Shares of GSX Techedu (GSX) are under pressure on Monday after Muddy Waters said it was short the shares of what it calls a "near-total fraud." Further, the firm claims that at least 70% of GSX Techedu's users "are fake, and we think it's quite likely that at least ~80% of its users are fake."
'NEAR-TOTAL FRAUD': In a newly published report on its site, Muddy Waters said it is short GSX Techedu "because we conclude that it is a near-total fraud." At least 70% of its users "are fake, and we think it's quite likely that at least ~80% of its users are fake," Muddy Waters stated, joining fellow short-seller Citron Research, which has been calling fraud at GSX for some time. Muddy Waters added that, "Our conclusions are based on GSX's own user and attendance data files (i.e., this is not from "scraping" data). We downloaded GSX's data from more than 200 paid K-12 classes covering 54,065 unique users. In addition, a former GSX manager corroborated our analysis."
"Based on the near total faking of users, we assume that the fraudulent portion of GSX’s revenue is at least equal to the percentage of fraudulent users, although it would not surprise us if the ASP on the real portion of GSX's business is fraudulently inflated too. We conclude that GSX is a massive loss-making business. Without users, there is no revenue. We also conclude that GSX greatly understates expenses. Regardless of how one cuts it though, GSX is an almost completely empty box. Amazingly, Chairman Chen has found a way to make GSX shares even more dangerous for long holders – he has pledged at least $318 million of stock. Long holders of GSX face the risk that the margin lenders will be forced to aggressively sell the stock, crashing the price," the report reads.
CITRON CALLS GSX 'FRAUD': Following GSX Techedu's first quarter results earlier this month, Andrew Left's Citron Research again called the company a "fraud." Citron tweeted that, "GSX fraud. When you have locals in China writing fraud reports, you know it has to be bad scorpio...You can fool US investors but not a Chinese Mother. BTW We will not come to China to meet you, instead we will see you in a US courtroom or meet at SEC office."
Citron Research claims GSX Techedu is "committing securities fraud through the use of multiple undisclosed related party transactions to hide expenses/liabilities." Further, the short-seller pointed out that "feedback from China" suggests that the Chinese education company is the next Luckin Coffee (LK), a company that has been halted for weeks after admitting to inflating its sales.
In reports that began on April 14, Citron Research called GSX "the most blatant Chinese stock fraud since 2011," and also said that up to 70% of the company's revenues are "fabricated."
PRICE ACTION: In morning trading, shares of GSX Techedu are down about 5% to $33.57.
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