China’s ‘Better Than Tesla’ Stock Is A Scam, Short Sellers Say
Short sellers absolutely hate this stock. It’s China’s online education company GSX Techedu. Look at this chart. It’s better than Tesla TSLA . And Tesla is the new Bitcoin, as some in the market refer to it, referring to the heady days of crypto some three years ago now.
In May 2020, famed short seller research firm Muddy Waters did a full report on the company that would defy their research and keep rising while the rest of China’s stocks, as measured by the MSCI MSCI China Index, flatlined.
“We are short GSX because we conclude that it is a near-total fraud,” Muddy Waters Capital research analysts led by Carson Brock wrote in May.
They concluded that at least 70% of its users were fake, and that it was “quite likely” that at least 80% of its users are fake.
It took a while for their views to catch on, but after being a runaway train all year, the stock fell around 9% yesterday as equity analysts downgraded the stock. Citi analyst Mark Li put a sell call on it yesterday, the first bulge bracket firm to do so. Oddly enough, as Motley Fool writer Jon Quast said, Li’s sell recommendation comes with a price target of $115 per share, which happens to around 20% higher from where the stock was trading the day of his recommendation.
GSX is a leader in the online K-12 after-school learning business in China. They offer K-12 courses covering all primary and secondary grades as well as foreign language classes and professional improvement courses.
Since the start of the summer, at least as far back as May, actually, when short-selling Muddy Waters went after them, GSX has been pushing back. Muddy Waters is not the only firm calling them what amounts to be a total scam operation.
On June 3, GSX reacted to a June 2 report by Grizzly Research, a due diligence firm for Wall Street. They said that the data that Grizzly obtained, including student enrollments and course numbers, are encrypted and don’t reflect actual operational data.
They said the Grizzly report wrongly alleged GSX’s marketing activities were illegal and said they might take legal actions against Grizzly for photoshopped images it used in their report. They said they remained “committed to maintaining the highest standards of corporate governance.”
In addition to Monday’s “sell” advise from Citi, Andrew Left of short selling firm Citron Capital has been making some waves in investor circles over the last few days
In a letter to SEC Chairman Jay Clayton signed by Joseph White, presumably from Citron Capital (letter obtained was not verified at press time) stated that Wall Street firms have uncovered additional evidence implicating GSX in identity theft; falsified financial filings disproven public statements by the Company’s CEO and CFO; money laundering through third parties; loosely affiliated entities used to fake user growth via computer bots; and interviews with former GSX employees and contractors who attest to the firm’s fraudulent activities.
GSX “has provided false, grossly misleading information to the SEC and investors detailing their business prospectsand beyond, yet the SEC has taken no action —not even a public statement—regarding GSX,” White wrote.
On June 8, Yongqiang Qian, a personal friend of GSX CEO, Larry Chen, taunted the short sellers on Twitter with a question of whether there’s “any financial proof”of the fraud claims they’re making. He wrote: “I personally guarantee $GSX at $100 by end of year”.
A great call. He later said he was shorting the shorts!
GSX cracked $100 on August 4.
GSX’s stock has been going gangbusters since Friday. It hit $140, then fell to as low as $104 in just a few hours. Now it’s trading around $96.
It’s closest competitor in China, TAL Education Group TAL , is up well this year too: 53%. By comparison, it’s a complete dud. GSX is up 341% year-to-date.
China’s online education sector is highly competitive and transparent, yet GSX’s growth and profitability seems to crush the competition. They are acquiring customers at half the cost and generating up to 8 times the revenue from those customers.
“The whole situation is just too good to be true,” says Left, Citron’s founder.
“The stated growth and profitability of this company can only be matched by Google GOOGL in its early days. This is just not believable” he says.
Citron believes that GSX has inflated their financials by 70%. They are another poster boy to those arguing to delist Chinese companies that are not compliant with the Sarbanes Oxley Act, or SOX.
There have now been at least three short sellers gunning for these guys this year. Each one argues that the company generates fake revenues and offloads costs to undisclosed related parties.
“There is more evidence to GSX being a fraud than there has ever been for any Chinese company, including Luckin Coffee,” says Left about the upscale coffee shop and coffee roaster from China designed to compete with Starbucks there. “This is a classic case of China Stock fraud that the White House is concerned about,” he says. “If this was a U.S.-based company, trading would be halted right now. Its financials are a complete disaster, and it can be brought to light that the Chinese are using our capital markets to prop the stock up and make themselves wealthy. And if anything ever goes wrong,” he says, alluding to Chinese leadership at the firm, “No one gets in trouble.”