Credit: From the Internet

NEW YORK/BEIJING, April 14 (TMTPOST) California-based short seller Citron Research published a research report on Tuesday morning accusing NYSE-listed China-based e-learning website GSX Techedu Inc. (NYSE: GSX) of overstating its revenue by 70%, sending the company’s stock diving immediately.

GSX founder, Chairman and CEO Chen Xiangdong quickly responded to the allegations on his WeChat Moments, China’s equivalent of Twitter, saying that his company’s management was made completely “speechless by such a shameless report”.

The e-learning platform also issued a statement, saying that the 36-page report merely rehashed an earlier report by Grizzly Research, which had been refuted.

The statement also pointed out that Citron Research was utterly ignorant given that the short seller was unaware of the e-learning platform’s major source of revenues – its major brand Gaotu Classroom.

The NYSE-listed firm said it reserves the legal right to sue the short seller for damaging its reputation.

In its report titled “GSX Techedu Inc – The Most Blatant Chinese Stock Fraud since 2011”, Citron Research alleged that “up to 70% of revenues are fabricated”.

Citron Research, known as an “activist” short-seller that publishes reports designed to torpedo a company’s stock after placing a bet against it, argued that GSX’s financials were “too good to be true”.

Apart from the “too good to be true” theory, no substantial evidence was provided in the report.

However, Citron Research said that it would provide more evidence of the extent of the fraud and mechanisms in the future since its complete set of “on-the-ground findings” has been delayed by the shutdown in Beijing amid the coronavirus pandemic.

Citron Research accused the e-learning website of planning to continue to commit securities fraud and urged U.S. securities regulator SEC to immediately halt trading in the stock.

Citron’s Suspicions

The report came a week after Nasdaq-listed Chinese video streaming site iQIYI was accused by Wolfpack Research of fudging revenue and user numbers. In the current wave of the short-selling of U.S.-listed Chinese firms since early April, China’s largest coffee chain Luckin Coffee has suffered a stock debacle due to its admission of a financial fraud first exposed by another short seller Muddy Water.

In the report, Citron Research described GSX as an insignificant player in China’s e-learning market in 2018 and 2019 by citing reports from Chinese media outlets, including Guangming Daily, and alleged that the lightweight company was unlikely to achieve “spectacular” growth in the increasingly competitive market.

The self-styled online stock commentary website supported its conclusion by citing that GSX was “missing” from a few market surveys of top e-learning firms in China conducted by Chinese news outlets.

The report questioned the truthfulness of GSX’s claim that its revenue grew by 432% along with a gross margin of 75% in the year up to its IPO in early June 2019. The short seller supported its argument by citing that no media outlet in China or the United States described the company’s growth as “hyper” or “disruptive” or gave “any praise” at the time of its IPO.

By benchmarking GSX’s revenue growth from FY2018 to FY2019 against that of TAL Education (NYSE: TAL) from FY 2010 to FY 2011 and New Oriental Education & Tech Group (NYSE:EDU) from FY2014 to FY2015, Citron Research concluded that it was not possible for GSX to achieve a year-on-year increase of 432% given that TAL and EDU grew by 57% and 46% respectively in a less competitive market years ago.

Some observers say that the approach was like a comparison of apples and oranges given that GSX targets different markets from those of TAL and EDU, the top major players in China’s education markets.

Citron Research, founded by activist short seller Andrew Left, trashed the online education site as worse than “Luckin with 4,500 stores”, adding that it was more like “a 2011 Chinese RTO with a too good to be true nonsense story”.

The short seller disputed the validity of the “claimed secret” of the online tutoring services provider, touted by the firm first as “making education better through technology” followed by “Star Teachers”.

However, these “Star Teachers” who are never named or listed on any website have generated 10 times more productivity than any of the teachers from the established and respected players, the report argued.

Citron Research claimed that it tracked over 20% of total available GSX classes and captured the number of students and actual discounted course fees (Citron claimed to have negotiated and bought these courses ourselves) during Q1 2020. It argued that duplicated classes (i.e. counted more than once) could be one way to inflate revenues, according to the report.

The short seller alleged that its opinion was in line with that of the Chinese government or think tanks but failed to provide such evidence in its report.

The report argued that GSX's filings with the Chinese government were different from the ones submitted to the SEC.

It also accused the e-learning provider of inflating its revenues by planting fake student users in WeChat groups.

GSX Closes Slightly Down

Shares of GSX plunged over 9% briefly on Tuesday morning before bouncing back and closing at $31.2, down 0.64% from the previous trading session.

GSX, which positioned itself as a “leading online K-12 large-class after-school tutoring service provider in China”, launched its IPO as the first profitable K12 e-learning platform at $10.5 per share on the NYSE in 2019, about five years after its founding.

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