In a wave of fraud allegations in recent weeks—involving Luckin Coffee, online streaming service iQiyi, and Tal Education—another US-listed Chinese company has been accused of fabricating revenue figures.
Short-seller Citron Research issued a report on Tuesday, alleging that Beijing-based online education platform GSX Techedu (NYSE: GSX) has overstated its revenue by 70%, calling it “the most blatant Chinese stock fraud since 2011.” It also called on the US securities regulator to “immediately halt trading and launch an internal investigation.”
GSX’s stocks tumbled as much as 9.9% following the announcement, but bounced back and closed down 0.6% at USD 31.2 as of market close on Tuesday.
Citron Research said in its 36-page report that after tracking more than 20% of GSX classes, it reached the conclusion that GSX’s revenue overstatement for 2019 could be as much as 70%, adding that duplicated classes could be one possible way to inflate the revenues.
The short seller also questioned GSX’s annual growth rate of 431% in 2019, and the firm’s projected revenue growth of 183% in 2020, after benchmarking these figures with rivals at the similar stage in their own history, such as New Oriental Education, which had an annual growth of 46% from 2014 to 2015, and TAL Education, whose annual growth from 2010 to 2011 reached 57%.
GSX issued a statement on Wednesday, saying that Citron Research’s report has mostly restated info from an earlier report made by short-seller Grizzly Research, which has already been refuted by GSX’s management team. The Beijing-based online education firm pointed out in the statement that Citron was unaware of the fact that the major revenue source of GSX was from its brand Gaotu Classroom.
GSX claimed that it reserves the legal right to sue the US-based short seller as it has already damaged the company’s reputation.
Chen Xiangdong, GSX’s founder and CEO, also responded to the allegations in his WeChat Moments feed, saying the company’s executive management team was “speechless by such a shameless report.”
The short-selling report came among a wave of recent fraud allegations of US-listed Chinese companies. Chinese video-streaming service platform iQiyi (NASDAQ: IQ) was accused of inflating its revenue and user numbers by Wolfpack Research on April 8. iQiyi replied to the allegations, saying that the report contains numerous errors, unsubstantiated statements, and misleading conclusions and interpretations.
Chinese coffee chain Luckin (NASDAQ: LK) was hit with a fraudulent sales scandal, which sent the latter’s stock plunging by 83% to USD 4.39 within days, KrASIA reported. In January, Muddy Waters said that it was short Luckin after analyzing an 89-page anonymous investigative report supported by 11,260 hours of store traffic video footage.
The once rising stock is now facing lawsuits from several US-based law firms on behalf of investors, including Hagens Berman and Kahn Swick & Foti.
Meanwhile, Beijing-based TAL Education Group (NYSE: TAL), a K-12 after-school tutoring services provider, also disclosed on April 8 that it has found inflated class sales during its internal auditing process.