Yalla Group Claims it Will Emerge From the Shadow of Short Selling

Yalla Group Limited YALA, a service provider of social networking and entertainment platform based in the Middle East, announced that it has been awarded the Middle East Technology Excellence Award 2021 (Games – Media & Entertainment Category).

The award was organized by the Asian Business Review and nominated by a panel of industry leaders from prestigious companies such as PwC Middle East and Baker Tilly Middle East.

Unlike other Chinese capital-backed companies, Yalla is based in the Middle East since its establishment, making it a homegrown enterprise for the locals. In September 2020, Yalla's listing on Nasdaq caused a great response in the Middle East as a number of dignitaries and royal family members of the United Arab Emirates attended Yalla's listing ceremony to show their support. More than 100 local media outlets in the Middle East reported the listing of Yalla, and the iconic building of Dubai, where Yalla's headquarters is located — the Burj Khalifa — was also lit to celebrate Yalla on its successful listing.

Despite being popular in the Middle East, Yalla’s share price fell continuously this year. Yalla has lost more than 80% of its market value since peaking above $40 in February, 2021 and is trading as low as $6.8/share by the end of November 4, 2021. The reason could be traced to short sellers.

In May 2021, Swan Street claimed on its website that a report written by a former Wall Street analyst pointed out that Yalla's user numbers were different from those obtained by its own channel and that there could be a case of data fraud. Later, the founder of Gotham City, Daniel Yu wrote in an email that Gotham City would continue to carry out the short-selling of Yalla.

While Yalla was quick to respond that it "does not place any bots in any of its chat rooms or otherwise manipulate its Monthly Active Users or other operational or financial data." But the continued decline in share prices has proved the success of this short selling.

Yalla revealed in a statement that it believes that the short sellers' research lacked "a sense of feeling and understanding" of the company's actual user base and that the short-selling was designed to intentionally manipulate the stock price to benefit the short sellers themselves at the expense of the company's shareholders. Later, to show confidence, Yalla announced a $150 million share repurchase program — more than the company raised in its IPO.

According to June's statement from Pomerantz LLP, more than a dozen of investor rights litigators in the United States have begun an investigation into whether "Yalla and certain of its officers or directors engaged in securities fraud or other illegal business activities." So far, however, the investigation seems to have yielded few results.

Profits in the Middle East Market

In August, 2021, Yalla Group Limited announced its unaudited financial results for the 3 months ended June 30, 2021. According to the company’s financials, the revenue for the second quarter grew over 110% year-on-year to $66.62 million, including $50.61 million from social services and $16.01 million from gaming services. Under NonGAAP, the net profit for the second quarter was over 101% year-on-year to $32.14 million, with a net profit margin of 48%. Yalla generated $50.614 million in revenue from social services, up 74.0% year-on-year, and $16.006 million in revenue from game services, up 518.1% year on year.

In terms of user data, Yalla's core products, Yalla and Yalla Ludo, have seen 8 consecutive quarters of positive Monthly Active Users (MAU) growth. In the second quarter, the company recorded 22.06 million MAU, up 77.0% year-on-year, with Yalla growing to 8.374 million MAU and Yalla Ludo growing to 13.686 million MAU. The company also increased its paying subscribers by 19.5% year-on-year to 6.405 million, with Yalla Ludo enjoying four consecutive quarters of high growth. Although this is the second quarter under the impact of Ramadan and the users' disposable market limited situation.

Such a growth rate cannot be achieved without the development trend of the region in which Yalla operates. Due to religious beliefs, cultural customs and other factors, residents in the Middle East are limited in their offline entertainment activities, resulting in a large number of online entertainment demands. As the digitization process in the Middle East continues to intensify, many countries in the region have increased their policy support to improve the business environment of the digital economy industry, laying a foundation for the development of online social products in the region.

The identity of the "local enterprise" mentioned above also gives Yalla an advantage over other social media in local development.

Despite the company’s demonstration of strong growth, the growth of Yalla appeared to fall short of analysts' expectations. Yalla's share price fell more than 18% the day after the earnings report was released. A few days later, a group of law firms sued Yalla and its Chief Executive, claiming that they had misled investors about their financial metrics and demanding that Yalla should compensate investors for the ADR's decline.

Yalla's interactive community culture has created strong word-of-mouth, thanks to the rise of online social networking during the COVID-19 pandemic and advertising on Facebook, Yalla's spokeswoman Kerry Gao said in a recent public event. Regarding the recent securities class action, she said that the recent shareholder class action "largely repeats the false allegations of short sellers" and believed that it was meaningless.

The company's accumulated development in the local area has created Yalla's success in the Middle East. Yalla believes that it is likely to be a leader in internet trends in the Middle East for a long period of time. Answers to the short-selling of the company and litigants' allegations will come after the release of the new earning report.

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