.

Oppenheimer analyst Bo Pei raised his target price on Yalla by 7% to $30 and maintained an “outperform” rating on the stock after the company issued its quarterly results but before the short seller attack. The upgrade was based on the belief that new apps launched in February, including the iOS version Yalla Parchis (a Spanish version of Ludo), Yalla Baloot, and 101 Okey, could drive more upside for the company.

Haitong International also has the same target price, putting future price-to-earnings (PE) ratios at between 22 and 25 from 2021 to 2023. It said Yalla’s net profit will fall in the second quarter but won’t affect its fundamentals.

While Yalla’s shares have gained back much of the ground from the short seller attack, one remaining overhang is shareholder lawsuits that typically follow such attacks. Several law firms said they are investigating potential claims against the company, which could ultimately be forced to pay settlements in those cases.

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